NBT BANCORP INC
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2009
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)
None
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Securities
registered pursuant to section 12(b) of the Act:
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Title
of each class:
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Name
of each exchange on which registered:
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Common
Stock, par value $0.01 per share
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to section 12(g) of the Act: None
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
x
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
x
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
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
¨
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
x
Accelerated
filer
¨
Non-accelerated
filer
¨
Smaller
reporting company
¨
1
Indicate
by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act)
.
¨
Yes
x
No
Based on
the closing price of the registrant’s common stock as of June 30, 2009, the
aggregate market value of the voting stock, common stock, par value, $0.01 per
share, held by non-affiliates of the registrant is $731,252,689.
The
number of shares of Common Stock outstanding as of February 15, 2010, was
34,412,890.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of
the registrant’s definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on May 4, 2010 are incorporated by reference
into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.
NBT
BA
NCOR
P INC.
FORM 10-K –
Year Ended
December 31, 2009
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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Report
of Independent Registered Public Accounting Firm
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Consolidated
Balance Sheets at December 31, 2009 and 2008
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Consolidated
Statements of Income for each of the years in the three-year period ended
December 31, 2009
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Consolidated
Statements of Changes in Stockholders’ Equity for each of the years in the
three-year period ended December 31, 2009
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Consolidated
Statements of Cash Flows for each of the years in the three- year period
ended December 31, 2009
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Consolidated
Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2009
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Notes
to Consolidated Financial Statements
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ITEM
9
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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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SIGNATURES
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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, 2009 had assets of $5.5 billion and
stockholders’ equity of $505.1 million. Return on average assets and
return on average equity were 0.96% and 10.90%, respectively, for the period
ending December 31, 2009. The Company had net income of $52.0 million
or $1.53 per diluted share for 2009 and fully taxable equivalent (“FTE”) net
interest margin was 4.04% for the same period.
The
principal assets of the Registrant consist of all of the outstanding shares of
common stock of its subsidiaries, including: NBT Bank, N.A. (the
“Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT Holdings, Inc.
(“NBT Holdings”) and CNBF Capital Trust I, NBT Statutory Trust I and NBT
Statutory Trust II (the “Trusts”). The Company’s principal sources of
revenue are the management fees and dividends it receives from the Bank, NBT
Financial, and NBT Holdings.
The
Company’s business, primarily conducted through the Bank but also through its
other subsidiaries, consists of providing commercial banking and financial
services to its customers in its market area, which includes central and upstate
New York, northeastern Pennsylvania and Burlington, Vermont. The
Company has been, and intends to continue to be, a community-oriented financial
institution offering a variety of financial services. The Company’s
business philosophy is to operate as a community bank with local
decision-making, principally in non-metropolitan markets, providing a broad
array of banking and financial services to retail, commercial, and municipal
customers. 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. Among other factors, 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, as well as noninterest
expense, such as salaries and employee benefits, data processing,
communications, occupancy, and equipment expenses.
Substantially
all of the Company’s business activities are with customers located in the
United States. For the year ended December 31, 2009, approximately
84% of the Registrant’s revenue was derived from New York and approximately 16%
from Pennsylvania. Vermont revenue was negligible for the year ended
December 31, 2009 as the Registrant was new to the market in
2009. Approximately 67% of the revenue generated in New York was
comprised of interest and fee income, predominately from loans and
securities. Approximately 33% of the revenue generated in New York
was comprised of noninterest income such as service charges on deposit accounts,
trust administration fees, bank owned life insurance income, and insurance
revenue. Approximately 66% of the revenue generated in Pennsylvania
was comprised of interest and fee income. Approximately 34% of the
revenue generated in Pennsylvania was comprised of noninterest income such as
service charges on deposit accounts, trust administration fees, bank owned life
insurance income, and insurance revenue. As of December 31, 2009,
approximately 81% of the Registrant’s loan portfolio was originated in New York
and approximately 19% was originated in Pennsylvania. The amount of
loans in the Vermont market was negligible as of December 31, 2009 as the
Registrant was new to the market in 2009. Approximately 56% of the
New York-based loan portfolio was secured by real estate in central and upstate
New York, while approximately 64% of the Pennsylvania-based loan portfolio was
secured by real estate in northeastern Pennsylvania as of December 31,
2009. Consumer loans (such as indirect and direct
installment loans) and home equity loans comprised approximately 41% of the New
York-based loan portfolio and approximately 38% of the Pennsylvania-based loan
portfolio.
Like the
rest of the nation, the market areas that the Company serves are presently
experiencing an economic slowdown. A variety of factors (e.g., any substantial
rise in inflation or further rise in unemployment rates, decrease in consumer
confidence, natural disasters, war, or political instability) may further affect
both the Company’s markets and the national market. The Company will
continue to emphasize managing our funding costs and lending rates to
effectively maintain profitability. In addition, the Company will
continue to seek and maintain relationships that can generate fee income that is
not directly tied to lending relationships. We anticipate that this
approach will help mitigate profit fluctuations that are caused by movements in
interest rates, business and consumer loan cycles, and local economic
factors.
NBT
Bank, N.A.
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, northeastern Pennsylvania and Burlington,
Vermont market areas.
Through
its network of branch locations, the Bank offers a wide range of products and
services tailored to individuals, businesses, and
municipalities. Deposit products offered by the bank include demand
deposit accounts, savings accounts, negotiable order of withdrawal (“NOW”)
accounts, money market deposit accounts (“MMDA”), and certificate of deposit
(“CD”) accounts. The Bank offers various types of each deposit
account to accommodate the needs of its customers with varying rates, terms, and
features. Loan products offered by the Bank include consumer loans,
home equity loans, mortgages, small business loans and commercial loans, with
varying rates, terms and features to accommodate the needs of its
customers. The Bank also offers various other products and services
through its branch network such as trust and investment services and financial
planning services. In addition to its branch network, the Bank also
offers access to certain products and services online enabling customers to
check balances, transfer funds, pay bills, view statements, apply for loans and
access various other product and service information. The
Bank provides 24-hour access to an automated telephone line whereby customers
can check balances, obtain interest information, transfer funds, request
statements, and perform various other activities.
The Bank
conducts business through two geographic operating divisions, NBT Bank and
Pennstar Bank. At year end 2009, the NBT Bank division had 85
divisional offices and 114 automated teller machines (ATMs), located primarily
in central and upstate New York and Burlington, Vermont. At December 31, 2009,
the NBT Bank division had total loans and leases of $3.0 billion, or 81.2% of
total loans and leases, and total deposits of $3.2 billion, or 77.8% of total
deposits. Revenue for the NBT Bank division totaled $185.8 million
for the year ended December 31, 2009. At year end 2009, the Pennstar
Bank division had 38 divisional offices and 49 ATMs, located primarily in
northeastern Pennsylvania. At December 31, 2009, the Pennstar Bank division had
total loans and leases of $686.4 million, or 18.8% of total loans and leases,
and total deposits of $910.5 million, or 22.2% of total deposits. Revenue for
the Pennstar Bank division totaled $38.2 million for the year ended December 31,
2009.
NBT
Financial Services, Inc.
Through
NBT Financial, the Company operates EPIC Advisors, Inc. (“EPIC”), a retirement
plan administrator. Through EPIC, the Company offers services
including retirement plan consulting and recordkeeping
services. EPIC’s headquarters are located in Rochester, New
York.
NBT
Holdings, Inc.
Through
NBT Holdings, the Company operates Mang Insurance Agency, LLC (“Mang”), a
full-service insurance agency acquired by the Company on September 1,
2008. Prior to its acquisition by the Company, Mang was one of the
largest independent insurance agencies in upstate New York and was 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, for a purchase price of $28.0 million, 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. Mang’s headquarters were moved to Norwich, New
York in December 2009 and many Mang office locations that were in the same
communities as NBT Bank branches have moved into those branches during
2009. Through Mang, the Company offers a full array of insurance
products including personal property and casualty, business liability and
commercial insurance tailored to serve the specific insurance needs of
individuals as well as businesses in a range of industries operating in the
markets served by the Company.
The
Trusts
The
Trusts were organized to raise additional regulatory capital and to provide
funding for certain acquisitions. 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 by Financial
Accounting Standards Board Accounting Standards Codification (“FASB
ASC”). In accordance with FASB ASC, the accounts of the Trusts are
not included in the Company’s consolidated financial statements. The
Trusts were organized to raise additional regulatory capital and to provide
funding for certain acquisitions.
Operating
Subsidiaries of the Bank
The Bank
has five operating subsidiaries, NBT Capital Corp., Pennstar Bank Services
Company, Broad Street Property Associates, Inc., NBT Services, Inc., 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. Pennstar Bank Services Company, formed in 2002, provides
administrative and support services to the Pennstar Bank division of the
Bank. 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. CNB
Realty Trust, formed in 1998, is a real estate investment trust.
COMPETITION
The
banking and financial services industry in the Company’s market areas 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, 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. 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
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. In addition, many of the Company’s competitors have
assets, capital and lending limits greater than that of the Company, have
greater access to capital markets and offer a broader range of products and
services than the Company. These institutions may have the ability to
finance wide-ranging advertising campaigns and may also be able to offer lower
rates on loans and higher rates on deposits than the Company can
offer. Many of these institutions offer services, such as credit
cards and international banking, which the Company does not directly
offer.
In
consumer transactions, 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. We also offer certain customer services, such as agricultural
lending, that many of our larger competitors do not offer. While the
Company’s position varies by market, the Company’s management believes that it
can compete effectively as a result of local market knowledge and awareness of
customer needs.
The table
below summarizes the Bank’s deposits and market share by the twenty-six counties
of New York and Pennsylvania in which it has customer facilities as of June 30,
2009. Market share is based on deposits of all commercial banks,
credit unions, savings and loans associations, and savings banks.
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County
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State
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Number
of
Branches
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Number
of
ATMs
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Deposits
(in
thousands)
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Market
Share
*
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Market
Rank
*
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Chenango
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NY
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11 | 16 | 647,502 | 80.86 | % | 1 | ||||||
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Fulton
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NY
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7 | 11 | 336,725 | 53.37 | % | 1 | ||||||
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Hamilton
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NY
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1 | 1 | 30,629 | 47.37 | % | 2 | ||||||
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Schoharie
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NY
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4 | 3 | 158,434 | 41.88 | % | 1 | ||||||
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Delaware
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NY
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5 | 5 | 322,217 | 38.75 | % | 1 | ||||||
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Montgomery
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NY
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6 | 5 | 212,855 | 29.00 | % | 2 | ||||||
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Otsego
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NY
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9 | 14 | 264,211 | 24.92 | % | 2 | ||||||
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Susquehanna
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PA
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6 | 7 | 153,958 | 24.62 | % | 3 | ||||||
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Essex
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NY
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3 | 6 | 106,853 | 21.70 | % | 4 | ||||||
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Pike
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PA
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3 | 3 | 89,454 | 15.22 | % | 4 | ||||||
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Saint
Lawrence
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NY
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5 | 6 | 141,459 | 12.07 | % | 4 | ||||||
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Broome
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NY
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8 | 11 | 232,065 | 10.20 | % | 3 | ||||||
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Wayne
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PA
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3 | 5 | 100,133 | 8.64 | % | 4 | ||||||
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Oneida
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NY
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6 | 13 | 245,936 | 8.01 | % | 5 | ||||||
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Tioga
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NY
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1 | 1 | 33,285 | 7.90 | % | 5 | ||||||
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Lackawanna
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PA
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17 | 21 | 362,574 | 7.80 | % | 7 | ||||||
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Clinton
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NY
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3 | 2 | 91,330 | 7.48 | % | 6 | ||||||
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Herkimer
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NY
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2 | 1 | 33,516 | 5.69 | % | 6 | ||||||
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Franklin
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NY
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1 | 1 | 24,272 | 5.21 | % | 5 | ||||||
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Saratoga
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NY
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5 | 6 | 134,789 | 4.07 | % | 11 | ||||||
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Monroe
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PA
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6 | 8 | 82,408 | 4.01 | % | 8 | ||||||
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Warren
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NY
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2 | 2 | 38,831 | 2.88 | % | 8 | ||||||
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Schenectady
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NY
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1 | 1 | 54,288 | 2.28 | % | 9 | ||||||
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Luzerne
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PA
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4 | 5 | 67,820 | 1.19 | % | 15 | ||||||
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Rensselaer
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NY
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1 | 1 | 14,992 | 0.81 | % | 13 | ||||||
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Albany
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NY
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4 | 7 | 108,903 | 0.70 | % | 12 | ||||||
| 124 | 162 | 4,089,439 | 30.18 | % |
Deposit
market share data is based on the most recent data available (as of June 30,
2009).
Source:
SNL Financial LLC
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 (“FRB”)
as its primary federal regulator. The Company also has qualified for and elected
to be registered with the FRB 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 FRB and the Federal
Deposit Insurance Corporation (“FDIC”).
The
Company is subject to capital adequacy guidelines of the FRB. 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 FRB 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, 2009, the Company’s leverage ratio was 8.35%, its ratio of Tier 1
capital to risk-weighted assets was 11.34%, and its ratio of qualifying total
capital to risk-weighted assets was 12.59%. The FRB 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
FRB 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 FRB 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, 2009, the Bank was in compliance with all minimum capital
requirements. The Bank’s leverage ratio was 7.72%, its ratio of Tier 1 capital
to risk-weighted assets was 10.50%, and its ratio of qualifying total capital to
risk-weighted assets was 11.76%.
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, 2009, the Bank’s total brokered deposits were $144.3
million.
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. 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 that took effect April 1, 2009 to change the way the FDIC
differentiates risk and sets appropriate assessment rates. In
addition, the FDIC also issued an interim rule on February 27, 2009 that imposed
an emergency special assessment of 20 basis points in addition to its risk-based
assessment resulting in a $2.5 million charge to the Company in
2009.
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 are 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, but did not utilize the second part of the TLGP as no such
debt was issued prior to October 2009.
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 Depositors Insurance Fund (“DIF”) and do not vary
depending upon a depository institution’s capitalization or supervisory
evaluation.
Like all
FDIC insured financial institutions, the Company has been subjected to
substantial increases in FDIC recurring premiums, as well as a special
assessment levied by the FDIC in the second quarter of 2009. The
Company paid $1.8 million and $8.4 million of FDIC assessments in 2008 and 2009,
respectively. On November 12, 2009, the FDIC adopted a final rule
amending the assessment regulations to require insured depository institutions
to prepay their quarterly risk-based assessments for the fourth quarter of 2009,
and for all of 2010, 2011, and 2012, on December 31, 2009. The
Company paid approximately $22.2 million in 2009 for prepaid assessment fees for
the fourth quarter of 2009, and for the years 2010, 2011, and 2012, of which
approximately $1.4 million was expensed in the fourth quarter of
2009.
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 FRB regulations
thereunder. An “affiliate” of a bank includes 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.
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 FRB 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 FRB and the OCC 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 FRB and OCC,
including recent rules regarding limitations on 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. The Bank is also subject to data security standards and
data breach notice requirements, chiefly those issued by the OCC.
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 activities, 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 took effect for the Bank beginning January 1,
2009.
Effective
July 1, 2010, a new federal banking rule under the Electronic Fund Transfer Act
will prohibit financial institutions from charging consumers fees for paying
overdrafts on automated teller machines (“ATM”) and one-time debit card
transactions, unless a consumer consents, or opts in, to the overdraft service
for those types of transactions. Overdrafts on the payment of checks
and regular electronic bill payments are not covered by this new
rule. This regulation is expected to have a negative impact on the
Company’s service charge income, and therefore result in decreased
earnings.
Under
Title III of the USA PATRIOT Act 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, 2009, the
Company and the Bank believe they are in compliance with the USA PATRIOT Act and
regulations thereunder.
The
Sarbanes-Oxley Act (“SOX”) 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. SOX 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. SOX 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 annual percentage rate (“APR”) and the average prime offer rate for
mortgage loans of a comparable type. 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.
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 would 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 was authorized to 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, 2009, the Company had 1,437 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.
There are
risks inherent to the Company’s business. The material risks and uncertainties
that management believes affect the Company are described below. Any of the
following risks could affect the Company’s financial condition and results of
operations and could be material and/or adverse in nature.
Deterioration
in local economic conditions may negatively impact our financial
performance.
The
Company’s success depends primarily on the general economic conditions of
upstate New York, northeastern Pennsylvania, and Burlington, Vermont 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, the northeastern Pennsylvania
areas of Scranton, Wilkes-Barre and East Stroudsburg, and the Burlington,
Vermont area. 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.
As a
lender with the majority of our loans secured by real estate or made to
businesses in New York, Pennsylvania, and Vermont, a downturn in the local
economy could cause significant increases in nonperforming loans, which could
negatively impact our earnings. Declines in real estate values in our market
areas could cause any of our loans to become inadequately collateralized, which
would expose us to greater risk of loss. Additionally, a decline in real estate
values could adversely impact our portfolio of residential and commercial real
estate loans and could result in the decline of originations of such loans, as
most of our loans, and the collateral securing our loans, are located in those
areas.
As a
lender with agricultural loans in the portfolio (approximately 3.4% of total
loans), continued low milk prices could result in an increase in nonperforming
loans, which could negatively impact our earnings.
Variations
in interest rates may negatively affect our financial performance.
The
Company’s earnings and financial condition are largely dependent upon net
interest income, which is the difference between interest earned from loans and
investments and interest paid on deposits and borrowings. The narrowing of
interest rate spreads could adversely affect the Company’s earnings and
financial condition. The Company cannot predict with certainty or control
changes in interest rates. Regional and local economic conditions and the
policies of regulatory authorities, including monetary policies of the Federal
Reserve Board (“FRB”), affect interest income and interest
expense. High interest rates could also affect the amount of loans
that the Company can originate, because higher rates could cause customers to
apply for fewer mortgages, or cause depositors to shift funds from accounts that
have a comparatively lower cost, to accounts with a higher cost or experience
customer attrition due to competitor pricing. With short-term interest rates at
historic lows and the current Federal Funds target rate at 25 bp, the Company’s
interest-bearing deposit accounts, particularly core deposits, are repricing at
historic lows as well. In the future, we anticipate that the interest
rate environment will increase and the Federal funds target rate will start to
increase. Depending on the nature and scale of those increases, the
company’s challenge will be managing the magnitude and scope of the
repricing. If the cost of interest-bearing deposits increases at a
rate greater than the yields on interest-earning assets increase, net interest
income will be negatively affected. Changes in the asset and liability mix may
also affect net interest income. Similarly, lower interest rates cause higher
yielding assets to prepay and floating or adjustable rate assets to reset to
lower rates. If the Company is not able to reduce its funding costs
sufficiently, due to either competitive factors or the maturity schedule of
existing liabilities, then the Company’s net interest margin will
decline.
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 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations and Item 3. 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.
Our
lending, and particularly our emphasis on commercial lending, exposes us to the
risk of losses upon borrower default.
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, Pennsylvania and Vermont, 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, 2009, approximately 41% of the Company’s loan and lease portfolio
consisted of commercial and industrial, agricultural, construction and
commercial real estate loans. These types of loans generally expose a lender to
greater risk of non-payment and loss than residential real estate loans because
repayment of the loans often depends on the successful operation of the
property, the income stream of the borrowers and, for construction loans, the
accuracy of the estimate of the property’s value at completion of construction
and the estimated cost of construction. Such loans typically involve larger loan
balances to single borrowers or groups of related borrowers compared to
residential real estate loans. Because the Company’s loan portfolio contains a
significant number of commercial and industrial, agricultural, 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” in Item 2. 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,
agricultural, construction and commercial real estate loans.
If
our allowance for loan and lease losses is not sufficient to cover actual loan
and lease losses, our earnings will decrease.
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 and lease
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 “Allowance for Loan and Lease Losses, Provision for Loan and Lease
Losses, and Nonperforming Assets” in Item 2. 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.
Strong
competition within our industry and market area could hurt our performance and
slow our growth.
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.
We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.
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” which is located in Item 1. Business in the
Company’s Annual Report on Form 10-K.
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. EESA authorized 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. Other government actions, 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 that 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 liquidity risk which could adversely affect net interest
income and earnings
The
purpose of the Company’s liquidity management is to meet the cash flow
obligations of its customers for both deposits and loans. The primary
liquidity measurement the Company utilizes is called Basic Surplus which
captures the adequacy of the Company’s 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. However, competitive pressure on deposit pricing
could result in a decrease in the Company’s deposit base or an increase in
funding costs. In addition, liquidity will come under additional
pressure if loan growth exceeds deposit growth. 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. Depending on the level of
interest rates, the Company’s net interest income, and therefore earnings, could
be adversely affected. See the section captioned “Liquidity Risk” in
Item 7.
Our
ability to service our debt, pay dividends and otherwise pay our obligations as
they come due is substantially dependent on capital distributions from our
subsidiaries.
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.
