NBT BANCORP INC.
FORM 10-K – Year Ended December 31, 20192021
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| PART II | ||
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| ITEM 6. | 28 | |
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| ITEM 8. | 49 | |
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| ITEM 9. | 104 | |
| ITEM 9A. | 104 | |
| ITEM 9B. | ||
| ITEM 9C. | 106 | |
| PART III | ||
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| PART IV | ||
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NBT Bancorp Inc. (the “Company”) is a registered financial holding company incorporated in the state of Delaware in 1986, with its principal headquarters located in Norwich, New York. The Company, on a consolidated basis, at December 31, 20192021 had assets of $9.7$12.0 billion and stockholders’ equity of $1.1$1.3 billion.
The principal assets of the Company 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 Company’s principal sources of revenue are the management fees and dividends it receives from the Bank, NBT Financial and NBT Holdings.
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 central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, Maine and the southern coastal Maine area.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, insurance and other financial services revenue, trust revenue and gains/losses on securities sales, bank owned life insurance income, ATM and debit card fees, and retirement plan administration fees and service charges on deposit accounts, as well as noninterest expense,expenses, such as salaries and employee benefits, occupancy, equipment, data processing and communications, professional fees and outside services, office supplies and postage, amortization of intangible assets, loan collection and other real estate owned ("OREO"(“OREO”) expenses, advertising, FDICFederal Deposit Insurance Corporation (“FDIC”) expenses and other expenses.
NBT Bank, N.A.
The Bank, is a full service commercial bank formed in 1856, which provides a broad range of financial products to individuals, corporations and municipalities throughout the central and upstate New York, northeastern Pennsylvania, western Massachusetts, southern New Hampshire, Massachusetts, Vermont, Maine and southern coastal Maine market areas.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 retirement plan administrator. Through EPIC the Company offers services including retirement plan consulting and recordkeeping services. 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. Through NBT Insurance the Company 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"(“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 fourthree operating subsidiaries, NBT Capital Corp., Broad Street Property Associates, Inc., CNB Realty Trust and NBT Capital Management, Inc. NBT Capital Corp., formed in 1998, is a venture capital corporation. Broad Street Property Associates, Inc., formed in 2004, is a property management company. CNB Realty Trust, formed in 1998, is a real estate investment trust. 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. TwoOne operating subsidiaries, Alliance Preferred Funding Corp. and Alliance Leasing, Inc. acquiredsubsidiary, CNB Realty Trust, formed in 2013, were1998, was a real estate investment trust which was dissolved during 2019.2021.
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 continued low 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 in whichwhere the Company currently operates. With the addition of new banking presencesfinancial 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'sCompany’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 table below summarizes the Bank’s deposits and market share as of June 30, 20192021 by the thirty-eight counties of New York, Pennsylvania, New Hampshire, Massachusetts, Vermont, Maine and Maine.Connecticut. Market share is based on deposits of all commercial banks, credit unions, savings and loans associations and savings banks.
| County | State | Deposits in Thousands | Market Share | Market Rank | Number of Branches* | Number of ATMs* | State | Deposits in Thousands | Market Share | Market Rank | Number of Branches* | Number of ATMs* | ||||||||||||||||||||||||
| Chenango | NY | $ | 993,037 | 95.39% | 1 | 11 | 12 | NY | $ | 1,212,561 | 95.19 | % | 1 | 11 | 12 | |||||||||||||||||||||
| Fulton | NY | 481,065 | 63.19% | 1 | 5 | 6 | NY | 598,208 | 60.35 | % | 1 | 5 | 6 | |||||||||||||||||||||||
| Schoharie | NY | 227,328 | 46.36% | 1 | 4 | 4 | NY | 272,133 | 45.31 | % | 1 | 4 | 4 | |||||||||||||||||||||||
| Hamilton | NY | 46,660 | 44.08% | 2 | 1 | 1 | NY | 47,385 | 39.98 | % | 2 | 1 | 1 | |||||||||||||||||||||||
| Montgomery | NY | 285,857 | 36.59% | 2 | 5 | 4 | NY | 382,441 | 38.67 | % | 2 | 5 | 4 | |||||||||||||||||||||||
| Cortland | NY | 272,985 | 34.55% | 1 | 4 | 7 | NY | 329,639 | 35.03 | % | 2 | 4 | 6 | |||||||||||||||||||||||
| Otsego | NY | 370,637 | 33.06% | 1 | 8 | 11 | NY | 487,453 | 34.92 | % | 1 | 8 | 11 | |||||||||||||||||||||||
| Delaware | NY | 331,900 | 32.54% | 1 | 5 | 5 | ||||||||||||||||||||||||||||||
| Essex | NY | 212,881 | 28.33% | 2 | 3 | 4 | NY | 307,108 | 31.70 | % | 1 | 3 | 4 | |||||||||||||||||||||||
| Madison | NY | 229,963 | 27.17% | 2 | 4 | 8 | NY | 347,460 | 29.42 | % | 2 | 5 | 7 | |||||||||||||||||||||||
| Delaware | NY | 327,141 | 28.54 | % | 3 | 5 | 5 | |||||||||||||||||||||||||||||
| Susquehanna | PA | 192,595 | 20.83% | 2 | 5 | 7 | PA | 230,519 | 17.43 | % | 2 | 5 | 7 | |||||||||||||||||||||||
| Broome | NY | 575,719 | 16.23 | % | 2 | 7 | 9 | |||||||||||||||||||||||||||||
| Oneida | NY | 549,687 | 14.92% | 2 | 7 | 9 | NY | 645,365 | 13.82 | % | 4 | 6 | 9 | |||||||||||||||||||||||
| Broome | NY | 397,388 | 13.82% | 2 | 7 | 9 | ||||||||||||||||||||||||||||||
| St. Lawrence | NY | 162,612 | 13.24% | 4 | 4 | 4 | NY | 214,321 | 13.08 | % | 4 | 4 | 4 | |||||||||||||||||||||||
| Herkimer | NY | 86,610 | 11.52% | 4 | 2 | 1 | ||||||||||||||||||||||||||||||
| Pike | PA | 76,509 | 10.70% | 5 | 2 | 2 | PA | 109,790 | 12.15 | % | 4 | 2 | 2 | |||||||||||||||||||||||
| Oswego | NY | 147,257 | 10.66% | 4 | 4 | 6 | NY | 187,100 | 10.74 | % | 4 | 4 | 5 | |||||||||||||||||||||||
| Wayne | PA | 122,361 | 8.71% | 4 | 3 | 4 | PA | 164,540 | 9.15 | % | 4 | 3 | 4 | |||||||||||||||||||||||
| Herkimer | NY | 69,360 | 8.71 | % | 5 | 1 | 1 | |||||||||||||||||||||||||||||
| Tioga | NY | 44,948 | 8.29 | % | 4 | 1 | 1 | |||||||||||||||||||||||||||||
| Schenectady | NY | 296,965 | 7.58 | % | 5 | 2 | 2 | |||||||||||||||||||||||||||||
| Clinton | NY | 136,649 | 7.21 | % | 5 | 2 | 2 | |||||||||||||||||||||||||||||
| Lackawanna | PA | 433,119 | 7.65% | 6 | 11 | 17 | PA | 563,825 | 7.03 | % | 6 | 10 | 14 | |||||||||||||||||||||||
| Tioga | NY | 34,861 | 7.48% | 5 | 1 | 1 | ||||||||||||||||||||||||||||||
| Clinton | NY | 105,228 | 7.36% | 5 | 3 | 3 | ||||||||||||||||||||||||||||||
| Franklin | NY | 30,538 | 5.96% | 4 | 1 | 1 | NY | 39,993 | 5.77 | % | 4 | 1 | 1 | |||||||||||||||||||||||
| Schenectady | NY | 168,228 | 5.84% | 5 | 2 | 2 | ||||||||||||||||||||||||||||||
| Warren | NY | 93,920 | 4.60% | 4 | 2 | 2 | ||||||||||||||||||||||||||||||
| Onondaga | NY | 464,174 | 4.33% | 6 | 11 | 13 | NY | 644,161 | 4.73 | % | 6 | 10 | 10 | |||||||||||||||||||||||
| Saratoga | NY | 165,993 | 3.32% | 9 | 4 | 5 | NY | 259,013 | 3.95 | % | 8 | 3 | 4 | |||||||||||||||||||||||
| Warren | NY | 100,519 | 3.59 | % | 5 | 2 | 2 | |||||||||||||||||||||||||||||
| Chittenden | VT | 140,599 | 3.07% | 7 | 3 | 4 | VT | 196,535 | 3.20 | % | 7 | 3 | 4 | |||||||||||||||||||||||
| Berkshire | MA | 157,305 | 3.11 | % | 7 | 5 | 5 | |||||||||||||||||||||||||||||
| Cheshire | NH | 69,166 | 2.98 | % | 7 | 1 | 1 | |||||||||||||||||||||||||||||
| Monroe | PA | 78,826 | 2.88% | 8 | 3 | 3 | PA | 108,147 | 2.84 | % | 8 | 3 | 3 | |||||||||||||||||||||||
| Cheshire | NH | 46,811 | 2.86% | 7 | 1 | 1 | ||||||||||||||||||||||||||||||
| Berkshire | MA | 115,376 | 2.51% | 7 | 5 | 6 | ||||||||||||||||||||||||||||||
| Albany | NY | 354,060 | 1.89 | % | 9 | 4 | 5 | |||||||||||||||||||||||||||||
| Greene | NY | 33,435 | 1.94% | 6 | 1 | 1 | NY | 42,499 | 1.51 | % | 5 | 1 | 1 | |||||||||||||||||||||||
| Albany | NY | 293,260 | 1.49% | 9 | 4 | 5 | ||||||||||||||||||||||||||||||
| Luzerne | PA | 90,236 | 1.47% | 13 | 4 | 5 | PA | 95,533 | 1.22 | % | 13 | 2 | 2 | |||||||||||||||||||||||
| Hillsborough | NH | 137,249 | 0.81 | % | 13 | 2 | 2 | |||||||||||||||||||||||||||||
| Rensselaer | NY | 25,612 | 1.14% | 10 | 1 | 1 | NY | 20,396 | 0.70 | % | 11 | 1 | 1 | |||||||||||||||||||||||
| Hillsborough | NH | 88,713 | 0.74% | 13 | 2 | 2 | ||||||||||||||||||||||||||||||
| Rutland | VT | 6,128 | 0.64% | 10 | 1 | 1 | ||||||||||||||||||||||||||||||
| Cumberland | ME | 32,369 | 0.32% | 15 | 1 | 1 | ME | 36,295 | 0.26 | % | 15 | 1 | 1 | |||||||||||||||||||||||
| Rockingham | NH | 9,061 | 0.11% | 24 | 1 | 2 | ||||||||||||||||||||||||||||||
| Merrimack | NH | 1,165 | 0.02 | % | 16 | 1 | 1 | |||||||||||||||||||||||||||||
| Hartford | CT | 6,888 | 0.01 | % | 22 | 2 | 1 | |||||||||||||||||||||||||||||
| $ | 7,643,819 | 146 | 180 | $ | 9,819,554 | 140 | 164 | |||||||||||||||||||||||||||||
Source: SNL Financial LLCS&P Global Market Intelligence
* Branch and ATM data is as of December 31, 2019.2021.
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 are in compliance withfollow all applicable laws and regulations including the Gramm-Leach Bliley Act of 2001 ("GLBA"(“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 requires the Company'sCompany’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.
Human Capital Resources
Diversity, Equity and Inclusion
We retooled our initiatives to diversity, equity and inclusion (“DEI”) to take into consideration our remote and hybrid working conditions over the past 18 months. Our Chief Diversity Officer led both grassroots and Executive sponsored strategies to continue our DEI journey. Executive sponsored strategies include providing leadership opportunities with cross-functional/geographic teams, webinars and virtual sessions on topics such as working parents and providing contribution support to employee interests such as a fundraiser for the LGBTQ community. Grassroot efforts include more focus and awareness of various cultural and diverse interests from our company-wide DEI Roundtable. The Roundtable also provided an internal forum called NBT Communities where employees with similar interests across our footprint have a way to get to know each other. The Company has a DEI steering committee comprised of members of the executive team, including the Chief Executive Officer. The plan is shared with our Board of Directors, management and employees, who are often included in implementing specific action items.
Both the Roundtable and the Steering Committee utilized data from our September 2021 Employee Engagement survey to understand perspectives and create specific initiatives addressing employee feedback and perceptions. More information can be located on the Company’s website at https://www.nbtbank.com/about-us/Diversity-and-Inclusion/.
Investment in Human CapitalOur People
The Company’s strategic initiative regardingfocus on investing in human capitalour people includes key initiatives to attract, develop and retain our valued employees. Talent management continuesacquisition and more importantly, retention, are top priorities in the post-coronavirus (“COVID-19”) “great resignation” and boomer generation transition to be a top priority as specific competencies are predicted to be in short-supply with the transition of retirement age skill sets.retirement.
While our employee retention rates, which resultsrate remains consistently high, significant effort is placed on retaining our valued employees - various compensation strategies, stay interviews, career planning conversations, an on-going coaching process instead of annual performance appraisals, and enhanced communications all play a part in greater customer satisfactionemployee satisfaction. Our 2021 Employee Engagement survey provided insights leading to specific initiatives to enhance future engagement including clarity around business strategies, decision making and continuity. development opportunities.
The Company offers total rewards that address employees at various stages of their personal lives and careers. Recently added werecareers, including a student loan repayment program, enhanced financial and emotional wellness programs and initiatives, undergraduate and graduation tuition, paid parental leave, more flexibility inrecently enhanced paid time off, additional flexibility in work schedules with hybrid and remove work, arrangementpaid leave benefits and a retirement transition option. The Company’s incentive programs recognize all full-time employees at all levels and are designed to motivate employees to support achievement of company success, with appropriate risk assessment and prevention measures designed to prevent fraud.
Learning and Career Development
The Company focuses on the future by encouraging and promoting internal talent development. We have four distinct trainingDuring the pandemic, emphasis was placed on connecting our employees using Microsoft Teams to ensure employees would be successful working and leading in a remote work environment. This past year the Company doubled the number of participants in our development programs that address andto encourage developmentindividual growth and foster retention. Our high-potential program is in its sixth cycle of leader development. Our emerging leaders program develops our up-and-coming next generation of leaders. Our management development program
The Management Development Program aims at attracting key external talent, particularly throughqualified diverse college graduates. The program consists of accelerated advancement, mentoring with senior executives and targeted benefit programs such as financial education, tuition repayment, graduate school tuition assistance and flexible work arrangements. programs.
The management development program has placed many graduates in key positions where they have made significant contributions. Our professional development program providesProfessional Development Program provide an entry point for early career professionals. This 12-18 month program provides an overview of banking functions over a 12-18 month period, ultimately placing employees with working knowledge in positions of responsibility around the Company. In addition,
The Emerging Leaders program is intended for employees who have approximately 5-7 years of professional experience who may or may not have had prior leadership experience but shows potential for becoming a future leader for the Company. This program works on developing the essential leadership skills and building confidence.
The Star Impact program is designed to further develop leaders who are already established in their leadership roles who demonstrate potential for assuming expanded responsibility in role or through promotion. This program is designed to further develop and strengthen leadership styles and it includes feedback, coaching, networking and team building.
Employees have access to career paths and career exploration programs throughout the Company’sa variety of business areas, supported by mentors, individual development plans and internal learning management system resources. To support this process, we namedemploy an internal career counselormanager to work as a liaison with employees and managers to direct their personal career aspirations. The Company also has a robust talent review and succession planning process. Significant time is spent at the Board and Management level identifying and providing development opportunities for potential successors.
The Company developed a purpose statementseeks to support the D&I initiative, which states that the Company strives to create an environment that is open and welcoming to all, leading to highfurther refine its workforce programs through its employee engagement survey which is planned on an annual basis with follow up pulse surveys in the interim. In addition to the pulse surveys conducted to understand employee well-being, attitudes about remote work, productivity and job performance.work-life balance during the last 18 months, a full Engagement Survey was completed in September 2021 to discover more about overall employee engagement. We believe thiswere pleased at the high level of participation and overall engagement at the same high level as pre-pandemic. Divisional and Corporate actions have been developed to address areas employees would like to be more knowledgeable and involved in. The Company believes our engaged employees will enable the Companydrive retention and effort, ultimately correlating to outperform its peers, ensure high levels of shareholder return and providea better experience for financial independence. We strive to ensure our executives are demonstrating the highest ethical leadership, are approachable and inspire trust. More information can be located on the Company’s website at https://www.nbtbank.com/Personal/About-Us/Our-Bank/Diversity-and-Inclusion.customers.
Conduct and Ethics
The Company seeks to further refine its workforce programsis 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 its employee engagement survey. Based on the most recent survey, high impact strengths included leadership, alignment to company goals and individual work, senseinvestments of team and identity, autonomy to get things done, access to learning and development and social responsibility. The executive team owns several initiatives directly tied to the survey feedback, including the employee forums mentioned above. With technologyboth money and the implementationtime of Office 365, we have increased interactions among team membersour employees.
Through our active contribution program, administered by market-based committees with representation from all lines of business, the Company contributed nearly $2.0 million in 2021, a 43% increase from 2020. Our teams’ efforts to distribute philanthropic resources across our geography. 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.
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 2021, these commitments resulted in over $375,000 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. New employees participate in an onboarding experience that includes a community service activity.
Products
The Company believesoffers a comprehensive array of financial products and services for consumers and businesses with options that engaged employees will drive retentionare beneficial to unbanked and effort, ultimately correlatingunderbanked 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 new NBT iSelect Account was certified as meeting the Bank On National Account Standard with 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 better experiencepersonal 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”) and U.S. Department of Veterans Affairs (“VA”) loans as well as programs developed in-house like our customers.First Home Loan, Habitat for Humanity, Home in the City 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 offers a financing product to homeowners on a national basis which provides an opportunity to power their homes with sustainable solar energy. It enables households to 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.
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.
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.
In addition to the summary below, as a result of the COVID-19 pandemic, the U.S. federal and state bank regulators issued several letters and other guidance to bank holding companies and banks regarding expectations for supporting the community and certain related temporary regulatory changes and accommodations. The Company continues to monitor guidance and developments related to COVID-19.
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"Act”), as administered by the SEC. The Company'sCompany’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 Federal Deposit Insurance Corporation (“FDIC”)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'sBank’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. Since 2016, the currentThe Trump administration and its appointees to the federal banking agencies have enacted some legislation and takentook other steps to modify and scale back portions of the Dodd-Frank Act and certain of its implementing regulations. It is not clear whether any additional such legislation or regulatory changes will be enacted or implemented or, if enacted or implemented,at this time what the effect on the Company would be of any legislation or regulatory changes that may be enacted or implemented by the Biden administration, though major changes are not expected in the near term.
The CARES Act and Initiatives Related to COVID-19
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Company and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the ongoing COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for the COVID-19 pandemic. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. The Company continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.
Paycheck Protection Program
Section 1102 of the CARES Act created the Paycheck Protection Program (“PPP”), a program that was administered by the Small Business Administration (“SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. The PPP ended on May 31, 2021. The Company participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments are deferred for the first six months of the loan term. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.
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Guidance on Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructuring (“TDR”) as defined by generally accepted accounting principles in the United States of America (“GAAP”), from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. Section 541 of the Consolidated Appropriation Act (“CAA”) extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as to set forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, the Bank offered short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Notes 1 and 6 to the consolidated financial statements for further information on non-TDR loan modifications. As of December 31, 2021, there were less than 1% of our customer loan balances participating under these loan programs.
Temporary Regulatory Capital Relief Related to Impact of CECL
Concurrent with enactment of the CARES Act, in March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of Accounting Standards Updates 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company adopted the capital transition relief over the permissible five-year period.
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 (i)(1) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury), or (ii)(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, (i)(1) the bank holding company and all of its depository institution subsidiaries must be “well-capitalized” and “well-managed,” as defined in the FRB'sFRB’s Regulation Y and (ii)(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.
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'sapplicant’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'sCompany’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'sbank’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'sbank’s undivided profits after deducting statutory bad debt in excess of the bank'sbank’s allowance for loan losses.
The federal banking agencies have indicated that paying dividends that deplete a bank'sbank’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 implementing 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 implementing Regulation O restricts loans to the Bank'sBank’s and its affiliates'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 total capital and surplus.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'sBank’s and its affiliates'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'sbank’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.
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 prohibitlimits the interest rate that any depository institution that is not well-capitalized from paying an interest ratemay pay on brokered deposits in excess of three-quarters of one percentage point over certain prevailing market rates.deposits.
Under the Federal Deposit Insurance Act ("FDIA"(“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'sBank’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, 2019.2021.
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, such as the Company, are exempt from the debit card interchange fee standards. However,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 COVID-19 pandemic on community banking organizations with less than $10 billion in total assets as of December 31, 2019. The rule allows 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 will be 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 and Prompt Corrective Action
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: (i)(1) require a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii)(2) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii)(3) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv)(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:
| ● | 4.5% CET1 to risk-weighted assets; |
| ● | 6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to risk-weighted assets; |
| ● | 8.0% Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and |
| ● | 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). |
The Capital Rules also require a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. The capital conservation buffer was phased in incrementally until when, on January 1, 2019, the capital conservation buffer was fully phased in, resulting in the capital standards applicable to the Company and the Bank including an additional capital conservation buffer of 2.5% of CET1, and effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i)(1) CET1 to risk-weighted assets of at least 7%, (ii)(2) Tier 1 capital to risk-weighted assets of at least 8.5% and (iii)(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. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of 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"(“AFS”) portfolio) under 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: (i)(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%; (ii)(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%; (iii)(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%; (iv)(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%.; (v)(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, 2019,2021, 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: (i)(1) engaging in “proprietary trading” and (ii)(2) investing in or sponsoring certain covered funds, subject to certain limited exceptions. Under the EGRRCPA,Economic Growth, Regulatory Reform and Consumer Protection Act (“EGRRCPA”), depository institutions and their holding companies with less than $10 billion in assets, like us, are excluded from the prohibitions of the Volcker Rule. Accordingly,During 2020, the Company crossed the $10 billion threshold, accordingly, we are no longer subject to the Volcker Rule, although if we grow to have more than $10 billion in assets, we will become 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, and we expect this will remain true if the Company becomes subject to the Volcker Rule again in the future.
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 CFPB has examination authority over all banks and savings institutions with more thanCompany grew its asset base in excess of $10 billion in assets. As the2020. The Company is below this threshold,now subject to the OCC continues to exercise primaryCFPB’s examination authority over the Bank with regard to compliance with federal consumer financial laws and regulations.regulations, in addition to the OCC as the primary regulatory of the Bank. Under the Dodd-Frank Act, state attorneys general are empowered to enforce rules issued by the CFPB.CFPB.
The Company is subject to federal consumer financial statutes and the regulations promulgated thereunder including, but not limited to:
| ● | the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
| ● | the Equal Credit Opportunity Act (“ECOA”), prohibiting discrimination in connection with the extension of credit; |
| ● | 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; |
| ● | the Fair Credit Reporting Act (“FCRA”), governing the provision of consumer information to credit reporting agencies and the use of consumer information; and |
| ● | the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies. |
The Bank’s failure to comply with any of the consumer financial laws can result in civil actions, regulatory enforcement action by the federal banking agencies and the U.S. Department of Justice.
USA PATRIOT Act
The Bank Secrecy Act (“BSA”), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), imposes obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. Beginning onSince May 11, 2018, the Bank ishas 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 Bank Secrecy ActBSA and USA PATRIOT Act board-approved compliance program commensurate with its risk profile.
Identity Theft Prevention
The Fair Credit Reporting Act’s (“FCRA”)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: (i)(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 (ii)(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 believes it is in compliance withfollows 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 partythird-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 latest 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, 2019,2021, the Company had 1,7881,801 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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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 ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely impacted the Company and our customers, counterparties, employees and third-party service providers and another pandemic or public health crisis in the future could material adverse effect on our business, results of operations and financial condition. Such effects will depend on future developments, that are highly uncertain and difficult to predict.
The COVID-19 pandemic has had and continues to have, and another pandemic or public health crisis in the future could have, repercussions across domestic and global economies and financial markets. The global impact of the COVID-19 pandemic evolved rapidly and many countries, and state and local governments in the United States, including those in which we operate, reacted by instituting government restrictions, border closings, quarantines, “shelter-in-place” orders and “social distancing” guidelines that, among other things, resulted in a dramatic increase in national unemployment and a significant economic contraction in 2020.
The Company’s business is dependent upon the willingness and ability of our employees and customers to conduct banking and other financial transactions. The extent of the impact of the COVID-19 pandemic and related responses on our capital, liquidity and other financial positions and on our business, results of operations and prospects will depend on a number of evolving factors, including:
| ● | The duration, extent, and severity of the pandemic. The COVID-19 pandemic does not yet appear to be contained and could affect significantly more households and businesses. The duration and level of severity of the pandemic continue to be unpredictable. |
| ● | The impact on our employees. While we have not experienced a significant impact on the availability of our employees to date, our colleagues remain at risk of being exposed to COVID-19. We have taken meaningful steps and precautions to ensure their health and well-being; however, COVID-19 could still impact our colleagues’ availability to work due to illness, quarantines, government actions, financial center closures or other reasons. If our employees are not able to work as effectively or a substantial number of employees are unable to work due to COVID-19, our business would be adversely affected. |
| ● | The effects on our customers, counterparties, employees and third-party service providers. COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational and other risks are generally expected to increase. |
| ● | The effects on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional and local economies and markets could suffer disruptions that are lasting. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect our results of operations and financial condition. |
Additionally, if the COVID-19 pandemic has an adverse effect on (1) customer deposits, (2) the ability of our borrowers to satisfy their obligations to us, (3) the demand for our loans or our other products and services, (4) other aspects of our business operations, or (5) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and our results of operations could be materially and adversely affected.
The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, each of which is highly uncertain and difficult to predict, including, but not limited to, the scope, severity and duration of the pandemic and its impact on our customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the direct and indirect economic effects of the pandemic and containment measures, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and their effectiveness against emerging variants of COVID-19, such as the Delta and Omicron variants, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the pandemic, including the availability of and access to credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
The Company is unable to fully estimate the impact of the COVID-19 pandemic on our business and operations at this time. The global pandemic may cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, further reduced demand for our products and services and other negative impacts on our financial position, results of operations and prospects. Sustained adverse effects may also prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements or result in downgrades in our credit ratings.
Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our results of operations, financial condition and cash flows. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed in this Annual Report on Form 10-K. The full extent to which the COVID-19 pandemic will negatively affect our results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Deterioration in local economic conditions may negatively impact our financial performance.
The Company’s success depends primarily on the general economic conditions in central and upstate New York, northeastern Pennsylvania, southern New Hampshire, western Massachusetts, Vermont, southern coastal Maine, 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, Maine and the southern coastal Maine area.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.
As a lender with the majority of our loans secured by real estate or made to businesses in New York, Pennsylvania, New Hampshire, Massachusetts, Vermont, Maine and Maine,Connecticut, a downturn in these 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, such as earthquakes, 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.
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, it is expected that the FRB will raise interest rates; however, 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. 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, 2019,2021, approximately 48%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 incurredexpected 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 level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, environmental and regulatory conditions and unidentified losses inherent in the current 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 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:
| ● | the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets; |
| ● | the ability to expand the Company’s market position; |
| ● | 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; |
| ● | customer satisfaction with the Company’s level of service; |
| ● | industry and general economic trends; and |
| ● | the ability to attract and retain talented employees. |
Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
The Company is subject to liquidity risk, which could adversely affect net interest income and earnings.
The purpose of the Company’s liquidity management is to meet the cash flow obligations of its customers for both deposits and loans. 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.
The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.
The economy in the United States and globally has experienced volatility in recent years and may continue to do so for the foreseeable future, particularly as a result of the COVID-19 pandemic. 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 changing governmental policies, natural disasters (including pandemics), terrorist attacks, acts of war or a combination of these or other factors. A worsening of business and economic conditions recovery could have adverse effects on our business, including the following:
| ● | 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; |
| ● | 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; |
| ● | 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; |
| ● | 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; |
| ● | demand for and income received from the Company’s fee-based services could decline; |
| ● | 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; |
| ● | 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; |
| ● | the value of loans and other assets or collateral securing loans may decrease. |
We are subject to other-than-temporary impairment risk, which could negatively impact our financial performance.
The process of evaluating the potential impairment of goodwill and other intangibles is highly subjective and requires significant judgment. The Company estimates the expected future cash flows of its various businesses and determines the carrying value of these businesses. The Company exercises judgment in assigning and allocating certain assets and liabilities to these businesses. The Company then compares the carrying value, including goodwill and other intangibles, to the discounted future cash flows. If the total of future cash flows is less than the carrying amount of the assets, an impairment loss is recognized based on the excess of the carrying amount over the fair value of the assets. Estimates of the future cash flows associated with the assets are critical to these assessments. Changes in these estimates based on changed economic conditions or business strategies could result in material impairment charges and therefore have a material adverse impact on the Company’s financial condition 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 now exceed $10 billion in total consolidated assets.
As of December 31, 2021, we had total assets of $12.0 billion. The Dodd-Frank Act and its implementing regulations impose enhanced supervisory requirements on bank holding companies with more than $10 billion in total consolidated assets. For bank holding companies with more than $10 billion in total consolidated assets, such requirements include, among other things:
| ● | applicability of Volcker Rule requirements and restrictions; |
| ● | increased capital, leverage, liquidity and risk management standards; |
| ● | examinations by the CFPB for compliance with federal consumer financial protection laws and regulations; and |
| ● | limits on interchange fees on debit cards. |
The EGRRCPA, which was enacted in 2018, amended 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.
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 COVID-19 pandemic on community banking organizations with less than $10 billion in total assets as of December 31, 2019. The rule allows 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 and has elected to delay the regulatory implications of crossing the $10 billion threshold until July 1, 2022 for the limits on interchange fees on debit cards.
We expect that our regulators will consider our compliance with these regulatory requirements that now 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 new requirements may negatively impact the results of our operations and financial condition. To ensure compliance, we will be required to investment 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 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR.
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision of LIBOR, could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, could create considerable costs and additional risk and could have an adverse impact on our overall financial condition or results of operations. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.
Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations.
The preparation of the Company’s financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as revenues and expenses during the period.
A variety of factors could affect the ultimate values of assets, liabilities, income and expenses recognized and reported in the Company’s financial statements, and these ultimate values may differ materially from those determined based on management’s estimates and assumptions. In addition, the FASB, regulatory agencies, and other bodies that establish accounting standards from time to time change the financial accounting and reporting standards governing the preparation of the Company’s financial statements. Further, those bodies that establish and interpret the accounting standards (such as the FASB, the Securities and Exchange Commission, and banking regulators) may change prior interpretations or positions regarding how these standards should be applied. These changes can be difficult to predict and can materially affect how the Company records and reports its financial condition and 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, 2021 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 market value of our FHLB of New York common stock was $7.2 million as of December 31, 2021. 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, reputations, 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, 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 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
The Company relies on third partiesCompany’s common stock price may fluctuate significantly.
The Company’s common stock price constantly changes. The market price of the Company’s common stock may continue to provide key componentsfluctuate significantly in response to a number of its business infrastructure.factors including, but not limited to:
| ● | the political climate and whether the proposed policies of the current Presidential administration in the U.S. that have affected market prices for financial institution stocks are successfully implemented; |
| ● | changes in securities analysts’ recommendations or expectations of financial performance; |
| ● | volatility of stock market prices and volumes; |
| ● | incorrect information or speculation; |
| ● | changes in industry valuations; |
| ● | variations in operating results from general expectations; |
| ● | actions taken against the Company by various regulatory agencies; |
| ● | changes in authoritative accounting guidance; |
| ● | changes in general domestic economic conditions such as inflation rates, tax rates, unemployment rates, labor and healthcare cost trend rates, recessions and changing government policies, laws and regulations; and |
| ● | severe weather, natural disasters, acts of war or terrorism and other external events. |
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 reliesis 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 or any class or series. Because the Company’s decision to issue securities in any future offering will depend on third parties to provide key components formarket conditions, its business operations, such as data processingacquisition activity and storage, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. Whileother factors, 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 breakdownscannot predict or other disruptions in communication services provided by a vendor, failureestimate the amount, timing or nature 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 affectits future offerings. Thus, the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficultiesstockholders bear the risk of a third-party vendor could also hurt the Company’s operations if those difficulties interfere withfuture offerings reducing the vendor's ability to serve the Company. Replacing these third party vendors also could create significant delays and expense that adversely affectmarket price of the Company’s businesscommon stock and performance.
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 future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks may include, among other things:
| ● | exposure to potential asset quality issues of the acquired business; |
| ● | potential exposure to unknown or contingent liabilities of the acquired business; |
| ● | our ability to realize anticipated cost savings; |
| ● | the difficulty of integrating operations and personnel and the potential loss of key employees; |
| ● | the potential disruption of our or the acquired company’s ongoing business in such a way that could result in decreased revenues or the inability of our management to maximize our financial and strategic position; |
| ● | the inability to maintain uniform standards, controls, procedures and policies; and |
| ● | the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management. |
We cannot provide any assurance that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome these risks could have an adverse effect on the achievement of our business strategy and results of operations.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key client relationship managers. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial condition.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
| ITEM 2. |
The Company owns its headquarters located at 52 South Broad Street, Norwich, New York 13815. The Company operated the following community banking branches and ATMsIn addition, as of December 31, 2019:
| County | Branches | ATMs | County | Branches | ATMs | |||||||
| New York | Pennsylvania | |||||||||||
| Albany | 4 | 5 | Lackawanna | 11 | 17 | |||||||
| Broome | 7 | 9 | Luzerne | 4 | 5 | |||||||
| Chenango | 11 | 12 | Monroe | 3 | 3 | |||||||
| Clinton | 3 | 3 | Pike | 2 | 2 | |||||||
| Cortland | 4 | 7 | Susquehanna | 5 | 7 | |||||||
| Delaware | 5 | 5 | Wayne | 3 | 4 | |||||||
| Essex | 3 | 4 | ||||||||||
| Franklin | 1 | 1 | New Hampshire | |||||||||
| Fulton | 5 | 6 | Cheshire | 1 | 1 | |||||||
| Greene | 1 | 1 | Hillsborough | 2 | 2 | |||||||
| Hamilton | 1 | 1 | Rockingham | 1 | 2 | |||||||
| Herkimer | 2 | 1 | ||||||||||
| Madison | 4 | 8 | Vermont | |||||||||
| Montgomery | 5 | 4 | Chittenden | 3 | 4 | |||||||
| Oneida | 7 | 9 | Rutland | 1 | 1 | |||||||
| Onondaga | 11 | 13 | ||||||||||
| Oswego | 4 | 6 | Massachusetts | |||||||||
| Otsego | 8 | 11 | Berkshire | 5 | 6 | |||||||
| Rensselaer | 1 | 1 | ||||||||||
| St. Lawrence | 4 | 4 | Maine | |||||||||
| Saratoga | 4 | 5 | Cumberland | 1 | 1 | |||||||
| Schenectady | 2 | 2 | ||||||||||
| Schoharie | 4 | 4 | ||||||||||
| Tioga | 1 | 1 | ||||||||||
| Warren | 2 | 2 | ||||||||||
| Total | 146 | 180 | ||||||||||
The Company believes that its offices are sufficient for its present operations and that all properties are adequately covered by insurance. All of the above ATMs are owned by the Company.
There are no material legal proceedings, other than ordinary routine 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
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The common stock of the Company, par value $0.01 per share (the “Common Stock”), is quoted on the NASDAQ Global Select Market under the symbol “NBTB.” The closing price of the Common Stock on February 10, 20207, 2022 was $38.86.$38.93. As of February 10, 2020,7, 2022, there were 5,7335,333 stockholders of record of Common Stock. No unregistered securities were sold by the Company during the year ended December 31, 2019.2021.
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, 2014.2016. 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 | Period Ending | ||||||||||||||||||||||||||||||||||||||||
| Index | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | |||||||||||||||||||||||||||||
| NBT Bancorp | $ | 100.00 | $ | 109.73 | $ | 169.66 | $ | 152.84 | $ | 147.47 | $ | 177.83 | $ | 100.00 | $ | 90.09 | $ | 86.92 | $ | 104.81 | $ | 85.82 | $ | 106.10 | |||||||||||||||||
| KBW Regional Bank Index | $ | 100.00 | $ | 105.99 | $ | 147.46 | $ | 150.13 | $ | 123.87 | $ | 153.43 | $ | 100.00 | $ | 101.81 | $ | 84.00 | $ | 104.05 | $ | 95.02 | $ | 129.84 | |||||||||||||||||
| NASDAQ Composite Index | $ | 100.00 | $ | 107.11 | $ | 116.72 | $ | 151.41 | $ | 147.16 | $ | 201.22 | $ | 100.00 | $ | 129.73 | $ | 126.08 | $ | 172.41 | $ | 250.08 | $ | 305.63 | |||||||||||||||||
Source: Bloomberg, L.P.
Dividends
The Company depends primarily upon dividends from subsidiaries for a substantial part of the Company'sCompany’s 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 OCCOffice 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, 2019,2021, the Bank was in compliance with all applicable minimum capital requirements and had the ability to pay dividends of $175.0up to $164.6 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 1615 to the consolidated financial statements is included in Item 8. Financial Statements and Supplementary Data, which are located elsewhere in this report.
