NBT Bancorp 10-K 12-31-2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE
FISCAL YEAR ENDED DECEMBER 31, 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
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16-1268674
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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52
SOUTH
BROAD STREET
NORWICH,
NEW YORK 13815
(Address
of principal executive office) (Zip Code)
(607)
337-2265 (Registrant’s telephone number, including area code)
Securities
registered pursuant to section 12(b) of the Act: None
Securities
registered pursuant to section 12(g) of the Act: Common Stock ($0. 01 par value
per share)
Stock
Purchase Rights Pursuant to Stockholders Rights Plan
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x
No
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 (d) of the Act. Yes o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K (Section 299.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K o.
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.
Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Indicate
by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
o
Yes
x
No
Based
upon the closing price of the registrant’s common stock as of June 30, 2006, the
aggregate market value of the voting stock, common stock, par value, $0.01
per
share, held by non-affiliates of the registrant is $755,900,535.
The
number of shares of Common Stock outstanding as of February 15, 2007, was
34,344,022.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement for it’s Annual Meeting of
Stockholders to be held on May 1, 2007 are incorporated by reference into Part
III, Items 10, 11, 12, 13 and 14 of this Form 10-K.
FORM
10-K - Year
Ended December 31, 2006
TABLE
OF CONTENTS
PART
I
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ITEM
1
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Description
of Business
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Average
Balance Sheets
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Net
Interest Income Analysis -Taxable Equivalent Basis
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Net
Interest Income and Volume/Rate Variance - Taxable Equivalent
Basis
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Securities
Portfolio
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Debt
Securities - Maturity Schedule
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Loans
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Maturities
and Sensitivities of Loans to Changes in Interest Rates
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Nonperforming
Assets
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Allowance
for Loan Losses
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Maturity
Distribution of Time Deposits
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Return
on Equity and Assets
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Short-Term
Borrowings
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ITEM
1A
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ITEM
1B
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ITEM
2
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ITEM
3
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ITEM
4
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PART
II
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ITEM
5
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ITEM
6
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ITEM
7
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ITEM
7A
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ITEM
8
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Consolidated
Balance Sheets at December 31, 2006 and 2005
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Consolidated
Statements of Income for each of the years in the three-year period
ended
December 31, 2006
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Consolidated
Statements of Changes in Stockholders’ Equity for each of the years in the
three-year period ended December 31, 2006
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Consolidated
Statements of Cash Flows for each of the years in the three- year
period
ended December 31, 2006
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Consolidated
Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2006
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Notes
to Consolidated Financial Statements
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Independent
Auditors’ Report
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ITEM
9
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ITEM
9A
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ITEM
9B
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PART
III
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ITEM
10
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ITEM
11
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ITEM
12
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ITEM
13
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ITEM
14
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PART
IV
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ITEM
15
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(a) (1) Financial
Statements (See Item 8 for Reference).
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(2) Financial
Statement Schedules normally required on Form 10-K are omitted since
they
are not applicable.
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(3) Exhibits.
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(b) Refer
to item 15(a)(3)above.
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(c) Refer
to item 15(a)(2) above.
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*
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Information
called for by Part III (Items 10 through 14) is incorporated by reference
to the Registrant’s Proxy Statement for the 2007 Annual Meeting of
Stockholders.
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PART
I
NBT
Bancorp Inc. (the “Registrant” or the “Company”) is a registered financial
holding company incorporated in the state of Delaware in 1986, with its
principal headquarters located in Norwich, New York. The Company, on a
consolidated basis, at December 31, 2006 had assets of $5.1 billion and
stockholders’ equity of $403 million. The Registrant is the parent holding
company of NBT Bank, N.A. (the Bank), NBT Financial Services, Inc. (NBT
Financial), Hathaway Agency, Inc., CNBF Capital Trust I, NBT Statutory Trust
I
and NBT Statutory Trust II (see Note 12 to the Notes to Consolidated Financial
Statements). Through the Bank and NBT Financial, the Company is focused on
community banking operations. The Trusts were organized to raise additional
regulatory capital and to provide funding for certain acquisitions. The
Registrant’s primary business consists of providing commercial banking and
financial services to its customers in its market area. The principal assets
of
the Registrant are all of the outstanding shares of common stock of its direct
subsidiaries, and its principal sources of revenue are the management fees
and
dividends it receives from the Bank 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 geographic operating divisions, NBT Bank
and
Pennstar Bank.
The
NBT
Bank division has 80 divisional offices and 109 automated teller machines
(ATMs), located primarily in central and upstate New York. At December 31,
2006,
NBT Bank had total loans and leases of $2.7 billion and total deposits of $3.0
billion.
The
Pennstar Bank division has 38 divisional offices and 55 ATMs, located primarily
in northeastern Pennsylvania. At December 31, 2006, Pennstar Bank had total
loans and leases of $729.1 million and total deposits of $852.0
million.
The
Bank
has six operating subsidiaries, NBT Capital Corp., Pennstar Services Company,
Broad Street Property Associates, Inc., NBT Services, Inc., Pennstar Realty
Trust, and CNB Realty Trust. NBT Capital Corp., formed in 1998, is a venture
capital corporation formed to assist young businesses to develop and grow in
the
markets we serve. Broad Street Property Associates, Inc. formed in 2004, is
a
property management company. NBT Services, Inc. formed in 2004, is the holding
company of and has an 80% ownership interest in NBT Settlement Services, LLC.
NBT Settlement Services, formed in 2004, provides title insurance products
to
individuals and corporations. Pennstar Realty Trust, formed in 2000, and CNB
Realty Trust formed in 1998, are real estate investment trusts. Pennstar
Services Company, formed in 2002, provides administrative and support services
to the Pennstar Bank division of the Bank.
NBT
Financial, formed in 1999, is the parent company of EPIC Advisors, Inc.
(“EPIC”). EPIC, acquired in January 2005, is a full service 401(k) plan
recordkeeping firm. During March 2005, NBT Financial sold M. Griffith, Inc.,
a
registered securities broker-dealer offering financial and retirement planning
as well as life, accident and health insurance.
CNBF
Capital Trust I (“Trust I”), a Delaware statutory business trust formed in 1999
and NBT Statutory Trust I, a Delaware statutory business trust formed in 2005,
for the purpose of issuing trust preferred securities and lending the proceeds
to the Company. In connection with acquisition of CNB Bancorp, Inc. mentioned
below, the Company formed NBT Statutory Trust II (“Trust II”) in February 2006
to fund the cash portion of the acquisition as well as to provide regulatory
capital. The Company raised $51.5 million through Trust II in February 2006.
The
Company guarantees, on a limited basis, payments of distributions on the trust
preferred securities and payments on redemption of the trust preferred
securities. The Trusts are variable interest entities (VIEs) for which the
Company is not the primary beneficiary, as defined in Financial Accounting
Standards Board Interpretation (“FIN”) No. 46 “Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51
(Revised December 2003) (FIN 46R).” In accordance with FIN 46R, the accounts of
the Trusts are not included in the Company’s consolidated financial statements.
See the Company’s accounting policy related to consolidation in Note 1 — Summary
of Significant Accounting Policies in the notes to consolidated financial
statements included in Item 8 Financial Statements and Supplementary Data,
which
is located elsewhere in this report.
On
February 10, 2006, the Company acquired CNB Bancorp, Inc. (“CNB”), a bank
holding company headquartered in Gloversville, New York. The acquisition was
accomplished by merging CNB with and into the Company. By virtue of this
acquisition, CNB’s banking subsidiary, City National Bank and Trust Company, was
merged with and into NBT Bank. City National Bank and Trust Company operated
9
full-service community banking offices - located in Fulton, Hamilton, Montgomery
and Saratoga counties, with approximately $400 million in assets.
In
connection with the Merger, the Company issued an aggregate of 2.1 million
shares of Company common stock and $39 million in cash to the former holders
of
CNB common stock.
CNB
nonqualified stock options, entitling holders to purchase CNB common stock
outstanding, were cancelled on the closing date and such option holders received
an option payment subject to the terms of the Merger Agreement. The total number
of CNB nonqualified stock options that were canceled was 103,545, which resulted
in a cash payment to option holders before any applicable federal or state
withholding tax, of approximately $1.3 million. In accordance with the terms
of
the Merger Agreement, all outstanding CNB incentive stock options as of the
effective date were assumed by the Company. At that time, there were 144,686
CNB
incentive stock options that were exchanged for 237,278 replacement incentive
stock options of the Company.
Based
on
the $22.42 per share closing price of the Company’s common stock on February 10,
2006, the transaction is valued at approximately $88 million.
COMPETITION
The
banking and financial services industry in New York and Pennsylvania generally,
and in the Company’s market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, additional
financial service providers, and the accelerating pace of consolidation among
financial services providers. The Company competes for loans and leases,
deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other
nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets
and
offer a broader range of financial services than the Company. In order to
compete with other financial services providers, the Company stresses the
community nature of its banking operations and principally relies upon local
promotional activities, personal relationships established by officers,
directors, and employees with their customers, and specialized services tailored
to meet the needs of the communities served.
SUPERVISION
AND REGULATION
As
a bank
holding company, the Company is subject to extensive regulation, supervision,
and examination by the Board of Governors of the Federal Reserve System (“FRS”)
as its primary federal regulator. The Company also has qualified for and elected
to be registered with the FRS as a financial holding company. The Bank, as
a
nationally chartered bank, is subject to extensive regulation, supervision
and
examination by the Office of the Comptroller of the Currency (“OCC”) as its
primary federal regulator and, as to certain matters, by the FRS and the Federal
Deposit Insurance Corporation (“FDIC”).
The
Company is subject to capital adequacy guidelines of the FRS. The guidelines
apply on a consolidated basis and require bank holding companies to maintain
a
minimum ratio of Tier 1 capital to total average assets (or “leverage ratio”) of
4%. For the most highly rated bank holding companies, the minimum ratio is
3%.
The FRS capital adequacy guidelines also require bank holding companies to
maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and
a
minimum ratio of qualifying total capital to risk-weighted assets of 8%. As
of
December 31, 2006, the Company’s leverage ratio was 7.57%, its ratio of Tier 1
capital to risk-weighted assets was 10.42%, and its ratio of qualifying total
capital to risk-weighted assets was 11.67%. The FRS may set higher minimum
capital requirements for bank holding companies whose circumstances warrant
it,
such as companies anticipating significant growth or facing unusual risks.
The
FRS has not advised the Company of any special capital requirement applicable
to
it.
Any
holding company whose capital does not meet the minimum capital adequacy
guidelines is considered to be undercapitalized and is required to submit an
acceptable plan to the FRS for achieving capital adequacy. Such a company’s
ability to pay dividends to its shareholders and expand its lines of business
through the acquisition of new banking or nonbanking subsidiaries also could
be
restricted.
The
Bank
is subject to leverage and risk-based capital requirements and minimum capital
guidelines of the OCC that are similar to those applicable to the Company.
As of
December 31, 2006, the Bank was in compliance with all minimum capital
requirements. The Bank’s leverage ratio was 7.16%, its ratio of Tier 1 capital
to risk-weighted assets was 9.83%, and its ratio of qualifying total capital
to
risk-weighted assets was 11.09%.
Under
FDIC regulations, no FDIC-insured bank can accept brokered deposits unless
it is
well capitalized, or is adequately capitalized and receives a waiver from the
FDIC. In addition, these regulations prohibit any bank that is not well
capitalized from paying an interest rate on brokered deposits in excess of
three-quarters of one percentage point over certain prevailing market rates.
As
of December 31, 2006, the Bank’s total brokered deposits were $208.6
million.
The
Bank
also is subject to substantial regulatory restrictions on its ability to pay
dividends to the Company. Under OCC regulations, the Bank may not pay a
dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the proposed dividend, exceed
the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. As of December 31, 2006, approximately
$68.1 million was available for the payment of dividends without prior OCC
approval. The Bank’s ability to pay dividends also is subject to the Bank being
in compliance with regulatory capital requirements. As indicated above, the
Bank
is currently in compliance with these requirements.
The
OCC
generally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any management fee
to
its parent holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. If a
depository institution fails to submit an acceptable capital restoration plan,
it is treated as if it is “significantly undercapitalized.” Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become “adequately capitalized,” requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. “Critically
undercapitalized” institutions are subject to the appointment of a receiver or
conservator.
The
deposits of the Bank are insured up to regulatory limits by the FDIC. The
Federal Deposit Insurance Reform Act of 2005, which was signed into law on
February 8, 2006, gave the FDIC increased flexibility in assessing premiums
on
banks and savings associations, including the Bank, to pay for deposit insurance
and in managing its deposit insurance reserves. The FDIC has adopted regulations
to implement its new authority. Under these regulations, all insured depository
institutions are placed into one of four risk categories. Approximately 95%
of
all insured institutions, including the Bank, are in Risk Category I, the most
favorable category. Within this category, all insured institutions pay a base
rate assessment of 5 basis points on all insured deposits (which rate may be
adjusted annually by the FDIC by up to 3 basis points without public comment)
and an additional assessment up to 2 basis points based on the risk of loss
to
the Depository Insurance Fund (“DIF”) posed by the particular institution. For
institutions such as the Bank, which do not have a long-term public debt rating,
the individual risk assessment is based on its supervisory ratings and certain
financial ratios and other measurements of its financial condition. For
institutions that have a long-term public debt rating, the individual risk
assessment is based on its supervisory ratings and its debt rating. The new
law
became effective on January 1, 2007, and the first premiums, payable quarterly
after the end of each quarter, are payable by June 30, 2007. The reform
legislation also provided a credit to all insured depository institutions,
based
on the amount of their insured deposits at year-end 1996, that may be used
as an
offset to the premiums that are assessed. The Bank estimates that it will
receive full, which will eliminate its 2007 deposit insurance
assessment.
The
Federal Deposit Insurance Act provides for additional assessments to be imposed
on insured depository institutions to pay for the cost of Financing Corporation
(“FICO”) funding. The FICO assessments are adjusted quarterly to reflect changes
in the assessment base of the DIF and do not vary depending upon a depository
institution’s capitalization or supervisory evaluation. During 2006, FDIC
assessments for purposes of funding FICO bond obligations ranged from an
annualized $0.0132 per $100 of deposits for the first quarter of 2006 to $0.0124
per $100 of deposits for the fourth quarter of 2006. The Bank paid $0.4 million
of FICO assessments in 2006. For the first quarter of 2007, the FICO assessment
rate is $0.0122 per $100 of deposits.
Transactions
between the Bank and any of its affiliates, including the Company, are governed
by sections 23A and 23B of the Federal Reserve Act and FRS regulations
thereunder. An “affiliate” of a bank is any company or entity that controls, is
controlled by, or is under common control with the bank. A subsidiary of a
bank
that is not also a depository institution is not treated as an affiliate of
the
bank for purposes of sections 23A and 23B, unless the subsidiary is also
controlled through a non-bank chain of ownership by affiliates or controlling
shareholders of the bank, the subsidiary is a financial subsidiary that operates
under the expanded authority granted to national banks under the
Gramm-Leach-Bliley Act (“GLB Act”), or the subsidiary engages in other
activities that are not permissible for a bank to engage in directly (except
insurance agency subsidiaries). Generally, sections 23A and 23B are intended
to
protect insured depository institutions from suffering losses arising from
transactions with non-insured affiliates, by limiting the extent to which a
bank
or its subsidiaries may engage in covered transactions with any one affiliate
and with all affiliates of the bank in the aggregate, and requiring that such
transactions be on terms that are consistent with safe and sound banking
practices.
On
October 13, 2006, the Financial Services Regulatory Relief Act of 2006 was
signed into law. This Act permits a financial holding company, such as the
Company, to increase cross-marketing between its banking subsidiaries, such
as
the Bank, and any commercial companies in which it may invest pursuant to its
merchant banking authority under the GLB Act. The Act also directs the FRS
and
the SEC to engage in joint rulemaking to clarify that traditional banking
activities involving some elements of securities brokerage activities may be
performed by banks without SEC supervision. A proposed rule was issued for
public comment on December 18, 2006. Other provisions of this Act increase
parity between banks and thrifts with regard to certain powers, accounting
practices, and lending limits, and may increase competition between
them.
Under
the
GLB Act, a financial holding company may engage in certain financial activities
that a bank holding company may not otherwise engage in under the Bank Holding
Company Act (“BHC Act”). In addition to engaging in banking and activities
closely related to banking as determined by the FRS by regulation or order
prior
to November 11, 1999, a financial holding company may engage in activities
that
are financial in nature or incidental to financial activities, or activities
that are complementary to a financial activity and do not pose a substantial
risk to the safety and soundness of depository institutions or the financial
system generally.
The
GLB
Act requires all financial institutions, including the Company and the Bank,
to
adopt privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer’s request, and establish procedures and
practices to protect customer data from unauthorized access. In addition, the
Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”) includes many
provisions concerning national credit reporting standards, and permits
consumers, including customers of the Company, to opt out of information sharing
among affiliated companies for marketing purposes. The FACT Act also requires
banks and other financial institutions to notify their customers if they report
negative information about them to a credit bureau or if they are granted credit
on terms less favorable than those generally available. The FRS and the Federal
Trade Commission have extensive rulemaking authority under the FACT Act, and
the
Company and the Bank are subject to these provisions. The Company has developed
policies and procedures for itself and its subsidiaries, including the Bank,
and
believes it is in compliance with all privacy, information sharing, and
notification provisions of the GLB Act and the FACT Act.
Periodic
disclosures by companies in various industries of the loss or theft of
computer-based nonpublic customer information have led several members of
Congress to call for the adoption of national standards for the safeguarding
of
such information and the disclosure of security breaches. Several committees
of
both houses of Congress have discussed plans to conduct hearings on data
security and related issues.
Under
Title III of the USA PATRIOT Act, also known as the International Money
Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial
institutions, including the Company and the Bank, are required in general to
identify their customers, adopt formal and comprehensive anti-money laundering
programs, scrutinize or prohibit altogether certain transactions of special
concern, and be prepared to respond to inquiries from U.S. law enforcement
agencies concerning their customers and their transactions. The USA PATRIOT
Act
also encourages information-sharing among financial institutions, regulators,
and law enforcement authorities by providing an exemption from the privacy
provisions of the GLB Act for financial institutions that comply with this
provision. The effectiveness of a financial institution in combating money
laundering activities is a factor to be considered in any application submitted
by the financial institution under the Bank Merger Act, which applies to the
Bank, or the BHC Act, which applies to the Company. Failure of a financial
institution to maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with all of the relevant laws
or regulations, could have serious legal, financial and reputational
consequences for the institution. As of December 31, 2006, the Company and
the
Bank believe they are in compliance with the USA PATRIOT Act and regulations
thereunder.
The
Sarbanes-Oxley Act (“SOA”) implemented a broad range of measures to increase
corporate responsibility, enhance penalties for accounting and auditing
improprieties at publicly traded companies, and protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to federal
securities laws. SOA applies generally to companies that have securities
registered under the Exchange Act, including publicly-held bank holding
companies such as the Company. It includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules, and mandates further studies of certain issues by the
SEC
and the Comptroller General. SOA represents significant federal involvement
in
matters traditionally left to state regulatory systems, such as the regulation
of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board
of
directors and its committees. In addition, the federal banking regulators have
adopted generally similar requirements concerning the certification of financial
statements by bank officials.
Home
mortgage lenders, including banks, are required under the Home Mortgage
Disclosure Act to make available to the public expanded information regarding
the pricing of home mortgage loans, including the “rate spread” between the
interest rate on loans and certain Treasury securities and other benchmarks.
The
availability of this information has led to increased scrutiny of higher-priced
loans at all financial institutions to detect illegal discriminatory practices
and to the initiation of a limited number of investigations by federal banking
agencies and the U.S. Department of Justice. The Company has no information
that
it or its affiliates is the subject of any investigation.
EMPLOYEES
At
December 31, 2006, the Company had 1,314 full-time equivalent employees. The
Company’s employees are not presently represented by any collective bargaining
group. The Company considers its employee relations to be good.
AVAILABLE
INFORMATION
The
Company’s website is http://www.nbtbancorp.com.
The
Company makes available free of charge through its website, its annual reports
on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K;
and
any amendments to those reports led or furnished pursuant to the Securities
Exchange Act of 1934 as soon as reasonably practicable after such material
is
electronically filed with, or furnished to the SEC. The reference to our website
does not constitute incorporation by reference of the information contained
in
the website and should not be considered part of this document.
There
are
risks inherent to the Company’s business. The material risks and uncertainties
that management believes affect the Company are described below. The risks
and
uncertainties described below are not the only ones facing the Company.
Additional risks and uncertainties that management is not aware of or focused
on
or that management currently deems immaterial may also impair the Company’s
business operations. This report is qualified in its entirety by these risk
factors. If any of the following risks actually occur, the Company’s financial
condition and results of operations could be materially and adversely affected.
