NBT BANCORP INC.
FORM 10-K – Year Ended December 31, 2023
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PART I
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ITEM 1.
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3
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ITEM 1A.
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15
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ITEM 1B.
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23
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ITEM 1C.
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23
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ITEM 2.
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24
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ITEM 3.
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24
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ITEM 4.
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24
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PART II
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ITEM 5.
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25
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ITEM 6.
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26
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ITEM 7.
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27
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ITEM 7A.
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48
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ITEM 8.
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49
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49
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51
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52
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53
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54
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55
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57
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ITEM 9.
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101
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ITEM 9A.
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101
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ITEM 9B.
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103
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ITEM 9C.
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103
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PART III
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ITEM 10.
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103
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ITEM 11.
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103
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ITEM 12.
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103
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ITEM 13.
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103
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ITEM 14.
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103
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PART IV
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ITEM 15.
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104
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ITEM 16.
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106
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107
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PART I
| ITEM 1. |
BUSINESS
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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”).
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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.
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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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RISK FACTORS
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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.
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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.
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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:
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applicability of Volcker Rule requirements and restrictions;
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increased capital, leverage, liquidity and risk management standards;
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examinations by the CFPB for compliance with federal consumer financial protection laws and regulations; and
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limits on interchange fees from debit card transactions.
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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:
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exposure to potential asset quality issues of the acquired business;
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potential exposure to unknown or contingent liabilities of the acquired business;
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our ability to realize anticipated cost savings;
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the difficulty of integrating operations and personnel (including the operations and personnel of Salisbury) and the potential loss of key employees;
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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;
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the inability to maintain uniform standards, controls, procedures and policies; and
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the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management.
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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.
| ITEM 1B. |
UNRESOLVED STAFF COMMENTS
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Risk Management and Strategy
The Company maintains a cyber risk management program that is designed to identify, assess, manage, mitigate and respond to cybersecurity threats. The program addresses both the corporate information technology
(“IT”) environment and customer facing products. In line with our dedication to upholding strong corporate governance standards and safeguarding the security of our operations, we maintain a continuous effort to assess and mitigate cybersecurity
risks that could impact our business, stakeholders and the integrity of our systems. Additionally, we maintain a similar risk-based approach to our third-party vendor management program including identifying and overseeing cybersecurity risks they
present.
The underlying controls of the cybersecurity program are based on recognized best practices and standards for cybersecurity and information security, including the National Institute of Standards and Technology
(“NIST”) Cybersecurity Framework (“CSF”). This framework organizes cybersecurity risks into five categories: identify, protect, detect, respond and recover. The Company regularly assesses the threat landscape of cybersecurity risks, with a layered
defense in depth strategy that is focused on prevention and detection.
Employing comprehensive methodologies for risk assessment, we diligently identify and evaluate potential cybersecurity threats and vulnerabilities across our systems, networks and data assets. This process involves
regular examinations of emerging threats, conducting penetration tests, vulnerability scanning and thorough analysis of industry-specific risks. We actively participate in industry forums, information sharing initiatives and collaborate with
relevant stakeholders to exchange threat intelligence and best practices.
The Company continues to expand investments in Information Technology security, including additional end-user training, using layered defenses, identifying, and protecting critical assets, strengthening monitoring
and alerting. We emphasize continuous training for our staff to improve their ability to identify and address diverse cybersecurity threats. We invest in cybersecurity technology and talent to support this endeavor. Furthermore, we conduct thorough
reviews of our vendors and mandate specific security standards for third-party providers. Our comprehensive policies and procedures are designed to safeguard the integrity and security of information collected by us and our service providers on our
systems. Additionally, we have implemented security measures to prevent unauthorized access to personal data and minimize the consequences of potential incidents. We consistently learn from any event and look at postmortem improvements where
necessary to enhance our security and resilience.
The Company consistently collaborates with third party experts to conduct audits, penetration testing, assessments and validations of our controls, aligning them with established frameworks like the NIST CFS. We
adapt our cybersecurity policies, standards, processes and practices accordingly based on the insights provided by these reviews. These audits and assessments are useful tools for maintaining a robust cybersecurity program.
Governance
It is the responsibility of the Risk Management Committee (“RMC”) of the Board to oversee the Company’s cybersecurity risk exposures and action taken by management to monitor and mitigate cybersecurity risks.
