UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
T ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2008
OR
£ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
TRANSITION PERIOD FROM ______ TO ______
COMMISSION
FILE NUMBER: 0-14703
NBT
BANCORP INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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16-1268674
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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52 SOUTH
BROAD STREET
NORWICH,
NEW YORK 13815
(Address
of principal executive office) (Zip Code)
(607)
337-2265 (Registrant’s telephone number, including area code)
Securities
registered pursuant to section 12(b) of the Act: None
Securities
registered pursuant to section 12(g) of the Act: Common Stock ($0. 01 par value
per share)
Stock
Purchase Rights Pursuant to Stockholders Rights Plan
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes T No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 (d) of the Act. Yes £ No
T
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during
the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements
for the past 90 days. Yes T No £
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer T
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Accelerated
filer £
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Non-accelerated
filer £
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Smaller
reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). £
Yes T
No
Based on
the closing price of the registrant’s common stock as of June 30, 2008, the
aggregate market value of the voting stock, common stock, par value, $0.01 per
share, held by non-affiliates of the registrant is $655,866,020.
The
number of shares of Common Stock outstanding as of February 15, 2009, was
32,648,164.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of
the registrant’s definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on May 5, 2009 are incorporated by reference
into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.
1
NBT BANCORP INC.
FORM 10-K – Year Ended
December 31, 2008
TABLE
OF CONTENTS
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PART
I
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ITEM
1
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ITEM
1A
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ITEM
1B
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ITEM
2
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ITEM
3
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ITEM
4
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PART
II
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ITEM
5
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ITEM
6
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ITEM
7
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ITEM
7A
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ITEM
8
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ITEM
9
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2
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ITEM
9A
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ITEM
9B
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PART
III
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ITEM
10
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ITEM
11
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ITEM
12
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ITEM
13
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ITEM
14
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PART
IV
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ITEM
15
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(a)
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(1)
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Consolidated
Financial Statements (See Item 8 for Reference).
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(2)
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Financial
Statement Schedules normally required on Form 10-K are omitted since they
are not applicable.
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(3)
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Exhibits.
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(b)
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Refer
to item 15(a)(3)above.
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(c)
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Refer
to item 15(a)(2) above.
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*
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Information
called for by Part III (Items 10 through 14) is incorporated by reference
to the Registrant’s Proxy Statement for the 2009 Annual Meeting of
Stockholders.
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PART
I
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ITEM
1. BUSINESS
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NBT
Bancorp Inc. (the “Registrant” or the “Company”) is a registered financial
holding company incorporated in the state of Delaware in 1986, with its
principal headquarters located in Norwich, New York. The Company, on a
consolidated basis, at December 31, 2008 had assets of $5.3 billion and
stockholders’ equity of $431.8 million. The Registrant is the parent holding
company of NBT Bank, N.A. (the “Bank”), NBT Financial Services, Inc. (“NBT
Financial”), NBT Holdings, Inc. (“NBT Holdings”), Hathaway Agency, Inc., CNBF
Capital Trust I, NBT Statutory Trust I and NBT Statutory Trust II (the
“Trusts”). Through the Bank and NBT Financial, the Company is focused
on community banking operations. Through NBT Holdings, the Company
operates Mang Insurance Agency, LLC, a full-service insurance
agency. The Trusts were organized to raise additional regulatory
capital and to provide funding for certain acquisitions. The Registrant’s
primary business consists of providing commercial banking and financial services
to its customers in its market area. The principal assets of the Registrant are
all of the outstanding shares of common stock of its direct subsidiaries, and
its principal sources of revenue are the management fees and dividends it
receives from the Bank, NBT Financial, and NBT Holdings.
The Bank
is a full service commercial bank formed in 1856, which provides a broad range
of financial products to individuals, corporations and municipalities throughout
the central and upstate New York and northeastern Pennsylvania market areas. The
Bank conducts business through two geographic operating divisions, NBT Bank and
Pennstar Bank.
At year
end 2008, the NBT Bank division had 84 divisional offices and 114 automated
teller machines (ATMs), located primarily in central and upstate New York. At
December 31, 2008, the NBT Bank division had total loans and leases of $2.9
billion and total deposits of $3.1 billion.
At year
end 2008, the Pennstar Bank division had 38 divisional offices and 57 ATMs,
located primarily in northeastern Pennsylvania. At December 31, 2008, the
Pennstar Bank division had total loans and leases of $761.0 million and total
deposits of $827.2 million.
The Bank
has six operating subsidiaries, NBT Capital Corp., Pennstar Bank Services
Company, Broad Street Property Associates, Inc., NBT Services, Inc., Pennstar
Realty Trust, and CNB Realty Trust. NBT Capital Corp., formed in 1998, is a
venture capital corporation formed to assist young businesses to develop and
grow primarily in the markets they serve. Broad Street Property Associates,
Inc., formed in 2004, is a property management company. NBT Services,
Inc., formed in 2004, has a 44% ownership interest in Land Record Services,
LLC. Land Record Services, LLC, a title insurance agency, offers
mortgagee and owner’s title insurance coverage to both retail and commercial
customers. Pennstar Realty Trust, formed in 2000, and CNB Realty
Trust, formed in 1998, are real estate investment trusts. Pennstar Bank Services
Company, formed in 2002, provides administrative and support services to the
Pennstar Bank division of the Bank.
CNBF
Capital Trust I (Trust I) and NBT Statutory Trust I are Delaware statutory
business trusts formed in 1999 and 2005, respectively, for the purpose of
issuing trust preferred securities and lending the proceeds to the Company. In
connection with the acquisition of CNB Bancorp, Inc. mentioned below, the
Company formed NBT Statutory Trust II (Trust II) in February 2006 to fund the
cash portion of the acquisition as well as to provide regulatory capital. The
Company raised $51.5 million through Trust II in February 2006. The Company
guarantees, on a limited basis, payments of distributions on the trust preferred
securities and payments on redemption of the trust preferred securities. The
Trusts are variable interest entities (VIEs) for which the Company is not the
primary beneficiary, as defined in Financial Accounting Standards Board
Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (Revised December 2003)
(FIN 46R).” In accordance with FIN 46R, the accounts of the Trusts are not
included in the Company’s consolidated financial statements. See the Company’s
accounting policy related to consolidation in Note 1 — Summary of Significant
Accounting Policies in the notes to consolidated financial statements included
in Item 8 Financial Statements and Supplementary Data of this
report. For more information relating to the Trusts, see Note 13 to
the consolidated financial statements.
On
September 1, 2008, the Company completed the acquisition of Mang Insurance
Agency, LLC (“Mang”), headquartered in Binghamton, New York. As part
of the acquisition, the Company acquired approximately $15.3 million of
intangible assets and $11.8 million of goodwill, which has been allocated to NBT
Holdings for reporting purposes. The results of operations are
included in the consolidated financial statements from the date of acquisition,
September 1, 2008.
On
February 10, 2006, the Company acquired CNB Bancorp, Inc. (“CNB”), a bank
holding company headquartered in Gloversville, New York. The acquisition was
accomplished by merging CNB with and into the Company. By virtue of this
acquisition, CNB’s banking subsidiary, City National Bank and Trust Company, was
merged with and into NBT Bank. City National Bank and Trust Company
operated 9 full-service community banking offices – located in Fulton, Hamilton,
Montgomery and Saratoga counties, with approximately $400 million in
assets. In connection with the merger with CNB, the Company issued an
aggregate of 2.1 million shares of Company common stock and $39 million in cash
to the former holders of CNB common stock. Based on the $22.42 per
share closing price of the Company’s common stock on February 10, 2006, the
transaction was valued at approximately $88 million.
CNB
nonqualified stock options, entitling holders to purchase CNB common stock
outstanding, were cancelled on the closing date and such option holders received
an option payment subject to the terms of the merger agreement. The total number
of CNB nonqualified stock options that were canceled was 103,545, which resulted
in a cash payment to option holders before any applicable federal or state
withholding tax, of approximately $1.3 million. In accordance with the terms of
the merger agreement, all outstanding CNB incentive stock options as of the
effective date were assumed by the Company. At that time, there were
144,686 CNB incentive stock options that were exchanged for 237,278 replacement
incentive stock options of the Company. All CNB incentive stock
options were converted to nonqualified stock options.
COMPETITION
The
banking and financial services industry in New York and Pennsylvania generally,
and in the Company’s market areas specifically, is highly competitive. The
increasingly competitive environment is the result of changes in regulation,
changes in technology and product delivery systems, additional financial service
providers, and the accelerating pace of consolidation among financial services
providers. The Company competes for loans and leases, deposits, and customers
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance companies,
money market funds, credit unions, and other nonbank financial service
providers. Many of these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader range
of financial services than the Company. In order to compete with other financial
services providers, the Company stresses the community nature of its banking
operations and principally relies upon local promotional activities, personal
relationships established by officers, directors, and employees with their
customers, and specialized services tailored to meet the needs of the
communities served.
SUPERVISION
AND REGULATION
As a bank
holding company, the Company is subject to extensive regulation, supervision,
and examination by the Board of Governors of the Federal Reserve System (“FRS”)
as its primary federal regulator. The Company also has qualified for and elected
to be registered with the FRS as a financial holding company. The Bank, as a
nationally chartered bank, is subject to extensive regulation, supervision and
examination by the Office of the Comptroller of the Currency (“OCC”) as its
primary federal regulator and, as to certain matters, by the FRS and the Federal
Deposit Insurance Corporation (“FDIC”).
The
Company is subject to capital adequacy guidelines of the FRS. The guidelines
apply on a consolidated basis and require bank holding companies to maintain a
minimum ratio of Tier 1 capital to total average assets (or “leverage ratio”) of
4%. For the most highly rated bank holding companies, the minimum ratio is 3%.
The FRS capital adequacy guidelines also require bank holding companies to
maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and a
minimum ratio of qualifying total capital to risk-weighted assets of 8%. As of
December 31, 2008, the Company’s leverage ratio was 7.17%, its ratio of Tier 1
capital to risk-weighted assets was 9.75%, and its ratio of qualifying total
capital to risk-weighted assets was 11.00%. The FRS may set higher minimum
capital requirements for bank holding companies whose circumstances warrant it,
such as companies anticipating significant growth or facing unusual risks. The
FRS has not advised the Company of any special capital requirement applicable to
it.
Any
holding company whose capital does not meet the minimum capital adequacy
guidelines is considered to be undercapitalized and is required to submit an
acceptable plan to the FRS for achieving capital adequacy. Such a company’s
ability to pay dividends to its shareholders and expand its lines of business
through the acquisition of new banking or nonbanking subsidiaries also could be
restricted.
The Bank
is subject to leverage and risk-based capital requirements and minimum capital
guidelines of the OCC that are similar to those applicable to the Company. As of
December 31, 2008, the Bank was in compliance with all minimum capital
requirements. The Bank’s leverage ratio was 6.93%, its ratio of Tier 1 capital
to risk-weighted assets was 9.38%, and its ratio of qualifying total capital to
risk-weighted assets was 10.64%.
Under
FDIC regulations, no FDIC-insured bank can accept brokered deposits unless it is
well capitalized, or is adequately capitalized and receives a waiver from the
FDIC. In addition, these regulations prohibit any bank that is not well
capitalized from paying an interest rate on brokered deposits in excess of
three-quarters of one percentage point over certain prevailing market rates. As
of December 31, 2008, the Bank’s total brokered deposits were $269.8
million.
The Bank
also is subject to substantial regulatory restrictions on its ability to pay
dividends to the Company. Under OCC regulations, the Bank may not pay a
dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the proposed dividend, exceed the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. As of December 31, 2008, approximately
$46.6 million was available for the payment of dividends without prior OCC
approval. The Bank’s ability to pay dividends is also subject to the Bank being
in compliance with regulatory capital requirements. As indicated above, the Bank
is currently in compliance with these requirements.
The OCC
generally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any management fee to
its parent holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. If a
depository institution fails to submit an acceptable capital restoration plan,
it is treated as if it is “significantly undercapitalized.” Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become “adequately capitalized,” requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. “Critically
undercapitalized” institutions are subject to the appointment of a receiver or
conservator.
The
deposits of the Bank are insured up to regulatory limits by the FDIC. The
Federal Deposit Insurance Reform Act of 2005 gave the FDIC increased flexibility
in assessing premiums on banks and savings associations, including the Bank, to
pay for deposit insurance and in managing its deposit insurance reserves. The
FDIC has adopted regulations to implement its new authority. Under
these regulations, all insured depository institutions are placed into one of
four risk categories. The Bank is in Risk Category I, the most
favorable category. As of January 1, 2009, all insured institutions
within this category will pay a base rate assessment of $0.12 to $0.50 per $100
of deposits for the first quarter of 2009 of assessable deposits based on the
risk of loss to the Depository Insurance Fund (“DIF”) posed by the particular
institution. Institutions, such as the Bank, in risk Category I will
be assessed within a range of $0.12 to $0.14 per $100 of deposits for the first
quarter of 2009. This is a substantial increase from the base rate
assessment of $0.02 to $0.04 per $100 of assessable deposits that was in effect
during 2008. The increase in the base rate assessment from 2008 to
2009 is due to the financial crises affecting the banking system and financial
markets. For institutions such as the Bank, which do not have a
long-term public debt rating, the individual risk assessment is based on its
supervisory ratings and certain financial ratios and other measurements of its
financial condition. For institutions that have a long-term public
debt rating, the individual risk assessment is based on its supervisory ratings
and its debt rating. On February 27, 2009, the FDIC issued new rules to take
effect April 1, 2009 to change the way the FDIC differentiates risk and
appropriate assessment rates. Base assessment rates set to take effect on
April 1, 2009 will range from 12 to 45 basis points, but giving effect to
certain risk adjustments in the rule issued by the FDIC on February 27, 2009,
assessments may range from 7 to 77.5 basis points. For institutions such as
the Bank, in Risk Category I, risk-adjusted assessments will range from 7 to 24
basis points. In addition, the FDIC also issued an interim rule on February 27,
2009 that will impose an emergency special assessment of 20 basis points in
addition to its risk-based assessment. This assessment will be imposed on June
30, 2009 and collected on September 30, 2009. The reform legislation also
provided a credit to all insured depository institutions, based on the amount of
their insured deposits at year-end 1996, that may be used as an offset to the
premiums that are assessed. The Bank’s credit was fully utilized in
2008 to offset its 2008 deposit insurance assessment. Due to the full
utilization of the Bank’s credit, the systemic increase in deposit insurance
assessments and the emergency special assessment, the Bank will be subject to
increased deposit premium expenses in future periods.
On
October 14, 2008, the FDIC announced a new program, the Temporary Liquidity
Guarantee Program (“TLGP”), that provides unlimited deposit insurance on funds
invested in noninterest-bearing transaction deposit accounts in excess of the
existing deposit insurance limit of $250,000. Participating
institutions will be assessed a $0.10 surcharge per $100 of deposits above the
existing deposit insurance limit. The TLGP also provides that the FDIC, for an
additional fee, will guarantee qualifying senior unsecured debt issued prior to
October 2009 by participating banks and certain qualifying holding
companies. The Bank and the Company have elected to opt in to both
portions of the TLGP.
The
Federal Deposit Insurance Act provides for additional assessments to be imposed
on insured depository institutions to pay for the cost of Financing Corporation
(“FICO”) funding. The FICO assessments are adjusted quarterly to reflect changes
in the assessment base of the DIF and do not vary depending upon a depository
institution’s capitalization or supervisory evaluation. During 2008, FDIC
assessments for purposes of funding FICO bond obligations ranged from an
annualized $0.0114 per $100 of deposits for the first quarter of 2008 to $0.0110
per $100 of deposits for the fourth quarter of 2008. The Bank paid $1.8 million
of FICO assessments in 2008. For the first quarter of 2009, the FICO assessment
rate is $0.0114 per $100 of deposits.
Transactions
between the Bank and any of its affiliates, including the Company, are governed
by sections 23A and 23B of the Federal Reserve Act and FRS regulations
thereunder. An “affiliate” of a bank is any company or entity that controls, is
controlled by, or is under common control with the bank. A subsidiary of a bank
that is not also a depository institution is not treated as an affiliate of the
bank for purposes of sections 23A and 23B, unless the subsidiary is also
controlled through a non-bank chain of ownership by affiliates or controlling
shareholders of the bank, the subsidiary is a financial subsidiary that operates
under the expanded authority granted to national banks under the
Gramm-Leach-Bliley Act (“GLB Act”), or the subsidiary engages in other
activities that are not permissible for a bank to engage in directly (except
insurance agency subsidiaries). Generally, sections 23A and 23B are intended to
protect insured depository institutions from suffering losses arising from
transactions with non-insured affiliates, by placing quantitative and
qualitative limitations on covered transactions between a bank and with any one
affiliate as well as all affiliates of the bank in the aggregate, and requiring
that such transactions be on terms that are consistent with safe and sound
banking practices.
In 2007,
the Federal Reserve and Securities and Exchange Commission (“SEC”) issued a
final joint rulemaking (Regulation R) to clarify that traditional banking
activities involving some elements of securities brokerage activitities, such as
most trust and fiduciary activities, may continue to be performed by banks
rather than being “pushed-out” to affiliates supervised by the
SEC. These rules take effect for the Bank beginning January 1,
2009.
Under the
GLB Act, a financial holding company may engage in certain financial activities
that a bank holding company may not otherwise engage in under the Bank Holding
Company Act (“BHC Act”). In addition to engaging in banking and activities
closely related to banking as determined by the FRS by regulation or order prior
to November 11, 1999, a financial holding company may engage in activities that
are financial in nature or incidental to financial activities, or activities
that are complementary to a financial activity and do not pose a substantial
risk to the safety and soundness of depository institutions or the financial
system generally.
The GLB
Act requires all financial institutions, including the Company and the Bank, to
adopt privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer’s request, and establish procedures and
practices to protect customer data from unauthorized access. In addition, the
Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”) includes many
provisions concerning national credit reporting standards, and permits
consumers, including customers of the Company, to opt out of information sharing
among affiliated companies for marketing purposes. The FACT Act also requires
banks and other financial institutions to notify their customers if they report
negative information about them to a credit bureau or if they are granted credit
on terms less favorable than those generally available. The FRS and the Federal
Trade Commission (“FTC”) have extensive rulemaking authority under the FACT Act,
and the Company and the Bank are subject to the rules that have been promulgated
by the FRS and FTC, including recent rules regarding limitaions of affiliate
marketing and implementation of programs to identify, detect and mitigate
certain identity theft red flags. The Company has developed policies and
procedures for itself and its subsidiaries, including the Bank, and believes it
is in compliance with all privacy, information sharing, and notification
provisions of the GLB Act and the FACT Act.
Periodic
disclosures by companies in various industries of the loss or theft of
computer-based nonpublic customer information have led several members of
Congress to call for the adoption of national standards for the safeguarding of
such information and the disclosure of security breaches. Several committees of
both houses of Congress have conducted and have proposed legislation regarding
these issues.
Under
Title III of the USA PATRIOT Act, also known as the International Money
Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial
institutions, including the Company and the Bank, are required in general to
identify their customers, adopt formal and comprehensive anti-money laundering
programs, scrutinize or prohibit altogether certain transactions of special
concern, and be prepared to respond to inquiries from U.S. law enforcement
agencies concerning their customers and their transactions. The USA PATRIOT Act
also encourages information-sharing among financial institutions, regulators,
and law enforcement authorities by providing an exemption from the privacy
provisions of the GLB Act for financial institutions that comply with this
provision. The effectiveness of a financial institution in combating money
laundering activities is a factor to be considered in any application submitted
by the financial institution under the Bank Merger Act, which applies to the
Bank, or the BHC Act, which applies to the Company. Failure of a financial
institution to maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with all of the relevant laws
or regulations, could have serious legal, financial and reputational
consequences for the institution. As of December 31, 2008, the Company and the
Bank believe they are in compliance with the USA PATRIOT Act and regulations
thereunder.
The
Sarbanes-Oxley Act (“SOA”) implemented a broad range of measures to increase
corporate responsibility, enhance penalties for accounting and auditing
improprieties at publicly traded companies, and protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to federal
securities laws. The SOA applies generally to companies that have securities
registered under the Exchange Act, including publicly-held bank holding
companies such as the Company. It includes very specific additional disclosure
requirements and has adopted corporate governance rules, and requires the SEC
and securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules pursuant to its mandates. The SOA represents
significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to
state corporate law, such as the relationship between a board of directors and
management and between a board of directors and its committees. In addition, the
federal banking regulators have adopted generally similar requirements
concerning the certification of financial statements by bank
officials.
Home
mortgage lenders, including banks, are required under the Home Mortgage
Disclosure Act (“HMDA”) to make available to the public expanded information
regarding the pricing of home mortgage loans, including the “rate spread”
between the interest rate on loans and certain Treasury securities and other
benchmarks. The availability of this information has led to increased scrutiny
of higher-priced loans at all financial institutions to detect illegal
discriminatory practices and to the initiation of a limited number of
investigations by federal banking agencies and the U.S. Department of Justice.
The Company has no information that it or its affiliates is the subject of any
HMDA investigation.
In the
past two years, declining housing values have resulted in deteriorating economic
conditions across the U.S., resulting in significant writedowns in the values of
mortgage-backed securities and derivative securities by financial institutions,
government sponsored entities, and major commercial and investment banks. This
has led to decreased confidence in financial markets among borrowers, lenders,
and depositors as well as extreme volatility in the capital and credit markets
and the failure of some entities in the financial sector The Company is
fortunate that the markets it serves have been impacted to a lesser extent than
many areas around the country.
In
response to the financial crises affecting the banking system and financial
markets, there have been several recent announcements of Federal programs
designed to purchase assets from, provide equity capital to, and guarantee the
liquidity of, the industry.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”)
was signed into law. The EESA authorizes the U.S. Treasury to, among
other things, purchase up to $700 billion of mortgages, mortgage-backed
securities, and certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the U.S. financial
markets. The Company did not originate or invest in sub-prime assets
and, therefore, does not expect to participate in the sale of any of our assets
into these programs. EESA also increased the FDIC deposit insurance
limit for most accounts from $100,000 to $250,000 through December 31,
2009.
On
October 14, 2008, the U.S. Treasury announced that it will purchase equity
stakes in a wide variety of banks and thrifts. Under this program,
known as the Troubled Asset Relief Program Capital Purchase Program (the “TARP
Capital Purchase Program”), the U.S. Treasury will make $250 billion of capital
available (from the $700 billion authorized by the EESA) to U.S. financial
institutions in the form of preferred stock. In conjunction with the
purchase of preferred stock, the U.S. Treasury will receive warrants to purchase
common stock with an aggregate market price equal to 15% of the preferred
investment. Participating financial institutions will be required to
adopt the U.S. Treasury’s standards for executive compensation and corporate
governance for the period during which the Treasury holds equity issued under
the TARP Capital Purchase Program, as well as the more stringent executive
compensation limits enacted as part of the American Recovery and Reinvestment
Act of 2009 (the “ARRA” or “Stimulus Bill”), which was signed into law on
February 17, 2009. The Company was approved but chose not to
participate in the TARP Capital Purchase Program.
EMPLOYEES
At
December 31, 2008, the Company had 1,411 full-time equivalent employees. The
Company’s employees are not presently represented by any collective bargaining
group. The Company considers its employee relations to be
good.
AVAILABLE
INFORMATION
The
Company’s website is http://www.nbtbancorp.com.
The Company makes available free of charge through its website, its annual
reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form
8-K; and any amendments to those reports as soon as reasonably practicable after
such material is electronically filed or furnished with the SEC pursuant to
Section 13(a) or 15(d) of the Exchange Act. We also make available through our
website other reports filed with or furnished to the SEC under the Exchange Act,
including our proxy statements and reports filed by officers and directors under
Section 16(a) of that Act, as well as our Code of Business Ethics and other
codes/committee charters. The references to our website do not constitute
incorporation by reference of the information contained in the
website and such information should not be considered part of this
document.
Any
materials we file with the SEC may be read and copied at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, DC, 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
ITEM
1A. RISK FACTORS
There are risks inherent to the
Company’s business. The material risks and uncertainties that management
believes affect the Company are described below. The risks and uncertainties
described below are not the only ones facing the Company. Additional risks and
uncertainties that management is not aware of or focused on or that management
currently deems immaterial may also present risk to the Company’s business operations. This
report is qualified in its entirety by these risk factors. If any of the
following risks actually occur, the Company’s financial condition and results of
operations could be materially and adversely affected.
The
Company’s Profitability Depends Significantly on Local and National Economic
Conditions
The Company’s success depends primarily
on the general economic conditions of upstate New York and northeastern Pennsylvania and the specific local markets in which
the Company operates. Unlike larger national or other regional banks that are
more geographically diversified, the Company provides banking and financial
services to customers primarily in the upstate New York areas of Norwich,
Oneonta, Amsterdam-Gloversville, Albany, Binghamton, Utica-Rome, Plattsburg, and
Ogdensburg-Massena and the
northeastern Pennsylvania
areas of Scranton, Wilkes-Barre and East Stroudsburg. The local economic
conditions in these areas have a significant impact on the demand for the
Company’s products and services as well as the ability of the Company’s
customers to repay loans, the value of the collateral securing loans and the
stability of the Company’s deposit funding sources. A significant decline in
general economic conditions, caused by inflation, recession, acts of terrorism,
outbreak of hostilities or other international or domestic occurrences,
unemployment, changes in securities markets or other factors could impact these
local economic conditions and, in turn, have a material adverse effect on the
Company’s financial condition and results of operations.
2008 was highlighted by significant
disruption and volatility in the financial and capital
marketplaces. This turbulence has been attributable to a variety of
factors, including the fallout associated with the subprime mortgage
market. One aspect of this fallout has been significant deterioration
in the activity of the secondary market. The disruptions have been
exacerbated by the continued decline of the real estate and housing market along
with significant mortgage loan related losses incurred by many lending
institutions. The turmoil in the mortgage market has impacted the
global markets as well as the domestic markets and led to a significant credit
and liquidity crisis in many domestic markets during 2008. As a
lender, we may be adversely affected by general economic weaknesses, and, in
particular, a sharp downturn in the housing industry in the states of
New York and Pennsylvania. No assurance can be given
that these conditions will improve or will not worsen or that such conditions
will not result in an increase in delinquencies, causing a decrease in our
interest income, or continue to have an adverse impact on our loan loss
experience, causing an increase in our allowance for loan
losses.
The
Company is Subject to Interest Rate Risk
The Company’s earnings and cash flows
are largely dependent upon its net interest income. Net interest income is the
difference between interest income earned on interest-earning assets such as
loans and securities and interest expense paid on interest-bearing liabilities
such as deposits and borrowed funds. Interest rates are highly sensitive to many
factors that are beyond the Company’s control, including general economic
conditions and policies of various governmental and regulatory agencies and, in
particular, the Board of Governors of the Federal Reserve System. Changes in
monetary policy, including changes in interest rates, could influence not only
the interest the Company receives on loans and securities and the amount of
interest it pays on deposits and borrowings, but such changes could also affect
(i) the Company’s ability to originate loans and obtain deposits, (ii) the fair
value of the Company’s financial assets and liabilities, and (iii) the average
duration of the Company’s mortgage-backed securities portfolio. If the interest
rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, the Company’s net
interest income, and therefore earnings, could be adversely affected. Earnings
could also be adversely affected if the interest rates received on loans and
other investments fall more quickly than the interest rates paid on deposits and
other borrowings.
Although management believes it has
implemented effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on the Company’s results of
operations, any substantial, unexpected, or prolonged change in market interest
rates could have a material adverse effect on the Company’s financial condition
and results of operations. See the section captioned “Net Interest Income” in
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations and Item 7A. Quantitative and Qualitative Disclosure About Market
Risk located elsewhere in this report for further discussion related to the
Company’s management of interest rate risk.
The
Company is Subject to Lending Risk
There are inherent risks associated with
the Company’s lending activities. These risks include, among other things, the
impact of changes in interest rates and changes in the economic conditions in
the markets where the Company operates as well as those across the States of New
York and Pennsylvania, and the entire United States. Increases in interest rates and/or
weakening economic conditions could adversely impact the ability of borrowers to
repay outstanding loans or the value of the collateral securing these loans. The
Company is also subject to various laws and regulations that affect its lending
activities. Failure to comply with applicable laws and regulations could subject
the Company to regulatory enforcement action that could result in the assessment
of significant civil money penalties against the Company.
As of December 31, 2008, approximately 39% of the Company’s loan and lease portfolio consisted of
commercial, agricultural,
construction and commercial
real estate loans. These types of loans are generally viewed as having more risk
of default than residential real estate loans or consumer loans. These types of
loans are also typically larger than residential real estate loans and consumer
loans. Because the Company’s loan portfolio contains a significant number of
commercial and industrial, construction and commercial real estate loans with
relatively large balances, the deterioration of one or a few of these loans
could cause a significant increase in nonperforming loans. An increase in
nonperforming loans could result in a net loss of earnings from these loans, an
increase in the provision for loan losses and/or an increase in loan charge-offs, all of
which could have a material adverse effect on the Company’s financial condition
and results of operations. See the section captioned “Loans and Leases and
Corresponding Interest and Fees on Loans” in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations located elsewhere in
this report for further discussion related to commercial and industrial,
construction and commercial real estate loans.
The
Company’s Allowance For Loan and Lease Losses May Be Insufficient
The Company maintains an allowance for
loan and lease losses, which is an allowance established through a provision for
loan and lease losses charged to expense, that represents management’s best
estimate of probable losses that could be incurred within the existing portfolio
of loans and leases. The allowance, in the judgment of management, is necessary
to reserve for estimated loan and lease losses and risks inherent in the loan
and lease portfolio. The level of the allowance reflects management’s continuing
evaluation of industry concentrations; specific credit risks; loan loss
experience; current loan and lease portfolio quality; present economic,
political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. The determination of the appropriate level of the
allowance for loan and lease losses inherently involves a high degree of
subjectivity and requires the Company to make significant estimates of current
credit risks and future trends, all of which may undergo material changes.
Changes in economic conditions affecting borrowers, new information regarding
existing loans, identification of additional problem loans and other factors,
both within and outside of the Company’s control, may require an increase in the
allowance for loan losses. In addition, bank regulatory agencies periodically
review the Company’s allowance for loan losses and may require an increase in
the provision for loan losses or the recognition of further loan charge-offs,
based on judgments different than those of management. In addition, if
charge-offs in future periods exceed the allowance for loan and lease losses,
the Company will need additional provisions to increase the allowance for loan
and lease losses. These increases in the allowance for loan and lease losses
will result in a decrease in net income and, possibly, capital, and may have a
material adverse effect on the Company’s financial condition and results of
operations. See the section captioned “Risk Management – Credit Risk” in Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations located elsewhere in this report for further discussion related to
the Company’s process for determining the appropriate level of the allowance for
loan and losses.
The
Company Operates In a Highly Competitive Industry and Market Area
The Company faces substantial
competition in all areas of its operations from a variety of different
competitors, many of which are larger and may have more financial resources.
Such competitors primarily include national, regional, and community banks
within the various markets the Company operates. Additionally, various
out-of-state banks continue to enter or have announced plans to enter the market
areas in which the Company currently operates. The Company also faces
competition from many other types of financial institutions, including, without
limitation, savings and loans, credit unions, finance companies, brokerage
firms, insurance companies, and other financial intermediaries. The
financial services industry could become even more competitive as a result of
legislative, regulatory and technological changes and continued consolidation.
Banks, securities firms and insurance companies can merge under the umbrella of
a financial holding company, which can offer virtually any type of financial
service, including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. Also, technology has lowered barriers to
entry and made it possible for non-banks to offer products and services
traditionally provided by banks, such as automatic transfer and automatic
payment systems. Many of the Company’s competitors have fewer regulatory
constraints and may have lower cost structures. Additionally, due to their size,
many competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for
those products and services than the Company can. The Company’s ability to
compete successfully depends on a number of factors, including, among other
things:
• The ability to develop, maintain and
build upon long-term customer relationships based on top quality service, high
ethical standards and safe, sound assets.
• The ability to expand the Company’s
market position.
• The scope, relevance and pricing of
products and services offered to meet customer needs and
demands.
• The rate at which the Company
introduces new products and services relative to its
competitors.
• Customer satisfaction with the
Company’s level of service.
• Industry and general economic
trends.
Failure to perform in any of these areas
could significantly weaken the Company’s competitive position, which could
adversely affect the Company’s growth and profitability, which, in turn, could
have a material adverse effect on the Company’s financial condition and results
of operations.
There
Can Be No Assurance That Recent Government Action Will Help Stabilize the U.S.
Financial System and Will Not Have Unintended Adverse Consequences.
In recent
periods, the U.S. government and various federal agencies and bank regulators
have taken steps to stabilize and stimulate the financial services industry.