The
Company is Subject to Interest Rate Risk
The
Company’s earnings and cash flows are largely dependent upon its net interest
income. Net interest income is the difference between interest income earned
on
interest-earning assets such as loans and securities and interest expense paid
on interest-bearing liabilities such as deposits and borrowed funds. Interest
rates are highly sensitive to many factors that are beyond the Company’s
control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Board of Governors
of the Federal Reserve System. Changes in monetary policy, including changes
in
interest rates, could influence not only the interest the Company receives
on
loans and securities and the amount of interest it pays on deposits and
borrowings, but such changes could also affect (i) the Company’s ability to
originate loans and obtain deposits, (ii) the fair value of the Company’s
financial assets and liabilities, and (iii) the average duration of the
Company’s mortgage-backed securities portfolio. If the interest rates paid on
deposits and other borrowings increase at a faster rate than the interest rates
received on loans and other investments, the Company’s net interest income, and
therefore earnings, could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and other investments
fall more quickly than the interest rates paid on deposits and other
borrowings.
Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on
the
Company’s results of operations, any substantial, unexpected, prolonged change
in market interest rates could have a material adverse effect on the Company’s
financial condition and results of operations. See the section captioned “Net
Interest Income” in Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the section captioned “Impact of
Inflation and Changing Prices” in Item 7A. Quantitative and Qualitative
Disclosure About Market Risk located elsewhere in this report for further
discussion related to the Company’s management of interest rate
risk.
The
Company is Subject to Lending Risk
There
are
inherent risks associated with the Company’s lending activities. These risks
include, among other things, the impact of changes in interest rates and changes
in the economic conditions in the markets where the Company operates as well
as
those across the States of New York and Pennsylvania, as well as the entire
United States. Increases in interest rates and/or weakening economic conditions
could adversely impact the ability of borrowers to repay outstanding loans
or
the value of the collateral securing these loans. The Company is also subject
to
various laws and regulations that affect its lending activities. Failure to
comply with applicable laws and regulations could subject the Company to
regulatory enforcement action that could result in the assessment of significant
civil money penalties against the Company.
As
of
December 31, 2006, approximately 43% of the Company’s loan and lease portfolio
consisted of commercial, agricultural, construction and commercial real estate
loans. These types of loans are generally viewed as having more risk of default
than residential real estate loans or consumer loans. These types of loans
are
also typically larger than residential real estate loans and consumer loans.
Because the Company’s loan portfolio contains a significant number of commercial
and industrial, construction and commercial real estate loans with relatively
large balances, the deterioration of one or a few of these loans could cause
a
significant increase in nonperforming loans. An increase in nonperforming loans
could result in a net loss of earnings from these loans, an increase in the
provision for loan losses and an increase in loan charge-offs, all of which
could have a material adverse effect on the Company’s financial condition and
results of operations. See the section captioned “Loans and Leases and
Corresponding Interest and Fees on Loans” in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations located elsewhere
in
this report for further discussion related to commercial and industrial,
construction and commercial real estate loans.
The
Company’s Allowance For Loan and Lease Losses May Be
Insufficient
The
Company maintains an allowance for loan and lease losses, which is an allowance
established through a provision for loan and lease losses charged to expense,
that represents management’s best estimate of probable losses that have been
incurred within the existing portfolio of loans and leases. The allowance,
in
the judgment of management, is necessary to reserve for estimated loan and
lease
losses and risks inherent in the loan and lease portfolio. The level of the
allowance reflects management’s continuing evaluation of industry
concentrations; specific credit risks; loan loss experience; current loan and
lease portfolio quality; present economic, political and regulatory conditions
and unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the allowance for loan and lease
losses inherently involves a high degree of subjectivity and requires the
Company to make significant estimates of current credit risks and future trends,
all of which may undergo material changes. Changes in economic conditions
affecting borrowers, new information regarding existing loans, identification
of
additional problem loans and other factors, both within and outside of the
Company’s control, may require an increase in the allowance for loan losses. In
addition, bank regulatory agencies periodically review the Company’s allowance
for loan losses and may require an increase in the provision for loan losses
or
the recognition of further loan charge-offs, based on judgments different than
those of management. In addition, if charge-offs in future periods exceed the
allowance for loan and lease losses, the Company will need additional provisions
to increase the allowance for loan and lease losses. These increases in the
allowance for loan and lease losses will result in a decrease in net income
and,
possibly, capital, and may have a material adverse effect on the Company’s
financial condition and results of operations. See the section captioned “Risk
Management - Credit Risk” in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations located elsewhere in this report
for further discussion related to the Company’s process for determining the
appropriate level of the allowance for loan and losses.
The
Company’s Profitability Depends Significantly on Economic Conditions in Upstate
New York and Northeastern Pennsylvania
The
Company’s success depends primarily on the general economic conditions of
upstate New York and northeastern Pennsylvania and the specific local markets
in
which the Company operates. Unlike larger national or other regional banks
that
are more geographically diversified, the Company provides banking and financial
services to customers primarily in the upstate New York areas of Norwich,
Oneonta, Amsterdam-Gloversville, Albany, Binghamton, Utica-Rome, Plattsburg,
and
Ogdensburg-Massena and northeastern Pennsylvania areas of Scranton, Wilkes-Barre
and East Stroudsburg. The local economic conditions in these areas have a
significant impact on the demand for the Company’s products and services as well
as the ability of the Company’s customers to repay loans, the value of the
collateral securing loans and the stability of the Company’s deposit funding
sources. A significant decline in general economic conditions, caused by
inflation, recession, acts of terrorism, outbreak of hostilities or other
international or domestic occurrences, unemployment, changes in securities
markets or other factors could impact these local economic conditions and,
in
turn, have a material adverse effect on the Company’s financial condition and
results of operations.
The
Company Operates In a Highly Competitive Industry and Market
Area
The
Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include national, regional,
and
community banks within the various markets the Company operates. Additionally,
various out-of-state banks continue to enter or have announced plans to enter
the market areas in which the Company currently operates. The Company also
faces
competition from many other types of financial institutions, including, without
limitation, savings and loans, credit unions, finance companies, brokerage
firms, insurance companies, factoring companies and other financial
intermediaries. The financial services industry could become even more
competitive as a result of legislative, regulatory and technological changes
and
continued consolidation. Banks, securities firms and insurance companies can
merge under the umbrella of a financial holding company, which can offer
virtually any type of financial service, including banking, securities
underwriting, insurance (both agency and underwriting) and merchant banking.
Also, technology has lowered barriers to entry and made it possible for
non-banks to offer products and services traditionally provided by banks, such
as automatic transfer and automatic payment systems. Many of the Company’s
competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be able to
achieve economies of scale and, as a result, may offer a broader range of
products and services as well as better pricing for those products and services
than the Company can. The Company’s ability to compete successfully depends on a
number of factors, including, among other things:
•
The
ability to develop, maintain and build upon long-term customer relationships
based on top quality service, high ethical standards and safe, sound
assets.
•
The
ability to expand the Company’s market position.
•
The
scope, relevance and pricing of products and services offered to meet customer
needs and demands.
•
The
rate at which the Company introduces new products and services relative to
its
competitors.
•
Customer satisfaction with the Company’s level of service.
•
Industry and general economic trends.
Failure
to perform in any of these areas could significantly weaken the Company’s
competitive position, which could adversely affect the Company’s growth and
profitability, which, in turn, could have a material adverse effect on the
Company’s financial condition and results of operations.
The
Company Is Subject To Extensive Government Regulation and
Supervision
The
Company, primarily through NBT Bank and certain non-bank subsidiaries, is
subject to extensive federal regulation and supervision. Banking regulations
are
primarily intended to protect depositors’ funds, federal deposit insurance funds
and the banking system as a whole, not shareholders. These regulations affect
the Company’s lending practices, capital structure, investment practices,
dividend policy and growth, among other things. Congress and federal regulatory
agencies continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect the Company in substantial and unpredictable ways. Such
changes could subject the Company to additional costs, limit the types of
financial services and products the Company may offer and/or increase the
ability of non-banks to offer competing financial services and products, among
other things. Failure to comply with laws, regulations or policies could result
in sanctions by regulatory agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on the Company’s business,
financial condition and results of operations. While the Company has policies
and procedures designed to prevent any such violations, there can be no
assurance that such violations will not occur. See the section captioned
“Supervision and Regulation” in Item 1., which is located elsewhere in this
report.
The
Company’s Controls and Procedures May Fail or Be
Circumvented
Management
regularly reviews and updates the Company’s internal controls, disclosure
controls and procedures, and corporate governance policies and procedures.
Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of
the
Company’s controls and procedures or failure to comply with regulations related
to controls and procedures could have a material adverse effect on the Company’s
business, results of operations and financial condition.
New
Lines of Business or New Products and Services May Subject The Company to
Additional Risks
From
time
to time, the Company may implement new lines of business or offer new products
and services within existing lines of business. There are substantial risks
and
uncertainties associated with these efforts, particularly in instances where
the
markets are not fully developed. In developing and marketing new lines of
business and/or new products and services the Company may invest significant
time and resources. Initial timetables for the introduction and development
of
new lines of business and/or new products or services may not be achieved and
price and profitability targets may not prove feasible. External factors, such
as compliance with regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the
effectiveness of the Company’s system of internal controls. Failure to
successfully manage these risks in the development and implementation of new
lines of business or new products or services could have a material adverse
effect on the Company’s business, results of operations and financial
condition.
The
Company Relies on Dividends From Its Subsidiaries For Most Of Its
Revenue
NBT
is a
separate and distinct legal entity from its subsidiaries. It receives
substantially all of its revenue from dividends from its subsidiaries. These
dividends are the principal source of funds to pay dividends on the Company’s
common stock and interest and principal on the Company’s debt. Various federal
and/or state laws and regulations limit the amount of dividends that NBT Bank
may pay to NBT. Also, NBT’s right to participate in a distribution of assets
upon a subsidiary’s liquidation or reorganization is subject to the prior claims
of the subsidiary’s creditors. In the event NBT Bank is unable to pay dividends
to NBT, NBT may not be able to service debt, pay obligations or pay dividends
on
the Company’s common stock.
The
inability to receive dividends from NBT Bank could have a material adverse
effect on the Company’s business, financial condition and results of operations.
See the section captioned “Supervision and Regulation” in Item 1. Business and
Note 15 — Stockholders’ Equity in the notes to consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data, which are
located elsewhere in this report.
The
Company May Not Be Able To Attract and Retain Skilled
People
The
Company’s success depends, in large part, on its ability to attract and retain
key people. Competition for the best people in most activities engaged in by
the
Company can be intense and the Company may not be able to hire people or to
retain them. The unexpected loss of services of one or more of the Company’s key
personnel could have a material adverse impact on the Company’s business because
of their skills, knowledge of the Company’s market, years of industry experience
and the difficulty of promptly finding qualified replacement personnel.
The
Company’s Information Systems May Experience An Interruption Or Breach In
Security
The
Company relies heavily on communications and information systems to conduct
its
business. Any failure, interruption or breach in security of these systems
could
result in failures or disruptions in the Company’s customer relationship
management, general ledger, deposit, loan and other systems. While the Company
has policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of its information systems, there
can
be no assurance that any such failures, interruptions or security breaches
will
not occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures, interruptions or security breaches of the Company’s
information systems could damage the Company’s reputation, result in a loss of
customer business, subject the Company to additional regulatory scrutiny, or
expose the Company to civil litigation and possible financial liability, any
of
which could have a material adverse effect on the Company’s financial condition
and results of operations.
The
Company Continually Encounters Technological Change
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and services.
The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. The Company’s future
success depends, in part, upon its ability to address the needs of its customers
by using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in the Company’s
operations. Many of the Company’s competitors have substantially greater
resources to invest in technological improvements. The Company may not be able
to effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers. Failure
to
successfully keep pace with technological change affecting the financial
services industry could have a material adverse impact on the Company’s business
and, in turn, the Company’s financial condition and results of
operations.
Severe
Weather, Natural Disasters, Acts Of War Or Terrorism and Other External Events
Could Significantly Impact The Company’s Business
Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on the Company’s ability to conduct
business. Such events could affect the stability of the Company’s deposit base,
impair the ability of borrowers to repay outstanding loans, impair the value
of
collateral securing loans, cause significant property damage, result in loss
of
revenue and/or cause the Company to incur additional expenses. Although
management has established disaster recovery policies and procedures, the
occurrence of any such event could have a material adverse effect on the
Company’s business, which, in turn, could have a material adverse effect on the
Company’s financial condition and results of operations.
The
Company’s Articles Of Incorporation, By-Laws and Stockholder Rights Plan As Well
As Certain Banking Laws May Have An Anti-Takeover
Effect
Provisions
of the Company’s articles of incorporation and by-laws, federal banking laws,
including regulatory approval requirements, and the Company’s stock purchase
rights plan could make it more difficult for a third party to acquire the
Company, even if doing so would be perceived to be beneficial to the Company’s
stockholders. The combination of these provisions effectively inhibits a
non-negotiated merger or other business combination, which, in turn, could
adversely affect the market price of the Company’s common stock.
None.
The
Company’s headquarters are located at 52 South Broad Street, Norwich, New York
13815. The Company operated the following number of community banking branches
and automated teller machines (ATMs) as of December 31, 2006:
County
|
Branches
|
ATMs
|
|
County
|
Branches
|
ATMs
|
NBT
Bank Division
|
|
Pennstar
Bank Division
|
|
|
|
New
York
|
|
Pennsylvania
|
|
|
Albany
County
|
3
|
4
|
|
Lackawanna
County
|
18
|
26
|
Broome
County
|
7
|
12
|
|
Luzerne
County
|
4
|
8
|
Chenango
County
|
11
|
13
|
|
Monroe
County
|
4
|
5
|
Clinton
County
|
3
|
2
|
|
Pike
County
|
3
|
4
|
Delaware
County
|
5
|
6
|
|
Susquehanna
County
|
6
|
8
|
Essex
County
|
3
|
6
|
|
Wayne
County
|
3
|
4
|
Franklin
County
|
1
|
1
|
|
|
|
|
Fulton
County
|
7
|
12
|
|
|
|
|
Greene
County
|
—
|
1
|
|
|
|
|
Hamilton
County
|
1
|
1
|
|
|
|
|
Herkimer
County
|
2
|
1
|
|
|
|
|
Montgomery
County
|
7
|
6
|
|
|
|
|
Oneida
County
|
6
|
11
|
|
|
|
|
Otsego
County
|
9
|
16
|
|
|
|
|
Saratoga
County
|
4
|
6
|
|
|
|
|
Schenectady
County
|
1
|
1
|
|
|
|
|
Schoharie
County
|
4
|
3
|
|
|
|
|
St.
Lawrence County
|
5
|
6
|
|
|
|
|
Tioga
County
|
1
|
1
|
|
|
|
|
The
Company leases fifty four of the above listed branches from third parties under
terms and conditions considered by management to be equitable to the Company.
The Company owns all other banking premises. The Company believes that its
offices are sufficient for its present operations. All automated teller machines
are owned.
There
are
no material pending legal proceedings, other than ordinary routine litigation
incidental to the business, to which the Company or any of its subsidiaries
is a
party or of which their property is the subject.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS, AND ISSUER REPURCHASES OF EQUITY
SECURITIES
|
The
common stock of NBT Bancorp Inc. (“Common Stock”) is quoted on the Nasdaq Stock
Market National Market Tier under the symbol “NBTB.” The following table sets
forth the market prices and dividends declared for the Common Stock for the
periods indicated:
|
|
High
|
|
Low
|
|
Dividend
|
|
2005
|
|
|
|
|
|
|
|
1st
quarter
|
|
$
|
23.79
|
|
$
|
20.75
|
|
$
|
0.19
|
|
2nd
quarter
|
|
|
25.50
|
|
|
22.79
|
|
|
0.19
|
|
3rd
quarter
|
|
|
24.15
|
|
|
20.10
|
|
|
0.19
|
|
4th
quarter
|
|
|
25.66
|
|
|
21.48
|
|
|
0.19
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
1st
quarter
|
|
$
|
23.90
|
|
$
|
21.02
|
|
$
|
0.19
|
|
2nd
quarter
|
|
|
23.24
|
|
|
21.03
|
|
|
0.19
|
|
3rd
quarter
|
|
|
24.57
|
|
|
21.44
|
|
|
0.19
|
|
4th
quarter
|
|
|
26.47
|
|
|
22.36
|
|
|
0.19
|
|
The
closing price of the Common Stock on February 15, 2007 was $24.35.
As
of
February 15, 2007, there were 7,289 shareholders of record of Company common
stock.
Stock
Repurchases
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 December
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)
|
10/1/06
- 10/31/06
|
-
|
-
|
-
|
737,147
|
11/1/06
- 11/30/06
|
-
|
-
|
-
|
737,147
|
12/1/06
- 12/31/06
|
-
|
-
|
-
|
737,147
|
Total
|
-
|
-
|
|
737,147
|
(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 authorized on January
24, 2005 and combined with the new repurchase program. As of December
31,
2006, there were 737,147 shares available for repurchase under the
Plans.
|
Performance
Graph
The
following graph compares the cumulative total stockholder return (i.e., price
change, reinvestment of cash dividends and stock dividends received) on our
common stock against the cumulative total return of the NASDAQ Stock Market
(U.S. Companies) Index and the Index for NASDAQ Financial Stocks. The stock
performance graph assumes that $100 was invested on December 31, 2001. The
graph
further assumes the reinvestment of dividends into additional shares of the
same
class of equity securities at the frequency with which dividends are paid on
such securities during the relevant fiscal year. The yearly points marked on
the
horizontal axis correspond to December 31 of that year. We calculate each of
the
referenced indices in the same manner. All are market-capitalization-weighted
indices, so companies judged by the market to be more important (i.e., more
valuable) count for more in all indices.
Dividends
We
depend
primarily upon dividends from our subsidiaries for a substantial part of our
revenue. Accordingly, our ability to pay dividends depends primarily upon the
receipt of dividends or other capital distributions from our subsidiaries.
Payment of dividends to the Company from the Bank is subject to certain
regulatory and other restrictions. Under OCC regulations, the Bank may pay
dividends to the Company without prior regulatory approval so long as it meets
its applicable regulatory capital requirements before and after payment of
such
dividends and its total dividends do not exceed its net income to date over
the
calendar year plus retained net income over the preceding two years. At
December 31, 2006, the Bank was in compliance with all applicable minimum
capital requirements and had the ability to pay dividends of $68.1 million
to the Company without the prior approval of the OCC.
If
the
capital of the Company is diminished by depreciation in the value of its
property or by losses, or otherwise, to an amount less than the aggregate amount
of the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets, no dividends may be paid
out of net profits until the deficiency in the amount of capital represented
by
the issued and outstanding stock of all classes having a preference upon the
distribution of assets has been repaired. See the section captioned “Supervision
and Regulation” in Item 1 and Note 15 - Stockholders Equity in the notes to
consolidated financial statements in included in Item 8. Financial Statements
and Supplementary Data, which are located elsewhere in this report.
