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NBTB > SEC Filings for NBTB > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for NBT BANCORP INC


10-May-2013

Quarterly Report


Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to provide a concise description of the financial condition and results of operations of NBT Bancorp Inc. and its wholly owned consolidated subsidiaries, NBT Bank, N.A. (the "Bank"), NBT Financial Services, Inc. ("NBT Financial"), and NBT Holdings, Inc. ("NBT Holdings") (collectively referred to herein as the "Company"). This discussion will focus on results of operations, financial condition, capital resources and asset/liability management. Reference should be made to the Company's consolidated financial statements and footnotes thereto included in this Form 10-Q as well as to the Company's Annual Report on Form 10-K for the year ended December 31, 2012 for an understanding of the following discussion and analysis. Operating results for the three month period ended March 31, 2013 are not necessarily indicative of the results of the full year ending December 31, 2013 or any future period.

Forward-looking Statements
Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act. These statements may be identified by the use of phrases such as "anticipate," "believe," "expect," "forecasts," "projects," "could," or other similar terms. There are a number of factors, many of which are beyond the Company's control, that could cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) revenues may be lower than expected; (3) changes in the interest rate environment may affect interest margins; (4) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (5) legislative or regulatory changes, including changes in accounting standards or tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than the Company; (7) adverse changes may occur in the securities markets or with respect to inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; (10) internal control failures; (11) the successful completion and integration of acquisitions; and
(12) the Company's success in managing the risks involved in the foregoing.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including those described above and other factors discussed in the Company's annual and quarterly reports previously filed with the Securities and Exchange Commission, could affect the Company's financial performance and could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligations to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Non-GAAP Measures
This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures adjust GAAP measures to exclude the effects of sales of securities and certain non-recurring and merger-related expenses. Where non-GAAP disclosures are used in this Quarterly Report on Form 10-Q, the comparable GAAP measure, as well as a reconciliation to the comparable GAAP measure, is provided in the accompanying tables. Management believes that these non-GAAP measures provided useful information that is important to an understanding of the operating results of the Company's core business due to the non-recurring nature of the excluded items. Non-GAAP measures should not be considered a substitute for financial measures determined in accordance with GAAP and investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.


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Critical Accounting Policies
The Company has identified policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, pension accounting, other-than-temporary impairment, provision for income taxes and intangible assets.

Management of the Company considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio and the material effect that such judgments can have on the results of operations. While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions, the allowance may need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provision for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Company's nonperforming loans and potential problem loans have a significant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral values were significantly lower, the Company's allowance for loan policy would also require additional provision for loan losses.

Management is required to make various assumptions in valuing its pension assets and liabilities. These assumptions include the expected rate of return on plan assets, the discount rate, and the rate of increase in future compensation levels. Changes to these assumptions could impact earnings in future periods. The Company takes into account the plan asset mix, funding obligations, and expert opinions in determining the various rates used to estimate pension expense. The Company also considers the Citigroup Pension Liability Index, market interest rates and discounted cash flows in setting the appropriate discount rate. In addition, the Company reviews expected inflationary and merit increases to compensation in determining the rate of increase in future compensation levels.

Management of the Company considers the accounting policy relating to other-than-temporary impairment to be a critical accounting policy. Management systematically evaluates certain assets for other-than-temporary declines in fair value, primarily investment securities. Management considers historical values and current market conditions as a part of the assessment. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings and the amount of the total other-than-temporary impairment related to other factors is generally recognized in other comprehensive income, net of applicable taxes.

The Company is subject to examinations from various taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate. Should tax laws change or the taxing authorities determine that management's assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company's results of operations.

Another critical accounting policy is the policy for acquired loans. Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate. Subsequent to the acquisition of acquired impaired loans, applicable accounting guidance requires the continued estimation of expected cash flows to be received. This estimation involves the use of key assumptions and estimates, similar to those used in the initial estimate of fair value. Changes in expected cash flows could result in the recognition of impairment through provision for credit losses. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for the non-impaired acquired loans is similar to originated loans.