Stock Repurchase
The Company did not purchasepurchased 604,637 shares of its common stock during year ended December 31, 2019.2021 at an average price of $35.91 per share under its previously announced share repurchase program. The repurchase program under which these shares were purchased expired on December 31, 2021. On October 28, 2019,December 20, 2021, the NBT Board of Directors authorized a repurchase program for NBTthe Company to repurchase up to 1,000,000an additional 2,000,000 shares of its outstanding common stock. ThisThe plan expires on December 31, 2021.2023. The Company purchased 204,637 shares of its common stock during the fourth quarter of 2021 at a weighted average price of $37.29.
The following table summarizes the share purchases made during the fourth quarter of 2021:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Number of Shares That May Yet be Purchased Under the Plans | ||
| 10/1/21 - 10/31/21 | - | $ | - | - | 1,600,000 | |
| 11/1/21 - 11/30/21 | 161,200 | 37.29 | 161,200 | 1,438,800 | ||
| 12/1/21 - 12/31/21 | 43,437 | 37.29 | 43,437 | 1,395,363 | ||
| Total | 204,637 | $ | 37.29 | 204,637 | 1,395,363 | |
The following summarydiscussion is an analysis of financial and other information about the Company is derived from the Company’s audited consolidated financial statementsresults of operations for each of the last five fiscal years ended December 31, 2021, 2020, and 2019, and financial condition as of December 31, 2021 and 2020. This discussion and analysis should be read in conjunction with Item 7 and the Company’sour consolidated financial statements and accompanying notes, included elsewhere in this report:
| Year ended December 31, | ||||||||||||||||||||
| (In thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Interest, fee and dividend income | $ | 367,534 | $ | 344,255 | $ | 309,407 | $ | 286,947 | $ | 273,224 | ||||||||||
| Interest expense | 55,979 | 38,626 | 25,914 | 22,506 | 20,616 | |||||||||||||||
| Net interest income | 311,555 | 305,629 | 283,493 | 264,441 | 252,608 | |||||||||||||||
| Provision for loan losses | 25,412 | 28,828 | 30,988 | 25,431 | 18,285 | |||||||||||||||
| Noninterest income excluding net securities gains (losses) | 139,810 | 131,103 | 119,437 | 116,357 | 115,394 | |||||||||||||||
| Net securities gains (losses) | 4,213 | (6,341 | ) | 1,867 | (644 | ) | 3,087 | |||||||||||||
| Noninterest expense | 274,734 | 264,561 | 245,648 | 235,922 | 236,176 | |||||||||||||||
| Income before income taxes | 155,432 | 137,002 | 128,161 | 118,801 | 116,628 | |||||||||||||||
| Net income | 121,021 | 112,566 | 82,151 | 78,409 | 76,425 | |||||||||||||||
| Per common share | ||||||||||||||||||||
| Basic earnings | $ | 2.76 | $ | 2.58 | $ | 1.89 | $ | 1.81 | $ | 1.74 | ||||||||||
| Diluted earnings | 2.74 | 2.56 | 1.87 | 1.80 | 1.72 | |||||||||||||||
| Cash dividends paid | 1.05 | 0.99 | 0.92 | 0.90 | 0.87 | |||||||||||||||
| Book value at year-end | 25.58 | 23.31 | 22.01 | 21.11 | 20.31 | |||||||||||||||
Tangible book value at year-end (1) | 19.03 | 16.66 | 15.54 | 14.61 | 13.79 | |||||||||||||||
| Average diluted common shares outstanding | 44,124 | 44,020 | 43,905 | 43,622 | 44,389 | |||||||||||||||
| Securities available for sale, at fair value | $ | 975,340 | $ | 998,496 | $ | 1,255,925 | $ | 1,338,290 | $ | 1,174,544 | ||||||||||
| Securities held to maturity, at amortized cost | 630,074 | 783,599 | 484,073 | 527,948 | 471,031 | |||||||||||||||
| Loans | 7,136,098 | 6,887,709 | 6,583,639 | 6,196,978 | 5,882,642 | |||||||||||||||
| Allowance for loan losses | 72,965 | 72,505 | 69,500 | 65,200 | 63,018 | |||||||||||||||
| Assets | 9,715,925 | 9,556,363 | 9,136,812 | 8,867,268 | 8,262,646 | |||||||||||||||
| Deposits | 7,587,820 | 7,368,211 | 7,170,636 | 6,973,688 | 6,604,843 | |||||||||||||||
| Borrowings | 820,682 | 1,046,616 | 909,188 | 886,986 | 674,124 | |||||||||||||||
| Stockholders’ equity | 1,120,397 | 1,017,909 | 958,177 | 913,316 | 882,004 | |||||||||||||||
| Key ratios | ||||||||||||||||||||
| Return on average assets | 1.26 | % | 1.20 | % | 0.91 | % | 0.92 | % | 0.96 | % | ||||||||||
| Return on average equity | 11.32 | % | 11.49 | % | 8.71 | % | 8.74 | % | 8.70 | % | ||||||||||
| Average equity to average assets | 11.17 | % | 10.47 | % | 10.45 | % | 10.49 | % | 10.98 | % | ||||||||||
| Net interest margin | 3.58 | % | 3.58 | % | 3.47 | % | 3.43 | % | 3.50 | % | ||||||||||
| Dividend payout ratio | 38.32 | % | 38.67 | % | 49.20 | % | 50.00 | % | 49.92 | % | ||||||||||
| Tier 1 leverage | 10.33 | % | 9.52 | % | 9.14 | % | 9.11 | % | 9.44 | % | ||||||||||
| Common equity tier 1 capital ratio | 11.29 | % | 10.49 | % | 10.06 | % | 9.98 | % | 10.20 | % | ||||||||||
| Tier 1 risk-based capital | 12.56 | % | 11.79 | % | 11.42 | % | 11.42 | % | 11.73 | % | ||||||||||
| Total risk-based capital | 13.52 | % | 12.78 | % | 12.42 | % | 12.39 | % | 12.74 | % | ||||||||||
| Year ended December 31, | ||||||||||||||||||||
| (In thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Stockholders' equity | $ | 1,120,397 | $ | 1,017,909 | $ | 958,177 | $ | 913,316 | $ | 882,004 | ||||||||||
| Intangibles | 286,789 | 290,368 | 281,463 | 281,254 | 283,222 | |||||||||||||||
| Tangible equity | 833,608 | 727,541 | 676,714 | 632,062 | 598,782 | |||||||||||||||
| Diluted common shares outstanding | 43,797 | 43,673 | 43,543 | 43,258 | 43,431 | |||||||||||||||
| Tangible book value | $ | 19.03 | $ | 16.66 | $ | 15.54 | $ | 14.61 | $ | 13.79 | ||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||
| Interest, fee and dividend income | $ | 90,576 | $ | 92,381 | $ | 93,233 | $ | 91,344 | $ | 90,524 | $ | 88,204 | $ | 84,767 | $ | 80,760 | ||||||||||||||||
| Interest expense | 13,393 | 14,327 | 14,606 | 13,653 | 11,649 | 10,677 | 9,026 | 7,274 | ||||||||||||||||||||||||
| Net interest income | 77,183 | 78,054 | 78,627 | 77,691 | 78,875 | 77,527 | 75,741 | 73,486 | ||||||||||||||||||||||||
| Provision for loan losses | 6,004 | 6,324 | 7,277 | 5,807 | 6,528 | 6,026 | 8,778 | 7,496 | ||||||||||||||||||||||||
| Noninterest income excluding net securities gains (losses) | 36,052 | 35,684 | 34,310 | 33,764 | 32,862 | 32,969 | 34,067 | 31,205 | ||||||||||||||||||||||||
| Net securities gains (losses) | 189 | 4,036 | (69 | ) | 57 | (6,916 | ) | 412 | 91 | 72 | ||||||||||||||||||||||
| Noninterest expense | 70,294 | 69,749 | 66,231 | 68,460 | 68,904 | 66,497 | 64,888 | 64,272 | ||||||||||||||||||||||||
| Net income | 28,960 | 32,379 | 30,555 | 29,127 | 28,652 | 29,807 | 28,121 | 25,986 | ||||||||||||||||||||||||
| Basic earnings per share | $ | 0.66 | $ | 0.74 | $ | 0.70 | $ | 0.67 | $ | 0.66 | $ | 0.68 | $ | 0.64 | $ | 0.60 | ||||||||||||||||
| Diluted earnings per share | $ | 0.66 | $ | 0.73 | $ | 0.69 | $ | 0.66 | $ | 0.65 | $ | 0.68 | $ | 0.64 | $ | 0.59 | ||||||||||||||||
| Annualized net interest margin | 3.52 | % | 3.57 | % | 3.61 | % | 3.64 | % | 3.61 | % | 3.57 | % | 3.57 | % | 3.57 | % | ||||||||||||||||
| Annualized return on average assets | 1.20 | % | 1.34 | % | 1.28 | % | 1.24 | % | 1.20 | % | 1.25 | % | 1.21 | % | 1.15 | % | ||||||||||||||||
| Annualized return on average equity | 10.36 | % | 11.83 | % | 11.63 | % | 11.52 | % | 11.34 | % | 11.96 | % | 11.64 | % | 10.99 | % | ||||||||||||||||
| Weighted average diluted common shares outstanding | 44,174 | 44,138 | 44,120 | 44,081 | 44,060 | 44,051 | 44,017 | 43,975 | ||||||||||||||||||||||||
Forward-Looking Statements
Certain statements in this filing and future filings by the CompanyNBT Bancorp Inc. (the “Company”) with the SEC,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. 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. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board ("FRB"(“FRB”); (5) inflation, interest rate, securities market and monetary fluctuations; (6) political instability; (7) acts of war or terrorism; (8) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (9) changes in consumer spending, borrowings and savings habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisitions and integration of acquired businesses; (13) the ability to increase market share and control expenses; (14) changes in the competitive environment among financial holding companies; (15) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including those under the Dodd-Frank Act;Act, Economic Growth, Regulatory Relief, Consumer Protection Act of 2018, Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and other legislative and regulatory responses to the coronavirus (“COVID-19”) pandemic; (16) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board ("FASB"(“FASB”) and other accounting standard setters; (17) changes in the Company’s organization, compensation and benefit plans; (18) the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; (19) greater than expected costs or difficulties related to the integration of new products and lines of business; (20) the adverse impact on the U.S. economy, including the markets in which we operate, of the COVID-19 global pandemic; and (20)(21) the Company’s success at managing the risks involved in the foregoing items. A discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward looking statements is included in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within this Annual Report on Form 10-K.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the potential adverse effect of the current COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company, its customers and the global economy and financial markets. The extent to which the COVID-19 pandemic impacts the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and their effectiveness against emerging variants of COVID-19, including the Delta and Omicron variants, the impact of the COVID-19 pandemic on the Company’s customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in this Form 10-K as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
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'sCompany’s annual and quarterly reports previously filed with the Securities and Exchange Commission,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, New York, with total assets of $12.0 billion at December 31, 2021. The Company’s business, primarily conducted through the Bank and its full-service retirement plan administration and recordkeeping subsidiary and full-service insurance agency subsidiary, consists of providing commercial banking, retail banking, wealth management and other financial services primarily to customers in its market area, which includes central and upstate New York, northeastern Pennsylvania, New Hampshire, Massachusetts, Vermont, Maine and 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 individual, 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 20192021 and, in summary form, the preceding two years. Collectively, the registrant and its subsidiaries are referred to herein as “the Company.” Net interest margin is presented in this discussion on a fully taxable equivalent ("FTE"(“FTE”) basis. Average balances discussed are daily averages unless otherwise described. The audited consolidated financial statements and related notes as of December 31, 20192021 and 20182020 and for each of the years in the three-year period ended December 31, 20192021 should be read in conjunction with this review.
Critical Accounting Policies
The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertainuncertain. The judgment and becauseassumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations. These policies relate to the allowance for loancredit losses, pension accounting and provision for income taxes.
The allowance for credit losses consists of the allowance for credit losses and the allowance for losses on unfunded commitments. As a result of the Company’s January 1, 2020, adoption of Accounting Standards Updates (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss. The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures). It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.” The estimate of expected credit losses under the CECL approach is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. The Company then considers whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. Finally, the Company considers forecasts about future economic conditions that are reasonable and supportable. The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. The allowance for losses on unfunded commitments represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The allowance for losses on unfunded commitments is determined by estimating future draws and applying the expected loss rates on those draws.
Management of the Company considers the accounting policy relating to the allowance for loancredit losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit incurred losses inherentover 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 loan portfolio and the material effect that such judgments can have on the results of operations.allowance for credit losses in those future periods. While management’s current evaluation of the allowance for loancredit losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. For example, if historicalGoing forward, the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the composition, characteristics and quality of our loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provision for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Company’s nonperforming loans and potential problem loans have a significant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable, if collateral values were significantly lower, the Company’s allowance for loan loss policy would also require additional provision for loan losses.
Management is required to make various assumptions in valuing the Company'sCompany’s pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate, and the rate of increase in future compensation levels.levels and interest rate of credit for cash balance plans. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations and expert opinions in determining the various rates used to estimate pension expense. The Company also considers the Citigroup Pension Liability Index, market interest rates and discounted cash flows in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.
The Company is subject to examinations from various taxing authorities. Such examinations may result in challengesThese tax laws are complex and subject to the tax return treatment applieddifferent interpretations by the Company to specific transactions. Managementtaxpayer and the relevant government taxing authorities. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Quarterly, a review of income tax expense and the carrying value of deferred tax assets and liabilities is performed and balances are adjusted as appropriate. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Although management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate.reasonable and appropriate, actual results could differ and we may be exposed to losses or gains that could be material. Should tax laws change or the taxing authorities during their examinations determine that management’s assumptions were inappropriate,differ from management’s and we do not prevail in a dispute over interpretations of tax laws, an adjustment may be required which could have a material effect on the Company’s results of operations.
The Company’s policies on the CECL method for allowance for loancredit losses, pension accounting and provision for income taxes are disclosed in Note 1 to the consolidated financial statements. A more detailed description of the allowance for loan losses is included in the section captioned “Risk Management – Credit Risk” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operationsstatements of this Form 10-K. All significant pension accounting assumptions and income tax assumptions are disclosed in Notes 13 and 12 to the consolidated financial statements, respectively. All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements to obtain a better understanding of how the Company’s financial performance is reported. Refer to Note 2 to the consolidated financial statements for recently adopted accounting standards.
Non-GAAP Measures
This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America ("GAAP"(“GAAP”). These measures adjust GAAP measures to exclude the effects of acquisition-related intangible amortization expense on earnings, equity and assets as well as providing a FTE yield on securities and loans. 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.
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 Company’s results in 2021 and 2020 have been impacted by the COVID-19 pandemic and the CECL accounting methodology, including the estimated impact of the COVID-19 pandemic on expected credit losses. The following information should be considered in connection with the Company'sCompany’s results for the fiscal year ended December 31, 2019:
| ● | net income |
| ● | noninterest income of $157.8 million, up 8% from 2020; represents 33% of total revenues; |
| ● | loan growth for the year ended December 31, |
| ● | strong |
| ● | book value per share of |
| (1) | Non-GAAP measure - Refer to non-GAAP reconciliation below. |
COVID-19 Pandemic and Company Response
The COVID-19 pandemic and countermeasures taken to contain its spread have caused economic and financial disruptions globally. The impact of the COVID-19 pandemic on the Company’s results of operations and the ultimate effect of the pandemic will depend on numerous factors that are highly uncertain, including how long restrictions for business and individuals will last, further information around the severity of the virus and any variants, additional actions taken by federal, state and local governments to contain and treat COVID-19 and what, if any, additional government relief will be provided. The expected impact of the pandemic on the Company’s business, financial condition, results of operations, and its customers has not fully manifested. The fiscal stimulus and relief programs appear to have delayed or mitigated any materially adverse financial impact to the Company. Once these stimulus programs have been exhausted, the Company’s credit metrics are expected to worsen and loan losses could ultimately materialize. Any potential loan losses will be contingent upon the resurgence of the virus, including any new strains, offset by the potency of the vaccine along with its extensive distribution, and the ability for customers and businesses to return to their pre-pandemic routines. However, economic uncertainty remains high and volatility is expected to continue in 2022.
In March 2020, the Company formed an Executive Task Force and engaged its established Incident Response Team under its Business Continuity Plan to execute a comprehensive pandemic response plan. The Company has taken significant steps to address the needs of its customers impacted by COVID-19. The Company provided payment relief for all its customers for 180 days or less, waiving associated late fees while not reporting these payment deferrals as late payments to the credit bureaus for all its consumer customers who were current prior to this event. The Company also offered longer payment deferral options on a limited, case by case basis to address certain customers’ hardships related to the pandemic where it was able to gather information on the ongoing viability of the borrower’s long-term ability to return to full payment. The Company continues to responsibly lend to qualified consumer and commercial customers, has designed special lending programs and continues to participate in government sponsored relief programs to respond to customers’ needs during the pandemic. The Company believes its historically strong underwriting practices, diverse and granular portfolios and geographic footprint will help to mitigate any adverse impact to the Company.
The Company has participated in the Small Business Administration’s (“SBA”) PPP, a loan guarantee program created under the CARES Act targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the SBA, whose guarantee is backed by the full faith and credit of the United States government. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Lenders receive pre-determined fees for processing and servicing PPP loans. In addition, PPP loans are risk-weighted at zero percent under the generally-applicable Standardized Approach used to calculate risk-weighted assets for regulatory capital purposes.
On December 27, 2020, the President signed into law the Consolidated Appropriation Act (“CAA”). The CAA, among other things, extended the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. The Company participated in the CAA’s second round of PPP lending. The Company processed approximately 3,100 loans totaling $287 million in relief during 2021 as compared to 3,000 loans totaling over $548 million in 2020. The Company is supporting the forgiveness process under the PPP with online resources, educational webinars and a partnership with a certified public accounting firm. During 2021, the Company has received payment from the SBA on 4,505 loans totaling $632.4 million as compared to 214 loans totaling $72.7 million in 2020.
The Company established a committee to ensure employee and customer safety and nimble response across geographic and functional areas. The teams that make up this committee are focused on employee well-being, alternate work plans, physical workspace, working with customers and vendors, and policies, training and communication. The Committee monitors the pandemic and the latest guidance at the local, state and national level. Health and safety protocols are in place to protect branch and onsite workers and are adjusted based on current information. Remote team members have transitioned to hybrid work schedules. The Company has also offered additional benefits for health, childcare/eldercare needs and well-being to employees. New mobile, online, business banking and mortgage banking platforms were launched in 2020, and a new commercial banking platform was launched in 2021.
Results of Operations
The Company reported net income of $121.0$154.9 million or $2.74 per diluted share for 2019,2021, up 7.5%48.4% from net income of $112.6$104.4 million or up 7.0% from $2.56 per diluted share for 2018.2020. Net interest income was $311.6$321.1 million for the year ended December 31, 2019,2021, up $5.9$5.4 million, or 1.9%1.7%, from 2018. FTE net interest margin of 3.58% for the year ended December 31, 2019, was comparable to the year ended December 31, 2018.2020. Average interest earninginterest-earning assets were up $144.8 million,$1.1 billion, or 1.7%11.1%, for the year ended December 31, 2019,2021, as compared to 2018.2020. The provision for loan losses totaled $25.4was a net benefit of $8.3 million for the year ended December 31, 2019,2021, as compared with $28.8a net expense of $51.1 million for the year ended December 31, 2018.2020. Significant non-recurring transactions occurring in the third quarter of 20192021 included a $4.0$4.3 million gain on the sale of Visa Class B common stock and a $3.1 million expense primarilyestimated litigation settlement cost related to branch optimization strategies.a pending lawsuit regarding certain of the Company’s deposit products and related disclosures. Significant non-recurring transactions occurring in the fourth quarter 20182020 included a one-time tax benefit of $5.5$4.8 million expense related to tax return accounting method changes and $6.6 million in losses on securities sold due to the restructuring of a portion of the investment securities portfolio.branch optimization.
The following table sets forth certain financial highlights:
Years Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Performance: | ||||||||||||
Diluted earnings per share | $ | 3.54 | $ | 2.37 | $ | 2.74 | ||||||
Return on average assets | 1.33 | % | 0.99 | % | 1.26 | % | ||||||
Return on average equity | 12.71 | % | 9.09 | % | 11.32 | % | ||||||
Return on average tangible common equity | 16.92 | % | 12.48 | % | 15.85 | % | ||||||
Net interest margin (FTE) | 3.03 | % | 3.31 | % | 3.58 | % | ||||||
Capital: | ||||||||||||
Equity to assets | 10.41 | % | 10.86 | % | 11.53 | % | ||||||
Tangible equity ratio | 8.20 | % | 8.41 | % | 8.84 | % | ||||||
Book value per share | $ | 28.97 | $ | 27.22 | $ | 25.58 | ||||||
Tangible book value per share | $ | 22.26 | $ | 20.52 | $ | 19.03 | ||||||
Leverage ratio | 9.41 | % | 9.56 | % | 10.33 | % | ||||||
Common equity tier 1 capital ratio | 12.25 | % | 11.84 | % | 11.29 | % | ||||||
Tier 1 capital ratio | 13.43 | % | 13.09 | % | 12.56 | % | ||||||
Total risk-based capital ratio | 15.73 | % | 15.62 | % | 13.56 | % | ||||||
The following tables provide non-GAAP reconciliations:
Years Ended December 31, | ||||||||||||
(In thousands) | 2021 | 2020 | 2019 | |||||||||
Net income | $ | 154,885 | $ | 104,388 | $ | 121,021 | ||||||
Amortization of intangible assets (net of tax) | 2,106 | 2,546 | 2,684 | |||||||||
Net income, excluding intangible amortization | $ | 156,991 | $ | 106,934 | $ | 123,705 | ||||||
Average stockholders’ equity | $ | 1,218,449 | $ | 1,148,475 | $ | 1,068,948 | ||||||
Less: average goodwill and other intangibles | 290,838 | 291,787 | 288,539 | |||||||||
Average tangible common equity | $ | 927,611 | $ | 856,688 | $ | 780,409 | ||||||
Return on average tangible common equity | 16.92 | % | 12.48 | % | 15.85 | % | ||||||
Years Ended December 31, | ||||||||||||
(In thousands) | 2021 | 2020 | 2019 | |||||||||
Stockholder’s equity | $ | 1,250,453 | $ | 1,187,618 | $ | 1,120,397 | ||||||
Intangibles | 289,468 | 292,276 | 286,789 | |||||||||
Assets | $ | 12,012,111 | $ | 10,932,906 | $ | 9,715,925 | ||||||
Tangible equity | 8.20 | % | 8.41 | % | 8.84 | % | ||||||
Years Ended December 31, | ||||||||||||
(In thousands, except share and per share data) | 2021 | 2020 | 2019 | |||||||||
Stockholder’s equity | $ | 1,250,453 | $ | 1,187,618 | $ | 1,120,397 | ||||||
Intangibles | 289,468 | 292,276 | 286,789 | |||||||||
Tangible equity | $ | 960,985 | $ | 895,342 | $ | 833,608 | ||||||
Diluted common shares outstanding | 43,168 | 43,629 | 43,797 | |||||||||
Tangible book value | $ | 22.26 | $ | 20.52 | $ | 19.03 | ||||||
2022 Outlook
Years ended December 31, | ||||||||||||
(In thousands) | 2019 | 2018 | 2017 | |||||||||
Net income | $ | 121,021 | $ | 112,566 | $ | 82,151 | ||||||
Amortization of intangible assets (net of tax) | 2,684 | 3,032 | 2,446 | |||||||||
Net income, excluding intangible amortization | $ | 123,705 | $ | 115,598 | $ | 84,597 | ||||||
Average stockholders' equity | $ | 1,068,948 | $ | 980,005 | $ | 943,676 | ||||||
Less: average goodwill and other intangibles | 288,539 | 288,273 | 283,573 | |||||||||
Average tangible common equity | $ | 780,409 | $ | 691,732 | $ | 660,103 | ||||||
The Company’s 20192021 earnings reflected the Company’s continued ability to operate and manage through the existingvolatile economic conditions and challenges in the financial services industry,economy, while investing in the Company’s future. During 2019,Throughout 2021, the Company, along with other financial services companies, experienced pressurecontinued material disruptions from the COVID-19 pandemic and the subsequent rapid downward shift in the second halfyield curve, which remained relatively flat for the majority of the year from lower short-termyear. However, the Company continues to see signs of recovery in the United States as the economy is poised for continued above average growth in 2022, with consensus estimates for GDP growth approximately 4%. The combination of strong consumer demand, strong consumer and corporate balance sheets, a continuing reopening of the economy and historically low interest rates and a flatter yield curve.provide fuel for growth. Significant items that may have an impact on 20202022 results include:
| ● |
| ο | loan growth may |
| ο | excess liquidity has proven to be longer lived than initially anticipated. While this creates a headwind to current day net interest margin, it should allow for slower repricing of deposit rates and NIM expansion if short term interest rates |
| ● | Inflationary pressures that have manifested themselves in |
| ο | this spike to inflation has had a significant impact on current and expected Federal Reserve Monetary Policy; |
| ο | the tightening of monetary policy through measures to raise interest |
| ● |
The Company’s 2022 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 a FTE basis, are discussed below. The following table includes the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis. Interest income for tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 21% for 20192021, 2020 and 2018 and 35% for 2017.2019.
Average Balances and Net Interest Income
| 2019 | 2018 | 2017 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term interest bearing accounts | $ | 36,174 | $ | 773 | 2.14 | % | $ | 3,377 | $ | 183 | 5.42 | % | $ | 9,636 | $ | 179 | 1.86 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities available for sale (1)(3) | 961,909 | 23,334 | 2.43 | % | 1,210,013 | 27,081 | 2.24 | % | 1,350,995 | 28,969 | 2.14 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities held to maturity (1) | 725,352 | 20,410 | 2.81 | % | 567,117 | 14,657 | 2.58 | % | 507,583 | 13,490 | 2.66 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-term interest-bearing accounts | $ | 932,086 | $ | 1,229 | 0.13 | % | $ | 372,144 | $ | 610 | 0.16 | % | $ | 36,174 | $ | 773 | 2.14 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities taxable (1) | 1,910,641 | 31,962 | 1.67 | % | 1,531,237 | 33,653 | 2.20 | % | 1,475,352 | 37,382 | 2.53 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities tax-exempt (1)(3) | 220,759 | 4,929 | 2.23 | % | 173,031 | 5,144 | 2.97 | % | 211,909 | 6,362 | 3.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal Reserve Bank and FHLB stock | 43,385 | 2,879 | 6.64 | % | 48,214 | 3,083 | 6.39 | % | 46,673 | 2,634 | 5.64 | % | 25,255 | 616 | 2.44 | % | 33,570 | 2,096 | 6.24 | % | 43,385 | 2,879 | 6.64 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Loans | 6,972,438 | 321,805 | 4.62 | % | 6,765,748 | 301,258 | 4.45 | % | 6,359,447 | 267,934 | 4.21 | % | 7,543,149 | 302,331 | 4.01 | % | 7,461,795 | 308,080 | 4.13 | % | 6,972,438 | 321,805 | 4.62 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 8,739,258 | $ | 369,201 | 4.22 | % | $ | 8,594,469 | $ | 346,262 | 4.03 | % | $ | 8,274,334 | $ | 313,206 | 3.79 | % | $ | 10,631,890 | $ | 341,067 | 3.21 | % | $ | 9,571,777 | $ | 349,583 | 3.65 | % | $ | 8,739,258 | $ | 369,201 | 4.22 | % | ||||||||||||||||||||||||||||||||||
| Other assets | 831,954 | 764,670 | 752,258 | 983,809 | 942,274 | 831,954 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 9,571,212 | $ | 9,359,139 | $ | 9,026,592 | $ | 11,615,699 | $ | 10,514,051 | $ | 9,571,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Stockholders' Equity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and stockholders’ equity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market deposit accounts | $ | 1,949,147 | $ | 22,257 | 1.14 | % | $ | 1,706,823 | $ | 8,314 | 0.49 | % | $ | 1,697,386 | $ | 3,864 | 0.23 | % | $ | 2,587,748 | $ | 5,117 | 0.20 | % | $ | 2,320,947 | $ | 10,313 | 0.44 | % | $ | 1,949,147 | $ | 22,257 | 1.14 | % | ||||||||||||||||||||||||||||||||||
| NOW deposit accounts | 1,095,402 | 1,518 | 0.14 | % | 1,191,008 | 1,894 | 0.16 | % | 1,153,361 | 1,051 | 0.09 | % | 1,452,560 | 738 | 0.05 | % | 1,194,398 | 716 | 0.06 | % | 1,095,402 | 1,518 | 0.14 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Savings deposits | 1,265,112 | 733 | 0.06 | % | 1,266,970 | 725 | 0.06 | % | 1,214,480 | 683 | 0.06 | % | 1,656,893 | 829 | 0.05 | % | 1,393,436 | 745 | 0.05 | % | 1,265,112 | 733 | 0.06 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 910,546 | 15,478 | 1.70 | % | 866,388 | 11,211 | 1.29 | % | 817,370 | 8,877 | 1.09 | % | 577,150 | 4,030 | 0.70 | % | 733,073 | 10,296 | 1.40 | % | 910,546 | 15,478 | 1.70 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | $ | 5,220,207 | $ | 39,986 | 0.77 | % | $ | 5,031,189 | $ | 22,144 | 0.44 | % | $ | 4,882,597 | $ | 14,475 | 0.30 | % | $ | 6,274,351 | $ | 10,714 | 0.17 | % | $ | 5,641,854 | $ | 22,070 | 0.39 | % | $ | 5,220,207 | $ | 39,986 | 0.77 | % | ||||||||||||||||||||||||||||||||||
| Federal funds purchased | 17 | - | - | 14,727 | 302 | 2.05 | % | 47,137 | 1,838 | 3.90 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase agreements | 100,519 | 132 | 0.13 | % | 154,383 | 266 | 0.17 | % | 123,337 | 410 | 0.33 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 573,927 | 9,693 | 1.69 | % | 727,635 | 10,552 | 1.45 | % | 690,036 | 5,996 | 0.87 | % | 1,302 | 26 | 2.00 | % | 183,699 | 2,840 | 1.55 | % | 403,453 | 7,445 | 1.85 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 80,528 | 1,875 | 2.33 | % | 80,195 | 1,790 | 2.23 | % | 93,389 | 2,299 | 2.46 | % | 15,479 | 389 | 2.51 | % | 62,990 | 1,553 | 2.47 | % | 80,528 | 1,875 | 2.33 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Subordinated debt | 98,259 | 5,437 | 5.53 | % | 51,394 | 2,842 | 5.53 | % | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Junior subordinated debt | 101,196 | 4,425 | 4.37 | % | 101,196 | 4,140 | 4.09 | % | 101,196 | 3,144 | 3.11 | % | 101,196 | 2,090 | 2.07 | % | 101,196 | 2,731 | 2.70 | % | 101,196 | 4,425 | 4.37 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 5,975,858 | $ | 55,979 | 0.94 | % | $ | 5,940,215 | $ | 38,626 | 0.65 | % | $ | 5,767,218 | $ | 25,914 | 0.45 | % | $ | 6,591,123 | $ | 18,788 | 0.29 | % | $ | 6,210,243 | $ | 32,604 | 0.53 | % | $ | 5,975,858 | $ | 55,979 | 0.94 | % | ||||||||||||||||||||||||||||||||||
| Demand deposits | 2,351,515 | 2,321,264 | 2,217,785 | 3,565,693 | 2,895,341 | 2,351,515 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 174,891 | 117,655 | 97,913 | 240,434 | 259,992 | 174,891 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' equity | 1,068,948 | 980,005 | 943,676 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 9,571,212 | $ | 9,359,139 | $ | 9,026,592 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders’ equity | 1,218,449 | 1,148,475 | 1,068,948 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 11,615,699 | $ | 10,514,051 | $ | 9,571,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (FTE) | $ | 313,222 | $ | 307,636 | $ | 287,292 | $ | 322,279 | $ | 316,979 | $ | 313,222 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate spread | 3.28 | % | 3.38 | % | 3.34 | % | 2.92 | % | 3.12 | % | 3.28 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin (FTE) | 3.58 | % | 3.58 | % | 3.47 | % | 3.03 | % | 3.31 | % | 3.58 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable equivalent adjustment | $ | 1,667 | $ | 2,007 | $ | 3,799 | $ | 1,191 | $ | 1,301 | $ | 1,667 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 311,555 | $ | 305,629 | $ | 283,493 | $ | 321,088 | $ | 315,678 | $ | 311,555 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Securities are shown at average amortized cost. |
| (2) | For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding. |
| (3) | Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%. |
Net Interest Income
Net interest income for the year ended 20192021 was $311.6$321.1 million, up $5.9$5.4 million, or 1.9%1.7%, from 2018.2020. FTE net interest margin of 3.58%3.03% for the year ended December 31, 2019,2021, was comparable todown from 3.31% for the year ended December 31, 2018. Average2020. Interest income decreased $8.4 million, or 2.4%, as the yield on average interest-earning assets were up $144.8decreased 44 basis points (“bps”) from 2020 to 3.21%, while average interest-earning assets increased $1.1 billion primarily due to excess liquidity which was invested in both investment securities and loans resulting in an increase to the average balance of investment securities. Interest expense was down $13.8 million, or 1.7%42.4%, for the year ended December 31, 2019,2021 as compared to the year ended December 31, 2018, driven by a $206.7 million increase in loans that was partially offset by an $89.9 million decrease in securities. Interest income increased $23.3 million, or 6.8%, due to the increase in earning assets combined with a 17 basis point ("bp") improvement in loan yields. Interest expense was up $17.4 million, or 44.9%, for the year ended December 31, 2019 as compared to the year ended December 31, 20182020 as the cost of interest-bearing liabilities increased 29 bps, drivendecreased 24 bps. The Federal Reserve lowered its target fed funds rate by interest-bearing deposit costs increasing 33 bps.150 basis points in the first quarter of 2020.
Analysis of Changes in FTE Net Interest Income
Increase (Decrease) 2019 over 2018 | Increase (Decrease) 2018 over 2017 | Increase (Decrease) 2021 over 2020 | Increase (Decrease) 2020 over 2019 | |||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||||||||||
Short-term interest-bearing accounts | $ | 764 | $ | (174 | ) | $ | 590 | $ | (173 | ) | $ | 177 | $ | 4 | $ | 759 | $ | (140 | ) | $ | 619 | $ | 1,150 | $ | (1,313 | ) | $ | (163 | ) | |||||||||||||||||||
Securities available for sale | (5,883 | ) | 2,136 | (3,747 | ) | (3,115 | ) | 1,227 | (1,888 | ) | ||||||||||||||||||||||||||||||||||||||
Securities held to maturity | 4,365 | 1,388 | 5,753 | 1,547 | (380 | ) | 1,167 | |||||||||||||||||||||||||||||||||||||||||
Securities taxable | 7,324 | (9,015 | ) | (1,691 | ) | 1,374 | (5,103 | ) | (3,729 | ) | ||||||||||||||||||||||||||||||||||||||
Securities tax-exempt | 1,233 | (1,448 | ) | (215 | ) | (1,156 | ) | (62 | ) | (1,218 | ) | |||||||||||||||||||||||||||||||||||||
Federal Reserve Bank and FHLB stock | (317 | ) | 113 | (204 | ) | 89 | 360 | 449 | (428 | ) | (1,052 | ) | (1,480 | ) | (621 | ) | (162 | ) | (783 | ) | ||||||||||||||||||||||||||||
Loans | 9,356 | 11,191 | 20,547 | 17,632 | 15,692 | 33,324 | 3,332 | (9,081 | ) | (5,749 | ) | 21,634 | (35,359 | ) | (13,725 | ) | ||||||||||||||||||||||||||||||||
Total FTE interest income | $ | 8,285 | $ | 14,654 | $ | 22,939 | $ | 15,980 | $ | 17,076 | $ | 33,056 | $ | 12,220 | $ | (20,736 | ) | $ | (8,516 | ) | $ | 22,381 | $ | (41,999 | ) | $ | (19,618 | ) | ||||||||||||||||||||
Money market deposit accounts | 1,332 | 12,611 | 13,943 | 22 | 4,428 | 4,450 | 1,073 | (6,269 | ) | (5,196 | ) | 3,628 | (15,572 | ) | (11,944 | ) | ||||||||||||||||||||||||||||||||
NOW deposit accounts | (145 | ) | (231 | ) | (376 | ) | 35 | 808 | 843 | 141 | (119 | ) | 22 | 126 | (928 | ) | (802 | ) | ||||||||||||||||||||||||||||||
Savings deposits | (1 | ) | 9 | 8 | 30 | 12 | 42 | 134 | (50 | ) | 84 | 71 | (59 | ) | 12 | |||||||||||||||||||||||||||||||||
Time deposits | 596 | 3,671 | 4,267 | 557 | 1,777 | 2,334 | (1,863 | ) | (4,403 | ) | (6,266 | ) | (2,740 | ) | (2,442 | ) | (5,182 | ) | ||||||||||||||||||||||||||||||
Federal funds purchased | (151 | ) | (151 | ) | (302 | ) | (909 | ) | (627 | ) | (1,536 | ) | ||||||||||||||||||||||||||||||||||||
Repurchase agreements | (80 | ) | (54 | ) | (134 | ) | 86 | (230 | ) | (144 | ) | |||||||||||||||||||||||||||||||||||||
Short-term borrowings | (2,435 | ) | 1,576 | (859 | ) | 343 | 4,213 | 4,556 | (3,456 | ) | 642 | (2,814 | ) | (3,548 | ) | (1,057 | ) | (4,605 | ) | |||||||||||||||||||||||||||||
Long-term debt | 7 | 78 | 85 | (307 | ) | (202 | ) | (509 | ) | (1,193 | ) | 29 | (1,164 | ) | (427 | ) | 105 | (322 | ) | |||||||||||||||||||||||||||||
Subordinated debt | 2,593 | 2 | 2,595 | 2,842 | - | 2,842 | ||||||||||||||||||||||||||||||||||||||||||
Junior subordinated debt | - | 285 | 285 | - | 996 | 996 | - | (641 | ) | (641 | ) | - | (1,694 | ) | (1,694 | ) | ||||||||||||||||||||||||||||||||
Total FTE interest expense | $ | (646 | ) | $ | 17,999 | $ | 17,353 | $ | 680 | $ | 12,032 | $ | 12,712 | $ | (2,802 | ) | $ | (11,014 | ) | $ | (13,816 | ) | $ | (871 | ) | $ | (22,504 | ) | $ | (23,375 | ) | |||||||||||||||||
Change in FTE net interest income | $ | 8,931 | $ | (3,345 | ) | $ | 5,586 | $ | 15,300 | $ | 5,044 | $ | 20,344 | $ | 15,022 | $ | (9,722 | ) | $ | 5,300 | $ | 23,252 | $ | (19,495 | ) | $ | 3,757 | |||||||||||||||||||||
Loans and Corresponding Interest and Fees on Loans
The average balance of loans increased by approximately $206.7$81.4 million, or 3.1%1.1%, from 20182020 to 2019.2021 with the increases in commercial, commercial real estate, residential mortgage and specialty lending portfolios being partly offset by the reduction in the average balance of PPP loans. The yield on average loans increaseddecreased from 4.45%4.13% in 20182020 to 4.62%4.01% in 2019,2021, as loan rates increasedloans re-priced downward due to the interest rate environment in 2019.2021. FTE interest income from loans increased 6.8%decreased 1.9%, from $301.3$308.1 million in 20182020 to $321.8$302.3 million in 2019.2021. This increasedecrease was due to the increasesdecreases in yieldsyields. Net interest income in 2021 included $21.3 million of interest and the average loan balances.fees on PPP loans.