We
are subject to security and operational risks relating to our use of technology
that could damage our reputation and our business.
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.
We
continually encounter technological change and the failure to understand and
adapt to these changes could hurt our business.
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.
Provisions
of our certificate of incorporation, by-laws and stockholder rights plan, as
well as Delaware law and certain banking laws, could delay or prevent a takeover
of us by a third party.
Provisions
of the Company’s certificate of incorporation and by-laws, the Company’s stock
purchase rights plan, the corporate law of the State of Delaware and state and
federal banking laws, including regulatory approval requirements, could delay,
defer or prevent a third party from acquiring the Company, despite the possible
benefit to the Company’s stockholders, or otherwise adversely affect the market
price of the Company’s common stock. These provisions include: supermajority
voting requirements for certain business combinations; the election of directors
to staggered terms of three years; and advance notice requirements for
nominations for election to the Company’s board of directors and for proposing
matters that stockholders may act on at stockholder meetings. In addition, the
Company is subject to Delaware law, which among other things prohibits the
Company from engaging in a business combination with any interested stockholder
for a period of three years from the date the person became an interested
stockholder unless certain conditions are met. These provisions may discourage
potential takeover attempts, discouraging bids for the Company’s common stock at
a premium over market price or adversely affect the market price of, and the
voting and other rights of the holders of, the Company’s common stock. These
provisions could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors other than candidates nominated by
the Board.
Recent
negative developments in the housing market, financial industry and the domestic
and international credit markets may adversely affect our operations and
results.
Dramatic
declines in the housing market over the past couple of years, 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. 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. In particular, we have seen increases in foreclosures in our
markets, increases in expenses such as FDIC premiums and a low reinvestment rate
environment. While it appears that the worst of the financial crisis
has past, we do not expect that the challenging conditions in the financial and
housing 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. In particular, we may be affected in one or more of the following
ways:
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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.
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Customer
confidence levels may continue to decline and increase delinquencies and
default rates, which could impact our charge-offs and provision for loan
losses.
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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.
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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.
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We
will continue to be required to pay significantly higher FDIC premiums
than in the past.
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We
are subject to other-than-temporary impairment risk which could negatively
impact our financial performance.
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 whether the Company has
the intent to sell and whether it is more likely than not it will be forced to
sell. 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 and therefore have a material adverse impact on the Company’s financial
condition and performance.
We
may be adversely affected by the soundness of other financial
institutions.
The
Company owns common stock of FHLB of New York in order to qualify for membership
in the FHLB system, which enables it to borrow funds under the FHLB of New
York’s advance program. The carrying value and fair market value of
our FHLB of New York common stock was $36.0 million as of December 31,
2009.
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. FHLB of New York 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.
None.
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, 2009:
|
County
|
Branches
|
ATMs
|
County
|
Branches
|
ATMs
|
|
|
NBT
Bank Division
|
Pennstar
Bank Division
|
|||||
|
New
York
|
Pennsylvania
|
|||||
|
Albany
County
|
4
|
7
|
Lackawanna
County
|
16
|
21
|
|
|
Broome
County
|
8
|
11
|
Luzerne
County
|
4
|
5
|
|
|
Chenango
County
|
11
|
16
|
Monroe
County
|
6
|
8
|
|
|
Clinton
County
|
3
|
2
|
Pike
County
|
3
|
3
|
|
|
Delaware
County
|
5
|
5
|
Susquehanna
County
|
6
|
7
|
|
|
Essex
County
|
3
|
6
|
Wayne
County
|
3
|
5
|
|
|
Franklin
County
|
1
|
1
|
||||
|
Fulton
County
|
7
|
11
|
|
|
||
|
Hamilton
County
|
1
|
1
|
||||
|
Herkimer
County
|
2
|
1
|
||||
|
Montgomery
County
|
6
|
5
|
||||
|
Oneida
County
|
6
|
13
|
||||
|
Otsego
County
|
9
|
14
|
||||
|
Rensselaer
|
1
|
1
|
||||
|
Saratoga
County
|
5
|
6
|
||||
|
Schenectady
County
|
1
|
1
|
||||
|
Schoharie
County
|
4
|
3
|
||||
|
St.
Lawrence County
|
5
|
6
|
||||
|
Tioga
County
|
1
|
1
|
||||
|
Warren
County
|
1
|
2
|
||||
|
Vermont
|
|
|
||||
|
Chittenden
County
|
1
|
1
|
||||
The
Company leases 47 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.
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 any of their property is the subject.
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 high
and low sales prices and dividends declared for the Common Stock for the periods
indicated:
|
High
|
Low
|
Dividend
|
||||||||||
|
2009
|
||||||||||||
|
1st
quarter
|
$ | 28.37 | $ | 15.42 | $ | 0.20 | ||||||
|
2nd
quarter
|
25.22 | 20.49 | 0.20 | |||||||||
|
3rd
quarter
|
24.16 | 20.57 | 0.20 | |||||||||
|
4th
quarter
|
23.59 | 19.43 | 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, 2010 was $20.60.
As of
February 15, 2010, there were 6,745 shareholders of record of Company common
stock.
Equity
Compensation Plan Information
As of
December 31, 2009, 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
|
1,853,200 | (1) | $ | 22.08 | 3,912,445 | |||||||
|
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 disclosed 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,
2004. 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.
|
Period
Ending
|
||||||||||||||||||||||||
|
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
|
NBT
Bancorp
|
$ | 100.00 | $ | 86.78 | $ | 105.85 | $ | 98.04 | $ | 124.08 | $ | 93.80 | ||||||||||||
|
NASDAQ
Financial Stocks
|
$ | 100.00 | $ | 102.35 | $ | 116.96 | $ | 108.51 | $ | 76.92 | $ | 79.55 | ||||||||||||
|
NASDAQ
Composite Index
|
$ | 100.00 | $ | 102.12 | $ | 112.72 | $ | 124.72 | $ | 74.89 | $ | 108.80 | ||||||||||||
|
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, 2009, the Bank was in
compliance with all applicable minimum capital requirements and had the ability
to pay dividends of $64.2 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.
Issuer
Purchases of Equity Securities
On
October 26, 2009, the Company’s Board of Directors authorized a new repurchase
program for the Company to repurchase up to an additional 1,000,000 shares
(approximately 3%) of its outstanding common stock, effective January 1, 2010,
as market conditions warrant in open market and privately negotiated
transactions. The plan expires on December 31, 2011. On
December 31, 2009, the repurchase program previously authorized on January 28,
2008 to repurchase up to 1,000,000 shares expired. The Company made
no purchases of its common stock securities during the year ended December 31,
2009.
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)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Interest,
fee and dividend income
|
$ | 273,393 | $ | 294,414 | $ | 306,117 | $ | 288,842 | $ | 236,367 | ||||||||||
|
Interest
expense
|
76,924 | 108,368 | 141,090 | 125,009 | 78,256 | |||||||||||||||
|
Net
interest income
|
196,469 | 186,046 | 165,027 | 163,833 | 158,111 | |||||||||||||||
|
Provision
for loan and lease losses
|
33,392 | 27,181 | 30,094 | 9,395 | 9,464 | |||||||||||||||
|
Noninterest
income excluding securities gains (losses)
|
79,987 | 70,171 | 57,586 | 49,504 | 43,785 | |||||||||||||||
|
Securities
gains (losses), net
|
144 | 1,535 | 2,113 | (875 | ) | (1,236 | ) | |||||||||||||
|
Noninterest
expense
|
170,566 | 146,813 | 122,517 | 122,966 | 115,305 | |||||||||||||||
|
Income
before income taxes
|
72,642 | 83,758 | 72,115 | 80,101 | 75,891 | |||||||||||||||
|
Net
income
|
52,011 | 58,353 | 50,328 | 55,947 | 52,438 | |||||||||||||||
|
Per
common share
|
||||||||||||||||||||
|
Basic
earnings
|
$ | 1.54 | $ | 1.81 | $ | 1.52 | $ | 1.65 | $ | 1.62 | ||||||||||
|
Diluted
earnings
|
1.53 | 1.80 | 1.51 | 1.64 | 1.60 | |||||||||||||||
|
Cash
dividends paid
|
0.80 | 0.80 | 0.79 | 0.76 | 0.76 | |||||||||||||||
|
Book
value at year-end
|
14.69 | 13.24 | 12.29 | 11.79 | 10.34 | |||||||||||||||
|
Tangible
book value at year-end
|
10.75 | 9.01 | 8.78 | 8.42 | 8.75 | |||||||||||||||
|
Average
diluted common shares outstanding
|
33,903 | 32,427 | 33,421 | 34,206 | 32,710 | |||||||||||||||
|
At
December 31,
|
||||||||||||||||||||
|
Securities
available for sale, at fair value
|
$ | 1,116,758 | $ | 1,119,665 | $ | 1,140,114 | $ | 1,106,322 | $ | 954,474 | ||||||||||
|
Securities
held to maturity, at amortized cost
|
159,946 | 140,209 | 149,111 | 136,314 | 93,709 | |||||||||||||||
|
Loans
and leases
|
3,645,398 | 3,651,911 | 3,455,851 | 3,412,654 | 3,022,657 | |||||||||||||||
|
Allowance
for loan and lease losses
|
66,550 | 58,564 | 54,183 | 50,587 | 47,455 | |||||||||||||||
|
Assets
|
5,464,026 | 5,336,088 | 5,201,776 | 5,087,572 | 4,426,773 | |||||||||||||||
|
Deposits
|
4,093,046 | 3,923,258 | 3,872,093 | 3,796,238 | 3,160,196 | |||||||||||||||
|
Borrowings
|
786,097 | 914,123 | 868,776 | 838,558 | 883,182 | |||||||||||||||
|
Stockholders’
equity
|
505,123 | 431,845 | 397,300 | 403,817 | 333,943 | |||||||||||||||
|
Key
ratios
|
||||||||||||||||||||
|
Return
on average assets
|
0.96 | % | 1.11 | % | 0.98 | % | 1.14 | % | 1.21 | % | ||||||||||
|
Return
on average equity
|
10.90 | 14.16 | 12.60 | 14.47 | 15.86 | |||||||||||||||
|
Average
equity to average assets
|
8.79 | 7.83 | 7.81 | 7.85 | 7.64 | |||||||||||||||
|
Net
interest margin
|
4.04 | 3.95 | 3.61 | 3.70 | 4.01 | |||||||||||||||
|
Dividend
payout ratio
|
52.29 | 44.44 | 52.32 | 46.34 | 47.50 | |||||||||||||||
|
Tier
1 leverage
|
8.35 | 7.17 | 7.14 | 7.57 | 7.16 | |||||||||||||||
|
Tier
1 risk-based capital
|
11.34 | 9.75 | 9.79 | 10.42 | 9.80 | |||||||||||||||
|
Total
risk-based capital
|
12.59 | 11.00 | 11.05 | 11.67 | 11.05 | |||||||||||||||
|
Selected
Quarterly Financial Data
|
||||||||||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||||||||||||||
|
Interest,
fee and dividend income
|
$ | 69,381 | $ | 68,372 | $ | 67,636 | $ | 68,004 | $ | 74,652 | $ | 72,854 | $ | 73,621 | $ | 73,287 | ||||||||||||||||
|
Interest
expense
|
21,269 | 20,321 | 18,954 | 16,380 | 30,587 | 26,849 | 26,578 | 24,354 | ||||||||||||||||||||||||
|
Net
interest income
|
48,112 | 48,051 | 48,682 | 51,624 | 44,065 | 46,005 | 47,043 | 48,933 | ||||||||||||||||||||||||
|
Provision
for loan and lease losses
|
6,451 | 9,199 | 9,101 | 8,641 | 6,478 | 5,803 | 7,179 | 7,721 | ||||||||||||||||||||||||
|
Noninterest
income excluding net securities (losses) gains
|
19,590 | 19,828 | 20,721 | 19,848 | 16,080 | 16,401 | 17,452 | 20,238 | ||||||||||||||||||||||||
|
Net
securities gains (losses)
|
- | 17 | 129 | (2 | ) | 15 | 18 | 1,510 | (8 | ) | ||||||||||||||||||||||
|
Noninterest
expense
|
42,305 | 41,939 | 41,032 | 45,290 | 34,034 | 35,423 | 37,058 | 40,298 | ||||||||||||||||||||||||
|
Net
income
|
13,072 | 11,560 | 13,578 | 13,801 | 13,716 | 14,657 | 15,083 | 14,897 | ||||||||||||||||||||||||
|
Basic
earnings per share
|
$ | 0.40 | $ | 0.34 | $ | 0.40 | $ | 0.40 | $ | 0.43 | $ | 0.46 | $ | 0.47 | $ | 0.46 | ||||||||||||||||
|
Diluted
earnings per share
|
$ | 0.40 | $ | 0.34 | $ | 0.40 | $ | 0.40 | $ | 0.43 | $ | 0.45 | $ | 0.46 | $ | 0.45 | ||||||||||||||||
|
Annualized
net interest margin
|
4.09 | % | 3.95 | % | 3.98 | % | 4.15 | % | 3.84 | % | 3.94 | % | 3.94 | % | 4.06 | % | ||||||||||||||||
|
Annualized
return on average assets
|
0.99 | % | 0.85 | % | 0.99 | % | 1.00 | % | 1.07 | % | 1.12 | % | 1.13 | % | 1.11 | % | ||||||||||||||||
|
Annualized
return on average equity
|
12.14 | % | 9.63 | % | 11.01 | % | 10.92 | % | 13.68 | % | 14.49 | % | 14.58 | % | 13.88 | % | ||||||||||||||||
|
Average
diluted common shares outstanding (in thousands)
|
32,645 | 34,314 | 34,342 | 34,348 | 32,252 | 32,242 | 32,453 | 32,758 | ||||||||||||||||||||||||
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 2009 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, 2009 and
2008 and for each of the years in the three-year period ended December 31, 2009
should be read in conjunction with this review. Amounts
in prior period consolidated financial statements
are reclassified whenever
necessary to conform to the 2009 presentation.
CRITICAL
ACCOUNTING POLICIES
The
Company has identified policies as being critical because they require
management to make particularly difficult, subjective and/or complex judgments
about matters that are inherently uncertain and because of the likelihood that
materially different amounts would be reported under different conditions or
using different assumptions. These policies relate to the allowance for loan and
lease 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 lower, 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 Pension Liability Index,
market interest rates and discounted cash flows in setting the appropriate
discount rate. In addition, the Company reviews expected inflationary and merit
increases to compensation in determining the rate of increase in future
compensation levels.
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
Significant
factors management reviews to evaluate the Company’s operating results and
financial condition include, but are not limited to: net income and
earnings per share, return on assets and equity, net interest margin,
noninterest income, operating expenses, asset quality indicators, loan and
deposit growth, capital management, liquidity and interest rate sensitivity,
enhancements to customer products and services, technology advancements, market
share and peer comparisons. The following information should be
considered in connection with the Company's results for the fiscal year ended
December 31, 2009:
·
Like
all FDIC insured financial institutions, the Company has been subjected to
substantial increases in FDIC recurring premiums, as well as a special
assessment levied by the FDIC in the second quarter of 2009, which had a
significant impact on fiscal year 2009 earnings. For the year ended December 31,
2009, FDIC expenses increased $6.6 million over the year ended December 31,
2008, including the aforementioned special assessment totaling $2.5 million. The
FDIC premium increases and special assessment had a $0.14 effect on diluted
earnings per share for the year ended December 31, 2009.
·
Pension
expenses increased in 2009 in comparison to 2008 primarily due to the impact of
market declines on pension assets. For the year ended December 31, 2009, pension
expenses increased $2.8 million over the year ended December 31, 2008. The
pension expense increases had a $0.06 effect on diluted earnings per share for
the year ended December 31, 2009.
·
The
Company's results for the year ended December 31, 2009, unlike the year ended
December 31, 2008, include the results of Mang for the entire period. Mang was
acquired by the Company on September 1, 2008.
·
In
2009, the Company has strategically expanded into the northwest Vermont
region.
·
The
Company’s results for the year ended December 31, 2009 include operating costs
of new branches from de novo activity for three branches opened in 2007, four
branches opened in 2008 and the branch in Burlington, Vermont,
which opened in 2009. The operating costs for those locations are included
in the Company’s noninterest expense for the year ended December 31, 2009 of
approximately $3.2 million, as compared to $2.7 million for the year ended
December 31, 2008.
·
The
Company's common stock was added to the Standard & Poor's SmallCap 600 Index
during the first quarter of 2009. Simultaneously with being added to the index,
the Company launched a public offering of its common stock, which was completed
during the second quarter of 2009.
As a
result of the current economic recession, the Company is facing certain
challenges in its industry. The condition of the residential real estate
marketplace and the U.S. economy since 2007 has had a significant impact on the
financial services industry as a whole, and therefore on the financial results
of the Company. Beginning with a pronounced downturn in the
residential real estate market in early 2007 that was led by problems in the
sub-prime mortgage markets, the deterioration of residential real estate values
continued throughout 2008 and 2009. With the U.S. economy in
recession in 2008 and 2009, financial institutions were facing higher credit
losses from distressed real estate values and borrower defaults, resulting in
reduced capital levels.
During
2009, the Company has experienced higher delinquencies and charge-offs related
to its loan portfolios; however, the Company remains
well-capitalized. The U.S. economic recession resulted in some
visible stress in the agricultural portfolio primarily as a result of reduced
milk prices. Unemployment in the Company’s markets, while lower than
the national average, has significantly increased resulting in increases in
certain asset quality trends, including nonperforming loans. In
response to the effects of the recession felt by the Company, we
have:
|
|
·
|
increased
our loan collection efforts.
|
|
|
·
|
increased
the sale of conforming residential real estate
mortgages. Interest rate conditions have made it
favorable for the Company to do so, which has lowered our portfolio growth
of this category.
|
|
|
·
|
chosen
to discontinue origination of new automobile leases in order to reduce the
exposure to residual values of leased vehicles, which showed continual
decline during 2008 and into 2009.
|
|
|
·
|
increased
noninterest income opportunities with the acquisition of Mang in 2008 as
well as organic growth of two of the Company’s nonbanking subsidiaries,
Mang and EPIC during 2009.
|
|
|
·
|
continued
to originate loans using strict underwriting
criteria.
|
The
Company had net income of $52.0 million or $1.53 per diluted share for 2009,
down 10.9% from net income of $58.4 million or $1.80 per diluted share for
2008. Net interest income increased $10.4 million or 5.6% in 2009
compared to 2008. The increase in net interest income resulted
primarily from decreases in rates paid on interest bearing deposits and
liabilities in 2009 as compared with 2008. In addition, average
earning assets increased $134.6 million, or 2.8%, in 2009 over
2008. The provision for loan and lease losses totaled $33.4 million
for the year ended December 31, 2009, up $6.2 million, or 22.9%, from $27.2
million for the year ended December 31, 2008. The increase in the
provision for loan and lease losses for the year ended December 31, 2009 was due
primarily to an increase in nonperforming loans and net charge-offs in
2009. Noninterest income increased $8.4 million or 11.7% compared to
2008. The increase in noninterest income was due primarily to an
increase in insurance revenue, which increased approximately $9.0 million for
the year ended December 31, 2009 as compared with the year ended December 31,
2008. This increase was due primarily to revenue generated by Mang,
which was acquired on September 1, 2008. Also included in noninterest
income for 2009 were net securities gains totaling $0.1 million compared to net
securities gains of $1.5 million in 2008. Excluding net security gains and
losses, total noninterest income increased 14.0% in 2009 compared with
2008. Noninterest expense increased $23.8 million, or 16.2%, in 2009
compared with 2008. The increase in noninterest expense was due
primarily to increases in salaries and employee benefits and FDIC
expenses. For the year ended December 31, 2009, FDIC expenses
increased $6.6 million over the year ended December 31, 2008, including the
special assessment of approximately $2.5 million. The FDIC premium
and special assessment had a $0.14 effect on diluted earnings per share for the
year ended December 31, 2009. For the year ended December 31, 2009,
pension expenses increased $2.8 million over the year ended December 31,
2008. The pension expense increases had a $0.06 effect on diluted
earnings per share for the year ended December 31, 2009.
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
primarily 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, professional fees and outside services, impairment on lease residual
assets, and other operating expenses.
2010
OUTLOOK
The
Company’s 2009 earnings reflected the Company’s ability to manage through the
global economic conditions and challenges in the financial services
industry. In 2010, the Company believes effects of the economic
crisis will still exist. In particular the Company expects that in
2010:
• revenue
from Federal Home Loan Bank dividends could decrease significantly;
•
payments representing interest and principal on currently outstanding loans and
investments will most likely continue to be reinvested at rates that are lower
than the rates on currently outstanding on those loans and
investments;
•
noninterest income will probably decrease as a result of new regulations
regarding consumer overdraft fees;
•
competitive pressure on non-maturing deposits could result in an increase in
interest expense if interest rates begin to rise;
• the
economy may continue to have an adverse affect on asset quality indicators,
particularly indicators related to loans secured by real estate, 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.
