Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide a concise description of the consolidated financial condition and results of operations of NBT Bancorp Inc. ("NBT") and its wholly owned subsidiaries, including NBT Bank, National Association (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”) and NBT Holdings, Inc. (“NBT Holdings”) (collectively referred to herein as the “Company”). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company's consolidated financial statements and footnotes thereto included in this Form 10‑Q as well as to the Company's Annual Report on Form 10‑K for the year ended December 31, 2018 for an understanding of the following discussion and analysis. Operating results for the three and nine month periods ending September 30, 2019 are not necessarily indicative of the results of the full year ending December 31, 2019 or any future period.
Forward-looking Statements
Certain statements in this filing and future filings by the Company with the SEC, in the Company’s press releases or other public or stockholder communications or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact; (2) changes in the level of nonperforming assets and charge-offs; (3) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (4) the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board ("FRB"); (5) inflation, interest rate, securities market and monetary fluctuations; (6) political instability; (7) acts of war or terrorism; (8) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (9) changes in consumer spending, borrowings and savings habits; (10) changes in the financial performance and/or condition of the Company’s borrowers; (11) technological changes; (12) acquisitions and integration of acquired businesses; (13) the ability to increase market share and control expenses; (14) changes in the competitive environment among financial holding companies; (15) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including those under the Dodd-Frank Act; (16) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters; (17) changes in the Company’s organization, compensation and benefit plans; (18) the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; (19) greater than expected costs or difficulties related to the integration of new products and lines of business; and (20) the Company’s success at managing the risks involved in the foregoing items.
The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors including, but not limited to, those described above and other factors discussed in the Company’s annual and quarterly reports previously filed with the Securities and Exchange Commission, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.
Unless required by law, the Company does not undertake, and specifically disclaims any obligations to, publicly release any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Non-GAAP Measures
This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures adjust GAAP measures to exclude the effects of acquisition-related intangible amortization expense on earnings, equity and assets as well as providing a fully taxable equivalent ("FTE") yield on securities and loans. Where non-GAAP disclosures are used in this Form 10-Q, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables. Management believes that these non-GAAP measures provide useful information that is important to an understanding of the results of the Company’s core business as well as provide information standard in the financial institution industry. Non-GAAP measures should not be considered a substitute for financial measures determined in accordance with GAAP and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.
Critical Accounting Policies
The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, pension accounting and provision for income taxes.
Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio and the material effect that such judgments can have on the results of operations. While management’s current evaluation of the allowance for loan losses indicates that the allowance is appropriate, the allowance may need to be increased under adversely different conditions or assumptions. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provision for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Company’s nonperforming loans and potential problem loans have a significant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable, if collateral values were significantly lower, the Company’s allowance for loan loss policy would also require additional provision for loan losses.
Management is required to make various assumptions in valuing the Company’s pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations and expert opinions in determining the various rates used to estimate pension expense. The Company also considers the Citigroup Pension Liability Index, market interest rates and discounted cash flows in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.
The Company is subject to examinations from various taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate. Should tax laws change or the taxing authorities determine that management’s assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company’s results of operations.
The Company’s policies on the allowance for loan losses, pension accounting and provision for income taxes are disclosed in Note 1 to the consolidated financial statements presented in our 2018 Annual Report on Form 10-K. All accounting policies are important and as such, the Company encourages the reader to review each of the policies included in Note 1 to the consolidated financial statements presented in our 2018 Annual Report on Form 10-K to obtain a better understanding of how the Company’s financial performance is reported.
Refer to Note 12 to the unaudited interim consolidated financial statements in this Quarterly Report on Form 10-Q for recently adopted accounting standards.
Overview
Significant factors management reviews to evaluate the Company’s operating results and financial condition include, but are not limited to: net income and earnings per share, return on average assets and equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons. The following information should be considered in connection with the Company's results for the three and nine months ended September 30, 2019:
·
|
Announced a 3.8% increase in the quarterly dividend
|
·
|
Third quarter diluted earnings per share up 5.8% from the prior quarter and up 7.4% from prior year
|
·
|
Third quarter net income up 6.0% from the prior quarter and up 8.6% from prior year
|
·
|
FTE net interest margin of 3.61% for the nine months ended September 30, 2019, up 4 basis points ("bps") from 2018
|
·
|
Tangible equity ratio of 8.65%, up 106 bps from the third quarter of 2018(1)
|
·
|
The Company's Board of Directors authorized a stock repurchase program
|
(1) Non-GAAP measure - Stockholders' equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets.
Results of Operations
Net income for the three months ended September 30, 2019 was $32.4 million, up 6.0% from $30.6 million for the second quarter of 2019 and up 8.6% from $29.8 million for the third quarter of 2018. Diluted earnings per share for the three months ended September 30, 2019 was $0.73, as compared with $0.69 for the prior quarter, an increase of 5.8%, and $0.68 for the third quarter of 2018, an increase of 7.4%. Return on average assets (annualized) was 1.34% for the three months ended September 30, 2019 as compared to 1.28% for the prior quarter and 1.25% for the same period last year. Return on average equity (annualized) was 11.83% for the three months ended September 30, 2019 as compared to 11.63% for the prior quarter and 11.96% for the three months ended September 30, 2018. Return on average tangible common equity (annualized) was 16.43% for the three months ended September 30, 2019 as compared to 16.38% for the prior quarter and 17.42% for the three months ended September 30, 2018.
Net income for the nine months ended September 30, 2019 was $92.1 million, up 9.7% from $83.9 million for the same period last year. Diluted earnings per share for the nine months ended September 30, 2019 was $2.09, as compared with $1.91 for the same period in 2018, an increase of 9.4%. Return on average assets (annualized) was 1.29% for the nine months ended September 30, 2019 as compared to 1.20% for the same period last year. Return on average equity (annualized) was 11.66% for the nine months ended September 30, 2019 as compared to 11.54% for the nine months ended September 30, 2018. Return on average tangible common equity (annualized) was 16.42% for the nine months ended September 30, 2019 as compared to 16.83% for the nine months ended September 30, 2018.
