EDGAR 10-K Filing

Company CIK: 790359
Filing Year: 2024
Filename: 790359_10-K_2024_0001140361-24-010464.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
NBT Bancorp Inc. is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The principal assets of NBT Bancorp Inc. consist of all of the outstanding shares of common stock of its subsidiaries, including: NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc. (“NBT Holdings”), CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II (collectively, the “Trusts”). The principal sources of revenue for NBT Bancorp Inc. are the management fees and dividends it receives from the Bank, NBT Financial and NBT Holdings. Collectively, NBT Bancorp Inc. and its subsidiaries are referred to herein as (the “Company”). The Company, on a consolidated basis, at December 31, 2023 had assets of $13.31 billion and stockholders’ equity of $1.43 billion. When we refer to “NBT,” “we,” “our,” “us,” and “the Company” in this report, we mean NBT Bancorp Inc. and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, NBT Bancorp Inc. When we refer to the “Bank” in this report, we mean its only bank subsidiary, NBT Bank, National Association, and its subsidiaries.
The Company’s business, primarily conducted through the Bank, consists of providing commercial banking, retail banking and wealth management services primarily to customers in its market area, which includes upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central and northwestern Connecticut. The Company has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. The Company’s business philosophy is to operate as a community bank with local decision-making, providing a broad array of banking and financial services to retail, commercial and municipal customers. The financial condition and operating results of the Company are dependent on its net interest income, which is the difference between the interest and dividend income earned on its earning assets, primarily loans and investments and the interest expense paid on its interest-bearing liabilities, primarily consisting of deposits and borrowings. Among other factors, net income is also affected by provisions for loan losses and noninterest income, such as service charges on deposit accounts, card services income, retirement plan administration fees, wealth management revenue including financial services and trust revenue, insurance services, bank owned life insurance income and gains/losses on securities sales, as well as noninterest expenses, such as salaries and employee benefits, technology and data services, occupancy, professional fees and outside services, office supplies and postage, amortization of intangible assets, loan collection and other real estate owned (“OREO”) expenses, advertising, Federal Deposit Insurance Corporation (“FDIC”) assessment expenses and other expenses.
NBT Bank, N.A.
The Bank, a full-service commercial bank formed in 1856, provides a broad range of financial products to individuals, corporations and municipalities throughout upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central and northwestern Connecticut.
Through its network of branch locations, the Bank offers a wide range of products and services tailored to individuals, businesses and municipalities. Deposit products offered by the Bank include demand deposit accounts, savings accounts, negotiable order of withdrawal (“NOW”) accounts, money market deposit accounts (“MMDA”) and certificate of deposit (“CD”) accounts. The Bank offers various types of each deposit account to accommodate the needs of its customers with varying rates, terms and features. Loan products offered by the Bank include indirect and direct consumer loans, home equity loans, mortgages, business banking loans and commercial loans, with varying rates, terms and features to accommodate the needs of its customers. The Bank also offers various other products and services through its branch network such as trust and investment services and financial planning and life insurance services. In addition to its branch network, the Bank also offers access to certain products and services electronically through 24-hour online, mobile and telephone channels that enable customers to check balances, make deposits, transfer funds, pay bills, access statements, apply for loans and access various other products and services.
NBT Financial Services, Inc.
Through NBT Financial Services, the Company operates EPIC Advisors, Inc. (“EPIC”), a national benefits administration firm which, was acquired by the Company on January 21, 2005. Among other services, EPIC provides retirement plan administration. EPIC’s headquarters are located in Rochester, New York.
NBT Holdings, Inc.
Through NBT Holdings, the Company operates NBT Insurance Agency, LLC (“NBT Insurance”), a full-service insurance agency acquired by the Company on September 1, 2008. NBT Insurance’s headquarters are located in Norwich, New York. NBT Insurance offers a full array of insurance products, including personal property and casualty, business liability and commercial insurance, tailored to serve the specific insurance needs of individuals as well as businesses in a range of industries operating in the markets served by the Company.
The Trusts
The Trusts were organized to raise additional regulatory capital and to provide funding for certain acquisitions. CNBF Capital Trust I and NBT Statutory Trust I are Delaware statutory business trusts formed in 1999 and 2005, respectively, for the purpose of issuing trust preferred securities and lending the proceeds to the Company. In connection with the acquisition of CNB Bancorp, Inc., the Company formed NBT Statutory Trust II in February 2006 to fund the cash portion of the acquisition as well as to provide regulatory capital. In connection with the acquisition of Alliance Financial Corporation (“Alliance”), the Company acquired two statutory trusts, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II, which were formed in 2003 and 2006, respectively. The Company guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities. The Trusts are variable interest entities for which the Company is not the primary beneficiary, as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). In accordance with ASC, the accounts of the Trusts are not included in the Company’s consolidated financial statements.
Operating Subsidiaries of the Bank
The Bank has four operating subsidiaries, NBT Capital Corp., Broad Street Property Associates, Inc., NBT Capital Management, Inc. and SBT Mortgage Service Corporation. NBT Capital Corp., formed in 1998, is a venture capital corporation. Broad Street Property Associates, Inc., formed in 2004, is a property management company. NBT Capital Management, Inc., formerly Columbia Ridge Capital Management, Inc., was acquired in 2016 and is a registered investment advisor that provides investment management and financial consulting services. SBT Mortgage Service Corporation is a passive investment company (“PIC”) acquired in 2023 in connection with the acquisition of Salisbury Bancorp, Inc. (“Salisbury”). The PIC holds loans collateralized by real estate originated or purchased by the Bank. Income of the PIC is exempt from the Connecticut Corporate Business Tax.
Merger with Salisbury Bancorp, Inc.
On August 11, 2023, the Company completed the acquisition of Salisbury through the merger of Salisbury with and into the Company, with the Company surviving the merger, and the merger of Salisbury Bank and Trust Company (“Salisbury Bank”) with and into the Bank, with the Bank as the surviving bank, for $161.7 million in stock. Salisbury Bank was a Connecticut-chartered commercial bank headquartered in Lakeville, Connecticut 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 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.
Competition
The financial services industry, including commercial banking, is highly competitive, and we encounter strong competition for deposits, loans and other financial products and services in our market area. The increasingly competitive environment is the result of the rate environment, changes in regulation, changes in technology and product delivery systems, additional financial service providers and the accelerating pace of consolidation among financial services providers. The Company competes for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions and other nonbank financial service providers.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.
Some of the Company’s nonbanking competitors have fewer regulatory constraints and may have lower cost structures. In addition, some of the Company’s competitors have assets, capital and lending limits greater than that of the Company, have greater access to capital markets and offer a broader range of products and services than the Company. These institutions may have the ability to finance wide-ranging advertising campaigns and may be able to offer lower rates on loans and higher rates on deposits than the Company can offer. Some of these institutions offer services, such as credit cards and international banking, which the Company does not directly offer.
Various in-state market competitors and out-of-state banks continue to enter or have announced plans to enter or expand their presence in the market areas where the Company currently operates. With the addition of new financial services providers within our market, the Company expects increased competition for loans, deposits and other financial products and services.
In order to compete with other financial services providers, the Company stresses the community nature of its banking operations and principally relies upon local promotional activities, personal relationships established by officers, directors and employees with the Company’s customers and specialized services tailored to meet the needs of the communities served. We also offer certain customer services, such as agricultural lending, that many of our larger competitors do not offer. While the Company’s position varies by market, the Company’s management believes that it can compete effectively as a result of local market knowledge, local decision making and awareness of customer needs. The Company has banking locations in forty-two counties in the states of New York, Pennsylvania, New Hampshire, Massachusetts, Vermont, Maine and Connecticut.
Data Privacy and Security Practices
The Company’s enterprise security strategy revolves around people, processes and technology. The Company employs a defense in depth strategy, which combines physical control measures with logical control measures and uses a layered security model to provide end-to-end security of Company and client information. The high-level objective of the information security program is to protect the confidentiality, integrity and availability of all information assets in our environment. We accomplish this by building our program around six foundational control areas: program oversight and governance, safeguards and controls, security awareness training, service provider oversight, incident response and business continuity. The Company’s data security and privacy practices follow all applicable laws and regulations including the Gramm-Leach Bliley Act of 2001 (“GLBA”) and applicable privacy laws described under the heading “Supervision and Regulation” in this Item 1. Business section.
The controls identified in our enterprise security program are managed by various stakeholders throughout the Company and monitored by the information security team. All employees are required to complete information security and privacy training when they join the Company and then complete annual online training certification and ad hoc face to face trainings. The Company engages outside consultants to perform periodic audits of our information and data security controls and processes including penetration testing of the Company’s public facing websites and corporate networks. The Board of Directors of the Company (the “Board”) requires the Company’s Information Security Officer to report to them the status of the overall information security and data privacy program on a recurring basis. More information can be located on the Company’s website https://www.nbtbank.com/Personal/Customer-Support/Fraud-Information-Center.
For more information regarding the Company’s cybersecurity policies and practices, see Item 1C. Cybersecurity below.
Human Capital Resources
Diversity, Equity and Inclusion
The Company’s diversity, equity and inclusion (“DEI”) strategy aims to enhance diversity within our organization, making us more innovative and effective at meeting the needs of our customers and the communities we serve. The Company utilizes a variety of approaches to maximize diversity within each pool of candidates through both internal and external recruitment practices. It is the Company’s belief that these efforts will provide equitable opportunities and contribute to improved products and services, better customer engagement and ultimately enhanced stockholder return.
Both grassroots and executive sponsored strategies continue to be critical to our DEI initiatives. Executive sponsored strategies support leadership opportunities with cross functional/geographic teams and panel discussions for employees and our communities hosted by our affinity group NBT Empowerment in support of women’s empowerment and being your authentic self. We have philanthropic goals to support our communities and, in 2023, we established a specific budget for DEI related contributions. We supported our communities with financial contributions for the first Pride festival in Chenango County, for a black baseball exhibit at the Cooperstown Baseball Hall of Fame and we made our second contribution in a five-year commitment supporting a LGBTQ+ youth community center in Maine. Our DEI Inclusion Roundtable supports grassroots efforts focusing on raising awareness of various cultural and diverse interests. NBT Communities is an internal social media forum where employees with similar interests across the footprint can connect and get to know each other around a variety of topics.
The Company has a DEI steering committee comprised of members of the executive team, including the Chief Executive Officer. The plan is shared with the Board, management, and employees, who are often included in implementing specific action items.
More information can be located on the Company’s website at https://www.nbtbank.com/about-us/Diversity-and-Inclusion/.
Investment in Our People
The Company’s focus on investing in our people includes key initiatives to attract, develop and retain our valued employees. Talent acquisition and more importantly, retention, continue to be top priorities especially in the post-pandemic environment and considering the current challenges in the labor market. An Employee Referral Program was implemented in the third quarter of 2022. In 2023, 84 qualified referrals were made by employees, equating to 28% of the total new employees hired. 88% of referred employees continue to be employed.
The Company offers total rewards that address employees at various stages of their personal lives and careers, including financial wellness programs, undergraduate and graduate tuition, paid parental leave, more flexibility in work schedules and paid leave benefits and a retirement transition option. The Company’s incentive programs recognize employees at all levels and are designed to motivate employees to support the achievement of company success, with appropriate risk assessment and prevention measures designed to prevent fraud.
Engaging Employees
While our employee retention rate remains consistently high, we continue to place significant effort toward retaining our valued employees - career planning conversations, an on-going coaching process, goal setting, individual development plans and enhanced communications all play a part in employee satisfaction. In the first quarter of 2024, we will administer our Employee Engagement Survey. The results from the survey will be used to define specific initiatives to enhance engagement around the organization including clarity with respect to our business strategies, decision making and corporate led development programs.
Learning and Career Development
The Company’s main priority is to attract and retain top talent by encouraging and promoting internal development. All employees have access to the LinkedIn Learning Library, which is intended to make learning and development accessible in a concise, easily consumable format that enables employees to get the development they need to achieve individual career aspirations. Currently 80% of our employees are active in the learning library and are taking full advantage of this resource.
In addition to the library, there are distinct training and development programs strategically designed to attract top talent early in their careers and to further foster the growth and retention of our high potential and emerging leaders. These programs have been designed to meet the objectives outlined in our succession plan. Our Management Development Program aims to attract diverse talent, primarily college seniors by offering accelerated career advancement and mentoring with senior executives. The Company also offers two programs designed for high potential employees, one for employees with prior professional experience and another one targeted to our more experienced employees with direct leadership responsibility. Both programs include a mentor, a coach, 360-degree feedback, individual development plans, presentation skill development and increased visibility to executive leadership. The programs accommodate delivery in both remote and in person learning environments, made possible by utilizing our Microsoft Teams technology which was implemented across the Company to strengthen internal communications, collaboration, and talent development. To support career development, we employ an internal career manager to work as a liaison with employees and managers. The Company also has a robust annual talent review and succession planning process that includes the Board and senior management.
Conduct and Ethics
The Board, senior management and the ethics committee have vigorously endorsed a no-tolerance stance for workplace harassment, biases and unethical behavior. The Company’s values-based Code of Business Conduct and Ethics is extensively communicated on our website and targeted internal communications platforms. Frequent training specific to managers and employees, regular publication of our whistleblower policy and reporting mechanisms provide framework to the Company’s motto of: “The right people. Doing the right things. In the right way.”
Community Engagement
The Company is engaged in the communities where we do business and where our employees and directors live and work. We live out our core value of community involvement through investments of both money and the time of our employees.
Through our active contribution program, administered by market-based committees with representation from all lines of business, the Company contributed over $2.0 million in 2023. Our teams’ efforts to distribute philanthropic resources across our footprint ensure alignment with local needs and support for hundreds of organizations that provide health and human services and promote education, affordable housing, economic development, the arts and agriculture. The Company has pledged to maintain charitable support in the markets served by Salisbury Bank following the acquisition in August 2023 and to make an additional $500,000 in geographically focused contributions to demonstrate the ongoing commitment to these markets.
A consistent way that the Company and our employees support our communities across our markets is through giving to United Way chapters in the form of corporate pledges and employee campaign contributions. In 2023, these commitments resulted in over $355,000 in funding for United Way chapters that provide resources to local organizations offering critical education, financial, food security and health services.
In addition to corporate financial support of community organizations and causes, employees are encouraged and empowered to volunteer and be a resource in their communities. They invest their financial and other expertise as board members and serve in roles where they offer direct support to those in need by engaging in all manner of volunteer activities.
The NBT CEI-Boulos Impact Fund, a high-impact commercial real estate equity investment fund established by the Bank and CEI-Boulos Capital Management, announced its first equity investment in 2023 that will provide affordable, workforce housing and a grocery store for residents in Troy, NY. The Flanigan Square Transformation Project is an approximately $75 million socially impactful, environmentally conscious, transit-oriented and community informed master plan, located at the 500 block of River Street along the Hudson River waterfront in the historically underinvested North Central neighborhood of Troy. The NBT CEI-Boulos Impact Fund made a $3.84 million equity investment for a majority ownership stake in two of the three components of the project.
The NBT CEI-Boulos Impact Fund, LLC launched in 2022 is a $10 million real estate equity investment fund with the Bank as the sole investor. The fund is designed to support individuals and communities with low- and moderate income through investments in high-impact, community supported, commercial real estate projects located within the Bank’s Community Reinvestment Act assessment areas in New York. A Social Impact Advisory Board was also appointed to review proposed investments based on each project’s social and environmental impact, alignment with community needs and community support. Areas of the fund’s targeted impact include: projects that support job creation; affordable and workforce housing; Main Street revitalization/historic preservation developments that do not contribute to displacement; developments that serve nonprofit organizations; and environmentally sustainable real estate developments.
Products
The Company offers a comprehensive array of financial products and services for consumers and businesses with options that are beneficial to unbanked and underbanked individuals. Deposit accounts include low balance savings and checking options that feature minimal or no monthly service fees, provide assistance rebuilding positive deposit relationships, and assistance for those just starting a new banking relationship. The NBT iSelect Account was introduced in 2021 and certified as meeting the Bank On National Account Standards for 2021-2022, 2023-2024 and again for 2024-2025. Over 11,000 NBT iSelect Accounts have been opened. These accounts feature no monthly charges for maintenance, inactivity or dormancy, no overdraft fees and no minimum balance requirement. An enhanced digital banking platform incorporates ready access through online and mobile services to current credit score information and a personal financial management tool for budget and expense tracking.
The Company is focused on making home ownership accessible to everyone in the communities we serve. Our suite of home lending products features innovative and flexible options, including government guaranteed programs like Federal Housing Administration (“FHA”), USDA Rural Housing Program and U.S. Department of Veterans Affairs (“VA”) loans. In addition, we have many offerings developed in house, including our Habitat for Humanity, Home in the City, Portfolio Housing Agency and Portfolio 97 programs. Our home lending team includes affordable housing loan originators, and we maintain longstanding relationships with affordable housing agency partners across our banking footprint that offer first-time homebuyer education programs and assistance with down payments and closing costs.
Environmental
The Company is focused on the environment and committed to business practices and activities that encourage sustainability and minimize our environmental impact. In larger facilities, the Company conserves energy through the use of building energy management systems and motion sensor lighting controls. In new construction and renovations, the Company incorporates high-efficiency mechanical equipment, LED lighting, and modern building techniques to reduce our carbon footprint wherever possible. The Company has an ongoing initiative to replace existing lighting with LED lighting to reduce energy consumption.
The Company offers a financing product to homeowners on a national basis which provides an opportunity to power their homes with sustainable solar energy and reduce their carbon footprint at an affordable price. Services like mobile and online banking, remote deposit capture, electronic loan payments, eStatements and combined statements enable us to support all customers in their efforts to consume less fuel and paper. We continue to digitize loan origination and deposit account opening processes, reducing trips to the bank and paper documents for our customers. Across our footprint, we host community shred days with multiple confidential document destruction companies to promote safe document disposal and recycling.
Supervision and Regulation
The Company, the Bank and certain of its non-banking subsidiaries are subject to extensive regulation under federal and state laws. The regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, federal deposit insurance funds and the stability of the U.S. banking system. This system is not designed to protect equity investors in bank holding companies, such as the Company.
Set forth below is a summary of the significant laws and regulations applicable to the Company and its subsidiaries. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Such statutes, regulations and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory agencies. A change in any of the statutes, regulations or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the results of the Company.
Overview
The Company is a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to the supervision of, and regular examination by, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”) as its primary federal regulator. The Company is also subject to the jurisdiction of the Securities and Exchange Commission (“SEC”) and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as administered by the SEC. The Company’s common stock is listed on the NASDAQ Global Select market under the ticker symbol, “NBTB,” and the Company is subject to the NASDAQ stock market rules.
The Bank is chartered as a national banking association under the National Bank Act. The Bank is subject to the supervision of, and to regular examination by, the Office of the Comptroller of the Currency (“OCC”) as its chartering authority and primary federal regulator. The Bank is also subject to the supervision and regulation, to a limited extent, of the FDIC as its deposit insurer. Financial products and services offered by the Company and the Bank are subject to federal consumer protection laws and implementing regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”). The Company and the Bank are also subject to oversight by state attorneys general for compliance with state consumer protection laws. The Bank’s deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations. The non-bank subsidiaries of the Company and the Bank are subject to federal and state laws and regulations, including regulations of the FRB and the OCC, respectively.
Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), U.S. banks and financial services firms have been subject to enhanced regulation and oversight.
Federal Bank Holding Company Regulation
The Company is a bank holding company as defined by the BHC Act. The BHC Act generally limits the business of the Company to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking “as to be a proper incident thereto.” The Company has also qualified for and elected to be a financial holding company. Financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury), or (2) complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by the FRB). If a bank holding company seeks to engage in the broader range of activities permitted under the BHC Act for financial holding companies, (1) the bank holding company and all of its depository institution subsidiaries must be “well-capitalized” and “well-managed,” as defined in the FRB’s Regulation Y and (2) it must file a declaration with the FRB that it elects to be a “financial holding company.” In order for a financial holding company to commence any activity that is financial in nature, incidental thereto, or complementary to a financial activity, or to acquire a company engaged in any such activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act of 1977 (the “CRA”). See the section titled “Community Reinvestment Act of 1977” for further information relating to the CRA. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
Regulation of Mergers and Acquisitions
The BHC Act, the Bank Merger Act and other federal and state statutes regulate acquisitions of depository institutions and their holding companies. The BHC Act requires prior FRB approval for a bank holding company to acquire, directly or indirectly, 5% or more of any class of voting securities of a commercial bank or its parent holding company and for a company, other than a bank holding company, to acquire 25% or more of any class of voting securities of a bank or bank holding company (and sometimes a lower percentage if there are other indications of control). Under the Change in Bank Control Act, any person, including a company, may not acquire, directly or indirectly, control of a bank without providing 60 days’ prior notice and receiving a non-objection from the appropriate federal banking agency.
Under the Bank Merger Act, prior approval of the OCC is required for a national bank to merge with another bank where the national bank is the surviving bank or to purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the federal banking agencies will consider, among other criteria, the competitive effect and public benefits of the transactions, the capital position of the combined banking organization, the applicant’s performance record under the CRA and the effectiveness of the subject organizations in combating money laundering activities.
As a financial holding company, the Company is permitted to acquire control of non-depository institutions engaged in activities that are financial in nature and in activities that are incidental to financial activities without prior FRB approval. However, the BHC Act, as amended by the Dodd-Frank Act, requires prior written approval from the FRB or prior written notice to the FRB before a financial holding company may acquire control of a company with consolidated assets of $10 billion or more.
Capital Distributions
The principal source of the Company’s liquidity is dividends from the Bank. The OCC oversees the ability of the Bank to make capital distributions, including dividends. The OCC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the bank would thereafter be undercapitalized. The OCC’s prior approval is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank’s net income for that year and its undistributed net income for the preceding two calendar years, less any required transfers to surplus. The National Bank Act also prohibits national banks from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses.
The federal banking agencies have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. The appropriate federal regulatory authority is authorized to determine, based on the financial condition of a bank holding company or a bank, that the payment of dividends would be an unsafe or unsound practice and to prohibit such payment.
Affiliate and Insider Transactions
Transactions between the Bank and its affiliates, including the Company, are governed by Sections 23A and 23B of the Federal Reserve Act (the “FRA”) and the FRB’s implementation of Regulation W. An “affiliate” of a bank includes any company or entity that controls, is controlled by or is under common control with such bank. In a bank holding company context, at a minimum, the parent holding company of a bank and companies that are controlled by such parent holding company, are affiliates of the bank. Generally, Sections 23A and 23B of the FRA are intended to protect insured depository institutions from losses in transactions with affiliates. These sections place quantitative and qualitative limitations on covered transactions between the Bank and its affiliates and require that all transactions between a bank and its affiliates occur on market terms that are consistent with safe and sound banking practices.
Section 22(h) of the FRA and its implementation of Regulation O restricts loans to the Bank’s and its affiliates’ directors, executive officers and principal stockholders (“Insiders”). Under Section 22(h), loans to Insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the Bank’s loan-to-one borrower limit. Loans to Insiders above specified amounts must receive the prior approval of the Bank’s Board of Directors. Further, under Section 22(h) of the FRA, loans to directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such Insiders may receive preferential loans made under a benefit or compensation program that is widely available to the Bank’s employees and does not give preference to the Insider over the employees. Section 22(g) of the FRA places additional limitations on loans to the Bank’s and its affiliates’ executive officers.
Federal Deposit Insurance and Brokered Deposits
The FDIC’s deposit insurance limit is $250,000 per depositor, per insured bank, for each account ownership category, in accordance with applicable FDIC regulations. The Bank’s deposit accounts are fully insured by the FDIC Deposit Insurance Fund (the “DIF”) up to the deposit insurance limits in accordance with applicable laws and regulations.
The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (“CAMELS rating”). The risk matrix uses different risk categories distinguished by capital levels and supervisory ratings. As a result of the Dodd-Frank Act, the base for deposit insurance assessments is the consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed.
In November 2023, the FDIC announced a special assessment on all insured depository institutions with more than $5 billion in total assets, including the Bank, in order to recover the loss to the DIF associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The assessment base for the special assessment was equal to an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion. The Company’s uninsured deposits as of December 31, 2022 were under $5 billion and therefore the Company will not be subject to this special assessment.
Under FDIC laws and regulations, no FDIC-insured depository institution can accept brokered deposits unless it is well-capitalized or unless it is adequately capitalized and receives a waiver from the FDIC. Applicable laws and regulations also limit the interest rate that any depository institution that is not well-capitalized may pay on brokered deposits.
Under the Federal Deposit Insurance Act (“FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank’s management is not aware of any practice, condition or violation that might lead to the termination of its deposit insurance.
Federal Home Loan Bank System
The Bank is also a member of the Federal Home Loan Bank (“FHLB”) of New York, which provides a central credit facility primarily for member institutions for home mortgage and neighborhood lending. The Bank is subject to the rules and requirements of the FHLB, including the requirement to acquire and hold shares of capital stock in the FHLB in an amount at least equal to the sum of 0.125% of mortgage related assets at the beginning of each year. The Bank was in compliance with FHLB rules and requirements as of December 31, 2023.
Debit Card Interchange Fees
The Dodd-Frank Act requires that any interchange transaction fee charged for a debit transaction be reasonable and proportional to the cost incurred by the issuer for the transaction. FRB regulations mandated by the Dodd-Frank Act limit interchange fees on debit cards to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. The rule also permits a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer developing, implementing and updating reasonably designed fraud-prevention policies and procedures. Issuers that, together with their affiliates, have less than $10 billion of assets, are exempt from the debit card interchange fee standards. In addition, FRB regulations prohibit all issuers, including the Company and the Bank, from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks.
In December 2020, the OCC, together with the Board of Governors of the Federal Reserve System and the FDIC, issued an interim final rule to temporarily mitigate transition costs related to the coronavirus (“COVID-19”) pandemic on community banking organizations with less than $10 billion in total assets as of December 31, 2019. The rule allowed organizations, including the Company, to use assets as of December 31, 2019, to determine the applicability of various regulatory asset thresholds. During 2020, the Company crossed the $10 billion threshold but elected to delay the regulatory implications of crossing the $10 billion threshold until 2022 for these debit card interchange fee standards. The Company became subject to the new standards starting in July 2022.
Source of Strength Doctrine
FRB policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Section 616 of the Dodd-Frank Act codifies the requirement that bank holding companies serve as a source of financial strength to their subsidiary depository institutions. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both. As a result, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loan by the Company to the Bank is subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The U.S. Bankruptcy Code provides that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
In addition, under the National Bank Act, if the Bank’s capital stock is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the Company. If the assessment is not paid within three months, the OCC could order a sale of Bank stock held by the Company to cover any deficiency.
Capital Adequacy
In July 2013, the FRB, the OCC and the FDIC approved final rules (the “Capital Rules”) that established a new capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach with a more risk-sensitive approach.
The Capital Rules: (1) require a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (2) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (3) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (4) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, for most banking organizations, including the Company, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan losses, in each case, subject to the Capital Rules’ specific requirements.
Pursuant to the Capital Rules, the minimum capital ratios as of January 1, 2015 are:
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4.5% CET1 to risk-weighted assets;
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6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to risk-weighted assets;
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8.0% Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
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4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).
The Capital Rules also require a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. The capital conservation buffer was phased in incrementally until when, on January 1, 2019, the capital conservation buffer was fully phased in, resulting in the capital standards applicable to the Company and the Bank including an additional capital conservation buffer of 2.5% of CET1, and effectively resulting in minimum ratios inclusive of the capital conservation buffer of (1) CET1 to risk-weighted assets of at least 7%, (2) Tier 1 capital to risk-weighted assets of at least 8.5% and (3) Total capital to risk-weighted assets of at least 10.5%. The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures and resulting in higher risk weights for a variety of asset classes. The Capital Rules provide for a number of deductions from and adjustments to CET1.
In addition, under the prior general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in stockholders’ equity (for example, marks-to-market of securities held in the available for sale (“AFS”) portfolio) under generally accepted accounting principles in the United States of America (“GAAP”) were excluded for the purposes of determining regulatory capital ratios. Under the Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations not using the advanced approaches, including the Company and the Bank, were permitted to make a one-time permanent election to continue to exclude these items in January 2015. The Capital Rules also preclude certain hybrid securities, such as trust preferred securities issued after May 19, 2010, from inclusion in bank holding companies’ Tier 1 capital.
Management believes that the Company is in compliance with the targeted capital ratios.
Prompt Corrective Action and Safety and Soundness
Pursuant to Section 38 of the FDIA, federal banking agencies are required to take “prompt corrective action” (“PCA”) should an insured depository institution fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized or undercapitalized, may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice, warrants such treatment.
For purposes of PCA, to be: (1) well-capitalized, an insured depository institution must have a total risk based capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (2) adequately capitalized, an insured depository institution must have a total risk based capital ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (3) undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (4) significantly undercapitalized, an insured depository institution would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%; (5) critically undercapitalized, an insured depository institution would have a ratio of tangible equity to total assets that is less than or equal to 2%. At December 31, 2023, the Bank qualified as “well-capitalized” under applicable regulatory capital standards.
Bank holding companies and insured depository institutions may also be subject to potential enforcement actions of varying levels of severity by the federal banking agencies for unsafe or unsound practices in conducting their business or for violation of any law, rule, regulation, condition imposed in writing by the agency or term of a written agreement with the agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors and other institution-affiliated parties; the termination of the insured depository institution’s deposit insurance; the appointment of a conservator or receiver for the insured depository institution; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the FDIC, as receiver, would be harmed if such equitable relief was not granted.
Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities from: (1) engaging in “proprietary trading” and (2) investing in or sponsoring certain covered funds, subject to certain limited exceptions. Under the Economic Growth, Regulatory Reform and Consumer Protection Act (“EGRRCPA”), depository institutions and their holding companies with less than $10 billion in assets, are excluded from the prohibitions of the Volcker Rule. During 2020, the Company crossed the $10 billion threshold, accordingly, we are subject to the Volcker Rule again. Given the Company’s size and the scope of its activities, the implementation of the Volcker Rule did not have a significant effect on its consolidated financial statements.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Consumer Protection and CFPB Supervision
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent agency charged with responsibility for implementing, enforcing and examining compliance with federal consumer financial laws. The Company grew its asset base in excess of $10 billion in 2020. The Company is now subject to the CFPB’s examination authority with regard to compliance with federal consumer financial laws and regulations, in addition to the OCC as the primary regulatory of the Bank. Under the Dodd-Frank Act, state attorneys general are also empowered to enforce rules issued by the CFPB.
