SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March 31, 2006.
OR
o
|
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)
|
DELAWARE
|
|
16-1268674
|
|
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
|
52
SOUTH BROAD STREET, NORWICH, NEW YORK 13815
(Address
of Principal Executive Offices) (Zip Code)
Registrant's
Telephone Number, Including Area Code: (607)
337-2265
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
|
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No
x
The
number of shares outstanding of the Registrant’s common stock, without par
value, was 34,376,927 at April 30, 2006.
NBT
BANCORP INC.
FORM
10-Q--Quarter
Ended March 31, 2006
PART
I
|
FINANCIAL
INFORMATION
|
|
|
Item
1
|
Interim
Financial Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Item
2
|
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Item
3
|
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Item
4
|
|
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PART
II
|
OTHER
INFORMATION
|
|
|
Item
1
|
|
Item
1A
|
|
Item
2
|
|
Item
3
|
|
Item
4
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Item
5
|
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Item
6
|
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|
NBT
Bancorp Inc. and Subsidiaries
Consolidated
Balance Sheets (unaudited)
|
|
March
31,
2006
|
|
December
31,
2005
|
|
March
31,
2005
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
123,593
|
|
$
|
134,501
|
|
$
|
106,520
|
|
Short-term
interest bearing accounts
|
|
|
9,675
|
|
|
7,987
|
|
|
5,783
|
|
Securities
available for sale, at fair value
|
|
|
1,112,118
|
|
|
954,474
|
|
|
950,555
|
|
Securities
held to maturity (fair value - $102,338, $93,701 and
$87,407)
|
|
|
102,754
|
|
|
93,709
|
|
|
87,063
|
|
Federal
Reserve and Federal Home Loan Bank stock
|
|
|
37,962
|
|
|
40,259
|
|
|
36,942
|
|
Loans
and leases
|
|
|
3,247,841
|
|
|
3,022,657
|
|
|
2,898,187
|
|
Less
allowance for loan and lease losses
|
|
|
49,818
|
|
|
47,455
|
|
|
45,389
|
|
Net
loans
|
|
|
3,198,023
|
|
|
2,975,202
|
|
|
2,852,798
|
|
Premises
and equipment, net
|
|
|
67,889
|
|
|
63,693
|
|
|
63,806
|
|
Goodwill
|
|
|
102,692
|
|
|
47,544
|
|
|
47,544
|
|
Other
intangible assets, net
|
|
|
13,632
|
|
|
3,808
|
|
|
4,234
|
|
Bank
owned life insurance
|
|
|
40,535
|
|
|
33,648
|
|
|
32,634
|
|
Other
assets
|
|
|
76,978
|
|
|
71,948
|
|
|
67,560
|
|
TOTAL
ASSETS
|
|
$
|
4,885,851
|
|
$
|
4,426,773
|
|
$
|
4,255,439
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Demand
(noninterest bearing)
|
|
$
|
618,531
|
|
$
|
593,422
|
|
$
|
509,077
|
|
Savings,
NOW, and money market
|
|
|
1,546,840
|
|
|
1,325,166
|
|
|
1,467,265
|
|
Time
|
|
|
1,454,690
|
|
|
1,241,608
|
|
|
1,192,585
|
|
Total
deposits
|
|
|
3,620,061
|
|
|
3,160,196
|
|
|
3,168,927
|
|
Short-term
borrowings
|
|
|
329,702
|
|
|
444,977
|
|
|
307,514
|
|
Trust
preferred debentures
|
|
|
75,422
|
|
|
23,875
|
|
|
18,720
|
|
Long-term
debt
|
|
|
424,865
|
|
|
414,330
|
|
|
394,500
|
|
Other
liabilities
|
|
|
50,047
|
|
|
49,452
|
|
|
46,539
|
|
Total
liabilities
|
|
|
4,500,097
|
|
|
4,092,830
|
|
|
3,936,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value. Authorized 50,000,000 shares at March 31,
2006,
December 31, 2005 and March 31, 2005; issued 36,459,560, 34,400,925
and
34,400,991 at March 31, 2006, December 31, 2005 and March 31, 2005,
respectively
|
|
|
365
|
|
|
344
|
|
|
344
|
|
Additional
paid-in-capital
|
|
|
270,462
|
|
|
219,157
|
|
|
218,167
|
|
Retained
earnings
|
|
|
170,330
|
|
|
163,989
|
|
|
143,831
|
|
Unvested
stock awards
|
|
|
-
|
|
|
(457
|
)
|
|
(637
|
)
|
Accumulated
other comprehensive loss
|
|
|
(12,210
|
)
|
|
(6,477
|
)
|
|
(3,922
|
)
|
Treasury
stock at cost 2,126,450, 2,101,382 and 1,976,636 shares at March
31, 2006,
December 31, 2005 and March 31, 2005, respectively
|
|
|
(43,193
|
)
|
|
(42,613
|
)
|
|
(38,544
|
)
|
Total
stockholders’ equity
|
|
|
385,754
|
|
|
333,943
|
|
|
319,239
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
4,885,851
|
|
$
|
4,426,773
|
|
$
|
4,255,439
|
|
See
notes
to unaudited interim consolidated financial statements.
NBT
Bancorp Inc. and Subsidiaries
|
|
Three
months ended March 31,
|
|
Consolidated
Statements of Income (unaudited)
|
|
2006
|
|
2005
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
Interest,
fee and dividend income:
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$
|
52,833
|
|
$
|
43,944
|
|
Securities
available for sale
|
|
|
11,877
|
|
|
10,247
|
|
Securities
held to maturity
|
|
|
985
|
|
|
803
|
|
Other
|
|
|
611
|
|
|
467
|
|
Total
interest, fee and dividend income
|
|
|
66,306
|
|
|
55,461
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
Deposits
|
|
|
17,225
|
|
|
10,720
|
|
Short-term
borrowings
|
|
|
3,937
|
|
|
1,861
|
|
Long-term
debt
|
|
|
4,142
|
|
|
3,808
|
|
Trust
preferred debentures
|
|
|
883
|
|
|
258
|
|
Total
interest expense
|
|
|
26,187
|
|
|
16,647
|
|
Net
interest income
|
|
|
40,119
|
|
|
38,814
|
|
Provision
for loan and lease losses
|
|
|
1,728
|
|
|
1,796
|
|
Net
interest income after provision for loan and lease losses
|
|
|
38,391
|
|
|
37,018
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
Trust
|
|
|
1,358
|
|
|
1,252
|
|
Service
charges on deposit accounts
|
|
|
4,219
|
|
|
3,929
|
|
ATM
and debit card fees
|
|
|
1,645
|
|
|
1,400
|
|
Broker/dealer
and insurance fees
|
|
|
908
|
|
|
1,352
|
|
Net
securities losses
|
|
|
(934
|
)
|
|
(4
|
)
|
Bank
owned life insurance income
|
|
|
381
|
|
|
333
|
|
Retirement
plan administration fees |
|
|
1,231 |
|
|
863 |
|
Other
|
|
|
2,416
|
|
|
1,586
|
|
Total
noninterest income
|
|
|
11,224
|
|
|
10,711
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses:
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
15,748
|
|
|
15,451
|
|
Office
supplies and postage
|
|
|
1,181
|
|
|
1,150
|
|
Occupancy
|
|
|
2,988
|
|
|
2,788
|
|
Equipment
|
|
|
2,156
|
|
|
2,096
|
|
Professional
fees and outside services
|
|
|
1,832
|
|
|
1,675
|
|
Data
processing and communications
|
|
|
2,702
|
|
|
2,658
|
|
Amortization
of intangible assets
|
|
|
323
|
|
|
118
|
|
Loan
collection and other real estate owned
|
|
|
211
|
|
|
401
|
|
Other
operating
|
|
|
3,331
|
|
|
2,544
|
|
Total
noninterest expenses
|
|
|
30,472
|
|
|
28,881
|
|
Income
before income tax expense
|
|
|
19,143
|
|
|
18,848
|
|
Income
tax expense
|
|
|
5,555
|
|
|
6,059
|
|
Net
income
|
|
$
|
13,588
|
|
$
|
12,789
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.41
|
|
$
|
0.39
|
|
Diluted
|
|
$
|
0.40
|
|
$
|
0.39
|
|
See
notes
to unaudited interim consolidated financial statements.
NBT
Bancorp
Inc. and Subsidiaries
|
|
Consolidated
Statements of Stockholders’ Equity (Unaudited)
|
|
|
|
Common
Stock
|
|
Additional
Paid-in-
Capital
|
|
Retained
Earnings
|
|
Unvested
Stock
Awards
|
|
Accumulated
Other
Comprehensive
(Loss)/Income
|
|
Treasury
Stock
|
|
Total
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
$
|
344
|
|
$
|
218,012
|
|
$
|
137,323
|
|
$
|
(296
|
)
|
$
|
4,989
|
|
$
|
(28,139
|
)
|
$
|
332,233
|
|
Net
income
|
|
|
|
|
|
|
|
|
12,789
|
|
|
|
|
|
|
|
|
|
|
|
12,789
|
|
Cash
dividends - $0.19 per share
|
|
|
|
|
|
|
|
|
(6,210
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,210
|
)
|
Purchase
of 514,683 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,897
|
)
|
|
(11,897
|
)
|
Issuance
of 57,619 shares to employee benefit plans and other stock plans,
including tax benefit
|
|
|
|
|
|
51
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
1,027
|
|
|
1,007
|
|
Grant
of 24,675 shares of restricted stock awards
|
|
|
|
|
|
104
|
|
|
|
|
|
(569
|
)
|
|
|
|
|
465
|
|
|
-
|
|
Amortization
of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
228
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,911
|
)
|
|
|
|
|
(8,911
|
)
|
Balance
at March 31, 2005
|
|
$
|
344
|
|
$
|
218,167
|
|
$
|
143,831
|
|
$
|
(637
|
)
|
$
|
(3,922
|
)
|
$
|
(38,544
|
)
|
$
|
319,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
$
|
344
|
|
$
|
219,157
|
|
$
|
163,989
|
|
$
|
(457
|
)
|
$
|
(6,477
|
)
|
$
|
(42,613
|
)
|
$
|
333,943
|
|
Net
income
|
|
|
|
|
|
|
|
|
13,588
|
|
|
|
|
|
|
|
|
|
|
|
13,588
|
|
Cash
dividends - $0.19 per share
|
|
|
|
|
|
|
|
|
(6,550
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,550
|
)
|
Purchase
of 178,404 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,055
|
)
|
|
(4,055
|
)
|
Issuance
of 2,058,661 shares of common stock in connection with purchase
business
combination
|
|
|
21
|
|
|
48,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,625
|
|
Issuance
of 237,278 incentive stock options in purchase transaction
|
|
|
|
|
|
1,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,955
|
|
2,500
shares of company stock in purchase transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
(55
|
)
|
Issuance
of 183,345 shares to employee benefit plans and other stock plans,
including tax benefit
|
|
|
|
|
|
234
|
|
|
(697
|
)
|
|
|
|
|
|
|
|
3,788
|
|
|
3,325
|
|
Reclassification
adjustment from the adoption of FAS123R, including 37,395 of restricted
shares from issued common stock to treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
|
|
(457
|
)
|
|
-
|
|
Stock-based
compensation
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756
|
|
Issuance
of 9,886 shares of vested restricted and deferred stock
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
199
|
|
|
-
|
|
Forfeit
2,625 shares of restricted stock
|
|
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,733
|
)
|
|
|
|
|
(5,733
|
)
|
Balance
at March 31, 2006
|
|
$
|
365
|
|
$
|
270,462
|
|
$
|
170,330
|
|
$
|
-
|
|
$
|
(12,210
|
)
|
$
|
(43,193
|
)
|
$
|
385,754
|
|
See
notes
to unaudited interim consolidated financial statements.
