NBT Bancorp Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. NBT is a regional financial holding company focused on commercial and retail banking and wealth management. The results include Salisbury Bancorp from its August 11, 2023 acquisition date.
Financial performance and condition
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $94.9 million | $94.5 million in Q3 2022 |
| Net interest margin, FTE | 3.21% | 3.51% in Q3 2022 |
| Noninterest income | $40.2 million | $37.2 million in Q3 2022 |
| Noninterest expense | $90.8 million | $76.7 million in Q3 2022 |
| Net income | $24.6 million; diluted EPS $0.54 | $39.0 million; diluted EPS $0.90 in Q3 2022 |
| Net income, first nine months | $88.3 million; diluted EPS $2.01 | $115.9 million; diluted EPS $2.68 in 2022 |
For the first nine months, net interest income rose 6.3% to $279.0 million and FTE margin increased to 3.34% from 3.22%. Noninterest income fell 14.6% to $103.7 million, including securities losses; noninterest expense rose 10.6% to $248.9 million.
- Assets and lending: Total assets were $13.83 billion at September 30, 2023, versus $11.74 billion at December 31, 2022. Loans were $9.67 billion, up $1.52 billion; excluding $1.18 billion acquired with Salisbury, loans increased $337.2 million, or 5.5% annualized.
- Deposits and funding: Deposits were $11.40 billion, up $1.91 billion from year-end, including $1.31 billion acquired. Excluding the acquisition, deposits rose $596.5 million. Short-term borrowings were $490.2 million; long-term debt $29.8 million; subordinated debt, net $119.4 million; and junior subordinated debt $101.2 million.
- Credit: The allowance for loan losses was $114.6 million, or 1.19% of loans, versus $100.8 million and 1.24% at year-end 2022. Q3 provision was $12.6 million, including $8.8 million for acquired non-PCD loans. Nine-month net charge-offs were $11.5 million versus $4.7 million in 2022.
- Capital and liquidity: Stockholders’ equity was $1.36 billion, 9.86% of assets. CET1 was 11.31% and total risk-based capital 14.45%; the company reported it remained well capitalized. Basic Surplus liquidity was 12.1% of assets, or $1.67 billion, above its 5% policy minimum. Cash and cash equivalents were $672.7 million at quarter-end.
- Cash flow, nine months: Operating activities provided $121.8 million; investing activities used $92.4 million; financing activities provided $445.9 million.
Material changes and unusual items
- Salisbury was acquired for approximately $161.7 million in stock. NBT issued 4.32 million shares and recorded preliminary goodwill of $78.1 million. Acquired loans were about $1.18 billion and deposits about $1.31 billion. Integration and merger expenses were $7.9 million in Q3 and $9.7 million year to date.
- Q3 net income included the acquisition expenses and $8.8 million of acquisition-related loan-loss provision. Excluding acquisition expenses, that provision, and securities gains or losses, management reported non-GAAP net income of $38.3 million and diluted EPS of $0.84. This measure is not GAAP net income.
- Nine-month securities losses were $9.8 million, including $4.5 million from sales of two subordinated debt securities and a $5.0 million write-off of a security issued by a failed financial institution.
- Deposit funding costs rose sharply: Q3 interest expense was $42.2 million versus $4.7 million a year earlier. Management cited higher deposit pricing and short-term borrowing costs; Q3 FTE margin was down 30 basis points year over year.
- AFS securities had $242.3 million of gross unrealized losses and HTM securities $130.5 million at September 30. Management attributed most losses to interest rates, stated it did not intend to sell the securities, and did not consider them credit-impaired.
Outlook, risks and contingencies
The filing gives no earnings or revenue guidance. Management said net interest income will depend significantly on the path of short- and medium-term rates, inflation and Federal Reserve policy; it expected short-term rates to remain near current levels in the near term and continued to focus on deposit costs. Its 12-month interest-rate sensitivity analysis showed estimated net interest income changes of +1.17% for a 200-basis-point increase, +0.86% for a 100-basis-point increase and -1.60% for a 200-basis-point decline.
- Management identified interest-rate and deposit competition, economic and banking-sector stress, credit deterioration, loan losses, securities values, and Salisbury integration and synergy execution as risks. Uninsured deposits were estimated at $4.3 billion, up from $3.6 billion at year-end; the company also reported migration toward higher-cost money-market and time deposits.
- Potential problem loans were $92.4 million, up from $52.0 million at year-end; management said most of the commercial loan migration was adequately secured by real estate. Nonperforming loans were $24.3 million, or 0.25% of loans, versus $21.1 million at year-end.
- The allowance estimate uses economic forecasts and management judgments. The filing reports a 25% increase in estimated allowance if the downside scenario were weighted at 100%, all else equal.
- Commitments to extend credit and unused lines totaled $2.71 billion; standby letters of credit totaled $40.5 million. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Salisbury integration, expected synergies and acquired-asset marks develop as anticipated, and how much of future results reflects the acquisition.
- Whether deposit retention and pricing, uninsured-deposit levels and reliance on higher-cost funding affect margins and liquidity.
- Trends in commercial real estate and other potential problem loans, consumer charge-offs, nonperforming loans and future credit-loss provisions.
- The effects of interest rates and securities valuation changes, including unrealized losses, on earnings, capital and liquidity.
- Reported GAAP results versus management’s non-GAAP adjusted earnings, and the company’s capital ratios following acquisition-related balance-sheet growth.