Return on average tangible common equity is a non-GAAP measure and excludes amortization of intangible assets (net of tax) from net income and average tangible equity calculated as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net income
|
|
$
|
32,379
|
|
|
$
|
29,807
|
|
|
$
|
92,061
|
|
|
$
|
83,914
|
|
Amortization of intangible assets (net of tax)
|
|
|
656
|
|
|
|
791
|
|
|
|
2,051
|
|
|
|
2,298
|
|
Net income, excluding intangible amortization
|
|
$
|
33,035
|
|
|
$
|
30,598
|
|
|
$
|
94,112
|
|
|
$
|
86,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders' equity
|
|
$
|
1,085,961
|
|
|
$
|
988,551
|
|
|
$
|
1,055,375
|
|
|
$
|
972,316
|
|
Less: average goodwill and other intangibles
|
|
|
288,077
|
|
|
|
291,814
|
|
|
|
288,967
|
|
|
|
287,403
|
|
Average tangible common equity
|
|
$
|
797,884
|
|
|
$
|
696,737
|
|
|
$
|
766,408
|
|
|
$
|
684,913
|
|
Net Interest Income
Net interest income is the difference between interest income on earning assets, primarily loans and securities and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on interest-earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution’s performance as it is the principal source of earnings.
Net interest income was $78.1 million for the third quarter of 2019, down $0.6 million, or 0.7%, from the previous quarter. The FTE net interest margin was 3.57% for the three months ended September 30, 2019, down 4 bps from the previous quarter and interest income decreased $0.9 million, or 0.9%. The yield on average interest-earning assets decreased 6 bps to 4.22%, and average interest-earning assets decreased $58 million from the prior quarter to $8.7 billion. The lower asset yield primarily reflects the impact of lower short-term rates on floating-rate loans, while contraction in average earning assets was driven by a smaller investment portfolio. Interest expense was down $0.3 million, or 1.9%, due to a $168 million decrease in average interest-bearing liabilities from the prior quarter. The cost of interest-bearing liabilities for the quarter ended September 30, 2019 remained comparable to the prior quarter at 0.96%, driven by the 17 bp decrease in short-term borrowings cost, offset by the 3 bp increase in interest-bearing deposit costs.
Net interest income was $78.1 million for the third quarter of 2019, up $0.5 million, or 0.7%, from the third quarter of 2018. The FTE net interest margin of 3.57% was comparable to the third quarter of 2018. Interest income increased $4.2 million, or 4.7%, as the yield on average interest-earning assets increased 17 bps from the same period in 2018, and average interest-earning assets increased $42.3 million, or 0.5%, primarily due to a $147.9 million increase in average loans. Interest expense increased $3.7 million, as the cost of interest-bearing liabilities increased 25 bps, driven by interest-bearing deposit costs increasing 33 bps.
Net interest income for the first nine months of 2019 was $234.4 million, up $7.6 million, or 3.4%, from the same period in 2018. FTE net interest margin of 3.61% for the nine months ended September 30, 2019, was up from 3.57% for the same period in 2018. Average interest-earning assets were up $187.7 million, or 2.2%, for the nine months ended September 30, 2019, as compared to the same period in 2018, driven by a $216.0 million increase in loans. Interest income increased $23.2 million, or 9.2%, due to the increase in earning assets combined with a 25 bp improvement in loan yields. Interest expense was up $15.6 million, for the nine months ended September 30, 2019 as compared to the same period in 2018 as the cost of interest-bearing liabilities increased 34 bps, driven by interest-bearing deposit costs increasing 36 bps combined with a 40 bp increase in short-term borrowing costs. The Federal Reserve reduced its target fed funds rate twice in the third quarter of 2019 by a total of 50 bps. Prior to the Federal Reserve’s change in policy, the Company’s full-cycle deposit beta during the period of policy tightening from December 2015 through July 2019 was 15.2%. The Company’s average cost of deposits increased by 34 bps versus the 225 bps increase in the fed funds rate.
Average Balances and Net Interest Income
The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing liabilities on a taxable equivalent basis.
Three Months Ended
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rates
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rates
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term interest bearing accounts
|
|
$
|
57,530
|
|
|
$
|
283
|
|
|
|
1.95
|
%
|
|
$
|
3,328
|
|
|
$
|
51
|
|
|
|
6.08
|
%
|
Securities available for sale (1) (3)
|
|
|
940,256
|
|
|
|
5,711
|
|
|
|
2.41
|
%
|
|
|
1,197,910
|
|
|
|
6,697
|
|
|
|
2.22
|
%
|
Securities held to maturity (1) (3)
|
|
|
698,617
|
|
|
|
4,879
|
|
|
|
2.77
|
%
|
|
|
591,220
|
|
|
|
3,843
|
|
|
|
2.58
|
%
|
Federal Reserve Bank and FHLB stock
|
|
|
40,525
|
|
|
|
719
|
|
|
|
7.04
|
%
|
|
|
50,107
|
|
|
|
783
|
|
|
|
6.20
|
%
|
Loans (2) (3)
|
|
|
6,987,476
|
|
|
|
81,163
|
|
|
|
4.61
|
%
|
|
|
6,839,565
|
|
|
|
77,359
|
|
|
|
4.49
|
%
|
Total interest-earning assets
|
|
$
|
8,724,404
|
|
|
$
|
92,755
|
|
|
|
4.22
|
%
|
|
$
|
8,682,130
|
|
|
$
|
88,733
|
|
|
|
4.05
|
%
|
Other assets
|
|
$
|
852,616
|
|
|
|
|
|
|
|
|
|
|
$
|
776,219
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,577,020
|
|
|
|
|
|
|
|
|
|
|
$
|
9,458,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposit accounts
|
|
$
|
2,015,297
|
|
|
$
|
6,281
|
|
|
|
1.24
|
%
|
|
$
|
1,724,853
|
|
|
$
|
2,526
|
|
|
|
0.58
|
%
|
NOW deposit accounts
|
|
|
1,056,001
|
|
|
|
340
|
|
|
|
0.13
|
%
|
|
|
1,164,513
|
|
|
|
485
|
|
|
|
0.17
|
%
|
Savings deposits
|
|
|
1,274,793
|
|
|
|
188
|
|
|
|
0.06
|
%
|
|
|
1,279,520
|
|
|
|
188
|
|
|
|
0.06
|
%
|
Time deposits
|
|
|
893,837
|
|
|
|
3,936
|
|
|
|
1.75
|
%
|
|
|
881,792
|
|
|
|
2,958
|
|
|
|
1.33
|
%
|
Total interest-bearing deposits
|
|
$
|
5,239,928
|
|
|
$
|
10,745
|
|
|
|
0.81
|
%
|
|
$
|
5,050,678
|
|
|
$
|
6,157
|
|
|
|
0.48
|
%
|
Short-term borrowings
|
|
|
490,694
|
|
|
|
1,989
|
|
|
|
1.61
|
%
|
|
|
766,372
|
|
|
|
3,000
|
|
|
|
1.55
|
%
|
Long-term debt
|
|
|
84,250
|
|
|
|
498
|
|
|
|
2.35
|
%
|
|
|
73,762
|
|
|
|
431
|
|
|
|
2.32
|
%
|
Junior subordinated debt
|
|
|
101,196
|
|
|
|
1,095
|
|
|
|
4.29
|
%
|
|
|
101,196
|
|
|
|
1,089
|
|
|
|
4.27
|
%
|
Total interest-bearing liabilities
|
|
$
|
5,916,068
|
|
|
$
|
14,327
|
|
|
|
0.96
|
%
|
|
$
|
5,992,008
|
|
|
$
|
10,677
|
|
|
|
0.71
|
%
|
Demand deposits
|
|
$
|
2,389,617
|
|
|
|
|
|
|
|
|
|
|
$
|
2,356,216
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
185,374
|
|
|
|
|
|
|
|
|
|
|
|
121,574
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
1,085,961
|
|
|
|
|
|
|
|
|
|
|
|
988,551
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
9,577,020
|
|
|
|
|
|
|
|
|
|
|
$
|
9,458,349
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
$
|
78,428
|
|
|
|
|
|
|
|
|
|
|
$
|
78,056
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
Net interest margin (FTE)
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
Taxable equivalent adjustment
|
|
|
|
|
|
$
|
374
|
|
|
|
|
|
|
|
|
|
|
$
|
529
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
78,054
|
|
|
|
|
|
|
|
|
|
|
$
|
77,527
|
|
|
|
|
|
(1)
|
Securities are shown at average amortized cost.
