NBT Bancorp Inc. — Q1 2017 Form 10-Q
Business context and reporting period
NBT Bancorp is a community-focused financial holding company serving markets in New York and neighboring states. Its principal business is commercial banking and related financial services. This unaudited report covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Interim results are not necessarily indicative of full-year results.
Financial results and condition
| Metric | Q1 2017 | Comparable / change |
|---|---|---|
| Net interest income | $68.5 million | Up 6.1% year over year |
| Noninterest income | $28.8 million | $28.4 million in Q1 2016 |
| Net income | $20.3 million | $18.9 million in Q1 2016 |
| Diluted EPS | $0.46 | $0.43 in Q1 2016 |
| FTE net interest margin | 3.46% | 3.47% in Q1 2016; 3.41% in Q4 2016 |
| Noninterest expense | $61.3 million | Up 5.3% year over year |
Income before taxes was $28.6 million, essentially unchanged from Q1 2016. The effective tax rate was 29.0%, versus 34.0% a year earlier; excluding a $1.5 million tax benefit from newly adopted stock-compensation accounting, the rate was 34.3%. The benefit added about $0.03 to diluted EPS. Annualized return on average assets was 0.92%; return on average tangible common equity was 13.24%, compared with 13.17%.
At March 31, total assets were $8.95 billion, loans $6.27 billion, and deposits $7.19 billion. Loans grew $74.2 million from year-end, or 4.9% annualized; deposits rose $211.4 million, or 3.0%. Average demand deposits were up 9.6% year over year. Stockholders’ equity was $926.8 million, 10.36% of assets. Regulatory capital ratios were above “well-capitalized” thresholds: tier 1 leverage 9.08%, common equity tier 1 10.02%, tier 1 capital 11.40%, and total risk-based capital 12.40%.
Cash and cash equivalents ended the quarter at $141.9 million, down $7.3 million. Operating cash flow was $27.7 million; investing activities used $94.0 million and financing activities provided $59.0 million. Short-term borrowings were $540.2 million, long-term debt $104.0 million, and junior subordinated debt $101.2 million. The company reported a $1.3 billion basic liquidity surplus, or 14.2% of assets, above its 5% policy minimum, as well as additional FHLB and Federal Reserve borrowing capacity.
Changes, outlook, and notable items
- Net income and EPS increased year over year, with higher net interest income and noninterest income partly offset by increased expenses and loan-loss provision. FTE margin was slightly below Q1 2016 but improved from the prior quarter.
- Provision for loan losses was $7.4 million, versus $6.1 million in Q1 2016. Net charge-offs were $6.9 million, or 0.45% of average loans annualized, versus $4.8 million and 0.33%. Consumer loans accounted for 80% of Q1 net charge-offs.
- Nonperforming loans were $35.1 million, or 0.56% of loans, and nonperforming assets were $42.0 million, or 0.47% of assets, both lower than at year-end. Potential problem loans increased to approximately $81 million from $70 million.
- A $1.3 million impairment write-down on an equity investment was recorded in Q1; management described securities impairments as temporary. Noninterest expense rose, notably in salaries and benefits, occupancy, loan collection and other real estate owned costs.
- No earnings or financial guidance was provided. Management noted that further short-term rate increases could lift deposit costs and pressure margin, particularly with a flatter yield curve. Modeled net interest income declined 3.01% under a +200-basis-point scenario and 2.94% under a -100-basis-point scenario, within internal policy limits.
- Commitments to extend credit and unused lines totaled $1.5 billion; standby letters of credit were $48.9 million. The filing reports no material change to previously disclosed risk factors and no material legal proceedings beyond routine litigation and matters described in the 2016 Form 10-K.
- After quarter-end, the company disclosed a May 9, 2017 split-dollar life-insurance agreement for CEO John H. Watt Jr. The stated employee death-benefit interest declines from up to $3.0 million for 2017–2018 to $500,000 from 2023 onward, subject to the policy’s net amount at risk.
Important facts for investors to verify
- How much of reported earnings growth and EPS reflects the one-time $1.5 million stock-compensation tax benefit.
- Whether elevated charge-offs and the increase in potential problem loans lead to further provisions, especially in consumer and commercial portfolios.
- Whether deposit repricing or market-rate changes affect net interest margin and funding costs.
- Liquidity, borrowing capacity, and capital remain adequate as loans and credit commitments grow; review the full regulatory and liquidity disclosures.
- The costs, terms, and potential implications of the CEO split-dollar agreement, and the outcome of legal matters incorporated from the 2016 Form 10-K.