The Company is subject to federal consumer financial statutes and the regulations promulgated thereunder including, but not limited to:
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the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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the Equal Credit Opportunity Act (“ECOA”), prohibiting discrimination in connection with the extension of credit;
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the Home Mortgage Disclosure Act (“HMDA”), requiring home mortgage lenders, including the Bank, to make available to the public expanded information regarding the pricing of home mortgage loans, including the “rate spread” between the annual percentage rate and the average prime offer rate for mortgage loans of a comparable type;
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the Fair Credit Reporting Act (“FCRA”), governing the provision of consumer information to credit reporting agencies and the use of consumer information; and
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the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies.
The Bank’s failure to comply with any of the consumer financial laws can result in civil actions, regulatory enforcement action by the federal banking agencies and the U.S. Department of Justice.
USA PATRIOT Act
The Bank Secrecy Act (“BSA”), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), imposes obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. Since May 11, 2018, the Bank has been required to comply with the Customer Due Diligence Rule, which clarified and strengthened the existing obligations for identifying new and existing customers and explicitly included risk-based procedures for conducting ongoing customer due diligence. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. The Company has a BSA and USA PATRIOT Act Board-approved compliance program commensurate with its risk profile.
Identity Theft Prevention
The FCRA’s Red Flags Rule requires financial institutions with covered accounts (e.g., consumer bank accounts and loans) to develop, implement and administer an identity theft prevention program. This program must include reasonable policies and procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such as inconsistencies in personal information or changes in account activity.
Office of Foreign Assets Control Regulation
The United States government has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in or providing investment-related advice or assistance to a sanctioned country; and (2) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Financial Privacy and Data Security
The Company and the Bank are subject to federal laws, including the GLBA and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from nonaffiliated financial institutions. These provisions require notice of privacy policies to clients and, in some circumstances, allow consumers to prevent disclosure of certain nonpublic personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations.
The GLBA requires that financial institutions implement comprehensive written information security programs that include administrative, technical and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance issued under the GLBA and certain state laws, financial institutions are required to notify clients of security breaches resulting in unauthorized access to their personal information. The Bank follows all GLBA obligations.
The Bank is also subject to data security standards, privacy and data breach notice requirements, primarily those issued by the OCC. The federal banking agencies, through the Federal Financial Institutions Examination Council, have adopted guidelines to encourage financial institutions to address cyber security risks and identify, assess and mitigate these risks, both internally and at critical third party services providers.
Community Reinvestment Act of 1977
The Bank has a responsibility under the CRA, as implemented by OCC regulations, to help meet the credit needs of the communities it serves, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. Regulators periodically assess the Bank’s record of compliance with the CRA. The Bank’s failure to comply with the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of the Company. The Bank’s most current CRA rating was “Satisfactory.”
Future Legislative Initiatives
Congress, state legislatures and financial regulatory agencies may introduce various legislative and regulatory initiatives that could affect the financial services industry, generally. Such initiatives may include proposals to expand or contract the powers of bank holding companies and/or depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could have a material effect on the business of the Company.
Employees
At December 31, 2023, the Company had 2,034 full-time equivalent employees. The Company’s employees are not presently represented by any collective bargaining group.
Available Information
The Company’s website is http://www.nbtbancorp.com. The Company makes available free of charge through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act, as well as our Code of Business Conduct and Ethics and other codes/committee charters. The references to our website do not constitute incorporation by reference of the information contained in the website and such information should not be considered part of this document.
This Annual Report on Form 10-K and other reports filed with the SEC are available on the SEC’s website, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC’s website address is www.sec.gov.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
There are risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Any of the following risks could affect the Company’s financial condition and results of operations and could be material and/or adverse in nature. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Risks Related to our Business and Industry
The Company may be adversely affected by conditions in the financial markets and economic conditions generally.
Key macroeconomic conditions historically have affected the Company’s business, results of operations and financial condition and are likely to affect them in the future. Consumer confidence, unemployment and other economic indicators are among the factors that often impact consumer spending and payment behavior and demand for credit. The Company relies primarily on interest and fees on our loan receivables to generate net earnings. The economy in the United States and globally has experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assurance that economic conditions will not worsen. Unfavorable or uncertain economic conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of geopolitical uncertainties, natural disasters, epidemics and pandemics, terrorist attacks, acts of war or a combination of these or other factors. Federal budget deficit concerns and the potential for political conflict over legislation to fund U.S. government operations and raise the U.S. government’s debt limit may increase the possibility of a default by the U.S. government on its debt obligations, related credit-rating downgrades, or an economic recession in the United States. A worsening of business and economic conditions could have adverse effects on our business, including the following:
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investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on the Company’s stock price and resulting market valuation;
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consumer and business confidence levels could be lowered and cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates;
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the Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches the Company uses to select, manage and underwrite its customers become less predictive of future behaviors;
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the Company could suffer decreases in demand for loans or other financial products and services or decreased deposits or other investments in accounts with the Company;
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demand for and income received from the Company’s fee-based services could decline;
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customers of the Company’s trust and benefit plan administration business may liquidate investments, which together with lower asset values, may reduce the level of assets under management and administration and thereby decrease the Company’s investment management and administration revenues;
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competition in the financial services industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions or otherwise; and
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the value of loans and other assets or collateral securing loans may decrease.
Deterioration in local economic conditions may negatively impact our financial performance.
The Company’s success depends primarily on the general economic conditions in upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine, central and northwestern Connecticut and the specific local markets in which the Company operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in the upstate New York areas of Norwich, Syracuse, Oneonta, Amsterdam-Gloversville, Albany, Binghamton, Utica-Rome, Plattsburgh, Glens Falls and Ogdensburg-Massena, the northeastern Pennsylvania areas of Scranton and Wilkes-Barre, Berkshire County, Massachusetts, southern New Hampshire, Vermont, southern Maine and central and northwestern Connecticut. The local economic conditions in these areas have a significant impact on the demand for the Company’s products and services as well as the ability of the Company’s customers to repay loans, the value of the collateral securing loans and the stability of the Company’s deposit funding sources.
A downturn in our local economies could cause significant increases in nonperforming loans, which could negatively impact our earnings. Declines in real estate values in our market areas could cause any of our loans to become inadequately collateralized, which would expose us to greater risk of loss. Additionally, a decline in real estate values could result in the decline of originations of such loans, as most of our loans and the collateral securing our loans are located in those areas.
Severe weather, flooding and other effects of climate change and other natural disasters could adversely affect our financial condition, results of operations or liquidity.
Our branch locations and our customers’ properties may be adversely impacted by flooding, wildfires, high winds and other effects of severe weather conditions that may be caused or exacerbated by climate change. These events can force property closures, result in property damage and/or result in delays in expansion, development or renovation of our properties and those of our customers. Even if these events do not directly impact our properties or our customers’ properties, they may impact us and our customers through increased insurance, energy or other costs. In addition, changes in laws or regulations, including federal, state or city laws, relating to climate change could result in increased capital expenditures to improve the energy efficiency of our branch locations and/or our customers’ properties.
Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, the Company may face regulatory risk of increasing focus on the Company’s resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.
Variations in interest rates could adversely affect our results of operations and financial condition.
The Company’s earnings and financial condition, like that of most financial institutions, are largely dependent upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect the Company’s earnings and financial condition. The Company cannot predict with certainty, or control, changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the FRB, affect rates and, therefore, interest income and interest expense. In order to address rising inflation, the FRB raised interest rates in 2022 and in the first half 2023 and, while the Federal funds rate has remained unchanged over recent months, the FRB may again raise interest rates in response to inflation. The magnitude of any such increase is not currently known. High interest rates could also affect the amount of loans that the Company can originate because higher rates could cause customers to apply for fewer mortgages or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost. The Company may also experience customer attrition due to competitor pricing on both deposits and loans. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If the Company is not able to reduce its funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then the Company’s net interest margin will decline.
Any substantial or unexpected change in, or prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. See the section captioned “Net Interest Income” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosure About Market Risk located elsewhere in this report for further discussion related to the Company’s management of interest rate risk.
Our lending, and particularly our emphasis on commercial lending, exposes us to the risk of losses upon borrower default.
As of December 31, 2023, approximately 52% of the Company’s loan portfolio consisted of commercial and industrial, agricultural, commercial construction and commercial real estate loans. These types of loans generally expose a lender to greater risk of non-payment and loss than residential real estate loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Because the Company’s loan portfolio contains a significant number of commercial and industrial, agricultural, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and/or an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations. See the section captioned “Loans” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to our commercial and industrial, agricultural, construction and commercial real estate loans.
Our allowance for loan losses may not be sufficient to cover actual loan losses, which could have a material adverse effect on our business, financial condition and results of operations.
The Company maintains an allowance for loan losses, which is an allowance established through a provision for loan losses charged to expense, that represents management’s best estimate of expected credit losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks, forecast economic conditions and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the allowance for loan losses. Bank regulatory agencies periodically review the Company’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the Company may need additional provisions to increase the allowance for loan losses. These potential increases in the allowance for loan losses would result in a decrease in net income and, possibly, capital and may have a material adverse effect on the Company’s financial condition and results of operations. See the section captioned “Risk Management - Credit Risk” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to the Company’s process for determining the appropriate level of the allowance for loan losses. Management expects that the Current Expected Credit Losses (“CECL”) model may create more volatility in the level of our allowance for loan losses from quarter to quarter as changes in the level of allowance for loan losses will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality.
Strong competition within our industry and market area could adversely affect our performance and slow our growth.
The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional and community banks within the various markets in which the Company operates. Additionally, various banks continue to enter or have announced plans to enter the market areas in which the Company currently operates. The Company also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could continue to become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can.
The Company’s ability to compete successfully depends on a number of factors, including, among other things:
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the ability to develop, maintain and build upon long-term customer relationships based on top-quality service, high ethical standards and safe, sound assets;
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the ability to expand the Company’s market position;
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the scope, relevance and pricing of products and services offered to meet customer needs and demands;
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the rate at which the Company introduces new products, services and technologies relative to its competitors;
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customer satisfaction with the Company’s level of service;
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industry and general economic trends; and
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the ability to attract and retain talented employees.
Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
The Company is subject to liquidity risk, which could adversely affect net interest income and earnings.
The purpose of the Company’s liquidity management is to meet the cash flow obligations of its customers for both deposits and loans. Regulators are increasingly focused on liquidity risk after the bank failures of 2023. The primary liquidity measurement the Company utilizes is called basic surplus, which captures the adequacy of the Company’s 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. However, competitive pressure on deposit pricing could result in a decrease in the Company’s deposit base or an increase in funding costs. In addition, liquidity will come under additional pressure if loan growth exceeds deposit growth. These scenarios could lead to a decrease in the Company’s basic surplus measure to an amount below the minimum policy level of 5%. To manage this risk, the Company has the ability to purchase brokered time deposits, borrow against established borrowing facilities with other banks (Federal funds) and enter into repurchase agreements with investment companies. Depending on the level of interest rates applicable to these alternatives, the Company’s net interest income, and therefore earnings, could be adversely affected. See the section captioned “Liquidity Risk” in Item 7.
Our ability to service our debt, pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from our subsidiaries.
The Company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the Company’s common stock and interest and principal on the Company’s debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. In addition, the Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to the Company, the Company may not be able to service debt, pay obligations or pay dividends on the Company’s common stock. The inability to receive dividends from the Bank could have a material adverse effect on the Company’s business, financial condition and results of operations.
A reduction in the Company’s credit rating could adversely affect our business and/or the holders of our securities.
The credit rating agency rating our indebtedness regularly evaluates the Company and the Bank. Credit ratings are based on a number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, including conditions affecting the financial services industry generally and the economy and changes in rating methodologies. There can be no assurance that the Company will maintain our current credit ratings. A downgrade of the credit ratings of the Company or the Bank could adversely affect our access to liquidity and capital, significantly increase our cost of funds, and decrease the number of investors and counterparties willing to lend to the Company or purchase our securities. This could affect our growth, profitability, and financial condition, including liquidity.
The Company relies on third parties to provide key components of its business infrastructure.
The Company relies on third parties to provide key components for its business operations, such as data processing and storage, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While the Company selects these third party vendors carefully, it does not control their actions. Any problems caused by these third parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services by a vendor, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third party vendor could also hurt the Company’s operations if those difficulties interfere with the vendor’s ability to serve the Company. Replacing these third party vendors also could create significant delays and expense that adversely affect the Company’s business and performance.
There are substantial risks and uncertainties associated with the introduction or expansion of lines of business or new products and services within existing lines of business.
From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove attainable. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations and financial condition.
Risks Related to Legal, Governmental and Regulatory Changes
We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.
We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, the DIF and the safety and soundness of the banking system as a whole, not stockholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or limit the pricing the Company may charge on certain banking services, among other things. Compliance personnel and resources may increase our costs of operations and adversely impact our earnings.
Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Supervision and Regulation” in Item 1. Business of this report for further information.
We are subject to heightened regulatory requirements because we exceed $10 billion in total consolidated assets.
As of December 31, 2023, we had total assets of approximately $13.31 billion. The Dodd-Frank Act, including the Durbin Amendment, and its implementing regulations impose enhanced supervisory requirements on bank holding companies with more than $10 billion in total consolidated assets. For bank holding companies with more than $10 billion in total consolidated assets, such requirements include, among other things:
●
applicability of Volcker Rule requirements and restrictions;
●
increased capital, leverage, liquidity and risk management standards;
●
examinations by the CFPB for compliance with federal consumer financial protection laws and regulations; and
●
limits on interchange fees from debit card transactions.
The EGRRCPA, which was enacted in 2018, amended the Dodd-Frank Act to raise the $10 billion stress testing threshold to $250 billion, among other things. The federal financial regulators issued final rules in 2019 to increase the threshold for these stress testing requirements from $10 billion to $250 billion, consistent with the EGRRCPA.
Our regulators will consider our compliance with these regulatory requirements that apply to us (in addition to regulatory requirements that applied to us previously) when examining our operations or considering any request for regulatory approval. We may, therefore, incur associated compliance costs and may be required to maintain compliance procedures.
Failure to comply with these requirements may negatively impact the results of our operations and financial condition. To ensure compliance, we will be required to invest significant resources, which may necessitate hiring additional personnel and implementing additional internal controls. These additional compliance costs may have a material adverse effect on our business, results of operations and financial condition.
Replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.
In March 2021, the United Kingdom’s Financial Conduct Authority and the Intercontinental Exchange Benchmark Administration, the administrator for London Interbank Offered Rate (“LIBOR”), concurrently announced that certain settings of LIBOR would no longer be published on a representative basis after December 31, 2021, and the most commonly used U.S. dollar LIBOR settings would no longer be published on a representative basis after June 30, 2023. The Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR.
We had a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that were either directly or indirectly dependent on LIBOR. With the transition from LIBOR to SOFR as the preferred alternative to LIBOR, we have transitioned and amended our contracts and financial instruments to reference the SOFR rate where required. Since alternative rates (including SOFR) are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The future performance of SOFR, including how changes in SOFR rates may differ from other rates during different economic conditions, cannot be predicted based on its limited historical performance. Further, we cannot predict how SOFR will perform in comparison to LIBOR in changing market conditions, what the effect of such rate’s implementation may be on the markets for floating-rate financial instruments or whether such rates will be vulnerable to manipulation. The implementation of an alternative index or indices for the Company’s financial arrangements may result in less predictable outcomes, including reduced or more volatile interest income if the alternative index or indices respond differently to market and other factors, and may result in reduced loan balances if borrowers do not accept the substitute index or indices and may result in disputes or litigation with customers over the appropriateness or comparability of the alternative index to LIBOR, which could have an adverse effect on the Company’s results of operations.
Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business.
Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
We may be held responsible for environmental liabilities with respect to properties to which we obtain title, resulting in significant financial loss.
A significant portion of our loan portfolio at December 31, 2023 was secured by real estate. In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. We may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business, results of operations, financial condition and liquidity.
We may be adversely affected by the soundness of other financial institutions including the FHLB of New York.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.
The Company owns common stock of FHLB of New York in order to qualify for membership in the FHLB system, which enables it to borrow funds under the FHLB of New York’s advance program. The carrying value and fair value of our FHLB of New York common stock was $21.6 million as of December 31, 2023. There are 11 branches of the FHLB, including New York, which are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt, other FHLB branches can be called upon to make the payment. Any adverse effects on the FHLB of New York could adversely affect the value of our investment in its common stock and negatively impact our results of operations.
Provisions of our certificate of incorporation and bylaws, as well as Delaware law and certain banking laws, could delay or prevent a takeover of us by a third party.
Provisions of the Company’s certificate of incorporation and bylaws, the corporate law of the State of Delaware and state and federal banking laws, including regulatory approval requirements, could delay, defer or prevent a third party from acquiring the Company, despite the possible benefit to the Company’s stockholders, or otherwise adversely affect the market price of the Company’s common stock. These provisions include supermajority voting requirements for certain business combinations and advance notice requirements for nominations for election to the Company’s Board of Directors and for proposing matters that stockholders may act on at stockholder meetings. In addition, the Company is subject to Delaware law, which among other things prohibits the Company from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for the Company’s common stock at a premium over market price or adversely affect the market price of and the voting and other rights of the holders of the Company’s common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than candidates nominated by the Board.
The Company has risk related to legal proceedings.
The Company is involved in judicial, regulatory, and arbitration proceedings concerning matters arising from our business activities and fiduciary responsibilities. The Company establishes reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. We may still incur legal costs for a matter even if a reserve is not established. In addition, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter. The ultimate resolution of a pending or future legal proceeding, depending on the remedy sought and granted, could materially adversely affect our results of operations and financial condition.
Risks Related to Cybersecurity and Data Privacy
The Company faces operational risks and cybersecurity risks associated with incidents which have the potential to disrupt our operations, cause material harm to our financial condition, result in misappropriation of assets, compromise confidential information and/or damage our business relationships and cannot guarantee that the steps we and our service providers take in response to these risks will be effective.
We depend upon data processing, communication systems, and information exchange on a variety of platforms and networks and over the internet to conduct business operations. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Although we require third party providers to maintain certain levels of security, such providers remain vulnerable to breaches, security incidents, system unavailability or other malicious attacks that could compromise sensitive information. The risk of experiencing security incidents and disruptions, particularly through cyber-attacks or cyber intrusions has generally increased as the number, intensity and sophistication of attempted attacks and intrusions by organized crime, hackers, terrorists, nation-states, activists and other external parties has increased. These security incidents may result in disruption of our operations; material harm to our financial condition, cash flows and the market price of our common stock; misappropriation of assets; compromise or corruption of confidential information; liability for information or assets stolen during the incident; remediation costs; increased cybersecurity and insurance costs; regulatory enforcement; litigation; and damage to our stakeholder and customer relationships.
Moreover, in the normal course of business, we and our service providers collect and retain certain personal information provided by our customers, employees and vendors. If this information gets mishandled, misused, improperly accessed, lost or stolen, we could suffer significant financial, business, reputational, regulatory or other harm. These risks may increase as we continue to increase and expand our usage of web-based products and applications.
These risks require continuous and likely increasing attention and resources from us to, among other actions, identify and quantify potential cybersecurity risks, and upgrade and expand our technologies, systems and processes to adequately address the risk. We provide on-going training for our employees to assist them in detecting phishing, malware and other malicious schemes. Such attention diverts time and resources from other activities and, while we have implemented policies and procedures designed to maintain the security and integrity of the information we and our service providers collect on our and their computer systems, there can be no assurance that our efforts will be effective. Likewise, while we have implemented security measures to prevent unauthorized access to personal information and prevent or limit the effect of possible incidents, we can provide no assurance that a security breach or disruption will not be successful or damaging, or, if any such breach or disruption does occur, that it can be sufficiently or timely remediated.
Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
The Company may be adversely affected by fraud.
As a financial institution, the Company is inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers and other third parties targeting the Company and/or the Company’s customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Although the Company devotes substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, the Company may experience financial losses or reputational harm as a result of fraud.
We continually encounter technological change and the failure to understand and adapt to these changes could have a material adverse impact on our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to serve customers better and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.
Risks Related to an Investment in the Company’s Securities
There may be future sales or other dilution of the Company’s equity, which may adversely affect the market price of the Company’s stock.
The Company is not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The Company also grants shares of common stock to employees and directors under the Company’s incentive plan each year. The issuance of any additional shares of the Company’s common stock or preferred stock or securities convertible into, exchangeable for or that represent the right to receive common stock or the exercise of such securities could be substantially dilutive to stockholders of the Company’s common stock. Holders of the Company’s common stock have no preemptive rights that entitle such holders to purchase their pro rata share of any offering of shares of any class or series. Because the Company’s decision to issue securities in any future offering will depend on market conditions, its acquisition activity and other factors, the Company cannot predict or estimate the amount, timing or nature of its future offerings. Thus, the Company’s stockholders bear the risk of the Company’s future offerings reducing the market price of the Company’s common stock and diluting their stock holdings in the Company.
Risks Related to the Merger with Salisbury
The merger with Salisbury could adversely affect the Company’s future business and financial results.
Despite the successful integration of Salisbury’s operations with the Company’s, inherent challenges persist, particularly in harmonizing operational processes, technology platforms, and corporate cultures. The complexity of this integration process may lead to unforeseen delays or disruptions, potentially impacting customer service quality and operational efficiency. Additionally, increased regulatory scrutiny following the merger could result in heightened compliance requirements and regulatory enforcement actions, posing additional risks to our business operations and financial performance. Moreover, the loss of key personnel, customer attrition, and competitive pressures post-merger could adversely affect the Company’s ability to execute strategic initiatives and sustain growth momentum. While the Company remains committed to mitigating these risks through diligent management and proactive measures, the uncertainties associated with the post-merger environment necessitate ongoing vigilance and risk management efforts to safeguard our stakeholders’ interests and ensure long-term success.
General Risks
The risks presented by acquisitions could adversely affect our financial condition and results of operations.
The business strategy of the Company has included and may continue to include growth through acquisition. Any acquisitions (including the acquisition of Salisbury) will be accompanied by the risks commonly encountered in acquisitions. These risks may include, among other things:
●
exposure to potential asset quality issues of the acquired business;
●
potential exposure to unknown or contingent liabilities of the acquired business;
●
our ability to realize anticipated cost savings;
●
the difficulty of integrating operations and personnel (including the operations and personnel of Salisbury) and the potential loss of key employees;
●
the potential disruption of our or the acquired company’s ongoing business in such a way that could result in decreased revenues or the inability of our management to maximize our financial and strategic position;
●
the inability to maintain uniform standards, controls, procedures and policies; and
●
the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management.
We cannot provide any assurance that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome these risks could have an adverse effect on the achievement of our business strategy and results of operations.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key client relationship managers. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial condition.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
The Company owns its headquarters located at 52 South Broad Street, Norwich, New York 13815. In addition, as of December 31, 2023 the Company has 153 branch locations, of which 66 are leased from third parties. The Company owns all other banking premises.
The Company believes that its offices are sufficient for its present operations and that all properties are adequately covered by insurance.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common stock of the Company, par value $0.01 per share (the “Common Stock”), is quoted on the NASDAQ Global Select Market under the symbol “NBTB.” The closing price of the Common Stock on January 31, 2024 was $35.57. As of January 31, 2024, there were 5,634 stockholders of record of Common Stock. No unregistered securities were sold by the Company during the year ended December 31, 2023.
Stock Performance Graph
The following stock performance graph compares the cumulative total stockholder return (i.e., price change, reinvestment of cash dividends and stock dividends received) on our Common Stock against the cumulative total return of the NASDAQ Stock Market (U.S. Companies) Index and the KBW Regional Bank Index (Peer Group). The stock performance graph assumes that $100 was invested on December 31, 2018. The graph further assumes the reinvestment of dividends into additional shares of the same class of equity securities at the frequency with which dividends are paid on such securities during the relevant fiscal year. The yearly points marked on the horizontal axis correspond to December 31 of that year. We calculate each of the referenced indices in the same manner. All are market-capitalization-weighted indices, so companies judged by the market to be more important (i.e., more valuable) count for more in all indices.
Period Ending
Index
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
NBT Bancorp
$
100.00
$
120.59
$
98.73
$
122.06
$
141.64
$
141.51
KBW Regional Bank Index
$
100.00
$
123.87
$
113.11
$
154.57
$
143.87
$
143.30
NASDAQ Composite Index
$
100.00
$
136.73
$
198.33
$
242.38
$
163.58
$
236.70
Source: Bloomberg, L.P.
Dividends
The Company depends primarily upon dividends from subsidiaries for a substantial part of the its revenue. Accordingly, the ability to pay dividends to stockholders depends primarily upon the receipt of dividends or other capital distributions from the subsidiaries. Payment of dividends to the Company from the Bank is subject to certain regulatory and other restrictions. Under Office of the Comptroller of the Currency (“OCC”) regulations, the Bank may pay dividends to the Company without prior regulatory approval so long as it meets its applicable regulatory capital requirements before and after payment of such dividends and its total dividends do not exceed its net income to date over the calendar year plus retained net income over the preceding two years. At December 31, 2023, the Bank was in compliance with all applicable minimum capital requirements and had the ability to pay dividends of $106.6 million to the Company without the prior approval of the OCC.
If the capital of the Company is diminished by depreciation in the value of its property or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, no dividends may be paid out of net profits until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets has been repaired. See the section captioned “Supervision and Regulation” in Item 1. Business and Note 15 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, which are located elsewhere in this report.
Stock Repurchase
The Company purchased 155,500 shares of its common stock during year ended December 31, 2023 at an average price of $31.79 per share under its previously announced share repurchase program. This repurchase program under which these shares were purchased was due to expire on December 31, 2023; however, on December 18, 2023, the Board of Directors authorized and approved an amendment to the repurchase program. Pursuant to the amended stock repurchase program, the Company may repurchase up to 2,000,000 shares of the outstanding shares of its common stock with all repurchases under the stock repurchase program to be made by December 31, 2025. The Company may repurchase shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. The Company did not purchase any share of its common stock during the fourth quarter of 2023.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
[RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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”). When we refer to “NBT,” “we,” “our,” “us,” and “the Company”, we mean NBT Bancorp Inc. and our consolidated subsidiaries, unless the context indicates that we refer only to the parent company, NBT Bancorp Inc. When we refer to the “Bank”, we mean our only bank subsidiary, NBT Bank, National Association, and its subsidiaries. This discussion will focus on results of operations for the fiscal years ended December 31, 2023, 2022, and 2021, and financial condition as of December 31, 2023 and 2022, including capital resources and asset/liability management. This discussion and analysis should be read in conjunction with the Company’s 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 $13.31 billion at December 31, 2023. 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 upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central and northwestern 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 2023 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, 2023 and 2022 and for each of the years in the three-year period ended December 31, 2023 should be read in conjunction with this review.
Critical Accounting Policies
Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.
Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for credit losses (“allowance”, or “ACL”) and the determination of fair values for acquired assets and assumed liabilities in a business combination, including intangible assets such as goodwill, to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.
The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to Note 1 and Note 6 to the consolidated financial statements included elsewhere in this report.
Goodwill represents the cost of the acquired business in excess of the fair value of the related net assets acquired. Following a merger, the determination of fair values for acquired assets and assumed liabilities, including intangible assets such as goodwill, becomes critical. All acquired assets, including goodwill and other intangible assets, and assumed liabilities in purchase acquisitions are recorded at fair value as of the acquisition date. The Company expenses all acquisition-related costs as incurred as required by Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.”
The determination of fair values for acquired loans in a business combination is a significant aspect of our financial reporting process. The valuation of acquired loans relied on a discounted cash flow approach applied on a pooled basis, utilizing a forecast of principal and interest payments. This methodology segmented the acquired loan portfolio by loan type, term, interest rate, payment frequency and payment, and incorporated specific key valuation assumptions, encompassing prepayments, probability of default, loss given default, and the discount rate to ascertain the fair value of these assets. Given the inherent subjectivity and reliance on future cash flows and market conditions, this process involves considerable judgment and estimation uncertainty.
The Company conducts an annual review of goodwill impairment and conducts quarterly analyses to identify any events that may necessitate an interim assessment. The Company initially undertakes a qualitative evaluation of goodwill to ascertain whether certain events or circumstances indicate a likelihood that the fair value of a reporting unit is less than its carrying amount. This qualitative evaluation demands considerable managerial discretion, and if it suggests that the fair value of a reporting unit is unlikely to be less than the carrying value, no quantitative analysis is required. Inputs for this qualitative analysis requiring managerial judgment encompass macroeconomic conditions, industry and market conditions, the financial performance of the reporting unit, and other pertinent events influencing the fair value of the reporting unit.
For information on the Company’s significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to Note 1 to the consolidated financial statements included elsewhere in this report.
Critical Accounting Estimates
SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with U.S. 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 GAAP. The allowance for credit losses and the allowance for unfunded commitments policies are deemed to meet the SEC’s definition of a critical accounting estimate.
Allowance for Credit Losses and Unfunded Commitments
The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. The measurement of Current Expected Credit Losses (“CECL”) on financial instruments requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.
Management of the Company considers the accounting policy relating to the allowance for credit losses to be a critical accounting estimate given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. While management’s current evaluation of the allowance for credit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. The impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses, and therefore, greater volatility to our reported earnings.
