NBT Bancorp Inc. — FY 2010 Form 10-K
Reporting period: Year ended December 31, 2010; the filing also reports fourth-quarter results. This is an annual report, not a quarterly filing. NBT is a community-focused bank holding company operating mainly in central and upstate New York, northeastern Pennsylvania, and the Burlington, Vermont area.
Financial results and condition
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Net income | $57.4 million | $52.0 million | Up 10.4% |
| Diluted earnings per share | $1.66 | $1.53 | Up from $1.53 |
| Net interest income | $202.5 million | $196.5 million | Up 3.1% |
| FTE net interest margin | 4.15% | 4.04% | Up 11 basis points |
| Provision for loan and lease losses | $29.8 million | $33.4 million | Down 10.7% |
| Noninterest income | $83.9 million | $80.1 million | Up 4.7%; includes $3.3 million in securities gains |
| Noninterest expense | $178.3 million | $170.6 million | Up 4.5% |
| Operating cash flow | $89.4 million | $54.7 million | Cash from investing was $58.5 million; financing used $166.3 million |
- Fourth-quarter net income was $14.4 million, versus $13.8 million in Q4 2009; diluted EPS was $0.42 versus $0.40.
- At year-end, assets were $5.34 billion, deposits $4.13 billion, loans and leases $3.61 billion, and stockholders’ equity $533.6 million. Versus 2009, assets declined 2.3%, while deposits increased about 1.0%, loans declined about 1.0%, and equity increased about 5.6%.
- Borrowings totaled $604.7 million, down from $786.1 million in 2009, mainly reflecting long-term debt repayments. The company paid $4.5 million in debt prepayment penalties during 2010.
- Regulatory capital remained strong: company Tier 1 leverage was 9.16%, Tier 1 risk-based capital 12.44%, and total risk-based capital 13.70%. The Bank was classified as well-capitalized.
- Liquidity Basic Surplus was $517 million, or 9.7% of assets, above the company’s 5% policy minimum. Additional liquidity available through identified facilities was $906 million; the Bank also had $284 million in additional FHLB borrowing capacity.
Material changes and asset quality
- Net interest income improved as funding costs fell faster than earning-asset yields. The average rate on interest-bearing liabilities fell to 1.32% from 1.85%, while the yield on earning assets fell to 5.21% from 5.58%.
- Fee growth in retirement plan administration, insurance, and trust services was partly offset by a $3.1 million decrease in deposit service charges, attributed to lower overdraft activity and new overdraft rules. The company also reported that Regulation E reduced service-charge income by about $1.5 million in 2010.
- Salaries and benefits increased $8.2 million, largely from staffing, expansion, benefits, and incentive compensation. Lower FDIC expense and lower professional fees partly offset expense increases.
- Commercial real estate loans increased $105.1 million, or 14.2%, while residential mortgages fell $69.9 million, or 11.3%, and leases declined as the company continued a previously announced exit from lease originations.
- Nonperforming loans rose to $44.8 million, or 1.24% of loans, from $41.3 million, or 1.13%. Total nonperforming assets were $45.7 million versus $43.6 million. Net charge-offs were $25.1 million, or 0.69% of average loans, compared with $25.4 million, or 0.70%, in 2009.
- The allowance for loan and lease losses increased to $71.2 million, or 1.97% of loans, from $66.6 million, or 1.83%. Potential problem loans increased to $82.2 million from $79.1 million.
Outlook, risks, and other notable items
Management expected economic and credit challenges to persist in 2011 and did not provide numerical earnings guidance. It anticipated possible lower FHLB dividend revenue, continued reinvestment of maturing assets at lower rates, pressure on fee income from overdraft regulation, and possible deposit-cost increases if rates rose. Management said credit costs were not expected to decline until economic indicators improved, though continued asset-quality improvement could reduce provisioning.
- Key risks include local economic weakness, real estate collateral values, unemployment, agricultural exposure and milk-price volatility, commercial credit concentrations, interest-rate and deposit-pricing changes, competition, liquidity, and evolving regulation. About 59% of loans were secured by real estate in the company’s regional markets; agricultural loans were about 3.1% of loans.
- The Dodd-Frank Act may increase compliance costs and affect fee income, capital rules, and competition. Management also identified possible indirect effects of debit interchange rules and the removal of restrictions on interest-bearing demand deposits.
- Off-balance-sheet exposures included $643.6 million in commitments to extend credit, $26.2 million in standby letters of credit, and $14.0 million in loans sold with recourse. These amounts are contractual exposures, not necessarily expected cash outflows.
- Cash dividends were $0.80 per share for 2010. The Bank could pay $108.5 million in dividends to the parent without prior OCC approval, subject to regulatory requirements.
- The company reported no material pending legal proceedings beyond routine litigation. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in nonperforming and potential problem loans stabilizes, and whether the allowance remains adequate as regional economic conditions evolve.
- How much 2011 earnings depend on lower funding costs, securities gains, and fee businesses, and whether deposit pricing or asset repricing pressures net interest margin.
- Whether commercial real estate growth and concentrations in regional real estate collateral raise credit risk beyond the reported portfolio measures.
- The realized effects of Dodd-Frank and overdraft and debit-fee regulation on compliance costs and noninterest income.
- Debt repayment benefits versus the $4.5 million prepayment charge, and the company’s capacity to sustain dividends while funding growth and maintaining capital and liquidity.
- Cash-flow detail: financing outflows included $184.8 million of long-term debt repayments, and cash and cash equivalents declined to $168.8 million from $187.2 million.