NBTB

Business Context and Reporting Period

Company: NBT Bancorp Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: NBT Bancorp is a financial holding company headquartered in Norwich, New York, operating primarily through its subsidiary, NBT Bank, N.A. The company provides commercial banking and financial services in upstate New York, northeastern Pennsylvania, and northwestern Vermont. It also operates Mang Insurance Agency, LLC, acquired in September 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income for the nine months ended September 30, 2009, decreased by $5.2 million (12.1%) compared to the same period in 2008. The quarterly decline was $1.5 million (10.0%).
• Expense Increases:
  • FDIC Expenses: Increased by $6.1 million year-to-date, driven by recurring premium hikes and a $2.5 million special assessment in Q2 2009.
  • Salaries and Benefits: Increased by $12.1 million year-to-date due to higher full-time-equivalent employees (including the Mang acquisition) and increased pension expenses ($2.2 million increase) resulting from market declines on plan assets.
• Provision for Loan Losses: Increased to $24.8 million for the nine months ended September 30, 2009, from $19.5 million in the prior year period. This was driven by higher net charge-offs ($18.7 million vs. $17.8 million) and increased specific reserves on impaired loans.
• Noninterest Income Growth: Increased by $8.8 million (17.1%) year-to-date, primarily due to $9.1 million in additional revenue from the Mang Insurance Agency and growth in retirement plan administration fees.
• Deposit Mix Shift: Average time deposits decreased by $286.4 million (18.4%) year-to-date, while money market and NOW accounts increased by $366.0 million (30.5%) as customers shifted to lower-cost accounts in a low-rate environment.

Outlook, Risks, and Management Commentary

• Capital Position: The company remains "well capitalized" with a Tier 1 leverage ratio of 8.30% and a total risk-based capital ratio of 12.46%. In April 2009, the company completed a public offering raising approximately $33.5 million.
• Liquidity: The company maintains a "Basic Surplus" of 7.6% of total assets ($419 million), exceeding its 5% minimum policy. It has been in a Fed Funds sold position since March 2009 due to excess liquidity.
• Asset Quality Risks: Nonperforming assets increased to $42.5 million (0.77% of total assets) from $27.2 million at year-end 2008. Potential problem loans were identified at $72.9 million. Management notes that economic conditions could worsen, potentially requiring further provisions.
• Interest Rate Risk: Management monitors interest rate risk via simulation models. In a rising rate scenario (+200 bp), net interest income is projected to decline by 1.46%. The company is mitigating this by extending short-term wholesale borrowings into longer-term debt.
• Strategic Actions: The company has discontinued originating new auto leases since Q2 2009 and is focusing on organic growth in retirement plan services and insurance to offset margin pressures.

Investor Verification Checklist

• FDIC Assessment Impact: Verify the sustainability of earnings given the $2.5 million special assessment and ongoing premium increases.
• Loan Portfolio Quality: Monitor the trend of nonperforming assets (up 56% from year-end 2008) and the adequacy of the allowance for loan losses (1.79% coverage).
• Pension Expense Volatility: Assess the impact of market volatility on pension plan assets and the resulting expense increases.
• Deposit Stability: Evaluate the shift from time deposits to transaction accounts and its long-term effect on funding costs if interest rates rise.
• Capital Ratios: Confirm continued compliance with "well capitalized" status as the company navigates the economic recession.