One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate expected credit losses over the forecast period. As of December 31, 2023, the quantitative model incorporates a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model. At December 31, 2023, the weightings were 70% and 30% for the baseline and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment starting at 3.8% and increasing slightly during the forecast period to 4.1%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2024 at approximately 3.7% before decreasing to a low of 2.9% in the third quarter of 2024 and then increasing to 3.8% by the end of the forecast period. Other utilized economic variable forecasts are mixed compared to the prior year, with retail sales up, business output mixed, and housing starts down. Key assumptions in the baseline economic outlook included currently being in a full employment economy, continued tapering of the Federal Reserve balance sheet, and the Federal Open Market Committee (“FOMC”) beginning to cut rates in the second quarter of 2024. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, northeast unemployment increases to a peak of 7.0% in the first quarter of 2025. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2023. 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, 2023, 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 December 31, 2023, the Company increased the downside scenario to 100% which resulted in a 26% 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 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, 2023:
●
the acquisition of Salisbury Bancorp, Inc. (“Salisbury”) by the merger of Salisbury with and into the Company was completed on August 11, 2023;
●
net income for the year ended December 31, 2023 was $118.8 million, down $33.2 million from the year ended December 31, 2022;
●
diluted earnings per share of $2.65 for the year ended December 31, 2023, down $0.87 from the year ended December 31, 2022;
●
operating net income(1), a non-GAAP measure, which excludes acquisition expenses, acquisition-related provision for credit losses, securities (losses) gains and an impairment of a minority interest equity investment, net of tax, was $144.7 million, or $3.23 per diluted common share, for the year ended December 31, 2023;
●
excluding securities (losses) gains, noninterest income represented 29% of total revenues and was $151.5 million for the year ended December 31, 2023, down $5.2 million, or 3.3% from the year ended December 31, 2022;
●
noninterest expense, excluding $10.0 million of acquisition expenses for the year ended December 31, 2023 and $1.0 million for the year ended December 31, 2022, respectively, was up $28.2 million, or 9.3%, from the prior year;
●
period end total loans were $9.65 billion, up $1.50 billion, or 18.4% from December 31, 2022, excluding the $1.18 billion of loans acquired from Salisbury, loans grew $320.6 million, or 3.9%, since December 31, 2022;
●
period end total deposits were $10.97 billion, up $1.47 billion, or 15.5% from December 31, 2022, excluding the $1.31 billion of deposits acquired from Salisbury, deposits increased $164.1 million, or 1.7%, since December 31, 2022;
●
credit quality metrics including net charge-offs of 0.19% and allowance for loan losses to total loans at 1.19%;
●
book value per share of $30.26 at December 31, 2023; tangible book value per share was $21.72(1) at December 31, 2023.
(1)
Non-GAAP measure - Refer to non-GAAP reconciliation below.
Salisbury Bancorp, Inc. Merger
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 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 purchase credit deteriorated (“PCD”) loans reclassified from loans and the $8.8 million allowance for non-PCD loans recognized through the provision for loan losses.
Results of Operations
Net income for the year ended December 31, 2023 was $118.8 million, or $2.65 per diluted common share, compared to $152.0 million, or $3.52 per diluted share, in the prior year.
●
Operating net income(1), a non-GAAP measure, which excludes the impact of acquisition expenses, acquisition-related provision for credit losses, securities (losses) gains and an impairment of a minority interest equity investment, the Company generated $3.23 per diluted share of earnings in 2023, compared to $3.56 per diluted share in 2022.
●
The Company incurred a $4.5 million ($0.08 per diluted share) securities loss on the sale of two subordinated debt securities held in the available for sale (“AFS”) portfolio and a $5.0 million ($0.09 per diluted share) securities loss on the write-off of a subordinated debt security of a failed financial institution.
●
The Company incurred acquisition expenses of $10.0 million ($0.18 per diluted share) and $1.0 million ($0.02 per diluted share) related to the merger with Salisbury in 2023 and 2022, respectively.
●
The Company recorded a full $4.8 million ($0.08 per diluted share) impairment of its minority interest equity investment in a provider of financial and technology services to residential solar equipment installers due to the uncertainty in the realizability of the investment in other noninterest expense in the consolidated statements of income.
●
Net interest income in 2023 increased $16.0 million in comparison to 2022, primarily due to the impact of the Salisbury acquisition.
●
The Company recorded a provision for loan losses of $25.3 million ($0.44 per diluted share) in 2023, compared to $17.1 million ($0.31 per diluted share) in 2022. Included in the provision expense for 2023 was $8.8 million of acquisition-related provision for loan losses.
●
Card services income decreased $8.2 million from prior year outcomes driven by the impact of the Company being subject to the statutory price cap provisions of the Durbin Amendment to the Dodd-Frank Act (“Durbin Amendment”).
The following table sets forth certain financial highlights:
Years Ended December 31,
Performance:
Diluted earnings per share
$
2.65
$
3.52
$
3.54
Return on average assets
0.95
%
1.29
%
1.33
%
Return on average equity
9.34
%
12.67
%
12.71
%
Return on average tangible common equity
13.02
%
16.89
%
16.92
%
Net interest margin (FTE)
3.29
%
3.34
%
3.03
%
Capital:
Equity to assets
10.71
%
10.00
%
10.41
%
Tangible equity ratio
7.93
%
7.73
%
8.20
%
Book value per share
$
30.26
$
27.38
$
28.97
Tangible book value per share
$
21.72
$
20.65
$
22.26
Leverage ratio
9.71
%
10.32
%
9.41
%
Common equity tier 1 capital ratio
11.57
%
12.12
%
12.25
%
Tier 1 capital ratio
12.50
%
13.19
%
13.43
%
Total risk-based capital ratio
14.75
%
15.38
%
15.73
%
The following tables provide non-GAAP reconciliations:
Years Ended December 31,
(In thousands, except per share data)
Return on average tangible common equity:
Net income
$
118,782
$
151,995
$
154,885
Amortization of intangible assets (net of tax)
3,551
1,698
2,106
Net income, excluding intangible amortization
$
122,333
$
153,693
$
156,991
Average stockholders’ equity
$
1,272,333
$
1,199,383
$
1,218,449
Less: average goodwill and other intangibles
332,667
289,238
290,838
Average tangible common equity
$
939,666
$
910,145
$
927,611
Return on average tangible common equity
13.02
%
16.89
%
16.92
%
Tangible equity ratio:
Stockholders’ equity
$
1,425,691
$
1,173,554
$
1,250,453
Intangibles
402,294
288,545
289,468
Assets
$
13,309,040
$
11,739,296
$
12,012,111
Tangible equity ratio
7.93
%
7.73
%
8.20
%
Tangible book value:
Stockholders’ equity
$
1,425,691
$
1,173,554
$
1,250,453
Intangibles
402,294
288,545
289,468
Tangible equity
$
1,023,397
$
885,009
$
960,985
Diluted common shares outstanding
47,110
42,858
43,168
Tangible book value per share
$
21.72
$
20.65
$
22.26
Operating net income:
Net income
$
118,782
$
151,995
$
154,885
Acquisition expenses
9,978
-
Acquisition-related provision for credit losses
8,750
-
-
Acquisition-related reserve for unfunded loan commitments
-
-
Impairment of a minority interest equity investment
4,750
-
-
Litigation settlement cost
-
-
4,250
Securities losses (gains)
9,315
1,131
(566
)
Adjustment to net income
$
33,629
$
2,098
$
3,684
Adjustment to net income (net of tax)
$
25,965
$
1,623
$
2,854
Operating net income
$
144,747
$
153,618
$
157,739
Operating diluted earnings per share
$
3.23
$
3.56
$
3.61
2024 Outlook
The Company’s 2023 earnings reflected a continued ability to invest in the Company’s future while managing through significant volatility in the interest rate environment and overall economic conditions which have challenged the financial services industry. Throughout 2023, the Company, along with other financial services companies, experienced lingering disruptions from the coronavirus (“COVID-19”) pandemic. Mainly, the interest rate 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 the remainder of 2022 and throughout 2023. This rate increase and curve inversion was highly correlated with a significant tightening of monetary policy to combat heightened inflation. Additionally, the three regional bank failures which occurred in the first quarter of 2023 resulted in heightened competition for balance sheet liquidity, which resulted in increased cost of funding as well assessment of earning asset growth capacity.
While economic indicators have remained mixed, they have trended toward the decline of inflation. Given this decline in inflation the probability for Federal Funds rate reductions in 2024 have increased. This anticipated interest rate decline, coupled with strong consumer and corporate balance sheets support a view that the potential for recession has been reduced and that any form of economic slowdown could be mild. Significant items that may have an impact on 2024 results include:
●
Excess liquidity in the banking system has significantly decreased:
ο
loan growth may be negatively impacted as interest rates have risen and lenders have reverted back to historical credit spreads to account for overall higher cost of funds;
ο
cost of deposits as well as overall cost of funds could continue to negatively impact net interest margin. While declining short term interest rates may allow for cost of funds reductions, the elevated level of relative interest rates and the bank failures in early 2023 continue to pressure competition for deposits as well as the associated cost of funds;
ο
higher short-term interest rates have continued to afford deposit customers investment opportunities outside the banking system resulting in deposit declines across the industry, however, a decline to short-term interest rates could potentially mitigate this;
ο
Investment purchases have slowed as runoff of investment cash flows have been utilized as a source of funding.
●
The Federal Reserve has continued to combat elevated inflation, with the result being inflationary pressures having declined in the second half of 2023:
ο
this reduced inflation has had a material impact on current and expected Federal Reserve monetary policy;
ο
the tightening of monetary policy through measures to raise interest rates seen in 2022 and 2023 could begin to reverse itself in 2024 given softening inflation;
ο
the loosening of monetary policy through the reduction to short term interest rates in 2024 could have a negative impact on overall net interest income given the decline in interest rates on floating rate assets. This risk has been mitigated by the Bank’s migration to a more neutral interest rate sensitivity position.
●
The Company’s continued focus on long-term strategies including growth in the New England markets, diversification of revenue sources, improving operating efficiencies and investing in technology.
●
The Company’s merger with Salisbury is expected to provide earnings benefit and incremental growth potential in these new markets.
The Company’s 2024 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.
Average Balances and Net Interest Income
(Dollars in thousands)
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Assets:
Short-term interest-bearing accounts
$
126,765
$
6,259
4.94
%
$
440,429
$
3,072
0.70
%
$
932,086
$
1,229
0.13
%
Securities taxable(1)
2,377,596
45,176
1.90
%
2,424,925
43,229
1.78
%
1,910,641
31,962
1.67
%
Securities tax-exempt(1) (3)
214,053
6,730
3.14
%
233,515
5,070
2.17
%
220,759
4,929
2.23
%
Federal Reserve Bank and FHLB stock
48,641
3,368
6.92
%
27,040
3.68
%
25,255
2.44
%
Loans(2) (3)
8,803,228
463,290
5.26
%
7,772,962
333,008
4.28
%
7,543,149
302,331
4.01
%
Total interest-earning assets
$
11,570,283
$
524,823
4.54
%
$
10,898,871
$
385,374
3.54
%
$
10,631,890
$
341,067
3.21
%
Other assets
923,850
893,197
983,809
Total assets
$
12,494,133
$
11,792,068
$
11,615,699
Liabilities and stockholders’ equity:
Money market deposit accounts
$
2,418,450
$
62,475
2.58
%
$
2,447,978
$
4,955
0.20
%
$
2,587,748
$
5,117
0.20
%
NOW deposit accounts
1,555,414
8,298
0.53
%
1,578,831
2,600
0.16
%
1,452,560
0.05
%
Savings deposits
1,715,749
0.04
%
1,829,360
0.03
%
1,656,893
0.05
%
Time deposits
1,006,867
33,218
3.30
%
464,912
1,776
0.38
%
577,150
4,030
0.70
%
Total interest-bearing deposits
$
6,696,480
$
104,641
1.56
%
$
6,321,081
$
9,923
0.16
%
$
6,274,351
$
10,714
0.17
%
Federal funds purchased
24,575
1,269
5.16
%
14,644
4.02
%
-
-
Repurchase agreements
70,251
1.06
%
69,561
0.10
%
100,519
0.13
%
Short-term borrowings
450,377
23,592
5.24
%
46,371
1,968
4.24
%
1,302
2.00
%
Long-term debt
24,247
3.81
%
6,579
2.45
%
15,479
2.51
%
Subordinated debt, net
105,756
6,076
5.75
%
98,439
5,424
5.51
%
98,259
5,437
5.53
%
Junior subordinated debt
101,196
7,320
7.23
%
101,196
3,749
3.70
%
101,196
2,090
2.07
%
Total interest-bearing liabilities
$
7,472,882
$
144,570
1.93
%
$
6,657,871
$
21,880
0.33
%
$
6,591,123
$
18,788
0.29
%
Demand deposits
3,463,608
3,696,957
3,565,693
Other liabilities
285,310
237,857
240,434
Stockholders’ equity
1,272,333
1,199,383
1,218,449
Total liabilities and stockholders’ equity
$
12,494,133
$
11,792,068
$
11,615,699
Net interest income (FTE)
$
380,253
$
363,494
$
322,279
Interest rate spread
2.61
%
3.21
%
2.92
%
Net interest margin (FTE)
3.29
%
3.34
%
3.03
%
Taxable equivalent adjustment
$
2,034
$
1,304
$
1,191
Net interest income
$
378,219
$
362,190
$
321,088
(1)
Securities are shown at average amortized cost.
(2)
For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.
(3)
Interest income for tax-exempt securities and loans have been adjusted to an FTE basis using the statutory Federal income tax rate of 21%.
2023 OPERATING RESULTS AS COMPARED TO 2022 OPERATING RESULTS
Net Interest Income
Net interest income for the year ended December 31, 2023 was $378.2 million, up $16.0 million, or 4.4%, from 2022. FTE net interest margin was 3.29% for the year ended December 31, 2023, a decrease of 5 basis points (“bps”) from 2022. Interest income increased $138.7 million, or 36.1%, as the yield on average interest-earning assets increased 100 bps from 2022 to 4.54%, while average interest-earning assets of $11.57 billion increased $671.4 million primarily due to the Salisbury acquisition and organic loan growth partially offset by the decrease in short-term interest bearing accounts (“excess liquidity”). Interest expense was up $122.7 million, or 560.7%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, driven by interest-bearing deposit costs increasing 140 bps to 1.56%, as well as a $404.0 million increase in the average balances of short-term borrowings and a 524 bps rate paid on those borrowings. The increase was also driven by the Company shifting from an excess liquidity position to an overnight borrowing position beginning in the fourth quarter of 2022. Included in net interest income was $4.3 million of acquisition-related net accretion, which positively impacted net interest margin by 4 bps. The Federal Reserve raised its target fed funds rate to 550 basis points in 2023, positively impacting our yields on earning assets.
Analysis of Changes in FTE Net Interest Income
Increase (Decrease)
2023 over 2022
Increase (Decrease)
2022 over 2021
(In thousands)
Volume
Rate
Total
Volume
Rate
Total
Short-term interest-bearing accounts
$
(3,583
)
$
6,770
$
3,187
$
(953
)
$
2,796
$
1,843
Securities taxable
(856
)
2,803
1,947
9,057
2,210
11,267
Securities tax-exempt
(452
)
2,112
1,660
(138
)
Federal Reserve Bank and FHLB stock
1,128
1,245
2,373
Loans
47,841
82,441
130,282
9,406
21,271
30,677
Total FTE interest income
$
44,077
$
95,372
$
139,449
$
17,835
$
26,472
$
44,307
Money market deposit accounts
(60
)
57,580
57,520
(281
)
(162
)
NOW deposit accounts
(39
)
5,737
5,698
1,792
1,862
Savings deposits
(38
)
(316
)
(237
)
Time deposits
4,164
27,278
31,442
(677
)
(1,577
)
(2,254
)
Federal funds purchased
-
Repurchase agreements
(35
)
(30
)
(65
)
Short-term borrowings
21,058
21,624
1,881
1,942
Long-term debt
(218
)
(10
)
(228
)
Subordinated debt, net
(23
)
(13
)
Junior subordinated debt
-
3,571
3,571
-
1,659
1,659
Total FTE interest expense
$
26,610
$
96,080
$
122,690
$
1,417
$
1,675
$
3,092
Change in FTE net interest income
$
17,467
$
(708
)
$
16,759
$
16,418
$
24,797
$
41,215
Loans and Corresponding Interest and Fees on Loans
The average balance of loans increased by approximately $1.03 billion, or 13.3%, from 2022 to 2023 driven by the Salisbury acquisition and organic loan growth, with increases in commercial and industrial (“C&I”), commercial real estate (“CRE”), indirect auto, residential solar and residential mortgage portfolios being partly offset by a reduction in the average balance of other consumer loans. The yield on average loans increased from 4.28% in 2022 to 5.26% in 2023, as loans re-priced upward due to the interest rate environment in 2023. FTE interest income from loans increased 39.1%, from $333.0 million in 2022 to $463.3 million in 2023. This increase was due to the increases in yields and an increase in the average balance.
Total loans were $9.65 billion and $8.15 billion at December 31, 2023 and 2022, respectively. Period end loans increased $1.50 billion or 18.4% from December 31, 2022, which included $1.18 billion of loans acquired from Salisbury. Commercial and industrial loans increased $88.2 million to $1.35 billion; commercial real estate loans increased $819.0 million to $3.63 billion; and total consumer loans increased $593.4 million to $4.67 billion. Total loans represent approximately 72.5% of assets as of December 31, 2023, as compared to 69.4% as of December 31, 2022.
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
December 31,
(In thousands)
Commercial & industrial
$
1,353,725
$
1,265,082
$
1,155,240
$
1,121,224
$
1,112,616
Commercial real estate
3,626,910
2,807,941
2,655,367
2,526,813
2,331,650
Paycheck protection program
101,222
430,810
-
Residential real estate
2,125,804
1,649,870
1,571,232
1,466,662
1,445,156
Indirect auto
1,130,132
989,587
859,454
931,286
1,193,635
Residential solar
917,755
856,798
440,016
282,224
219,210
Home equity
337,214
314,124
330,357
387,974
444,082
Other consumer
158,650
265,796
385,571
351,892
389,749
Total loans
$
9,650,713
$
8,150,147
$
7,498,459
$
7,498,885
$
7,136,098
(1)
Loans are summarized by business line which does not align with how the Company assesses credit risk in the estimate for credit losses under CECL.
Loans in the C&I and CRE portfolios, consist primarily of loans made to small and medium-sized entities. The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and seasonal crop expenses. These loans are usually collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. The Company extends CRE loans to facilitate various real estate transactions, encompassing acquisitions, refinancing, expansions, and enhancements to both commercial and agricultural properties. These loans are secured by liens on real estate assets, covering a spectrum of properties including apartments, commercial structures, healthcare facilities, and others, whether occupied by owners or non-owners. Risks associated with the CRE portfolio pertain to the borrowers’ capacity to meet interest and principal payments throughout the loan’s duration, as well as their ability to secure refinancing upon the loan’s maturity. The Company has a risk management framework that includes rigorous underwriting standards, targeted portfolio stress testing, interest rate sensitivities on commercial borrowers and comprehensive credit risk monitoring mechanisms. The Company remains vigilant in monitoring market trends, economic indicators, and regulatory developments to promptly adapt our risk management strategies as needed.
Within the CRE portfolio, approximately 78% comprises Non-Owner Occupied CRE, with the remaining 22% being Owner-Occupied CRE. Non-Owner Occupied CRE includes diverse sectors across the Company’s markets such as apartments (33%), office spaces (17%), and construction (13%), along with retail, manufacturing, small commercial, accommodations, and others. Notably, office CRE loans account for 5% of the total outstanding loans, predominantly serving suburban medical and professional tenants across suburban and small urban markets. These loans carry an average size of $2.5 million, with 14% maturing over the next two years. As of December 31, 2023, the total CRE construction and development loans amounted to $347.2 million.
The Company participated in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“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.
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, 2023, there were $39.9 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. Springstone and LendingClub loans are in a planned run-off status. 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 home equity and other consumer loans.
Remaining Maturity at December 31, 2023
(In thousands)
C&I
CRE
Indirect
Auto
Residential
Solar
Other
Consumer
Residential
Total
Within one year
$
263,204
$
158,227
$
13,380
$
$
22,393
$
$
457,993
From one to five years
523,893
962,542
630,046
13,457
147,382
38,549
2,315,869
From five to fifteen years
325,814
2,195,525
486,706
297,119
319,739
421,967
4,046,870
After fifteen years
241,337
310,616
-
607,012
6,350
1,664,666
2,829,981
Total
$
1,354,248
$
3,626,910
$
1,130,132
$
917,755
$
495,864
$
2,125,804
$
9,650,713
Interest rate terms on amounts due after one year:
Fixed
$
760,886
$
828,425
$
1,116,713
$
917,403
$
240,404
$
1,829,553
$
5,693,384
Variable
$
330,158
$
2,640,258
$
$
$
233,067
$
295,629
$
3,499,336
Securities and Corresponding Interest and Dividend Income
The average balance of taxable securities AFS and held to maturity (“HTM”) decreased $47.3 million, or 2.0%, from 2022 to 2023. The yield on average taxable securities was 1.90% for 2023 compared to 1.78% in 2022. The average balance of tax-exempt securities AFS and HTM decreased from $233.5 million in 2022 to $214.1 million in 2023. The FTE yield on tax-exempt securities increased from 2.17% in 2022 to 3.14% in 2023.
The average balance of Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock increased to $48.6 million in 2023 from $27.0 million in 2022. The yield on investments in Federal Reserve Bank and FHLB stock increased from 3.68% in 2022 to 6.92% in 2023.
Securities Portfolio
As of December 31,
(In thousands)
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
AFS securities:
U.S. treasury
$
133,302
$
125,024
$
132,891
$
121,658
$
73,016
$
73,069
Federal agency
248,384
214,740
248,419
206,419
248,454
239,931
State & municipal
96,251
86,306
97,036
82,851
95,531
94,088
Mortgage-backed
473,813
422,268
536,021
473,694
603,375
606,675
Collateralized mortgage obligations
614,886
541,544
669,111
588,363
623,930
621,595
Corporate
48,442
40,976
60,404
54,240
50,500
52,003
Total AFS securities
$
1,615,078
$
1,430,858
$
1,743,882
$
1,527,225
$
1,694,806
$
1,687,361
HTM securities:
Federal agency
$
100,000
$
82,216
$
100,000
$
79,322
$
100,000
$
95,635
Mortgage-backed
245,806
213,630
267,907
230,473
170,574
172,001
Collateralized mortgage obligations
251,335
228,463
274,366
249,848
138,815
140,280
State & municipal
308,126
290,215
277,244
253,004
323,821
327,344
Total HTM securities
$
905,267
$
814,524
$
919,517
$
812,647
$
733,210
$
735,260
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 masturities of debt securities shown in amortized cost ($) and weighted average yield (%) at December 31, 2023. 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.
Less than 1 Year
1 Year to 5 Years
5 Years to 10 Years
Over 10 Years
Total
(Dollars in thousands)
$
%
$
%
$
%
$
%
$
%
AFS securities:
U.S. treasury
$
34,955
2.59
%
$
98,347
1.42
%
$
-
-
$
-
-
$
133,302
1.73
%
Federal agency
-
-
150,600
0.96
%
97,784
1.15
%
-
-
248,384
1.04
%
State & municipal
-
-
74,390
1.33
%
21,861
1.55
%
-
-
96,251
1.38
%
Mortgage-backed
0.55
%
88,454
1.30
%
158,468
2.32
%
226,783
1.52
%
473,813
1.74
%
Collateralized mortgage obligations
15,326
2.95
%
124,306
1.90
%
30,389
1.54
%
444,865
1.99
%
614,886
1.97
%
Corporate
-
-
-
-
48,442
4.03
%
-
-
48,442
4.03
%
Total AFS securities
$
50,389
2.69
%
$
536,097
1.37
%
$
356,944
2.12
%
$
671,648
1.83
%
$
1,615,078
1.77
%
HTM securities:
Federal agency
$
-
-
$
-
-
$
100,000
1.11
%
$
-
-
$
100,000
1.11
%
Mortgage-backed
-
-
4,501
3.51
%
12,585
4.23
%
228,720
2.02
%
245,806
2.16
%
Collateralized mortgage obligations
-
-
27,339
2.60
%
87,106
3.01
%
136,890
2.80
%
251,335
2.85
%
State & municipal
92,757
3.92
%
81,235
2.34
%
63,252
1.91
%
70,882
1.82
%
308,126
2.61
%
Total HTM securities
$
92,757
3.92
%
$
113,075
2.45
%
$
262,943
2.08
%
$
436,492
2.23
%
$
905,267
2.39
%
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 $7.47 billion in 2023 and increased $815.0 million from 2022. The increase was primarily driven by the interest-bearing deposits acquired from Salisbury and an increase in short-term borrowings. The rate paid on interest-bearing liabilities increased from 0.33% in 2022 to 1.93% in 2023. This increase in rates caused an increase in interest expense of $122.7 million, or 560.7%, from $21.9 million in 2022 to $144.6 million in 2023.
Deposits
Average interest-bearing deposits increased $375.4 million, or 5.9%, from 2022 to 2023. Average money market deposits decreased $29.5 million, or 1.2% during 2023 compared to 2022. Average NOW accounts decreased $23.4 million, or 1.5% during 2023 as compared to 2022. The average balance of savings accounts decreased $113.6 million, or 6.2%, during 2023 compared to 2022. The average balance of time deposits increased $542.0 million, or 116.6%, from 2022 to 2023. The average balance of demand deposits decreased $233.3 million, or 6.3%, during 2023 compared to 2022. The Company continues to experience the migration from no interest and low interest checking and savings accounts into higher cost money market and time deposit instruments. The decrease in average balances was due primarily to larger commercial customers shifting balances to higher yielding investment opportunities in both the Company’s wealth management solutions as well as other offerings in the market. The Company’s composition of total deposits is diverse and granular with over 563,000 accounts with an average per account balance of $19,483 as of December 31, 2023.
The rate paid on average interest-bearing deposits was up 140 bps to 1.56% for 2023. The rate paid for money market deposit accounts increased 238 bps to 2.58% from 2022 to 2023. The rate paid for NOW deposit accounts increased from 0.16% in 2022 to 0.53% in 2023. The rate paid for savings deposits increased from 0.03% in 2022 to 0.04% in 2023. The rate paid for time deposits increased from 0.38% during 2022 to 3.30% during 2023.
Years Ended December 31,
(In thousands)
Average
Balance
Yield/Rate
Average
Balance
Yield Rate
Average
Balance
Yield/Rate
Demand deposits
$
3,463,608
$
3,696,957
$
3,565,693
Money market deposit accounts
2,418,450
2.58
%
2,447,978
0.20
%
2,587,748
0.20
%
NOW deposit accounts
1,555,414
0.53
%
1,578,831
0.16
%
1,452,560
0.05
%
Savings deposits
1,715,749
0.04
%
1,829,360
0.03
%
1,656,893
0.05
%
Time deposits
1,006,867
3.30
%
464,912
0.38
%
577,150
0.70
%
Total interest-bearing deposits
$
6,696,480
1.56
%
$
6,321,081
0.16
%
$
6,274,351
0.17
%
The following table presents the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting:
As of December 31,
(In thousands)
Estimated amount of uninsured deposits
$
4,077,186
$
3,555,342
$
4,175,208
The following table presents the maturity distribution of time deposits of $250,000 or more:
(In thousands)
December 31, 2023
Portion of time deposits in excess of insurance limit
$
113,317
Time deposits otherwise uninsured with a maturity of:
Within three months
$
45,070
After three but within six months
32,967
After six but within twelve months
18,131
Over twelve months
17,149
Borrowings
Average federal funds purchased increased to $24.6 million in 2023. The rate paid on federal funds purchased was 5.16% in 2023. Average repurchase agreements increased to $70.3 million in 2023 from $69.6 million in 2022. The average rate paid on repurchase agreements increased from 0.10% in 2022 to 1.06% in 2023. Average short-term borrowings increased to $450.4 million in 2023 from $46.4 million in 2022. The average rate paid on short-term borrowings increased from 4.24% in 2022 to 5.24% in 2023. Average long-term debt increased from $6.6 million in 2022 to $24.2 million in 2023. The average balance of junior subordinated debt remained at $101.2 million in 2023. The average rate paid for junior subordinated debt in 2023 was 7.23%, up from 3.70% in 2022.
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 $2.87 billion and $2.90 billion at December 31, 2023 and 2022, 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 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 debt issuance cost of $2.2 million is being amortized on a straight-line basis into interest expense over five years. The Company repurchased $2.0 million of the subordinated notes during the year ended December 31, 2022 at a discount of $0.1 million.
Subordinated notes assumed in connection with the Salisbury acquisition included $25.0 million of 3.50% fixed-to-floating rate subordinated notes due 2031. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 3.50%, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80%, payable quarterly in arrears commencing on June 30, 2026. As of the acquisition date, the fair value discount was $3.0 million.
As of December 31, 2023 and December 31, 2022 the subordinated debt net of unamortized issuance costs and fair value discount was $119.7 million and $96.9 million, respectively. Which will be amortized into interest expense over the expected call or maturity date.
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:
Years Ended December 31,
(In thousands)
Service charges on deposit account
$
15,425
$
14,630
$
13,348
Card services income
20,829
29,058
34,682
Retirement plan administration fees
47,221
48,112
42,188
Wealth management
34,763
33,311
33,718
Insurance services
15,667
14,696
14,083
Bank owned life insurance income
6,750
6,044
6,217
Net securities (losses) gains
(9,315
)
(1,131
)
Other
10,838
10,858
12,992
Total noninterest income
$
142,178
$
155,578
$
157,794
Noninterest income for the year ended December 31, 2023 was $142.2 million, down $13.4 million, or 8.6%, from the year ended December 31, 2022. During 2023, the Company incurred a $4.5 million securities loss on the sale of two subordinated debt securities held in the AFS portfolio and a $5.0 million securities loss on the write-off of a subordinated debt security of a failed financial institution. Excluding net securities (losses) gains, noninterest income for the year ended December 31, 2023 was $151.5 million, down $5.2 million or 3.3%, from the year ended December 31, 2022. The decrease from the prior year was driven by lower card services income from the impact of the statutory price cap provisions of the Durbin Amendment of approximately $8.0 million and lower retirement plan administration fees driven by a decrease in certain activity-based fees. These decreases were partially offset by an increase in wealth management and insurance services.
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:
Years Ended December 31,
(In thousands)
Salaries and employee benefits
$
194,250
$
187,830
$
172,580
Technology and data services
38,163
35,712
34,717
Occupancy
28,408
26,282
26,048
Professional fees and outside services
17,601
16,810
16,306
Office supplies and postage
6,917
6,140
6,006
FDIC assessment
6,257
3,197
3,041
Advertising
3,054
2,822
2,521
Amortization of intangible assets
4,734
2,263
2,808
Loan collection and other real estate owned, net
2,618
2,647
2,915
Acquisition expenses
9,978
-
Other
29,684
19,795
20,339
Total noninterest expense
$
341,664
$
304,465
$
287,281
Noninterest expense for the year ended December 31, 2023 was $341.7 million, up $37.2 million or 12.2%, from the year ended December 31, 2022. The Company incurred acquisition expenses for the year ended December 31, 2023 and December 31, 2022 of $10.0 million and $1.0 million, respectively, related to the merger with Salisbury. Included in other noninterest expenses for the year ended December 31, 2023, the Company recorded a $4.8 million impairment of its minority interest equity investment in a provider of financial and technology services to residential solar equipment installers due to the uncertainty in the realizability of the investment. Excluding acquisition expenses and the impairment of a minority interest equity investment, noninterest expense for the year ended December 31, 2023 was $326.9 million, up $23.4 million or 7.7%, from the year ended December 31, 2022. The increase from the prior year was driven by higher salaries and employee benefits due to the Salisbury acquisition, increased salaries and wages including merit pay increases and higher health and welfare benefits, which were partially offset by lower levels of incentive compensation. In addition, the increase in technology and data services was due to continued investment in digital platforms solutions, the increase in the FDIC assessment expense was driven by the statutory increase in the FDIC assessment rate, increased occupancy expense was driven by the addition of Salisbury locations and other expenses were higher due to the increase in actuarially determined expense related to the Company’s retirement plans.
