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NBTB > SEC Filings for NBTB > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for NBT BANCORP INC

Form 10-Q for NBT BANCORP INC


8-Aug-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 and six month periods ending June 30, 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 provide 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 substitutes 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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Recent Legislation
The following section should be read in conjunction with the Supervision and Regulation section of NBT's 2012 Form 10-K.

On July 2, 2013, the Federal Reserve Board issued final rules, and on July 9, 2013, the Office of the Comptroller of the Currency issued interim final rules that revise the existing regulatory capital requirements to incorporate certain revisions to the Basel capital framework, including Basel III, and to implement certain provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act ("Dodd Frank Act") . The final and interim final rules seek to strengthen the components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final and interim final rules, among other things:

revise minimum capital requirements and adjust prompt corrective action thresholds;

revise the components of regulatory capital, add a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets, increase the minimum Tier 1 capital ratio requirement from 4% to 6%;

retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;

permit most banking organizations, including the Company, to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income;

implement a new capital conservation buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% common equity Tier 1 capital ratio and be phased in over a three year period beginning January 1, 2016 which buffer is generally required to make capital distributions and pay executive bonuses;

increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;

require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of common equity Tier 1 capital in the aggregate; and

remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures.

Under the final and interim rules, compliance is required beginning January 1, 2015, for most banking organizations including the Company, subject to a transition period for several aspects of the rule, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. We are still in the process of assessing the impacts of these complex final and interim final rules, however, we believe we will continue to exceed all estimated well-capitalized regulatory requirements on a fully phased-in basis.

In May 2013, the Securities and Exchange Commission and the Commodity Futures Trading Commission (together, the "Commissions") jointly issued final rules and guidelines to require certain regulated entities to establish programs to address risks of identity theft. The rules and guidelines implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These provisions amend Section 615(e) of the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions' jurisdiction to address identity theft in two ways. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and debit card issuers that are subject to the Commissions' jurisdiction, to assess the validity of notifications of changes of address under certain circumstances.


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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 loss policy would also require additional provision for loan losses.

Management is required to make various assumptions in valuing the Company's 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.


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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.

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, acquired loans, 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 six months of 2013:
Core net income was $32.1 million for the six months ended June 30, 2013, up 19.6% from $26.9 million for the same period in 2012. Core diluted earnings per share for the six months ended June 30, 2013 were $0.79, down 1.3% from $0.80 in the same period in 2012. Core annualized return on average assets and return on average equity were 0.93% and 8.93%, respectively, for the six months ended June 30, 2013, compared with 0.94% and 9.86%, respectively, for the six months ended June 30, 2012.

Reported results for the six months ending June 30, 2013 include the impact of the acquisition of Alliance Financial Corporation ("Alliance") since March 8, 2013, including $12.0 million in merger related expenses for the six months ended June 30, 2013.


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Net interest margin (on a fully taxable equivalent basis ("FTE")) was 3.68% for the six months ended June 30, 2013 as compared to 3.86% for the same period in 2012.

Past due loans as a percentage of total loans were 0.71% at June 30, 2013 and December 31, 2012.

Net charge-offs, annualized, were 0.42% of average loans for the first six months of 2013, compared to 0.55% for the year ended December 31, 2012.

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.

                                               For the three months               For the six months
(Dollars in thousands)                            ended June 30,                    ended June 30,

                                               2013             2012             2013             2012
Reconciliation of Non-GAAP Financial
Measures:
Reported net income (GAAP)                 $     16,916     $     13,257     $     24,565     $     26,907
Adj: Loss / (Gain) on sale of
securities, net                                      61              (97 )         (1,084 )           (552 )
Adj: Other adjustments (1)                            -             (115 )              -             (865 )
Plus: Merger related expenses                     1,269              826           11,950            1,337
Total Adjustments                                 1,330              614           10,866              (80 )
Income tax effect on adjustments                   (406 )           (187 )         (3,314 )             24
Core net income                            $     17,840     $     13,684     $     32,117     $     26,851

Weighted Average Diluted Shares              44,316,531       33,492,659       40,574,934       33,452,970
Core Diluted Earnings Per Share            $       0.40     $       0.41     $       0.79     $       0.80

Performance measures:
Core Return on Average Assets (2)                  0.95 %           0.95 %           0.93 %           0.94 %
Core Return on Average Equity (2)                  8.88 %           9.97 %           8.93 %           9.86 %
Core Return on Average Tangible Common
Equity (2)(3)                                     14.57 %          14.35 %          14.11 %          14.18 %

(1) Other adjustments were primarily a flood insurance recovery for the 2012 quarter, and for the first half of 2012 a prepayment penalty fee and a flood insurance recovery
(2) Annualized
(3) Excludes amortization of intangible assets (net of tax) from net income and average tangible common equity is calculated as follows:

                                                 For the three months          For the six months
                                                    ended June 30,               ended June 30,
                                                  2013           2012          2013          2012

Average stockholders equity                    $   806,200     $ 551,865     $ 724,898     $ 547,246
Less: average goodwill and other intangibles       292,775       154,058       247,031       152,268
Average tangible common equity                 $   513,425     $ 397,807     $ 477,867     $ 394,978


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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.