Total loans were $7.5 billion at December 31, 2021 and 2020. Total PPP loans as of December 31, 2021 were $101.2 million (net of unamortized fees). The following PPP loan activity occurred during 2021: $286.6 million in PPP loan originations, $632.4 million of loans forgiven and $21.3 million of interest and fees recognized into interest income. Excluding PPP loans, period end loans increased $248.4$329.2 million or 3.6%,4.7% from December 31, 20182020. Commercial and industrial loans increased $37.9 million to $1.5 billion; commercial real estate loans increased $124.7 million to $2.3 billion; and total consumer loans increased $166.6 million to $3.6 billion. Total loans represent approximately 62.4% of assets as of December 31, 2019. Increases in Commercial Real Estate, Residential Real Estate and Specialty Lending loans were the primary drivers2021, as compared to 68.6% as of the increase in total loans from 2018 with the New England market accounting for the majority of the growth.December 31, 2020.
The following table reflects the loan portfolio by major categories(1), net of deferred fees and origination costs, for the years indicated:
Composition of Loan Portfolio
December 31, | ||||||||||||||||||||
(In thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Commercial | $ | 1,302,209 | $ | 1,291,568 | $ | 1,258,212 | $ | 1,242,701 | $ | 1,159,089 | ||||||||||
Commercial Real Estate | 2,142,057 | 1,930,742 | 1,769,620 | 1,543,301 | 1,430,618 | |||||||||||||||
Residential Real Estate | 1,445,156 | 1,380,836 | 1,320,370 | 1,262,041 | 1,196,780 | |||||||||||||||
Indirect Auto | 1,193,635 | 1,216,144 | 1,227,870 | 1,169,129 | 1,173,729 | |||||||||||||||
Specialty Lending | 542,063 | 524,928 | 438,866 | 361,152 | 287,096 | |||||||||||||||
Home Equity | 444,082 | 474,566 | 498,179 | 507,784 | 528,442 | |||||||||||||||
Other Consumer | 66,896 | 68,925 | 70,522 | 110,870 | 106,888 | |||||||||||||||
Total loans | $ | 7,136,098 | $ | 6,887,709 | $ | 6,583,639 | $ | 6,196,978 | $ | 5,882,642 | ||||||||||
December 31, | ||||||||||||||||||||
(In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||
Commercial | $ | 1,489,414 | $ | 1,451,560 | $ | 1,463,017 | $ | 1,423,302 | $ | 1,337,382 | ||||||||||
Commercial real estate | 2,321,193 | 2,196,477 | 1,981,249 | 1,799,008 | 1,690,450 | |||||||||||||||
Paycheck protection program | 101,222 | 430,810 | - | - | - | |||||||||||||||
Residential real estate | 1,571,232 | 1,466,662 | 1,445,156 | 1,380,836 | 1,320,370 | |||||||||||||||
Indirect auto | 859,454 | 931,286 | 1,193,635 | 1,216,144 | 1,227,870 | |||||||||||||||
Specialty lending | 778,291 | 579,644 | 542,063 | 524,928 | 438,866 | |||||||||||||||
Home equity | 330,357 | 387,974 | 444,082 | 474,566 | 498,179 | |||||||||||||||
Other consumer | 47,296 | 54,472 | 66,896 | 68,925 | 70,522 | |||||||||||||||
Total loans | $ | 7,498,459 | $ | 7,498,885 | $ | 7,136,098 | $ | 6,887,709 | $ | 6,583,639 | ||||||||||
| (1) | Loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL. |
Residential Real Estatereal estate loans consist primarily of loans secured by a first or second deeds of trustmortgage on primary residences. We originate adjustable-rate and fixed-rate, one-to-four-family residential loans for the construction or purchase of a residential property or refinancing of a mortgage. These loans are collateralized by properties located in the Company’s market area. Subprime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market that the Company has ever actively pursued. The market does not apply a uniform definition of what constitutes “subprime” lending. Our reference to subprime lending relies upon the “Statement on Subprime Mortgage Lending” issued by the OTS and the other federal bank regulatory agencies (the “Agencies”), on June 29, 2007, which further referenced the “Expanded Guidance for Subprime Lending Programs,” or the Expanded Guidance, issued by the Agencies by press release dated January 31, 2001.
Loans in the Commercialcommercial and Commercial Real Estate,commercial real estate, consist primarily of loans made to small and medium-sized entities. The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion, equipment purchases, livestock purchases and seasonal crop expenses. These loans typically are collateralized by business assets such as equipment, accounts receivable and perishable agricultural products, which are exposed to industry price volatility. The Company offers commercial real estate (“CRE”) loans to finance real estate purchases, refinancings, expansions and improvements to commercial and agricultural properties. CRE loans are loans secured by liens on real estate, which may include both owner-occupied and nonowner-occupied properties, such as apartments, commercial structures, health care facilities and other facilities.
The Company offers a variety of Consumer loan products including indirect auto, specialty lending, home equity and other consumer loans. Indirect Autoauto loans include indirect installment loans to individuals, which are primarily secured by automobiles. Other Consumer loans also consist of direct installment loans to individuals most secured by automobiles and other personal property. Although automobile loans have generally been originated through dealers, all applications submitted through dealers are subject to the Company’s normal underwriting and loan approval procedures. The Specialty Lendingspecialty lending portfolio includes unsecured consumer loans across a national footprint originated through our relationship with national technology-driven consumer lending companies that began over 10 years ago as the result ofbeginning with our investment in Springstone Financial LLC ("Springstone"(“Springstone”). which was subsequently acquired by LendingClub in 2014. In 2017, the Company partnered with Sungage Financial, Inc. to offer financing to consumers for solar ownership with the program tailored for delivery through solar installers. Advances of credit through this specialty lending business line are to prime borrowers and are subject to the Company'sCompany’s underwriting standards. Other Consumer loans consist of direct installment loans to individuals most secured by automobiles and other personal property. In addition to installment loans, the Company also offers personal lines of credit, overdraft protection, home equity lines of credit and second mortgage loans (loans secured by a lien position on one-to-four family residential real estate) to finance home improvements, debt consolidation, education and other uses. For home equity loans, consumers are able to borrow up to 85% of the equity in their homes, and are generally tied to Prime with a ten year draw followed by a fifteen year amortization. As of December 31, 2019,2021, there were $149.4$200.5 million in construction and development loans included in total loans.
Risks associated with the Commercial Real Estatecommercial real estate portfolio include the ability of borrowers to pay interest and principal during the loan’s term, as well as the ability of the borrowers to refinance at the end of the loan term.
Loans by Maturity and Interest Rate Sensitivity
The following table Maturitiespresents the maturity distribution and Sensitivitiesan analysis of Certain Loans to Changes in Interest Rates, summarizes the maturities of the commercialloans that have predetermined and commercial real estate loan portfolios and the sensitivity of those loans tofloating interest rate fluctuations at December 31, 2019.rates. Scheduled repayments are reported in the maturity category in which the contractual payment is due.
Commercial includes PPP and other consumer includes specialty lending, home equity and other consumer loans.Remaining maturity at December 31, 2019 | ||||||||||||||||
(In thousands) | Within One Year | After One Year But Within Five Years | After Five Years | Total | ||||||||||||
Floating/adjustable rate: | ||||||||||||||||
Commercial and Commercial Real Estate | $ | 465,550 | $ | 432,655 | $ | 1,633,498 | $ | 2,531,703 | ||||||||
Fixed rate: | ||||||||||||||||
Commercial and Commercial Real Estate | 71,679 | 459,477 | 381,407 | 912,563 | ||||||||||||
Total | $ | 537,229 | $ | 892,132 | $ | 2,014,905 | $ | 3,444,266 | ||||||||
Remaining Maturity as of December 31, 2021 | ||||||||||||||||||||||||
(In thousands) | Commercial | CRE | Indirect Auto | Other Consumer | Residential | Total | ||||||||||||||||||
Within one year | $ | 330,398 | $ | 123,967 | $ | 14,151 | $ | 22,358 | $ | 392 | $ | 491,266 | ||||||||||||
From one to five years | 481,861 | 476,676 | 535,485 | 290,235 | 22,333 | 1,806,590 | ||||||||||||||||||
From five to fifteen years | 428,740 | 1,668,129 | 309,818 | 618,759 | 432,972 | 3,458,418 | ||||||||||||||||||
After fifteen years | 349,637 | 52,421 | - | 224,592 | 1,115,535 | 1,742,185 | ||||||||||||||||||
Total | $ | 1,590,636 | $ | 2,321,193 | $ | 859,454 | $ | 1,155,944 | $ | 1,571,232 | $ | 7,498,459 | ||||||||||||
Interest rate terms on amounts due after one year: | ||||||||||||||||||||||||
Fixed | $ | 694,550 | $ | 477,254 | $ | 845,266 | $ | 907,759 | $ | 1,493,034 | $ | 4,417,863 | ||||||||||||
Variable | $ | 565,688 | $ | 1,719,972 | $ | 37 | $ | 225,827 | $ | 77,806 | $ | 2,589,330 | ||||||||||||
Securities and Corresponding Interest and Dividend Income
The average balance of taxable securities available for sale ("AFS"(“AFS”) decreased $248.1and held to maturity (“HTM”) increased $379.4 million, or 20.5%24.8%, from 20182020 to 2019.2021. The yield on average taxable securities was 1.67% for 2021 compared to 2.20% in 2020. The average balance of tax-exempt securities AFS and HTM increased from $173.0 million in 2020 to $220.8 million in 2021. The FTE yield on average AFStax-exempt securities was 2.43% for 2019 compareddecreased from 2.97% in 2020 to 2.24%2.23% in 2018.2021.
The average balance of Federal Reserve Bank and FHLBFederal Home Loan Bank (“FHLB”) stock decreased to $43.4$25.3 million in 20192021 from $48.2$33.6 million in 2018.2020. The FTE yield fromon investments in Federal Reserve Bank and FHLB stock increaseddecreased from 6.39%6.24% in 20182020 to 6.64%2.44% in 2019.2021.
Securities Portfolio
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||||||||||||||||||
AFS securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. treasury | $ | 73,016 | $ | 73,069 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||||||||||
Federal agency | $ | 34,998 | $ | 34,758 | $ | 84,982 | $ | 84,299 | $ | 109,862 | $ | 108,899 | 248,454 | 239,931 | 245,590 | 243,597 | 34,998 | 34,758 | ||||||||||||||||||||||||||||||
State & municipal | 2,533 | 2,513 | 30,136 | 29,915 | 42,171 | 41,956 | 95,531 | 94,088 | 42,550 | 43,180 | 2,533 | 2,513 | ||||||||||||||||||||||||||||||||||||
Mortgage-backed | 498,372 | 503,626 | 522,415 | 512,295 | 556,755 | 554,927 | 603,375 | 606,675 | 576,497 | 595,839 | 498,372 | 503,626 | ||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | 432,651 | 434,443 | 380,093 | 371,987 | 546,754 | 535,994 | 623,930 | 621,595 | 426,574 | 437,804 | 432,651 | 434,443 | ||||||||||||||||||||||||||||||||||||
Equity securities | - | - | - | - | 10,623 | 14,149 | ||||||||||||||||||||||||||||||||||||||||||
Corporate | 50,500 | 52,003 | 27,500 | 28,278 | - | - | ||||||||||||||||||||||||||||||||||||||||||
Total AFS securities | $ | 968,554 | $ | 975,340 | $ | 1,017,626 | $ | 998,496 | $ | 1,266,165 | $ | 1,255,925 | $ | 1,694,806 | $ | 1,687,361 | $ | 1,318,711 | $ | 1,348,698 | $ | 968,554 | $ | 975,340 | ||||||||||||||||||||||||
HTM securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal agency | $ | - | $ | - | $ | 19,995 | $ | 20,047 | $ | - | $ | - | $ | 100,000 | $ | 95,635 | $ | 100,000 | $ | 98,342 | $ | - | $ | - | ||||||||||||||||||||||||
Mortgage-backed | 163,115 | 166,728 | 179,848 | 178,190 | 96,775 | 96,107 | 170,574 | 172,001 | 119,447 | 125,009 | 163,115 | 166,728 | ||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | 299,900 | 304,853 | 340,623 | 338,590 | 186,327 | 183,974 | 138,815 | 140,280 | 182,250 | 190,677 | 299,900 | 304,853 | ||||||||||||||||||||||||||||||||||||
State & municipal | 167,059 | 169,681 | 243,133 | 241,848 | 200,971 | 201,790 | 323,821 | 327,344 | 214,863 | 222,799 | 167,059 | 169,681 | ||||||||||||||||||||||||||||||||||||
Total HTM securities | $ | 630,074 | $ | 641,262 | $ | 783,599 | $ | 778,675 | $ | 484,073 | $ | 481,871 | $ | 733,210 | $ | 735,260 | $ | 616,560 | $ | 636,827 | $ | 630,074 | $ | 641,262 | ||||||||||||||||||||||||
The Company'sCompany’s mortgage-backed securities, U.S. agency notes and CMOs are all guaranteed by Fannie Mae, Freddie Mac, the FHLB, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio.
The following tables set forth information with regard to contractual maturities of debt securities shown in amortized cost ($) and weighted average yield (%) at December 31, 2019:
(Dollars in thousands) | Amortized Cost | Estimated Fair Value | Weighted Average Yield | |||||||||
AFS debt securities: | ||||||||||||
Within one year | $ | 268 | $ | 272 | 3.21 | % | ||||||
From one to five years | 28,692 | 28,668 | 2.33 | % | ||||||||
From five to ten years | 170,771 | 171,943 | 2.61 | % | ||||||||
After ten years | 768,823 | 774,457 | 2.65 | % | ||||||||
Total AFS debt securities | $ | 968,554 | $ | 975,340 | ||||||||
HTM debt securities: | ||||||||||||
Within one year | $ | 27,010 | $ | 27,010 | 2.32 | % | ||||||
From one to five years | 53,895 | 54,358 | 2.98 | % | ||||||||
From five to ten years | 171,942 | 175,630 | 2.28 | % | ||||||||
After ten years | 377,227 | 384,264 | 2.97 | % | ||||||||
Total HTM debt securities | $ | 630,074 | $ | 641,262 | ||||||||
Less than 1 Year | 1 Year to 5 Years | 5 Years to 10 Years | Over 10 Years | Total | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | $ | % | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||
AFS securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. treasury | $ | - | - | $ | 49,111 | 1.20 | % | $ | 23,905 | 1.40 | % | $ | - | - | $ | 73,016 | 1.27 | % | ||||||||||||||||||||||
Federal agency | - | - | - | - | 248,454 | 1.04 | % | - | - | 248,454 | 1.04 | % | ||||||||||||||||||||||||||||
State & municipal | 3 | 8.50 | % | 16,865 | 1.04 | % | 78,663 | 1.40 | % | - | - | 95,531 | 1.34 | % | ||||||||||||||||||||||||||
Mortgage-backed | 30 | 1.64 | % | 18,104 | 2.39 | % | 245,845 | 1.82 | % | 339,396 | 1.44 | % | 603,375 | 1.63 | % | |||||||||||||||||||||||||
Collateralized mortgage obligations | 886 | 1.63 | % | 27,301 | 1.05 | % | 91,524 | 1.38 | % | 504,219 | 1.57 | % | 623,930 | 1.52 | % | |||||||||||||||||||||||||
Corporate | - | - | - | - | 50,500 | 3.75 | % | - | - | 50,500 | 3.75 | % | ||||||||||||||||||||||||||||
Total AFS securities | $ | 919 | 1.65 | % | $ | 111,381 | 1.33 | % | $ | 738,891 | 1.58 | % | $ | 843,615 | 1.52 | % | $ | 1,694,806 | 1.53 | % | ||||||||||||||||||||
HTM securities: | ||||||||||||||||||||||||||||||||||||||||
Federal agency | $ | - | - | $ | - | - | $ | 100,000 | 1.11 | % | $ | - | - | $ | 100,000 | 1.11 | % | |||||||||||||||||||||||
Mortgage-backed | - | - | 12 | 7.73 | % | 9,100 | 3.49 | % | 161,462 | 1.85 | % | 170,574 | 1.94 | % | ||||||||||||||||||||||||||
Collateralized mortgage obligations | - | - | 525 | 2.06 | % | 43,627 | 2.69 | % | 94,663 | 2.12 | % | 138,815 | 2.30 | % | ||||||||||||||||||||||||||
State & municipal | 102,967 | 0.58 | % | 57,827 | 2.30 | % | 69,451 | 2.01 | % | 93,576 | 1.75 | % | 323,821 | 1.53 | % | |||||||||||||||||||||||||
Total HTM securities | $ | 102,967 | 0.58 | % | $ | 58,364 | 2.30 | % | $ | 222,178 | 1.80 | % | $ | 349,701 | 1.90 | % | $ | 733,210 | 1.71 | % | ||||||||||||||||||||
Funding Sources and Corresponding Interest Expense
The Company utilizes traditional deposit products such as time, savings, NOW, money market and demand deposits as its primary source for funding. Other sources, such as short-term FHLB advances, federal funds purchased, securities sold under agreements to repurchase, brokered time deposits and long-term FHLB borrowings are utilized as necessary to support the Company’s growth in assets and to achieve interest rate sensitivity objectives. The average balance of interest-bearing liabilities increased $35.6$380.9 million from 20182020 primarily due to the increase in interest-bearing deposits and totaled $6.0$6.6 billion in 2019.2021. The rate paid on interest-bearing liabilities increaseddecreased from 0.65%0.53% in 20182020 to 0.94%0.29% in 2019.2021. This increasedecrease in rates and increase in average balances caused an increasea decrease in interest expense of $17.4$13.8 million, or 44.9%42.4%, from $38.6$32.6 million in 20182020 to $56.0$18.8 million in 2019.2021.
Deposits
Average interest bearinginterest-bearing deposits increased $189.0$632.5 million, or 3.8%11.2%, from 20182020 to 2019, due primarily to organic deposit growth.2021. Average money market deposits increased $242.3$266.8 million, or 14.2%11.5% during 20192021 compared to 2018. This growth in money market deposits was driven principally by increases in accounts from commercial customers.2020. Average NOW accounts decreased $95.6increased $258.2 million, or 8.0%21.6% during 20192021 as compared to 2018.2020. The average balance of savings accounts decreased $1.9increased $263.5 million, or 0.1%18.9% during 20192021 compared to 2018.2020. The average balance of time deposits increased $44.2decreased $155.9 million, or 5.1%21.3%, from 20182020 to 2019.2021. The average balance of demand deposits increased $30.3$670.4 million, or 1.3%23.2%, during 20192021 compared to 2018. This2020. The high rate of deposit growth in demand deposits was driven principally by increases in accounts from retail, municipalprimarily due to funding of PPP loans and commercial customers.various government support programs.
The rate paid on average interest-bearing deposits was 0.77%down 22 basis points to 0.17% for 2019 and 0.44% for 2018.2021. The rate paid for money market deposit accounts increaseddecreased from 0.49%0.44% during 20182020 to 1.14%0.20% during 2019.2021. The rate paid for NOW deposit accounts decreased from 0.16%0.06% in 20182020 to 0.14%0.05% in 2019.2021. The rate paid for savings deposits was 0.06%a consistent at 0.05% for 20192020 and 2018.2021. The rate paid for time deposits increaseddecreased from 1.29%1.40% during 20182020 to 1.70%0.70% during 2019.2021.
Years Ended December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
(In thousands) | Average Balance | Yield/Rate | Average Balance | Yield/Rate | Average Balance | Yield/Rate | ||||||||||||||||||
Demand deposits | $ | 3,565,693 | $ | 2,895,341 | $ | 2,351,515 | ||||||||||||||||||
Money market deposit accounts | 2,587,748 | 0.20 | % | 2,320,947 | 0.44 | % | 1,949,147 | 1.14 | % | |||||||||||||||
NOW deposit accounts | 1,452,560 | 0.05 | % | 1,194,398 | 0.06 | % | 1,095,402 | 0.14 | % | |||||||||||||||
Savings deposits | 1,656,893 | 0.05 | % | 1,393,436 | 0.05 | % | 1,265,112 | 0.06 | % | |||||||||||||||
Time deposits | 577,150 | 0.70 | % | 733,073 | 1.40 | % | 910,546 | 1.70 | % | |||||||||||||||
Total interest-bearing deposits | $ | 6,274,351 | 0.17 | % | $ | 5,641,854 | 0.39 | % | $ | 5,220,207 | 0.77 | % | ||||||||||||
The following table presents the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting:
| As of December 31, | ||||||||||||
| (In thousands) | 2021 | 2020 | 2019 | |||||||||
Estimated amount of uninsured deposits | $ | 4,175,208 | $ | 3,639,731 | $ | 3,868,134 | ||||||
The following table presents the maturity distribution of time deposits of $250,000 or more:
(In thousands) | December 31, 2019 | |||
Within three months | $ | 16,060 | ||
After three but within twelve months | 77,039 | |||
After one but within three years | 39,124 | |||
Over three years | 8,182 | |||
Total | $ | 140,405 | ||
(In thousands) | December 31, 2021 | |||
Portion of time deposits in excess of insurance limit | $ | 33,092 | ||
Time deposits otherwise uninsured with a maturity of: | ||||
Within three months | $ | 4,387 | ||
After three but within six months | 7,907 | |||
After six but within twelve months | 10,107 | |||
Over twelve months | 10,691 | |||
Borrowings
Average repurchase agreements decreased to $100.5 million in 2021 from $154.4 million in 2020. The average rate paid on repurchase agreements decreased from 0.17% in 2020 to 0.13% in 2021. Average short-term borrowings decreased to $573.9$1.3 million in 20192021 from $727.6$183.7 million in 2018.2020. The average rate paid on short-term borrowings increased from 1.45%1.55% in 20182020 to 1.69%2.00% in 2019.2021. Average long-term debt increaseddecreased from $80.2$63.0 million in 20182020 to $80.5$15.5 million in 2019.
2021. The average balance of junior subordinated debt remained at $101.2 million in 2019.2021. The average rate paid for junior subordinated debt in 20192021 was 4.37%2.07%, updown from 4.09%2.70% in 2018.2020.
On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.2 million. As of December 31, 2021 and 2020 the subordinated debt net of unamortized issuance costs was $98.5 million and $98.1 million, respectively.
Noninterest Income
Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the years indicated:
Years ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
(In thousands) | 2019 | 2018 | 2017 | 2021 | 2020 | 2019 | ||||||||||||||||||
Insurance and other financial services revenue | $ | 25,006 | $ | 24,345 | $ | 23,532 | ||||||||||||||||||
Service charges on deposit accounts | 17,151 | 17,224 | 16,750 | |||||||||||||||||||||
Service charges on deposit account | $ | 13,348 | $ | 13,201 | $ | 17,151 | ||||||||||||||||||
ATM and debit card fees | 23,893 | 22,699 | 21,372 | 31,301 | 25,960 | 23,893 | ||||||||||||||||||
Retirement plan administration fees | 30,388 | 26,992 | 20,213 | 42,188 | 35,851 | 30,388 | ||||||||||||||||||
Trust | 19,164 | 19,524 | 19,586 | |||||||||||||||||||||
Wealth management | 33,718 | 29,247 | 28,400 | |||||||||||||||||||||
Insurance services | 14,083 | 14,757 | 15,770 | |||||||||||||||||||||
Bank owned life insurance income | 5,355 | 5,091 | 5,175 | 6,217 | 5,743 | 5,355 | ||||||||||||||||||
Net securities gains (losses) | 4,213 | (6,341 | ) | 1,867 | 566 | (388 | ) | 4,213 | ||||||||||||||||
Gain on the sale of equity investment | - | - | 818 | |||||||||||||||||||||
Other | 18,853 | 15,228 | 11,991 | 16,373 | 21,905 | 18,853 | ||||||||||||||||||
Total noninterest income | $ | 144,023 | $ | 124,762 | $ | 121,304 | $ | 157,794 | $ | 146,276 | $ | 144,023 | ||||||||||||
Noninterest income for the year ended December 31, 20192021 was $144.0$157.8 million, up $19.3$11.5 million, or 15.4%7.9%, from the year ended December 31, 2018.2020. Excluding net securities gains (losses), noninterest income for the year ended December 31, 20192021 was $139.8$157.2 million, up $8.7$10.6 million or 6.6%7.2%, from the year ended December 31, 2018.2020. The increase from the prior year was driven by higher other noninterest income primarily due to higher swap fee income, higher retirement plan administration fees due to a full year's contributions from Retirement Plan Services, LLC ("RPS"), which was acquiredan increase in the second quarter of 2018, and higher ATM and debit card fees due to an increase inincreased volume and higher per transaction rates, retirement plan administration fees driven by the numberApril 1, 2020 acquisition of accountsAlliance Benefit Group of Illinois Inc. (“ABG”) and usage.wealth management fees driven by market performance and organic growth, partly offset by other noninterest income driven by lower swap fees and lower mortgage banking income.
Noninterest Expense
Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the years indicated:
Years ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
(In thousands) | 2019 | 2018 | 2017 | 2021 | 2020 | 2019 | ||||||||||||||||||
Salaries and employee benefits | $ | 156,867 | $ | 151,685 | $ | 135,222 | $ | 172,580 | $ | 161,934 | $ | 156,867 | ||||||||||||
Occupancy | 22,706 | 22,318 | 21,808 | 21,922 | 21,634 | 22,706 | ||||||||||||||||||
Data processing and communications | 18,318 | 17,652 | 17,068 | 16,989 | 16,527 | 18,318 | ||||||||||||||||||
Professional fees and outside services | 14,785 | 14,376 | 13,499 | 16,306 | 15,082 | 14,785 | ||||||||||||||||||
Equipment | 18,583 | 17,037 | 15,225 | 21,854 | 19,889 | 18,583 | ||||||||||||||||||
Office supplies and postage | 6,579 | 6,204 | 6,284 | 6,006 | 6,138 | 6,579 | ||||||||||||||||||
FDIC expenses | 1,946 | 4,651 | 4,767 | 3,041 | 2,688 | 1,946 | ||||||||||||||||||
Advertising | 2,773 | 2,782 | 2,744 | 2,521 | 2,288 | 2,773 | ||||||||||||||||||
Amortization of intangible assets | 3,579 | 4,042 | 3,960 | 2,808 | 3,395 | 3,579 | ||||||||||||||||||
Loan collection and other real estate owned, net | 4,158 | 4,217 | 4,763 | 2,915 | 3,295 | 4,158 | ||||||||||||||||||
Other | 24,440 | 19,597 | 20,308 | 20,339 | 24,863 | 24,440 | ||||||||||||||||||
Total noninterest expense | $ | 274,734 | $ | 264,561 | $ | 245,648 | $ | 287,281 | $ | 277,733 | $ | 274,734 | ||||||||||||
Noninterest expense for the year ended December 31, 20192021 was $274.7$287.3 million, up $10.2$9.5 million or 3.8%3.4%, from the year ended December 31, 2018.2020. The increase from the prior year was driven by higher salaries and employee benefits equipment expensedue to annual merit pay increases, the ABG acquisition, higher medical expenses and other noninterest expenses as compared tohigher levels of incentive compensation. In addition, the year ended December 31, 2018, partially offset by lower FDIC insurance expense. The increase in salariesprofessional fees and employee benefitsoutside services was primarily due toa result of projects paused during the RPS acquisition inCOVID-19 pandemic and the second quarter of 2018 and $0.7 million in one-time charges related to efficiency initiatives and general wage and benefit increases. The increase in equipment expense resulted from the Company's technology investments over the past several years. The $4.8 million increase in other noninterest expenses was due to $3.1higher technology costs associated with several digital upgrades. The increase in expenses was partly offset by lower other noninterest expense due to a $4.0 million decrease in reorganizationthe provision for unfunded commitments and lower nonrecurring expenses incurred during the third quarter of 2019, primarily relateddue to a $4.3 million estimated litigation settlement expense in 2021 compared to a $4.8 million branch optimization strategies to improve future operating efficiencies and an increasecharge in the amortization expense for pension plan actuarial costs. FDIC insurance expense decreased from 2018 due to receipt2020.
39
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the fourth quarter of the subsequent year for U.S. federal and state provisions.
The amount of income taxes the Company pays is subject at times to ongoing audits by U.S. federal and state tax authorities, which may result in proposed assessments. Future results may include favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are proposed or resolved or when statutes of limitation on potential assessments expire. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly or annual basis.
Income tax expense for the year ended December 31, 20192021 was $34.4$45.0 million, up $10.0$16.3 million, or 40.8%56.7%, from the year ended December 31, 2018.2020. The effective tax rate of 22.1%22.5% in 20192021 was up from 17.8%21.6% in 2018.2020. The increase in income tax expense from the prior year was due to a $5.5 million tax benefit recorded in the fourth quarter of 2018 primarily related to one-time income tax return accounting method changes during the fourth quarter of 2018, combined with a higher level of taxable income. The adjusted income tax expense onas a result of the Company's income was different from the income tax expense at the Federal statutory rate of 21%decreased provision for 2019 and 2018 due primarily to tax-exempt income and, to a lesser extent, the effect of state income taxes and Federal low income housing credits.loan losses.
Risk Management – Credit Risk
Credit risk is managed through a network of loan officers, credit committees, loan policies and oversight from senior credit officers and Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in each loan portfolio. An ongoing independent review of individual credits in the commercial loan portfolio is performed by the independent loan review function. These components of the Company’s underwriting and monitoring functions are critical to the timely identification, classification and resolution of problem credits.
Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified and nonperforming loans specifically evaluated for impairment is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.
Nonperforming Assets
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % | 2018 | % | 2017 | % | 2016 | % | 2015 | % | 2021 | % | 2020 | % | ||||||||||||||||||||||||||||||||||||||||||
Nonaccrual loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial, Agricultural and Real Estate loans | $ | 12,379 | 49 | % | $ | 11,804 | 46 | % | $ | 12,485 | 48 | % | $ | 19,351 | 54 | % | $ | 14,655 | 43 | % | ||||||||||||||||||||||||||||||||||||
Residential Real Estate | 5,233 | 21 | % | 6,526 | 26 | % | 5,919 | 23 | % | 8,027 | 23 | % | 8,625 | 26 | % | |||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 15,942 | 53 | % | $ | 23,557 | 53 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 8,862 | 29 | % | 13,082 | 29 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 4,046 | 16 | % | 4,068 | 16 | % | 4,324 | 17 | % | 4,653 | 13 | % | 6,009 | 18 | % | 1,511 | 5 | % | 3,020 | 7 | % | |||||||||||||||||||||||||||||||||||
Troubled debt restructured loans | 3,516 | 14 | % | 3,089 | 12 | % | 2,980 | 12 | % | 3,681 | 10 | % | 4,455 | 13 | % | 3,970 | 13 | % | 4,988 | 11 | % | |||||||||||||||||||||||||||||||||||
Total nonaccrual loans | $ | 25,174 | 100 | % | $ | 25,487 | 100 | % | $ | 25,708 | 100 | % | $ | 35,712 | 100 | % | $ | 33,744 | 100 | % | $ | 30,285 | 100 | % | $ | 44,647 | 100 | % | ||||||||||||||||||||||||||||
Loans 90 days or more past due and still accruing: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial, Agricultural and Real Estate loans | $ | - | - | $ | 588 | 12 | % | $ | - | - | $ | - | - | $ | - | - | ||||||||||||||||||||||||||||||||||||||||
Residential Real Estate | 927 | 25 | % | 1,182 | 23 | % | 1,402 | 26 | % | 1,733 | 36 | % | 1,022 | 28 | % | |||||||||||||||||||||||||||||||||||||||||
Loans over 90 days past due and still accruing: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | - | - | $ | 493 | 16 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 808 | 33 | % | 518 | 16 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 2,790 | 75 | % | 3,315 | 65 | % | 4,008 | 74 | % | 3,077 | 64 | % | 2,640 | 72 | % | 1,650 | 67 | % | 2,138 | 68 | % | |||||||||||||||||||||||||||||||||||
Total loans 90 days or more past due and still accruing | $ | 3,717 | 100 | % | $ | 5,085 | 100 | % | $ | 5,410 | 100 | % | $ | 4,810 | 100 | % | $ | 3,662 | 100 | % | ||||||||||||||||||||||||||||||||||||
Total loans over 90 days past due and still accruing | $ | 2,458 | 100 | % | $ | 3,149 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Total nonperforming loans | $ | 28,891 | $ | 30,572 | $ | 31,118 | $ | 40,522 | $ | 37,406 | $ | 32,743 | $ | 47,796 | ||||||||||||||||||||||||||||||||||||||||||
Other real estate owned | 1,458 | 2,441 | 4,529 | 5,581 | 4,666 | 167 | 1,458 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total nonperforming assets | $ | 30,349 | $ | 33,013 | $ | 35,647 | $ | 46,103 | $ | 42,072 | $ | 32,910 | $ | 49,254 | ||||||||||||||||||||||||||||||||||||||||||
Total nonaccrual loans to total loans | 0.40 | % | 0.60 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total nonperforming loans to total loans | 0.40 | % | 0.44 | % | 0.47 | % | 0.65 | % | 0.64 | % | 0.44 | % | 0.64 | % | ||||||||||||||||||||||||||||||||||||||||||
Total nonperforming assets to total assets | 0.31 | % | 0.35 | % | 0.39 | % | 0.52 | % | 0.51 | % | 0.27 | % | 0.45 | % | ||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses to nonperforming loans | 252.55 | % | 237.16 | % | 223.34 | % | 160.90 | % | 168.47 | % | 280.98 | % | 230.14 | % | ||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses to nonaccrual loans | 303.78 | % | 246.38 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
The following tables are related to non-performing loans in prior periods. Non-performing loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
As of December 31, | ||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % | 2018 | % | 2017 | % | ||||||||||||||||||
Nonaccrual loans: | ||||||||||||||||||||||||
Commercial | $ | 12,379 | 49 | % | $ | 11,804 | 46 | % | $ | 12,485 | 48 | % | ||||||||||||
Residential real estate | 5,233 | 21 | % | 6,526 | 26 | % | 5,919 | 23 | % | |||||||||||||||
Consumer | 4,046 | 16 | % | 4,068 | 16 | % | 4,324 | 17 | % | |||||||||||||||
Troubled debt restructured loans | 3,516 | 14 | % | 3,089 | 12 | % | 2,980 | 12 | % | |||||||||||||||
Total nonaccrual loans | $ | 25,174 | 100 | % | $ | 25,487 | 100 | % | $ | 25,708 | 100 | % | ||||||||||||
Loans over 90 days past due and still accruing: | ||||||||||||||||||||||||
Commercial | $ | - | - | $ | 588 | 12 | % | $ | - | - | ||||||||||||||
Residential real estate | 927 | 25 | % | 1,182 | 23 | % | 1,402 | 26 | % | |||||||||||||||
Consumer | 2,790 | 75 | % | 3,315 | 65 | % | 4,008 | 74 | % | |||||||||||||||
Total loans over 90 days past due and still accruing | $ | 3,717 | 100 | % | $ | 5,085 | 100 | % | $ | 5,410 | 100 | % | ||||||||||||
Total nonperforming loans | $ | 28,891 | $ | 30,572 | $ | 31,118 | ||||||||||||||||||
Other real estate owned | 1,458 | 2,441 | 4,529 | |||||||||||||||||||||
Total nonperforming assets | $ | 30,349 | $ | 33,013 | $ | 35,647 | ||||||||||||||||||
Total nonaccrual loans to total loans | 0.35 | % | 0.37 | % | 0.39 | % | ||||||||||||||||||
Total nonperforming loans to total loans | 0.40 | % | 0.44 | % | 0.47 | % | ||||||||||||||||||
Total nonperforming assets to total assets | 0.31 | % | 0.35 | % | 0.39 | % | ||||||||||||||||||
Total allowance for loan losses to nonperforming loans | 252.55 | % | 237.16 | % | 223.34 | % | ||||||||||||||||||
Total allowance for loan losses to nonaccrual loans | 289.84 | % | 284.48 | % | 270.34 | % | ||||||||||||||||||
Total nonperforming assets were $30.3$32.9 million at December 31, 2019,2021, compared to $33.0$49.3 million at December 31, 2018.2020. Nonperforming loans at December 31, 20192021 were $28.9$32.7 million or 0.44% of total loans (0.44% excluding PPP loan originations), compared with $47.8 million or 0.64% of total loans (0.68% excluding PPP loan originations) at December 31, 2020. The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential mortgage nonaccrual loans during 2021. Total nonaccrual loans were $30.3 million or 0.40% of total loans at December 31, 2021, compared with $30.6to $44.6 million or 0.44%0.60% of total loans at December 31, 2018. Included in nonperforming2020. Past due loans are $1.6 million and $2.1 millionas a percentage of nonaccrualtotal loans in the acquired loan portfoliowas 0.29% at December 31, 2019 and 2018, respectively. Excluding nonaccrual acquired2021 (0.29% excluding PPP loan originations), down from 0.37% of total loans originated nonperforming loans to originated loans was 0.39% and 0.43%(0.39% excluding PPP loan originations) at December 31, 2019 and 2018, respectively.2020.