The
following summary of financial and other information about the Company is
derived from the Company’s audited consolidated financial statements for each of
the five fiscal years ended December 31, 2006 and should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the Company’s consolidated financial statements and accompanying
notes, included elsewhere in this report:
|
|
Year
ended December 31,
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Interest,
fee and dividend income
|
|
$
|
288,842
|
|
$
|
236,367
|
|
$
|
210,179
|
|
$
|
207,298
|
|
$
|
227,222
|
|
Interest
expense
|
|
|
125,009
|
|
|
78,256
|
|
|
59,692
|
|
|
62,874
|
|
|
80,402
|
|
Net
interest income
|
|
|
163,833
|
|
|
158,111
|
|
|
150,487
|
|
|
144,424
|
|
|
146,820
|
|
Provision
for loan and lease losses
|
|
|
9,395
|
|
|
9,464
|
|
|
9,615
|
|
|
9,111
|
|
|
9,073
|
|
Noninterest
income excluding securities (losses) gains
|
|
|
49,504
|
|
|
43,785
|
|
|
40,673
|
|
|
37,603
|
|
|
31,934
|
|
Securities
(losses) gains, net
|
|
|
(875
|
)
|
|
(1,236
|
)
|
|
216
|
|
|
175
|
|
|
(413
|
)
|
Other
noninterest expense
|
|
|
122,966
|
|
|
115,305
|
|
|
109,777
|
|
|
104,517
|
|
|
102,455
|
|
Income
before income taxes
|
|
|
80,101
|
|
|
75,891
|
|
|
71,984
|
|
|
68,574
|
|
|
66,813
|
|
Net
income
|
|
|
55,947
|
|
|
52,438
|
|
|
50,047
|
|
|
47,104
|
|
|
44,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
$
|
1.65
|
|
$
|
1.62
|
|
$
|
1.53
|
|
$
|
1.45
|
|
$
|
1.36
|
|
Diluted
earnings
|
|
|
1.64
|
|
|
1.60
|
|
|
1.51
|
|
|
1.43
|
|
|
1.35
|
|
Cash
dividends paid
|
|
|
0.76
|
|
|
0.76
|
|
|
0.74
|
|
|
0.68
|
|
|
0.68
|
|
Book
value at year-end
|
|
|
11.79
|
|
|
10.34
|
|
|
10.11
|
|
|
9.46
|
|
|
8.96
|
|
Tangible
book value at year-end
|
|
|
8.42
|
|
|
8.75
|
|
|
8.66
|
|
|
7.94
|
|
|
7.47
|
|
Average
diluted common shares outstanding
|
|
|
34,206
|
|
|
32,710
|
|
|
33,087
|
|
|
32,844
|
|
|
33,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale, at fair value
|
|
$
|
1,106,322
|
|
$
|
954,474
|
|
$
|
952,542
|
|
$
|
980,961
|
|
$
|
1,007,583
|
|
Securities
held to maturity, at amortized cost
|
|
|
136,314
|
|
|
93,709
|
|
|
81,782
|
|
|
97,204
|
|
|
82,514
|
|
Loans
and leases
|
|
|
3,412,654
|
|
|
3,022,657
|
|
|
2,869,921
|
|
|
2,639,976
|
|
|
2,355,932
|
|
Allowance
for loan and lease losses
|
|
|
50,587
|
|
|
47,455
|
|
|
44,932
|
|
|
42,651
|
|
|
40,167
|
|
Assets
|
|
|
5,087,572
|
|
|
4,426,773
|
|
|
4,212,304
|
|
|
4,046,885
|
|
|
3,723,726
|
|
Deposits
|
|
|
3,796,238
|
|
|
3,160,196
|
|
|
3,073,838
|
|
|
3,001,351
|
|
|
2,922,040
|
|
Borrowings
|
|
|
838,558
|
|
|
883,182
|
|
|
752,066
|
|
|
672,631
|
|
|
451,076
|
|
Stockholders’
equity
|
|
|
403,817
|
|
|
333,943
|
|
|
332,233
|
|
|
310,034
|
|
|
292,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
1.14
|
%
|
|
1.21
|
%
|
|
1.21
|
%
|
|
1.22
|
%
|
|
1.23
|
%
|
Return
on average equity
|
|
|
14.47
|
|
|
15.86
|
|
|
15.69
|
|
|
15.90
|
|
|
16.13
|
|
Average
equity to average assets
|
|
|
7.85
|
|
|
7.64
|
|
|
7.74
|
|
|
7.69
|
|
|
7.64
|
|
Net
interest margin
|
|
|
3.70
|
|
|
4.01
|
|
|
4.03
|
|
|
4.16
|
|
|
4.43
|
|
Dividend
payout ratio
|
|
|
46.34
|
|
|
47.50
|
|
|
49.01
|
|
|
47.55
|
|
|
50.37
|
|
Tier
1 leverage
|
|
|
7.57
|
|
|
7.16
|
|
|
7.13
|
|
|
6.76
|
|
|
6.73
|
|
Tier
1 risk-based capital
|
|
|
10.42
|
|
|
9.80
|
|
|
9.78
|
|
|
9.96
|
|
|
9.93
|
|
Total
risk-based capital
|
|
|
11.67
|
|
|
11.05
|
|
|
11.04
|
|
|
11.21
|
|
|
11.18
|
|
Selected
Quarterly Financial Data
|
|
|
|
2006
|
|
2005
|
|
(Dollars
in thousands, except per share data)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Interest,
fee and dividend income
|
|
$
|
66,306
|
|
$
|
71,831
|
|
$
|
74,688
|
|
$
|
76,017
|
|
$
|
55,461
|
|
$
|
57,866
|
|
$
|
60,282
|
|
$
|
62,758
|
|
Interest
expense
|
|
|
26,187
|
|
|
30,462
|
|
|
33,768
|
|
|
34,592
|
|
|
16,647
|
|
|
18,542
|
|
|
20,331
|
|
|
22,736
|
|
Net
interest income
|
|
|
40,119
|
|
|
41,369
|
|
|
40,920
|
|
|
41,425
|
|
|
38,814
|
|
|
39,324
|
|
|
39,951
|
|
|
40,022
|
|
Provision
for loan and lease losses
|
|
|
1,728
|
|
|
1,703
|
|
|
2,480
|
|
|
3,484
|
|
|
1,796
|
|
|
2,320
|
|
|
2,752
|
|
|
2,596
|
|
Noninterest
income excluding net securities (losses) gains
|
|
|
12,158
|
|
|
12,534
|
|
|
12,510
|
|
|
12,302
|
|
|
10,715
|
|
|
11,004
|
|
|
11,088
|
|
|
10,978
|
|
Net
securities (losses) gains
|
|
|
(934
|
)
|
|
22
|
|
|
7
|
|
|
30
|
|
|
(4
|
)
|
|
51
|
|
|
(737
|
)
|
|
(546
|
)
|
Noninterest
expense
|
|
|
30,472
|
|
|
31,694
|
|
|
29,918
|
|
|
30,882
|
|
|
28,881
|
|
|
28,696
|
|
|
28,579
|
|
|
29,149
|
|
Net
income
|
|
$
|
13,588
|
|
$
|
14,169
|
|
$
|
14,542
|
|
$
|
13,648
|
|
$
|
12,789
|
|
$
|
13,128
|
|
$
|
13,526
|
|
$
|
12,995
|
|
Basic
earnings per share
|
|
$
|
0.41
|
|
$
|
0.41
|
|
$
|
0.43
|
|
$
|
0.40
|
|
$
|
0.39
|
|
$
|
0.41
|
|
$
|
0.42
|
|
$
|
0.40
|
|
Diluted
earnings per share
|
|
$
|
0.40
|
|
$
|
0.41
|
|
$
|
0.43
|
|
$
|
0.40
|
|
$
|
0.39
|
|
$
|
0.40
|
|
$
|
0.41
|
|
$
|
0.40
|
|
Net
interest margin
|
|
|
3.86
|
%
|
|
3.73
|
%
|
|
3.60
|
%
|
|
3.63
|
%
|
|
4.09
|
%
|
|
4.02
|
%
|
|
3.99
|
%
|
|
3.97
|
%
|
Return
on average assets
|
|
|
1.18
|
%
|
|
1.15
|
%
|
|
1.15
|
%
|
|
1.07
|
%
|
|
1.23
|
%
|
|
1.22
|
%
|
|
1.23
|
%
|
|
1.17
|
%
|
Return
on average equity
|
|
|
15.11
|
%
|
|
14.71
|
%
|
|
14.89
|
%
|
|
13.31
|
%
|
|
15.74
|
%
|
|
16.21
|
%
|
|
16.06
|
%
|
|
15.47
|
%
|
Average
diluted common shares outstanding
|
|
|
33,746
|
|
|
34,472
|
|
|
34,197
|
|
|
34,402
|
|
|
32,977
|
|
|
32,584
|
|
|
32,729
|
|
|
32,556
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
|
GENERAL
The
financial review which follows focuses on the factors affecting the consolidated
financial condition and results of operations of NBT Bancorp Inc. (the
“Registrant”) and its wholly owned subsidiaries, NBT Bank, N.A. (the Bank), NBT
Financial Services, Inc. (NBT Financial), Hathaway Agency, Inc., CNBF Capital
Trust I, NBT Statutory Trust I and NBT Statutory Trust II, during 2006 and,
in
summary form, the preceding two years. Collectively, the Registrant and its
subsidiaries are referred to herein as “the Company.” Net interest margin is
presented in this discussion on a fully taxable equivalent (FTE) basis. Average
balances discussed are daily averages unless otherwise described. The audited
consolidated financial statements and related notes as of December 31, 2006
and
2005 and for each of the years in the three-year period ended December 31,
2006
should be read in conjunction with this review. Amounts in prior period
consolidated financial statements are reclassified whenever necessary to conform
to the 2006 presentation.
The
preparation of the consolidated financial statements requires management to
make
estimates and assumptions, in the application of certain accounting policies,
about the effect of matters that are inherently uncertain. Those estimates
and
assumptions affect the reported amounts of certain assets, liabilities, revenues
and expenses. Different amounts could be reported under different conditions,
or
if different assumptions were used in the application of these accounting
policies.
The
business of the Company is providing commercial banking and financial services
through its subsidiaries. The Company’s primary market area is central and
upstate New York and northeastern Pennsylvania. The Company has been, and
intends to continue to be, a community-oriented financial institution offering
a
variety of financial services. The Company’s principal business is attracting
deposits from customers within its market area and investing those funds
primarily in loans and leases, and, to a lesser extent, in marketable
securities. The financial condition and operating results of the Company are
dependent on its net interest income which is the difference between the
interest and dividend income earned on its earning assets and the interest
expense paid on its interest bearing liabilities, primarily consisting of
deposits and borrowings. Net income is also affected by provisions for loan
and
lease losses and noninterest income, such as service charges on deposit
accounts, broker/dealer fees, trust fees, and gains/losses on securities sales;
it is also impacted by noninterest expense, such as salaries and employee
benefits, data processing, communications, occupancy, and
equipment.
The
Company’s results of operations are significantly affected by general economic
and competitive conditions (particularly changes in market interest rates),
government policies, changes in accounting standards, and actions of regulatory
agencies. Future changes in applicable laws, regulations, or government policies
may have a material impact on the Company. Lending activities are substantially
influenced by the demand for and supply of housing, competition among lenders,
the level of interest rates, the state of the local and regional economy, and
the availability of funds. The ability to gather deposits and the cost of funds
are influenced by prevailing market interest rates, fees and terms on deposit
products, as well as the availability of alternative investments including
mutual funds and stocks.
CRITICAL
ACCOUNTING POLICIES
The
Company has identified several policies as being critical because they require
management to make particularly difficult, subjective and/or complex judgments
about matters that are inherently uncertain and because of the likelihood that
materially different amounts would be reported under different conditions or
using different assumptions. These policies relate to the allowance for loan
losses and pension accounting.
Management
of the Company considers the accounting policy relating to the allowance for
loan and lease losses to be a critical accounting policy given the uncertainty
in evaluating the level of the allowance required to cover credit losses
inherent in the loan and lease portfolio and the material effect that such
judgments can have on the results of operations. While management’s current
evaluation of the allowance for loan and lease losses indicates that the
allowance is adequate, under adversely different conditions or assumptions,
the
allowance 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 nonperforming 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 values were significantly lowered, the
Company’s allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
Management
is required to make various assumptions in valuing its pension assets and
liabilities. These assumptions include the expected rate of return on plan
assets, the discount rate, and the rate of increase in future compensation
levels. Changes to these assumptions could impact earnings in future periods.
The Company takes into account the plan asset mix, funding obligations, and
expert opinions in determining the various rates used to estimate pension
expense. The Company also considers the Moody’s AA 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.
The
Company’s policy on the allowance for loan and lease losses and pension
accounting is disclosed in note 1 to the consolidated financial statements.
A
more detailed description of the allowance for loan and lease losses is included
in the “Risk Management” section of this Form 10-K. All significant pension
accounting assumptions and detail is disclosed in Note 16 to the consolidated
financial statements. All accounting policies are important, and as such, the
Company encourages the reader to review each of the policies included in Note
1
to obtain a better understanding on how the Company’s financial performance is
reported.
FORWARD
LOOKING STATEMENTS
Certain
statements in this filing and future filings by the Company with the Securities
and Exchange Commission, in the Company’s press releases or other public or
shareholder communications, or in oral statements made with the approval of
an
authorized executive officer, contain forward-looking statements, as defined
in
the Private Securities Litigation Reform Act. These statements may be identified
by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,”
“projects,” “will,” “can,” “would,” “should,” “could,” “may,” or other similar
terms. There are a number of factors, many of which are beyond the Company’s
control that could cause actual results to differ materially from those
contemplated by the forward looking statements. Factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include, among others, the following possibilities:
•
Local,
regional, national and international economic conditions and the impact they
may
have on the Company and its customers and the Company’s assessment of that
impact.
•
Changes
in the level of non-performing assets and charge-offs.
•
Changes
in estimates of future reserve requirements based upon the periodic review
thereof under relevant regulatory and accounting requirements.
•
The
effects of and changes in trade and monetary and fiscal policies and laws,
including the interest rate policies of the Federal Reserve Board.
•
Inflation, interest rate, securities market and monetary
fluctuations.
•
Political instability.
•
Acts
of
war or terrorism.
•
The
timely development and acceptance of new products and services and perceived
overall value of these products and services by users.
•
Changes
in consumer spending, borrowings and savings habits.
•
Changes
in the financial performance and/or condition of the Company’s
borrowers.
•
Technological changes.
•
Acquisitions and integration of acquired businesses.
•
The
ability to increase market share and control expenses.
•
Costs
or difficulties related to the integration of the businesses of the Company
and
CNB may be greater than expected.
•
Changes
in the competitive environment among financial holding companies.
•
The
effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which the Company
and
its subsidiaries must comply.
•
The
effect of changes in accounting policies and practices, as may be adopted by
the
regulatory agencies, as well as the Public Company Accounting Oversight Board,
the Financial Accounting Standards Board and other accounting standard
setters.
•
Changes
in the Company’s organization, compensation and benefit plans.
•
The
costs and effects of legal and regulatory developments including the resolution
of legal proceedings or regulatory or other governmental inquiries and the
results of regulatory examinations or reviews.
•
Greater
than expected costs or difficulties related to the integration of new products
and lines of business.
•
The
Company’s success at managing the risks involved in the foregoing
items.
The
Company cautions readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors, including but not limited to those described above, could
affect the Company’s financial performance and could cause the Company’s actual
results or circumstances for future periods to differ materially from those
anticipated or projected. Except
as
required by law, the Company does not undertake, and specifically disclaims
any
obligations to, publicly release any revisions that may be made to any
forward-looking statements to reflect statements to the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
OVERVIEW
The
Company had net income of $55.9 million or $1.64 per diluted share for 2006,
compared to net income of $52.4 million or $1.60 per diluted share for 2005.
Results were driven by several factors. Net interest income increased $5.7
million or 3.6% in 2006 compared to 2005. The increase in net interest income
resulted mainly from an increase in average earning assets of $528.8 million,
or
13.1% to $4.6 billion in 2006, driven by a 11.6% increase in average loans
and
leases for the period. Noninterest income increased $6.1 million or 14.3%
compared to 2005. Included in noninterest income for 2006 were net securities
losses totaling $0.9 million compared to net securities losses of $1.2 million
in 2005. Excluding net security gains and losses, total noninterest income
increased 13.1% in 2006 compared with 2005. Offsetting the increases in net
interest income and noninterest income was an increase in noninterest expense
of
$7.7 million in 2006 compared to 2005. Noninterest income and expense increased
in all line items, primarily as a result of the CNB merger in February of 2006
(see Item 1 for merger details). The provision for loan and lease losses
decreased slightly in 2006 compared to 2005, as potential problem loans have
decreased as a percentage of the loan portfolio, offset by an increase in net
charge-offs.
The
Company had net income of $52.4 million or $1.60 per diluted share for 2005,
compared to net income of $50.0 million or $1.51 per diluted share for 2004.
Results were driven by several factors. Net interest income increased $7.6
million or 5.1% in 2005 compared to 2004. The increase in net interest income
resulted mainly from an increase in average earning assets of 5.3%, driven
by an
7.9% increase in average loans and leases for the period. Noninterest income
increased $1.7 million or 4.1% compared to 2004. Included in noninterest income
for 2005 were net securities losses totaling $1.2 million compared to net
securities gains of $0.2 million in 2004. Excluding net security gains and
losses, total noninterest income increased 7.7% in 2005 compared with 2004.
This
increase resulted from increases in retirement plan administration fees (from
the acquisition of EPIC in January 2005), other income, service charges on
deposit accounts, ATM and debit card fees and trust revenue offset by a decline
in broker/dealer and insurance revenue of $3.6 million (from the sale of M.
Griffith Inc. in March 2005). Offsetting the increases in net interest income
and noninterest income was an increase in noninterest expense of $5.5 million
in
2005 compared to 2004. The increase in noninterest expense resulted mainly
from
increases in salaries and employee benefits, occupancy expense, equipment and
other operating expense offset by a goodwill impairment charge in 2004 and
a
decrease in data processing and communications expense. The provision for loan
and lease losses decreased slightly in 2005 compared to 2004, as credit quality
was stable, net charge-offs as a percentage of total loans and leases decreased,
and the Company experienced a decline in the rate of loan growth in 2005, which
was 5.3% at December 31, 2005 compared to a growth rate of 8.7% for
2004.
ASSET/LIABILITY
MANAGEMENT
The
Company attempts to maximize net interest income, and net income, while actively
managing its liquidity and interest rate sensitivity through the mix of various
core deposit products and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company’s asset mix and
sources of funds, and the resultant impact on net interest income, on a fully
tax equivalent basis, are discussed below.
The
following table includes the condensed consolidated average balance sheet,
an
analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans and leases
has been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
Table
1. Average Balances and Net Interest Income
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
(Dollars
in thousands)
|
|
Average
Balance
|
|
Interest
|
|
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Yield/Rate
|
|
Average
Balance
|
|
Interest
|
|
Yield/Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
interest bearing accounts
|
|
$
|
8,116
|
|
$
|
395
|
|
|
4.87
|
%
|
$
|
7,298
|
|
$
|
229
|
|
|
3.14
|
%
|
$
|
7,583
|
|
$
|
222
|
|
|
2.93
|
%
|
Securities
available for sale 1
|
|
|
1,110,405
|
|
|
53,992
|
|
|
4.86
|
|
|
954,461
|
|
|
43,113
|
|
|
4.52
|
|
|
970,024
|
|
|
44,633
|
|
|
4.60
|
|
Securities
held to maturity 1
|
|
|
115,636
|
|
|
7,071
|
|
|
6.11
|
|
|
88,244
|
|
|
5,035
|
|
|
5.71
|
|
|
85,771
|
|
|
4,385
|
|
|
5.11
|
|
Investment
in FRB and FHLB Banks
|
|
|
39,437
|
|
|
2,076
|
|
|
5.26
|
|
|
37,607
|
|
|
1,898
|
|
|
5.05
|
|
|
34,813
|
|
|
854
|
|
|
2.45
|
|
Loans
and leases 2
|
|
|
3,302,080
|
|
|
230,800
|
|
|
6.99
|
|
|
2,959,256
|
|
|
190,331
|
|
|
6.43
|
|
|
2,743,753
|
|
|
164,285
|
|
|
5.99
|
|
Total
earning assets
|
|
|
4,575,674
|
|
|
294,334
|
|
|
6.43
|
|
|
4,046,866
|
|
|
240,606
|
|
|
5.95
|
|
|
3,841,944
|
|
|
214,379
|
|
|
5.58
|
|
Other
non-interest earning assets
|
|
|
349,396
|
|
|
|
|
|
|
|
|
279,289
|
|
|
|
|
|
|
|
|
278,603
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,925,070
|
|
|
|
|
|
|
|
$
|
4,326,155
|
|
|
|
|
|
|
|
$
|
4,120,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposit accounts
|
|
$
|
543,323
|
|
|
18,050
|
|
|
3.32
|
%
|
$
|
399,056
|
|
|
7,312
|
|
|
1.83
|
%
|
$
|
438,819
|
|
|
5,327
|
|
|
1.21
|
%
|
NOW
deposit accounts
|
|
|
443,339
|
|
|
3,297
|
|
|
0.74
|
|
|
439,751
|
|
|
2,305
|
|
|
0.52
|
|
|
462,509
|
|
|
2,230
|
|
|
0.48
|
|
Savings
deposits
|
|
|
532,788
|
|
|
4,597
|
|
|
0.86
|
|
|
559,584
|
|
|
3,985
|
|
|
0.71
|
|
|
574,386
|
|
|
3,846
|
|
|
0.67
|
|
Time
deposits
|
|
|
1,534,556
|
|
|
61,854
|
|
|
4.03
|
|
|
1,217,442
|
|
|
36,330
|
|
|
2.98
|
|
|
1,079,670
|
|
|
28,358
|
|
|
2.63
|
|
Total
interest-bearing deposits
|
|
|
3,054,006
|
|
|
87,798
|
|
|
2.87
|
|
|
2,615,833
|
|
|
49,932
|
|
|
1.91
|
|
|
2,555,384
|
|
|
39,761
|
|
|
1.56
|
|
Short-term
borrowings
|
|
|
331,255
|
|
|
15,448
|
|
|
4.66
|
|
|
353,644
|
|
|
10,983
|
|
|
3.11
|
|
|
302,276
|
|
|
4,086
|
|
|
1.35
|
|
Trust
preferred debentures
|
|
|
70,055
|
|
|
4,700
|
|
|
6.71
|
|
|
19,596
|
|
|
1,227
|
|
|
6.26
|
|
|
18,297
|
|
|
823
|
|
|
4.50
|
|
Long-term
debt
|
|
|
414,976
|
|
|
17,063
|
|
|
4.11
|
|
|
410,891
|
|
|
16,114
|
|
|
3.92
|
|
|
381,756
|
|
|
15,022
|
|
|
3.93
|
|
Total
interest-bearing liabilities
|
|
|
3,870,292
|
|
|
125,009
|
|
|
3.23
|
|
|
3,399,964
|
|
|
78,256
|
|
|
2.30
|
|
|
3,257,713
|
|
|
59,692
|
|
|
1.83
|
|
Demand
deposits
|
|
|
614,055
|
|
|
|
|
|
|
|
|
543,077
|
|
|
|
|
|
|
|
|
492,746
|
|
|
|
|
|
|
|
Other
non-interest-bearing liabilities
|
|
|
54,170
|
|
|
|
|
|
|
|
|
52,438
|
|
|
|
|
|
|
|
|
51,187
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
386,553
|
|
|
|
|
|
|
|
|
330,676
|
|
|
|
|
|
|
|
|
318,901
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
4,925,070
|
|
|
|
|
|
|
|
$
|
4,326,155
|
|
|
|
|
|
|
|
$
|
4,120,547
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
3.75
|
%
|
Net
interest income-FTE
|
|
|
|
|
|
169,325
|
|
|
|
|
|
|
|
|
162,350
|
|
|
|
|
|
|
|
|
154,687
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
4.03
|
%
|
Taxable
equivalent adjustment
|
|
|
|
|
|
5,492
|
|
|
|
|
|
|
|
|
4,239
|
|
|
|
|
|
|
|
|
4,200
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
163,833
|
|
|
|
|
|
|
|
$
|
158,111
|
|
|
|
|
|
|
|
$
|
150,487
|
|
|
|
|
1.
|
Securities
are shown at average amortized
cost.
|
2. |
For
purposes of these computations, nonaccrual loans are included in
the
average loan balances outstanding. The interest collected thereon
is
included in interest income based upon the characteristics of the
related
loans.
|
NET
INTEREST INCOME
On
a tax
equivalent basis, the Company’s net interest income for 2006 was $169.3 million,
up from $162.4 million for 2005. The Company’s net interest margin declined to
3.70% for 2006 from 4.01% for 2005. The decline in the net interest margin
resulted primarily from interest-bearing liabilities repricing up faster than
earning assets, offset somewhat by the increase in average demand deposits,
which increased $71.0 million or 13% during the period. Earning assets,
particularly those tied to a fixed rate, have not realized the benefit of the
higher interest rate environment, since rates for earning assets with terms
three years or longer have remained relatively flat during this period due
to
the flat/inverted yield curve. The yield on earning assets increased 48 basis
points (bp), from 5.95% for 2005 to 6.43% for 2006. Meanwhile, the rate paid
on
interest bearing liabilities increased 93 bp, from 2.30% for 2005 to 3.23%
for
2006. Additionally, offsetting the decline in net interest margin was an
increase in average earning assets of $528.8 million or 13.1%, driven primarily
by a $342.8 million increase in average loans and leases. The increase in
average loans and leases was due to organic loan growth as well as the merger
with CNB. The following table presents changes in interest income, on a FTE
basis, and interest expense attributable to changes in volume (change in average
balance multiplied by prior year rate), changes in rate (change in rate
multiplied by prior year volume), and the net change in net interest income.