NBT
Bancorp Inc. and Subsidiaries
|
|
Three
Months Ended March 31,
|
|
Consolidated
Statements of Cash Flows (unaudited)
|
|
2006
|
|
2005
|
|
(in
thousands)
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
Net
income
|
|
$
|
13,588
|
|
$
|
12,789
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
1,728
|
|
|
1,796
|
|
Depreciation
of premises and equipment
|
|
|
1,590
|
|
|
1,573
|
|
Net
amortization on securities
|
|
|
135
|
|
|
384
|
|
Amortization
of intangible assets
|
|
|
323
|
|
|
118
|
|
Stock-based
compensation
|
|
|
711
|
|
|
228
|
|
Tax
benefit from the exercise of stock options
|
|
|
-
|
|
|
202
|
|
Bank
owned life insurance income
|
|
|
(381
|
)
|
|
(333
|
)
|
Proceeds
from sale of loans held for sale
|
|
|
8,837
|
|
|
1,185
|
|
Origination
of loans held for sale
|
|
|
(6,957
|
)
|
|
(730
|
)
|
Net
(gains) losses on sale of loans
|
|
|
(60
|
)
|
|
5
|
|
Net
gain on sale of other real estate owned
|
|
|
(60
|
)
|
|
(43
|
)
|
Net
gain on sale of branch
|
|
|
(470
|
)
|
|
-
|
|
Net
security losses
|
|
|
934
|
|
|
4
|
|
Net
decrease in other assets
|
|
|
6,025
|
|
|
4,816
|
|
Net
increase in other liabilities
|
|
|
(2,199
|
)
|
|
(7,675
|
)
|
Net
cash provided by operating activities
|
|
|
23,744
|
|
|
14,319
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
Proceeds
from maturities
|
|
|
45,451
|
|
|
37,054
|
|
Proceeds
from sales
|
|
|
42,292
|
|
|
27,868
|
|
Purchases
|
|
|
(108,488
|
)
|
|
(78,128
|
)
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
Proceeds
from maturities
|
|
|
11,013
|
|
|
8,882
|
|
Purchases
|
|
|
(11,837
|
)
|
|
(14,180
|
)
|
Net
purchases (sales) of FRB and FHLB stock
|
|
|
2,297
|
|
|
(100
|
)
|
Net
cash paid in sale of branch
|
|
|
(2,307
|
)
|
|
-
|
|
Net
cash used in CNB Bancorp, Inc. merger
|
|
|
(20,770
|
)
|
|
-
|
|
Cash
paid for the acquisition of EPIC Advisor’s, Inc.
|
|
|
-
|
|
|
(6,129
|
)
|
Cash
received for the sale of M. Griffith Inc.
|
|
|
-
|
|
|
1,016
|
|
Net
increase in loans
|
|
|
(38,054
|
)
|
|
(30,170
|
)
|
Purchase
of premises and equipment, net
|
|
|
(599
|
)
|
|
(1,445
|
)
|
Proceeds
from sales of other real estate owned
|
|
|
210
|
|
|
138
|
|
Net
cash used in investing activities
|
|
|
(80,792
|
)
|
|
(55,194
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
130,856
|
|
|
95,089
|
|
Net
decrease in short-term borrowings
|
|
|
(115,275
|
)
|
|
(31,309
|
)
|
Repayments
of long-term debt
|
|
|
(12,020
|
)
|
|
(23
|
)
|
Proceeds
from the issuance of trust preferred debentures
|
|
|
51,547
|
|
|
-
|
|
Proceeds
from issuance of treasury shares to employee benefit plans and
other stock
plans
|
|
|
3,012
|
|
|
805
|
|
Tax
benefit from the exercise of stock options
|
|
|
313
|
|
|
-
|
|
Purchase
of treasury stock
|
|
|
(4,055
|
)
|
|
(11,897
|
)
|
Cash
dividends
|
|
|
(6,550
|
)
|
|
(6,210
|
)
|
Net
cash provided by financing activities
|
|
|
47,828
|
|
|
46,455
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(9,220
|
)
|
|
5,580
|
|
Cash
and cash equivalents at beginning of period
|
|
|
142,488
|
|
|
106,723
|
|
Cash
and cash equivalents at end of period
|
|
$
|
133,268
|
|
$
|
112,303
|
|
Consolidated
Statements of Cash Flows, Continued
|
|
Three
Months Ended March 31,
|
|
Supplemental
disclosure of cash flow information:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
24,820
|
|
$
|
16,608
|
|
Income
taxes
|
|
|
-
|
|
|
443
|
|
Cash
received during the period for:
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
449
|
|
|
-
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
Loans
transferred to OREO
|
|
$
|
164
|
|
$
|
105
|
|
Dispositions:
|
|
|
|
|
|
|
|
Fair
value of assets sold
|
|
$
|
3,453
|
|
$
|
1,405
|
|
Fair
value of liabilities transferred
|
|
|
5,760
|
|
|
389
|
|
Acquisitions:
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
431,943
|
|
$
|
6,565
|
|
Fair
value of liabilities assumed
|
|
|
360,648
|
|
|
435
|
|
Net
cash and cash equivalents used in merger
|
|
|
20,770
|
|
|
-
|
|
Fair
value of equity acquired
|
|
|
50,525
|
|
|
-
|
|
See
notes
to unaudited interim consolidated financial statements.
|
|
Three
months ended
March
31,
|
|
Consolidated
Statements of Comprehensive Income
(unaudited)
|
|
2006
|
|
2005
|
|
(in
thousands)
|
|
|
|
Net
income
|
|
$
|
13,588
|
|
$
|
12,789
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
Unrealized
holding losses arising during period [pre-tax amounts of $10,089
and
$14,827]
|
|
|
(6,065
|
)
|
|
(8,913
|
)
|
Minimum
pension liability adjustment
|
|
|
(229
|
)
|
|
-
|
|
Less:
Reclassification adjustment for net losses included in net income
[pre-tax
amounts of $934 and $4]
|
|
|
561
|
|
|
2
|
|
Total
other comprehensive loss
|
|
|
(5,733
|
)
|
|
(8,911
|
)
|
Comprehensive
income
|
|
$
|
7,855
|
|
$
|
3,878
|
|
See
notes
to unaudited interim consolidated financial statements.
NBT
BANCORP INC. and Subsidiary
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2006
Note
1.
|
Description
of Business
|
NBT
Bancorp Inc. (the Company or the Registrant) 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 is the parent holding
company of NBT Bank, N.A. (the Bank), NBT Financial Services, Inc. (NBT
Financial), Hathaway Insurance Agency, Inc., CNBF Capital Trust I, NBT Statutory
Trust I and NBT Statutory Trust II. Through these subsidiaries, the Company
operates as one segment focused on community banking operations. The Company’s
primary business consists of providing commercial banking and financial services
to its customers in its market area. The principal assets of the Company
are all
of the outstanding shares of common stock of its direct subsidiaries, and
its
principal sources of revenue are the management fees and dividends it receives
from the Bank and NBT Financial.
The
Bank
is a full service commercial bank formed in 1856, which provides a broad
range
of financial products to individuals, corporations and municipalities throughout
the central and upstate New York and northeastern Pennsylvania market area.
The
Bank conducts business through two operating divisions, NBT Bank and Pennstar
Bank.
Note
2.
|
Basis
of Presentation
|
The
accompanying unaudited interim consolidated financial statements include
the
accounts of NBT Bancorp Inc. and its wholly owned subsidiaries, NBT Bank,
N.A.
and NBT Financial Services, Inc. Collectively, the Registrant and its
subsidiaries are referred to herein as “the Company”. All intercompany
transactions have been eliminated in consolidation. Amounts in the prior
period
financial statements are reclassified whenever necessary to conform to current
period presentation.
CNBF
Capital Trust I is a Delaware statutory business trust formed in 1999, for
the
purpose of issuing $18 million in trust preferred securities and lending
the
proceeds to the Company. NBT Statutory Trust I is a Delaware statutory business
trust formed in 2005, for the purpose of issuing $5 million in trust preferred
securities and lending the proceeds to the Company. NBT Statutory Trust II
is a
Delaware statutory business trust formed in 2006, for the purpose of issuing
$50
million in trust preferred securities and lending the proceeds to the Company
to
provide funding for the acquisition of CNB Bancorp, Inc during the three
months
ended March 31, 2006. These three statutory business trusts are collectively
referred here in as “the Trusts”. The Company guarantees, on a limited basis,
payments of distributions on the trust preferred securities and payments
on
redemption of the trust preferred securities. The Trusts are variable interest
entities (VIEs) for which the Company is not the primary beneficiary, as
defined
in Financial Accounting Standards Board Interpretation (“FIN”) No. 46
“Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 (Revised December 2003 (FIN 46R)).” In accordance with
FIN 46R, which was implemented in the first quarter of 2004, the accounts
of the
Trusts are not included in the Company’s consolidated financial
statements.