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, 2023 was $34.7 million, down $9.5 million, or 21.5%, from the year ended December 31, 2022. The effective tax rate was 22.6% in 2023 and was 22.5% in 2022.
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, troubled loans modifications, 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, commercial and commercial real estate loans risk graded substandard or doubtful, and nonperforming loans specifically evaluated for individual credit loss is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.
Nonperforming Assets
As of December 31,
(Dollars in thousands)
%
%
%
%
Nonaccrual loans:
Commercial
$
21,567
%
$
7,664
%
$
15,942
%
$
23,557
%
Residential
9,632
%
4,835
%
8,862
%
13,082
%
Consumer
2,566
%
1,667
%
1,511
%
3,020
%
Troubled loan modifications(1)
%
3,067
%
3,970
%
4,988
%
Total nonaccrual loans
$
34,213
%
$
17,233
%
$
30,285
%
$
44,647
%
Loans over 90 days past due and still accruing:
Commercial
$
-
$
-
$
-
-
$
%
Residential
%
%
%
%
Consumer
3,106
%
3,048
%
1,650
%
2,138
%
Total loans over 90 days past due and still accruing
$
3,661
%
$
3,823
%
$
2,458
%
$
3,149
%
Total nonperforming loans
$
37,874
$
21,056
$
32,743
$
47,796
OREO
-
1,458
Total nonperforming assets
$
37,874
$
21,161
$
32,910
$
49,254
Total nonaccrual loans to total loans
0.35
%
0.21
%
0.40
%
0.60
%
Total nonperforming loans to total loans
0.39
%
0.26
%
0.44
%
0.64
%
Total nonperforming assets to total assets
0.28
%
0.18
%
0.27
%
0.45
%
Total allowance for loan losses to nonperforming loans
302.05
%
478.72
%
280.98
%
230.14
%
Total allowance for loan losses to nonaccrual loans
334.38
%
584.92
%
303.78
%
246.38
%
(1)
TDRs prior to adoption of ASU 2022-02.
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.
As of December 31,
(Dollars in thousands)
%
Nonaccrual loans:
Commercial
$
12,379
%
Residential real estate
5,233
%
Consumer
4,046
%
Troubled debt restructured loans
3,516
%
Total nonaccrual loans
$
25,174
%
Loans over 90 days past due and still accruing:
Residential real estate
$
%
Consumer
2,790
%
Total loans over 90 days past due and still accruing
$
3,717
%
Total nonperforming loans
$
28,891
OREO
1,458
Total nonperforming assets
$
30,349
Total nonaccrual loans to total loans
0.35
%
Total nonperforming loans to total loans
0.40
%
Total nonperforming assets to total assets
0.31
%
Total allowance for loan losses to nonperforming loans
252.55
%
Total allowance for loan losses to nonaccrual loans
289.84
%
Total nonperforming assets were $37.9 million at December 31, 2023, compared to $21.2 million at December 31, 2022. Nonperforming loans at December 31, 2023 were $37.9 million or 0.39% of total loans, compared with $21.1 million or 0.26% of total loans at December 31, 2022. The increase in nonperforming assets was attributable to a diversified, multi-tenant commercial real estate development relationship that was placed into a nonaccrual status in the fourth quarter of 2023, in which NBT is a participant. The relationship is being actively managed and recent appraised values continue to support its carrying value, and as such, no specific reserve has been established. Total nonaccrual loans were $34.2 million or 0.35% of total loans at December 31, 2023, compared to $17.2 million or 0.21% of total loans at December 31, 2022. Past due loans as a percentage of total loans was 0.32% at December 31, 2023, down slightly from 0.33% of total loans at December 31, 2022.
In addition to nonperforming loans discussed above, the Company has also identified approximately $87.7 million in potential problem loans at December 31, 2023 as compared to $52.0 million at December 31, 2022. 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 increase in potential problem loans from December 31, 2022 is primarily due to the migration of $48.2 million to substandard, partially offset by an increase of $13.5 million in nonaccrual commercial loan balances. Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become troubled loans modifications or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.
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 Accounting Standards Updates (“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.
Beginning January 1, 2023, the Company adopted ASU 2022-02 Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which resulted in an insignificant change to the Company’s methodology for estimating the allowance for credit losses on Troubled Debt Restructurings (“TDRs”) since December 31, 2022. The January 1, 2023 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million, which increased retained earnings by $0.5 million and decreased the deferred tax asset by $0.1 million.
Management considers the accounting policy relating to the allowance for credit losses to be a critical estimate given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). 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 and loss given default modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
Additional information about our Allowance for 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.
The allowance for credit losses totaled $114.4 million at December 31, 2023, compared to $100.8 million at December 31, 2022. The allowance for credit losses as a percentage of loans was 1.19% at December 31, 2023, compared to 1.24% at December 31, 2022. The increase in the allowance for credit losses from December 31, 2022 to December 31, 2023 was primarily due to the $14.5 million of allowance for acquired Salisbury loans which included both the $5.8 million allowance for PCD loans reclassified from loans and the $8.8 million allowance for non-PCD loans recognized through the provision for loan losses.
The allowance for credit losses was 302.05% of nonperforming loans at December 31, 2023 as compared to 478.72% at December 31, 2022. The allowance for credit losses was 334.38% of nonaccrual loans at December 31, 2023 as compared to 584.92% at December 31, 2022. The 2023 decline in the coverage of the allowance to nonperforming and nonaccrual loans largely relates to one nonperforming relationship that is individually evaluated for allowance which had no reserve established at December 31, 2023.
The provision for loan losses was $25.3 million for the year ended December 31, 2023, compared to $17.1 million for the year ended December 31, 2022. Provision expense increased from the prior year primarily due to the $8.8 million of acquisition-related provision for loan losses due to the Salisbury acquisition and an increase in net charge-offs. Net charge-offs totaled $16.8 million for 2023, up from $8.3 million in 2022. Net charge-offs to average loans was 19 bps for 2023 compared to 11 bps for 2022.
(Dollars in thousands)
Balance at January 1*
$
100,152
$
92,000
$
110,000
$
75,999
Loans charged-off
Commercial
4,154
1,870
4,638
4,005
Residential
1,135
Consumer**
22,107
16,140
14,489
21,938
Total loans charged-off
$
26,778
$
18,643
$
20,106
$
27,078
Recoveries
Commercial
$
3,625
$
2,430
$
$
Residential
1,069
Consumer**
5,859
7,014
8,571
8,541
Total recoveries
$
9,980
$
10,296
$
10,363
$
9,945
Net loans charged-off
$
16,798
$
8,347
$
9,743
$
17,133
Allowance for credit loss on PCD acquired loans
$
5,772
$
-
$
-
$
-
Provision for loan losses
25,274
17,147
(8,257
)
51,134
Balance at December 31
$
114,400
$
100,800
$
92,000
$
110,000
Allowance for loan losses to loans outstanding at end of year
1.19
%
1.24
%
1.23
%
1.47
%
Commercial net charge-offs to average loans outstanding
0.01
%
(0.01
)%
0.05
%
0.04
%
Residential net charge-offs to average loans outstanding
-
-
-
0.01
%
Consumer net charge-offs to average loans outstanding
0.18
%
0.12
%
0.08
%
0.18
%
Net charge-offs to average loans outstanding
0.19
%
0.11
%
0.13
%
0.23
%
*
2020 includes an adjustment of $3.0 million as a result of the January 1, 2020, adoption of ASC 326 and 2023 includes an adjustment of $0.6 million as a result of the January 1, 2023, adoption of ASU 2022-02.
**
Consumer charge-off and recoveries include consumer and home equity.
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.
(Dollars in thousands)
Balance at January 1
$
72,505
Loans charged-off
Commercial and agricultural
3,151
Residential real estate
Consumer
28,398
Total loans charged-off
$
32,540
Recoveries
Commercial and agricultural
$
Residential real estate
Consumer
6,913
Total recoveries
$
7,588
Net loans charged-off
$
24,952
Provision for loan losses
$
25,412
Balance at December 31
$
72,965
Allowance for loan losses to loans outstanding at end of year
1.02
%
Commercial and agricultural net charge-offs to average loans outstanding
0.04
%
Residential real estate net charge-offs to average loans outstanding
0.01
%
Consumer net charge-offs to average loans outstanding
0.31
%
Net charge-offs to average loans outstanding
0.36
%
Allocation of the Allowance for Loan Losses
December 31,
(Dollars in thousands)
Allowance
Category
Percent of
Loans
Allowance
Category
Percent of
Loans
Allowance
Category
Percent of
Loans
Allowance
Category
Percent of
Loans
Commercial
$
45,903
%
$
34,722
%
$
28,941
%
$
50,942
%
Residential
22,070
%
15,127
%
18,806
%
21,255
%
Consumer
46,427
%
50,951
%
44,253
%
37,803
%
Total
$
114,400
%
$
100,800
%
$
92,000
%
$
110,000
%
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.
December 31,
(Dollars in thousands)
Allowance
Category
Percent of
Loans
Commercial and agricultural
$
34,525
%
Residential real estate
2,793
%
Consumer
35,647
%
Total
$
72,965
%
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, 2023 and 2022, 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, 2023, the Company’s Basic Surplus measurement was 11.6% of total assets, or $1.54 billion, as compared to the December 31, 2022 Basic Surplus of 13.2%, or $1.55 billion, and was above the Company’s minimum of 5% (calculated at $665.5 million and $587.0 million, of period end total assets as of December 31, 2023 and December 31, 2022, respectively) set forth in its liquidity policies.
At December 31, 2023 and 2022, FHLB advances outstanding totaled $322.7 million and $443.8 million, respectively. At December 31, 2023 and 2022, the Bank had $77.0 million and $8.0 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 $1.11 billion at December 31, 2023 and $1.17 billion at December 31, 2022. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $823.3 million and $898.1 million at December 31, 2023 and 2022, 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 $2.01 billion at December 31, 2023 and $1.92 billion at December 31, 2022. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile and residential solar loans as collateral. At December 31, 2023 and 2022, the Bank had the capacity to borrow $1.02 billion and $622.7 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 $2.99 billion at December 31, 2023 and $2.41 billion at December 31, 2022.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considers its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2024. Continued increases to interest rates could result in deposit declines as depositors have alternative opportunities for yield on their excess funds. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Note, enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity. While the pandemic has come to an end, this enhanced monitoring continues as rising interest rates and the recent bank failures have led to a deposit decline in the banking system and increased volatility to liquidity risk.
At December 31, 2023, 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.
Net cash flows provided by operating activities totaled $157.5 million and $183.2 million in 2023 and 2022, 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 $44.2 million and $926.2 million in 2023 and 2022, respectively. Critical elements of investing activities are loan and investment securities transactions.
Net cash flows used in financing activities totaled $105.4 million and $328.7 million in 2023 and 2022, respectively. 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, 2023 and 2022, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $2.68 billion and $2.42 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, 2023 and 2022, outstanding standby letters of credit were approximately $44.7 million and $53.3 million, respectively. The fair value of the Company’s standby letters of credit at December 31, 2023 and 2022 was not significant. The following table sets forth the commitment expiration period for standby letters of credit at:
(In thousands)
December 31, 2023
Within one year
$
39,521
After one but within three years
4,781
After three but within five years
After five years
Total
$
44,735
Interest Rate Swaps
The Company records all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated and that qualify as cash flow hedges, changes in fair value of the cash flow hedges are reported in accumulated other comprehensive income or loss (“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 $856.9 million and $592.7 million at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, the Company had approximately $1.0 million and $0.6 million, respectively, of mortgage servicing rights. At December 31, 2023 and 2022, the Company serviced $26.4 million and $31.0 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is considered necessary at December 31, 2023 and 2022.
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 and the Bank’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 is also subject to 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, 2023 and 2022, approximately $106.6 million and $145.3 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.
Stock Repurchase Plan
The Company purchased 155,500 shares of its common stock during the year ended December 31, 2023 at an average price of $31.79 per share under its previously announced share repurchase program. This repurchase program under which these shares were purchased was due to expire on December 31, 2023; however, on December 18, 2023, the Board of Directors authorized and approved an amendment to the repurchase program. Pursuant to the amended stock repurchase program, the Company may repurchase up to 2,000,000 shares of the outstanding shares of its common stock with all repurchases under the stock repurchase program to be made by December 31, 2025. The Company may repurchase shares of its common stock from time to time to mitigate the potential dilutive effect of stock-based incentive plans and other potential uses of common stock for corporate purposes. As of December 31, 2023, there were 2,000,000 shares available for repurchase under this plan which is set to expire on December 31, 2025. The Company purchased no shares of its common stock during the fourth quarter of 2023.
Recent Accounting Updates
See Note 2 to the consolidated financial statements for a detailed discussion of new accounting pronouncements.
2022 OPERATING RESULTS AS COMPARED TO 2021 OPERATING RESULTS
For similar operating and financial data and discussion of our results for the year ended December 31, 2022 compared to our results for the year ended December 31, 2021, 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, 2022, which was filed with the SEC on March 1, 2023 and is incorporated herein by reference.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.
Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”) meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In managing the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.
The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (e.g., no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 200 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.
The Company’s Interest Rate Sensitivity has migrated to a near neutral position. In the declining rate scenario, net interest income is projected to modestly decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets repricing and rolling over at lower yields at a faster pace than interest-bearing liabilities decline and/or reach their floors. In the rising rate scenarios, net interest income is near neutral, impacted by slowing prepayments speeds and increased deposit reactivity; the magnitude of potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, money market deposit accounts and time accounts. Net interest income for the next twelve months in the +200/+100/-200 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% reduction in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the December 31, 2023 balance sheet position:
Interest Rate Sensitivity Analysis
Change in interest rates
(in bps points)
Percent change in
net interest income
+200
(0.06
%)
+100
0.27
%
(0.36
%)
The Company anticipates that the trajectory of net interest income will continue to depend significantly on the timing and path of short to mid-term interest rates which are heavily driven by inflationary pressures and Federal Open Market Committee monetary policy. In response to the economic impact of the pandemic, the federal funds rate was reduced to near zero in March 2020, term interest rates fell sharply across the yield curve and the Company reduced deposit rates. Post-pandemic, inflationary pressures have resulted in a higher overall yield curve with Federal Funds increases of 425 bps in 2022 with additional 100 bps of increases in 2023. While deposit rates have increased meaningfully in 2023 in conjunction with the increase to short term interest rates, the Company continues to focus on managing deposit expense in an environment of elevated interest rates while allowing assets to reprice upward.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NBT Bancorp Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 29, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for credit losses - loans evaluated on a collective basis
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for credit losses on loans evaluated on a collective basis (the collective ACL on loans) was $114.4 million of a total allowance for credit losses of $114.4 million as of December 31, 2023. The collective ACL on loans includes the measure of expected credit losses on a collective (pooled) basis for class segments of loans that share similar risk characteristics. The Company uses a discounted cash flow methodology where the respective quantitative allowance for each segment is measured by comparing the amortized cost to the present value of expected principal, interest and recovery cash flows projected using an econometric, probability of default (PD) and loss given default (LGD) modeling methodology. The Company uses PD regression models to develop the PD, and LGD models to develop the LGD, using historical credit loss experience for both the Company and segment-specific selected peers. The application of these models incorporates multiple weighted external economic forecasts for the economic variables over the reasonable and supportable forecast period. After the reasonable and supportable forecast period, the Company reverts to long-term average economic variables over a reversion period on a straight-line basis. Contractual cash flows over the contractual life of the loans are the basis for expected principal, interest and recovery cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level effective interest rate. After quantitative considerations, the Company applies additional qualitative adjustments, giving consideration to the effects of limitations inherent in the quantitative model, so that the collective ACL is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
We identified the assessment of the collective ACL on loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL on loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL on loans methodology, including the methods and models used to estimate (1) the PD and LGD and their significant assumptions including the external economic forecasts and economic variables, and the related weighting of the forecasts, the reasonable and supportable forecast periods, the composition of the peer group and the period from which historical Company and peer experience was used, (2) the expected prepayments assumption, and (3) the qualitative adjustments and the significant assumptions, including the effects of limitations inherent in the quantitative model. The assessment also included an evaluation of the conceptual soundness and performance of the PD regression and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL on loans estimate, including controls over the:
•
development of the collective ACL on loans methodology
•
continued use and appropriateness of changes made to the PD regression models
•
continued use and appropriateness of the LGD models
•
performance monitoring of the PD regression and LGD models
•
identification and determination of the expected prepayments assumption and the significant assumptions used in the PD regression and LGD models
•
development of the qualitative methodology and related adjustments, including the significant assumptions used in the measurement of select qualitative adjustments
•
analysis of the collective ACL on loans results, trends, and ratios.
We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•
evaluating the Company’s collective ACL on loans methodology for compliance with U.S. generally accepted accounting principles
•
evaluating judgments made by the Company relative to the performance monitoring of the PD regression and LGD models, by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•
assessing the conceptual soundness and performance testing of the PD regression and LGD models, by inspecting the model documentation to determine whether the models are suitable for their intended use
•
evaluating the expected prepayments assumption by comparing to relevant Company-specific metrics and trends and current economic considerations
•
evaluating the selection of economic forecasts, including weighting of the forecasts, and underlying assumptions by comparing to the Company’s business environment and relevant industry practices
•
evaluating the length of the period from which historical Company and peer experience was used and the reasonable and supportable forecast period by comparing them to specific portfolio risk characteristics and trends
•
assessing the composition of the peer group by comparing to Company and specific portfolio risk characteristics
•
evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans by comparing to relevant credit risk factors, the current economic environment and consistency with credit trends and identified limitations of the underlying quantitative models.
We also assessed the sufficiency of the audit evidence obtained related to the collective ACL on loans estimate by evaluating the:
•
cumulative results of the audit procedures
•
qualitative aspects of the Company’s accounting practices
•
potential bias in the accounting estimate.
Fair value measurement of the acquired loans in the Salisbury Bancorp, Inc. business combination
As discussed in Note 3 to the consolidated financial statements, the Company acquired Salisbury Bancorp, Inc. (Salisbury) on August 11, 2023. The transaction was accounted for as a business combination using the acquisition method of accounting. Accordingly, asset acquired, liabilities assumed, and consideration paid for Salisbury were recorded at the fair values at the acquisition date, including the fair value of acquired loans of $1.17 billion. The fair value of acquired loans was determined using a discounted cash flow methodology applied on a pooled basis that used a forecast of principal and interest payments based on certain key valuation assumptions including, probability of default, loss given default, prepayment rate, and discount rate.
We identified the assessment of the fair value measurement of the acquired loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and auditor judgment was involved in the assessment due to significant measurement uncertainty. Specifically, the assessment of the fair value measurement encompassed the evaluation of the key assumptions including probability of default, loss given default, prepayment rate, and discount rate.
The following are the primary procedures we performed to address the critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s fair value measurement process for acquired loans, including control over the determination of the key assumptions including probability of default, loss given default, prepayments, and discount rate. We involved valuation professionals with specialized skills and knowledge who assisted in developing an independent estimate of the fair value of the acquired loan portfolio, including developing independent assumptions utilizing market data for the loss assumptions, prepayment rate, and discount rate and comparing to the Company’s estimate of fair value.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Albany, New York
February 29, 2024
NBT Bancorp Inc. and Subsidiaries
Consolidated
Balance Sheets
As of December 31,
(In thousands except share and per share data)
Assets
Cash and due from banks
$
173,811
$
166,488
Short-term interest-bearing accounts
31,378
30,862
Equity securities, at fair value
37,591
30,784
Securities available for sale, at fair value
1,430,858
1,527,225
Securities held to maturity (fair value $814,524 and $812,647, respectively)
905,267
919,517
Federal Reserve and Federal Home Loan Bank stock
45,861
44,713
Loans held for sale
3,371
Loans
9,650,713
8,150,147
Less allowance for loan losses
114,400
100,800
Net loans
$
9,536,313
$
8,049,347
Premises and equipment, net
80,675
69,047
Goodwill
361,851
281,204
Intangible assets, net
40,443
7,341
Bank owned life insurance
265,732
232,409
Other assets
395,889
379,797
Total assets
$
13,309,040
$
11,739,296
Liabilities
Demand (noninterest bearing)
$
3,413,829
$
3,617,324
Savings, NOW and money market
6,230,456
5,444,837
Time
1,324,709
433,772
Total deposits
$
10,968,994
$
9,495,933
Short-term borrowings
386,651
585,012
Long-term debt
29,796
4,815
Subordinated debt, net
119,744
96,927
Junior subordinated debt
101,196
101,196
Other liabilities
276,968
281,859
Total liabilities
$
11,883,349
$
10,565,742
Stockholders’ equity
Preferred stock, $0.01 par value, 2,500,000 shares authorized
$
-
$
-
Common stock, $0.01 par value, 100,000,000 shares authorized; 53,974,492 and 49,651,493 shares issued, respectively
Additional paid-in-capital
740,943
577,853
Retained earnings
1,021,831
958,433
Accumulated other comprehensive loss
(160,934
)
(190,034
)
Common stock in treasury, at cost, 6,864,593 and 6,793,670 shares, respectively
(176,689
)
(173,195
)
Total stockholders’ equity
$
1,425,691
$
1,173,554
Total liabilities and stockholders’ equity
$
13,309,040
$
11,739,296
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
(In thousands, except per share data)
Interest, fee and dividend income
Interest and fees on loans
$
462,669
$
332,768
$
302,175
Securities available for sale
29,812
29,653
23,305
Securities held to maturity
20,681
17,582
12,551
Other
9,627
4,067
1,845
Total interest, fee and dividend income
$
522,789
$
384,070
$
339,876
Interest expense
Deposits
$
104,641
$
9,923
$
10,714
Short-term borrowings
25,608
2,623
Long-term debt
Subordinated debt
6,076
5,424
5,437
Junior subordinated debt
7,320
3,749
2,090
Total interest expense
$
144,570
$
21,880
$
18,788
Net interest income
$
378,219
$
362,190
$
321,088
Provision for loan losses
25,274
17,147
(8,257
)
Net interest income after provision for loan losses
$
352,945
$
345,043
$
329,345
Noninterest income
Service charges on deposit accounts
$
15,425
$
14,630
$
13,348
Card services income
20,829
29,058
34,682
Retirement plan administration fees
47,221
48,112
42,188
Wealth management
34,763
33,311
33,718
Insurance services
15,667
14,696
14,083
Bank owned life insurance income
6,750
6,044
6,217
Net securities (losses) gains
(9,315
)
(1,131
)
Other
10,838
10,858
12,992
Total noninterest income
$
142,178
$
155,578
$
157,794
Noninterest expense
Salaries and employee benefits
$
194,250
$
187,830
$
172,580
Technology and data services
38,163
35,712
34,717
Occupancy
28,408
26,282
26,048
Professional fees and outside services
17,601
16,810
16,306
Office supplies and postage
6,917
6,140
6,006
FDIC assessment
6,257
3,197
3,041
Advertising
3,054
2,822
2,521
Amortization of intangible assets
4,734
2,263
2,808
Loan collection and other real estate owned, net
2,618
2,647
2,915
Acquisition expenses
9,978
-
Other
29,684
19,795
20,339
Total noninterest expense
$
341,664
$
304,465
$
287,281
Income before income tax expense
$
153,459
$
196,156
$
199,858
Income tax expense
34,677
44,161
44,973
Net income
$
118,782
$
151,995
$
154,885
Earnings per share
Basic
$
2.67
$
3.54
$
3.57
Diluted
$
2.65
$
3.52
$
3.54
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of
Comprehensive Income (Loss)
Years Ended December 31,
(In thousands)
Net income
$
118,782
$
151,995
$
154,885
Other comprehensive income (loss), net of tax:
Securities available for sale:
Unrealized net holding gains (losses) arising during the period, gross
$
22,987
$
(209,212
)
$
(37,432
)
Tax effect
(5,746
)
52,303
9,358
Unrealized net holding gains (losses) arising during the period, net
$
17,241
$
(156,909
)
$
(28,074
)
Reclassification adjustment for net losses in net income, gross
$
9,450
$
-
$
-
Tax effect
(2,363
)
-
-
Reclassification adjustment for net losses in net income, net
$
7,087
$
-
$
-
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross
$
$
$
Tax effect
(107
)
(128
)
(145
)
Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net
$
$
$
Total securities available for sale, net
$
24,648
$
(156,524
)
$
(27,642
)
Cash flow hedges:
Reclassification of net unrealized losses on cash flow hedges to interest expense, gross
$
-
$
-
$
Tax effect
-
-
(5
)
Reclassification of net unrealized losses on cash flow hedges to interest expense, net
$
-
$
-
$
Total cash flow hedges, net
$
-
$
-
$
Pension and other benefits:
Amortization of prior service cost and actuarial losses, gross
$
2,640
$
$
1,373
Tax effect
(660
)
(184
)
(343
)
Amortization of prior service cost and actuarial losses, net
$
1,980
$
$
1,030
Decrease (increase) in unrecognized actuarial loss, gross
$
3,296
$
(14,292
)
$
3,780
Tax effect
(824
)
3,573
(945
)
Decrease (increase) in unrecognized actuarial loss, net
$
2,472
$
(10,719
)
$
2,835
Total pension and other benefits, net
$
4,452
$
(10,166
)
$
3,865
Total other comprehensive income (loss)
$
29,100
$
(166,690
)
$
(23,761
)
Comprehensive income (loss)
$
147,882
$
(14,695
)
$
131,124
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders’ Equity
(In thousands, except share and per share data)
Common
Stock
Additional
Paid-in-
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Common
Stock in
Treasury
Total
Balance at December 31, 2020
$
$
578,082
$
749,056
$
$
(140,434
)
$
1,187,618
Net income
-
-
154,885
-
-
154,885
Cash dividends - $1.10 per share
-
-
(47,738
)
-
-
(47,738
)
Purchase of 604,637 treasury shares
-
-
-
-
(21,714 )
(21,714 )
Net issuance of 143,555 shares to employee and other stock plans
-
(5,520
)
-
-
2,269
(3,251
)
Stock-based compensation
-
4,414
-
-
-
4,414
Other comprehensive (loss)
-
-
-
(23,761
)
-
(23,761
)
Balance at December 31, 2021
$
$
576,976
$
856,203
$
(23,344
)
$
(159,879
)
$
1,250,453
Net income
-
-
151,995
-
-
151,995
Cash dividends - $1.16 per share
-
-
(49,765
)
-
-
(49,765
)
Purchase of 400,000 treasury shares
-
-
-
-
(14,713 )
(14,713 )
Net issuance of 89,811 shares to employee and other stock plans
-
(3,653
)
-
-
1,397
(2,256
)
Stock-based compensation
-
4,530
-
-
-
4,530
Other comprehensive (loss)
-
-
-
(166,690
)
-
(166,690
)
Balance at December 31, 2022
$
$
577,853
$
958,433
$
(190,034
)
$
(173,195
)
$
1,173,554
Cumulative effect adjustment for ASU 2022-02 implementation as of January 1, 2023
-
-
-
-
Net income
-
-
118,782
-
-
118,782
Cash dividends - $1.24 per share
-
-
(55,886
)
-
-
(55,886
)
Issuance of 4,322,999 shares of common stock for acquisition
161,680
-
-
-
161,723
Purchase of 155,500 treasury shares
-
-
-
-
(4,944
)
(4,944
)
Net issuance of 84,577 shares to employee and other stock plans
-
(3,692
)
-
-
1,450
(2,242
)
Stock-based compensation
-
5,102
-
-
-
5,102
Other comprehensive income
-
-
-
29,100
-
29,100
Balance at December 31, 2023
$
$
740,943
$
1,021,831
$
(160,934
)
$
(176,689
)
$
1,425,691
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of
Cash Flows
Years Ended December 31,
(In thousands)
Operating activities
Net income
$
118,782
$
151,995
$
154,885
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses
25,274
17,147
(8,257
)
Depreciation and amortization of premises and equipment
10,695
10,155
9,896
Net amortization on securities
2,736
3,460
5,832
Amortization of intangible assets
4,734
2,263
2,808
Amortization of operating lease right-of-use assets
6,843
6,643
7,176
Excess tax benefit on stock-based compensation
(296
)
(288
)
(385
)
Stock-based compensation expense
5,102
4,530
4,414
Bank owned life insurance income
(6,750
)
(6,044
)
(6,217
)
Amortization of subordinated debt issuance costs
Discount on repurchase of subordinated debt
-
(106 )
-
Proceeds from sale of loans held for sale
53,969
5,674
55,065
Originations of loans held for sale
(55,960
)
(5,475
)
(54,608
)
Net gains on sales of loans held for sale
(156
)
(122
)
(361
)
Net security losses (gains)
9,315
1,131
(566
)
Net (gains) losses on sale of other real estate owned
(69
)
(259
)
Impairment of a minority interest equity investment
4,750
-
-
Net deferred income tax expense (benefit)
5,958
(19,850
)
Net change in other assets and other liabilities
(27,907
)
11,932
(11,981
)
Net cash provided by operating activities
$
157,457
$
183,223
$
159,185
Investing activities
Net cash provided by (used in) acquisitions
$
44,564
$
(2,616
)
$
(1,550
)
Securities available for sale:
Proceeds from maturities, calls and principal paydowns
116,453
213,722
395,386
Proceeds from sales
124,577
-
-
Purchases
-
(264,569
)
(775,963
)
Securities held to maturity:
Proceeds from maturities, calls and principal paydowns
100,954
177,554
181,620
Purchases
(88,022
)
(365,033
)
(299,014
)
Equity securities:
Proceeds from calls
-
-
1,000
Purchases
(11
)
(1,000
)
-
Other:
Net increase in loans
(338,111
)
(659,949
)
(9,305
)
Proceeds from Federal Home Loan Bank stock redemption
91,535
36,125
2,422
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock
(90,945
)
(55,740
)
(167
)
Proceeds from settlement of bank owned life insurance
3,766
1,873
4,413
Purchase of bank owned life insurance
-
-
(40,000 )
Purchases of premises and equipment, net
(9,254
)
(7,009
)
(7,740
)
Proceeds from sales of other real estate owned
1,290
Net cash used in investing activities
$
(44,226
)
$
(926,216
)
$
(547,608
)
Financing activities
Net increase (decrease) in deposits
$
164,085
$
(738,536
)
$
1,152,777
Net (decrease) increase in short-term borrowings
(231,743
)
487,217
(70,592
)
Repurchase of subordinated debt
-
(2,000 )
-
Proceeds from long-term debt
25,000
1,519
-
Repayments of long-term debt
(118
)
(10,699
)
(25,101
)
Proceeds from the issuance of shares to employee and other stock plans
-
Cash paid by employer for tax-withholding on stock issuance
(1,877
)
(1,751
)
(2,931
)
Purchase of treasury stock
(4,944
)
(14,713
)
(21,714
)
Cash dividends
(55,886
)
(49,765
)
(47,738
)
Net cash (used in) provided by financing activities
$
(105,392
)
$
(328,728
)
$
984,813
Net increase (decrease) in cash and cash equivalents
$
7,839
$
(1,071,721
)
$
596,390
Cash and cash equivalents at beginning of year
197,350
1,269,071
672,681
Cash and cash equivalents at end of year
$
205,189
$
197,350
$
1,269,071
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31,
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense
$
130,180
$
20,608
$
20,285
Income taxes paid, net of refund
27,636
62,795
46,097
Noncash investing activities:
Loans transferred to other real estate owned
$
$
$
Acquisitions:
Fair value of assets acquired, excluding acquired cash and goodwill
$
1,415,712
$
$
-
Fair value of liabilities assumed
1,380,386
-
-
Common stock issued
161,723
-
-
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
1. Summary of Significant Accounting Policies
The accounting and reporting policies of NBT Bancorp Inc. (“NBT Bancorp”) and its subsidiaries, NBT Bank, National Association (“NBT Bank” or the “Bank”), NBT Financial Services, Inc. and NBT Holdings, Inc., conform, in all material respects, with generally accepted accounting principles in the United States of America (“GAAP”) and to general practices within the banking industry. Collectively, NBT Bancorp and its subsidiaries are referred to herein as (the “Company”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from these estimates and such differences could be material to the financial statements.