The
net change attributable to the combined impact of volume and rate has been
allocated to each in proportion to the absolute dollar amounts of
change.
Table
2. Analysis of Changes in Taxable Equivalent Net Interest Income
|
|
|
|
Increase
(Decrease)
2006
over 2005
|
|
Increase
(Decrease)
2005
over 2004
|
|
(In
thousands)
|
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
|
Short-term
interest-bearing accounts
|
|
$
|
28
|
|
$
|
138
|
|
$
|
166
|
|
$
|
(9
|
)
|
$
|
16
|
|
$
|
7
|
|
Securities
available for sale
|
|
|
7,411
|
|
|
3,468
|
|
|
10,879
|
|
|
(710
|
)
|
|
(810
|
)
|
|
(1,520
|
)
|
Securities
held to maturity
|
|
|
1,654
|
|
|
382
|
|
|
2,036
|
|
|
129
|
|
|
521
|
|
|
650
|
|
Investment
in FRB and FHLB Banks
|
|
|
94
|
|
|
84
|
|
|
178
|
|
|
74
|
|
|
970
|
|
|
1,044
|
|
Loans
and leases
|
|
|
23,143
|
|
|
17,326
|
|
|
40,469
|
|
|
13,396
|
|
|
12,650
|
|
|
26,046
|
|
Total
interest income
|
|
|
33,023
|
|
|
20,705
|
|
|
53,728
|
|
|
11,771
|
|
|
14,456
|
|
|
26,227
|
|
Money
market deposit accounts
|
|
|
3,305
|
|
|
7,433
|
|
|
10,738
|
|
|
(520
|
)
|
|
2,505
|
|
|
1,985
|
|
NOW
deposit accounts
|
|
|
19
|
|
|
973
|
|
|
992
|
|
|
(113
|
)
|
|
188
|
|
|
75
|
|
Savings
deposits
|
|
|
(198
|
)
|
|
810
|
|
|
612
|
|
|
(101
|
)
|
|
240
|
|
|
139
|
|
Time
deposits
|
|
|
10,878
|
|
|
14,646
|
|
|
25,524
|
|
|
3,857
|
|
|
4,115
|
|
|
7,972
|
|
Short-term
borrowings
|
|
|
(734
|
)
|
|
5,198
|
|
|
4,464
|
|
|
799
|
|
|
6,098
|
|
|
6,897
|
|
Trust
preferred debentures
|
|
|
3,379
|
|
|
95
|
|
|
3,474
|
|
|
62
|
|
|
342
|
|
|
404
|
|
Long-term
debt
|
|
|
162
|
|
|
787
|
|
|
949
|
|
|
1,143
|
|
|
(51
|
)
|
|
1,092
|
|
Total
interest expense
|
|
|
11,940
|
|
|
34,813
|
|
|
46,753
|
|
|
2,704
|
|
|
15,860
|
|
|
18,564
|
|
Change
in FTE net interest income
|
|
$
|
21,083
|
|
$
|
(14,108
|
)
|
$
|
6,975
|
|
$
|
9,067
|
|
$
|
(1,404
|
)
|
$
|
7,663
|
|
LOANS
AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The
average balance of loans and leases increased 11.6%, totaling $3.3 billion
in
2006 compared to $3.0 billion in 2005. The yield on average loans and leases
increased from 6.43% in 2005 to 6.99% in 2006, as loans, particularly loans
indexed to Prime and other short-term variable rate indices, benefited from
the
rising rate environment in 2006. Interest income from loans and leases on a
FTE
basis increased 21.3%, from $190.3 million in 2005 to $230.8 million in 2006.
The increase in interest income from loans and leases was due primarily to
the
increase in the average balance of loans and leases from organic loan growth
and
the merger with CNB, as well as the increase in yield on loans and leases in
2006 compared to 2005 noted above.
Total
loans and leases increased 12.9% at December 31, 2006, totaling $3.4 billion
from $3.0 billion at December 31, 2005. The increase in loans and leases was
driven by strong growth in commercial and commercial real estate loans, consumer
loans, and home equity loans. Residential real estate mortgages increased $37.9
million or 5.4% at December 31, 2006 compared to December 31, 2005, primarily
due to the acquisition of CNB in February 2006, which contributed approximately
$69.8 million. Commercial and commercial real estate increased $112.7 million
at
December 31, 2006 when compared to December 31, 2005, due in large part to
an
increase in organic loan originations, as well as the acquisition of CNB which
contributed approximately $61.9 million. Real estate construction and
development loans increased $25.4 million or 36.7% from $69.1 million at
December 31, 2005 to $94.5 million at December 31, 2006. Consumer loans
increased $123.0 million or 26.5%, from $464.0 million at December 31, 2005
to
$586.9 million at December 31, 2006. The increase in consumer loans was driven
primarily by an increase in indirect loans of $91.9 million, from $365.5 million
in 2005 to $457.4 million in 2006. Home equity loans increased $82.9 million
or
17.9% from $463.8 million at December 31, 2005 to $546.7 million at December
31,
2006. The increase in home equity loans was due to strong product demand and
successful marketing of home equity products.
The
following table reflects the loan and lease portfolio by major categories as
of
December 31 for the years indicated:
Table
3. Composition of Loan and Lease Portfolio
|
|
|
|
December
31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Residential
real estate mortgages
|
|
$
|
739,607
|
|
$
|
701,734
|
|
$
|
721,615
|
|
$
|
703,906
|
|
$
|
579,638
|
|
Commercial
and commercial real estate
|
|
|
1,240,383
|
|
|
1,127,705
|
|
|
1,069,451
|
|
|
983,640
|
|
|
942,086
|
|
Real
estate construction and development
|
|
|
94,494
|
|
|
69,135
|
|
|
86,031
|
|
|
56,430
|
|
|
42,269
|
|
Agricultural
and agricultural real estate
|
|
|
118,278
|
|
|
114,043
|
|
|
108,181
|
|
|
106,310
|
|
|
104,078
|
|
Consumer
|
|
|
586,922
|
|
|
463,955
|
|
|
412,139
|
|
|
390,413
|
|
|
357,214
|
|
Home
equity
|
|
|
546,719
|
|
|
463,848
|
|
|
391,807
|
|
|
336,547
|
|
|
269,553
|
|
Lease
financing
|
|
|
86,251
|
|
|
82,237
|
|
|
80,697
|
|
|
62,730
|
|
|
61,094
|
|
Total
loans and leases
|
|
$
|
3,412,654
|
|
$
|
3,022,657
|
|
$
|
2,869,921
|
|
$
|
2,639,976
|
|
$
|
2,355,932
|
|
Real
estate construction and development loans presented in prior years have been
reclassified to conform with current year presentation which represents the
conversion of construction loans to permanent financing.
Real
estate mortgages consist primarily of loans secured by first or second deeds
of
trust on primary residences. Loans in the commercial and agricultural category,
as well as commercial and agricultural real estate mortgages, consist primarily
of short-term and/or floating rate loans made to small to medium-sized entities.
Consumer loans consist primarily of installment credit to individuals secured
by
automobiles and other personal property including manufactured housing. Indirect
installment loans represent $457.4 million of total consumer loans. Real estate
construction and development loans include commercial construction and
development and residential construction loans. Commercial construction loans
are for small and medium sized office buildings and other commercial properties
and residential construction loans are primarily for projects located in upstate
New York and northeastern Pennsylvania.
The
Company’s automobile lease financing portfolio totaled $86.3 million at December
31, 2006 and $82.2 million at December 31, 2005. Lease receivables primarily
represent automobile financing to customers through direct financing leases
and
are carried at the aggregate of the lease payments receivable and the estimated
residual values, net of unearned income and net deferred lease origination
fees
and costs. Net deferred lease origination fees and costs are amortized under
the
effective interest method over the estimated lives of the leases. The estimated
residual value related to the total lease portfolio is reviewed quarterly,
and
if there had been a decline in the estimated fair value of the residual that
is
judged by management to be other-than-temporary, including consideration of
residual value insurance, a loss would be recognized.
Adjustments
related to such other-than-temporary declines in estimated fair value are
recorded with other noninterest expenses in the consolidated statements of
income. One of the most significant risks associated with leasing operations
is
the recovery of the residual value of the leased vehicles at the termination
of
the lease. A lease receivable asset includes the estimated residual value of
the
leased vehicle at the termination of the lease. At termination, the lessor
has
the option to purchase the vehicle or may turn the vehicle over to the Company.
The residual values included in lease financing receivables totaled $59.2
million and $55.5 million at December 31, 2006 and 2005,
respectively.
The
Company has acquired residual value insurance protection in order to reduce
the
risk related to residual values. Based on analysis performed by management,
the
Company has concluded that no other-than-temporary impairment exists which
would
warrant a charge to earnings during the years ended December 31, 2006 and 2005.
The
following table, Maturities and Sensitivities of Certain Loans to Changes in
Interest Rates, are the maturities of the commercial and agricultural and real
estate and construction development loan portfolios and the sensitivity of
loans
to interest rate fluctuations at December 31, 2006. Scheduled repayments are
reported in the maturity category in which the contractual payment is
due.
Table
4. Maturities and Sensitivities of Certain Loans to Changes in
Interest Rates
|
|
|
|
Remaining
maturity at December 31, 2006
|
|
(In
thousands)
|
|
Within
One Year
|
|
After
One Year But
Within
Five Years
|
|
After
Five Years
|
|
Total
|
|
Floating/adjustable
rate
|
|
|
|
|
|
|
|
|
|
Commercial,
commercial real estate, agricultural, and agricultural real
estate
|
|
$
|
382,864
|
|
$
|
123,484
|
|
$
|
1,133
|
|
$
|
507,481
|
|
Real
estate construction and development
|
|
|
59,085
|
|
|
987
|
|
|
-
|
|
|
60,072
|
|
Total
floating rate loans
|
|
|
441,949
|
|
|
124,471
|
|
|
1,133
|
|
|
567,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
commercial real estate, agricultural, and agricultural real
estate
|
|
|
324,754
|
|
|
439,883
|
|
|
86,543
|
|
|
851,180
|
|
Real
estate construction and development
|
|
|
644
|
|
|
6,522
|
|
|
27,256
|
|
|
34,422
|
|
Total
fixed rate loans
|
|
|
325,398
|
|
|
446,405
|
|
|
113,799
|
|
|
885,602
|
|
Total
|
|
$
|
767,347
|
|
$
|
570,876
|
|
$
|
114,932
|
|
$
|
1,453,155
|
|
SECURITIES
AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The
average balance of the amortized cost for securities available for sale in
2006
was $1.1 billion, an increase of $155.9 million, or 16.3%, from $954.5 million
in 2005. The yield on average securities available for sale was 4.86% for 2006
compared to 4.52% in 2005. The increase in yield on securities available for
sale resulted from the increasing rate environment.
The
average balance of securities held to maturity increased from $88.2 million
in
2005 to $115.6 million in 2006. At December 31, 2006, securities held to
maturity were comprised primarily of tax-exempt municipal securities. The yield
on securities held to maturity increased from 5.71% in 2005 to 6.11% in 2006
from higher yields for tax-exempt securities purchased during 2006. Investments
in FRB and Federal Home Loan Bank (FHLB) stock increased to $39.4 million in
2006 from $37.7 million in 2005. This increase was driven primarily by an
increase in the investment in FHLB resulting from an increase in the Company’s
borrowing capacity at FHLB. The yield from investments in FRB and FHLB Banks
increased from 5.05% in 2005 to 5.26% in 2006. In 2003, the FHLB disclosed
it
had capital concerns and credit issues in their investment security portfolio.
As a result of these issues, the FHLB reduced their dividend rate in 2005 and
increased the rate back to normal in 2006.
The
Company classifies its securities at date of purchase as either available for
sale, held to maturity or trading. Held to maturity debt securities are those
that the Company has the ability and intent to hold until maturity. Available
for sale securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, on available for sale securities are
excluded from earnings and are reported in stockholders’ equity as a component
of accumulated other comprehensive income or loss. Held to maturity securities
are recorded at amortized cost. Trading securities are recorded at fair value,
with net unrealized gains and losses recognized 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
non-accrual status.
Non-marketable
equity securities are carried at cost, with the exception of small business
investment company (SBIC) investments, which are carried at fair value in
accordance with SBIC rules.
Premiums
and discounts are amortized or accreted over the life of the related security
as
an adjustment to yield using the interest method. Dividend and interest income
are recognized when earned. Realized gains and losses on securities sold are
derived using the specific identification method for determining the cost of
securities sold.
Table
5. Securities Portfolio
|
|
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Securities
available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
10,516
|
|
$
|
10,487
|
|
$
|
10,005
|
|
$
|
10,005
|
|
$
|
10,037
|
|
$
|
9,977
|
|
Federal
Agency and mortgage-backed
|
|
|
744,078
|
|
|
731,754
|
|
|
684,907
|
|
|
672,602
|
|
|
694,928
|
|
|
696,835
|
|
State
& Municipal, collateralized mortgage Obligations, corporate and other
securities
|
|
|
361,854
|
|
|
364,081
|
|
|
269,826
|
|
|
271,867
|
|
|
238,770
|
|
|
245,730
|
|
Total
securities available for sale
|
|
$
|
1,116,448
|
|
$
|
1,106,322
|
|
$
|
964,738
|
|
$
|
954,474
|
|
$
|
943,735
|
|
$
|
952,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Agency and mortgage-backed
|
|
$
|
3,434
|
|
$
|
3,497
|
|
$
|
4,354
|
|
$
|
4,482
|
|
$
|
6,412
|
|
$
|
6,706
|
|
State
& Municipal
|
|
|
132,213
|
|
|
132,123
|
|
|
87,582
|
|
|
87,446
|
|
|
75,128
|
|
|
75,764
|
|
Other
securities
|
|
|
667
|
|
|
667
|
|
|
1,773
|
|
|
1,773
|
|
|
242
|
|
|
242
|
|
Total
securities held to maturity
|
|
$
|
136,314
|
|
$
|
136,287
|
|
$
|
93,709
|
|
$
|
93,701
|
|
$
|
81,782
|
|
$
|
82,712
|
|
In
the
available for sale category at December 31, 2006, federal agency securities
were
comprised of Government-Sponsored Enterprise (“GSE”) securities;
Mortgaged-backed securities were comprised of GSEs with an amortized cost of
$352.0 million and a fair value of $341.8 million and US Government Agency
securities with an amortized cost of $48.5 million and a fair value of $48.2
million; Collateralized mortgage obligations were comprised of GSEs with an
amortized cost of $164.8 million and a fair value of $163.0 million and US
Government Agency securities with an amortized cost of $77.1 million and a
fair
value of $75.8 million. At December 31, 2006, all of the mortgaged-backed
securities held to maturity were comprised of US Government Agency
securities.
The
following tables set forth information with regard to contractual maturities
of
debt securities at December 31, 2006:
(In
thousands)
|
|
Amortized
cost
|
|
Estimated
fair
value
|
|
Weighted
Average
Yield
|
|
Debt
securities classified as available for sale
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
61,314
|
|
$
|
61,107
|
|
|
4.54
|
%
|
From
one to five years
|
|
|
266,686
|
|
|
264,821
|
|
|
4.81
|
%
|
From
five to ten years
|
|
|
162,935
|
|
|
163,074
|
|
|
4.99
|
%
|
After
ten years
|
|
|
608,604
|
|
|
597,075
|
|
|
4.92
|
%
|
|
|
$
|
1,099,539
|
|
$
|
1,086,077
|
|
|
|
|
Debt
securities classified as held to maturity
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
63,308
|
|
$
|
63,301
|
|
|
4.21
|
%
|
From
one to five years
|
|
|
34,850
|
|
|
34,632
|
|
|
3.67
|
%
|
From
five to ten years
|
|
|
29,479
|
|
|
29,453
|
|
|
3.89
|
%
|
After
ten years
|
|
|
14,817
|
|
|
15,042
|
|
|
5.04
|
%
|
|
|
$
|
142,454
|
|
$
|
142,428
|
|
|
|
|
FUNDING
SOURCES AND CORRESPONDING INTEREST EXPENSE
The
Company utilizes traditional deposit products such as time, savings, NOW, money
market, and demand deposits as its primary source for funding. Other sources,
such as short-term FHLB advances, federal funds purchased, securities sold
under
agreements to repurchase, brokered time deposits, and long-term FHLB borrowings
are utilized as necessary to support the Company’s growth in assets and to
achieve interest rate sensitivity objectives. The average balance of
interest-bearing liabilities increased $470.3 million, totaling $3.9 billion
in
2006 from $3.4 billion in 2005. The rate paid on interest-bearing liabilities
increased from 2.30% in 2005 to 3.23% in 2006. Increases in the rate paid on
and
the average balance of interest bearing liabilities caused an increase in
interest expense of $46.8 million, or 59.8%, from $78.3 million in 2005 to
$125.0 million in 2006.
DEPOSITS
Average
interest bearing deposits increased $438.2 million during 2006 compared to
2005.
The increase resulted primarily from increases in time deposits and money market
deposits, partially offset by a decrease in savings deposits. Average time
deposits increased $317.1 million or 26.0% during 2006 when compared to 2005.
The increase in average time deposits resulted primarily from increases in
retail and municipal and negotiated rate time deposits. In addition, the
acquisition of CNB contributed approximately $129.3 million in time deposits.
Average money market deposits increased $144.3 million or 36.2% during 2006
when
compared to 2005. The increase in average money market deposits resulted
primarily from an increase in personal money market deposits, as well as the
acquisition of CNB which contributed approximately $52.3 million to money market
deposits. The average balance of savings and NOW accounts decreased collectively
$23.2 million or 2.3% during 2006 when compared to 2005. The decrease in savings
and NOW accounts was driven primarily from municipal customers shifting their
funds into higher paying money market and time deposits in 2006. As a result
of
the flat/inverted yield curve, money market accounts and time deposits reprice
in a higher interest rate environment. The average balance of demand deposits
increased $71.0 million, or 13.1%, from $543.1 million in 2005 to $614.1 million
in 2006. Solid growth in demand deposits was driven principally by increases
in
accounts from retail and business customers, in large part due to the
acquisition of CNB which contributed approximately $48.0 million to demand
deposits.
The
rate
paid on average interest-bearing deposits increased 96 bp from 1.91% during
2005
to 2.87% in 2006. The increase in rate on interest-bearing deposits was driven
primarily by pricing increases from money market accounts and time deposits.
