NBT Bancorp (NBTB) - 2022 Q4 - Annual Report

PART I Business NBT Bancorp Inc. is a financial holding company with $11.74 billion in assets, offering commercial, retail, and wealth management services, and has a pending merger with Salisbury Bancorp Company Overview (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Assets | $11.74 billion | | Stockholders' Equity | $1.17 billion | | Full-time Equivalent Employees | 1,861 | - The company's business consists of providing commercial banking, retail banking, and wealth management services primarily in central and upstate New York, northeastern Pennsylvania, and parts of New England[14] - On December 5, 2022, the Company entered into an agreement to acquire Salisbury Bancorp, Inc. Under the terms, each share of Salisbury common stock will be converted into 0.7450 shares of the Company's common stock. Salisbury had assets of $1.54 billion at year-end 2022[22] - The company faces strong competition from other financial institutions. It competes by emphasizing its community banking nature, local market knowledge, and specialized services like agricultural lending[23][27] - The company is subject to extensive regulation by federal and state authorities, including the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB), particularly after crossing the $10 billion asset threshold[53][56][57] Risk Factors The company faces material risks from adverse economic conditions, interest rate volatility, heightened regulatory scrutiny, cybersecurity threats, and its pending merger - The Company's financial performance is highly dependent on the economic conditions in its primary markets, including central/upstate New York and northeastern Pennsylvania. A downturn in these local economies could significantly increase nonperforming loans[110][111] - Changes in interest rates could adversely affect net interest income. The Federal Reserve's rate hikes in 2022 to combat inflation present both opportunities and risks, potentially impacting loan demand and funding costs[113] - As of December 31, 2022, approximately 50% of the loan portfolio consisted of commercial loans, which generally carry greater risk of non-payment and loss compared to residential real estate loans[115] - Having exceeded $10 billion in total assets, the Company is subject to heightened regulatory requirements, including limits on debit card interchange fees (Durbin Amendment), examinations by the CFPB, and applicability of the Volcker Rule, which increase compliance costs[126][128] - The transition from LIBOR to alternative rates like SOFR by June 30, 2023, creates considerable costs and risks for a significant number of the Company's loans, derivatives, and other financial instruments[129][130] - The pending merger with Salisbury Bancorp is subject to regulatory and shareholder approvals and presents significant integration challenges that could divert management focus and result in unanticipated costs, potentially failing to achieve the expected benefits[145][148][149] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[154] Properties The company owns its headquarters and operates 140 branch locations, with 61 leased, deemed sufficient for current operations - The Company owns its headquarters and operates 140 branch locations, with 61 of these branches being leased properties[156] Legal Proceedings The company is not a party to any material legal proceedings beyond ordinary business litigation - There are no material legal proceedings against the Company, apart from ordinary litigation incidental to its business[158] Mine Safety Disclosures This item is not applicable to the company - None[159] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NBT Bancorp's common stock trades on NASDAQ, with dividend capacity from its subsidiary and recent share repurchases - The Company's common stock is traded on the NASDAQ Global Select Market under the symbol "NBTB"[160] - At December 31, 2022, NBT Bank had the ability to pay dividends of $145.3 million to the parent company without prior approval from the OCC[164] - The Company purchased 400,000 shares of its common stock in 2022 at an average price of $36.78 per share. As of December 31, 2022, 1,600,000 shares were available for repurchase under the plan expiring December 31, 2023[166] [Reserved] This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net income slightly decreased in 2022 to $152.0 million, driven by increased net interest income and loan growth, offset by higher loan loss provisions and Durbin Amendment impact Key Performance Metrics (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $152.0 million | $154.9 million | | Diluted EPS | $3.52 | $3.54 | | Return on Average Assets | 1.29% | 1.33% | | Return on Average Equity | 12.67% | 12.71% | | Net Interest Margin (FTE) | 3.34% | 3.03% | - Net interest income increased by $41.1 million (12.8%) to $362.2 million in 2022, primarily due to higher yields on earning assets from rising interest rates, which offset a $17.6 million year-over-year decrease in income from PPP loans[189] - The Company recorded a provision for loan losses of $17.1 million in 2022, a significant shift from the $8.3 million net benefit recorded in 2021, reflecting a deteriorating economic forecast and loan growth[243] - Noninterest income decreased 1.4% to $155.6 million, largely due to an approximate $8 million negative impact on card services income from the Durbin Amendment. This was partially offset by growth in retirement plan administration fees[214] - Noninterest expense increased 6.0% to $304.5 million, driven by higher salaries and employee benefits, technology investments, and $1.0 million in merger-related expenses[217] - Total loans grew to $8.15 billion at year-end 2022, an increase of 8.7% from 2021. Excluding PPP loans, loan growth was 10.2%[192] - Credit quality remained strong, with nonperforming loans decreasing to 0.26% of total loans at year-end 2022 from 0.44% at year-end 2021. Net charge-offs were low at 0.11% of average loans[227][243] Quantitative and Qualitative Disclosure About Market Risk The company's primary market risk is interest rate risk, managed by ALCO, with modeling showing asset sensitivity and projected net interest income changes under rate shifts - The company's most significant market risk is interest rate risk, managed by the Asset Liability Committee (ALCO) primarily through earnings at risk modeling[270][272][274] Interest Rate Sensitivity Analysis (as of Dec 31, 2022) | Change in Interest Rates (bps) | Percent Change in Net Interest Income | | :--- | :--- | | +200 | 2.83% | | +100 | 1.60% | | -200 | (3.99%) | - The company's focus in the current rising rate environment is on managing deposit expenses while allowing assets to reprice upward[276] Financial Statements and Supplementary Data This section presents audited financial statements with an unqualified auditor's opinion, highlighting the Allowance for Credit Losses as a critical audit matter - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[278][536] - The auditor identified the Allowance for Credit Losses (ACL) for loans evaluated on a collective basis as a critical audit matter due to the high degree of subjective and complex judgment required in its estimation[282][285] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $11,739,296 | $12,012,111 | | Net Loans | $8,049,347 | $7,406,459 | | Total Deposits | $9,495,933 | $10,234,469 | | Total Liabilities | $10,565,742 | $10,761,658 | | Total Stockholders' Equity | $1,173,554 | $1,250,453 | Consolidated Income Statement Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Interest Income | $362,190 | $321,088 | $315,678 | | Provision for Loan Losses | $17,147 | ($8,257) | $51,134 | | Noninterest Income | $155,578 | $157,794 | $146,276 | | Noninterest Expense | $304,465 | $287,281 | $277,733 | | Net Income | $151,995 | $154,885 | $104,388 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[530] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective, with KPMG LLP issuing an unqualified opinion - Based on an evaluation as of December 31, 2022, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective[530] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2022, based on the criteria established in the COSO framework[532] - KPMG LLP, the independent auditor, issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2022[533][536] Other Information The company reports no other information for this item - None[543] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[544] PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive Proxy Statement - The required information is incorporated by reference from the Company's definitive Proxy Statement[545] Executive Compensation Information for this item is incorporated by reference from the company's definitive Proxy Statement - The required information is incorporated by reference from the Company's definitive Proxy Statement[546] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with details on equity compensation plan issuances and available securities Equity Compensation Plan Information | Plan Category | Securities to be issued upon exercise | Securities remaining available for future issuance | | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 9,100 | 384,182 | Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive Proxy Statement - The required information is incorporated by reference from the Company's definitive Proxy Statement[548] Principal Accountant Fees and Services KPMG LLP is the independent auditor, with fee and service information incorporated by reference from the Proxy Statement - The Company's independent registered public accounting firm is KPMG LLP. Other required information is incorporated by reference from the Company's definitive Proxy Statement[549] PART IV Exhibits and Financial Statement Schedules This section lists financial statements and provides an index of exhibits, including the merger agreement with Salisbury Bancorp - This section lists the financial statements filed with the report and provides an index of exhibits, including the merger agreement with Salisbury Bancorp, Inc[550][557] Form 10-K Summary The company has not provided a summary for this item - None[560]