|
(2)
|
For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.
|
(3)
|
Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.
|
Nine Months Ended
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
(Dollars in thousands)
|
|
Average Balance
|
|
|
Interest
|
|
|
Yield/
Rates
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rates
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term interest bearing accounts
|
|
$
|
30,970
|
|
|
$
|
457
|
|
|
|
1.97
|
%
|
|
$
|
3,242
|
|
|
$
|
133
|
|
|
|
5.48
|
%
|
Securities available for sale (1) (3)
|
|
|
968,517
|
|
|
|
17,695
|
|
|
|
2.44
|
%
|
|
|
1,245,672
|
|
|
|
20,714
|
|
|
|
2.22
|
%
|
Securities held to maturity (1) (3)
|
|
|
750,305
|
|
|
|
15,921
|
|
|
|
2.84
|
%
|
|
|
526,097
|
|
|
|
9,924
|
|
|
|
2.52
|
%
|
Federal Reserve Bank and FHLB stock
|
|
|
45,254
|
|
|
|
2,271
|
|
|
|
6.71
|
%
|
|
|
48,391
|
|
|
|
2,248
|
|
|
|
6.21
|
%
|
Loans (2) (3)
|
|
|
6,944,518
|
|
|
|
241,932
|
|
|
|
4.66
|
%
|
|
|
6,728,479
|
|
|
|
222,184
|
|
|
|
4.41
|
%
|
Total interest-earning assets
|
|
$
|
8,739,564
|
|
|
$
|
278,276
|
|
|
|
4.26
|
%
|
|
$
|
8,551,881
|
|
|
$
|
255,203
|
|
|
|
3.99
|
%
|
Other assets
|
|
$
|
821,859
|
|
|
|
|
|
|
|
|
|
|
$
|
763,108
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,561,423
|
|
|
|
|
|
|
|
|
|
|
$
|
9,314,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposit accounts
|
|
$
|
1,912,572
|
|
|
$
|
16,255
|
|
|
|
1.14
|
%
|
|
$
|
1,693,627
|
|
|
$
|
5,459
|
|
|
|
0.43
|
%
|
NOW deposit accounts
|
|
|
1,105,919
|
|
|
|
1,157
|
|
|
|
0.14
|
%
|
|
|
1,199,306
|
|
|
|
1,366
|
|
|
|
0.15
|
%
|
Savings deposits
|
|
|
1,269,723
|
|
|
|
550
|
|
|
|
0.06
|
%
|
|
|
1,272,452
|
|
|
|
543
|
|
|
|
0.06
|
%
|
Time deposits
|
|
|
929,819
|
|
|
|
11,843
|
|
|
|
1.70
|
%
|
|
|
847,899
|
|
|
|
7,799
|
|
|
|
1.23
|
%
|
Total interest-bearing deposits
|
|
$
|
5,218,033
|
|
|
$
|
29,805
|
|
|
|
0.76
|
%
|
|
$
|
5,013,284
|
|
|
$
|
15,167
|
|
|
|
0.40
|
%
|
Short-term borrowings
|
|
|
607,155
|
|
|
|
7,986
|
|
|
|
1.76
|
%
|
|
|
728,627
|
|
|
|
7,421
|
|
|
|
1.36
|
%
|
Long-term debt
|
|
|
80,162
|
|
|
|
1,391
|
|
|
|
2.32
|
%
|
|
|
82,372
|
|
|
|
1,359
|
|
|
|
2.21
|
%
|
Junior subordinated debt
|
|
|
101,196
|
|
|
|
3,404
|
|
|
|
4.50
|
%
|
|
|
101,196
|
|
|
|
3,030
|
|
|
|
4.00
|
%
|
Total interest-bearing liabilities
|
|
$
|
6,006,546
|
|
|
$
|
42,586
|
|
|
|
0.95
|
%
|
|
$
|
5,925,479
|
|
|
$
|
26,977
|
|
|
|
0.61
|
%
|
Demand deposits
|
|
$
|
2,332,965
|
|
|
|
|
|
|
|
|
|
|
$
|
2,303,751
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
166,537
|
|
|
|
|
|
|
|
|
|
|
|
113,443
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
1,055,375
|
|
|
|
|
|
|
|
|
|
|
|
972,316
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
9,561,423
|
|
|
|
|
|
|
|
|
|
|
$
|
9,314,989
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
$
|
235,690
|
|
|
|
|
|
|
|
|
|
|
$
|
228,226
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
Net interest margin (FTE)
|
|
|
|
|
|
|
|
|
|
|
3.61
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
Taxable equivalent adjustment
|
|
|
|
|
|
$
|
1,318
|
|
|
|
|
|
|
|
|
|
|
$
|
1,472
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
234,372
|
|
|
|
|
|
|
|
|
|
|
$
|
226,754
|
|
|
|
|
|
(1)
|
Securities are shown at average amortized cost.
|
(2)
|
For purposes of these computations, nonaccrual loans and loans held for sale are included in the average loan balances outstanding.
|
(3)
|
Interest income for tax-exempt securities and loans have been adjusted to a FTE basis using the statutory Federal income tax rate of 21%.
|
The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume) and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.