Note
3.
|
New
Accounting Pronouncements
|
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid
Financial Instruments (“SFAS 155”), which eliminates the exemption from applying
SFAS 133 to interests in securitized financial assets so that similar
instruments are accounted for similarly regardless of the form of the
instruments. SFAS 155 also allows the election of fair value measurement
at
acquisition, at issuance, or when a previously recognized financial instrument
is subject to a remeasurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of the first fiscal year
that
begins after September 15, 2006. Early adoption is permitted. The adoption
of
SFAS 155 is not expected to have a material effect on our consolidated financial
position, results of operations or cash flows.
In
March
2006, the FASB issued Statement of Financial Accounting Standard 156 -
Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value. SFAS 156 permits, but does not require, the subsequent
measurement of servicing assets and servicing liabilities at fair value.
Adoption is required as of the beginning of the first fiscal year that begins
after September 15, 2006. Early adoption is permitted. The adoption of SFAS
156
is not expected to have a material effect on our consolidated financial
position, results of operations or cash flows.
Note
4.
|
Business
Combination
|
On
February 10, 2006, the Company completed the acquisition through merger of
CNB
Bancorp, Inc. (“CNB”). CNB was a bank holding company for City National Bank and
Trust Company (“CNB Bank”) and Hathaway Insurance Agency, Inc. (“Hathaway”),
headquartered in Gloversville, NY. CNB Bank conducted
business from nine community bank offices in four upstate New York
counties—Fulton, Hamilton, Montgomery and Saratoga. The stockholders of CNB
received approximately $39 million in cash and 2,058,661 shares of NBT common
stock. The aggregate transaction value was approximately $89.0 million. The
transaction was accounted for under the purchase method of accounting. CNB
had
total assets of $399.0 million, loans of $197.6 million, deposits of $335.0
million and shareholders equity of $40.1 million. CNB was merged with and
into
the Company, CNB Bank was merged with and into NBT Bank and Hathaway is a
direct
subsidiary of the Company. The results of operations are included in the
consolidated financial statements from the date of acquisition, February
10,
2006.
Preparing
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilites at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period, as well as the disclosures provided. Actual results could differ
from
those estimates. Estimates associated with the allowance for loan losses,
pension expense, fair values of financial instruments and status of
contingencies are particularly susceptible to material change in the near
term.
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.
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 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 requirements prescribed by
GAAP.
Income
taxes are accounted for under the asset and liability method. The Company
files
consolidated tax returns 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.
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 March 31,
2006
and 2005. The effect on deferred taxes of a change in tax rates is recognized
in
income in the period that includes the enactment date.
Note
6.
|
Commitments
and Contingencies
|
The
Company is a party to financial instruments in the normal course of business
to
meet financing needs of its customers and to reduce its own exposure to
fluctuating interest rates. These financial instruments include commitments
to
extend credit, unused lines of credit, and standby letters of credit. Exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of
credit
is represented by the contractual amount of those instruments. The Company
uses
the same credit policy to make such commitments as it uses for on-balance-sheet
items. At both March 31, 2006, and December 31, 2005, commitments to extend
credit and unused lines of credit totaled $497.1 million. Since commitments
to
extend credit and unused lines of credit may expire without being fully drawn
upon, this amount does not necessarily represent future cash commitments.
Collateral obtained upon exercise of the commitment is determined using
management’s credit evaluation of the borrower and may include accounts
receivable, inventory, property, land and other items.
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. Standby
letters of credit totaled $43.1 million at March 31, 2006 and $42.9 million
at
December 31, 2005. As of March 31, 2006, the fair value of standby letters
of
credit was not material to the Company’s consolidated financial
statements.
Note
7.
|
Earnings
per share
|
Basic
earnings per share 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 earnings per share 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).
The
following is a reconciliation of basic and diluted earnings per share for
the
periods presented in the consolidated statements of income.
|
|
|
|
|
|
Three
months ended March 31,
|
|
2006
|
|
2005
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
33,422
|
|
|
32,674
|
|
Net
income available to common shareholders
|
|
$
|
13,588
|
|
$
|
12,789
|
|
Basic
EPS
|
|
$
|
0.41
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
33,422
|
|
|
32,674
|
|
Dilutive
potential common stock
|
|
|
324
|
|
|
303
|
|
Weighted
average common shares and common Share equivalents
|
|
|
33,746
|
|
|
32,977
|
|
Net
income available to common shareholders
|
|
$
|
13,588
|
|
$
|
12,789
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
0.40
|
|
$
|
0.39
|
|
There
were 375,211 stock options for the quarter ended March 31, 2006 and 339,179
stock options for the quarter ended March 31, 2005 that were not considered
in
the calculation of diluted earnings per share since the stock options’ exercise
price was greater than the average market price during these periods.
Note
8.
|
Stock-Based
Compensation
|
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment”, (“FAS 123R”) using the
modified-prospective transition method. Under this transition method,
compensation cost in 2006 includes costs for stock options granted prior
to but
not vested as of December 31, 2005, and options vested in 2006. Therefore
results for prior periods have not been restated.
The
adoption of FAS 123R lowered net income by approximately $0.4 million for
the
three months ended March 31, 2006, compared to if we had continued to account
for share-based compensation under APB No. 25, Accounting for Stock Issued
to
Employees.
The
following table illustrates the effect on net income and earnings per share
if
we had applied the fair value recognition provisions of FAS 123 during the
period presented. For the purpose of this pro forma disclosure, the value
of
options is estimated using a Black-Scholes option-pricing model and amortized
to
expense over the options vesting periods.
|
|
|
|
|
|
Three
months ended March 31,
|
|
(in
thousands, except per share data)
|
|
2005
|
|
Net
income, as reported
|
|
$
|
12,789
|
|
Add:
Stock-based compensation expense included in reported net income,
net of
related tax effects
|
|
|
137
|
|
Less:
Stock-based compensation expense determined under fair value method
for
all awards, net of related tax effects
|
|
|
(315
|
)
|
Pro
forma net income
|
|
$
|
12,611
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.39
|
|
Basic
- Pro forma
|
|
$
|
0.39
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.39
|
|
Diluted
- Pro forma
|
|
$
|
0.38
|
|
As
of
March 31, 2006, there was approximately $3.3 million of unrecognized
compensation cost related to unvested share-based stock option awards granted.
That cost is expected to be recognized over the next four years.
In
November 2005, the FASB issued Staff Position No. FAS 123(R)-3 (“FSP 123R-3”),
Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards. FSP 123R-3 provides an elective alternative transition method
for calculating the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to the adoption of FAS 123R. Companies
may
take up to one year from the effective date of FSP 123R-3 to evaluate the
available transition alternatives and make a one-time election as to which
method to adopt. The Company is currently in the process of evaluating the
alternative methods.
Options
are granted to certain employees and directors at prices equal to the market
value of the stock on the dates the options were granted. The options granted
have a term of ten years from the grant date and granted options for employees
vest in the following manner: 40% in the first year and 20% per year for
the
subsequent three years. Generally, the fair value of each option is amortized
into compensation expense on a straight-line basis between the grant date
for
the option and each vesting date. Prior to the adoption of FAS 123(R), options
granted to retirement eligible employees were expensed over the nominal vesting
period on a pro forma basis. Beginning on January 1, 2006, options granted
to
retirement eligible employees are expensed in full on the date of grant.
The
impact of this change was not material. The Company has estimated the fair
value
of all stock option awards as of the date of the grant by applying the
Black-Scholes pricing valuation model. The application of this valuation
model
involves assumptions that are judgmental and sensitive in the determination
of
compensation expense. The weighted average for key assumptions used in
determining the fair value of options granted during the three months ended
March 31, 2006 follows:
|
Three
months ended
March
31, 2006
|
Dividend
Yield
|
3.28%
- 3.52%
|
Expected
Volatility
|
28.41%
- 28.62%
|
Risk-free
interest rate
|
4.36%
- 4.58%
|
Expected
life
|
7
years
|
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.
Stock
option activity during the three months ended March 31, 2006 is as
follows:
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Term (in yrs)
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2006
|
|
|
1,916,624
|
|
$
|
18.79
|
|
|
|
|
|
|
|
Granted
|
|
|
287,548
|
|
$
|
22.36
|
|
|
|
|
|
|
|
Issued
in connection with the CNB transaction
|
|
|
237,278
|
|
$
|
16.76
|
|
|
|
|
|
|
|
Exercised
|
|
|
(183,345
|
)
|
$
|
(16.32
|
)
|
|
|
|
|
|
|
Lapsed
|
|
|
(22,641
|
)
|
$
|
21.82
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
2,235,464
|
|
$
|
19.21
|
|
|
6.65
|
|
$
|
9,049,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2006
|
|
|
1,556,578
|
|
$
|
17.94
|
|
|
5.68
|
|
$
|
8,272,917
|
|
The
fair
market value of stock options granted for the three months ended March 31,
2006,
was $5.21. Total stock-based compensation expense for stock option awards
totaled $0.7 million for the three months ended March 31, 2006. The amount
of
stock-based compensation expensed deferred under FAS 91 “Accounting for
Nonrefundable Fee and Costs Associated with Origination or Acquiring Loans
and
Initial Direct Costs of Leases” was less than $0.1 million for the three months
ended March 31, 2006. Cash proceeds, tax benefits and intrinsic value related
to
total stock options exercised is as follows:
|
|
Three
months ended
|
|
(dollars
in thousands)
|
|
March
31, 2006
|
|
March
31, 2005
|
|
Proceeds
from stock option exercised
|
|
$
|
3,012
|
|
$
|
805
|
|
Tax
benefits related to stock options exercised
|
|
|
313
|
|
|
202
|
|
Intrinsic
value of stock options exercised
|
|
|
1,191
|
|
|
506
|
|
The
Company has outstanding restricted and deferred stock awards granted from
various plans at March 31, 2006. The Company recognized $0.1 million in
stock-based compensation expense related to these stock awards for the three
months ended March 31, 2006 and $0.2 million for the three months ended March
31, 2005. Unrecognized compensation cost related to restricted stock awards
totaled $0.8 million at March 31, 2006. The following table summarizes
information for unvested restricted stock awards outstanding as of March
31,
2006:
|
|
Number
of Shares
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
Unvested
Restricted Stock Awards
|
|
|
|
|
|
Unvested
at start of quarter
|
|
|
37,935
|
|
$
|
21.46
|
|
Forefited
|
|
|
(2,625
|
)
|
$
|
23.04
|
|
Vested
|
|
|
(9,886
|
)
|
$
|
20.26
|
|
Granted
|
|
|
29,817
|
|
$
|
21.74
|
|
Unvested
at end of quarter
|
|
|
55,241
|
|
$
|
21.75
|
|
As
of
March 31, 2006, the Company’s Employee and Non-Employee Stock Option Plans had
1,128,799 options available for grant; the Company’s Directors & Deferred
Stock Plan had 147,777 shares available for grant; The Company’s Performance
Share Plan had 252,750 shares available for grant; the Employees Stock Purchase
Plan had 403,279 shares available for issuance.