The Company recordedbegan offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act, along with a provisionjoint agency statement issued by banking regulatory agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for loan losses of $25.4 million for the year ended December 31, 2019 compared with $28.8 million for the year ended December 31, 2018. Net charge-offs to average loans for the year ended December 31, 2019 were 0.36%, compared with 0.38% for the year ended December 31, 2018. The allowance for loan losses was 252.55% of nonperforming loans at December 31, 2019 as compared to 237.16% at December 31, 2018. The allowance for loan losses as a percentage of loans was 1.02% (1.06% excluding acquired loans with no related allowance recorded) at December 31, 2019 compared to 1.05% (1.10% excluding acquired loans with no related allowance recorded) at December 31, 2018.
In addition to nonperforming loans discussed above, the Company has also identified approximately $74.9 million in potential problem loans at December 31, 2021 as compared to $136.6 million at December 31, 2019 as compared to $20.6 million at2020. The decrease in potential problem loans from December 31, 2018. At2020 is primarily due to the improved economic conditions which resulted in loans coming off deferral and returning to payment in 2021. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of December 31, 2019, there were no impaired loans that had a specific reserve allocation compared to $0.2 million of impaired loans at December 31, 2018, which had a specific reserve allocation of $25 thousand.
Allowance for Loan Losses
Beginning January 1, 2020, the Company calculated the allowance for credit losses using current expected credit losses methodology. As a result of our January 1, 2020, adoption of CECL and its related amendments, our methodology for estimating the allowance for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the deferred tax asset.
(Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Balance at January 1 | $ | 72,505 | $ | 69,500 | $ | 65,200 | $ | 63,018 | $ | 66,359 | ||||||||||
Loans charged-off | ||||||||||||||||||||
Commercial and Agricultural | 3,151 | 3,463 | 4,169 | 4,592 | 5,718 | |||||||||||||||
Residential Real Estate | 991 | 913 | 1,846 | 1,343 | 2,229 | |||||||||||||||
Consumer* | 28,398 | 29,752 | 27,072 | 23,364 | 18,140 | |||||||||||||||
Total loans charged-off | $ | 32,540 | $ | 34,128 | $ | 33,087 | $ | 29,299 | $ | 26,087 | ||||||||||
Recoveries | ||||||||||||||||||||
Commercial and Agricultural | $ | 534 | $ | 1,178 | $ | 1,077 | $ | 1,887 | $ | 1,014 | ||||||||||
Residential Real Estate | 141 | 306 | 180 | 293 | 320 | |||||||||||||||
Consumer* | 6,913 | 6,821 | 5,142 | 3,870 | 3,127 | |||||||||||||||
Total recoveries | $ | 7,588 | $ | 8,305 | $ | 6,399 | $ | 6,050 | $ | 4,461 | ||||||||||
Net loans charged-off | $ | 24,952 | $ | 25,823 | $ | 26,688 | $ | 23,249 | $ | 21,626 | ||||||||||
Provision for loan losses | $ | 25,412 | $ | 28,828 | $ | 30,988 | $ | 25,431 | $ | 18,285 | ||||||||||
Balance at December 31 | $ | 72,965 | $ | 72,505 | $ | 69,500 | $ | 65,200 | $ | 63,018 | ||||||||||
Allowance for loan losses to loans outstanding at end of year | 1.02 | % | 1.05 | % | 1.06 | % | 1.05 | % | 1.07 | % | ||||||||||
Net charge-offs to average loans outstanding | 0.36 | % | 0.38 | % | 0.42 | % | 0.39 | % | 0.38 | % | ||||||||||
Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required recognition of a credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and recoveries include consumeranalysis of the loan portfolio.
Management estimates the allowance balance using relevant available information, from internal and home equity.external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
Additional information about our Allowance for Loan Losses is included in Notes 1 and 6 to the consolidated financial statements. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
(Dollars in thousands) | 2021 | 2020 | ||||||
Balance at January 1* | $ | 110,000 | $ | 75,999 | ||||
Loans charged-off | ||||||||
Commercial | 4,638 | 4,005 | ||||||
Residential | 979 | 1,135 | ||||||
Consumer** | 14,489 | 21,938 | ||||||
Total loans charged-off | $ | 20,106 | $ | 27,078 | ||||
Recoveries | ||||||||
Commercial | $ | 723 | $ | 786 | ||||
Residential | 1,069 | 618 | ||||||
Consumer** | 8,571 | 8,541 | �� | |||||
Total recoveries | $ | 10,363 | $ | 9,945 | ||||
Net loans charged-off | $ | 9,743 | $ | 17,133 | ||||
Provision for loan losses | $ | (8,257 | ) | $ | 51,134 | |||
Balance at December 31 | $ | 92,000 | $ | 110,000 | ||||
Allowance for loan losses to loans outstanding at end of year | 1.23 | % | 1.47 | % | ||||
Commercial net charge-offs to average loans outstanding | 0.05 | % | 0.04 | % | ||||
Residential net charge-offs to average loans outstanding | - | 0.01 | % | |||||
Consumer net charge-offs to average loans outstanding | 0.08 | % | 0.18 | % | ||||
Net charge-offs to average loans outstanding | 0.13 | % | 0.23 | % | ||||
| * | 2020 includes an adjustment of $3.0 million as a result of our January 1, 2020, adoption of Accounting Standards Codification (“ASC”) 326. |
| ** | Consumer charge-off and recoveries include consumer and home equity. |
Prior to the adoption of ASU 2016-13 on nonaccrual, become restructured or require increasedJanuary 1, 2020, the Company’s calculated allowance coverage and provision for loan losses. To mitigate this risklosses used the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.
incurred loss methodology. The following table sets forth the allocation oftables related to the allowance for loan losses in prior periods under the incurred methodology. Charge-off and recoveries are summarized by category,business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
Balance at January 1* | $ | 72,505 | $ | 69,500 | $ | 65,200 | ||||||
Loans charged-off | ||||||||||||
Commercial and agricultural | 3,151 | 3,463 | 4,169 | |||||||||
Residential real estate | 991 | 913 | 1,846 | |||||||||
Consumer | 28,398 | 29,752 | 27,072 | |||||||||
Total loans charged-off | $ | 32,540 | $ | 34,128 | $ | 33,087 | ||||||
Recoveries | ||||||||||||
Commercial and agricultural | $ | 534 | $ | 1,178 | $ | 1,077 | ||||||
Residential real estate | 141 | 306 | 180 | |||||||||
Consumer | 6,913 | 6,821 | 5,142 | |||||||||
Total recoveries | $ | 7,588 | $ | 8,305 | $ | 6,399 | ||||||
Net loans charged-off | $ | 24,952 | $ | 25,823 | $ | 26,688 | ||||||
Provision for loan losses | $ | 25,412 | $ | 28,828 | $ | 30,988 | ||||||
Balance at December 31 | $ | 72,965 | $ | 72,505 | $ | 69,500 | ||||||
Allowance for loan losses to loans outstanding at end of year | 1.02 | % | 1.05 | % | 1.06 | % | ||||||
Commercial and agricultural net charge-offs to average loans outstanding | 0.04 | % | 0.03 | % | 0.05 | % | ||||||
Residential real estate net charge-offs to average loans outstanding | 0.01 | % | 0.01 | % | 0.03 | % | ||||||
Consumer net charge-offs to average loans outstanding | 0.31 | % | 0.34 | % | 0.34 | % | ||||||
Net charge-offs to average loans outstanding | 0.36 | % | 0.38 | % | 0.42 | % | ||||||
The provision for loan losses was a net benefit of $8.3 million for year ended December 31, 2021, compared to provision expense of $51.1 million in for the year ended December 31, 2020. The allowance for credit losses was 280.98% of nonperforming loans at December 31, 2021 as wellcompared to 230.14% at December 31, 2020. The allowance for credit losses was 303.78% of nonaccrual loans at December 31, 2021 as thecompared to 246.38% at December 31, 2020. The allowance for credit losses as a percentage of loans in each categorywas 1.23% (1.24% excluding PPP loan originations) at December 31, 2021 compared to total loans, as prepared by the Company. This allocation is based on management’s assessment of the risk characteristics of each of the component parts of the total1.47% (1.56% excluding PPP loan portfolio as of a given point in time and is subject to changes as and when the risk factors of each such component part change.originations) at December 31, 2020. The allocation is not indicative of either the specific amounts of the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. On January 1, 2020, the Company adopted CECL and while certain key assumptions to be used in NBT's CECL model and methodologies are being finalized, as well as certain review controls, the day-one impact of adopting CECL is not expected to be materialdecrease to the Company's total capital. Management expects thatDecember 31, 2021 allowance for credit loss and provision expense was primarily due to the improved economic conditions in the CECL model may create more volatilityforecast.
Total net charge-offs for 2021 were $9.7 million, down from $17.1 million in the level of our allowance2020. Net charge-offs to average loans was 13 bps for loan losses from quarter2021 compared to quarter as changes23 bps for 2020. Net charge-offs to average loans decreased during 2021 due to COVID-19 pandemic relief programs during 2020 and 2021 and improved economic conditions 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.
2021.December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||||||||||||||||||||||||||||||||
Commercial and Agricultural | $ | 34,525 | 48 | % | $ | 32,759 | 47 | % | $ | 27,606 | 46 | % | $ | 25,444 | 45 | % | $ | 25,545 | 44 | % | ||||||||||||||||||||||||||||||||||||
Residential Real Estate | 2,793 | 20 | % | 2,568 | 20 | % | 5,064 | 20 | % | 6,381 | 20 | % | 7,960 | 20 | % | |||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 28,941 | 51 | % | $ | 50,942 | 53 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 18,806 | 27 | % | 21,255 | 26 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 35,647 | 32 | % | 37,178 | 33 | % | 36,830 | 34 | % | 33,375 | 35 | % | 29,253 | 36 | % | 44,253 | 22 | % | 37,803 | 21 | % | |||||||||||||||||||||||||||||||||||
Unallocated | - | - | - | - | - | - | - | - | 260 | - | ||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 72,965 | 100 | % | $ | 72,505 | 100 | % | $ | 69,500 | 100 | % | $ | 65,200 | 100 | % | $ | 63,018 | 100 | % | $ | 92,000 | 100 | % | $ | 110,000 | 100 | % | ||||||||||||||||||||||||||||
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The Company’s accounting policy relatingfollowing tables are related to the allowance for loan losses requiresin prior periods. Category percentage of loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||||||||
Commercial and agricultural | $ | 34,525 | 48 | % | $ | 32,759 | 47 | % | $ | 27,606 | 46 | % | ||||||||||||
Residential real estate | 2,793 | 20 | % | 2,568 | 20 | % | 5,064 | 20 | % | |||||||||||||||
Consumer | 35,647 | 32 | % | 37,178 | 33 | % | 36,830 | 34 | % | |||||||||||||||
Total | $ | 72,965 | 100 | % | $ | 72,505 | 100 | % | $ | 69,500 | 100 | % | ||||||||||||
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a review of each significant loan type withincontractual obligation to extend credit, unless that obligation is unconditionally cancellable by the loan portfolio, considering asset quality trendsCompany. The allowance for each type, including, but not limited to, delinquencies, nonaccruals, historical charge-off experience and specific economic factors suchcredit losses on off-balance sheet credit exposures is adjusted as changesan expense in unemployment statistics and used car prices. Based on this review, management believes the reserve allocations are adequate to address any trends in asset quality indicators. As a resultother noninterest expense. The estimate includes consideration of the general improvementlikelihood that funding will occur and stabilizationan estimate of asset quality indicators in 2019, as well as the aforementioned reviewexpected credit losses on commitments expected to be funded over their estimated lives. As of the loan portfolio,December 31, 2021, the allowance for loan losses as a percentage of originated loans decreased from 1.10%on unfunded commitments totaled $5.1 million, compared to $6.4 million as of December 31, 20182020. The decrease in the allowance in 2021 compared to 1.06% as2020 is related to a decrease in expected losses due to the adoption of December 31, 2019. Acquired loans were recorded at fair value onCECL and the date of acquisition, with no carryoverdeterioration of the related allowance for loan losses. Generally, the fair value discount represents expected credit losses, net of market interest rate adjustments. The discount on loans receivable will be amortizedeconomic forecast due to interest income over the estimated remaining life of the acquired loans using the level yield method.
Liquidity Risk
Liquidity involvesrisk arises from the abilitypossibility that we may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Management'sManagement’s Asset Liability Committee ("ALCO"(“ALCO”) is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies.strategies, regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.
Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At December 31, 2019 and 2018,2021, the Company'sCompany’s Basic Surplus measurement was 15.8% and 11.2%28.5% of total assets or $1.5approximately $3.4 billion as compared to the December 31, 2020 Basic Surplus measurement of 25.7% of total assets, or $2.8 billion, and $1.1 billion, respectively, which werewas above the Company'sCompany’s minimum of 5% (calculated at $485.8$600.6 million and $477.8$546.6 million, of period end total assets atas of December 31, 20192021 and 2018,2020, respectively) set forth in its liquidity policies.
At December 31, 20192021 and 2018,2020, FHLB advances outstanding totaled $585.8$14.0 million and $795.8$64.1 million, respectively. At December 31, 2021 and 2020, the Bank had $81.0 million and $74.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.2$1.7 billion and $0.8$1.6 billion at December 31, 20192021 and 2018,2020, respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $627.6$999.1 million and $630.0$839.4 million at December 31, 20192021 and 2018,2020, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $1.4$2.0 billion at December 31, 20192021 and $1.3$1.8 billion at December 31, 2018.2020. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans.loans as collateral. At December 31, 20192021 and 2018,2020, the Bank had the capacity to borrow $837.3$580.8 million and $854.7$658.1 million, respectively, from this program. The Company'sCompany’s internal policies authorize borrowings up to 25% of assets. Under this policy, remaining available borrowings capacity totaled $1.8$2.9 billion at December 31, 20192021 and $1.5$2.6 billion at December 31, 2018.2020.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2020. Increasing2022. The large inflow of deposits experienced since the second quarter of 2020 could reverse itself and flow out. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits could result in a decrease in the Company’s deposit base or increase funding costs. Additionally, liquidity will come under additional pressure if loan growth exceeds deposit growth in 2020.deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.
At December 31, 2019,2021, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.
Net cash flows provided by operating activities totaled $153.5$157.6 million and $147.8$142.4 million in 20192021 and 2018,2020, respectively. The critical elements of net operating cash flows include net income, adjusted for non-cash income and expense items such as the provision for loan losses, deferred income tax expense, depreciation and amortization and cash flows generated through changes in other assets and liabilities.
Net cash flows used in investing activities totaled $64.3$546.1 million and $417.6$709.7 million in 20192021 and 2018,2020, respectively. Critical elements of investing activities are loan and investment securities transactions.
Net cash flows used in financing activities totaled $53.2 million in 2019 and net cash flows provided by financing activities totaled $291.1 million$1.0 billion in 2018.2021 and 2020. The critical elements of financing activities are proceeds from deposits, borrowings and stock issuance. In addition, financing activities are impacted by dividends and treasury stock transactions.
Payments Due by Period | ||||||||||||||||||||||||||||
(In thousands) | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
Long-term debt obligations | $ | 25,000 | $ | 25,021 | $ | 10,598 | $ | - | $ | - | $ | 3,592 | $ | 64,211 | ||||||||||||||
Junior subordinated debt | - | - | - | - | - | 101,196 | 101,196 | |||||||||||||||||||||
Operating lease obligations | 7,435 | 6,646 | 5,870 | 4,969 | 4,365 | 12,876 | 42,161 | |||||||||||||||||||||
Capital lease obligations | 149 | 77 | 8 | - | - | - | 234 | |||||||||||||||||||||
IT/Software obligations | 3,285 | 176 | 100 | 34 | - | - | 3,595 | |||||||||||||||||||||
Data processing commitments | 15,735 | 15,735 | 14,884 | 14,600 | 14,600 | 14,600 | 90,154 | |||||||||||||||||||||
Total contractual obligations | $ | 51,604 | $ | 47,655 | $ | 31,460 | $ | 19,603 | $ | 18,965 | $ | 132,264 | $ | 301,551 | ||||||||||||||
Commitments to Extend Credit
The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company’s credit approval and monitoring procedures. At December 31, 20192021 and 2018,2020, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $1.9$2.3 billion and $1.7$2.2 billion, respectively. In the opinion of management, there are no material commitments to extend credit, including unused lines of credit that represent unusual risks. All commitments to extend credit in the form of loans, including unused lines of credit, expire within one year.
The average balance of taxable securities available for sale (“AFS”) and held to maturity (“HTM”) increased $379.4 million, or 24.8%, from 2020 to 2021. The yield on average taxable securities was 1.67% for 2021 compared to 2.20% in 2020. The average balance of tax-exempt securities AFS and HTM increased from $173.0 million in 2020 to $220.8 million in 2021. The FTE yield on tax-exempt securities decreased from 2.97% in 2020 to 2.23% in 2021.
The average balance of Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) stock decreased to $25.3 million in 2021 from $33.6 million in 2020. The yield on investments in Federal Reserve Bank and FHLB stock decreased from 6.24% in 2020 to 2.44% in 2021.
Securities Portfolio
As of December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
AFS securities: | ||||||||||||||||||||||||
U.S. treasury | $ | 73,016 | $ | 73,069 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Federal agency | 248,454 | 239,931 | 245,590 | 243,597 | 34,998 | 34,758 | ||||||||||||||||||
State & municipal | 95,531 | 94,088 | 42,550 | 43,180 | 2,533 | 2,513 | ||||||||||||||||||
Mortgage-backed | 603,375 | 606,675 | 576,497 | 595,839 | 498,372 | 503,626 | ||||||||||||||||||
Collateralized mortgage obligations | 623,930 | 621,595 | 426,574 | 437,804 | 432,651 | 434,443 | ||||||||||||||||||
Corporate | 50,500 | 52,003 | 27,500 | 28,278 | - | - | ||||||||||||||||||
Total AFS securities | $ | 1,694,806 | $ | 1,687,361 | $ | 1,318,711 | $ | 1,348,698 | $ | 968,554 | $ | 975,340 | ||||||||||||
HTM securities: | ||||||||||||||||||||||||
Federal agency | $ | 100,000 | $ | 95,635 | $ | 100,000 | $ | 98,342 | $ | - | $ | - | ||||||||||||
Mortgage-backed | 170,574 | 172,001 | 119,447 | 125,009 | 163,115 | 166,728 | ||||||||||||||||||
Collateralized mortgage obligations | 138,815 | 140,280 | 182,250 | 190,677 | 299,900 | 304,853 | ||||||||||||||||||
State & municipal | 323,821 | 327,344 | 214,863 | 222,799 | 167,059 | 169,681 | ||||||||||||||||||
Total HTM securities | $ | 733,210 | $ | 735,260 | $ | 616,560 | $ | 636,827 | $ | 630,074 | $ | 641,262 | ||||||||||||
The Company’s mortgage-backed securities, U.S. agency notes and CMOs are all guaranteed by Fannie Mae, Freddie Mac, the FHLB, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio.
The following tables set forth information with regard to contractual maturities of debt securities shown in amortized cost ($) and weighted average yield (%) at December 31, 2021. Weighted-average yields are an arithmetic computation of income (not FTE adjusted) divided by amortized cost. Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Less than 1 Year | 1 Year to 5 Years | 5 Years to 10 Years | Over 10 Years | Total | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | $ | % | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||
AFS securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. treasury | $ | - | - | $ | 49,111 | 1.20 | % | $ | 23,905 | 1.40 | % | $ | - | - | $ | 73,016 | 1.27 | % | ||||||||||||||||||||||
Federal agency | - | - | - | - | 248,454 | 1.04 | % | - | - | 248,454 | 1.04 | % | ||||||||||||||||||||||||||||
State & municipal | 3 | 8.50 | % | 16,865 | 1.04 | % | 78,663 | 1.40 | % | - | - | 95,531 | 1.34 | % | ||||||||||||||||||||||||||
Mortgage-backed | 30 | 1.64 | % | 18,104 | 2.39 | % | 245,845 | 1.82 | % | 339,396 | 1.44 | % | 603,375 | 1.63 | % | |||||||||||||||||||||||||
Collateralized mortgage obligations | 886 | 1.63 | % | 27,301 | 1.05 | % | 91,524 | 1.38 | % | 504,219 | 1.57 | % | 623,930 | 1.52 | % | |||||||||||||||||||||||||
Corporate | - | - | - | - | 50,500 | 3.75 | % | - | - | 50,500 | 3.75 | % | ||||||||||||||||||||||||||||
Total AFS securities | $ | 919 | 1.65 | % | $ | 111,381 | 1.33 | % | $ | 738,891 | 1.58 | % | $ | 843,615 | 1.52 | % | $ | 1,694,806 | 1.53 | % | ||||||||||||||||||||
HTM securities: | ||||||||||||||||||||||||||||||||||||||||
Federal agency | $ | - | - | $ | - | - | $ | 100,000 | 1.11 | % | $ | - | - | $ | 100,000 | 1.11 | % | |||||||||||||||||||||||
Mortgage-backed | - | - | 12 | 7.73 | % | 9,100 | 3.49 | % | 161,462 | 1.85 | % | 170,574 | 1.94 | % | ||||||||||||||||||||||||||
Collateralized mortgage obligations | - | - | 525 | 2.06 | % | 43,627 | 2.69 | % | 94,663 | 2.12 | % | 138,815 | 2.30 | % | ||||||||||||||||||||||||||
State & municipal | 102,967 | 0.58 | % | 57,827 | 2.30 | % | 69,451 | 2.01 | % | 93,576 | 1.75 | % | 323,821 | 1.53 | % | |||||||||||||||||||||||||
Total HTM securities | $ | 102,967 | 0.58 | % | $ | 58,364 | 2.30 | % | $ | 222,178 | 1.80 | % | $ | 349,701 | 1.90 | % | $ | 733,210 | 1.71 | % | ||||||||||||||||||||
Funding Sources and Corresponding Interest Expense
The Company utilizes traditional deposit products such as time, savings, NOW, money market and demand deposits as its primary source for funding. Other sources, such as short-term FHLB advances, federal funds purchased, securities sold under agreements to repurchase, brokered time deposits and long-term FHLB borrowings are utilized as necessary to support the Company’s growth in assets and to achieve interest rate sensitivity objectives. The average balance of interest-bearing liabilities increased $380.9 million from 2020 primarily due to the increase in interest-bearing deposits and totaled $6.6 billion in 2021. The rate paid on interest-bearing liabilities decreased from 0.53% in 2020 to 0.29% in 2021. This decrease in rates caused a decrease in interest expense of $13.8 million, or 42.4%, from $32.6 million in 2020 to $18.8 million in 2021.
Deposits
Average interest-bearing deposits increased $632.5 million, or 11.2%, from 2020 to 2021. Average money market deposits increased $266.8 million, or 11.5% during 2021 compared to 2020. Average NOW accounts increased $258.2 million, or 21.6% during 2021 as compared to 2020. The average balance of savings accounts increased $263.5 million, or 18.9% during 2021 compared to 2020. The average balance of time deposits decreased $155.9 million, or 21.3%, from 2020 to 2021. The average balance of demand deposits increased $670.4 million, or 23.2%, during 2021 compared to 2020. The high rate of deposit growth was primarily due to funding of PPP loans and various government support programs.
The rate paid on average interest-bearing deposits was down 22 basis points to 0.17% for 2021. The rate paid for money market deposit accounts decreased from 0.44% during 2020 to 0.20% during 2021. The rate paid for NOW deposit accounts decreased from 0.06% in 2020 to 0.05% in 2021. The rate paid for savings deposits was a consistent at 0.05% for 2020 and 2021. The rate paid for time deposits decreased from 1.40% during 2020 to 0.70% during 2021.
Years Ended December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
(In thousands) | Average Balance | Yield/Rate | Average Balance | Yield/Rate | Average Balance | Yield/Rate | ||||||||||||||||||
Demand deposits | $ | 3,565,693 | $ | 2,895,341 | $ | 2,351,515 | ||||||||||||||||||
Money market deposit accounts | 2,587,748 | 0.20 | % | 2,320,947 | 0.44 | % | 1,949,147 | 1.14 | % | |||||||||||||||
NOW deposit accounts | 1,452,560 | 0.05 | % | 1,194,398 | 0.06 | % | 1,095,402 | 0.14 | % | |||||||||||||||
Savings deposits | 1,656,893 | 0.05 | % | 1,393,436 | 0.05 | % | 1,265,112 | 0.06 | % | |||||||||||||||
Time deposits | 577,150 | 0.70 | % | 733,073 | 1.40 | % | 910,546 | 1.70 | % | |||||||||||||||
Total interest-bearing deposits | $ | 6,274,351 | 0.17 | % | $ | 5,641,854 | 0.39 | % | $ | 5,220,207 | 0.77 | % | ||||||||||||
The following table presents the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting:
| As of December 31, | ||||||||||||
| (In thousands) | 2021 | 2020 | 2019 | |||||||||
Estimated amount of uninsured deposits | $ | 4,175,208 | $ | 3,639,731 | $ | 3,868,134 | ||||||
The following table presents the maturity distribution of time deposits of $250,000 or more:
(In thousands) | December 31, 2021 | |||
Portion of time deposits in excess of insurance limit | $ | 33,092 | ||
Time deposits otherwise uninsured with a maturity of: | ||||
Within three months | $ | 4,387 | ||
After three but within six months | 7,907 | |||
After six but within twelve months | 10,107 | |||
Over twelve months | 10,691 | |||
Borrowings
Average repurchase agreements decreased to $100.5 million in 2021 from $154.4 million in 2020. The average rate paid on repurchase agreements decreased from 0.17% in 2020 to 0.13% in 2021. Average short-term borrowings decreased to $1.3 million in 2021 from $183.7 million in 2020. The average rate paid on short-term borrowings increased from 1.55% in 2020 to 2.00% in 2021. Average long-term debt decreased from $63.0 million in 2020 to $15.5 million in 2021. The average balance of junior subordinated debt remained at $101.2 million in 2021. The average rate paid for junior subordinated debt in 2021 was 2.07%, down from 2.70% in 2020.
Total short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, which generally represent overnight borrowing transactions and other short-term borrowings, primarily FHLB advances, with original maturities of one year or less. The Company has unused lines of credit with the FHLB and access to brokered deposits available for short-term financing of approximately $3.4 billion and $3.1 billion at December 31, 2021 and 2020, respectively. Securities collateralizing repurchase agreements are held in safekeeping by nonaffiliated financial institutions and are under the Company’s control. Long-term debt, which is comprised primarily of FHLB advances, are collateralized by the FHLB stock owned by the Company, certain of its mortgage-backed securities and a blanket lien on its residential real estate mortgage loans.
On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.2 million. As of December 31, 2021 and 2020 the subordinated debt net of unamortized issuance costs was $98.5 million and $98.1 million, respectively.
Noninterest Income
Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the years indicated:
Years Ended December 31, | ||||||||||||
(In thousands) | 2021 | 2020 | 2019 | |||||||||
Service charges on deposit account | $ | 13,348 | $ | 13,201 | $ | 17,151 | ||||||
ATM and debit card fees | 31,301 | 25,960 | 23,893 | |||||||||
Retirement plan administration fees | 42,188 | 35,851 | 30,388 | |||||||||
Wealth management | 33,718 | 29,247 | 28,400 | |||||||||
Insurance services | 14,083 | 14,757 | 15,770 | |||||||||
Bank owned life insurance income | 6,217 | 5,743 | 5,355 | |||||||||
Net securities gains (losses) | 566 | (388 | ) | 4,213 | ||||||||
Other | 16,373 | 21,905 | 18,853 | |||||||||
Total noninterest income | $ | 157,794 | $ | 146,276 | $ | 144,023 | ||||||
Noninterest income for the year ended December 31, 2021 was $157.8 million, up $11.5 million, or 7.9%, from the year ended December 31, 2020. Excluding net securities gains (losses), noninterest income for the year ended December 31, 2021 was $157.2 million, up $10.6 million or 7.2%, from the year ended December 31, 2020. The increase from the prior year was driven by an increase in ATM and debit card fees due to increased volume and higher per transaction rates, retirement plan administration fees driven by the April 1, 2020 acquisition of Alliance Benefit Group of Illinois Inc. (“ABG”) and wealth management fees driven by market performance and organic growth, partly offset by other noninterest income driven by lower swap fees and lower mortgage banking income.
Noninterest Expense
Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the years indicated:
Years Ended December 31, | ||||||||||||
(In thousands) | 2021 | 2020 | 2019 | |||||||||
Salaries and employee benefits | $ | 172,580 | $ | 161,934 | $ | 156,867 | ||||||
Occupancy | 21,922 | 21,634 | 22,706 | |||||||||
Data processing and communications | 16,989 | 16,527 | 18,318 | |||||||||
Professional fees and outside services | 16,306 | 15,082 | 14,785 | |||||||||
Equipment | 21,854 | 19,889 | 18,583 | |||||||||
Office supplies and postage | 6,006 | 6,138 | 6,579 | |||||||||
FDIC expenses | 3,041 | 2,688 | 1,946 | |||||||||
Advertising | 2,521 | 2,288 | 2,773 | |||||||||
Amortization of intangible assets | 2,808 | 3,395 | 3,579 | |||||||||
Loan collection and other real estate owned, net | 2,915 | 3,295 | 4,158 | |||||||||
Other | 20,339 | 24,863 | 24,440 | |||||||||
Total noninterest expense | $ | 287,281 | $ | 277,733 | $ | 274,734 | ||||||
Noninterest expense for the year ended December 31, 2021 was $287.3 million, up $9.5 million or 3.4%, from the year ended December 31, 2020. The increase from the prior year was driven by higher salaries and employee benefits due to annual merit pay increases, the ABG acquisition, higher medical expenses and higher levels of incentive compensation. In addition, the increase in professional fees and outside services was a result of projects paused during the COVID-19 pandemic and the increase in equipment expenses was due to higher technology costs associated with several digital upgrades. The increase in expenses was partly offset by lower other noninterest expense due to a $4.0 million decrease in the provision for unfunded commitments and lower nonrecurring expenses due to a $4.3 million estimated litigation settlement expense in 2021 compared to a $4.8 million branch optimization charge in 2020.
Income Taxes
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the fourth quarter of the subsequent year for U.S. federal and state provisions.
The amount of income taxes the Company pays is subject at times to ongoing audits by U.S. federal and state tax authorities, which may result in proposed assessments. Future results may include favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are proposed or resolved or when statutes of limitation on potential assessments expire. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly or annual basis.
Income tax expense for the year ended December 31, 2021 was $45.0 million, up $16.3 million, or 56.7%, from the year ended December 31, 2020. The effective tax rate of 22.5% in 2021 was up from 21.6% in 2020. The increase in income tax expense from the prior year was due to a higher level of taxable income as a result of the decreased provision for loan losses.
Risk Management – Credit Risk
Credit risk is managed through a network of loan officers, credit committees, loan policies and oversight from senior credit officers and Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in each loan portfolio. An ongoing independent review of individual credits in the commercial loan portfolio is performed by the independent loan review function. These components of the Company’s underwriting and monitoring functions are critical to the timely identification, classification and resolution of problem credits.
Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified and nonperforming loans specifically evaluated for impairment is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.
Nonperforming Assets
As of December 31, | ||||||||||||||||
(Dollars in thousands) | 2021 | % | 2020 | % | ||||||||||||
Nonaccrual loans: | ||||||||||||||||
Commercial | $ | 15,942 | 53 | % | $ | 23,557 | 53 | % | ||||||||
Residential | 8,862 | 29 | % | 13,082 | 29 | % | ||||||||||
Consumer | 1,511 | 5 | % | 3,020 | 7 | % | ||||||||||
Troubled debt restructured loans | 3,970 | 13 | % | 4,988 | 11 | % | ||||||||||
Total nonaccrual loans | $ | 30,285 | 100 | % | $ | 44,647 | 100 | % | ||||||||
Loans over 90 days past due and still accruing: | ||||||||||||||||
Commercial | $ | - | - | $ | 493 | 16 | % | |||||||||
Residential | 808 | 33 | % | 518 | 16 | % | ||||||||||
Consumer | 1,650 | 67 | % | 2,138 | 68 | % | ||||||||||
Total loans over 90 days past due and still accruing | $ | 2,458 | 100 | % | $ | 3,149 | 100 | % | ||||||||
Total nonperforming loans | $ | 32,743 | $ | 47,796 | ||||||||||||
Other real estate owned | 167 | 1,458 | ||||||||||||||
Total nonperforming assets | $ | 32,910 | $ | 49,254 | ||||||||||||
Total nonaccrual loans to total loans | 0.40 | % | 0.60 | % | ||||||||||||
Total nonperforming loans to total loans | 0.44 | % | 0.64 | % | ||||||||||||
Total nonperforming assets to total assets | 0.27 | % | 0.45 | % | ||||||||||||
Total allowance for loan losses to nonperforming loans | 280.98 | % | 230.14 | % | ||||||||||||
Total allowance for loan losses to nonaccrual loans | 303.78 | % | 246.38 | % | ||||||||||||
The following tables are related to non-performing loans in prior periods. Non-performing loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
As of December 31, | ||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % | 2018 | % | 2017 | % | ||||||||||||||||||
Nonaccrual loans: | ||||||||||||||||||||||||
Commercial | $ | 12,379 | 49 | % | $ | 11,804 | 46 | % | $ | 12,485 | 48 | % | ||||||||||||
Residential real estate | 5,233 | 21 | % | 6,526 | 26 | % | 5,919 | 23 | % | |||||||||||||||
Consumer | 4,046 | 16 | % | 4,068 | 16 | % | 4,324 | 17 | % | |||||||||||||||
Troubled debt restructured loans | 3,516 | 14 | % | 3,089 | 12 | % | 2,980 | 12 | % | |||||||||||||||
Total nonaccrual loans | $ | 25,174 | 100 | % | $ | 25,487 | 100 | % | $ | 25,708 | 100 | % | ||||||||||||
Loans over 90 days past due and still accruing: | ||||||||||||||||||||||||
Commercial | $ | - | - | $ | 588 | 12 | % | $ | - | - | ||||||||||||||
Residential real estate | 927 | 25 | % | 1,182 | 23 | % | 1,402 | 26 | % | |||||||||||||||
Consumer | 2,790 | 75 | % | 3,315 | 65 | % | 4,008 | 74 | % | |||||||||||||||
Total loans over 90 days past due and still accruing | $ | 3,717 | 100 | % | $ | 5,085 | 100 | % | $ | 5,410 | 100 | % | ||||||||||||
Total nonperforming loans | $ | 28,891 | $ | 30,572 | $ | 31,118 | ||||||||||||||||||
Other real estate owned | 1,458 | 2,441 | 4,529 | |||||||||||||||||||||
Total nonperforming assets | $ | 30,349 | $ | 33,013 | $ | 35,647 | ||||||||||||||||||
Total nonaccrual loans to total loans | 0.35 | % | 0.37 | % | 0.39 | % | ||||||||||||||||||
Total nonperforming loans to total loans | 0.40 | % | 0.44 | % | 0.47 | % | ||||||||||||||||||
Total nonperforming assets to total assets | 0.31 | % | 0.35 | % | 0.39 | % | ||||||||||||||||||
Total allowance for loan losses to nonperforming loans | 252.55 | % | 237.16 | % | 223.34 | % | ||||||||||||||||||
Total allowance for loan losses to nonaccrual loans | 289.84 | % | 284.48 | % | 270.34 | % | ||||||||||||||||||
Total nonperforming assets were $32.9 million at December 31, 2021, compared to $49.3 million at December 31, 2020. Nonperforming loans at December 31, 2021 were $32.7 million or 0.44% of total loans (0.44% excluding PPP loan originations), compared with $47.8 million or 0.64% of total loans (0.68% excluding PPP loan originations) at December 31, 2020. The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential mortgage nonaccrual loans during 2021. Total nonaccrual loans were $30.3 million or 0.40% of total loans at December 31, 2021, compared to $44.6 million or 0.60% of total loans at December 31, 2020. Past due loans as a percentage of total loans was 0.29% at December 31, 2021 (0.29% excluding PPP loan originations), down from 0.37% of total loans (0.39% excluding PPP loan originations) at December 31, 2020.
