NBT Bancorp Inc. — Q3 2017 Form 10-Q
Business context and period. NBT Bancorp is a community-oriented financial holding company serving markets in the northeastern United States, primarily through NBT Bank. This unaudited report covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q3 / September 30, 2017 | Comparison |
|---|---|---|
| Net interest income | $71.9; FTE net interest margin 3.47% | Net interest income +7.9% year over year; FTE margin +7 basis points |
| Noninterest income | $30.8 | +3.8% year over year |
| Provision for loan losses | $7.9 | $6.4 in Q3 2016 |
| Net income / diluted EPS | $22.9 / $0.52 | $20.0 / $0.46 in Q3 2016 |
| Returns | ROAA 1.00%; ROAE 9.55% | Q3 2016: 0.92% and 8.80% |
| Assets / loans / deposits | $9,155 / $6,467 / $7,231 | Since year-end 2016: assets +3.2%, loans +4.3%, deposits +3.7% |
| Equity / regulatory capital | Equity $955; total risk-based capital ratio 12.45% | Equity was 10.43% of assets; company reported capital above “well-capitalized” thresholds |
For the first nine months, net income was $64.5 versus $58.8 in 2016, and diluted EPS was $1.47 versus $1.35. Net interest income was $210.0, up 6.6%; FTE net interest margin was 3.46% versus 3.44%. Noninterest income was $89.8, up 2.5%, and noninterest expense was $182.2, up 2.2%.
Cash flow and funding. Nine-month operating cash flow was $96.6; investing cash flow was negative $275.9, including $293.3 of net loan growth; financing cash flow was positive $212.0. Cash and cash equivalents ended at $181.8. Deposits were $7.23 billion. Short-term borrowings were $682 million, long-term debt $88.9 million, and junior subordinated debt $101.2 million. Reported basic surplus liquidity was approximately $1.2 billion, or 12.7% of assets, above the company’s 5% policy minimum. Additional stated borrowing capacity included approximately $0.9 billion each at the FHLB and Federal Reserve.
Credit quality. The allowance for loan losses was $68.4 million, or 1.06% of loans. Nine-month net charge-offs rose to $19.7 million from $14.6 million; annualized net charge-offs were 0.42% versus 0.33%. Nonperforming assets declined to $31.1 million (0.34% of assets) from $46.1 million at year-end; nonperforming loans were 0.42% of loans. Management identified $63.5 million of performing potential problem loans, primarily commercial real estate, commercial, and agricultural credits.
Material changes and unusual items
- Loan growth and higher asset yields supported net interest income; higher borrowing costs and rates on interest-bearing liabilities partly offset the benefit.
- Higher retirement-plan administration, ATM/debit-card, and trust fees contributed to fee-income growth. The retirement-plan business benefited in part from the second-quarter 2017 acquisition of Downeast Pension Services.
- Higher loan-collection and other-real-estate expense reflected commercial-property write-downs. Nine-month provision expense increased to $22.8 million from $17.3 million, alongside higher net charge-offs.
- A $1.3 million impairment loss on an available-for-sale equity investment was recognized during the first nine months. Management considered the reported unrealized losses on debt securities temporary and said it intended to hold securities for recovery.
- Adoption of stock-compensation accounting guidance generated $1.7 million of income-tax benefits year to date, adding $0.04 to diluted EPS. The company reported a 32.0% nine-month effective tax rate, or 33.8% excluding this benefit.
- Stockholders received $0.69 per share in dividends during the first nine months. The board approved a $0.23 fourth-quarter dividend and, after quarter-end, authorized a new repurchase program for up to 1 million shares through December 31, 2019.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said net interest income under modeled +200-basis-point and -100-basis-point rate scenarios would remain within internal risk limits; modeled changes were declines of 2.03% and 3.45%, respectively, versus a flat-rate scenario. Management cautioned that both rising and falling rates could pressure net interest income and margins, depending on repricing timing and deposit competition.
Key risks identified include economic and borrower deterioration, credit losses and reserve estimates, interest-rate and securities-market movements, competitive and regulatory changes, and acquisition integration. The allowance, pension assumptions, and goodwill/intangible valuations involve significant management judgment. Commitments to extend credit and unused lines totaled $1.6 billion; standby letters of credit totaled $40.9 million. The company reported no material legal proceedings beyond routine litigation and matters described in its 2016 Form 10-K, and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth continues without further deterioration in charge-offs, delinquency, or the $63.5 million potential-problem-loan pool.
- How loan-loss provisioning and consumer/commercial credit trends develop relative to portfolio growth.
- Whether deposit pricing and borrowing costs constrain net interest margin as rates and competition change.
- The sustainability of fee growth, including contributions from acquisitions, and the impact of property write-downs and other expenses.
- Capital, liquidity, and share-repurchase developments, including execution of the new authorization and payment of the declared dividend.