The
Company’s 2010 outlook is subject to factors in addition to those identified
above and those risks and uncertainties that could impact the Company’s future
results are explained in 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
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Interest
|
Rate%
|
Balance
|
Interest
|
Rate%
|
Balance
|
Interest
|
Rate%
|
|||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Short-term
interest bearing accounts
|
$ | 88,012 | $ | 238 | 0.27 | $ | 9,190 | $ | 186 | 2.03 | $ | 8,395 | $ | 419 | 4.99 | |||||||||||||||||||||
|
Securities
available for sale (1)
|
1,095,609 | 48,951 | 4.47 | 1,113,810 | 56,841 | 5.10 | 1,134,837 | 57,290 | 5.05 | |||||||||||||||||||||||||||
|
Securities
held to maturity (1)
|
151,078 | 7,385 | 4.89 | 149,775 | 8,430 | 5.63 | 144,518 | 8,901 | 6.16 | |||||||||||||||||||||||||||
|
Investment
in FRB and FHLB Banks
|
37,878 | 1,966 | 5.19 | 39,735 | 2,437 | 6.13 | 34,022 | 2,457 | 7.22 | |||||||||||||||||||||||||||
|
Loans
and leases (2)
|
3,641,852 | 221,128 | 6.07 | 3,567,299 | 233,016 | 6.53 | 3,425,318 | 243,317 | 7.10 | |||||||||||||||||||||||||||
|
Total
earning assets
|
5,014,429 | $ | 279,668 | 5.58 | 4,879,809 | $ | 300,910 | 6.17 | 4,747,090 | $ | 312,384 | 6.58 | ||||||||||||||||||||||||
|
Trading
securities
|
1,929 | 2,254 | 2,674 | |||||||||||||||||||||||||||||||||
|
Other
non-interest earning assets
|
412,651 | 382,592 | 359,823 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 5,429,009 | $ | 5,264,655 | $ | 5,109,587 | ||||||||||||||||||||||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||||||||||||||||||||||
|
Money
market deposit accounts
|
$ | 1,013,514 | $ | 12,165 | 1.20 | $ | 778,477 | $ | 14,373 | 1.85 | $ | 663,532 | $ | 22,402 | 3.38 | |||||||||||||||||||||
|
NOW
deposit accounts
|
600,943 | 3,159 | 0.53 | 485,014 | 4,133 | 0.85 | 449,122 | 3,785 | 0.84 | |||||||||||||||||||||||||||
|
Savings
deposits
|
499,079 | 826 | 0.17 | 467,572 | 2,161 | 0.46 | 485,562 | 4,299 | 0.89 | |||||||||||||||||||||||||||
|
Time
deposits
|
1,227,199 | 32,346 | 2.64 | 1,507,966 | 55,465 | 3.68 | 1,675,116 | 76,088 | 4.54 | |||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
3,340,735 | 48,496 | 1.45 | 3,239,029 | 76,132 | 2.35 | 3,273,332 | 106,574 | 3.26 | |||||||||||||||||||||||||||
|
Short-term
borrowings
|
140,066 | 552 | 0.39 | 223,830 | 4,847 | 2.17 | 280,162 | 12,943 | 4.62 | |||||||||||||||||||||||||||
|
Trust
preferred debentures
|
75,422 | 4,247 | 5.63 | 75,422 | 4,747 | 6.29 | 75,422 | 5,087 | 6.74 | |||||||||||||||||||||||||||
|
Long-term
debt
|
601,039 | 23,629 | 3.93 | 563,460 | 22,642 | 4.02 | 384,017 | 16,486 | 4.29 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
4,157,262 | $ | 76,924 | 1.85 | 4,101,741 | $ | 108,368 | 2.64 | 4,012,933 | $ | 141,090 | 3.52 | ||||||||||||||||||||||||
|
Demand
deposits
|
718,580 | 682,656 | 639,423 | |||||||||||||||||||||||||||||||||
|
Other
non-interest-bearing liabilities
|
75,868 | 68,156 | 57,932 | |||||||||||||||||||||||||||||||||
|
Stockholders’
equity
|
477,299 | 412,102 | 399,299 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and stockholders’ equity
|
$ | 5,429,009 | $ | 5,264,655 | $ | 5,109,587 | ||||||||||||||||||||||||||||||
|
Interest
rate spread
|
3.73 | % | 3.53 | % | 3.06 | % | ||||||||||||||||||||||||||||||
|
Net
interest income-FTE
|
202,744 | 192,542 | 171,294 | |||||||||||||||||||||||||||||||||
|
Net
interest margin
|
4.04 | % | 3.95 | % | 3.61 | % | ||||||||||||||||||||||||||||||
|
Taxable
equivalent adjustment
|
6,275 | 6,496 | 6,267 | |||||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 196,469 | $ | 186,046 | $ | 165,027 | ||||||||||||||||||||||||||||||
|
(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.
|
2009
OPERATING RESULTS AS COMPARED TO 2008 OPERATING RESULTS
NET
INTEREST INCOME
On a tax
equivalent basis, the Company’s net interest income for 2009 was $202.7 million,
up from $192.5 million for 2008. The Company’s net interest margin
increased to 4.04% for 2009 from 3.95% for 2008. 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 59 basis points
(bp), from 6.17% for 2008 to 5.58% for 2009. Meanwhile, the rate paid
on interest bearing liabilities decreased 79 bp, from 2.64% for 2008 to 1.85%
for 2009. Average earning assets increased $134.6 million, or 2.8%,
from 2008 to 2009. This increase was driven primarily by a $78.8
million increase in short-term interest bearing accounts and a $74.6 million
increase in average loans and leases, which was driven primarily by a 19.3%
increase in average 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)
|
|||||||||||||||||||||||
|
2009
over 2008
|
2008
over 2007
|
|||||||||||||||||||||||
|
(In
thousands)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||||||
|
Short-term
interest-bearing accounts
|
$ | 340 | $ | (288 | ) | $ | 52 | $ | 36 | $ | (269 | ) | $ | (233 | ) | |||||||||
|
Securities
available for sale
|
(915 | ) | (6,975 | ) | (7,890 | ) | (1,069 | ) | 620 | (449 | ) | |||||||||||||
|
Securities
held to maturity
|
73 | (1,118 | ) | (1,045 | ) | 316 | (787 | ) | (471 | ) | ||||||||||||||
|
Investment
in FRB and FHLB Banks
|
(110 | ) | (361 | ) | (471 | ) | 380 | (400 | ) | (20 | ) | |||||||||||||
|
Loans
and leases
|
4,791 | (16,679 | ) | (11,888 | ) | 9,810 | (20,111 | ) | (10,301 | ) | ||||||||||||||
|
Total
interest income
|
4,179 | (25,421 | ) | (21,242 | ) | 9,473 | (20,947 | ) | (11,474 | ) | ||||||||||||||
|
Money
market deposit accounts
|
3,636 | (5,844 | ) | (2,208 | ) | 3,394 | (11,423 | ) | (8,029 | ) | ||||||||||||||
|
NOW
deposit accounts
|
842 | (1,816 | ) | (974 | ) | 305 | 43 | 348 | ||||||||||||||||
|
Savings
deposits
|
137 | (1,472 | ) | (1,335 | ) | (154 | ) | (1,984 | ) | (2,138 | ) | |||||||||||||
|
Time
deposits
|
(9,166 | ) | (13,953 | ) | (23,119 | ) | (7,095 | ) | (13,528 | ) | (20,623 | ) | ||||||||||||
|
Short-term
borrowings
|
(1,348 | ) | (2,947 | ) | (4,295 | ) | (2,223 | ) | (5,873 | ) | (8,096 | ) | ||||||||||||
|
Trust
preferred debentures
|
- | (500 | ) | (500 | ) | - | (340 | ) | (340 | ) | ||||||||||||||
|
Long-term
debt
|
1,485 | (498 | ) | 987 | 7,270 | (1,114 | ) | 6,156 | ||||||||||||||||
|
Total
interest expense
|
(4,414 | ) | (27,030 | ) | (31,444 | ) | 1,497 | (34,219 | ) | (32,722 | ) | |||||||||||||
|
Change
in FTE net interest income
|
$ | 8,593 | $ | 1,609 | $ | 10,202 | $ | 7,976 | $ | 13,272 | $ | 21,248 | ||||||||||||
LOANS
AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The
average balance of loans and leases increased $74.6 million, or 2.1%, totaling
$3.6 billion in 2009. The yield on average loans and leases decreased from 6.53%
in 2008 to 6.07% in 2009, 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 2009. Interest income from loans and
leases on a FTE basis decreased 5.1%, from $233.0 million in 2008 to $221.1
million in 2009. The decrease in interest income from loans and
leases was due to the decrease in yield on loans and leases in 2009 compared to
2008 noted above.
Total
loans and leases decreased nominally at December 31, 2009. The
Company experienced increases in consumer and commercial real estate loans,
which were offset by decreases in residential real estate loans, home equity
loans, and leases. Consumer loans increased $61.9 million or 7.8%,
from $795.1 million at December 31, 2008 to $857.0 million at December 31,
2009. The increase in consumer loans was driven primarily by an
increase in indirect installment loans of $70.0 million, from $677.9 million in
2008 to $747.9 million in 2009. Commercial real estate loans
increased $48.5 million, or 7.2%, from $669.7 million at December 31, 2008 to
$718.2 million at December 31, 2009, in large part due to increases in new
business. Residential real estate loans decreased $99.8 million, or
13.8%, from $722.7 million at December 31, 2008 to $622.9 million at December
31, 2009. This decrease was due primarily to the sales of fixed rate
mortgages during 2009. Home equity loans decreased $24.0 million or
3.8% from $627.6 million at December 31, 2008 to $603.6 million at December 31,
2009 due to current market conditions decreasing consumer
demand. Leases decreased $20.6 million, or 24.7%, from $83.3 million
at December 31, 2008 to $62.7 million at December 31, 2009 as the Company
discontinued lease originations beginning in the second quarter of
2009.
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)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Residential
real estate mortgages
|
$ | 622,898 | $ | 722,723 | $ | 719,182 | $ | 739,607 | $ | 701,734 | ||||||||||
|
Commercial
|
581,870 | 572,059 | 593,077 | 581,736 | 569,021 | |||||||||||||||
|
Commercial
real estate
|
718,235 | 669,720 | 621,820 | 658,647 | 558,684 | |||||||||||||||
|
Real
estate construction and development
|
76,721 | 67,859 | 81,350 | 94,494 | 69,135 | |||||||||||||||
|
Agricultural
and agricultural real estate
|
122,466 | 113,566 | 116,190 | 118,278 | 114,043 | |||||||||||||||
|
Consumer
|
856,956 | 795,123 | 655,375 | 586,922 | 463,955 | |||||||||||||||
|
Home
equity
|
603,585 | 627,603 | 582,731 | 546,719 | 463,848 | |||||||||||||||
|
Lease
financing
|
62,667 | 83,258 | 86,126 | 86,251 | 82,237 | |||||||||||||||
|
Total
loans and leases
|
$ | 3,645,398 | $ | 3,651,911 | $ | 3,455,851 | $ | 3,412,654 | $ | 3,022,657 | ||||||||||
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 and
medium-sized entities. Consumer loans consist primarily of indirect
installment credit to individuals secured by automobiles and other personal
property including marine, recreational vehicles and manufactured
housing. Indirect installment loans represent $747.9 million of total
consumer loans, or 87.3%. Installment credit for automobiles accounts for 66% of
total consumer loans. Although automobile loans have generally been
originated through dealers, all applications submitted through dealers are
subject to the Company’s normal underwriting and loan approval
procedures. 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.
Commercial
real estate loans increased by approximately $48.5 million, or 7.2%, from
December 31, 2008 to December 31, 2009. Risks associated with the
commercial real estate portfolio include the ability of borrowers to pay
interest and principal during the loan’s term, as well as the ability of the
borrowers to refinance an the end of the loan term. While the Company
continues to adhere to prudent underwriting standards, the recent severe
economic recession has translated into fewer retail customers, decreased retail
spending and decreased demand for office space which has impacted the borrowers’
ability to maintain cash flow.
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. During the second quarter of
2009, the Company chose to discontinue lease origination. Therefore, this
balance will gradually decrease as leases terminate.
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 $44.9 million and $58.6 million
at December 31, 2009 and 2008, 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, 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
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,
2009. 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, 2009
|
||||||||||||||||
|
After
One Year But
|
|
|||||||||||||||
|
(In
thousands)
|
Within
One Year
|
Within
Five Years
|
After
Five Years
|
Total
|
||||||||||||
|
Floating/adjustable
rate
|
||||||||||||||||
|
Commercial,
commercial real estate, agricultural, and agricultural real
estate
|
$ | 310,207 | $ | 182,839 | $ | 324,916 | $ | 817,962 | ||||||||
|
Real
estate construction and development
|
37,438 | 13,391 | 2,425 | 53,254 | ||||||||||||
|
Total
floating rate loans
|
347,645 | 196,230 | 327,341 | 871,216 | ||||||||||||
|
Fixed
rate
|
||||||||||||||||
|
Commercial,
commercial real estate, agricultural, and agricultural real
estate
|
65,894 | 261,148 | 277,567 | 604,609 | ||||||||||||
|
Real
estate construction and development
|
7,361 | 2,067 | 14,039 | 23,467 | ||||||||||||
|
Total
fixed rate loans
|
73,255 | 263,215 | 291,606 | 628,076 | ||||||||||||
|
Total
|
$ | 420,900 | $ | 459,445 | $ | 618,947 | $ | 1,499,292 | ||||||||
SECURITIES
AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The
average balance of the amortized cost for securities available for sale
decreased $18.2 million, or 1.6%, from December 31, 2008 to December 31, 2009.
The yield on average securities available for sale was 4.47% for 2009 compared
to 5.10% in 2008.
The
average balance of securities held to maturity increased from $149.8 million in
2008 to $151.1 million in 2009. At December 31, 2009, securities held to
maturity were comprised primarily of tax-exempt municipal securities. The yield
on securities held to maturity decreased from 5.63% in 2008 to 4.89% in 2009 due
to reinvestments during 2009 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 decreased to
$37.9 million in 2009 from $39.7 million in 2008. The yield from
investments in FRB and FHLB Banks decreased from 6.13% in 2008 to 5.19% in 2009
due to decreases in dividend rates from FHLB during 2009.
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. 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
or in other comprehensive income, depending on whether the Company intends to
sell the security or more likely than not will be required to sell the security
before recovery of its amortized cost basis less any current-period credit
loss. If the Company intends to sell the security or more likely than
not will be required to sell the security before recovery of its amortized cost
basis less any current-period credit loss, the other-than-temporary impairment
shall be recognized in earnings equal to the entire difference between the
investment’s amortized cost basis and its fair value at the balance sheet
date. If the Company does not intend to sell the security and it is
not more likely than not that the entity will be required to sell the security
before recovery of its amortized cost basis less any current-period credit loss,
the other-than-temporary impairment shall be separated into (a) the amount
representing the credit loss and (b) the amount related to all other
factors. The amount of the total other-than-temporary impairment
related to the credit loss shall be recognized in earnings. The amount of the
total other-than-temporary impairment related to other factors shall be
recognized in other comprehensive income, net of applicable taxes.
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 historical and implied volatility of the fair value of the
security.
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,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||||||||
|
(In
thousands)
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||||||||
|
Securities
available for sale
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 20,102 | $ | 20,086 | $ | 59 | $ | 67 | $ | 10,042 | $ | 10,077 | ||||||||||||
|
Federal
Agency and mortgage-backed
|
579,267 | 594,018 | 565,970 | 579,796 | 704,308 | 705,354 | ||||||||||||||||||
|
State
& Municipal, collateralized mortgage obligations and other
securities
|
489,377 | 502,654 | 532,918 | 539,802 | 418,654 | 424,683 | ||||||||||||||||||
|
Total
securities available for sale
|
$ | 1,088,746 | $ | 1,116,758 | $ | 1,098,947 | $ | 1,119,665 | $ | 1,133,004 | $ | 1,140,114 | ||||||||||||
|
Securities
held to maturity
|
||||||||||||||||||||||||
|
Federal
Agency and mortgage-backed
|
$ | 2,041 | $ | 2,213 | $ | 2,372 | $ | 2,467 | $ | 2,810 | $ | 2,909 | ||||||||||||
|
State
& Municipal
|
157,905 | 159,638 | 137,837 | 138,841 | 146,301 | 146,610 | ||||||||||||||||||
|
Total
securities held to maturity
|
$ | 159,946 | $ | 161,851 | $ | 140,209 | $ | 141,308 | $ | 149,111 | $ | 149,519 | ||||||||||||
In the
available for sale category at December 31, 2009, federal agency securities were
comprised of Government-Sponsored Enterprise (“GSE”) securities;
Mortgaged-backed securities were comprised of GSEs with an amortized cost of
$238.8 million and a fair value of $248.7 million and US Government Agency
securities with an amortized cost of $30.5 million and a fair value of $32.1
million; Collateralized mortgage obligations were comprised of GSEs with an
amortized cost of $186.1 million and a fair value of $190.4 million and US
Government Agency securities with an amortized cost of $135.8 million and a fair
value of $140.3 million. At December 31, 2009, all of the mortgaged-backed
securities held to maturity were comprised of US Government Agency
securities.
Our
mortgage backed securities, U.S. agency notes, and collateralized mortgage
obligations are all “prime/conforming” and are guaranteed by Fannie Mae, Freddie
Mac, Federal Home Loan Bank, Federal Farm Credit Banks, or Ginnie Mae
(“GNMA”). GNMA securities are considered equivalent to U.S. Treasury
securities, as they are backed by the full faith and credit of the U.S.
government. Currently, there are no subprime mortgages in our
investment portfolio.
The
following tables set forth information with regard to contractual maturities of
debt securities at December 31, 2009:
|
(In
thousands)
|
Amortized
cost
|
Estimated
fair value
|
Weighted
Average Yield
|
|||||||||
|
Debt
securities classified as available for sale
|
||||||||||||
|
Within
one year
|
$ | 17,093 | $ | 17,483 | 4.60 | % | ||||||
|
From
one to five years
|
336,822 | 339,337 | 2.50 | % | ||||||||
|
From
five to ten years
|
306,346 | 317,577 | 4.71 | % | ||||||||
|
After
ten years
|
416,190 | 428,705 | 4.18 | % | ||||||||
| $ | 1,076,451 | $ | 1,103,102 | |||||||||
|
Debt
securities classified as held to maturity
|
||||||||||||
|
Within
one year
|
$ | 98,688 | $ | 98,723 | 2.15 | % | ||||||
|
From
one to five years
|
38,212 | 39,339 | 3.76 | % | ||||||||
|
From
five to ten years
|
17,761 | 18,330 | 4.13 | % | ||||||||
|
After
ten years
|
5,285 | 5,459 | 5.16 | % | ||||||||
| $ | 159,946 | $ | 161,851 | |||||||||
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 $55.5 million, totaling $4.2 billion in
2009 from $4.1 billion in 2008. The rate paid on interest-bearing
liabilities decreased from 2.64% in 2008 to 1.85% in 2009. This
decrease caused a decrease in interest expense of $31.5 million, or 29.0%, from
$108.4 million in 2008 to $76.9 million in 2009.
DEPOSITS
Average
interest bearing deposits increased $101.7 million, or 3.1%, during 2009
compared to 2008. The increase resulted primarily from increases in
money market deposit accounts and NOW accounts, partially offset by a decrease
in time deposits. Average money market deposits increased $235.0
million or 30.2% during 2009 when compared to 2008. The increase in
average money market deposits resulted primarily from an increase in personal
money market deposits and municipal money market deposits as customers chose the
term flexibility of money market deposit accounts in the low rate environment as
opposed to longer term options such as CD’s. Average NOW accounts
increased $115.9 million or 23.9% during 2009 as compared to
2008. This increase was due primarily to increases in municipal NOW
accounts as the Company acquired new accounts in 2009, and existing municipal
customers choosing the higher yielding NOW accounts over CD’s. The
average balance of savings accounts decreased $31.5 million or 6.7% during 2009
when compared to 2008. Average time deposits decreased $280.8 million
or 18.6% during 2009 as compared to 2008. The decrease in average
time deposits resulted primarily from decreases in municipal and negotiated rate
time deposits due to lower interest
rates. The average balance of demand deposits
increased $35.9 million, or 5.3%, from $682.6 million in 2008 to $718.5 million
in 2009. 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 2.35% during 2008 to
1.45% in 2009. 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 driven by the cuts made to
the Federal Funds Target rate by the FRB during 2008 as well as an overall
decrease in all interest rates. The rates paid for money market
deposit accounts decreased from 1.85% during 2008 to 1.20% during
2009. The rate paid for savings deposits decreased from 0.46% in 2008
to 0.17% in 2009 and the rate paid on time deposits decreased from 3.68% during
2008 to 2.64% during 2009.
