NBT Bancorp Inc. — Q2 2012 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2012; comparisons are with 2011 for income and cash-flow measures, and December 31, 2011 for balance-sheet measures. Amounts below are in millions unless stated otherwise.
Business context
NBT Bancorp is a financial holding company focused on community banking across upstate New York and surrounding northeastern markets, with insurance and retirement-plan administration businesses. On June 8, 2012, it acquired Hampshire First Bank, adding five New Hampshire banking centers. Hampshire First’s results are included from the acquisition date.
Financial results and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $49.8 | $50.2 | $99.1 | $99.4 |
| Provision for loan losses | $4.1 | $6.0 | $8.6 | $10.0 |
| Noninterest income | $20.7 | $19.9 | $43.7 | $40.0 |
| Noninterest expense | $47.4 | $43.2 | $95.9 | $88.2 |
| Net income | $13.3 | $14.7 | $26.9 | $29.0 |
| Diluted EPS | $0.40 | $0.43 | $0.80 | $0.84 |
- For the six months, net income declined 7.1%; annualized return on average assets was 0.94% versus 1.08%, and return on average equity was 9.89% versus 10.82%.
- Fully taxable-equivalent net interest margin was 3.82% in Q2 versus 4.13%; six-month margin was 3.86% versus 4.12%. Lower asset yields outweighed lower funding costs; management noted deposit rates are nearing their floors.
- At June 30, total assets were $5.968 billion, loans $4.161 billion, deposits $4.689 billion, and stockholders’ equity $566.5 million. Loans rose 9.5% and deposits 7.4% from year-end, driven substantially by acquisitions as well as organic loan growth.
- Short-term borrowings were $212.2 million, long-term debt $367.1 million, and trust preferred debentures $75.4 million. The company reported regulatory capital ratios of 8.59% Tier 1 leverage, 10.78% Tier 1 capital, and 12.03% total risk-based capital; it remained “well capitalized.”
- Six-month operating cash flow was $33.1 million, down from $43.1 million. Investing activities used $62.2 million; financing activities provided $38.9 million. Cash and cash equivalents ended the period at $139.2 million.
- Liquidity Basic Surplus was $668 million, or 11.2% of assets, above the company’s 5% policy minimum. Additional stated borrowing capacity included approximately $376 million from the FHLB and $506 million from unused Federal Reserve collateral.
Changes, outlook, and risks
- Hampshire First was acquired for $43.0 million of total consideration, including approximately 1.3 million NBT shares and cash. The transaction added $219.8 million of loans and $17.8 million of goodwill. The acquired loans were recorded at fair value without a transferred loan-loss allowance.
- Noninterest income rose, but expenses grew faster: six-month expenses increased 8.7%, including $1.3 million of merger costs. Other income benefited from a $1.1 million purchased-loan payoff gain, a $0.8 million retirement-plan client prepayment fee, and increased mortgage-banking activity. Deposit service-charge income declined.
- Credit measures were mixed. Past-due loans improved to 0.54% of total loans from 0.89% at year-end, and six-month net charge-offs were 0.48% of average loans versus 0.60%. However, nonaccrual loans rose to $43.9 million from $38.3 million, primarily reflecting a commercial relationship; nonperforming assets were $47.4 million versus $43.6 million. Potential problem loans declined to $79.2 million from $96.9 million.
- The allowance was $70.7 million, or 1.70% of loans versus 1.88% at year-end; management attributed much of the ratio decline to acquired loans recorded at fair value and stated the allowance was adequate. Management cautioned that economic weakness, lower collateral values, and borrower payment problems could increase provisions and losses.
- Interest-rate simulations projected net interest income declines of 1.84% under a gradual 200-basis-point rise and 1.30% under a 100-basis-point fall, each versus a flat-rate scenario over 12 months. Management warned that low rates and limited room to reduce deposit costs could further pressure margins. No specific earnings guidance was provided; management said interim results are not necessarily indicative of full-year results.
- The Bank is defending a putative class action concerning overdraft-fee practices, alleging the claims are without merit. The filing reports no other material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Hampshire First integration, acquired-loan performance, and associated goodwill support expected growth without additional costs or credit deterioration.
- Whether margin compression persists as earning-asset yields fall and deposit rates approach their floors.
- How nonaccrual loans, impaired commercial relationships, potential problem loans, and the allowance develop in subsequent quarters.
- The repeatability of income from loan payoff, prepayment, securities gains, and mortgage banking, alongside merger and operating costs.
- The status and potential financial exposure of the overdraft-fee litigation, and the company’s ability to sustain liquidity and capital levels amid loan growth and repurchases.