Note
9. |
Goodwill
and Intangible Assets
|
A
summary
of goodwill by operating subsidiaries follows:
(in
thousands)
|
|
January
1,
2005
|
|
Goodwill
Acquired
|
|
Goodwill
Disposed
|
|
March
31,
2005
|
|
NBT
Bank, N.A.
|
|
$
|
44,520
|
|
|
-
|
|
|
-
|
|
$
|
44,520
|
|
NBT
Financial Services, Inc.
|
|
|
1,050
|
|
|
3,024
|
|
|
1,050
|
|
|
3,024
|
|
Total
|
|
$
|
45,570
|
|
$
|
3,024
|
|
$
|
1,050
|
|
$
|
47,544
|
|
(in
thousands)
|
|
January
1,
2006
|
|
Goodwill
Acquired
|
|
Goodwill
Disposed
|
|
March
31,
2006
|
|
NBT
Bank, N.A.
|
|
$
|
44,520
|
|
|
54,934
|
|
|
-
|
|
$
|
99,454
|
|
NBT
Financial Services, Inc
|
|
|
3,024
|
|
|
-
|
|
|
-
|
|
|
3,024
|
|
Hathaway
Agency, Inc.
|
|
|
-
|
|
|
214
|
|
|
-
|
|
|
214
|
|
Total
|
|
$
|
47,544
|
|
$
|
55,148
|
|
$
|
-
|
|
$
|
102,692
|
|
In
February 2006, the Company acquired CNB. The acquisition resulted in increases
to goodwill of $55.1 million, core deposit intangibles of $9.6 million and
other
intangibles of $0.5 million. The core deposit intangibles will be amortized
over
ten years.
In
January 2005, the Company acquired EPIC Advisors, Inc., a 401(k) record keeping
firm located in Rochester, NY. In that transaction, the Company recorded
customer relationship intangible assets of $2.1 million and non-compete
provision intangible assets of $0.2 million, which have amortization periods
of
13 years and 5 years, respectively. Also in connection with the acquisition,
the
Company recorded $3.0 million in goodwill.
In
March
2005, the Company sold its broker/dealer subsidiary, M. Griffith Inc. In
connection with the sale of M. Griffith Inc., goodwill was reduced by $1.1
million and was allocated against the sales price. In the fourth quarter
of
2004, the Company recorded a $2.0 million goodwill impairment charge in
connection with the above mentioned sale. A definitive agreement was signed
by
the Company and the acquirer in the fourth quarter of 2004. The negotiation
and
resolution of sale terms for M. Griffith Inc. during the fourth quarter of
2004
resulted in the goodwill impairment charge in that same
quarter.
The
Company has finite-lived intangible assets capitalized on its consolidated
balance sheet in the form of core deposit and other intangible assets. These
intangible assets continue to be amortized over their estimated useful lives,
which range from one to twenty-five years.
A
summary
of core deposit and other intangible assets follows:
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
(in
thousands)
|
|
|
|
|
|
Core
deposit intangibles:
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
11,806
|
|
$
|
2,186
|
|
Less:
accumulated amortization
|
|
|
1,924
|
|
|
1,388
|
|
Net
Carrying amount
|
|
|
9,882
|
|
|
798
|
|
|
|
|
|
|
|
|
|
Other
intangibles:
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
|
4,164
|
|
|
3,197
|
|
Less:
accumulated amortization
|
|
|
779
|
|
|
278
|
|
Net
Carrying amount
|
|
|
3,385
|
|
|
2,919
|
|
|
|
|
|
|
|
|
|
Other
intangibles not subject to amortization: Pension asset
|
|
|
365
|
|
|
517
|
|
|
|
|
|
|
|
|
|
Total
intangibles with definite useful lives:
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
|
16,335
|
|
|
5,900
|
|
Less:
accumulated amortization
|
|
|
2,703
|
|
|
1,666
|
|
Net
Carrying amount
|
|
$
|
13,632
|
|
$
|
4,234
|
|
Amortization
expense on finite-lived intangible assets is expected to total $1.3 million
for
the remainder of 2006, $1.7 million for 2007, $1.4 million for each of 2008,
2009 and 2010, and $6.5 million thereafter.
Note
10.
|
Defined
Benefit Pension Plan and Postretirement Health
Plan
|
The
Company maintains a qualified, noncontributory, defined benefit pension plan
covering substantially all employees. 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. In addition, 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, N.A. on or before January 1, 2000 are eligible to receive
postretirement health care benefits. The Company funds the cost of the
postretirement health plan as benefits are paid.
The
Components of pension expense and postretirement expense are set forth below
(in
thousands):
|
|
Three
months ended March 31,
|
|
Pension
plan:
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
502
|
|
$
|
469
|
|
Interest
cost
|
|
|
539
|
|
|
561
|
|
Expected
return on plan assets
|
|
|
(905
|
)
|
|
(947
|
)
|
Net
amortization
|
|
|
179
|
|
|
374
|
|
Total
|
|
$
|
315
|
|
$
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Health Plan:
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
1
|
|
$
|
9
|
|
Interest
cost
|
|
|
51
|
|
|
67
|
|
Net
amortization
|
|
|
(24
|
)
|
|
(15
|
)
|
Total
|
|
$
|
28
|
|
$
|
61
|
|
Note
11. |
Trust
Preferred Debentures
|
As
of
March 31, 2006, the CNBF Capital Trust I, NBT Statutory Trust I and NBT
Statutory Trust II (“the Trusts”), all wholly-owned unconsolidated subsidiaries
of the Company, had the following Trust Preferred Securities outstanding
and the
Company had the following issues of trust preferred debentures, all held
by the
Trusts, outstanding (dollars in thousands):
Description
|
|
Issuance
Date
|
|
Trust
Preferred Securities Outstanding
|
|
Interest
Rate
|
|
Trust
Preferred Debt Owed To Trust
|
|
Final
Maturity date
|
|
CNBF
Capital Trust I
|
|
|
August-99
|
|
$
|
18,000
|
|
|
3-month
LIBOR plus 2.75%
|
|
$
|
18,720
|
|
|
August-29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NBT
Statutory Trust I
|
|
|
November-05
|
|
|
5,000
|
|
|
6.30%
Fixed
|
|
|
5,155
|
|
|
December-35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NBT
Statutory Trust II
|
|
|
February-06
|
|
|
50,000
|
|
|
6.195%
Fixed
|
|
|
51,547
|
|
|
March-36
|
|
The
Company owns all of the common stock of the three business trusts, which
have
issued trust preferred securities in conjunction with the Company and issuing
trust preferred debentures to the Trusts. The terms of the trust preferred
debentures are substantially the same as the terms of the trust preferred
securities. In
February 2005, the Federal Reserve Board issued a final rule that allows
the
continued inclusion of trust preferred securities in the Tier 1 capital of
bank
holding companies. The Board’s final rule limits the aggregate amount of
restricted core capital elements (which includes trust preferred securities,
among other things) that may be included in the Tier 1 capital of most bank
holding companies to 25% of all core capital elements, including restricted
core
capital elements, net of goodwill less any associated deferred tax liability.
Large, internationally active bank holding companies (as defined) are subject
to
a 15% limitation. Amounts of restricted core capital elements in excess of
these
limits generally may be included in Tier 2 capital. The final rule provides
a
five-year transition period, ending March 31, 2009, for application of the
quantitative limits. The Corporation does not expect that the quantitative
limits will preclude it from including the trust preferred securities in
Tier 1
capital. However, the trust preferred securities could be redeemed without
penalty if they were no longer permitted to be included in Tier 1
capital.
NBT
BANCORP INC. and Subsidiaries
Item
2 -- MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
purpose of this discussion and analysis is to provide the reader with a concise
description of the financial condition and results of operations of NBT Bancorp
Inc. (Bancorp) and its wholly owned subsidiaries, NBT Bank, N.A. (NBT), Hathaway
Insurance Agency, Inc. and NBT Financial Services, Inc. (collectively referred
to herein as the Company). This discussion will focus on Results of Operations,
Financial Position, Capital Resources and Asset/Liability Management. Reference
should be made to the Company's consolidated financial statements and footnotes
thereto included in this Form 10-Q as well as to the Company's 2005 Form
10-K
for an understanding of the following discussion and analysis.
FORWARD
LOOKING STATEMENTS
Certain
statements in this filing and future filings by the Company with the Securities
and Exchange Commission, in the Company’s press releases or other public or
shareholder communications, contain forward-looking statements, as defined
in
the Private Securities Litigation Reform Act. These statements may be identified
by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,”
“projects,” 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: (1) competitive pressures among depository and other financial
institutions may increase significantly; (2) revenues may be lower than
expected; (3) changes in the interest rate environment may effect interest
margins; (4) general economic conditions, either nationally or regionally,
may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit; (5)
legislative or regulatory changes, including changes in accounting standards
or
tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products
that
enable such competitors to compete more successfully than the Company; (7)
adverse changes may occur in the securities markets or with respect to
inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; (10) internal control
failures; (11) the Company may fail to realize projected cost savings, revenue
enhancements and the accretive effect of the CNB acquisition on our earnings;
and (12) the Company’s success in managing the risks involved in the
foregoing.
The
Company wishes to caution 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 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.
Unless
required by law, the Company does not undertake, and specifically disclaims
any
obligations to publicly release the result of 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.
Critical
Accounting Policies
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 would need to be increased. For example, if historical loan and
lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions 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 non-performing loans and
potential problem loans has 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 evaluations were significantly lowered,
the
Company’s allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
Management
of the Company considers the accounting policy relating to pension accounting
to
be a critical accounting policy.
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 Moody’s AA and AAA corporate bond yields
and other market interest rates in setting the appropriate discount rate.
In
addition, the Company reviews expected inflationary and merit increases to
compensation in determining the rate of increase in future compensation levels.
While differences in these rate assumptions could alter pension expense,
given
not only past history, it is not expected that such estimates could adversely
impact pension expense.