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As a result of acquisitions, the Company has acquired goodwill and identifiable intangible assets. Goodwill represents the cost of acquired companies in excess of the fair value of net assets at the acquisition date. Goodwill is evaluated at least annually or when business conditions suggest that an impairment may have occurred. Goodwill will be reduced to its carrying value through a charge to earnings if impairment exists. Core deposits and other identifiable intangible assets are amortized to expense over their estimated useful lives. The determination of whether or not impairment exists is based upon discounted cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires them to select a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums and Company-specific risk indicators, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates used to determine the carrying value of goodwill and identifiable intangible assets could have a material impact on the Company's results of operations.

The Company's policies on the allowance for loan losses, pension accounting, provision for income taxes and intangible assets are disclosed in Note 1 to the consolidated financial statements presented in our 2012 Annual Report on Form 10-K. All accounting policies are important, and as such, the Company encourages the reader to review each of the policies included in Note 1 to obtain a better understanding of how the Company's financial performance is reported.

Overview
Significant factors management reviews to evaluate the Company's operating results and financial condition include, but are not limited to: net income and earnings per share, return on assets and equity, tangible common equity, net interest margin, noninterest income, operating expenses, asset quality indicators, loan and deposit growth, capital management, liquidity and interest rate sensitivity, enhancements to customer products and services, technology advancements, market share and peer comparisons. The following information should be considered in connection with the Company's results for the first three months of 2013:

Completed the previously announced acquisition of Alliance Financial Corporation ("Alliance") on March 8, 2013, a $1.4 billion financial holding company headquartered in Syracuse, N.Y.

Core earnings were $14.3 million for the three months ended March 31, 2013, up 8.5% from $13.2 million for the same period in 2012. Core diluted earnings per share for the three months ended March 31, 2013 were $0.39, equivalent to the same period last year. Core annualized return on average assets and return on average equity were 0.90% and 9.01%, respectively, for the three months ended March 31, 2013, compared with 0.94% and 9.76%, respectively, for the three months ended March 31, 2012.

Reported results from the first quarter of 2013 include the impact of the acquisition of Alliance Financial Corporation ("Alliance") since March 8, 2013, including approximately $10.7 million in merger related expenses. Reported net income for the three months ended March 31, 2013 was $7.6 million, down from $13.7 million for the same period in 2012. Reported earnings per diluted share for the three months ended March 31, 2013 was $0.21 for the three months ended March 31, 2013 as compared to $0.41 for the three months ended March 31, 2012.

Net interest margin (on a fully taxable equivalent basis ("FTE")) was 3.68% for the three months ended March 31, 2013 as compared to 3.90% for the same period in 2012.

Past due loans as a percentage of total loans were 0.81% at March 31, 2013, as compared with 0.71% at December 31, 2012.

Net charge-offs were 0.56% of average loans for the first three months of 2013, compared to 0.55% for the year ended December 31, 2012.

The provision for loan losses was $5.7 million for the three months ended March 31, 2013, up from $4.5 million for the same period in 2012.


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The following table depicts several annualized measurements of performance using Core and U.S. GAAP net income that management reviews in analyzing the Company's performance. Returns on average assets and average equity measure how effectively an entity utilizes its total resources and capital, respectively. Net interest margin, which is the net FTE interest income divided by average earning assets, is a measure of an entity's ability to utilize its earning assets in relation to the cost of funding. Interest income for tax-exempt securities and loans is adjusted to a taxable equivalent basis using the statutory Federal income tax rate of 35%.

