NBT Bancorp Inc. — Q3 2019 Form 10-Q
Business context and reporting period. NBT Bancorp is a community-oriented financial holding company providing commercial banking, retail banking and wealth management across upstate and central New York and parts of the Northeast. This unaudited filing covers the three and nine months ended September 30, 2019; comparisons are with 2018 unless noted. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
- Q3 earnings: Net income was $32.4 million, up 8.6% year over year; diluted EPS was $0.73, up 7.4%. Annualized return on average assets was 1.34%; return on average equity was 11.83%.
- Nine-month earnings: Net income was $92.1 million, up 9.7%; diluted EPS was $2.09, up 9.4%.
- Net interest income and margin: Q3 net interest income was $78.1 million, up 0.7% year over year; FTE net interest margin was 3.57%, unchanged year over year. Nine-month net interest income was $234.4 million, up 3.4%, and FTE margin was 3.61%, versus 3.57% in 2018.
- Other income and expenses: Q3 noninterest income was $39.7 million, up 19.0%; it included a $4.0 million gain on Visa Class B shares. Excluding securities gains, noninterest income was $35.7 million, up 8.2% year over year. Q3 noninterest expense was $69.7 million, up 4.9%. Nine-month noninterest income was $107.8 million, up 9.1%, and expense was $204.4 million, up 4.5%.
- Credit costs: Q3 provision for loan losses was $6.3 million, versus $6.0 million a year earlier. Nine-month provision was $19.4 million, down from $22.3 million; annualized net charge-offs were 0.38% of average loans, unchanged year over year.
- Balance sheet: Total assets were $9.66 billion at September 30, 2019, up from $9.56 billion at year-end 2018. Loans were $7.01 billion, up $126.1 million; deposits were $7.74 billion, up $375.0 million. Stockholders’ equity was $1.10 billion, or 11.37% of assets, compared with $1.02 billion, or 10.65%, at year-end.
- Funding and liquidity: Short-term borrowings were $443.3 million, down from $871.7 million at year-end; long-term debt was $84.2 million and junior subordinated debt $101.2 million. Cash and cash equivalents ended the nine-month period at $274.1 million, versus $181.0 million at the start. Operating cash flow was $104.0 million. The company reported a $1.6 billion Basic Surplus liquidity measure, 16.1% of assets, above its 5% minimum.
- Capital and shareholder returns: Regulatory ratios exceeded “well-capitalized” thresholds; tangible equity ratio was 8.65%, up from 7.85% at year-end. The board approved a Q4 dividend of $0.27 per share, a 3.8% increase, and authorized a new repurchase program for up to 1 million shares through December 31, 2021.
Material changes, outlook and risks
- Year-to-date earnings growth reflected higher net interest income and noninterest income. Loan growth was concentrated in commercial real estate and residential real estate, partly offset by runoff in consumer portfolios.
- Q3 expense included $3.1 million of reorganization costs, primarily for branch optimization, and $0.7 million of one-time efficiency-related charges. Management said these initiatives are intended to improve future operating efficiency. A separate $1.0 million write-down related to a branch pending disposition was recorded.
- Interest-rate sensitivity modeling projected net interest income down 0.77% in a gradual +200 basis-point scenario and down 2.00% in a −100 basis-point scenario over 12 months. Management highlighted that competitive deposit pricing could limit the ability to reduce funding costs as rates fall, and said it would focus on lower-cost core deposits.
- Management considered the allowance for loan losses appropriate but noted it could require increases if economic conditions, loss experience or collateral values deteriorate. Nonperforming loans were 0.47% of loans, versus 0.41% at September 30, 2018; the increase was attributed mainly to a commercial real estate relationship more than 90 days past due that remained accruing and was described as well secured. Potential problem loans were $81.5 million, down from $90.0 million at year-end.
- CECL was scheduled for adoption January 1, 2020. Management was still evaluating the effect, said adoption could materially affect the financial statements and could increase allowance volatility, and had begun third-party model validation and parallel testing.
- The filing reports no material change to previously disclosed risk factors and no material legal proceedings beyond routine litigation. Management stated disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- How much of earnings growth persists after excluding the Visa gain and unusual restructuring and efficiency costs.
- Whether deposit costs, deposit growth and loan growth sustain net interest margin following the Federal Reserve’s rate cuts.
- Trends in commercial real estate delinquencies, consumer charge-offs, potential problem loans and allowance coverage.
- The eventual CECL day-one allowance and capital impact; the filing does not provide a finalized estimate.
- Execution and costs of branch optimization, and any actual share repurchases under the newly authorized program.