Changes also have been made in tax policy for financial
institutions. The Emergency Economic Stabilization Act of 2008 (the
“EESA”) was an initial legislative response to the financial crises affecting
the banking system and financial markets and going concern threats to financial
institutions. Pursuant to the EESA, the U.S. Treasury will have the authority
to, among other things, purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial instruments from
financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets. As an initial program, the U.S. Treasury is
exercising its authority to purchase an aggregate of $250 billion of capital
instruments from financial entities throughout the United
States. Other government action, such as the recently announced
Homeowner Affordability and Stability Plan are intended to prevent mortgage
defaults and foreclosures, which may provide benefits to the economy as a whole,
but may reduce the value of certain mortgage loans or related mortgage-related
securities investors such as the Company may hold. There can be no
assurance as to the actual impact that these or other government actions will
have on the financial markets, including the extreme levels of volatility and
limited credit availability currently being experienced. The failure of the EESA
and other measures to help stabilize the financial markets and a continuation or
worsening of current financial market conditions could materially and adversely
affect the Company’s business, financial condition, results of operations,
access to credit or the trading price of its common stock.
The
Company Is Subject To Extensive Government Regulation and
Supervision
The Company, primarily through
the Bank and certain non-bank subsidiaries,
is subject to extensive federal regulation and supervision. Banking regulations
are primarily intended to protect depositors’ funds, federal deposit insurance
funds and the banking system as a whole, not shareholders. These regulations
affect the Company’s lending practices, capital structure, investment practices,
dividend policy and growth, among other things. Congress and federal regulatory
agencies continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect the Company in substantial and unpredictable ways. Such
changes could subject the Company to additional costs, limit the types of
financial services and products the Company may offer and/or increase the
ability of non-banks to offer competing financial services and products, among
other things. Failure to comply with laws, regulations or policies could result
in sanctions by regulatory agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on the Company’s business,
financial condition and results of operations. While the Company has policies
and procedures designed to prevent any such violations, there can be no
assurance that such violations will not occur. See the section captioned
“Supervision and Regulation” in Item 1. Business, which is located elsewhere in this
report.
The
Company’s Controls and Procedures May Fail or Be Circumvented
Management regularly reviews and updates
the Company’s internal controls, disclosure controls and procedures, and
corporate governance policies and procedures. Any system of controls, however
well designed and operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or circumvention of the Company’s controls and
procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the Company’s business,
results of operations and financial condition.
New
Lines of Business or New Products and Services May Subject The Company to
Additional Risks
From time to time, the Company may
implement new lines of business or offer new products and services within
existing lines of business. There are substantial risks and uncertainties
associated with these efforts, particularly in instances where the markets are
not fully developed. In developing and marketing new lines of business and/or
new products and services the Company may invest significant time and resources.
Initial timetables for the introduction and development of new lines of business
and/or new products or services may not be achieved and price and profitability
targets may not prove feasible. External factors, such as compliance with
regulations, competitive alternatives, and shifting market preferences, may also
impact the successful implementation of a new line of business or a new product
or service. Furthermore, any new line of business and/or new product or service
could have a significant impact on the effectiveness of the Company’s system of
internal controls. Failure to successfully manage these risks in the development
and implementation of new lines of business or new products or services could
have a material adverse effect on the Company’s business, results of operations
and financial condition.
The
Company Relies on Dividends From Its Subsidiaries For Most Of Its
Revenue
The Company is a separate and distinct legal entity
from its subsidiaries. It receives substantially all of its revenue from
dividends from its subsidiaries. These dividends are the principal source of
funds to pay dividends on the Company’s common stock and interest and principal
on the Company’s debt. Various federal and/or state laws and regulations limit
the amount of dividends that the Bank may pay to the Company. Also, the Company’s right to participate in a distribution
of assets upon a subsidiary’s liquidation or reorganization is subject to the
prior claims of the subsidiary’s creditors. In the event the Bank is unable to pay dividends to
the Company, the Company may not be able to service debt, pay
obligations or pay dividends on the Company’s common stock.
The inability to receive dividends from
the Bank could have a material adverse effect
on the Company’s business, financial condition and results of operations. See
the section captioned “Supervision and Regulation” in Item 1. Business and Note
16 — Stockholders’ Equity in the notes to
consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data, which are located elsewhere in this
report.
The
Company May Not Be Able To Attract and Retain Skilled People
The Company’s success depends, in large
part, on its ability to attract and retain key people. Competition for the best
people in most activities engaged in by the Company can be intense and the
Company may not be able to hire people or to retain them. The unexpected loss of
services of one or more of the Company’s key personnel could have a material
adverse impact on the Company’s business because of their skills, knowledge of
the Company’s market, years of industry experience and the difficulty of
promptly finding qualified replacement personnel.
The
Company’s Information Systems May Experience An Interruption Or Breach In
Security
The Company relies heavily on
communications and information systems to conduct its business. Any failure,
interruption or breach in security of these systems could result in failures or
disruptions in the Company’s customer relationship management, general ledger,
deposit, loan and other systems. While the Company has policies and procedures
designed to prevent or limit the effect of the failure, interruption or security
breach of its information systems, there can be no assurance that any such
failures, interruptions or security breaches will not occur or, if they do
occur, that they will be adequately addressed. The occurrence of any failures,
interruptions or security breaches of the Company’s information systems could
damage the Company’s reputation, result in a loss of customer business, subject
the Company to additional regulatory scrutiny, or expose the Company to civil
litigation and possible financial liability, any of which could have a material
adverse effect on the Company’s financial condition and results of
operations.
The
Company Continually Encounters Technological Change
The financial services industry is
continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve
customers and to reduce costs. The Company’s future success depends, in part,
upon its ability to address the needs of its customers by using technology to
provide products and services that will satisfy customer demands, as well as to
create additional efficiencies in the Company’s operations. Many of the
Company’s competitors have substantially greater resources to invest in
technological improvements. The Company may not be able to effectively implement
new technology-driven products and services or be successful in marketing these
products and services to its customers. Failure to successfully keep pace with
technological changes affecting the financial services
industry could have a material adverse impact on the Company’s business and, in
turn, the Company’s financial condition and results of
operations.
Severe
Weather, Natural Disasters, Acts Of War Or Terrorism and Other External Events
Could Significantly Impact The Company’s Business
Severe weather, natural disasters, acts
of war or terrorism and other adverse external events could have a significant
impact on the Company’s ability to conduct business. Such events could affect
the stability of the Company’s deposit base, impair the ability of borrowers to
repay outstanding loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue and/or cause the Company
to incur additional expenses. Although management has established disaster
recovery policies and procedures, the occurrence of any such event could have a
material adverse effect on the Company’s business, which, in turn, could have a
material adverse effect on the Company’s financial condition and results of
operations.
The
Company’s Articles Of Incorporation, By-Laws and Stockholder Rights Plan As Well
As Certain Banking Laws May Have An Anti-Takeover Effect
Provisions of the Company’s articles of
incorporation and by-laws, federal banking laws, including regulatory approval
requirements, and the Company’s stock purchase rights plan could make it more
difficult for a third party to acquire the Company, even if doing so would be
perceived to be beneficial to the Company’s stockholders. The combination of
these provisions effectively inhibits a non-negotiated merger or other business
combination, which, in turn, could adversely affect the market price of the
Company’s common stock.
Difficult
Market Conditions Have Adversely Affected Our Industry.
Dramatic
declines in the housing market over the past year, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of mortgage loans and resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities as well as major commercial and investment banks.
These write-downs, initially of mortgage-backed securities but spreading to
credit default swaps and other derivative and cash securities, in turn, have
caused many financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail. Reflecting concern
about the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This
market turmoil and tightening of credit have led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity generally. The
resulting economic pressure on consumers and lack of confidence in the financial
markets has adversely affected our business, financial condition and results of
operations. We do not expect that the difficult conditions in the financial
markets are likely to improve in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the financial institution industry. In
particular, we may face the following risks in connection with these
events:
|
|
•
|
We
expect to face increased regulation of our industry. Compliance with such
regulation may increase our costs and limit our ability to pursue business
opportunities.
|
|
|
•
|
Market
developments may affect customer confidence levels and may cause increases
in delinquencies and default rates, which we expect could impact our
charge-offs and provision for loan
losses.
|
|
|
•
|
Our
ability to borrow from other financial institutions or to access the debt
or equity capital markets on favorable terms or at all could be adversely
affected by further disruptions in the capital markets or other events,
including actions by rating agencies and deteriorating investor
expectations.
|
|
|
•
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Competition
in our industry could intensify as a result of the increasing
consolidation of financial services companies in connection with current
market conditions.
|
|
|
•
|
We
will be required to pay significantly higher FDIC premiums because market
developments have significantly depleted the insurance fund of the FDIC
and reduced the ratio of reserves to insured
deposits.
|
Current
Levels Of Market Volatility Are Unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. Recently, the volatility and disruption has reached
unprecedented levels. In most cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers without regard to
those issuers’ underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on our ability to
access capital and on our business, financial condition and results of
operations.
The Company is Subject to
Other-than-temporary Impairment Risk
The
Company recognizes an impairment charge when the decline in the fair value of
equity, debt securities and cost-method investments below their cost basis are
judged to be other-than-temporary. Significant judgment is used to identify
events or circumstances that would likely have a significant adverse effect on
the future use of the investment. The Company considers various factors in
determining whether an impairment is other-than-temporary, including the
severity and duration of the impairment, forecasted recovery, the financial
condition and near-term prospects of the investee, and our ability and intent to
hold the investment for a period of time sufficient to allow for any anticipated
recovery in market value. Information about unrealized gains and losses is
subject to changing conditions. The values of securities with unrealized gains
and losses will fluctuate, as will the values of securities that we identify as
potentially distressed. Our current evaluation of other-than-temporary
impairments reflects our intent to hold securities for a reasonable period of
time sufficient for a forecasted recovery of fair value. However, our intent to
hold certain of these securities may change in future periods as a result of
facts and circumstances impacting a specific security. If our intent to hold a
security with an unrealized loss changes, and we do not expect the security to
fully recover prior to the expected time of disposition, we will write down the
security to its fair value in the period that our intent to hold the security
changes.
The
process of evaluating the potential impairment of goodwill and other intangibles
is highly subjective and requires significant judgment. The Company estimates
expected future cash flows of its various businesses and determines the carrying
value of these businesses. The Company exercises judgment in
assigning and allocating certain assets and liabilities to these businesses. The
Company then compares the carrying value, including goodwill and other
intangibles, to the discounted future cash flows. If the total of future cash
flows is less than the carrying amount of the assets, an impairment loss is
recognized based on the excess of the carrying amount over the fair value of the
assets. Estimates of the future cash flows associated with the assets are
critical to these assessments. Changes in these estimates based on changed
economic conditions or business strategies could result in material impairment
charges in future periods.
The Company May Be Adversely Affected by
the Soundness of Other Financial Institutions
The
Company owns common stock of Federal Home Loan Bank of New York
("FHLBNY") in order to qualify for membership in the FHLB system, which enables
it to borrow funds under the FHLBNY advance program. The carrying
value of our FHLBNY common stock was $39.0 million as of December 31,
2008.
There are
12 branches of the FHLB, including New York. Several members have
warned that they have either breached risk-based capital requirements or that
they are close to breaching those requirements. To conserve capital,
some FHLB branches are suspending dividends, cutting dividend payments, and not
buying back excess FHLB stock that members hold. FHLBNY has stated
that they expect to be able to continue to pay dividends, redeem excess capital
stock, and provide competively priced advances in the future. The
most severe problems in FHLB have been at some of the other FHLB
branches. Nonetheless, the 12 FHLB branches are jointly liable for
the consolidated obligations of the FHLB system. To the extent that
one FHLB branch cannot meet its obligations to pay its share of the system’s
debt, other FHLB branches can be called upon to make the
payment.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM
2. PROPERTIES
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The
Company’s headquarters are located at 52 South Broad Street, Norwich, New York
13815. The Company operated the following number of community banking
branches and ATMs as of December 31, 2008:
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County
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Branches
|
ATMs
|
County
|
Branches
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ATMs
|
|
|
NBT
Bank Division
|
Pennstar
Bank Division
|
|||||
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New
York
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Pennsylvania
|
|||||
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Albany
County
|
4
|
6
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Lackawanna
County
|
16
|
24
|
|
|
Broome
County
|
8
|
13
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Luzerne
County
|
4
|
8
|
|
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Chenango
County
|
11
|
13
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Monroe
County
|
6
|
8
|
|
|
Clinton
County
|
3
|
2
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Pike
County
|
3
|
4
|
|
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Delaware
County
|
5
|
5
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Susquehanna
County
|
6
|
8
|
|
|
Essex
County
|
3
|
6
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Wayne
County
|
3
|
5
|
|
|
Franklin
County
|
1
|
1
|
||||
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Fulton
County
|
7
|
12
|
||||
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Hamilton
County
|
1
|
1
|
||||
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Herkimer
County
|
2
|
1
|
||||
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Montgomery
County
|
6
|
5
|
||||
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Oneida
County
|
6
|
13
|
||||
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Otsego
County
|
9
|
16
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||||
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Rensselaer
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1
|
1
|
||||
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Saratoga
County
|
5
|
7
|
||||
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Schenectady
County
|
1
|
1
|
||||
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Schoharie
County
|
4
|
3
|
||||
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St.
Lawrence County
|
5
|
6
|
||||
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Tioga
County
|
1
|
1
|
||||
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Ulster
County
|
-
|
1
|
||||
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Warren
County
|
1
|
-
|
The
Company leases 45 of the above listed branches from third
parties. The Company owns all other banking premises. The Company
believes that its offices are sufficient for its present
operations. All of the above ATMs are owned by the
Company.
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ITEM 3. LEGAL
PROCEEDINGS
|
There are
no material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Company or any of its subsidiaries is a
party or of which their property is the subject.
|
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
PART II
|
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
The
common stock of NBT Bancorp Inc. (“Common Stock”) is quoted on the Nasdaq Global
Select Market under the symbol “NBTB.” The following table sets forth the market
prices and dividends declared for the Common Stock for the periods
indicated:
|
High
|
Low
|
Dividend
|
||||||||||
|
2007
|
||||||||||||
|
1st
quarter
|
$ | 25.81 | $ | 21.73 | $ | 0.20 | ||||||
|
2nd
quarter
|
23.45 | 21.80 | 0.20 | |||||||||
|
3rd
quarter
|
23.80 | 17.10 | 0.20 | |||||||||
|
4th
quarter
|
25.00 | 20.58 | 0.20 | |||||||||
|
2008
|
||||||||||||
|
1st
quarter
|
$ | 23.65 | $ | 17.95 | $ | 0.20 | ||||||
|
2nd
quarter
|
25.00 | 20.33 | 0.20 | |||||||||
|
3rd
quarter
|
36.47 | 19.05 | 0.20 | |||||||||
|
4th
quarter
|
30.83 | 21.71 | 0.20 | |||||||||
The
closing price of the Common Stock on February 15, 2009 was $21.70.
As of
February 15, 2009, there were 6,887 shareholders of record of Company common
stock.
|
Equity
Compensation Plan Information
|
As of
December 31, 2008, the following table summarizes the Company’s equity
compensation plans:
|
Plan Category
|
A. Number of securities to be issued upon exercise
of outstanding options
|
B. Weighted-average exercise price of outstanding
options
|
Number of securities remaining available for
future issuance under equity compensation plans (excluding securities
reflected in column A.)
|
|||||||||
|
Equity
compensation plans approved by stockholders
|
1,640,237 | (1) | $ | 21.26 | 4,255,768 | |||||||
|
Equity
compensation plans not approved by stockholders
|
None
|
None
|
None
|
|||||||||
|
(1)
|
Includes
30,700 shares issuable pursuant to restricted stock units granted pursuant
to the Company's equity compensation plan. These awards are for
the distribution of shares to the grant recipient upon the completion of
time-based holding periods and do not have an associated exercise
price. Accordingly, these awards are not reflected in the
weighted-average exercise price dislosed in Column
B.
|
Performance
Graph
The
following graph compares the cumulative total stockholder return (i.e., price
change, reinvestment of cash dividends and stock dividends received) on our
common stock against the cumulative total return of the NASDAQ Stock Market
(U.S. Companies) Index and the Index for NASDAQ Financial Stocks. The
stock performance graph assumes that $100 was invested on December 31,
2003. The graph further assumes the reinvestment of dividends into
additional shares of the same class of equity securities at the frequency with
which dividends are paid on such securities during the relevant fiscal
year. The yearly points marked on the horizontal axis correspond to
December 31 of that year. We calculate each of the referenced indices
in the same manner. All are market-capitalization-weighted indices,
so companies judged by the market to be more important (i.e., more valuable)
count for more in all indices.
Five Year
Cumulative Total Return
|
Period
Ending
|
||||||||||||||||||||||||
|
Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||||||||||||||||||
|
NBT
Bancorp
|
$ | 100.00 | $ | 123.79 | $ | 107.43 | $ | 131.04 | $ | 121.37 | $ | 153.61 | ||||||||||||
|
NASDAQ
Financial Stocks
|
$ | 100.00 | $ | 115.23 | $ | 117.94 | $ | 134.76 | $ | 125.03 | $ | 88.63 | ||||||||||||
|
NASDAQ
Composite Index
|
$ | 100.00 | $ | 109.14 | $ | 111.46 | $ | 123.02 | $ | 136.12 | $ | 81.73 | ||||||||||||
Source: Bloomberg,
L.P.
Dividends
We depend
primarily upon dividends from our subsidiaries for a substantial part of our
revenue. Accordingly, our ability to pay dividends depends primarily
upon the receipt of dividends or other capital distributions from our
subsidiaries. Payment of dividends to the Company from the Bank is
subject to certain regulatory and other restrictions. Under OCC
regulations, the Bank may pay dividends to the Company without prior regulatory
approval so long as it meets its applicable regulatory capital requirements
before and after payment of such dividends and its total dividends do not exceed
its net income to date over the calendar year plus retained net income over the
preceding two years. At December 31, 2008, the Bank was in compliance
with all applicable minimum capital requirements and had the ability to pay
dividends of $46.6 million to the Company without the prior approval of the
OCC.
If the
capital of the Company is diminished by depreciation in the value of its
property or by losses, or otherwise, to an amount less than the aggregate amount
of the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets, no dividends may be paid
out of net profits until the deficiency in the amount of capital represented by
the issued and outstanding stock of all classes having a preference upon the
distribution of assets has been repaired. See the section captioned
“Supervision and Regulation” in Item 1. Business and Note 15 – Stockholders’
Equity in the notes to consolidated financial statements in included in Item 8.
Financial Statements and Supplementary Data, which are located elsewhere in this
report.
|
ITEM 6. SELECTED FINANCIAL DATA
|
The
following summary of financial and other information about the Company is
derived from the Company’s audited consolidated financial statements for each of
the last five fiscal years ended December 31 and should be read in conjunction
with Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations and the Company’s consolidated financial statements and
accompanying notes, included elsewhere in this report:
|
Year ended
December 31,
|
||||||||||||||||||||
|
(In
thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Interest,
fee and dividend income
|
$ | 294,414 | $ | 306,117 | $ | 288,842 | $ | 236,367 | $ | 210,179 | ||||||||||
|
Interest
expense
|
108,368 | 141,090 | 125,009 | 78,256 | 59,692 | |||||||||||||||
|
Net
interest income
|
186,046 | 165,027 | 163,833 | 158,111 | 150,487 | |||||||||||||||
|
Provision
for loan and lease losses
|
27,181 | 30,094 | 9,395 | 9,464 | 9,615 | |||||||||||||||
|
Noninterest
income excluding securities gains (losses)
|
70,171 | 57,586 | 49,504 | 43,785 | 40,673 | |||||||||||||||
|
Securities
gains (losses) , net
|
1,535 | 2,113 | (875 | ) | (1,236 | ) | 216 | |||||||||||||
|
Noninterest
expense
|
146,813 | 122,517 | 122,966 | 115,305 | 109,777 | |||||||||||||||
|
Income
before income taxes
|
83,758 | 72,115 | 80,101 | 75,891 | 71,984 | |||||||||||||||
|
Net
income
|
58,353 | 50,328 | 55,947 | 52,438 | 50,047 | |||||||||||||||
|
Per
common share
|
||||||||||||||||||||
|
Basic
earnings
|
$ | 1.81 | $ | 1.52 | $ | 1.65 | $ | 1.62 | $ | 1.53 | ||||||||||
|
Diluted
earnings
|
1.80 | 1.51 | 1.64 | 1.60 | 1.51 | |||||||||||||||
|
Cash
dividends paid
|
0.80 | 0.79 | 0.76 | 0.76 | 0.74 | |||||||||||||||
|
Book
value at year-end
|
13.24 | 12.29 | 11.79 | 10.34 | 10.11 | |||||||||||||||
|
Tangible
book value at year-end
|
9.01 | 8.78 | 8.42 | 8.75 | 8.66 | |||||||||||||||
|
Average
diluted common shares outstanding
|
32,427 | 33,421 | 34,206 | 32,710 | 33,087 | |||||||||||||||
|
At
December 31,
|
||||||||||||||||||||
|
Securities
available for sale, at fair value
|
$ | 1,119,665 | $ | 1,140,114 | $ | 1,106,322 | $ | 954,474 | $ | 952,542 | ||||||||||
|
Securities
held to maturity, at amortized cost
|
140,209 | 149,111 | 136,314 | 93,709 | 81,782 | |||||||||||||||
|
Loans
and leases
|
3,651,911 | 3,455,851 | 3,412,654 | 3,022,657 | 2,869,921 | |||||||||||||||
|
Allowance
for loan and lease losses
|
58,564 | 54,183 | 50,587 | 47,455 | 44,932 | |||||||||||||||
|
Assets
|
5,336,088 | 5,201,776 | 5,087,572 | 4,426,773 | 4,212,304 | |||||||||||||||
|
Deposits
|
3,923,258 | 3,872,093 | 3,796,238 | 3,160,196 | 3,073,838 | |||||||||||||||
|
Borrowings
|
914,123 | 868,776 | 838,558 | 883,182 | 752,066 | |||||||||||||||
|
Stockholders’
equity
|
431,845 | 397,300 | 403,817 | 333,943 | 332,233 | |||||||||||||||
|
Key
ratios
|
||||||||||||||||||||
|
Return
on average assets
|
1.11 | % | 0.98 | % | 1.14 | % | 1.21 | % | 1.21 | % | ||||||||||
|
Return
on average equity
|
14.16 | 12.60 | 14.47 | 15.86 | 15.69 | |||||||||||||||
|
Average
equity to average assets
|
7.83 | 7.81 | 7.85 | 7.64 | 7.74 | |||||||||||||||
|
Net
interest margin
|
3.95 | 3.61 | 3.70 | 4.01 | 4.03 | |||||||||||||||
|
Dividend
payout ratio
|
44.44 | 52.32 | 46.34 | 47.50 | 49.01 | |||||||||||||||
|
Tier
1 leverage
|
7.17 | 7.14 | 7.57 | 7.16 | 7.13 | |||||||||||||||
|
Tier
1 risk-based capital
|
9.75 | 9.79 | 10.42 | 9.80 | 9.78 | |||||||||||||||
|
Total
risk-based capital
|
11.00 | 11.05 | 11.67 | 11.05 | 11.04 | |||||||||||||||
|
Selected Quarterly Financial
Data
|
||||||||||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
(Dollars in thousands, except per share
data)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||||||||||||||
|
Interest,
fee and dividend income
|
$ | 74,652 | $ | 72,854 | $ | 73,621 | $ | 73,287 | $ | 75,459 | $ | 76,495 | $ | 77,181 | $ | 76,982 | ||||||||||||||||
|
Interest
expense
|
30,587 | 26,849 | 26,578 | 24,354 | 34,830 | 35,137 | 35,994 | 35,129 | ||||||||||||||||||||||||
|
Net
interest income
|
44,065 | 46,005 | 47,043 | 48,933 | 40,629 | 41,358 | 41,187 | 41,853 | ||||||||||||||||||||||||
|
Provision
for loan and lease losses
|
6,478 | 5,803 | 7,179 | 7,721 | 2,096 | 9,770 | 4,788 | 13,440 | ||||||||||||||||||||||||
|
Noninterest
income excluding net securities gains (losses)
|
16,080 | 16,401 | 17,452 | 20,238 | 12,695 | 13,971 | 15,043 | 15,877 | ||||||||||||||||||||||||
|
Net
securities gains (losses)
|
15 | 18 | 1,510 | (8 | ) | (5 | ) | 21 | 1,484 | 613 | ||||||||||||||||||||||
|
Noninterest
expense
|
34,034 | 35,423 | 37,058 | 40,298 | 30,872 | 28,014 | 31,227 | 32,404 | ||||||||||||||||||||||||
|
Net
income
|
13,716 | 14,657 | 15,083 | 14,897 | 14,132 | 12,064 | 15,147 | 8,985 | ||||||||||||||||||||||||
|
Basic
earnings per share
|
$ | 0.43 | $ | 0.46 | $ | 0.47 | $ | 0.46 | $ | 0.41 | $ | 0.36 | $ | 0.46 | $ | 0.28 | ||||||||||||||||
|
Diluted
earnings per share
|
$ | 0.43 | $ | 0.45 | $ | 0.46 | $ | 0.45 | $ | 0.41 | $ | 0.36 | $ | 0.46 | $ | 0.28 | ||||||||||||||||
|
Net
interest margin
|
3.84 | % | 3.94 | % | 3.94 | % | 4.06 | % | 3.63 | % | 3.63 | % | 3.56 | % | 3.61 | % | ||||||||||||||||
|
Return
on average assets
|
1.07 | % | 1.12 | % | 1.13 | % | 1.11 | % | 1.13 | % | 0.95 | % | 1.17 | % | 0.69 | % | ||||||||||||||||
|
Return
on average equity
|
13.68 | % | 14.49 | % | 14.58 | % | 13.88 | % | 14.06 | % | 11.90 | % | 15.41 | % | 9.06 | % | ||||||||||||||||
|
Average
diluted common shares outstanding
|
32,252 | 32,242 | 32,453 | 32,758 | 34,457 | 33,936 | 32,921 | 32,398 | ||||||||||||||||||||||||
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
GENERAL
The
financial review which follows focuses on the factors affecting the consolidated
financial condition and results of operations of NBT Bancorp Inc. (the
“Registrant”) and its wholly owned subsidiaries, the Bank, NBT Financial and NBT
Holdings during 2008 and, in summary form, the preceding two years.
Collectively, the Registrant and its subsidiaries are referred to herein as “the
Company.” Net interest margin is presented in this discussion on a fully taxable
equivalent (FTE) basis. Average balances discussed are daily averages unless
otherwise described. The audited consolidated financial statements and related
notes as of December 31, 2008 and 2007 and for each of the years in the
three-year period ended December 31, 2008 should be read in conjunction with
this review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 2008
presentation.
The
preparation of the consolidated financial statements requires management to make
estimates and assumptions, in the application of certain accounting policies,
about the effect of matters that are inherently uncertain. Those estimates and
assumptions affect the reported amounts of certain assets, liabilities, revenues
and expenses. Different amounts could be reported under different conditions, or
if different assumptions were used in the application of these accounting
policies.
The
business of the Company is providing commercial banking and financial services
through its subsidiaries. The Company’s primary market area is central and
upstate New York and northeastern Pennsylvania. The Company has been, and
intends to continue to be, a community-oriented financial institution offering a
variety of financial services. The Company’s principal business is attracting
deposits from customers within its market area and investing
those funds
primarily in loans and leases within
its market
area, and, to a lesser extent, in marketable
securities. The financial condition and operating results of the
Company are dependent on its net interest income which is the difference between
the interest and dividend income earned on its earning assets and the interest
expense paid on its interest bearing liabilities, primarily consisting of
deposits and borrowings. Net income is also affected by provisions for loan and
lease losses and noninterest income, such as service charges on deposit
accounts, broker/dealer fees, trust fees, insurance commissions, and
gains/losses on securities sales; it is also impacted by noninterest expense,
such as salaries and employee benefits, data processing, communications,
occupancy, and equipment expenses.
The
Company’s results of operations are significantly affected by general economic
and competitive conditions (particularly changes in market interest rates),
government policies, changes in accounting standards, and actions of regulatory
agencies. Future changes in applicable laws, regulations, or government policies
may have a material impact on the Company. Lending activities are substantially
influenced by the demand for and supply of housing, competition among lenders,
the level of interest rates, the state of the local and regional economy, and
the availability of funds. The ability to gather deposits and the cost of funds
are influenced by prevailing market interest rates, fees and terms on deposit
products, as well as the availability of alternative investments including
mutual funds and stocks.
CRITICAL
ACCOUNTING POLICIES
The
Company has identified several 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 and pension accounting.
Management
of the Company considers the accounting policy relating to the allowance for
loan and lease 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 and lease 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 and lease 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 and lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provision for loan and lease 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 and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral values were significantly lowered, the
Company’s allowance for loan and lease policy would also require additional
provision for loan and lease 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 Liability Index and market
interest rates 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. In
2006, the Pension Protection Act of 2006 was enacted, which established certain
criteria to ensure that pension plan assets are sufficient to satisfy future
obligations. The law identifies at risk plans and applies stricter
funding requirements to help stabilize at risk plans. The Company has
determined that the law does not materially affect the Company’s funding
obligations with respect to its benefit plans.
The
Company’s policy on the allowance for loan and lease losses and pension
accounting is disclosed in Note 1 to the consolidated financial statements. A
more detailed description of the allowance for loan and lease losses is included
in the “Risk Management” section of this Form 10-K. All significant
pension accounting assumptions and detail is disclosed in Note 17 to the
consolidated financial statements. 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 on how the Company’s financial
performance is reported.
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, or in oral statements made with the approval of an
authorized executive officer, 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,” “will,” “can,”
“would,” “should,” “could,” “may,” 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 possibilities:
• Local, regional, national and
international economic conditions and the impact they may have on the Company
and its customers and the Company’s assessment of that
impact.
• Changes in the level of
non-performing assets and charge-offs.
• Changes in estimates of future reserve
requirements based upon the periodic review thereof under relevant regulatory
and accounting requirements.
• The effects of and changes in trade
and monetary and fiscal policies and laws, including the interest rate policies
of the Federal Reserve Board.
• Inflation, interest rate, securities
market and monetary fluctuations.
• Political
instability.
• Acts of war or
terrorism.
• The timely development and acceptance
of new products and services and perceived overall value of these products and
services by users.
• Changes in consumer spending,
borrowings and savings habits.
• Changes in the financial performance
and/or condition of the Company’s borrowers.
• Technological
changes.
• Acquisitions and integration of
acquired businesses.
• The ability to increase market share
and control expenses.
• Changes in the competitive environment
among financial holding companies.
• The effect of changes in laws and
regulations (including laws and regulations concerning taxes, banking,
securities and insurance) with which the Company and its subsidiaries must
comply.
• The effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies, as well as
the Public Company Accounting Oversight Board, the Financial Accounting
Standards Board and other accounting standard setters.
• Changes in the Company’s organization,
compensation and benefit plans.
• The costs and effects of legal and
regulatory developments including the resolution of legal proceedings or
regulatory or other governmental inquiries and the results of regulatory
examinations or reviews.
• Greater than expected costs or
difficulties related to the integration of new products and lines of
business.
• The Company’s success at managing the
risks involved in the foregoing items.
The
Company cautions readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors, including but not limited to those described above, 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.
Except as
required by law, the Company does not undertake, and specifically disclaims any
obligations to, publicly release any revisions that may be made to any
forward-looking statements to reflect statements to the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
OVERVIEW
The
Company had net income of $58.4 million or $1.80 per diluted share for 2008, up
15.9% from net income of $50.3 million or $1.51 per diluted share for
2007. Net interest income increased $21.0 million or 12.7% in 2008
compared to 2007. The increase in net interest income resulted from
decreases in rates paid on interest bearing deposits and liabilities in 2008 as
compared with 2007. In addition, average earning assets increased
$132.7 million, or 2.8%, in 2008 over 2007. The provision for loan
and lease losses totaled $27.2 million for the year ended December 31, 2008,
down $2.9 million, or 9.7%, from $30.1 million for the year ended December 31,
2007. Noninterest income increased $12.0 million or 20.1% compared to
2007. The increase in noninterest income was driven primarily by an
increase in service charges on deposit accounts and ATM and debit card fees,
which collectively increased $6.0 million due to various initiatives in
2008. Also included in noninterest income for 2008 were net
securities gains totaling $1.5 million compared to net securities gains of $2.1
million in 2007. Excluding net security gains and losses, total noninterest
income increased 21.9% in 2008 compared with 2007. Noninterest
expense increased $24.3 million, or 19.8%, in 2008 compared with
2007. The increase in noninterest expense was due to several factors
including increases in salaries and employee benefits, occupancy, equipment and
data processing and communications expenses, professional fees and outside
services, loan collection and other real estate owned expenses, and other
operating expenses. Please refer to “NONINTEREST EXPENSE” on
page 42 for additional information.
The
Company had net income of $50.3 million or $1.51 per diluted share for 2007,
down 10.0% from net income of $55.9 million or $1.64 per diluted share for
2006. The provision for loan and lease losses totaled $30.1 million
for the year ended December 31, 2007, up $20.7, or 220.3%, from $9.4 million for
the year ended December 31, 2006. This increase was due in large part
to increases in nonperforming loans and charge-offs in 2007. The
increase in the provision for loan and lease losses was offset by several
factors. Net interest income increased $1.2 million or 0.7% in 2007
compared to 2006. The increase in net interest income resulted mainly
from an increase in average earning assets of $171.4 million, or 3.7% to $4.7
billion in 2007, driven by a 3.7% increase in average loans and leases for the
period. Noninterest income increased $11.1 million or 22.8% compared to 2006.