Three Months Ended September 30,
|
|
Increase (Decrease)
2019 over 2018
|
|
(In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Short-term interest bearing accounts
|
|
$
|
289
|
|
|
$
|
(57
|
)
|
|
$
|
232
|
|
Securities available for sale
|
|
|
(1,528
|
)
|
|
|
542
|
|
|
|
(986
|
)
|
Securities held to maturity
|
|
|
735
|
|
|
|
301
|
|
|
|
1,036
|
|
Federal Reserve Bank and FHLB stock
|
|
|
(161
|
)
|
|
|
97
|
|
|
|
(64
|
)
|
Loans
|
|
|
1,693
|
|
|
|
2,111
|
|
|
|
3,804
|
|
Total interest income (FTE)
|
|
$
|
1,028
|
|
|
$
|
2,994
|
|
|
$
|
4,022
|
|
Money market deposit accounts
|
|
$
|
488
|
|
|
$
|
3,267
|
|
|
$
|
3,755
|
|
NOW deposit accounts
|
|
|
(42
|
)
|
|
|
(103
|
)
|
|
|
(145
|
)
|
Savings deposits
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
Time deposits
|
|
|
41
|
|
|
|
937
|
|
|
|
978
|
|
Short-term borrowings
|
|
|
(1,114
|
)
|
|
|
103
|
|
|
|
(1,011
|
)
|
Long-term debt
|
|
|
62
|
|
|
|
5
|
|
|
|
67
|
|
Junior subordinated debt
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
Total interest expense (FTE)
|
|
$
|
(566
|
)
|
|
$
|
4,216
|
|
|
$
|
3,650
|
|
Change in net interest income (FTE)
|
|
$
|
1,594
|
|
|
$
|
(1,222
|
)
|
|
$
|
372
|
|
Nine Months Ended September 30,
|
|
Increase (Decrease)
2019 over 2018
|
|
(In thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Short-term interest bearing accounts
|
|
$
|
460
|
|
|
$
|
(136
|
)
|
|
$
|
324
|
|
Securities available for sale
|
|
|
(4,923
|
)
|
|
|
1,904
|
|
|
|
(3,019
|
)
|
Securities held to maturity
|
|
|
4,637
|
|
|
|
1,360
|
|
|
|
5,997
|
|
Federal Reserve Bank and FHLB stock
|
|
|
(151
|
)
|
|
|
174
|
|
|
|
23
|
|
Loans
|
|
|
7,279
|
|
|
|
12,469
|
|
|
|
19,748
|
|
Total interest income (FTE)
|
|
$
|
7,302
|
|
|
$
|
15,771
|
|
|
$
|
23,073
|
|
Money market deposit accounts
|
|
$
|
790
|
|
|
$
|
10,006
|
|
|
$
|
10,796
|
|
NOW deposit accounts
|
|
|
(102
|
)
|
|
|
(107
|
)
|
|
|
(209
|
)
|
Savings deposits
|
|
|
(1
|
)
|
|
|
8
|
|
|
|
7
|
|
Time deposits
|
|
|
812
|
|
|
|
3,232
|
|
|
|
4,044
|
|
Short-term borrowings
|
|
|
(1,368
|
)
|
|
|
1,933
|
|
|
|
565
|
|
Long-term debt
|
|
|
(37
|
)
|
|
|
69
|
|
|
|
32
|
|
Junior subordinated debt
|
|
|
-
|
|
|
|
374
|
|
|
|
374
|
|
Total interest expense (FTE)
|
|
$
|
94
|
|
|
$
|
15,515
|
|
|
$
|
15,609
|
|
Change in net interest income (FTE)
|
|
$
|
7,208
|
|
|
$
|
256
|
|
|
$
|
7,464
|
|
Noninterest Income
Noninterest income is a significant source of revenue for the Company and an important factor in the Company’s results of operations. The following table sets forth information by category of noninterest income for the periods indicated:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Insurance and other financial services revenue
|
|
$
|
6,421
|
|
|
$
|
6,172
|
|
|
$
|
19,115
|
|
|
$
|
18,502
|
|
Service charges on deposit accounts
|
|
|
4,330
|
|
|
|
4,503
|
|
|
|
12,790
|
|
|
|
12,721
|
|
ATM and debit card fees
|
|
|
6,277
|
|
|
|
5,906
|
|
|
|
17,958
|
|
|
|
16,995
|
|
Retirement plan administration fees
|
|
|
7,600
|
|
|
|
7,244
|
|
|
|
23,170
|
|
|
|
19,879
|
|
Trust
|
|
|
5,209
|
|
|
|
4,808
|
|
|
|
14,491
|
|
|
|
14,951
|
|
Bank owned life insurance
|
|
|
1,556
|
|
|
|
1,288
|
|
|
|
4,119
|
|
|
|
3,852
|
|
Net securities gains
|
|
|
4,036
|
|
|
|
412
|
|
|
|
4,024
|
|
|
|
575
|
|
Other
|
|
|
4,291
|
|
|
|
3,048
|
|
|
|
12,115
|
|
|
|
11,341
|
|
Total noninterest income
|
|
$
|
39,720
|
|
|
$
|
33,381
|
|
|
$
|
107,782
|
|
|
$
|
98,816
|
|
Noninterest income for the three months ended September 30, 2019 was $39.7 million, up $5.5 million, or 16.0%, from the prior quarter and up $6.3 million, or 19.0%, from the third quarter of 2018. In the third quarter of 2019, the Company sold Visa Class B common stock for a gain of $4.0 million. Excluding net securities gains, noninterest income for the three months ended September 30, 2019 would have been $35.7 million, up $1.4 million, or 4.0%, from the prior quarter and up $2.7 million, or 8.2%, from the third quarter of 2018. The increase from the prior quarter was primarily driven by higher insurance and other finance services revenue along with an increase in trust income. The increase from the third quarter of 2018 was primarily due to an increase in other noninterest income due primarily to higher swap fee income.