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act, along with a joint agency statement issued by banking regulatory agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a troubled debt restructuring (“TDR”). The Company evaluated the short-term modification programs provided to its borrowers and has concluded the modifications were generally made to borrowers who were in good standing prior to the COVID-19 pandemic and the modifications were temporary and minor in nature and therefore do not qualify for designation as TDRs. As of December 31, 2021, $1.4 million of total loans outstanding were in payment deferral programs, of which 5% are commercial borrowers and 95% are consumer borrowers. As of December 31, 2020, $110.8 million of total loans outstanding were in payment deferral programs, of which 80% were commercial borrowers and 20% were consumer borrowers.
In addition to nonperforming loans discussed above, the Company has also identified approximately $74.9 million in potential problem loans at December 31, 2021 as compared to $136.6 million at December 31, 2020. The decrease in potential problem loans from December 31, 2020 is primarily due to the improved economic conditions which resulted in loans coming off deferral and returning to payment in 2021. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of December 31, 2021, 8.9% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.
Allowance for Loan Losses
Beginning January 1, 2020, the Company calculated the allowance for credit losses using current expected credit losses methodology. As a result of our January 1, 2020, adoption of CECL and its related amendments, our methodology for estimating the allowance for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the deferred tax asset.
Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required recognition of a credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
Additional information about our Allowance for Loan Losses is included in Notes 1 and 6 to the consolidated financial statements. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
The allowance for credit losses totaled $92.0 million at December 31, 2021, compared to $110.0 million at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loans) at December 31, 2021, compared to 1.47% (1.56% excluding PPP loans) at December 31, 2020. The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improved economic conditions in the CECL forecast, partly offset by providing for the increase in loan balances.
(Dollars in thousands) | 2021 | 2020 | ||||||
Balance at January 1* | $ | 110,000 | $ | 75,999 | ||||
Loans charged-off | ||||||||
Commercial | 4,638 | 4,005 | ||||||
Residential | 979 | 1,135 | ||||||
Consumer** | 14,489 | 21,938 | ||||||
Total loans charged-off | $ | 20,106 | $ | 27,078 | ||||
Recoveries | ||||||||
Commercial | $ | 723 | $ | 786 | ||||
Residential | 1,069 | 618 | ||||||
Consumer** | 8,571 | 8,541 | �� | |||||
Total recoveries | $ | 10,363 | $ | 9,945 | ||||
Net loans charged-off | $ | 9,743 | $ | 17,133 | ||||
Provision for loan losses | $ | (8,257 | ) | $ | 51,134 | |||
Balance at December 31 | $ | 92,000 | $ | 110,000 | ||||
Allowance for loan losses to loans outstanding at end of year | 1.23 | % | 1.47 | % | ||||
Commercial net charge-offs to average loans outstanding | 0.05 | % | 0.04 | % | ||||
Residential net charge-offs to average loans outstanding | - | 0.01 | % | |||||
Consumer net charge-offs to average loans outstanding | 0.08 | % | 0.18 | % | ||||
Net charge-offs to average loans outstanding | 0.13 | % | 0.23 | % | ||||
| * | 2020 includes an adjustment of $3.0 million as a result of our January 1, 2020, adoption of Accounting Standards Codification (“ASC”) 326. |
| ** | Consumer charge-off and recoveries include consumer and home equity. |
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables related to the allowance for loan losses in prior periods under the incurred methodology. Charge-off and recoveries are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
Balance at January 1* | $ | 72,505 | $ | 69,500 | $ | 65,200 | ||||||
Loans charged-off | ||||||||||||
Commercial and agricultural | 3,151 | 3,463 | 4,169 | |||||||||
Residential real estate | 991 | 913 | 1,846 | |||||||||
Consumer | 28,398 | 29,752 | 27,072 | |||||||||
Total loans charged-off | $ | 32,540 | $ | 34,128 | $ | 33,087 | ||||||
Recoveries | ||||||||||||
Commercial and agricultural | $ | 534 | $ | 1,178 | $ | 1,077 | ||||||
Residential real estate | 141 | 306 | 180 | |||||||||
Consumer | 6,913 | 6,821 | 5,142 | |||||||||
Total recoveries | $ | 7,588 | $ | 8,305 | $ | 6,399 | ||||||
Net loans charged-off | $ | 24,952 | $ | 25,823 | $ | 26,688 | ||||||
Provision for loan losses | $ | 25,412 | $ | 28,828 | $ | 30,988 | ||||||
Balance at December 31 | $ | 72,965 | $ | 72,505 | $ | 69,500 | ||||||
Allowance for loan losses to loans outstanding at end of year | 1.02 | % | 1.05 | % | 1.06 | % | ||||||
Commercial and agricultural net charge-offs to average loans outstanding | 0.04 | % | 0.03 | % | 0.05 | % | ||||||
Residential real estate net charge-offs to average loans outstanding | 0.01 | % | 0.01 | % | 0.03 | % | ||||||
Consumer net charge-offs to average loans outstanding | 0.31 | % | 0.34 | % | 0.34 | % | ||||||
Net charge-offs to average loans outstanding | 0.36 | % | 0.38 | % | 0.42 | % | ||||||
The provision for loan losses was a net benefit of $8.3 million for year ended December 31, 2021, compared to provision expense of $51.1 million in for the year ended December 31, 2020. The allowance for credit losses was 280.98% of nonperforming loans at December 31, 2021 as compared to 230.14% at December 31, 2020. The allowance for credit losses was 303.78% of nonaccrual loans at December 31, 2021 as compared to 246.38% at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loan originations) at December 31, 2021 compared to 1.47% (1.56% excluding PPP loan originations) at December 31, 2020. The decrease to the December 31, 2021 allowance for credit loss and provision expense was primarily due to the improved economic conditions in the CECL forecast.
Total net charge-offs for 2021 were $9.7 million, down from $17.1 million in 2020. Net charge-offs to average loans was 13 bps for 2021 compared to 23 bps for 2020. Net charge-offs to average loans decreased during 2021 due to COVID-19 pandemic relief programs during 2020 and 2021 and improved economic conditions in 2021.
December 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||
Commercial | $ | 28,941 | 51 | % | $ | 50,942 | 53 | % | ||||||||
Residential | 18,806 | 27 | % | 21,255 | 26 | % | ||||||||||
Consumer | 44,253 | 22 | % | 37,803 | 21 | % | ||||||||||
Total | $ | 92,000 | 100 | % | $ | 110,000 | 100 | % | ||||||||
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables are related to the allowance for loan losses in prior periods. Category percentage of loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||||||||
Commercial and agricultural | $ | 34,525 | 48 | % | $ | 32,759 | 47 | % | $ | 27,606 | 46 | % | ||||||||||||
Residential real estate | 2,793 | 20 | % | 2,568 | 20 | % | 5,064 | 20 | % | |||||||||||||||
Consumer | 35,647 | 32 | % | 37,178 | 33 | % | 36,830 | 34 | % | |||||||||||||||
Total | $ | 72,965 | 100 | % | $ | 72,505 | 100 | % | $ | 69,500 | 100 | % | ||||||||||||
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. As of December 31, 2021, the allowance for losses on unfunded commitments totaled $5.1 million, compared to $6.4 million as of December 31, 2020. The decrease in the allowance in 2021 compared to 2020 is related to a decrease in expected losses due to the adoption of CECL and the deterioration of the economic forecast due to COVID-19. Prior to January 1, 2020, the Company calculated the allowance for losses on unfunded commitments using the incurred loss methodology.
Liquidity Risk
Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Management’s Asset Liability Committee (“ALCO”) is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies, regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.
The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At December 31, 2021, the Company’s Basic Surplus measurement was 28.5% of total assets or approximately $3.4 billion as compared to the December 31, 2020 Basic Surplus measurement of 25.7% of total assets, or $2.8 billion, and was above the Company’s minimum of 5% (calculated at $600.6 million and $546.6 million, of period end total assets as of December 31, 2021 and 2020, respectively) set forth in its liquidity policies.
At December 31, 2021 and 2020, FHLB advances outstanding totaled $14.0 million and $64.1 million, respectively. At December 31, 2021 and 2020, the Bank had $81.0 million and $74.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.7 billion and $1.6 billion at December 31, 2021 and 2020, respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $999.1 million and $839.4 million at December 31, 2021 and 2020, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.0 billion at December 31, 2021 and $1.8 billion at December 31, 2020. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral. At December 31, 2021 and 2020, the Bank had the capacity to borrow $580.8 million and $658.1 million, respectively, from this program. The Company’s internal policies authorize borrowings up to 25% of assets. Under this policy, remaining available borrowings capacity totaled $2.9 billion at December 31, 2021 and $2.6 billion at December 31, 2020.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2022. The large inflow of deposits experienced since the second quarter of 2020 could reverse itself and flow out. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.
At December 31, 2021, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.
Net cash flows provided by operating activities totaled $157.6 million and $142.4 million in 2021 and 2020, respectively. The critical elements of net operating cash flows include net income, adjusted for non-cash income and expense items such as the provision for loan losses, deferred income tax expense, depreciation and amortization and cash flows generated through changes in other assets and liabilities.
Net cash flows used in investing activities totaled $546.1 million and $709.7 million in 2021 and 2020, respectively. Critical elements of investing activities are loan and investment securities transactions.
Net cash flows provided by financing activities totaled $1.0 billion in 2021 and 2020. The critical elements of financing activities are proceeds from deposits, borrowings and stock issuance. In addition, financing activities are impacted by dividends and treasury stock transactions.
Commitments to Extend Credit
The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company guarantees the obligations or performance of customers by issuing standby lettersmakes contractual commitments to extend credit, which include unused lines of credit, to third parties. These standby letters of credit are frequently issued in support of third party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of creditwhich are subject to the sameCompany’s credit origination, portfolio maintenanceapproval and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements.monitoring procedures. At December 31, 20192021 and 2018, outstanding standby letters2020, commitments to extend credit in the form of loans, including unused lines of credit, were approximately $34.5 millionamounted to $2.3 billion and $41.2 million,$2.2 billion, respectively. The fair valueIn the opinion of the Company’s standby lettersmanagement, there are no material commitments to extend credit, including unused lines of credit at December 31, 2019 and 2018 was not significant. The following table sets forththat represent unusual risks. All commitments to extend credit in the commitment expiration period for standby lettersform of loans, including unused lines of credit, at:
(In thousands) | December 31, 2019 | |||
Within one year | $ | 23,024 | ||
After one but within three years | 9,805 | |||
After three but within five years | 49 | |||
After five years | 1,601 | |||
Total | $ | 34,479 | ||
Securities and Corresponding Interest and Dividend Income
The average balance of taxable securities available for sale (“AFS”) and held to maturity (“HTM”) increased $379.4 million, or 24.8%, from 2020 to 2021. The yield on average taxable securities was 1.67% for 2021 compared to 2.20% in 2020. The average balance of tax-exempt securities AFS and HTM increased from $507.6$173.0 million in 20172020 to $567.1$220.8 million in 2018. At December 31, 2018, HTM securities were comprised primarily of tax-exempt municipal securities and government-sponsored collateralized mortgage obligations CMOs.2021. The FTE yield on HTMtax-exempt securities decreased from 2.66%2.97% in 20172020 to 2.58%2.23% in 2018.2021.
The average balance of Federal Reserve Bank and FHLBFederal Home Loan Bank (“FHLB”) stock increaseddecreased to $48.2$25.3 million in 20182021 from $46.7$33.6 million in 2017.2020. The FTE yield fromon investments in Federal Reserve Bank and FHLB stock increaseddecreased from 5.64%6.24% in 20172020 to 6.39%2.44% in 2018.2021.
Securities Portfolio
As of December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
AFS securities: | ||||||||||||||||||||||||
U.S. treasury | $ | 73,016 | $ | 73,069 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Federal agency | 248,454 | 239,931 | 245,590 | 243,597 | 34,998 | 34,758 | ||||||||||||||||||
State & municipal | 95,531 | 94,088 | 42,550 | 43,180 | 2,533 | 2,513 | ||||||||||||||||||
Mortgage-backed | 603,375 | 606,675 | 576,497 | 595,839 | 498,372 | 503,626 | ||||||||||||||||||
Collateralized mortgage obligations | 623,930 | 621,595 | 426,574 | 437,804 | 432,651 | 434,443 | ||||||||||||||||||
Corporate | 50,500 | 52,003 | 27,500 | 28,278 | - | - | ||||||||||||||||||
Total AFS securities | $ | 1,694,806 | $ | 1,687,361 | $ | 1,318,711 | $ | 1,348,698 | $ | 968,554 | $ | 975,340 | ||||||||||||
HTM securities: | ||||||||||||||||||||||||
Federal agency | $ | 100,000 | $ | 95,635 | $ | 100,000 | $ | 98,342 | $ | - | $ | - | ||||||||||||
Mortgage-backed | 170,574 | 172,001 | 119,447 | 125,009 | 163,115 | 166,728 | ||||||||||||||||||
Collateralized mortgage obligations | 138,815 | 140,280 | 182,250 | 190,677 | 299,900 | 304,853 | ||||||||||||||||||
State & municipal | 323,821 | 327,344 | 214,863 | 222,799 | 167,059 | 169,681 | ||||||||||||||||||
Total HTM securities | $ | 733,210 | $ | 735,260 | $ | 616,560 | $ | 636,827 | $ | 630,074 | $ | 641,262 | ||||||||||||
The Company’s mortgage-backed securities, U.S. agency notes and CMOs are all guaranteed by Fannie Mae, Freddie Mac, the FHLB, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio.
The following tables set forth information with regard to contractual maturities of debt securities shown in amortized cost ($) and weighted average yield (%) at December 31, 2021. Weighted-average yields are an arithmetic computation of income (not FTE adjusted) divided by amortized cost. Maturities of mortgage-backed, collateralized mortgage obligations and asset-backed securities are stated based on their estimated average lives. Actual maturities may differ from estimated average lives or contractual maturities because, in certain cases, borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Less than 1 Year | 1 Year to 5 Years | 5 Years to 10 Years | Over 10 Years | Total | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | $ | % | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||
AFS securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. treasury | $ | - | - | $ | 49,111 | 1.20 | % | $ | 23,905 | 1.40 | % | $ | - | - | $ | 73,016 | 1.27 | % | ||||||||||||||||||||||
Federal agency | - | - | - | - | 248,454 | 1.04 | % | - | - | 248,454 | 1.04 | % | ||||||||||||||||||||||||||||
State & municipal | 3 | 8.50 | % | 16,865 | 1.04 | % | 78,663 | 1.40 | % | - | - | 95,531 | 1.34 | % | ||||||||||||||||||||||||||
Mortgage-backed | 30 | 1.64 | % | 18,104 | 2.39 | % | 245,845 | 1.82 | % | 339,396 | 1.44 | % | 603,375 | 1.63 | % | |||||||||||||||||||||||||
Collateralized mortgage obligations | 886 | 1.63 | % | 27,301 | 1.05 | % | 91,524 | 1.38 | % | 504,219 | 1.57 | % | 623,930 | 1.52 | % | |||||||||||||||||||||||||
Corporate | - | - | - | - | 50,500 | 3.75 | % | - | - | 50,500 | 3.75 | % | ||||||||||||||||||||||||||||
Total AFS securities | $ | 919 | 1.65 | % | $ | 111,381 | 1.33 | % | $ | 738,891 | 1.58 | % | $ | 843,615 | 1.52 | % | $ | 1,694,806 | 1.53 | % | ||||||||||||||||||||
HTM securities: | ||||||||||||||||||||||||||||||||||||||||
Federal agency | $ | - | - | $ | - | - | $ | 100,000 | 1.11 | % | $ | - | - | $ | 100,000 | 1.11 | % | |||||||||||||||||||||||
Mortgage-backed | - | - | 12 | 7.73 | % | 9,100 | 3.49 | % | 161,462 | 1.85 | % | 170,574 | 1.94 | % | ||||||||||||||||||||||||||
Collateralized mortgage obligations | - | - | 525 | 2.06 | % | 43,627 | 2.69 | % | 94,663 | 2.12 | % | 138,815 | 2.30 | % | ||||||||||||||||||||||||||
State & municipal | 102,967 | 0.58 | % | 57,827 | 2.30 | % | 69,451 | 2.01 | % | 93,576 | 1.75 | % | 323,821 | 1.53 | % | |||||||||||||||||||||||||
Total HTM securities | $ | 102,967 | 0.58 | % | $ | 58,364 | 2.30 | % | $ | 222,178 | 1.80 | % | $ | 349,701 | 1.90 | % | $ | 733,210 | 1.71 | % | ||||||||||||||||||||
Funding Sources and Corresponding Interest Expense
The Company utilizes traditional deposit products such as time, savings, NOW, money market and demand deposits as its primary source for funding. Other sources, such as short-term FHLB advances, federal funds purchased, securities sold under agreements to repurchase, brokered time deposits and long-term FHLB borrowings are utilized as necessary to support the Company’s growth in assets and to achieve interest rate sensitivity objectives. The average balance of interest-bearing liabilities increased $173.0$380.9 million from 20172020 primarily due to the increase in interest-bearing deposits and totaled $5.9$6.6 billion in 2018.2021. The rate paid on interest-bearing liabilities increaseddecreased from 0.45%0.53% in 20172020 to 0.65%0.29% in 2018.2021. This increasedecrease in rates and increase in average balances caused an increasea decrease in interest expense of $12.7$13.8 million, or 49.1%42.4%, from $25.9$32.6 million in 20172020 to $38.6$18.8 million in 2018.2021.
Deposits
Average interest-bearing deposits increased $148.6$632.5 million, or 3.0%11.2%, from 20172020 to 2018, due primarily to organic deposit growth.2021. Average money market deposits increased $9.4$266.8 million, or 0.6%11.5% during 20182021 compared to 2017.2020. Average NOW accounts increased $37.6$258.2 million, or 3.3%21.6% during 20182021 as compared to 2017.2020. The average balance of savings accounts increased $52.5$263.5 million, or 4.3%18.9% during 20182021 compared to 2017. These2020. The average balance of time deposits increased $49.0decreased $155.9 million, or 6.0%21.3%, from 20172020 to 2018.2021. The average balance of demand deposits increased $103.5$670.4 million, or 4.7%23.2%, during 20182021 compared to 2017. This2020. The high rate of deposit growth in demand deposits was driven principally by increases in accounts from retail, municipalprimarily due to funding of PPP loans and commercial customers.various government support programs.
The rate paid on average interest-bearing deposits was 0.44%down 22 basis points to 0.17% for 2018 and 0.30% for 2017.2021. The rate paid for money market deposit accounts increaseddecreased from 0.23%0.44% during 20172020 to 0.49%0.20% during 2018.2021. The rate paid for NOW deposit accounts increaseddecreased from 0.09%0.06% in 20172020 to 0.16%0.05% in 2018.2021. The rate paid for savings deposits was 0.06%a consistent at 0.05% for 20182020 and 2017.2021. The rate paid for time deposits increaseddecreased from 1.09%1.40% during 20172020 to 1.29%0.70% during 2018.2021.
Years Ended December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
(In thousands) | Average Balance | Yield/Rate | Average Balance | Yield/Rate | Average Balance | Yield/Rate | ||||||||||||||||||
Demand deposits | $ | 3,565,693 | $ | 2,895,341 | $ | 2,351,515 | ||||||||||||||||||
Money market deposit accounts | 2,587,748 | 0.20 | % | 2,320,947 | 0.44 | % | 1,949,147 | 1.14 | % | |||||||||||||||
NOW deposit accounts | 1,452,560 | 0.05 | % | 1,194,398 | 0.06 | % | 1,095,402 | 0.14 | % | |||||||||||||||
Savings deposits | 1,656,893 | 0.05 | % | 1,393,436 | 0.05 | % | 1,265,112 | 0.06 | % | |||||||||||||||
Time deposits | 577,150 | 0.70 | % | 733,073 | 1.40 | % | 910,546 | 1.70 | % | |||||||||||||||
Total interest-bearing deposits | $ | 6,274,351 | 0.17 | % | $ | 5,641,854 | 0.39 | % | $ | 5,220,207 | 0.77 | % | ||||||||||||
The following table presents the estimated amounts of uninsured deposits based on the same methodologies and assumptions used for the bank regulatory reporting:
| As of December 31, | ||||||||||||
| (In thousands) | 2021 | 2020 | 2019 | |||||||||
Estimated amount of uninsured deposits | $ | 4,175,208 | $ | 3,639,731 | $ | 3,868,134 | ||||||
The following table presents the maturity distribution of time deposits of $250,000 or more:
(In thousands) | December 31, 2021 | |||
Portion of time deposits in excess of insurance limit | $ | 33,092 | ||
Time deposits otherwise uninsured with a maturity of: | ||||
Within three months | $ | 4,387 | ||
After three but within six months | 7,907 | |||
After six but within twelve months | 10,107 | |||
Over twelve months | 10,691 | |||
Borrowings
Average repurchase agreements decreased to $100.5 million in 2021 from $154.4 million in 2020. The average rate paid on repurchase agreements decreased from 0.17% in 2020 to 0.13% in 2021. Average short-term borrowings increaseddecreased to $727.6$1.3 million in 20182021 from $690.0$183.7 million in 2017 funding earning asset growth.2020. The average rate paid on short-term borrowings increased from 0.87%1.55% in 20172020 to 1.45%2.00% in 2018.2021. Average long-term debt decreased from $93.4$63.0 million in 20172020 to $80.2$15.5 million in 2018.
2021. The average balance of junior subordinated debt remained at $101.2 million in 2018.2021. The average rate paid for junior subordinated debt in 20182021 was 4.09%2.07%, updown from 3.11%2.70% in 2017.2020.
Total short-term borrowings consist of federal funds purchased, and securities sold under repurchase agreements, which generally represent overnight borrowing transactions and other short-term borrowings, primarily FHLB advances, with original maturities of one year or less. The Company has unused lines of credit with the FHLB and access to brokered deposits available for short-term financing of approximately $1.9$3.4 billion and $2.0$3.1 billion at December 31, 20182021 and 2017,2020, respectively. Securities collateralizing repurchase agreements are held in safekeeping by non-affiliatednonaffiliated financial institutions and are under the Company’s control. Long-term debt, which is comprised primarily of FHLB advances, are collateralized by the FHLB stock owned by the Company, certain of its mortgage-backed securities and a blanket lien on its residential real estate mortgage loans.
On June 23, 2020, the Company issued $100.0 million of 5.00% fixed-to-floating rate subordinated notes due 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 5.00%, payable semi-annually in arrears commencing on January 1, 2021, and a floating rate of interest equivalent to the three-month Secured Overnight Financing Rate (“SOFR”) plus a spread of 4.85%, payable quarterly in arrears commencing on October 1, 2025. The subordinated debt issuance cost, which is being amortized on a straight-line basis, was $2.2 million. As of December 31, 2021 and 2020 the subordinated debt net of unamortized issuance costs was $98.5 million and $98.1 million, respectively.
Noninterest Income
Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the years indicated:
Years Ended December 31, | ||||||||||||
(In thousands) | 2021 | 2020 | 2019 | |||||||||
Service charges on deposit account | $ | 13,348 | $ | 13,201 | $ | 17,151 | ||||||
ATM and debit card fees | 31,301 | 25,960 | 23,893 | |||||||||
Retirement plan administration fees | 42,188 | 35,851 | 30,388 | |||||||||
Wealth management | 33,718 | 29,247 | 28,400 | |||||||||
Insurance services | 14,083 | 14,757 | 15,770 | |||||||||
Bank owned life insurance income | 6,217 | 5,743 | 5,355 | |||||||||
Net securities gains (losses) | 566 | (388 | ) | 4,213 | ||||||||
Other | 16,373 | 21,905 | 18,853 | |||||||||
Total noninterest income | $ | 157,794 | $ | 146,276 | $ | 144,023 | ||||||
Noninterest income for the year ended December 31, 20182021 was $124.8$157.8 million, up $3.5$11.5 million, or 2.9%7.9%, from the year ended December 31, 2017.2020. Excluding net securities gains (losses), noninterest income for the year ended December 31, 2021 was $157.2 million, up $10.6 million or 7.2%, from the year ended December 31, 2020. The increase from the prior year was driven by an increase in ATM and debit card fees due to increased volume and higher per transaction rates, retirement plan administration fees driven by the April 1, 2020 acquisition of Alliance Benefit Group of Illinois Inc. (“ABG”) and an increase inwealth management fees driven by market performance and organic growth, partly offset by other noninterest income that was partially offsetdriven by net securities losses in 2018. Retirement plan administrationlower swap fees increased due to the acquisitions of RPS in the second quarter of 2018 and of Downeast Pension Services in the second quarter of 2017. In the fourth quarter of 2018, the Company restructured the investment portfolio by selling $109 million lower yielding bonds and reinvesting the proceeds in higher yielding bonds, which resulted in a $6.6 million loss on securities sold. Other noninterest income in 2018 increased compared to 2017 due to non-recurring gains recognized in 2018. Excluding net securities (losses) gains, noninterest income for the year ended December 31, 2018 would have been $131.1 million, up $11.7 million, or 9.8%, from the year ended December 31, 2017.mortgage banking income.
Noninterest Expense
Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the years indicated:
Years Ended December 31, | ||||||||||||
(In thousands) | 2021 | 2020 | 2019 | |||||||||
Salaries and employee benefits | $ | 172,580 | $ | 161,934 | $ | 156,867 | ||||||
Occupancy | 21,922 | 21,634 | 22,706 | |||||||||
Data processing and communications | 16,989 | 16,527 | 18,318 | |||||||||
Professional fees and outside services | 16,306 | 15,082 | 14,785 | |||||||||
Equipment | 21,854 | 19,889 | 18,583 | |||||||||
Office supplies and postage | 6,006 | 6,138 | 6,579 | |||||||||
FDIC expenses | 3,041 | 2,688 | 1,946 | |||||||||
Advertising | 2,521 | 2,288 | 2,773 | |||||||||
Amortization of intangible assets | 2,808 | 3,395 | 3,579 | |||||||||
Loan collection and other real estate owned, net | 2,915 | 3,295 | 4,158 | |||||||||
Other | 20,339 | 24,863 | 24,440 | |||||||||
Total noninterest expense | $ | 287,281 | $ | 277,733 | $ | 274,734 | ||||||
Noninterest expense for the year ended December 31, 20182021 was $264.6$287.3 million, up $18.9$9.5 million or 7.7%3.4%, from the year ended December 31, 2017.2020. The increase from the prior year was driven by higher salaries and employee benefits due to annual merit pay increases, the retirement planABG acquisition, higher medical expenses and higher levels of incentive compensation. In addition, the increase in professional fees and outside services acquisitionswas a result of projects paused during the COVID-19 pandemic and the increase in 2018equipment expenses was due to higher technology costs associated with several digital upgrades. The increase in expenses was partly offset by lower other noninterest expense due to a $4.0 million decrease in the provision for unfunded commitments and 2017, higher incentive compensation and wage increases for over 60% of our employees from the Company’s commitmentlower nonrecurring expenses due to invest a portion of the tax reform benefit$4.3 million estimated litigation settlement expense in our employees.2021 compared to a $4.8 million branch optimization charge in 2020.
Income Taxes
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are recorded when identified, which is generally in the fourth quarter of the subsequent year for U.S. federal and state provisions.
The amount of income taxes the Company pays is subject at times to ongoing audits by U.S. federal and state tax authorities, which may result in proposed assessments. Future results may include favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are proposed or resolved or when statutes of limitation on potential assessments expire. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly or annual basis.
Income tax expense for the year ended December 31, 20182021 was $24.4$45.0 million, down $21.6up $16.3 million, or 46.9%56.7%, from the year ended December 31, 2017.2020. The effective tax rate of 17.8%22.5% in 20182021 was downup from 35.9%21.6% in 2017.2020. The decreaseincrease in income tax expense from the prior year was due to the lower effective tax rate resulting from the TCJA, a $5.5 million tax benefit recorded in the fourth quarter of 2018 primarily related to one-time income tax return accounting method changes during the fourth quarter of 2018, combined with the $4.4 million non-cash charge related to the enactment of the TCJA in 2017 for the Company’s deferred tax assets due to the tax rate reduction. This was partially offset by a higher level of taxable income as a result of the decreased provision for loan losses.
Risk Management – Credit Risk
Credit risk is managed through a network of loan officers, credit committees, loan policies and lower tax benefitoversight from equity-based transactions. Excluding the tax benefit from equity-based transactions, the tax benefitsenior credit officers and Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in each loan portfolio. An ongoing independent review of individual credits in the fourthcommercial loan portfolio is performed by the independent loan review function. These components of the Company’s underwriting and monitoring functions are critical to the timely identification, classification and resolution of problem credits.
Nonperforming assets consist of nonaccrual loans, loans over 90 days past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. The threshold for evaluating classified and nonperforming loans specifically evaluated for impairment is $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.
Nonperforming Assets
As of December 31, | ||||||||||||||||
(Dollars in thousands) | 2021 | % | 2020 | % | ||||||||||||
Nonaccrual loans: | ||||||||||||||||
Commercial | $ | 15,942 | 53 | % | $ | 23,557 | 53 | % | ||||||||
Residential | 8,862 | 29 | % | 13,082 | 29 | % | ||||||||||
Consumer | 1,511 | 5 | % | 3,020 | 7 | % | ||||||||||
Troubled debt restructured loans | 3,970 | 13 | % | 4,988 | 11 | % | ||||||||||
Total nonaccrual loans | $ | 30,285 | 100 | % | $ | 44,647 | 100 | % | ||||||||
Loans over 90 days past due and still accruing: | ||||||||||||||||
Commercial | $ | - | - | $ | 493 | 16 | % | |||||||||
Residential | 808 | 33 | % | 518 | 16 | % | ||||||||||
Consumer | 1,650 | 67 | % | 2,138 | 68 | % | ||||||||||
Total loans over 90 days past due and still accruing | $ | 2,458 | 100 | % | $ | 3,149 | 100 | % | ||||||||
Total nonperforming loans | $ | 32,743 | $ | 47,796 | ||||||||||||
Other real estate owned | 167 | 1,458 | ||||||||||||||
Total nonperforming assets | $ | 32,910 | $ | 49,254 | ||||||||||||
Total nonaccrual loans to total loans | 0.40 | % | 0.60 | % | ||||||||||||
Total nonperforming loans to total loans | 0.44 | % | 0.64 | % | ||||||||||||
Total nonperforming assets to total assets | 0.27 | % | 0.45 | % | ||||||||||||
Total allowance for loan losses to nonperforming loans | 280.98 | % | 230.14 | % | ||||||||||||
Total allowance for loan losses to nonaccrual loans | 303.78 | % | 246.38 | % | ||||||||||||
The following tables are related to non-performing loans in prior periods. Non-performing loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
As of December 31, | ||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % | 2018 | % | 2017 | % | ||||||||||||||||||
Nonaccrual loans: | ||||||||||||||||||||||||
Commercial | $ | 12,379 | 49 | % | $ | 11,804 | 46 | % | $ | 12,485 | 48 | % | ||||||||||||
Residential real estate | 5,233 | 21 | % | 6,526 | 26 | % | 5,919 | 23 | % | |||||||||||||||
Consumer | 4,046 | 16 | % | 4,068 | 16 | % | 4,324 | 17 | % | |||||||||||||||
Troubled debt restructured loans | 3,516 | 14 | % | 3,089 | 12 | % | 2,980 | 12 | % | |||||||||||||||
Total nonaccrual loans | $ | 25,174 | 100 | % | $ | 25,487 | 100 | % | $ | 25,708 | 100 | % | ||||||||||||
Loans over 90 days past due and still accruing: | ||||||||||||||||||||||||
Commercial | $ | - | - | $ | 588 | 12 | % | $ | - | - | ||||||||||||||
Residential real estate | 927 | 25 | % | 1,182 | 23 | % | 1,402 | 26 | % | |||||||||||||||
Consumer | 2,790 | 75 | % | 3,315 | 65 | % | 4,008 | 74 | % | |||||||||||||||
Total loans over 90 days past due and still accruing | $ | 3,717 | 100 | % | $ | 5,085 | 100 | % | $ | 5,410 | 100 | % | ||||||||||||
Total nonperforming loans | $ | 28,891 | $ | 30,572 | $ | 31,118 | ||||||||||||||||||
Other real estate owned | 1,458 | 2,441 | 4,529 | |||||||||||||||||||||
Total nonperforming assets | $ | 30,349 | $ | 33,013 | $ | 35,647 | ||||||||||||||||||
Total nonaccrual loans to total loans | 0.35 | % | 0.37 | % | 0.39 | % | ||||||||||||||||||
Total nonperforming loans to total loans | 0.40 | % | 0.44 | % | 0.47 | % | ||||||||||||||||||
Total nonperforming assets to total assets | 0.31 | % | 0.35 | % | 0.39 | % | ||||||||||||||||||
Total allowance for loan losses to nonperforming loans | 252.55 | % | 237.16 | % | 223.34 | % | ||||||||||||||||||
Total allowance for loan losses to nonaccrual loans | 289.84 | % | 284.48 | % | 270.34 | % | ||||||||||||||||||
Total nonperforming assets were $32.9 million at December 31, 2021, compared to $49.3 million at December 31, 2020. Nonperforming loans at December 31, 2021 were $32.7 million or 0.44% of total loans (0.44% excluding PPP loan originations), compared with $47.8 million or 0.64% of total loans (0.68% excluding PPP loan originations) at December 31, 2020. The decrease in nonperforming loans primarily resulted from a reduction in commercial and residential mortgage nonaccrual loans during 2021. Total nonaccrual loans were $30.3 million or 0.40% of total loans at December 31, 2021, compared to $44.6 million or 0.60% of total loans at December 31, 2020. Past due loans as a percentage of total loans was 0.29% at December 31, 2021 (0.29% excluding PPP loan originations), down from 0.37% of total loans (0.39% excluding PPP loan originations) at December 31, 2020.
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. The CARES Act, along with a joint agency statement issued by banking regulatory agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a troubled debt restructuring (“TDR”). The Company evaluated the short-term modification programs provided to its borrowers and has concluded the modifications were generally made to borrowers who were in good standing prior to the COVID-19 pandemic and the modifications were temporary and minor in nature and therefore do not qualify for designation as TDRs. As of December 31, 2021, $1.4 million of total loans outstanding were in payment deferral programs, of which 5% are commercial borrowers and 95% are consumer borrowers. As of December 31, 2020, $110.8 million of total loans outstanding were in payment deferral programs, of which 80% were commercial borrowers and 20% were consumer borrowers.
In addition to nonperforming loans discussed above, the Company has also identified approximately $74.9 million in potential problem loans at December 31, 2021 as compared to $136.6 million at December 31, 2020. The decrease in potential problem loans from December 31, 2020 is primarily due to the improved economic conditions which resulted in loans coming off deferral and returning to payment in 2021. Higher risk industries include entertainment, restaurants, retail, healthcare and accommodations. As of December 31, 2021, 8.9% of the Company’s outstanding loans were in higher risk industries due to the COVID-19 pandemic. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become over 90 days past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.
Allowance for Loan Losses
Beginning January 1, 2020, the Company calculated the allowance for credit losses using current expected credit losses methodology. As a result of our January 1, 2020, adoption of CECL and its related amendments, our methodology for estimating the allowance for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the deferred tax asset.
Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required recognition of a credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the measurement process.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
Additional information about our Allowance for Loan Losses is included in Notes 1 and 6 to the consolidated financial statements. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
The allowance for credit losses totaled $92.0 million at December 31, 2021, compared to $110.0 million at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loans) at December 31, 2021, compared to 1.47% (1.56% excluding PPP loans) at December 31, 2020. The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improved economic conditions in the CECL forecast, partly offset by providing for the increase in loan balances.