The increase in noninterest income was driven primarily by an increase in
service charges on deposit accounts from fee initiatives during the
year. Also included in noninterest income for 2007 were net
securities gains totaling $2.1 million compared to net securities losses of $0.9
million in 2006. Excluding net security gains and losses, total noninterest
income increased 16.3% in 2007 compared with 2006. Noninterest expense remained
relatively stable from $123.0 million in 2006 to $122.5 million in
2007.
2009
OUTLOOK
While the
Company reported record earnings for 2008, it anticipates that current global
economic conditions and challenges in the financial services industry may
negatively impact earnings in 2009. In particular, the Company currently expects
that in 2009:
•
premiums paid to the Federal Deposit Insurance Corporation will increase
significantly;
• pension
and postretirement expenses will increase significantly;
• revenue
from Federal Home Loan Bank dividends may decrease significantly;
•
payments representing interest and principal on currently outstanding loans and
investments will most likely be reinvested at rates that are lower than the
rates on currently outstanding loans and investments; and
• the
economy may have an adverse affect on asset quality indicators and the provision
for loan and lease losses, and therefore credit costs, which have trended higher
in recent years, are not expected to decline until economic indicators
improve.
Due to
current uncertainty in economic conditions and the financial services industry
in general, it is particularly difficult to estimate certain revenues, expenses
and other related matters. There may be factors in addition to those
identified above that impact 2009 results. For a discussion of risks
and uncertainties that could impact the Company’s future results, see ITEM 1A.
RISK FACTORS.
ASSET/LIABILITY
MANAGEMENT
The
Company attempts to maximize net interest income, and net income, while actively
managing its liquidity and interest rate sensitivity through the mix of various
core deposit products and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company’s asset mix and
sources of funds, and the resultant impact on net interest income, on a fully
tax equivalent basis, are discussed below. The following table
includes 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 and leases has been adjusted
to a taxable-equivalent basis using the statutory Federal income tax rate of
35%.
|
Table 1. Average Balances and Net Interest
Income
|
||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
|||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Short-term
interest bearing accounts
|
$ | 9,190 | $ | 186 | 2.03 | % | $ | 8,395 | $ | 419 | 4.99 | % | $ | 8,116 | $ | 395 | 4.87 | % | ||||||||||||||||||
|
Securities
available for sale 1
|
1,113,810 | 56,841 | 5.10 | 1,134,837 | 57,290 | 5.05 | 1,110,405 | 53,992 | 4.86 | |||||||||||||||||||||||||||
|
Securities
held to maturity 1
|
149,775 | 8,430 | 5.63 | 144,518 | 8,901 | 6.16 | 115,636 | 7,071 | 6.11 | |||||||||||||||||||||||||||
|
Investment
in FRB and FHLB Banks
|
39,735 | 2,437 | 6.13 | 34,022 | 2,457 | 7.22 | 39,437 | 2,076 | 5.26 | |||||||||||||||||||||||||||
|
Loans
and leases 2
|
3,567,299 | 233,016 | 6.53 | 3,425,318 | 243,317 | 7.10 | 3,302,080 | 230,800 | 6.99 | |||||||||||||||||||||||||||
|
Total
earning assets
|
4,879,809 | 300,910 | 6.17 | 4,747,090 | 312,384 | 6.58 | 4,575,674 | 294,334 | 6.43 | |||||||||||||||||||||||||||
|
Other
non-interest earning assets
|
384,846 | 362,497 | 349,396 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 5,264,655 | $ | 5,109,587 | $ | 4,925,070 | ||||||||||||||||||||||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||||||||||||||||||||||
|
Money
market deposit accounts
|
$ | 778,477 | 14,373 | 1.85 | % | $ | 663,532 | 22,402 | 3.38 | % | $ | 543,323 | 18,050 | 3.32 | % | |||||||||||||||||||||
|
NOW
deposit accounts
|
485,014 | 4,133 | 0.85 | 449,122 | 3,785 | 0.84 | 443,339 | 3,297 | 0.74 | |||||||||||||||||||||||||||
|
Savings
deposits
|
467,572 | 2,161 | 0.46 | 485,562 | 4,299 | 0.89 | 532,788 | 4,597 | 0.86 | |||||||||||||||||||||||||||
|
Time
deposits
|
1,507,966 | 55,465 | 3.68 | 1,675,116 | 76,088 | 4.54 | 1,534,556 | 61,854 | 4.03 | |||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
3,239,029 | 76,132 | 2.35 | 3,273,332 | 106,574 | 3.26 | 3,054,006 | 87,798 | 2.87 | |||||||||||||||||||||||||||
|
Short-term
borrowings
|
223,830 | 4,847 | 2.17 | 280,162 | 12,943 | 4.62 | 331,255 | 15,448 | 4.66 | |||||||||||||||||||||||||||
|
Trust
preferred debentures
|
75,422 | 4,747 | 6.29 | 75,422 | 5,087 | 6.74 | 70,055 | 4,700 | 6.71 | |||||||||||||||||||||||||||
|
Long-term
debt
|
563,460 | 22,642 | 4.02 | 384,017 | 16,486 | 4.29 | 414,976 | 17,063 | 4.11 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
4,101,741 | 108,368 | 2.64 | 4,012,933 | 141,090 | 3.52 | 3,870,292 | 125,009 | 3.23 | |||||||||||||||||||||||||||
|
Demand
deposits
|
682,656 | 639,423 | 614,055 | |||||||||||||||||||||||||||||||||
|
Other
non-interest-bearing liabilities
|
68,156 | 57,932 | 54,170 | |||||||||||||||||||||||||||||||||
|
Stockholders’
equity
|
412,102 | 399,299 | 386,553 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 5,264,655 | $ | 5,109,587 | $ | 4,925,070 | ||||||||||||||||||||||||||||||
|
Interest
rate spread
|
3.53 | % | 3.06 | % | 3.20 | % | ||||||||||||||||||||||||||||||
|
Net
interest income-FTE
|
192,542 | 171,294 | 169,325 | |||||||||||||||||||||||||||||||||
|
Net
interest margin
|
3.95 | % | 3.61 | % | 3.70 | % | ||||||||||||||||||||||||||||||
|
Taxable
equivalent adjustment
|
6,496 | 6,267 | 5,492 | |||||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 186,046 | $ | 165,027 | $ | 163,833 | ||||||||||||||||||||||||||||||
1.
Securities are shown at average amortized cost.
2. For
purposes of these computations, nonaccrual loans are included in the average
loan balances outstanding. The interest collected thereon is included in
interest income based upon the characteristics of the related
loans.
NET
INTEREST INCOME
On a tax
equivalent basis, the Company’s net interest income for 2008 was $192.5 million,
up from $171.3 million for 2007. The Company’s net interest margin increased to
3.95% for 2008 from 3.61% for 2007. The increase in the net interest margin
resulted primarily from interest-bearing liabilities repricing down faster than
earning assets. Earning assets, particularly those tied to a fixed
rate, reprice at a slower rate than interest-bearing liabilities, and have not
fully realized the effect of the lower interest rate environment. The
yield on earning assets decreased 41 basis points (bp), from 6.58% for 2007 to
6.17% for 2008. Meanwhile, the rate paid on interest bearing liabilities
decreased 88 bp, from 3.52% for 2007 to 2.64% for 2008. Average
earning assets increased $132.7 million, or 2.8%, from 2007 to
2008. This increase was driven primarily by a $142.0 million increase
in average loans and leases, which was driven primarily by a 23.4% increase in
consumer indirect installment loans. The following table presents
changes in interest income, on a FTE basis, 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.
|
Table 2. Analysis of Changes in Taxable Equivalent
Net Interest Income
|
||||||||||||||||||||||||
|
Increase
(Decrease)
|
Increase
(Decrease)
|
|||||||||||||||||||||||
|
2008 over 2007
|
2007 over 2006
|
|||||||||||||||||||||||
|
(In thousands)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||||||
|
Short-term
interest-bearing accounts
|
$ | 44 | $ | (276 | ) | $ | (232 | ) | $ | 14 | $ | 10 | $ | 24 | ||||||||||
|
Securities
available for sale
|
(1,021 | ) | 222 | (799 | ) | 1,205 | 2,093 | 3,298 | ||||||||||||||||
|
Securities
held to maturity
|
228 | (538 | ) | (310 | ) | 1,779 | 51 | 1,830 | ||||||||||||||||
|
Investment
in FRB and FHLB Banks
|
380 | (400 | ) | (20 | ) | (314 | ) | 695 | 381 | |||||||||||||||
|
Loans
and leases
|
10,908 | (21,250 | ) | (10,342 | ) | 8,711 | 3,806 | 12,517 | ||||||||||||||||
|
Total
interest income
|
10,539 | (22,242 | ) | (11,703 | ) | 11,184 | 6,866 | 18,050 | ||||||||||||||||
|
Money
market deposit accounts
|
4,969 | (12,998 | ) | (8,029 | ) | 4,054 | 298 | 4,352 | ||||||||||||||||
|
NOW
deposit accounts
|
305 | 43 | 348 | 44 | 444 | 488 | ||||||||||||||||||
|
Savings
deposits
|
(154 | ) | (1,984 | ) | (2,138 | ) | (416 | ) | 118 | (298 | ) | |||||||||||||
|
Time
deposits
|
(7,095 | ) | (13,528 | ) | (20,623 | ) | 5,967 | 8,267 | 14,234 | |||||||||||||||
|
Short-term
borrowings
|
(2,223 | ) | (5,873 | ) | (8,096 | ) | (2,362 | ) | (143 | ) | (2,505 | ) | ||||||||||||
|
Trust
preferred debentures
|
- | (340 | ) | (340 | ) | 362 | 25 | 387 | ||||||||||||||||
|
Long-term
debt
|
7,133 | (977 | ) | 6,156 | (1,308 | ) | 731 | (577 | ) | |||||||||||||||
|
Total
interest expense
|
2,935 | (35,657 | ) | (32,722 | ) | 4,727 | 11,354 | 16,081 | ||||||||||||||||
|
Change
in FTE net interest income
|
$ | 7,604 | $ | 13,415 | $ | 21,019 | $ | 6,457 | $ | (4,488 | ) | $ | 1,969 | |||||||||||
LOANS
AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The
average balance of loans and leases increased 4.1%, totaling $3.6 billion in
2008 compared to $3.4 billion in 2007. The yield on average loans and leases
decreased from 7.10% in 2007 to 6.53% in 2008, as loan rates, particularly for
loans indexed to the Prime Rate and other short-term variable rate indices,
declined due to the declining rate environment in 2008. Interest
income from loans and leases on a FTE basis decreased 4.2%, from $243.3 million
in 2007 to $233.0 million in 2008. The decrease in interest income
from loans and leases was due to the decrease in yield on loans and leases in
2008 compared to 2007 noted above.
Total
loans and leases increased 5.7% at December 31, 2008, totaling $3.7 billion from
$3.5 billion at December 31, 2007. The increase in loans and leases was driven
by strong growth in consumer loans and home equity loans. Consumer
loans increased $139.7 million or 21.3%, from $655.4 million at December 31,
2007 to $795.1 million at December 31, 2008. The increase in consumer
loans was driven primarily by an increase in indirect installment loans of
$155.0 million, from $520.7 million in 2007 to $675.7 million in
2008. Home equity loans increased $44.9 million or 7.7% from $582.7
million at December 31, 2007 to $627.6 million at December 31,
2008. The increase in home equity loans was due to strong product
demand and successful marketing of home equity products. Commercial
and commercial real estate increased $26.9 million at December 31, 2008 when
compared to December 31, 2007. These increases were partially offset
by a decrease in real estate construction and development loans, which decreased
$13.5 million, or 16.6% at December 31, 2008 as compared to December 31,
2007.
The following table reflects the loan and lease portfolio by
major
categories as of December 31 for the years indicated:
|
Table 3. Composition of Loan and Lease
Portfolio
|
||||||||||||||||||||
|
December 31,
|
||||||||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Residential
real estate mortgages
|
$ | 722,723 | $ | 719,182 | $ | 739,607 | $ | 701,734 | $ | 721,615 | ||||||||||
|
Commercial
and commercial real estate
|
1,241,779 | 1,214,897 | 1,240,383 | 1,127,705 | 1,069,451 | |||||||||||||||
|
Real
estate construction and development
|
67,859 | 81,350 | 94,494 | 69,135 | 86,031 | |||||||||||||||
|
Agricultural
and agricultural real estate
|
113,566 | 116,190 | 118,278 | 114,043 | 108,181 | |||||||||||||||
|
Consumer
|
795,123 | 655,375 | 586,922 | 463,955 | 412,139 | |||||||||||||||
|
Home
equity
|
627,603 | 582,731 | 546,719 | 463,848 | 391,807 | |||||||||||||||
|
Lease
financing
|
83,258 | 86,126 | 86,251 | 82,237 | 80,697 | |||||||||||||||
|
Total
loans and leases
|
$ | 3,651,911 | $ | 3,455,851 | $ | 3,412,654 | $ | 3,022,657 | $ | 2,869,921 | ||||||||||
Residential
real estate mortgages consist primarily of loans secured by first or second
deeds of trust on primary residences. Loans in the commercial and agricultural
categories, including commercial and agricultural real estate mortgages, consist
primarily of short-term and/or floating rate loans made to small to medium-sized
entities. Consumer loans consist primarily of installment credit to
individuals secured by automobiles and other personal property including
manufactured housing. Indirect installment loans represent $675.7
million of total consumer loans. Real estate construction and
development loans include commercial construction and development and
residential construction loans. Commercial construction loans are for small and
medium sized office buildings and other commercial properties and residential
construction loans are primarily for projects located in upstate New York and
northeastern Pennsylvania.
Lease
financing receivables primarily represent automobile financing to customers
through direct financing leases and are carried at the aggregate of the lease
payments receivable and the estimated residual values, net of unearned income
and net deferred lease origination fees and costs. Net deferred lease
origination fees and costs are amortized under the effective interest method
over the estimated lives of the leases.
One of
the most significant risks associated with leasing operations is the recovery of
the residual value of the leased vehicles at the termination of the
lease. At termination, the lessor has the option to purchase the
vehicle or may turn the vehicle over to the Company. The residual values
included in lease financing receivables totaled $58.6 million and $58.4 million
at December 31, 2008 and 2007, respectively. The estimated residual
value related to the total lease portfolio is reviewed quarterly. If
it is determined that there has been a decline in the estimated fair value of
the residual that is judged by management to be other-than-temporary, including
consideration of residual value insurance, a loss is
recognized. Adjustments related to such other-than-temporary declines
in estimated fair value are recorded within noninterest expenses in the
consolidated statements of income. The Company recorded an
other-than-temporary impairment charge on lease residual assets totaling $2.0
million during the third quarter of 2008 as a result of a decline in the fair
value of lease residual assets associated with certain leased
vehicles.
The
following table, Maturities and Sensitivities of Certain Loans to Changes in
Interest Rates, summarizes the maturities of the commercial and agricultural and
real estate construction and development loan portfolios and the sensitivity of
those loans to interest rate fluctuations at December 31,
2008. Scheduled repayments are reported in the maturity category in
which the contractual payment is due.
|
Table 4. Maturities and Sensitivities of Certain
Loans to Changes in Interest Rates
|
||||||||||||||||
|
Remaining maturity at December 31,
2008
|
||||||||||||||||
|
(In thousands)
|
Within One Year
|
After
One Year But Within Five Years
|
After Five Years
|
Total
|
||||||||||||
|
Floating/adjustable
rate
|
||||||||||||||||
|
Commercial,
commercial real estate, agricultural,and agricultural real
estate
|
$ | 318,868 | $ | 100,704 | $ | 3,614 | $ | 423,186 | ||||||||
|
Real
estate construction and development
|
36,671 | 1,181 | - | 37,852 | ||||||||||||
|
Total
floating rate loans
|
355,539 | 101,885 | 3,614 | 461,038 | ||||||||||||
|
Fixed
rate
|
||||||||||||||||
|
Commercial,
commercial real estate, agricultural,and agricultural real
estate
|
384,238 | 379,122 | 168,797 | 932,157 | ||||||||||||
|
Real
estate construction and development
|
15,289 | 3,950 | 10,770 | 30,009 | ||||||||||||
|
Total
fixed rate loans
|
399,527 | 383,072 | 179,567 | 962,166 | ||||||||||||
|
Total
|
$ | 755,066 | $ | 484,957 | $ | 183,181 | $ | 1,423,204 | ||||||||
SECURITIES
AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The
average balance of the amortized cost for securities available for sale
decreased $21.0 million, or 1.9%, from $1.1 billion in 2007. The yield on
average securities available for sale was 5.10% for 2008 compared to 5.05% in
2007.
The
average balance of securities held to maturity increased from $144.5 million in
2007 to $149.8 million in 2008. At December 31, 2008, securities held to
maturity were comprised primarily of tax-exempt municipal securities. The yield
on securities held to maturity decreased from 6.16% in 2007 to 5.63% in 2008 due
to reinvestments during 2008 in lower yielding securities resulting from
interest rate cuts by the FRB during 2008.
The
average balance of FRB and Federal Home Loan Bank (FHLB) stock increased to
$39.7 million in 2008 from $34.0 million in 2007. This increase was
driven primarily by increases in average borrowings from 2007 to 2008, which
directly impacts FHLB holdings. The yield from investments in FRB and
FHLB Banks decreased from 7.22% in 2007 to 6.13% in 2008 due to decreases in
dividend rates from FHLB during 2008.
The
Company classifies its securities at date of purchase as either available for
sale, held to maturity or trading. Held to maturity debt securities
are those that the Company has the ability and intent to hold until
maturity. Available for sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on available
for sale securities are excluded from earnings and are reported in stockholders’
equity as a component of accumulated other comprehensive income or loss. Held to
maturity securities are recorded at amortized cost. Trading securities are
recorded at fair value, with net unrealized gains and losses recognized in
income. Transfers of securities between categories are recorded at
fair value at the date of transfer. A decline in the fair value of any available
for sale or held to maturity security below cost that is deemed
other-than-temporary is charged to earnings resulting in the establishment of a
new cost basis for the security. Securities with an other than
temporary impairment are generally placed on non-accrual status.
Non-marketable
equity securities are carried at cost, with the exception of small business
investment company (SBIC) investments, which are carried at fair value in
accordance with SBIC rules.
Premiums
and discounts are amortized or accreted over the life of the related security as
an adjustment to yield using the interest method. Dividend and interest income
are recognized when earned. Realized gains and losses on
securities sold are derived using the specific identification method
for
determining the cost of securities sold.
|
Table 5. Securities
Portfolio
|
||||||||||||||||||||||||
|
As of December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||||||||
|
(In
thousands)
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||||||||
|
Securities
available for sale
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 59 | $ | 67 | $ | 10,042 | $ | 10,077 | $ | 10,516 | $ | 10,487 | ||||||||||||
|
Federal
Agency and mortgage-backed
|
565,970 | 579,796 | 704,308 | 705,354 | 744,078 | 731,754 | ||||||||||||||||||
|
State
& Municipal, collateralized mortgage obligations and other
securities
|
532,918 | 539,802 | 418,654 | 424,683 | 361,854 | 364,081 | ||||||||||||||||||
|
Total
securities available for sale
|
$ | 1,098,947 | $ | 1,119,665 | $ | 1,133,004 | $ | 1,140,114 | $ | 1,116,448 | $ | 1,106,322 | ||||||||||||
|
Securities
held to maturity
|
||||||||||||||||||||||||
|
Federal
Agency and mortgage-backed
|
$ | 2,372 | $ | 2,467 | $ | 2,810 | $ | 2,909 | $ | 3,434 | $ | 3,497 | ||||||||||||
|
State
& Municipal
|
136,259 | 137,263 | 145,458 | 145,767 | 132,213 | 132,123 | ||||||||||||||||||
|
Other
securities
|
1,578 | 1,578 | 843 | 843 | 667 | 667 | ||||||||||||||||||
|
Total
securities held to maturity
|
$ | 140,209 | $ | 141,308 | $ | 149,111 | $ | 149,519 | $ | 136,314 | $ | 136,287 | ||||||||||||
In the
available for sale category at December 31, 2008, federal agency securities were
comprised of Government-Sponsored Enterprise (“GSE”) securities;
Mortgaged-backed securities were comprised of GSEs with an amortized cost of
$313.7 million and a fair value of $321.0 million and US Government Agency
securities with an amortized cost of $38.2 million and a fair value of $39.7
million; Collateralized mortgage obligations were comprised of GSEs with an
amortized cost of $204.1 million and a fair value of $205.6 million and US
Government Agency securities with an amortized cost of $172.0 million and a fair
value of $174.6 million. At December 31, 2008, all of the mortgaged-backed
securities held to maturity were comprised of US Government Agency
securities.
The
following tables set forth information with regard to contractual maturities of
debt securities at December 31, 2008:
|
(In thousands)
|
Amortized cost
|
Estimated fair value
|
Weighted Average Yield
|
|||||||||
|
Debt
securities classified as available for sale
|
||||||||||||
|
Within
one year
|
$ | 27,075 | $ | 27,447 | 4.36 | % | ||||||
|
From
one to five years
|
175,125 | 178,107 | 4.18 | % | ||||||||
|
From
five to ten years
|
388,180 | 399,259 | 4.76 | % | ||||||||
|
After
ten years
|
498,092 | 504,085 | 4.75 | % | ||||||||
| $ | 1,088,472 | $ | 1,108,898 | |||||||||
|
Debt
securities classified as held to maturity
|
||||||||||||
|
Within
one year
|
$ | 75,141 | $ | 75,192 | 2.98 | % | ||||||
|
From
one to five years
|
34,547 | 34,929 | 3.89 | % | ||||||||
|
From
five to ten years
|
22,530 | 23,075 | 4.02 | % | ||||||||
|
After
ten years
|
7,991 | 8,112 | 5.11 | % | ||||||||
| $ | 140,209 | $ | 141,308 | |||||||||
FUNDING
SOURCES AND CORRESPONDING INTEREST EXPENSE
The
Company utilizes traditional deposit products such as time, savings, NOW, money
market, and demand deposits as its primary source for funding. Other sources,
such as short-term FHLB advances, federal funds purchased, securities sold under
agreements to repurchase, brokered time deposits, and long-term FHLB borrowings
are utilized as necessary to support the Company’s growth in assets and to
achieve interest rate sensitivity objectives. The average balance of
interest-bearing liabilities increased $88.8 million, totaling $4.1 billion in
2008 from $4.0 billion in 2007. The rate paid on interest-bearing
liabilities decreased from 3.52% in 2007 to 2.64% in 2008. This decrease caused
a decrease in interest expense of $32.7 million, or 23.2%, from $141.1 million
in 2007 to $108.4 million in 2008.
DEPOSITS
Average
interest bearing deposits decreased $34.3 million, or 1.0%, during 2008 compared
to 2007. The decrease resulted primarily from a decrease in time deposits,
partially offset by increases in money market deposits and NOW account
deposits. Average time deposits decreased $167.2 million or 10.0%
during 2008 as compared to 2007. The decrease in average time deposits resulted
primarily from decreases in municipal and negotiated rate time
deposits. Average money market deposits increased $114.9 million or
17.3% during 2008 when compared to 2007. The increase in average
money market deposits resulted primarily from an increase in personal money
market deposits. Average NOW accounts increased $35.9 million or 8.0%
during 2008 as compared to 2007. This increase was due primarily to
increases in municipal NOW accounts. The average balance of savings
accounts decreased $18.0 million or 3.7% during 2008 when compared to
2007. The average balance of demand deposits increased $43.2 million,
or 6.8%, from $639.4 million in 2007 to $682.6 million in 2008. This
growth in demand deposits was driven principally by increases in accounts from
retail customers.
The rate
paid on average interest-bearing deposits decreased from 3.26% during 2007 to
2.35% in 2008. The decrease in the rate on interest-bearing deposits was driven
primarily by pricing decreases from money market accounts and time deposits,
which are sensitive to interest rate changes. The pricing decreases for these
products resulted from decreases in short-term rates by the FRB during 2008
combined with an overall decrease in market rates. The rates paid for
money market deposit accounts decreased from 3.38% during 2007 to 1.85% during
2008. The rate paid for savings deposits decreased from 0.89% in 2007
to 0.46% in 2008 and the rate paid on time deposits decreased from 4.54% during
2007 to 3.68% during 2008.
The
following table presents the maturity distribution of time deposits of $100,000
or more at December 31, 2008 and December 31, 2007:
|
Table 6. Maturity Distribution of Time Deposits of
$100,000 or More
|
||||||||
|
December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Within
three months
|
$ | 240,788 | $ | 446,347 | ||||
|
After
three but within twelve months
|
134,097 | 214,368 | ||||||
|
After
one but within three years
|
35,735 | 28,468 | ||||||
|
Over
three years
|
18,130 | 5,082 | ||||||
|
Total
|
$ | 428,750 | $ | 694,265 | ||||
BORROWINGS
Average
short-term borrowings decreased $56.3 million to $223.8 million in
2008. The average rate paid on short-term borrowings decreased from
4.62% in 2007 to 2.17% in 2008, which was primarily driven by the FRB decreasing
the Fed Funds target rate (which directly impacts short-term borrowing rates)
400 bp in 2008. Average long-term debt increased from $384.0 million
in 2007 to $563.5 million in 2008, which was primarily due to the Company’s
strategy of mitigating interest rate risk exposure by securing long term
borrowings in the relatively low rate environment.
The
average balance of trust preferred debentures remained at $75.4 million in 2008
compared to 2007. The average rate paid for trust preferred
debentures in 2008 was 6.29%, down from 6.74% in 2007. The decrease in rate on
the trust preferred debentures is due primarily to the previously mentioned
decrease in short-term rates during 2008.
Short-term
borrowings consist of Federal funds purchased and securities sold under
repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily FHLB advances, with
original maturities of one year or less. The Company has unused lines of credit
and access to brokered deposits available for short-term financing of
approximately $771 million and $804 million at
December 31, 2008 and 2007, respectively. Securities collateralizing
repurchase agreements are held in safekeeping by non-affiliated financial
institutions and are under the Company’s
control. Long-term debt, which is comprised
primarily of FHLB advances, are collateralized by the FHLB
stock owned by the Company, certain of its mortgage-backed securities and a
blanket lien on its residential real estate mortgage loans.
RISK
MANAGEMENT-CREDIT RISK
Credit
risk is managed through a network of loan officers, credit committees, loan
policies, and oversight from the senior credit officers and Board of Directors.
Management follows a policy of continually identifying, analyzing, and grading
credit risk inherent in each loan portfolio. An ongoing independent review,
subsequent to management’s review, of individual credits in the commercial loan
portfolio is performed by the independent loan review function. These components
of the Company’s underwriting and monitoring functions are critical to the
timely identification, classification, and resolution of problem
credits.
NONPERFORMING
ASSETS
|
Table 7. Nonperforming
Assets
|
||||||||||||||||||||
|
As of December 31,
|
||||||||||||||||||||
|
(Dollars in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Nonaccrual
loans
|
||||||||||||||||||||
|
Commercial
and agricultural loans and real estate
|
$ | 15,891 | $ | 20,491 | $ | 9,346 | $ | 9,373 | $ | 10,550 | ||||||||||
|
Real
estate mortgages
|
3,803 | 1,372 | 2,338 | 2,009 | 2,553 | |||||||||||||||
|
Consumer
|
3,468 | 2,934 | 1,981 | 2,037 | 1,888 | |||||||||||||||
|
Troubled
debt restructured loans
|
1,029 | 4,900 | - | - | - | |||||||||||||||
|
Total
nonaccrual loans
|
24,191 | 29,697 | 13,665 | 13,419 | 14,991 | |||||||||||||||
|
Loans
90 days or more past due and still accruing
|
||||||||||||||||||||
|
Commercial
and agricultural loans and real estate
|
12 | 51 | 138 | - | - | |||||||||||||||
|
Real
estate mortgages
|
770 | 295 | 682 | 465 | 737 | |||||||||||||||
|
Consumer
|
1,523 | 536 | 822 | 413 | 449 | |||||||||||||||
|
Total
loans 90 days or more past due and still accruing
|
2,305 | 882 | 1,642 | 878 | 1,186 | |||||||||||||||
|
Total
nonperforming loans
|
26,496 | 30,579 | 15,307 | 14,297 | 16,177 | |||||||||||||||
|
Other
real estate owned
|
665 | 560 | 389 | 265 | 428 | |||||||||||||||
|
Total
nonperforming loans and other real estate owned
|
27,161 | 31,139 | 15,696 | 14,562 | 16,605 | |||||||||||||||
|
Total
nonperforming loans to loans and leases
|
0.73 | % | 0.88 | % | 0.45 | % | 0.47 | % | 0.56 | % | ||||||||||
|
Total
nonperforming loans and other real estate owned to total
assets
|
0.51 | % | 0.60 | % | 0.31 | % | 0.33 | % | 0.39 | % | ||||||||||
|
Total
allowance for loan and lease losses to nonperforming loans
|
221.03 | % | 177.19 | % | 330.48 | % | 331.92 | % | 277.75 | % | ||||||||||
The allowance for loan
and lease losses is maintained at a level estimated by
management to provide adequately for
risk of probable losses inherent in the
current loan and lease portfolio.
The adequacy of the allowance for loan and lease losses is continuously
monitored. It is assessed for adequacy using a methodology designed
to ensure the level of the allowance reasonably reflects the loan and lease
portfolio’s risk profile. It is evaluated to ensure that it is sufficient to
absorb all reasonably estimable credit losses inherent in the current loan and
lease portfolio.
Management
considers the accounting policy relating to the allowance for loan and lease
losses to be a critical accounting policy given the inherent uncertainty in
evaluating the levels of the allowance required to cover credit losses in the
portfolio and the material effect that such judgments can have on the
consolidated results of operations.
For
purposes of evaluating the adequacy of the allowance, the Company considers a
number of significant factors that affect the collectibility of the
portfolio. For individually analyzed loans, these include estimates
of loss exposure, which reflect the facts and circumstances that affect the
likelihood of repayment of such loans as of the evaluation date. For homogeneous
pools of loans and leases, estimates of the Company’s exposure to credit loss
reflect a current assessment of a number of factors, which could affect
collectibility. These factors include: past loss
experience; size, trend, composition, and nature of
loans; changes in lending policies and procedures, including
underwriting standards and
collection, charge-offs and recoveries; trends
experienced in nonperforming and delinquent loans; current economic conditions
in the Company’s market; portfolio concentrations that may affect
loss experienced across one or more components of the portfolio; the effect of
external factors such as competition, legal and regulatory requirements; and the
experience, ability, and depth of lending management and staff. In
addition, various regulatory agencies, as an integral component of their
examination process, periodically review the Company’s allowance for loan and
lease losses. Such agencies may require the Company to recognize
additions to the allowance based on their examination.
After a
thorough consideration of the factors discussed above, any required additions to
the allowance for loan and lease losses are made periodically by charges to the
provision for loan and lease losses. These charges are necessary to maintain the
allowance at a level which management believes is reasonably reflective of
overall inherent risk of probable loss in the portfolio. While management uses
available information to recognize losses on loans and leases, additions to the
allowance may fluctuate from one reporting period to another. These
fluctuations are reflective of changes in risk associated with portfolio content
and/or changes in management’s assessment of any or all of the determining
factors discussed above.
Total
nonperforming assets were $27.2 million at December 31, 2008, compared to $31.1
million at December 31, 2007. Nonperforming loans totaled $26.5
million at December 31, 2008, down from $30.6 million outstanding at December
31, 2007. The decrease in 2008 was primarily due to net charge-offs
during the 12 month period ending December 31, 2008 related to two large
commercial loans, both of which had been previously identified and reserved for
in 2007. The Company recorded a provision for loan and lease losses
of $27.2 million during 2008 compared with $30.1 million for
2007. This decrease was due primarily to the provision in the fourth
quarter of 2007 related to one of the aforementioned loans and the overall
decrease in nonperforming loans. Nonperforming loans as a percentage
of total loans and leases decreased to 0.73% for December 31, 2008 from 0.88% at
December 31, 2007. The allowance for loan and lease losses was
221.03% of non-performing loans at December 31, 2008 as compared to 177.19% at
December 31, 2007.
Impaired
loans, which primarily consist of nonaccruing commercial, commercial real
estate, agricultural, and agricultural real estate loans decreased to $11.3
million at December 31, 2008 as compared to $21.5 million at December 31, 2007.
At December 31, 2008, $1.7 million of the total impaired loans had a specific
reserve allocation of $0.6 million compared to $12.8 million of impaired loans
at December 31, 2007 which had a specific reserve allocation of $5.1
million.