The
following table presents the maturity distribution of time deposits of $100,000
or more at December 31, 2009 and December 31, 2008:
|
Table
6. Maturity Distribution of Time Deposits of $100,000 or
More
|
||||||||
|
December
31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Within
three months
|
$ | 104,397 | $ | 240,788 | ||||
|
After
three but within twelve months
|
101,416 | 134,097 | ||||||
|
After
one but within three years
|
46,375 | 35,735 | ||||||
|
Over
three years
|
46,606 | 18,130 | ||||||
|
Total
|
$ | 298,794 | $ | 428,750 | ||||
BORROWINGS
Average
short-term borrowings decreased $83.8 million to $140.1 million in
2009. The average rate paid on short-term borrowings decreased from
2.17% in 2008 to 0.39% in 2009, which was primarily driven by the FRB decreasing
the Fed Funds target rate (which directly impacts short-term borrowing
rates). Average long-term debt increased from $563.5 million in 2008
to $601.0 million in 2009, 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 2009
compared to 2008. The average rate paid for trust preferred
debentures in 2009 was 5.63%, down from 6.29% in 2008. The decrease in rate on
the trust preferred debentures is due primarily to the previously mentioned
decrease in short-term rates during 2009.
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 $848 million and $771 million at December 31, 2009 and 2008,
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.
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)
|
2009
|
2008
|
2007
|
|||||||||
|
Service
charges on deposit accounts
|
$ | 27,165 | $ | 28,143 | $ | 22,742 | ||||||
|
Insurance
revenue
|
17,725 | 8,726 | 4,255 | |||||||||
|
Trust
|
6,719 | 7,278 | 6,514 | |||||||||
|
Bank
owned life insurance income
|
3,135 | 4,923 | 3,114 | |||||||||
|
ATM
and debit card fees
|
9,339 | 8,832 | 8,185 | |||||||||
|
Retirement
plan administration fees
|
9,086 | 6,308 | 6,336 | |||||||||
|
Other
|
6,818 | 5,961 | 6,440 | |||||||||
|
Total
before net securities gains
|
79,987 | 70,171 | 57,586 | |||||||||
|
Net
securities gains
|
144 | 1,535 | 2,113 | |||||||||
|
Total
|
$ | 80,131 | $ | 71,706 | $ | 59,699 | ||||||
Noninterest
income for the year ended December 31, 2009 was $80.1 million, up $8.4 million
or 11.7% from $71.7 million for the same period in 2008. The increase
in noninterest income was due primarily to an increase in insurance revenue,
which increased approximately $9.0 million for the year ended December 31, 2009
as compared with the year ended December 31, 2008. This increase was
due primarily to revenue generated by Mang Insurance Agency, LLC, which was
acquired on September 1, 2008. In addition, retirement plan
administration fees increased approximately $2.8 million for the year ended
December 31, 2009 as compared with the year ended December 31, 2008 as a result
of organic growth from new business. These increases were partially
offset by a decrease in bank owned life insurance income of approximately $1.8
million for the year ended December 31, 2009 as compared to the year ended
December 31, 2008. This decrease was primarily due to the death
benefit realized during 2008 from two life insurance policies. In
addition, net securities gains decreased by approximately $1.4 million for the
year ended December 31, 2009 as compared with the year ended December 31,
2008.
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)
|
2009
|
2008
|
2007
|
|||||||||
|
Salaries
and employee benefits
|
$ | 85,565 | $ | 71,159 | $ | 59,516 | ||||||
|
Occupancy
|
14,864 | 13,781 | 11,630 | |||||||||
|
Equipment
|
8,139 | 7,539 | 7,422 | |||||||||
|
Data
processing and communications
|
13,238 | 12,694 | 11,400 | |||||||||
|
Professional
fees and outside services
|
10,508 | 10,476 | 9,135 | |||||||||
|
Office
supplies and postage
|
5,857 | 5,346 | 5,120 | |||||||||
|
Amortization
of intangible assets
|
3,246 | 2,105 | 1,645 | |||||||||
|
Loan
collection and other real estate owned
|
2,766 | 2,494 | 1,633 | |||||||||
|
Impairment
on lease residual assets
|
- | 2,000 | - | |||||||||
|
FDIC
expenses
|
8,408 | 1,813 | 452 | |||||||||
|
Other
|
17,975 | 17,406 | 14,564 | |||||||||
|
Total
noninterest expense
|
$ | 170,566 | $ | 146,813 | $ | 122,517 | ||||||
Noninterest
expense for the year ended December 31, 2009 was $170.6 million, up from $146.8
million for the same period in 2008. Salaries and employee benefits
increased $14.4 million, or 20.2%, for the year ended December 31, 2009 compared
with the same period in 2008. This increase was due primarily to
increases in full-time-equivalent employees during 2009, largely due to the
aforementioned acquisition and de novo branch activity. In addition,
the Company experienced increases of approximately $2.8 million and $1.3 million
in pension and medical expenses, respectively, for the year ended December 31,
2009 as compared with the same period in 2008. FDIC expenses
increased approximately $6.6 million for the year ended December 31, 2009,
compared with the year ended December 31, 2008. This increase was due
to the special assessment imposed by the FDIC totaling approximately $2.5
million during the second quarter of 2009, in addition to increased recurring
FDIC insurance premiums. Amortization of intangible assets was $3.2
million for the year ended December 31, 2009, up $1.1 million from $2.1 million
for same period in 2008 due to the aforementioned
acquisition. Occupancy expenses were up approximately $1.1 million
for the year ended December 31, 2009 as compared with the year ended December
31, 2008. This increase was due primarily to the aforementioned
acquisition and de novo branch activity during the period.
INCOME
TAXES
Income
tax expense for the year ended December 31, 2009 was $20.6 million, down from
$25.4 million for the same period in 2008. The decrease in income tax
expense is primarily the result of the decrease in pre-tax income.
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.
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.
|
Table
7. Nonperforming Assets
|
||||||||||||||||||||||||||||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
2009
|
%
|
2008
|
%
|
2007
|
%
|
2006
|
%
|
2005
|
%
|
||||||||||||||||||||||||||||||
|
Nonaccrual
loans
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial
and agricultural loans and real estate
|
$ | 25,521 | 66 | % | $ | 15,891 | 66 | % | $ | 20,491 | 69 | % | $ | 9,346 | 69 | % | $ | 9,373 | 70 | % | ||||||||||||||||||||
|
Real
estate mortgages
|
6,140 | 16 | % | 3,803 | 16 | % | 1,372 | 5 | % | 2,338 | 17 | % | 2,009 | 15 | % | |||||||||||||||||||||||||
|
Consumer
|
6,249 | 16 | % | 3,468 | 14 | % | 2,934 | 10 | % | 1,981 | 14 | % | 2,037 | 15 | % | |||||||||||||||||||||||||
|
Troubled
debt restructured loans
|
836 | 2 | % | 1,029 | 4 | % | 4,900 | 16 | % | - | 0 | % | - | 0 | % | |||||||||||||||||||||||||
|
Total
nonaccrual loans
|
38,746 | 100 | % | 24,191 | 100 | % | 29,697 | 100 | % | 13,665 | 100 | % | 13,419 | 100 | % | |||||||||||||||||||||||||
|
Loans
90 days or more past due and still accruing
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial
and agricultural loans and real estate
|
59 | 2 | % | 12 | 1 | % | 51 | 6 | % | 138 | 8 | % | - | 0 | % | |||||||||||||||||||||||||
|
Real
estate mortgages
|
602 | 24 | % | 770 | 33 | % | 295 | 33 | % | 682 | 42 | % | 465 | 53 | % | |||||||||||||||||||||||||
|
Consumer
|
1,865 | 74 | % | 1,523 | 66 | % | 536 | 61 | % | 822 | 50 | % | 413 | 47 | % | |||||||||||||||||||||||||
|
Total
loans 90 days or more past due and still accruing
|
2,526 | 100 | % | 2,305 | 100 | % | 882 | 100 | % | 1,642 | 100 | % | 878 | 100 | % | |||||||||||||||||||||||||
|
Total
nonperforming loans
|
41,272 | 26,496 | 30,579 | 15,307 | 14,297 | |||||||||||||||||||||||||||||||||||
|
Other
real estate owned
|
2,358 | 665 | 560 | 389 | 265 | |||||||||||||||||||||||||||||||||||
|
Total
nonperforming loans and other real estate owned
|
43,630 | 27,161 | 31,139 | 15,696 | 14,562 | |||||||||||||||||||||||||||||||||||
|
Total
nonperforming loans to loans and leases
|
1.13 | % | 0.73 | % | 0.88 | % | 0.45 | % | 0.47 | % | ||||||||||||||||||||||||||||||
|
Total
nonperforming loans and other real estate owned to total
assets
|
0.80 | % | 0.51 | % | 0.60 | % | 0.31 | % | 0.33 | % | ||||||||||||||||||||||||||||||
|
Total
allowance for loan and lease losses to nonperforming loans
|
161.25 | % | 221.03 | % | 177.19 | % | 330.48 | % | 331.92 | % | ||||||||||||||||||||||||||||||
Loans
over 60 days past due but not over 90 days past due were .15%, .15%, .12%, .12%
and .07% of total loans as of December 31, 2009, 2008, 2007, 2006 and 2005,
respectively.
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 $43.6 million at December 31, 2009, compared to $27.2
million at December 31, 2008. Nonperforming loans at December 31,
2009 were $41.3 million or 1.13% of total loans and leases compared with $39.2
million or 1.08% at September 30, 2009 and $26.5 million or 0.73% at December
31, 2008. The increase in nonperforming loans at December 31, 2009 as
compared with December 31, 2008 was primarily the result of specific commercial
and agricultural credits. As a result of a decline in milk prices,
the agricultural industry has suffered in 2009. This has caused an
increase in nonperforming agricultural loans. As a result of this,
the Company has determined that additional reserves are warranted on these loan
types. The increase in nonperforming commercial credits is a result
of certain relationships whose risks do not appear to be representative of the
entire commercial loan portfolio. The Company recorded a provision
for loan and lease losses of $33.4 million for the year ended December 31, 2009
compared with $27.2 million for the year ended December 31, 2008. The
increase in the provision for loan and lease losses for the year ended December
31, 2009 was due primarily to an increase in net charge-offs which totaled $25.4
million for the year ended December 31, 2009, up from $22.8 million for the year
ended December 31, 2008. Net charge-offs to average loans and leases
for the year ended December 31, 2009 were 0.70%, compared with 0.64% for the
year ended December 31, 2008. The allowance for loan and lease losses
was 161.25% of non-performing loans at December 31, 2008 as compared to 221.03%
at December 31, 2008.
Impaired
loans, which primarily consist of nonaccruing commercial, commercial real
estate, agricultural, and agricultural real estate loans increased to $19.8
million at December 31, 2009 as compared to $11.3 million at December 31, 2008.
At December 31, 2009, $6.3 million of the total impaired loans had a specific
reserve allocation of $2.6 million compared to $1.7 million of impaired loans at
December 31, 2008 which had a specific reserve allocation of $0.6
million.
Total net
charge-offs for 2009 were $25.4 million as compared with $22.8 million for
2008. The ratio of net charge-offs to average loans and leases was
0.70% for 2009 compared to 0.64% for 2008. Gross charge-offs
increased $2.8 million, totaling $29.8 million for 2009 compared to $27.0
million for 2008. Recoveries increased slightly from $4.2 million for
the year ended December 31, 2008 to $4.4 million for the year ended December 31,
2009. The allowance for loan and lease losses as a percentage of
total loans and leases was 1.83% at December 31, 2009 and 1.60% at December 31,
2008.
|
Table
8. Allowance for Loan and Lease Losses
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Balance
at January 1
|
$ | 58,564 | $ | 54,183 | $ | 50,587 | $ | 47,455 | $ | 44,932 | ||||||||||
|
Loans
and leases charged-off
|
||||||||||||||||||||
|
Commercial
and agricultural
|
11,500 | 14,464 | 20,349 | 6,132 | 3,403 | |||||||||||||||
|
Residential
real estate mortgages
|
705 | 543 | 1,032 | 542 | 741 | |||||||||||||||
|
Consumer*
|
17,609 | 11,985 | 9,862 | 6,698 | 6,875 | |||||||||||||||
|
Total
loans and leases charged-off
|
29,814 | 26,992 | 31,243 | 13,372 | 11,019 | |||||||||||||||
|
Recoveries
|
||||||||||||||||||||
|
Commercial
and agricultural
|
1,508 | 1,411 | 1,816 | 1,939 | 1,695 | |||||||||||||||
|
Residential
real estate mortgages
|
133 | 68 | 125 | 239 | 438 | |||||||||||||||
|
Consumer*
|
2,767 | 2,713 | 2,804 | 2,521 | 1,945 | |||||||||||||||
|
Total
recoveries
|
4,408 | 4,192 | 4,745 | 4,699 | 4,078 | |||||||||||||||
|
Net
loans and leases charged-off
|
25,406 | 22,800 | 26,498 | 8,673 | 6,941 | |||||||||||||||
|
Allowance
related to purchase acquisitions
|
- | - | - | 2,410 | - | |||||||||||||||
|
Provision
for loan and lease losses
|
33,392 | 27,181 | 30,094 | 9,395 | 9,464 | |||||||||||||||
|
Balance
at December 31
|
$ | 66,550 | $ | 58,564 | $ | 54,183 | $ | 50,587 | $ | 47,455 | ||||||||||
|
Allowance
for loan and lease losses to loans and leases outstanding at end of
year
|
1.83 | % | 1.60 | % | 1.57 | % | 1.48 | % | 1.57 | % | ||||||||||
|
Net
charge-offs to average loans and leases outstanding
|
0.70 | % | 0.64 | % | 0.77 | % | 0.26 | % | 0.23 | % | ||||||||||
|
*
Consumer charge-off and recoveries include consumer, home equity, and
lease financing.
|
||||||||||||||||||||
In
addition to the nonperforming loans discussed above, the Company has also
identified approximately $79.1 million in potential problem loans at December
31, 2009 as compared to $95.4 million at December 31, 2008. 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, 2009 and 2008,
potential problem loans primarily consisted of commercial and agricultural loans
and totaled $72.4 million and $90.7 million, respectively. At
December 31, 2009, there were 17 potential problem loans that equaled or
exceeded $1.0 million, totaling $32.2 million in aggregate compared to 21
potential problem loans exceeding $1.0 million, totaling $41.2 million at
December 31, 2008. 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,
|
||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
|
(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
|
$ | 36,599 | 41 | % | $ | 33,231 | 39 | % | $ | 32,811 | 41 | % | $ | 28,149 | 43 | % | $ | 30,257 | 43 | % | ||||||||||||||||||||
|
Real
estate mortgages
|
3,002 | 17 | % | 3,143 | 20 | % | 3,277 | 21 | % | 3,377 | 22 | % | 3,148 | 23 | % | |||||||||||||||||||||||||
|
Consumer
|
26,664 | 42 | % | 21,908 | 41 | % | 17,362 | 38 | % | 17,327 | 35 | % | 12,402 | 34 | % | |||||||||||||||||||||||||
|
Unallocated
|
285 | 0 | % | 282 | 0 | % | 733 | 0 | % | 1,734 | 0 | % | 1,648 | 0 | % | |||||||||||||||||||||||||
|
Total
|
$ | 66,550 | 100 | % | $ | 58,564 | 100 | % | $ | 54,183 | 100 | % | $ | 50,587 | 100 | % | $ | 47,455 | 100 | % | ||||||||||||||||||||
The
Company’s accounting policy relating to the allowance for loan and lease losses
requires a review of each significant loan type within the loan portfolio,
considering asset quality trends for each type, including, but not limited too,
delinquencies, nonaccruals, historical charge-off experience, and specific
economic factors (i.e. milk prices are considered when reviewing agricultural
loans). Based on this review, management believes the reserve
allocations are adequate to address any trends in asset quality
indicators. As a result of the increase in 2009 in nonperforming
loans and charge-offs increased compared to 2008, the allowance to loan and
lease loss as a percentage of total loans increased from 1.60% as of December
31, 2008 to 1.83% as of December 31, 2009.
For 2009,
the reserve allocation for commercial and agricultural loans increased to $36.6
million from $33.2 million in 2008. The reserve allocation for real
estate mortgages decreased slightly from $3.1 million in 2008 to $3.0 million in
2009. The reserve allocation for consumer loans increased from $21.9
million in 2008 to $26.7 million in 2009. This 21.7% increase was due
in large part to increased reserves warranted by the worsened economic
conditions in 2009 that affected most U.S. consumers.
At
December 31, 2009, approximately 58.1% of the Company’s loans are secured by
real estate located in central and northern New York, northeastern Pennsylvania
and the Burlington, Vermont area. 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
RISK
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, 2009, the Company’s Basic
Surplus measurement was 6.8% of total assets or $367 million, which was above
the Company’s minimum of 5% (calculated at $273 million of period end total
assets at December 31, 2009) 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, 2009, the Company considered its Basic Surplus position to be
adequate. However, certain events may adversely impact the Company’s
liquidity position in 2010. 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 2010. 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 $848 million at December 31, 2009. In
addition, the Bank has enhanced its Borrower-in-Custody (“BIC”) program with the
Federal Reserve Bank with the addition of the ability to pledge automobile
loans. At December 31, 2009, the Bank had the capacity to borrow $395
million from the BIC program.
At
December 31, 2009 and December 31, 2008, FHLB advances outstanding totaled $530
million and $601 million, respectively. The Bank is a member of the
FHLB system and had additional borrowing capacity from the FHLB of approximately
$167 million at December 31, 2009 and $230 million at December 31,
2008. In addition, unpledged securities could have been used to
increase borrowing capacity at the FHLB by an additional $162 million at
December 31, 2009 or used to collateralize other borrowings, such as repurchase
agreements. In addition, the Bank has enhanced its
Borrower-in-Custody (“BIC”) program with the Federal Reserve Bank with the
addition of the ability to pledge automobile loans. At December 31,
2009, the Bank had the capacity to borrow $395 million from the BIC
program.
At
December 31, 2009, 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 $54.7 million in 2009 and $87.3
million in 2008. The critical elements of net operating cash flows include net
income, after adding back provision for loan and lease losses, depreciation and
amortization, and changes in other assets and liabilities.
Net cash
used in investing activities totaled $28.4 million in 2009 and $216.6 million in
2008. Critical elements of investing activities are loan and investment
securities transactions. The decrease in cash used in investing activities in
2009 compared with 2008 was primarily due to less loan growth in 2009 compared
with 2008. The net increase in loans was $18.8 million in 2009 as
compared to $220.7 million in 2008.
Net cash
flows provided by financing activities totaled $50.5 million in 2009 and $76.7
million in 2008. 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 2009, the Company had a net decrease in short term
borrowings of approximately $50.5 million as compared with a net decrease of
$162.0 million in 2008. In addition, the Company experienced a net
increase in deposits totaling approximately $169.8 million in 2009 as compared
with a net increase of $51.2 million in 2008. Proceeds from long-term
debt, which totaled $340.0 million in 2008, were zero in 2009. In
addition, approximately $33.5 million was provided through the issuance of
common stock in 2009 from a capital raise.
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, 2009
are as follows:
|
Contractual
Obligations
|
||||||||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||
|
Payments
Due by Period
|
||||||||||||||||||||||||||||
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
Long-term
debt obligations
|
$ | 79,000 | $ | 52,083 | $ | 25,000 | $ | 150,000 | $ | - | $ | 248,615 | $ | 554,698 | ||||||||||||||
|
Trust
preferred debentures
|
- | - | - | - | - | 75,422 | 75,422 | |||||||||||||||||||||
|
Operating
lease obligations
|
4,680 | 4,279 | 3,837 | 3,142 | 2,734 | 21,700 | 40,372 | |||||||||||||||||||||
|
Retirement
plan obligations
|
4,775 | 4,856 | 4,951 | 5,077 | 5,172 | 42,415 | 67,246 | |||||||||||||||||||||
|
Data
processing commitments
|
2,972 | 1,713 | 1,713 | 1,713 | 1,713 | 1,713 | 11,537 | |||||||||||||||||||||
|
Total
contractual obligations
|
$ | 91,427 | $ | 62,931 | $ | 35,501 | $ | 159,932 | $ | 9,619 | $ | 376,578 | $ | 749,275 | ||||||||||||||
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, 2009 and 2008, commitments to
extend credit in the form of loans, including unused lines of credit, amounted
to $556.6 million and $537.6 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, 2009 and 2008, outstanding stand-by letters of credit were approximately
$34.6 million and $27.6 million, respectively. The fair value of the Company’s
stand-by letters of credit at December 31, 2009 and 2008 was not significant.
