NBT Bancorp Inc. — Q2 2018 Form 10-Q
Business context and reporting period. NBT Bancorp is a financial holding company based in Norwich, New York. Through its bank and other subsidiaries, it provides commercial and retail banking and wealth-management services across upstate and central New York and parts of the Northeast. This unaudited report covers the quarter and six months ended June 30, 2018; balance-sheet comparisons are to December 31, 2017. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2018 | Comparable period | Six months 2018 | Comparable period |
|---|---|---|---|---|
| Net interest income | $75.7 | $69.6, Q2 2017 | $149.2 | $138.1, H1 2017 |
| Noninterest income | $34.2 | $30.3, Q2 2017 | $65.4 | $59.1, H1 2017 |
| Provision for loan losses | $8.8 | $7.6, Q2 2017 | $16.3 | $14.9, H1 2017 |
| Noninterest expense | $64.9 | $60.3, Q2 2017 | $129.2 | $121.6, H1 2017 |
| Net income | $28.1 | $21.4, Q2 2017 | $54.1 | $41.6, H1 2017 |
| Diluted EPS | $0.64 | $0.49, Q2 2017 | $1.23 | $0.95, H1 2017 |
| FTE net interest margin | 3.57% | 3.44%, Q2 2017 | 3.57% | 3.45%, H1 2017 |
For Q2, net income rose 31.7% year over year and diluted EPS rose 30.6%. For the first half, net income increased 29.9%. The effective tax rate was 22.4% in Q2 and 21.8% for the first half, compared with 33.3% and 31.3%, respectively, in 2017, reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act. Q2 return on average assets was 1.21% and return on average equity was 11.64%; first-half returns were 1.18% and 11.32%, respectively.
- Balance sheet and funding: Total assets were $9.47 billion, up 3.6% from year-end. Loans were $6.86 billion, up $274 million (4.2%); deposits were $7.34 billion, up $174 million (2.4%). Management reported year-to-date loan growth of 8.4% on an annualized basis.
- Credit: Allowance for loan losses was $72.5 million, or 1.06% of loans. First-half net charge-offs were $13.3 million (0.40% annualized), versus $13.5 million (0.44%) in H1 2017. Nonperforming loans were $26.2 million, or 0.38% of loans, and nonperforming assets were $30.6 million, or 0.32% of assets. Potential problem loans totaled $57.3 million.
- Cash flow: For the first half, operating activities provided $57.2 million, investing activities used $336.1 million and financing activities provided $271.8 million. Cash and cash equivalents ended at $152.5 million, down $7.2 million from the start of the period.
- Debt and liquidity: At June 30, short-term borrowings were $854.0 million, long-term debt $73.8 million and junior subordinated debt $101.2 million. Shareholders’ equity was $978.9 million, or 10.34% of assets. Regulatory capital ratios met the company’s “well-capitalized” thresholds. The basic-surplus liquidity measure was 10.0% of assets (about $0.9 billion), above the 5% policy minimum; remaining available borrowing capacity under company policy was $1.5 billion.
- Dividends: The company paid $21.0 million in dividends during H1, or $0.48 per share. The board approved a Q3 dividend of $0.25 per share, payable September 14, 2018.
Material changes versus comparable periods
- Net interest income increased 8.8% in Q2 and 8.0% for H1 year over year. Loan growth and higher loan yields supported revenue; higher borrowing and deposit costs partly offset the benefit. H1 FTE margin increased 12 basis points from 2017.
- Noninterest income rose 12.7% in Q2 and 10.8% for H1. Retirement-plan administration fees benefited from the Q2 acquisition of Retirement Plan Services, LLC (RPS); other income also rose, including from swap fees and nonrecurring gains in H1.
- Noninterest expense increased 7.6% in Q2 and 6.2% for H1. The company cited RPS-related costs, wage increases and incentive compensation; lower other expenses partly offset H1 increases.
- Q2 provision expense rose year over year primarily with loan growth, while annualized net charge-offs were lower. Nonperforming assets declined from 0.39% of assets at year-end to 0.32% at June 30.
- Unrealized losses on available-for-sale securities contributed to a $14.5 million H1 other comprehensive loss. Management attributed debt-security losses primarily to rising market rates and considered impairments temporary; it reported no OTTI losses in H1 2018.
Outlook, risks, contingencies and unusual items
The filing provides no specific earnings or revenue guidance. Management said interest-rate sensitivity modeling projected net interest income to decline 1.98% under a gradual +200-basis-point scenario and 2.98% under a gradual -100-basis-point scenario over 12 months, both within internal policy limits. It cautioned that deposit repricing, loan growth outpacing deposit growth and competition for deposits could pressure funding costs or liquidity.
Other stated risks include economic and borrower-credit deterioration, changes in interest rates and securities markets, regulatory and tax changes, competition, technology, and acquisition execution and integration. The allowance for loan losses is a critical estimate and could require increases if economic conditions, historical losses or collateral values worsen. The company is preparing for the expected January 1, 2020 adoption of CECL; management said the effect could be material but could not yet reasonably estimate it. Lease-accounting changes effective in 2019 are expected to add right-of-use assets and lease liabilities, particularly for real-estate leases.
Commitments to extend credit and unused lines totaled $1.7 billion; standby letters of credit totaled $40.5 million. These amounts are not necessarily expected future cash outflows. The company reported no material legal proceedings beyond routine litigation, no material changes to its previously disclosed risk factors, and effective disclosure controls as of June 30.
Important facts for investors to verify
- Whether loan and deposit growth, net interest margin and funding costs remain favorable as rates and competition change.
- Credit performance in consumer lending, including Dealer Finance and the growing Specialty Lending portfolio, and the level and trend of potential problem loans.
- The sustainability of fee-income gains and the costs, integration and contribution of the RPS acquisition.
- The sensitivity of the investment portfolio and accumulated other comprehensive loss to interest-rate changes, including management’s assumptions about recovery of unrealized losses.
- Future CECL estimates and implementation progress, and the balance-sheet impact of the new lease standard.
- Liquidity headroom and reliance on borrowings if loan growth exceeds deposit growth; the reported cash-flow figures and available borrowing capacity provide additional context.