Total net
charge-offs for 2008 were $22.8 million as compared with $26.5 million for
2007. The decrease in net charge-offs for the 12 months ended
December 31, 2008 was due primarily to higher charge-offs in 2007 related to one
of the aforementioned loans. The ratio of net charge-offs to average
loans and leases was 0.64% for 2008 compared to 0.77% for 2007. Gross
charge-offs decreased $4.6 million, totaling $26.7 million for 2008 compared to
$31.2 million for 2007. Recoveries declined slightly from $4.7
million for the 12 months ended December 31, 2007 to $4.2 million for the 12
month period ending December 31, 2008. The allowance for loan and
lease losses as a percentage of total loans and leases was 1.60% at December 31,
2008 and 1.57% at December 31, 2007.
|
Table 8. Allowance for Loan and Lease
Losses
|
||||||||||||||||||||
|
(Dollars in thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Balance
at January 1
|
$ | 54,183 | $ | 50,587 | $ | 47,455 | $ | 44,932 | $ | 42,651 | ||||||||||
|
Loans
and leases charged-off
|
||||||||||||||||||||
|
Commercial
and agricultural
|
14,464 | 20,349 | 6,132 | 3,403 | 4,595 | |||||||||||||||
|
Real
estate mortgages
|
543 | 1,032 | 542 | 741 | 772 | |||||||||||||||
|
Consumer*
|
11,985 | 9,862 | 6,698 | 6,875 | 6,239 | |||||||||||||||
|
Total
loans and leases charged-off
|
26,992 | 31,243 | 13,372 | 11,019 | 11,606 | |||||||||||||||
|
Recoveries
|
||||||||||||||||||||
|
Commercial
and agricultural
|
1,411 | 1,816 | 1,939 | 1,695 | 2,547 | |||||||||||||||
|
Real
estate mortgages
|
68 | 125 | 239 | 438 | 215 | |||||||||||||||
|
Consumer*
|
2,713 | 2,804 | 2,521 | 1,945 | 1,510 | |||||||||||||||
|
Total
recoveries
|
4,192 | 4,745 | 4,699 | 4,078 | 4,272 | |||||||||||||||
|
Net
loans and leases charged-off
|
22,800 | 26,498 | 8,673 | 6,941 | 7,334 | |||||||||||||||
|
Allowance
related to purchase acquisitions
|
- | - | 2,410 | - | - | |||||||||||||||
|
Provision
for loan and lease losses
|
27,181 | 30,094 | 9,395 | 9,464 | 9,615 | |||||||||||||||
|
Balance
at December 31
|
$ | 58,564 | $ | 54,183 | $ | 50,587 | $ | 47,455 | $ | 44,932 | ||||||||||
|
Allowance
for loan and lease losses to loans and leases outstanding at end of
year
|
1.60 | % | 1.57 | % | 1.48 | % | 1.57 | % | 1.57 | % | ||||||||||
|
Net
charge-offs to average loans and leases outstanding
|
0.64 | % | 0.77 | % | 0.26 | % | 0.23 | % | 0.27 | % | ||||||||||
*
Consumer charge-offs and recoveries include consumer, home equity, and lease
financing.
Total
nonperforming assets were $31.1 million at December 31, 2007, compared to $15.7
million at December 31, 2006. Nonperforming loans totaled $30.6
million at December 31, 2007, up from the $15.3 million outstanding at December
31, 2006. The increase in 2007 was primarily due to one
owner-occupied commercial real estate relationship and several dairy credits
becoming nonperforming during the second quarter, as well as one large
commercial loan becoming nonperforming during the fourth quarter. The
Company recorded a provision for loan and lease losses of $30.1 million during
2007 compared with $9.4 million for 2006. This increase was due to an
increase in nonperforming loans and charge-offs during the
period. Nonperforming loans as a percentage of total loans and leases
increased to 0.88% for December 31, 2007 from 0.45% at December 31, 2006. The
total allowance for loan and lease losses was 177.19% of non-performing loans at
December 31, 2007 as compared to 330.48% at December 31, 2006.
Total net
charge-offs for 2007 totaled $26.5 million as compared to $8.7 million for 2006.
The ratio of net charge-offs to average loans and leases was 0.77% for 2007
compared to 0.26% for 2006. Gross charge-offs increased $17.8 million, totaling
$31.2 million for 2007 compared to $13.4 million for 2006. Recoveries remained
consistent at $4.7 million for 2006 and 2007. The provision for loan and lease
losses increased to $30.1 million in 2007 from $9.4 million in 2006. The
allowance for loan and lease losses as a percentage of total loans and leases
was 1.57% at December 31, 2007 and 1.48% at December 31, 2006.
In
addition to the nonperforming loans discussed above, the Company has also
identified approximately $95.4 million in potential problem loans at December
31, 2008 as compared to $73.3 million at December 31, 2007. Potential problem
loans are loans that are currently performing, but where known information about
possible credit problems of the related borrowers causes management to have
concerns as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in disclosure of such loans as
nonperforming at some time in the future. At the Company, potential problem
loans are typically loans that are performing but are classified by the
Company’s loan rating system as “substandard.” At December 31, 2008 and 2007,
potential problem loans primarily consisted of commercial and agricultural
loans. At December 31, 2008, there were 21 potential problem loans
that exceeded $1.0 million, totaling $41.2 million in aggregate compared to 13
potential problem loans exceeding $1.0 million, totaling $28.5 million at
December 31, 2007. Management cannot predict the extent to which economic
conditions may worsen or other factors which may impact borrowers and the
potential problem loans. Accordingly, there can be no assurance that
other loans will not become 90 days or more past due, be placed on nonaccrual,
become restructured, or require increased allowance coverage and provision for
loan losses.
The
following table sets forth the allocation of the allowance for loan losses by
category, as well as the percentage of loans and leases in each category to
total loans and leases, as prepared by the Company. This allocation is based on
management’s assessment of the risk characteristics of each of the component
parts of the total loan portfolio as of a given point in time and is subject to
changes as and when the risk factors of each such component part
change. The allocation is not indicative of either the specific
amounts of the loan categories in which future charge-offs may be taken, nor
should it be taken as an indicator of future loss trends. The allocation of the
allowance to each category does not restrict the use of the allowance to absorb
losses in any category. The following table sets forth the allocation
of the allowance for loan losses by loan category:
|
Table 9. Allocation of the Allowance for Loan and
Lease Losses
|
||||||||||||||||||||||||||||||||||||||||
|
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Allowance
|
Category
Percent of Loans
|
Allowance
|
Category
Percent of Loans
|
Allowance
|
Category
Percent of Loans
|
Allowance
|
Category
Percent of Loans
|
Allowance
|
Category
Percent of of Loans
|
||||||||||||||||||||||||||||||
|
Commercial
and agricultural
|
$ | 33,231 | 39 | % | $ | 32,811 | 41 | % | $ | 28,149 | 43 | % | $ | 30,257 | 43 | % | $ | 28,158 | 44 | % | ||||||||||||||||||||
|
Real
estate mortgages
|
3,143 | 20 | % | 3,277 | 21 | % | 3,377 | 22 | % | 3,148 | 23 | % | 4,029 | 25 | % | |||||||||||||||||||||||||
|
Consumer
|
21,908 | 41 | % | 17,362 | 38 | % | 17,327 | 35 | % | 12,402 | 34 | % | 10,887 | 31 | % | |||||||||||||||||||||||||
|
Unallocated
|
282 | 0 | % | 733 | 0 | % | 1,734 | 0 | % | 1,648 | 0 | % | 1,858 | 0 | % | |||||||||||||||||||||||||
|
Total
|
$ | 58,564 | 100 | % | $ | 54,183 | 100 | % | $ | 50,587 | 100 | % | $ | 47,455 | 100 | % | $ | 44,932 | 100 | % | ||||||||||||||||||||
For 2008,
the reserve allocation for commercial and agricultural loans increased slightly
to $33.2 million from $32.8 million in 2007. The reserve allocation
for real estate mortgages decreased slightly from $3.3 million in 2007 to $3.1
million in 2008. The reserve allocation for consumer loans increased
from $17.4 million in 2007 to $21.9 million in 2008. This 26.2%
increase was due in large part to the 13.7% increase in consumer loans from 2007
to 2008.
At
December 31, 2008, approximately 59.8% of the Company’s loans are secured by
real estate located in central and northern New York and northeastern
Pennsylvania. Accordingly, the ultimate collectibility of a
substantial portion of the Company’s portfolio is susceptible to changes in
market conditions of those areas. Management is not aware of any material
concentrations of credit to any industry or individual borrowers.
Subprime
mortgage lending, which has been the riskiest sector of the residential housing
market, is not a market that the Company has ever actively
pursued. The market does not apply a uniform definition of what
constitutes “subprime” lending. Our reference to subprime lending
relies upon the “Statement on Subprime Mortgage Lending” issued by the OTS and
the other federal bank regulatory agencies, or the Agencies, on June 29, 2007,
which further referenced the “Expanded Guidance for Subprime Lending Programs,”
or the Expanded Guidance, issued by the Agencies by press release dated January
31, 2001. In the Expanded Guidance, the Agencies indicated that
subprime lending does not refer to individual subprime loans originated and
managed, in the ordinary course of business, as exceptions to prime risk
selection standards. The Agencies recognize that many prime loan
portfolios will contain such accounts. The Agencies also excluded
prime loans that develop credit problems after acquisition and community
development loans from the subprime arena. According to the Expanded
Guidance, subprime loans are other loans to borrowers which display one or more
characteristics of reduced payment capacity. Five specific criteria,
which are not intended to be exhaustive and are not meant to define specific
parameters for all subprime borrowers and may not match all markets or
institutions’ specific subprime definitions, are set forth, including having a
FICO score of 660 or below. Based upon the definition and exclusions
described above, the Company is a prime lender. Within the loan
portfolio, there are loans that, at the time of origination, had FICO scores of
660 or below. However, since the Company is a portfolio lender, it
reviews all data contained in borrower credit reports and does not base
underwriting decisions solely on FICO scores. We believe the
aforementioned loans, when made, were amply collateralized and otherwise
conformed to our prime lending standards.
LIQUIDITY
Liquidity
involves the ability to meet the cash flow requirements of customers who may be
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. The Asset
Liability Committee (ALCO) is responsible for liquidity management and has
developed guidelines which cover all assets and liabilities, as well as off
balance sheet items that are potential sources or uses of liquidity. Liquidity
policies must also provide the flexibility to implement appropriate strategies
and tactical actions. Requirements change as loans and leases grow, deposits and
securities mature, and payments on borrowings are made. Liquidity management
includes a focus on interest rate sensitivity management with a goal of avoiding
widely fluctuating net interest margins through periods of changing economic
conditions.
The
primary liquidity measurement the Company utilizes is called Basic Surplus which
captures the adequacy of its access to reliable sources of cash relative to the
stability of its funding mix of average liabilities. This approach recognizes
the importance of balancing levels of cash flow liquidity from short and
long-term securities with the availability of dependable borrowing sources which
can be accessed when necessary. At December 31, 2008, the Company’s Basic
Surplus measurement was 6.6% of total assets or $352 million, which was above
the Company’s minimum of 5% (calculated at $267 million of period end total
assets at December 31, 2008) set forth in its liquidity policies.
This
Basic Surplus approach enables the Company to adequately manage liquidity from
both operational and contingency perspectives. By tempering the need for cash
flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit
pricing strategies are impacted by the liquidity position. At
December 31, 2008, the Company considered its Basic Surplus position to be
adequate. However, certain events may adversely impact the Company’s
liquidity position in 2009. Improvement in the economy may increase
demand for equity related products or increase competitive pressure on deposit
pricing, which in turn, could result in a decrease in the Company’s deposit base
or increase funding costs. Additionally, liquidity will come under additional
pressure if loan growth exceeds deposit growth in 2009. These
scenarios could lead to a decrease in the Company’s basic surplus measure below
the minimum policy level of 5%. To manage this risk, the Company has
the ability to purchase brokered time deposits, borrow against established
borrowing facilities with other banks (Federal funds), and enter into repurchase
agreements with investment companies. The additional liquidity that could be
provided by these measures was $771 million at December 31, 2008.
At
December 31, 2008, a portion of the Company’s loans and securities were pledged
as collateral on borrowings. Therefore, future growth of earning
assets will depend upon the Company’s ability to obtain additional funding,
through growth of core deposits and collateral management, and may require
further use of brokered time deposits, or other higher cost borrowing
arrangements.
Net cash
flows provided by operating activities totaled $87.4 million in 2008 and $85.8
million in 2007. The critical elements of net operating cash flows include net
income, after adding back provision for loan and lease losses, and depreciation
and amortization.
Net cash
used in investing activities totaled $216.6 million in 2008 and $97.6 million in
2007. Critical elements of investing activities are loan and investment
securities transactions. The increase in cash used in investing activities in
2008 was primarily due to loan growth in 2008 as compared with
2007. The net increase in loans was $220.7 million in 2008 as
compared to $70.1 million in 2007.
Net cash
flows provided by financing activities totaled $76.6 million in 2008 and $36.0
million in 2007. The critical elements of financing activities are proceeds from
deposits, borrowings, and stock issuances. In addition, financing
activities are impacted by dividends and treasury stock
transactions. In 2008, the Company had a net decrease in short term
borrowings of approximately $162.0 million as compared with a net increase in
short-term borrowings of $23.1 million in 2007. This decrease in
short-term borrowings in 2008 was offset by an increase from proceeds from
long-term debt in 2008 over 2007. Proceeds from the issuance of
long-term debt totaled $340.0 million in 2008 and $150.0 million in
2007. In addition, the Company purchased 272,840 shares of its common
stock for approximately $5.9 million during 2008 as compared with the purchase
of 2,261,267 shares of its common stock for approximately $49.0 million in
2007.
In
connection with its financing and operating activities, the Company has entered
into certain contractual obligations. The Company’s future minimum cash
payments, excluding interest, associated with its contractual obligations
pursuant to its borrowing agreements and operating leases at December 31, 2008
are as follows:
Contractual
Obligations
(In
thousands)
|
Payments Due by Period
|
||||||||||||||||||||||||||||
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
Long-term
debt obligations
|
$ | 40,000 | $ | 79,000 | $ | 89,444 | $ | 25,025 | $ | 150,000 | $ | 248,740 | $ | 632,209 | ||||||||||||||
|
Trust
preferred debentures
|
- | - | - | - | - | 75,422 | 75,422 | |||||||||||||||||||||
|
Operating
lease obligations
|
4,226 | 3,677 | 3,440 | 3,025 | 2,343 | 19,555 | 36,266 | |||||||||||||||||||||
|
Retirement
plan obligations
|
4,566 | 4,619 | 4,637 | 4,728 | 4,864 | 37,000 | 60,414 | |||||||||||||||||||||
|
Data
processing commitments
|
10,294 | 9,569 | 1,037 | 259 | - | - | 21,159 | |||||||||||||||||||||
|
Total
contractual obligations
|
$ | 59,086 | $ | 96,865 | $ | 98,558 | $ | 33,037 | $ | 157,207 | $ | 380,717 | $ | 825,470 | ||||||||||||||
OFF-BALANCE
SHEET RISK COMMITMENTS TO EXTEND CREDIT
The
Company makes contractual commitments to extend credit, which include unused
lines of credit, which are subject to the Company’s credit approval and
monitoring procedures. At December 31, 2008 and 2007, commitments to
extend credit in the form of loans, including unused lines of credit, amounted
to $537.6 million and $546.8 million, respectively. In the opinion of
management, there are no material commitments to extend credit, including unused
lines of credit, that represent unusual risks. All commitments to extend credit
in the form of loans, including unused lines of credit, expire within one
year.
STAND-BY LETTERS OF CREDIT
The
Company does not issue any guarantees that would require liability-recognition
or disclosure, other than its stand-by letters of credit. The Company
guarantees the obligations or performance of customers by issuing stand-by
letters of credit to third parties. These stand-by letters of credit are
frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities. The risk involved
in issuing stand-by letters of credit is essentially the same as the credit risk
involved in extending loan facilities to customers, and they are subject to the
same credit origination, portfolio maintenance and management procedures in
effect to monitor other credit and off-balance sheet
products. Typically, these instruments have terms of five years or
less and expire unused; therefore, the total amounts do not necessarily
represent future cash requirements. At December 31, 2008 and 2007,
outstanding stand-by letters of credit were approximately $27.6 million and
$27.5 million, respectively. The fair value of the Company’s stand-by letters of
credit at December 31, 2008 and 2007 was not
significant. The following table sets forth the
commitment
expiration period for stand-by letters of credit at December 31, 2008:
|
Commitment Expiration of Stand-by Letters of
Credit
|
||||
|
Within
one year
|
$ | 11,601 | ||
|
After
one but within three years
|
14,795 | |||
|
After
three but within five years
|
1,235 | |||
|
After
five years
|
- | |||
|
Total
|
$ | 27,631 | ||
LOANS
SERVICED FOR OTHERS AND LOANS SOLD WITH RECOURSE
The total
amount of loans serviced by the Company for unrelated third parties was
approximately $141.4 million and $125.5 million at December 31, 2008 and 2007,
respectively. At December 31, 2008 and 2007, the Company serviced
$11.2 million and $8.9 million, respectively, of loans sold with recourse. Due
to collateral on these loans, no reserve is considered necessary at December 31,
2008 and 2007.
CAPITAL
RESOURCES
Consistent
with its goal to operate a sound and profitable financial institution, the
Company actively seeks to maintain a “well-capitalized” institution in
accordance with regulatory standards. The principal source of capital to the
Company is earnings retention. The Company’s capital measurements are in excess
of both regulatory minimum guidelines and meet the requirements to be considered
well-capitalized.
The
Company’s principal source of funds to pay interest on trust preferred
debentures and pay cash dividends to its shareholders is dividends from its
subsidiaries. Various laws and regulations restrict the ability of
banks to pay dividends to their shareholders. Generally, the payment
of dividends by the Company in the future as well as the payment of interest on
the capital securities will require the generation of sufficient future earnings
by its subsidiaries.
The Bank
also is subject to substantial regulatory restrictions on its ability to pay
dividends to the Company. Under OCC regulations, the Bank may not pay a
dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the proposed dividend, exceeds the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. At December 31, 2008, approximately
$46.6 million of the total stockholders’ equity of the Bank was available for
payment of dividends to the Company without approval by the OCC. The Bank’s
ability to pay dividends also is subject to the Bank being in compliance with
regulatory capital requirements. The Bank is currently in compliance with these
requirements.
STOCK
REPURCHASE PLAN
Under
previously disclosed stock repurchase plans, the Company purchased 272,840
shares of its common stock during the year ended December 31, 2008, for a total
of $5.9 million at an average price of $21.77 per share. There were
no shares purchased during the three month period ended December 31,
2008. At December 31, 2008, there were 1,203,040 shares available for
repurchase under previously announced plans.
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 years
indicated:
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Service
charges on deposit accounts
|
$ | 28,143 | $ | 22,742 | $ | 17,590 | ||||||
|
Broker/dealer
and insurance revenue
|
8,726 | 4,255 | 3,936 | |||||||||
|
Trust
|
7,278 | 6,514 | 5,629 | |||||||||
|
Bank
owned life insurance income
|
2,416 | 1,831 | 1,629 | |||||||||
|
ATM
fees
|
8,832 | 8,185 | 7,086 | |||||||||
|
Retirement
plan administration fees
|
6,308 | 6,336 | 5,536 | |||||||||
|
Other
|
8,468 | 7,723 | 8,098 | |||||||||
|
Total
before net securities gains (losses)
|
70,171 | 57,586 | 49,504 | |||||||||
|
Net
securities gains (losses)
|
1,535 | 2,113 | (875 | ) | ||||||||
|
Total
|
$ | 71,706 | $ | 59,699 | $ | 48,629 | ||||||
Noninterest
income for the year ended December 31, 2008 was $71.7 million, up $12.0 million
or 20.1% from $59.7 million for the same period in 2007. The increase
in noninterest income was due primarily to an increase in service charges on
deposit accounts and ATM and debit card fees, which collectively increased $6.0
million due to various initiatives in 2008. In addition, trust
administration income increased $0.8 million for the year ended December 31,
2008, compared with the same period in 2007. This increase stems
primarily from an increase in customer accounts resulting from successful
business development. Broker/dealer and insurance revenue increased
approximately $4.5 million for the year ended December 31, 2008, primarily due
to the acquisition of Mang Insurance Agency, LLC during the third quarter of
2008. Other noninterest income increased $0.7 million for the year
ended December 31, 2008, compared with the same period in 2007. This
increase was due primarily to a death benefit realized during the fourth quarter
of 2008 from a life insurance policy. Net securities gains for the
year ending December 31, 2008 were $1.5 million, compared with $2.1 million for
the year ending December 31, 2007. Excluding the effects of these
securities transactions, noninterest income increased $12.6 million, or 21.9%,
for the years ended December 31, 2008, compared with 2007.
NONINTEREST EXPENSE
Noninterest
expenses are also an important factor in the Company’s results of
operations. The following table sets forth the major components of
noninterest expense for the years indicated:
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Salaries
and employee benefits
|
$ | 71,159 | $ | 59,516 | $ | 62,877 | ||||||
|
Occupancy
|
13,781 | 11,630 | 11,518 | |||||||||
|
Equipment
|
7,539 | 7,422 | 8,332 | |||||||||
|
Data
processing and communications
|
12,694 | 11,400 | 10,454 | |||||||||
|
Professional
fees and outside services
|
10,476 | 9,135 | 7,761 | |||||||||
|
Office
supplies and postage
|
5,346 | 5,120 | 5,330 | |||||||||
|
Amortization
of intangible assets
|
2,105 | 1,645 | 1,649 | |||||||||
|
Loan
collection and other real estate owned
|
2,494 | 1,633 | 1,351 | |||||||||
|
Impairment
on lease residual assets
|
2,000 | - | - | |||||||||
|
Other
|
19,219 | 15,016 | 13,694 | |||||||||
|
Total
noninterest expense
|
$ | 146,813 | $ | 122,517 | $ | 122,966 | ||||||
Noninterest
expense for the year ended December 31, 2008 was $146.8 million, up from $122.5
million for the same period in 2007. Salaries and employee benefits
increased $11.6 million, or 19.6%, for the year ended December 31, 2008,
compared with the same period in 2007. This increase was due
primarily to increases in full time equivalent employees during 2008 and reduced
levels of incentive compensation in 2007 compared with 2008. The
increase in full time equivalent employees was largely due to new branch
activity and the aforementioned acquisition. Occupancy, equipment and
data processing and communications expenses were $34.0 million for the year
ended December 31, 2008, up $3.5 million, or 11.7%, from $30.5 million for the
year ended December 31, 2007. This increase was due primarily to an
increase in expenses related to new branch activity during the past
year. Professional fees and outside services increased $1.3 million
for the year ended December 31, 2008, compared with the same period in 2007, due
primarily to increases in legal and audit fees incurred in 2008, as well as
increases in fees related to the aforementioned noninterest income
initiatives. Loan collection and other real estate owned expenses
were $2.5 million for the year ended December 31, 2008, up from $1.6 million for
same period in 2007. The Company recorded an other than temporary
impairment charge on lease residual assets totaling $2.0 million during the
third quarter of 2008 as a result of declines in the fair value of lease
residual assets associated with certain leased vehicles. Other
operating expenses were $19.2 million for the year ended December 31, 2008, up
$4.2 million from $15.0 million for the year ended December 31,
2007. This increase resulted primarily from losses incurred from
sales of certain returned lease vehicles totaling approximately $1.4 million
during the period due to reduced values of those vehicles. In
addition, Federal Deposit Insurance Corporation (“FDIC”) insurance premiums
increased approximately $1.4 million for the year ended December 31, 2008,
compared with the same period in 2007.
INCOME
TAXES
Income
tax expense for the year ended December 31, 2008 was $25.4 million, up from
$21.8 million for the same period in 2007. The effective rates were
30.3% and 30.2% for the years ended December 31, 2008 and 2007,
respectively.
We calculate our current and deferred
tax provision based on estimates and assumptions that could differ from the
actual results reflected in income tax returns filed during the subsequent year.
Adjustments based on filed returns are recorded when identified, which is
generally in the third quarter of the subsequent year for U.S. federal and state
provisions.
The amount of income taxes the Company pays is subject at times to ongoing audits
by federal and state tax authorities, which often result in proposed
assessments. The Company’s
estimate for the potential
outcome for any uncertain tax issue is highly judgmental. The Company believes that it has
adequately provided for any
reasonably foreseeable outcome related to these matters. However, future results
may include favorable or unfavorable adjustments to the estimated tax liabilities in the period
the assessments are proposed or resolved or when statutes of limitation on
potential assessments expire. As a result, the Company’s effective tax rate may fluctuate
significantly on a quarterly or annual basis.
2007
OPERATING RESULTS AS COMPARED TO 2006 OPERATING RESULTS
NET
INTEREST INCOME
On a tax
equivalent basis, the Company’s net interest income for 2007 was $171.3 million,
up from $169.3 million for 2006. The Company’s net interest margin declined to
3.61% for 2007 from 3.70% for 2006. The decline in the net interest margin
resulted primarily from interest-bearing liabilities repricing up faster than
earning assets, offset somewhat by the increase in average demand deposits,
which increased $25.4 million or 4.1% during the period. Earning
assets, particularly those tied to a fixed rate, have not fully realized the
benefit of the higher interest rate environment, since rates for earning assets
with terms three years or longer have remained relatively flat during this
period due to the flat/inverted yield curve. The yield on earning
assets increased 15 basis points (bp), from 6.43% for 2006 to 6.58% for 2007.
Meanwhile, the rate paid on interest bearing liabilities increased 29 bp, from
3.23% for 2006 to 3.52% for 2007. Additionally, offsetting the decline in net
interest margin was an increase in average earning assets of $171.4 million or
3.7%, driven primarily by a $123.2 million increase in average loans and leases.
The increase in average loans and leases was due to in large part to a 17.1%
increase in consumer installment loans.
LOANS
AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The
average balance of loans and leases increased 3.7%, totaling $3.4 billion in
2007 compared to $3.3 billion in 2006. The yield on average loans and leases
increased from 6.99% in 2006 to 7.10% in 2007, as loans, particularly loans
indexed to the Prime Rate and other short-term variable rate indices, benefited
from the rising rate environment in 2007. Interest income from loans and leases
on a FTE basis increased 5.4%, from $230.8 million in 2006 to $243.3 million in
2007. The increase in interest income from loans and leases was due
to the increase in the average balance of loans and leases as well as the
increase in yield on loans and leases in 2007 compared to 2006 noted
above.
Total
loans and leases increased 1.3% at December 31, 2007, totaling $3.5 billion from
$3.4 billion at December 31, 2006. The increase in loans and leases was driven
by strong growth in consumer loans and home equity loans. Residential
real estate mortgages decreased $20.4 million or 2.8% at December 31, 2007
compared to December 31, 2006. Commercial and commercial real estate
decreased $25.5 million at December 31, 2007 when compared to December 31,
2006. Real estate construction and development loans decreased $13.1
million, or 13.9%, from $94.5 million at December 31, 2006 to $81.4 million at
December 31, 2007. Consumer loans increased $68.5 million or 11.7%,
from $586.9 million at December 31, 2006 to $655.4 million at December 31, 2007.
The increase in consumer loans was driven primarily by an increase in indirect
loans of $63.3 million, from $457.4 million in 2006 to $520.7 million in
2007. Home equity loans increased $36.0 million or 6.6% from $546.7
million at December 31, 2006 to $582.7 million at December 31, 2007. The
increase in home equity loans was due to strong product demand and successful
marketing of home equity products.
SECURITIES
AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The
average balance of the amortized cost for securities available for sale
increased $24.4 million, or 2.2%, from $1.1 billion in 2006. The yield on
average securities available for sale was 5.05% for 2007 compared to 4.86% in
2006. The increase in yield on securities available for sale resulted from the
increasing rate environment.
The
average balance of securities held to maturity increased from $115.6 million in
2006 to $144.5 million in 2007. At December 31, 2007, securities held to
maturity were comprised primarily of tax-exempt municipal securities. The yield
on securities held to maturity increased from 6.11% in 2006 to 6.16% in 2007
from higher yields for tax-exempt securities purchased during 2007. Investments
in FRB and FHLB stock decreased to $34.0 million in 2007 from $39.4 million in
2006. This decrease was driven primarily by a decrease in the
investment in FHLB resulting from a decrease in the Company’s borrowing capacity
at FHLB. The yield from investments in FRB and FHLB Banks increased from 5.26%
in 2006 to 7.22% in 2007.
DEPOSITS
Average
interest bearing deposits increased $219.3 million during 2007 compared to 2006.
The increase resulted primarily from increases in time deposits and money market
deposits, partially offset by a decrease in savings deposits. Average
time deposits increased $140.6 million or 9.2% during 2007 when compared to
2006. The increase in average time deposits resulted primarily from increases in
municipal and negotiated rate time deposits. Average money market
deposits increased $120.2 million or 22.1% during 2007 when compared to 2006.
The increase in average money market deposits resulted primarily from an
increase in personal money market deposits. While the average balance
of NOW accounts remained relatively stable, the average balance of savings
accounts decreased $47.2 million or 8.9% during 2007 when compared to 2006. The
decrease in savings accounts was driven primarily from municipal customers
shifting their funds into higher paying money market and time deposits in
2007. The average balance of demand deposits increased $25.4 million,
or 4.1%, from $614.1 million in 2006 to $639.4 million in 2007. Solid growth in
demand deposits was driven principally by increases in accounts from retail
customers.
The rate
paid on average interest-bearing deposits increased from 2.87% during 2006 to
3.26% in 2007. The increase in rate on interest-bearing deposits was driven
primarily by pricing increases from money market accounts and time deposits.
These deposit products are more sensitive to interest rate changes. The pricing
increases for these products resulted from increases in short-term rates by the
FRB during 2006 combined with competitive pricing from market competitors. The
increases by the FRB in 2006 were partially offset by several rate decreases
toward the end of 2007. The rates paid for NOW accounts increased
from 0.74% in 2006 to 0.84% in 2007, while rates paid for savings deposits
increased from 0.86% in 2006 to 0.89% in 2007.
BORROWINGS
Average
short-term borrowings decreased $51.1 million to $280.2 million in
2007. The average rate paid on short-term borrowings decreased from
4.66% in 2006 to 4.62% in 2007, which was primarily driven by the Federal
Reserve Bank decreasing the Fed Funds target rate (which directly impacts
short-term borrowing rates) 100 bp in 2007. Average long-term debt
decreased from $415.0 million in 2006 to $384.0 million in 2007.
NONINTEREST
INCOME
Noninterest
income for the year ended December 31, 2007 was $59.7 million, up $11.1 million
or 22.8% from $48.6 million for the same period in 2006. Fees from
service charges on deposit accounts and ATM and debit cards collectively
increased $6.3 million as the Company focused on enhancing fee income through
various initiatives. Retirement plan administration fees for the year
ended December 31, 2007 increased $0.8 million, compared with the same period in
2006, as a result of our growing client base. Trust administration
income increased $0.9 million for the year ended December 31, 2007, compared
with the same period in 2006. This increase stems from market
appreciation of existing accounts and an increase in customer accounts resulting
from successful business. Net securities gains for the year ended
December 31, 2007 were $2.1 million, compared with net securities losses of $0.9
million for the year ended December 31, 2006. Excluding the effect of
these securities transactions, noninterest income increased $8.1 million, or
16.3%, for the year ended December 31, 2007, compared with the same period in
2006.
NONINTEREST EXPENSE
Noninterest
expense for the year ended December 31, 2007 was $122.5 million, down slightly
from $123.0 million for the same period in 2006. Office expenses, such as
supplies and postage, occupancy, equipment and data processing and
communications charges remained consistent at approximately $35.6 million for
the years ended December 31, 2007 and December 31, 2006. Salaries and
employee benefits decreased $3.4 million, or 5.3%, for the year ended December
31, 2007 compared with the same period in 2006. This decrease was due
primarily to a reduction in the amount of incentive compensation paid, number of
employees, and pension expenses incurred in 2007. Professional fees
and outside services increased $1.4 million for the year ended December 31,
2007, compared with the same period in 2006, due primarily to fees and costs
related to the aforementioned noninterest income initiatives. Other
operating expense for the year ended December 31, 2007 increased $1.3 million
compared with the same period in 2006, primarily due to flood-related insurance
recoveries in 2006.
|
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
|
Interest
rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course
of the Company’s business activities or are immaterial to the results of
operations.
Interest
rate risk is defined as an exposure to a movement in interest rates that could
have an adverse effect on the Company’s net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more
quickly than earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
earning assets mature or reprice more quickly than interest-bearing liabilities,
falling interest rates could result in a decrease in net interest
income.
In an
attempt to manage the Company’s exposure to changes in interest rates,
management monitors the Company’s interest rate risk. Management’s
asset/liability committee (ALCO) meets monthly to review the Company’s interest
rate risk position and profitability, and to recommend strategies for
consideration by the Board of Directors. Management also reviews loan
and deposit pricing, and the Company’s securities portfolio, formulates
investment and funding strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board’s objectives in the most
effective manner. Notwithstanding the Company’s interest rate risk
management activities, the potential for changing interest rates is an
uncertainty that can have an adverse effect on net income.