The following table sets forth the commitment expiration period for stand-by
letters of credit at December 31, 2009:
|
Commitment
Expiration of Stand-by Letters of Credit
|
||||
|
Within
one year
|
$ | 20,490 | ||
|
After
one but within three years
|
8,743 | |||
|
After
three but within five years
|
3,133 | |||
|
After
five years
|
2,196 | |||
|
Total
|
$ | 34,562 | ||
LOANS
SERVICED FOR OTHERS AND LOANS SOLD WITH RECOURSE
The total
amount of loans serviced by the Company for unrelated third parties was
approximately $262.7 million and $141.4 million at December 31, 2009 and 2008,
respectively. This increase was due to the increase in mortgages sold
in 2009 in which servicing was retained. At December 31, 2009, the
Company had approximately $1.1 million of mortgage servicing rights, as compared
to $0.6 million at December 31, 2008. At December 31, 2009 and 2008,
the Company serviced $11.9 million and $11.2 million, respectively, of loans
sold with recourse. Due to collateral on these loans, no reserve is considered
necessary at December 31, 2009 and 2008.
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 are 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, 2009, approximately
$64.2 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.
In the second quarter of 2009, the Company raised approximately
$34 million in capital through an additional public offering of our common
stock.
STOCK
REPURCHASE PLAN
On
October 26, 2009, the Company’s Board of Directors authorized a new repurchase
program for the Company to repurchase up to an additional 1,000,000 shares
(approximately 3%) of its outstanding common stock, effective January 1, 2010,
as market conditions warrant in open market and privately negotiated
transactions. The plan expires on December 31, 2011. On
December 31, 2009, the repurchase program previously authorized on January 28,
2008 to repurchase up to 1,000,000 shares expired. The Company made
no purchases of its common stock securities during the year ended December 31,
2009.
2008
OPERATING RESULTS AS COMPARED TO 2007 OPERATING RESULTS
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.
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.
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.
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.
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.
NONINTEREST
INCOME
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. 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. Bank
owned life insurance income increased $1.8 million for the year ended December
31, 2008, compared with the same period in 2007. This increase was
due primarily to the death benefit realized during 2008 from two life insurance
policies. 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
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 $17.4 million for the year ended December 31, 2008, up
$2.8 million from $14.6 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, FDIC insurance premiums increased approximately $1.4 million for the
year ended December 31, 2008, compared with the same period in
2007.
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; however, the potential impact on earnings is dependent on the ability
to lag deposit repricing on NOW, savings, MMDA, and CD accounts. 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, 2009 balance sheet position:
|
Table
10. Interest Rate Sensitivity Analysis
|
|
|
Change
in interest rates
|
Percent
change
|
|
(In
basis points)
|
in
net interest income
|
|
+200
|
(1.54%)
|
|
-100
|
(0.82%)
|
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, 2009, the Company would
expect net interest income to decline in 2010.
RECENT
ACCOUNTING PRONOUNCEMENTS
ASU
2009-17, Consolidations: Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities (Topic 810) was issued in June
2009. This update amends the guidance related to the consolidation of
variable interest entities (VIE). It requires reporting entities to evaluate
former Qualifying Special Purpose Entities (QSPEs) for consolidation, changes
the approach to determining a VIE’s primary beneficiary from a quantitative
assessment to a qualitative assessment designed to identify a controlling
financial interest, and increases the frequency of required reassessments to
determine whether a company is the primary beneficiary of a VIE. It also
clarifies, but does not significantly change, the characteristics that identify
a VIE. This standard requires additional year-end and interim disclosures for
public and nonpublic companies. It is effective for us beginning on January 1,
2010. The Company is currently evaluating this new
guidance.
ASU
2009-16, Transfers and Servicing: Accounting for Transfers of Financial Assets
(Topic 860) was issued in June 2009. It eliminates the QSPE concept, creates
more stringent conditions for reporting a transfer of a portion of a financial
asset as a sale, clarifies the derecognition criteria, revises how retained
interests are initially measured, and removes the guaranteed mortgage
securitization recharacterization provisions. This standard also requires
additional year-end and interim disclosures for public and nonpublic companies
The standard is effective for our Company on January 1, 2010 and must be applied
to transfers that occurred before and after its effective date. The
Company is currently evaluating this new guidance.
ASU
2010-06, Fair Value Measurements and Disclosures (Topic 820), was issued in
January 2010. Subtopic 820-10 has been amended to require new disclosures: (a)
transfers in and out of Levels 1 and 2 should be disclosed separately including
a description of the reasons for the transfers, and (b) activity in Level 3 fair
value measurements shall be reported on a gross basis, including information
about purchases, sales, issuances, and settlements. The amendments also
clarify existing disclosures relating to disaggregated reporting, model inputs,
and valuation techniques. The new disclosures are effective for us in the first
quarter of 2010, except for the gross reporting of Level 3 activity which is
effective beginning in the first quarter of 2011. Implementing these amendments
may result in additional disclosures in our interim and annual
reports.
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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, 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, 2009, 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 26, 2010 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/S/ KPMG
LLP
Albany,
New York
February
26, 2010
|
|
||||||||
|
As
of December 31,
|
||||||||
|
(In
thousands, except share and per share data)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 107,980 | $ | 107,409 | ||||
|
Short-term
interest bearing accounts
|
79,181 | 2,987 | ||||||
|
Securities
available for sale, at fair value
|
1,116,758 | 1,119,665 | ||||||
|
Securities
held to maturity (fair value $161,851 and $141,308)
|
159,946 | 140,209 | ||||||
|
Trading
securities
|
2,410 | 1,407 | ||||||
|
Federal
Reserve and Federal Home Loan Bank stock
|
35,979 | 39,045 | ||||||
|
Loans
and leases
|
3,645,398 | 3,651,911 | ||||||
|
Less
allowance for loan and lease losses
|
66,550 | 58,564 | ||||||
|
Net
loans and leases
|
3,578,848 | 3,593,347 | ||||||
|
Premises
and equipment, net
|
66,221 | 65,241 | ||||||
|
Goodwill
|
114,938 | 114,838 | ||||||
|
Intangible
assets, net
|
20,590 | 23,367 | ||||||
|
Bank
owned life insurance
|
74,322 | 72,276 | ||||||
|
Other
assets
|
106,853 | 56,297 | ||||||
|
Total
assets
|
$ | 5,464,026 | $ | 5,336,088 | ||||
|
Liabilities
|
||||||||
|
Demand
(noninterest bearing)
|
$ | 789,989 | $ | 685,495 | ||||
|
Savings,
NOW, and money market
|
2,269,779 | 1,885,551 | ||||||
|
Time
|
1,033,278 | 1,352,212 | ||||||
|
Total
deposits
|
4,093,046 | 3,923,258 | ||||||
|
Short-term
borrowings
|
155,977 | 206,492 | ||||||
|
Long-term
debt
|
554,698 | 632,209 | ||||||
|
Trust
preferred debentures
|
75,422 | 75,422 | ||||||
|
Other
liabilities
|
79,760 | 66,862 | ||||||
|
Total
liabilities
|
4,958,903 | 4,904,243 | ||||||
|
Stockholders’
equity
|
||||||||
|
Preferred
stock, $0.01 par value; authorized 2,500,000 shares at December 31,
2009 and 2008
|
- | - | ||||||
|
Common
stock, $0.01 par value. Authorized 50,000,000 shares at December 31, 2009
and 2008; issued 38,035,539 and 36,459,344 at December 31, 2009 and 2008,
respectively
|
380 | 365 | ||||||
|
Additional
paid-in-capital
|
311,164 | 276,418 | ||||||
|
Retained
earnings
|
270,232 | 245,340 | ||||||
|
Accumulated
other comprehensive income (loss)
|
1,163 | (8,204 | ) | |||||
|
Common
stock in treasury, at cost, 3,650,068 and 3,853,548 shares at December 31,
2009 and 2008, respectively
|
(77,816 | ) | (82,074 | ) | ||||
|
Total
stockholders’ equity
|
505,123 | 431,845 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 5,464,026 | $ | 5,336,088 | ||||
See
accompanying notes to consolidated financial statements.
|
|
||||||||||||
|
Years
ended December 31,
|
||||||||||||
|
(In
thousands, except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Interest,
fee, and dividend income
|
||||||||||||
|
Interest
and fees on loans and leases
|
$ | 220,324 | $ | 232,155 | $ | 242,497 | ||||||
|
Securities
available for sale
|
45,972 | 54,048 | 54,847 | |||||||||
|
Securities
held to maturity
|
4,894 | 5,588 | 5,898 | |||||||||
|
Other
|
2,203 | 2,623 | 2,875 | |||||||||
|
Total
interest, fee, and dividend income
|
273,393 | 294,414 | 306,117 | |||||||||
|
Interest
expense
|
||||||||||||
|
Deposits
|
48,496 | 76,132 | 106,574 | |||||||||
|
Short-term
borrowings
|
552 | 4,847 | 12,943 | |||||||||
|
Long-term
debt
|
23,629 | 22,642 | 16,486 | |||||||||
|
Trust
preferred debentures
|
4,247 | 4,747 | 5,087 | |||||||||
|
Total
interest expense
|
76,924 | 108,368 | 141,090 | |||||||||
|
Net
interest income
|
196,469 | 186,046 | 165,027 | |||||||||
|
Provision
for loan and lease losses
|
33,392 | 27,181 | 30,094 | |||||||||
|
Net
interest income after provision for loan and lease losses
|
163,077 | 158,865 | 134,933 | |||||||||
|
Noninterest
income
|
||||||||||||
|
Service
charges on deposit accounts
|
27,165 | 28,143 | 22,742 | |||||||||
|
Insurance
revenue
|
17,725 | 8,726 | 4,255 | |||||||||
|
Trust
|
6,719 | 7,278 | 6,514 | |||||||||
|
Net
securities gains
|
144 | 1,535 | 2,113 | |||||||||
|
Bank
owned life insurance
|
3,135 | 4,923 | 3,114 | |||||||||
|
ATM
and debit card fees
|
9,339 | 8,832 | 8,185 | |||||||||
|
Retirement
plan administration fees
|
9,086 | 6,308 | 6,336 | |||||||||
|
Other
|
6,818 | 5,961 | 6,440 | |||||||||
|
Total
noninterest income
|
80,131 | 71,706 | 59,699 | |||||||||
|
Noninterest
expense
|
||||||||||||
|
Salaries
and employee benefits
|
85,565 | 71,159 | 59,516 | |||||||||
|
Occupancy
|
14,864 | 13,781 | 11,630 | |||||||||
|
Equipment
|
8,139 | 7,539 | 7,422 | |||||||||
|
Data
processing and communications
|
13,238 | 12,694 | 11,400 | |||||||||
|
Professional
fees and outside services
|
10,508 | 10,476 | 9,135 | |||||||||
|
Office
supplies and postage
|
5,857 | 5,346 | 5,120 | |||||||||
|
Amortization
of intangible assets
|
3,246 | 2,105 | 1,645 | |||||||||
|
Loan
collection and other real estate owned
|
2,766 | 2,494 | 1,633 | |||||||||
|
Impairment
on lease residual assets
|
- | 2,000 | - | |||||||||
|
FDIC
expenses
|
8,408 | 1,813 | 452 | |||||||||
|
Other
|
17,975 | 17,406 | 14,564 | |||||||||
|
Total
noninterest expense
|
170,566 | 146,813 | 122,517 | |||||||||
|
Income
before income tax expense
|
72,642 | 83,758 | 72,115 | |||||||||
|
Income
tax expense
|
20,631 | 25,405 | 21,787 | |||||||||
|
Net
income
|
$ | 52,011 | $ | 58,353 | $ | 50,328 | ||||||
|
Earnings
per share
|
||||||||||||
|
Basic
|
$ | 1.54 | $ | 1.81 | $ | 1.52 | ||||||
|
Diluted
|
$ | 1.53 | $ | 1.80 | $ | 1.51 | ||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Years
ended December 31,
2009,
2008, and 2007
(In
thousands except share and per share data)
|
Common
stock
|
Additional
paid-in-capital
|
Retained earnings
|
Accumulated
other comprehensive income (loss)
|
Common
stock in treasury
|
Total
|
||||||||||||||||||
|
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 tax benefit
|
- | 383 | (841 | ) | - | 5,526 | 5,068 | |||||||||||||||||
|
Stock-based
compensation
|
- | 2,831 | - | - | - | 2,831 | ||||||||||||||||||
|
Net
issuance of 84,192 shares of restricted stock awards
|
- | (1,633 | ) | - | - | 1,633 | - | |||||||||||||||||
|
Forfeiture
of 7,633 shares of restricted stock awards
|
- | 166 | - | - | (166 | ) | - | |||||||||||||||||
|
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 530,039
shares to employee
benefit
plans and other stock plans, including tax
benefit
|
- | 1,396 | (696 | ) | - | 11,303 | 12,003 | |||||||||||||||||
|
Stock-based
compensation
|
- | 2,105 | - | - | - | 2,105 | ||||||||||||||||||
|
Net
issuance of 31,648 shares of restricted stock awards
|
- | (526 | ) | - | - | 526 | - | |||||||||||||||||
|
Forfeiture
of 9,067 shares of restricted stock
|
- | 168 | - | - | (168 | ) | - | |||||||||||||||||
|
Other
comprehensive loss
|
- | - | - | (4,629 | ) | - | (4,629 | ) | ||||||||||||||||
|
Balance
at December 31, 2008
|
$ | 365 | $ | 276,418 | $ | 245,340 | $ | (8,204 | ) | $ | (82,074 | ) | $ | 431,845 | ||||||||||
|
Net
income
|
- | - | 52,011 | - | - | 52,011 | ||||||||||||||||||
|
Cash
dividends - $0.80 per share
|
- | - | (27,119 | ) | - | - | (27,119 | ) | ||||||||||||||||
|
Net
issuance of 1,576,230 common shares
|
15 | 33,386 | - | - | - | 33,401 | ||||||||||||||||||
|
Net
issuance of 143,190 shares to employee benefit
plans
and other stock plans, including tax benefit
|
- | (500 | ) | - | - | 2,985 | 2,485 | |||||||||||||||||
|
Stock-based
compensation
|
- | 3,133 | - | - | - | 3,133 | ||||||||||||||||||
|
Net
issuance of 66,098 shares of restricted stock awards
|
- | (1,406 | ) | - | - | 1,406 | - | |||||||||||||||||
|
Forfeiture
of 5,808 shares of restricted stock
|
- | 133 | - | - | (133 | ) | - | |||||||||||||||||
|
Other
comprehensive income
|
- | - | - | 9,367 | - | 9,367 | ||||||||||||||||||
|
Balance
at December 31, 2009
|
$ | 380 | $ | 311,164 | $ | 270,232 | $ | 1,163 | $ | (77,816 | ) | $ | 505,123 | |||||||||||
|
See
accompanying notes to unaudited interim consolidated financial
statements.
|
||||||||||||||||||||||||
|
|
||||||||||||
|
Years
ended December 31,
|
||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Operating
activities
|
||||||||||||
|
Net
income
|
$ | 52,011 | $ | 58,353 | $ | 50,328 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
|
Provision
for loan and lease losses
|
33,392 | 27,181 | 30,094 | |||||||||
|
Depreciation
and amortization of premises and equipment
|
5,398 | 5,220 | 5,295 | |||||||||
|
Net
accretion on securities
|
535 | 423 | 105 | |||||||||
|
Amortization
of intangible assets
|
3,246 | 2,105 | 1,645 | |||||||||
|
Stock
based compensation
|
3,133 | 2,105 | 2,831 | |||||||||
|
Bank
owned life insurance income
|
(3,135 | ) | (4,923 | ) | (3,114 | ) | ||||||
|
Trading
security (purchases) sales
|
(460 | ) | 456 | 46 | ||||||||
|
Unrealized
(gains) losses on trading securities
|
(543 | ) | 669 | 49 | ||||||||
|
Deferred
income tax expense
|
(1,501 | ) | 4,778 | 2,244 | ||||||||
|
Proceeds
from sale of loans held for sale
|
135,519 | 26,745 | 30,427 | |||||||||
|
Originations
and purchases of loans held for sale
|
(138,583 | ) | (27,760 | ) | (31,086 | ) | ||||||
|
Net
gains on sales of loans held for sale
|
(953 | ) | (170 | ) | (112 | ) | ||||||
|
Net
security gains
|
(144 | ) | (1,535 | ) | (2,113 | ) | ||||||
|
Net
gains on sales of other real estate owned
|
(306 | ) | (230 | ) | (442 | ) | ||||||
|
Impairment
on lease residual assets
|
- | 2,000 | - | |||||||||
|
Net
(increase) decrease in other assets
|
(39,324 | ) | 1,576 | (7,205 | ) | |||||||
|
Net
increase (decrease) in other liabilities
|
6,399 | (9,711 | ) | 6,848 | ||||||||
|
Net
cash provided by operating activities
|
54,684 | 87,282 | 85,840 | |||||||||
|
Investing
activities
|
||||||||||||
|
Net
cash used in Mang Insurance Agency, LLC acquisition
|
- | (26,233 | ) | - | ||||||||
|
Securities
available for sale:
|
||||||||||||
|
Proceeds
from maturities, calls, and principal paydowns
|
434,127 | 413,560 | 233,312 | |||||||||
|
Proceeds
from sales
|
2,753 | 6,800 | 55,758 | |||||||||
|
Purchases
|
(426,979 | ) | (392,957 | ) | (303,465 | ) | ||||||
|
Securities
held to maturity:
|
||||||||||||
|
Proceeds
from maturities, calls, and principal paydowns
|
90,668 | 91,309 | 70,234 | |||||||||
|
Purchases
|
(110,496 | ) | (82,525 | ) | (83,186 | ) | ||||||
|
Net
increase in loans
|
(18,775 | ) | (220,700 | ) | (70,061 | ) | ||||||
|
Net
decrease (increase) in Federal Reserve and FHLB stock
|
3,066 | (943 | ) | 710 | ||||||||
|
Cash
received from death benefit
|
1,054 | - | - | |||||||||
|
Purchases
of premises and equipment, net
|
(6,378 | ) | (6,039 | ) | (2,355 | ) | ||||||
|
Proceeds
from sales of other real estate owned
|
2,512 | 1,150 | 1,408 | |||||||||
|
Net
cash used in investing activities
|
(28,448 | ) | (216,578 | ) | (97,645 | ) | ||||||
|
Financing
activities
|
||||||||||||
|
Net
increase in deposits
|
169,788 | 51,165 | 75,855 | |||||||||
|
Net
(decrease) increase in short-term borrowings
|
(50,515 | ) | (161,975 | ) | 23,059 | |||||||
|
Proceeds
from issuance of long-term debt
|
- | 340,027 | 150,000 | |||||||||
|
Repayments
of long-term debt
|
(77,511 | ) | (132,705 | ) | (142,841 | ) | ||||||
|
Excess
tax benefit from exercise of stock options
|
(243 | ) | 700 | 715 | ||||||||
|
Proceeds
from the issuance of shares to employee benefit plans and other stock
plans
|
2,728 | 11,303 | 4,353 | |||||||||
|
Issuance
of common stock
|
33,401 | - | - | |||||||||
|
Purchase
of treasury stock
|
- | (5,939 | ) | (48,957 | ) | |||||||
|
Cash
dividends and payments for fractional shares
|
(27,119 | ) | (25,830 | ) | (26,226 | ) | ||||||
|
Net
cash provided by financing activities
|
50,529 | 76,746 | 35,958 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
76,765 | (52,550 | ) | 24,153 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
110,396 | 162,946 | 138,793 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 187,161 | $ | 110,396 | $ | 162,946 | ||||||
|
Supplemental
disclosure of cash flow information
|
Years
ended December 31,
|
|||||||||||
|
Cash
paid during the year for:
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
|
$ | 79,819 | $ | 113,597 | $ | 138,791 | ||||||
|
Income
taxes, net of refunds
|
13,952 | 17,081 | 18,007 | |||||||||
|
Noncash
investing activities:
|
||||||||||||
|
Loans
transferred to other real estate owned
|
$ | 3,899 | $ | 1,025 | $ | 1,137 | ||||||
|
Acquisitions:
|
||||||||||||
|
Fair
value of assets acquired
|
$ | - | $ | 30,062 | $ | - | ||||||
|
Goodwill
and identifiable intangible assets recognized in purchase
combination
|
- | 27,107 | - | |||||||||
|
Fair
value of liabilities assumed
|
- | 3,829 | - | |||||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||
|
Consolidated
Statements of Comprehensive Income
|
|
|||||||||||
|
Years
ended December 31,
|
||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income
|
$ | 52,011 | $ | 58,353 | $ | 50,328 | ||||||
|
Other
comprehensive (loss) income, net of tax
|
||||||||||||
|
Unrealized
net holding gains arising during the year (pre-tax amounts of $7,438,
$15,143, and $19,347)
|
4,490 | 9,138 | 11,618 | |||||||||
|
Reclassification
adjustment for net gains related to securities available for sale included
in net income (pre-tax amounts of $144, $1,535, and
$2,113)
|
(86 | ) | (921 | ) | (1,270 | ) | ||||||
|
Amortization
of prior service cost and actuarial gains (pre-tax amounts of $2,581, $378
and $481)
|
1,548 | 227 | 288 | |||||||||
|
Increase
(decrease) in unrecognized actuarial amounts (pre-tax amounts of $5,637,
$(21,087) and $(326))
|
3,415 | (13,073 | ) | (197 | ) | |||||||
|
Total
other comprehensive income (loss)
|
9,367 | (4,629 | ) | 10,439 | ||||||||
|
Comprehensive
income
|
$ | 61,378 | $ | 53,724 | $ | 60,767 | ||||||
|
See
accompanying notes to consolidated financial statements
|
||||||||||||
NBT
BANCORP INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
(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 and lease 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 recorded using
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 also
provides other services through its subsidiaries such as insurance, retirement
plan administration, and trust administration. The Company operates solely in
the geographical regions of central and northern New York, northeastern
Pennsylvania and Burlington, Vermont. 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. For
the securities that the Company does not have the intent to sell and will not be
more likely than not forced to sell, the amount of the total
other-than-temporary impairment related to the credit loss is recognized in
earnings and the amount of the total other-than-temporary impairment related to
other factors is recognized in other comprehensive income, net of applicable
taxes. Credit loss is determined by calculating the present value of
future cash flows of the security as compared to the amortized cost of the
security. Credit loss is the amount by which the fair value is less
than the amortized cost. 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, 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 troubled 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 all or a portion 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. The balance of OREO at
December 31, 2009 was approximately $2.4 million.
