NBT Bancorp Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. NBT Bancorp is a community-oriented financial holding company serving markets in upstate and central New York and parts of the Northeast. Unless noted otherwise, amounts below are in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Net interest income | $77.5 | $71.9 | +7.8% |
| Noninterest income | $33.4 | $30.8 | +8.5% |
| Noninterest expense | $66.5 | $60.6 | +9.7% |
| Provision for loan losses | $6.0 | $7.9 | Lower by $1.9 |
| Net income | $29.8 | $22.9 | +30.3% |
| Diluted EPS | $0.68 | $0.52 | +30.8% |
For the first nine months, net income was $83.9 million, up 30.1%, and diluted EPS was $1.91, up 30.1%. The effective tax rate declined to 22.0% from 32.0%, primarily reflecting the Tax Cuts and Jobs Act. Q3 annualized return on average assets was 1.25%; return on average equity was 11.96%. The fully taxable-equivalent (FTE) net interest margin was 3.57% for both Q3 and the nine-month period; the nine-month figure was up 11 basis points year over year.
Financial position, cash flow and liquidity
- At September 30, 2018, total assets were $9.55 billion, loans were $6.89 billion, and deposits were $7.44 billion. Since December 31, 2017, loans rose 4.6% and deposits rose 3.8%.
- Cash and cash equivalents were $174.6 million at September 30, versus $181.8 million a year earlier. For the first nine months, operating cash flow was $99.8 million; investing cash outflow was $400.4 million and financing cash inflow was $315.6 million.
- Total deposits increased $270.7 million from year-end. Short-term borrowings were $811.7 million, long-term debt $73.8 million and junior subordinated debt $101.2 million. Shareholders’ equity was $994.2 million, or 10.41% of assets.
- Regulatory capital ratios remained above “well-capitalized” thresholds: Tier 1 leverage 9.36%, common equity Tier 1 10.28%, Tier 1 capital 11.58%, and total risk-based capital 12.58%.
- Management reported a $0.9 billion basic liquidity surplus, 9.9% of assets, above its 5% minimum. Additional borrowing capacity was available through the FHLB, Federal Reserve, other banks and securities collateral.
Material changes and asset quality
- Loan growth was led by commercial real estate and specialty lending. Average loans increased $426.0 million year over year for the first nine months. Average demand deposits increased 4.7% year over year.
- Q3 net charge-offs were $5.7 million, or 0.33% of average loans on an annualized basis, compared with $6.1 million and 0.38% a year earlier. Nine-month net charge-offs were $19.0 million, versus $19.7 million.
- The allowance for loan losses was $72.8 million, 1.06% of loans (1.11% excluding acquired loans). Nonperforming loans were $28.0 million, 0.41% of loans; nonperforming assets were $31.3 million, or 0.33% of assets.
- Potential problem loans increased to $60.5 million from $57.7 million at year-end. Consumer loans accounted for 90% of nine-month net charge-offs.
- Accumulated other comprehensive loss widened to $49.1 million from $22.1 million at year-end, largely reflecting unrealized losses on available-for-sale securities as market rates rose. Management characterized securities impairments as temporary and stated it intended to hold the debt securities for recovery.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Interest-rate modeling projected net interest income decreases of 2.14% under a gradual 200-basis-point increase and 2.47% under a gradual 100-basis-point decrease over 12 months; both were within the company’s 7.5% policy limit. Management noted deposit repricing and loan growth relative to deposit growth as liquidity sensitivities.
- Key stated risks include economic and borrower-credit conditions, interest rates and deposit competition, loan-loss estimates, acquisitions and integration, regulation, technology, and the transition to new accounting standards. CECL adoption was expected in 2020; management said its impact could be material but could not yet be reasonably estimated.
- Retirement Plan Services was acquired in Q2 2018, contributing to higher fee income and operating costs. The company approved a Q4 dividend of $0.26 per share, a 4% increase. It received an IRS letter ruling after quarter-end resulting in a $4.7 million tax benefit recorded in Q4 2018.
- No material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective and reported no material control changes during the quarter.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate and specialty lending, is accompanied by stable credit performance; monitor potential problem loans and consumer charge-offs.
- Whether deposit costs and short-term borrowing costs continue to rise faster than asset yields, and how this affects net interest margin and funding needs.
- How the securities portfolio’s unrealized losses and the widening accumulated other comprehensive loss evolve if rates rise or securities must be sold.
- The realized effect of the $4.7 million IRS tax benefit and the sustainability of earnings growth after acquisition-related contributions and expenses.
- The eventual impact of CECL on allowance levels, earnings and capital when implemented.