In
adjusting the Company’s asset/liability position, the Board and management
attempt to manage the Company’s interest rate risk while minimizing the net
interest margin compression. At times, depending on the level of general
interest rates, the relationship between long and short-term interest rates,
market conditions and competitive factors, the Board and management may
determine to increase the Company’s interest rate risk position somewhat in
order to increase its net interest margin. The Company’s results of operations
and net portfolio values remain vulnerable to changes in interest rates and
fluctuations in the difference between long and short-term interest
rates.
The
primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next repricing date (if needed), and current rates is uploaded into the model to
create an ending balance sheet. In
addition, ALCO makes certain assumptions regarding prepayment speeds for loans
and leases and mortgage related investment securities along with any optionality
within the deposits and borrowings. The model is first run under an assumption
of a flat rate scenario (i.e. no change in current interest rates) with a static
balance sheet over a 12-month period. Two additional models are run in which a
gradual increase of 200 bp and a gradual decrease of 100 bp takes place over a
12 month period with a static balance sheet. Under these scenarios,
assets subject to prepayments are adjusted to account for faster or slower
prepayment assumptions. Any investment securities or borrowings that have
callable options embedded into them are handled accordingly based on the
interest rate scenario. The resultant changes in net interest income are then
measured against the flat rate scenario.
In the
declining rate scenario, net interest income is projected to decrease slightly
when compared to the forecasted net interest income in the flat rate scenario
through the simulation period. The decrease in net interest income is a result
of earning assets repricing downward, given potential higher prepayments and
lower reinvestment rates, slightly faster than the interest bearing liabilities
that are at or near their floors. In the rising rate scenarios, net
interest income is projected to experience a decline from the flat rate
scenario. The potential impact on earnings is dependent on the ability to lag
deposit repricing. Net interest income for the next twelve months in the
+200/-100 bp scenarios, as described above, is within the internal policy risk
limits of not more than a 7.5% change in net interest income. The following
table
summarizes the percentage change in net interest income
in the rising and declining rate scenarios over a 12-month period from the
forecasted net interest
income in the flat rate scenario using
the December 31, 2008 balance sheet position:
|
Table 10. Interest Rate Sensitivity
Analysis
|
||||
|
Change
in interest rates
|
Percent
change
|
|||
|
(In basis points)
|
in net interest income
|
|||
|
+200
|
(1.20 | %) | ||
|
-100
|
(0.78 | %) | ||
Under the
flat rate scenario with a static balance sheet, net interest income is
anticipated to remain roughly the same as total net interest income for
2008. The Company anticipates that under the current low rate
environment, on a monthly basis, interest income is expected to decrease at a
faster rate than interest expense given the potential higher prepayments and
reinvestment into lower rates as deposit rates are at or near their respective
floors. In order to protect net interest income from anticipated net
interest margin compression, the Company will continue to focus on increasing
earning assets through loan growth and leverage
opportunities. However, if the Company cannot maintain the level of
earning assets at December 31, 2008, the Company would expect net interest
income to decline in 2009.
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
Report of Independent Registered Public Accounting
Firm
The Board
of Directors and Stockholders
NBT
Bancorp Inc.:
We have
audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and
subsidiaries (the Company) as of December 31, 2008 and 2007, and the related
consolidated statements of income, changes in stockholders’ equity, cash flows
and comprehensive income for each of the years in the three-year period ended
December 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NBT Bancorp Inc. and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 27, 2009 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/S/ KPMG
LLP
Albany, New York
February
27, 2009
|
Consolidated Balance
Sheets
|
||||||||
|
As of December 31,
|
||||||||
|
(In
thousands, except share and per share data)
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 107,409 | $ | 155,495 | ||||
|
Short-term
interest bearing accounts
|
2,987 | 7,451 | ||||||
|
Securities
available for sale, at fair value
|
1,119,665 | 1,132,230 | ||||||
|
Securities
held to maturity (fair value $141,308 and $149,519)
|
140,209 | 149,111 | ||||||
|
Federal
Reserve and Federal Home Loan Bank stock
|
39,045 | 38,102 | ||||||
|
Loans
and leases
|
3,651,911 | 3,455,851 | ||||||
|
Less
allowance for loan and lease losses
|
58,564 | 54,183 | ||||||
|
Net
loans and leases
|
3,593,347 | 3,401,668 | ||||||
|
Premises
and equipment, net
|
65,241 | 64,042 | ||||||
|
Goodwill
|
114,838 | 103,398 | ||||||
|
Intangible
assets, net
|
23,367 | 10,173 | ||||||
|
Bank
owned life insurance
|
46,030 | 43,614 | ||||||
|
Other
assets
|
83,950 | 96,492 | ||||||
|
Total
assets
|
$ | 5,336,088 | $ | 5,201,776 | ||||
|
Liabilities
|
||||||||
|
Demand
(noninterest bearing)
|
$ | 685,495 | $ | 666,698 | ||||
|
Savings,
NOW, and money market
|
1,885,551 | 1,614,289 | ||||||
|
Time
|
1,352,212 | 1,591,106 | ||||||
|
Total
deposits
|
3,923,258 | 3,872,093 | ||||||
|
Short-term
borrowings
|
206,492 | 368,467 | ||||||
|
Long-term
debt
|
632,209 | 424,887 | ||||||
|
Trust
preferred debentures
|
75,422 | 75,422 | ||||||
|
Other
liabilities
|
66,862 | 63,607 | ||||||
|
Total
liabilities
|
4,904,243 | 4,804,476 | ||||||
|
Stockholders’
equity
|
||||||||
|
Preferred
stock, $0.01 par value; authorized 2,500,000 shares at December 31, 2008
and 2007
|
- | - | ||||||
|
Common
stock, $0.01 par value. Authorized 50,000,000 shares at December 31, 2008
and 2007; issued 36,459,344 and 36,459,421 at December 31, 2008 and 2007,
respectively
|
365 | 365 | ||||||
|
Additional
paid-in-capital
|
276,418 | 273,275 | ||||||
|
Retained
earnings
|
245,340 | 215,031 | ||||||
|
Accumulated
other comprehensive loss
|
(8,204 | ) | (3,575 | ) | ||||
|
Common
stock in treasury, at cost, 3,853,548 and 4,133,328 shares at December 31,
2008 and 2007, respectively
|
(82,074 | ) | (87,796 | ) | ||||
|
Total
stockholders’ equity
|
431,845 | 397,300 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 5,336,088 | $ | 5,201,776 | ||||
See
accompanying notes to consolidated financial statements.
|
Consolidated Statements of Income
|
||||||||||||
|
Years ended
December 31,
|
||||||||||||
|
(In thousands, except per share
data)
|
2008
|
2007
|
2006
|
|||||||||
|
Interest,
fee, and dividend income
|
||||||||||||
|
Interest
and fees on loans and leases
|
$ | 232,155 | $ | 242,497 | $ | 230,042 | ||||||
|
Securities
available for sale
|
54,048 | 54,847 | 51,599 | |||||||||
|
Securities
held to maturity
|
5,588 | 5,898 | 4,730 | |||||||||
|
Other
|
2,623 | 2,875 | 2,471 | |||||||||
|
Total
interest, fee, and dividend income
|
294,414 | 306,117 | 288,842 | |||||||||
|
Interest
expense
|
||||||||||||
|
Deposits
|
76,132 | 106,574 | 87,798 | |||||||||
|
Short-term
borrowings
|
4,847 | 12,943 | 15,448 | |||||||||
|
Long-term
debt
|
22,642 | 16,486 | 17,063 | |||||||||
|
Trust
preferred debentures
|
4,747 | 5,087 | 4,700 | |||||||||
|
Total
interest expense
|
108,368 | 141,090 | 125,009 | |||||||||
|
Net
interest income
|
186,046 | 165,027 | 163,833 | |||||||||
|
Provision
for loan and lease losses
|
27,181 | 30,094 | 9,395 | |||||||||
|
Net
interest income after provision for loan and lease losses
|
158,865 | 134,933 | 154,438 | |||||||||
|
Noninterest
income
|
||||||||||||
|
Service
charges on deposit accounts
|
28,143 | 22,742 | 17,590 | |||||||||
|
Broker/dealer
and insurance revenue
|
8,726 | 4,255 | 3,936 | |||||||||
|
Trust
|
7,278 | 6,514 | 5,629 | |||||||||
|
Net
securities gains (losses)
|
1,535 | 2,113 | (875 | ) | ||||||||
|
Bank
owned life insurance
|
2,416 | 1,831 | 1,629 | |||||||||
|
ATM
and debit card fees
|
8,832 | 8,185 | 7,086 | |||||||||
|
Retirement
plan administration fees
|
6,308 | 6,336 | 5,536 | |||||||||
|
Other
|
8,468 | 7,723 | 8,098 | |||||||||
|
Total
noninterest income
|
71,706 | 59,699 | 48,629 | |||||||||
|
Noninterest
expense
|
||||||||||||
|
Salaries
and employee benefits
|
71,159 | 59,516 | 62,877 | |||||||||
|
Occupancy
|
13,781 | 11,630 | 11,518 | |||||||||
|
Equipment
|
7,539 | 7,422 | 8,332 | |||||||||
|
Data
processing and communications
|
12,694 | 11,400 | 10,454 | |||||||||
|
Professional
fees and outside services
|
10,476 | 9,135 | 7,761 | |||||||||
|
Office
supplies and postage
|
5,346 | 5,120 | 5,330 | |||||||||
|
Amortization
of intangible assets
|
2,105 | 1,645 | 1,649 | |||||||||
|
Loan
collection and other real estate owned
|
2,494 | 1,633 | 1,351 | |||||||||
|
Impairment
on lease residual assets
|
2,000 | - | - | |||||||||
|
Other
|
19,219 | 15,016 | 13,694 | |||||||||
|
Total
noninterest expense
|
146,813 | 122,517 | 122,966 | |||||||||
|
Income
before income tax expense
|
83,758 | 72,115 | 80,101 | |||||||||
|
Income
tax expense
|
25,405 | 21,787 | 24,154 | |||||||||
|
Net
income
|
$ | 58,353 | $ | 50,328 | $ | 55,947 | ||||||
|
Earnings
per share
|
||||||||||||
|
Basic
|
$ | 1.81 | $ | 1.52 | $ | 1.65 | ||||||
|
Diluted
|
1.80 | 1.51 | 1.64 | |||||||||
See
accompanying notes to consolidated financial statements.
|
Consolidated Statements of Changes in
Stockholders’ Equity
|
||||||||||||||||||||||||||||
|
Years
ended December 31,
2008,
2007, and 2006
(In thousands except share and per share
data)
|
Common
stock
|
Additional
paid-in- capital
|
Retained
earnings
|
Unvested
restricted Stock
|
Accumulated
other comprehensive loss
|
Common
stock in treasury
|
Total
|
|||||||||||||||||||||
|
Balance
at December 31, 2005
|
$ | 344 | $ | 219,157 | $ | 163,989 | $ | (457 | ) | $ | (6,477 | ) | $ | (42,613 | ) | $ | 333,943 | |||||||||||
|
Net
income
|
- | - | 55,947 | - | - | - | 55,947 | |||||||||||||||||||||
|
Cash
dividends- $0.76 per share
|
- | - | (26,018 | ) | - | - | - | (26,018 | ) | |||||||||||||||||||
|
Purchase
of 766,004 treasury shares
|
- | - | - | - | - | (17,111 | ) | (17,111 | ) | |||||||||||||||||||
|
Issuance
of 2,058,661 shares of common stock in connection with purchase business
combination
|
21 | 48,604 | - | - | - | - | 48,625 | |||||||||||||||||||||
|
Issuance
of 237,278 incentive stock options in purchase transaction
|
- | 1,955 | - | - | - | - | 1,955 | |||||||||||||||||||||
|
Acquisition
of 2,500 shares of company stock in purchase transaction
|
- | - | - | - | - | (55 | ) | (55 | ) | |||||||||||||||||||
|
Net
issuance of 595,447 shares to employee benefit plans and other stock
plans, including excess tax benefit
|
- | 1,244 | (2,148 | ) | - | - | 12,508 | 11,604 | ||||||||||||||||||||
|
Reclassification
adjustment from the adoption of FAS123R
|
- | (457 | ) | - | 457 | - | - | - | ||||||||||||||||||||
|
Stock-based
compensation expense
|
- | 2,509 | - | - | - | - | 2,509 | |||||||||||||||||||||
|
Net
issuance of 73,515 shares of restricted stock awards
|
- | (1,499 | ) | - | - | - | 1,499 | - | ||||||||||||||||||||
|
Forfeiture
of 2,625 shares of restricted stock
|
- | 15 | - | - | - | (60 | ) | (45 | ) | |||||||||||||||||||
|
Other
comprehensive income
|
- | - | - | - | 84 | - | 84 | |||||||||||||||||||||
|
Adjustment to initially apply SFAS No. 158, net of
tax
|
- | - | - | - | (7,621 | ) | - | (7,621 | ) | |||||||||||||||||||
|
Balance at December 31,
2006
|
$ | 365 | $ | 271,528 | $ | 191,770 | $ | - | $ | (14,014 | ) | $ | (45,832 | ) | $ | 403,817 | ||||||||||||
|
Net
income
|
- | - | 50,328 | - | - | - | 50,328 | |||||||||||||||||||||
|
Cash
dividends - $0.79 per share
|
- | - | (26,226 | ) | - | - | - | (26,226 | ) | |||||||||||||||||||
|
Purchase
of 2,261,267 treasury shares
|
- | - | - | - | - | (48,957 | ) | (48,957 | ) | |||||||||||||||||||
|
Net issuance of
254,929 shares to employee benefit
|
||||||||||||||||||||||||||||
|
plans
and other stock plans, including excess tax benefit
|
- | 383 | (841 | ) | - | - | 5,526 | 5,068 | ||||||||||||||||||||
|
Stock-based
compensation
|
- | 2,831 | - | - | - | - | 2,831 | |||||||||||||||||||||
|
Net
issuance of 76,559 shares of restricted stock awards
|
- | (1,467 | ) | - | - | - | 1,467 | - | ||||||||||||||||||||
|
Other comprehensive income
|
- | - | - | - | 10,439 | - | 10,439 | |||||||||||||||||||||
|
Balance at December 31,
2007
|
$ | 365 | $ | 273,275 | $ | 215,031 | $ | - | $ | (3,575 | ) | $ | (87,796 | ) | $ | 397,300 | ||||||||||||
|
Cumulative
effect adjustment to record liability
for split-dollar life insurance
policies
|
- | - | (1,518 | ) | - | - | - | (1,518 | ) | |||||||||||||||||||
|
Net
income
|
- | - | 58,353 | - | - | - | 58,353 | |||||||||||||||||||||
|
Cash
dividends - $0.80 per share
|
- | - | (25,830 | ) | - | - | - | (25,830 | ) | |||||||||||||||||||
|
Purchase
of 272,840 treasury shares
|
- | - | - | - | - | (5,939 | ) | (5,939 | ) | |||||||||||||||||||
|
Net issuance of
536,487 shares to employee benefit
|
||||||||||||||||||||||||||||
|
plans
and other stock plans, including excess tax benefit
|
- | 1,406 | (696 | ) | - | - | 11,249 | 11,959 | ||||||||||||||||||||
|
Stock-based
compensation
|
- | 2,213 | - | - | - | - | 2,213 | |||||||||||||||||||||
|
Net
issuance of 25,200 shares of restricted stock awards
|
- | (566 | ) | - | - | - | 566 | - | ||||||||||||||||||||
|
Forfeiture
of 9,067 shares of restricted stock
|
- | 90 | - | - | - | (154 | ) | (64 | ) | |||||||||||||||||||
|
Other comprehensive loss
|
- | - | - | - | (4,629 | ) | - | (4,629 | ) | |||||||||||||||||||
|
Balance at December 31,
2008
|
$ | 365 | $ | 276,418 | $ | 245,340 | $ | - | $ | (8,204 | ) | $ | (82,074 | ) | $ | 431,845 | ||||||||||||
See
accompanying notes to consolidated financial statements.
|
Consolidated Statements of Cash
Flows
|
||||||||||||
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
activities
|
||||||||||||
|
Net
income
|
$ | 58,353 | $ | 50,328 | $ | 55,947 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
|
Provision
for loan and lease losses
|
27,181 | 30,094 | 9,395 | |||||||||
|
Depreciation
and amortization of premises and equipment
|
5,220 | 5,295 | 6,074 | |||||||||
|
Net
accretion on securities
|
423 | 105 | 178 | |||||||||
|
Amortization
of intangible assets
|
2,105 | 1,645 | 1,649 | |||||||||
|
Stock
based compensation
|
2,213 | 2,831 | 2,509 | |||||||||
|
Bank
owned life insurance income
|
(2,416 | ) | (1,831 | ) | (1,629 | ) | ||||||
|
Deferred
income tax expense
|
4,778 | 2,244 | 9,767 | |||||||||
|
Proceeds
from sale of loans held for sale
|
26,745 | 30,427 | 36,407 | |||||||||
|
Originations
and purchases of loans held for sale
|
(27,760 | ) | (31,086 | ) | (33,601 | ) | ||||||
|
Net
gains on sales of loans held for sale
|
(170 | ) | (112 | ) | (85 | ) | ||||||
|
Net
security (gains) losses
|
(1,535 | ) | (2,113 | ) | 875 | |||||||
|
Net
gains on sales of other real estate owned
|
(230 | ) | (442 | ) | (374 | ) | ||||||
|
Impairment
on lease residual assets
|
2,000 | - | - | |||||||||
|
Net
gain on sale of branch
|
- | - | (470 | ) | ||||||||
|
Net
decrease (increase) in other assets
|
194 | (8,393 | ) | (18,800 | ) | |||||||
|
Net
(decrease) increase in other liabilities
|
(9,775 | ) | 6,848 | (2,325 | ) | |||||||
|
Net
cash provided by operating activities
|
87,326 | 85,840 | 65,517 | |||||||||
|
Investing
activities
|
||||||||||||
|
Net
cash paid for sale of branch
|
- | - | (2,307 | ) | ||||||||
|
Net
cash used in CNB Bancorp, Inc. merger
|
- | - | (21,223 | ) | ||||||||
|
Net
cash used in Mang Insurance Agency, LLC acquisition
|
(26,233 | ) | - | - | ||||||||
|
Securities
available for sale:
|
||||||||||||
|
Proceeds
from maturities, calls, and principal paydowns
|
413,560 | 233,312 | 217,232 | |||||||||
|
Proceeds
from sales
|
6,800 | 55,758 | 42,292 | |||||||||
|
Purchases
|
(392,957 | ) | (303,465 | ) | (265,052 | ) | ||||||
|
Securities
held to maturity:
|
||||||||||||
|
Proceeds
from maturities, calls, and principal paydowns
|
91,309 | 70,234 | 45,990 | |||||||||
|
Purchases
|
(82,525 | ) | (83,186 | ) | (80,485 | ) | ||||||
|
Net
increase in loans
|
(220,700 | ) | (70,061 | ) | (211,280 | ) | ||||||
|
Net
(increase) decrease in Federal Reserve and FHLB stock
|
(943 | ) | 710 | 1,447 | ||||||||
|
Purchases
of premises and equipment, net
|
(6,039 | ) | (2,355 | ) | (4,176 | ) | ||||||
|
Proceeds
from sales of other real estate owned
|
1,150 | 1,408 | 1,028 | |||||||||
|
Net
cash used in investing activities
|
(216,578 | ) | (97,645 | ) | (276,534 | ) | ||||||
|
Financing
activities
|
||||||||||||
|
Net
increase in deposits
|
51,165 | 75,855 | 307,033 | |||||||||
|
Net
(decrease) increase in short-term borrowings
|
(161,975 | ) | 23,059 | (99,569 | ) | |||||||
|
Proceeds
from issuance of long-term debt
|
340,027 | 150,000 | 95,000 | |||||||||
|
Repayments
of long-term debt
|
(132,705 | ) | (142,841 | ) | (114,157 | ) | ||||||
|
Proceeds
from the issuance of trust preferred debentures
|
- | - | 51,547 | |||||||||
|
Excess
tax benefit from exercise of stock options
|
1,406 | 715 | 466 | |||||||||
|
Proceeds
from the issuance of shares to employee benefit plans and other stock
plans
|
10,553 | 4,353 | 10,131 | |||||||||
|
Purchases
of treasury stock
|
(5,939 | ) | (48,957 | ) | (17,111 | ) | ||||||
|
Cash
dividends and payments for fractional shares
|
(25,830 | ) | (26,226 | ) | (26,018 | ) | ||||||
|
Net
cash provided by financing activities
|
76,702 | 35,958 | 207,322 | |||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(52,550 | ) | 24,153 | (3,695 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
162,946 | 138,793 | 142,488 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 110,396 | $ | 162,946 | $ | 138,793 | ||||||
|
Supplemental
disclosure of cash flow information
|
||||||||||||
|
Cash paid during the year
for:
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
|
$ | 113,597 | $ | 138,791 | $ | 121,447 | ||||||
|
Income
taxes
|
17,081 | 18,007 | 19,914 | |||||||||
|
Noncash
investing activities:
|
||||||||||||
|
Loans
transferred to other real estate owned
|
$ | 1,025 | $ | 1,137 | $ | 778 | ||||||
|
Dispositions:
|
||||||||||||
|
Fair
value of assets sold
|
$ | - | $ | - | $ | 3,453 | ||||||
|
Fair
value of liabilities transferred
|
- | - | 5,760 | |||||||||
|
Acquisitions:
|
||||||||||||
|
Fair
value of assets acquired
|
$ | 30,062 | $ | - | $ | 422,097 | ||||||
|
Goodwill
and identifiable intangible assets recognized in purchase
combination
|
27,107 | - | 65,637 | |||||||||
|
Fair
value of liabilities assumed
|
3,829 | - | 360,648 | |||||||||
|
Fair
value of equity issued in purchase combination
|
- | - | 50,525 | |||||||||
See
accompanying notes to consolidated financial statements.
|
Consolidated Statements of Comprehensive Income
|
||||||||||||
|
As of December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
income
|
$ | 58,353 | $ | 50,328 | $ | 55,947 | ||||||
|
Other
comprehensive (loss) income, net of tax
|
||||||||||||
|
Unrealized
net holding gains (losses) arising during the year (pre-tax amounts of
$15,143, $19,347, and $(737)
|
9,138 | 11,618 | (442 | ) | ||||||||
|
Reclassification
adjustment for net (gains) losses related to
securities available for sale included in net income (pre-tax
amounts of $(1,535), $(2,113), and $875)
|
(921 | ) | (1,270 | ) | 526 | |||||||
|
Pension
and other benefits:
|
||||||||||||
|
Amortization
of prior service cost and actuarial gains (pre-tax amounts of $378, $481
and $0)
|
227 | 288 | - | |||||||||
|
Decrease
in unrecognized actuarial amounts (pre-tax amounts of $(21,087), $(326)
and $0)
|
(13,073 | ) | (197 | ) | - | |||||||
|
Total
other comprehensive (loss) income
|
(4,629 | ) | 10,439 | 84 | ||||||||
|
Comprehensive
income
|
$ | 53,724 | $ | 60,767 | $ | 56,031 | ||||||
See
accompanying notes to consolidated financial statements.
NBT
BANCORP INC. AND SUBSIDIARIES:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
|
(1) SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
The
accounting and reporting policies of NBT Bancorp Inc. (Bancorp) and its
subsidiaries, NBT Bank, N.A. (NBT Bank), NBT Holdings, Inc., and NBT Financial
Services, Inc., conform, in all material respects, to accounting principles
generally accepted in the United States of America (GAAP) and to general
practices within the banking industry. Collectively, Bancorp and its
subsidiaries are referred to herein as “the Company.”
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Estimates
associated with the allowance for loan losses, other real estate owned (“OREO”),
income taxes, pension expense, fair values of lease residual assets, fair values
of financial instruments and status of contingencies, and other-than-temporary
impairment on investments are particularly susceptible to material change in the
near term. In connection with the determination of the allowance for
loan and lease losses and the valuation of other real estate owned, management
obtains appraisals for properties.
The
following is a description of significant policies and practices:
CONSOLIDATION
The
accompanying consolidated financial statements include the accounts of Bancorp
and its wholly owned subsidiaries mentioned above. All material
intercompany transactions have been eliminated in consolidation. Amounts
previously reported in the consolidated financial statements are reclassified
whenever necessary to conform to the current year’s presentation. In the “Parent
Company Financial Information,” the investment in subsidiaries is carried under
the equity method of accounting.
The
Company determines whether it has a controlling financial interest in an entity
by first evaluating whether the entity is a voting interest entity or a variable
interest entity under GAAP. Voting interest entities are entities in which the
total equity investment at risk is sufficient to enable the entity to finance
itself independently and provides the equity holders with the obligation to
absorb losses, the right to receive residual returns and the right to make
decisions about the entity’s activities. The Company consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest. As defined in applicable accounting standards, variable interest
entities (VIEs) are entities that lack one or more of the characteristics of a
voting interest entity. A controlling financial interest in an entity is present
when an enterprise has a variable interest, or a combination of variable
interests, that will absorb a majority of the entity’s expected losses, receive
a majority of the entity’s expected residual returns, or both. The enterprise
with a controlling financial interest, known as the primary beneficiary,
consolidates the VIE. The Company’s wholly owned subsidiaries CNBF Capital Trust
I, NBT Statutory Trust I and NBT Statutory Trust II are VIEs for which the
Company is not the primary beneficiary. Accordingly, the accounts of these
entities are not included in the Company’s consolidated financial
statements.
SEGMENT
REPORTING
The
Company’s operations are primarily in the community banking industry and include
the provision of traditional banking services. The Company operates solely in
the geographical regions of central and northern New York and northeastern
Pennsylvania. The Company has identified separate operating segments;
however, these segments did not meet the quantitative thresholds for separate
disclosure.
CASH
EQUIVALENTS
The
Company considers amounts due from correspondent banks, cash items in process of
collection, and institutional money market mutual funds to be cash equivalents
for purposes of the consolidated statements of cash flows.
SECURITIES
The
Company classifies its securities at date of purchase as either available for
sale, held to maturity, or trading. Held to maturity debt securities are those
that the Company has the ability and intent to hold until
maturity. Held to maturity securities are stated at amortized
cost. Securities bought and held for the purpose of selling in the
near term are classified as trading. Trading securities are recorded
at fair value, with net unrealized gains and losses recognized currently in
income. Securities not classified as held to maturity or trading are
classified as available for sale. Available for sale securities are
recorded at fair value. Unrealized holding gains and losses, net of the related
tax effect, on available for sale securities are excluded from earnings and are
reported in stockholders’ equity as a component of accumulated other
comprehensive income or loss. Transfers of securities between
categories are recorded at fair value at the date of transfer. A decline in the
fair value of any available for sale or held to maturity security below cost
that is deemed other-than-temporary is charged to earnings resulting in the
establishment of a new cost basis for the security. Securities with
other-than-temporary impairment are generally placed on non-accrual
status.
Nonmarketable
equity securities are carried at cost, with the exception of investments owned
by NBT Bank’s small business investment company (SBIC) subsidiary, which are
carried at fair value in accordance with SBIC rules.
Premiums
and discounts are amortized or accreted over the life of the related security as
an adjustment to yield using the interest method. Dividend and interest income
are recognized when earned. Realized gains and losses on securities sold are
derived using the specific identification method for determining the cost of
securities sold.
Investments
in Federal Reserve and Federal Home Loan Bank stock are required for membership
in those organizations and are carried at cost since there is no market value
available.
LOANS
AND LEASES
Loans are
recorded at their current unpaid principal balance, net of unearned income and
unamortized loan fees and expenses, which are amortized under the effective
interest method over the estimated lives of the loans. Interest income on loans
is accrued based on the principal amount outstanding.
Lease
receivables primarily represent automobile financing to customers through direct
financing leases and are carried at the aggregate of the lease payments
receivable and the estimated residual values, net of unearned income and net
deferred lease origination fees and costs. Net deferred lease
origination fees and costs are amortized under the effective interest method
over the estimated lives of the leases. The estimated residual value related to
the total lease portfolio is reviewed quarterly, and if there has been a decline
in the estimated fair value of the total residual value that is judged by
management to be other-than-temporary, a loss is recognized. Adjustments related
to such other-than-temporary declines in estimated fair value are recorded in
noninterest expense in the consolidated statements of income.
Loans and
leases are placed on nonaccrual status when timely collection of principal and
interest in accordance with contractual terms is doubtful. Loans and leases are
transferred to nonaccrual status generally when principal or interest payments
become ninety days delinquent, unless the loan is well secured and in the
process of collection, or sooner when management concludes circumstances
indicate that borrowers may be unable to meet contractual principal or interest
payments. When a loan or lease is transferred to a nonaccrual status,
all interest previously accrued in the current period but not collected is
reversed against interest income in that period. Interest accrued in a prior
period and not collected is charged-off against the allowance for loan and lease
losses.
If
ultimate repayment of a nonaccrual loan is expected, any payments received are
applied in accordance with contractual terms. If ultimate repayment of principal
is not expected, any payment received on a nonaccrual loan is applied to
principal until ultimate repayment becomes expected. Nonaccrual loans are
returned to accrual status when they become current as to principal and interest
and demonstrate a period of performance under the contractual terms and, in the
opinion of management, are fully collectible as to principal and
interest. When in the opinion of management the collection of
principal appears unlikely, the loan balance is charged-off in total or in
part.
Commercial
type loans are considered impaired when it is probable that the borrower will
not repay the loan according to the original contractual terms of the loan
agreement, and all loan types are considered impaired if the loan is
restructured in a troubled debt restructuring.
A loan is
considered to be a trouble debt restructured loan (TDR) when the Company grants
a concession to the borrower because of the borrower’s financial condition that
it would not otherwise consider. Such concessions include the reduction of
interest rates, forgiveness of principal or interest, or other modifications at
interest rates that are less than the current market rate for new obligations
with similar risk. TDR loans that are in compliance with their modified terms
and that yield a market rate may be removed from the TDR status after a period
of performance.
ALLOWANCE
FOR LOAN AND LEASE LOSSES
The
allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
portfolio with respect to the mix between the various
types of loans and their related risk characteristics, a review of the value of
collateral supporting the loans, comprehensive reviews of the loan portfolio by
the independent loan review staff and management, as well as consideration of
volume and trends of delinquencies, nonperforming loans, and loan charge-offs.
As a result of the test of adequacy, required additions to the allowance for
loan and lease losses are made periodically by charges to the provision for loan
and lease losses.
The
allowance for loan and lease losses related to impaired loans is based on
discounted cash flows using the loan’s initial effective interest rate or the
fair value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company’s impaired loans are generally collateral
dependent. The Company considers the estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
impairment if those costs are expected to reduce the cash flows available to
repay or otherwise satisfy the loans.
Management
believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize
loan and lease losses, future additions to the allowance for loan and lease
losses may be necessary based on changes in economic conditions or changes in
the values of properties securing loans in the process of foreclosure. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company’s allowance for loan and lease losses.
Such agencies may require the Company to recognize additions to the allowance
for loan and lease losses based on their judgments about information available
to them at the time of their examination which may not be currently available to
management.
PREMISES
AND EQUIPMENT
Premises
and equipment are stated at cost, less accumulated
depreciation. Depreciation of premises and equipment is determined
using the straight-line method over the estimated useful lives of the respective
assets. Expenditures for maintenance, repairs, and minor replacements are
charged to expense as incurred.
OTHER
REAL ESTATE OWNED
Other
real estate owned (OREO) consists of properties acquired through foreclosure or
by acceptance of a deed in lieu of foreclosure. These assets are recorded at the
lower of fair value of the asset acquired less estimated costs to sell or “cost”
(defined as the fair value at initial foreclosure). At the time of foreclosure,
or when foreclosure occurs in-substance, the excess, if any, of the loan over
the fair market value of the assets received, less estimated selling costs, is
charged to the allowance for loan and lease losses and any subsequent valuation
write-downs are charged to other expense. Operating costs associated with the
properties are charged to expense as incurred. Gains on the sale of OREO are
included in income when title has passed and the sale has met the minimum down
payment requirements prescribed by GAAP.
GOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
and intangible assets that have indefinite useful lives are not amortized, but
are tested at least annually for impairment. Intangible assets that have finite
useful lives continue to be amortized over their useful lives. Core
deposit intangibles at the Company are generally amortized over 7 to 25 years
using the straight-line methods for all periods presented. Covenants
not to compete are amortized on a straight-line basis. Customer lists
are amortized using an accelerated method.
When
facts and circumstances indicate potential impairment of amortizable intangible
assets, the Company evaluates the recoverability of the asset carrying value,
using estimates of undiscounted future cash flows over the remaining asset life.
Any impairment loss is measured by the excess of carrying value over fair value.
Goodwill impairment tests are performed on an annual basis or when events or
circumstances dictate. In these tests, the fair values of each reporting unit,
or segment, is compared to the carrying amount of that reporting unit in order
to determine if impairment is indicated. If so, the implied fair value of the
reporting unit’s goodwill is compared to its carrying amount and the impairment
loss is measured by the excess of the carrying value over fair
value.