(Dollars in thousands) | 2021 | 2020 | ||||||
Balance at January 1* | $ | 110,000 | $ | 75,999 | ||||
Loans charged-off | ||||||||
Commercial | 4,638 | 4,005 | ||||||
Residential | 979 | 1,135 | ||||||
Consumer** | 14,489 | 21,938 | ||||||
Total loans charged-off | $ | 20,106 | $ | 27,078 | ||||
Recoveries | ||||||||
Commercial | $ | 723 | $ | 786 | ||||
Residential | 1,069 | 618 | ||||||
Consumer** | 8,571 | 8,541 | �� | |||||
Total recoveries | $ | 10,363 | $ | 9,945 | ||||
Net loans charged-off | $ | 9,743 | $ | 17,133 | ||||
Provision for loan losses | $ | (8,257 | ) | $ | 51,134 | |||
Balance at December 31 | $ | 92,000 | $ | 110,000 | ||||
Allowance for loan losses to loans outstanding at end of year | 1.23 | % | 1.47 | % | ||||
Commercial net charge-offs to average loans outstanding | 0.05 | % | 0.04 | % | ||||
Residential net charge-offs to average loans outstanding | - | 0.01 | % | |||||
Consumer net charge-offs to average loans outstanding | 0.08 | % | 0.18 | % | ||||
Net charge-offs to average loans outstanding | 0.13 | % | 0.23 | % | ||||
| * | 2020 includes an adjustment of $3.0 million as a result of our January 1, 2020, adoption of Accounting Standards Codification (“ASC”) 326. |
| ** | Consumer charge-off and recoveries include consumer and home equity. |
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables related to the allowance for loan losses in prior periods under the incurred methodology. Charge-off and recoveries are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
Balance at January 1* | $ | 72,505 | $ | 69,500 | $ | 65,200 | ||||||
Loans charged-off | ||||||||||||
Commercial and agricultural | 3,151 | 3,463 | 4,169 | |||||||||
Residential real estate | 991 | 913 | 1,846 | |||||||||
Consumer | 28,398 | 29,752 | 27,072 | |||||||||
Total loans charged-off | $ | 32,540 | $ | 34,128 | $ | 33,087 | ||||||
Recoveries | ||||||||||||
Commercial and agricultural | $ | 534 | $ | 1,178 | $ | 1,077 | ||||||
Residential real estate | 141 | 306 | 180 | |||||||||
Consumer | 6,913 | 6,821 | 5,142 | |||||||||
Total recoveries | $ | 7,588 | $ | 8,305 | $ | 6,399 | ||||||
Net loans charged-off | $ | 24,952 | $ | 25,823 | $ | 26,688 | ||||||
Provision for loan losses | $ | 25,412 | $ | 28,828 | $ | 30,988 | ||||||
Balance at December 31 | $ | 72,965 | $ | 72,505 | $ | 69,500 | ||||||
Allowance for loan losses to loans outstanding at end of year | 1.02 | % | 1.05 | % | 1.06 | % | ||||||
Commercial and agricultural net charge-offs to average loans outstanding | 0.04 | % | 0.03 | % | 0.05 | % | ||||||
Residential real estate net charge-offs to average loans outstanding | 0.01 | % | 0.01 | % | 0.03 | % | ||||||
Consumer net charge-offs to average loans outstanding | 0.31 | % | 0.34 | % | 0.34 | % | ||||||
Net charge-offs to average loans outstanding | 0.36 | % | 0.38 | % | 0.42 | % | ||||||
The provision for loan losses was a net benefit of $8.3 million for year ended December 31, 2021, compared to provision expense of $51.1 million in for the year ended December 31, 2020. The allowance for credit losses was 280.98% of nonperforming loans at December 31, 2021 as compared to 230.14% at December 31, 2020. The allowance for credit losses was 303.78% of nonaccrual loans at December 31, 2021 as compared to 246.38% at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loan originations) at December 31, 2021 compared to 1.47% (1.56% excluding PPP loan originations) at December 31, 2020. The decrease to the December 31, 2021 allowance for credit loss and provision expense was primarily due to the improved economic conditions in the CECL forecast.
Total net charge-offs for 2021 were $9.7 million, down from $17.1 million in 2020. Net charge-offs to average loans was 13 bps for 2021 compared to 23 bps for 2020. Net charge-offs to average loans decreased during 2021 due to COVID-19 pandemic relief programs during 2020 and 2021 and improved economic conditions in 2021.
December 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||
Commercial | $ | 28,941 | 51 | % | $ | 50,942 | 53 | % | ||||||||
Residential | 18,806 | 27 | % | 21,255 | 26 | % | ||||||||||
Consumer | 44,253 | 22 | % | 37,803 | 21 | % | ||||||||||
Total | $ | 92,000 | 100 | % | $ | 110,000 | 100 | % | ||||||||
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables are related to the allowance for loan losses in prior periods. Category percentage of loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||||||||
Commercial and agricultural | $ | 34,525 | 48 | % | $ | 32,759 | 47 | % | $ | 27,606 | 46 | % | ||||||||||||
Residential real estate | 2,793 | 20 | % | 2,568 | 20 | % | 5,064 | 20 | % | |||||||||||||||
Consumer | 35,647 | 32 | % | 37,178 | 33 | % | 36,830 | 34 | % | |||||||||||||||
Total | $ | 72,965 | 100 | % | $ | 72,505 | 100 | % | $ | 69,500 | 100 | % | ||||||||||||
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. As of December 31, 2021, the allowance for losses on unfunded commitments totaled $5.1 million, compared to $6.4 million as of December 31, 2020. The decrease in the allowance in 2021 compared to 2020 is related to a decrease in expected losses due to the adoption of CECL and the deterioration of the economic forecast due to COVID-19. Prior to January 1, 2020, the Company calculated the allowance for losses on unfunded commitments using the incurred loss methodology.
Liquidity Risk
Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Management’s Asset Liability Committee (“ALCO”) is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies, regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.
The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At December 31, 2021, the Company’s Basic Surplus measurement was 28.5% of total assets or approximately $3.4 billion as compared to the December 31, 2020 Basic Surplus measurement of 25.7% of total assets, or $2.8 billion, and was above the Company’s minimum of 5% (calculated at $600.6 million and $546.6 million, of period end total assets as of December 31, 2021 and 2020, respectively) set forth in its liquidity policies.
At December 31, 2021 and 2020, FHLB advances outstanding totaled $14.0 million and $64.1 million, respectively. At December 31, 2021 and 2020, the Bank had $81.0 million and $74.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.7 billion and $1.6 billion at December 31, 2021 and 2020, respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $999.1 million and $839.4 million at December 31, 2021 and 2020, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.0 billion at December 31, 2021 and $1.8 billion at December 31, 2020. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral. At December 31, 2021 and 2020, the Bank had the capacity to borrow $580.8 million and $658.1 million, respectively, from this program. The Company’s internal policies authorize borrowings up to 25% of assets. Under this policy, remaining available borrowings capacity totaled $2.9 billion at December 31, 2021 and $2.6 billion at December 31, 2020.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2022. The large inflow of deposits experienced since the second quarter of 20182020 could reverse itself and flow out. In the TCJA chargecurrent economic environment, draws against lines of credit could drive asset growth higher. Disruptions in 2017,wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the effective tax rateCompany’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was 22.2%put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and 33.8% for the years endingadding additional sources of liquidity.
At December 31, 20182021, a portion of the Company’s loans and 2017,securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.
Net cash flows provided by operating activities totaled $157.6 million and $142.4 million in 2021 and 2020, respectively. The critical elements of net operating cash flows include net income, adjusted for non-cash income and expense items such as the provision for loan losses, deferred income tax expense, ondepreciation and amortization and cash flows generated through changes in other assets and liabilities.
Net cash flows used in investing activities totaled $546.1 million and $709.7 million in 2021 and 2020, respectively. Critical elements of investing activities are loan and investment securities transactions.
Net cash flows provided by financing activities totaled $1.0 billion in 2021 and 2020. The critical elements of financing activities are proceeds from deposits, borrowings and stock issuance. In addition, financing activities are impacted by dividends and treasury stock transactions.
Commitments to Extend Credit
The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company's incomeCompany’s credit approval and monitoring procedures. At December 31, 2021 and 2020, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $2.3 billion and $2.2 billion, respectively. In the opinion of management, there are no material commitments to extend credit, including unused lines of credit that represent unusual risks. All commitments to extend credit in the form of loans, including unused lines of credit, expire within one year.
Standby Letters of Credit
The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are frequently issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. At December 31, 2021 and 2020, outstanding standby letters of credit were approximately $55.1 million and $54.0 million, respectively. The fair value of the Company’s standby letters of credit at December 31, 2021 and 2020 was different fromnot significant. The following table sets forth the income tax expense at the Federal statutory ratecommitment expiration period for standby letters of 21% for 2018 and 35% for 2017 due primarily to tax-exempt income and, to a lesser extent, the effect of state income taxes and Federal low income housing credits.credit at:
(In thousands) | December 31, 2021 | |||
Within one year | $ | 50,177 | ||
After one but within three years | 2,518 | |||
After three but within five years | 1,738 | |||
After five years | 700 | |||
Total | $ | 55,133 | ||
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in the consolidated statements of income.
When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions. Any fee paid to the Company under a risk participation agreement is in consideration of the credit risk of the counterparties and is recognized in the income statement. Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default and loss given default of the counterparties.
Loans Serviced for Others and Loans Sold with Recourse
The total amount of loans serviced by the Company for unrelated third parties was approximately $575.9 million and $614.5 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had approximately $1.0 million and $1.3 million, respectively, of mortgage servicing rights. At December 31, 2021 and 2020, the Company serviced $25.6 million and $25.7 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is considered necessary at December 31, 2021 and 2020. As of December 31, 2021 and 2020, the Company serviced Springstone consumer loans of $11.4 million and $11.8 million, respectively.
Capital Resources
Consistent with its goal to operate a sound and profitable financial institution, the Company actively seeks to maintain a “well-capitalized” institution in accordance with regulatory standards. The principal source of capital to the Company is earnings retention. The Company’s capital measurements are in excess of both regulatory minimum guidelines and meet the requirements to be considered well-capitalized.
The Company’s primary source of funds to pay interest on trust preferred debentures and pay cash dividends to its stockholders are dividends from its subsidiaries. Various laws and regulations restrict the ability of banks to pay dividends to their stockholders. Generally, the payment of dividends by the Company in the future as well as the payment of interest on the capital securities will require the generation of sufficient future earnings by its subsidiaries.
The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Company. Under Office of the Comptroller of the Currency (“OCC”) regulations, the Bank may not pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. At December 31, 2021 and 2020, approximately $164.6 million and $194.2 million, respectively, of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.
Stock Repurchase Plan
The Company purchased 604,637 shares of its common stock during the year ended December 31, 2021 at an average price of $35.91 per share under its previously announced share repurchase program. The repurchase program under which these shares were purchased expired on December 31, 2021. On December 20, 2021, the NBT Board of Directors authorized a repurchase program for the Company to repurchase up to an additional 2,000,000 shares of its outstanding common stock. The plan expires on December 31, 2023.
Recent Accounting Updates
See Note 2 to the consolidated financial statements for a detailed discussion of new accounting pronouncements.
2020 OPERATING RESULTS AS COMPARED TO 2019 OPERATING RESULTS
For similar operating and financial data and discussion of our results for the year ended December 31, 2020 compared to our results for the year ended December 31, 2019, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 1, 2021 and is incorporated herein by reference.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.
Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s ALCO meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the Board and management attemptaim to manage the Company’s interest rate risk while minimizing the net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.
The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 10050 bps takes place over a 12 month12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded intoin them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.
In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets (particularly LIBOR-based loans) repricing downward faster than therolling over at lower yields while interest-bearing liabilities that remain at or near their floors. In the rising rate scenarios, net interest income is projected to experience a slight declinemodest increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, MMDA and time accounts. Net interest income for the next twelve months in the +200/+100/-100-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% changereduction in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the December 31, 20192021 balance sheet position:
Interest Rate Sensitivity Analysis
Change in interest rates (in basis points) | Percent change in net interest income | |
| +200 | (1.0%) | |
| +100 | 0.2% | |
| -100 | (1.5%) | |
Change in interest rates (in basis points) | Percent change in net interest income | ||
| +200 | 6.46 | % | |
| +100 | 3.10 | % | |
| -50 | (0.74 | %) | |
The Company anticipates that in the current environment, the trajectory of net interest income will depend significantly on the abilitytiming and path of the recovery from the recent economic downturn and related inflationary pressures. In response to manage deposit pricing in a competitive market. Deposit rates began to rise in 2018 asthe economic impact of the pandemic, the federal funds rate increased four times, through December 2018 bringingwas reduced by 150 bps in March 2020, and term interest rates fell sharply across the cycle total to nine increases totaling 225 basis points. Beginning in July 2019, the federal funds rate decreased three times for a total of 75 bps.yield curve. The Company anticipates thathas reduced deposit rates, may move lower respondingbut future reductions are likely to the lower federal funds rate. Competitive pressure may limit the Company's ability to quickly reducebe smaller and more selective. With deposit rates following reductionsnear their lower bound, the Company will focus on managing asset yields in the federal funds rate. In order to maintain the net interest margin and position itself for anticipated increases to short term interest rates. Competitive pressure may limit the Company’s ability to maintain asset yields in 2020, the Company will continue to focus funding growth through lower cost core deposits.current environment, however.
To the Stockholders and Board of Directors
NBT Bancorp Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and subsidiaries (the Company) as of December 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019,2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 20201, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for loan losses related to loans collectivelyCredit Losses – Loans evaluated for impairmenton a collective basis
As discussed in NoteNotes 1 and 56 to the consolidated financial statements, the Company’s allowance for loancredit losses related toon loans collectively evaluated for impairment (ALL)on a collective basis (the collective ACL on loans) was $72.965$92.0 million which also represents theof a total allowance for loancredit losses of $92.0 million as of December 31, 2019.2021. The collective ACL on loans includes the measure of expected credit losses on a collective (pooled) basis for class segments of loans that share similar risk characteristics. The Company estimatesestimated the ALLcollective ACL on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. The Company uses a discounted cash flow methodology where the respective quantitative allowance for each segment is measured by applyingcomparing the present value of expected principal and interest cash flows projected using an econometric, probability of default (PD) and loss given default (LGD) modeling methodology to the amortized cost. The Company uses regression models to develop the PD and LGD, which are derived from historical credit loss rates to pools of loans with similar risk characteristicsexperience for both the Company and by internal risk gradesclass segment-specific selected peers, that incorporate multiple weighted external economic forecasts for commercial loans. The historical loss rates are calculated by using the average annual historical charge-offs that have occurred within each pool of loanseconomic variables over the lookbackreasonable and supportable forecast period. After the reasonable and supportable forecast period, multiplied by the loss emergence period. The Company subjectsreverts to long-term average economic variables over a reversion period on a straight-line basis. Contractual cash flows over the historical loss rates tocontractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at the loan-level stated interest rate. After quantitative considerations, the Company applies additional qualitative adjustments, to reflectincluding the effects of limitations inherent incurred loanin the quantitative model, so that the collective ACL is reflective of the estimate of lifetime losses that are not fully capturedexist in the historical loss rates.loan portfolio at the balance sheet date.
We identified the assessment of the ALLcollective ACL on loans as a critical audit matter because it involved significant measurement uncertainty requiringmatter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment and knowledge and experiencewas involved in the industry. Thisassessment of the collective ACL on loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the ALLcollective ACL on loans methodology, inclusive ofincluding the methodologiesmethods and models used to estimate 1)(1) the historical loss rates for each pool of loansPD and LGD and their key factorssignificant assumptions including portfolio segmentation, the external economic forecasts and economic variables, and the related weighting of the forecasts, the reasonable and supportable forecast periods, the composition of the peer group and the period from which historical Company and peer experience was used, (2) the expected prepayments assumption, and (3) the qualitative adjustments and their significant assumptions, including the lookback period,effects of limitations inherent in the loss emergence periods,quantitative model. The assessment also included an evaluation of the conceptual soundness and how loans with similar characteristics are pooled, 2)performance of the internal risk grades for commercial loans,PD and 3)LGD models. In addition, auditor judgment was required to evaluate the qualitative adjustments.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the critical auditing matter includeddesign and tested the following. We testedoperating effectiveness of certain internal controls overrelated to the (1) development and approvalCompany’s measurement of the ALLcollective ACL on loans estimate, including controls over the:
development of the collective ACL on loans methodology including key factors
development of certain models
continued use and appropriateness of changes made to PD and LGD models
performance monitoring of the PD and LGD models
identification and determination of the expected prepayments assumption and the significant assumptions (2) determinationused in the PD and LGD models
development of the qualitative adjustments, (3) periodic testingincluding the significant assumptions used in the measurement of internal risk grades for commercial loans, and (4) the qualitative adjustments
analysis of the ALLcollective ACL on loans results, trends, and ratios.
We assessedevaluated the Company’s process to develop the ALL estimate; specifically, we tested thecollective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, to consider whether they were relevant and reliable,considered the relevance and whether additionalreliability of such data, factors, and alternative assumptions should have been used. We tested the qualitative adjustments by:
evaluating the Company’s collective ACL on loans methodology for compliance with U.S. generally accepted accounting principles
evaluating judgments made by the Company relative to the development and performance monitoring of the PD and LGD models, by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
assessing the conceptual soundness and performance testing of the PD and LGD models, by inspecting the model documentation to determine whether the models are suitable for their intended use
evaluating the expected prepayments assumption by comparing to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
evaluating the selection of economic forecast scenarios, including weighting of the scenarios, and underlying assumptions by comparing it to the Company’s business environment and relevant industry practices
evaluating the length of the period from which historical Company and peer experience was used and the reasonable and supportable forecast period by comparing them to specific portfolio risk characteristics and trends
assessing the composition of the peer group by comparing to Company and specific portfolio risk characteristics
determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices
evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.
cumulative results of the audit procedures
qualitative aspects of the Company’s accounting practices
potential bias in the accounting estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Albany, New York
March 2, 20201, 2022
NBT Bancorp Inc. and Subsidiaries
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| (In thousands except share and per share data) | ||||||||
| Assets | ||||||||
| Cash and due from banks | $ | 170,595 | $ | 175,550 | ||||
| Short-term interest bearing accounts | 46,248 | 5,405 | ||||||
| Equity securities, at fair value | 27,771 | 23,053 | ||||||
| Securities available for sale, at fair value | 975,340 | 998,496 | ||||||
| Securities held to maturity (fair value $641,262 and $778,675, respectively) | 630,074 | 783,599 | ||||||
| Federal Reserve and Federal Home Loan Bank stock | 44,620 | 53,229 | ||||||
| Loans held for sale | 11,731 | 6,943 | ||||||
| Loans | 7,136,098 | 6,887,709 | ||||||
| Less allowance for loan losses | 72,965 | 72,505 | ||||||
| Net loans | $ | 7,063,133 | $ | 6,815,204 | ||||
| Premises and equipment, net | 75,631 | 78,970 | ||||||
| Goodwill | 274,769 | 274,769 | ||||||
| Intangible assets, net | 12,020 | 15,599 | ||||||
| Bank owned life insurance | 181,748 | 177,479 | ||||||
| Other assets | 202,245 | 148,067 | ||||||
| Total assets | $ | 9,715,925 | $ | 9,556,363 | ||||
| Liabilities | ||||||||
| Demand (noninterest bearing) | $ | 2,414,383 | $ | 2,361,099 | ||||
| Savings, NOW and money market | 4,312,244 | 4,076,434 | ||||||
| Time | 861,193 | 930,678 | ||||||
| Total deposits | $ | 7,587,820 | $ | 7,368,211 | ||||
| Short-term borrowings | 655,275 | 871,696 | ||||||
| Long-term debt | 64,211 | 73,724 | ||||||
| Junior subordinated debt | 101,196 | 101,196 | ||||||
| Other liabilities | 187,026 | 123,627 | ||||||
| Total liabilities | $ | 8,595,528 | $ | 8,538,454 | ||||
| Stockholders’ equity | ||||||||
| Preferred stock, $0.01 par value; authorized 2,500,000 shares at December 31, 2019 and 2018 | $ | - | $ | - | ||||
| Common stock, $0.01 par value; authorized 100,000,000 shares at December 31, 2019 and 2018, respectively; issued 49,651,493 at December 31, 2019 and 2018 | 497 | 497 | ||||||
| Additional paid-in-capital | 576,708 | 575,466 | ||||||
| Retained earnings | 696,214 | 621,203 | ||||||
| Accumulated other comprehensive loss | (19,026 | ) | (43,174 | ) | ||||
| Common stock in treasury, at cost, 5,854,882 and 5,978,527 shares at December 31, 2019 and 2018, respectively | (133,996 | ) | (136,083 | ) | ||||
| Total stockholders’ equity | $ | 1,120,397 | $ | 1,017,909 | ||||
| Total liabilities and stockholders’ equity | $ | 9,715,925 | $ | 9,556,363 | ||||
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| (In thousands except share and per share data) | ||||||||
| Assets | ||||||||
| Cash and due from banks | $ | 157,775 | $ | 159,995 | ||||
| Short-term interest-bearing accounts | 1,111,296 | 512,686 | ||||||
| Equity securities, at fair value | 33,550 | 30,737 | ||||||
| Securities available for sale, at fair value | 1,687,361 | 1,348,698 | ||||||
Securities held to maturity (fair value $735,260 and $636,827, respectively) | 733,210 | 616,560 | ||||||
| Federal Reserve and Federal Home Loan Bank stock | 25,098 | 27,353 | ||||||
| Loans held for sale | 830 | 1,119 | ||||||
| Loans | 7,498,459 | 7,498,885 | ||||||
| Less allowance for loan losses | 92,000 | 110,000 | ||||||
| Net loans | $ | 7,406,459 | $ | 7,388,885 | ||||
| Premises and equipment, net | 72,093 | 74,206 | ||||||
| Goodwill | 280,541 | 280,541 | ||||||
| Intangible assets, net | 8,927 | 11,735 | ||||||
| Bank owned life insurance | 228,238 | 186,434 | ||||||
| Other assets | 266,733 | 293,957 | ||||||
| Total assets | $ | 12,012,111 | $ | 10,932,906 | ||||
| Liabilities | ||||||||
| Demand (noninterest bearing) | $ | 3,689,556 | $ | 3,241,123 | ||||
| Savings, NOW and money market | 6,043,441 | 5,207,090 | ||||||
| Time | 501,472 | 633,479 | ||||||
| Total deposits | $ | 10,234,469 | $ | 9,081,692 | ||||
| Short-term borrowings | 97,795 | 168,386 | ||||||
| Long-term debt | 13,995 | 39,097 | ||||||
| Subordinated debt, net | 98,490 | 98,052 | ||||||
| Junior subordinated debt | 101,196 | 101,196 | ||||||
| Other liabilities | 215,713 | 256,865 | ||||||
| Total liabilities | $ | 10,761,658 | $ | 9,745,288 | ||||
| Stockholders’ equity | ||||||||
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at December 31, 2021 and 2020 | $ | 0 | $ | 0 | ||||
Common stock, $0.01 par value. Authorized 100,000,000 shares at December 31, 2021 and 2020, issued 49,651,493 at December 31, 2021 and 2020 | 497 | 497 | ||||||
| Additional paid-in-capital | 576,976 | 578,082 | ||||||
| Retained earnings | 856,203 | 749,056 | ||||||
Accumulated other comprehensive (loss) income | (23,344 | ) | 417 | |||||
Common stock in treasury, at cost, 6,483,481 and 6,022,399 shares at December 31, 2021 and 2020, respectively | (159,879 | ) | (140,434 | ) | ||||
| Total stockholders’ equity | $ | 1,250,453 | $ | 1,187,618 | ||||
| Total liabilities and stockholders’ equity | $ | 12,012,111 | $ | 10,932,906 | ||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Interest, fee and dividend income | ||||||||||||
| Interest and fees on loans | $ | 302,175 | $ | 307,859 | $ | 321,474 | ||||||
| Securities available for sale | 23,305 | 22,434 | 23,303 | |||||||||
| Securities held to maturity | 12,551 | 15,283 | 19,105 | |||||||||
| Other | 1,845 | 2,706 | 3,652 | |||||||||
| Total interest, fee and dividend income | $ | 339,876 | $ | 348,282 | $ | 367,534 | ||||||
| Interest expense | ||||||||||||
| Deposits | $ | 10,714 | $ | 22,070 | $ | 39,986 | ||||||
| Short-term borrowings | 158 | 3,408 | 9,693 | |||||||||
| Long-term debt | 389 | 1,553 | 1,875 | |||||||||
| Subordinated debt | 5,437 | 2,842 | 0 | |||||||||
| Junior subordinated debt | 2,090 | 2,731 | 4,425 | |||||||||
| Total interest expense | $ | 18,788 | $ | 32,604 | $ | 55,979 | ||||||
| Net interest income | $ | 321,088 | $ | 315,678 | $ | 311,555 | ||||||
| Provision for loan losses (1) | (8,257 | ) | 51,134 | 25,412 | ||||||||
| Net interest income after provision for loan losses | $ | 329,345 | $ | 264,544 | $ | 286,143 | ||||||
| Noninterest income | ||||||||||||
| Service charges on deposit accounts | $ | 13,348 | $ | 13,201 | $ | 17,151 | ||||||
| ATM and debit card fees | 31,301 | 25,960 | 23,893 | |||||||||
| Retirement plan administration fees | 42,188 | 35,851 | 30,388 | |||||||||
| Wealth management | 33,718 | 29,247 | 28,400 | |||||||||
| Insurance services | 14,083 | 14,757 | 15,770 | |||||||||
| Bank owned life insurance income | 6,217 | 5,743 | 5,355 | |||||||||
| Net securities gains (losses) | 566 | (388 | ) | 4,213 | ||||||||
| Other | 16,373 | 21,905 | 18,853 | |||||||||
| Total noninterest income | $ | 157,794 | $ | 146,276 | $ | 144,023 | ||||||
| Noninterest expense | ||||||||||||
| Salaries and employee benefits | $ | 172,580 | $ | 161,934 | $ | 156,867 | ||||||
| Occupancy | 21,922 | 21,634 | 22,706 | |||||||||
| Data processing and communications | 16,989 | 16,527 | 18,318 | |||||||||
| Professional fees and outside services | 16,306 | 15,082 | 14,785 | |||||||||
| Equipment | 21,854 | 19,889 | 18,583 | |||||||||
| Office supplies and postage | 6,006 | 6,138 | 6,579 | |||||||||
| FDIC expenses | 3,041 | 2,688 | 1,946 | |||||||||
| Advertising | 2,521 | 2,288 | 2,773 | |||||||||
| Amortization of intangible assets | 2,808 | 3,395 | 3,579 | |||||||||
| Loan collection and other real estate owned, net | 2,915 | 3,295 | 4,158 | |||||||||
| Other | 20,339 | 24,863 | 24,440 | |||||||||
| Total noninterest expense | $ | 287,281 | $ | 277,733 | $ | 274,734 | ||||||
| Income before income tax expense | $ | 199,858 | $ | 133,087 | $ | 155,432 | ||||||
| Income tax expense | 44,973 | 28,699 | 34,411 | |||||||||
| Net income | $ | 154,885 | $ | 104,388 | $ | 121,021 | ||||||
| Earnings per share | ||||||||||||
| Basic | $ | 3.57 | $ | 2.39 | $ | 2.76 | ||||||
| Diluted | $ | 3.54 | $ | 2.37 | $ | 2.74 | ||||||
| (1) | Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology. |
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Interest, fee and dividend income | ||||||||||||
| Interest and fees on loans | $ | 321,474 | $ | 300,827 | $ | 267,096 | ||||||
| Securities available for sale | 23,303 | 26,920 | 28,564 | |||||||||
| Securities held to maturity | 19,105 | 13,242 | 10,934 | |||||||||
| Other | 3,652 | 3,266 | 2,813 | |||||||||
| Total interest, fee and dividend income | $ | 367,534 | $ | 344,255 | $ | 309,407 | ||||||
| Interest expense | ||||||||||||
| Deposits | $ | 39,986 | $ | 22,144 | $ | 14,475 | ||||||
| Short-term borrowings | 9,693 | 10,552 | 5,996 | |||||||||
| Long-term debt | 1,875 | 1,790 | 2,299 | |||||||||
| Junior subordinated debt | 4,425 | 4,140 | 3,144 | |||||||||
| Total interest expense | $ | 55,979 | $ | 38,626 | $ | 25,914 | ||||||
| Net interest income | $ | 311,555 | $ | 305,629 | $ | 283,493 | ||||||
| Provision for loan losses | 25,412 | 28,828 | 30,988 | |||||||||
| Net interest income after provision for loan losses | $ | 286,143 | $ | 276,801 | $ | 252,505 | ||||||
| Noninterest income | ||||||||||||
| Insurance and other financial services revenue | $ | 25,006 | $ | 24,345 | $ | 23,532 | ||||||
| Service charges on deposit accounts | 17,151 | 17,224 | 16,750 | |||||||||
| ATM and debit card fees | 23,893 | 22,699 | 21,372 | |||||||||
| Retirement plan administration fees | 30,388 | 26,992 | 20,213 | |||||||||
| Trust | 19,164 | 19,524 | 19,586 | |||||||||
| Bank owned life insurance | 5,355 | 5,091 | 5,175 | |||||||||
| Net securities gains (losses) | 4,213 | (6,341 | ) | 1,867 | ||||||||
| Gain on the sale of equity investment | - | - | 818 | |||||||||
| Other | 18,853 | 15,228 | 11,991 | |||||||||
| Total noninterest income | $ | 144,023 | $ | 124,762 | $ | 121,304 | ||||||
| Noninterest expense | ||||||||||||
| Salaries and employee benefits | $ | 156,867 | $ | 151,685 | $ | 135,222 | ||||||
| Occupancy | 22,706 | 22,318 | 21,808 | |||||||||
| Data processing and communications | 18,318 | 17,652 | 17,068 | |||||||||
| Professional fees and outside services | 14,785 | 14,376 | 13,499 | |||||||||
| Equipment | 18,583 | 17,037 | 15,225 | |||||||||
| Office supplies and postage | 6,579 | 6,204 | 6,284 | |||||||||
| FDIC expenses | 1,946 | 4,651 | 4,767 | |||||||||
| Advertising | 2,773 | 2,782 | 2,744 | |||||||||
| Amortization of intangible assets | 3,579 | 4,042 | 3,960 | |||||||||
| Loan collection and other real estate owned, net | 4,158 | 4,217 | 4,763 | |||||||||
| Other | 24,440 | 19,597 | 20,308 | |||||||||
| Total noninterest expense | $ | 274,734 | $ | 264,561 | $ | 245,648 | ||||||
| Income before income tax expense | $ | 155,432 | $ | 137,002 | $ | 128,161 | ||||||
| Income tax expense | 34,411 | 24,436 | 46,010 | |||||||||
| Net income | $ | 121,021 | $ | 112,566 | $ | 82,151 | ||||||
| Earnings per share | ||||||||||||
| Basic | $ | 2.76 | $ | 2.58 | $ | 1.89 | ||||||
| Diluted | $ | 2.74 | $ | 2.56 | $ | 1.87 | ||||||
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands) | ||||||||||||
| Net income | $ | 154,885 | $ | 104,388 | $ | 121,021 | ||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||
| Securities available for sale: | ||||||||||||
| Unrealized net holding (losses) gains arising during the period, gross | $ | (37,432 | ) | $ | 23,204 | $ | 25,836 | |||||
| Tax effect | 9,358 | (5,800 | ) | (6,459 | ) | |||||||
| Unrealized net holding (losses) gains arising during the period, net | $ | (28,074 | ) | $ | 17,404 | $ | 19,377 | |||||
| Reclassification adjustment for net (gains) losses in net income, gross | $ | 0 | $ | (3 | ) | $ | 79 | |||||
| Tax effect | 0 | 1 | (20 | ) | ||||||||
| Reclassification adjustment for net (gains) losses in net income, net | $ | 0 | $ | (2 | ) | $ | 59 | |||||
| Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross | $ | 577 | $ | 644 | $ | 737 | ||||||
| Tax effect | (145 | ) | (161 | ) | (184 | ) | ||||||
| Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net | $ | 432 | $ | 483 | $ | 553 | ||||||
| Total securities available for sale, net | $ | (27,642 | ) | $ | 17,885 | $ | 19,989 | |||||
| Cash flow hedges: | ||||||||||||
| Unrealized losses on derivatives (cash flow hedges), gross | $ | 0 | $ | (275 | ) | $ | (459 | ) | ||||
| Tax effect | 0 | 69 | 115 | |||||||||
| Unrealized losses on derivatives (cash flow hedges), net | $ | 0 | $ | (206 | ) | $ | (344 | ) | ||||
| Reclassification of net unrealized losses (gains) on cash flow hedges to interest expense, gross | $ | 21 | $ | 296 | $ | (2,012 | ) | |||||
| Tax effect | (5 | ) | (74 | ) | 503 | |||||||
| Reclassification of net unrealized losses (gains) on cash flow hedges to interest expense, net | $ | 16 | $ | 222 | $ | (1,509 | ) | |||||
| Total cash flow hedges, net | $ | 16 | $ | 16 | $ | (1,853 | ) | |||||
| Pension and other benefits: | ||||||||||||
| Amortization of prior service cost and actuarial losses, gross | $ | 1,373 | $ | 1,627 | $ | 2,686 | ||||||
| Tax effect | (343 | ) | (407 | ) | (672 | ) | ||||||
| Amortization of prior service cost and actuarial losses, net | $ | 1,030 | $ | 1,220 | $ | 2,014 | ||||||
| Decrease in unrecognized actuarial loss, gross | $ | 3,780 | $ | 429 | $ | 5,331 | ||||||
| Tax effect | (945 | ) | (107 | ) | (1,333 | ) | ||||||
| Decrease in unrecognized actuarial loss, net | $ | 2,835 | $ | 322 | $ | 3,998 | ||||||
| Total pension and other benefits, net | $ | 3,865 | $ | 1,542 | $ | 6,012 | ||||||
| Total other comprehensive (loss) income | $ | (23,761 | ) | $ | 19,443 | $ | 24,148 | |||||
| Comprehensive income | $ | 131,124 | $ | 123,831 | $ | 145,169 | ||||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Net income | $ | 121,021 | $ | 112,566 | $ | 82,151 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Securities available for sale: | ||||||||||||
| Unrealized net holding gains (losses) arising during the period, gross | $ | 25,836 | $ | (11,985 | ) | $ | (6,915 | ) | ||||
| Tax effect | (6,459 | ) | 2,996 | 2,845 | ||||||||
| Unrealized net holding gains (losses) arising during the period, net | $ | 19,377 | $ | (8,989 | ) | $ | (4,070 | ) | ||||
| Reclassification adjustment for net losses (gains) in net income, gross | $ | 79 | $ | 6,622 | $ | (1,869 | ) | |||||
| Tax effect | (20 | ) | (1,655 | ) | 716 | |||||||
| Reclassification adjustment for net losses (gains) in net income, net | $ | 59 | $ | 4,967 | $ | (1,153 | ) | |||||
| Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross | $ | 737 | $ | 688 | $ | 875 | ||||||
| Tax effect | (184 | ) | (172 | ) | (335 | ) | ||||||
| Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net | $ | 553 | $ | 516 | $ | 540 | ||||||
| Reclassification adjustment for an impairment write-down of equity security, gross | $ | - | $ | - | $ | 1,312 | ||||||
| Tax effect | - | - | (501 | ) | ||||||||
| Reclassification adjustment for an impairment write-down of equity security, net | $ | - | $ | - | $ | 811 | ||||||
| Total securities available for sale, net | $ | 19,989 | $ | (3,506 | ) | $ | (3,872 | ) | ||||
| Cash flow hedges: | ||||||||||||
| Unrealized (losses) gains on derivatives (cash flow hedges), gross | $ | (459 | ) | $ | 1,218 | $ | 901 | |||||
| Tax effect | 115 | (304 | ) | (350 | ) | |||||||
| Unrealized (losses) gains on derivatives (cash flow hedges), net | $ | (344 | ) | $ | 914 | $ | 551 | |||||
| Reclassification of net unrealized (gains) on cash flow hedges to interest (income), gross | $ | (2,012 | ) | $ | (2,300 | ) | $ | (292 | ) | |||
| Tax effect | 503 | 575 | 113 | |||||||||
| Reclassification of net unrealized (gains) on cash flow hedges to interest (income), net | $ | (1,509 | ) | $ | (1,725 | ) | $ | (179 | ) | |||
| Total cash flow hedges, net | $ | (1,853 | ) | $ | (811 | ) | $ | 372 | ||||
| Pension and other benefits: | ||||||||||||
| Amortization of prior service cost and actuarial losses, gross | $ | 2,686 | $ | 1,145 | $ | 1,852 | ||||||
| Tax effect | (672 | ) | (286 | ) | (740 | ) | ||||||
| Amortization of prior service cost and actuarial losses, net | $ | 2,014 | $ | 859 | $ | 1,112 | ||||||
| Decrease (increase) in unrecognized actuarial loss, gross | $ | 5,331 | $ | (12,457 | ) | $ | 2,401 | |||||
| Tax effect | (1,333 | ) | 3,038 | (570 | ) | |||||||
| Decrease (increase) in unrecognized actuarial loss, net | $ | 3,998 | $ | (9,419 | ) | $ | 1,831 | |||||
| Total pension and other benefits, net | $ | 6,012 | $ | (8,560 | ) | $ | 2,943 | |||||
| Total other comprehensive income (loss) | $ | 24,148 | $ | (12,877 | ) | $ | (557 | ) | ||||
