NBT Bancorp Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. NBT is a community-focused financial holding company serving markets in upstate and central New York and parts of the Northeast, principally through commercial and retail banking and wealth management.
Key financial metrics
Amounts are in millions except per-share data and ratios.
| Metric | Q1 2018 | Comparable period / date |
|---|---|---|
| Interest, fee and dividend income | $80.8 | $74.4 in Q1 2017 |
| Net interest income | $73.5 | $68.5 in Q1 2017 |
| Net interest margin, fully taxable equivalent | 3.57% | 3.46% in Q1 2017; 3.52% in Q4 2017 |
| Noninterest income | $31.3 | $28.8 in Q1 2017 |
| Noninterest expense | $64.3 | $61.3 in Q1 2017 |
| Provision for loan losses | $7.5 | $7.4 in Q1 2017 |
| Net income | $26.0 | $20.3 in Q1 2017 |
| Diluted earnings per share | $0.59 | $0.46 in Q1 2017 |
| Effective income tax rate | 21.2% | 29.0% in Q1 2017 |
| Operating cash flow | $40.1 | $27.7 in Q1 2017 |
- Assets were $9.23 billion, up from $9.14 billion at year-end. Loans were $6.65 billion, up $62.4 million, or 0.9%, during the quarter (3.8% annualized); deposits were $7.39 billion, up $223.3 million, or 3.1%.
- Cash and cash equivalents ended at $159.6 million, down $0.1 million from year-end. Investing cash flow was negative $108.2 million and financing cash flow was positive $68.1 million.
- Allowance for loan losses was $70.2 million, or 1.06% of loans. Net charge-offs were $6.8 million, an annualized 0.42% of average loans.
- Nonperforming assets were $33.3 million, or 0.36% of assets, versus $35.6 million and 0.39% at year-end. Nonperforming loans were 0.43% of loans, compared with 0.47%.
- Short-term borrowings were $586.0 million, long-term debt $88.8 million and junior subordinated debt $101.2 million. Stockholders’ equity was $952.7 million, or 10.32% of assets, versus $958.2 million, or 10.49%, at year-end.
- All reported regulatory capital ratios exceeded the stated “well capitalized” thresholds: tier 1 leverage 9.26%, common equity tier 1 10.12%, tier 1 capital 11.48%, and total risk-based capital 12.47%.
Material changes versus prior periods
- Net income increased 28.1% year over year. Net interest income rose 7.3%, supported by higher loan balances and yields; the FTE margin expanded 11 basis points year over year. Higher funding costs partially offset asset-yield improvement.
- Noninterest income increased 8.7%, led by retirement plan administration fees and other income. Retirement fees benefited from the 2017 acquisition of Downeast Pension Services. Noninterest expense rose 4.9%, primarily reflecting salaries and benefits, including acquisition-related effects, and higher professional and equipment costs.
- The Q4 2017 comparison is affected by a $4.4 million estimated one-time, noncash tax charge related to the Tax Cuts and Jobs Act. Q1 2018 net income was $26.0 million versus $17.6 million in Q4 2017; diluted EPS was $0.59 versus $0.40 ($0.50 excluding that tax charge).
- Other comprehensive loss was $10.7 million, principally reflecting unrealized investment-security losses as market interest rates rose. AOCI loss increased to $41.0 million from $22.1 million at year-end.
- Cash dividends were $21.0 million, or $0.48 per share, compared with $10.0 million, or $0.23 per share, in Q1 2017. The board approved a Q2 dividend of $0.25 per share, an 8.7% increase.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management described loan growth and liquidity as sound and reported that nonperforming assets improved sequentially.
- Management’s interest-rate sensitivity model projected net interest income declines of 1.75% under a gradual 200-basis-point rate increase and 3.37% under a 100-basis-point decrease over 12 months; both were within the company’s 7.5% internal policy limit. Results remain sensitive to deposit repricing, market rates and the balance-sheet mix.
- Liquidity Basic Surplus was approximately $1.1 billion, or 11.6% of assets, above the 5% policy minimum. Available additional funding included approximately $1.0 billion of FHLB capacity and other borrowing sources. Management cautioned that higher rates could increase deposit competition and funding costs, and that loan growth exceeding deposit growth could pressure liquidity.
- Commitments to extend credit and unused lines totaled $1.6 billion; standby letters of credit totaled $40.8 million. These are contingent exposures, not necessarily expected cash outflows. Management identified no material commitments to borrowers with nonperforming loans.
- Unrealized losses on available-for-sale and held-to-maturity securities were $30.4 million and $10.1 million, respectively. Management considered the losses temporary, attributing them primarily to higher market rates, and stated its intent and ability to hold the securities long enough for recovery.
- The company adopted several accounting standards in Q1. Adoption of the new revenue-recognition standard had no material effect. Early adoption of ASU 2018-02 reclassified $5.6 million from AOCI to retained earnings with no effect on total equity; ASU 2016-01 also produced opening-equity and asset reclassifications.
- Management cited credit quality, economic conditions, interest rates, deposit competition, borrower performance, regulation, technology, acquisitions and expense control among factors that could cause actual results to differ from forward-looking statements. It reported no material change to previously disclosed risk factors and no material legal proceedings beyond ordinary routine litigation and matters referenced in the 2017 Form 10-K.
Important facts for investors to verify
- Confirm the sustainability of margin expansion as deposit and borrowing costs rise, and compare actual results with the disclosed rate-shock sensitivities.
- Track deposit growth and pricing against loan growth, borrowing needs and the stated liquidity buffers.
- Review consumer-loan charge-offs, delinquencies, allowance adequacy and the unsecured Specialty Lending portfolio; verify credit trends behind the nonperforming-asset improvement.
- Assess the effect of rising rates on securities fair values, accumulated other comprehensive loss and capital, and verify management’s ability to hold the securities through recovery.
- Verify dividend affordability and capital trends, given Q1 dividends of $21.0 million and the decline in equity-to-assets.
- The filing’s potential-problem-loan discussion gives approximately $61.7 million “at March 31, 2017” compared with $57.7 million at December 31, 2017. The period appears inconsistent with the reporting date; confirm the intended date and value in the source filing.