Overview
The
Company earned net income of $13.6 million ($0.40 diluted earnings per share)
for the three months ended March 31, 2006 compared to net income of $12.8
million ($0.39 diluted earnings per share) for the three months ended March
31,
2005. The quarter to quarter increase in net income from 2006 to 2005 was
primarily the result of increases in net interest income of $1.3 million,
noninterest income of $0.5 million and a decrease in income tax expense of
$0.5
million partially offset by an increase in total noninterest expense of $1.6
million. The increase in net interest income resulted primarily from 9% growth
in average loans during the three months ended March 31, 2006 compared to
the
same period in 2005 (driven by the CNB acquisition and organic loan growth).
Included
in noninterest income for the three months ended March 31, 2006 were $0.9
million in net losses from investment securities sales and a $0.5 million
gain
from a sale of branch in March 2006. Excluding the effect of these transactions
for the three months ended March 31, 2006, noninterest income increased $1.0
million or 9% compared to the same period in 2005. The increase in noninterest
income resulted from increases in service charges on deposit accounts, ATM
and
debit card fees, retirement plan administration fees and other income partially
offset by a decline commission and advisory fees (from the sale of M. Griffith
in March 2005). The
decrease in income tax expense resulted from a $0.5 million settlement from
a
tax refund claim. The increase in total noninterest expense was due primarily
to
increases in salaries and employee benefits, occupancy expense, amortization
of
intangible assets and other operating expenses.
Table
1
depicts several annualized measurements of performance using GAAP net income.
Returns on average assets and equity measure how effectively an entity utilizes
its total resources and capital, respectively. Net interest margin, which
is the
net federal taxable equivalent (FTE) interest income divided by average earning
assets, is a measure of an entity's ability to utilize its earning assets
in
relation to the cost of funding. Interest income for tax-exempt securities
and
loans is adjusted to a taxable equivalent basis using the statutory Federal
income tax rate of 35%.
Table
1
Performance
Measurements
|
|
2006
|
First
Quarter
|
Return
on average assets (ROAA)
|
1.18%
|
Return
on average equity (ROE)
|
15.11%
|
Net
interest margin (Federal taxable equivalent)
|
3.86%
|
|
|
2005
|
|
Return
on average assets (ROAA)
|
1.23%
|
Return
on average equity (ROE)
|
15.74%
|
Net
interest margin (Federal taxable equivalent)
|
4.09%
|
Net
Interest Income
Net
interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest-bearing
liabilities, primarily deposits and borrowings. Net interest income is affected
by the interest rate spread, the difference between the yield on earning
assets
and cost of interest-bearing liabilities, as well as the volumes of such
assets
and liabilities. Net
interest income is one of the major determining factors in a financial
institution’s performance as it is the principal source of earnings.
Table
2
represents an analysis of net interest income on a federal taxable equivalent
basis.
Federal
taxable equivalent (FTE) net interest income increased $1.5 million during
the
three months ended March 31, 2006 compared to the same period of 2005. The
increase in FTE net interest income resulted primarily from 10% growth in
average earning assets. The Company’s interest rate spread declined 38 bp during
the three months ended March 31, 2006 compared to the same period in 2005.
The
yield on earning assets for the period increased 51 bp to 6.31% for the three
months ended March 31, 2006 from 5.80% for the same period in 2005. Meanwhile,
the rate paid on interest-bearing liabilities increased 89 bp, to 2.91% for
the
three months ended March 31, 2006 from 2.02% for the same period in
2005.
Total
FTE
interest income for the three months ended March 31, 2006 increased $11.0
million compared to the same period in 2005, a result of the previously
mentioned increase in average earning assets as well as the increase in yield
on
earning assets of 51 bp. The growth in earning assets during the period was
driven primarily by the CNB acquisition and organic loan growth. Average
securities available for sale increased $101.5 million or 11%, mainly from
the
CNB acquisition, which increased average securities available for sale by
$81.2
million for the three months ended March 31, 2006. Average loans and leases
increased $270.3 million or 9%, driven mainly by loans acquired from the
CNB
transaction of $103.2 million and organic loan growth of $167.1 million or
6%.
The increase in the yield on earning assets can be primarily attributed to
variable rate earning assets that are tied to the Prime lending rate, which
increased 200 bp since March 31, 2005.
During
the same time period, total interest expense increased $9.5 million, primarily
the result of the previously mentioned 200 bp increase in the Federal Funds
rate
since March 31, 2005, which impacts the Company’s short-term borrowing, money
market account and time deposit rates. Additionally, average interest-bearing
liabilities increased $309.7 million for the three months ended March 31,
2006
when compared to the same period in 2005, principally from deposits assumed
from
the CNB transaction and increases in short-term borrowings and trust preferred
debentures. Total average interest-bearing deposits increased $205.3 million
for
the three months ended March 31, 2006 when compared to the same period in
2005.
The rate paid on average interest-bearing deposits increased 82 bp from 1.67%
for the three months ended March 31, 2005 to 2.49% for the same period in
2006.
The increase in interest-bearing deposits resulted primarily from the previously
mentioned deposits assumed from the CNB transaction, which increased average
interest bearing deposits $153.3 million for the three months ended March
31,
2006 as compared to the same period in 2005. Excluding the effects of the
CNB
transaction, the Company experienced a shift in its deposit mix from savings
and
NOW accounts to money market and time deposit accounts, as interest sensitive
customers shifted funds into higher paying interest bearing accounts. Excluding
the CNB transaction, savings and NOW accounts collectively decreased $98.8
million and money market and time deposit accounts collectively increased
$150.7
million (time deposits was the primary driver of the increase). If short-term
rates continue to rise, the Company anticipates that this trend will continue
placing greater pressure on the net interest margin.
Total
borrowings, including trust preferred debentures increased $104.4 million
for
the three months ended March 31, 2006 compared with the same period in 2005,
primarily from loan growth exceeding deposit growth and funding the cash
portion
of the CNB transaction. Average short-term borrowings increased $41.9 million
for the three months ended March 31, 2006, compared with the same period
in
2005, principally from the previously mentioned loan growth that exceeded
deposit growth during this same period. Interest expense from short-term
borrowings increased $2.1 million, driven by the above mentioned increase
in the
average balance as well as an increase in rate from 2.29% for the three months
ended March 31, 2005 to 4.30% for the same period in 2006 (due to increases
in
short-term rates). Trust preferred debentures increased $34.9 million for
the
three months ended March 31, 2006, compared with the same period in 2005,
primarily from the issuance of $51.5 million in trust preferred debentures
in
February 2006 to fund the cash portion of the CNB transaction and to provide
regulatory capital. The rate paid on trust preferred debentures increased
to
6.68% for the three months ended March 31, 2006, compared with 5.60% for
the
same period in 2005, driven primarily by $51.5 million in trust preferred
debentures issued in February 2006 with a fixed rate of 6.195% and $18.7
million
in trust preferred debentures that reprice quarterly at 3-month LIBOR plus
275
bp (3-month LIBOR is up approximately 200 bp).
Another
important performance measurement of net interest income is the net interest
margin. Despite a 38 bp decrease in the Company’s net interest spread, the net
interest margin only declined by 23 bp to 3.86% for the three months ended
March
31, 2006, compared with 4.09% for the same period in 2005. The Company thus
far
has mitigated some of the margin pressure by growing noninterest bearing
demand
deposit accounts. Average demand deposits are up $85.6 million or 17% for
the
three months ended March 31, 2006, compared to the same period in 2005. This
increase was driven mainly by the CNB transaction, which accounted for $25.1
million of the increase and strong organic growth of $60.5 million (12% growth).
Sustaining the growth rate for noninterest bearing demand deposits will be
key
factor in mitigating anticipated margin pressure from rising deposit
costs.
Table
2
Average
Balances and Net Interest Income
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 has
been
adjusted to a taxable-equivalent basis using the statutory Federal income
tax
rate of 35%.
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2005
|
|
(dollars
in thousands)
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rates
|
|
Average
Balance
|
|
Interest
|
|
Yield/
Rates
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
interest bearing accounts
|
|
$
|
7,742
|
|
$
|
78
|
|
|
4.09
|
%
|
$
|
6,578
|
|
$
|
39
|
|
|
2.41
|
%
|
Securities
available for sale (2)
|
|
|
1,054,370
|
|
|
12,437
|
|
|
4.79
|
%
|
|
952,848
|
|
|
10,774
|
|
|
4.59
|
%
|
Securities
held to maturity (2)
|
|
|
97,347
|
|
|
1,464
|
|
|
6.11
|
%
|
|
84,783
|
|
|
1,175
|
|
|
5.63
|
%
|
Investment
in FRB and FHLB Banks
|
|
|
40,549
|
|
|
533
|
|
|
5.34
|
%
|
|
36,535
|
|
|
429
|
|
|
4.77
|
%
|
Loans
(1)
|
|
|
3,147,115
|
|
|
53,016
|
|
|
6.84
|
%
|
|
2,876,853
|
|
|
44,076
|
|
|
6.22
|
%
|
Total
earning assets
|
|
|
4,347,123
|
|
|
67,528
|
|
|
6.31
|
%
|
|
3,957,597
|
|
|
56,493
|
|
|
5.80
|
%
|
Other
assets
|
|
|
319,040
|
|
|
|
|
|
|
|
|
280,030
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,666,163
|
|
|
|
|
|
|
|
|
4,237,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposit accounts
|
|
$
|
451,822
|
|
$
|
3,239
|
|
|
2.91
|
%
|
$
|
416,774
|
|
$
|
1,451
|
|
|
1.41
|
%
|
NOW
deposit accounts
|
|
|
431,503
|
|
|
646
|
|
|
0.61
|
%
|
|
451,453
|
|
|
512
|
|
|
0.46
|
%
|
Savings
deposits
|
|
|
545,754
|
|
|
1,076
|
|
|
0.80
|
%
|
|
572,475
|
|
|
976
|
|
|
0.69
|
%
|
Time
deposits
|
|
|
1,380,617
|
|
|
12,264
|
|
|
3.61
|
%
|
|
1,163,739
|
|
|
7,781
|
|
|
2.71
|
%
|
Total
interest bearing deposits
|
|
|
2,809,696
|
|
|
17,225
|
|
|
2.49
|
%
|
|
2,604,441
|
|
|
10,720
|
|
|
1.67
|
%
|
Short-term
borrowings
|
|
|
371,632
|
|
|
3,937
|
|
|
4.30
|
%
|
|
329,726
|
|
|
1,861
|
|
|
2.29
|
%
|
Trust
preferred debentures
|
|
|
53,658
|
|
|
883
|
|
|
6.68
|
%
|
|
18,720
|
|
|
258
|
|
|
5.60
|
%
|
Long-term
debt
|
|
|
422,097
|
|
|
4,142
|
|
|
3.98
|
%
|
|
394,513
|
|
|
3,808
|
|
|
3.92
|
%
|
Total
interest bearing liabilities
|
|
|
3,657,083
|
|
|
26,187
|
|
|
2.91
|
%
|
|
3,347,400
|
|
|
16,647
|
|
|
2.02
|
%
|
Demand
deposits
|
|
|
591,087
|
|
|
|
|
|
|
|
|
505,457
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
52,978
|
|
|
|
|
|
|
|
|
54,823
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
365,015
|
|
|
|
|
|
|
|
|
329,947
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
|
4,666,163
|
|
|
|
|
|
|
|
|
4,237,627
|
|
|
|
|
|
|
|
Net
interest income (FTE basis)
|
|
|
|
|
|
41,341
|
|
|
|
|
|
|
|
|
39,846
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
3.40
|
%
|
|
|
|
|
|
|
|
3.78
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
4.09
|
%
|
Taxable
equivalent adjustment
|
|
|
|
|
|
1,222
|
|
|
|
|
|
|
|
|
1,032
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
40,119
|
|
|
|
|
|
|
|
$
|
38,814
|
|
|
|
|
(1)
|
For
purposes of these computations, nonaccrual loans are included in
the
average loan balances outstanding.
