NBT Bancorp Inc. — Q2 2019 Form 10-Q
Business context and period. NBT Bancorp is a community-oriented financial holding company headquartered in Norwich, New York, operating primarily through banking, financial services and wealth management businesses across the Northeast. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018. Dollar amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $30.6; diluted EPS $0.69 | Q2 2018: $28.1; diluted EPS $0.64 |
| Six-month net income / diluted EPS | $59.7 / $1.35 | First half 2018: $54.1 / $1.23 |
| Net interest income | Q2: $78.6; first half: $156.3 | Q2 2018: $75.7; first half 2018: $149.2 |
| FTE net interest margin | Q2: 3.61%; first half: 3.63% | Q2 2018: 3.57%; first half 2018: 3.57% |
| Noninterest income / expense | Q2: $34.2 / $66.2; first half: $68.1 / $134.7 | Q2 2018: $34.2 / $64.9; first half 2018: $65.4 / $129.2 |
| Loans / deposits | $6,963 / $7,594 | December 31, 2018: $6,888 / $7,368 |
| Total assets / stockholders’ equity | $9,636 / $1,075 | December 31, 2018: $9,556 / $1,018 |
| Short-term borrowings / long-term debt / junior subordinated debt | $609 / $84 / $101 | December 31, 2018: $872 / $74 / $101 |
| Allowance for loan losses | $72.2; 1.04% of loans | December 31, 2018: $72.5 |
Cash flow, six months. Operating activities provided $61.8, investing activities used $3.0 and financing activities used $50.3. Cash and cash equivalents ended at $189.4, up from $181.0 at the start of the period. Dividends paid were $22.8.
Profitability and capital. Q2 annualized return on average assets was 1.28% and return on average equity was 11.63%. At June 30, the company reported a 9.88% tier 1 leverage ratio, 10.95% common equity tier 1 ratio and 13.21% total risk-based capital ratio, and stated it remained well capitalized. Tangible equity ratio was 8.41%, a non-GAAP measure.
Material changes versus comparable periods
- Q2 net income rose 8.7% year over year; diluted EPS rose 7.8%. First-half net income increased 10.3% and diluted EPS increased 9.8% year over year.
- First-half net interest income increased 4.8%; the FTE margin improved 6 basis points to 3.63%. Higher loan balances and yields supported interest income, while higher deposit and borrowing costs increased interest expense.
- First-half noninterest income rose 4.0%, led by retirement plan administration fees, including the effect of the 2018 RPS acquisition, and higher ATM and debit card fees. Noninterest expense increased 4.3%, primarily reflecting compensation, equipment and other costs.
- Loans increased $75.6 from year-end, with commercial and commercial real estate growth partly offset by consumer portfolio runoff. Deposits increased $225.5; short-term borrowings declined $262.3.
- Nonperforming assets declined to $29.3 from $33.0 at year-end; nonperforming loans were 0.39% of total loans versus 0.44%. Potential problem loans increased to approximately $96 from $90.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said 2019 net interest income will depend substantially on deposit pricing and competitive conditions, and emphasized growing lower-cost core deposits.
- Interest-rate modeling projected net interest income decreases of 0.88% under a gradual 200-basis-point increase and 1.85% under a gradual 100-basis-point decrease, versus the flat-rate scenario over 12 months. Management said both were within its 7.5% policy limit.
- Liquidity was described as strong: Basic Surplus was 15.8% of assets, or about $1.5 billion, above the 5% policy minimum. Remaining available borrowing capacity under internal policy was $1.8 billion. Management cautioned that deposit competition or loan growth exceeding deposit growth could pressure liquidity.
- Credit risks include economic deterioration, borrower performance, potential losses in the consumer portfolio and the possibility that potential problem loans become nonperforming. Net charge-offs were $13.4 for the first half, or 0.39% annualized; management considered the allowance appropriate but noted it could require increases if conditions worsen.
- CECL is scheduled for adoption January 1, 2020. Management could not yet reasonably estimate the impact and said it may be material and could increase allowance volatility; implementation work, parallel calculations and sensitivity analyses were underway.
- The company adopted lease accounting on January 1, 2019, recognizing approximately $34 million of right-of-use assets and $37 million of lease liabilities; management said adoption did not materially affect earnings or regulatory capital. The Board approved a $0.26-per-share third-quarter dividend, payable September 13, 2019.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective; no material internal-control changes were reported.
Most important facts for investors to verify
- Whether loan and deposit growth, particularly commercial real estate growth and deposit pricing, sustain net interest income and margin.
- Trends in potential problem loans, consumer charge-offs, nonperforming assets and the adequacy of the $72.2 million allowance.
- The eventual CECL adoption effect on credit-loss reserves, earnings, capital and reported volatility.
- Whether the reported interest-rate sensitivity and strong liquidity position remain within policy as rates, funding costs and loan growth change.
- How expense growth and the RPS acquisition’s contribution to fee income evolve; assess non-GAAP tangible capital measures alongside GAAP results.