Estimates associated with the allowance for credit losses, pension accounting, provision for income taxes, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term.
The following is a description of significant policies and practices:
Consolidation
The accompanying consolidated financial statements include the accounts of NBT Bancorp and its wholly-owned subsidiaries mentioned above. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation. In the “Parent Company Financial Information,” the investment in subsidiaries is recorded using the equity method of accounting.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company’s wholly-owned subsidiaries CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements.
Segment Reporting
The Company’s operations are primarily in the community banking industry and include the provision of traditional banking services. The Company also provides other services through its subsidiaries such as insurance, retirement plan administration and trust administration. The Company operates in the geographical regions of upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern Maine and central and northwestern Connecticut. The Company has no reportable operating segments.
Cash Equivalents
The Company considers amounts due from correspondent banks, cash items in process of collection and institutional money market mutual funds to be cash equivalents for purposes of the consolidated statements of cash flows.
Securities
The Company classifies its securities at date of purchase as either held to maturity (“HTM”), available for sale (“AFS”) or equity. HTM debt securities are those that the Company has the ability and intent to hold until maturity. AFS debt securities are securities that are not classified as HTM. AFS securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on AFS securities are excluded from earnings and are reported in the consolidated statements of changes in stockholders’ equity and the consolidated statements of comprehensive income (loss) as a component of accumulated other comprehensive income (loss) (“AOCI”). HTM securities are recorded at amortized cost. Transfers of securities between categories are recorded at fair value at the date of transfer. Non-marketable equity securities and equity securities without readily determinable fair values are carried at cost. The Company performs a qualitative assessment on equity securities to determine whether the investments are impaired and downward or upward adjustments are recognized through the income statement. All other equity securities are recorded at fair value, with net unrealized gains and losses recognized in income.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on securities sold are derived using the specific identification method for determining the cost of securities sold.
Allowance for Credit Losses - HTM Debt Securities
With respect to its HTM debt securities, the Company is required to utilize the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as (as applicable): internal or external (third-party) credit score or credit ratings, risk ratings or classification, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or expected credit loss patterns, and reasonable and supportable forecast periods. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government-sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.
The HTM mortgage-backed and collateralized mortgage obligations securities are issued by U.S. government entities and agencies. These securities are either explicitly and/or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of zero credit losses. Therefore, the Company did not record an allowance for credit loss for these securities.
State and municipal bonds generally carry a Moody’s rating of A to AAA. In addition, the Company has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual bond over its contractual life and considers historical credit loss information, current conditions and reasonable and supportable forecasts. Given the rarity of municipal defaults and losses, the Company utilized Moody’s Municipal Loss Forecast Model as the sole source of municipal default and loss rates which provides decades of data across all municipal sectors and geographies. As with the loan portfolio, cash flows are forecast over a 6-quarter period under various weighted economic conditions, with a reversion to long-term average economic conditions over a 4-quarter period on a straight-line basis. Management may exercise discretion to make adjustments based on environmental factors. The Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit losses was recorded.
Allowance for Credit Losses - AFS Debt Securities
The impairment model for AFS debt securities differs from the CECL approach utilized for HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, the Bank first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows should be estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Investments in Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock are required for membership in those organizations and are carried at cost since there is no market value available. The FHLB New York continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of Federal Reserve Bank and FHLB stock.
Loan Held for Sale and Loan Servicing
Loans held for sale are recorded at the lower of cost or fair value on an individual basis. Loan sales are recorded when the sales are funded. Gains and losses on sales of loans held for sale are included in other noninterest income in the consolidated statements of income. Mortgage loans held for sale are generally sold with servicing rights retained. Mortgage servicing rights are recorded at fair value upon sale of the loan, and are amortized in proportion to and over the period of estimated net servicing income.
Loans
Loans are recorded at their current unpaid principal balance, net of unearned income and unamortized loan fees and expenses, which are amortized under the effective interest method over the estimated lives of the loans. Interest income on loans is accrued based on the principal amount outstanding.
For all loan classes within the Company’s loan portfolio, loans are placed on nonaccrual status when timely collection of principal and/or interest in accordance with contractual terms is in doubt. Loans are transferred to nonaccrual status generally when principal or interest payments become over ninety days delinquent, unless the loan is well secured and in the process of collection, or sooner when management concludes circumstances indicate that borrowers may be unable to meet contractual principal or interest payments. When a loan is transferred to a nonaccrual status, all interest previously accrued in the current period but not collected is reversed against interest income in that period. Interest accrued in a prior period and not collected is charged-off against the allowance for credit losses.
If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment of principal is not expected, any payment received on a nonaccrual loan is applied to principal until ultimate repayment becomes expected. For all loan classes within the Company’s loan portfolio, nonaccrual loans are returned to accrual status when they become current as to principal and interest and demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest. For loans in all portfolios, the principal amount is charged off in full or in part as soon as management determines, based on available facts, that the collection of principal in full or in part is improbable. For Commercial loans, management considers specific facts and circumstances relative to individual credits in making such a determination. For Consumer and Residential loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy.
Beginning in 2023, with the Company’s adoption of ASU 2022-02, Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), the recognition of a troubled debt restructuring (“TDR”) was eliminated and instead the Company evaluates borrowers who are experiencing financial difficulty or loan modifications to borrowers experiencing financial difficulties. When a borrower is experiencing financial difficulties and the Company modifies a loan, such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a change in scheduled payment amount; or principal forgiveness. Modifications to borrowers experiencing financial difficulty may be different from those previously disclosed in TDR disclosures since the Company is no longer required to determine if a concession has been granted, which was a requirement to determine whether a loan modification was considered to be a TDR. Historically, a TDR would generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a temporary reduction in the interest rate; or a change in scheduled payment amount. TDR loans were nonaccrual loans; however, they could be returned to accrual status after a period of performance, generally evidenced by six months of compliance with their modified terms.
Allowance for Credit Losses - Loans
The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance for credit losses using relevant information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience is used. Adjustments to historical loss information is made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as changes in environmental conditions, such as changes in unemployment rates, production metrics, property values, or other relevant factors. Company historical loss experience is supplemented with peer information when there is insufficient loss data for the Company. Peer selection is based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. Significant management judgment is required at various points in the measurement process.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
During 2023, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the monitoring and assessment of risks as the portfolios continue to evolve. Paycheck Protection Program was consolidated with Commercial & Industrial, as the portfolio had decreased to less than $1 million and no longer warranted a material class segment. The Other Consumer class segment was further separated into Residential Solar and Other Consumer. The growth in our Residential Solar loans warranted evaluation of this class separately from the Other Consumer class segments. The change to the class segments was applied retrospectively and did not have a significant impact on the allowance for loan losses. The following table illustrates the portfolio and class segments for the Company’s loan portfolio:
Portfolio Segment
Class
Commercial Loans
Commercial & Industrial
Commercial Real Estate
Consumer Loans
Auto
Residential Solar
Other Consumer
Residential Loans
Commercial Loans
The Company offers a variety of commercial loan products. The Company’s underwriting analysis for commercial loans typically includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows.
Commercial and Industrial (“C&I”) - The Company offers a variety of loan options to meet the specific needs of our C&I customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs and are typically collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. To reduce these risks, management also attempts to obtain personal guarantees of the owners or to obtain government loan guarantees to provide further support.
Commercial Real Estate (“CRE”) - The Company offers CRE loans to finance real estate purchases, refinancing’s, expansions and improvements to commercial and agricultural properties. CRE loans are loans that are secured by liens on real estate, which may include both owner-occupied and nonowner-occupied properties, such as apartments, commercial structures, health care facilities and other facilities. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property. Government loan guarantees may be obtained to provide further support for agricultural property.
Consumer Loans
The Company offers a variety of Consumer loan products including Auto, Residential Solar and Other Consumer loans.
Auto - The Company provides both direct and indirect financing of automobiles (“Auto”). The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the Company primarily finances the purchases of automobiles indirectly through dealer relationships. Auto loans are secured with collateral consisting of a perfected lien on the vehicle being purchased. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years, based upon the nature of the collateral and the size of the loan.
Residential Solar - The Company offers loans across a national footprint originated through our relationships with national technology-driven consumer lending companies to finance the purchase and installation of residential solar energy. Advances of credit through this business line are subject to the Company’s underwriting standards including criteria such as FICO score and debt to income thresholds. In 2017, the Company partnered with Sungage Financial, LLC. to offer financing to consumers for solar ownership with the program tailored for delivery through solar installers. Advances of credit through this business line are to prime borrowers and are subject to the Company’s underwriting standards. Residential solar loans carry a fixed rate of interest with principal repayment terms typically ranging from five to twenty-five years. Typically, the Company collects origination fees that are deferred and recognized into interest income over the estimated life of the loan.
Other Consumer - The Other Consumer loan segment consists primarily of unsecured consumer loans and direct consumer loans. The Company offers unsecured consumer loans across a national footprint originated through our relationships with national technology-driven consumer lending companies to finance such things as dental and medical procedures, K-12 tuition and other consumer purpose loans. Advances of credit through this business line are subject to the Company’s underwriting standards including criteria such as FICO score and debt to income thresholds. Advances of credit through this business line are to prime borrowers and are subject to the Company’s underwriting standards. Typically, the Company collects origination fees that are deferred and recognized into interest income over the estimated life of the loan. The Company offers a variety of direct consumer installment loans to finance various personal expenditures. In addition to installment loans, the Company also offers personal lines of credit, overdraft protection, debt consolidation, education and other uses. Direct consumer installment loans carry a fixed rate of interest with principal repayment terms typically ranging from one to fifteen years, based upon the nature of the collateral and the size of the loan. Consumer installment loans are often secured with collateral consisting of a perfected lien on the asset being purchased or a perfected lien on a consumer’s deposit account. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower’s financial condition and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.
Residential
Residential loans consist primarily of loans secured by a first or second mortgage on primary residences, home equity loans and lines of credit in first and second lien positions and residential construction loans. We originate adjustable-rate and fixed rate, one-to-four-family residential loans for the construction or purchase of a residential property or the refinancing of a mortgage. These loans are collateralized by properties located in the Company’s market area. Loans on one-to-four-family residential are generally originated in amounts of no more than 85% of the purchase price or appraised value (whichever is lower) or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. For home equity loans, consumers are able to borrow up to 85% of the equity in their homes and are generally tied to Prime with a ten-year draw followed by a fifteen-year amortization. These loans carry a higher risk than first mortgage residential loans as they are often in a second position with respect to collateral.
Historical credit loss experience for both the Company and segment-specific peers provides the basis for the estimation of expected credit losses, where observed credit losses are converted to probability of default rate (“PD”) curves through the use of segment-specific loss given default (“LGD”) risk factors that convert default rates to loss severity based on industry-level, observed relationships between the two variables for each asset class, primarily due to the nature of the underlying collateral. These risk factors were assessed for reasonableness against the Company’s own loss experience and adjusted in certain cases when the relationship between the Company’s historical default and loss severity deviated from that of the wider industry. The historical PD curves, together with corresponding economic conditions, establish a quantitative relationship between economic conditions and loan performance through an economic cycle.
Using the historical relationship between economic conditions and loan performance, management’s expectation of future loan performance is incorporated using externally developed economic forecasts which are probabilistically weighted to reflect potential forecast inaccuracy and model limitations. These forecasts are applied over a period that management has determined to be reasonable and supportable. Beyond the period over which management can develop or source a reasonable and supportable forecast, the model will revert to long-term average economic conditions using a straight-line, time-based methodology.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level stated interest rate. The contractual term excludes expected extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit losses is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components of the portfolio; the experience, ability and depth of lending management and staff; the Company’s credit review system; and the effect of external factors; such as competition, legal and regulatory requirements.
The threshold for evaluating classified, commercial and commercial real estate loans risk graded substandard or doubtful, and nonperforming loans specifically evaluated for individual credit loss is $1.0 million. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. If the loan is not collateral dependent, the allowance for credit losses related to individually assessed loans is based on discounted expected cash flows using the loan’s initial effective interest rate. Generally, individually assessed loans are collateral dependent.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires the Bank to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate a reserve on unfunded commitments.
Accrued Interest Receivable
Accrued interest receivable balances are included in other assets on the consolidated balance sheets. The Company has excluded interest receivable that is included in amortized cost of financing receivables from related disclosure requirements and accrued interest receivable is written off by reversing interest income. For loans, write off typically occurs upon becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. Historically, the Company has not experienced uncollectible accrued interest receivable on investment securities.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation of premises and equipment is determined using the straight-line method over the estimated useful lives of the respective assets. Expenditures for maintenance, repairs and minor replacements are charged to expense as incurred.
Leases
The Company determines if a lease is present at the inception of an agreement. Right-of-use (“ROU”) assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets and operating lease liabilities, are included in other assets and other liabilities, respectively, on the consolidated balance sheets. Leases with original terms of 12 months or less are recognized in profit or loss on a straight-line basis over the lease term.
Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statements of income.
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes and insurance are not included in the measurement of the lease liability since they are generally able to be segregated. Our leases relate primarily to office space and bank branches, and some contain options to renew the lease. These options to renew are generally not considered reasonably certain to exercise, and are therefore not included in the lease term until such time that the option to renew is reasonably certain.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are recorded at the lower of fair value of the asset acquired less estimated costs to sell or “cost” (defined as the fair value at initial foreclosure). At the time of foreclosure, or when foreclosure occurs in-substance, the excess, if any, of the loan over the fair market value of the assets received, less estimated selling costs, is charged to the allowance for loan losses and any subsequent valuation write-downs are charged to other expense. In connection with the determination of the allowance for loan losses and the valuation of OREO, management obtains appraisals for properties. Operating costs associated with the properties are charged to expense as incurred. Gains on the sale of OREO are included in income when title has passed and the sale has met the minimum down payment requirements prescribed by GAAP. The balance of OREO is recorded in other assets on the consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired business in excess of the fair value of the related net assets acquired. Goodwill is not amortized but tested at the reporting unit level for impairment on an annual basis and on an interim basis or when events or circumstances dictate. The Company has elected June 30 as the annual impairment testing date for the insurance and retirement services reporting units and December 31 for the Bank reporting unit.
The Company has the option to first assess qualitative factors, by performing a qualitative analysis, to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the impairment test is not required. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test. In the quantitative impairment test, the estimated fair value of a reporting unit is compared to the carrying amount in order to determine if impairment is indicated. If the estimated fair value exceeds the carrying amount, the reporting unit is not deemed to be impaired. If the estimated fair value is below the carrying value of the reporting unit, the difference is the amount of impairment.
Intangible assets that have indefinite useful lives are not amortized, but are tested at least annually for impairment. Intangible assets that have finite useful lives are amortized over their useful lives. Core deposit intangibles and trust intangibles at the Company are amortized using the sum-of-the-years’-digits method. Covenants not to compete are amortized on a straight-line basis. Customer lists are amortized using an accelerated method. When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the asset carrying value, using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value.
Determining the fair value of a reporting unit under the goodwill impairment tests and determining the fair value of other intangible assets are judgmental and often involve the use of significant estimates and assumptions. Estimates of fair value are primarily determined using the discounted cash flows method, which uses significant estimates and assumptions including projected future cash flows, discount rates reflecting the market rate of return and projected growth rates. Future events may impact such estimates and assumptions and could cause the Company to conclude that our goodwill or intangible assets have become impaired, which would result in recording an impairment loss.
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain employees, key executives and directors. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Treasury Stock
Treasury stock acquisitions are recorded at cost. Subsequent sales of treasury stock are recorded on an average cost basis. Gains on the sale of treasury stock are credited to additional paid-in-capital. Losses on the sale of treasury stock are charged to additional paid-in-capital to the extent of previous gains, otherwise charged to retained earnings.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The realization of deferred tax assets is primarily dependent upon the generation of adequate future taxable income. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense.
Tax positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Pension Costs
The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all of its employees, as well as supplemental employee retirement plans to certain current and former executives and a defined benefit postretirement healthcare plan that covers certain employees. Costs associated with these plans, based on actuarial computations of current and future benefits for employees, are charged to current operating expenses.
Stock-Based Compensation
The Company maintains various long-term incentive stock benefit plans under which restricted stock units are granted to certain directors and key employees. Compensation expense is recognized in the consolidated statements of income over the requisite service period, based on the grant-date fair value of the award. For restricted stock units, compensation expense is recognized ratably over the vesting period for the fair value of the award, measured at the grant date.
Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company’s dilutive stock options and restricted stock units).
Comprehensive Income (Loss)
At the Company, comprehensive income (loss) represents net income plus OCI, which consists primarily of the net change in unrealized gains (losses) on AFS debt securities for the period, changes in the funded status of employee benefit plans and unrealized gains (losses) on derivatives designated as hedging instruments. AOCI represents the net unrealized gains (losses) on AFS debt securities, the previously unrecognized portion of the funded status of employee benefit plans and the fair value of instruments designated as hedging instruments, net of income taxes, as of the consolidated balance sheet dates.
Derivative Instruments and Hedging Activities
The Company records all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in the consolidated statements of income.
When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions. Any fee paid to the Company under a risk participation agreement is in consideration of the credit risk of the counterparties and is recognized in the income statement. Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default and loss given default of the counterparties.
Business Combinations
Business
combinations are accounted for under the acquisition method of accounting. Acquired assets, including separately identifiable intangible assets, and assumed liabilities are recorded at their acquisition date estimated fair values. The excess of the cost of acquisition over these fair values is recognized as goodwill. During the measurement period, which cannot exceed one year from the acquisition date, changes to estimated fair values are recognized as an adjustment to goodwill. Certain transaction costs are expensed as incurred. See Note 3 for additional information.
Fair Value Measurements
GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments.
The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or quote from alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used in pricing the securities by its third-party providers in pricing the securities.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows.
Other Financial Instruments
The Company is a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letter of credit and certain agricultural real estate loans sold to investors with recourse. The Company’s policy is to record such instruments when funded.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers. Under the standby letters of credit, the Company is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. Standby letters of credit typically have one year expirations with an option to renew upon annual review. The Company typically receives a fee for these transactions. The fair value of standby letters of credit is recorded upon inception.
Repurchase Agreements
Repurchase agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. Obligations to repurchase securities sold are reflected as a liability in the consolidated balance sheets. The securities underlying the agreements are delivered to a custodial account for the benefit of the counterparties with whom each transaction is executed. The counterparties, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agree to resell to the Company the same securities at the maturities of the agreements.
Revenue from Contracts with Customers
The Company recognizes revenue in accordance with ASU 2014-09, Revenue
from Contracts with Customers (Accounting Standards Codification (“ASC”) Topic 606) (“ASC 606”), and all subsequent ASUs that modified ASC 606. ASC 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities and certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives and certain credit card fees are also not in scope. ASC 606 is applicable to noninterest revenue streams such as retirement plan administration fees, trust and asset management income, deposit related fees and annuity and insurance commissions. Noninterest revenue streams in-scope of ASC 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of overdraft fees, monthly service fees, check orders and other deposit account related fees. Overdraft, monthly service, check orders and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Card Services Income
ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks. The Company’s performance obligations for these revenue streams are satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Retirement Plan Administration Fees
Retirement plan administration fees are primarily generated for services related to the recordkeeping, administration and plan design solutions of defined benefit, defined contribution and revenue sharing plans. Revenue is recognized in arrears for services already provided in accordance with fees established in contracts with customers or based on rates agreed to with investment trade platforms based on ending investment balances held. The Company’s performance obligation is satisfied, and related revenue recognized based on services completed or ending investment balances, for which receivables are recorded at the time of revenue recognition.
Wealth Management
Wealth Management revenue primarily is comprised of trust and other financial services revenue. Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts, pensions and other customer assets. The Company’s performance obligation is generally satisfied with the resulting fees recognized monthly, based upon services completed or the month-end market value of the assets under management and the applicable fee rate. Payment is generally received shortly after services are rendered or a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Financial services revenue primarily consists of commissions received on brokered investment product sales. For other financial services revenue, the Company’s performance obligation is generally satisfied upon the issuance of the annuity policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company does not earn a significant amount of trailing commission fees on brokered investment product sales. The majority of the trailing commission fees are calculated based on a percentage of market value of a period end and revenue is recognized when an investment product’s market value can be determined.
Insurance Revenue
Insurance and other financial services revenue primarily consists of commissions received on insurance. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation related to insurance sales for both property and casualty insurance and employee benefit plans is generally satisfied upon the later of the issuance or effective date of the policy. The Company earns performance based incentives, commonly known as contingent payments, which usually are based on certain criteria established by the insurance carrier such as premium volume, growth and insured loss ratios. Contingent payments are accrued for based upon management’s expectations for the year. Commission expense associated with sales of insurance products is expensed as incurred. The Company does not earn a significant amount of trailing commission fees on insurance product sales. The majority of the trailing commission fees are calculated based on a percentage of market value of a period end and revenue is recognized when an investment product’s market value can be determined.
Other
Other noninterest income consists of other recurring revenue streams such as account and loan fees, interest rate swap fees, safe deposit box rental fees and other miscellaneous revenue streams. These revenue streams are primarily transactional based and payment is received immediately or in the following month, and therefore, the Company’s performance obligation is satisfied, and the related revenue is recognized, at a point in time.
The following table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606:
Years Ended December 31,
(In thousands)
Noninterest income
In-Scope of ASC 606:
Service charges on deposit accounts
$
15,424
$
14,630
$
13,348
Card services income
20,829
29,058
34,682
Retirement plan administration fees
47,221
48,112
42,188
Wealth management
34,763
33,311
33,718
Insurance services
15,667
14,696
14,083
Other
10,838
10,858
12,992
Total noninterest income in-scope of ASC 606
$
144,742
$
150,665
$
151,011
Total noninterest income out-of-scope of ASC 606
$
(2,564
)
$
4,913
$
6,783
Total noninterest income
$
142,178
$
155,578
$
157,794
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration or before payment is due, which would result in contract receivables or assets, respectively. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment or for which payment is due from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances.
Contract Acquisition Costs
ASC 606 requires the capitalization, and subsequently amortization into expense, of certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company elected the practical expedient, which allows immediate expensing of contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less, and did not capitalize any contract acquisition costs as of or during the year ended December 31, 2023, 2022 and 2021.
Trust Operations
Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Company.
Subsequent Events
The Company has evaluated subsequent events for potential recognition and/or disclosure and there were none identified.
2.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - CECL Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the guidance on TDRs and requires an evaluation on all loan modifications to determine if they result in a new loan or a continuation of the existing loan. The ASU also requires that entities disclose current-period gross charge-offs by year of origination. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The amendments in this ASU are effective for the Company on January 1, 2023, with early adoption permitted. The Company adopted ASU 2022-02 on January 1, 2023 using the modified retrospective method and recorded a net increase to retained earnings of $0.5 million. The transition adjustment includes a $0.6 million impact to the allowance for credit losses on loans and a $0.1 million impact to the deferred tax asset.
Accounting Standards Issued Not Yet Adopted
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements, which amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were redundant, duplicative, overlapping, outdated, or superseded. The new guidance is intended to align GAAP requirements with those of the SEC. The ASU will become effective on the earlier of the date on which the SEC removes its disclosure requirements for the related disclosure or June 30, 2027. Early adoption is not permitted. The adoption, other than to meet the new disclosure requirements, is not expected to have a material impact on the consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, that addresses requests for improved income tax disclosures from investors, lenders, creditors and other allocators of capital that use the financial statements to make capital allocation decisions. The ASU requires enhanced disclosures primarily related to existing rate reconciliation and income taxes paid information to help investors better assess how the Company’s operations and related tax risks and tax planning and operational opportunities affect the Company’s tax rate and prospects for future cash flows. The ASU 2023-09 improves the transparency of income tax. The amendments in this ASU are effective for the Company on January 1, 2025 and should be applied on a prospective basis. Retrospective application and early adoption are permitted. The adoption, other than to meet the new disclosure requirements, is not expected to have a material impact on the consolidated financial statements.
3.
Acquisitions
Salisbury Bancorp, Inc.
On August 11, 2023, the Company completed the acquisition of Salisbury Bancorp, Inc. (“Salisbury”) through the merger of Salisbury with and into the Company, with the Company surviving the merger, for $161.7 million in stock. Salisbury Bank and Trust Company, Salisbury’s wholly-owned bank subsidiary, was a Connecticut-chartered commercial bank headquartered in Lakeville, Connecticut with 13 banking offices. The acquisition enhances the Company’s presence in Massachusetts’ Berkshire county, and extends its footprint into New York’s Dutchess, Orange and Ulster counties and Connecticut’s Litchfield county. In connection with the acquisition, the Company issued 4.32 million shares and acquired approximately $1.46 billion of identifiable assets. Goodwill of $79.7 million was recognized as a result of the merger and is not amortizable or deductible for tax purposes. During the fourth quarter of 2023, the Company revised the estimated fair value of premises and equipment, net and related deferred income taxes based upon receipt of land and building appraisals, which resulted in a $1.7 million increase in goodwill. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. As a result of the full integration of the operations of Salisbury, it is not practicable to determine all revenue or net income included in the Company’s operating results relating to Salisbury since the date of acquisition as Salisbury results cannot be separately identified.
The Company determined that this acquisition constitutes a business combination and therefore was accounted for using the acquisition method of accounting. Accordingly, as of the date of the acquisition, the Company recorded the assets acquired, liabilities assumed and consideration paid at fair value based on management’s best estimates using information available at the date of the acquisition and these estimates are subject to adjustment based on updated information not available at the time of the acquisition. The amount of goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with Salisbury. Accrued income taxes and deferred taxes associated with the Salisbury acquisition were recorded on a provisional basis and could vary from the actual recorded balance and tax provisions when returns are finalized.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed:
August 11, 2023
(In thousands)
Salisbury Bancorp, Inc.
Consideration:
Cash paid to shareholders (fractional shares)
$
Common stock issuance
161,723
Total net consideration
$
161,738
Recognized amounts of identifiable assets acquired and (liabilities) assumed:
Cash and cash equivalents
$
48,665
Securities available for sale
122,667
Loans, net of allowance for credit losses on purchased credit deteriorated loans
1,174,237
Premises and equipment, net
13,026
Core deposit intangibles
31,188
Wealth management customer intangible
4,654
Bank owned life insurance
30,315
Other assets
37,631
Total identifiable assets acquired
$
1,462,383
Deposits
$
(1,308,976
)
Borrowings
(55,461
)
Other liabilities
(15,949
)
Total liabilities assumed
$
(1,380,386
)
Total identifiable assets, net
$
81,997
Goodwill
$
79,741
The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. The Company used an independent valuation specialist to assist with the determination of fair values for certain acquired assets and assumed liabilities.
Cash and due from banks - The estimated fair value was determined to approximate the carrying amount of these assets.
Securities available for sale - The estimated fair value of the investment portfolio was based on quoted market prices and dealer quotes. The investment securities were sold immediately after the acquisition and no gains or losses were recorded.
Loans - The estimated fair value of loans were based on a discounted cash flow methodology applied on a pooled basis for non-purchased credit deteriorated (“non-PCD”) loans and for purchased credit deteriorated (“PCD”) loans. The valuation considered underlying characteristics including loan type, term, rate, payment schedule and credit rating. Other factors included assumptions related to prepayments, probability of default and loss given default. The discount rates applied were based on a build-up approach considering the funding mix, servicing costs, liquidity premium and factors related to performance risk.
Core deposit intangible - The core deposit intangible was valued utilizing the cost savings method approach, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source. The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates.
Wealth management customer intangible - The wealth management customer intangible was valued utilizing the income approach, which employs a present value analysis, which calculates the expected after-tax cash flow benefits of the net revenues generated by the acquired customers over the expected lives of the acquired customers, discounted at a long-term market-oriented after-tax rate of return on investment. The value assigned to the acquired customers represents the future economic benefit from acquiring the customers (net of operating expenses).
Deposits - The fair value of noninterest bearing demand deposits, interest checking, money market and savings deposit accounts from Salisbury were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit (time deposit accounts) were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates.
Borrowings - The estimated fair value of short-term borrowings was determined to approximate stated value. Subordinated debt was valued using a discounted cash flow approach incorporating a discount rate that incorporated similar terms, maturity and credit rating.
