NBT Bancorp Inc. — Q2 2022 Form 10-Q
Business context and reporting period
NBT Bancorp is a community-oriented financial holding company operating primarily through NBT Bank, with commercial banking, retail banking and wealth management businesses across the Northeast. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are primarily with Q2 and the first six months of 2021.
Financial performance and condition
- Q2 earnings: Net income was $37.8 million, down 6.3% year over year; diluted EPS was $0.88 versus $0.92. For the first six months, net income was $76.9 million versus $80.1 million and diluted EPS was $1.78 versus $1.83.
- Revenue and margin: Q2 net interest income was $87.6 million, up 10.6% year over year, and noninterest income was $41.7 million, up 6.0%. Fully taxable-equivalent net interest margin was 3.21%, up 21 basis points year over year. First-half net interest income was $167.9 million, up 6.1%, while FTE margin was unchanged at 3.08%.
- Expenses and credit costs: Q2 noninterest expense increased 6.6% year over year to $76.1 million. Provision for loan losses was $4.4 million, compared with a $5.2 million provision benefit in Q2 2021. First-half provision was $5.0 million versus an $8.0 million benefit a year earlier.
- Loans and credit quality: Loans totaled $7.78 billion, up 7.5% annualized from year-end 2021, or 9.9% excluding PPP loans. The allowance was $93.6 million, or 1.20% of loans. Nonperforming assets were $25.8 million, 0.22% of assets, down from $32.9 million at year-end. Annualized net charge-offs were 0.04% of average loans in Q2.
- Deposits, liquidity and debt: Deposits were $10.03 billion, down 2.0% from December 31, 2021. Short-term borrowings were $62.5 million and long-term debt was $3.3 million; subordinated and junior subordinated debt totaled about $199.9 million. Basic Surplus liquidity was $2.60 billion, or 22.2% of assets, above the 5% policy minimum. The company reported $2.90 billion in remaining borrowing capacity under its internal policy.
- Capital and securities: Stockholders’ equity was $1.19 billion. Regulatory ratios included 12.14% CET1, 13.27% Tier 1 and 15.50% total risk-based capital; the company said it remained well capitalized. Accumulated other comprehensive loss widened to $124.8 million, primarily reflecting interest-rate-driven unrealized securities losses.
- Cash flow: For the first half, operating activities provided $102.7 million; investing activities used $556.5 million and financing activities used $291.7 million. Cash and cash equivalents ended at $523.6 million, down from $1.27 billion at year-end 2021.
Material changes versus comparable periods
- Q2 net interest income rose, reflecting higher earning-asset yields and growth in average earning assets; lower PPP income partly offset the increase. Deposit and other funding costs remained low.
- Fee income increased, led by retirement-plan administration, card services and deposit service charges. Higher salaries and benefits contributed to expense growth.
- First-half loan growth included increases in commercial and consumer lending. PPP loans declined to $17.3 million as forgiveness and paydowns continued.
- Capital declined from year-end, largely due to the $101.4 million after-tax reduction in accumulated other comprehensive income, dividends and share repurchases, partly offset by earnings.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management said uncertainty and volatility were expected to continue in 2022; the pandemic appeared less disruptive, but its effects and the economic outlook remained uncertain.
- Management cited inflation, Federal Reserve rate increases, economic conditions, securities-market fluctuations, borrower performance, deposit outflows and funding-market disruption as risks. Its June 30 interest-rate sensitivity analysis projected next-12-month net interest income changes of +4.32% under a 200-basis-point increase, +2.37% under a 100-basis-point increase and -1.40% under a 50-basis-point decrease.
- The credit-loss forecast used 50% baseline and 50% downside scenario weights, with no upside weight; management cited modest forecast deterioration, loan growth and an additional specific reserve as drivers of the higher allowance. A 10-point shift from baseline to downside weighting would increase the estimated allowance by 4%.
- AFS securities had $143.5 million of gross unrealized losses at quarter-end, which management attributed primarily to interest rates rather than credit deterioration; it said it did not intend, and was not likely required, to sell before recovery. The filing reports no material change to previously disclosed risk factors and no material legal proceedings beyond routine litigation.
- The Board approved a Q3 2022 dividend of $0.30 per share, a 7.1% increase. The company repurchased 182,900 shares in Q2 at an average $35.88 per share.
Important facts for investors to verify
- Whether loan growth, deposit trends and funding costs sustain net interest income as rates change.
- How credit quality, criticized and classified loans, and the allowance develop under the company’s economic scenarios.
- The effect of unrealized securities losses and further rate movements on AOCI, tangible book value and capital.
- Whether operating expenses and fee-income trends support earnings, and how management’s interest-rate sensitivity assumptions compare with actual results.
- Liquidity capacity and deposit stability, including the potential use and cost of alternative funding sources.