| Comprehensive income | $ | 145,169 | $ | 99,689 | $ | 81,594 | ||||||
Common Stock | Additional Paid-in- Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Common Stock in Treasury | Total | |||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||
Balance at December 31, 2018 | $ | 497 | $ | 575,466 | $ | 621,203 | $ | (43,174 | ) | $ | (136,083 | ) | $ | 1,017,909 | ||||||||||
| Net income | 0 | 0 | 121,021 | 0 | 0 | 121,021 | ||||||||||||||||||
Cash dividends - $1.05 per share | 0 | 0 | (46,010 | ) | 0 | 0 | (46,010 | ) | ||||||||||||||||
Net issuance of 123,645 shares to employee and other stock plans | 0 | (2,968 | ) | 0 | 0 | 2,087 | (881 | ) | ||||||||||||||||
| Stock-based compensation | 0 | 4,210 | 0 | 0 | 0 | 4,210 | ||||||||||||||||||
| Other comprehensive income | 0 | 0 | 0 | 24,148 | 0 | 24,148 | ||||||||||||||||||
Balance at December 31, 2019 | $ | 497 | $ | 576,708 | $ | 696,214 | $ | (19,026 | ) | $ | (133,996 | ) | $ | 1,120,397 | ||||||||||
| Net income | 0 | 0 | 104,388 | 0 | 0 | 104,388 | ||||||||||||||||||
Cash dividends - $1.08 per share | 0 | 0 | (47,207 | ) | 0 | 0 | (47,207 | ) | ||||||||||||||||
| Cumulative effect adjustment for ASU 2016-13 implementation | 0 | 0 | (4,339 | ) | 0 | 0 | (4,339 | ) | ||||||||||||||||
Purchase of 263,507 treasury shares | 0 | 0 | 0 | 0 | (7,980 | ) | (7,980 | ) | ||||||||||||||||
Net issuance of 95,990 shares to employee and other stock plans | 0 | (3,207 | ) | 0 | 0 | 1,542 | (1,665 | ) | ||||||||||||||||
| Stock-based compensation | 0 | 4,581 | 0 | 0 | 0 | 4,581 | ||||||||||||||||||
| Other comprehensive income | 0 | 0 | 0 | 19,443 | 0 | 19,443 | ||||||||||||||||||
Balance at December 31, 2020 | $ | 497 | $ | 578,082 | $ | 749,056 | $ | 417 | $ | (140,434 | ) | $ | 1,187,618 | |||||||||||
| Net income | 0 | 0 | 154,885 | 0 | 0 | 154,885 | ||||||||||||||||||
Cash dividends - $1.10 per share | 0 | 0 | (47,738 | ) | 0 | 0 | (47,738 | ) | ||||||||||||||||
Purchase of 604,637 treasury shares | 0 | 0 | 0 | 0 | (21,714 | ) | (21,714 | ) | ||||||||||||||||
Net issuance of 143,555 shares to employee and other stock plans | 0 | (5,520 | ) | 0 | 0 | 2,269 | (3,251 | ) | ||||||||||||||||
| Stock-based compensation | 0 | 4,414 | 0 | 0 | 0 | 4,414 | ||||||||||||||||||
| Other comprehensive (loss) | 0 | 0 | 0 | (23,761 | ) | 0 | (23,761 | ) | ||||||||||||||||
Balance at December 31, 2021 | $ | 497 | $ | 576,976 | $ | 856,203 | $ | (23,344 | ) | $ | (159,879 | ) | $ | 1,250,453 | ||||||||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| (In thousands, except share and per share data) | Common Stock | Additional Paid-in- Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Common Stock in Treasury | Total | ||||||||||||||||||
| Balance at December 31, 2016 | $ | 497 | $ | 575,078 | $ | 501,761 | $ | (21,520 | ) | $ | (142,500 | ) | $ | 913,316 | ||||||||||
| Net income | - | - | 82,151 | - | - | 82,151 | ||||||||||||||||||
| Cash dividends - $0.92 per share | - | - | (40,104 | ) | - | - | (40,104 | ) | ||||||||||||||||
| Net issuance of 285,059 shares to employee and other stock plans | - | (4,608 | ) | - | - | 4,335 | (273 | ) | ||||||||||||||||
| Stock-based compensation | - | 3,739 | (95 | ) | - | - | 3,644 | |||||||||||||||||
| Other comprehensive (loss) | - | - | - | (557 | ) | - | (557 | ) | ||||||||||||||||
| Balance at December 31, 2017 | $ | 497 | $ | 574,209 | $ | 543,713 | $ | (22,077 | ) | $ | (138,165 | ) | $ | 958,177 | ||||||||||
| Net income | - | - | 112,566 | - | - | 112,566 | ||||||||||||||||||
| Cumulative effect adjustment for ASU 2016-01 implementation | - | - | 2,618 | (2,645 | ) | - | (27 | ) | ||||||||||||||||
| Cumulative effect adjustment for ASU 2018-02 implementation | - | - | 5,575 | (5,575 | ) | - | - | |||||||||||||||||
| Cash dividends - $0.99 per share | - | - | (43,269 | ) | - | - | (43,269 | ) | ||||||||||||||||
| Net issuance of 130,157 shares to employee and other stock plans | - | (2,679 | ) | - | - | 2,082 | (597 | ) | ||||||||||||||||
| Stock-based compensation | - | 3,936 | - | - | - | 3,936 | ||||||||||||||||||
| Other comprehensive (loss) | - | - | - | (12,877 | ) | - | (12,877 | ) | ||||||||||||||||
| Balance at December 31, 2018 | $ | 497 | $ | 575,466 | $ | 621,203 | $ | (43,174 | ) | $ | (136,083 | ) | $ | 1,017,909 | ||||||||||
| Net income | - | - | 121,021 | - | - | 121,021 | ||||||||||||||||||
| Cash dividends - $1.05 per share | - | - | (46,010 | ) | - | - | (46,010 | ) | ||||||||||||||||
| Net issuance of 123,645 shares to employee and other stock plans | - | (2,968 | ) | - | - | 2,087 | (881 | ) | ||||||||||||||||
| Stock-based compensation | - | 4,210 | - | - | - | 4,210 | ||||||||||||||||||
| Other comprehensive income | - | - | - | 24,148 | - | 24,148 | ||||||||||||||||||
| Balance at December 31, 2019 | $ | 497 | $ | 576,708 | $ | 696,214 | $ | (19,026 | ) | $ | (133,996 | ) | $ | 1,120,397 | ||||||||||
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands) | ||||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 154,885 | $ | 104,388 | $ | 121,021 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
| Provision for loan losses | (8,257 | ) | 51,134 | 25,412 | ||||||||
| Depreciation and amortization of premises and equipment | 9,896 | 9,772 | 9,497 | |||||||||
| Net amortization on securities | 5,832 | 4,369 | 3,375 | |||||||||
| Amortization of intangible assets | 2,808 | 3,395 | 3,579 | |||||||||
| Amortization of operating lease right-of-use assets | 7,176 | 7,382 | 7,239 | |||||||||
| Excess tax benefit on stock-based compensation | (385 | ) | (181 | ) | (409 | ) | ||||||
| Stock-based compensation expense | 4,414 | 4,581 | 4,210 | |||||||||
| Bank owned life insurance income | (6,217 | ) | (5,743 | ) | (5,355 | ) | ||||||
| Amortization of subordinated debt issuance costs | 438 | 230 | 0 | |||||||||
| Proceeds from sale of loans held for sale | 55,065 | 168,707 | 175,829 | |||||||||
| Originations of loans held for sale | (54,608 | ) | (158,279 | ) | (181,261 | ) | ||||||
| Net gains on sales of loans held for sale | (361 | ) | (1,989 | ) | (786 | ) | ||||||
| Net security (gains) losses | (566 | ) | 388 | (4,213 | ) | |||||||
| Net losses (gains) on sale of other real estate owned | 182 | (96 | ) | 227 | ||||||||
| Lease termination losses | 0 | 4,284 | 1,872 | |||||||||
| Net change in other assets and other liabilities | (12,667 | ) | (49,930 | ) | (6,774 | ) | ||||||
| Net cash provided by operating activities | $ | 157,635 | $ | 142,412 | $ | 153,463 | ||||||
| Investing activities | ||||||||||||
| Net cash used in acquisitions | $ | 0 | $ | (3,899 | ) | $ | 0 | |||||
Securities available for sale: | ||||||||||||
| Proceeds from maturities, calls and principal paydowns | 395,386 | 336,410 | 273,578 | |||||||||
| Proceeds from sales | 0 | 0 | 26,203 | |||||||||
| Purchases | (775,963 | ) | (689,932 | ) | (252,963 | ) | ||||||
| Securities held to maturity: | ||||||||||||
| Proceeds from maturities, calls and principal paydowns | 181,620 | 243,136 | 223,733 | |||||||||
| Proceeds from sales | 0 | 996 | 0 | |||||||||
| Purchases | (299,014 | ) | (230,951 | ) | (70,660 | ) | ||||||
| Equity securities: | ||||||||||||
| Proceeds from calls | 1,000 | 2,000 | 0 | |||||||||
| Proceeds from sales | 0 | 0 | 3,966 | |||||||||
| Purchases | 0 | 0 | (93 | ) | ||||||||
| Other: | ||||||||||||
| Net increase in loans | (9,305 | ) | (378,765 | ) | (272,698 | ) | ||||||
| Proceeds from Federal Home Loan Bank stock redemption | 2,422 | 63,305 | 182,752 | |||||||||
| Purchases of Federal Reserve Bank and Federal Home Loan Bank stock | (167 | ) | (46,038 | ) | (174,143 | ) | ||||||
| Proceeds from settlement of bank owned life insurance | 4,413 | 1,057 | 1,086 | |||||||||
| Purchase of bank owned life insurance | (40,000 | ) | 0 | 0 | ||||||||
| Purchases of premises and equipment, net | (7,740 | ) | (8,157 | ) | (6,647 | ) | ||||||
| Proceeds from sales of other real estate owned | 1,290 | 1,113 | 1,543 | |||||||||
| Net cash used in investing activities | $ | (546,058 | ) | $ | (709,725 | ) | $ | (64,343 | ) | |||
| Financing activities | ||||||||||||
| Net increase in deposits | $ | 1,152,777 | $ | 1,493,872 | $ | 219,609 | ||||||
| Net decrease in short-term borrowings | (70,592 | ) | (486,889 | ) | (216,421 | ) | ||||||
| Proceeds from issuance of subordinated debt | 0 | 100,000 | 0 | |||||||||
| Payment of subordinated debt issuance costs | 0 | (2,178 | ) | 0 | ||||||||
| Proceeds from issuance of long-term debt | 0 | 0 | 10,598 | |||||||||
| Repayments of long-term debt | (25,101 | ) | (25,114 | ) | (20,111 | ) | ||||||
| Proceeds from the issuance of shares to employee and other stock plans | 112 | 184 | 725 | |||||||||
| Cash paid by employer for tax-withholding on stock issuance | (2,931 | ) | (1,537 | ) | (1,622 | ) | ||||||
| Purchase of treasury stock | (21,714 | ) | (7,980 | ) | 0 | |||||||
| Cash dividends | (47,738 | ) | (47,207 | ) | (46,010 | ) | ||||||
| Net cash provided by (used in) financing activities | $ | 984,813 | $ | 1,023,151 | $ | (53,232 | ) | |||||
| Net increase in cash and cash equivalents | $ | 596,390 | $ | 455,838 | $ | 35,888 | ||||||
| Cash and cash equivalents at beginning of year | 672,681 | 216,843 | 180,955 | |||||||||
| Cash and cash equivalents at end of year | $ | 1,269,071 | $ | 672,681 | $ | 216,843 | ||||||
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest expense | $ | 20,285 | $ | 31,692 | $ | 55,908 | ||||||
| Income taxes paid, net of refund | 46,097 | 45,790 | 28,374 | |||||||||
| Noncash investing activities: | ||||||||||||
| Loans transferred to other real estate owned | $ | 181 | $ | 1,017 | $ | 787 | ||||||
| Acquisitions: | ||||||||||||
| Fair value of assets acquired | $ | 0 | $ | 3,328 | $ | 0 | ||||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In thousands) | ||||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 121,021 | $ | 112,566 | $ | 82,151 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
| Provision for loan losses | 25,412 | 28,828 | 30,988 | |||||||||
| Depreciation and amortization of premises and equipment | 9,497 | 9,280 | 9,056 | |||||||||
| Net amortization on securities | 3,375 | 4,007 | 4,786 | |||||||||
| Amortization of intangible assets | 3,579 | 4,042 | 3,960 | |||||||||
| Amortization of operating lease right-of-use assets | 7,239 | - | - | |||||||||
| Excess tax benefit on stock-based compensation | (409 | ) | (543 | ) | (1,769 | ) | ||||||
| Stock-based compensation expense | 4,210 | 3,936 | 3,644 | |||||||||
| Bank owned life insurance income | (5,355 | ) | (5,091 | ) | (5,175 | ) | ||||||
| Trading security purchases | - | - | (1,586 | ) | ||||||||
| Net unrealized losses on trading securities | - | - | (623 | ) | ||||||||
| Proceeds from sales of loans held for sale | 175,829 | 102,547 | 111,284 | |||||||||
| Originations of loans held for sale | (181,261 | ) | (108,070 | ) | (111,206 | ) | ||||||
| Net gains on sales of loans held for sale | (786 | ) | (286 | ) | (349 | ) | ||||||
| Net security (gains) losses | (4,213 | ) | 6,341 | (1,867 | ) | |||||||
| Net losses (gains) on sales and write-down of other real estate owned | 227 | (230 | ) | (221 | ) | |||||||
| Gain on sale of equity investment | - | - | (818 | ) | ||||||||
| Impairment write-down of equity security | - | - | 1,312 | |||||||||
| Impairment write-down of goodwill and intangible assets | - | - | 1,530 | |||||||||
| Re-evaluation of deferred tax amounts from Tax Act | - | - | 4,407 | |||||||||
| Net change in other assets and other liabilities | (4,902 | ) | (9,554 | ) | 7,400 | |||||||
| Net cash provided by operating activities | $ | 153,463 | $ | 147,773 | $ | 136,904 | ||||||
| Investing activities | ||||||||||||
| Net cash used in acquisitions | $ | - | $ | (7,884 | ) | $ | (4,000 | ) | ||||
Securities available for sale: | ||||||||||||
| Proceeds from maturities, calls and principal paydowns | 273,578 | 259,446 | 290,613 | |||||||||
| Proceeds from sales | 26,203 | 101,315 | 14,788 | |||||||||
| Purchases | (252,963 | ) | (132,448 | ) | (233,804 | ) | ||||||
| Securities held to maturity: | ||||||||||||
| Proceeds from maturities, calls and principal paydowns | 223,733 | 100,738 | 103,759 | |||||||||
| Proceeds from sales | - | - | 764 | |||||||||
| Purchases | (70,660 | ) | (400,602 | ) | (60,706 | ) | ||||||
| Equity securities: | ||||||||||||
| Proceeds from sales | 3,966 | 3,318 | - | |||||||||
| Purchases | (93 | ) | (2 | ) | - | |||||||
| Other: | ||||||||||||
| Net increase in loans | (272,698 | ) | (331,166 | ) | (419,114 | ) | ||||||
| Proceeds from Federal Home Loan Bank stock redemption | 182,752 | 246,844 | 248,887 | |||||||||
| Purchases of Federal Reserve and Federal Home Loan Bank stock | (174,143 | ) | (253,367 | ) | (248,560 | ) | ||||||
| Proceeds from settlement of bank owned life insurance | 1,086 | - | 799 | |||||||||
| Purchases of premises and equipment, net | (6,647 | ) | (7,402 | ) | (6,691 | ) | ||||||
| Proceeds from sale of equity investment | - | - | 818 | |||||||||
| Proceeds from sales of other real estate owned | 1,543 | 3,591 | 7,254 | |||||||||
| Net cash used in investing activities | $ | (64,343 | ) | $ | (417,619 | ) | $ | (305,193 | ) | |||
| Financing activities | ||||||||||||
| Net increase in deposits | $ | 219,609 | $ | 197,575 | $ | 196,948 | ||||||
| Net (decrease) increase in short-term borrowings | (216,421 | ) | 152,573 | 37,419 | ||||||||
| Proceeds from issuance of long-term debt | 10,598 | 25,000 | 25,000 | |||||||||
| Repayments of long-term debt | (20,111 | ) | (40,145 | ) | (40,218 | ) | ||||||
| Proceeds from the issuance of shares to employee and other stock plans | 725 | 1,296 | 3,309 | |||||||||
| Cash paid by employer for tax-withholding on stock issuance | (1,622 | ) | (1,893 | ) | (3,582 | ) | ||||||
| Cash dividends | (46,010 | ) | (43,269 | ) | (40,104 | ) | ||||||
| Net cash (used in) provided by financing activities | $ | (53,232 | ) | $ | 291,137 | $ | 178,772 | |||||
| Net increase in cash and cash equivalents | $ | 35,888 | $ | 21,291 | $ | 10,483 | ||||||
| Cash and cash equivalents at beginning of year | 180,955 | 159,664 | 149,181 | |||||||||
| Cash and cash equivalents at end of year | $ | 216,843 | $ | 180,955 | $ | 159,664 | ||||||
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest expense | $ | 55,908 | $ | 36,691 | $ | 25,887 | ||||||
| Income taxes paid | 28,374 | 31,898 | 33,675 | |||||||||
| Noncash investing activities: | ||||||||||||
| Loans transferred to other real estate owned | $ | 787 | $ | 1,273 | $ | 5,981 | ||||||
| Acquisitions: | ||||||||||||
| Fair value of assets acquired | $ | - | $ | 6,274 | $ | 3,096 | ||||||
December 31, 20192021 and 20182020
1. Summary of Significant Accounting Policies
The accounting and reporting policies of NBT Bancorp Inc. (“NBT Bancorp”) and its subsidiaries, NBT Bank, National Association (“NBT Bank” or the “Bank"“Bank”), NBT Holdings, Inc. and NBT Financial Services, Inc.and NBT Holdings, Inc., conform, in all material respects, with generally accepted accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. Collectively, NBT Bancorp and its subsidiaries are referred to herein as “the Company.”(“the Company”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.estimates and such estimates could be material to the financial statements.
Estimates associated with the allowance for loancredit losses, pension accounting, provision for income taxes, pension expense, fair values of financial instruments and status of contingencies and other-than-temporary impairment ("OTTI") on investments are particularly susceptible to material change in the near term.
The following is a description of significant policies and practices:
Consolidation
The accompanying consolidated financial statements include the accounts of NBT Bancorp and its wholly-owned subsidiaries mentioned above. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation. In the “Parent Company Financial Information,” the investment in subsidiaries is recorded using the equity method of accounting.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE'sVIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company’s wholly-owned subsidiaries CNBF Capital Trust I, NBT Statutory Trust I, NBT Statutory Trust II, Alliance Financial Capital Trust I and Alliance Financial Capital Trust II are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements.
Beginning January 1, 2020, the Company calculated the allowance for credit losses using current expected credit losses methodology. As a result of our January 1, 2020, adoption of CECL and its related amendments, our methodology for estimating the allowance for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the deferred tax asset.
Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
The Company’s operationsCECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required recognition of a credit loss when it was probable a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net, lifetime amount expected to be collected on the loans. Loan losses are primarilycharged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Required additions or reductions to the allowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall loss expected over the contractual life of the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required at each point in the community banking industrymeasurement process.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and includequalitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the provisiondiscounted cash flows methodology, expected credit losses are estimated over the effective life of traditional banking services. The Company also provides other services through its subsidiaries such as insurance, retirement plan administrationthe loans by measuring the difference between the net present value of modeled cash flows and trust administration. The Company operates solelyamortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the geographical regionsloan portfolio at the balance sheet date.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of centralCECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and upstate New York, northeastern Pennsylvania, western Massachusetts, southern New Hampshire, Vermontcollateral which is generally based upon federal call report segmentation and southern coastal Maine.have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
Additional information about our Allowance for Loan Losses is included in Notes 1 and 6 to the consolidated financial statements. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
The allowance for credit losses totaled $92.0 million at December 31, 2021, compared to $110.0 million at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loans) at December 31, 2021, compared to 1.47% (1.56% excluding PPP loans) at December 31, 2020. The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improved economic conditions in the CECL forecast, partly offset by providing for the increase in loan balances.
(Dollars in thousands) | 2021 | 2020 | ||||||
Balance at January 1* | $ | 110,000 | $ | 75,999 | ||||
Loans charged-off | ||||||||
Commercial | 4,638 | 4,005 | ||||||
Residential | 979 | 1,135 | ||||||
Consumer** | 14,489 | 21,938 | ||||||
Total loans charged-off | $ | 20,106 | $ | 27,078 | ||||
Recoveries | ||||||||
Commercial | $ | 723 | $ | 786 | ||||
Residential | 1,069 | 618 | ||||||
Consumer** | 8,571 | 8,541 | �� | |||||
Total recoveries | $ | 10,363 | $ | 9,945 | ||||
Net loans charged-off | $ | 9,743 | $ | 17,133 | ||||
Provision for loan losses | $ | (8,257 | ) | $ | 51,134 | |||
Balance at December 31 | $ | 92,000 | $ | 110,000 | ||||
Allowance for loan losses to loans outstanding at end of year | 1.23 | % | 1.47 | % | ||||
Commercial net charge-offs to average loans outstanding | 0.05 | % | 0.04 | % | ||||
Residential net charge-offs to average loans outstanding | - | 0.01 | % | |||||
Consumer net charge-offs to average loans outstanding | 0.08 | % | 0.18 | % | ||||
Net charge-offs to average loans outstanding | 0.13 | % | 0.23 | % | ||||
| * | 2020 includes an adjustment of $3.0 million as a result of our January 1, 2020, adoption of Accounting Standards Codification (“ASC”) 326. |
| ** | Consumer charge-off and recoveries include consumer and home equity. |
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables related to the allowance for loan losses in prior periods under the incurred methodology. Charge-off and recoveries are summarized by business line which do not align to how the Company has no reportable operating segments.assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
Balance at January 1* | $ | 72,505 | $ | 69,500 | $ | 65,200 | ||||||
Loans charged-off | ||||||||||||
Commercial and agricultural | 3,151 | 3,463 | 4,169 | |||||||||
Residential real estate | 991 | 913 | 1,846 | |||||||||
Consumer | 28,398 | 29,752 | 27,072 | |||||||||
Total loans charged-off | $ | 32,540 | $ | 34,128 | $ | 33,087 | ||||||
Recoveries | ||||||||||||
Commercial and agricultural | $ | 534 | $ | 1,178 | $ | 1,077 | ||||||
Residential real estate | 141 | 306 | 180 | |||||||||
Consumer | 6,913 | 6,821 | 5,142 | |||||||||
Total recoveries | $ | 7,588 | $ | 8,305 | $ | 6,399 | ||||||
Net loans charged-off | $ | 24,952 | $ | 25,823 | $ | 26,688 | ||||||
Provision for loan losses | $ | 25,412 | $ | 28,828 | $ | 30,988 | ||||||
Balance at December 31 | $ | 72,965 | $ | 72,505 | $ | 69,500 | ||||||
Allowance for loan losses to loans outstanding at end of year | 1.02 | % | 1.05 | % | 1.06 | % | ||||||
Commercial and agricultural net charge-offs to average loans outstanding | 0.04 | % | 0.03 | % | 0.05 | % | ||||||
Residential real estate net charge-offs to average loans outstanding | 0.01 | % | 0.01 | % | 0.03 | % | ||||||
Consumer net charge-offs to average loans outstanding | 0.31 | % | 0.34 | % | 0.34 | % | ||||||
Net charge-offs to average loans outstanding | 0.36 | % | 0.38 | % | 0.42 | % | ||||||
The provision for loan losses was a net benefit of $8.3 million for year ended December 31, 2021, compared to provision expense of $51.1 million in for the year ended December 31, 2020. The allowance for credit losses was 280.98% of nonperforming loans at December 31, 2021 as compared to 230.14% at December 31, 2020. The allowance for credit losses was 303.78% of nonaccrual loans at December 31, 2021 as compared to 246.38% at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loan originations) at December 31, 2021 compared to 1.47% (1.56% excluding PPP loan originations) at December 31, 2020. The decrease to the December 31, 2021 allowance for credit loss and provision expense was primarily due to the improved economic conditions in the CECL forecast.
December 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||
Commercial | $ | 28,941 | 51 | % | $ | 50,942 | 53 | % | ||||||||
Residential | 18,806 | 27 | % | 21,255 | 26 | % | ||||||||||
Consumer | 44,253 | 22 | % | 37,803 | 21 | % | ||||||||||
Total | $ | 92,000 | 100 | % | $ | 110,000 | 100 | % | ||||||||
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables are related to the allowance for loan losses in prior periods. Category percentage of loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||||||||
Commercial and agricultural | $ | 34,525 | 48 | % | $ | 32,759 | 47 | % | $ | 27,606 | 46 | % | ||||||||||||
Residential real estate | 2,793 | 20 | % | 2,568 | 20 | % | 5,064 | 20 | % | |||||||||||||||
Consumer | 35,647 | 32 | % | 37,178 | 33 | % | 36,830 | 34 | % | |||||||||||||||
Total | $ | 72,965 | 100 | % | $ | 72,505 | 100 | % | $ | 69,500 | 100 | % | ||||||||||||
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company considers amounts due from correspondent banks, cash itemsestimates expected credit losses over the contractual period in processwhich the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of collectionthe likelihood that funding will occur and institutional money market mutual fundsan estimate of expected credit losses on commitments expected to be cash equivalentsfunded over their estimated lives. As of December 31, 2021, the allowance for purposeslosses on unfunded commitments totaled $5.1 million, compared to $6.4 million as of December 31, 2020. The decrease in the allowance in 2021 compared to 2020 is related to a decrease in expected losses due to the adoption of CECL and the deterioration of the consolidated statementseconomic forecast due to COVID-19. Prior to January 1, 2020, the Company calculated the allowance for losses on unfunded commitments using the incurred loss methodology.
Liquidity Risk
Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Management’s Asset Liability Committee (“ALCO”) is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies, regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.
The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash flows.relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At December 31, 2021, the Company’s Basic Surplus measurement was 28.5% of total assets or approximately $3.4 billion as compared to the December 31, 2020 Basic Surplus measurement of 25.7% of total assets, or $2.8 billion, and was above the Company’s minimum of 5% (calculated at $600.6 million and $546.6 million, of period end total assets as of December 31, 2021 and 2020, respectively) set forth in its liquidity policies.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2022. The large inflow of deposits experienced since the second quarter of 2020 could reverse itself and flow out. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.
At December 31, 2021, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.
Net cash flows provided by operating activities totaled $157.6 million and $142.4 million in 2021 and 2020, respectively. The critical elements of net operating cash flows include net income, adjusted for non-cash income and expense items such as the provision for loan losses, deferred income tax expense, depreciation and amortization and cash flows generated through changes in other assets and liabilities.
Net cash flows used in investing activities totaled $546.1 million and $709.7 million in 2021 and 2020, respectively. Critical elements of investing activities are loan and investment securities transactions.
Net cash flows provided by financing activities totaled $1.0 billion in 2021 and 2020. The critical elements of financing activities are proceeds from deposits, borrowings and stock issuance. In addition, financing activities are impacted by dividends and treasury stock transactions.
Commitments to Extend Credit
The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company’s credit approval and monitoring procedures. At December 31, 2021 and 2020, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $2.3 billion and $2.2 billion, respectively. In the opinion of management, there are no material commitments to extend credit, including unused lines of credit that represent unusual risks. All commitments to extend credit in the form of loans, including unused lines of credit, expire within one year.
Standby Letters of Credit
The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are frequently issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. At December 31, 2021 and 2020, outstanding standby letters of credit were approximately $55.1 million and $54.0 million, respectively. The fair value of the Company’s standby letters of credit at December 31, 2021 and 2020 was not significant. The following table sets forth the commitment expiration period for standby letters of credit at:
(In thousands) | December 31, 2021 | |||
Within one year | $ | 50,177 | ||
After one but within three years | 2,518 | |||
After three but within five years | 1,738 | |||
After five years | 700 | |||
Total | $ | 55,133 | ||
The Company classifies its securitiesrecords all derivatives on the balance sheet at datefair value. The accounting for changes in the fair value of purchase as either held to maturity ("HTM"), trading, available for sale ("AFS") or equity. HTM debt securities are those thatderivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the abilityhedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and intentqualifying as a hedge of the exposure to hold until maturity. Trading securitieschanges in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are securities purchasedconsidered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the intent to sell within a short periodrecognition of time. AFS debt securities are securitiesthe changes in the fair value of the hedged asset or liability that are not classified as HTMattributable to the hedged risk in a fair value hedge or trading securities. AFS securities are recorded at fair value. Unrealized holding gains and losses, netthe earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related tax effect, on AFS securitiesto the hedged risk are excluded from earnings andrecognized in earnings. For derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in the consolidated statements of income.
When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions. Any fee paid to the Company under a risk participation agreement is in consideration of the credit risk of the counterparties and is recognized in the income statement. Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default and loss given default of the counterparties.
Loans Serviced for Others and Loans Sold with Recourse
The total amount of loans serviced by the Company for unrelated third parties was approximately $575.9 million and $614.5 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had approximately $1.0 million and $1.3 million, respectively, of mortgage servicing rights. At December 31, 2021 and 2020, the Company serviced $25.6 million and $25.7 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is considered necessary at December 31, 2021 and 2020. As of December 31, 2021 and 2020, the Company serviced Springstone consumer loans of $11.4 million and $11.8 million, respectively.
Capital Resources
Consistent with its goal to operate a sound and profitable financial institution, the Company actively seeks to maintain a “well-capitalized” institution in accordance with regulatory standards. The principal source of capital to the Company is earnings retention. The Company’s capital measurements are in excess of both regulatory minimum guidelines and meet the requirements to be considered well-capitalized.
The Company’s primary source of funds to pay interest on trust preferred debentures and pay cash dividends to its stockholders are dividends from its subsidiaries. Various laws and regulations restrict the ability of banks to pay dividends to their stockholders. Generally, the payment of dividends by the Company in the future as well as the payment of interest on the capital securities will require the generation of sufficient future earnings by its subsidiaries.
The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Company. Under Office of the Comptroller of the Currency (“OCC”) regulations, the Bank may not pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. At December 31, 2021 and 2020, approximately $164.6 million and $194.2 million, respectively, of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.
Stock Repurchase Plan
The Company purchased 604,637 shares of its common stock during the year ended December 31, 2021 at an average price of $35.91 per share under its previously announced share repurchase program. The repurchase program under which these shares were purchased expired on December 31, 2021. On December 20, 2021, the NBT Board of Directors authorized a repurchase program for the Company to repurchase up to an additional 2,000,000 shares of its outstanding common stock. The plan expires on December 31, 2023.
Recent Accounting Updates
See Note 2 to the consolidated financial statements for a detailed discussion of new accounting pronouncements.
2020 OPERATING RESULTS AS COMPARED TO 2019 OPERATING RESULTS
For similar operating and financial data and discussion of our results for the year ended December 31, 2020 compared to our results for the year ended December 31, 2019, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 1, 2021 and is incorporated herein by reference.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.
Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s ALCO meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.
The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 50 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.
In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets rolling over at lower yields while interest-bearing liabilities remain at or near their floors. In the rising rate scenarios, net interest income is projected to experience a modest increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, MMDA and time accounts. Net interest income for the next twelve months in the +200/+100/-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% reduction in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the December 31, 2021 balance sheet position:
Interest Rate Sensitivity Analysis
Change in interest rates (in basis points) | Percent change in net interest income | ||
| +200 | 6.46 | % | |
| +100 | 3.10 | % | |
| -50 | (0.74 | %) | |
The Company anticipates that the trajectory of net interest income will depend significantly on the timing and path of the recovery from the recent economic downturn and related inflationary pressures. In response to the economic impact of the pandemic, the federal funds rate was reduced by 150 bps in March 2020, and term interest rates fell sharply across the yield curve. The Company has reduced deposit rates, but future reductions are likely to be smaller and more selective. With deposit rates near their lower bound, the Company will focus on managing asset yields in order to maintain the net interest margin and position itself for anticipated increases to short term interest rates. Competitive pressure may limit the Company’s ability to maintain asset yields in the current environment, however.
To the Stockholders and Board of Directors
NBT Bancorp Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of comprehensive incomethe Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a componentwhole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Loans evaluated on a collective basis
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for credit losses on loans evaluated on a collective basis (the collective ACL on loans) was $92.0 million of a total allowance for credit losses of $92.0 million as of December 31, 2021. The collective ACL on loans includes the measure of expected credit losses on a collective (pooled) basis for class segments of loans that share similar risk characteristics. The Company estimated the collective ACL on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. The Company uses a discounted cash flow methodology where the respective quantitative allowance for each segment is measured by comparing the present value of expected principal and interest cash flows projected using an econometric, probability of default (PD) and loss ("AOCI"). HTM securities are recorded atgiven default (LGD) modeling methodology to the amortized cost. Trading securitiesThe Company uses regression models to develop the PD and equity securitiesLGD, which are recordedderived from historical credit loss experience for both the Company and class segment-specific selected peers, that incorporate multiple weighted external economic forecasts for the economic variables over the reasonable and supportable forecast period. After the reasonable and supportable forecast period, the Company reverts to long-term average economic variables over a reversion period on a straight-line basis. Contractual cash flows over the contractual life of the loans are the basis for modeled cash flows, adjusted for modeled defaults and expected prepayments and discounted at fair value,the loan-level stated interest rate. After quantitative considerations, the Company applies additional qualitative adjustments, including the effects of limitations inherent in the quantitative model, so that the collective ACL is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
We identified the assessment of the collective ACL on loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL on loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL on loans methodology, including the methods and models used to estimate (1) the PD and LGD and their significant assumptions including portfolio segmentation, the external economic forecasts and economic variables, and the related weighting of the forecasts, the reasonable and supportable forecast periods, the composition of the peer group and the period from which historical Company and peer experience was used, (2) the expected prepayments assumption, and (3) the qualitative adjustments and their significant assumptions, including the effects of limitations inherent in the quantitative model. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL on loans estimate, including controls over the:
development of the collective ACL on loans methodology
development of certain models
continued use and appropriateness of changes made to PD and LGD models
performance monitoring of the PD and LGD models
identification and determination of the expected prepayments assumption and the significant assumptions used in the PD and LGD models
development of the qualitative adjustments, including the significant assumptions used in the measurement of the qualitative adjustments
analysis of the collective ACL on loans results, trends, and ratios.
We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with net unrealized gainsspecialized skills and losses recognizedknowledge, who assisted in:
evaluating the Company’s collective ACL on loans methodology for compliance with U.S. generally accepted accounting principles
evaluating judgments made by the Company relative to the development and performance monitoring of the PD and LGD models, by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
assessing the conceptual soundness and performance testing of the PD and LGD models, by inspecting the model documentation to determine whether the models are suitable for their intended use
evaluating the expected prepayments assumption by comparing to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
evaluating the selection of economic forecast scenarios, including weighting of the scenarios, and underlying assumptions by comparing it to the Company’s business environment and relevant industry practices
evaluating the length of the period from which historical Company and peer experience was used and the reasonable and supportable forecast period by comparing them to specific portfolio risk characteristics and trends
assessing the composition of the peer group by comparing to Company and specific portfolio risk characteristics
determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business environment and relevant industry practices
evaluating the methodology used to develop the qualitative adjustments and the effect of those adjustments on the collective ACL on loans compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.
We also assessed the sufficiency of the audit evidence obtained related to the collective ACL on loans by evaluating the:
cumulative results of the audit procedures
qualitative aspects of the Company’s accounting practices
potential bias in income. Transfersthe accounting estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1987.