These deposit products are more sensitive to interest rate changes. The pricing
increases for these products resulted from several increases in short-term
rates
by the FRB during 2006 combined with competitive pricing for market competitors.
The Company expects this trend to continue for money market accounts and time
deposits in 2006. The rates paid for NOW accounts increased from 0.52% in 2005
to 0.74% in 2006, while rates paid for savings deposits increased from 0.71%
in
2005 to 0.86% in 2006.
The
following table presents the maturity distribution of time deposits of $100,000
or more at December 31, 2006:
Table
6. Maturity Distribution of Time Deposits of $100,000 or More
|
|
(In
thousands)
|
|
December
31, 2006
|
|
Within
three months
|
|
$
|
380,862
|
|
After
three but within twelve months
|
|
|
299,727
|
|
After
one but within three years
|
|
|
135,113
|
|
Over
three years
|
|
|
8,634
|
|
Total
|
|
$
|
824,336
|
|
BORROWINGS
Average
short-term borrowings decreased $22.4 million to $331.3 million in 2006 as
a
result of the balance sheet changes due to the acquisition of CNB. The average
rate paid on short-term borrowings increased from 3.11% in 2005 to 4.66% in
2006, which was primarily driven by the Federal Reserve Bank increasing the
Fed
Funds target rate (which directly impacts short-term borrowing rates) 100 bp
in
2006 and 200 bp in 2005. The increases in the average rate paid caused interest
expense on short-term borrowings to increase $4.5 million from $11.0 million
in
2005 to $15.4 million in 2006. Average long-term debt increased slightly from
$410.9 million in 2005 to $415.0 million in 2006.
The
average balance of trust preferred debentures increased $50.5 million in 2006
compared to 2005. The average rate paid for trust preferred debentures in 2006
was 6.71%, up 45 bp from 6.26% in 2005. The increase in rate on the trust
preferred debentures is due primarily to the previously mentioned increase
in
short-term rates during 2006. The increase in the average balance of trust
preferred debentures is due primarily to the issuance of $51.5 million of trust
preferred debentures in February 2006 at a fixed rate of 6.195%.
Short-term
borrowings consist of Federal funds purchased and securities sold under
repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily FHLB advances, with
original maturities of one year or less. The Company has unused lines of credit
and access to brokered deposits available for short-term financing of
approximately $849 million and $594 million at December 31, 2006 and 2005,
respectively. Securities collateralizing repurchase agreements are held in
safekeeping by non-affiliated financial institutions and are under the Company’s
control. Long-term debt, which is comprised primarily of FHLB advances, are
collateralized by the FHLB stock owned by the Company, certain of its
mortgage-backed securities and a blanket lien on its residential real estate
mortgage loans.
RISK
MANAGEMENT-CREDIT RISK
Credit
risk is managed through a network of loan officers, credit committees, loan
policies, and oversight from the senior credit officers and Board of Directors.
Management follows a policy of continually identifying, analyzing, and grading
credit risk inherent in each loan portfolio. An ongoing independent review,
subsequent to management’s review, of individual credits in the commercial loan
portfolio is performed by the independent loan review function. These components
of the Company’s underwriting and monitoring functions are critical to the
timely identification, classification, and resolution of problem
credits.
NONPERFORMING
ASSETS
Table
7. Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
(Dollars
in thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and agricultural loans and real estate
|
|
$
|
9,346
|
|
$
|
9,373
|
|
$
|
10,550
|
|
$
|
8,693
|
|
$
|
16,980
|
|
Real
estate mortgages
|
|
|
2,338
|
|
|
2,009
|
|
|
2,553
|
|
|
2,483
|
|
|
5,522
|
|
Consumer
|
|
|
1,981
|
|
|
2,037
|
|
|
1,888
|
|
|
2,685
|
|
|
1,507
|
|
Total
nonaccrual loans
|
|
|
13,665
|
|
|
13,419
|
|
|
14,991
|
|
|
13,861
|
|
|
24,009
|
|
Loans
90 days or more past due and still accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and agricultural loans and real estate
|
|
|
138
|
|
|
-
|
|
|
-
|
|
|
242
|
|
|
237
|
|
Real
estate mortgages
|
|
|
682
|
|
|
465
|
|
|
737
|
|
|
244
|
|
|
1,325
|
|
Consumer
|
|
|
822
|
|
|
413
|
|
|
449
|
|
|
482
|
|
|
414
|
|
Total
loans 90 days or more past due and still accruing
|
|
|
1,642
|
|
|
878
|
|
|
1,186
|
|
|
968
|
|
|
1,976
|
|
Restructured
loans
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
409
|
|
Total
nonperforming loans
|
|
|
15,307
|
|
|
14,297
|
|
|
16,177
|
|
|
14,829
|
|
|
26,394
|
|
Other
real estate owned
|
|
|
389
|
|
|
265
|
|
|
428
|
|
|
1,157
|
|
|
2,947
|
|
Total
nonperforming loans and other real estate owned
|
|
|
15,696
|
|
|
14,562
|
|
|
16,605
|
|
|
15,986
|
|
|
29,341
|
|
Nonperforming
securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
395
|
|
|
1,122
|
|
Total
nonperforming loans, securities, and other real estate
owned
|
|
$
|
15,696
|
|
$
|
14,562
|
|
$
|
16,605
|
|
$
|
16,381
|
|
$
|
30,463
|
|
Total
nonperforming loans to loans and leases
|
|
|
0.45
|
%
|
|
0.47
|
%
|
|
0.56
|
%
|
|
0.56
|
%
|
|
1.12
|
%
|
Total
nonperforming loans and other real estate owned to total
assets
|
|
|
0.31
|
%
|
|
0.33
|
%
|
|
0.39
|
%
|
|
0.40
|
%
|
|
0.79
|
%
|
Total
nonperforming loans, securities, and other real estate owned to total
assets
|
|
|
0.31
|
%
|
|
0.33
|
%
|
|
0.39
|
%
|
|
0.40
|
%
|
|
0.82
|
%
|
Total
allowance for loan and lease losses to nonperforming loans
|
|
|
330.48
|
%
|
|
331.92
|
%
|
|
277.75
|
%
|
|
287.62
|
%
|
|
152.18
|
%
|
The
allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan and lease portfolio’s risk profile. It is evaluated to ensure that it
is sufficient to absorb all reasonably estimable credit losses inherent in
the
current loan and lease portfolio.
Management
considers the accounting policy relating to the allowance for loan and lease
losses to be a critical accounting policy given the inherent uncertainty in
evaluating the levels of the allowance required to cover credit losses in the
portfolio and the material effect that such judgments can have on the
consolidated results of operations.
For
purposes of evaluating the adequacy of the allowance, the Company considers
a
number of significant factors that affect the collectibility of the portfolio.
For individually analyzed loans, these include estimates of loss exposure,
which
reflect the facts and circumstances that affect the likelihood of repayment
of
such loans as of the evaluation date. For homogeneous pools of loans and leases,
estimates of the Company’s exposure to credit loss reflect a current assessment
of a number of factors, which could affect collectibility. These factors
include: past loss experience; size, trend, composition, and nature of loans;
changes in lending policies and procedures, including underwriting standards
and
collection, charge-offs and recoveries; trends experienced in nonperforming
and
delinquent loans; current economic conditions in the Company’s market; portfolio
concentrations that may affect loss experienced across one or more components
of
the portfolio; the effect of external factors such as competition, legal and
regulatory requirements; and the experience, ability, and depth of lending
management and staff. In addition, various regulatory agencies as an integral
component of their examination process periodically review the Company’s
allowance for loan and lease losses. Such agencies may require the Company
to
recognize additions to the allowance based on their
examination.
After
a
thorough consideration of the factors discussed above, any required additions
to
the allowance for loan and lease losses are made periodically by charges to
the
provision for loan and lease losses. These charges are necessary to maintain
the
allowance at a level which management believes is reasonably reflective of
overall inherent risk of probable loss in the portfolio. While management uses
available information to recognize losses on loans and leases, additions to
the
allowance may fluctuate from one reporting period to another. These fluctuations
are reflective of changes in risk associated with portfolio content and/or
changes in management’s assessment of any or all of the determining factors
discussed above.
Total
nonperforming assets were $15.7 million at December 31, 2006, compared to $14.6
million at December 31, 2005. Credit quality remained stable in 2006, as
nonperforming loans totaled $15.3 million at December 31, 2006, up from the
$14.3 million outstanding at December 31, 2005. Nonperforming loans as a
percentage of total loans and leases decreased to 0.45% for December 31, 2006
from 0.47% at December 31, 2005. The total allowance for loan and lease losses
is 330.48% of non-performing loans at December 31, 2006 as compared to 331.92%
at December 31, 2005.
Impaired
loans, which primarily consist of nonaccruing commercial type loans, decreased
slightly, totaling $9.3 million at December 31, 2006 as compared to $9.4 million
at December 31, 2005. At December 31, 2006, $2.2 million of the total impaired
loans had a specific reserve allocation of $0.2 million or 10% compared to
$2.9
million of total impaired loans at December 31, 2005 which had no specific
reserve allocation.
Total
net
charge-offs for 2006 totaled $8.7 million as compared to $6.9 million for 2005.
The ratio of net charge-offs to average loans and leases was 0.26% for 2006
compared to 0.23% for 2005. Gross charge-offs increased $2.4 million, totaling
$13.4 million for 2006 compared to $11.0 million for 2005. Recoveries increased
from $4.1 million in 2005 to $4.7 million in 2006. The provision for loan and
lease losses decreased slightly to $9.4 million in 2006 from $9.5 million in
2005. The allowance for loan and lease losses as a percentage of total loans
and
leases was 1.48% at December 31, 2006 and 1.57% at December 31, 2005. While
potential problem loans have increased slightly, potential problem loans have
decreased as a percentage of the loan portfolio, offset by an increase in net
charge-offs.
Table
8. Allowance for Loan and Lease Losses
|
|
(Dollars
in thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Balance
at January 1
|
|
$
|
47,455
|
|
$
|
44,932
|
|
$
|
42,651
|
|
$
|
40,167
|
|
$
|
44,746
|
|
Loans
and leases charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and agricultural
|
|
|
6,132
|
|
|
3,403
|
|
|
4,595
|
|
|
5,619
|
|
|
9,970
|
|
Real
estate mortgages
|
|
|
542
|
|
|
741
|
|
|
772
|
|
|
362
|
|
|
2,547
|
|
Consumer*
|
|
|
6,698
|
|
|
6,875
|
|
|
6,239
|
|
|
5,862
|
|
|
5,805
|
|
Total
loans and leases charged-off
|
|
|
13,372
|
|
|
11,019
|
|
|
11,606
|
|
|
11,843
|
|
|
18,322
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and agricultural
|
|
|
1,939
|
|
|
1,695
|
|
|
2,547
|
|
|
3,185
|
|
|
3,394
|
|
Real
estate mortgages
|
|
|
239
|
|
|
438
|
|
|
215
|
|
|
430
|
|
|
104
|
|
Consumer*
|
|
|
2,521
|
|
|
1,945
|
|
|
1,510
|
|
|
1,601
|
|
|
1,172
|
|
Total
recoveries
|
|
|
4,699
|
|
|
4,078
|
|
|
4,272
|
|
|
5,216
|
|
|
4,670
|
|
Net
loans and leases charged-off
|
|
|
8,673
|
|
|
6,941
|
|
|
7,334
|
|
|
6,627
|
|
|
13,652
|
|
Allowance
related to purchase acquisitions
|
|
|
2,410
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Provision
for loan and lease losses
|
|
|
9,395
|
|
|
9,464
|
|
|
9,615
|
|
|
9,111
|
|
|
9,073
|
|
Balance
at December 31
|
|
$
|
50,587
|
|
$
|
47,455
|
|
$
|
44,932
|
|
$
|
42,651
|
|
$
|
40,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses to loans and leases outstanding at end
of
year
|
|
|
1.48
|
%
|
|
1.57
|
%
|
|
1.57
|
%
|
|
1.62
|
%
|
|
1.70
|
%
|
Net
charge-offs to average loans and leases outstanding
|
|
|
0.26
|
%
|
|
0.23
|
%
|
|
0.27
|
%
|
|
0.27
|
%
|
|
0.58
|
%
|
*
Consumer charge-off and recoveries include consumer, home equity,
and
lease financing.
|
Total
nonperforming assets were $14.6 million at December 31, 2005, compared to $16.6
million at December 31, 2004. Credit quality remained stable in 2005, as
nonperforming loans totaled $14.3 million at December 31, 2005, down from the
$16.2 million outstanding at December 31, 2004. Nonperforming loans as a
percentage of total loans and leases decreased to 0.47% for December 31, 2005
from 0.56% at December 31, 2004. The total allowance for loan and lease losses
was 331.92% of nonperforming loans at December 31, 2005 as compared to 277.75%
at December 31, 2004.
Total
net
charge-offs for 2005 totaled $6.9 million as compared to $7.3 million for 2004.
The ratio of net charge-offs to average loans and leases was 0.23% for 2005
compared with 0.27% for 2004. Gross charge-offs decreased $0.6 million, totaling
$11.0 million for 2005 compared to $11.6 million for 2004. Recoveries decreased
slightly, from $4.3 million in 2004 to $4.1 million in 2005. The provision
for
loan and lease losses decreased slightly to $9.5 million in 2005 from $9.6
million in 2004. The allowance for loan and lease losses as a percentage of
total loans and leases was 1.57% at December 31, 2005 and 2004. The slight
increase in the provision for loan and lease losses in 2005 compared to 2004
resulted mainly from loan growth and an increase in potential problem loans
discussed below, offset by decreases in net charge-offs and nonperforming loans.
In
addition to the nonperforming loans discussed above, the Company has also
identified approximately $69.8 million in potential problem loans at December
31, 2006 as compared to $69.5 million at December 31, 2005. 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
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 December 31, 2006 and 2005,
potential problem loans primarily consisted of commercial and agricultural
loans. At December 31, 2006, there were nineteen potential problem loans that
exceeded $1.0 million, totaling $31.1 million in aggregate compared to fifteen
potential problem loans exceeding $1.0 million, totaling $38.3 million at
December 31, 2005. Management cannot predict the extent to which economic
conditions may worsen or other factors which may impact borrowers and the
potential problem loans. Accordingly, there can be no assurance that other
loans
will not become 90 days or more past due, be placed on nonaccrual, become
restructured, or require increased allowance coverage and provision for loan
losses.
The
following table sets forth the allocation of the allowance for loan losses
by
category, as well as the percentage of loans and leases in each category to
total loans and leases, as prepared by the Company. This allocation is based
on
management’s assessment of the risk characteristics of each of the component
parts of the total loan portfolio as of a given point in time and is subject
to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts of the loan
categories in which future charge-offs may be taken, nor should it be taken
as
an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category. The following table sets forth the allocation of the allowance for
loan losses by loan category:
Table
9. Allocation of the Allowance for Loan and Lease Losses
|
|
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
2003
|
|
|
|
2002
|
|
|
|
(Dollars
in thousands)
|
|
Allowance
|
|
Category
Percent
of
Loans
|
|
Allowance
|
|
Category
Percent
of
Loans
|
|
Allowance
|
|
Category
Percent
of
Loans
|
|
Allowance
|
|
Category
Percent
of
Loans
|
|
Allowance
|
|
Category
Percent
of
Loans
|
|
Commercial
and agricultural
|
|
$
|
28,149
|
|
|
43
|
%
|
$
|
30,257
|
|
|
43
|
%
|
$
|
28,158
|
|
|
44
|
%
|
$
|
25,502
|
|
|
43
|
%
|
$
|
25,589
|
|
|
46
|
%
|
Real
estate mortgages
|
|
|
3,377
|
|
|
22
|
%
|
|
3,148
|
|
|
23
|
%
|
|
4,029
|
|
|
25
|
%
|
|
4,699
|
|
|
27
|
%
|
|
3,884
|
|
|
25
|
%
|
Consumer
|
|
|
17,327
|
|
|
35
|
%
|
|
12,402
|
|
|
34
|
%
|
|
10,887
|
|
|
31
|
%
|
|
9,357
|
|
|
30
|
%
|
|
7,654
|
|
|
29
|
%
|
Unallocated
|
|
|
1,734
|
|
|
0
|
%
|
|
1,648
|
|
|
0
|
%
|
|
1,858
|
|
|
0
|
%
|
|
3,093
|
|
|
0
|
%
|
|
3,040
|
|
|
0
|
%
|
Total
|
|
$
|
50,587
|
|
|
100
|
%
|
$
|
47,455
|
|
|
100
|
%
|
$
|
44,932
|
|
|
100
|
%
|
$
|
42,651
|
|
|
100
|
%
|
$
|
40,167
|
|
|
100
|
%
|
In
2006,
the Company updated its historical charge-off factors for graded commercial
and
agricultural loans, as well as revising its environmental risk factors for
all
loan types. This was done to be consistent with the Interagency
Policy Statement on the Allowance for Loan and Lease Losses,
issued
in December 2006. As a result, there was a decrease in the amount of
allowance for loan and lease losses allocated to the commercial and agricultural
portfolio and an increase in the amount allocated to the consumer
loan portfolio. The unallocated reserve was relatively flat year over year.
For
2005,
the reserve allocation for commercial and agricultural loans increased as a
decrease in net charge-off experience was offset by an increase in potential
problem loans. The reserve allocation for real estate mortgages decreased,
consistent with the decline in real estate mortgages and continued low
charge-off experience. The reserve allocation for consumer loans increased
from
increases in net charge-offs and strong loan growth. The unallocated reserve
decreased slightly to $1.6 million for 2005 from $1.9 million for
2004.
At
December 31, 2006, approximately 58.6% of the Company’s loans are secured by
real estate located in central and northern New York and northeastern
Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion
of the Company’s portfolio is susceptible to changes in market conditions of
those areas. Management is not aware of any material concentrations of credit
to
any industry or individual borrowers.
LIQUIDITY
RISK
Liquidity
involves the ability to meet the cash flow requirements of customers who may
be
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. The Asset
Liability Committee (ALCO) is responsible for liquidity management and has
developed guidelines which cover all assets and liabilities, as well as off
balance sheet items that are potential sources or uses of liquidity. Liquidity
policies must also provide the flexibility to implement appropriate strategies
and tactical actions. Requirements change as loans and leases grow, deposits
and
securities mature, and payments on borrowings are made. Liquidity management
includes a focus on interest rate sensitivity management with a goal of avoiding
widely fluctuating net interest margins through periods of changing economic
conditions.
The
primary liquidity measurement the Company utilizes is called Basic Surplus
which
captures the adequacy of its access to reliable sources of cash relative to
the
stability of its funding mix of average liabilities. This approach recognizes
the importance of balancing levels of cash flow liquidity from short and
long-term securities with the availability of dependable borrowing sources
which
can be accessed when necessary. At December 31, 2006, the Company’s Basic
Surplus measurement was 7.9% of total assets or $399 million, which was above
the Company’s minimum of 5% (calculated at $253 million of period end total
assets at December 31, 2006) set forth in its liquidity policies.
This
Basic Surplus approach enables the Company to adequately manage liquidity from
both operational and contingency perspectives. By tempering the need for cash
flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At December 31, 2006, the
Company considered its Basic Surplus position to be adequate. However, certain
events may adversely impact the Company’s liquidity position in 2007. Continued
improvement in the economy may increase demand for equity related products
or
increase competitive pressure on deposit pricing, which in turn, could result
in
a decrease in the Company’s deposit base or increase funding costs.
Additionally, liquidity will come under additional pressure if loan growth
exceeds deposit growth in 2007. These scenarios could lead to a decrease in
the
Company’s basic surplus measure below the minimum policy level of 5%. To manage
this risk, the Company has the ability to purchase brokered time deposits,
established borrowing facilities with other banks (Federal funds), and has
the
ability to enter into repurchase agreements with investment companies. The
additional liquidity that could be provided by these measures amounted to $849
million at December 31, 2006.
At
December 31, 2006, a portion of the Company’s loans and securities were pledged
as collateral on borrowings. Therefore, future growth of earning assets will
depend upon the Company’s ability to obtain additional funding, through growth
of core deposits and collateral management, and may require further use of
brokered time deposits, or other higher cost borrowing
arrangements.
Net
cash
flows provided by operating activities totaled $64.2 million in 2006 and $65.1
million in 2005. The critical elements of net operating cash flows include
net
income, after adding back provision for loan and lease losses, and depreciation
and amortization.
Net
cash
used in investing activities totaled $276.2 million in 2006 and $206.1 million
in 2005. Critical elements of investing activities are loan and investment
securities transactions. The increase in cash used in investing activities
in
2006 was primarily due to cash used in the CNB merger and a net increase in
loans, which totaled $211.3 million in 2006 compared to $157.0 million in
2005.
Net
cash
flows provided by financing activities totaled $208.3 million in 2006 and $176.8
million in 2005. The critical elements of financing activities are proceeds
from
deposits, short-term borrowings, and stock issuances. In addition, financing
activities are impacted by dividends and treasury stock transactions.
