NBT Bancorp Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Dollar amounts are in millions unless otherwise stated. NBT is a community banking and financial services holding company operating mainly in upstate New York and nearby markets.
Business context and material developments
On March 8, 2013, NBT completed its acquisition of Alliance Financial Corporation for approximately $226 million, paid primarily in 10.3 million NBT shares. Alliance added 26 branches in central New York. Its operations are included from the acquisition date; acquired loans were recorded at fair value, with no carryover of Alliance’s loan-loss allowance. The transaction added approximately $904.5 million of loans, $1.1 billion of deposits and $112.2 million of goodwill. NBT incurred $10.7 million of merger-related costs during the quarter.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net interest income | $52.1 | $49.4 |
| Provision for loan losses | $5.7 | $4.5 |
| Noninterest income | $25.2 | $23.1 |
| Noninterest expense | $60.7 | $48.5 |
| Income before taxes | $11.0 | $19.5 |
| Net income | $7.6 | $13.7 |
| Diluted EPS | $0.21 | $0.41 |
| FTE net interest margin | 3.68% | 3.90% |
Net interest income rose 5.6% and noninterest income rose 9.4%, but reported net income fell about 44%, largely reflecting merger expense. Excluding merger costs and securities gains (and the prior-year prepayment penalty fee), management reported non-GAAP core net income of $14.3 million versus $13.2 million, up 8.5%; core diluted EPS was $0.39 in both periods. Core ROAA was 0.90% versus 0.94%, and core ROE was 9.01% versus 9.76%. These adjusted measures are not GAAP results.
Management attributed higher net interest income to growth in earning assets, including the acquisition and prior organic loan growth, partly offset by lower asset yields. Average earning assets increased 12.5%; loan yield fell to 4.87% from 5.33%, while the cost of interest-bearing liabilities declined to 0.76% from 0.93%. Fee growth included insurance, trust and retirement-plan administration revenue; securities gains were $1.1 million versus $0.5 million.
Financial position, cash flow and credit
- Scale and funding: Total assets were $7.61 billion at March 31, up from $6.04 billion at year-end, primarily due to Alliance. Loans were $5.20 billion, up 21.4%; deposits were $6.02 billion, up 25.7%. The acquisition was the principal driver of both increases.
- Debt and capital: Short-term borrowings were $185.9 million, long-term debt $428.7 million and trust preferred debentures $101.2 million. Stockholders’ equity was $803.3 million, or 10.55% of assets. Regulatory capital ratios were 10.25% Tier 1 leverage, 11.33% Tier 1 capital and 12.58% total risk-based capital; the filing states the company remained well capitalized.
- Liquidity and cash flow: Cash and cash equivalents ended at $299.1 million, up $135.5 million in the quarter. Operating cash flow was $4.9 million, investing cash flow $61.9 million and financing cash flow $68.6 million. Management’s Basic Surplus measure was $793 million, or 10.5% of assets, above its 5% policy minimum. Additional borrowing capacity was reported at approximately $602 million from the FHLB and $687 million from unused Federal Reserve collateral.
- Credit quality: Allowance for loan losses was $68.7 million, 1.32% of loans (1.69% excluding acquired loans without an allowance). Quarterly net charge-offs were $6.3 million, or 0.56% annualized of average loans, compared with 0.47% in Q1 2012; management cited one large previously reserved commercial loan charge-off. Nonperforming loans were $43.4 million and nonperforming assets $46.2 million; nonperforming loans were 0.83% of loans. Potential problem loans increased to $83.4 million from $79.6 million at year-end.
- Other: The quarterly cash dividend was $0.20 per share. Total dividends were $6.8 million. Book value per share was $18.36; tangible book value per share was $11.67.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management cautioned that continued low rates could compress margins: deposit rates were near their floors while asset yields continued to reprice downward. Its 12-month interest-rate simulations projected net interest income declines of 2.23% under a gradual 200-basis-point increase and 1.41% under a 100-basis-point decrease, versus a flat-rate scenario; both were within internal policy limits. Other stated risks include regional economic weakness and credit deterioration, competition, regulatory or tax changes, litigation, and successful integration of acquisitions.
Commitments to extend credit and unused lines totaled $1.1 billion at quarter-end; standby letters of credit were $45.0 million and commercial letters of credit $37.4 million. These contractual amounts are not necessarily future cash outflows. Management reported no material legal proceedings beyond ordinary routine litigation and no material change to the risk factors in the 2012 Form 10-K. It considered the allowance adequate, while noting that adverse economic conditions, weaker collateral values or regulatory review could require additional provisions.
Important facts for investors to verify
- Alliance purchase accounting, integration progress, and whether expected cost savings emerge; the filing’s pro forma figures exclude integration costs and do not reflect cost savings.
- Underlying earnings and expense trends after separating the $10.7 million merger charge and other adjustments from GAAP results.
- Loan performance, particularly the $83.4 million of potential problem loans, rising past-due loans, charge-offs and acquired-loan credit assumptions.
- Whether net interest margin and earnings withstand low rates, deposit-rate floors and the modeled rate scenarios.
- Liquidity, borrowing needs and capital ratios as a full quarter of Alliance assets and liabilities enters reported results.