NBT Bancorp Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results. NBT is a community banking and financial services holding company operating principally in upstate New York, northeastern Pennsylvania, and Burlington, Vermont. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net interest income | $50.6 | $48.1 | $101.4 | $96.2 |
| Provision for loan and lease losses | $6.4 | $9.2 | $15.6 | $15.7 |
| Noninterest income | $20.3 | $19.8 | $40.7 | $39.4 |
| Noninterest expense | $44.2 | $41.9 | $86.4 | $84.2 |
| Net income | $14.4 | $11.6 | $28.4 | $24.6 |
| Diluted EPS | $0.42 | $0.34 | $0.82 | $0.74 |
- Q2 net income rose 24.8%; first-half net income rose 15.3%. Management attributed the gains mainly to higher net interest income and, for Q2, a lower loan-loss provision.
- Net interest margin was 4.14% in Q2 and 4.17% for the first half, versus 3.95% and 4.02% in the corresponding 2009 periods. Lower funding costs more than offset lower yields on earning assets; management cited deposit rates nearing their floor as a possible source of future margin pressure.
- First-half noninterest income increased 3.1%, led by retirement-plan administration and trust fees. First-half noninterest expense rose 2.5%; salaries and benefits increased 12.2%, partly offset by lower FDIC expense following the prior-year special assessment.
- Returns for the first half: ROAA 1.04% and ROAE 11.07%, compared with 0.92% and 10.82% in 2009.
Financial condition, credit, and liquidity
- At June 30, total assets were $5.42 billion, down from $5.46 billion at year-end 2009. Loans and leases were $3.65 billion, essentially unchanged; deposits were $4.10 billion, up 0.2% from year-end.
- Cash and cash equivalents were $167.0 million, down from $187.2 million at year-end. First-half operating cash flow was $44.6 million, investing cash flow was $11.6 million, and financing cash flow was negative $76.3 million. The financing outflow included $75.2 million of long-term debt repayments and $13.8 million of dividends.
- Long-term debt fell to $479.5 million from $554.7 million; short-term borrowings were $159.0 million. Stockholders’ equity was $527.0 million, or 9.7% of assets. Regulatory capital ratios remained above “well-capitalized” thresholds: Tier 1 leverage 8.75%, Tier 1 risk-based 11.88%, and total risk-based 13.14%.
- The allowance for loan and lease losses was $70.3 million, equal to 1.93% of loans and leases, versus 1.83% at year-end. First-half net charge-offs were $11.8 million, or 0.66% annualized, compared with 0.63% in 2009.
- Nonperforming assets declined to $40.7 million from $43.6 million; nonperforming loans were 1.07% of loans. However, potential problem loans increased to $87.7 million from $79.1 million, chiefly commercial real estate and commercial/agricultural loans.
- Liquidity remained above policy minimums: the company’s Basic Surplus was $411 million, or 7.6% of assets, against a 5% minimum. Additional stated borrowing capacity included $141 million from the FHLB and $432 million from unused Federal Reserve collateral.
Changes, outlook, and risks
- Loan balances were broadly flat, with growth in commercial and commercial real estate loans offset by declines in residential mortgages and lease financing. The company had discontinued lease originations in Q2 2009.
- Management reported excess liquidity and a negative five-basis-point impact on first-half net interest margin from its Federal Funds sold position. It continued to invest in new markets, including a Queensbury, New York office opened in February, and described plans for additional branches in New York, Pennsylvania, and Vermont.
- No numerical earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Interest-rate simulations showed projected 12-month net interest income changes of negative 1.02% under a 200-basis-point increase and negative 1.19% under a 100-basis-point decrease, relative to a flat-rate scenario.
- Key risks include economic deterioration and credit losses, borrower collateral values, competition, deposit repricing and interest-rate movements, securities-market changes, regulatory and legislative requirements, and litigation. Management considered the allowance adequate, but noted estimates are judgmental and regulators may require additions.
- Commitments to extend credit and unused lines totaled $594.5 million; standby letters of credit were $26.3 million and commercial letters of credit $8.6 million. These amounts do not necessarily represent future cash outflows. The filing reported no material legal proceedings beyond routine litigation.
- The filing identifies the Dodd-Frank Act, signed July 21, 2010, as a potential source of higher compliance costs and adverse effects on earnings or capital. Management also noted forthcoming credit-disclosure requirements and was evaluating the potential impact of a loan-modification accounting update.
Important facts for investors to verify
- Whether rising potential problem loans and higher charge-offs lead to additional provision expense or allowance needs.
- Whether personnel-cost growth and planned branch expansion can be absorbed while sustaining earnings and efficiency.
- How deposit-rate floors, changing deposit mix, and interest-rate shifts affect net interest margin and funding costs.
- Whether liquidity and capital remain adequate after debt repayments, dividends, and potential regulatory changes.
- Whether retirement-plan and trust fee growth persists if administered asset values weaken.