Noninterest income for the nine months ended September 30, 2019 was $107.8 million, up $9.0 million, or 9.1%, from the same period in 2018. Excluding net securities gains, noninterest income for the nine months ended September 30, 2019 would have been $103.8 million, up $5.5 million, or 5.6%, from the same period in 2018. The increase from the prior year was driven by higher retirement plan administration fees due to the acquisition of Retirement Plan Services, LLC (“RPS”) in the second quarter of 2018 and higher ATM and debit card fees due to an increase in the number of accounts and usage.
Noninterest Expense
Noninterest expenses are also an important factor in the Company’s results of operations. The following table sets forth the major components of noninterest expense for the periods indicated:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Salaries and employee benefits
|
|
$
|
39,352
|
|
|
$
|
38,394
|
|
|
$
|
117,275
|
|
|
$
|
112,687
|
|
Occupancy
|
|
|
5,335
|
|
|
|
5,380
|
|
|
|
17,053
|
|
|
|
17,034
|
|
Data processing and communications
|
|
|
4,492
|
|
|
|
4,434
|
|
|
|
13,599
|
|
|
|
13,221
|
|
Professional fees and outside services
|
|
|
3,535
|
|
|
|
3,580
|
|
|
|
10,562
|
|
|
|
10,408
|
|
Equipment
|
|
|
4,487
|
|
|
|
4,319
|
|
|
|
13,762
|
|
|
|
12,508
|
|
Office supplies and postage
|
|
|
1,667
|
|
|
|
1,563
|
|
|
|
4,835
|
|
|
|
4,640
|
|
FDIC (credit) expense
|
|
|
(20
|
)
|
|
|
1,223
|
|
|
|
1,946
|
|
|
|
3,516
|
|
Advertising
|
|
|
677
|
|
|
|
739
|
|
|
|
1,821
|
|
|
|
1,776
|
|
Amortization of intangible assets
|
|
|
874
|
|
|
|
1,054
|
|
|
|
2,735
|
|
|
|
3,064
|
|
Loan collection and other real estate owned, net
|
|
|
976
|
|
|
|
1,234
|
|
|
|
2,722
|
|
|
|
3,479
|
|
Other
|
|
|
8,374
|
|
|
|
4,577
|
|
|
|
18,130
|
|
|
|
13,324
|
|
Total noninterest expense
|
|
$
|
69,749
|
|
|
$
|
66,497
|
|
|
$
|
204,440
|
|
|
$
|
195,657
|
|
Noninterest expense for the three months ended September 30, 2019 was $69.7 million, up $3.5 million, or 5.3%, from the prior quarter and up $3.3 million, or 4.9%, from the third quarter of 2018. The increase from the prior quarter and the third quarter of 2018 was primarily driven by higher other noninterest expense items and increases in salaries and employee benefits, partially offset by lower FDIC insurance expense. Salaries and employee benefits expense increased from the prior quarter and the third quarter of 2018 due to wage increases and $0.7 million in one-time charges related to efficiency initiatives. FDIC insurance expense decreased from the prior quarter and the third quarter of 2018 due to receipt of the Small Bank Assessment Credit in the third quarter of 2019. Other noninterest expense increased from the prior quarter and the third quarter of 2018 due to $3.1 million in reorganization expenses incurred during the third quarter of 2019 primarily related to branch optimization strategies to improve future operating efficiencies.
Noninterest expense for the nine months ended September 30, 2019 was $204.4 million, up $8.8 million, or 4.5%, from the same period in 2018. The increase from the prior year was driven by higher salaries and employee benefits, equipment expense and other noninterest expenses in the first nine months of 2019 as compared to the same period of 2018, partially offset by lower FDIC insurance expense. The increase in salaries and employee benefits was primarily due to the RPS acquisition in the second quarter of 2018, the previously mentioned $0.7 million in one-time charges and general wage and benefit increases. The $4.8 million increase in other noninterest expenses was due to the $3.1 million in reorganization expenses previously mentioned and an increase in the amortization expense for pension plan actuarial costs.
Income Taxes
Income tax expense for the three months ended September 30, 2019 was $9.3 million, up $0.5 million from the prior quarter and up $0.7 million from the third quarter of 2018. The effective tax rate of 22.4% for the third quarter of 2019 was comparable to the second quarter of 2019 and to the third quarter of 2018. The increase in income tax expense from the prior quarter and from the third quarter of 2018 was primarily due to a higher level of taxable income.
Income tax expense for the nine months ended September 30, 2019 was $26.2 million, up $2.5 million, or 10.7%, from the same period of 2018. The effective tax rate of 22.2% for the first nine months of 2019 was up from 22.0% for the same period in the prior year. The increase in income tax expense from the prior year was due to a higher level of taxable income.
ANALYSIS OF FINANCIAL CONDITION
Securities
Total securities decreased $167.7 million, or 9.3%, from December 31, 2018 to September 30, 2019. The securities portfolio represents 16.9% of total assets as of September 30, 2019 as compared to 18.9% as of December 31, 2018.
The following table details the composition of securities available for sale, securities held to maturity and equity securities for the periods indicated:
|
September 30, 2019
|
|
December 31, 2018
|
Mortgage-backed securities:
|
|
|
|
With maturities 15 years or less
|
|
26%
|
|
|
26%
|
With maturities greater than 15 years
|
|
10%
|
|
|
10%
|
Collateral mortgage obligations
|
|
46%
|
|
|
40%
|
Municipal securities
|
|
11%
|
|
|
15%
|
U.S. agency notes
|
|
6%
|
|
|
8%
|
Equity securities
|
|
1%
|
|
|
1%
|
Total
|
|
100%
|
|
|
100%
|
The Company’s mortgage-backed securities, U.S. agency notes and collateralized mortgage obligations are all guaranteed by Fannie Mae, Freddie Mac, Federal Home Loan Bank, Federal Farm Credit Banks or Ginnie Mae (“GNMA”). GNMA securities are considered similar in credit quality to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. Currently, there are no subprime mortgages in our investment portfolio. Refer to Note 3 to the Company's unaudited interim consolidated financial statements included in this Form 10-Q for information related to other-than-temporary impairment considerations.