|
(2)
|
Securities
are shown at average amortized
cost.
|
The
following table presents changes in interest income and interest expense
attributable to changes in volume (change in average balance multiplied by
prior
year rate), changes in rate (change in rate multiplied by prior year volume),
and the net change in net interest income. The net change attributable to
the
combined impact of volume and rate has been allocated to each in proportion
to
the absolute dollar amounts of change.
Table
3
|
|
Analysis
of Changes in Taxable Equivalent Net Interest
Income
|
|
Three
months ended March 31,
|
|
|
|
Increase
(Decrease)
2006
over 2005
|
|
(in
thousands)
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
Short-term
interest bearing accounts
|
|
$
|
8
|
|
$
|
31
|
|
$
|
39
|
|
Securities
available for sale
|
|
|
1,183
|
|
|
480
|
|
|
1,663
|
|
Securities
held to maturity
|
|
|
184
|
|
|
105
|
|
|
289
|
|
Investment
in FRB and FHLB Banks
|
|
|
50
|
|
|
54
|
|
|
104
|
|
Loans
|
|
|
434
|
|
|
4,599
|
|
|
5,033
|
|
Total
FTE interest income
|
|
|
5,819
|
|
|
5,216
|
|
|
11,035
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposit accounts
|
|
|
132
|
|
|
1,656
|
|
|
1,788
|
|
NOW
deposit accounts
|
|
|
(24
|
)
|
|
158
|
|
|
134
|
|
Savings
deposits
|
|
|
(47
|
)
|
|
147
|
|
|
100
|
|
Time
deposits
|
|
|
1,623
|
|
|
2,860
|
|
|
4,483
|
|
Short-term
borrowings
|
|
|
263
|
|
|
1,813
|
|
|
2,076
|
|
Trust
preferred debentures
|
|
|
566
|
|
|
59
|
|
|
625
|
|
Long-term
debt
|
|
|
270
|
|
|
64
|
|
|
334
|
|
Total
interest expense
|
|
|
1,658
|
|
|
7,882
|
|
|
9,540
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in FTE net interest income
|
|
$
|
4,161
|
|
$
|
(2,666
|
)
|
$
|
1,495
|
|
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:
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
(in
thousands)
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$
|
4,219
|
|
$
|
3,929
|
|
ATM
and debit card fees
|
|
|
1,645
|
|
|
1,400
|
|
Broker/dealer
and insurance fees
|
|
|
908
|
|
|
1,352
|
|
Trust
|
|
|
1,358
|
|
|
1,252
|
|
Net
securities losses
|
|
|
(934
|
)
|
|
(4
|
)
|
Retirement
plan administration fees
|
|
|
1,231
|
|
|
863
|
|
Bank
owned life insurance income
|
|
|
381
|
|
|
333
|
|
Other
|
|
|
2,416
|
|
|
1,586
|
|
Total
|
|
$
|
11,224
|
|
$
|
10,711
|
|
Noninterest
income for the three months ended March 31, 2006, totaled $11.2 million,
up $0.5
million from the $10.7 million reported in the same period of 2005. Included
in
noninterest income for the three months ended March 31, 2006 were $0.9 million
in net losses from investment securities sales and a $0.5 million gain from
a
sale of branch in March 2006. Excluding the effect of these transactions
for the
three months ended March 31, 2006, noninterest income increased $1.0 million
or
9% compared with the same period in 2005. Retirement plan administration
fees
for the three months ended March 31, 2006, increased $0.4 million compared
with
the same period in 2005. This increase resulted from a full quarter of revenue
for the three months ended March 31, 2006 compared with a partial quarter
of
revenue in the same period in 2005 when we acquired EPIC Advisors, Inc. in
January 2005. Excluding the $0.5 million gain on sale of a branch mentioned
above, other noninterest income increased $0.4 million compared with the
same
period in 2005, principally from increases in retail and commercial banking
fees. Fees from service charges on deposit accounts and ATM and debit cards
collectively increased $0.5 million from solid growth in demand deposit
accounts. Broker/dealer and insurance revenue for the three months ended
March
31, 2006, decreased $0.4 million, primarily from the sale of the Company’s
broker/dealer subsidiary M. Griffith Inc., in March 2005.
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 periods indicated:
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
(in
thousands)
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$
|
15,748
|
|
$
|
15,451
|
|
Occupancy
|
|
|
2,988
|
|
|
2,788
|
|
Equipment
|
|
|
2,156
|
|
|
2,096
|
|
Data
processing and communications
|
|
|
2,702
|
|
|
2,658
|
|
Professional
fees and outside services
|
|
|
1,832
|
|
|
1,675
|
|
Office
supplies and postage
|
|
|
1,181
|
|
|
1,150
|
|
Amortization
of intangible assets
|
|
|
323
|
|
|
118
|
|
Loan
collection and other real estate owned
|
|
|
211
|
|
|
401
|
|
Other
|
|
|
3,331
|
|
|
2,544
|
|
Total
noninterest expense
|
|
$
|
30,472
|
|
$
|
28,881
|
|
Total
noninterest expense for the three months ended March 31, 2006, increased
$1.6
million compared with the same period for 2005. Salaries and employee benefits
for the three months ended March 31, 2006, increased $0.3 million over the
same
period in 2005, primarily from the previously mentioned stock option expense
of
$0.7 million that reflects the adoption of FAS 123R. Other operating expense
increased $0.8 million for the three months ended March 31, 2006, compared
with
the same period in 2005, primarily from merger related expenses from the
CNB
transaction. Occupancy expense increased $0.2 million, principally from
increasing energy costs and occupancy costs from the CNB branches. Amortization
of intangible assets increased $0.2 million from core deposit intangible
amortization associated with the CNB transaction. Loan collection and other
real
estate owned (OREO) decreased $0.2 million, from low delinquency rates and
expense recoveries associated with sold OREO.
Income
Taxes
Income
tax expense for the quarter ended March 31, 2006, was $5.6 million, down
$0.5
million from the $6.1 million recorded during the same period in 2005. The
effective rate for the quarter ended March 31, 2006, was 29.0%, down from
32.1%
for the same period in 2005. The decrease in tax expense and the effective
tax
rate for the quarter ended March 31, 2006, was due primarily to a settlement
for
a tax refund claim of $0.5 million. The Company anticipates that the effective
tax rate will be approximately 32% for the remainder of the year.
ANALYSIS
OF FINANCIAL CONDITION
Loans
and Leases
A
summary
of loans and leases, net of deferred fees and origination costs, by category
for
the periods indicated follows:
|
|
March
31,
2006
|
|
December
31,
2005
|
|
March
31,
2005
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Residential
real estate mortgages
|
|
$
|
747,912
|
|
$
|
701,734
|
|
$
|
718,142
|
|
Commercial
and commercial real estate mortgages
|
|
|
1,126,838
|
|
|
1,032,977
|
|
|
1,025,937
|
|
Real
estate construction and development
|
|
|
176,854
|
|
|
163,863
|
|
|
158,169
|
|
Agricultural
and agricultural real estate mortgages
|
|
|
114,008
|
|
|
114,043
|
|
|
108,377
|
|
Consumer
|
|
|
523,381
|
|
|
463,955
|
|
|
418,186
|
|
Home
equity
|
|
|
477,173
|
|
|
463,848
|
|
|
390,163
|
|
Lease
financing
|
|
|
81,675
|
|
|
82,237
|
|
|
79,213
|
|
Total
loans and leases
|
|
$
|
3,247,841
|
|
$
|
3,022,657
|
|
$
|
2,898,187
|
|
Total
loans and leases were $3.2 billion, or 66.5% of assets, at March 31, 2006,
and
$3.0 billion at December 31, 2005, and $2.9 billion, or 68.1%, at March 31,
2005. Total loans and leases increased $349.7 million or 12% at March 31,
2006
over March 31, 2005. The year over year increase in loans and leases was
driven
mainly by the CNB transaction and organic loan growth. Home equity loans
increased $87.0 million or 22%, primarily from the CNB transaction of $12.1
million and $74.9 million in organic growth from market expansion and continued
success in marketing this product throughout the Company’s branch network.
Consumer loans increased $105.2 million or 25%, mainly from organic loan
growth
of $47.4 million driven by increases in indirect automobile loans and from
the
CNB transaction of $57.8 million. Commercial loans and commercial mortgages
increased $100.9 million or 10%, driven by the CNB transaction of $61.9 million
and organic growth of $39.0 million as the Company continues to face strong
competition for these loan types in its markets. Residential real estate
mortgages increased $29.8 million when compared to March 31, 2006. The CNB
transaction provided $69.8 million in growth offset by a decline in the core
portfolio of $40.0 million. The decrease in the core residential mortgage
portfolio resulted mainly from mortgage repayments exceeding originations
retained for the loan portfolio as the Company began selling 20-year and
30-year
residential mortgages from its pipeline in the second quarter 2005. Furthermore,
long-term rates have modestly increased, leading to a softening in demand
for
this loan product.
Securities
The
Company classifies its securities at date of purchase as 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 currently in income. Transfers of
securities between categories are recorded at fair value at the date of
transfer. A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other-than-temporary is charged
to
earnings resulting in the establishment of a new cost basis for the security.