Albany, New York
March 1, 2022
NBT Bancorp Inc. and Subsidiaries
| As of December 31, | ||||||||
| 2021 | 2020 | |||||||
| (In thousands except share and per share data) | ||||||||
| Assets | ||||||||
| Cash and due from banks | $ | 157,775 | $ | 159,995 | ||||
| Short-term interest-bearing accounts | 1,111,296 | 512,686 | ||||||
| Equity securities, at fair value | 33,550 | 30,737 | ||||||
| Securities available for sale, at fair value | 1,687,361 | 1,348,698 | ||||||
Securities held to maturity (fair value $735,260 and $636,827, respectively) | 733,210 | 616,560 | ||||||
| Federal Reserve and Federal Home Loan Bank stock | 25,098 | 27,353 | ||||||
| Loans held for sale | 830 | 1,119 | ||||||
| Loans | 7,498,459 | 7,498,885 | ||||||
| Less allowance for loan losses | 92,000 | 110,000 | ||||||
| Net loans | $ | 7,406,459 | $ | 7,388,885 | ||||
| Premises and equipment, net | 72,093 | 74,206 | ||||||
| Goodwill | 280,541 | 280,541 | ||||||
| Intangible assets, net | 8,927 | 11,735 | ||||||
| Bank owned life insurance | 228,238 | 186,434 | ||||||
| Other assets | 266,733 | 293,957 | ||||||
| Total assets | $ | 12,012,111 | $ | 10,932,906 | ||||
| Liabilities | ||||||||
| Demand (noninterest bearing) | $ | 3,689,556 | $ | 3,241,123 | ||||
| Savings, NOW and money market | 6,043,441 | 5,207,090 | ||||||
| Time | 501,472 | 633,479 | ||||||
| Total deposits | $ | 10,234,469 | $ | 9,081,692 | ||||
| Short-term borrowings | 97,795 | 168,386 | ||||||
| Long-term debt | 13,995 | 39,097 | ||||||
| Subordinated debt, net | 98,490 | 98,052 | ||||||
| Junior subordinated debt | 101,196 | 101,196 | ||||||
| Other liabilities | 215,713 | 256,865 | ||||||
| Total liabilities | $ | 10,761,658 | $ | 9,745,288 | ||||
| Stockholders’ equity | ||||||||
Preferred stock, $0.01 par value. Authorized 2,500,000 shares at December 31, 2021 and 2020 | $ | 0 | $ | 0 | ||||
Common stock, $0.01 par value. Authorized 100,000,000 shares at December 31, 2021 and 2020, issued 49,651,493 at December 31, 2021 and 2020 | 497 | 497 | ||||||
| Additional paid-in-capital | 576,976 | 578,082 | ||||||
| Retained earnings | 856,203 | 749,056 | ||||||
Accumulated other comprehensive (loss) income | (23,344 | ) | 417 | |||||
Common stock in treasury, at cost, 6,483,481 and 6,022,399 shares at December 31, 2021 and 2020, respectively | (159,879 | ) | (140,434 | ) | ||||
| Total stockholders’ equity | $ | 1,250,453 | $ | 1,187,618 | ||||
| Total liabilities and stockholders’ equity | $ | 12,012,111 | $ | 10,932,906 | ||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Interest, fee and dividend income | ||||||||||||
| Interest and fees on loans | $ | 302,175 | $ | 307,859 | $ | 321,474 | ||||||
| Securities available for sale | 23,305 | 22,434 | 23,303 | |||||||||
| Securities held to maturity | 12,551 | 15,283 | 19,105 | |||||||||
| Other | 1,845 | 2,706 | 3,652 | |||||||||
| Total interest, fee and dividend income | $ | 339,876 | $ | 348,282 | $ | 367,534 | ||||||
| Interest expense | ||||||||||||
| Deposits | $ | 10,714 | $ | 22,070 | $ | 39,986 | ||||||
| Short-term borrowings | 158 | 3,408 | 9,693 | |||||||||
| Long-term debt | 389 | 1,553 | 1,875 | |||||||||
| Subordinated debt | 5,437 | 2,842 | 0 | |||||||||
| Junior subordinated debt | 2,090 | 2,731 | 4,425 | |||||||||
| Total interest expense | $ | 18,788 | $ | 32,604 | $ | 55,979 | ||||||
| Net interest income | $ | 321,088 | $ | 315,678 | $ | 311,555 | ||||||
| Provision for loan losses (1) | (8,257 | ) | 51,134 | 25,412 | ||||||||
| Net interest income after provision for loan losses | $ | 329,345 | $ | 264,544 | $ | 286,143 | ||||||
| Noninterest income | ||||||||||||
| Service charges on deposit accounts | $ | 13,348 | $ | 13,201 | $ | 17,151 | ||||||
| ATM and debit card fees | 31,301 | 25,960 | 23,893 | |||||||||
| Retirement plan administration fees | 42,188 | 35,851 | 30,388 | |||||||||
| Wealth management | 33,718 | 29,247 | 28,400 | |||||||||
| Insurance services | 14,083 | 14,757 | 15,770 | |||||||||
| Bank owned life insurance income | 6,217 | 5,743 | 5,355 | |||||||||
| Net securities gains (losses) | 566 | (388 | ) | 4,213 | ||||||||
| Other | 16,373 | 21,905 | 18,853 | |||||||||
| Total noninterest income | $ | 157,794 | $ | 146,276 | $ | 144,023 | ||||||
| Noninterest expense | ||||||||||||
| Salaries and employee benefits | $ | 172,580 | $ | 161,934 | $ | 156,867 | ||||||
| Occupancy | 21,922 | 21,634 | 22,706 | |||||||||
| Data processing and communications | 16,989 | 16,527 | 18,318 | |||||||||
| Professional fees and outside services | 16,306 | 15,082 | 14,785 | |||||||||
| Equipment | 21,854 | 19,889 | 18,583 | |||||||||
| Office supplies and postage | 6,006 | 6,138 | 6,579 | |||||||||
| FDIC expenses | 3,041 | 2,688 | 1,946 | |||||||||
| Advertising | 2,521 | 2,288 | 2,773 | |||||||||
| Amortization of intangible assets | 2,808 | 3,395 | 3,579 | |||||||||
| Loan collection and other real estate owned, net | 2,915 | 3,295 | 4,158 | |||||||||
| Other | 20,339 | 24,863 | 24,440 | |||||||||
| Total noninterest expense | $ | 287,281 | $ | 277,733 | $ | 274,734 | ||||||
| Income before income tax expense | $ | 199,858 | $ | 133,087 | $ | 155,432 | ||||||
| Income tax expense | 44,973 | 28,699 | 34,411 | |||||||||
| Net income | $ | 154,885 | $ | 104,388 | $ | 121,021 | ||||||
| Earnings per share | ||||||||||||
| Basic | $ | 3.57 | $ | 2.39 | $ | 2.76 | ||||||
| Diluted | $ | 3.54 | $ | 2.37 | $ | 2.74 | ||||||
| (1) | Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology. |
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands) | ||||||||||||
| Net income | $ | 154,885 | $ | 104,388 | $ | 121,021 | ||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||
| Securities available for sale: | ||||||||||||
| Unrealized net holding (losses) gains arising during the period, gross | $ | (37,432 | ) | $ | 23,204 | $ | 25,836 | |||||
| Tax effect | 9,358 | (5,800 | ) | (6,459 | ) | |||||||
| Unrealized net holding (losses) gains arising during the period, net | $ | (28,074 | ) | $ | 17,404 | $ | 19,377 | |||||
| Reclassification adjustment for net (gains) losses in net income, gross | $ | 0 | $ | (3 | ) | $ | 79 | |||||
| Tax effect | 0 | 1 | (20 | ) | ||||||||
| Reclassification adjustment for net (gains) losses in net income, net | $ | 0 | $ | (2 | ) | $ | 59 | |||||
| Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, gross | $ | 577 | $ | 644 | $ | 737 | ||||||
| Tax effect | (145 | ) | (161 | ) | (184 | ) | ||||||
| Amortization of unrealized net gains for the reclassification of available for sale securities to held to maturity, net | $ | 432 | $ | 483 | $ | 553 | ||||||
| Total securities available for sale, net | $ | (27,642 | ) | $ | 17,885 | $ | 19,989 | |||||
| Cash flow hedges: | ||||||||||||
| Unrealized losses on derivatives (cash flow hedges), gross | $ | 0 | $ | (275 | ) | $ | (459 | ) | ||||
| Tax effect | 0 | 69 | 115 | |||||||||
| Unrealized losses on derivatives (cash flow hedges), net | $ | 0 | $ | (206 | ) | $ | (344 | ) | ||||
| Reclassification of net unrealized losses (gains) on cash flow hedges to interest expense, gross | $ | 21 | $ | 296 | $ | (2,012 | ) | |||||
| Tax effect | (5 | ) | (74 | ) | 503 | |||||||
| Reclassification of net unrealized losses (gains) on cash flow hedges to interest expense, net | $ | 16 | $ | 222 | $ | (1,509 | ) | |||||
| Total cash flow hedges, net | $ | 16 | $ | 16 | $ | (1,853 | ) | |||||
| Pension and other benefits: | ||||||||||||
| Amortization of prior service cost and actuarial losses, gross | $ | 1,373 | $ | 1,627 | $ | 2,686 | ||||||
| Tax effect | (343 | ) | (407 | ) | (672 | ) | ||||||
| Amortization of prior service cost and actuarial losses, net | $ | 1,030 | $ | 1,220 | $ | 2,014 | ||||||
| Decrease in unrecognized actuarial loss, gross | $ | 3,780 | $ | 429 | $ | 5,331 | ||||||
| Tax effect | (945 | ) | (107 | ) | (1,333 | ) | ||||||
| Decrease in unrecognized actuarial loss, net | $ | 2,835 | $ | 322 | $ | 3,998 | ||||||
| Total pension and other benefits, net | $ | 3,865 | $ | 1,542 | $ | 6,012 | ||||||
| Total other comprehensive (loss) income | $ | (23,761 | ) | $ | 19,443 | $ | 24,148 | |||||
| Comprehensive income | $ | 131,124 | $ | 123,831 | $ | 145,169 | ||||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
Common Stock | Additional Paid-in- Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Common Stock in Treasury | Total | |||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||
Balance at December 31, 2018 | $ | 497 | $ | 575,466 | $ | 621,203 | $ | (43,174 | ) | $ | (136,083 | ) | $ | 1,017,909 | ||||||||||
| Net income | 0 | 0 | 121,021 | 0 | 0 | 121,021 | ||||||||||||||||||
Cash dividends - $1.05 per share | 0 | 0 | (46,010 | ) | 0 | 0 | (46,010 | ) | ||||||||||||||||
Net issuance of 123,645 shares to employee and other stock plans | 0 | (2,968 | ) | 0 | 0 | 2,087 | (881 | ) | ||||||||||||||||
| Stock-based compensation | 0 | 4,210 | 0 | 0 | 0 | 4,210 | ||||||||||||||||||
| Other comprehensive income | 0 | 0 | 0 | 24,148 | 0 | 24,148 | ||||||||||||||||||
Balance at December 31, 2019 | $ | 497 | $ | 576,708 | $ | 696,214 | $ | (19,026 | ) | $ | (133,996 | ) | $ | 1,120,397 | ||||||||||
| Net income | 0 | 0 | 104,388 | 0 | 0 | 104,388 | ||||||||||||||||||
Cash dividends - $1.08 per share | 0 | 0 | (47,207 | ) | 0 | 0 | (47,207 | ) | ||||||||||||||||
| Cumulative effect adjustment for ASU 2016-13 implementation | 0 | 0 | (4,339 | ) | 0 | 0 | (4,339 | ) | ||||||||||||||||
Purchase of 263,507 treasury shares | 0 | 0 | 0 | 0 | (7,980 | ) | (7,980 | ) | ||||||||||||||||
Net issuance of 95,990 shares to employee and other stock plans | 0 | (3,207 | ) | 0 | 0 | 1,542 | (1,665 | ) | ||||||||||||||||
| Stock-based compensation | 0 | 4,581 | 0 | 0 | 0 | 4,581 | ||||||||||||||||||
| Other comprehensive income | 0 | 0 | 0 | 19,443 | 0 | 19,443 | ||||||||||||||||||
Balance at December 31, 2020 | $ | 497 | $ | 578,082 | $ | 749,056 | $ | 417 | $ | (140,434 | ) | $ | 1,187,618 | |||||||||||
| Net income | 0 | 0 | 154,885 | 0 | 0 | 154,885 | ||||||||||||||||||
Cash dividends - $1.10 per share | 0 | 0 | (47,738 | ) | 0 | 0 | (47,738 | ) | ||||||||||||||||
Purchase of 604,637 treasury shares | 0 | 0 | 0 | 0 | (21,714 | ) | (21,714 | ) | ||||||||||||||||
Net issuance of 143,555 shares to employee and other stock plans | 0 | (5,520 | ) | 0 | 0 | 2,269 | (3,251 | ) | ||||||||||||||||
| Stock-based compensation | 0 | 4,414 | 0 | 0 | 0 | 4,414 | ||||||||||||||||||
| Other comprehensive (loss) | 0 | 0 | 0 | (23,761 | ) | 0 | (23,761 | ) | ||||||||||||||||
Balance at December 31, 2021 | $ | 497 | $ | 576,976 | $ | 856,203 | $ | (23,344 | ) | $ | (159,879 | ) | $ | 1,250,453 | ||||||||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (In thousands) | ||||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 154,885 | $ | 104,388 | $ | 121,021 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
| Provision for loan losses | (8,257 | ) | 51,134 | 25,412 | ||||||||
| Depreciation and amortization of premises and equipment | 9,896 | 9,772 | 9,497 | |||||||||
| Net amortization on securities | 5,832 | 4,369 | 3,375 | |||||||||
| Amortization of intangible assets | 2,808 | 3,395 | 3,579 | |||||||||
| Amortization of operating lease right-of-use assets | 7,176 | 7,382 | 7,239 | |||||||||
| Excess tax benefit on stock-based compensation | (385 | ) | (181 | ) | (409 | ) | ||||||
| Stock-based compensation expense | 4,414 | 4,581 | 4,210 | |||||||||
| Bank owned life insurance income | (6,217 | ) | (5,743 | ) | (5,355 | ) | ||||||
| Amortization of subordinated debt issuance costs | 438 | 230 | 0 | |||||||||
| Proceeds from sale of loans held for sale | 55,065 | 168,707 | 175,829 | |||||||||
| Originations of loans held for sale | (54,608 | ) | (158,279 | ) | (181,261 | ) | ||||||
| Net gains on sales of loans held for sale | (361 | ) | (1,989 | ) | (786 | ) | ||||||
| Net security (gains) losses | (566 | ) | 388 | (4,213 | ) | |||||||
| Net losses (gains) on sale of other real estate owned | 182 | (96 | ) | 227 | ||||||||
| Lease termination losses | 0 | 4,284 | 1,872 | |||||||||
| Net change in other assets and other liabilities | (12,667 | ) | (49,930 | ) | (6,774 | ) | ||||||
| Net cash provided by operating activities | $ | 157,635 | $ | 142,412 | $ | 153,463 | ||||||
| Investing activities | ||||||||||||
| Net cash used in acquisitions | $ | 0 | $ | (3,899 | ) | $ | 0 | |||||
Securities available for sale: | ||||||||||||
| Proceeds from maturities, calls and principal paydowns | 395,386 | 336,410 | 273,578 | |||||||||
| Proceeds from sales | 0 | 0 | 26,203 | |||||||||
| Purchases | (775,963 | ) | (689,932 | ) | (252,963 | ) | ||||||
| Securities held to maturity: | ||||||||||||
| Proceeds from maturities, calls and principal paydowns | 181,620 | 243,136 | 223,733 | |||||||||
| Proceeds from sales | 0 | 996 | 0 | |||||||||
| Purchases | (299,014 | ) | (230,951 | ) | (70,660 | ) | ||||||
| Equity securities: | ||||||||||||
| Proceeds from calls | 1,000 | 2,000 | 0 | |||||||||
| Proceeds from sales | 0 | 0 | 3,966 | |||||||||
| Purchases | 0 | 0 | (93 | ) | ||||||||
| Other: | ||||||||||||
| Net increase in loans | (9,305 | ) | (378,765 | ) | (272,698 | ) | ||||||
| Proceeds from Federal Home Loan Bank stock redemption | 2,422 | 63,305 | 182,752 | |||||||||
| Purchases of Federal Reserve Bank and Federal Home Loan Bank stock | (167 | ) | (46,038 | ) | (174,143 | ) | ||||||
| Proceeds from settlement of bank owned life insurance | 4,413 | 1,057 | 1,086 | |||||||||
| Purchase of bank owned life insurance | (40,000 | ) | 0 | 0 | ||||||||
| Purchases of premises and equipment, net | (7,740 | ) | (8,157 | ) | (6,647 | ) | ||||||
| Proceeds from sales of other real estate owned | 1,290 | 1,113 | 1,543 | |||||||||
| Net cash used in investing activities | $ | (546,058 | ) | $ | (709,725 | ) | $ | (64,343 | ) | |||
| Financing activities | ||||||||||||
| Net increase in deposits | $ | 1,152,777 | $ | 1,493,872 | $ | 219,609 | ||||||
| Net decrease in short-term borrowings | (70,592 | ) | (486,889 | ) | (216,421 | ) | ||||||
| Proceeds from issuance of subordinated debt | 0 | 100,000 | 0 | |||||||||
| Payment of subordinated debt issuance costs | 0 | (2,178 | ) | 0 | ||||||||
| Proceeds from issuance of long-term debt | 0 | 0 | 10,598 | |||||||||
| Repayments of long-term debt | (25,101 | ) | (25,114 | ) | (20,111 | ) | ||||||
| Proceeds from the issuance of shares to employee and other stock plans | 112 | 184 | 725 | |||||||||
| Cash paid by employer for tax-withholding on stock issuance | (2,931 | ) | (1,537 | ) | (1,622 | ) | ||||||
| Purchase of treasury stock | (21,714 | ) | (7,980 | ) | 0 | |||||||
| Cash dividends | (47,738 | ) | (47,207 | ) | (46,010 | ) | ||||||
| Net cash provided by (used in) financing activities | $ | 984,813 | $ | 1,023,151 | $ | (53,232 | ) | |||||
| Net increase in cash and cash equivalents | $ | 596,390 | $ | 455,838 | $ | 35,888 | ||||||
| Cash and cash equivalents at beginning of year | 672,681 | 216,843 | 180,955 | |||||||||
| Cash and cash equivalents at end of year | $ | 1,269,071 | $ | 672,681 | $ | 216,843 | ||||||
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
| Years Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest expense | $ | 20,285 | $ | 31,692 | $ | 55,908 | ||||||
| Income taxes paid, net of refund | 46,097 | 45,790 | 28,374 | |||||||||
| Noncash investing activities: | ||||||||||||
| Loans transferred to other real estate owned | $ | 181 | $ | 1,017 | $ | 787 | ||||||
| Acquisitions: | ||||||||||||
| Fair value of assets acquired | $ | 0 | $ | 3,328 | $ | 0 | ||||||
See accompanying notes to consolidated financial statements.
NBT Bancorp Inc. and Subsidiaries
December 31, 2021 and 2020
1. Summary of Significant Accounting Policies
The accounting and reporting policies of NBT Bancorp Inc. (“NBT Bancorp”) and its subsidiaries, NBT Bank, National Association (“NBT Bank” or the “Bank”), NBT Financial Services, Inc. and NBT Holdings, Inc., conform, in all material respects, with generally accepted accounting principles in the United States of America (“GAAP”) and to general practices within the banking industry. Collectively, NBT Bancorp and its subsidiaries are recorded at fair valuereferred to herein as (“the Company”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of transfer. Non-marketable equity securities are carried at cost. Equity securities without readily determinablethe financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and such estimates could be material to the financial statements.
Estimates associated with the allowance for credit losses, pension accounting, provision for income taxes, fair values of financial instruments and status of contingencies are carried at cost. The Company performs a qualitative assessmentparticularly susceptible to determine whether investments are impaired. Downward or upward adjustments are recognized throughmaterial change in the income statement.
Consolidation
The accompanying consolidated financial statements include the accounts of NBT Bancorp and its wholly-owned subsidiaries mentioned above. All material intercompany transactions have been eliminated in consolidation. Amounts previously reported in the fair valueconsolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation. In the “Parent Company Financial Information,” the investment in subsidiaries is recorded using the equity method of AFS and HTM securities below their amortized cost, less any current period credit loss, that are deemed to be other-than-temporary are reflectedaccounting.
The Company determines whether it has a controlling financial interest in earnings as realized losses, or in other comprehensive income ("OCI"). The classification is dependent uponan entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company intends to sell the security,consolidates voting interest entities in which it has all, or whether it is more likely than not, that the Company will be required to sell the security before recovery. The OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be separated into (i) the amount representing the credit loss and (ii) the amount related to all other factors. The amountleast a majority of, the total OTTI impairment related to the credit loss shall be recognizedvoting interest. As defined in earnings. The amountapplicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the total OTTI related to other factors shall be recognizedcharacteristics of a voting interest entity. A controlling financial interest in OCI, net of applicable taxes.
Allowance for Loan Losses
Beginning January 1, 2020, the Company calculated the allowance for credit losses using current expected credit losses methodology. As a result of our January 1, 2020, adoption of CECL and its related amendments, our methodology for estimating the allowance for credit losses changed significantly from December 31, 2019. The Company recorded a net decrease to retained earnings of $4.3 million as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. The transition adjustment included a $3.0 million impact due to the allowance for credit losses on loans, $2.8 million impact due to the allowance for unfunded commitments reserve, and $1.5 million impact to the deferred tax asset.
Management considers the accounting policy relating to the allowance for credit losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to estimate expected credit losses over the expected contractual life of our loan portfolio and the material effect that such judgments can have on the consolidated results of operations.
The CECL approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required recognition of a credit loss when it was probable a loss event was incurred. The allowance for loancredit losses is maintained at a level estimated by management to provide adequately for probable incurred losses inherent in the current loan portfolio. The allowancevaluation account that is determined based upon numerous considerations, including local and regional conditions, the growth and composition of the loan portfolio with respectdeducted from, or added to, the mix betweenloans’ amortized cost basis to present the various types of loans and their related risk characteristics, a review ofnet, lifetime amount expected to be collected on the value of collateral supporting the loans, comprehensive reviews of the loan portfolio by the independent loan review staff and management, as well as consideration of volume and trends of delinquencies, nonperforming loans and loan charge-offs.loans. Loan losses are charged off against the allowance whilewhen management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off are creditedcharged-off and expected to be charged-off.
Required additions or reductions to the allowance. Asallowance for credit losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a resultlevel which management believes is reasonably reflective of teststhe overall loss expected over the contractual life of adequacy,the loan portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Company historical loss experience was supplemented with peer information when there was insufficient loss data for the Company. Significant management judgment is required additionsat each point in the measurement process.
The allowance for credit losses is measured on a collective (pool) basis, with both a quantitative and qualitative analysis that is applied on a quarterly basis, when similar risk characteristics exist. The respective quantitative allowance for each segment is measured using an econometric, discounted PD/LGD modeling methodology in which distinct, segment-specific multi-variate regression models are applied to multiple, probabilistically weighted external economic forecasts. Under the discounted cash flows methodology, expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and amortized cost basis. After quantitative considerations, management applies additional qualitative adjustments so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.
Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed segments for estimating loss based on type of borrower and collateral which is generally based upon federal call report segmentation and have been combined or subsegmented as needed to ensure loans of similar risk profiles are appropriately pooled.
Additional information about our Allowance for Loan Losses is included in Notes 1 and 6 to the consolidated financial statements. The Company’s management considers the allowance for credit losses to be appropriate based on evaluation and analysis of the loan portfolio.
The allowance for credit losses totaled $92.0 million at December 31, 2021, compared to $110.0 million at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loans) at December 31, 2021, compared to 1.47% (1.56% excluding PPP loans) at December 31, 2020. The decrease in the allowance for credit losses from December 31, 2020 to December 31, 2021 was primarily due to the improved economic conditions in the CECL forecast, partly offset by providing for the increase in loan balances.
(Dollars in thousands) | 2021 | 2020 | ||||||
Balance at January 1* | $ | 110,000 | $ | 75,999 | ||||
Loans charged-off | ||||||||
Commercial | 4,638 | 4,005 | ||||||
Residential | 979 | 1,135 | ||||||
Consumer** | 14,489 | 21,938 | ||||||
Total loans charged-off | $ | 20,106 | $ | 27,078 | ||||
Recoveries | ||||||||
Commercial | $ | 723 | $ | 786 | ||||
Residential | 1,069 | 618 | ||||||
Consumer** | 8,571 | 8,541 | �� | |||||
Total recoveries | $ | 10,363 | $ | 9,945 | ||||
Net loans charged-off | $ | 9,743 | $ | 17,133 | ||||
Provision for loan losses | $ | (8,257 | ) | $ | 51,134 | |||
Balance at December 31 | $ | 92,000 | $ | 110,000 | ||||
Allowance for loan losses to loans outstanding at end of year | 1.23 | % | 1.47 | % | ||||
Commercial net charge-offs to average loans outstanding | 0.05 | % | 0.04 | % | ||||
Residential net charge-offs to average loans outstanding | - | 0.01 | % | |||||
Consumer net charge-offs to average loans outstanding | 0.08 | % | 0.18 | % | ||||
Net charge-offs to average loans outstanding | 0.13 | % | 0.23 | % | ||||
| * | 2020 includes an adjustment of $3.0 million as a result of our January 1, 2020, adoption of Accounting Standards Codification (“ASC”) 326. |
| ** | Consumer charge-off and recoveries include consumer and home equity. |
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables related to the allowance for loan losses in prior periods under the incurred methodology. Charge-off and recoveries are made periodicallysummarized by chargesbusiness line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||
Balance at January 1* | $ | 72,505 | $ | 69,500 | $ | 65,200 | ||||||
Loans charged-off | ||||||||||||
Commercial and agricultural | 3,151 | 3,463 | 4,169 | |||||||||
Residential real estate | 991 | 913 | 1,846 | |||||||||
Consumer | 28,398 | 29,752 | 27,072 | |||||||||
Total loans charged-off | $ | 32,540 | $ | 34,128 | $ | 33,087 | ||||||
Recoveries | ||||||||||||
Commercial and agricultural | $ | 534 | $ | 1,178 | $ | 1,077 | ||||||
Residential real estate | 141 | 306 | 180 | |||||||||
Consumer | 6,913 | 6,821 | 5,142 | |||||||||
Total recoveries | $ | 7,588 | $ | 8,305 | $ | 6,399 | ||||||
Net loans charged-off | $ | 24,952 | $ | 25,823 | $ | 26,688 | ||||||
Provision for loan losses | $ | 25,412 | $ | 28,828 | $ | 30,988 | ||||||
Balance at December 31 | $ | 72,965 | $ | 72,505 | $ | 69,500 | ||||||
Allowance for loan losses to loans outstanding at end of year | 1.02 | % | 1.05 | % | 1.06 | % | ||||||
Commercial and agricultural net charge-offs to average loans outstanding | 0.04 | % | 0.03 | % | 0.05 | % | ||||||
Residential real estate net charge-offs to average loans outstanding | 0.01 | % | 0.01 | % | 0.03 | % | ||||||
Consumer net charge-offs to average loans outstanding | 0.31 | % | 0.34 | % | 0.34 | % | ||||||
Net charge-offs to average loans outstanding | 0.36 | % | 0.38 | % | 0.42 | % | ||||||
The provision for loan losses was a net benefit of $8.3 million for year ended December 31, 2021, compared to provision expense of $51.1 million in for the year ended December 31, 2020. The allowance for credit losses was 280.98% of nonperforming loans at December 31, 2021 as compared to 230.14% at December 31, 2020. The allowance for credit losses was 303.78% of nonaccrual loans at December 31, 2021 as compared to 246.38% at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.23% (1.24% excluding PPP loan originations) at December 31, 2021 compared to 1.47% (1.56% excluding PPP loan originations) at December 31, 2020. The decrease to the December 31, 2021 allowance for credit loss and provision expense was primarily due to the improved economic conditions in the CECL forecast.
Total net charge-offs for 2021 were $9.7 million, down from $17.1 million in 2020. Net charge-offs to average loans was 13 bps for 2021 compared to 23 bps for 2020. Net charge-offs to average loans decreased during 2021 due to COVID-19 pandemic relief programs during 2020 and 2021 and improved economic conditions in 2021.
December 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||
Commercial | $ | 28,941 | 51 | % | $ | 50,942 | 53 | % | ||||||||
Residential | 18,806 | 27 | % | 21,255 | 26 | % | ||||||||||
Consumer | 44,253 | 22 | % | 37,803 | 21 | % | ||||||||||
Total | $ | 92,000 | 100 | % | $ | 110,000 | 100 | % | ||||||||
Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables are related to the allowance for loan losses in prior periods. Category percentage of loans are summarized by business line which do not align to how the Company assesses credit risk in the estimate for credit losses under CECL for 2021 and 2020.
December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(Dollars in thousands) | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | Allowance | Category Percent of Loans | ||||||||||||||||||
Commercial and agricultural | $ | 34,525 | 48 | % | $ | 32,759 | 47 | % | $ | 27,606 | 46 | % | ||||||||||||
Residential real estate | 2,793 | 20 | % | 2,568 | 20 | % | 5,064 | 20 | % | |||||||||||||||
Consumer | 35,647 | 32 | % | 37,178 | 33 | % | 36,830 | 34 | % | |||||||||||||||
Total | $ | 72,965 | 100 | % | $ | 72,505 | 100 | % | $ | 69,500 | 100 | % | ||||||||||||
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as an expense in other noninterest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. As of December 31, 2021, the allowance for losses on unfunded commitments totaled $5.1 million, compared to $6.4 million as of December 31, 2020. The decrease in the allowance in 2021 compared to 2020 is related to a decrease in expected losses due to the adoption of CECL and the deterioration of the economic forecast due to COVID-19. Prior to January 1, 2020, the Company calculated the allowance for losses on unfunded commitments using the incurred loss methodology.
Liquidity Risk
Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments or may become unduly reliant on alternate funding sources. The objective of liquidity management is to ensure the Company can fund balance sheet growth, meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Management’s Asset Liability Committee (“ALCO”) is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies, regular monitoring of liquidity and testing of the contingent liquidity plan. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. Management continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.
The primary liquidity measurement the Company utilizes is called “Basic Surplus,” which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At December 31, 2021, the Company’s Basic Surplus measurement was 28.5% of total assets or approximately $3.4 billion as compared to the December 31, 2020 Basic Surplus measurement of 25.7% of total assets, or $2.8 billion, and was above the Company’s minimum of 5% (calculated at $600.6 million and $546.6 million, of period end total assets as of December 31, 2021 and 2020, respectively) set forth in its liquidity policies.
At December 31, 2021 and 2020, FHLB advances outstanding totaled $14.0 million and $64.1 million, respectively. At December 31, 2021 and 2020, the Bank had $81.0 million and $74.0 million, respectively, of collateral encumbered by municipal letters of credit. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.7 billion and $1.6 billion at December 31, 2021 and 2020, respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $999.1 million and $839.4 million at December 31, 2021 and 2020, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to issue brokered time deposits and to borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $2.0 billion at December 31, 2021 and $1.8 billion at December 31, 2020. In addition, the Bank has a “Borrower-in-Custody” program with the FRB with the addition of the ability to pledge automobile loans as collateral. At December 31, 2021 and 2020, the Bank had the capacity to borrow $580.8 million and $658.1 million, respectively, from this program. The Company’s internal policies authorize borrowings up to 25% of assets. Under this policy, remaining available borrowings capacity totaled $2.9 billion at December 31, 2021 and $2.6 billion at December 31, 2020.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2022. The large inflow of deposits experienced since the second quarter of 2020 could reverse itself and flow out. In the current economic environment, draws against lines of credit could drive asset growth higher. Disruptions in wholesale funding markets could spark increased competition for deposits. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%. Significant monetary and fiscal policy actions taken by the federal government have helped to mitigate these risks. Enhanced liquidity monitoring was put in place to quickly respond to the changing environment during the COVID-19 pandemic including increasing the frequency of monitoring and adding additional sources of liquidity.
At December 31, 2021, a portion of the Company’s loans and securities were pledged as collateral on borrowings. Therefore, once on-balance-sheet liquidity is depleted, future growth of earning assets will depend upon the Company’s ability to obtain additional funding, through growth of core deposits and collateral management and may require further use of brokered time deposits or other higher cost borrowing arrangements.
Net cash flows provided by operating activities totaled $157.6 million and $142.4 million in 2021 and 2020, respectively. The critical elements of net operating cash flows include net income, adjusted for non-cash income and expense items such as the provision for loan losses.losses, deferred income tax expense, depreciation and amortization and cash flows generated through changes in other assets and liabilities.
Net cash flows used in investing activities totaled $546.1 million and $709.7 million in 2021 and 2020, respectively. Critical elements of investing activities are loan and investment securities transactions.
Net cash flows provided by financing activities totaled $1.0 billion in 2021 and 2020. The critical elements of financing activities are proceeds from deposits, borrowings and stock issuance. In addition, financing activities are impacted by dividends and treasury stock transactions.
Commitments to Extend Credit
The Company makes contractual commitments to extend credit, which include unused lines of credit, which are subject to the Company’s credit approval and monitoring procedures. At December 31, 2021 and 2020, commitments to extend credit in the form of loans, including unused lines of credit, amounted to $2.3 billion and $2.2 billion, respectively. In the opinion of management, there are no material commitments to extend credit, including unused lines of credit that represent unusual risks. All commitments to extend credit in the form of loans, including unused lines of credit, expire within one year.
Standby Letters of Credit
The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third-parties. These standby letters of credit are frequently issued in support of third-party debt, such as corporate debt issuances, industrial revenue bonds and municipal securities. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers and letters of credit are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have one year expirations with an option to renew upon annual review; therefore, the total amounts do not necessarily represent future cash requirements. At December 31, 2021 and 2020, outstanding standby letters of credit were approximately $55.1 million and $54.0 million, respectively. The fair value of the Company’s standby letters of credit at December 31, 2021 and 2020 was not significant. The following table sets forth the commitment expiration period for standby letters of credit at:
(In thousands) | December 31, 2021 | |||
Within one year | $ | 50,177 | ||
After one but within three years | 2,518 | |||
After three but within five years | 1,738 | |||
After five years | 700 | |||
Total | $ | 55,133 | ||
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, changes in fair value of the cash flow hedges are reported in OCI. When the cash flows associated with the hedged item are realized, the gain or loss included in OCI is recognized in the consolidated statements of income.
When the Company purchases or sells a portion of a commercial loan that has an existing interest rate swap, it may enter into a risk participation agreement to provide credit protection to the financial institution that originated the swap transaction should the borrower fail to perform on its obligation. The Company enters into both risk participation agreements in which it purchases credit protection from other financial institutions and those in which it provides credit protection to other financial institutions. Any fee paid to the Company under a risk participation agreement is in consideration of the credit risk of the counterparties and is recognized in the income statement. Credit risk on the risk participation agreements is determined after considering the risk rating, probability of default and loss given default of the counterparties.
Loans Serviced for Others and Loans Sold with Recourse
The total amount of loans serviced by the Company for unrelated third parties was approximately $575.9 million and $614.5 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had approximately $1.0 million and $1.3 million, respectively, of mortgage servicing rights. At December 31, 2021 and 2020, the Company serviced $25.6 million and $25.7 million, respectively, of agricultural loans sold with recourse. Due to sufficient collateral on these loans and government guarantees, no reserve is considered necessary at December 31, 2021 and 2020. As of December 31, 2021 and 2020, the Company serviced Springstone consumer loans of $11.4 million and $11.8 million, respectively.
Capital Resources
Consistent with its goal to operate a sound and profitable financial institution, the Company actively seeks to maintain a “well-capitalized” institution in accordance with regulatory standards. The principal source of capital to the Company is earnings retention. The Company’s capital measurements are in excess of both regulatory minimum guidelines and meet the requirements to be considered well-capitalized.
The Company’s primary source of funds to pay interest on trust preferred debentures and pay cash dividends to its stockholders are dividends from its subsidiaries. Various laws and regulations restrict the ability of banks to pay dividends to their stockholders. Generally, the payment of dividends by the Company in the future as well as the payment of interest on the capital securities will require the generation of sufficient future earnings by its subsidiaries.
The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Company. Under Office of the Comptroller of the Currency (“OCC”) regulations, the Bank may not pay a dividend, without prior OCC approval, if the total amount of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two years. At December 31, 2021 and 2020, approximately $164.6 million and $194.2 million, respectively, of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.
Stock Repurchase Plan
The Company purchased 604,637 shares of its common stock during the year ended December 31, 2021 at an average price of $35.91 per share under its previously announced share repurchase program. The repurchase program under which these shares were purchased expired on December 31, 2021. On December 20, 2021, the NBT Board of Directors authorized a repurchase program for the Company to repurchase up to an additional 2,000,000 shares of its outstanding common stock. The plan expires on December 31, 2023.
Recent Accounting Updates
See Note 2 to the consolidated financial statements for a detailed discussion of new accounting pronouncements.
2020 OPERATING RESULTS AS COMPARED TO 2019 OPERATING RESULTS
For similar operating and financial data and discussion of our results for the year ended December 31, 2020 compared to our results for the year ended December 31, 2019, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 1, 2021 and is incorporated herein by reference.
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.
Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s ALCO meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.
The primary tool utilized by the ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, the ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Three additional models are run in which a gradual increase of 200 bps, a gradual increase of 100 bps and a gradual decrease of 50 bps takes place over a 12-month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded in them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risk.
In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets rolling over at lower yields while interest-bearing liabilities remain at or near their floors. In the rising rate scenarios, net interest income is projected to experience a modest increase from the flat rate scenario; however, the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, MMDA and time accounts. Net interest income for the next twelve months in the +200/+100/-50 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% reduction in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the December 31, 2021 balance sheet position:
Interest Rate Sensitivity Analysis
Change in interest rates (in basis points) | Percent change in net interest income | ||
| +200 | 6.46 | % | |
| +100 | 3.10 | % | |
| -50 | (0.74 | %) | |
The Company anticipates that the trajectory of net interest income will depend significantly on the timing and path of the recovery from the recent economic downturn and related inflationary pressures. In response to the economic impact of the pandemic, the federal funds rate was reduced by 150 bps in March 2020, and term interest rates fell sharply across the yield curve. The Company has reduced deposit rates, but future reductions are likely to be smaller and more selective. With deposit rates near their lower bound, the Company will focus on managing asset yields in order to maintain the net interest margin and position itself for anticipated increases to short term interest rates. Competitive pressure may limit the Company’s ability to maintain asset yields in the current environment, however.