Loans
A summary of loans, net of deferred fees and origination costs, by category for the periods indicated follows:
(In thousands)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Commercial
|
|
$
|
1,317,649
|
|
|
$
|
1,291,568
|
|
Commercial real estate
|
|
|
2,033,552
|
|
|
|
1,930,742
|
|
Residential real estate
|
|
|
1,416,920
|
|
|
|
1,380,836
|
|
Dealer finance
|
|
|
1,195,783
|
|
|
|
1,216,144
|
|
Specialty lending
|
|
|
528,505
|
|
|
|
524,928
|
|
Home equity
|
|
|
452,535
|
|
|
|
474,566
|
|
Other consumer
|
|
|
68,865
|
|
|
|
68,925
|
|
Total loans
|
|
$
|
7,013,809
|
|
|
$
|
6,887,709
|
|
Total loans increased by $126.1 million, at September 30, 2019 from December 31, 2018. Loan growth in the first nine months of 2019 resulted from growth in the commercial real estate and residential real estate portfolios partly offset by run-off in our consumer portfolios. Total loans represent approximately 72.6% of assets as of September 30, 2019, as compared to 72.1% as of December 31, 2018.
Allowance for Loan Losses, Provision for Loan Losses and Nonperforming Assets
The allowance for loan losses is maintained at a level estimated by management to provide appropriately for risk of probable incurred losses inherent in the current loan portfolio. The adequacy of the allowance for loan losses is continuously monitored using a methodology designed to ensure that the level of the allowance reasonably reflects the loan portfolio’s risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable incurred credit losses inherent in the current loan portfolio.
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the degree of judgment exercised in evaluating the level of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the consolidated results of operations.
For purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectability of the portfolio. For individually analyzed loans, these factors include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans, estimates of the Company’s exposure to credit loss reflect a thorough current assessment of a number of factors, which affect collectability. These factors include: past loss experience; the size, trend, composition and nature of the loans; changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; trends experienced in nonperforming and delinquent loans; current economic conditions in the Company’s market; portfolio concentrations that may affect loss experienced across one or more components of the portfolio; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability and depth of lending management and staff. In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination, which may not be currently available to management.
After a thorough consideration and validation of the factors discussed above, required additions or reductions to the allowance for loan losses are made periodically by charges or credits to the provision for loan losses. These are necessary to maintain the allowance at a level which management believes is reasonably reflective of the overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans, additions or reductions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. Management considers the allowance for loan losses to be appropriate based on evaluation and analysis of the loan portfolio.
The
following table reflects changes to the allowance for loan losses for the periods presented.
Allowance for Loan Losses
|
|
Three Months Ended
|
|
(Dollars in thousands)
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Balance, beginning of period
|
|
$
|
72,165
|
|
|
|
|
|
$
|
72,450
|
|
|
|
|
Recoveries
|
|
|
1,891
|
|
|
|
|
|
|
2,093
|
|
|
|
|
Charge-offs
|
|
|
(8,015
|
)
|
|
|
|
|
|
(7,764
|
)
|
|
|
|
Net charge-offs
|
|
$
|
(6,124
|
)
|
|
|
|
|
$
|
(5,671
|
)
|
|
|
|
Provision for loan losses
|
|
|
6,324
|
|
|
|
|
|
|
6,026
|
|
|
|
|
Balance, end of period
|
|
$
|
72,365
|
|
|
|
|
|
$
|
72,805
|
|
|
|
|
Composition of Net Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
(733
|
)
|
|
|
12
|
%
|
|
$
|
(413
|
)
|
|
|
7
|
%
|
Residential Real Estate
|
|
|
(161
|
)
|
|
|
3
|
%
|
|
|
(42
|
)
|
|
|
1
|
%
|
Consumer
|
|
|
(5,230
|
)
|
|
|
85
|
%
|
|
|
(5,216
|
)
|
|
|
92
|
%
|
Net charge-offs
|
|
$
|
(6,124
|
)
|
|
|
100
|
%
|
|
$
|
(5,671
|
)
|
|
|
100
|
%
|
Annualized net charge-offs to average loans
|
|
|
0.35
|
%
|
|
|
|
|
|
|
0.33
|
%
|
|
|
|
|
Allowance for Loan Losses
|
|
Nine Months Ended
|
|
(Dollars in thousands)
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Balance, beginning of period
|
|
$
|
72,505
|
|
|
|
|
|
$
|
69,500
|
|
|
|
|
Recoveries
|
|
|
5,353
|
|
|
|
|
|
|
6,000
|
|
|
|
|
Charge-offs
|
|
|
(24,901
|
)
|
|
|
|
|
|
(24,995
|
)
|
|
|
|
Net charge-offs
|
|
$
|
(19,548
|
)
|
|
|
|
|
$
|
(18,995
|
)
|
|
|
|
Provision for loan losses
|
|
|
19,408
|
|
|
|
|
|
|
22,300
|
|
|
|
|
Balance, end of period
|
|
$
|
72,365
|
|
|
|
|
|
$
|
72,805
|
|
|
|
|
Composition of Net Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
(2,439
|
)
|
|
|
12
|
%
|
|
$
|
(1,755
|
)
|
|
|
9
|
%
|
Residential Real Estate
|
|
|
(660
|
)
|
|
|
3
|
%
|
|
|
(239
|
)
|
|
|
1
|
%
|
Consumer
|
|
|
(16,449
|
)
|
|
|
85
|
%
|
|
|
(17,001
|
)
|
|
|
90
|
%
|
Net charge-offs
|
|
$
|
(19,548
|
)
|
|
|
100
|
%
|
|
$
|
(18,995
|
)
|
|
|
100
|
%
|
Annualized net charge-offs to average loans
|
|
|
0.38
|
%
|
|
|
|
|
|
|
0.38
|
%
|
|
|
|
|
Net charge-offs of $6.1 million for the three months ended September 30, 2019 were down as compared to $6.5 million for the prior quarter and up compared to $5.7 million for the third quarter of 2018. Provision expense was lower at $6.3 million for the three months ended September 30, 2019, as compared with $7.3 million for the prior quarter and up from $6.0 million for the third quarter of 2018. Annualized net charge-offs to average loans for the third quarter of 2019 was 0.35%, down from 0.38% for the prior quarter and up from 0.33% for the third quarter of 2018.
Net charge-offs of $19.5 million for the nine months ended September 30, 2019 were up compared to $19.0 million for the same period of 2018. Provision expense was $19.4 million for the nine months ended September 30, 2019, as compared with $22.3 million for the same period of 2018. Annualized net charge-offs to average loans for the first nine months of 2019 was 0.38%, comparable to the first nine months of 2018.
The allowance for loan losses totaled $72.4 million at September 30, 2019, compared to $72.2 million at June 30, 2019 and $72.8 million at September 30, 2018. The allowance for loan losses as a percentage of loans was 1.03% (1.08% excluding acquired loans) at September 30, 2019, compared to 1.04% (1.08% excluding acquired loans) at June 30, 2019 and 1.06% (1.11% excluding acquired loans) at September 30, 2018.