In
connection with its financing and operating activities, the Company has entered
into certain contractual obligations. The Company’s future minimum cash
payments, excluding interest, associated with its contractual obligations
pursuant to its borrowing agreements and operating leases at December 31, 2006
are as follows:
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Period
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Total
|
|
Long-term
debt obligations
|
|
$
|
93,700
|
|
$
|
115,209
|
|
$
|
75,000
|
|
$
|
31,000
|
|
$
|
3,815
|
|
$
|
99,004
|
|
$
|
417,728
|
|
Trust
preferred debentures
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
75,422
|
|
|
75,422
|
|
Operating
lease obligations
|
|
|
2,931
|
|
|
2,460
|
|
|
2,007
|
|
|
1,651
|
|
|
1,576
|
|
|
11,006
|
|
|
21,631
|
|
Retirement
plan obligations
|
|
|
4,114
|
|
|
4,093
|
|
|
4,212
|
|
|
4,229
|
|
|
4,212
|
|
|
22,878
|
|
|
43,738
|
|
Data
processing commitments
|
|
|
7,467
|
|
|
7,205
|
|
|
6,737
|
|
|
6,737
|
|
|
437
|
|
|
109
|
|
|
28,692
|
|
Total
contractual obligations
|
|
$
|
108,212
|
|
$
|
128,967
|
|
$
|
87,956
|
|
$
|
43,617
|
|
$
|
10,040
|
|
$
|
208,419
|
|
$
|
587,211
|
|
OFF-BALANCE
SHEET RISK COMMITMENTS TO EXTEND CREDIT
The
Company makes contractual commitments to extend credit, which include unused
lines of credit, which are subject to the Company’s credit approval and
monitoring procedures. At December 31, 2006 and 2005, commitments to extend
credit in the form of loans, including unused lines of credit, amounted to
$536.3 million and $497.1 million, respectively. In the opinion of management,
there are no material commitments to extend credit, including unused lines
of
credit, that represent unusual risks. All commitments to extend credit in the
form of loans, including unused lines of credit, expire within one
year.
STAND-BY
LETTERS OF CREDIT
The
Company does not issue any guarantees that would require liability-recognition
or disclosure, other than its stand-by letters of credit. The Company guarantees
the obligations or performance of customers by issuing stand-by letters of
credit to third parties. These stand-by letters of credit are frequently issued
in support of third party debt, such as corporate debt issuances, industrial
revenue bonds, and municipal securities. The risk involved in issuing stand-by
letters of credit is essentially the same as the credit risk involved in
extending loan facilities to customers, and they are subject to the same credit
origination, portfolio maintenance and management procedures in effect to
monitor other credit and off-balance sheet products. Typically, these
instruments have terms of five years or less and expire unused; therefore,
the
total amounts do not necessarily represent future cash requirements. At December
31, 2006 and 2005, outstanding stand-by letters of credit were approximately
$30.8 million and $42.9 million, respectively. The fair value of the Company’s
stand-by letters of credit at December 31, 2006 and 2005 was not significant.
The following table sets forth the commitment expiration period for stand-by
letters of credit at December 31, 2006:
Commitment
Expiration of Stand-by Letters of Credit
|
|
Within
one year
|
|
$
|
24,643
|
|
After
one but within three years
|
|
|
2,061
|
|
After
three but within five years
|
|
|
48
|
|
After
five years
|
|
|
4,000
|
|
Total
|
|
$
|
30,752
|
|
LOANS
SERVICED FOR OTHERS AND LOANS SOLD WITH RECOURSE
The
total
amount of loans serviced by the Company for unrelated third parties was
approximately $105.0 million and $81.2 million at December 31, 2006 and 2005,
respectively. At December 31, 2006 and 2005, the Company serviced $5.7 million
and $5.8 million, respectively, of loans sold with recourse. Due to collateral
on these loans, no reserve is considered necessary at December 31, 2006 and
2005.
CAPITAL
RESOURCES
Consistent
with its goal to operate a sound and profitable financial institution, the
Company actively seeks to maintain a “well-capitalized” institution in
accordance with regulatory standards. The principal source of capital to the
Company is earnings retention. The Company’s capital measurements are in excess
of both regulatory minimum guidelines and meet the requirements to be considered
well capitalized.
The
Company’s principal source of funds to pay interest on trust preferred
debentures and pay cash dividends to its shareholders is dividends from its
subsidiaries. Various laws and regulations restrict the ability of banks to
pay
dividends to their shareholders. Generally, the payment of dividends by the
Company in the future as well as the payment of interest on the capital
securities will require the generation of sufficient future earnings by its
subsidiaries.
The
Bank
also is subject to substantial regulatory restrictions on its ability to pay
dividends to the Company. Under OCC regulations, the Bank may not pay a
dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the proposed dividend, exceed
the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. At December 31, 2006, approximately
$68.1 million of the total stockholders’ equity of the Bank was available for
payment of dividends to the Company without approval by the OCC. The Bank’s
ability to pay dividends also is subject to the Bank being in compliance with
regulatory capital requirements. The Bank is currently in compliance with these
requirements.
STOCK
REPURCHASE PLAN
On
January 24, 2005, the Company’s Board of Directors adopted a new repurchase
program whereby the Company is authorized to repurchase up to 1,500,000 shares
(approximately 5%) of its outstanding common stock. At that time, there were
719,800 shares remaining under the January 26, 2004 authorization that was
superseded by the new repurchase program. On January 23, 2006, the Company’s
Board of Directors adopted a new repurchase program whereby the Company is
authorized to repurchase up to an additional 1,000,000 shares (approximately
3%)
of its outstanding common stock. The shares remaining under the 2005
authorization will be combined with the 2006 authorization, increasing the
total
shares available for repurchase to 1,503,151. During 2006, the Company
repurchased 766,004 shares of its own commons stock for $17.1 million at an
average price of $22.34 per share. At December 31, 2006, there were 737,147
shares available for repurchase under previously announced plans.
NONINTEREST
INCOME
Noninterest
income is a significant source of revenue for the Company and an important
factor in the Company’s results of operations. The following table sets forth
information by category of noninterest income for the years
indicated:
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Service
charges on deposit accounts
|
|
$
|
17,590
|
|
$
|
16,894
|
|
$
|
16,470
|
|
Broker/dealer
and insurance revenue
|
|
|
3,936
|
|
|
3,186
|
|
|
6,782
|
|
Trust
|
|
|
5,629
|
|
|
5,029
|
|
|
4,605
|
|
Bank
owned life insurance income
|
|
|
1,629
|
|
|
1,347
|
|
|
1,487
|
|
ATM
fees
|
|
|
7,086
|
|
|
6,162
|
|
|
5,530
|
|
Retirement
plan administration fees
|
|
|
5,536
|
|
|
4,426
|
|
|
-
|
|
Other
|
|
|
8,098
|
|
|
6,741
|
|
|
5,799
|
|
Total
before net securities (losses) gains
|
|
|
49,504
|
|
|
43,785
|
|
|
40,673
|
|
Net
securities (losses) gains
|
|
|
(875
|
)
|
|
(1,236
|
)
|
|
216
|
|
Total
|
|
$
|
48,629
|
|
$
|
42,549
|
|
$
|
40,889
|
|
Noninterest
income for the year ended December 31, 2006 was $48.6 million, up $6.1 million
or 14.3% from $42.5 million for the same period in 2005. Fees from service
charges on deposit accounts and ATM and debit cards collectively increased
$1.6
million from solid growth in demand deposit accounts and debit card base.
Retirement plan administration fees for the year ended December 31, 2006
increased $1.1 million, compared with the same period in 2005, as a result
of
our growing client base. Trust administration income increased $0.6 million
for
the year ended December 31, 2006, compared with the same period in 2005. This
increase stems from the increased market value of accounts, an increase in
customer accounts as a result of the acquisition of CNB and successful business
development. Broker/dealer and insurance revenue for the year ended December
31,
2006 increased $0.8 million in large part due to the growth in brokerage income
from retail financial services as well as the addition of Hathaway Agency as
part of the acquisition of CNB. Other noninterest income for the year ended
December 31, 2006 increased $1.4 million, compared with the same period in
2005,
as a result of a gain on the sale of a branch, an increase in title insurance
revenue, and an increase in interest income earned from our payment services
vendor. Net securities losses for the year ended December 31, 2006 were $0.9
million, compared with net securities losses of $1.2 million for the year ended
December 31, 2005. Excluding the effect of these securities transactions,
noninterest income increased $5.7 million, or 13.1%, for the year ended December
31, 2006, compared with the same period in 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 years indicated:
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Salaries
and employee benefits
|
|
$
|
62,877
|
|
$
|
60,005
|
|
$
|
55,204
|
|
Occupancy
|
|
|
11,518
|
|
|
10,452
|
|
|
9,905
|
|
Equipment
|
|
|
8,332
|
|
|
8,118
|
|
|
7,573
|
|
Data
processing and communications
|
|
|
10,454
|
|
|
10,349
|
|
|
10,972
|
|
Professional
fees and outside services
|
|
|
7,761
|
|
|
6,087
|
|
|
6,175
|
|
Office
supplies and postage
|
|
|
5,330
|
|
|
4,628
|
|
|
4,459
|
|
Amortization
of intangible assets
|
|
|
1,649
|
|
|
544
|
|
|
284
|
|
Loan
collection and other real estate owned
|
|
|
1,351
|
|
|
1,002
|
|
|
1,241
|
|
Goodwill
impairment
|
|
|
-
|
|
|
-
|
|
|
1,950
|
|
Other
|
|
|
13,694
|
|
|
14,120
|
|
|
12,014
|
|
Total
noninterest expense
|
|
$
|
122,966
|
|
$
|
115,305
|
|
$
|
109,777
|
|
Noninterest
expense for the year ended December 31, 2006 was $123.0 million, up from $115.3
million for the same period in 2005. Office expenses, such as supplies and
postage, occupancy, equipment and data processing and communications charges,
increased by $2.1 million for the year ended December 31, 2006, compared with
the same period in 2005. This 6.2% increase resulted primarily from the
acquisition of CNB. Salaries and employee benefits increased $2.9 million for
the year ended December 31, 2006 over the same period in 2005. This increase
was
due primarily to the adoption of FAS 123R in 2006, which contributed $1.8
million to the increase in salaries and employee benefits, as well as higher
salaries from merit increases and the acquisition of CNB. Professional fees
and
services increased $1.7 million for the year ended December 31, 2006, compared
with the same period in 2005. Legal fees incurred in 2006 increased over 2005
because the Company was reimbursed during the second quarter of 2005 for legal
fees associated with a prior litigation. Item processing fees during the year
ended December 31, 2006 increased over the same period in 2005 because the
Company outsourced a portion of its item processing work as a result of
flood-related damage to one of its processing centers. Amortization expense
increased $1.1 million for the year ended December 31, 2006 over the same period
in 2005. This increase was due primarily to the acquisition of CNB. Loan
collection and other real estate owned expenses increased $0.3 million for
the
year ended December 31, 2006 over the same period in 2005. This increase was
due
primarily to an increase in the number of foreclosures in 2006 as compared
to
2005. Other operating expense for the year ended December 31, 2006 decreased
$0.4 million compared with the same period in 2005, primarily due to
flood-related insurance recoveries.
INCOME
TAXES
Income
tax expense for the year ended December 31, 2006 was $24.2 million, up from
$23.5 million for the same period in 2005. The effective rate for the year
ended
December 31, 2006 was 30.2%, down from 30.9% for the same period in 2005. The
decrease in the effective tax rate for the year ended December 31, 2006 versus
the same period in 2005 resulted primarily from an increase in interest income
from tax-exempt sources.
The
proposed 2007 New York State budget bill contains a provision that would
disallow the exclusion of dividends paid by a real estate investment trust
subsidiary (“REIT”). The bill, if enacted as proposed would be effective for
taxable years beginning on or after January 1, 2007, and the Company would
lose
the tax benefit associated with the REIT. Additionally, the proposed legislation
would disallow the deduction for bad debts in excess of bank losses that had
been written off, require the add back of expenses related to the 22.5%
deduction of interest income from NYS and US obligations and eliminate the
20%
reduction in the wage factor of the apportionment formula. Had the provision
been effective in 2006, it would have resulted in an increase in income tax
expense of $0.7 million.
We
calculate our current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the subsequent year. Adjustments based on filed returns
are
recorded when identified, which is generally in the third quarter of the
subsequent year for U.S. federal and state provisions.
The
amount of income taxes we pay is subject at times to ongoing audits by federal
and state tax authorities, which often result in proposed assessments. Our
estimate for the potential outcome for any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may
include favorable or unfavorable adjustments to our estimated tax liabilities
in
the period the assessments are proposed or resolved or when statutes of
limitation on potential assessments expire. As a result, our effective tax
rate
may fluctuate significantly on a quarterly or annual basis.
2005
OPERATING RESULTS AS COMPARED TO 2004 OPERATING RESULTS
NET
INTEREST INCOME
On
a tax
equivalent basis, the Company’s net interest income for 2005 was $162.4 million,
up from $154.7 million for 2004. The Company’s net interest margin declined
slightly to 4.01% for 2005 from 4.03% for 2004. The decline in the net interest
margin resulted primarily from interest-bearing liabilities repricing up faster
than earning assets, offset somewhat by the increase in average demand deposits,
which increased $50.3 million or 10% during the period. The yield on earning
assets increased 37 basis points (bp), from 5.58% for 2004 to 5.95% for 2005.
Meanwhile, the rate paid on interest bearing liabilities increased 47 bp, from
1.83% for 2004 to 2.30% for 2005. Additionally, offsetting the decline in net
interest margin was an increase in average earning assets of $204.9 million
or
5%, driven primarily by a $215.5 million increase in average loans and
leases.
LOANS
AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The
average balance of loans and leases increased 8%, totaling $3.0 billion in
2005
compared to $2.7 billion in 2004. The yield on average loans and leases
increased from 5.99% in 2004 to 6.43% in 2005, as loans, particularly loans
indexed to Prime and other short-term variable rate indices, benefited from
the
rising rate environment in 2005. Interest income from loans and leases on a
FTE
basis increased 16%, from $164.3 million in 2004 to $190.3 million in 2005.
The
increase in interest income from loans and leases was due primarily to the
increase in the average balance of loans and leases as well as the increase
in
yield on loans and leases in 2005 compared to 2004 noted above.
Total
loans and leases increased 5% at December 31, 2005, totaling $3.0 billion from
$2.9 billion at December 31, 2004. The increase in loans and leases was driven
by strong growth in home equity loans, consumer loans, and real estate
construction and development (primarily comprised of commercial real estate.)
Home equity loans increased $72.0 million or 18% from $391.8 million at December
31, 2004 to $463.8 million at December 31, 2005. The increase in home equity
loans was due to strong product demand and successful marketing of home equity
products in newer markets. Consumer loans increased $51.8 million or 13%, from
$412.1 million at December 31, 2004 to $464.0 million at December 31, 2005.
The
increase in consumer loans was driven primarily by strong growth in indirect
auto lending from an expanded presence in Pennsylvania and newer markets in
New
York. Real estate construction and development loans increased $26.9 million
or
20% from $136.9 million at December 31, 2004 to $163.9 million at December
31,
2005, as the Bank originated several large commercial construction development
loans in 2005 in its newer markets. Commercial and commercial real estate
remained relatively unchanged at December 31, 2005 when compared to December
31,
2004, as new loan originations were offset by prepayments as competition for
these loan types was particularly strong across all of the Company’s markets in
2005. Residential real estate mortgages declined $19.9 million or 3% at December
31, 2005 compared to December 31, 2004 as the Company began selling real estate
mortgages in the secondary market during the second half of 2005 as a means
of
limiting its exposure to long-term interest rate risk.
SECURITIES
AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The
average balance of the amortized cost for securities available for sale in
2005
was $954.5 million, a decrease of $15.6 million, or 2%, from $970.0 million
in
2004. The yield on average securities available for sale was 4.52% for 2005
compared to 4.60% in 2004. The slight decrease in yield on securities available
for sale resulted from continued efforts to shorten the duration and weighted
average life of the securities available for sale portfolio in 2005. At December
31, 2005, approximately 53% of total securities were comprised of fifteen/ten
year mortgage-backed securities and collateralized mortgage obligations (CMOs),
22% were comprised of US Agency notes and bonds and 5% were comprised of
thirty/twenty year mortgaged-backed securities. At December 31, 2004, the mix
was 67% fifteen/ten year mortgage-backed securities and CMOs, 11% US Agency
notes and bonds and 9% of thirty/twenty year mortgaged-backed securities.
Furthermore, the Company shortened the estimated weighted average life of the
total securities portfolio from 4.6 years at December 31, 2004 to 4.1 years
at
December 31, 2005. In the event of a rising rate environment, the Company should
be positioned to reinvest cash flows at a faster rate from shortening the
expected life of the portfolio.
The
average balance of securities held to maturity increased from $85.8 million
in
2004 to $88.2 million in 2005. At December 31, 2005, securities held to maturity
were comprised primarily of tax-exempt municipal securities. The yield on
securities held to maturity increased from 5.11% in 2004 to 5.71% in 2005 from
higher yields for tax-exempt securities purchased during 2005. Investments
in
FRB and Federal Home Loan Bank (FHLB) stock increased to $37.7 million in 2005
from $34.8 million in 2004. This increase was driven primarily by an increase
in
the investment in FHLB resulting from an increase in the Company’s borrowing
capacity at FHLB. The yield from investments in FRB and FHLB Banks increased
from 2.45% in 2004 to 5.05% in 2005. In 2003, the FHLB disclosed it had capital
concerns and credit issues in their investment security portfolio. As a result
of these issues, the FHLB reduced their dividend rate in 2004.
DEPOSITS
Average
interest bearing deposits increased $60.4 million during 2005 compared to 2004.
The increase resulted primarily from increases in time deposits offset by
declines in money market, savings and NOW accounts. Average time deposits
increased $137.8 million or 13% during 2005 when compared to 2004. The increase
in average time deposits resulted primarily from increases in municipal, jumbo
and brokered time deposits. The average balance of money market, savings and
NOW
accounts decreased collectively $77.3 million or 5% during 2005 when compared
to
2004. The decrease in money market and NOW accounts was driven primarily from
municipal customers shifting their funds into higher paying time deposits in
2005. The decrease in savings was driven primarily from retail customers
shifting funds into higher paying money market accounts and time deposits.
The
average balance of demand deposits increased $50.3 million, or 10%, from $492.7
million in 2004 to $543.1 million in 2005. Solid growth in demand deposits
was
driven principally by increases in accounts from retail and business customers
in newer markets. The ratio of average demand deposits to total average deposits
increased from 16.2% in 2004 to 17.2% in 2005.
The
rate
paid on average interest-bearing deposits increased 35 bp from 1.56% during
2004
to 1.91% in 2005. The increase in rate on interest-bearing deposits was driven
primarily by pricing increases from money market accounts and time deposits.
These deposit products are more sensitive to interest rate changes. The pricing
increases for these products resulted from several increases in short-term
rates
by the FRB during 2005 combined with competitive pricing for market competitors.
The Company expects this trend to continue for money market accounts and time
deposits in 2006. The rates paid for NOW and savings accounts remained
relatively unchanged for 2005 compared to 2004. These product types are not
as
sensitive to rate changes and pricing pressure from competitors was
low.
BORROWINGS
Average
short-term borrowings increased $51.4 million to $353.6 million in 2005. The
average rate paid on short-term borrowings increased from 1.35% in 2004 to
3.11%
in 2005, as the Federal Reserve Bank increased the discount rate (which directly
impacts short-term borrowing rates) 200 bp in 2005. The increases in the average
balance and the average rate paid caused interest expense on short-term
borrowings to increase $6.9 million from $4.1 million in 2004 to $11.0 million
in 2005. Average long-term debt increased $29.1 million from $381.8 million
in
2004 to $410.9 million in 2005. The increases in long-term debt and short-term
borrowings resulted primarily from loan growth exceeding deposit growth in
2005.
NONINTEREST
INCOME
Noninterest
income for the year ended December 31, 2005, was $42.5 million, up $1.6 million
from $40.9 million for the same period in 2004. Excluding net securities losses
of $1.2 million for 2005 and net securities gains of $216 thousand in 2004,
total noninterest income increased $2.9 million or 7% from the same period
in
2004. Net securities losses of $1.2 million resulted from the sale of $47.8
million in securities available for sale to improve investment portfolio yield
going forward. Retirement plan administration fees were $4.4 million. This
is a
new service from the acquisition of EPIC Advisors, Inc. in January 2005. ATM
and
debit card fees increased $0.6 million compared with the same period a year
ago,
due to growth from transaction deposit accounts, which has led to an increase
in
the Company’s debit card base. Other income increased $0.9 million from
increases in consumer banking fees, mortgage banking income and title insurance
revenue. Offsetting these increases was a $3.6 million decrease in broker/dealer
and insurance revenue due to the sale of the Company’s broker/dealer subsidiary,
M. Griffith, Inc. in March 2005.
NONINTEREST
EXPENSE
Noninterest
expense for the year ended December 31, 2005, was $115.3 million, up $5.5
million or 5% from $109.8 million for the same period in 2004. The increase
in
noninterest expense was due largely to increases in salaries and employee
benefits, occupancy, equipment and other expense offset by a decrease in data
processing and communications expense. Also, 2004 included a $2.0 million
goodwill impairment charge. Salaries and employee benefits increased $4.8
million primarily from merit increases as well as an increase in retirement
costs and incentive compensation. Occupancy expense increased $0.5 million,
driven principally by branch expansion and rising energy costs. Equipment
expense increased $0.5 million from various technology upgrades. Other operating
expense increased $2.1 million, principally from the reversal of a previously
accrued $1.4 million liability that was determined in the fourth quarter of
2004
to no longer be required. The $2.0 million goodwill impairment charge in 2004
resulted from the expected sale of the Company’s broker/dealer subsidiary, M
Griffith, Inc. in the first quarter of 2005. The decrease in data processing
and
communications of $0.6 million was driven by a contract renewal with the
Company’s core data system service provider in 2005.