Securities with an other-than-temporary impairment are generally placed on
nonaccrual status.
Average
total earning securities increased $114.1 million for the three months ended
March 31, 2006 when compared to the same period in 2005. The average balance
of
securities available for sale increased $101.5 million for the three months
ended March 31, 2006 when compared to the same period in 2005, mainly from
the
CNB transaction. The average balance of securities held to maturity increased
$12.6 million for the three months ended March 31, 2006, compared to the
same
period in 2005. The average total securities portfolio represents 26% of
total
average earning assets for the three months ended March 31, 2006, up from
25%
for the same period in 2005.
The
following details the composition of securities available for sale, securities
held to maturity and regulatory investments for the periods
indicated:
|
|
At
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
With
maturities 15 years or less
|
|
|
33
|
%
|
|
44
|
%
|
With
maturities greater than 15 years
|
|
|
4
|
%
|
|
7
|
%
|
Collateral
mortgage obligations
|
|
|
17
|
%
|
|
14
|
%
|
Municipal
securities
|
|
|
16
|
%
|
|
15
|
%
|
US
agency notes
|
|
|
26
|
%
|
|
16
|
%
|
Other
|
|
|
4
|
%
|
|
4
|
%
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
Allowance
for Loan and Lease Losses, Provision for Loan and Lease Losses, and
Nonperforming Assets
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 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 judgements 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 thorough current
assessment of a number of factors, which could affect collectibility. These
factors include: past loss experience; the size, trend, composition, and
nature
of the loans and leases; changes in lending policies and procedures, including
underwriting standards and collection, charge-off and recovery practices;
trends
experienced in nonperforming and delinquent loans and leases; 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 judgment about information available to them at the time of
their
examination, which may not be currently available to management.
After
a
thorough consideration and validation of the factors discussed above, 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. The allowance for loan and lease losses
to
outstanding loans and leases at March 31, 2006 was 1.53% compared with 1.57%
at
December 31, 2005, and March 31, 2005. Management considers the allowance
for
loan losses to be adequate based on evaluation and analysis of the loan
portfolio.
Table
4
reflects changes to the allowance for loan and lease losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net charge-offs. Charge-offs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan and lease losses.
Table
4
Allowance
for Loan Losses
|
|
|
|
|
|
Three
months ended March 31,
|
|
(dollars
in thousands)
|
|
2006
|
|
|
|
2005
|
|
|
|
Balance,
beginning of period
|
|
$
|
47,455
|
|
|
|
|
$
|
44,932
|
|
|
|
|
Recoveries
|
|
|
1,175
|
|
|
|
|
|
1,079
|
|
|
|
|
Charge-offs
|
|
|
(2,950
|
)
|
|
|
|
|
(2,418
|
)
|
|
|
|
Net
charge-offs
|
|
|
(1,775
|
)
|
|
|
|
|
(1,339
|
)
|
|
|
|
Allowance
related to purchase acquisition
|
|
|
2,410
|
|
|
|
|
|
-
|
|
|
|
|
Provision
for loan losses
|
|
|
1,728
|
|
|
|
|
|
1,796
|
|
|
|
|
Balance,
end of period
|
|
$
|
49,818
|
|
|
|
|
$
|
45,389
|
|
|
|
|
Composition
of Net Charge-Offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and agricultural
|
|
$
|
(858
|
)
|
|
48
|
%
|
$
|
(105
|
)
|
|
8
|
%
|
Real
estate mortgage
|
|
|
(71
|
)
|
|
4
|
%
|
|
(326
|
)
|
|
24
|
%
|
Consumer
|
|
|
(846
|
)
|
|
48
|
%
|
|
(908
|
)
|
|
68
|
%
|
Net
charge-offs
|
|
$
|
(1,775
|
)
|
|
100
|
%
|
$
|
(1,339
|
)
|
|
100
|
%
|
Annualized
net charge-offs to average loans
|
|
|
0.23
|
%
|
|
|
|
|
0.19
|
%
|
|
|
|
Nonperforming
assets consist of nonaccrual loans, loans 90 days or more past due, restructured
loans, other real estate owned (OREO), and nonperforming securities. Loans
are
generally placed on nonaccrual when principal or interest payments become
ninety
days past due, unless the loan is well secured and in the process of collection.
Loans may also be placed on nonaccrual when circumstances indicate that the
borrower may be unable to meet the contractual principal or interest payments.
OREO represents property acquired through foreclosure and is valued at the
lower
of the carrying amount or fair market value, less any estimated disposal
costs.
Nonperforming securities include securities which management believes are
other-than-temporarily impaired, carried at their estimated fair value and
are
not accruing interest.
Total
nonperforming assets were $13.3 million at March 31, 2006, and $14.6 million
at
December 31, 2005, and $17.8 million at March 31, 2005. Nonaccrual loans
decreased from $14.3 million at December 31, 2005 to $13.3 million at March
31,
2006, primarily from decreases in nonperforming consumer and mortgage loans.
OREO has remained at relatively low levels throughout 2006 and 2005, as the
Company’s nonperforming loans have remained relatively stable and credit quality
remains solid.
In
addition to the nonperforming loans discussed above, the Company has also
identified approximately $60.2 million in potential problem loans at March
31,
2006 as compared to $69.5 million at December 31, 2005. The decrease in
potential problem loans resulted mainly from repayments of two large potential
problem loans during the three months end March 31, 2006. 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
serious doubts 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 March 31, 2006, potential
problem loans primarily consisted of commercial real estate and commercial
and
agricultural loans. 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 non-accrual, become
restructured, or require increased allowance coverage and provision for loan
losses.
Net
charge-offs totaled $1.8 million for the three months ended March 31, 2006,
up
$0.5 million from the $1.3 million charged-off during the same period in
2005.
The increase in net charge-offs resulted primarily from an increase in
charge-offs for commercial and agricultural loans during the three months
ended
March 31, 2006. The provision for loan and lease losses totaled $1.7 million
for
the three months ended March 31, 2006, compared with the $1.8 million provided
during the same period in 2005. The slight decrease for the provision for
loan
and lease losses for the three months ended March 31, 2006, compared with
the
same period in 2005 resulted primarily from continued improvement in credit
quality (decreases in nonperforming loans and potential problem
loans).
Table
5
Nonperforming
Assets
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
March
31,
2006
|
|
December
31,
2005
|
|
March
31,
2005
|
|
Commercial
and agricultural
|
|
$
|
9,188
|
|
$
|
9,373
|
|
$
|
11,523
|
|
Real
estate mortgage
|
|
|
1,816
|
|
|
2,009
|
|
|
3,202
|
|
Consumer
|
|
|
1,612
|
|
|
2,037
|
|
|
1,887
|
|
Total
nonaccrual loans
|
|
|
12,616
|
|
|
13,419
|
|
|
16,612
|
|
Loans
90 days or more past due and still accruing:
|
|
|
|
|
|
|
|
|
|
|
Commercial
and agricultural
|
|
|
-
|
|
|
-
|
|
|
64
|
|
Real
estate mortgage
|
|
|
55
|
|
|
465
|
|
|
130
|
|
Consumer
|
|
|
665
|
|
|
413
|
|
|
566
|
|
Total
loans 90 days or more past due and still accruing
|
|
|
720
|
|
|
878
|
|
|
760
|
|
Total
nonperforming loans
|
|
|
13,336
|
|
|
14,297
|
|
|
17,372
|
|
Other
real estate owned (OREO)
|
|
|
279
|
|
|
265
|
|
|
438
|
|
Total
nonperforming assets
|
|
$
|
13,615
|
|
$
|
14,562
|
|
$
|
17,810
|
|
Total
nonperforming loans to loans and leases
|
|
|
0.41
|
%
|
|
0.47
|
%
|
|
0.60
|
%
|
Total
nonperforming assets to assets
|
|
|
0.28
|
%
|
|
0.28
|
%
|
|
0.42
|
%
|
Total
allowance for loan and lease losses to nonperforming loans
|
|
|
373.56
|
%
|
|
331.92
|
%
|
|
261.28
|
%
|
Deposits
Total
deposits were $3.6 billion at March 31, 2006, up $459.9 million from year-end
2005, and an increase of $451.1 million, or 14%, from the same period in
the
prior year. The increase in deposits compared with March 31, 2005, was driven
primarily by the CNB transaction, which provided $335.0 million in deposits
and
organic deposit growth of $116.0 million. Total average deposits for the
three
months ended March 31, 2006 increased $290.9 million, or 9%, from the same
period in 2005. The Company experienced an increase in time deposits, as
average
time deposits increased $216.9 million or 19%, for the three months ended
March
31, 2006 compared to the same period in 2005, primarily from the CNB
transaction, which provided $72.1 million in time deposits as well as increases
in municipal, jumbo and retail time deposits, as the Company experienced
a shift
in its deposit mix from interest sensitive customers into higher paying time
accounts. Meanwhile, excluding the effect of the CNB transaction, which provided
$52.1 million in average savings and NOW accounts, these deposit categories
experienced a decrease of $98.8 million, from the previously mentioned shift
in
deposit mix from lower cost deposit accounts to higher cost deposit accounts
with more attractive interest rates (which have increased due to the rising
rate
environment). Average money market accounts increased $35.0 million, mainly
from
the CNB transaction. Average demand deposit accounts increased $85.6 million,
due in part to solid organic growth of $60.5 million and $25.1 million from
the
CNB transaction.
Borrowed
Funds
The
Company's borrowed funds consist of short-term borrowings and long-term debt.
Short-term borrowings totaled $329.7 million at March 31, 2006 compared to
$445.0 million and $307.5 million at December 31, and March 31, 2005,
respectively. Long-term debt was $424.9 million at March 31, 2006, and was
$414.3 and 394.5 million at December 31, and March 31, 2005, respectively.
For
more information about the Company’s borrowing capacity and liquidity position,
see the section with the title caption of “Liquidity Risk” on page 33 in this
discussion.
Capital
Resources
Stockholders'
equity of $385.8 million represents 7.9% of total assets at March 31, 2006,
compared with $319.2 million, or 7.5% in the comparable period of the prior
year, and $333.9 million, or 7.5% at December 31, 2005. The increase in
stockholders’ equity resulted mainly from the issuance of 2,058,661 shares of
Company common stock in connection with the CNB transaction. Under previously
announced stock repurchase plans, the Company acquired 178,404 shares of
its
common stock at an average price of $22.73 per share, totaling $4.1 million
for
the three months ended March 31, 2006. At March 31, 2006, there were 1,324,747
shares available for repurchase under previously announced plans. The Company
does not have a target dividend pay out ratio, rather the Board of Directors
considers the Company's earnings position and earnings potential when making
dividend decisions.
