NBT Bancorp Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. NBT Bancorp is a community-oriented bank holding company serving markets in upstate and central New York and parts of the Northeast. Results reflect the COVID-19 pandemic and adoption of the CECL expected-credit-loss standard on January 1, 2020.
Financial performance and condition
| Metric | Q2 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $80.4 million | Up 2.3% from Q2 2019; first-half 2020 was $157.6 million, up 0.8% year over year |
| Net interest margin, fully tax-equivalent | 3.38% | Down 23 basis points year over year and 14 basis points from Q1 2020 |
| Noninterest income | $35.0 million | Up 2.2% year over year; first-half total was $70.4 million, up 3.5% |
| Noninterest expense | $65.3 million | Down 1.3% year over year; first-half total was $136.2 million, up 1.1% |
| Provision for loan losses | $18.8 million | Up $11.6 million year over year; first-half provision was $48.5 million versus $13.1 million |
| Net income / diluted EPS | $24.7 million / $0.56 | Q2 2019: $30.6 million / $0.69. First-half 2020 net income was $35.1 million and diluted EPS $0.80, versus $59.7 million and $1.35 |
| Assets / loans / deposits | $10.85 billion / $7.63 billion / $8.82 billion | At June 30; assets rose from $9.72 billion and deposits from $7.59 billion at year-end 2019 |
| Allowance for loan losses | $113.5 million | 1.49% of loans, or 1.59% excluding PPP loans; $72.2 million at June 30, 2019 |
| Cash and cash equivalents | $699.5 million | Six-month ending balance, versus $189.4 million at June 30, 2019 |
Q2 pre-provision net revenue (a non-GAAP measure) was $50.7 million, compared with $47.2 million in Q2 2019. The filing attributes the stronger result versus Q1 partly to higher net interest income and lower noninterest expense. Six-month operating cash flow was $77.0 million, investing cash use was $572.2 million, and financing cash inflow was $977.8 million. Financing inflows included $1.23 billion of deposit growth and $100 million from subordinated notes; investing outflows primarily reflected loan growth.
Material changes and balance-sheet highlights
- Total loans increased $491.9 million from year-end, including $510.1 million in PPP loans. Excluding PPP, period-end loans decreased $18.2 million; consumer loans fell $149.3 million, while commercial real estate loans rose $114.5 million.
- Deposits grew $1.23 billion, or 16.2%, from year-end, partly reflecting PPP funding and government support programs. Short-term borrowings fell to $339.7 million from $655.3 million.
- Allowance for credit losses was $113.5 million at quarter-end, up from $100.0 million at March 31. The increase since CECL adoption was primarily attributed to COVID-related macroeconomic expectations. CECL adoption reduced opening retained earnings by $4.3 million.
- Nonperforming loans were $27.6 million, down from $28.9 million at year-end; nonperforming assets were $29.4 million, or 0.27% of assets. Management identified $115.3 million of potential problem loans, up from $84.1 million at year-end.
- Stockholders’ equity was $1.14 billion. Regulatory capital ratios met “well capitalized” thresholds; the total risk-based capital ratio was 15.15%, compared with 13.52% at year-end.
- The company issued $100 million of 5.00% fixed-to-floating subordinated notes due 2030, qualifying as Tier 2 capital. It suspended share repurchases and said it did not expect further repurchases at that time. The board approved a $0.27 per-share third-quarter dividend.
Outlook, risks and unusual items
- Management provided no specific earnings or full-year financial guidance. It said net interest income will depend significantly on the depth and duration of the downturn. Deposit rates were reduced, with limited room for further reductions, and competition could constrain asset yields.
- COVID-19 is identified as a material uncertainty affecting borrowers, credit quality, demand, funding, operations and financial markets. The June 30 forecast assumed continued economic deterioration, elevated unemployment through the forecast period, and a GDP rebound followed by a short period of negative growth.
- About $1.0 billion of loans were in COVID-related modification programs at June 30, equal to 13% of loans; 80% were commercial and 20% consumer. As of August 5, 6.3% of loans excluding PPP balances remained in deferral programs. Management said these short-term modifications generally were not classified as troubled debt restructurings.
- NBT processed approximately 3,000 PPP loans totaling more than $547 million. PPP loans are SBA-guaranteed, but the filing highlights possible compliance, litigation and guarantee risks, including potential SBA challenges to lender processes.
- Management reported strong liquidity: its Basic Surplus measure was 24.1% of assets, about $2.6 billion, versus a 5% policy minimum. It cautioned that credit-line draws, funding-market disruption or deposit competition could weaken liquidity.
- Interest-rate sensitivity analysis estimated next-12-month net interest income changes of +1.55% under a 200-basis-point rise, +1.27% under a 100-basis-point rise, and +1.32% under a 50-basis-point decline. The filing notes modeled declines in falling-rate scenarios historically can pressure asset yields.
- No material legal proceedings were reported beyond routine litigation. Management said there were no material changes to previously disclosed risk factors except COVID-19 and risks associated with PPP participation.
Important facts for investors to verify
- Whether COVID-related deferrals, potential problem loans and exposure to higher-risk industries lead to rising delinquencies, charge-offs or further reserve builds.
- How PPP forgiveness, servicing fees and any SBA compliance or guarantee issues affect loan balances, income and risk.
- Whether deposit growth persists and how excess liquidity, loan mix and low interest rates affect net interest margin.
- Whether CECL assumptions and economic forecasts change materially; the filing warns that model inputs may increase provision and earnings volatility.
- Capital and liquidity trends, including the effects of the new subordinated debt, dividends and the planned pause in share repurchases.