NBT Bancorp Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below refer to the fourth quarter. NBT is a community-oriented financial holding company operating primarily through NBT Bank, with banking, wealth management, insurance and retirement-plan services across upstate and central New York and parts of Pennsylvania and New England. Year-end assets were $9.56 billion.
Financial performance and condition
- Profit: 2018 net income was $112.6 million, up 37.0% from $82.2 million in 2017. Diluted EPS was $2.56 versus $1.87. Return on average assets was 1.20% and return on average equity was 11.49%, compared with 0.91% and 8.71%, respectively, in 2017.
- Revenue and margin: Net interest income rose 7.8% to $305.6 million; FTE net interest margin increased 11 basis points to 3.58%. Total noninterest income was $124.8 million, up 2.9%; excluding securities gains and losses, it was $131.1 million, up 9.8%. Interest expense increased 49.1% to $38.6 million as funding costs rose.
- Credit costs and asset quality: Provision for loan losses was $28.8 million, down from $31.0 million. Net charge-offs were $25.8 million, or 0.38% of average loans, versus $26.7 million and 0.42% in 2017. Nonperforming assets declined to $33.0 million from $35.6 million; nonperforming loans were 0.44% of loans versus 0.47%. However, potential problem loans increased to $90.0 million from $57.7 million.
- Growth and funding: Year-end loans increased 4.6% to $6.89 billion and deposits increased 2.8% to $7.37 billion. Average demand deposits grew 4.7%. Borrowings rose to $1.05 billion from $909.2 million; short-term borrowings were $871.7 million and long-term debt $73.7 million, in addition to $101.2 million in junior subordinated debt.
- Cash flow: Operating activities provided $147.8 million, investing activities used $417.6 million, and financing activities provided $291.1 million. Cash and cash equivalents ended the year at $181.0 million.
- Capital and liquidity: Stockholders’ equity was $1.02 billion. Company CET1, Tier 1 risk-based and total risk-based capital ratios were 10.49%, 11.79% and 12.78%, respectively; the Bank was classified as well-capitalized. Basic Surplus liquidity was 11.2% of assets, above the 5% policy minimum. The Bank could pay $174.1 million in dividends to the parent without prior OCC approval, subject to applicable requirements.
- Shareholder returns: Cash dividends were $0.99 per share for 2018, up from $0.92. No shares were repurchased during the year.
Changes versus the prior comparable period
- Net interest income growth reflected higher loan balances and yields; average interest-earning assets rose 3.9%, and average loan yield increased to 4.45% from 4.21%.
- Funding costs rose: the average rate on interest-bearing liabilities increased to 0.65% from 0.45%, with deposit and short-term borrowing costs both higher. Management reported a full-cycle deposit beta of 6.9% through year-end.
- Noninterest expense increased 7.7% to $264.6 million, mainly from compensation, acquisitions and wage increases. Salaries and benefits rose to $151.7 million from $135.2 million.
- The effective tax rate fell to 17.8% from 35.9%, materially lifting net income. The comparison reflects the 2017 Tax Cuts and Jobs Act deferred-tax remeasurement charge and 2018 tax benefits, including a $5.5 million benefit related primarily to tax-return accounting-method changes.
- Quarterly fourth-quarter net income was $28.7 million versus $17.6 million a year earlier; diluted EPS was $0.65 versus $0.40. The 2018 quarter included a $6.9 million securities loss and the $5.5 million tax benefit.
Outlook, commentary and risks
Management did not provide quantified 2019 earnings or growth guidance. It said rising rates could support asset yields but may also increase deposit and borrowing costs, potentially offsetting those benefits; a flatter yield curve and deposit-pricing competition are additional sensitivities. Slower economic growth could restrain loan demand. Strategic priorities include growth in New England, revenue diversification, operating efficiency and technology investment.
- In the fourth quarter, the Company sold approximately $109 million of lower-yielding securities and reinvested the proceeds in higher-yielding bonds, recognizing a $6.6 million loss. The annual net securities loss was $6.3 million.
- Interest-rate sensitivity modeling projected net interest income declines of 1.18% under a gradual +200-basis-point scenario and 2.87% under a gradual -100-basis-point scenario. These are model estimates, not forecasts.
- Material risks include regional economic weakness, real-estate collateral and commercial-credit exposure, loan-loss allowance estimation, interest-rate and liquidity pressures, competition, cybersecurity and third-party technology risk, regulatory changes, and the transition away from LIBOR. About 47% of the loan portfolio was commercial, agricultural, construction or commercial real estate; approximately 59% was secured by real estate in the Company’s regional footprint.
- The Company had $1.7 billion of commitments to extend credit and $41.2 million of standby letters of credit at year-end. Management reported no material legal proceedings beyond routine litigation and no subsequent events requiring recognition or disclosure.
- CECL was scheduled for adoption in 2020; management said the impact could be material but could not yet be reasonably estimated. New lease accounting adopted January 1, 2019 was expected to add approximately $33 million of lease assets and $36 million of lease liabilities, without a material effect on net earnings or regulatory capital ratios.
Important facts for investors to verify
- How much of the 37% earnings increase is sustainable after separating recurring operating results from tax benefits and other nonrecurring items.
- Whether the increase in potential problem loans to $90.0 million signals emerging credit deterioration, and how consumer and commercial credit performance develops.
- Whether deposit pricing and borrowing costs continue to rise faster than asset yields, and how this affects net interest margin and liquidity.
- The eventual CECL allowance impact, implementation readiness and any resulting effects on earnings, capital and credit-loss volatility.
- Whether loan growth can be funded with core deposits while maintaining the reported capital and liquidity buffers.