TREASURY
STOCK
Treasury
stock acquisitions are recorded at cost. Subsequent sales of treasury stock are
recorded on an average cost basis. Gains on the sale of treasury stock are
credited to additional paid-in-capital. Losses on the sale of treasury stock are
charged to additional paid-in-capital to the extent of previous gains, otherwise
charged to retained earnings.
INCOME
TAXES
Income
taxes are accounted for under the asset and liability method. The Company files
a consolidated tax return on the accrual basis. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company
recognizes interest accrued and penalties related to unrecognized tax benefits
in income tax expense.
STOCK-BASED
COMPENSATION
The fair
value of stock-based awards is determined on the date of grant, and is
recognized as compensation expense over the vesting period of the
awards.
STANDBY
LETTERS OF CREDIT
Standby
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Under the standby letters of
credit, the Company is required to make payments to the beneficiary of the
letters of credit upon request by the beneficiary contingent upon the customer's
failure to perform under the terms of the underlying contract with the
beneficiary. Standby letters of credit typically have one year
expirations with an option to renew upon annual review. The Company
typically receives a fee for these transactions. The fair value of
stand-by letters of credit is recorded upon inception.
LOAN
SALES AND LOAN SERVICING
The
Company originates and services residential mortgage loans for consumers and
sells 15-year, 20-year and 30-year residential real estate mortgages in the
secondary market, while retaining servicing rights on the sold
loans. Loan sales are recorded when the sales are
funded. Mortgage servicing rights are recorded at fair value upon
sale of the loan.
REPURCHASE
AGREEMENTS
Repurchase
agreements are accounted for as secured financing transactions since the Company
maintains effective control over the transferred securities and the transfer
meets the other criteria for such accounting. Obligations to
repurchase securities sold are reflected as a liability in the Consolidated
Balance Sheets. The securities underlying the agreements are
delivered to a custodial account for the benefit of the dealer or bank with whom
each transaction is executed. The dealers or banks, who may sell,
loan or otherwise dispose of such securities to other parties in the normal
course of their operations, agree to resell to the Company the same securities
at the maturities of the agreements.
EARNINGS
PER SHARE
Basic
earnings per share (EPS) excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity (such as the Company’s
dilutive stock options and restricted stock).
OTHER
FINANCIAL INSTRUMENTS
The
Company is a party to certain other financial instruments with off-balance-sheet
risk such as commitments to extend credit, unused lines of credit, as well as
certain mortgage loans sold to investors with recourse. The Company’s policy is
to record such instruments when funded.
COMPREHENSIVE
INCOME
At the
Company, comprehensive income represents net income plus other comprehensive
income (loss), which consists primarily of the net change in unrealized gains or
losses on securities available for sale for the period and changes in the funded
status of employee benefit plans. Accumulated other comprehensive (loss) income
represents the net unrealized gains or losses on securities available for sale
and the previously unrecognized portion of the funded status of employee benefit
plans, net of income taxes, as of the consolidated balance sheet
dates.
PENSION
COSTS
The
Company maintains a noncontributory, defined benefit pension plan covering
substantially all employees, as well as supplemental employee retirement plans
covering certain executives and a defined benefit postretirement healthcare plan
that covers certain employees. Costs associated with these plans,
based on actuarial computations of current and future benefits for employees,
are charged to current operating expenses.
TRUST
Assets
held by the Company in a fiduciary or agency capacity for its customers are not
included in the accompanying consolidated balance sheets, since such assets are
not assets of the Company. Trust income is recognized on the accrual
method based on contractual rates applied to the balances of trust
accounts.
FAIR
VALUE MEASUREMENTS
The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurements” (“SFAS No. 157”), effective January 1,
2008. SFAS No. 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants.
Under SFAS No. 157, fair value measurements are not adjusted for transaction
costs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the fair value
hierarchy under SFAS No. 157 are described below:
Level 1 -
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
Level 2
- Quoted prices for similar assets or liabilities in active markets,
quoted prices in markets that are not active, or inputs that are observable,
either directly or indirectly, for substantially the full term of the asset or
liability;
Level 3 -
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e., supported by little or no
market activity).
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
The types
of instruments valued based on quoted market prices in active markets include
most U.S. government and agency securities, many other sovereign government
obligations, liquid mortgage products, active listed equities and most money
market securities. Such instruments are generally classified within level 1 or
level 2 of the fair value hierarchy. As required by SFAS No. 157, the
Company does not adjust the quoted price for such instruments.
The types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade and high-yield
corporate bonds, less liquid mortgage products, less liquid agency securities,
less liquid listed equities, state, municipal and provincial obligations, and
certain physical commodities. Such instruments are generally classified within
level 2 of the fair value hierarchy.
Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management’s best estimate
will be used. Management’s best estimate consists of both internal and external
support on certain Level 3 investments. Subsequent to inception, management only
changes level 3 inputs and assumptions when corroborated by evidence such as
transactions in similar instruments, completed or pending third-party
transactions in the underlying investment or comparable entities, subsequent
rounds of financing, recapitalizations and other transactions across the capital
structure, offerings in the equity or debt markets, and changes in financial
ratios or cash flows.
In
accordance with FASB Staff Position No. 157-2, Effective Date of FASB Statement No.
157, the Company has delayed the application of SFAS No. 157 for
nonfinancial assets, such as goodwill and real property held for sale, and
nonfinancial liabilities until January 1, 2009.
In
October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active. The FSP is effective October 10, 2008, and for prior
periods for which financial statements have not been issued. Adoption
did not have a material impact on the Company’s financial position or results of
operations.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued revised
SFAS No. 141, "Business Combinations," (“SFAS No. 141”) or SFAS No.
141(R). SFAS No. 141(R) retains the fundamental requirements of SFAS
No. 141 that the acquisition method of accounting (formerly the purchase method)
be used for all business combinations; that an acquirer be identified for each
business combination; and that intangible assets be identified and recognized
separately from goodwill. SFAS No. 141(R) requires the acquiring
entity in a business combination to recognize the assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. Additionally, SFAS No. 141(R) changes the requirements
for recognizing assets acquired and liabilities assumed arising from
contingencies and recognizing and measuring contingent
consideration. SFAS No. 141(R) also enhances the disclosure
requirements for business combinations. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008 and may not be applied before that date.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51," or SFAS No. 160.
SFAS No. 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Among other things, SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements and requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. SFAS No. 160 also amends SFAS No. 128,
"Earnings per Share," so that earnings per share calculations in consolidated
financial statements will continue to be based on amounts attributable to the
parent. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008 and
is applied prospectively as of the beginning of the fiscal year in which it is
initially applied, except for the presentation and disclosure requirements which
are to be applied retrospectively for all periods presented. SFAS No. 160 is not
expected to have a material impact on our financial condition or results of
operations.
In
February 2008, the FASB issued FASB Staff Position FAS 140-3, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
(“FSP FAS 140-3”). FSP FAS 140-3 was issued to provide guidance on accounting
for a transfer of a financial asset and repurchase financing. FSP FAS 140-3
presumes that an initial transfer of a financial asset and repurchase financing
are considered part of the same arrangement (“linked transaction”) under SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. However, if certain criteria are met, the
initial transfer and repurchase financing should not be evaluated as a linked
transaction and should be evaluated separately under SFAS No. 140. FSP FAS 140-3
is effective for financial statements issued for fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. Earlier
application is not permitted. FSP FAS 140-3 should be applied prospectively to
initial transfers and repurchase financings for which the initial transfer is
executed on or after the beginning of the fiscal year for which FSP FAS 140-3 is
effective. The adoption did not have a material impact on the
Company’s financial position or results of operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (“SFAS No. 161”). The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under SFAS
133, Accounting for Derivative Instruments and Hedging Activities; and how
derivative instruments and related hedged items affect its financial position,
financial performance, and cash flows. SFAS No. 161 achieves these
improvements by requiring disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format. It also provides
more information about an entity’s liquidity by requiring disclosure of
derivative features that are credit risk–related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. It is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. SFAS No.
161 did not have a material impact on our financial condition or results of
operations.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS No. 162”). The new standard is intended
to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with GAAP for nongovernmental
entities. The hierarchy under SFAS 162 is as follows: A)
FASB Statements of Financial Accounting Standards and Interpretations, FASB
Statement 133 Implementation Issues, FASB Staff Positions, and American
Institute of Certified Public Accountants (“AICPA”) Accounting Research
Bulletins and Accounting Principles Board Opinions that are not superseded by
actions of the FASB; B) FASB Technical Bulletins and, if cleared by the FASB,
AICPA Industry Audit and Accounting Guides and Statements of Position; C) AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force
(“EITF”), and the Topics discussed in Appendix D of EITF Abstracts (EITF
D-Topics); and D) Implementation guides (Q&As) published by the FASB staff,
AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and
Statements of Position not cleared by the FASB, and practices that are widely
recognized and prevalent either generally or in the industry. The
Statement was effective November 15, 2008. SFAS No. 162 did not have
a material impact on the Company’s financial condition or results of
operations.
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities (“FSP EITF 03-6-1”), which addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method. FSP EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. FSP EITF
03-6-1 is not expected to have a material impact on the Company’s financial
condition or results of operations.
|
(2) MERGER
AND ACQUISITION ACTIVITY
|
On
September 1, 2008, the Company completed the acquisition of Mang Insurance
Agency, LLC (“Mang”), headquartered in Binghamton, New York. As part
of the acquisition, the Company acquired approximately $15.3 million of
intangible assets and $11.8 million of goodwill, which has been allocated to NBT
Holdings, Inc. for reporting purposes. The results of operations are
included in the consolidated financial statements from the date of acquisition,
September 1, 2008.
|
(3)
EARNINGS PER SHARE
|
The
following is a reconciliation of basic and diluted earnings per share for the
years presented in the consolidated statements of income:
|
Years ended
December 31,
|
||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
(In thousands, except per share
data)
|
Net
income
|
Weighted
average shares
|
Per
share amount
|
Net
income
|
Weighted
average shares
|
Per
share amount
|
Net
income
|
Weighted
average shares
|
Per
share amount
|
|||||||||||||||||||||||||||
|
Basic
earnings per share
|
$ | 58,353 | 32,152 | $ | 1.81 | $ | 50,328 | 33,165 | $ | 1.52 | $ | 55,947 | 33,886 | $ | 1.65 | |||||||||||||||||||||
|
Effect
of dilutive securities
|
||||||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
275 | 256 | 320 | |||||||||||||||||||||||||||||||||
|
Diluted
earnings per share
|
$ | 58,353 | 32,427 | $ | 1.80 | $ | 50,328 | 33,421 | $ | 1.51 | $ | 55,947 | 34,206 | $ | 1.64 | |||||||||||||||||||||
There
were approximately 328,000, 628,000, and 356,000 weighted average stock options
for the years ended December 31, 2008, 2007, and 2006, respectively, that were
not considered in the calculation of diluted earnings per share since the stock
options’ exercise prices were greater than the average market price
during these periods.
(4) FEDERAL
RESERVE BANK REQUIREMENT
The
Company is required to maintain reserve balances with the Federal Reserve Bank.
The required average total reserve for NBT Bank for the 14-day maintenance
period ending December 31, 2008 was $26.9 million.
|
(5)
SECURITIES
|
The
amortized cost, estimated fair value, and unrealized gains and losses of
securities available for sale are as follows:
|
(In thousands)
|
Amortized cost
|
Unrealized gains
|
Unrealized losses
|
Estimated fair value
|
||||||||||||
|
December
31, 2008
|
||||||||||||||||
|
U.S.
Treasury
|
$ | 59 | $ | 8 | $ | - | $ | 67 | ||||||||
|
Federal
Agency
|
213,997 | 5,211 | 41 | 219,167 | ||||||||||||
|
State
& municipal
|
126,369 | 2,374 | 770 | 127,973 | ||||||||||||
|
Mortgage-backed
|
351,973 | 8,755 | 99 | 360,629 | ||||||||||||
|
Collateralized
mortgage obligations
|
376,058 | 5,656 | 1,437 | 380,277 | ||||||||||||
|
Corporate
|
20,016 | 769 | - | 20,785 | ||||||||||||
|
Other
securities
|
10,475 | 1,279 | 987 | 10,767 | ||||||||||||
|
Total
securities available for sale
|
$ | 1,098,947 | $ | 24,052 | $ | 3,334 | $ | 1,119,665 | ||||||||
|
December
31, 2007
|
||||||||||||||||
|
U.S.
Treasury
|
$ | 10,042 | $ | 35 | $ | - | $ | 10,077 | ||||||||
|
Federal
Agency
|
322,723 | 4,352 | 28 | 327,047 | ||||||||||||
|
State
& municipal
|
112,647 | 2,122 | 108 | 114,661 | ||||||||||||
|
Mortgage-backed
|
381,585 | 1,195 | 4,473 | 378,307 | ||||||||||||
|
Collateralized
mortgage obligations
|
288,222 | 2,496 | 1,103 | 289,615 | ||||||||||||
|
Corporate
|
1,186 | 27 | - | 1,213 | ||||||||||||
|
Other
securities
|
8,715 | 2,746 | 151 | 11,310 | ||||||||||||
|
Total
securities available for sale
|
$ | 1,125,120 | $ | 12,973 | $ | 5,863 | $ | 1,132,230 | ||||||||
In the
available for sale category at December 31, 2008, federal agency securities were
comprised of Government-Sponsored Enterprise (“GSE”) securities;
mortgaged-backed securities were comprised of GSEs with an amortized cost of
$313.7 million and a fair value of $321.0 million and US Government Agency
securities with an amortized cost of $38.2 million and a fair value of $39.7
million; collateralized mortgage obligations were comprised of GSEs with an
amortized cost of $204.1 million and a fair value of $205.6 million and US
Government Agency securities with an amortized cost of $172.0 million and a fair
value of $174.6 million.
In the
available for sale category at December 31, 2007, federal agency securities were
comprised of GSE securities; mortgaged-backed securities were comprised of GSEs
with an amortized cost of $342.0 million and a fair value of $338.5 million and
US Government Agency securities with an amortized cost of $39.5 million and a
fair value of $39.8 million; collateralized mortgage obligations were comprised
of GSEs with an amortized cost of $179.1 million and a fair value of $180.1
million and US Government Agency securities with an amortized cost of $109.1
million and a fair value of $109.5 million.
Others
securities primarily represent marketable equity securities.
The
following table sets forth information with regard to sales transactions of
securities available for sale:
|
Years ended
December 31
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Proceeds
from sales
|
$ | 6,800 | $ | 55,758 | $ | 42,292 | ||||||
|
Gross
realized gains
|
$ | 1,780 | $ | 2,248 | $ | 618 | ||||||
|
Gross
realized losses
|
(245 | ) | (135 | ) | (1,493 | ) | ||||||
|
Net
securities gains (losses)
|
$ | 1,535 | $ | 2,113 | $ | (875 | ) | |||||
At
December 31, 2008 and 2007, securities available for sale with amortized costs
totaling $891.6 million and $962.9 million, respectively, were pledged to secure
public deposits and for other purposes required or permitted by
law. Additionally, at December 31, 2008, securities available for
sale with an amortized cost of $165.7 million were pledged as collateral for
securities sold under the repurchase agreements.
The
amortized cost, estimated fair value, and unrealized gains and losses of
securities held to maturity are as follows:
|
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
|||||||||||||
|
(In thousands)
|
cost
|
gains
|
losses
|
fair value
|
||||||||||||
|
December
31, 2008
|
||||||||||||||||
|
Mortgage-backed
|
$ | 2,372 | $ | 95 | $ | - | $ | 2,467 | ||||||||
|
State
& municipal
|
136,259 | 1,048 | 44 | 137,263 | ||||||||||||
|
Other
securities
|
1,578 | - | - | 1,578 | ||||||||||||
|
Total
securities held to maturity
|
$ | 140,209 | $ | 1,143 | $ | 44 | $ | 141,308 | ||||||||
|
December
31, 2007
|
||||||||||||||||
|
Mortgage-backed
|
$ | 2,810 | $ | 99 | $ | - | $ | 2,909 | ||||||||
|
State
& municipal
|
145,458 | 439 | 130 | 145,767 | ||||||||||||
|
Other
securities
|
843 | - | - | 843 | ||||||||||||
|
Total
securities held to maturity
|
$ | 149,111 | $ | 538 | $ | 130 | $ | 149,519 | ||||||||
At
December 31, 2008, all of the mortgaged-backed securities held to maturity were
comprised of US Government Agency securities.
The
following table sets forth information with regard to investment securities with
unrealized losses at December 31, 2008 and 2007, segregated according to the
length of time the securities had been in a continuous unrealized loss
position:
|
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
|
Security
Type:
|
Fair Value
|
Unrealized losses
|
Fair Value
|
Unrealized losses
|
Fair Value
|
Unrealized losses
|
||||||||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Federal
agency
|
9,959 | (41 | ) | - | - | 9,959 | (41 | ) | ||||||||||||||||
|
State
& municipal
|
17,024 | (412 | ) | 15,112 | (402 | ) | 32,136 | (814 | ) | |||||||||||||||
|
Mortgage-backed
|
2,105 | (28 | ) | 7,336 | (71 | ) | 9,441 | (99 | ) | |||||||||||||||
|
Collateralized
mortgage obligations
|
46,865 | (1,301 | ) | 15,682 | (136 | ) | 62,547 | (1,437 | ) | |||||||||||||||
|
Other
securities
|
5,276 | (947 | ) | 704 | (40 | ) | 5,980 | (987 | ) | |||||||||||||||
|
Total
securities with unrealized losses
|
$ | 81,229 | $ | (2,729 | ) | $ | 38,834 | $ | (649 | ) | $ | 120,063 | $ | (3,378 | ) | |||||||||
|
December
31, 2007
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Federal
agency
|
- | - | 29,971 | (28 | ) | 29,971 | (28 | ) | ||||||||||||||||
|
State
& municipal
|
5,284 | (31 | ) | 28,141 | (207 | ) | 33,425 | (238 | ) | |||||||||||||||
|
Mortgage-backed
|
666 | (1 | ) | 268,751 | (4,472 | ) | 269,417 | (4,473 | ) | |||||||||||||||
|
Collateralized
mortgage obligations
|
525 | (22 | ) | 65,212 | (1,081 | ) | 65,737 | (1,103 | ) | |||||||||||||||
|
Other
securities
|
613 | (20 | ) | 423 | (131 | ) | 1,036 | (151 | ) | |||||||||||||||
|
Total
securities with unrealized losses
|
$ | 7,088 | $ | (74 | ) | $ | 392,498 | $ | (5,919 | ) | $ | 399,586 | $ | (5,993 | ) | |||||||||
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment losses,
management considers, among other things, (i) the length of time and the extent
to which the fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, and (iii) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
Management
has the ability and intent to hold the securities classified as held to maturity
until they mature, at which time it is believed the Company will receive full
value for the securities. Furthermore, as of December 31, 2008, management also
had the ability and intent to hold the securities classified as available for
sale for a period of time sufficient for a recovery of cost, which may be until
maturity. The unrealized losses are due to increases in market interest rates
over the yields available at the time the underlying securities were purchased.
The fair value is expected to recover as the bonds approach their maturity date
or repricing date or if market yields for such investments
decline. As of December 31, 2008, management believes the impairments
detailed in the table above are temporary and minimal impairment losses have
been realized in the Company’s consolidated statements of income.
The
following tables set forth information with regard to contractual maturities of
debt securities at December 31, 2008:
|
(In thousands)
|
Amortized cost
|
Estimated fair value
|
||||||
|
Debt
securities classified as available for sale
|
||||||||
|
Within
one year
|
$ | 27,075 | $ | 27,447 | ||||
|
From
one to five years
|
175,125 | 178,107 | ||||||
|
From
five to ten years
|
388,180 | 399,259 | ||||||
|
After
ten years
|
498,092 | 504,085 | ||||||
| $ | 1,088,472 | $ | 1,108,898 | |||||
|
Debt
securities classified as held to maturity
|
||||||||
|
Within
one year
|
$ | 75,141 | $ | 75,192 | ||||
|
From
one to five years
|
34,547 | 34,929 | ||||||
|
From
five to ten years
|
22,530 | 23,075 | ||||||
|
After
ten years
|
7,991 | 8,112 | ||||||
| $ | 140,209 | $ | 141,308 | |||||
Maturities
of mortgage-backed, collateralized mortgage obligations and asset-backed
securities are stated based on their estimated average lives. Actual
maturities may differ from estimated average lives or contractual maturities
because, in certain cases, borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
Except
for U.S. Government securities, there were no holdings, when taken in the
aggregate, of any single issuer that exceeded 10% of consolidated stockholders’
equity at December 31, 2008 and 2007.
(6) LOANS
AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary
of loans and leases, net of deferred fees and origination costs, by category is
as follows:
|
At December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Residential
real estate mortgages
|
$ | 722,723 | $ | 719,182 | ||||
|
Commercial
|
572,059 | 593,077 | ||||||
|
Commercial
real estate
|
669,720 | 621,820 | ||||||
|
Real
estate construction and development
|
67,859 | 81,350 | ||||||
|
Agricultural
and agricultural real estate mortgages
|
113,566 | 116,190 | ||||||
|
Consumer
|
795,123 | 655,375 | ||||||
|
Home
equity
|
627,603 | 582,731 | ||||||
|
Lease
financing
|
83,258 | 86,126 | ||||||
|
Total
loans and leases
|
$ | 3,651,911 | $ | 3,455,851 | ||||
Included
in the above loans and leases are net deferred loan origination costs totaling
$4.2 million and $3.3 million at December 31, 2008 and December 31, 2007,
respectively. Also included is unearned income of $7.3 million and
$7.4 million at December 31, 2008 and 2007, respectively. Loans held
for sale were $2.2 million and $1.2 million at December 31, 2008 and 2007,
respectively and are included in residential real estate mortgages.
FHLB
advances are collateralized by a blanket lien on the Company’s residential real
estate mortgages.
Changes
in the allowance for loan and lease losses for the three years ended December
31, 2008, are summarized as follows:
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Balance
at January 1
|
$ | 54,183 | $ | 50,587 | $ | 47,455 | ||||||
|
Allowance
from purchase transaction
|
- | - | 2,410 | |||||||||
|
Provision
|
27,181 | 30,094 | 9,395 | |||||||||
|
Recoveries
|
4,192 | 4,745 | 4,699 | |||||||||
|
Charge-offs
|
(26,992 | ) | (31,243 | ) | (13,372 | ) | ||||||
|
Balance
at December 31
|
$ | 58,564 | $ | 54,183 | $ | 50,587 | ||||||
The
following table sets forth information with regard to nonperforming
loans:
|
At December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Loans
in nonaccrual status
|
$ | 24,191 | $ | 29,697 | $ | 13,665 | ||||||
|
Loans
contractually past due 90 days or more and still accruing
interest
|
2,305 | 882 | 1,642 | |||||||||
|
Total
nonperforming loans
|
$ | 26,496 | $ | 30,579 | $ | 15,307 | ||||||
There
were no material commitments to extend further credit to borrowers with
nonperforming loans. Within nonaccrual loans, there are approximately $1.0
million of troubled debt restructured loans at December 31, 2008.
Accumulated
interest on the above nonaccrual loans of approximately $1.2 million, $0.8
million, and $0.7 million would have been recognized as income in 2008, 2007,
and 2006, respectively, had these loans been in accrual
status. Approximately $1.4 million, $1.0 million, and $0.8 million of
interest on the above nonaccrual loans was collected in 2008, 2007, and 2006,
respectively.
Impaired
loans consist primarily of large, nonaccrual commercial, commercial real estate,
agricultural, and agricultural real estate loans. Impaired loans
totaled $11.3 million at December 31, 2008 and $21.5 million at December 31,
2007. At December 31, 2008, $1.7 million of the impaired loans
reviewed in accordance with SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan--an amendment of FASB Statements No. 5 and 15” (“SFAS No.
114”) had a specific reserve allocation of $0.6 million and $9.6 million of the
impaired loans reviewed had no specific reserve allocation. At
December 31, 2007, $12.8 million of the impaired loans reviewed had a specific
reserve allocation of $5.1 million and $8.7 million of the impaired loans
reviewed had no specific reserve allocation.
The
following provides additional information on impaired loans for the periods
presented:
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Average
recorded investment on impaired loans
|
$ | 14,438 | $ | 20,984 | $ | 9,644 | ||||||
|
Interest
income recognized on impaired loans
|
360 | 559 | 384 | |||||||||
|
Cash
basis interest income recognized on impaired loans
|
360 | 559 | 384 | |||||||||
There was
significant disruption and volatility in the financial and capital markets
during the second half of 2008. Turmoil in the mortgage market
adversely impacted both domestic and global markets, and led to a significant
credit and liquidity crisis in many domestic markets. These market
conditions were attributable to a variety of factors, in particular the fallout
associated with subprime mortgage loans (a type of lending we have never
actively pursued). The disruption has been exacerbated by the
continued decline of the real estate and housing market. While we
continue to adhere to prudent underwriting standards, as a lender we may be
adversely impacted by general economic weaknesses and, in particular, a sharp
downturn in the housing market nationally. Decreases in real estate
values could adversely affect the value of property used as collateral for our
loans. Adverse changes in the economy may have a negative effect on
the ability of our borrowers to make timely loan payments, which would have an
adverse impact on our earnings. A further increase in loan
delinquencies would decrease our net interest income and adversely impact our
loan loss experience, causing increases in our provision and allowance for loan
and lease losses.
The
Company recorded an other-than-temporary impairment charge on lease residual
assets totaling $2.0 million during the third quarter of 2008 as a result of a
decline in the fair value of lease residual assets associated with certain
leased vehicles.
(7)
RELATED PARTY TRANSACTIONS
In the
ordinary course of business, the Company has made loans at prevailing rates and
terms to directors, officers, and other related parties. Such loans, in
management’s opinion, do not present more than the normal risk of collectibility
or incorporate other unfavorable features. The aggregate amount of loans
outstanding to qualifying related parties and changes during the years are
summarized as follows:
|
(In thousands)
|
2008
|
2007
|
||||||
|
Balance
at January 1
|
$ | 10,950 | $ | 9,949 | ||||
|
New
loans
|
335 | 2,686 | ||||||
|
Adjustment
due to change in composition of related parties
|
344 | 130 | ||||||
|
Repayments
|
(6,196 | ) | (1,815 | ) | ||||
|
Balance
at December 31
|
$ | 5,433 | $ | 10,950 | ||||
|
(8)
PREMISES AND EQUIPMENT, NET
|
A summary
of premises and equipment follows:
|
December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Land,
buildings, and improvements
|
$ | 88,567 | $ | 85,363 | ||||
|
Equipment
|
68,450 | 65,925 | ||||||
|
Construction
in progress
|
113 | 115 | ||||||
|
Premises
and equipment before accumulated depreciation
|
157,130 | 151,403 | ||||||
|
Accumulated
depreciation
|
91,889 | 87,361 | ||||||
|
Total
premises and equipment
|
$ | 65,241 | $ | 64,042 | ||||
Land,
buildings, and improvements with a carrying value of approximately $3.2 million
and $3.3 million at December 31, 2008 and 2007, respectively, are pledged to
secure long-term borrowings. Buildings and improvements are
depreciated based on useful lives of 15 to 40 years. Equipment is
depreciated based on useful lives of 3 to 10 years.
Rental
expense included in occupancy expense amounted to $4.5 million in 2008, $3.5
million in 2007, and $3.2 million in 2006. The future minimum rental payments
related to noncancelable operating leases with original terms of one year or
more are as follows at December 31, 2008 (in thousands):
|
Future
Minimum Rental Payments
|
||||
|
2009
|
$ | 4,226 | ||
|
2010
|
3,677 | |||
|
2011
|
3,440 | |||
|
2012
|
3,025 | |||
|
2013
|
2,343 | |||
|
Thereafter
|
19,555 | |||
|
Total
|
$ | 36,266 | ||
|
(9)
GOODWILL AND OTHER INTANGIBLE
ASSETS
|
A summary
of goodwill is as follows:
|
(In thousands)
|
||||
|
January
1, 2008
|
103,398 | |||
|
Goodwill
Acquired
|
11,808 | |||
|
Goodwill Adjustments
|
(368 | ) | ||
|
December 31, 2008
|
$ | 114,838 | ||
|
January
1, 2007
|
$ | 103,356 | ||
|
Goodwill Adjustments
|
42 | |||
|
December 31, 2007
|
103,398 | |||
In
September 2008, the Company acquired Mang Insurance Agency, LLC. The
acquisition resulted in increases to goodwill of $11.8 million and other
intangibles of $15.3 million.
The
Company has intangible assets with definite useful lives capitalized on its
consolidated balance sheet in the form of core deposit and other identified
intangible assets. These intangible assets are amortized over their
estimated useful lives, which range primarily from one to twelve
years.
A summary
of core deposit and other intangible assets follows:
|
December 31,
|
||||||||
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Core
deposit intangibles
|
||||||||
|
Gross
carrying amount
|
$ | 10,631 | $ | 12,663 | ||||
|
Less:
accumulated amortization
|
3,469 | 4,387 | ||||||
|
Net
carrying amount
|
7,162 | 8,276 | ||||||
|
Identified
intangible assets
|
||||||||
|
Gross
carrying amount
|
18,194 | 2,895 | ||||||
|
Less:
accumulated amortization
|
1,989 | 998 | ||||||
|
Net
carrying amount
|
16,205 | 1,897 | ||||||
|
Total
intangibles
|
||||||||
|
Gross
carrying amount
|
28,825 | 15,558 | ||||||
|
Less:
accumulated amortization
|
5,458 | 5,385 | ||||||
|
Net
carrying amount
|
$ | 23,367 | $ | 10,173 | ||||
Amortization
expense on intangible assets with definite useful lives totaled $2.1 million for
2008, $1.6 million for 2007 and $1.6 million for 2006. Amortization
expense on intangible assets with definite useful lives is expected to total
$3.2 million for 2009, $3.0 million for 2010, $2.8 million for 2011, $2.6
million for 2012, $2.5 million for 2013 and $7.5 million
thereafter. The Company also has $1.8 million in intangible assets
that will not amortize.
|
(10) DEPOSITS
|
The
following table sets forth the maturity distribution of time deposits at
December 31, 2008 (in thousands):
|
Time deposits
|
||||
|
Within
one year
|
$ | 971,490 | ||
|
After
one but within two years
|
236,742 | |||
|
After
two but within three years
|
59,711 | |||
|
After
three but within four years
|
62,687 | |||
|
After
four but within five years
|
16,872 | |||
|
After
five years
|
4,710 | |||
|
Total
|
$ | 1,352,212 | ||
Time
deposits of $100,000 or more aggregated $428.8 million and $694.3 million at
year end 2008 and 2007, respectively.
|
(11)
SHORT-TERM BORROWINGS
|
Short-term
borrowings totaled $206.5 million and $368.5 million at December 31,
2008 and 2007, respectively, and consist of
Federal funds purchased and securities sold under repurchase agreements, which
generally represent overnight borrowing transactions, and other short-term
borrowings, primarily Federal Home Loan Bank (FHLB)
advances, with original maturities of one year or less. The Company has unused
lines of credit with the FHLB available for short-term financing of
approximately $245 million and $238 million at December 31, 2008 and 2007,
respectively.
Included
in the information provided above, the Company has two lines of credit available
with the FHLB, which are automatically renewed on July 30th of each
year. The first is an overnight line of credit for approximately
$100.0 million with interest based on existing market conditions. The
second is a one-month overnight repricing line of credit for approximately
$100.0 million with interest based on existing market conditions. As of December
31, 2008, there was $10.0 million (included in federal funds purchased)
outstanding on these lines of credit. Borrowings on these lines are
secured by FHLB stock, certain securities and one-to-four family first lien
mortgage
loans. Securities collateralizing repurchase agreements are held
in safekeeping by
nonaffiliated financial institutions and are under the Company’s
control.
