NBT Bancorp Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. NBT Bancorp is a community-oriented financial holding company operating primarily through NBT Bank, with banking, wealth-management, insurance and retirement-plan services across parts of the Northeast. Unaudited results are not necessarily indicative of full-year performance. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Net interest income | $77.7 | Up 5.7% year over year; Q1 2018 $73.5 |
| Net interest margin, FTE | 3.64% | Up 7 basis points year over year; Q1 2018 3.57% |
| Noninterest income | $33.8 | Up 8.1% year over year |
| Noninterest expense | $68.5 | Up 6.5% year over year |
| Provision for loan losses | $5.8 | Down from $7.5 in Q1 2018 |
| Net income | $29.1 | Up 12.1% year over year; Q1 2018 $26.0 |
| Diluted EPS | $0.66 | Up from $0.59 |
| Annualized return on average assets / equity | 1.24% / 11.52% | Q1 2018: 1.15% / 10.99% |
Interest income rose 13.1% year over year, supported by higher asset yields and average loan growth. Interest expense increased $6.4 million as funding costs rose, including deposit and short-term borrowing costs. Retirement-plan administration fees benefited from the 2018 acquisition of Retirement Plan Services, LLC. Salaries, employee benefits and equipment costs contributed to higher expenses.
Financial position, cash flow and credit
- Balance sheet: Total assets were $9.53 billion at March 31, 2019, slightly below $9.56 billion at year-end 2018. Loans were $6.89 billion, essentially unchanged from year-end; management said growth in commercial, commercial real estate and residential real estate was partly offset by lower dealer-finance loans.
- Deposits and borrowings: Deposits increased 3.4% from year-end to $7.62 billion. Short-term borrowings fell to $544.9 million from $871.7 million; long-term debt was $73.7 million and junior subordinated debt $101.2 million. Cash flows show a $249.4 million increase in deposits and a $326.8 million decrease in short-term borrowings.
- Liquidity and cash flow: Cash and cash equivalents ended at $177.1 million, down $3.8 million during the quarter. Operating cash flow was $39.2 million. Management reported a $1.3 billion Basic Surplus liquidity measure, 13.2% of assets, above its 5% minimum. Additional borrowing capacity included approximately $1.0 billion from the FHLB and $1.4 billion through other-bank federal-funds facilities.
- Credit quality: Allowance for loan losses was $71.4 million, or 1.04% of loans (1.09% excluding acquired loans). Net charge-offs were $6.9 million, an annualized 0.41% of average loans. Nonperforming loans were $29.0 million, or 0.42% of loans, and nonperforming assets were $31.2 million, down from $33.0 million at year-end. Potential problem loans were approximately $90.1 million, broadly unchanged from year-end.
- Capital and shareholder returns: Stockholders’ equity was $1.03 billion, 10.85% of assets. Regulatory capital ratios exceeded “well capitalized” thresholds; the total risk-based capital ratio was 12.98%. The company declared $0.52 per share in first-quarter dividends and approved a second-quarter dividend of $0.26 per share. It made no share repurchases during the quarter.
Changes, outlook and risks
- Net income and diluted EPS increased year over year, while FTE net interest margin improved. Noninterest income growth reflected, in part, acquired retirement-plan administration business; expenses also increased.
- Compared with the prior quarter, net interest income fell 1.5%, while the margin rose 3 basis points. Noninterest income increased from Q4 2018, when a securities portfolio restructuring had produced a $6.6 million securities loss; Q1 2019 recorded only $57,000 of net securities gains.
- Management gave no specific full-year earnings or revenue guidance in the supplied filing text. It said 2019 margin performance would depend significantly on managing deposit pricing and emphasized funding growth through lower-cost core deposits.
- Interest-rate modeling projected net interest income decreases of 1.42% under a gradual 200-basis-point rate increase and 1.89% under a 100-basis-point decrease over 12 months, both within internal policy limits. Deposit competition or loan growth outpacing deposits could pressure funding costs and liquidity.
- Management considered the loan-loss allowance appropriate but cautioned that weaker economic conditions, worsening borrower performance or lower collateral values could require additional provisions. Adoption of CECL was expected January 1, 2020; management said the impact could be material and increase allowance volatility, and was preparing parallel calculations.
- Unrealized losses on securities were attributed primarily to market interest-rate movements; management considered them temporary and reported no other-than-temporary impairment losses in the quarter. The company adopted lease accounting guidance, recognizing approximately $34 million of net lease assets and $37 million of liabilities at adoption, with no material effect on earnings or regulatory capital.
- The filing reported no material change to previously disclosed risk factors, no material legal proceedings beyond routine litigation, effective disclosure controls, and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan and deposit pricing can sustain margin as funding costs rise, and whether loan growth remains aligned with core-deposit growth.
- Trends in potential problem loans, consumer credit losses, nonperforming loans and the adequacy of the allowance, including the eventual CECL impact.
- Whether reported liquidity sources remain available and the Basic Surplus measure stays above policy minimums under deposit competition or faster loan growth.
- How operating expenses, including acquired-business costs and compensation, develop relative to fee-income growth.
- The assumptions behind interest-rate sensitivity and the effect of market-rate changes on securities values, earnings and funding costs.