NBT Bancorp Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. NBT is a community-oriented bank holding company operating principally across upstate and central New York and neighboring northeastern states. Financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2017 | Comparable period / change |
|---|---|---|
| Net interest income | $69.6 | Up 5.8% from Q2 2016 |
| Noninterest income | $30.3 | Up 2.3% from Q2 2016 |
| Net income | $21.4 | Up 7.3% from Q2 2016 |
| Diluted EPS | $0.49 | $0.46 in Q2 2016 |
| FTE net interest margin | 3.44% | Unchanged from Q2 2016; 3.46% in Q1 2017 |
| Return on average assets | 0.95% | 0.94% in Q2 2016 |
| Return on average equity | 9.11% | 9.00% in Q2 2016 |
For the six months ended June 30, net income was $41.6 million versus $38.8 million; diluted EPS was $0.95 versus $0.89. Net interest income was $138.1 million, up 6.0%, and noninterest income was $59.1 million, up 1.9%. The six-month FTE margin was 3.45%, compared with 3.46% in the prior-year period.
Financial position, cash flow and credit
- Balance sheet: Total assets were $9.08 billion at June 30, up from $8.87 billion at year-end 2016. Loans were $6.37 billion, up $169.9 million, or 2.7%, since year-end (5.5% annualized). Deposits were $7.02 billion, up 0.6%.
- Funding and debt: Short-term borrowings were $831.2 million, up from $681.7 million at year-end; long-term debt was $89.0 million, down from $104.1 million; junior subordinated debt was $101.2 million. Interest expense rose 12.1% in Q2 year over year, mainly reflecting higher short-term borrowing costs and balances.
- Cash flow: First-half operating cash flow was $65.9 million; investing activities used $206.2 million and financing activities provided $155.1 million. Cash and cash equivalents increased $14.7 million to $163.9 million.
- Capital and liquidity: Stockholders’ equity was $940.4 million, 10.36% of assets. The company reported that it remained well capitalized; total risk-based capital was 12.32%. Basic Surplus liquidity was approximately $1.2 billion, or 13.0% of assets, above its 5% policy minimum. Additional borrowing capacity included approximately $0.8 billion at the FHLB and $0.9 billion at the Federal Reserve.
- Credit: The allowance for loan losses was $66.6 million, or 1.05% of loans. First-half provision was $14.9 million versus $10.9 million, while net charge-offs were $13.5 million versus $9.3 million; annualized net charge-offs to average loans were 0.44% versus 0.32%. Nonperforming assets declined to $36.7 million from $46.1 million at year-end; nonperforming loans were 0.50% of loans versus 0.65%.
Material changes and notable items
- Loan growth and higher earning-asset balances supported net interest income growth, but margin was slightly lower year to date as funding costs increased.
- Noninterest income benefited from retirement-plan administration, trust, and ATM/debit-card fees. The company attributed lower year-over-year “other” income in part to a nonrecurring gain in Q2 2016. Q2 2017 results included the Downeast Pension Services acquisition; the filing reports $4.0 million of net cash used in acquisitions for the first half.
- Provision expense and net charge-offs increased year over year. Management attributed the higher provision primarily to loan growth; consumer loans accounted for most first-half net charge-offs.
- A $1.3 million other-than-temporary impairment loss on an available-for-sale equity investment was recognized in the first half. Management considered the disclosed unrealized losses on other securities temporary and stated it intended and was able to hold those securities.
- Adoption of stock-compensation accounting guidance generated a $1.5 million first-half income-tax benefit, adding approximately $0.03 to year-to-date diluted EPS.
- The Board approved a Q3 2017 dividend of $0.23 per share, payable September 15, 2017. No shares were repurchased in the first half; 1.0 million shares remained available under the repurchase plan, which expires December 31, 2017.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management cautioned that results for interim periods are not necessarily indicative of full-year results. It identified interest-rate exposure as the primary market risk: modeled net interest income declined 2.47% in a +200-basis-point scenario and 3.10% in a -100-basis-point scenario over 12 months. Management noted that deposit-rate floors, repricing lags, and competition could pressure margins in either environment.
Other stated risks include economic deterioration, borrower performance and credit losses, changes in reserve estimates, regulatory and legal developments, competition, technology, and acquisition integration. Potential problem loans were approximately $70.6 million, compared with $70.0 million at year-end; management warned some could become nonperforming or require additional reserves. Commitments to extend credit and unused lines totaled $1.6 billion, and standby letters of credit totaled $47.5 million; these amounts do not necessarily represent future cash outflows. The company reported no material change to previously disclosed risk factors and no material legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether elevated provision expense, charge-offs, and the $70.6 million of potential problem loans persist or worsen, especially in consumer and commercial portfolios.
- Whether loan growth continues to outpace deposit growth and increases reliance on short-term borrowings.
- How changes in market rates and deposit pricing affect net interest margin and interest expense.
- The recurring contribution from the Downeast Pension Services acquisition and other acquired businesses, versus one-time gains and tax benefits.
- Current capital and liquidity levels, credit commitments, and the terms and utilization of available borrowing facilities.