IMPACT
OF INFLATION AND CHANGING PRICES
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
|
Interest
rate risk is the most significant market risk affecting the Company. Other
types
of market risk, such as foreign currency exchange rate risk and commodity price
risk, do not arise in the normal course of the Company’s business activities or
are immaterial to the results of operations.
Interest
rate risk is defined as an exposure to a movement in interest rates that could
have an adverse effect on the Company’s net interest income. Net interest income
is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than earning assets. When
interest-bearing liabilities mature or reprice more quickly than earning assets
in a given period, a significant increase in market rates of interest could
adversely affect net interest income. Similarly, when earning assets mature
or
reprice more quickly than interest-bearing liabilities, falling interest rates
could result in a decrease in net interest income.
In
an
attempt to manage the Company’s exposure to changes in interest rates,
management monitors the Company’s interest rate risk. Management’s
asset/liability committee (ALCO) meets monthly to review the Company’s interest
rate risk position and profitability, and to recommend strategies for
consideration by the Board of Directors. Management also reviews loan and
deposit pricing, and the Company’s securities portfolio, formulates investment
and funding strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board’s objectives in the most
effective manner. Notwithstanding the Company’s interest rate risk management
activities, the potential for changing interest rates is an uncertainty that
can
have an adverse effect on net income.
In
adjusting the Company’s asset/liability position, the Board and management
attempt to manage the Company’s interest rate risk while minimizing the net
interest margin compression. At times, depending on the level of general
interest rates, the relationship between long and short-term interest rates,
market conditions and competitive factors, the Board and management may
determine to increase the Company’s interest rate risk position somewhat in
order to increase its net interest margin. The Company’s results of operations
and net portfolio values remain vulnerable to changes in interest rates and
fluctuations in the difference between long and short-term interest
rates.
The
primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next repricing date (if needed), and current rates is uploaded into the model
to
create an ending balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and leases and mortgage related investment
securities along with any optionality within the deposits and borrowings. The
model is first run under an assumption of a flat rate scenario (i.e. no change
in current interest rates) with a static balance sheet over a 12-month period.
Two additional models are run in which a gradual increase of 200 bp and a
gradual decrease of 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 increase slightly
when compared to the forecasted net interest income in the flat rate scenario
through the simulation period. The increase in net interest income is a result
of interest-bearing liabilities repricing downward slightly faster than earning
assets. However, the inability to effectively lower deposit rates will likely
reduce or eliminate the otherwise normal expected benefit of lower interest
rates. In the rising rate scenarios, net interest income is projected to
experience a decline from the flat rate scenario. The potential impact on
earnings is dependent on the ability to lag deposit repricing. Net interest
income for the next twelve months in the +200/-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 December 31, 2006 balance sheet position:
Table
10. Interest Rate Sensitivity Analysis
|
|
|
|
Change
in interest rates
|
|
Percent
change
|
(In
basis points)
|
|
in
net interest income
|
+200
|
|
|
(4.01
|
%)
|
-200
|
|
|
0.22
|
%
|
Under
the
flat rate scenario with a static balance sheet, net interest income is
anticipated to decrease approximately 1.4% from total net interest income for
2006. The Company anticipates under current conditions, interest expense is
expected to increase at a faster rate that interest income as the Company is
somewhat liability sensitive. In order to protect net interest income from
anticipated net interest margin compression, the Company will continue to focus
on increasing earning assets through loan growth and leverage opportunities.
However, if the Company cannot maintain the level of earning assets at December
31, 2006, the Company expects net interest income to decline in
2007.
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,
limiting its exposure to long-term fixed rate assets. The Company has also
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, from time to time
during 2006, the Company has increased its long-term debt to offset exposure
to
long-term earning assets.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
NBT
Bancorp Inc.:
We
have
audited the accompanying consolidated balance sheets of NBT Bancorp Inc. and
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of income, changes in stockholders’ equity, cash flows
and comprehensive income for each of the years in the three-year period ended
December 31, 2006. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NBT Bancorp Inc. and
subsidiaries at December 31, 2006 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of NBT Bancorp Inc.’s
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal
Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated February 27, 2007 expressed an unqualified opinion on
management’s assessment of, and effective operation of, internal control over
financial reporting.
/S/
KPMG
LLP
Albany,
New York
February
27, 2007
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
As
of December 31,
|
|
(In
thousands, except share and per share data)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
130,936
|
|
$
|
134,501
|
|
Short-term
interest bearing accounts
|
|
|
7,857
|
|
|
7,987
|
|
Securities
available for sale, at fair value
|
|
|
1,106,322
|
|
|
954,474
|
|
Securities
held to maturity (fair value $136,287 and $93,701)
|
|
|
136,314
|
|
|
93,709
|
|
Federal
Reserve and Federal Home Loan Bank stock
|
|
|
38,812
|
|
|
40,259
|
|
Loans
and leases
|
|
|
3,412,654
|
|
|
3,022,657
|
|
Less
allowance for loan and lease losses
|
|
|
50,587
|
|
|
47,455
|
|
Net
loans and leases
|
|
|
3,362,067
|
|
|
2,975,202
|
|
Premises
and equipment, net
|
|
|
66,982
|
|
|
63,693
|
|
Goodwill
|
|
|
103,356
|
|
|
47,544
|
|
Intangible
assets, net
|
|
|
11,984
|
|
|
3,808
|
|
Bank
owned life insurance
|
|
|
41,783
|
|
|
33,648
|
|
Other
assets
|
|
|
81,159
|
|
|
71,948
|
|
Total
assets
|
|
$
|
5,087,572
|
|
$
|
4,426,773
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Demand
(noninterest bearing)
|
|
$
|
646,377
|
|
$
|
593,422
|
|
Savings,
NOW, and money market
|
|
|
1,566,557
|
|
|
1,325,166
|
|
Time
|
|
|
1,583,304
|
|
|
1,241,608
|
|
Total
deposits
|
|
|
3,796,238
|
|
|
3,160,196
|
|
Short-term
borrowings
|
|
|
345,408
|
|
|
444,977
|
|
Long-term
debt
|
|
|
417,728
|
|
|
414,330
|
|
Trust
preferred debentures
|
|
|
75,422
|
|
|
23,875
|
|
Other
liabilities
|
|
|
48,959
|
|
|
49,452
|
|
Total
liabilities
|
|
|
4,683,755
|
|
|
4,092,830
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; authorized 2,500,000 shares at December 31,
2006
and 2005.
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.01 par value. Authorized 50,000,000 shares at December
31, 2006
and 2005; issued 36,459,491 and
34,400,925 at December 31, 2006 and 2005, respectively
|
|
|
365
|
|
|
344
|
|
Additional
paid-in-capital
|
|
|
271,528
|
|
|
219,157
|
|
Unvested
restricted stock
|
|
|
-
|
|
|
(457
|
)
|
Retained
earnings
|
|
|
191,770
|
|
|
163,989
|
|
Accumulated
other comprehensive loss
|
|
|
(14,014
|
)
|
|
(6,477
|
)
|
Common
stock in treasury, at cost, 2,203,549 and 2,101,382 shares
|
|
|
(45,832
|
)
|
|
(42,613
|
)
|
Total
stockholders’ equity
|
|
|
403,817
|
|
|
333,943
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
5,087,572
|
|
$
|
4,426,773
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
|
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2004
|
|
Interest,
fee, and dividend income
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$
|
230,042
|
|
$
|
189,714
|
|
$
|
163,795
|
|
Securities
available for sale
|
|
|
51,599
|
|
|
41,120
|
|
|
42,264
|
|
Securities
held to maturity
|
|
|
4,730
|
|
|
3,407
|
|
|
3,044
|
|
Other
|
|
|
2,471
|
|
|
2,126
|
|
|
1,076
|
|
Total
interest, fee, and dividend income
|
|
|
288,842
|
|
|
236,367
|
|
|
210,179
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
87,798
|
|
|
49,932
|
|
|
39,761
|
|
Short-term
borrowings
|
|
|
15,448
|
|
|
10,984
|
|
|
4,086
|
|
Long-term
debt
|
|
|
17,063
|
|
|
16,114
|
|
|
15,022
|
|
Trust
preferred debentures
|
|
|
4,700
|
|
|
1,226
|
|
|
823
|
|
Total
interest expense
|
|
|
125,009
|
|
|
78,256
|
|
|
59,692
|
|
Net
interest income
|
|
|
163,833
|
|
|
158,111
|
|
|
150,487
|
|
Provision
for loan and lease losses
|
|
|
9,395
|
|
|
9,464
|
|
|
9,615
|
|
Net
interest income after provision for loan and lease losses
|
|
|
154,438
|
|
|
148,647
|
|
|
140,872
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
17,590
|
|
|
16,894
|
|
|
16,470
|
|
Broker/
dealer and insurance revenue
|
|
|
3,936
|
|
|
3,186
|
|
|
6,782
|
|
Trust
|
|
|
5,629
|
|
|
5,029
|
|
|
4,605
|
|
Net
securities (losses) gains
|
|
|
(875
|
)
|
|
(1,236
|
)
|
|
216
|
|
Bank
owned life insurance
|
|
|
1,629
|
|
|
1,347
|
|
|
1,487
|
|
ATM
Fees
|
|
|
7,086
|
|
|
6,162
|
|
|
5,530
|
|
Retirement
plan administration fees
|
|
|
5,536
|
|
|
4,426
|
|
|
-
|
|
Other
|
|
|
8,098
|
|
|
6,741
|
|
|
5,799
|
|
Total
noninterest income
|
|
|
48,629
|
|
|
42,549
|
|
|
40,889
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
62,877
|
|
|
60,005
|
|
|
55,204
|
|
Occupancy
|
|
|
11,518
|
|
|
10,452
|
|
|
9,905
|
|
Equipment
|
|
|
8,332
|
|
|
8,118
|
|
|
7,573
|
|
Data
processing and communications
|
|
|
10,454
|
|
|
10,349
|
|
|
10,972
|
|
Professional
fees and outside services
|
|
|
7,761
|
|
|
6,087
|
|
|
6,175
|
|
Office
supplies and postage
|
|
|
5,330
|
|
|
4,628
|
|
|
4,459
|
|
Amortization
of intangible assets
|
|
|
1,649
|
|
|
544
|
|
|
284
|
|
Loan
collection and other real estate owned
|
|
|
1,351
|
|
|
1,002
|
|
|
1,241
|
|
Goodwill
impairment
|
|
|
-
|
|
|
-
|
|
|
1,950
|
|
Other
|
|
|
13,694
|
|
|
14,120
|
|
|
12,014
|
|
Total
noninterest expense
|
|
|
122,966
|
|
|
115,305
|
|
|
109,777
|
|
Income
before income tax expense
|
|
|
80,101
|
|
|
75,891
|
|
|
71,984
|
|
Income
tax expense
|
|
|
24,154
|
|
|
23,453
|
|
|
21,937
|
|
Net
income
|
|
$
|
55,947
|
|
$
|
52,438
|
|
$
|
50,047
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.65
|
|
$
|
1.62
|
|
$
|
1.53
|
|
Diluted
|
|
|
1.64
|
|
|
1.60
|
|
|
1.51
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
Additional
|
|
Unvested
|
|
|
|
other
|
|
Common
|
|
|
|
2006,
2005, and 2004
|
|
Common
|
|
Paid-in-
|
|
Restricted
|
|
Retained
|
|
comprehensive
|
|
stock
in
|
|
|
|
(In
thousands except share and per share data)
|
|
stock
|
|
capital
|
|
Stock
|
|
earnings
|
|
(loss)/
income
|
|
treasury
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
344
|
|
|
216,636
|
|
|
(197
|
)
|
|
112,647
|
|
|
7,933
|
|
|
(27,329
|
)
|
|
310,034
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
50,047
|
|
|
-
|
|
|
-
|
|
|
50,047
|
|
Cash
dividends- $0.74 per share
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24,251
|
)
|
|
-
|
|
|
-
|
|
|
(24,251
|
)
|
Purchase
of 423,989 treasury shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9,149
|
)
|
|
(9,149
|
)
|
Net
issuance of 458,593 shares to employee benefit plans and other stock
plans, including tax benefit
|
|
|
-
|
|
|
1,317
|
|
|
-
|
|
|
(1,120
|
)
|
|
-
|
|
|
8,103
|
|
|
8,300
|
|
Grant
of 14,547 shares of restricted stock awards
|
|
|
-
|
|
|
59
|
|
|
(312
|
)
|
|
-
|
|
|
-
|
|
|
253
|
|
|
-
|
|
Amortization
of restricted stock awards
|
|
|
-
|
|
|
-
|
|
|
196
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
196
|
|
Forfeited
963 shares of restricted stock
|
|
|
-
|
|
|
-
|
|
|
17
|
|
|
-
|
|
|
-
|
|
|
(17
|
)
|
|
-
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,944
|
)
|
|
-
|
|
|
(2,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
$
|
344
|
|
$
|
218,012
|
|
$
|
(296
|
)
|
$
|
137,323
|
|
$
|
4,989
|
|
$
|
(28,139
|
)
|
$
|
332,233
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
52,438
|
|
|
-
|
|
|
-
|
|
|
52,438
|
|
Cash
dividends- $0.76 per share
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24,673
|
)
|
|
-
|
|
|
-
|
|
|
(24,673
|
)
|
Purchase
of 1,008,114 treasury shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(23,165
|
)
|
|
(23,165
|
)
|
Net
issuance of 415,976 shares to employee benefit plans and other stock
plans, including tax benefit
|
|
|
-
|
|
|
1,292
|
|
|
-
|
|
|
(1,099
|
)
|
|
-
|
|
|
8,025
|
|
|
8,218
|
|
Grant
of 35,003 shares of restricted stock awards
|
|
|
-
|
|
|
(147
|
)
|
|
(519
|
)
|
|
-
|
|
|
-
|
|
|
666
|
|
|
-
|
|
Amortization
of restricted stock awards
|
|
|
-
|
|
|
-
|
|
|
358
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
358
|
|
Other
comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,466
|
)
|
|
-
|
|
|
(11,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
$
|
344
|
|
$
|
219,157
|
|
$
|
(457
|
)
|
$
|
163,989
|
|
$
|
(6,477
|
)
|
$
|
(42,613
|
)
|
$
|
333,943
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55,947
|
|
|
-
|
|
|
-
|
|
|
55,947
|
|
Cash
dividends- $0.76 per share
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(26,018
|
)
|
|
-
|
|
|
-
|
|
|
(26,018
|
)
|
Purchase
of 766,004 treasury shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(17,111
|
)
|
|
(17,111
|
)
|
Issuance
of 2,058,661 shares of common stock in connection with purchase business
combination
|
|
|
21
|
|
|
48,604
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,625
|
|
Issuance
of 237,278 incentive stock options in purchase transaction
|
|
|
-
|
|
|
1,955
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,955
|
|
Acquisition
of 2,500 shares of company stock in purchase transaction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(55
|
)
|
|
(55
|
)
|
Net
issuance of 595,447 shares to employee benefit plans and other stock
plans, including tax benefit
|
|
|
-
|
|
|
1,244
|
|
|
-
|
|
|
(2,148
|
)
|
|
-
|
|
|
12,508
|
|
|
11,604
|
|
Reclassification
adjustment from the adoption of FAS123R
|
|
|
-
|
|
|
(457
|
)
|
|
457
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
2,509
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,509
|
|
Grant
of 73,515 shares of restricted stock awards
|
|
|
-
|
|
|
(1,499
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,499
|
|
|
-
|
|
Forfeit
2,625 shares of restricted stock
|
|
|
-
|
|
|
15
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(60
|
)
|
|
(45
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
84
|
|
|
-
|
|
|
84
|
|
Adjustment
to initially apply SFAS No. 158, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,621
|
)
|
|
-
|
|
|
(7,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
365
|
|
$
|
271,528
|
|
$
|
-
|
|
$
|
191,770
|
|
$
|
(14,014
|
)
|
$
|
(45,832
|
)
|
$
|
403,817
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
(In
thousands, except per share data)
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
55,947
|
|
$
|
52,438
|
|
$
|
50,047
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
9,395
|
|
|
9,464
|
|
|
9,615
|
|
Depreciation
and amortization of premises and equipment
|
|
|
6,074
|
|
|
6,296
|
|
|
6,057
|
|
Net
accretion on securities
|
|
|
178
|
|
|
1,362
|
|
|
2,406
|
|
Amortization
of intangible assets
|
|
|
1,649
|
|
|
544
|
|
|
284
|
|
Stock-based
compensation expense
|
|
|
2,509
|
|
|
358
|
|
|
196
|
|
Bank
owned life insurance income
|
|
|
(1,629
|
)
|
|
(1,347
|
)
|
|
(1,487
|
)
|
Deferred
income tax expense
|
|
|
9,767
|
|
|
743
|
|
|
7,602
|
|
Proceeds
from sale of loans held for sale
|
|
|
36,407
|
|
|
24,690
|
|
|
19,541
|
|
Originations
and purchases of loans held for sale
|
|
|
(33,601
|
)
|
|
(27,674
|
)
|
|
(2,631
|
)
|
Net
gains on sales of loans held for sale
|
|
|
(85
|
)
|
|
(55
|
)
|
|
(89
|
)
|
Net
security losses (gains)
|
|
|
875
|
|
|
1,236
|
|
|
(216
|
)
|
Net
gain on sales of other real estate owned
|
|
|
(374
|
)
|
|
(351
|
)
|
|
(909
|
)
|
Net
gain on sale of branch
|
|
|
(470
|
)
|
|
-
|
|
|
-
|
|
Tax
benefit from exercise of stock options
|
|
|
-
|
|
|
1,057
|
|
|
1,336
|
|
Goodwill
impairment
|
|
|
-
|
|
|
-
|
|
|
1,950
|
|
Net
(increase) decrease in other assets
|
|
|
(18,800
|
)
|
|
1,803
|
|
|
2,164
|
|
Net
(decrease) increase in other liabilities
|
|
|
(2,325
|
)
|
|
(5,506
|
)
|
|
696
|
|
Net
cash provided by operating activities
|
|
|
65,517
|
|
|
65,058
|
|
|
96,562
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for the acquisition of EPIC Advisors, Inc.
|
|
|
-
|
|
|
(6,129
|
)
|
|
-
|
|
Net
cash paid for sale of branch
|
|
|
(2,307
|
)
|
|
-
|
|
|
-
|
|
Cash
received for the sale of M. Griffith Inc.