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 amortized on a straight-line
basis. 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). On January 1, 2009, the
Company adopted new accounting standards that require share based compensation
awards that qualify as participating securities to be included in basic
EPS. Adoption of this standard did not have a significant
effect on EPS.
SUBSEQUENT
EVENTS
The
Company has evaluated subsequent events for potential recognition and/or
disclosure through March 1, 2010, the date the consolidated financial statements
included in the Annual Report on Form 10-K were issued.
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
OPERATIONS
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
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. Fair value measurements are not adjusted for transaction
costs. A fair value hierarchy 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 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. 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.
(2) MERGER
AND ACQUISITION ACTIVITY
On
September 1, 2008, the Company completed the acquisition of Mang Insurance
Agency, LLC (“Mang”), then 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 for a purchase price of $28.0
million, 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,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||||||||||
|
Net
|
average
|
Per
share
|
Net
|
average
|
Per
share
|
Net
|
average
|
Per
share
|
||||||||||||||||||||||||||||
|
(In
thousands, except per share data)
|
income
|
shares
|
amount
|
income
|
shares
|
amount
|
income
|
shares
|
amount
|
|||||||||||||||||||||||||||
|
Basic
earnings per share
|
$ | 52,011 | 33,723 | $ | 1.54 | $ | 58,353 | 32,152 | $ | 1.81 | $ | 50,328 | 33,165 | $ | 1.52 | |||||||||||||||||||||
|
Effect
of dilutive securities
|
||||||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
180 | 275 | 256 | |||||||||||||||||||||||||||||||||
|
Diluted
earnings per share
|
$ | 52,011 | 33,903 | $ | 1.53 | $ | 58,353 | 32,427 | $ | 1.80 | $ | 50,328 | 33,421 | $ | 1.51 | |||||||||||||||||||||
There
were approximately 609,000, 328,000, and 628,000 weighted average stock options
for the years ended December 31, 2009, 2008, and 2007, 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, 2009 was $31.0 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, 2009
|
||||||||||||||||
|
U.S.
Treasury
|
$ | 20,102 | $ | 5 | $ | 21 | $ | 20,086 | ||||||||
|
Federal
Agency
|
310,012 | 3,214 | 69 | 313,157 | ||||||||||||
|
State
& municipal
|
135,181 | 2,738 | 306 | 137,613 | ||||||||||||
|
Mortgage-backed
|
269,255 | 11,606 | - | 280,861 | ||||||||||||
|
Collateralized
mortgage obligations
|
321,890 | 9,003 | 182 | 330,711 | ||||||||||||
|
Corporate
|
20,011 | 663 | - | 20,674 | ||||||||||||
|
Other
securities
|
12,295 | 1,483 | 122 | 13,656 | ||||||||||||
|
Total
securities available for sale
|
$ | 1,088,746 | $ | 28,712 | $ | 700 | $ | 1,116,758 | ||||||||
|
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 | ||||||||
In the
available for sale category at December 31, 2009, federal agency securities were
comprised of Government-Sponsored Enterprise (“GSE”) securities;
mortgaged-backed securities were comprised of GSEs with an amortized cost of
$238.8 million and a fair value of $248.7 million and US Government Agency
securities with an amortized cost of $30.5 million and a fair value of $32.1
million; collateralized mortgage obligations were comprised of GSEs with an
amortized cost of $186.1 million and a fair value of $190.4 million and US
Government Agency securities with an amortized cost of $135.8 million and a fair
value of $140.3 million.
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. Other 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)
|
2009
|
2008
|
2007
|
|||||||||
|
Proceeds
from sales
|
$ | 2,753 | $ | 6,800 | $ | 55,758 | ||||||
|
Gross
realized gains
|
$ | 238 | $ | 1,780 | $ | 2,248 | ||||||
|
Gross
realized losses
|
(94 | ) | (245 | ) | (135 | ) | ||||||
|
Net
securities gains
|
$ | 144 | $ | 1,535 | $ | 2,113 | ||||||
At
December 31, 2009 and 2008, securities available for sale with amortized costs
totaling $891.4 million and $891.6 million, respectively, were pledged to secure
public deposits and for other purposes required or permitted by
law. Additionally, at December 31, 2009, securities available for
sale with an amortized cost of $178.0 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, 2009
|
||||||||||||||||
|
Mortgage-backed
|
$ | 2,041 | $ | 172 | $ | - | $ | 2,213 | ||||||||
|
State
& municipal
|
157,905 | 1,736 | 3 | 159,638 | ||||||||||||
|
Total
securities held to maturity
|
$ | 159,946 | $ | 1,908 | $ | 3 | $ | 161,851 | ||||||||
|
December
31, 2008
|
||||||||||||||||
|
Mortgage-backed
|
$ | 2,372 | $ | 95 | $ | - | $ | 2,467 | ||||||||
|
State
& municipal
|
137,837 | 1,048 | 44 | 138,841 | ||||||||||||
|
Total
securities held to maturity
|
$ | 140,209 | $ | 1,143 | $ | 44 | $ | 141,308 | ||||||||
At
December 31, 2009 and 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, 2009 and 2008, 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, 2009
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
$ | 20,022 | $ | (21 | ) | $ | - | $ | - | $ | 20,022 | $ | (21 | ) | ||||||||||
|
Federal
agency
|
29,931 | (69 | ) | - | - | 29,931 | (69 | ) | ||||||||||||||||
|
State
& municipal
|
7,121 | (40 | ) | 9,629 | (269 | ) | 16,750 | (309 | ) | |||||||||||||||
|
Mortgage-backed
|
- | - | - | - | - | - | ||||||||||||||||||
|
Collateralized
mortgage obligations
|
51,882 | (124 | ) | 33,235 | (58 | ) | 85,117 | (182 | ) | |||||||||||||||
|
Other
securities
|
4,900 | (93 | ) | 52 | (29 | ) | 4,952 | (122 | ) | |||||||||||||||
|
Total
securities with unrealized losses
|
$ | 113,856 | $ | (347 | ) | $ | 42,916 | $ | (356 | ) | $ | 156,772 | $ | (703 | ) | |||||||||
|
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 | ) | |||||||||
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 or in other comprehensive income, depending on whether the
Company intends to sell the security or more likely than not will be required to
sell the security before recovery of its amortized cost basis less any
current-period credit loss. If the Company intends to sell the
security or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the
other-than-temporary impairment shall be recognized in earnings equal to the
entire difference between the investment’s amortized cost basis and its fair
value at the balance sheet date. If the Company does not intend to
sell the security and it is not more likely than not that the entity will be
required to sell the security before recovery of its amortized cost basis less
any current-period credit loss, the other-than-temporary impairment shall be
separated into (a) the amount representing the credit loss and (b) the amount
related to all other factors. The amount of the total
other-than-temporary impairment related to the credit loss shall be recognized
in earnings. The amount of the total other-than-temporary impairment related to
other factors shall be recognized in other comprehensive income, net of
applicable taxes.
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 historical and implied volatility of the fair value of the
security.
Management
has the 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, 2009, management also had intent to
hold, and will not be required to sell, 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. When necessary, the Company has performed a discounted cash flow
analysis to determine whether or not it will receive the contractual principal
and interest on certain securities. 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, 2009,
management believes the impairments detailed in the table above are temporary
and no other-than-temporary 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, 2009:
|
(In
thousands)
|
Amortized
cost
|
Estimated
fair value
|
||||||
|
Debt
securities classified as available for sale
|
||||||||
|
Within
one year
|
$ | 17,093 | $ | 17,483 | ||||
|
From
one to five years
|
336,822 | 339,337 | ||||||
|
From
five to ten years
|
306,346 | 317,577 | ||||||
|
After
ten years
|
416,190 | 428,705 | ||||||
| $ | 1,076,451 | $ | 1,103,102 | |||||
|
Debt
securities classified as held to maturity
|
||||||||
|
Within
one year
|
$ | 98,688 | $ | 98,723 | ||||
|
From
one to five years
|
38,212 | 39,339 | ||||||
|
From
five to ten years
|
17,761 | 18,330 | ||||||
|
After
ten years
|
5,285 | 5,459 | ||||||
| $ | 159,946 | $ | 161,851 | |||||
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, 2009 and 2008.
(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)
|
2009
|
2008
|
||||||
|
Residential
real estate mortgages
|
$ | 622,898 | $ | 722,723 | ||||
|
Commercial
|
581,870 | 572,059 | ||||||
|
Commercial
real estate
|
718,235 | 669,720 | ||||||
|
Real
estate construction and development
|
76,721 | 67,859 | ||||||
|
Agricultural
and agricultural real estate mortgages
|
122,466 | 113,566 | ||||||
|
Consumer
|
856,956 | 795,123 | ||||||
|
Home
equity
|
603,585 | 627,603 | ||||||
|
Lease
financing
|
62,667 | 83,258 | ||||||
|
Total
loans and leases
|
$ | 3,645,398 | $ | 3,651,911 | ||||
Included
in the above loans and leases are net deferred loan origination costs totaling
$3.8 million and $4.2 million at December 31, 2009 and December 31, 2008,
respectively. Also included is unearned income of $4.0 million and
$7.3 million at December 31, 2009 and 2008, respectively. Loans held
for sale were $4.7 million and $2.2 million at December 31, 2009 and 2008,
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, 2009, are summarized as follows:
|
Years
ended December 31,
|
||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at January 1
|
$ | 58,564 | $ | 54,183 | $ | 50,587 | ||||||
|
Provision
|
33,392 | 27,181 | 30,094 | |||||||||
|
Recoveries
|
4,408 | 4,192 | 4,745 | |||||||||
|
Charge-offs
|
(29,814 | ) | (26,992 | ) | (31,243 | ) | ||||||
|
Balance
at December 31
|
$ | 66,550 | $ | 58,564 | $ | 54,183 | ||||||
The
following table sets forth information with regard to nonperforming
loans:
|
At
December 31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Loans
in nonaccrual status
|
$ | 38,746 | $ | 24,191 | ||||
|
Loans
contractually past due 90 days or more and still accruing
interest
|
2,526 | 2,305 | ||||||
|
Total
nonperforming loans
|
$ | 41,272 | $ | 26,496 | ||||
There
were no material commitments to extend further credit to borrowers with
nonperforming loans. Within nonaccrual loans, there are approximately $0.8
million of troubled debt restructured loans at December 31, 2009.
Accumulated
interest on the above nonaccrual loans of approximately $1.4 million, $1.2
million, and $0.8 million would have been recognized as income in 2009, 2008,
and 2007, respectively, had these loans been in accrual
status. Approximately $0.8 million, $1.4 million, and $1.0 million of
interest on the above nonaccrual loans was collected in 2009, 2008, and 2007,
respectively.
Impaired
loans consist primarily of large, nonaccrual commercial, commercial real estate,
agricultural, and agricultural real estate loans. Impaired loans
totaled $19.8 million at December 31, 2009 and $11.3 million at December 31,
2008. At December 31, 2009, $6.3 million of the impaired loans had a
specific reserve allocation of $2.6 million and $13.5 million of the impaired
loans reviewed had no specific reserve allocation. At December 31,
2008, $1.7 million of the impaired loans reviewed had a specific reserve
allocation of $0.6 million and $9.6 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)
|
2009
|
2008
|
2007
|
|||||||||
|
Average
recorded investment on impaired loans
|
$ | 17,256 | $ | 14,438 | $ | 20,984 | ||||||
|
Interest
income recognized on impaired loans
|
558 | 360 | 559 | |||||||||
|
Cash
basis interest income recognized on impaired loans
|
558 | 360 | 559 | |||||||||
There was
significant disruption and volatility in the financial and capital markets
during the second half of 2008 and most of 2009. 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. However, in the markets in which the Company does business,
the disruption has been somewhat delayed and less significant than the national
impact. For example, our real estate market has not suffered the
extreme declines seen nationally and our unemployment rate, while notably
higher, is still below the national average.
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. For example, we have seen an increase
in charge-offs and nonperforming loans as a result of economic conditions in
2009. 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.
(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)
|
2009
|
2008
|
||||||
|
Balance
at January 1
|
$ | 5,433 | $ | 10,950 | ||||
|
New
loans
|
358 | 335 | ||||||
|
Adjustment
due to change in composition of related parties
|
(1,226 | ) | 344 | |||||
|
Repayments
|
(2,722 | ) | (6,196 | ) | ||||
|
Balance
at December 31
|
$ | 1,843 | $ | 5,433 | ||||
(8)
PREMISES AND EQUIPMENT, NET
A summary
of premises and equipment follows:
|
December
31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Land,
buildings, and improvements
|
$ | 92,408 | $ | 88,567 | ||||
|
Equipment
|
70,628 | 68,450 | ||||||
|
Construction
in progress
|
181 | 113 | ||||||
|
Premises
and equipment before accumulated depreciation
|
163,217 | 157,130 | ||||||
|
Accumulated
depreciation
|
96,996 | 91,889 | ||||||
|
Total
premises and equipment
|
$ | 66,221 | $ | 65,241 | ||||
Land,
buildings, and improvements with a carrying value of approximately $3.1 million
and $3.2 million at December 31, 2009 and 2008, 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 $5.3 million in 2009, $4.5
million in 2008, and $3.5 million in 2007. The future minimum rental payments
related to noncancelable operating leases with original terms of one year or
more are as follows at December 31, 2009 (in thousands):
|
Future
Minimum Rental Payments
|
||||
|
2010
|
$ | 4,680 | ||
|
2011
|
4,279 | |||
|
2012
|
3,837 | |||
|
2013
|
3,142 | |||
|
2014
|
2,734 | |||
|
Thereafter
|
21,700 | |||
|
Total
|
$ | 40,372 | ||
(9)
GOODWILL AND OTHER INTANGIBLE ASSETS
A summary
of goodwill is as follows:
|
(In
thousands)
|
||||
|
January
1, 2009
|
114,838 | |||
|
Goodwill
Acquired
|
- | |||
|
Goodwill
Adjustments
|
100 | |||
|
December
31, 2009
|
$ | 114,938 | ||
|
January
1, 2008
|
103,398 | |||
|
Goodwill
Acquired
|
11,808 | |||
|
Goodwill
Adjustments
|
(368 | ) | ||
|
December
31, 2008
|
$ | 114,838 | ||
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)
|
2009
|
2008
|
||||||
|
Core
deposit intangibles
|
||||||||
|
Gross
carrying amount
|
$ | 10,762 | $ | 10,631 | ||||
|
Less:
accumulated amortization
|
4,495 | 3,469 | ||||||
|
Net
carrying amount
|
6,267 | 7,162 | ||||||
|
Identified
intangible assets
|
||||||||
|
Gross
carrying amount
|
18,532 | 18,194 | ||||||
|
Less:
accumulated amortization
|
4,209 | 1,989 | ||||||
|
Net
carrying amount
|
14,323 | 16,205 | ||||||
|
Total
intangibles
|
||||||||
|
Gross
carrying amount
|
29,294 | 28,825 | ||||||
|
Less:
accumulated amortization
|
8,704 | 5,458 | ||||||
|
Net
carrying amount
|
$ | 20,590 | $ | 23,367 | ||||
Amortization
expense on intangible assets with definite useful lives totaled $3.2 million for
2009, $2.1 million for 2008 and $1.6 million for 2007. Amortization
expense on intangible assets with definite useful lives is expected to total
$3.1 million for 2010, $2.9 million for 2011, $2.7 million for 2012, $2.6
million for 2013, $2.4 million for 2014 and $5.1 million
thereafter. Identified intangible assets include customer lists,
non-competes, and trademark intangibles. 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, 2009 (in thousands):
|
Time
deposits
|
||||
|
Within
one year
|
$ | 679,851 | ||
|
After
one but within two years
|
174,396 | |||
|
After
two but within three years
|
81,290 | |||
|
After
three but within four years
|
62,926 | |||
|
After
four but within five years
|
30,651 | |||
|
After
five years
|
4,164 | |||
|
Total
|
$ | 1,033,278 | ||
Time deposits of $100,000 or more
aggregated $298.8 million and $428.8 million at year end 2009 and 2008,
respectively.
(11)
SHORT-TERM BORROWINGS
Short-term
borrowings totaled $156.0 million and $206.5 million at December 31, 2009 and
2008, 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. Since March 2009, the Company has been in a Fed Funds
sold position as a result of excess liquidity. The Fed Funds balance
as of December 31, 2009 was approximately $78.6 million.
The
Company has unused lines of credit with the FHLB available for short-term
financing of approximately $182 million and $245 million at December 31, 2009
and 2008, respectively.
