NBT Bancorp Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2014. NBT is a community-oriented financial holding company operating primarily in central and upstate New York and nearby northeastern states. The prior-year comparison includes only a partial-quarter contribution from Alliance Financial Corporation, acquired March 8, 2013; Q1 2014 includes a full quarter.
Financial performance and position
- Earnings: Net income was $18.0 million versus $7.6 million; diluted EPS was $0.41 versus $0.21. Management’s non-GAAP core net income was $18.4 million, up 29.1%, and core diluted EPS was $0.42 versus $0.39.
- Revenue and margins: Net interest income was $61.5 million, up $9.4 million year over year, primarily reflecting Alliance. Noninterest income was $26.3 million, up 4.2%. FTE net interest margin was 3.63%, down from 3.68% a year earlier; management cited continued asset-yield compression.
- Expenses and profitability: Noninterest expense was $57.5 million versus $60.7 million, including $10.7 million of Alliance merger expense in Q1 2013. Excluding that prior-year charge, Q1 2014 expense was up 15.0%, largely due to Alliance-related costs. GAAP return on average assets and equity were 0.95% and 8.81%; core measures were 0.98% and 9.02%.
- Cash flow: Operating cash flow was $32.3 million, investing cash flow was negative $76.2 million, and financing cash flow was $70.5 million. Cash and cash equivalents increased $26.6 million to $185.6 million.
- Balance sheet and funding: Total assets were $7.75 billion at quarter-end, up 1.3% from December 31, 2013. Loans were $5.48 billion, up 1.4%; deposits were $6.07 billion, up 3.0%, chiefly from NOW and money-market growth. Short-term borrowings were $356.9 million, down from $456.0 million; long-term debt was $308.7 million and junior subordinated debt was $101.2 million.
- Credit: Provision for loan losses was $3.6 million versus $5.7 million. Net charge-offs were $3.6 million, or 0.27% annualized of average loans, versus $6.3 million and 0.56% in Q1 2013. The allowance was $69.4 million, or 1.27% of loans. Nonperforming assets were $56.7 million, 0.73% of assets; nonperforming loans were 0.99% of loans. Potential problem loans rose to $101.1 million from $89.9 million, primarily after a large commercial-loan downgrade.
- Capital and liquidity: Stockholders’ equity was $832.2 million, or 10.73% of assets. The company reported regulatory capital ratios of 9.05% Tier 1 leverage, 11.81% Tier 1, and 13.06% total risk-based, and stated it remained well capitalized. Basic Surplus liquidity was approximately $612 million, or 7.9% of assets, above the 5% policy minimum.
Material changes, outlook, and risks
- Reported earnings rose substantially year over year, but the comparison is affected by the Alliance acquisition and $10.7 million of merger costs in Q1 2013. The company’s core measure, which excludes specified items, showed 29.1% growth.
- Management reported 5.6% annualized organic loan growth for the quarter and said asset growth helped offset ongoing rate compression. No formal full-year earnings or revenue guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- Interest-rate simulations projected net interest income declines of 4.01% under a gradual 200-basis-point increase and 1.70% under a 100-basis-point decrease, each versus the flat-rate scenario over 12 months. Management warned that low rates and limited scope to reduce deposit rates could further pressure margins.
- Management considered the allowance adequate but noted that worsening economic conditions, loan performance, or collateral values could require additional provisions. Potential problem loans and the large commercial-loan downgrade warrant monitoring.
- Available-for-sale securities had $21.6 million of gross unrealized losses at March 31; management attributed losses principally to higher market rates, considered them temporary, and reported no other-than-temporary impairment.
- As a subsequent event, on April 17, 2014 NBT sold its 20% Springstone Financial interest in connection with LendingClub’s acquisition of Springstone. The filing gives a $140 million aggregate purchase price paid to the selling equityholders, but does not specify NBT’s individual proceeds. NBT said it was considering uses for the proceeds; NBT Bank will continue participating in Springstone lending activities.
- The filing identifies customary risks including economic and borrower deterioration, interest-rate changes, regulation, competition, acquisition integration, and credit-loss estimates. It reported no material changes to previously disclosed risk factors and no material legal proceedings beyond ordinary-course matters.
Important facts for investors to verify
- How much of reported and core earnings growth reflects Alliance, and whether the 15.0% increase in expenses excluding prior-year merger costs persists.
- Trends in net interest margin, loan yields, deposit pricing, and actual sensitivity to rising or falling rates.
- Whether the $101.1 million of potential problem loans, particularly the downgraded commercial credit, migrate to nonperforming status or require additional reserves.
- The allowance’s adequacy relative to acquired and originated loans, charge-offs, and changing collateral or economic conditions.
- NBT’s individual proceeds from the Springstone sale and management’s eventual use of those proceeds.
- Ongoing liquidity, capital ratios, and dividend capacity; the company declared a $0.21-per-share second-quarter dividend payable June 13, 2014.