NBT Bancorp Inc. — Second-Quarter 2011 Form 10-Q
Business context and period. Community banking and related financial services company headquartered in Norwich, New York, operating principally in upstate New York, northeastern Pennsylvania and northwestern Vermont. This unaudited filing covers the three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods unless stated otherwise. Dollar figures below are in millions unless noted.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $50.2 | $50.6 | $99.4 | $101.4 |
| Provision for loan losses | $6.0 | $6.4 | $10.0 | $15.6 |
| Noninterest income | $19.9 | $20.3 | $40.0 | $40.7 |
| Noninterest expense | $43.2 | $44.2 | $88.2 | $86.4 |
| Net income | $14.7 | $14.4 | $29.0 | $28.4 |
| Diluted earnings per share | $0.43 | $0.42 | $0.84 | $0.82 |
| Net interest margin, FTE | 4.13% | 4.14% | 4.12% | 4.17% |
For the first half, return on average assets was 1.08% versus 1.04%; return on average equity was 10.82% versus 11.07%. The filing reports first-half net income growth of 2.0%.
Financial position, cash flow and credit
- Balance sheet at June 30: total assets were $5.337 billion, broadly unchanged from $5.339 billion at year-end 2010. Gross loans and leases were $3.665 billion, up $54.5 million (1.5%); deposits were $4.115 billion, down $19.7 million (0.5%).
- Funding and debt: short-term borrowings were $176.0 million, long-term debt $370.4 million and trust preferred debentures $75.4 million. Total stockholders’ equity was $535.3 million, or 10.03% of assets.
- Cash flow, first half: operating activities provided $43.1 million; investing activities used $69.8 million; financing activities used $39.3 million. Cash and cash equivalents fell $66.0 million to $102.8 million.
- Liquidity: management’s Basic Surplus measure was $604 million, or 11.3% of assets, above its 5% policy minimum. Additional disclosed borrowing capacity included approximately $322 million from the FHLB and $462 million from unused Federal Reserve collateral.
- Capital: regulatory ratios remained above “well capitalized” thresholds: Tier 1 leverage 9.13%, Tier 1 capital 12.23% and total risk-based capital 13.49%. Ratios declined slightly from year-end, which management attributed in large part to share repurchases.
- Credit quality: nonperforming loans were $41.7 million (1.14% of loans), down from $44.8 million (1.24%) at year-end; nonperforming assets were $42.7 million (0.80% of assets), versus $45.7 million (0.86%). First-half net charge-offs were $10.7 million, compared with $11.8 million; the allowance was $70.5 million, or 1.92% of loans, versus 1.97% at year-end.
Material changes and management commentary
- First-half net interest income declined 2.0% as lower earning-asset yields and a modest decline in average earning assets outweighed savings from lower funding costs. FTE net interest margin fell five basis points to 4.12%.
- Lower loan-loss provision supported earnings: first-half provision declined to $10.0 million from $15.6 million. However, potential problem loans rose to $92.7 million from $82.2 million at year-end and increased $13.4 million during Q2, primarily from commercial credits migrating to classified status. Impaired loans increased to $21.6 million from $17.2 million at year-end; troubled debt restructurings within nonaccrual loans were about $4.0 million.
- Deposit service charges fell $1.9 million (15.3%) for the first half, reflecting reduced overdraft activity after new overdraft-fee regulations took effect in 2010. Higher insurance, trust and ATM/debit-card revenues partly offset the decline.
- First-half noninterest expense rose 2.2%, including higher salaries and occupancy costs, partly offset by lower FDIC and loan-collection/OREO expenses.
- The company repurchased 976,190 shares for $21.2 million during the first half, at an average $21.68 per share. On July 25, 2011, the board authorized a further repurchase of up to 1 million shares through December 31, 2013.
- The Bank agreed to purchase four western Massachusetts branches, expected to close in Q4 2011. First-half investing cash flows also included $1.0 million of net cash used in the Lattremore acquisition.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management cautioned that results for the first half are not necessarily indicative of full-year results.
- Management expects continued net interest margin pressure if rates remain near historical lows: asset yields may reprice down while deposit rates are near their floors. Its 12-month simulation projected net interest income declines of 2.18% under a gradual 200-basis-point rise and 1.03% under a gradual 100-basis-point decline, relative to a flat-rate scenario; both were within internal policy limits.
- Key risks include economic weakness, falling real estate collateral values, borrower repayment stress, competition, regulatory and legislative changes, litigation, securities-market volatility and interest-rate movements. Management said the allowance was adequate, but acknowledged estimates and future credit losses may change; regulators may require additional reserves.
- Off-balance-sheet commitments to extend credit and unused lines totaled $642.8 million; standby letters of credit were $26.3 million and commercial letters of credit $15.7 million. These contractual amounts do not necessarily represent future cash outflows. The filing reports no material legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether potential problem loans, impaired loans and troubled debt restructurings stabilize or worsen, particularly in commercial real estate, commercial and agricultural lending.
- Whether lower credit costs are sustainable and the allowance remains adequate relative to portfolio growth, charge-offs and collateral values.
- Whether margin compression continues as asset yields reprice and deposit rates approach their floors.
- Progress and terms of the four-branch Massachusetts purchase, and the effect of acquisitions and repurchases on capital and earnings.
- Liquidity and funding trends, including deposit movements, borrowing capacity and the implications of a material drawdown of customer credit commitments.