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, restructured loans, other real estate owned (“OREO”) and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become 90 days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. In the third quarter of 2019 the threshold for evaluating classified and nonperforming loans specifically evaluated for impairment was increased from $750 thousand to $1.0 million. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair value, less any estimated disposal costs.
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
11,624
|
|
|
|
46
|
%
|
|
$
|
11,804
|
|
|
|
46
|
%
|
Residential Real Estate
|
|
|
5,558
|
|
|
|
23
|
%
|
|
|
6,526
|
|
|
|
26
|
%
|
Consumer
|
|
|
4,098
|
|
|
|
17
|
%
|
|
|
4,068
|
|
|
|
16
|
%
|
Troubled debt restructured loans
|
|
|
3,343
|
|
|
|
14
|
%
|
|
|
3,089
|
|
|
|
12
|
%
|
Total nonaccrual loans
|
|
$
|
24,623
|
|
|
|
100
|
%
|
|
$
|
25,487
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days or more past due and still accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,906
|
|
|
|
59
|
%
|
|
$
|
588
|
|
|
|
12
|
%
|
Residential Real Estate
|
|
|
566
|
|
|
|
7
|
%
|
|
|
1,182
|
|
|
|
23
|
%
|
Consumer
|
|
|
2,870
|
|
|
|
34
|
%
|
|
|
3,315
|
|
|
|
65
|
%
|
Total loans 90 days or more past due and still accruing
|
|
$
|
8,342
|
|
|
|
100
|
%
|
|
$
|
5,085
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
32,965
|
|
|
|
|
|
|
$
|
30,572
|
|
|
|
|
|
OREO
|
|
|
2,144
|
|
|
|
|
|
|
|
2,441
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
35,109
|
|
|
|
|
|
|
$
|
33,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans
|
|
|
0.47
|
%
|
|
|
|
|
|
|
0.44
|
%
|
|
|
|
|
Total nonperforming assets to total assets
|
|
|
0.36
|
%
|
|
|
|
|
|
|
0.35
|
%
|
|
|
|
|
Allowance for loan losses to total nonperforming loans
|
|
|
219.52
|
%
|
|
|
|
|
|
|
237.16
|
%
|
|
|
|
|
Nonperforming loans to total loans was 0.47% at September 30, 2019, up 8 bps from 0.39% at June 30, 2019 and up 6 bps from 0.41% at September 30, 2018. Past due loans as a percentage of total loans was 0.57% at September 30, 2019, up from 0.52% at June 30, 2019 and up from 0.53% at September 30, 2018. The increase in nonperforming and past due loans to total loans primarily resulted from a commercial real estate relationship migrating to over ninety days past due during the quarter. The loan is still accruing interest and is well secured by underlying collateral.
For acquired loans that are not deemed to be impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value and amortized over the life of the asset.
As a result of the application of this accounting methodology, certain credit-related ratios may not necessarily be directly comparable with periods prior to the acquisitions, or comparable with other institutions. The credit metrics most impacted by our acquisitions were the allowance for loans losses to total loans and total allowance for loan losses to nonperforming loans. As of September 30, 2019, the allowance for loan losses to total originated loans and the total allowance for loan losses to originated nonperforming loans were 1.08% and 231.21%, respectively. As of December 31, 2018, the allowance for loan losses to total originated loans and the total allowance for loan losses to originated nonperforming loans were 1.10% and 254.92%, respectively.
In addition to nonperforming loans discussed above, the Company has also identified approximately $81.5 million in potential problem loans at September 30, 2019 as compared to $90.0 million at December 31, 2018. Potential problem loans are loans that are currently performing, with a possibility of loss if weaknesses are not corrected. Such loans may need to be disclosed as nonperforming at some time in the future. Potential problem loans are classified by the Company’s loan rating system as “substandard.” Management cannot predict the extent to which economic conditions may worsen or other factors, which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured or require increased allowance coverage and provision for loan losses. To mitigate this risk the Company maintains a diversified loan portfolio, has no significant concentration in any particular industry and originates loans primarily within its footprint.
Deposits
Total deposits were $7.7 billion at September 30, 2019, up $375.0 million, or 5.1%, from December 31, 2018. Total average deposits increased $234.0 million, or 3.2%, from the same period last year. The growth was driven primarily by growth in interest bearing deposits of $204.7 million, or 4.1%, due to growth in MMDA and time accounts, combined with a $29.2 million, or a 1.3% increase in demand deposits.
Borrowed Funds
The Company's borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $443.3 million at September 30, 2019 compared to $871.7 million at December 31, 2018. The notional value of interest rate swaps hedging cash flows related to short-term borrowings totaled $100.0 million at September 30, 2019 and $225.0 million at December 31, 2018. Long-term debt was $84.2 million at September 30, 2019 and $73.7 million at December 31, 2018.
For more information about the Company’s borrowing capacity and liquidity position, see “Liquidity Risk” below.
Capital Resources
Stockholders' equity of $1.1 billion represented 11.37% of total assets at September 30, 2019 compared with $1.0 billion, or 10.65% as of December 31, 2018. The increase in stockholders' equity resulted primarily from net income of $92.1 million for the nine months ending September 30, 2019 and changes in OCI of $20.3 million, partially offset by dividends of $34.2 million during the period .
The Company did not purchase shares of its common stock during the nine months ended September 30, 2019. As of September 30, 2019, there were 1,000,000 shares available for repurchase under a plan authorized on October 23, 2017, which expires on December 31, 2019. On October 28, 2019, the NBT Board of Directors authorized a repurchase program for NBT to repurchase up to an additional 1,000,000 shares of its outstanding common stock. This plan expires on December 31, 2021.
The Board of Directors considers the Company's earnings position and earnings potential when making dividend decisions. The Board of Directors approved a fourth-quarter 2019 cash dividend of $0.27 per share at a meeting held on October 28, 2019. The dividend, which represents a $0.01, or 3.8% increase, will be paid on December 13, 2019 to stockholders of record as of November 29, 2019.
As the capital ratios in the following table indicate, the Company remained “well capitalized” at September 30, 2019 under applicable bank regulatory requirements. Capital measurements are well in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. To be considered well capitalized, tier 1 leverage, common equity tier 1 capital, tier 1 capital and total risk-based capital ratios must be 5%, 6.5%, 8% and 10%, respectively.