Accounting for Acquired Loans - Acquired loans are classified into two categories: PCD loans and non-PCD loans. PCD loans are defined as a loan or group of loans that have experienced more than insignificant credit deterioration since origination. Non-PCD loans will have an allowance established on the acquisition date, which is recognized as an expense through the provision for credit losses. For PCD loans, an allowance is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost”. There is no provision for credit loss expense recognized on PCD loans because the initial allowance is established by grossing-up the amortized cost of the PCD loan. A day 1 allowance for credit losses on non-PCD loans of $8.8 million was recorded through the provision for loan losses within the unaudited interim consolidated statements of income. The
following table provides details related to the fair value of acquired PCD loans.
(In thousands)
PCD Loans
Par value of PCD loans at acquisition
$
219,076
Allowance for credit losses at acquisition
5,772
Discount at acquisition
(24,512
)
Fair value of PCD loans at acquisition
$
200,336
Direct costs related to the acquisition were expensed as incurred. Acquisition integration-related expenses were $10.0 million and $1.0 million during the years ended 2023 and 2022, respectively. These amounts have been separately stated in the consolidated statements of income and are included in operating activities in the consolidated statements of cash flows.
Supplemental Pro Forma Financial Information (Unaudited)
The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the years ended December 31, 2023 and 2022, as if Salisbury had been acquired on January 1, 2022. This unaudited pro forma information combines the historical results of Salisbury with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair value, cost savings or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.
Pro Forma (Unaudited)
Years Ended December 31,
(In thousands)
Total revenue, net of interest expense
$
542,241
$
578,543
Net income
112,330
168,101
Other Acquisitions
In July 2023, the Company, through its subsidiary, EPIC Advisors Inc., completed its acquisition of certain assets of Retirement Direct, LLC, a retirement plan administration business based near Charlotte, North Carolina for a total consideration of $2.8 million. As part of the acquisition, the Company recorded goodwill of $0.9 million and $1.0 million contingent consideration recorded in other liabilities on the consolidated balance sheet as of December 31, 2023.
The operating results of the acquired company is included in the consolidated results after the date of acquisition.
4.
Securities
The amortized cost, estimated fair value and unrealized gains (losses) of AFS securities are as follows:
(In thousands)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
As of December 31, 2023
U.S. treasury
$ 133,302
$ -
$ (8,278 )
$ 125,024
Federal agency
248,384
-
(33,644
)
214,740
State & municipal
96,251
(9,956
)
86,306
Mortgage-backed:
Government-sponsored enterprises
399,532
(44,264
)
355,275
U.S. government agency securities
74,281
(7,302
)
66,993
Collateralized mortgage obligations:
Government-sponsored enterprises
452,715
(48,257
)
404,473
U.S. government agency securities
162,171
-
(25,100
)
137,071
Corporate
48,442
-
(7,466
)
40,976
Total AFS securities
$
1,615,078
$
$
(184,267
)
$
1,430,858
As of December 31, 2022
U.S. treasury
$ 132,891
$ -
$ (11,233 )
$ 121,658
Federal agency
248,419
-
(42,000
)
206,419
State & municipal
97,036
(14,190
)
82,851
Mortgage-backed:
Government-sponsored enterprises
454,177
(54,675
)
399,511
U.S. government securities
81,844
(7,676
)
74,183
Collateralized mortgage obligations:
Government-sponsored enterprises
498,021
(59,473
)
438,557
U.S. government securities
171,090
-
(21,284
)
149,806
Corporate
60,404
-
(6,164 )
54,240
Total AFS securities
$
1,743,882
$
$
(216,695
)
$
1,527,225
There was no allowance for credit losses on AFS securities as of December 31, 2023 and 2022.
During the year ended December 31, 2023, there were $4.5 million of gross realized losses reclassified out of AOCI and into earnings and the Company incurred a $5.0 million loss on the write-off of an AFS corporate debt security from a subordinated debt investment of a financial institution that failed. These losses were reclassified out of AOCI and into earnings in net securities losses in the consolidated statements of income. During the years ended December 31, 2022 and 2021, there were no gains or losses reclassified out of AOCI and into earnings.
The amortized cost, estimated fair value and unrealized gains (losses) of HTM securities are as follows:
(In thousands)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
As of December 31, 2023
Federal agency
$
100,000
$
-
$
(17,784
)
$
82,216
Mortgage-backed:
Government-sponsored enterprises
228,720
-
(31,613
)
197,107
U.S. government agency securities
17,086
(566
)
16,523
Collateralized mortgage obligations:
Government-sponsored enterprises
187,457
(12,021
)
175,493
U.S. government agency securities
63,878
-
(10,908
)
52,970
State & municipal
308,126
(18,122
)
290,215
Total HTM securities
$
905,267
$
$
(91,014
)
$
814,524
As of December 31, 2022
Federal agency
$ 100,000
$ -
$ (20,678 )
$ 79,322
Mortgage-backed:
Government-sponsored enterprises
249,511
-
(36,819
)
212,692
U.S. government agency securities
18,396
(619
)
17,781
Collateralized mortgage obligations:
Government-sponsored enterprises
207,738
(14,876
)
193,062
U.S. government agency securities
66,628
-
(9,842
)
56,786
State & municipal
277,244
(24,245
)
253,004
Total HTM securities
$
919,517
$
$
(107,079
)
$
812,647
At December 31, 2023 and 2022, all of the mortgaged-backed HTM securities were comprised of U.S. government agency and government-sponsored enterprises securities. There was no allowance for credit losses on HTM securities as of December 31, 2023 and 2022 because the expectation of nonrepayment of the amortized cost is zero, except for state & municipal securities, which such expected losses from nonrepayment were immaterial.
The Company recorded no gains from calls on HTM securities for year ended December 31, 2023. Included in net securities (losses) gains, the Company recorded gains from calls on HTM securities of approximately $4 thousand for the year ended December 31, 2022 and approximately $29 thousand for the year ended December 31, 2021.
AFS and HTM securities with amortized costs totaling $2.03 billion at December 31, 2023 and $1.73 billion at December 31, 2022 were pledged to secure public deposits and for other purposes required or permitted by law. Additionally, at December 31, 2023 and 2022, AFS and HTM securities with an amortized cost of $177.2 million and $149.5 million, respectively, were pledged as collateral for securities sold under repurchase agreements.
The following table sets forth information with regard to gains and (losses) on equity securities:
Years Ended
December 31,
(In thousands)
Net gains and (losses) recognized on equity securities
$
$
(1,135
)
Less: Net gains and (losses) recognized on equity securities sold during the period
-
-
Unrealized gains and (losses) recognized on equity securities still held
$
$
(1,135
)
As of December 31, 2023 and 2022 the carrying value of equity securities without readily determinable fair values was $1.0 million. The Company performed a qualitative assessment to determine whether the investments were impaired and identified no areas of concern as of December 31, 2023 and 2022. There were no impairments, or downward or upward adjustments recognized for equity securities without readily determinable fair values during the years ended December 31, 2023 and 2022.
The following table sets forth information with regard to contractual maturities of debt securities at December 31, 2023:
(In thousands)
Amortized
Cost
Estimated
Fair Value
AFS debt securities:
Within one year
$
50,389
$
49,462
From one to five years
536,097
483,546
From five to ten years
356,944
315,359
After ten years
671,648
582,491
Total AFS debt securities
$
1,615,078
$
1,430,858
HTM debt securities:
Within one year
$
92,757
$
92,724
From one to five years
113,075
109,686
From five to ten years
262,943
231,113
After ten years
436,492
381,001
Total HTM debt securities
$
905,267
$
814,524
Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Except for U.S. government securities and government-sponsored enterprises securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of consolidated stockholders’ equity at December 31, 2023, 2022 and 2021.
The following table sets forth information with regard to investment securities with unrealized losses, for which an allowance for credit losses has not been recorded, segregated according to the length of time the securities had been in a continuous unrealized loss position:
Less Than 12 Months
12 Months or Longer
Total
(In thousands)
Fair
Value
Unrealized
Losses
Number
of
Positions
Fair
Value
Unrealized
Losses
Number
of
Positions
Fair
Value
Unrealized
Losses
Number
of
Positions
As of December 31, 2023
AFS securities:
U.S. treasury
$ -
$ -
-
$ 125,024
$ (8,278 )
$ 125,024
$ (8,278 )
Federal agency
-
-
-
214,740
(33,644
)
214,740
(33,644
)
State & municipal
-
-
-
85,528
(9,956 )
85,528
(9,956 )
Mortgage-backed
(1
)
421,259
(51,565
)
421,312
(51,566
)
Collateralized mortgage obligations
1,333
(6
)
536,678
(73,351
)
538,011
(73,357
)
Corporate
1,379
(75 )
39,597
(7,391 )
40,976
(7,466 )
Total securities with unrealized losses
$
2,765
$
(82
)
$
1,422,826
$
(184,185
)
$
1,425,591
$
(184,267
)
HTM securities:
Federal agency
$
-
$
-
-
$
82,216
$
(17,784
)
$
82,216
$
(17,784
)
Mortgage-backed
12,221
(365 )
201,320
(31,814 )
213,541
(32,179 )
Collateralize mortgage obligations
-
-
-
219,820
(22,929 )
219,820
(22,929 )
State & municipal
14,422
(127
)
171,904
(17,995
)
186,326
(18,122
)
Total securities with unrealized losses
$
26,643
$
(492
)
$
675,260
$
(90,522
)
$
701,903
$
(91,014
)
As of December 31, 2022
AFS securities:
U.S. treasury
$ 55,616
$ (3,864 )
$ 66,042
$ (7,369 )
$ 121,658
$ (11,233 )
Federal agency
-
-
-
206,419
(42,000
)
206,419
(42,000
)
State & municipal
3,679
(341 )
78,395
(13,849 )
82,074
(14,190 )
Mortgage-backed
204,447
(15,048
)
267,926
(47,303
)
472,373
(62,351
)
Collateralized mortgage obligations
211,612
(14,458
)
374,376
(66,299
)
585,988
(80,757
)
Corporate
34,434
(2,970 )
19,806
(3,194 )
54,240
(6,164 )
Total securities with unrealized losses
$
509,788
$
(36,681
)
$
1,012,964
$
(180,014
)
$
1,522,752
$
(216,695
)
HTM securities:
Federal agency
$ -
$ -
-
$ 79,322
$ (20,678 )
$ 79,322
$ (20,678 )
Mortgage-backed
91,417
(9,096 )
138,936
(28,342 )
230,353
(37,438 )
Collateralized mortgage obligations
191,644
(13,863 )
48,289
(10,855 )
239,933
(24,718 )
State & municipal
110,727
(4,930
)
82,949
(19,315
)
193,676
(24,245
)
Total securities with unrealized losses
$
393,788
$
(27,889
)
$
349,496
$
(79,190
)
$
743,284
$
(107,079
)
The Company does not believe the AFS securities that were in an unrealized loss position as of December 31, 2023 and 2022, which consisted of 388 and 415 individual securities, respectively, represented a credit loss impairment. AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. As of December 31, 2023 and 2022, the majority of the AFS securities in an unrealized loss position consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises that carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk-free” and have a long history of zero credit losses. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell, nor is it more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities. AIR on AFS debt securities totaled $3.9 million at December 31, 2023 and $4.2 million at December 31, 2022 and is excluded from the estimate of credit losses and reported in the other assets financial statement line.
None of the Bank’s HTM debt securities were past due or on nonaccrual status as of December 31, 2023 and 2022. There was no accrued interest reversed against interest income for the years ended December 31, 2023 and 2022 as all securities remained on accrual status. In addition, there were no collateral-dependent HTM debt securities as of December 31, 2023 and 2022. As of December 31, 2023 and 2022, 66% and 70%, respectively, of the Company’s HTM debt securities were issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, which are widely recognized as “risk free,” and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for these securities as of December 31, 2023 and 2022. The remaining HTM debt securities at December 31, 2023 and 2022 were comprised of state and municipal obligations generally with bond ratings of A to AAA. Utilizing the CECL methodology, the Company determined that the expected credit loss on its HTM municipal bond portfolio was immaterial and therefore no allowance for credit loss was recorded as of December 31, 2023 and 2022. AIR on HTM debt securities totaled $4.7 million at December 31, 2023 and $3.8 million at December 31, 2022 and is excluded from the estimate of credit losses and reported in the other assets financial statement line.
5. Loans
A summary of loans, net of deferred fees and origination costs, by category is as follows:
At December 31,
(In thousands)
Commercial & industrial
$
1,354,248
$
1,266,031
Commercial real estate
3,626,910
2,807,941
Residential real estate
2,125,804
1,649,870
Indirect auto
1,130,132
989,587
Residential solar
917,755
856,798
Home equity
337,214
314,124
Other consumer
158,650
265,796
Total loans
$
9,650,713
$
8,150,147
Included in the above loans are net deferred loan origination (fees) costs totaling $(98.2) million and $(109.1) million at December 31, 2023 and 2022, respectively. The Company had $0.4 million and $0.6 million of residential real estate loans held for sale as of December 31, 2023 and 2022, respectively. Beginning in 2023, the Company began selling residential solar loans. As of December 31, 2023 the Company had $2.9 million of residential solar loans held for sale.
The total amount of loans serviced by the Company for unrelated third parties was $856.9 million and $592.7 million at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, the Company had $1.0 million and $0.6 million, respectively, of mortgage servicing rights.
At December 31, 2023 and 2022, the Company serviced $26.4 million and $31.0 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is considered necessary at December 31, 2023 and 2022.
FHLB advances are collateralized by a blanket lien on the Company’s residential real estate mortgages.
In the ordinary course of business, the Company has made loans at prevailing rates and terms to directors, officers and other related parties. Such loans, in management’s opinion, do not present more than the normal risk of collectability or incorporate other unfavorable features. The aggregate amount of loans outstanding to qualifying related parties and changes during the years are summarized as follows:
(In thousands)
Balance at January 1
$
2,516
$
3,292
New loans
Adjustment due to change in composition of related parties
-
(37
)
Repayments
(2,134
)
(1,315
)
Balance at December 31
$
1,087
$
2,516
6. Allowance for Credit Losses and Credit Quality of Loans
As described in Note 2, the Company’s adoption of ASU 2022-02 resulted in an insignificant change to its methodology for estimating the allowance for credit losses on TDRs. The decrease in allowance for credit loss on TDR loans relating to the adoption of ASU 2022-02 was $0.6 million.
The allowance for credit losses totaled $114.4 million at December 31, 2023, compared to $100.8 million at December 31, 2022. The allowance for credit losses as a percentage of loans was 1.19% at December 31, 2023, compared to 1.24% at December 31, 2022.
The allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverts to long-term economic conditions over a 4-quarter reversion period on a straight-line basis. The Company considers a baseline, upside and downside economic forecast in measuring the allowance.
The quantitative model as of December 31, 2023 incorporated a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model. At December 31, 2023, the weightings were 70% and 30% for the baseline and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment starting at 3.8% and increasing slightly during the forecast period to 4.1%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2024 at approximately 3.7% before decreasing to a low of 2.9% in the third quarter of 2024 and then increasing to 3.8% by the end of the forecast period. Other utilized economic variable forecasts are mixed compared to the prior year, with retail sales improving, business output mixed and housing starts down. Key assumptions in the baseline economic outlook included currently being in a full employment economy, continued tapering of the Federal Reserve balance sheet and the Federal Open Market Committee (“FOMC”) beginning to cut rates in the second quarter of 2024. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, northeast unemployment increases to a peak of 7.0% in the first quarter of 2025. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2023. Additional qualitative adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth and policy exceptions was also conducted.
The quantitative model as of December 31, 2022 incorporated a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model. At December 31, 2022, the weightings were 50% and 50% for the baseline and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment initially around pre-coronavirus (“COVID-19”) levels at 3.9% that increases slightly during the forecast period to 4.0%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period. Other utilized economic variables have generally deteriorated in their respective forecasts, with retail sales and housing starts forecasts declining from the prior year. Key assumptions in the baseline economic outlook included a full employment economy being realized in the near future, continued tapering of the Federal Reserve balance sheet, an increasing yield on ten-year treasury securities and a gradual decline in global oil prices. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.9% in the fourth quarter of 2022 to a peak of 6.9% in the first quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2022. Additional qualitative adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth and policy exceptions was also conducted.
The quantitative model as of December 31, 2021 incorporated a baseline economic outlook along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels at 4.8% but falling below pre-COVID-19 levels by the end of the forecast period to 3.5%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2022 at approximately 9% and hover around 5% by the middle and end of the forecast period. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rose from 5.7% in the fourth quarter of 2021 to a peak of 8% in the first quarter of 2023, remaining around or above 7% for the entire forecast period. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the second quarter of 2022 and with northeast unemployment moving down to 3.1% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2021. At December 31, 2021, the weightings were 60%, 10% and 30% for the baseline, upside and downside economic forecasts, respectively. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs. The Company also continued to monitor the level of criticized and classified loans in the fourth quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential additional losses above modeled losses. Additionally, qualitative adjustments were made for Moody’s baseline economic forecast to include impacts of the Build Back Better Act not passing by December 31, 2021 and to address potential economic deterioration due to Omicron, as well as isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in historical periods.
There were $219.5 million of PCD loans acquired from Salisbury during the year ended December 31, 2023, which resulted in an allowance for credit losses at acquisition of $5.8 million. There were no loans purchased with credit deterioration during the year ended December 31, 2022. During 2023, the Company purchased $3.8 million of residential loans at a 7.00% premium with a $31 thousand allowance for credit losses recorded for these loans. During 2022, the Company purchased $11.5 million of residential loans at a 1.53% premium and $50.1 million of consumer loans at a par with an allowance for credit losses recorded on the purchase date of $3.2 million.
The Company made a policy election to report AIR in the other assets line item on the consolidated balance sheets. AIR on loans totaled $34.1 million at December 31, 2023 and $25.0 million at December 31, 2022 and there was no estimated allowance for credit losses related to AIR at December 31, 2023 and 2022 as it is excluded from amortized cost.
The following tables present the activity in the allowance for credit losses by our portfolio segment:
(In thousands)
Commercial
Loans
Consumer
Loans
Residential
Total
Balance as of January 1, 2023 (after adoption of ASU 2022-02)
$
34,662
$
50,951
$
14,539
$
100,152
Allowance for credit loss on PCD acquired loans
5,300
5,772
Charge-offs
(4,154
)
(22,107
)
(517
)
(26,778
)
Recoveries
3,625
5,859
9,980
Provision
6,470
11,705
7,099
25,274
Ending Balance as of December 31, 2023
$
45,903
$
46,427
$
22,070
$
114,400
Balance as of December 31, 2021
$
28,941
$
44,253
$
18,806
$
92,000
Charge-offs
(1,870
)
(16,140
)
(633
)
(18,643
)
Recoveries
2,430
7,014
10,296
Provision
5,221
15,824
(3,898
)
17,147
Ending Balance as of December 31, 2022
$
34,722
$
50,951
$
15,127
$
100,800
Balance as of December 31, 2020
$ 50,942
$ 37,803
$ 21,255
$ 110,000
Charge-offs
(4,638 )
(14,489 )
(979 )
(20,106 )
Recoveries
8,571
1,069
10,363
Provision
(18,086 )
12,368
(2,539 )
(8,257 )
Ending Balance as of December 31, 2021
$ 28,941
$ 44,253
$ 18,806
$ 92,000
The allowance for credit losses as of December 31, 2023 increased compared to the allowance estimates as of December 31, 2022 due to the recording of $14.5 million of allowance for acquired Salisbury loans as of the acquisition date, which included both the $8.8 million of non-PCD allowance recognized through the provision for loan losses and the $5.8 million of PCD allowance reclassified from loans. The increase in the allowance for credit losses from December 31, 2021 to December 31, 2022 was primarily due to an increase in loan balances and a modest deterioration in the economic forecast. The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improvement in the economic forecast, partly offset by providing for the increase in loan balances.
Individually Evaluated Loans
As of December 31, 2023, there were two relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $17.3 million, with no allowance for credit loss. As of December 31, 2022, two different relationships were identified to be evaluated for loss on an individual basis, which in aggregate, had an amortized cost basis of $2.4 million, with no allowance for credit loss.
The following table sets forth information with regard to past due and nonperforming loans by loan segment:
(In thousands)
31-60 Days
Past Due
Accruing
61-90 Days
Past Due
Accruing
Greater
Than
90 Days
Past Due
Accruing
Total
Past Due
Accruing
Nonaccrual
Current
Recorded
Total
Loans
As of December 31, 2023
Commercial loans:
C&I
$
$
$
$
$
3,441
$
1,393,616
$
1,397,505
CRE
-
1,638
18,126
3,413,984
3,433,748
Total commercial loans
$
1,217
$
$
$
2,086
$
21,567
$
4,807,600
$
4,831,253
Consumer loans:
Auto
$
10,115
$
2,011
$
1,067
$
13,193
$
2,106
$
1,084,143
$
1,099,442
Residential solar
3,074
1,301
5,290
912,220
917,755
Other consumer
2,343
1,811
1,124
5,278
164,867
170,360
Total consumer loans
$
15,532
$
5,123
$
3,106
$
23,761
$
2,566
$
2,161,230
$
2,187,557
Residential
$
3,836
$
$
$
4,789
$
10,080
$
2,617,034
$
2,631,903
Total loans
$
20,585
$
6,390
$
3,661
$
30,636
$
34,213
$
9,585,864
$
9,650,713
(In thousands)
31-60 Days
Past Due
Accruing
61-90 Days
Past Due
Accruing
Greater
Than
90 Days
Past Due
Accruing
Total
Past Due
Accruing
Nonaccrual
Current
Recorded
Total
Loans
As of December 31, 2022
Commercial loans:
C&I
$
$
$
$
$
2,244
$
1,238,468
$
1,241,157
CRE
-
5,780
2,689,196
2,695,408
Total commercial loans
$
$
$
$
$
8,024
$
3,927,664
$
3,936,565
Consumer loans:
Auto
$
8,640
$
1,393
$
$
10,818
$
1,494
$
950,389
$
962,701
Residential solar
2,858
4,063
852,656
856,798
Other consumer
3,483
1,838
1,789
7,110
272,384
279,588
Total consumer loans
$
14,981
$
3,962
$
3,048
$
21,991
$
1,667
$
2,075,429
$
2,099,087
Residential
$
2,496
$
$
$
3,822
$
7,542
$
2,103,131
$
2,114,495
Total loans
$
18,155
$
4,712
$
3,823
$
26,690
$
17,233
$
8,106,224
$
8,150,147
As of December 31, 2023 and 2022, there were $17.3 million and $1.1 million, respectively, of loans in nonaccrual that were specifically evaluated for individual expected credit loss without an allowance for credit losses.
Credit Quality Indicators
The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, which facilitates recognition and response to problem loans and potential problem loans.
Commercial Grading System
For Commercial and Industrial (“C&I”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass.
Doubtful
A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss.
Substandard
Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.
Special Mention
Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage and/or tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent.
Pass
Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Pass loans also include any portion of a government guaranteed loan, including Paycheck Protection Program loans.
Consumer and Residential Grading System
Consumer and Residential loans are graded as either Nonperforming or Performing.
Nonperforming
Nonperforming loans are loans that are (1) over 90 days past due and interest is still accruing or (2) on nonaccrual status.
Performing
All loans not meeting any of the above criteria are considered Performing.
The following tables illustrate the Company’s credit quality by loan class by vintage and, beginning in 2023 with the Company’s January 1, 2023 adoption of ASU 2022-02, also includes gross charge-offs by loan class by vintage for the year ended December 31, 2023. Included in other consumer gross charge-offs, the Company recorded $0.2 million in overdrawn deposit accounts reported as 2022 originations and $0.8 million in overdrawn deposit accounts reported as 2023 originations for the year ended December 31, 2023.
(In thousands)
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
As of December 31, 2023
C&I
By internally assigned grade:
Pass
$
229,249
$
270,796
$
241,993
$
158,051
$
74,469
$
63,826
$
299,248
$
2,923
$
1,340,555
Special mention
1,672
3,524
1,854
19,489
-
27,323
Substandard
1,496
2,461
1,609
2,266
5,632
14,266
1,607
29,619
Doubtful
-
-
-
-
Total C&I
$
231,165
$
274,930
$
243,881
$
161,857
$
76,826
$
71,313
$
333,003
$
4,530
$
1,397,505
Current-period gross charge-offs
$ (24 )
$ (3,021 )
$ (5 )
$ (86 )
$ -
$ (600 )
$ -
$ -
$ (3,736 )
CRE
By internally assigned grade:
Pass
$
353,161
$
518,201
$
561,897
$
452,110
$
327,804
$
739,189
$
294,039
$
33,705
$
3,280,106
Special mention
3,577
4,472
10,711
7,055
9,967
39,460
2,970
-
78,212
Substandard
21,807
1,146
2,996
37,418
10,962
-
75,430
Total CRE
$
357,108
$
523,404
$
594,415
$
460,311
$
340,767
$
816,067
$
307,971
$
33,705
$
3,433,748
Current-period gross charge-offs
$ -
$ -
$ -
$ -
$ (114 )
$ (304 )
$ -
$ -
$ (418 )
Auto
By payment activity:
Performing
$
474,369
$
363,516
$
157,251
$
42,644
$
45,406
$
13,071
$
$
-
$
1,096,269
Nonperforming
1,241
-
-
3,173
Total auto
$
474,901
$
364,757
$
158,081
$
42,834
$
45,712
$
13,145
$
$
-
$
1,099,442
Current-period gross charge-offs
$ (102 )
$ (1,183 )
$ (1,066 )
$ (340 )
$ (301 )
$ (295 )
$ -
$ -
$ (3,287 )
Residential solar
By payment activity:
Performing
$ 155,425
$ 430,855
$ 178,839
$ 65,382
$ 46,554
$ 39,540
$ -
$ -
$ 916,595
Nonperforming
-
-
-
1,160
Total residential solar
$ 155,425
$ 431,692
$ 179,044
$ 65,400
$ 46,601
$ 39,593
$ -
$ -
$ 917,755
Current-period gross charge-offs
$ (150 )
$ (1,930 )
$ (923 )
$ (45 )
$ (558 )
$ (345 )
$ -
$ -
$ (3,951 )
Other consumer
By payment activity:
Performing
$
13,089
$
27,394
$
57,876
$
21,087
$
14,548
$
15,964
$
19,042
$
$
169,021
Nonperforming
-
1,339
Total other consumer
$
13,089
$
27,638
$
58,561
$
21,231
$
14,604
$
16,125
$
19,046
$
$
170,360
Current-period gross charge-offs
$ (885 )
$ (3,744 )
$ (7,511 )
$ (1,329 )
$ (832 )
$ (568 )
$ -
$ -
$ (14,869 )
Residential
By payment activity:
Performing
$
212,799
$
366,860
$
453,206
$
267,845
$
167,860
$
876,563
$
260,836
$
15,300
$
2,621,269
Nonperforming
1,121
7,460
-
10,634
Total residential
$
212,933
$
367,290
$
454,327
$
268,230
$
168,451
$
884,023
$
260,836
$
15,813
$
2,631,903
Current-period gross charge-offs
$
-
$
-
$
(81 )
$
(30 )
$
-
$
(406 )
$
-
$
-
$
(517 )
Total loans
$
1,444,621
$
1,989,711
$
1,688,309
$
1,019,863
$
692,961
$
1,840,266
$
920,868
$
54,114
$
9,650,713
Current-period gross charge-offs
$ (1,161 )
$ (9,878 )
$ (9,586 )
$ (1,830 )
$ (1,805 )
$ (2,518 )
$ -
$ -
$ (26,778 )
(In thousands)
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
As of December 31, 2022
C&I
By internally assigned grade:
Pass
$
296,562
$
252,480
$
164,976
$
91,497
$
39,394
$
32,413
$
327,166
$
3,133
$
1,207,621
Special mention
1,044
4,531
1,108
5,234
-
13,052
Substandard
3,098
3,969
12,348
20,435
Doubtful
-
-
-
-
-
Total C&I
$
297,682
$
253,483
$
169,738
$
94,817
$
40,593
$
36,800
$
344,748
$
3,296
$
1,241,157
CRE
By internally assigned grade:
Pass
$
374,313
$
465,990
$
439,012
$
333,568
$
217,141
$
566,783
$
201,563
$
24,735
$
2,623,105
Special mention
2,641
4,649
24,023
-
34,400
Substandard
-
2,316
3,937
1,822
23,819
4,987
37,903
Total CRE
$
375,227
$
466,754
$
442,196
$
340,146
$
223,612
$
614,625
$
203,126
$
29,722
$
2,695,408
Auto
By payment activity:
Performing
$
488,776
$
239,090
$
75,853
$
99,615
$
44,061
$
13,027
$
-
$
-
$
960,422
Nonperforming
-
-
2,279
Total auto
$
489,366
$
239,745
$
76,257
$
100,000
$
44,277
$
13,056
$
-
$
-
$
962,701
Residential solar
By payment activity:
Performing
$
485,942
$
193,971
$
74,532
$
54,662
$
36,119
$
11,019
$
-
$
-
$
856,245
Nonperforming
-
-
Total residential solar
$
486,262
$
194,069
$
74,582
$
54,687
$
36,135
$
11,063
$
-
$
-
$
856,798
Other consumer
By payment activity:
Performing
$
52,545
$
110,624
$
36,412
$
27,383
$
15,536
$
15,735
$
19,218
$
$
277,703
Nonperforming
1,885
Total other consumer
$
52,783
$
111,462
$
36,807
$
27,630
$
15,593
$
15,822
$
19,226
$
$
279,588
Residential
By payment activity:
Performing
$
251,012
$
349,498
$
212,161
$
156,957
$
157,755
$
717,621
$
233,056
$
28,122
$
2,106,182
Nonperforming
1,028
5,651
-
8,313
Total residential
$
251,279
$
349,882
$
212,569
$
157,512
$
158,783
$
723,272
$
233,056
$
28,142
$
2,114,495
Total loans
$
1,952,599
$
1,615,395
$
1,012,149
$
774,792
$
518,993
$
1,414,638
$
800,156
$
61,425
$
8,150,147
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The allowance for losses on unfunded commitments totaled $5.1 million as of December 31, 2023 and December 31, 2022, which included $0.8 million of acquisition-related provision for unfunded loan commitments as of December 31, 2023, which was offset by a release of unfunded commitment reserves.