Fully Taxable Equivalent ("FTE") net interest income increased $11.9 million during the three months ended June 30, 2013, compared to the same period of 2012. The Company's FTE net interest margin was 3.69% for the three months ended June 30, 2013, down from 3.82% for the three months ended June 30, 2012.
Average interest earning assets were $6.8 billion for the second quarter of 2013, an increase of 27.4% compared to the same period in 2012. The growth in earning assets was due to the acquisition of Alliance in March 2013 combined with organic loan growth. The increase in average earning assets for the three months ended June 30, 2013 as compared to the same period of 2012 offset the decline in the yield on earning assets, resulting in the increase in net interest income over the same period last year.

For the three months ended June 30, 2013, total FTE interest income increased $10.9 million, or 18.3%, from the same period in 2012 as a result of the increase in average earning assets, attributed to aforementioned acquisition activity and organic loan growth in the previous year and current quarter. The average balance of loans for the three months ended June 30, 2013 was $5.2 billion, up approximately $1.3 billion, or 33.1%, from the three months ended June 30, 2012. The average balance of securities available for sale for the three months ended June 30, 2013 was $1.4 billion, down 18% from the three months ended June 30, 2012. The growth in average earning assets from the second quarter of 2012 was partially offset by a 33 basis point decrease in the yield earned on earning assets. The yield on securities available for sale decreased 56 basis points to 1.97% for the second quarter of 2013 from 2.53% for same period in 2012. In addition, the yield on loans decreased 42 basis points to 4.76% for the three months ended June 30, 2013 from 5.18% for the three months ended June 30, 2012. The decreases in the yield on securities and loans were due primarily to the reinvestment of cash flows from loan principal payments and maturing of securities in the current low interest rate environment. At the end of the second quarter, long-term rates increased providing more favorable yields on the reinvestment of cash flows.

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 June 30, 2013 was down 26 bps to 0.62%.
Rates paid on interest bearing deposits and borrowings decreased by 17 and 49 basis points, respectively, from the same period in 2012. The decrease in interest paid on interest bearing deposits primarily resulted from the 42 basis point decrease in the cost of time deposits. The cost of long term debt also decreased as maturing higher cost borrowings were replaced with lower rate short term borrowings during the period. In future periods, additional rate reductions on deposits could be more difficult as deposit rates are at or near their floors.

Average interest bearing liabilities increased approximately $1.1 billion, or 25.7%, for the three months ended June 30, 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 the Alliance acquisition, partly offset by the pay down of long term borrowings in the first six months of 2013.

FTE net interest income was $115.7 million for the six months ended June 30, 2013, up 14.3% from the same period in 2012. This increase from the previous year was due primarily to the 20.1% increase in average earning assets for the six months ended June 30, 2013 over the prior year, partly offset by an 18 basis point decrease in the net interest margin for the same period. The acquisition of Hampshire First Bank in June 2012, the acquisition of Alliance in March 2013, and organic loan growth during the period contributed to the growth in average earning assets.


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The Company's FTE net interest margin was 3.68% for the six months ended June 30, 2013, down from 3.86% for the same period last year. Rate compression on earning assets continued to negatively impact net interest margin for the first six months of 2013 as evidenced by decreasing loan yields from 5.25% for the first six months of 2012 to 4.81% for the first six months of 2013. In addition, yields on available for sale securities declined 54 basis points in the first six months of 2013 as compared to the same period in 2012.

The reduction in yields on earning assets was partially offset by a reduction in rates paid on interest bearing liabilities in the first six months of 2013 as compared to the same period in 2012. The cost of interest bearing liabilities for the six months ended June 30, 2013 was down 22 bps to 0.68%. The reduction in the cost of interest bearing liabilities was primarily attributable to the decrease in the cost of deposits and long term borrowings.

Average interest bearing liabilities increased approximately $736.3 million, or 18.2%, for the six months ended June 30, 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 the acquisition of Hampshire First Bank in June 2012, the Alliance acquisition in March 2013, partly offset by the pay down of long term debt.


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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
June 30,                                   2013                                          2012
                          Average                        Yield/         Average                        Yield/
(dollars in
thousands)                Balance        Interest        Rates          Balance        Interest        Rates
ASSETS
Short-term interest
bearing accounts        $    41,313     $       59           0.57 %   $   102,192     $       84           0.33 %
. . .
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