Information
related to short-term borrowings is summarized as follows:
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Federal
funds purchased
|
||||||||||||
|
Balance
at year-end
|
$ | 85,000 | $ | 149,250 | $ | 100,000 | ||||||
|
Average
during the year
|
70,445 | 98,872 | 76,550 | |||||||||
|
Maximum
month end balance
|
124,000 | 149,250 | 122,000 | |||||||||
|
Weighted
average rate during the year
|
2.34 | % | 5.14 | % | 5.10 | % | ||||||
|
Weighted
average rate at December 31
|
0.27 | % | 4.38 | % | 5.36 | % | ||||||
|
Securities
sold under repurchase agreements
|
||||||||||||
|
Balance
at year-end
|
$ | 121,242 | $ | 93,967 | $ | 95,158 | ||||||
|
Average
during the year
|
109,692 | 104,876 | 89,934 | |||||||||
|
Maximum
month end balance
|
138,527 | 117,337 | 103,921 | |||||||||
|
Weighted
average rate during the year
|
1.74 | % | 3.62 | % | 3.32 | % | ||||||
|
Weighted
average rate at December 31
|
0.42 | % | 3.56 | % | 3.53 | % | ||||||
|
Other
short-term borrowings
|
||||||||||||
|
Balance
at year-end
|
$ | 250 | $ | 125,250 | $ | 150,250 | ||||||
|
Average
during the year
|
43,693 | 76,414 | 164,771 | |||||||||
|
Maximum
month end balance
|
200,250 | 125,250 | 225,250 | |||||||||
|
Weighted
average rate during the year
|
2.94 | % | 5.32 | % | 5.19 | % | ||||||
|
Weighted
average rate at December 31
|
0.00 | % | 4.54 | % | 5.44 | % | ||||||
See Note
5 for additional information regarding securities pledged as collateral for
securities sold under the repurchase agreements.
|
(12)
LONG-TERM DEBT
|
Long-term
debt consists of obligations having an original maturity at issuance of more
than one year. A majority of the Company’s long-term debt is comprised of FHLB
advances collateralized by the FHLB stock owned by the Company, certain of its
mortgage-backed securities and a blanket lien on its residential real estate
mortgage loans. A summary as of December 31, 2008 and 2007 is as
follows:
|
As of December 31,
2008
|
As of December 31,
2007
|
|||||||||||||||||||||||||||||||
|
Maturity
|
Amount
|
Weighted Average Rate
|
Callable Amount
|
Weighted Average Rate
|
Amount
|
Weighted Average Rate
|
Callable Amount
|
Weighted Average Rate
|
||||||||||||||||||||||||
|
2008
|
- | - | - | - | 130,079 | 4.05 | % | 25,000 | 5.38 | % | ||||||||||||||||||||||
|
2009
|
40,000 | 5.47 | % | 40,000 | 5.47 | % | 40,000 | 5.47 | % | 40,000 | 5.47 | % | ||||||||||||||||||||
|
2010
|
79,000 | 4.07 | % | 29,000 | 3.35 | % | 54,000 | 4.20 | % | 29,000 | 3.35 | % | ||||||||||||||||||||
|
2011
|
89,444 | 3.64 | % | 2,000 | 4.72 | % | 1,921 | 4.92 | % | 1,921 | 4.72 | % | ||||||||||||||||||||
|
2012
|
25,025 | 4.01 | % | - | - | 32 | 0.00 | % | - | - | ||||||||||||||||||||||
|
2013
|
150,000 | 3.79 | % | 125,000 | 3.61 | % | 25,000 | 3.21 | % | 25,000 | 3.21 | % | ||||||||||||||||||||
|
2016
|
70,000 | 4.17 | % | 70,000 | 4.17 | % | 70,000 | 4.17 | % | 70,000 | 4.17 | % | ||||||||||||||||||||
|
2017
|
100,000 | 3.89 | % | 100,000 | 3.89 | % | 100,000 | 3.89 | % | 100,000 | 3.89 | % | ||||||||||||||||||||
|
2018
|
75,000 | 3.61 | % | 75,000 | 3.61 | % | - | - | - | - | ||||||||||||||||||||||
|
2025
|
3,740 | 2.75 | % | - | - | 3,855 | 2.75 | % | - | - | ||||||||||||||||||||||
| $ | 632,209 | $ | 441,000 | $ | 424,887 | $ | 290,921 | |||||||||||||||||||||||||
|
(13) TRUST PREFERRED
DEBENTURES
|
The
Company has issued a total of $75.4 million of junior subordinated deferrable
interest debentures to three wholly owned Delaware statutory business trusts,
CNBF Capital Trust I (“CNBF Trust I”), NBT Statutory Trust I (“NBT Trust I”) and
NBT Statutory Trust II (“NBT Trust II”) collectively referred to as the
(“Trusts”). The Trusts are considered variable interest entities for which the
Company is not the primary beneficiary. Accordingly, the accounts of the Trusts
are not included in the Company’s consolidated financial statements. See Note 1
— Summary of Significant Accounting Policies for additional information about
the Company’s consolidation policy. Details of the Company’s transactions with
these trusts are presented below.
CNBF Trust I
In June 1999, CNBF Trust I issued
$18.0 million of floating rate (three-month
LIBOR plus 275 basis points) trust preferred securities, which represent
beneficial interests in the assets of the trust. The trust preferred securities
will mature on August 31,
2029 and are redeemable
with the approval of the Federal Reserve Board in whole or in part at the option
of the Company at any time after September 1, 2009 and in whole at any time upon the
occurrence of certain events affecting their tax or regulatory capital
treatment. Distributions on the trust preferred securities are payable quarterly
in arrears on March 31, June 30, September 30 and December 31 of each year.
CNBF Trust I also issued $0.7 million of common equity securities to the
Company. The proceeds of the offering of the trust preferred securities and
common equity securities were used to purchase $18.7 million of floating rate (three-month LIBOR plus
275 basis points) junior subordinated deferrable interest debentures
issued by the Company, which have terms substantially similar to the trust
preferred securities.
NBT
Trust I
In
November 2005, NBT Trust I issued $5.0 million of fixed rate (at 6.30%) trust
preferred securities, which represent beneficial interests in the assets of the
trust. After 5 years, the rate converts to a floating rate (three-month LIBOR plus 140 basis points). The trust preferred
securities will mature on December 1, 2035 and are redeemable with the approval
of the Federal Reserve Board in whole or in part at the option of the
Corporation at any time after December 1, 2010 and in whole at any time upon the
occurrence of certain events affecting their tax or regulatory capital
treatment. Distributions on the trust preferred securities are payable quarterly
in arrears on March 15, June 15, September 15 and December 15 of each year. NBT
Trust I also issued $0.2 million of common equity securities to the Company. The
proceeds of the offering of the trust preferred securities and common equity
securities were used to purchase $5.2 million of fixed rate (at 6.30%) junior
subordinated deferrable interest debentures issued by the Corporation, which
have terms substantially similar to the trust preferred securities.
NBT
Trust II
In
connection with acquisition of CNB, the Company formed NBT Trust II in February
2006 to fund the cash portion of the acquisition as well as to provide
regulatory capital. NBT Trust II issued $50.0 million of fixed rate (at 6.195%)
trust preferred securities, which represent beneficial interests in the assets
of the trust. After 5 years, the rate converts to a floating rate
(three-month LIBOR plus
140 basis points). The trust preferred
securities will mature on March 15, 2036 and are redeemable with the approval of
the Federal Reserve Board in whole or in part at the option of the Corporation
at any time after March 15, 2011 and in whole at any time upon the occurrence of
certain events affecting their tax or regulatory capital treatment.
Distributions on the trust preferred securities are payable quarterly in arrears
on March 15, June 15, September 15 and December 15 of each year. NBT Trust II
also issued $1.5 million of common equity securities to the Company. The
proceeds of the offering of the trust preferred securities and common equity
securities were used to purchase $51.5 million of fixed rate (at 6.195%) junior
subordinated deferrable interest debentures issued by the Corporation, which
have terms substantially similar to the trust preferred securities.
With respect to the Trusts,
the Company has the right
to defer payments of interest on the debentures at any time or from time to time
for a period of up to ten consecutive semi-annual periods with respect to each
deferral period in the case of the debentures issued to the Trusts. Under the
terms of the debentures, in the event that under certain circumstances there is
an event of default under the debentures or the Company has elected to defer
interest on the debentures, the Company may not, with certain exceptions,
declare or pay any dividends or distributions on its capital stock or purchase
or acquire any of its capital stock.
Payments of distributions on the trust
preferred securities and payments on redemption of the trust preferred
securities are guaranteed by the Company on a limited basis. The Company also
entered into an agreement as to expenses and liabilities with the Trusts
pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses
or liabilities of each trust other than those arising under the trust preferred
securities. The obligations of the Company under the junior subordinated
debentures, the related indentures, the trust agreements establishing the
trusts, the guarantees and the agreements as to expenses and liabilities, in the
aggregate, constitute a full and unconditional guarantee by the Company of each
Trust’s obligations under the trust
preferred securities.
Despite
the fact that the accounts of CNBF Trust I, NBT Trust I, and NBT Trust II are
not included in the Company’s consolidated financial statements, the $74 million
of the $75 million in trust preferred securities issued by these subsidiary
trusts are included in the Tier 1 capital of the Company for regulatory capital
purposes as allowed by the Federal Reserve Board (NBT Bank, NA owns $1.0 million of CNBF Trust I
securities).
|
(14)
INCOME TAXES
|
The
significant components of income tax expense attributable to operations
are:
|
Years ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 19,156 | $ | 19,020 | $ | 13,655 | ||||||
|
State
|
1,471 | 523 | 732 | |||||||||
| 20,627 | 19,543 | 14,387 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
3,915 | 1,530 | 7,754 | |||||||||
|
State
|
863 | 714 | 2,013 | |||||||||
| 4,778 | 2,244 | 9,767 | ||||||||||
|
Total
income tax expense
|
$ | 25,405 | $ | 21,787 | $ | 24,154 | ||||||
Not
included in the above table are changes in deferred tax assets and liabilities
that were recorded to stockholders’ equity of approximately ($3.9 million), $6.1
million, and ($6.5 million) for 2008, 2007, and 2006, respectively, relating to
unrealized gain (loss) on available for sale securities, tax benefits recognized
with respect to stock options exercised, and tax benefit related to pension
funding.
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are as follows:
|
December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan and lease losses
|
$ | 22,059 | $ | 20,372 | ||||
|
Deferred
compensation
|
4,196 | 4,606 | ||||||
|
Postretirement
benefit obligation
|
1,170 | 1,187 | ||||||
|
Writedowns
on corporate debt securities
|
177 | 465 | ||||||
|
Accrued
liabilities
|
1,186 | 1,534 | ||||||
|
New
York State tax credit and net operating loss carryforward
|
- | 196 | ||||||
|
Stock-based
compensation expense
|
1,962 | 1,377 | ||||||
|
Other
|
943 | 893 | ||||||
|
Total
deferred tax assets
|
31,693 | 30,630 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Pension
|
16,744 | 14,454 | ||||||
|
Premises
and equipment, primarily due to accelerated depreciation
|
1,803 | 1,817 | ||||||
|
Equipment
leasing
|
26,354 | 23,483 | ||||||
|
Deferred
loan costs
|
1,687 | 1,315 | ||||||
|
Intangible
amortization
|
8,715 | 7,997 | ||||||
|
Other
|
452 | 848 | ||||||
|
Total
deferred tax liabilities
|
55,755 | 49,914 | ||||||
|
Net
deferred tax liability at year-end
|
(24,062 | ) | (19,284 | ) | ||||
|
Net
deferred tax liability at beginning of year
|
(19,284 | ) | (17,040 | ) | ||||
|
Deferred
tax expense
|
$ | 4,778 | $ | 2,244 | ||||
The above
table does not include the recorded deferred tax liability of $8.2 million as of
December 31, 2008 and the deferred tax liability of $2.8 million as of December
31, 2007 related to the net unrealized holding gain/loss in the
available-for-sale securities portfolio. The table also excludes
deferred tax assets of $13.6 million and $5.2 million related to pension and
postretirement benefit funding as of December 31, 2008 and December 31, 2007,
respectively. The changes in these deferred assets are recorded
directly in stockholders’ equity.
Realization
of deferred tax assets is dependent upon the generation of future taxable income
or the existence of sufficient taxable income within the available carryback
period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. Based on available evidence, gross deferred tax assets will
ultimately be realized and a valuation allowance was not deemed necessary at
December 31, 2008 and 2007.
The
Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109” on January 1, 2007 with no
material impact to the financial statements.
A
reconciliation of the beginning and ending balance of gross unrecognized tax
benefits is as follows:
|
December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Balance
at January 1
|
$ | 2,515 | $ | 2,563 | ||||
|
Additions
based on tax positions related to the current year
|
- | 86 | ||||||
|
Additions
for tax positions of prior years
|
65 | 258 | ||||||
|
Reduction
for tax positions of prior years
|
(368 | ) | (392 | ) | ||||
|
Balance
at December 31
|
$ | 2,212 | $ | 2,515 | ||||
Approximately
$1.8 million of the total amount of unrecognized tax benefits at December 31,
2008 and 2007 would impact the annual effective tax rate, if
recognized. The Company is currently under examination by New York
State for tax years 2000 through 2004. It is likely that the
examination phase of some of these audits will conclude in 2009, and it is
reasonably possible a reduction in the unrecognized tax benefits may occur;
however, quantification of an estimated range cannot be made at this
time. The Company is no longer subject to U.S. Federal examination by
tax authorities for years prior to 2007.
The
Company recognizes interest accrued and penalties related to unrecognized tax
benefits in income tax expense. The total amount of accrued interest
at December 31, 2008 and December 31, 2007 was approximately $0.6 million and
$0.4 million (less the associated tax benefit), respectively. Net
interest impacting the Company’s 2008 and 2007 tax expense was $0.2 million and
$0.1 million, respectively.
The
following is a reconciliation of the provision for income taxes to the amount
computed by applying the applicable Federal statutory rate of 35% to income
before taxes:
|
Years ended
December 31
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Federal
income tax at statutory rate
|
$ | 29,315 | $ | 25,229 | $ | 28,035 | ||||||
|
Tax
exempt income
|
(3,847 | ) | (3,596 | ) | (3,164 | ) | ||||||
|
Net
increase in CSV of life insurance
|
(1,473 | ) | (915 | ) | (869 | ) | ||||||
|
State
taxes, net of federal tax benefit
|
1,517 | 804 | 1,785 | |||||||||
|
Other,
net
|
(107 | ) | 265 | (1,633 | ) | |||||||
|
Income
tax expense
|
$ | 25,405 | $ | 21,787 | $ | 24,154 | ||||||
|
(15) STOCKHOLDERS’
EQUITY
|
Certain
restrictions exist regarding the ability of the subsidiary bank to transfer
funds to the Company in the form of cash dividends. The approval of the Office
of Comptroller of the Currency (OCC) is required to pay dividends when a bank
fails to meet certain minimum regulatory capital standards or when such
dividends are in excess of a subsidiary bank’s earnings retained in the current
year plus retained net profits for the preceding two years (as defined in the
regulations). At December 31, 2008, approximately $46.6 million of
the total stockholders’ equity of the Bank was available for payment of
dividends to the Company without approval by the OCC. The Bank’s ability to pay
dividends also is subject to the Bank being in compliance with regulatory
capital requirements. The Bank is currently in compliance with these
requirements. Under the State of Delaware Business Corporation Law, the Company
may declare and pay dividends either out of accumulated net retained earnings or
capital surplus.
In
October 2004, the Company adopted a Stockholder Rights Plan (Plan) designed to
ensure that any potential acquirer of the Company negotiate with the board of
directors and that all Company stockholders are treated equitably in the event
of a takeover attempt. At that time, the Company paid a dividend of one
Preferred Share Purchase Right (Right) for each outstanding share of common
stock of the Company. Similar rights are attached to each share of the Company’s
common stock issued after November 16, 2004. Under the Plan, the Rights will not
be exercisable until a person or group acquires beneficial ownership of 15% or
more of the Company’s outstanding common stock or begins a tender or exchange
offer for 15% or more of the Company’s outstanding common stock. Additionally,
until the occurrence of such an event, the Rights are not severable from the
Company’s common stock and, therefore, the Rights will be transferred upon the
transfer of shares of the Company’s common stock. Upon the occurrence of such
events, each Right entitles the holder to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, no par value, and $0.01 stated
value per share of the Company at a price of $70.
The Plan
also provides that upon the occurrence of certain specified events, the holders
of Rights will be entitled to acquire additional equity interests, in the
Company or in the acquiring entity, such interests having a market value of two
times the Right’s exercise price of $70. The Rights, which expire October 24,
2014, are redeemable in whole, but not in part, at the Company’s option prior to
the time they are exercisable, for a price of $0.001 per Right.
Components
of accumulated other comprehensive loss are:
|
As
of December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Unrecognized
prior service cost and net actuarial loss on pension plans
|
$ | (20,692 | ) | $ | (7,846 | ) | ||
|
Unrealized net holding gains on available for sale
securities
|
12,488 | 4,271 | ||||||
|
Accumulated other comprehensive
loss
|
$ | (8,204 | ) | $ | (3,575 | ) | ||
|
(16) REGULATORY
CAPITAL REQUIREMENTS
|
Bancorp
and NBT Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, NBT Bank
must meet specific capital guidelines that involve quantitative measures of NBT
Bank’s assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and NBT Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 Capital to risk-weighted assets, and of Tier 1
capital to average assets. As of December 31, 2008 and 2007, the Company and NBT
Bank meet all capital adequacy requirements to which they were
subject.
Under
their prompt corrective action regulations, regulatory authorities are required
to take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions could
have a direct material effect on an institution’s financial
statements. The regulations establish a framework for the
classification of banks into five categories: well capitalized,
adequately capitalized, under capitalized, significantly under capitalized, and
critically under capitalized. As of December 31, 2008, the most
recent notification from NBT Bank’s regulators categorized NBT Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized NBT Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 capital to average asset
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed NBT Bank’s
category.
The
Company and NBT Bank’s actual capital amounts and ratios are presented as
follows:
|
Actual
|
Regulatory ratio
requirements
|
|||||||||||||||
|
(Dollars in thousands)
|
Amount
|
Ratio
|
Minimum
capital adequacy
|
For
classification as well
capitalized
|
||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||
|
Total
capital (to risk weighted assets):
|
||||||||||||||||
|
Company
combined
|
$ | 421,829 | 11.00 | % | 8.00 | % | 10.00 | % | ||||||||
|
NBT
Bank
|
408,069 | 10.64 | % | 8.00 | % | 10.00 | % | |||||||||
|
Tier
I Capital (to risk weighted assets)
|
||||||||||||||||
|
Company
combined
|
373,783 | 9.75 | % | 4.00 | % | 6.00 | % | |||||||||
|
NBT
Bank
|
359,984 | 9.38 | % | 4.00 | % | 6.00 | % | |||||||||
|
Tier
I Capital (to average assets)
|
||||||||||||||||
|
Company
combined
|
373,783 | 7.17 | % | 4.00 | % | 5.00 | % | |||||||||
|
NBT
Bank
|
359,984 | 6.93 | % | 4.00 | % | 5.00 | % | |||||||||
|
As
of December 31, 2007
|
||||||||||||||||
|
Total
capital (to risk weighted assets):
|
||||||||||||||||
|
Company
combined
|
$ | 405,194 | 11.05 | % | 8.00 | % | 10.00 | % | ||||||||
|
NBT
Bank
|
387,690 | 10.66 | % | 8.00 | % | 10.00 | % | |||||||||
|
Tier
I Capital (to risk weighted assets)
|
||||||||||||||||
|
Company
combined
|
359,241 | 9.79 | % | 4.00 | % | 6.00 | % | |||||||||
|
NBT
Bank
|
342,102 | 9.40 | % | 4.00 | % | 6.00 | % | |||||||||
|
Tier
I Capital (to average assets)
|
||||||||||||||||
|
Company
combined
|
359,241 | 7.14 | % | 4.00 | % | 5.00 | % | |||||||||
|
NBT
Bank
|
342,102 | 6.82 | % | 4.00 | % | 5.00 | % | |||||||||
|
(17)
EMPLOYEE BENEFIT PLANS
|
DEFINED
BENEFIT POSTRETIREMENT PLANS
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all of its employees at December 31, 2008. Benefits paid from the
plan are based on age, years of service, compensation, social security benefits,
and are determined in accordance with defined formulas. The Company’s policy is
to fund the pension plan in accordance with ERISA standards. Assets of the plan
are invested in publicly traded stocks and bonds. Prior to January 1, 2000, the
Company’s plan was a traditional defined benefit plan based on final average
compensation. On January 1, 2000, the plan was converted to a cash
balance plan with grandfathering provisions for existing
participants. In 2006, the Pension Protection Act of 2006 was
enacted, which established certain criteria to ensure that pension plan assets
are sufficient to satisfy future obligations. The law identifies at
risk plans and applies stricter funding requirements to help stabilize at risk
plans. The Company has determined that the law does not materially
affect the Company’s funding obligations with respect to its benefit
plans.
In
addition to the pension plan, the Company also provides supplemental employee
retirement plans to certain current and former executives. These
supplemental employee retirement plans and the defined benefit pension plan are
collectively referred to herein as “Pension Benefits”.
Also, the
Company provides certain health care benefits for retired
employees. Benefits are accrued over the employees’ active service
period. Only employees that were employed by NBT Bank on or before January 1,
2000 are eligible to receive postretirement health care benefits. The
plan is contributory for participating retirees, requiring participants to
absorb certain deductibles and coinsurance amounts with contributions adjusted
annually to reflect cost sharing provisions and benefit limitations called for
in the plan. Employees become eligible for these benefits if they reach normal
retirement age while working for the Company. The Company funds the
cost of postretirement health care as benefits are paid. The Company elected to
recognize the transition obligation on a delayed basis over twenty
years. These postretirement benefits are referred to herein as “Other
Benefits”.
As
discussed in Note 1, the Company adopted SFAS No. 158 effective December 31,
2006. SFAS No. 158 requires an employer to: (1) recognize the
overfunded or underfunded status of defined benefit postretirement plans, which
is measured as the difference between plan assets at fair value and the benefit
obligation, as an asset or liability in its balance sheet; (2) recognize changes
in that funded status in the year in which the changes occur through
comprehensive income, except in year of adoption; and (3) measure the defined
benefit plan assets and obligations as of the date of its year-end balance
sheet. SFAS No. 158 does not change how an employer measures plan
assets and benefit obligations as of the date of its balance sheet or how it
determines the amount of net periodic benefit cost. The adjustment to
accumulated other comprehensive loss for the adoption of SFAS No. 158 was $7.6
million at December 31, 2006.
The
components of accumulated other comprehensive loss, which have not yet been
recognized as components of net periodic benefit cost, related to pensions and
other postretirement benefits, net of tax, at December 31, 2008 are summarized
below. The Company expects that $2.6 million in net actuarial loss
and $0.1 million in prior service cost will be recognized as components of net
periodic benefit cost in 2009.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Transition
asset
|
$ | (23 | ) | $ | (215 | ) | $ | - | $ | - | ||||||
|
Net
actuarial loss
|
31,416 | 11,585 | 2,182 | 2,578 | ||||||||||||
|
Prior service cost (credit)
|
2,208 | 1,329 | (1,480 | ) | (1,683 | ) | ||||||||||
|
Total amounts recognized in accumulated other
comprehensive loss (pre-tax)
|
$ | 33,601 | $ | 12,699 | $ | 702 | $ | 895 | ||||||||
A
December 31 measurement date is used for the pension, supplemental pension and
postretirement benefit plans. The following table sets forth changes
in benefit obligation, changes in plan assets, and the funded status of the
pension plans and other postretirement benefits:
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
(In
thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Change
in benefit obligation
|
||||||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 53,325 | $ | 52,903 | $ | 3,978 | $ | 3,839 | ||||||||
|
Service
cost
|
2,193 | 2,100 | 22 | 19 | ||||||||||||
|
Interest
cost
|
3,253 | 2,979 | 218 | 233 | ||||||||||||
|
Plan
participants' contributions
|
- | - | 287 | 303 | ||||||||||||
|
Actuarial
loss (gain)
|
420 | 49 | (240 | ) | 301 | |||||||||||
|
Amendments
|
1,098 | - | - | - | ||||||||||||
|
Benefits
paid
|
(3,523 | ) | (4,617 | ) | (617 | ) | (717 | ) | ||||||||
|
Prior
service cost
|
- | (89 | ) | - | - | |||||||||||
|
Projected
benefit obligation at end of year
|
56,766 | 53,325 | 3,648 | 3,978 | ||||||||||||
|
Change
in plan assets
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
72,714 | 65,544 | - | - | ||||||||||||
|
Actual
(loss) return on plan assets
|
(13,781 | ) | 5,365 | - | - | |||||||||||
|
Employer
contributions
|
5,490 | 6,422 | 330 | 414 | ||||||||||||
|
Plan
participants' contributions
|
- | - | 287 | 303 | ||||||||||||
|
Benefits
paid
|
(3,523 | ) | (4,617 | ) | (617 | ) | (717 | ) | ||||||||
|
Fair
value of plan assets at end of year
|
60,900 | 72,714 | - | - | ||||||||||||
|
Funded
status at year end
|
$ | 4,134 | $ | 19,389 | $ | (3,648 | ) | $ | (3,978 | ) | ||||||
The
funded status of the pension and other postretirement benefit plans has been
recognized as follows in the consolidated balance sheets at December 31, 2008
and December 31, 2007. An asset is recognized for an overfunded plan
and a liability is recognized for an underfunded plan. The
accumulated benefit obligation for pension benefits was $55.9 million and $52.7
million for the years ended 2008 and 2007, respectively. The
accumulated benefit obligation for other postretirement benefits was $3.6
million and $4.0 million for the years ended 2008 and 2007,
respectively.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Other
assets
|
$ | 9,844 | $ | 24,872 | $ | - | $ | - | ||||||||
|
Other liabilities
|
(5,710 | ) | (5,483 | ) | (3,648 | ) | (3,978 | ) | ||||||||
|
Funded status
|
$ | 4,134 | $ | 19,389 | $ | (3,648 | ) | $ | (3,978 | ) | ||||||
The
following assumptions were used to determine the benefit obligation and the net
periodic pension cost for the years indicated:
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted
average assumptions:
|
||||||||||||
|
The
following assumptions were used to determine the benefit
obligation:
|
||||||||||||
|
Discount
rate
|
6.30 | % | 6.30 | % | 5.80 | % | ||||||
|
Expected
long-term return on plan assets
|
8.00 | % | 8.50 | % | 8.50 | % | ||||||
|
Rate
of compensation increase
|
3.00 | % | 3.00 | % | 3.09 | % | ||||||
|
The
following assumptions were used to determine net periodic pension
cost:
|
||||||||||||
|
Discount
rate
|
6.30 | % | 5.80 | % | 5.50 | % | ||||||
|
Expected
long-term return on plan assets
|
8.50 | % | 8.50 | % | 8.50 | % | ||||||
|
Rate
of compensation increase
|
3.00 | % | 3.00 | % | 3.75 | % | ||||||
Net
periodic benefit cost and other amounts recognized in other comprehensive income
for the years ended December 31 included the following components:
|
Pension Benefits
|
Other Benefits
|
|||||||||||||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Components
of net periodic benefit cost
|
||||||||||||||||||||||||
|
Service
cost
|
$ | 2,193 | $ | 2,100 | $ | 2,019 | $ | 22 | $ | 19 | $ | 3 | ||||||||||||
|
Interest
cost
|
3,253 | 2,979 | 2,776 | 218 | 233 | 185 | ||||||||||||||||||
|
Expected
return on plan assets
|
(6,028 | ) | (5,430 | ) | (3,952 | ) | - | - | - | |||||||||||||||
|
Amortization
of initial unrecognized asset
|
(192 | ) | (192 | ) | (192 | ) | - | - | - | |||||||||||||||
|
Amortization
of prior service cost
|
218 | 283 | 236 | (202 | ) | (202 | ) | (266 | ) | |||||||||||||||
|
Amortization
of unrecognized net gain
|
398 | 422 | 838 | 156 | 170 | 160 | ||||||||||||||||||
|
Net
periodic pension (income) cost
|
$ | (158 | ) | $ | 162 | $ | 1,725 | $ | 194 | $ | 220 | $ | 82 | |||||||||||
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income (pre-tax)
|
||||||||||||||||||||||||
|
Net
loss (gain)
|
$ | 20,229 | $ | 114 | $ | - | $ | (240 | ) | $ | 302 | $ | - | |||||||||||
|
Prior
service cost
|
1,098 | (90 | ) | - | - | - | - | |||||||||||||||||
|
Amortization
of initial unrecognized asset
|
192 | 192 | - | - | - | - | ||||||||||||||||||
|
Amortization
of prior service cost
|
(218 | ) | (283 | ) | - | 202 | 202 | - | ||||||||||||||||
|
Amortization
of unrecognized net gain
|
(398 | ) | (422 | ) | - | (156 | ) | (170 | ) | - | ||||||||||||||
|
Total
recognized in other comprehensive income (loss)
|
20,903 | (489 | ) | - | (194 | ) | 334 | - | ||||||||||||||||
|
Total
recognized in net periodic benefit cost and other comprehensive
income (pre-tax)
|
$ | 20,745 | $ | (327 | ) | $ | 1,725 | $ | - | $ | 554 | $ | 82 | |||||||||||
The
following table sets forth estimated future benefit payments for the pension
plans and other postretirement benefit plans:
|
Pension Benefits
|
Other Benefits
|
|||||||
|
2009
|
4,320 | 246 | ||||||
|
2010
|
4,376 | 243 | ||||||
|
2011
|
4,402 | 235 | ||||||
|
2012
|
4,481 | 247 | ||||||
|
2013
|
4,604 | 260 | ||||||
|
2014
- 2018
|
26,044 | 1,443 | ||||||
The
Company is not required to make contributions to the plan in 2009.
PLAN
INVESTMENT POLICY AS OF DECEMBER 31, 2008:
The
Company’s key investment objectives in managing its defined benefit plan assets
are to ensure that present and future benefit obligations to all participants
and beneficiaries are met as they become due; to provide a total return that,
over the long-term, maximizes the ratio of the plan assets to liabilities, while
minimizing the present value of required Company contributions, at the
appropriate levels of risk; to meet statutory requirements and regulatory
agencies’ requirements; and to satisfy applicable accounting
standards. The Company periodically evaluates the asset allocations,
funded status, rate of return assumption and contribution strategy for
satisfaction of our investment objectives. Generally, the investment
manager allocates investments as follows: 20-40% of the total portfolio in fixed
income, 40-80% in equities, and 0-20% in cash. Only high-quality bonds should be
included in the portfolio. All issues that are rated lower than A by
Standard and Poor’s should be excluded. Equity securities at December
31, 2008 and 2007 do not include any NBT Bancorp Inc. common stock.
The
following is a summary of the plan’s weighted average asset allocation at
December 31, 2008:
|
(In thousands)
|
Actual Allocation
|
Percentage Allocation
|
||||||
|
Cash
and Cash Equivalents
|
$ | 9,742 | 16.00 | % | ||||
|
Foreign
Equity Mutual Funds
|
$ | 4,228 | 6.95 | % | ||||
|
Equity
Mutual Funds
|
$ | 6,292 | 10.33 | % | ||||
|
US
Government Bonds
|
18,328 | 30.09 | % | |||||
|
Corporate
Bonds
|
3,955 | 6.49 | % | |||||
|
Common
Stock
|
14,881 | 24.44 | % | |||||
|
Preferred
Stock
|
179 | 0.29 | % | |||||
|
Foreign
Equity
|
3,295 | 5.41 | % | |||||
|
Total
|
$ | 60,900 | 100.00 | % | ||||
DETERMINATION
OF ASSUMED RATE OF RETURN
The
expected long-term rate-of-return on assets is 8.5%. This assumption
represents the rate of return on plan assets reflecting the average rate of
earnings expected on the funds invested or to be invested to provide for the
benefits included in the projected benefit obligation. The assumption
has been determined by reflecting expectations regarding future rates of return
for the portfolio considering the asset distribution and related historical
rates of return. The appropriateness of the assumption is reviewed
annually. The portfolio allocation as of December 31, 2008 is as
follows:
|
Percentage Allocation
|
||||
|
Money
Market & Equivalents
|
16.00 | % | ||
|
Taxable
Bonds
|
36.58 | % | ||
|
International
Equities
|
12.36 | % | ||
|
US
Equities
|
35.06 | % | ||
|
Total
|
100.00 | % | ||
For
measurement purposes, the annual rates of increase in the per capita cost of
covered medical and prescription drug benefits for fiscal year 2008 were assumed
to be 8.0 and 11.0 percent, respectively. The rates were assumed to decrease
gradually to 5.0 percent for fiscal year 2014 and remain at that level
thereafter. The rates were assumed to decrease gradually to 5.0
percent for fiscal year 2016 for post-65 medical costs and prescription drug
benefits. The rates were assumed to decrease gradually to 5.0 percent
for fiscal year 2017 for pre-65 medical costs and prescription drug
benefits. Assumed health care cost trend rates have a significant
effect on amounts reported for health care plans. A one-percentage point change
in the health care trend rates would have the following effects as of and for
the year ended December 31, 2008:
|
(In thousands)
|
1-Percentage point increase
|
1-Percentage point decrease
|
||||||
|
Increase
(decrease) on total service and interest cost components
|
$ | 27 | $ | (25 | ) | |||
|
Increase
(decrease) on postretirement accumulated benefit
obligation
|
399 | (366 | ) | |||||
EMPLOYEE
401(K) AND EMPLOYEE STOCK OWNERSHIP PLANS
At
December 31, 2008, the Company maintains a 401(k) and employee stock ownership
plan (the “401k Plan”). The Company contributes to the 401k Plan
based on employees’ contributions out of their annual salary. In
addition, the Company may also make discretionary contributions to the 401k Plan
based on profitability. Participation in the 401k Plan is contingent
upon certain age and service requirements. The recorded expenses
associated with the 401k Plan were $2.7 million in 2008, $1.4 million in 2007,
and $1.4 million in 2006.