Loan Modifications to Borrowers Experiencing Financial Difficulties
As discussed in Note 2, the Company’s January 1, 2023 adoption of ASU 2022-02 eliminates the recognition and measurement of TDRs. Upon adoption of this guidance, the Company no longer recognizes an allowance for credit losses for the economic concession granted to a borrower for changes in the timing and amount of contractual cash flows when a loan is restructured. The adoption of ASU 2022-02 resulted in a change to reporting for loan modifications to borrowers experiencing financial difficulties. With the adoption of ASU 2022-02 these modifications required enhanced reporting on the type of modifications granted and the financial magnitude of the concessions granted.
When the Company modifies a loan with financial difficulty, such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a change in scheduled payment amount; or principal forgiveness.
The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:
Year Ended December 31, 2023
Interest Rate Reduction
Term Extension
Combination - Term
Extension and Interest Rate
Reduction
(Dollars in thousands)
Amortized
Cost
% of Total Class
of Financing
Receivables
Amortized
Cost
% of Total Class
of Financing
Receivables
Amortized
Cost
% of Total Class
of Financing
Receivables
Residential
$
0.007 %
$
0.012 %
$
0.006 %
Total
$
$
$
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulties:
Year Ended December 31,
Loan Type
Term Extension
Interest Rate Reduction
Residential
Added a weighted-average 12 years to the
life of loans, which reduced monthly
payment amounts for the borrowers.
Interest rates were reduced by an average
of one and a half percent
The following table depicts the financing receivables that had a payment default that were modified to borrowers experiencing financial difficulty since the adoption of ASU 2022-02 effective January 1, 2023:
Year Ended December 31, 2023
Amortized Cost Basis of
Modified Financing Receivables
that Subsequently Defaulted
(In thousands)
Interest Rate Reduction
Term Extension
Residential
$
$
Total
$
$
The following table depicts the performance of loans that have been modified since the adoption of ASU 2022-02 effective January 1, 2023:
Payment Status (Amortized Cost Basis)
(In thousands)
Current
31-60 Days
Past Due
61-90 Days
Past Due
Greater than 90
Days Past Due
Year Ended December 31, 2023
Residential
$
$
$
-
$
Total
$
$
$
-
$
Troubled Debt Restructuring
Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company accounted for loan modifications to borrowers experiencing financial difficulty when concessions were granted as TDRs. The following tables are disclosures related to TDRs in prior periods.
The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:
Year Ended December 31, 2022
(Dollars in thousands)
Number of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Residential
$
$
Total TDRs
$
$
The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the year:
Year Ended December 31,
Year Ended December 31,
(Dollars in thousands)
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Commercial loans:
C&I
$
-
$ -
Total commercial loans
$
-
$ -
Consumer loans:
Auto
$
$
Total consumer loans
$
$
Residential
$ 3,387
$ 2,830
Total TDRs
$ 3,727
$ 2,866
7. Premises, Equipment and Leases
A summary of premises and equipment follows:
December 31,
(In thousands)
Land, buildings and improvements
$
146,564
$
121,156
Furniture and equipment
96,928
68,653
Premises and equipment before accumulated depreciation
$
243,492
$
189,809
Accumulated depreciation
(162,817
)
(120,762
)
Total premises and equipment
$
80,675
$
69,047
Buildings and improvements are depreciated based on useful lives of five to twenty years. Furniture and equipment is depreciated based on useful lives of three to ten years.
Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated balance sheets. The Company does not have any significant finance leases in which we are the lessee as of December 31, 2023 and December 31, 2022.
Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in occupancy expense in the consolidated statements of income.
The Company made a policy election to exclude the recognition requirements to all classes of leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in profit or loss on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes and insurance are not included in the measurement of the lease liability since they are generally able to be segregated.
Our leases relate primarily to office space and bank branches, and some contain options to renew the lease. These options to renew are generally not considered reasonably certain to exercise, and are therefore not included in the lease term until such time that the option to renew is reasonably certain. As of December 31, 2023, operating lease ROU assets and liabilities were $26.7 million and $28.2 million, respectively. As of December 31, 2022, operating lease ROU assets and liabilities were $23.9 million and $25.6 million, respectively.
The table below summarizes net lease cost:
December 31,
(In thousands)
Operating lease cost
$
6,843
$
6,643
Variable lease cost
2,457
2,041
Short-term lease cost
Sublease income
(286
)
(266
)
Total operating lease cost
$
9,429
$
8,715
The table below shows future minimum rental commitments related to non-cancelable operating leases for the next five years and thereafter as of December 31, 2023:
(In thousands)
$
7,102
5,778
4,856
4,065
2,739
Thereafter
7,528
Total lease payments
$
32,068
Less: interest
(3,842
)
Present value of lease liabilities
$
28,226
The following table shows the weighted average remaining operating lease term, the weighted average discount rate and supplemental information on the consolidated statements of cash flows for operating leases:
December 31,
(In thousands except for percent and period data)
Weighted average remaining lease term, in years
6.55
6.42
Weighted average discount rate
3.68
%
3.10
%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
6,138
$
8,371
ROU assets obtained in exchange for lease liabilities
8,797
7,377
As of December 31, 2023 there are no new significant leases that have not yet commenced.
Rental expense included in occupancy expense amounted to $7.9 million in 2023, $7.2 million in 2022 and $7.2 million in 2021.
8. Goodwill and Other Intangible Assets
A summary of goodwill is as follows:
(In thousands)
January 1, 2023
$
281,204
Goodwill acquired
80,647
December 31, 2023
$
361,851
January 1, 2022
$
280,541
Goodwill acquired
December 31, 2022
$
281,204
The Company has intangible assets with definite useful lives capitalized on its consolidated balance sheet in the form of core deposit and other identified intangible assets. These intangible assets are amortized over their estimated useful lives, which range primarily from one to twenty years.
There was no impairment of goodwill recorded during the years ended December 31, 2023, 2022 and 2021.
A summary of core deposit and other intangible assets follows:
December 31,
(In thousands)
Core deposit intangibles:
Gross carrying amount
$
31,188
$
6,161
Less: accumulated amortization
2,363
6,133
Net carrying amount
$
28,825
$
Identified intangible assets:
Gross carrying amount
$
31,826
$
25,179
Less: accumulated amortization
20,208
17,866
Net carrying amount
$
11,618
$
7,313
Total intangibles:
Gross carrying amount
$
63,014
$
31,340
Less: accumulated amortization
22,571
23,999
Net carrying amount
$
40,443
$
7,341
Amortization expense on intangible assets with definite useful lives totaled $4.7 million for 2023, $2.3 million for 2022 and $2.8 million for 2021. Amortization expense on intangible assets with definite useful lives is expected to total $8.1 million for 2024, $7.1 million for 2025, $6.2 million for 2026, $5.2 million for 2027, $4.2 million for 2028 and $9.7 million thereafter. Other identified intangible assets include customer lists and non-compete agreements.
During the years ended December 31, 2023, 2022 and 2021, there was no impairment of intangible assets.
9. Deposits
The following table sets forth the maturity distribution of time deposits:
(In thousands)
December 31, 2023
Within one year
$
1,206,689
After one but within two years
57,989
After two but within three years
32,950
After three but within four years
19,217
After four but within five years
7,209
After five years
Total
$
1,324,709
Time deposits of $250,000 or more aggregated $263.1 million and $48.4 million December 31, 2023 and 2022, respectively.
10. Borrowings
Short-Term Borrowings
In addition to the liquidity provided by balance sheet cash flows, liquidity must also be supplemented with additional sources such as credit lines from correspondent banks as well as borrowings from the FHLB and the Federal Reserve Bank. Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements and brokered certificate of deposit (“CD”) accounts.
Short-term borrowings totaled $386.7 million and $585.0 million at December 31, 2023 and 2022, respectively, and consist of Federal funds purchased and securities sold under repurchase agreements, which generally represent overnight borrowing transactions and other short-term borrowings, primarily FHLB advances, with original maturities of one year or less.
The Company has unused lines of credit with the FHLB and access to brokered deposits available for short-term financing. Those sources totaled approximately $2.87 billion and $2.90 billion at December 31, 2023 and 2022, respectively. Borrowings on the FHLB lines are secured by FHLB stock, certain securities and one-to-four family first lien mortgage loans. Securities collateralizing repurchase agreements are held in safekeeping by nonaffiliated financial institutions and are under the Company’s control.
Information related to short-term borrowings is summarized as follows:
December 31,
(Dollars in thousands)
Federal funds purchased:
Balance at year-end
$
-
$
60,000
$
-
Average during the year
24,575
14,644
Maximum month end balance
60,000
80,000
-
Weighted average rate during the year
5.16
%
4.02
%
0.11
%
Weighted average rate at year-end
5.63
%
4.28
%
-
Securities sold under repurchase agreements:
Balance at year-end
$
93,651
$
86,012
$
97,795
Average during the year
70,251
69,561
100,519
Maximum month end balance
96,195
88,637
135,623
Weighted average rate during the year
1.06
%
0.10
%
0.13
%
Weighted average rate at year-end
1.49
%
0.11
%
0.11
%
Other short-term borrowings:
Balance at year-end
$
293,000
$
439,000
$
-
Average during the year
450,377
46,371
1,302
Maximum month end balance
593,000
439,000
-
Weighted average rate during the year
5.24
%
4.24
%
2.02
%
Weighted average rate at year-end
5.28
%
4.45
%
-
See Note 4 for additional information regarding securities pledged as collateral for securities sold under the repurchase agreements.
Long-Term Debt
Long-term debt consists of obligations having an original maturity at issuance of more than one year. A majority of the Company’s long-term debt is comprised of FHLB advances collateralized by the FHLB stock owned by the Company, and a blanket lien on its residential real estate mortgage loans. As of December 31, 2023 the Company had no callable long-term debt. A summary is as follows:
(Dollars in thousands)
December 31, 2023
December 31, 2022
Maturity
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
$
26,603
4.35
%
$
1,519
4.39
%
3,193
2.45
%
3,296
2.45
%
Total
$
29,796
$
4,815
Subordinated Debt
On June 23, 2020, the Company issued $100.0 million aggregate principal amount of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated notes issuance costs of $2.2 million are being amortized on a straight-line basis into interest expense over five years.
The Company may redeem the subordinated notes (1) in whole or in part beginning with the interest payment date of July 1, 2025, and on any interest payment date thereafter or (2) in whole but not in part upon the occurrence of a “Tax Event”, a “Tier 2 Capital Event” or in the event the Company is required to register as an investment company pursuant to the Investment Company Act of 1940, as amended. The redemption price for any redemption is 100% of the principal amount of the subordinated notes being redeemed, plus accrued and unpaid interest thereon to, but excluding, the date of redemption. Any redemption of the subordinated notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System to the extent then required under applicable laws or regulations, including capital regulations. The Company repurchased $2.0 million of the subordinated notes during the year ended December 31, 2022 at a discount of $0.1 million.
The subordinated notes assumed in connection with the Salisbury acquisition included $25.0 million of 3.50% fixed-to-floating rate subordinated notes due 2031. The subordinated notes, which qualify as Tier 2 capital, have a maturity date of March 31, 2031 and bear interest at an annual rate of 3.50%, payable quarterly in arrears commencing on June 30, 2021, and a floating rate of interest equivalent to the three-month SOFR plus a spread of 2.80%, payable quarterly in arrears commencing on June 30, 2026. The subordinated notes are redeemable, without penalty, on or after March 31, 2026 and, in certain limited circumstances, prior to that date. As of the acquisition date, the fair value discount was $3.0 million.
The following table summarizes the Company’s subordinated debt:
(Dollars in thousands)
December 31, 2023
December 31,
Subordinated notes issued June 2020 - fixed interest rate of 5.00% through June 2025 and a variable interest rate equivalent to three-month SOFR plus 4.85% thereafter, maturing July 1, 2030
$ 98,000
$
98,000
Subordinated notes issued March 2021 and acquired August 2023 - fixed interest rate of 3.50% through June 2026 and a variable interest rate equivalent to three-month SOFR plus 2.80% thereafter, maturing March 31, 2031
25,000
-
Subtotal subordinated notes
$
123,000
$
98,000
Unamortized debt issuance costs and unamortized fair value discount
(3,256 )
(1,073
)
Total subordinated debt, net
$ 119,744
$
96,927
Junior Subordinated Debt
The Company sponsors five business trusts, CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II (collectively, the “Trusts”). The Company’s junior subordinated debentures include amounts related to the Company’s NBT Statutory Trust I and II as well as junior subordinated debentures associated with one statutory trust affiliate that was acquired from our merger with CNB Financial Corp. and two statutory trusts that were acquired from our acquisition of Alliance Financial Corporation (“Alliance”). The Trusts were formed for the purpose of issuing company-obligated mandatorily redeemable trust preferred securities to third-party investors and investing in the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company for general corporate purposes. The Company guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities. The Trusts are VIEs for which the Company is not the primary beneficiary, as defined by GAAP. In accordance with GAAP, the accounts of the Trusts are not included in the Company’s consolidated financial statements. See Note 1 for additional information about the Company’s consolidation policy.
The debentures held by each trust are the sole assets of that trust. The Trusts hold, as their sole assets, junior subordinated debentures of the Company with face amounts totaling $98.0 million at December 31, 2023. The Company owns all of the common securities of the Trusts and has accordingly recorded $3.2 million in equity method investments classified as other assets in our consolidated balance sheets at December 31, 2023. The Company owns all of the common stock of the Trusts, which have issued trust preferred securities in conjunction with the Company issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities.
As of December 31, 2023, the Trusts had the following trust preferred securities outstanding and held the following junior subordinated debentures of the Company (dollars in thousands):
Description
Issuance Date
Trust
Preferred
Securities
Outstanding
Interest Rate
Trust
Preferred
Debt Owed
To Trust
Final Maturity Date
CNBF Capital Trust I
August 1999
$
18,000
3-month Term SOFR +
0.26161% plus 2.75%
$
18,720
August 2029
NBT Statutory Trust I
November 2005
5,000
3-month Term SOFR +
0.26161% plus 1.40%
5,155
December 2035
NBT Statutory Trust II
February 2006
50,000
3-month Term SOFR +
0.26161% plus 1.40%
51,547
March 2036
Alliance Financial Capital Trust I
December 2003
10,000
3-month Term SOFR +
0.26161% plus 2.85%
10,310
January 2034
Alliance Financial Capital Trust II
September 2006
15,000
3-month Term SOFR +
0.26161% plus 1.65%
15,464
September 2036
The Company’s junior subordinated debentures are redeemable prior to the maturity date at our option upon each trust’s stated option repurchase dates and from time to time thereafter. These debentures are also redeemable in whole at any time upon the occurrence of specific events defined within the trust indenture. Our obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the issuers’ obligations under the trust preferred securities. The Company owns all of the common stock of the Trusts, which have issued trust preferred securities in conjunction with the Company issuing trust preferred debentures to the Trusts. The terms of the trust preferred debentures are substantially the same as the terms of the trust preferred securities.
With respect to the Trusts, the Company has the right to defer payments of interest on the debentures issued to the Trusts at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each deferral period. Under the terms of the debentures, if in certain circumstances there is an event of default under the debentures or the Company elects to defer interest on the debentures, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock.
Despite the fact that the Trusts are not included in the Company’s consolidated financial statements, $97 million of the $101 million in trust preferred securities issued by these subsidiary trusts is included in the Tier 1 capital of the Company for regulatory capital purposes as allowed by the Federal Reserve Board (NBT Bank owns $1.0 million of CNBF Trust I securities). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires bank holding companies with assets greater than $500 million to be subject to the same capital requirements as insured depository institutions, meaning, for instance, that such bank holding companies will not be able to count trust preferred securities issued after May 19, 2010 as Tier 1 capital. The aforementioned Trusts are grandfathered with respect to this enactment based on their date of issuance.
11. Income Taxes
The significant components of income tax expense attributable to operations are as follows:
Years Ended December 31,
(In thousands)
Current
Federal
$
22,829
$
51,077
$
35,483
State
5,890
12,934
8,626
Total Current
$
28,719
$
64,011
$
44,109
Deferred
Federal
$
4,593
$
(15,862
)
$
State
1,365
(3,988
)
Total Deferred
$
5,958
$
(19,850
)
$
Total income tax expense
$
34,677
$
44,161
$
44,973
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31,
(In thousands)
Deferred tax assets:
Allowance for loan losses
$
28,039
$
24,792
Lease liability
6,917
6,273
Deferred compensation
9,915
9,181
Fair value adjustments on acquisitions
18,306
Loan fees
30,778
33,389
Stock-based compensation expense
3,006
2,822
Unrealized losses on securities
45,446
53,663
Other
9,362
5,902
Total deferred tax assets
$
151,769
$
136,147
Deferred tax liabilities:
Pension benefits
$
14,742
$
13,103
Lease right-of-use asset
6,551
5,877
Amortization of intangible assets
22,850
14,112
Premises and equipment, primarily due to accelerated depreciation
2,746
4,889
Other
1,669
Total deferred tax liabilities
$
48,558
$
38,827
Net deferred tax asset at year-end
$
103,211
$
97,320
Net deferred tax asset at beginning of year
97,320
22,038
Increase in net deferred tax asset
$
5,891
$
75,282
Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on available evidence, gross deferred tax assets will ultimately be realized and a valuation allowance was not deemed necessary at December 31, 2023 and 2022.
The following is a reconciliation of the provision for income taxes to the amount computed by applying the applicable Federal statutory rate to income before taxes:
Years Ended December 31,
(In thousands)
Federal income tax at statutory rate
$
32,226
$
41,193
$
41,971
Tax exempt income
(1,442
)
(984
)
(1,014
)
Net increase in cash surrender value of life insurance
(1,367
)
(1,215
)
(1,230
)
Federal tax credits
(2,855
)
(2,417
)
(1,884
)
State taxes, net of federal tax benefit
5,732
7,067
7,097
Other, net
2,383
Income tax expense
$
34,677
$
44,161
$
44,973
A reconciliation of the beginning and ending balance of Federal and State gross unrecognized tax benefits (“UTBs”) is as follows:
(In thousands)
Balance at January 1
$
1,942
$
1,545
Additions for tax positions of prior years
Reduction for tax positions of prior years
(104 )
-
Current period tax positions
Balance at December 31
$
2,879
$
1,942
Amount that would affect the effective tax rate if recognized, gross of tax
$
2,274
$
1,535
The Company recognizes interest and penalties on the income tax expense line in the accompanying consolidated statements of income. The Company monitors changes in tax statutes and regulations to determine if significant changes will occur over the next 12 months. As of December 31, 2023, no significant changes to UTBs are projected; however, tax audit examinations are possible, but it is not reasonably possible to estimate when examinations in subsequent years will be completed. The Company recognized an insignificant amount of interest expense related to UTBs in the consolidated statement of income for the year ended December 31, 2023, 2022 and 2021.
As of December 31, 2023, the Company is no longer subject to U.S. Federal tax examination by tax authorities for years prior to 2020. The tax years 2017 to 2019 are currently being audited by New York State.
12. Employee Benefit Plans
Defined Benefit Post-Retirement Plans
The Company has a qualified, noncontributory, defined benefit pension plan (“the Plan”) covering substantially all of its employees at December 31, 2023. Benefits paid from the Plan are based on age, years of service, compensation and social security benefits and are determined in accordance with defined formulas. The Company’s policy is to fund the Plan in accordance with Employee Retirement Income Security Act of 1974 standards. Assets of the Plan are invested in publicly traded stocks, bonds and mutual funds. Prior to January 1, 2000, the Plan was a traditional defined benefit plan based on final average compensation. On January 1, 2000, the Plan was converted to a cash balance plan with grandfathering provisions for existing participants. Effective March 1, 2013, the Plan was amended. Benefit accruals for participants who, as of January 1, 2000, elected to continue participating in the traditional defined benefit plan design were frozen as of March 1, 2013. In May 2013, the noncontributory, frozen, defined benefit pension plan assumed from Alliance in the acquisition was merged into the Plan. In addition to the Plan, the Company provides supplemental employee retirement plans to certain current and former executives. The Company also assumed supplemental retirement plans for former executives in the Alliance acquisition. These supplemental employee retirement plans and the Plan are collectively referred to herein as “Pension Benefits.”
In addition, the Company provides certain health care benefits for retired employees. Benefits were accrued over the employees’ active service period. Only employees that were employed by the Company on or before January 1, 2000 are eligible to receive post-retirement health care benefits. The Plan is contributory for participating retirees, requiring participants to absorb certain deductibles and coinsurance amounts with contributions adjusted annually to reflect cost sharing provisions and benefit limitations called for in the Plan. Employees become eligible for these benefits if they reach normal retirement age while working for the Company. For eligible employees described above, the Company funds the cost of post-retirement health care as benefits are paid. The Company elected to recognize the transition obligation on a delayed basis over twenty years. In addition, the Company assumed post-retirement medical life insurance benefits for certain Alliance employees, retirees and their spouses, if applicable, in the Alliance acquisition. These post-retirement benefits are referred to herein as “Other Benefits.”
Accounting standards require an employer to: (1) recognize the overfunded or underfunded status of defined benefit post-retirement plans, which is measured as the difference between plan assets at fair value and the benefit obligation, as an asset or liability in its balance sheet; (2) recognize changes in that funded status in the year in which the changes occur through comprehensive income; and (3) measure the defined benefit plan assets and obligations as of the date of its year-end balance sheet.
The components of AOCI, which have not yet been recognized as components of net periodic benefit cost, related to pensions and other post-retirement benefits are summarized below:
Pension Benefits
Other Benefits
(In thousands)
Net actuarial loss (gain)
$
29,301
$
35,971
$
(178
)
$
(921
)
Prior service cost (credit)
(10
)
(14
)
Total amounts recognized in AOCI (pre-tax)
$
29,499
$
36,182
$
(188
)
$
(935
)
A December 31 measurement date is used for the pension, supplemental pension and post-retirement benefit plans. The following table sets forth changes in benefit obligations, changes in plan assets and the funded status of the pension plans and other post-retirement benefits:
Pension Benefits
Other Benefits
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
$
75,940
$
88,919
$
4,183
$
5,152
Service cost
1,904
2,024
Interest cost
4,002
2,765
Plan participants’ contributions
-
-
Actuarial loss (gain)
1,387
(11,158
)
(695
)
Amendments
-
-
-
Benefits paid
(6,269
)
(6,610
)
(563
)
(598
)
Projected benefit obligation at end of year
$
76,994
$
75,940
$
4,715
$
4,183
Change in plan assets:
Fair value of plan assets at beginning of year
$
113,316
$
135,867
$
-
$
-
Gain (loss) on plan assets
12,803
(17,260
)
-
-
Employer contributions
1,319
1,319
Plan participants’ contributions
-
-
Benefits paid
(6,269
)
(6,610
)
(563
)
(598
)
Fair value of plan assets at end of year
$
121,169
$
113,316
$
-
$
-
Funded (unfunded) status at year end
$
44,175
$
37,376
$
(4,715
)
$
(4,183
)
An asset is recognized for an overfunded plan and a liability is recognized for an underfunded plan. The accumulated benefit obligation for pension benefits was $77.0 million and $75.9 million at December 31, 2023 and 2022, respectively. The accumulated benefit obligation for other post-retirement benefits was $4.7 million and $4.2 million at December 31, 2023 and 2022, respectively. The funded status of the pension and other post-retirement benefit plans has been recognized as follows in the consolidated balance sheets at December 31, 2023 and 2022.
Pension Benefits
Other Benefits
(In thousands)
Other assets
$
59,889
$
53,031
$
-
$
-
Other liabilities
(15,714
)
(15,655
)
(4,715
)
(4,183
)
Funded status
$
44,175
$
37,376
$
(4,715
)
$
(4,183
)
The following assumptions were used to determine the benefit obligation and the net periodic pension cost for the years indicated:
Years Ended December 31,
Weighted average assumptions:
The following assumptions were used to determine benefit obligations:
Discount rate
4.91% - 5.66%
5.54% - 5.66%
3.23% - 3.35%
Expected long-term return on plan assets
6.70%
6.70%
6.70%
Rate of compensation increase
3.00%
3.00%
3.00%
Interest rate of credit for cash balance plan
4.66%
3.99%
1.94%
The following assumptions were used to determine net periodic pension cost:
Discount rate
3.35% - 5.66%
3.23% - 3.35%
3.08% - 3.25%
Expected long-term return on plan assets
6.70%
6.70%
7.00%
Rate of compensation increase
3.00%
3.00%
3.00%
Interest rate of credit for cash balance plan
3.99%
1.94%
1.62%
Net periodic benefit cost and other amounts recognized in OCI for the years ended December 31 included the following components:
Pension Benefits
Other Benefits
(In thousands)
Components of net periodic (benefit) cost:
Service cost
$
1,904
$
2,024
$
2,069
$
$
$
Interest cost
4,002
2,765
2,717
Expected return on plan assets
(7,379
)
(8,884
)
(8,786
)
-
-
-
Amortization of prior service cost (credit)
(4
)
Amortization of unrecognized net loss (gain)
2,633
1,263
(32
)
-
-
Net periodic pension cost (benefit)
$
1,203
$
(3,364
)
$
(2,678
)
$
$
$
Other changes in plan assets and benefit obligations recognized in OCI (pre-tax):
Net (gain) loss
$
(4,037
)
$
14,987
$
(3,237
)
$
$
(695
)
$
(543
)
Prior service cost
-
-
-
-
-
Amortization of prior service (cost) credit
(43
)
(108
)
(59
)
(6
)
(51
)
Amortization of unrecognized net (loss) gain
(2,633
)
(623
)
(1,263
)
-
-
Total recognized in OCI
$
(6,683
)
$
14,256
$
(4,559
)
$
$
(701
)
$
(594
)
Total recognized in net periodic (benefit) cost and OCI, pre-tax
$
(5,480
)
$
10,892
$
(7,237
)
$
$
(518
)
$
(372
)
The service cost component of the net periodic (benefit) cost is included in Salaries and Employee Benefits and the interest cost, expected return on plan assets and net amortization components are included in Other Noninterest Expense on the consolidated statements of income.
The following table sets forth estimated future benefit payments for the pension plans and other post-retirement benefit plans as of December 31, 2023:
(In thousands)
Pension
Benefits
Other
Benefits
$
7,676
$
7,249
7,269
7,759
7,382
2029 - 2033
33,035
1,860
The Company made no voluntary contributions to the pension and other benefit plans during the years ended December 31, 2023 and 2022.
For measurement purposes, the annual rates of increase in the per capita cost of covered medical and prescription drug benefits for fiscal year 2023 were assumed to be 4.5% to 6.5%. The rates were assumed to decrease gradually to 4.0% for fiscal year 2075 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on amounts reported for health care plans.
Plan Investment Policy
The Company’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due; to provide a total return that, over the long-term, maximizes the ratio of the plan assets to liabilities, while minimizing the present value of required Company contributions, at the appropriate levels of risk; to meet statutory requirements and regulatory agencies’ requirements; and to satisfy applicable accounting standards. The Company periodically evaluates the asset allocations, funded status, rate of return assumption and contribution strategy for satisfaction of our investment objectives.
The target and actual allocations expressed as a percentage of the defined benefit pension plan’s assets are as follows:
Target 2023
Cash and cash equivalents
0 - 15%
2%
3%
Fixed income securities
30 - 60%
38%
38%
Equities
40 - 70%
60%
59%
Total
100%
100%
Only high-quality bonds are to be included in the portfolio. All issues that are rated lower than A by Standard and Poor’s are to be excluded. Equity securities at December 31, 2023 and 2022 do not include any Company common stock.
The following table presents the financial instruments recorded at fair value on a recurring basis by the Plan:
(In thousands)
Level 1
Level 2
December 31,
Cash and cash equivalents
$
2,435
$
-
$
2,435
Foreign equity mutual funds
39,001
-
39,001
Equity mutual funds
34,281
-
34,281
U.S. government bonds
-
Corporate bonds
-
45,439
45,439
Total
$
75,717
$
45,452
$
121,169
Level 1
Level 2
December 31,
Cash and cash equivalents
$
3,401
$
-
$
3,401
Foreign equity mutual funds
36,111
-
36,111
Equity mutual funds
30,859
-
30,859
U.S. government bonds
-
Corporate bonds
-
42,925
42,925
Total
$
70,371
$
42,945
$
113,316
The plan had no financial instruments recorded at fair value on a non-recurring basis as of December 31, 2023 and 2022.
Determination of Assumed Rate of Return
The expected long-term rate-of-return on assets was 6.7% at December 31, 2023 and 2022, respectively. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The assumption has been determined by reflecting expectations regarding future rates of return for the portfolio considering the asset distribution and related historical rates of return. The appropriateness of the assumption is reviewed annually.
Employee 401(k) and Employee Stock Ownership Plans
The Company maintains a 401(k) and employee stock ownership plan (the “401(k) Plan”). The Company contributes to the 401(k) Plan based on employees’ contributions out of their annual salaries. In addition, the Company may also make discretionary contributions to the 401(k) Plan based on profitability. Participation in the 401(k) Plan is contingent upon certain age and service requirements. The employer contributions associated with the 401(k) Plan were $4.4 million in 2023, $4.0 million in 2022 and $3.9 million in 2021.
Other Retirement Benefits
Included in other liabilities is $0.9 million and $1.1 million at December 31, 2023 and 2022, respectively, for supplemental retirement benefits for retired executives from legacy plans assumed in acquisitions. The Company recognized $0.2 million in expense for each of the years ended December 31, 2023, 2022 and 2021, related to these plans.
13. Stock-Based Compensation
In May 2018, the Company adopted the NBT Bancorp Inc. 2018 Omnibus Incentive Plan (the “Stock Plan”) replacing the 2008 Omnibus Incentive Plan which automatically expired in April 2018. Under the terms of the Stock Plan, equity-based awards are granted to directors and employees to increase their direct proprietary interest in the operations and success of the Company. The Stock Plan assumed all prior equity-based incentive plans and any new equity-based awards are granted under the terms of the Stock Plan. Restricted shares granted under the Plan typically vest after three or five years for employees and one or three years for non-employee directors. Restricted stock units granted under the Stock Plan may have different terms and conditions. Performance shares and units granted under the Stock Plan for executives may have different terms and conditions. Since 2011, the Company primarily grants restricted stock unit awards. Stock option grants since that time were reloads of existing grants which terminate ten years from the date of the grant. Under terms of the Stock Plan, stock options are granted to purchase shares of the Company’s common stock at a price equal to the fair market value of the common stock on the date of the grant. Shares issued as a result of vesting of restricted stock unit awards and stock option exercises are funded from the Company’s treasury stock.