Cybersecurity risks are reported to the RMC at least quarterly and those reports include key performance indicators, test results, recent threats and how the Company is managing those threats, along with the effectiveness of the Information
Security and cyber risk program. The RMC is responsible for monitoring our Information Security Program (“ISP”) and is led by a member of our Board of Directors. The RMC reports quarterly to the Board regarding its activities, including those
related to cybersecurity risk oversight. The Board receives briefings from executive management on the overall Information Security program at least annually.
The Company has appointed the Senior Director of Information Security (“DISO”) to oversee the implementation, coordination, and maintenance of the ISP. The responsibilities of the DISO include developing and
implementing our information security program, designing appropriate administrative, technical, and physical safeguards to protect institutional data and ensuring the implementation and maintenance of safeguards across the Company as needed. The
DISO reports to our Chief Risk Officer and has over a decade of experience leading cybersecurity oversight along with expertise in cyber-crime prevention, threat intelligence, social engineering, identity access and governance, identity theft and
fraud prevention through prior roles in the organization. The Information Security team has cybersecurity experience or certifications, such as the Certified Information Systems Security Professional and Certified Information Security Manager from
the Information Systems Audit and Control Association.
The DISO also administers the Incident Response Team (“IRT”) and its members, which is comprised of various high-ranking executive personnel such as the Chief Audit Officer, Chief Compliance Officer, General Counsel,
and representatives from Technology, Operations, Accounting and Corporate Communications. Members of the NBT IRT have extensive knowledge regarding the security protocols, operational processes and IT infrastructure for the Company. This allows
cross-functional response efforts in the detection, mitigation and prevention of a cybersecurity incident suffered by the Company or its third party service providers. Upon detection of an incident, the IRT promptly convenes and updates executive
leadership to assess its severity level, categorizing it as low, moderate, or high. The Company actively performs simulations and tabletop exercises at a management level and incorporates external resources as needed to stay current to cyber threat
vectors. The Incident Response Plan also maintains procedures and escalation protocol to escalate significant cybersecurity matters to the Executive Committee, RMC and/or full Board, as deemed necessary.
During the incident response process, senior management, in collaboration with relevant personnel from information technology, information security, and, when necessary, external cybersecurity firms specializing in
forensic investigations will assess the materiality of the breach alongside the severity scale. This evaluation aims to accurately identify risks and potential operational and business impacts. Materiality determination involves an objective
analysis of both quantitative and qualitative factors, including an evaluation of immediate impact and reasonably likely future impacts.
Although cybersecurity threats, including those stemming from prior incidents, have not had a significant impact on the Company in the previous fiscal year, and there are no known imminent cybersecurity threats
likely to materially affect us, we cannot guarantee that we will remain unaffected in the future. Further, there is increasing regulation regarding responses to cybersecurity incidents, including reporting to regulators, which could subject us to
additional liability and reputational harm. Cybersecurity threats are expected to continue to be persistent and severe. For further discussion of such risks, see the section entitled “Risk Factors” in Item 1A of this Form 10-K under the heading
“Risks Related to Cybersecurity and Data Privacy.”
| ITEM 2. |
PROPERTIES
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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.
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.
None.
PART II
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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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.
| ITEM 6. |
[RESERVED]
|
| 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.”
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.
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,
|
||||||||||||
|
2023
|
2022
|
2021
|
||||||||||
|
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)
|
2023
|
2022
|
2021
|
|||||||||
|
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
|
967
|
-
|
|||||||||
|
Acquisition-related provision for credit losses
|
8,750
|
-
|
-
|
|||||||||
|
Acquisition-related reserve for unfunded loan commitments
|
836
|
-
|
-
|
|||||||||
|
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
|
||||||
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
|
2023
|
2022
|
2021
|
||||||||||||||||||||||||||||||||||
|
(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
|
995
|
3.68
|
%
|
25,255
|
616
|
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
|
738
|
0.05
|
%
|
||||||||||||||||||||||||
|
Savings deposits
|
1,715,749
|
650
|
0.04
|
%
|
1,829,360
|
592
|
0.03
|
%
|
1,656,893
|
829
|
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
|
588
|
4.02
|
%
|
17
|
-
|
-
|
|||||||||||||||||||||||||
|
Repurchase agreements
|
70,251
|
747
|
1.06
|
%
|
69,561
|
67
|
0.10
|
%
|
100,519
|
132
|
0.13
|
%
|
||||||||||||||||||||||||
|
Short-term borrowings
|
450,377
|
23,592
|
5.24
|
%
|
46,371
|
1,968
|
4.24
|
%
|
1,302
|
26
|
2.00
|
%
|
||||||||||||||||||||||||
|
Long-term debt
|
24,247
|
|||||||||||||||||||||||||||||||||||