OMNIBUS
INCENTIVE PLAN
In April
2008, the Company adopted the NBT Bancorp Inc. 2008 Omnibus Incentive Plan (the
“Plan”). Under the terms of the Plan, options and other stock-based awards are
granted to directors and key employees to increase their direct proprietary
interest in the operations and success of the Company. The Plan
assumes all prior incentive plans and any new stock-based awards are granted
under the terms of the Plan. Under terms of the Plan, stock options
are granted to purchase shares of the Company’s common stock at a price equal to
the fair market value of the common stock on the date of the grant. Options
granted have a vesting period of four years and terminate eight or ten years
from the date of the grant. Shares issued as a result of stock option
exercises are funded from the Company’s treasury stock.
The per
share weighted average fair value of stock options granted during
2008, 2007, and 2006 was $4.41, $6.37, and $5.26,
respectively. The fair value of each award is estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in the years ended December
31. Historical information was the primary basis for the selection of
the expected volatility, expected dividend yield and the expected lives of the
options. The risk-free interest rate was selected based upon yields of the U.S.
treasury issues with a term equal to the expected life of the option being
valued:
|
Years ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Dividend
yield
|
2.72%–4.17 | % | 2.98%–4.35 | % | 3.08%–3.52 | % | ||||||
|
Expected
volatility
|
27.73%–29.38 | % | 25.08%–28.01 | % | 28.26%–28.62 | % | ||||||
|
Risk-free
interest rates
|
2.96%–3.62 | % | 3.64%–4.96 | % | 4.36%–5.04 | % | ||||||
|
Expected
life
|
7
years
|
7
years
|
7
years
|
|||||||||
The
following table summarizes information concerning stock options outstanding at
December 31, 2008:
|
Number of Shares
|
Weighted average exercise
price
|
Weighted Average Remaining Contractual Term (in
yrs)
|
Aggregate Intrinsic Value
|
|||||||||||||
|
Outstanding
at December 31, 2007
|
1,878,352 | $ | 20.89 | |||||||||||||
|
Granted
|
316,400 | 21.24 | ||||||||||||||
|
Exercised
|
(547,895 | ) | 19.88 | |||||||||||||
|
Forfeited
|
(37,320 | ) | 22.34 | |||||||||||||
|
Outstanding at December 31,
2008
|
1,609,537 | $ | 21.26 | 6.42 | $ | 10,828,575 | ||||||||||
|
Exercisable at December 31,
2008
|
961,657 | $ | 20.39 | 5.18 | $ | 7,284,331 | ||||||||||
|
Expected to Vest
|
613,598 | $ | 22.54 | 8.21 | $ | 3,544,245 | ||||||||||
The
weighted-average fair market value of stock options granted for the twelve
months ended December 31, 2008, was $4.41 per share. Total stock-based
compensation expense for stock option awards totaled $1.4 million for the year
ended December 31, 2008. The tax benefit recognized on stock-based compensation
expense for stock option awards during 2008 totaled $1.4
million. Cash proceeds, tax benefits and intrinsic value related to
total stock options exercised is as follows:
|
Year
ended
|
||||||||
|
(dollars
in thousands)
|
December 31, 2008
|
December 31, 2007
|
||||||
|
Proceeds
from stock options exercised
|
$ | 10,553 | $ | 4,353 | ||||
|
Tax
benefits related to stock options exercised
|
1,406 | 715 | ||||||
|
Intrinsic
value of stock options exercised
|
3,591 | 1,800 | ||||||
The
Company has outstanding restricted and deferred stock awards granted from
various plans at December 31, 2008. The Company recognized $0.8 million in
stock-based compensation expense related to these stock awards for the year
ended December 31, 2008 and $1.0 million for the year ended December 31,
2007. The tax benefit recognized on restricted and deferred
stock-based compensation expense during 2008 totaled $0.6 million and $0.7
million during 2007. Unrecognized compensation cost related to
restricted stock awards totaled $3.1 million at December 31, 2008 and will be
recognized over 2.9 years on a weighted average basis. Shares issued
are funded from the Company’s treasury stock. The following table
summarizes information for unvested restricted stock awards outstanding as of
December 31, 2008:
|
Number
|
Weighted-Average
|
|||||||
|
of
|
Grant
Date Fair
|
|||||||
|
Shares
|
Value
|
|||||||
|
Unvested Restricted Stock
Awards
|
||||||||
|
Unvested at January 1, 2008
|
144,800 | $ | 22.35 | |||||
|
Forfeited
|
(9,067 | ) | $ | 22.60 | ||||
|
Vested
|
(30,239 | ) | $ | 23.83 | ||||
|
Granted
|
31,648 | $ | 22.38 | |||||
|
Unvested at December 31,
2008
|
137,142 | $ | 24.07 | |||||
The
following table summarizes information for unvested restricted stock units
outstanding as of December 31, 2008:
|
Number
of Shares
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
Unvested Restricted Stock
Units
|
||||||||
|
Unvested at January 1, 2008
|
- | $ | - | |||||
|
Forfeited
|
- | $ | - | |||||
|
Vested
|
- | $ | - | |||||
|
Granted
|
30,700 | $ | 24.52 | |||||
|
Unvested at December 31,
2008
|
30,700 | $ | 24.52 | |||||
The
Company has 4.3 million securities remaining available to be granted as part of
the Plan at December 31, 2008.
|
(18)
COMMITMENTS AND CONTINGENT
LIABILITIES
|
The
Company’s concentrations of credit risk are reflected in the consolidated
balance sheets. The concentrations of credit risk with standby
letters of credit, unused lines of credit, commitments to originate new loans
and loans sold with recourse generally follow the loan
classifications.
At
December 31, 2008, approximately 60% of the Company’s loans are secured by real
estate located in central and northern New York and northeastern
Pennsylvania. Accordingly, the ultimate collectibility of a
substantial portion of the Company’s portfolio is susceptible to changes in
market conditions of those areas. Management is not aware of any material
concentrations of credit to any industry or individual borrowers.
The
Company is a party to certain financial instruments with off balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, unused lines of credit, standby letters of credit, and as certain
mortgage loans sold to investors with recourse. The Company’s exposure to credit
loss in the event of nonperformance by the other party to the commitments to
extend credit, unused lines of credit, standby letters of credit, and loans sold
with recourse is represented by the contractual amount of those instruments. The
Company uses the same credit standards in making commitments and conditional
obligations as it does for on balance sheet instruments.
The total
amount of loans serviced by the Company for unrelated third parties was
approximately $141.4 million and $125.5 million at December 31, 2008 and 2007,
respectively.
In the
normal course of business there are various outstanding legal proceedings. In
the opinion of management, the aggregate amount involved in such proceedings is
not material to the consolidated balance sheets or results of operations of the
Company.
|
At December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Unused
lines of credit
|
$ | 146,942 | $ | 151,945 | ||||
|
Commitments
to extend credits, primarily variable rate
|
390,678 | 394,842 | ||||||
|
Standby
letters of credit
|
27,631 | 27,545 | ||||||
|
Loans sold with
recourse
|
11,233 | 8,876 | ||||||
The
Company does not issue any guarantees that would require liability-recognition
or disclosure, other than its standby letters of credit.
The
Company guarantees the obligations or performance of customers by issuing
stand-by letters of credit to third parties. These stand-by letters of credit
are frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities. The risk involved
in issuing stand-by letters of credit is essentially the same as the credit risk
involved in extending loan facilities to customers, and they are subject to the
same credit origination, portfolio maintenance and management procedures in
effect to monitor other credit and off-balance sheet
products. Typically, these instruments have terms of five years or
less and expire unused; therefore, the total amounts do not necessarily
represent future cash requirements. The fair value of the Company’s
stand-by letters of credit at December 31, 2008 and 2007 was not
significant.
|
(19) PARENT
COMPANY FINANCIAL INFORMATION
|
|
December 31,
|
||||||||
|
(In thousands)
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 10,846 | $ | 4,004 | ||||
|
Securities
available for sale, at estimated fair value
|
9,779 | 10,737 | ||||||
|
Investment
in subsidiaries, on equity basis
|
517,541 | 463,470 | ||||||
|
Other
assets
|
40,531 | 27,545 | ||||||
|
Total
assets
|
$ | 578,697 | $ | 505,756 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Total
liabilities
|
$ | 146,852 | $ | 108,456 | ||||
|
Stockholders’
equity
|
431,845 | 397,300 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 578,697 | $ | 505,756 | ||||
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Dividends
from subsidiaries
|
$ | 42,900 | $ | 61,500 | $ | 26,000 | ||||||
|
Management
fee from subsidiaries
|
59,102 | 57,135 | 59,933 | |||||||||
|
Securities
gains
|
1,514 | 67 | - | |||||||||
|
Interest
and other dividend income
|
1,026 | 917 | 951 | |||||||||
|
Total
revenue
|
104,542 | 119,619 | 86,884 | |||||||||
|
Operating
expense
|
65,180 | 57,846 | 60,180 | |||||||||
|
Income
before income tax (benefit) expense and equity in undistributed income of
subsidiaries (excess distributions by subsidiaries over
income)
|
39,362 | 61,773 | 26,704 | |||||||||
|
Income
tax benefit (expense)
|
1,016 | (392 | ) | 301 | ||||||||
|
Equity
in undistributed income of subsidiaries (excess distributions by
subsidiaries over income)
|
17,975 | (11,053 | ) | 28,942 | ||||||||
|
Net
income
|
$ | 58,353 | $ | 50,328 | $ | 55,947 | ||||||
|
Years ended
December 31,
|
||||||||||||
|
(In thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
activities
|
||||||||||||
|
Net
income
|
$ | 58,353 | $ | 50,328 | $ | 55,947 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
|
Impairment
of available-for-sale securities
|
162 | - | - | |||||||||
|
Stock-based
compensation
|
2,213 | 2,831 | 2,509 | |||||||||
|
(Gain)
loss on sales of available-for-sale securities
|
(1,514 | ) | (68 | ) | 40 | |||||||
|
(Equity
in undistributed income of subsidiaries) excess distributions by
subsidiaries over income
|
(17,975 | ) | 11,053 | (28,942 | ) | |||||||
|
Net
change in other liabilities
|
24,494 | (2,215 | ) | 4,026 | ||||||||
|
Net
change in other assets
|
(24,450 | ) | (2,845 | ) | (13,091 | ) | ||||||
|
Net
cash provided by operating activities
|
41,283 | 59,084 | 20,489 | |||||||||
|
Investing
activities
|
||||||||||||
|
Cash
used in CNB Bancorp, Inc. merger
|
- | - | (39,037 | ) | ||||||||
|
Cash
used in Mang Insurance Agency, LLC acquisition
|
(26,233 | ) | - | - | ||||||||
|
Purchases
of available-for-sale securities
|
(5,934 | ) | (1,500 | ) | (96 | ) | ||||||
|
Sales
and maturities of available-for-sale securities
|
5,660 | 1,159 | 350 | |||||||||
|
(Purchases)
disposals of premises and equipment
|
(445 | ) | 433 | 1,262 | ||||||||
|
Net
cash (provided by) used in investing activities
|
(26,952 | ) | 92 | (37,521 | ) | |||||||
|
Financing
activities
|
||||||||||||
|
Proceeds
from the issuance of shares to employee benefit plans and other stock
plans
|
10,489 | 4,353 | 13,077 | |||||||||
|
Payments
on long-term debt
|
(1,365 | ) | (111 | ) | (104 | ) | ||||||
|
Proceeds
from the issuance of long-term debt
|
13,750 | - | - | |||||||||
|
Proceeds
from the issuance of trust preferred debentures
|
- | - | 51,547 | |||||||||
|
Purchases
of treasury shares
|
(5,939 | ) | (48,957 | ) | (17,111 | ) | ||||||
|
Cash
dividends and payments for fractional shares
|
(25,830 | ) | (26,226 | ) | (26,018 | ) | ||||||
|
Excess
tax benefit from exercise of stock options
|
1,406 | 715 | 466 | |||||||||
|
Net
cash (used in) provided by financing activities
|
(7,489 | ) | (70,226 | ) | 21,857 | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
6,842 | (11,050 | ) | 4,825 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
4,004 | 15,054 | 10,229 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 10,846 | $ | 4,004 | $ | 15,054 | ||||||
A
statement of changes in stockholders’ equity has not been presented since it is
the same as the consolidated statement of changes in stockholders’ equity
previously presented.
|
(20)
FAIR VALUES OF FINANCIAL
INSTRUMENTS
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments.
SHORT
TERM INSTRUMENTS
For
short-term instruments, such as cash and cash equivalents, accrued interest
receivable, accrued interest payable, and short term borrowings, carrying value
approximates fair value.
SECURITIES
Fair
values for securities are based on quoted market prices or dealer quotes, where
available. Where quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. When
necessary, the Company utilizes matrix pricing from third party pricing vendor
to determine fair value pricing. Matrix prices are based on quoted
prices for securities with similar coupons, ratings, and maturities, rather than
on specific bids and offers for the designated security.
LOANS
For
variable rate loans that reprice frequently and have no significant credit risk,
fair values are based on carrying values. The fair values for fixed rate
loans are estimated through discounted cash flow analysis
using interest rates
currently being offered for loans with similar terms and
credit quality. Nonperforming loans are valued based upon recent loss
history for similar loans.
DEPOSITS
The fair
values disclosed for savings, money market, and noninterest bearing accounts
are, by definition, equal to their carrying values at the reporting
date. The fair value of fixed maturity time deposits is estimated
using a discounted cash flow analysis that applies interest rates currently
offered to a schedule of aggregated expected monthly maturities on time
deposits.
LONG-TERM
DEBT
The fair
value of long-term debt has been estimated using discounted cash flow analysis
that applies interest rates currently offered for notes with similar
terms.
COMMITMENTS
TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair
value of commitments to extend credit and standby letters of credit are
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present credit
worthiness of the counterparties. Carrying amounts, which are comprised of the
unamortized fee income, are not significant.
TRUST
PREFERRED DEBENTURES
The fair
value of trust preferred debentures has been estimated using a discounted cash
flow analysis.
Estimated
fair values of financial instruments at December 31 are as follows:
|
2008
|
2007
|
|||||||||||||||
|
(In thousands)
|
Carrying amount
|
Estimated fair value
|
Carrying amount
|
Estimated fair value
|
||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 110,396 | $ | 110,396 | $ | 162,946 | $ | 162,946 | ||||||||
|
Securities
available for sale
|
1,119,665 | 1,119,665 | 1,140,114 | 1,140,114 | ||||||||||||
|
Securities
held to maturity
|
140,209 | 141,308 | 149,111 | 149,519 | ||||||||||||
|
Loans
(1)
|
3,651,911 | 3,650,428 | 3,455,851 | 3,376,001 | ||||||||||||
|
Less
allowance for loan losses
|
58,564 | - | 54,183 | - | ||||||||||||
|
Net
loans
|
3,593,347 | 3,650,428 | 3,401,668 | 3,376,001 | ||||||||||||
|
Accrued
interest receivable
|
22,746 | 22,746 | 24,672 | 24,672 | ||||||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Savings,
NOW, and money market
|
$ | 1,885,551 | $ | 1,885,551 | $ | 1,614,289 | $ | 1,614,289 | ||||||||
|
Time
deposits
|
1,352,212 | 1,367,425 | 1,591,106 | 1,590,158 | ||||||||||||
|
Noninterest
bearing
|
685,495 | 685,495 | 666,698 | 666,698 | ||||||||||||
|
Short-term
borrowings
|
206,492 | 206,492 | 368,467 | 368,467 | ||||||||||||
|
Long-term
debt
|
632,209 | 660,246 | 424,887 | 427,847 | ||||||||||||
|
Accrued
interest payable
|
8,709 | 8,709 | 13,938 | 13,938 | ||||||||||||
|
Trust
preferred debentures
|
75,422 | 79,411 | 75,422 | 74,848 | ||||||||||||
1. Lease
receivables, although excluded from the scope of SFAS No. 107, are included in
the estimated fair value amounts at their carrying amounts.
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company’s entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair
value estimates are based on existing on and off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust and
investment management operation that contributes net fee income annually. The
trust and investment management operation is not considered a financial
instrument, and its value has not been incorporated into the fair value
estimates. Other significant assets and liabilities include the benefits
resulting from the low-cost funding of deposit liabilities as compared to the
cost of borrowing funds in the market, and premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in the estimate of fair value.
The
following table sets forth the Company’s financial assets and liabilities
measured on a recurring basis that were accounted for at fair
value. Assets and liabilities are classified in their entirety based
on the lowest level of input that is significant to the fair value measurement
(in thousands):
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level
2)
|
Significant
Unobservable Inputs (Level
3)
|
Balance
as of December 31,
2008
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Securities
Available for Sale
|
$ | 8,846 | $ | 1,110,819 | $ | - | $ | 1,119,665 | ||||||||
|
Total
|
$ | 8,846 | $ | 1,110,819 | $ | - | $ | 1,119,665 | ||||||||
Fair
values for securities are based on quoted market prices or dealer quotes, where
available. Where quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. When
necessary, the Company utilizes matrix pricing from a third party pricing vendor
to determine fair value pricing. Matrix prices are based on quoted
prices for securities with similar coupons, ratings, and maturities, rather than
on specific bids and offers for the designated security.
SFAS No.
157 requires disclosure of assets and liabilities measured and recorded at fair
value on a nonrecurring basis. In accordance with the provisions of
SFAS No. 114, the Company had collateral dependent impaired loans with a
carrying value of approximately $6.2 million which had specific reserves
included in the allowance for loan and lease losses of $0.6 million at December
31, 2008. During the year ended December 31, 2008, the Company
established specific reserves of approximately $1.3 million, which were included
in the provision for loan and lease losses. The Company uses the fair
value of underlying collateral to estimate the specific reserves for collateral
dependent impaired loans. Based on the valuation techniques used, the
fair value measurements for collateral dependent impaired loans are classified
as Level 3.
Simultaneously with the adoption of
SFAS No. 157, the Company adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”), effective January
1, 2008. SFAS No. 159 gives entities the option to measure eligible
financial assets, financial liabilities and Company commitments at fair value
(i.e., the fair value option), on an instrument-by-instrument basis, that are
otherwise not permitted to be accounted for at fair value under other accounting
standards. The election to use the fair value option is available
when an entity first recognizes a financial asset or financial liability or upon
entering into a Company commitment. Subsequent changes in fair value
must be recorded in earnings. Additionally, SFAS No. 159 allows for a
one-time election for existing positions upon adoption, with the transition
adjustment recorded to beginning retained earnings. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 does not affect
any existing accounting literature that requires certain assets and liabilities
to be carried at fair value and does not eliminate disclosure requirements
included in other accounting standards. As of December 31, 2008, the
Company has not elected the fair value option for any eligible
items.
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM 9A. CONTROLS AND
PROCEDURES
|
As of the end of the period covered by
this Annual Report on Form 10-K, an evaluation was carried out by the Company’s
management, with the participation of its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report. No changes were
made to the Company’s internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal
quarter that materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Management Report on Internal Controls
Over Financial Reporting
The management of NBT Bancorp, Inc. (the
“Company”) is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s Chief
Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company’s consolidated financial statements for external purposes in accordance
with generally accepted accounting principles.
As of December 31, 2008, management assessed the effectiveness
of the Company’s internal control over financial reporting based on the criteria
for effective internal control over financial reporting established in “Internal
Control — Integrated Framework,” issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based on
the assessment, management determined that the Company maintained effective
internal control over financial reporting as of December 31, 2008, based on those
criteria.
KPMG LLP, the independent registered
public accounting firm that audited the consolidated financial statements of the
Company included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2008. The report, which expresses
an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2008, is included in this Item under the
heading “Report of Independent Registered Public Accounting
Firm.”
Report of Independent Registered Public
Accounting Firm
To the Board of Directors and
Stockholders of NBT Bancorp Inc.:
We have audited NBT Bancorp, Inc. and subsidiaries’ (the
Company) internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control —
Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is
responsible for maintaining effective internal control over financial
reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying
Management’s report
on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on the criteria established in
Internal Control —
Integrated Framework issued
by COSO.
We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of NBT Bancorp Inc. and subsidiaries as of
December 31,
2008 and 2007 and the related consolidated statements
of income, changes in stockholders’ equity, cash flows, and comprehensive income
for each of the years in the three-year period ended December 31, 2008, and our report dated February 27, 2009 expressed an unqualified opinion on
those financial statements.
/s/ KPMG LLP
Albany, NY
February 27, 2009
|
ITEM 9B. OTHER
INFORMATION
|
None.
PART
III
|
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
information required by this item is incorporated herein by reference to the
Company’s definitive Proxy Statement for its annual meeting of
shareholders to be held on May 5, 2009 (the “Proxy Statement”), which will be
filed with the Securities and Exchange Commission within 120 days of the
Company’s 2008 fiscal year end.
|
ITEM
11. EXECUTIVE
COMPENSATION
|
The
information required by this item is incorporated herein by reference to the
Proxy Statement which will be filed with the Securities and
Exchange Commission within 120 days of the
Company’s 2008 fiscal year end.
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The
information required by this item is incorporated herein by reference to the
Proxy Statement which will be filed with the Securities and
Exchange Commission within 120 days of the
Company’s 2008 fiscal year end.
|
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
|
The
information required by this item is incorporated herein by reference to the
Proxy Statement which will be filed with the Securities and
Exchange Commission within 120 days of the
Company’s 2008 fiscal year end.
|
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
|
The
information required by this item is incorporated herein by reference to the
Proxy Statement which will be filed with the Securities and
Exchange Commission within 120 days of the
Company’s 2008 fiscal year end.
PART IV
|
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
|
(a)(1) The
following Consolidated Financial Statements are included in Part II, Item 8
hereof:
Report of
Independent Registered Public Accounting Firm.
Consolidated
Balance Sheets as of December 31, 2008 and 2007.
Consolidated
Statements of Income for each of the three years ended December 31, 2008, 2007
and 2006.
Consolidated
Statements of Changes in Stockholders’ Equity for each of the three years ended
December 31, 2008, 2007 and 2006.
Consolidated
Statements of Cash Flows for each of the three years ended December 31, 2008,
2007 and 2006.
Consolidated
Statements of Comprehensive Income for each of the three years ended December
31, 2008, 2007 and 2006.
Notes to
the Consolidated Financial Statements.
(a)(2) There
are no financial statement schedules that are required to be filed as part of
this form since they are not applicable or the information is included in the
consolidated financial statements.
(a)(3) See
below for all exhibits filed herewith and the Exhibit Index.
|
Certificate
of Incorporation of NBT Bancorp Inc. as amended through July 23,
2001.
|
|
By-laws
of NBT Bancorp Inc. as amended and restated through July 23,
2001.
|
|
3.3
|
Rights
Agreement, dated as of November 15, 2004, between NBT Bancorp Inc. and
Registrar and Transfer Company, as Rights Agent (filed as Exhibit 4.1 to
Registrant's Form 8-K, file number 0-14703, filed on November 18, 2004,
and incorporated by reference
herein).
|
|
3.4
|
Certificate
of Designation of the Series A Junior Participating Preferred
Stock (filed as Exhibit A to Exhibit 4.1 of the Registration’s Form 8-K,
file Number 0-14703, filed on November 18, 2004, and incorporated herein
by reference).
|
|
4.1
|
Specimen
common stock certificate for NBT’s common stock (filed as exhibit 4.1 to
the Registrant’s Amendment No. 1 to Registration Statement on Form S-4
filed on December 27, 2005 and incorporated herein by
reference).
|
|
10.1
|
NBT
Bancorp Inc. 1993 Stock Option Plan (filed as Exhibit 99.1 to Registrant's
Form S-8 Registration Statement, file number 333-71830 filed on October
18, 2001 and incorporated by reference
herein).
|
|
10.2
|
NBT
Bancorp Inc. Non-Employee Director, Divisional Director and Subsidiary
Director Stock Option Plan (filed as Exhibit 99.1 to Registrant's Form S-8
Registration Statement, file number 333-73038 filed on November 9, 2001
and incorporated by reference
herein).
|
|
CNB
Bancorp, Inc. Stock Option Plan.
|
|
NBT
Bancorp Inc. Employee Stock Purchase
Plan.
|
|
NBT
Bancorp Inc. Non-employee Directors Restricted and Deferred Stock
Plan.
|
|
NBT
Bancorp Inc. Performance Share
Plan.
|
|
NBT
Bancorp Inc. 2009 Executive Incentive Compensation
Plan.
|
|
CNB
Bancorp, Inc. Long-Term Incentive Compensation
Plan.
|
|
10.9
|
2006
Non-Executive Restricted Stock Plan (filed as Exhibit 99.1 to Registrant’s
Form S-8 Registration Statement, file number 333-139956, filed on January
12, 2007, and incorporated herein by
reference).
|
|
10.10
|
Supplemental
Retirement Agreement between NBT Bancorp Inc., NBT Bank, National
Association and Daryl R. Forsythe as amended and restated Effective
January 1, 2005. (filed as Exhibit 10.11 to Registrant’s Form
10-K for the year ended December 31, 2005, filed on March 15, 2006 and
incorporated herein by
reference).
|
|
10.11
|
Death
Benefits Agreement between NBT Bancorp Inc., NBT Bank, National
Association and Daryl R. Forsythe made August 22, 1995 (filed as Exhibit
10.12 to Registrant’s Form 10-K for the year ended December 31, 2005,
filed on March 15, 2006 and incorporated herein by
reference).
|
|
Amendment
dated January 28, 2002 to Death Benefits Agreement between NBT Bancorp
Inc., NBT Bank, National Association and Daryl R. Forsythe made August 22,
1995.
|
|
10.13
|
Form
of Employment Agreement between NBT Bancorp Inc. and Martin A. Dietrich as
amended and restated January 1, 2006 (filed as Exhibit 10.1 to
Registrant’s Form 10-Q for the quarterly period ended March 31, 2006,
filed on May 9, 2006 and incorporated herein by
reference).
|
|
10.14
|
Supplemental
Executive Retirement Agreement between NBT Bancorp Inc. and Martin A.
Dietrich as amended and restated January 20, 2006 (filed as
Exhibit 10.16 to Registrant’s Form 10-K for the year ended December 31,
2005, filed on March 15, 2006 and incorporated herein by
reference).
|
|
10.15
|
First
Amendment to Supplemental Executive Retirement Agreement between NBT
Bancorp Inc. and Martin A. Dietrich effective January 1,
2006 (filed as Exhibit 10.2 to Registrant’s Form 10-Q for the
quarterly period ended March 31, 2006, filed on May 9, 2006 and
incorporated herein by
reference).
|
|
Change
in control agreement with Martin A. Dietrich as amended and restated July
23, 2001.
|
|
10.17
|
Form
of Employment Agreement between NBT Bancorp Inc. and Michael J. Chewens as
amended and restated January 1, 2005 (filed as Exhibit 10.18 to
Registrant’s Form 10-K for the year ended December 31, 2005, filed on
March 15, 2006 and incorporated herein by
reference).
|
|
Supplemental
Executive Retirement Agreement between NBT Bancorp Inc. and Michael J.
Chewens made as of July 23, 2001.
|
|
Change
in control agreement with Michael J. Chewens as amended and restated July
23, 2001.
|
|
10.20
|
Form
of Employment Agreement between NBT Bancorp Inc. and David E. Raven as
amended and restated January 1, 2005 (filed as Exhibit 10.21 to
Registrant’s Form 10-K for the year ended December 31, 2005, filed on
March 15, 2006 and incorporated herein by
reference).
|
|
Change
in control agreement with David E. Raven as amended and restated July 23,
2001.
|
|
10.22
|
Supplemental
Executive Retirement Agreement between NBT Bancorp Inc. and David E. Raven
made as of January 1, 2004 (filed as Exhibit 10.35 to Registrant's Form
10-K for the year ended December 31, 2003, filed on March 15, 2004 and
incorporated herein by reference).
|
|
10.23
|
Form
of Employment Agreement between NBT Bancorp Inc. and Jeff Levy made as of
April 23, 2007 (filed as Exhibit 10.27 to Registrant’s Form 10-K for the
year ended December 31, 2007, filed on February 29, 2008 and incorporated
herein by reference).
|
|
10.24
|
Change
in control agreement with Jeff Levy dated April 23, 2007 (filed as Exhibit
10.28 to Registrant’s Form 10-K for the year ended December 31, 2007,
filed on February 29, 2008 and incorporated herein by
reference).
|
|
First
Amendment to the Supplemental Executive Retirement Agreement between NBT
Bancorp Inc. and Michael J. Chewens effective January 1,
2005.
|
|
Second Amendment
to the Supplemental Executive Retirement Agreement between NBT Bancorp
Inc. and Martin A. Dietrich effective January 1,
2005.
|
|
First
Amendment to the Supplemental Executive Retirement Agreement between NBT
Bancorp Inc. and David E. Raven effective January 1,
2005.
|
|
Amendment
dated November 13, 2008 to Form of Employment Agreement as amended between
NBT Bancorp Inc. and Michael J. Chewens restated January 1, 2005 (filed as
Exhibit 10.18 to Registrant’s Form 10-K for the year ended December 31,
2005, filed on March 15, 2006 and incorporated herein by reference) and
Change in Control Agreement with Michael J. Chewens as amended and
restated July 23, 2001 (filed as Exhibit 10.1 to Registrant's Form 10-Q
for the quarterly period ended September 30, 2001, filed on November 14,
2001 and incorporated herein by
reference).
|
|
Amendment
dated November 13, 2008 to Form of Employment Agreement as amended between
NBT Bancorp Inc. and Martin A. Dietrich restated January 1, 2006 (filed as
Exhibit 10.1 to Registrant’s Form 10-Q for the quarterly period ended
March 31, 2006, filed on May 9, 2006 and incorporated herein by reference)
and Change in Control Agreement with Martin A. Dietrich as amended and
restated July 23, 2001 (filed as Exhibit 10.3 to Registrant's Form 10-Q
for the quarterly period ended September 30, 2001, filed on November 14,
2001 and incorporated herein by
reference).
|
|
Amendment
dated November 13, 2008 to Form of Employment Agreement as amended between
NBT Bancorp Inc. and David E. Raven restated January 1, 2005 (filed as
Exhibit 10.21 to Registrant’s Form 10-K for the year ended December 31,
2005, filed on March 15, 2006 and incorporated herein by reference) and
Change in Control Agreement with David E. Raven as amended and restated
July 23, 2001 (filed as Exhibit 10.7 to Registrant's Form 10-Q for the
quarterly period ended September 30, 2001, filed on November 14, 2001 and
incorporated herein by reference).
|
|
10.31
|
Split-Dollar
Agreement between NBT Bancorp Inc., NBT Bank, National Association and
Martin A. Dietrich made November 10, 2008 (filed as Exhibit 10.1 to
Registrant’s Form 10-Q for the quarterly period ended September 30, 2008,
filed on November 10, 2008 and incorporated herein by
reference).
|
|
10.32
|
NBT
Bancorp Inc. 2008 Omnibus Incentive Plan (filed as Appendix A of
Registrant's Definitive Proxy Statement on Form 14A filed on March 31,
2008, and incorporated herein by
reference).
|
|
Description
of Arrangement for Directors Fees.
|
|
Consent
of KPMG LLP.
|
|
Certification by the Chief Executive Officer
pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange
Act of 1934.
|
|
Certification by the Chief Financial Officer
pursuant to Rules 13(a)-14(a)/15(d)-14(e) of the Securities and Exchange
Act of 1934.
|
|
Certification by
the Chief Executive Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification of
the Chief Financial Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
(b) Exhibits
to this Form 10-K are attached or incorporated herein by reference as noted
above.
(c) Not
applicable
SIGNATURES
Pursuant to
the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, NBT Bancorp Inc. has duly caused
this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NBT
BANCORP INC. (Registrant)
March 2,
2009
|
/s/
Martin A. Dietrich
|
Martin A.
Dietrich
Chief
Executive Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
/s/
Daryl R. Forsythe
|
Daryl R.
Forsythe
Chairman
and Director
|
Date:
|
March
2, 2009
|
|
/s/
Martin A. Dietrich
|
Martin A.
Dietrich
NBT
Bancorp Inc. President, CEO, and Director (Principal Executive
Officer)
|
Date:
|
March
2, 2009
|
|
/s/
John C. Mitchell
|
John C.
Mitchell, Director
|
Date:
|
March
2, 2009
|
|
/s/
Joseph G. Nasser
|
Joseph G. Nasser,
Director
|
Date:
|
March
2, 2009
|
|
/s/
William C. Gumble
|
William
C. Gumble, Director
|
Date:
|
March
2, 2009
|
|
/s/
Richard Chojnowski
|
Richard
Chojnowski, Director
|
Date:
|
March
2, 2009
|
|
/s/
Michael M. Murphy
|
Michael
M. Murphy, Director
|
Date:
|
March
2, 2009
|
|
/s/
Michael J. Chewens
|
Michael
J. Chewens
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
Date:
|
March
2, 2009
|
|
/s/
William L. Owens
|
William
L. Owens, Director
|
Date:
|
March
2, 2009
|
|
/s/
Joseph A. Santengelo
|
Joseph A.
Santangelo, Director
|
Date:
|
March
2, 2009
|
|
/s/
Robert A. Wadsworth
|
Robert A.
Wadsworth, Director
|
Date:
|
March
2, 2009
|
|
/s/
Patricia T. Civil
|
Patricia
T. Civil, Director
|
Date:
|
March
2, 2009
|
99