Reconciliation of Non-GAAP Financial Measures:

Three Months Ended March 31,                                        2013                2012
Reported net income (GAAP)                                      $       7,649       $      13,650
Adj: Gain on sale of securities, net                                   (1,145 )              (455 )
Adj: Prepayment penalty fee                                                 -                (750 )
Plus: Merger related expenses                                          10,681                 511
Total Adjustments                                                       9,536                (694 )
Income tax effect on adjustments                                        2,908                (208 )
Core net income                                                 $      14,277       $      13,164

                                                                    2013                2012
Core return on average assets                                            0.90 %              0.94 %
Core return on average equity                                            9.01 %              9.76 %
Core Return on Average Tangible Common Equity (1)                       13.58 %             14.01 %

(1) Excludes amortization of intangible assets (net of tax) from net income and average tangible common equity is calculated as follows:

                                                 2013          2012
Average stockholders' equity                   $ 642,693     $ 542,628
Less: average goodwill and other intangibles     200,779       150,478
Average tangible common equity                 $ 441,914     $ 392,150

Net Interest Income
Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on earning assets and cost of interest bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the key determining factors in a financial institution's performance as it is the principal source of earnings.

FTE net interest income increased $2.6 million during the three months ended March 31, 2013, compared to the same period of 2012. The Company's FTE net interest margin was 3.68% for the three months ended March 31, 2013, down from 3.90% for the three months ended March 31, 2012. Average interest earning assets were $5.8 billion for the first quarter of 2013, an increase of 12.5% compared to the same period in 2012. The growth in earning assets was due to strong organic loan growth in 2012 as well as the acquisition of Alliance in March 2013. The increase in average earning assets for the three months ended March 31, 2013 as compared to the same period of 2012 offset the decline in rates, resulting in the increase in net interest income over the same period last year.


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For the three months ended March 31, 2013, total FTE interest income increased $1.6 million, or 2.6%, from the same period in 2012 as a result of the increase in average earning assets, attributed to aforementioned acquisition activity and strong organic loan growth in the previous year. The average balance of loans for the three months ended March 31, 2013 was $4.5 billion, up approximately $682.6 million, or 17.9%, from the three months ended March 31, 2012. The average balance of securities available for sale for the three months ended March 31, 2013 was $1.2 billion, down slightly from the three months ended March 31, 2012. The growth in average earning assets was partially offset by a decrease in the yield earned on earning assets. The yield on securities available for sale decreased 52 bp to 2.09% for the first quarter of 2013 from 2.61% for same period in 2012. In addition, the yield on loans decreased 46 bp to 4.87% for the three months ended March 31, 2013 from 5.33% for the three months ended March 31, 2012. The decreases in the yield on securities and loans was due to the reinvestment of cash flows from loan principal payments and maturing of securities into the current low interest rate environment combined with the acquisition of Alliance interest earning assets at a lower average yield.

The reduction in yields on earning assets was partially offset by a reduction in rates paid on interest bearing liabilities. The cost of interest bearing liabilities for the three months ended March 31, 2013 was down 17 bps to 0.76%. The rate on time deposits was 1.26% for the three months ended March 31, 2013, compared with 1.63% for the three months ended March 31, 2012. The rate on money market deposit accounts was 0.14% for the three months ended March 31, 2013, compared with 0.23% for the three months ended March 31, 2012. Going forward, additional rate reductions on deposits could be more difficult as deposit rates are at or near their floors.

Average interest bearing liabilities increased approximately $418.1 million, or 10.5%, for the three months ended March 31, 2013 as compared to the same period in 2012, which partially offset the decrease in total interest expense attributed to the decrease in the rates on interest bearing liabilities. The increase in average interest bearing liabilities is primarily due to seasonal municipal deposits and the Alliance acquisition at the end of the quarter.


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Average Balances and Net Interest Income The following tables include the condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest bearing liabilities on a taxable equivalent basis. Interest income for tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%.

