NBT Bancorp Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless stated otherwise. NBT Bancorp is a regional community banking and financial services holding company operating primarily in the northeastern United States. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Key financial results
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $77.2 million | Down 0.7% from Q1 2019 |
| Noninterest income | $35.4 million | Up 4.7% from Q1 2019 |
| Provision for loan losses | $29.6 million | $5.8 million in Q1 2019 |
| Noninterest expense | $70.9 million | Up 3.5% from Q1 2019 |
| Net income | $10.4 million | Down 64% from $29.1 million in Q1 2019 and 64% from Q4 2019 |
| Diluted EPS | $0.23 | $0.66 in Q1 2019 |
| FTE net interest margin | 3.52% | Down 12 basis points year over year; unchanged from Q4 2019 |
| Operating cash flow | $40.9 million | $39.2 million in Q1 2019 |
The effective tax rate was 14.2%, compared with 21.8% in Q1 2019. Management reported pre-provision net revenue excluding securities gains and losses of $42.5 million, versus $43.0 million in Q1 2019; this is a non-GAAP measure.
Financial position, funding and capital
- Total assets were $9.95 billion, up from $9.72 billion at year-end. Loans were $7.25 billion, up $111.3 million; deposits were $7.86 billion, up $276.8 million.
- Cash and cash equivalents were $283.4 million. Q1 cash flows included $112.2 million used in investing activities and $137.8 million provided by financing activities; cash and equivalents increased $66.5 million.
- Short-term borrowings were $548.9 million; long-term debt was $64.2 million; junior subordinated debt was $101.2 million.
- Management reported a $1.6 billion Basic Surplus liquidity measure, or 15.6% of assets, against a 5% policy minimum. Additional borrowing capacity under available sources was reported at approximately $1.9 billion under the company’s internal policy limit.
- Stockholders’ equity was $1.11 billion, or 11.17% of assets. The tangible equity ratio was 8.55%. Regulatory capital ratios remained above “well capitalized” thresholds: CET1 10.90%, Tier 1 capital 12.14%, and total risk-based capital 13.36%.
- The quarterly dividend was $0.54 per share. The board approved a second-quarter dividend of $0.27 per share, payable June 15, 2020. The company repurchased 263,507 shares during Q1, then suspended repurchases and said it did not expect further repurchases at that time.
Material changes and credit quality
- Net income and EPS fell sharply, principally as the loan-loss provision rose amid adoption of CECL and a deteriorating COVID-19 economic forecast. CECL adoption on January 1, 2020 reduced retained earnings by $4.3 million after tax; Q1 provision expense was $29.6 million.
- The allowance for credit losses was $100.0 million, or 1.38% of loans, compared with $73.0 million and 1.02% at year-end. Net charge-offs were $5.6 million, versus $6.9 million in Q1 2019.
- Nonperforming loans were $32.3 million, or 0.45% of loans, versus 0.40% at year-end; nonperforming assets were $34.6 million, or 0.35% of assets. Management attributed the increase in nonperforming loans primarily to one $4.2 million commercial credit.
- As of April 30, 13.7% of loans were in payment-deferral programs; 74% of those loans were commercial and 26% consumer. Management said the Q1 COVID-related short-term modifications were immaterial and generally were not classified as troubled debt restructurings.
- Net interest income was broadly stable from the prior quarter, while the margin was below the prior-year level. Lower asset yields and the Federal Reserve’s 150-basis-point rate reduction in Q1 affected earnings-asset yields; lower funding costs partly offset that pressure.
Outlook, management commentary and risks
The filing provides no formal earnings or revenue guidance. Management said future net interest income would depend significantly on the depth and duration of the economic downturn. Deposit rates were reduced, with further reductions expected in Q2, but management noted that deposit rates were nearing their lower bound and competitive pressure could constrain asset yields. In the company’s modeled 12-month rate scenarios, net interest income changed by +0.61% for a 200-basis-point increase, +1.83% for a 100-basis-point increase, and -0.54% for a 100-basis-point decrease.
Management’s CECL baseline forecast assumed unemployment peaking in Q2 2020 and remaining elevated well into 2021, negative GDP in the next quarter, and a recovery beginning in the second half of 2020. The company also weighted upside and downside scenarios. Management cautioned that CECL estimates may be volatile as forecasts, portfolio composition and credit quality change.
COVID-19 was identified as the principal near-term uncertainty, with potential effects on borrower repayment, credit losses, loan demand, deposits, liquidity, markets, operations and regulatory capital. The company said it could not estimate the pandemic’s ultimate impact. Through April 30, it had processed more than 1,650 Paycheck Protection Program loans totaling over $400 million and anticipated funding more than $500 million before the program’s second round ended. The filing also describes participation in government relief programs and plans to consider the CARES Act Main Street program when launched.
Other items to note: securities produced a $0.8 million net loss in Q1, including unrealized losses on equity securities; accumulated other comprehensive income improved by $16.2 million, largely reflecting securities gains. The company recorded no credit-loss allowance for available-for-sale securities or held-to-maturity securities at quarter-end, citing its assessments of credit risk.
Important facts for investors to verify
- How subsequent-quarter credit provisions, charge-offs, nonperforming loans and CECL assumptions evolved as COVID-19 effects became clearer.
- Performance and repayment outcomes for deferred loans, including whether payment deferrals converted into delinquencies or restructurings.
- Whether PPP lending and related fees, funding costs and customer relief programs affected subsequent revenue, liquidity or credit exposure.
- Whether deposit pricing and asset yields preserved net interest margin in the low-rate environment.
- Changes in regulatory capital, liquidity buffers, borrowing capacity, dividends and the suspension of share repurchases.