The Company has outstanding restricted stock granted from various plans at December 31, 2023. The Company recognized $5.1 million, $4.5 million and $4.4 million in stock-based compensation expense related to these stock awards for the years ended December 31, 2023, 2022 and 2021, respectively. Tax benefits recognized with respect to restricted stock units were $1.3 million, $1.2 million and $1.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Unrecognized compensation cost related to restricted stock units totaled $5.4 million at December 31, 2023 and will be recognized over 1.4 years on a weighted average basis. Shares issued are funded from the Company’s treasury stock. The following table summarizes information for unvested restricted stock units outstanding as of December 31, 2023:
Number
of Shares
Weighted-
Average Grant
Date Fair Value
Unvested at January 1, 2023
532,372
$
32.15
Forfeited
(4,597
)
33.85
Vested
(126,312
)
31.41
Granted
139,187
33.73
Unvested at December 31, 2023
540,650
$
32.72
The following table summarizes information concerning stock options outstanding:
(In thousands, except share and per share data)
Number
of Shares
Weighted
Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(in Years)
Aggregate
Intrinsic
Value
Outstanding at January 1, 2023
9,100
$
29.89
Exercised
(3,630
)
25.09
Expired
(120
)
26.29
Outstanding at December 31, 2023
5,350
$
33.24
2.50
$
Exercisable at December 31, 2023
5,350
$
33.24
2.50
$
There was no stock-based compensation expense for stock option awards for the years ended December 31, 2023, 2022 and 2021. Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows:
Years Ended December 31,
(In thousands)
Proceeds from stock options exercised
$
$
-
$
Tax benefits related to stock options exercised
-
Intrinsic value of stock options exercised
-
The Company has 182,418 securities remaining available to be granted as part of the Plan at December 31, 2023.
14. Stockholders’ Equity
In accordance with GAAP, unrecognized prior service costs and net actuarial gains or losses associated with the Company’s pension and postretirement benefit plans and unrealized gains and losses on AFS securities are included in AOCI, net of tax. For the years ended December 31, components of AOCI are:
(In thousands)
Unrecognized prior service cost and net actuarial (losses) on pension plans
$
(21,983
)
$
(26,435
)
$
(16,269
)
Unrealized net holding (losses) on AFS securities
(138,951
)
(163,599
)
(7,075
)
AOCI
$
(160,934
)
$
(190,034
)
$
(23,344
)
Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the Office of the Comptroller of the Currency (“OCC”) is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At December 31, 2023, approximately $106.6 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends also is subject to the Bank’s being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.
The Company purchased 155,500 shares of its common stock during the year ended December 31, 2023, for a total of $4.9 million at an average price of $31.79 per share under its previously announced share repurchase program. This repurchase program under which these shares were purchased was due to expire on December 31, 2023; however, on December 18, 2023, the Board of Directors authorized and approved an amendment to the repurchase program. Pursuant to the amended stock repurchase program, the Company may repurchase up to 2,000,000 shares of the outstanding shares of its common stock with all repurchases under the stock repurchase program to be made by December 31, 2025. The Company may repurchase shares of its common stock from time to time to mitigate the potential dilutive effects of stock-based incentive plans and other potential uses of common stock for corporate purposes. As of December 31, 2023, there were 2,000,000 shares available for repurchase under this plan which is set to expire on December 31, 2025.
15. Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of NBT Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital to risk-weighted assets and of Tier 1 capital to average assets. In addition to maintaining minimum capital ratios, the Company is subject to a capital conservation buffer (“Buffer”) of 2.50% above the minimum to avoid restriction on capital distributions and discretionary bonus paychecks to officers. At December 31, 2023 and 2022, the Company and the Bank meet all capital adequacy requirements to which they were subject.
Under their prompt corrective action regulations, regulatory authorities are required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on an institution’s financial statements. The regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2023 and 2022, the most recent notifications from the Bank’s regulators categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 Capital to Average Asset ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
In March 2020, the OCC, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. Under the modified CECL transition provision, the regulatory capital impact of the January 1, 2020 CECL adoption date adjustment to the allowance for credit losses (after-tax) has been deferred and will phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, the Company is allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020 and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020 and December 31, 2021, will also phase into regulatory capital at 25% per year commencing January 1, 2022. The Company adopted the capital transition relief over the permissible five-year period. The Company and NBT Bank’s actual capital amounts and ratios are presented as follows:
Actual
Regulatory Ratio Requirements
(Dollars in thousands)
Amount
Ratio
Minimum
Capital
Adequacy
Minimum
plus Buffer
For
Classification
as Well-
Capitalized
As of December 31, 2023
Tier 1 Capital (to average assets)
Company
$
1,301,560
9.71
%
4.00
%
5.00
%
NBT Bank
1,223,551
9.16
%
4.00
%
5.00
%
Common Equity Tier 1 Capital
Company
1,204,560
11.57
%
4.50
%
7.00
%
6.50
%
NBT Bank
1,223,551
11.84
%
4.50
%
7.00
%
6.50
%
Tier 1 Capital (to risk-weighted assets)
Company
1,301,560
12.50
%
6.00
%
8.50
%
8.00
%
NBT Bank
1,223,551
11.84
%
6.00
%
8.50
%
8.00
%
Total Capital (to risk-weighted assets)
Company
1,534,826
14.75
%
8.00
%
10.50
%
10.00
%
NBT Bank
1,333,817
12.91
%
8.00
%
10.50
%
10.00
%
As of December 31, 2022
Tier 1 Capital (to average assets)
Company
$
1,193,336
10.32
%
4.00
%
5.00
%
NBT Bank
1,133,481
9.86
%
4.00
%
5.00
%
Common Equity Tier 1 Capital
Company
1,096,336
12.12
%
4.50
%
7.00
%
6.50
%
NBT Bank
1,133,481
12.63
%
4.50
%
7.00
%
6.50
%
Tier 1 Capital (to risk-weighted assets)
Company
1,193,336
13.19
%
6.00
%
8.50
%
8.00
%
NBT Bank
1,133,481
12.63
%
6.00
%
8.50
%
8.00
%
Total Capital (to risk-weighted assets)
Company
1,391,182
15.38
%
8.00
%
10.50
%
10.00
%
NBT Bank
1,233,327
13.74
%
8.00
%
10.50
%
10.00
%
16. Earnings Per Share
The following is a reconciliation of basic and diluted EPS for the years presented in the consolidated statements of income:
Years Ended December 31,
(In thousands except per share data)
Net
Income
Weighted
Average
Shares
Per
Share
Amount
Net
Income
Weighted
Average
Shares
Per
Share
Amount
Net
Income
Weighted
Average
Shares
Per
Share
Amount
Basic EPS
$
118,782
44,528
$
2.67
$
151,995
42,917
$
3.54
$
154,885
43,421
$
3.57
Effect of dilutive securities:
Stock-based compensation
Diluted EPS
$
118,782
44,770
$
2.65
$
151,995
43,181
$
3.52
$
154,885
43,719
$
3.54
There was a nominal number of weighted average stock options outstanding for the years ended December 31, 2023, 2022 and 2021, that were not considered in the calculation of diluted EPS since the stock options’ exercise prices were greater than the average market price during these periods.
17. Reclassification Adjustments Out of Other Comprehensive Income (Loss)
The following table summarizes the reclassification adjustments out of AOCI:
Detail About AOCI Components
Amount Reclassified from AOCI
Affected Line Item in the
Consolidated
Statements of Comprehensive
Income (Loss)
(In thousands)
Years Ended December 31,
AFS securities:
Losses on AFS securities
$
9,450
$
-
$
-
Net securities losses (gains)
Amortization of unrealized gains related to securities transfer
Interest income
Tax effect
$
(2,470
)
$
(128
)
$
(145
)
Income tax (benefit)
Net of tax
$
7,407
$
$
Cash flow hedges:
Net unrealized losses on cash flow hedges reclassified to interest expense
$
-
$
-
$
Interest expense
Tax effect
$
-
$
-
$
(5
)
Income tax (benefit)
Net of tax
$
-
$
-
$
Pension and other benefits:
Amortization of net losses
$
2,601
$
$
1,263
Other noninterest expense
Amortization of prior service costs
Other noninterest expense
Tax effect
$
(660
)
$
(184
)
$
(343
)
Income tax (benefit)
Net of tax
$
1,980
$
$
1,030
Total reclassifications, net of tax
$
9,387
$
$
1,478
18. Commitments and Contingent Liabilities
The Company’s concentrations of credit risk are reflected in the consolidated balance sheets. The concentrations of credit risk with standby letters of credit, unused lines of credit, commitments to originate new loans and loans sold with recourse generally follow the loan classifications.
At December 31, 2023, approximately 63% of the Company’s loans were secured by real estate located in upstate New York, northeastern Pennsylvania, western Massachusetts, southern New Hampshire, Vermont, southern Maine and central and northwestern Connecticut. Accordingly, the ultimate collectability of a substantial portion of the Company’s portfolio is susceptible to changes in market conditions of those areas. Management is not aware of any material concentrations of credit to any industry or individual borrowers.
The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, standby letters of credit and certain agricultural real estate loans sold to investors with recourse, with the sold portion having a government guarantee that is assignable back to the Company upon repurchase of the loan in the event of default. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.
At December 31,
(In thousands)
Unused lines of credit
$
429,430
$
384,370
Commitments to extend credits, primarily variable rate
2,254,841
2,033,549
Standby letters of credit
44,735
53,307
Loans sold with recourse
26,423
31,021
Since many loan commitments, standby letters of credit and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit.
The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are generally issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. As of December 31, 2023 and 2022, the fair value of the Company’s standby letters of credit was not significant.
In the normal course of business there are various outstanding legal proceedings. If legal costs are deemed material by management, the Company accrues for the estimated loss from a loss contingency if the information available indicates that it is probable that a liability had been incurred at the date of the financial statements and the amount of loss can be reasonably estimated.
The Company is required to maintain reserve balances with the Federal Reserve Bank. The required average total reserve for NBT Bank for the 14-day maintenance period ending December 28, 2023 was $99.6 million.
19. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Generally, the Company may use derivative financial instruments to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments. Currently, the Company has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.
Derivatives Not Designated as Hedging Instruments
The Company enters into interest rate swaps to facilitate customer transactions and meet their financing needs. These swaps are considered derivatives, but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them. To mitigate the interest rate risk, the Company enters into offsetting interest rate swaps with counterparties. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Interest rate swaps are recorded within other assets or other liabilities on the consolidated balance sheets at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statements of income.
The Company is subject to over-the-counter derivative clearing requirements, which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House (“CME”). The CME requires the Company to post initial and variation margin payments to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts. A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company’s financial statements are not equal and offsetting.
In 2017, the U.K. Financial Conduct Authority announced its intention to stop compelling banks to submit rates for the calculation of London Interbank Offered Rate (“LIBOR”) after 2021. In 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on the Secured Overnight Financing Rate (“SOFR”) that replaced LIBOR in certain financial contracts after June 30, 2023. As of December 31, 2023, the Company has transitioned all of its financial instruments to an alternative benchmark rate.
As of December 31, 2023 and 2022, the Company had twelve and fifteen risk participation agreements, respectively, with financial institution counterparties for interest rate swaps related to participated loans. Risk participation agreements provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions.
Derivatives Designated as Hedging Instruments
The Company has previously entered into interest rate swaps to modify the interest rate characteristics of certain short-term FHLB advances from variable rate to fixed rate in order to reduce the impact of changes in future cash flows due to market interest rate changes. These agreements are designated as cash flow hedges with currently none outstanding.
The following table summarizes the derivatives outstanding:
(In thousands)
Notional
Amount
Balance
Sheet
Location
Fair
Value
Notional
Amount
Balance
Sheet
Location
Fair
Value
As of December 31, 2023
Derivatives not designated as hedging instruments
Interest rate derivatives
$
1,303,711
Other assets
$
95,972
$
1,303,711
Other liabilities
$
95,869
Risk participation agreements
62,112
Other assets
16,146
Other liabilities
Total derivatives not designated as hedging instruments
$
95,991
$
95,875
Netting adjustments(1)
20,849
-
Net derivatives in the balance sheet
$
75,142
$
95,875
Derivatives not offset on the balance sheet
$
2,930
$
2,930
Cash collateral(2)
-
-
Net derivative amounts
$
72,212
$
92,945
As of December 31, 2022
Derivatives not designated as hedging instruments
Interest rate derivatives
$
1,275,708
Other assets
$
117,247
$
1,275,708
Other liabilities
$
117,247
Risk participation agreements
88,963
Other assets
18,421
Other liabilities
Total derivatives not designated as hedging instruments
$
117,294
$
117,257
Netting adjustments(1)
24,109
-
Net derivatives in the balance sheet
$
93,185
$
117,257
Derivatives not offset on the balance sheet
$
$
Cash collateral(2)
-
-
Net derivative amounts
$
92,833
$
116,905
(1)
Netting adjustments represents the amounts recorded to convert derivatives assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance on the settle to market rules for cleared derivatives. The CME legally characterizes the variation margin posted between counterparties as settlements of the outstanding derivative contracts instead of cash collateral.
(2)
Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s short-term rate borrowings. During 2021 the Company’s final cash flow hedge of interest rate risk matured and the remaining balance was reclassified from AOCI as a reduction to interest expense. There is no additional amount that will be reclassified from AOCI as a reduction to interest expense.
The following table indicates the effect of cash flow hedge accounting on AOCI and on the consolidated statements of income:
Years Ended December 31,
(In thousands)
Derivatives designated as hedging instruments:
Interest rate derivatives - included component
Amount of loss reclassified from AOCI into interest expense
$
-
$
-
$
The following table indicates the gain or loss recognized in income on derivatives not designated as a hedging relationship:
Years Ended December 31,
(In thousands)
Derivatives not designated as hedging instruments:
Decrease in other income
$
(70
)
$
(155
)
$
(356
)
20. Fair Value Measurements and Fair Values of Financial Instruments
GAAP states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. A fair value hierarchy exists within GAAP that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not adjust the quoted prices for such instruments.
The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations or quote from alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid agency securities, less liquid listed equities, state, municipal and provincial obligations and certain physical commodities. Such instruments are generally classified within Level 2 of the fair value hierarchy. Certain common equity securities are reported at fair value utilizing Level 1 inputs (exchange quoted prices). Other investment securities are reported at fair value utilizing Level 1 and Level 2 inputs. The prices for Level 2 instruments are obtained through an independent pricing service or dealer market participants with whom the Company has historically transacted both purchases and sales of investment securities. Prices obtained from these sources include prices derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviews the methodologies used by its third-party providers in pricing the securities.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate will be used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets and changes in financial ratios or cash flows.
The following tables set forth the Company’s financial assets and liabilities measured on a recurring basis that were accounted for at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:
(In thousands)
Level 1
Level 2
Level 3
December 31,
Assets:
AFS securities
U.S. treasury
$
125,024
$ -
$ -
$ 125,024
Federal agency
-
214,740
-
214,740
State & municipal
-
86,306
-
86,306
Mortgage-backed
-
422,268
-
422,268
Collateralized mortgage obligations
-
541,544
-
541,544
Corporate
-
40,976
-
40,976
Total AFS securities
$
125,024
$
1,305,834
$
-
$
1,430,858
Equity securities
36,591
1,000
-
37,591
Derivatives
-
75,142
-
75,142
Total
$
161,615
$
1,381,976
$
-
$
1,543,591
Liabilities:
Derivatives
$
-
$
95,875
$
-
$
95,875
Total
$
-
$
95,875
$
-
$
95,875
(In thousands)
Level 1
Level 2
Level 3
December 31,
Assets:
AFS securities
U.S. treasury
$
121,658
$
-
$
-
$
121,658
Federal agency
-
206,419
-
206,419
State & municipal
-
82,851
-
82,851
Mortgage-backed
-
473,694
-
473,694
Collateralized mortgage obligations
-
588,363
-
588,363
Corporate
-
54,240
-
54,240
Total AFS securities
$
121,658
$
1,405,567
$
-
$
1,527,225
Equity securities
29,784
1,000
-
30,784
Derivatives
-
93,185
-
93,185
Total
$
151,442
$
1,499,752
$
-
$
1,651,194
Liabilities:
Derivatives
$
-
$
117,257
$
-
$
117,257
Total
$
-
$
117,257
$
-
$
117,257
GAAP requires disclosure of assets and liabilities measured and recorded at fair value on a non-recurring basis such as goodwill, loans held for sale, other real estate owned, collateral-dependent loans individually evaluated for expected credit losses and HTM securities. The non-recurring fair value measurements recorded during the years ended December 31, 2023 and 2022 were related to loans individually evaluated for expected credit losses. Loans with fair value of $1.1 million as of December 31, 2022 were individually evaluated for expected credit losses where the amortized cost was adjusted to fair value. There were no loans individually evaluated expected credit losses where the amortized cost was adjusted to fair value for the year ended December 31, 2023. The Company uses the fair value of underlying collateral, less costs to sell, to estimate the allowance for credit losses for individually evaluated collateral dependent loans. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses ranging from 10% to 50%. Based on the valuation techniques used, the fair value measurements for collateral dependent individually evaluated loans are classified as Level 3.
The following table sets forth information with regard to estimated fair values of financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. Financial instruments for which the fair value approximates carrying value include cash and cash equivalents, AFS securities, equity securities, accrued interest receivable, non-maturity deposits, short-term borrowings, accrued interest payable and derivatives.
December 31, 2023
December 31, 2022
(In thousands)
Fair Value
Hierarchy
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Financial assets:
HTM securities
$
905,267
$
814,524
$
919,517
$
812,647
Net loans
9,539,684
9,216,162
8,049,909
7,840,350
Financial liabilities:
Time deposits
$
1,324,709
$
1,285,999
$
433,772
$
413,868
Long-term debt
29,796
29,416
4,815
4,539
Subordinated debt
120,380
113,757
98,000
92,883
Junior subordinated debt
101,196
102,337
101,196
98,372
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial wealth operation that contributes net fee income annually. The wealth management operation is not considered a financial instrument and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.
HTM Securities
The fair value of the Company’s HTM securities is primarily measured using information from a third-party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
Net Loans
Net loans include portfolio loans and loans held for sale. Loans were first segregated by type and then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments, and those expected future cash flows also include credit risk, illiquidity risk and other market factors to calculate the exit price fair value in accordance with ASC 820.
Time Deposits
The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
Long-Term Debt
The fair value of long-term debt was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.
Subordinated Debt
The fair value of subordinated debt has been measured using the observable market price as of the period reported.
Junior Subordinated Debt
The fair value of junior subordinated debt has been estimated using a discounted cash flow analysis.
21. Parent Company Financial Information
Condensed Balance Sheets
December 31,
(In thousands)
Assets
Cash and cash equivalents
$
162,364
$
116,129
Equity securities, at estimated fair value
28,739
24,499
Investment in subsidiaries, on equity basis
1,464,980
1,245,459
Other assets
42,435
39,339
Total assets
$
1,698,518
$
1,425,426
Liabilities and Stockholders’ Equity
Total liabilities
$
272,827
$
251,872
Stockholders’ equity
1,425,691
1,173,554
Total liabilities and stockholders’ equity
$
1,698,518
$
1,425,426
Condensed Statements of Income
Years Ended December 31,
(In thousands)
Dividends from subsidiaries
$
116,250
$
119,000
$
118,900
Management fee from subsidiaries
7,093
2,005
2,653
Net securities (losses) gains
(82
)
(618
)
Interest, dividends and other income
Total revenue
$
123,976
$
121,025
$
122,660
Operating expenses
22,930
14,035
11,956
Income before income tax benefit and equity in undistributed income of subsidiaries
$
101,046
$
106,990
$
110,704
Income tax expense (benefit)
(3,785
)
(3,027
)
(2,250
)
Equity in undistributed income of subsidiaries
13,951
41,978
41,931
Net income
$
118,782
$
151,995
$
154,885
Condensed Statements of Cash Flows
Years Ended December 31,
(In thousands)
Operating activities
Net income
$
118,782
$
151,995
$
154,885
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of premises and equipment
1,113
Excess tax benefit on stock-based compensation
(296
)
(288
)
(385
)
Stock-based compensation expense
5,102
4,530
4,414
Net securities losses (gains)
(543
)
Equity in undistributed income of subsidiaries
(13,950
)
(41,978
)
(41,931
)
Bank owned life insurance income
(271
)
(238
)
(326
)
Amortization of subordinated debt issuance costs
Discount on repurchase of subordinated debt
-
(106 )
-
Net change in other assets and other liabilities
(4,930
)
(8,376
)
(7,127
)
Net cash provided by operating activities
$
105,309
$
107,176
$
110,538
Investing activities
Net cash provided by (used in) acquisitions
$ 3,542
$ -
$ -
Proceeds from calls of equity securities
-
-
1,000
Net cash provided by investing activities
$
3,542
$
-
$
1,000
Financing activities
Repurchase of subordinated debt
$ -
$ (2,000 )
$ -
Proceeds from the issuance of shares to employee and other stock plans
-
Cash paid by employer for tax-withholding on stock issuance
(1,877
)
(1,751
)
(2,931
)
Purchases of treasury shares
(4,944
)
(14,713
)
(21,714
)
Cash dividends
(55,886
)
(49,765
)
(47,738
)
Net cash (used in) financing activities
$
(62,616
)
$
(68,229
)
$
(72,271
)
Net increase in cash and cash equivalents
$
46,235
$
38,947
$
39,267
Cash and cash equivalents at beginning of year
116,129
77,182
37,915
Cash and cash equivalents at end of year
$
162,364
$
116,129
$
77,182
A statement of changes in stockholders’ equity has not been presented since it is the same as the consolidated statement of changes in stockholders’ equity previously presented.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out by the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No changes were made to the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
The management of NBT Bancorp Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
As of December 31, 2023, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on the assessment, management determined that the Company’s internal control over financial reporting as of December 31, 2023 was effective at the reasonable assurance level based on those criteria.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, is included in this Item under the heading “Report of Independent Registered Public Accounting Firm” on the following page.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NBT Bancorp Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited NBT Bancorp Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated February 29, 2024 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Albany, New York
February 29, 2024

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
During the three months ended December 31, 2023, none of NBT’s directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of NBT securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the Company’s definitive Proxy Statement for its Annual Meeting of stockholders to be held on May 21, 2024 (the “Proxy Statement”), which will be filed with the SEC within 120 days after the Company’s 2023 fiscal year end.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Proxy Statement, which will be filed with the SEC within 120 days after the Company’s 2023 fiscal year end.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information with respect to shares of common stock that may be issued under the Company’s existing equity compensation plans:
Plan Category
A. Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
B. Weighted-
average exercise
price of
outstanding
options, warrants
and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column A)
Equity compensation plans approved by stockholders
5,350
$
33.24
182,418
Equity compensation plans not approved by stockholders
None
None
None
The other information required by this item is incorporated herein by reference to the Proxy Statement, which will be filed with the SEC within 120 days of the Company’s 2023 fiscal year end.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the Proxy Statement, which will be filed with the SEC within 120 days of the Company’s 2023 fiscal year end.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm is KPMG, LLP, Albany, NY, Auditor Firm ID: 185.
The information required by this item is incorporated herein by reference to the Proxy Statement, which will be filed with the SEC within 120 days of the Company’s 2023 fiscal year end.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following Consolidated Financial Statements are included in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2023 and 2022.
Consolidated Statements of Income for each of the three years ended December 31, 2023, 2022 and 2021.
Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2023, 2022 and 2021.
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years ended December 31, 2023, 2022 and 2021.
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2023, 2022 and 2021.
Notes to the Consolidated Financial Statements.
(a)(2) There are no financial statement schedules that are required to be filed as part of this form since they are not applicable or the information is included in the consolidated financial statements.
(a)(3) See below for all exhibits filed herewith and the Exhibit Index.
2.1
Agreement and Plan of Merger, dated as of December 5, 2022, by and among NBT Bancorp Inc., NBT Bank, N.A., Salisbury Bancorp, Inc. and Salisbury Bank and Trust Company (filed as Exhibit 2.1 to Registrant’s Form 8-K, filed on December 5, 2022, and incorporated herein by reference).
2.2
First Amendment to Agreement and Plan of Merger, dated as of August 9, 2023, by and among NBT Bancorp Inc., NBT Bank, National Association, Salisbury Bancorp, Inc. and Salisbury Bank and Trust Company (filed as Exhibit 2.2 to Registrant’s Form 8-K, filed on August 14, 2023, and incorporated herein by reference).
3.1
Restated Certificate of Incorporation of NBT Bancorp Inc. as amended through July 1, 2015 (filed as Exhibit 3.1 to Registrant’s Form 10-Q, filed on August 10, 2015, and incorporated herein by reference).
3.2
Amended and Restated Bylaws of NBT Bancorp Inc. effective May 22, 2018 (filed as Exhibit 3.1 to Registrant’s Form 8-K, filed on May 23, 2018 and incorporated herein by reference).
3.3
Certificate of Designation of the Series A Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4.1 of the Registrant’s Form 8-K, filed on November 18, 2004, and incorporated herein by reference).
4.1
Specimen common stock certificate for NBT’s Bancorp Inc. common stock (filed as Exhibit 4.3 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-4, filed on December 27, 2005, and incorporated herein by reference).
4.2
Description of Registrant’s Securities (filed as Exhibit 4.2 to the Registrant’s Form 10-K for the year ended December 31, 2019, filed on March 2, 2020, and incorporated herein by reference).
4.3
Subordinated Indenture, dated as of June 23, 2020, between NBT Bancorp Inc. and U.S. Bank National Association (filed as Exhibit 4.1 to Registrant’s Form 8-K, filed on June 23, 2020 and incorporated herein by reference).
4.4
First Supplemental Indenture, dated as of June 23, 2020, between NBT Bancorp Inc. and U.S. Bank National Association (filed as Exhibit 4.2 to Registrant’s Form 8-K, filed on June 23, 2020 and incorporated herein by reference).
4.5
Form of 5.000% Fixed-to-Floating Rate Subordinated Notes due 2030 (included in Exhibit 4.4).
10.1
NBT Bancorp Inc. Non-employee Directors Restricted and Deferred Stock Plan (filed as Exhibit 10.5 to Registrant’s Form 10-K for the year ended December 31, 2008, filed on March 2, 2009, and incorporated herein by reference).*
10.2
Supplemental Executive Retirement Agreement between NBT Bancorp Inc. and Martin A. Dietrich as amended and restated January 20, 2010 (filed as Exhibit 10.14 to Registrant’s Form 10-K for the year ended December 31, 2009, filed on March 1, 2010, and incorporated herein by reference).*
10.3
Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank, National Association and Martin A. Dietrich made November 10, 2008 (filed as Exhibit 10.1 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2008, filed on November 10, 2008, and incorporated herein by reference).*
10.4
First Amendment dated November 5, 2009 to Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank, National Association and Martin A. Dietrich made November 10, 2008 (filed as Exhibit 10.6 to Registrant’s Form 10-Q for the quarterly period ended September 30, 2009, filed on November 9, 2009, and incorporated herein by reference).*
10.5
Second Amendment dated July 28, 2014 to Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank, National Association, and Martin A. Dietrich made November 10, 2008 (filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on August 1, 2014, and incorporated herein by reference).*
10.6
NBT Bancorp Inc. 2008 Omnibus Incentive Plan (filed as Appendix A of Registrant’s Definitive Proxy Statement on Form 14A, filed on March 31, 2008, and incorporated herein by reference).*
10.7
Long-Term Incentive Compensation Plan for Named Executive Officers (filed as Exhibit 10.24 to Registrant’s Form 10-K for the year ended December 31, 2011, filed on February 29, 2012, and incorporated herein by reference).*
10.8
Amended and Restated Supplemental Retirement Agreement and First Amendment to the Supplemental Retirement Agreement between Alliance Financial Corporation, Alliance Bank, N.A. and Jack H. Webb (filed as Exhibit 10.29 to Registrant’s Form 10-K for the year ended December 31, 2013, filed on March 3, 2014, and incorporated herein by reference).*
10.9
Employment Agreement, dated December 19, 2016, by and between NBT Bancorp Inc. and John H. Watt, Jr. (filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on December 20, 2016, and incorporated herein by reference).*
10.10
Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank, National Association and John H. Watt, Jr. dated May 9, 2017 (filed as Exhibit 10.1 to Registrant’s Form 10-Q, filed on May 10, 2017, and incorporated herein by reference).*
10.11
Supplemental Executive Retirement Agreement, dated December 19, 2016 by and between NBT Bancorp Inc. and John H. Watt, Jr. (filed as Exhibit 10.2 to Registrant’s Form 8-K, filed on December 20, 2016, and incorporated herein by reference).*
10.12
Employment Agreement, dated December 19, 2016, by and between NBT Bancorp Inc. and Joseph R. Stagliano (Filed as Exhibit 10.19 to Registrant’s Form 10-K, filed on March 1, 2018, and incorporated herein by reference).*
10.13
Employment Agreement, dated August 5, 2021 by and between NBT Bancorp Inc. and Scott A. Kingsley (Filed as Exhibit 10.1 to Registrant’s Form 10-Q, filed on August 6, 2021, and incorporated herein by reference).*
10.14
Form of Amendment to Employment Agreements, dated September 27, 2017, by and between NBT Bancorp Inc. and John H. Watt, Jr. and Joseph R. Stagliano, respectively (Filed as Exhibit 10.1 to Registrant’s Form 8-K, filed on September 29, 2017, and incorporated herein by reference).*
10.15
NBT Bancorp Inc. 2018 Omnibus Incentive Plan (filed as Appendix A of Registrant’s Definitive Proxy Statement on Form 14A, filed on April 6, 2018, and incorporated herein by reference).*
10.16
Employment Agreement, dated November 1, 2021, by and between NBT Bancorp Inc. and Ruth H. Mahoney (Filed as Exhibit 10.16 to Registrant’s Form 10-K, filed on March 1, 2023, and incorporated herein by reference).*
10.17
Employment Agreement, dated May 23, 2022, by and between NBT Bancorp Inc. and M. Randolph Sparks (Filed as Exhibit 10.17 to Registrant’s Form 10-K, filed on March 1, 2023, and incorporated herein by reference).*
10.18
Employment Agreement, dated August 11, 2023 by and between NBT Bank, National Association and Richard J. Cantele, Jr.*
A list of the subsidiaries of the Registrant.
Consent of KPMG LLP.
Incentive Compensation Recovery Policy.
31.1
Certification by the Chief Executive Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
31.2
Certification by the Chief Financial Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Management contract or compensatory plan or arrangement.
(b)
Exhibits to this Form 10-K are attached or incorporated herein by reference as noted above.
(c)
Not applicable.