 Three Months ended
      March 31,
                                           2013                                          2012
                          Average                        Yield/         Average                        Yield/
(dollars in
thousands)                Balance        Interest        Rates          Balance        Interest        Rates
ASSETS
Short-term interest
bearing accounts        $    75,110     $       39           0.21 %   $    80,127     $       35           0.18 %
Securities available
for sale (1)(2)           1,197,238          6,179           2.09 %     1,212,766          7,855           2.61 %
Securities held to
maturity (1)                 52,905            790           6.06 %        70,542            965           5.50 %
Investment in FRB and
FHLB Banks                   31,312            367           4.75 %        27,020            357           5.31 %
Loans (3)                 4,492,106         53,904           4.87 %     3,809,461         50,445           5.33 %
Total interest
earning assets          $ 5,848,671     $   61,279           4.25 %   $ 5,199,916     $   59,657           4.61 %
Other assets                554,355                                       459,542
Total assets            $ 6,403,026                                   $ 5,659,458

LIABILITIES AND
STOCKHOLDERS' EQUITY
Money market deposit
accounts                $ 1,190,555            410           0.14 %   $ 1,089,347     $      612           0.23 %
NOW deposit accounts        799,219            447           0.23 %       694,937            530           0.31 %
Savings deposits            770,559            145           0.08 %       641,969            114           0.07 %
Time deposits             1,015,711          3,148           1.26 %       956,350          3,887           1.63 %
Total interest
bearing deposits        $ 3,776,044     $    4,150           0.45 %   $ 3,382,603     $    5,143           0.61 %
Short-term borrowings       168,783             42           0.10 %       162,806             41           0.10 %
Trust preferred
debentures                   82,295            428           2.11 %        75,422            449           2.40 %
Long-term debt              382,177          3,609           3.83 %       370,395          3,581           3.89 %
Total interest
bearing liabilities     $ 4,409,299     $    8,229           0.76 %   $ 3,991,226     $    9,214           0.93 %
Demand deposits           1,283,737                                     1,062,557
Other liabilities            67,297                                        63,047
Stockholders' equity        642,693                                       542,628
Total liabilities and
stockholders' equity    $ 6,403,026                                   $ 5,659,458
Net interest income
(FTE)                                       53,050                                        50,443
Interest rate spread                                         3.49 %                                        3.68 %
Net interest margin                                          3.68 %                                        3.90 %
Taxable equivalent
adjustment                                     910                                         1,051
Net interest income                     $   52,140                                    $   49,392

(1) Securities are shown at average amortized cost
(2) Excluding unrealized gains or losses
(3) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding


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The following table presents changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.

Three months ended March 31,
                                               Increase (Decrease)
                                                 2013 over 2012
(in thousands)                          Volume        Rate         Total

Short-term interest bearing accounts   $    (12 )   $      16     $      4
Securities available for sale              (103 )      (1,573 )     (1,676 )
Securities held to maturity                (682 )         507         (175 )
Investment in FRB and FHLB Banks            188          (178 )         10
Loans                                    25,962       (22,503 )      3,459
Total interest income                    25,353       (23,731 )      1,622

Money market deposit accounts               328          (530 )       (202 )
NOW deposit accounts                        376          (459 )        (83 )
Savings deposits                             23             8           31
Time deposits                             1,373        (2,112 )       (739 )
Short-term borrowings                         2            (1 )          1
Trust preferred debentures                  181          (202 )        (21 )
Long-term debt                              314          (286 )         28
Total interest expense                    2,597        (3,582 )       (985 )

Change in FTE net interest income      $ 22,756     $ (20,149 )   $  2,607

Noninterest Income
Noninterest income is a significant source of revenue for the Company and an
important factor in the Company's results of operations. The following table
sets forth information by category of noninterest income for the periods
indicated:

                                                    Three months ended March 31,
                                                      2013                 2012
(in thousands)
Insurance and other financial services revenue   $        6,893       $        6,154
Service charges on deposit accounts                       4,323                4,341
ATM and debit card fees                                   3,242                2,962
Retirement plan administration fees                       2,682                2,333
Trust                                                     2,913                2,129
Bank owned life insurance                                   849                  971
Net securities gains                                      1,145                  455
Other                                                     3,182                3,711
Total noninterest income                         $       25,229       $       23,056

Noninterest income for the three months ended March 31, 2013 was $25.2 million, up 9.4% or $2.1 million, compared with $23.1 million for the same period in 2012. Insurance and other financial services revenue increased approximately . . .

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