Included
in the information provided above, the Company has two lines of credit available
with the FHLB, which are automatically renewed on July 30
th
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, 2009,
there were no outstanding balances 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)
|
2009
|
2008
|
2007
|
|||||||||
|
Federal
funds purchased
|
||||||||||||
|
Balance
at year-end
|
$ | 0 | $ | 85,000 | $ | 149,250 | ||||||
|
Average
during the year
|
5,957 | 70,445 | 98,872 | |||||||||
|
Maximum
month end balance
|
50,000 | 124,000 | 149,250 | |||||||||
|
Weighted
average rate during the year
|
0.30 | % | 2.34 | % | 5.14 | % | ||||||
|
Weighted
average rate at December 31
|
0.00 | % | 0.27 | % | 4.38 | % | ||||||
|
Securities
sold under repurchase agreements
|
||||||||||||
|
Balance
at year-end
|
$ | 155,727 | $ | 121,242 | $ | 93,967 | ||||||
|
Average
during the year
|
133,859 | 109,692 | 104,876 | |||||||||
|
Maximum
month end balance
|
166,208 | 138,527 | 117,337 | |||||||||
|
Weighted
average rate during the year
|
0.40 | % | 1.74 | % | 3.62 | % | ||||||
|
Weighted
average rate at December 31
|
0.32 | % | 0.42 | % | 3.56 | % | ||||||
|
Other
short-term borrowings
|
||||||||||||
|
Balance
at year-end
|
$ | 250 | $ | 250 | $ | 125,250 | ||||||
|
Average
during the year
|
250 | 43,693 | 76,414 | |||||||||
|
Maximum
month end balance
|
250 | 200,250 | 125,250 | |||||||||
|
Weighted
average rate during the year
|
0.03 | % | 2.94 | % | 5.32 | % | ||||||
|
Weighted
average rate at December 31
|
0.00 | % | 0.00 | % | 4.54 | % | ||||||
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, 2009 and 2008 is as
follows:
|
As
of December 31, 2009
|
As
of December 31, 2008
|
|||||||||||||||||||||||||||||||
|
Maturity
|
Amount
|
Weighted
Average Rate
|
Callable
Amount
|
Weighted
Average Rate
|
Amount
|
Weighted
Average Rate
|
Callable
Amount
|
Weighted
Average Rate
|
||||||||||||||||||||||||
|
2009
|
- | - | 40,000 | 5.47 | % | 40,000 | 5.47 | % | ||||||||||||||||||||||||
|
2010
|
79,000 | 4.11 | % | 29,000 | 3.43 | % | 79,000 | 4.07 | % | 29,000 | 3.35 | % | ||||||||||||||||||||
|
2011
|
52,083 | 3.64 | % | 2,000 | 4.72 | % | 89,444 | 3.64 | % | 2,000 | 4.72 | % | ||||||||||||||||||||
|
2012
|
25,000 | 4.01 | % | - | 25,025 | 4.01 | % | - | ||||||||||||||||||||||||
|
2013
|
150,000 | 3.79 | % | 125,000 | 3.61 | % | 150,000 | 3.79 | % | 125,000 | 3.61 | % | ||||||||||||||||||||
|
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 | % | 75,000.00 | 3.61 | % | 75,000 | 3.61 | % | ||||||||||||||||||||
|
2025
|
3,615 | 2.75 | % | - | 3,740 | 2.75 | % | - | ||||||||||||||||||||||||
| $ | 554,698 | $ | 401,000 | $ | 632,209 | $ | 441,000 | |||||||||||||||||||||||||
(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,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 21,046 | $ | 19,156 | $ | 19,020 | ||||||
|
State
|
1,086 | 1,471 | 523 | |||||||||
| 22,132 | 20,627 | 19,543 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(1,669 | ) | 3,915 | 1,530 | ||||||||
|
State
|
168 | 863 | 714 | |||||||||
| (1,501 | ) | 4,778 | 2,244 | |||||||||
|
Total
income tax expense
|
$ | 20,631 | $ | 25,405 | $ | 21,787 | ||||||
Not
included in the above table are changes in deferred tax assets and liabilities
that were recorded to stockholders’ equity of approximately $6.1 million, ($3.9
million), and $6.1 million for 2009, 2008, and 2007, 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)
|
2009
|
2008
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan and lease losses
|
$ | 25,036 | $ | 22,059 | ||||
|
Deferred
compensation
|
4,534 | 4,196 | ||||||
|
Postretirement
benefit obligation
|
1,111 | 1,170 | ||||||
|
Writedowns
on corporate debt securities
|
177 | 177 | ||||||
|
Accrued
liabilities
|
1,336 | 1,186 | ||||||
|
Stock-based
compensation expense
|
2,798 | 1,962 | ||||||
|
Other
|
1,248 | 940 | ||||||
|
Total
deferred tax assets
|
36,240 | 31,690 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Pension
and executive retirement
|
12,070 | 3,073 | ||||||
|
Unrealized
gains on securities available for sale
|
11,097 | 8,207 | ||||||
|
Premises
and equipment, primarily due to accelerated depreciation
|
1,630 | 1,803 | ||||||
|
Equipment
leasing
|
23,169 | 26,354 | ||||||
|
Deferred
loan costs
|
1,658 | 1,687 | ||||||
|
Intangible
amortization
|
9,464 | 8,715 | ||||||
|
Other
|
397 | 452 | ||||||
|
Total
deferred tax liabilities
|
59,485 | 50,291 | ||||||
|
Net
deferred tax liability at year-end
|
23,245 | 18,601 | ||||||
|
Net
deferred tax liability at beginning of year
|
18,601 | 16,857 | ||||||
|
Increase
in net deferred tax liability
|
$ | 4,644 | $ | 1,744 | ||||
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, 2009 and 2008.
A
reconciliation of the beginning and ending balance of gross unrecognized tax
benefits is as follows:
|
December
31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Balance
at January 1
|
$ | 2,212 | $ | 2,515 | ||||
|
Additions
for tax positions of prior years
|
132 | 65 | ||||||
|
Reduction
for tax positions of prior years
|
(57 | ) | (368 | ) | ||||
|
Balance
at December 31
|
$ | 2,287 | $ | 2,212 | ||||
The $2.3
million and $2.2 million of unrecognized tax benefits at December 31, 2009 and
2008, respectively, 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 2010, 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, 2009 and December 31, 2008 was approximately $0.8 million and
$0.6 million (less the associated tax benefit), respectively. Net
interest impacting the Company’s 2009 and 2008 tax expense was $0.2 million for
each year.
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
|
2008
|
2007
|
|||||||||
|
Federal
income tax at statutory rate
|
$ | 25,424 | $ | 29,315 | $ | 25,229 | ||||||
|
Tax
exempt income
|
(3,811 | ) | (3,847 | ) | (3,596 | ) | ||||||
|
Net
increase in CSV of life insurance
|
(871 | ) | (1,473 | ) | (915 | ) | ||||||
|
State
taxes, net of federal tax benefit
|
816 | 1,517 | 804 | |||||||||
|
Other,
net
|
(927 | ) | (107 | ) | 265 | |||||||
|
Income
tax expense
|
$ | 20,631 | $ | 25,405 | $ | 21,787 | ||||||
(15) STOCKHOLDERS’
EQUITY
In
accordance with accounting standards, unrealized gains on available for sale
securities and unrecognized actuarial gains or losses and prior service costs
associated with the Company’s pension and postretirement benefit plans are
included in accumulated other comprehensive income (loss). During the
years ended December 31, components of accumulated other comprehensive income
(loss) are:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Unrecognized
prior service cost and net actuarial loss on pension plans
|
$ | (15,751 | ) | $ | (20,714 | ) | ||
|
Unrealized
net holding gains on available for sale securities
|
16,914 | 12,510 | ||||||
|
Accumulated
other comprehensive income (loss)
|
$ | 1,163 | $ | (8,204 | ) | |||
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, 2009, approximately $64.2 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.
(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, 2009 and 2008, 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, 2009, 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, 2009
|
||||||||||||||||
|
Total
capital (to risk weighted assets):
|
||||||||||||||||
|
Company
|
$ | 498,230 | 12.59 | % | 8.00 | % | 10.00 | % | ||||||||
|
NBT
Bank
|
464,144 | 11.76 | % | 8.00 | % | 10.00 | % | |||||||||
|
Tier
I Capital (to risk weighted assets)
|
||||||||||||||||
|
Company
|
448,565 | 11.34 | % | 4.00 | % | 6.00 | % | |||||||||
|
NBT
Bank
|
414,587 | 10.50 | % | 4.00 | % | 6.00 | % | |||||||||
|
Tier
I Capital (to average assets)
|
||||||||||||||||
|
Company
|
448,565 | 8.35 | % | 4.00 | % | 5.00 | % | |||||||||
|
NBT
Bank
|
414,587 | 7.72 | % | 4.00 | % | 5.00 | % | |||||||||
|
As
of December 31, 2008
|
||||||||||||||||
|
Total
capital (to risk weighted assets):
|
||||||||||||||||
|
Company
|
$ | 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
|
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
|
373,783 | 7.17 | % | 4.00 | % | 5.00 | % | |||||||||
|
NBT
Bank
|
359,984 | 6.93 | % | 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, 2009. 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
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”.
Accounting
standards require 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; and
(3) measure the defined benefit plan assets and obligations as of the date of
its year-end balance sheet.
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, 2009 are summarized
below. The Company expects that $1.5 million in net actuarial loss
and $0.1 million in prior service cost will be recognized as components of net
periodic benefit cost in 2010.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Transition
asset
|
$ | - | $ | (23 | ) | $ | - | $ | - | |||||||
|
Net
actuarial loss
|
22,988 | 31,416 | 2,335 | 2,182 | ||||||||||||
|
Prior
service cost
|
2,040 | 2,208 | (1,278 | ) | (1,480 | ) | ||||||||||
|
Total
amounts recognized in accumulated other comprehensive loss
(pre-tax)
|
$ | 25,028 | $ | 33,601 | $ | 1,057 | $ | 702 | ||||||||
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)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Change
in benefit obligation
|
||||||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 56,766 | $ | 53,325 | $ | 3,648 | $ | 3,978 | ||||||||
|
Service
cost
|
2,222 | 2,193 | 17 | 22 | ||||||||||||
|
Interest
cost
|
3,413 | 3,253 | 205 | 218 | ||||||||||||
|
Plan
participants' contributions
|
- | - | 290 | 287 | ||||||||||||
|
Actuarial
loss (gain)
|
4,641 | 420 | 289 | (240 | ) | |||||||||||
|
Amendments
|
127 | 1,098 | - | - | ||||||||||||
|
Benefits
paid
|
(3,761 | ) | (3,523 | ) | (611 | ) | (617 | ) | ||||||||
|
Projected
benefit obligation at end of year
|
63,408 | 56,766 | 3,838 | 3,648 | ||||||||||||
|
Change
in plan assets
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
60,900 | 72,714 | - | - | ||||||||||||
|
Actual
return (loss) on plan assets
|
16,285 | (13,781 | ) | - | - | |||||||||||
|
Employer
contributions
|
17,467 | 5,490 | 321 | 330 | ||||||||||||
|
Plan
participants' contributions
|
- | - | 290 | 287 | ||||||||||||
|
Benefits
paid
|
(3,761 | ) | (3,523 | ) | (611 | ) | (617 | ) | ||||||||
|
Fair
value of plan assets at end of year
|
90,891 | 60,900 | - | - | ||||||||||||
|
Funded
status at year end
|
$ | 27,483 | $ | 4,134 | $ | (3,838 | ) | $ | (3,648 | ) | ||||||
The
funded status of the pension and other postretirement benefit plans has been
recognized as follows in the consolidated balance sheets at December 31, 2009
and December 31, 2008. 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 $63.4 million and $56.8
million for the years ended 2009 and 2008, respectively. The
accumulated benefit obligation for other postretirement benefits was $3.8
million and $3.6 million for the years ended 2009 and 2008,
respectively.
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Other
assets
|
$ | 34,255 | $ | 9,844 | $ | - | $ | - | ||||||||
|
Other
liabilities
|
(6,772 | ) | (5,710 | ) | (3,838 | ) | (3,648 | ) | ||||||||
|
Funded
status
|
$ | 27,483 | $ | 4,134 | $ | (3,838 | ) | $ | (3,648 | ) | ||||||
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)
|
2009
|
2008
|
2007
|
|||||||||
|
Weighted
average assumptions:
|
||||||||||||
|
The
following assumptions were used to determine benefit
obligations:
|
||||||||||||
|
Discount
rate
|
5.70 | % | 6.30 | % | 6.30 | % | ||||||
|
Expected
long-term return on plan assets
|
8.00 | % | 8.00 | % | 8.50 | % | ||||||
|
Rate
of compensation increase
|
3.00 | % | 3.00 | % | 3.00 | % | ||||||
|
|
||||||||||||
|
The
following assumptions were used to determine net periodic pension
cost:
|
||||||||||||
|
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 | % | 3.00 | % | ||||||
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)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Components
of net periodic benefit cost
|
||||||||||||||||||||||||
|
Service
cost
|
$ | 2,222 | $ | 2,193 | $ | 2,100 | $ | 17 | $ | 22 | $ | 19 | ||||||||||||
|
Interest
cost
|
3,413 | 3,253 | 2,979 | 205 | 218 | 233 | ||||||||||||||||||
|
Expected
return on plan assets
|
(5,591 | ) | (6,028 | ) | (5,430 | ) | - | - | - | |||||||||||||||
|
Amortization
of initial unrecognized asset
|
(23 | ) | (192 | ) | (192 | ) | - | - | - | |||||||||||||||
|
Amortization
of prior service cost
|
296 | 218 | 283 | (202 | ) | (202 | ) | (202 | ) | |||||||||||||||
|
Amortization
of unrecognized net gain
|
2,374 | 398 | 422 | 136 | 156 | 170 | ||||||||||||||||||
|
Net
periodic pension cost (income)
|
$ | 2,691 | $ | (158 | ) | $ | 162 | $ | 156 | $ | 194 | $ | 220 | |||||||||||
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income (pre-tax)
|
||||||||||||||||||||||||
|
Net
(gain) loss
|
$ | (6,053 | ) | $ | 20,229 | $ | 114 | $ | 289 | $ | (240 | ) | $ | 302 | ||||||||||
|
Prior
service cost
|
127 | 1,098 | (90 | ) | - | - | - | |||||||||||||||||
|
Amortization
of initial unrecognized asset
|
23 | 192 | 192 | - | - | - | ||||||||||||||||||
|
Amortization
of prior service cost
|
(296 | ) | (218 | ) | (283 | ) | 202 | 202 | 202 | |||||||||||||||
|
Amortization
of unrecognized net gain
|
(2,374 | ) | (398 | ) | (422 | ) | (136 | ) | (156 | ) | (170 | ) | ||||||||||||
|
Total
recognized in other comprehensive (income) loss
|
(8,573 | ) | 20,903 | (489 | ) | 355 | (194 | ) | 334 | |||||||||||||||
|
Total
recognized in net periodic benefit cost and other comprehensive
income (pre-tax)
|
$ | (5,882 | ) | $ | 20,745 | $ | (327 | ) | $ | 511 | $ | - | $ | 554 | ||||||||||
The
following table sets forth estimated future benefit payments for the pension
plans and other postretirement benefit plans:
|
Pension
|
Other
|
|||||||
|
|
Benefits
|
Benefits
|
||||||
|
2010
|
$ | 4,536 | $ | 239 | ||||
|
2011
|
4,623 | 233 | ||||||
|
2012
|
4,705 | 246 | ||||||
|
2013
|
4,817 | 260 | ||||||
|
2014
|
4,899 | 273 | ||||||
|
2015
- 2019
|
$ | 27,632 | $ | 1,496 | ||||
The
Company is not required to make contributions to the plan in 2010.
84
PLAN
INVESTMENT POLICY AS OF DECEMBER 31, 2009
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, 2009 and 2008 do not include any Company common stock.
The
following is a summary of the plan’s weighted average asset allocation at
December 31, 2009:
|
(In
thousands)
|
Actual
Allocation
|
Percentage
Allocation
|
||||||
|
Cash
and Cash Equivalents
|
$ | 11,411 | 12.55 | % | ||||
|
Foreign
Equity Mutual Funds
|
8,635 | 9.50 | % | |||||
|
Equity
Mutual Funds
|
16,263 | 17.89 | % | |||||
|
Federal
Agency
|
17,388 | 19.13 | % | |||||
|
Corporate
Bonds
|
3,732 | 4.11 | % | |||||
|
Common
Stock
|
27,389 | 30.13 | % | |||||
|
Preferred
Stock
|
238 | 0.26 | % | |||||
|
Foreign
Equity
|
5,835 | 6.42 | % | |||||
|
Total
|
$ | 90,891 | 100.00 | % | ||||
The
following table presents the financial instruments recorded at fair value on a
recurring basis by the Plan as of December 31, 2009:
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
Balance
as of
|
|||||||||||||
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
December
31, 2009
|
|||||||||||||
|
Cash
and Cash Equivalents
|
$ | 11,411 | $ | - | $ | - | $ | 11,411 | ||||||||
|
Foreign
Equity Mutual Funds
|
8,635 | - | - | 8,635 | ||||||||||||
|
Equity
Mutual Funds
|
16,263 | - | - | 16,263 | ||||||||||||
|
Federal
Agency
|
- | 17,388 | - | 17,388 | ||||||||||||
|
Corporate
Bonds
|
- | 3,732 | - | 3,732 | ||||||||||||
|
Common
Stock
|
27,389 | - | - | 27,389 | ||||||||||||
|
Preferred
Stock
|
- | 238 | - | 238 | ||||||||||||
|
Foreign
Equity
|
5,835 | - | - | 5,835 | ||||||||||||
|
Totals
|
$ | 69,533 | $ | 21,358 | $ | - | $ | 90,891 | ||||||||
The Plan
has no financial instruments recorded at fair value on a nonrecurring basis as
of December 31, 2009.
DETERMINATION
OF ASSUMED RATE OF RETURN
The
expected long-term rate-of-return on assets is 8.0%. 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, 2009 is as
follows:
|
Percentage
Allocation
|
||||
|
Money
Market & Equivalents
|
12.55 | % | ||
|
Bonds
|
23.24 | % | ||
|
International
Equities
|
15.92 | % | ||
|
US
Equities
|
48.29 | % | ||
|
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 2009 were assumed
to be 7.0 to 10.0 percent. The rates were assumed to decrease gradually to 5.0
percent for fiscal year 2016 and remain at that level thereafter for
prescription drug benefits and post-65 medical costs. The rates were
assumed to decrease gradually to 5.0 percent for fiscal year 2017 for pre-65
medical costs. 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, 2009:
|
(In
thousands)
|
1-Percentage
point increase
|
1-Percentage
point decrease
|
||||||
|
Increase
(decrease) on total service and interest cost components
|
$ | 26 | $ | (24 | ) | |||
|
Increase
(decrease) on postretirement accumulated benefit
obligation
|
436 | (397 | ) | |||||
EMPLOYEE
401(K) AND EMPLOYEE STOCK OWNERSHIP PLANS
At
December 31, 2009, the Company maintains a 401(k) and employee stock ownership
plan (the “401(k) Plan”). The Company contributes to the 401(k) Plan
based on employees’ contributions out of their annual salary. In
addition, the Company may also make discretionary contributions to the 401(k)
Plan based on profitability. Participation in the 401(k) Plan is
contingent upon certain age and service requirements. The employer
contributions associated with the 401(k) Plan were $3.4 million in 2009, $2.7
million in 2008, and $1.4 million in 2007.
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 equity-based awards are
granted to directors and employees to increase their direct proprietary interest
in the operations and success of the Company. The Plan assumes all
prior equity-based incentive plans and any new equity-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 ten years from the
date of the grant. Shares issued as a result of stock option
exercises and vesting of restricted stock unit awards are funded from the
Company’s treasury stock. Restricted shares and units granted under
the Plan vest after five years for employees and three years for non-employee
directors.
The per
share weighted average fair value of stock options granted during
2009, 2008, and 2007 was $5.71, $4.41, and $6.37,
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,
|
|||
|
2009
|
2008
|
2007
|
|
|
Dividend
yield
|
2.86%–3.65%
|
2.72%–4.17%
|
2.98%–4.35%
|
|
Expected
volatility
|
30.20%–32.91%
|
27.73%–29.38%
|
25.08%–28.01%
|
|
Risk-free
interest rates
|
1.71%–3.20%
|
2.96%–3.62%
|
3.64%–4.96%
|
|
Expected
life
|
7
years
|
7
years
|
7
years
|
The
following table summarizes information concerning stock options outstanding at
December 31, 2009:
|
Number
of Shares
|
Weighted
average exercise price
|
Weighted
Average Remaining Contractual Term (in yrs)
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Outstanding
at December 31, 2008
|
1,609,537 | $ | 21.26 | |||||||||||||
|
Granted
|
332,660 | 25.24 | ||||||||||||||
|
Exercised
|
(70,070 | ) | 17.57 | |||||||||||||
|
Forfeited
|
(25,871 | ) | 23.25 | |||||||||||||
|
Expired
|
(23,756 | ) | 22.58 | |||||||||||||
|
Outstanding
at December 31, 2009
|
1,822,500 | $ | 22.08 | 6.15 | $ | 1,335,658 | ||||||||||
|
Exercisable
at December 31, 2009
|
1,168,915 | $ | 21.07 | 4.96 | $ | 1,334,494 | ||||||||||
|
Expected
to Vest
|
611,746 | $ | 23.86 | 8.25 | $ | 1,093 | ||||||||||
The
weighted-average fair market value of stock options granted for the twelve
months ended December 31, 2009, was $5.71 per share. Total stock-based
compensation expense for stock option awards totaled $1.6 million for the year
ended December 31, 2009, $1.4 million for the year ended December 31, 2008, and
$0.9 million for the year ended December 31, 2007. Cash proceeds, tax
benefits and intrinsic value related to total stock options exercised is as
follows:
|
Years
ended
|
||||||||||||
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Proceeds
from stock options exercised
|
$ | 2,728 | $ | 11,303 | $ | 11,361 | ||||||
|
Tax
benefits related to stock options exercised
|
(243 | ) | 700 | 700 | ||||||||
|
Intrinsic
value of stock options exercised
|
406 | 3,591 | 3,591 | |||||||||
|
Fair
value of shares vested during the year
|
1,700 | 2,081 | 2,028 | |||||||||
The
Company has outstanding restricted and deferred stock awards granted from
various plans at December 31, 2009. The Company recognized $1.5 million in
stock-based compensation expense related to these stock awards for the year
ended December 31, 2009 and $0.8 million for the year ended December 31, 2008,
and $1.0 million for the year ended December 31, 2007. There was no
tax benefit recognized on restricted and deferred stock-based compensation
expense during 2009, $0.6 million recognized during 2008, and $0.7 million
during 2007. Unrecognized compensation cost related to restricted
stock awards totaled $2.5 million at December 31, 2009 and will be recognized
over 2.3 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,
2009:
|
Number
|
Weighted-Average
|
|||||||
|
of
|
Grant
Date Fair
|
|||||||
|
Shares
|
Value
|
|||||||
|
Unvested Restricted Stock
Awards
|
||||||||
|
Unvested
at January 1, 2009
|
137,142 | $ | 24.07 | |||||
|
Forfeited
|
(5,808 | ) | $ | 22.92 | ||||
|
Vested
|
(21,016 | ) | $ | 22.06 | ||||
|
Granted
|
66,098 | $ | 25.71 | |||||
|
Unvested
at December 31, 2009
|
176,416 | $ | 24.17 | |||||
The
following table summarizes information for unvested restricted stock units
outstanding as of December 31, 2009:
|
Number
|
Weighted-Average
|
|||||||
|
of
|
Grant
Date Fair
|
|||||||
|
Shares
|
Value
|
|||||||
|
Unvested Restricted Stock
Units
|
||||||||
|
Unvested
at January 1, 2009
|
30,700 | $ | 24.52 | |||||
|
Forfeited
|
- | - | ||||||
|
Vested
|
- | - | ||||||
|
Granted
|
- | - | ||||||
|
Unvested
at December 31, 2009
|
30,700 | $ | 24.52 | |||||
The
Company has 3.9 million securities remaining available to be granted as part of
the Plan at December 31, 2009.