Capital Measurements
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Tier 1 leverage ratio
|
|
|
10.15
|
%
|
|
|
9.52
|
%
|
Common equity tier 1 capital ratio
|
|
|
11.14
|
%
|
|
|
10.49
|
%
|
Tier 1 capital ratio
|
|
|
12.42
|
%
|
|
|
11.79
|
%
|
Total risk-based capital ratio
|
|
|
13.38
|
%
|
|
|
12.78
|
%
|
Cash dividends as a percentage of net income
|
|
|
37.12
|
%
|
|
|
38.44
|
%
|
Per common share:
|
|
|
|
|
|
|
|
|
Book value
|
|
$
|
25.09
|
|
|
$
|
23.31
|
|
Tangible book value (1)
|
|
$
|
18.52
|
|
|
$
|
16.66
|
|
Tangible equity ratio (2)
|
|
|
8.65
|
%
|
|
|
7.85
|
%
|
(1) Stockholders' equity less goodwill and intangible assets divided by common shares outstanding.
(2) Non-GAAP measure - Stockholders’ equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets.
Liquidity and Interest Rate Sensitivity Management
Market Risk
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities or are immaterial to the results of operations.
Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company’s net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
To manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Management’s Asset Liability Committee (“ALCO”), meets monthly to review the Company’s interest rate risk position and profitability and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing and the Company’s securities portfolio, formulates investment and funding strategies and oversees the timing and implementation of transactions to assure attainment of the Board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the Board and management aim to manage the Company’s interest rate risk while minimizing net interest margin compression. At times, depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is earnings at risk modeling (interest rate sensitivity analysis). Information, such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed) and current rates are uploaded into the model to create an ending balance sheet. In addition, ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet. Two additional models are run in which a gradual increase of 200 bps and a gradual decrease of 100 bps takes place over a 12 month period with a static balance sheet. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded into them are handled accordingly based on the interest rate scenario. The resulting changes in net interest income are then measured against the flat rate scenario. The Company also runs other interest rate scenarios to highlight potential interest rate risks.
In the declining rate scenario, net interest income is projected to decrease when compared to the forecasted net interest income in the flat rate scenario through the simulation period. The decrease in net interest income is a result of earning assets, particularly prime and LIBOR-based loans) repricing downward faster than the interest-bearing liabilities that remain at or near their floors. In the rising rate scenarios, net interest income is projected to experience a slight decline from the flat rate scenario; however the potential impact on earnings may be affected by the ability to lag deposit repricing on NOW, savings, MMDA and time accounts. Net interest income for the next twelve months in the + 200/- 100 bp scenarios, as described above, is within the internal policy risk limits of not more than a 7.5% change in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario using the September 30, 2019 balance sheet position:
Interest Rate Sensitivity Analysis
|
|
Change in interest rates
|
Percent change in
|
(in bps points)
|
net interest income
|
+200
|
(0.77%)
|
-100
|
(2.00%)
|
The Company anticipates that in the current environment, the trajectory of net interest income will depend significantly on the ability to manage deposit pricing in a competitive market. Deposit rates began to rise in 2018 as the federal funds rate increased four times, through December 2018 bringing the cycle total to nine increases totaling 225 basis points. Beginning in July 2019, the federal funds rate decreased three times for a total of 75 bps. The Company anticipates that deposit rates may move lower responding to the lower federal funds rate. Competitive pressure may limit the Company’s ability to quickly reduce deposit rates following reductions in the federal funds rate. In order to maintain the net interest margin in 2019, the Company will continue to focus funding growth through lower cost core deposits.
Liquidity Risk
Liquidity is the ability to meet the cash flow requirements of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. ALCO is responsible for liquidity management and has developed guidelines, which cover all assets and liabilities, as well as off-balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies. Requirements change as loans grow, deposits and securities mature and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions.
The primary liquidity measurement the Company utilizes is called the “Basic Surplus”, which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. At September 30, 2019, the Company’s Basic Surplus measurement was 16.1% of total assets or approximately $1.6 billion as compared to the December 31, 2018 Basic Surplus of 11.2% or $1.1 billion and was above the Company’s minimum of 5% (calculated at $483.1 million and $477.8 million, or period end total assets as September 30, 2019 and December 31, 2018, respectively) set forth in its liquidity policies.
At September 30, 2019 and December 31, 2018, Federal Home Loan Bank ("FHLB") advances outstanding totaled $440.3 million and $795.8 million, respectively. The Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $1.3 billion at September 30, 2019 and $0.8 billion at December 31, 2018. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $567.1 million and $630.0 million at September 30, 2019 and December 31, 2018, respectively, or used to collateralize other borrowings, such as repurchase agreements. The Company also has the ability to purchase brokered time deposits and borrow against established borrowing facilities with other banks (federal funds), which could provide additional liquidity of $1.4 billion at September 30, 2019 and $1.3 billion at December 31, 2018. In addition, the Bank has a "Borrower-in-Custody" program with the FRB with the addition of the ability to pledge automobile loans. At September 30, 2019 and December 31, 2018, the Bank had the capacity to borrow $822.2 million and $854.7 million, respectively, from this program. The Company's internal policies authorize borrowing up to 25% of assets. Under this policy, remaining available borrowing capacity totaled $1.9 billion at September 30, 2019 and $1.5 billion at December 31, 2018.
This Basic Surplus approach enables the Company to appropriately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. The Company considered its Basic Surplus position to be strong. However, certain events may adversely impact the Company’s liquidity position in 2019. Increasing competition for deposits could result in a decrease in the Company’s deposit base or increase funding costs. Additionally, liquidity will come under additional pressure if loan growth exceeds deposit growth in 2019. These scenarios could lead to a decrease in the Company’s Basic Surplus measure below the minimum policy level of 5%.
The Company’s primary source of funds is the Bank. Certain restrictions exist regarding the ability of the subsidiary bank to transfer funds to the Company in the form of cash dividends. The approval of the Office of Comptroller of the Currency (the “OCC”) is required to pay dividends when a bank fails to meet certain minimum regulatory capital standards or when such dividends are in excess of a subsidiary bank’s earnings retained in the current year plus retained net profits for the preceding two years as specified in applicable OCC regulations. At September 30, 2019, approximately $159.8 million of the total stockholders’ equity of the Bank was available for payment of dividends to the Company without approval by the OCC. The Bank’s ability to pay dividends is also subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements. Under the State of Delaware General Corporation Law, the Company may declare and pay dividends either out of accumulated net retained earnings or capital surplus.