As
the
capital ratios in Table 6 indicate, the Company remains “well capitalized”.
Capital measurements are significantly in excess of regulatory minimum
guidelines and meet the requirements to be considered well capitalized for
all
periods presented. Tier 1 leverage, Tier 1 capital and Risk-based capital
ratios
have regulatory minimum guidelines of 3%, 4% and 8% respectively, with
requirements to be considered well capitalized of 5%, 6% and 10%,
respectively.
Table
6
|
|
|
|
Capital
Measurements
|
|
|
|
2006
|
|
March
31
|
|
Tier
1 leverage ratio
|
|
|
7.77
|
%
|
Tier
1 capital ratio
|
|
|
10.30
|
%
|
Total
risk-based capital ratio
|
|
|
11.56
|
%
|
Cash
dividends as a percentage of net income
|
|
|
48.20
|
%
|
Per
common share:
|
|
|
|
|
Book
value
|
|
$
|
11.22
|
|
Tangible
book value
|
|
$
|
7.84
|
|
2005
|
|
|
|
|
Tier
1 leverage ratio
|
|
|
6.89
|
%
|
Tier
1 capital ratio
|
|
|
9.41
|
%
|
Total
risk-based capital ratio
|
|
|
10.67
|
%
|
Cash
dividends as a percentage of net income
|
|
|
48.57
|
%
|
Per
common share:
|
|
|
|
|
Book
value
|
|
$
|
9.85
|
|
Tangible
book value
|
|
$
|
8.25
|
|
The
accompanying Table 7 presents the high, low and closing sales price for the
common stock as reported on the NASDAQ Stock Market, and cash dividends declared
per share of common stock. The Company's price to book value ratio was 2.07
at
March 31, 2006 and 2.28 in the comparable period of the prior year. The
Company's price was 14.2 times trailing twelve months earnings at March 31,
2006, compared to 15.3 times for the same period last year.
Table
7
Quarterly
Common Stock and Dividend Information
|
|
Quarter
Ending
|
|
High
|
|
Low
|
|
Close
|
|
Cash
Dividends
Declared
|
|
2005
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
25.66
|
|
$
|
21.48
|
|
$
|
22.41
|
|
$
|
0.190
|
|
June
30
|
|
|
24.15
|
|
|
20.10
|
|
|
23.64
|
|
|
0.190
|
|
September
30
|
|
|
25.50
|
|
|
22.79
|
|
|
23.58
|
|
|
0.190
|
|
December
31
|
|
|
23.79
|
|
|
20.75
|
|
|
21.59
|
|
|
0.190
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
23.90
|
|
$
|
21.02
|
|
$
|
23.25
|
|
$
|
0.190
|
|
Liquidity
and Interest Rate Sensitivity Management
Market
Risk
Interest
rate risk is among 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. 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 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 with static balance sheets; (1) a gradual increase
of
200 bp, (2) and a gradual decrease of 200 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 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 at a faster rate than interest bearing
liabilities. The inability to effectively lower deposit rates will likely
reduce
or eliminate the benefit of lower interest rates. In the rising rate scenarios,
net interest income is projected to experience a decline from the flat rate
scenario. Net interest income is projected to remain at lower levels than
in a
flat rate scenario through the simulation period primarily due to a lag in
assets repricing while funding costs increase. The potential impact on earnings
is dependent on the ability to lag deposit repricing. If short-term rates
continue to increase, the Company expects competitive pressures will likely
lead
to core deposit pricing increases, which will likely continue compression
of the
net interest margin.
Net
interest income for the next twelve months in the + 200/- 200 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 March 31, 2006 balance sheet position:
Table
8
Interest
Rate Sensitivity Analysis
|
|
Change
in interest rates
(in
basis points)
|
Percent
change in
net
interest income
|
+200
|
(0.42%)
|
-200
|
(2.86%)
|
The
Company has taken several measures to mitigate net interest margin compression.
The Company began originating 20-year and 30-year residential real estate
mortgages with the intent to sell at the end of the second quarter of 2005.
Over
time, the Company has shortened the average life of its investment securities
portfolio by limiting purchases of mortgage-backed securities and redirecting
proceeds into short-duration CMOs and US Agency notes and bonds. Lastly,
the
Company will continue to focus on growing noninterest bearing demand deposits
and prudently managing deposit costs.
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 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 the 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 March 31, 2006, the Company’s Basic
Surplus measurement was 7.7% of total assets or $374 million, which was above
the Company’s minimum of 5% or $244 million 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 March 31, 2006, the
Company Basic Surplus improved compared to December 31, 2005, Basic Surplus
of
5.2%, driven primarily by the CNB transaction.
The
Company’s primary source of funds is from its subsidiary, NBT Bank. Certain
restrictions exist regarding the ability of the Company’s 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 March 31, 2006, approximately $52.9 million of the total
stockholders’ equity of NBT Bank was available for payment of dividends to the
Company without approval by the OCC. The Company expects that the issuance
of
NBT Statutory Trust II will result in increased dividend payments of
approximately $0.8 million per quarter from NBT Bank to the Company to fund
interest obligations associated with Trust Preferred Debentures of NBT Statutory
Trust II. NBT Bank’s ability to pay dividends also is subject to the Bank
being in compliance with regulatory capital requirements. NBT 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.
|
Quantitative
and Qualitative Disclosure About Market
Risk
|
Information
called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity
Management section of the Management Discussion and Analysis.
The
Company's management, including the Company's Chief Executive Officer and
Chief
Financial Officer evaluated the effectiveness of the design and operation
of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and
15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of
March
31, 2006. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were effective in timely alerting them
to any
material information relating to the Company and its subsidiaries required
to be
included in the Company's periodic SEC filings.
There
were no changes made in the Company's internal controls over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect the Company's
internal controls over financial reporting.
PART
II. OTHER INFORMATION
Item
1 -- Legal Proceedings
There
are
no material legal proceedings, other than ordinary routine litigation incidental
to business to which the Company is a party or of which any of its property
is
subject.
Item
1A. ----- Risk Factors
Management
of the Company does not believe there have been any material changes in the
risk
factors that were disclosed in the Form 10-K filed with the Securities and
Exchange Commission on March 15, 2006.
Item
2 -- Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securitries
(c)
|
The
table below sets forth the information with respect to purchases
made by
the Company (as defined in Rule 10b-18(a)(3) under the Securities
Exchange
Act of 1934), of our common stock during the quarter ended March
31,
2006:
|
Period
|
Total
Number of
Shares
Purchased
|
Average
Price
Paid
Per Share
|
Total
Number of
Shares
Purchased
As
Part of
Publicly
Announced
Plans
|
Maximum
Number
of Shares
That
May Yet Be
Purchased
Under
The
Plans (1)
|
1/1/06
- 1/31/06
|
-
|
-
|
-
|
1,503,151
|
2/1/06
- 2/28/06
|
31,401
|
22.51
|
31,401
|
1,471,750
|
3/1/06
- 3/31/06
|
147,003
|
22.78
|
147,003
|
1,324,747
|
Total
|
178,404
|
$22.73
|
178,404
|
1,324,747
|
(1)
|
On
January 23, 2006, NBT announced that the NBT Board of Directors
approved a
new repurchase program whereby NBT is authorized to repurchase
up to an
additional 1,000,000 shares (approximately 3%) of its outstanding
common
stock from time to time as market conditions warrant in open market
and
privately negotiated transactions. At that time, there were 503,151
shares
remaining under a previous authorization that was combined with
the new
repurchase program.
|
Item
3 -- Defaults Upon Senior Securities
None
Item
4
-- Submission of Matters to a Vote of Security
Holders
None
On
April
24, 2006, NBT Bancorp Inc. announced the declaration of a regular quarterly
cash
dividend of $0.19 per share. The cash dividend will be paid on June 15, 2006
to
stockholders of record as of June 1, 2006.
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, 2001, filed on March 29, 2002 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,
2001, filed on March 29, 2002 and incorporated herein by
reference).
|
3.3
|
Rights
Agreement, dated as of November 15, 2004, between NBT Bancorp
Inc. and
Registrar and Transfer Company, as Rights Agent (filed as
Exhibit 4.1 to
Registrant's Form 8-K, file number 0-14703, filed on November
18, 2004,
and incorporated by reference
herein).
|
3.4
|
Certificate
of Designation of the Series A Junior Participating Preferred
Stock (filed
as Exhibit A to Exhibit 4.1 of the Registration’s Form 8-K, file Number
0-14703, filed on November 18, 2004, and incorporated herein
by
reference).
|
4.1
|
Specimen
common stock certificate for NBT’s common stock (filed as exhibit 4.1 to
the Registrant’s Amendment No. 1 to Registration Statement on Form S-4
filed on December 27, 2005 and incorporated herein by
reference).
|
10.1
|
Form
of Employment Agreement between NBT Bancorp Inc. and Martin
A. Deitrich as
amended and restated January 1,
2006.
|
10.2
|
First
Amendment to Supplemental Executive Retirement Agreement between
NBT
Bancorp Inc. and Martin A. Dietrich effective January 1,
2006.
|
10.3 |
Amendment
dated January 20, 2006 to Change in Control Agreement with
Ronald M.
Bentley made as of May 1,
2003.
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Written
Statement of the Chief Executive Officer Pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
Written
Statement of the Chief Financial Officer Pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report on FORM 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized, this 7th day of November
2005.
|
|
NBT
BANCORP INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
MICHAEL J. CHEWENS
|
|
|
|
|
Michael
J. Chewens, CPA
|
|
|
|
|
Senior
Executive Vice President
|
|
|
|
|
Chief
Financial Officer and Corporate Secretary
|
|
|
|
Form
of Employment Agreement between NBT Bancorp Inc. and Martin A.
Dietrich as
amended and restated January 1,
2006.
|
|
First
Amendment to Supplemental Executive Retirement Agreement between
NBT
Bancorp Inc. and Martin A. Dietrich effective January 1,
2006.
|
|
Amendment
dated January 20, 2006 to Change in Control Agreement with Ronald
M.
Bentley made as of May 1, 2003.
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Written
Statement of the Chief Executive Officer Pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002.
|
|
Written
Statement of the Chief Financial Officer Pursuant to Section 906
of the
Sarbanes-Oxley Act of 2002.
|