NBT Bancorp Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. NBT Bancorp is a community-oriented financial holding company providing commercial and retail banking and wealth management services across the Northeast.
Financial performance and condition
All dollar amounts are in millions unless otherwise stated.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $77.9 | $78.1 | $235.6 | $234.4 |
| Provision for loan losses | $3.3 | $6.3 | $51.7 | $19.4 |
| Noninterest income | $37.7 | $39.7 | $108.2 | $107.8 |
| Noninterest expense | $66.3 | $69.7 | $202.5 | $204.4 |
| Net income | $35.1 | $32.4 | $70.2 | $92.1 |
| Diluted EPS | $0.80 | $0.73 | $1.60 | $2.09 |
- Q3 net interest margin was 3.17% on a fully tax-equivalent basis, down 40 basis points year over year. The nine-month margin was 3.35%, versus 3.61%.
- Q3 return on average assets was 1.29%; return on average equity was 12.09%. For the first nine months, these were 0.90% and 8.23%, respectively.
- Operating cash flow for the first nine months was $107.4, versus $104.0 in 2019. Investing activities used $658.7, financing activities provided $951.9, and cash and cash equivalents increased $400.6 to $617.5.
- At September 30, total assets were $10.85 billion, up from $9.72 billion at year-end 2019. Loans were $7.56 billion, including $514.6 million of PPP loans; deposits were $8.96 billion.
- Allowance for credit losses was $114.5, or 1.51% of loans (1.62% excluding PPP loans). Nonperforming loans were $38.5, 0.51% of loans; nonperforming assets were $40.1, or 0.37% of assets.
- Funding included $183.5 of short-term borrowings, $64.1 of long-term debt, $97.9 of subordinated debt net of issuance costs, and $101.2 of junior subordinated debt. Stockholders’ equity was $1.17 billion; regulatory capital ratios remained above “well-capitalized” thresholds.
- Liquidity was reported as strong: the company’s Basic Surplus was 25.5% of assets, or approximately $2.8 billion, compared with its 5% minimum. Additional available borrowing capacity under its stated policy was $2.6 billion.
Material changes versus comparable periods
- Q3 net income rose $2.7 million year over year and $10.4 million from Q2 2020; nine-month net income declined $21.9 million year over year. The year-to-date decline reflected sharply higher credit-loss provision expense.
- Q3 provision expense fell to $3.3 million from $18.8 million in Q2. The allowance increased from $72.4 million at September 2019, reflecting CECL adoption and the COVID-19 economic outlook.
- Deposits increased $1.37 billion from December 2019, supported partly by PPP lending and government support programs. Total loans increased $424.5 million, but decreased $90.0 million excluding PPP loans; consumer loan reduction reflected managed runoff of indirect auto loans.
- On January 1, 2020, NBT adopted CECL and recorded a $4.3 million reduction to retained earnings. This changed the allowance methodology, so 2020 and prior-period credit-loss amounts are not fully comparable.
- NBT issued $100 million of 5.00% fixed-to-floating subordinated notes due 2030, qualifying as Tier 2 capital. The company repurchased 263,507 shares in Q1 and suspended further repurchases.
Outlook, management commentary, and risks
- The filing provides no specific earnings or revenue guidance. Management emphasized that results depend on the depth and duration of the COVID-19 downturn and the timing and effectiveness of economic stimulus.
- NBT processed approximately 3,000 PPP loans totaling more than $548 million and reported $233 million of COVID-related loan modifications outstanding at September 30, representing 3.1% of total loans. Most modified loans were not treated as troubled debt restructurings under applicable relief guidance.
- Management’s September CECL baseline assumed a large, effective stimulus package by quarter-end and no secondary surge in cases or pandemic-related business closures. An equally weighted downside scenario assumed no stimulus package by quarter-end. The allowance remains sensitive to forecasts, portfolio mix, and credit quality.
- Potential problem loans rose to $134.1 million from $84.1 million at year-end 2019. Management cited proactive risk-rating of borrowers in pandemic-affected industries; 9.5% of loans were in identified higher-risk industries. Two commercial relationships totaling $10.9 million moved to nonaccrual, with $3.0 million of specific reserves.
- Management identified low interest rates and margin pressure as risks. Its modeled 12-month net interest income changes were +0.89% under a 200-basis-point increase, +1.37% under a 100-basis-point increase, and -0.26% under a 50-basis-point decrease. Deposit outflows, increased line draws, and funding-market disruption could also pressure liquidity.
- Other disclosed risks include economic weakness, unemployment, credit losses, interest-rate changes, regulatory and accounting developments, and uncertainty around COVID-19. No material change to previously disclosed risk factors or material legal proceedings was reported.
Important facts for investors to verify
- Whether credit performance, COVID-related deferrals, and the $134.1 million potential-problem-loan balance worsen, and how that affects provisions and the allowance.
- How quickly PPP loans are forgiven or repaid, and whether deposit growth persists or reverses as government support changes.
- Whether net interest margin and earnings hold up in a prolonged low-rate environment, including the effects of asset repricing and deposit-rate floors.
- Whether the CECL allowance assumptions and downside scenario remain appropriate as economic forecasts and borrower conditions evolve.
- Capital and liquidity trends, including the subordinated debt cost, dividend capacity, and management’s decision to keep share repurchases suspended.