(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, 2009, approximately 58% of the Company’s loans are secured by real
estate located in central and northern New York, northeastern Pennsylvania and
the Burlington, Vermont area. 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
credit risk associated with commitments to extend credit and standby and
commercial letters of credit is essentially the same as that involved with
extending loans to customers and is subject to normal credit
policies. Collateral may be obtained based on management’s assessment
of the customer’s creditworthiness.
|
At
December 31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Unused
lines of credit
|
$ | 141,743 | $ | 146,942 | ||||
|
Commitments
to extend credits, primarily variable rate
|
414,845 | 390,678 | ||||||
|
Standby
letters of credit
|
34,562 | 27,631 | ||||||
|
Commercial
letters of credit
|
14,061 | 14,818 | ||||||
|
Loans
sold with recourse
|
11,948 | 11,233 | ||||||
Since
many loan commitments, standby letters of credit, and guarantees and
indemnification contracts expire without being funded in whole or in part, the
contract amounts are not necessarily indicative of future cash
flows. 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, 2009 and 2008 was not
significant.
The total
amount of loans serviced by the Company for unrelated third parties was
approximately $262.7 million and $141.4 million at December 31, 2009 and 2008,
respectively.
In the
normal course of business there are various outstanding legal proceedings. If
legal costs are deemed material by management, the Company accrues for the
estimated loss from a loss contingency if the information available indicates
that it is probable that a liability had been incurred at the date of the
financial statements, and the amount of loss can be reasonably
estimated. 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.
(19) PARENT
COMPANY FINANCIAL INFORMATION
Condensed
Balance Sheets
|
December
31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 11,584 | $ | 10,846 | ||||
|
Securities
available for sale, at estimated fair value
|
12,653 | 9,779 | ||||||
|
Trading
securities
|
1,875 | 953 | ||||||
|
Investment
in subsidiaries, on equity basis
|
569,407 | 517,541 | ||||||
|
Other
assets
|
40,169 | 39,578 | ||||||
|
Total
assets
|
$ | 635,688 | $ | 578,697 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Total
liabilities
|
$ | 130,565 | $ | 146,852 | ||||
|
Stockholders’
equity
|
505,123 | 431,845 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 635,688 | $ | 578,697 | ||||
Condensed
Income Statements
|
Years
ended December 31,
|
||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Dividends
from subsidiaries
|
$ | 9,000 | $ | 42,900 | $ | 61,500 | ||||||
|
Management
fee from subsidiaries
|
65,596 | 59,102 | 57,135 | |||||||||
|
Securities
gains
|
141 | 1,514 | 67 | |||||||||
|
Interest,
dividend and other income
|
869 | 1,026 | 917 | |||||||||
|
Total
revenue
|
75,606 | 104,542 | 119,619 | |||||||||
|
Operating
expense
|
73,687 | 65,180 | 57,846 | |||||||||
|
Income
before income tax benefit (expense) and equity in undistributed income of
subsidiaries (excess distributions by subsidiaries over
income)
|
1,919 | 39,362 | 61,773 | |||||||||
|
Income
tax benefit (expense)
|
1,994 | 1,016 | (392 | ) | ||||||||
|
Equity
in undistributed income of subsidiaries (excess distributions by
subsidiaries over income)
|
48,098 | 17,975 | (11,053 | ) | ||||||||
|
Net
income
|
$ | 52,011 | $ | 58,353 | $ | 50,328 | ||||||
|
Years
ended December 31,
|
||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Operating
activities
|
||||||||||||
|
Net
income
|
$ | 52,011 | $ | 58,353 | $ | 50,328 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||
|
Impairment
of available-for-sale securities
|
- | 162 | - | |||||||||
|
Stock-based
compensation
|
3,133 | 2,105 | 2,831 | |||||||||
|
(Gain)
loss on sales of available-for-sale securities
|
(141 | ) | (1,514 | ) | (68 | ) | ||||||
|
(Equity
in undistributed income of subsidiaries) excess distributions by
subsidiaries over income
|
(48,098 | ) | (17,975 | ) | 11,053 | |||||||
|
Net
change in other liabilities
|
(3,662 | ) | 24,436 | (2,215 | ) | |||||||
|
Net
change in other assets
|
3,632 | (24,450 | ) | (2,845 | ) | |||||||
|
Net
cash provided by operating activities
|
6,875 | 41,117 | 59,084 | |||||||||
|
Investing
activities
|
||||||||||||
|
Cash
used in Mang Insurance Agency, LLC acquisition
|
- | (26,233 | ) | - | ||||||||
|
Purchases
of available-for-sale securities
|
(2,173 | ) | (5,934 | ) | (1,500 | ) | ||||||
|
Sales
and maturities of available-for-sale securities
|
494 | 5,660 | 1,159 | |||||||||
|
(Purchases)
disposals of premises and equipment
|
(600 | ) | (445 | ) | 433 | |||||||
|
Net
cash (provided by) used in investing activities
|
(2,279 | ) | (26,952 | ) | 92 | |||||||
|
Financing
activities
|
||||||||||||
|
Proceeds
from the issuance of shares to employee benefit plans and other stock
plans
|
2,728 | 11,361 | 4,353 | |||||||||
|
Payments
on long-term debt
|
(12,625 | ) | (1,365 | ) | (111 | ) | ||||||
|
Proceeds
from the issuance of long-term debt
|
- | 13,750 | - | |||||||||
|
Proceeds
from the issuance of common stock
|
33,401 | - | - | |||||||||
|
Purchases
of treasury shares
|
- | (5,939 | ) | (48,957 | ) | |||||||
|
Cash
dividends and payments for fractional shares
|
(27,119 | ) | (25,830 | ) | (26,226 | ) | ||||||
|
Excess
tax benefit from exercise of stock options
|
(243 | ) | 700 | 715 | ||||||||
|
Net
cash (used in) provided by financing activities
|
(3,858 | ) | (7,323 | ) | (70,226 | ) | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
738 | 6,842 | (11,050 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
10,846 | 4,004 | 15,054 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 11,584 | $ | 10,846 | $ | 4,004 | ||||||
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.
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:
|
2009
|
2008
|
|||||||||||||||
|
(In
thousands)
|
Carrying
amount
|
Estimated
fair value
|
Carrying
amount
|
Estimated
fair value
|
||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 187,161 | $ | 187,161 | $ | 110,396 | $ | 110,396 | ||||||||
|
Securities
available for sale
|
1,116,758 | 1,116,758 | 1,119,665 | 1,119,665 | ||||||||||||
|
Securities
held to maturity
|
159,946 | 161,851 | 140,209 | 141,308 | ||||||||||||
|
Trading
securities
|
2,410 | 2,410 | 1,407 | 1,407 | ||||||||||||
|
Loans
|
3,645,398 | 3,627,198 | 3,651,911 | 3,650,428 | ||||||||||||
|
Less
allowance for loan losses
|
66,550 | - | 58,564 | - | ||||||||||||
|
Net
loans
|
3,578,848 | 3,627,198 | 3,593,347 | 3,650,428 | ||||||||||||
|
Accrued
interest receivable
|
22,104 | 22,104 | 22,746 | 22,746 | ||||||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Savings,
NOW, and money market
|
$ | 2,269,779 | $ | 2,269,779 | $ | 1,885,551 | $ | 1,885,551 | ||||||||
|
Time
deposits
|
1,033,278 | 1,041,370 | 1,352,212 | 1,367,425 | ||||||||||||
|
Noninterest
bearing
|
789,989 | 789,989 | 685,495 | 685,495 | ||||||||||||
|
Short-term
borrowings
|
155,977 | 155,977 | 206,492 | 206,492 | ||||||||||||
|
Long-term
debt
|
554,698 | 596,588 | 632,209 | 660,246 | ||||||||||||
|
Accrued
interest payable
|
5,814 | 5,814 | 8,709 | 8,709 | ||||||||||||
|
Trust
preferred debentures
|
75,422 | 73,244 | 75,422 | 79,411 | ||||||||||||
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,
2009
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Securities
Available for Sale:
|
||||||||||||||||
|
U.S.
Treasury
|
20,086 | - | - | 20,086 | ||||||||||||
|
Federal
Agency
|
- | 313,157 | - | 313,157 | ||||||||||||
|
State
& municipal
|
137,613 | - | 137,613 | |||||||||||||
|
Mortgage-backed
|
- | 280,861 | - | 280,861 | ||||||||||||
|
Collateralized
mortgage obligations
|
- | 330,711 | - | 330,711 | ||||||||||||
|
Corporate
|
20,674 | - | 20,674 | |||||||||||||
|
Other
securities
|
11,654 | 2,002 | - | 13,656 | ||||||||||||
|
Total
Securities Available for Sale
|
$ | 31,740 | $ | 1,085,018 | $ | - | $ | 1,116,758 | ||||||||
|
Trading
Securities
|
2,410 | - | - | 2,410 | ||||||||||||
|
Total
|
$ | 34,150 | $ | 1,085,018 | $ | - | $ | 1,119,168 | ||||||||
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.
FASB ASC
Topic 820 requires disclosure of assets and liabilities measured and recorded at
fair value on a nonrecurring basis. In accordance with the provisions
of FASB ASC Topic 310, the Company had collateral dependent impaired loans with
a carrying value of approximately $12.0 million which had specific reserves
included in the allowance for loan and lease losses of $2.6 million at December
31, 2009. During the year ended December 31, 2009, the Company
established specific reserves of approximately $2.1 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.
FASB ASC
Topic 825 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, FASB ASC Topic 825 allows
for a one-time election for existing positions upon adoption, with the
transition adjustment recorded to beginning retained earnings. FASB
ASC Topic 825 also establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. FASB ASC
Topic 825 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, 2009, the Company has not elected the
fair value option
for any
eligible items.
None.
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, 2009, 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’s internal control over financial reporting as of
December 31, 2009 was effective at the reasonable assurance level 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, 2009. The report, which expresses an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009, is included in this Item under the
heading “Report of Independent Registered Public Accounting Firm” on page
93.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
NBT
Bancorp Inc.:
We have
audited NBT Bancorp, Inc. and subsidiaries’ (the Company) internal control over
financial reporting as of December 31, 2009, 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, 2009, 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, 2009 and 2008 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, 2009, and our report dated February 26, 2010 expressed an
unqualified opinion on those financial statements.
/s/ KPMG
LLP
Albany,
New York
February
26, 2010
None.
The
following table sets forth certain information for the executive officers other
than directors who are officers of NBT Bancorp Inc.
|
Name
|
Age
at
December 31, 2009
|
Positions
Held with NBT and NBT Bank
|
||
|
Michael
J. Chewens
|
48
|
Senior
Executive Vice President, Chief Financial Officer and
Corporate Secretary
|
||
|
David
E. Raven
|
47
|
President
of Retail Banking of NBT Bank, President and Chief Executive Officer
Pennstar Bank Division
|
||
|
Jeffrey
M. Levy
|
48
|
President
of Commercial Banking and Capital Region President of NBT
Bank
|
Information
concerning the principal occupation of these executive officers of NBT Bancorp
Inc. and NBT Bank N.A. during at least the last five years is set forth
below.
Michael
J. Chewens has been Senior Executive Vice President and Chief Financial Officer
of NBT and NBT Bank since January 2002. He was EVP and CFO of same
from 1999 to 2001. He has been Secretary of NBT and NBT Bank since
December 2000.
David E.
Raven has been President of Retail Banking of NBT Bank since July 2006 and
President and Chief Executive Officer of Pennstar Bank Division since August
2005. Prior to that, he was President and Chief Operating Officer of
Pennstar Bank Division from August 2000 to 2005 and Sales and Administration
from September 1999 through August 2000.
Jeffrey
M. Levy has been Executive Vice President of NBT and Executive Vice President,
Commercial Banking for NBT Bank since December 2006. He joined NBT in August
2005 as Capital Region President. Prior to joining NBT, Mr. Levy was
Manager of New York State Government Banking at M&T Bank from January 2004
to August 2005 and President of the Capital District, Commercial Banking at
M&T Bank from January 2001 to December 2003.
Additional
information by this items is incorporated herein by reference to the Company’s
definitive Proxy Statement for its annual meeting of shareholders to be held on
may 4, 2010 (the “Proxy Statement”), which will be filed with the Securities and
Exchange Commission within 120 days after the Company’s 2009 fiscal year
end.
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 2009 fiscal year end.
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 2009 fiscal year end.
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 2009 fiscal year end.
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 2009 fiscal year end.
(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, 2009 and 2008.
Consolidated
Statements of Income for each of the three years ended December 31, 2009, 2008
and 2007.
Consolidated
Statements of Changes in Stockholders’ Equity for each of the three years ended
December 31, 2009, 2008 and 2007.
Consolidated
Statements of Cash Flows for each of the three years ended December 31, 2009,
2008 and 2007.
Consolidated
Statements of Comprehensive Income for each of the three years ended December
31, 2009, 2008 and 2007.
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.
|
3.1
|
Certificate
of Incorporation of NBT Bancorp Inc. as amended through July 23, 2001.
(filed as Exhibit 3.1 to Registrant’s Form 10-K for the year ended
December 31, 2008, filed on March 2, 2009 and incorporated herein by
reference).
|
|
3.2
|
By-laws
of NBT Bancorp Inc. as amended and restated through July 23, 2001. (filed
as Exhibit 3.2 to Registrant’s Form 10-K for the year ended December 31,
2008, filed on March 2, 2009 and incorporated herein by
reference).
|
|
3.3
|
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).
|
|
4.2
|
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).
|
|
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).*
|
|
10.3
|
CNB
Bancorp, Inc. Stock Option Plan (filed as Exhibit 10.3 to Registrant’s
Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and
incorporated herein by reference).*
|
|
10.4
|
NBT
Bancorp Inc. Employee Stock Purchase Plan (filed as Exhibit 10.4 to
Registrant’s Form 10-K for the year ended December 31, 2008, filed on
March 2, 2009 and incorporated herein by
reference).*
|
|
10.5
|
NBT
Bancorp Inc. Non-employee Directors Restricted and Deferred Stock Plan
(filed as Exhibit 10.5 to Registrant’s Form 10-K for the year ended
December 31, 2008, filed on March 2, 2009 and incorporated herein by
reference).*
|
|
10.6
|
NBT
Bancorp Inc. Performance Share Plan (filed as Exhibit 10.6 to Registrant’s
Form 10-K for the year ended December 31, 2008, filed on March 2, 2009 and
incorporated herein by reference).*
|
|
NBT
Bancorp Inc. 2010 Executive Incentive Compensation
Plan.*
|
|
10.8
|
CNB
Bancorp, Inc. Long-Term Incentive Compensation Plan (filed as Exhibit 10.8
to Registrant’s Form 10-K for the year ended December 31, 2008, filed on
March 2, 2009 and incorporated herein by
reference).*
|
|
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).*
|
|
10.12
|
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 (filed as Exhibit 10.12 to Registrant’s Form 10-K for the year ended
December 31, 2008, filed on March 2, 2009 and incorporated herein by
reference).*
|
|
10.13
|
Employment
Agreement between NBT Bancorp Inc. and Martin A. Dietrich as amended and
restated November 5, 2009 (filed as Exhibit 10.1 to Registrant’s Form 10-Q
for the quarterly period ended September 30, 2009, filed on November 9,
2009 and incorporated herein by
reference).*
|
|
Supplemental
Executive Retirement Agreement between NBT Bancorp Inc. and Martin A.
Dietrich as amended and restated January 20,
2010.
|
|
10.15
|
Form
of Change in Control Agreement, dated November 5, 2009, by and between NBT
Bancorp Inc. and certain executive officers. (filed as Exhibit 10.5 to
Registrant’s Form 10-Q for the quarterly period ended September 30, 2009,
filed on November 9, 2009 and incorporated herein by
reference).*
|
|
10.16
|
Employment
Agreement between NBT Bancorp Inc. and Michael J. Chewens as amended and
restated November 5, 2009 (filed as Exhibit 10.2 to Registrant’s Form 10-Q
for the quarterly period ended September 30, 2009, filed on November 9,
2009 and incorporated herein by
reference).*
|
|
10.17
|
Form
of Amended and Restated NBT Bancorp Inc. Supplemental Retirement
Agreement, dated as of November 5, 2009, between NBT Bancorp Inc. and
certain executive officers. (filed as Exhibit 10.7 to Registrant’s Form
10-Q for the quarterly period ended September 30, 2009, filed on November
9, 2009 and incorporated herein by
reference).*
|
|
10.18
|
Employment
Agreement between NBT Bancorp Inc. and David E. Raven as amended and
restated November 5, 2009 (filed as Exhibit 10.3 to Registrant’s Form 10-Q
for the quarterly period ended September 30, 2009, filed on November 9,
2009 and incorporated herein by
reference).*
|
|
10.19
|
Employment
Agreement between NBT Bancorp Inc. and Jeff Levy made as amended and
restated November 5, 2009 (filed as Exhibit 10.3 to Registrant’s Form 10-Q
for the quarterly period ended September 30, 2009, filed on November 9,
2009 and incorporated herein by
reference).*
|
|
10.20
|
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).*
|
|
10.21
|
First
amendment dated November 5, 2009 to Split-Dollar Agreement between NBT
Bancorp Inc., NBT Bank, National Association and Martin A. Dietrich made
November 10, 2008. (filed as Exhibit 10.6 to Registrant’s Form 10-Q for
the quarterly period ended September 30, 2009, filed on November 9, 2009
and incorporated herein by
reference).*
|
|
10.22
|
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.*
|
21
A
list of the subsidiaries of the Registrant.
|
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.
|
*
Management contract or compensatory plan or arrangement
|
(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 1,
2010
/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 1,
2010
/s/
Martin A. Dietrich
Martin A.
Dietrich
NBT
Bancorp Inc. President, CEO, and Director (Principal Executive
Officer)
Date:
March 1,
2010
/s/ John
C. Mitchell
John C.
Mitchell, Director
Date:
March 1,
2010
/s/
Joseph G. Nasser
Joseph G. Nasser,
Director
Date:
March 1,
2010
/s/
William C. Gumble
William
C. Gumble, Director
Date:
March 1,
2010
/s/
Richard Chojnowski
Richard
Chojnowski, Director
Date:
March 1,
2010
/s/
Michael M. Murphy
Michael
M. Murphy, Director
Date:
March 1,
2010
/s/
Michael J. Chewens
Michael
J. Chewens
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
Date:
March 1,
2010
/s/
Joseph A. Santengelo
Joseph A.
Santangelo, Director
Date:
March 1,
2010
/s/
Robert A. Wadsworth
Robert A.
Wadsworth, Director
Date:
March 1,
2010
/s/
Patricia T. Civil
Patricia
T. Civil, Director
Date:
March 1,
2010
102
TABLE OF CONTENTS
Part IItem 1. Bus Ine SsItem 1A. Risk Fa Cto RsItem 1B. Un Reso Lved Staff CommentsItem 2. Pr Oper TiesItem 3. L Ega L ProceedingsItem 4. [re Ser Ved] 19 Table Of ContentsItem 4. [re Ser Ved]Part IIItem 5. M Ar Ket For Registrant S Common Equity and Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Se Lect Ed Financial DataItem 7. Ma Nage Ment S Discussion and Analysis Of Financial Condition and Results Of Operations GeneralItem 7. Ma Nage Ment S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quan Tita Tive and Qualitative Disclosure About Market RiskItem 8. Fin Anc Ial Statements and Supplementary DataItem 9. Ch Ang Es in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Co Ntr Ols and ProceduresItem 9B. Other Inf Orm AtionPart IIIItem 10. Dir Ect Ors, Executive Officers and Corporate GovernanceItem 11. Ex Ecu Tive CompensationItem 12. Se Curi Ty Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Ce Rtai N Relationships, Related Transactions and Director IndependenceItem 14. Pr Inci Pal Accountant Fees and ServicesPart IV Item 15. Ex Hib Its and Financial Statement SchedulesPart IVItem 15. Ex Hib Its and Financial Statement Schedules