|
|
|
-
|
|
|
1,016
|
|
|
-
|
|
Net
cash used in CNB Bancorp, Inc. merger
|
|
|
(21,223
|
)
|
|
-
|
|
|
-
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls, and principal paydowns
|
|
|
217,232
|
|
|
173,460
|
|
|
262,999
|
|
Proceeds
from sales
|
|
|
42,292
|
|
|
53,044
|
|
|
12,950
|
|
Purchases
|
|
|
(265,052
|
)
|
|
(250,003
|
)
|
|
(253,469
|
)
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls, and principal paydowns
|
|
|
45,990
|
|
|
44,624
|
|
|
55,770
|
|
Purchases
|
|
|
(80,485
|
)
|
|
(56,654
|
)
|
|
(40,388
|
)
|
Net
increase in loans
|
|
|
(211,280
|
)
|
|
(156,998
|
)
|
|
(254,985
|
)
|
Net
decrease (increase) in Federal Reserve and FHLB stock
|
|
|
1,447
|
|
|
(3,417
|
)
|
|
(2,799
|
)
|
Purchases
of premises and equipment, net
|
|
|
(4,176
|
)
|
|
(6,055
|
)
|
|
(7,357
|
)
|
Proceeds
from sales of other real estate owned
|
|
|
1,028
|
|
|
1,022
|
|
|
2,582
|
|
Net
cash used in investing activities
|
|
|
(276,534
|
)
|
|
(206,090
|
)
|
|
(224,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
307,033
|
|
|
86,358
|
|
|
72,487
|
|
Net
(decrease) increase in short-term borrowings
|
|
|
(99,569
|
)
|
|
106,154
|
|
|
35,892
|
|
Proceeds
from issuance of long-term debt
|
|
|
-
|
|
|
60,000
|
|
|
30,000
|
|
Repayments
of long-term debt
|
|
|
(19,157
|
)
|
|
(40,193
|
)
|
|
(5,177
|
)
|
Proceeds
from the issuance of trust preferred debentures
|
|
|
51,547
|
|
|
5,155
|
|
|
-
|
|
Tax
benefit from exercise of stock options
|
|
|
466
|
|
|
-
|
|
|
-
|
|
Proceeds
from the issuance of shares to employee benefit plans and other stock
plans
|
|
|
10,131
|
|
|
7,161
|
|
|
6,964
|
|
Purchase
of treasury stock
|
|
|
(17,111
|
)
|
|
(23,165
|
)
|
|
(9,149
|
)
|
Cash
dividends and payment for fractional shares
|
|
|
(26,018
|
)
|
|
(24,673
|
)
|
|
(24,251
|
)
|
Net
cash provided by financing activities
|
|
|
207,322
|
|
|
176,797
|
|
|
106,766
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(3,695
|
)
|
|
35,765
|
|
|
(21,369
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
142,488
|
|
|
106,723
|
|
|
128,092
|
|
Cash
and cash equivalents at end of year
|
|
$
|
138,793
|
|
$
|
142,488
|
|
$
|
106,723
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
121,447
|
|
$
|
76,563
|
|
$
|
60,181
|
|
Income
taxes
|
|
|
19,914
|
|
|
23,582
|
|
|
10,696
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
Loans
transferred to OREO
|
|
$
|
778
|
|
$
|
360
|
|
$
|
885
|
|
Adjustment
to initially apply SFAS No. 158, net of tax
|
|
|
(7,621
|
)
|
|
-
|
|
|
-
|
|
Dispositions:
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets sold
|
|
$
|
3,453
|
|
$
|
1,405
|
|
$
|
-
|
|
Fair
value of liabilities transferred
|
|
|
5,760
|
|
|
389
|
|
|
-
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
422,097
|
|
$
|
6,565
|
|
$
|
-
|
|
Goodwill
and identifiable intangible assets recognized in purchase
combination
|
|
|
65,637
|
|
|
-
|
|
|
-
|
|
Fair
value of liabilities assumed
|
|
|
360,648
|
|
|
435
|
|
|
-
|
|
Fair
value of equity issued in purchase combination
|
|
|
50,525
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
Consolidated
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Net
income
|
|
$
|
55,947
|
|
$
|
52,438
|
|
$
|
50,047
|
|
Other
comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
Unrealized
net holding losses arising during the year (pre-tax amounts of $737,
$20,308, and $4,531)
|
|
|
(442
|
)
|
|
(12,209
|
)
|
|
(2,724
|
)
|
Less
reclassification adjustment for net losses (gains) related to securities
available for sale included in net income (pre-tax amounts of $875,
$1,236, and ($216))
|
|
|
526
|
|
|
743
|
|
|
(131
|
)
|
Minimum
pension liability adjustment (pre-tax amounts of $0, $0, and
$147)
|
|
|
-
|
|
|
-
|
|
|
(89
|
)
|
Total
other comprehensive income (loss)
|
|
|
84
|
|
|
(11,466
|
)
|
|
(2,944
|
)
|
Comprehensive
income
|
|
$
|
56,031
|
|
$
|
40,972
|
|
$
|
47,103
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
NBT
BANCORP INC. AND SUBSIDIARIES:
NOTES
TO
CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER
31, 2006
AND 2005
(1)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
accounting and reporting policies of NBT Bancorp Inc. (Bancorp) and its
subsidiaries, NBT Bank, N.A. (NBT Bank) and NBT Financial Services, Inc.,
conform, in all material respects, to accounting principles generally accepted
in the United States of America (GAAP) and to general practices within the
banking industry. Collectively, Bancorp and its subsidiaries are referred to
herein as “the Company.”
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan and lease losses
and
the valuation of other real estate owned acquired in connection with
foreclosures. In connection with the determination of the allowance for loan
and
lease losses and the valuation of other real estate owned, management obtains
appraisals for properties.
The
following is a description of significant policies and practices:
CONSOLIDATION
The
accompanying consolidated financial statements include the accounts of Bancorp
and its wholly owned subsidiaries mentioned above. All material intercompany
transactions have been eliminated in consolidation. Amounts previously reported
in the consolidated financial statements are reclassified whenever necessary
to
conform with the current year’s presentation. In the “Parent Company Financial
Information,” the investment in subsidiaries is carried under the equity method
of accounting.
The
Company determines whether it has a controlling financial interest in an entity
by first evaluating whether the entity is a voting interest entity or a variable
interest entity under accounting principles generally accepted in the United
States. Voting interest entities are entities in which the total equity
investment at risk is sufficient to enable the entity to finance itself
independently and provides the equity holders with the obligation to absorb
losses, the right to receive residual returns and the right to make decisions
about the entity’s activities. The Company consolidates voting interest entities
in which it has all, or at least a majority of, the voting interest. As defined
in applicable accounting standards, variable interest entities (VIEs) are
entities that lack one or more of the characteristics of a voting interest
entity. A controlling financial interest in an entity is present when an
enterprise has a variable interest, or a combination of variable interests,
that
will absorb a majority of the entity’s expected losses, receive a majority of
the entity’s expected residual returns, or both. The enterprise with a
controlling financial interest, known as the primary beneficiary, consolidates
the VIE. The Company’s wholly owned subsidiaries CNBF Capital Trust I, NBT
Statutory Trust I and NBT Statutory Trust II are VIEs for which the Company
is
not the primary beneficiary. Accordingly, the accounts of these entities are
not
included in the Company’s consolidated financial statements.
SEGMENT
REPORTING
The
Company’s operations are primarily in the community banking industry and include
the provision of traditional banking services. The Company operates solely
in
the geographical regions of central and northern New York and northeastern
Pennsylvania. The Company has identified separate operating segments; however,
these segments did not meet the quantitative thresholds for separate
disclosure.
CASH
EQUIVALENTS
The
Company considers amounts due from correspondent banks, cash items in process
of
collection, and institutional money market mutual funds to be cash equivalents
for purposes of the consolidated statements of cash flows.
SECURITIES
The
Company classifies its securities at date of purchase as either available for
sale, held to maturity, or trading. Held to maturity debt securities are those
that the Company has the ability and intent to hold until maturity. 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 other-than-temporary impairment are generally placed on
non-accrual status.
Nonmarketable
equity securities are carried at cost, with the exception of investments owned
by NBT Bank’s small business investment company (SBIC) subsidiary, which are
carried at fair value in accordance with SBIC rules.
Premiums
and discounts are amortized or accreted over the life of the related security
as
an adjustment to yield using the interest method. Dividend and interest income
are recognized when earned. Realized gains and losses on securities sold are
derived using the specific identification method for determining the cost of
securities sold.
Investments
in Federal Reserve and Federal Home Loan Bank stock are required for membership
in those organizations and are carried at cost since there is no market value
available.
LOANS
AND LEASES
Loans
are
recorded at their current unpaid principal balance, net of unearned income
and
unamortized loan fees and expenses, which are amortized under the effective
interest method over the estimated lives of the loans. Interest income on loans
is accrued based on the principal amount outstanding.
Lease
receivables primarily represent automobile financing to customers through direct
financing leases and are carried at the aggregate of the lease payments
receivable and the estimated residual values, net of unearned income and net
deferred lease origination fees and costs. Net deferred lease origination fees
and costs are amortized under the effective interest method over the estimated
lives of the leases. The estimated residual value related to the total lease
portfolio is reviewed quarterly, and if there has been a decline in the
estimated fair value of the total residual value that is judged by management
to
be other-than-temporary, a loss is recognized. Adjustments related to such
other-than-temporary declines in estimated fair value are recorded in
noninterest expense in the consolidated statements of income.
Loans
and
leases are placed on nonaccrual status when timely collection of principal
and
interest in accordance with contractual terms is doubtful. Loans and leases
are
transferred to a nonaccrual basis generally when principal or interest payments
become ninety days delinquent, unless the loan is well secured and in the
process of collection, or sooner when management concludes circumstances
indicate that borrowers may be unable to meet contractual principal or interest
payments. When a loan or lease is transferred to a nonaccrual status, all
interest previously accrued in the current period but not collected is reversed
against interest income in that period. Interest accrued in a prior period
and
not collected is charged-off against the allowance for loan and lease
losses.
If
ultimate repayment of a nonaccrual loan is expected, any payments received
are
applied in accordance with contractual terms. If ultimate repayment of principal
is not expected, any payment received on a nonaccrual loan is applied to
principal until ultimate repayment becomes expected. Nonaccrual loans are
returned to accrual status when they become current as to principal and interest
or demonstrate a period of performance under the contractual terms and, in
the
opinion of management, are fully collectible as to principal and interest.
When
in the opinion of management the collection of principal appears unlikely,
the
loan balance is charged-off in total or in part.
Commercial
type loans are considered impaired when it is probable that the borrower will
not repay the loan according to the original contractual terms of the loan
agreement, and all loan types are considered impaired if the loan is
restructured in a troubled debt restructuring.
A
loan is
considered to be a trouble debt restructured loan (TDR) when the Company grants
a concession to the borrower because of the borrower’s financial condition that
it would not otherwise consider. Such concessions include the reduction of
interest rates, forgiveness of principal or interest, or other modifications
at
interest rates that are less than the current market rate for new obligations
with similar risk. TDR loans that are in compliance with their modified terms
and that yield a market rate may be removed from the TDR status after a period
of performance.
ALLOWANCE
FOR LOAN AND LEASE LOSSES
The
allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
portfolio with respect to the mix between the various types of loans and their
related risk characteristics, a review of the value of collateral supporting
the
loans, comprehensive reviews of the loan portfolio by the independent loan
review staff and management, as well as consideration of volume and trends
of
delinquencies, nonperforming loans, and loan charge-offs. As a result of the
test of adequacy, required additions to the allowance for loan and lease losses
are made periodically by charges to the provision for loan and lease
losses.
The
allowance for loan and lease losses related to impaired loans is based on
discounted cash flows using the loan’s initial effective interest rate or the
fair value of the collateral for certain loans where repayment of the loan
is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company’s impaired loans are generally collateral
dependent. The Company considers the estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
impairment if those costs are expected to reduce the cash flows available to
repay or otherwise satisfy the loans.
Management
believes that the allowance for loan and lease losses is adequate. While
management uses available information to recognize loan and lease losses, future
additions to the allowance for loan and lease losses may be necessary based
on
changes in economic conditions or changes in the values of properties securing
loans in the process of foreclosure. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company’s allowance for loan and lease losses. Such agencies may require the
Company to recognize additions to the allowance for loan and lease losses based
on their judgments about information available to them at the time of their
examination which may not be currently available to management.
PREMISES
AND EQUIPMENT
Premises
and equipment are stated at cost, less accumulated depreciation. Depreciation
of
premises and equipment is determined using the straight-line method over the
estimated useful lives of the respective assets. Expenditures for maintenance,
repairs, and minor replacements are charged to expense as incurred.
OTHER
REAL ESTATE OWNED
Other
real estate owned (OREO) consists of properties acquired through foreclosure
or
by acceptance of a deed in lieu of foreclosure. These assets are recorded at
the
lower of fair value of the asset acquired less estimated costs to sell or “cost”
(defined as the fair value at initial foreclosure). At the time of foreclosure,
or when foreclosure occurs in-substance, the excess, if any, of the loan over
the fair market value of the assets received, less estimated selling costs,
is
charged to the allowance for loan losses and any subsequent valuation
write-downs are charged to other expense. Operating costs associated with the
properties are charged to expense as incurred. Gains on the sale of OREO are
included in income when title has passed and the sale has met the minimum down
payment requirements prescribed by GAAP.
GOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
and intangible assets that have indefinite useful lives are not amortized,
but
are tested at least annually for impairment. Intangible assets that have finite
useful lives, such as core deposit intangibles, continue to be amortized over
their useful lives. Core deposit intangibles are amortized over a maximum of
10
years using the straight-line methods for all periods presented.
When
facts and circumstances indicate potential impairment of amortizable intangible
assets, the Company evaluates the recoverability of the asset carrying value,
using estimates of undiscounted future cash flows over the remaining asset
life.
Any impairment loss is measured by the excess of carrying value over fair value.
Goodwill impairment tests are performed on an annual basis or when events or
circumstances dictate. In these tests, the fair values of each reporting unit,
or segment, is compared to the carrying amount of that reporting unit in order
to determine if impairment is indicated. If so, the implied fair value of the
reporting unit’s goodwill is compared to its carrying amount and the impairment
loss is measured by the excess of the carrying value over fair
value.
TREASURY
STOCK
Treasury
stock acquisitions are recorded at cost. Subsequent sales of treasury stock
are
recorded on an average cost basis. Gains on the sale of treasury stock are
credited to additional paid-in-capital. Losses on the sale of treasury stock
are
charged to additional paid-in-capital to the extent of previous gains, otherwise
charged to retained earnings.
INCOME
TAXES
Income
taxes are accounted for under the asset and liability method. The Company files
a consolidated tax return on the accrual basis. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The
effect on deferred taxes of a change in tax rates is recognized in income in
the
period that includes the enactment date.
STOCK-BASED
COMPENSATION
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS”) No. 123 (revised 2004), “Share-Based Payment”, (“SFAS No. 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.
Previous
to the adoption of SFAS No. 123R, the Company accounted for its stock-based
compensation plans in accordance with the provisions of Accounting Principles
board (APB) Opinion No. 25, “Accounting
for Stock Issued to Employees,”
and
related interpretations. On January 1, 1996, the Company adopted SFAS No. 123,
“Accounting
for Stock-Based Compensation” which
permits entities to recognize as expense over the vesting period the estimated
fair value of all stock based awards measured on the date of grant.
Alternatively, SFAS No. 123 allowed entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma net income
per share disclosures for employee stock-based grants made in 1995 and
thereafter as if the fair value based method defined in SFAS No. 123 had been
applied. The Company elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures of SFAS No. 123.
EARNINGS
PER SHARE
Basic
earnings per share (EPS) excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity (such as the Company’s
dilutive stock options and restricted stock).
OTHER
FINANCIAL INSTRUMENTS
The
Company is a party to certain other financial instruments with off-balance-sheet
risk such as commitments to extend credit, unused lines of credit, as well
as
certain mortgage loans sold to investors with recourse. The Company’s policy is
to record such instruments when funded and the funded status.
COMPREHENSIVE
INCOME
At
the
Company, comprehensive income represents net income plus other comprehensive
income, which consists primarily of the net change in unrealized gains or losses
on securities available for sale for the period. Accumulated other comprehensive
(loss) income represents the net unrealized gains or losses on securities
available for sale and the previously unrecognized portion of the funded status
of employee benefit plans, net of income taxes, as of the consolidated balance
sheet dates.
PENSION
COSTS
The
Company maintains a noncontributory, defined benefit pension plan covering
substantially all employees, as well as supplemental employee retirement plans
covering certain executives and a defined benefit postretirement healthcare
plan
that covers certain employees. Costs associated with these plans, based on
actuarial computations of current and future benefits for employees, are charged
to current operating expenses.
Effective
December 31, 2006, the Company adopted SFAS No. 158, Employers’
Accounting For Defined Benefit Pension and Other Postretirement Plans - An
Amendment of FASB Statements No. 87, 88, 106, and 132(R), which
requires the Company to recognize the overfunded or underfunded status of a
single employer defined benefit postretirement plan as an asset or liability
on
its balance sheet and to recognize changes in the funded status in comprehensive
income in the year in which the change occurred. However, gains or losses,
prior
service costs or credits, and transition assets or obligations that have not
been included in net periodic benefit cost as of the end of 2006, the fiscal
year in which SFAS No. 158 is initially applied, are to be recognized as
components of the ending balance of accumulated other comprehensive income,
net
of tax. The adjustment to accumulated other comprehensive loss for the adoption
of SFAS No. 158 was $7.6 million.
TRUST
Assets
held by the Company in a fiduciary or agency capacity for its customers are
not
included in the accompanying consolidated balance sheets, since such assets
are
not assets of the Company. Such assets totaled $2.5 billion and $2.2 billion
at
December 31, 2006 and 2005, respectively. Trust income is recognized on the
accrual method based on contractual rates applied to the balances of trust
accounts.
Recent
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. We are evaluating
whether the adoption of SFAS 155 is 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.
In
July
2006, the FASB posted the final Interpretation No. 48 - Accounting for
Uncertainty in Income Taxes (“FIN 48”), which prescribes a minimum recognition
threshold a tax position must meet before being recognized in the financial
statements. FIN 48 concludes that recognition of a tax position, based solely
on
its technical merits, occurs when the tax position is more-likely-than-not
to be
sustained upon examination. The tax benefit is measured as the largest amount
of
benefit that is more-likely-than-not to be realized upon ultimate settlement.
In
addition, FIN 48 expands disclosure requirements to include a tabular
roll-forward of the beginning and ending aggregate unrecognized tax benefits
as
well as detail regarding tax uncertainties for which it is reasonably possible
the amount of unrecognized tax benefit will increase or decrease within 1 year.
The adoption of FIN 48 did not have a material effect on our consolidated
financial position, results of operations or cash flows.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
157 -
Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement
does not require any new fair value measurements, but the application of this
Statement may change current practice. Adoption is required as of the beginning
of the first fiscal year that begins after November 15, 2007. Early application
of this Standard is encouraged. The Company is assessing the effect that SFAS
157 will have on our consolidated financial position, results of operations
or
cash flows.
In
September 2006, the SEC published Staff Accounting Bulletin No. 108 -
Considering the Effects of Prior Year Misstatements in Current Year Financial
Statements (“SAB 108”) to provide guidance on the consideration of the effects
of prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. SAB 108 addresses the effects that
unadjusted assets and liabilities of prior year errors have on current year
financial statements. Registrants must quantify the impact of correcting all
misstatements, including both the carryover and reversing effects of prior
year
misstatements, on the current year financial statements. A registrant’s
financial statements would require adjustment when a misstatement is quantified
as material, after considering all relevant quantitative and qualitative
factors. Restating prior periods is not mandatory, but financial statements
covering the first fiscal year ending after November 15, 2006 should reflect
the
effects of prior year misstatements. The adoption of SAB 108 as of January
1,
2006 did not have a material effect on the Company's consolidated financial
statements.
(2)
|
MERGER
AND ACQUISITION ACTIVITY
|
A)
EPIC Advisors, Inc.
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.
B)
M. Griffith Inc.
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.
C)
CNB Bancorp, Inc.
On
February 10, 2006, the Company acquired CNB Bancorp, Inc. (“CNB”), a bank
holding company headquartered in Gloversville, New York. The acquisition was
accomplished by merging CNB with and into the Company (the "Merger"). By virtue
of this acquisition, CNB’s banking subsidiary, City National Bank and Trust
Company was merged with and into NBT Bank, N.A. City National Bank and Trust
Company operated 9 full-service community banking offices - located in Fulton,
Hamilton, Montgomery and Saratoga counties, with approximately $400 million
in
assets. The Merger increases the Company’s assets to approximately $4.9
billion.
In
connection with the Merger, the Company issued an aggregate of 2.1 million
shares of Company common stock and $39 million in cash to the former holders
of
CNB common stock. In connection with acquisition of CNB, the Company formed
NBT
Statutory Trust II in February 2006 to fund the cash portion of the acquisition
as well as to provide regulatory capital. The Company raised $51.5 million
through NBT Statutory Trust II in February 2006.
CNB
nonqualified stock options, entitling holders to purchase CNB common stock
outstanding, were cancelled on the closing date and such option holders received
an option payment subject to the terms of the merger agreement. The total number
of CNB nonqualified stock options that were canceled was 103,545, which resulted
in a cash payment to option holders before any applicable federal or state
withholding tax, of approximately $1.3 million. In accordance with the terms
of
the merger agreement, all outstanding CNB incentive stock options as of the
effective date were assumed by the Company. At that time, there were 144,686
CNB
incentive stock options that were exchanged for 237,278 replacement incentive
stock options of the Company.
Based
on
the $22.42 per share closing price of the Company’s common stock on February 10,
2006, the transaction is valued at approximately $88 million.
The
following is a reconciliation of basic and diluted earnings per share for the
years presented in the consolidated statements of income:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
(In
thousands, except per share data)
|
|
Net
income
|
|
Weighted
average
shares
|
|
Per
share
amount
|
|
Net
income
|
|
Weigthed
average
shares
|
|
Per
share
amount
|
|
Net
income
|
|
Weighted
average
shares
|
|
Per
share
amount
|
|
Basic
earnings per share
|
|
$
|
55,947
|
|
|
33,886
|
|
$
|
1.65
|
|
$
|
52,438
|
|
|
32,437
|
|
$
|
1.62
|
|
$
|
50,047
|
|
|
32,739
|
|
$
|
1.53
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
302
|
|
|
|
|
|
|
|
|
265
|
|
|
|
|
|
|
|
|
336
|
|
|
|
|
Contingent
shares
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
55,947
|
|
|
34,206
|
|
$
|
1.64
|
|
$
|
52,438
|
|
|
32,710
|
|
$
|
1.60
|
|
$
|
50,047
|
|
|
33,087
|
|
$
|
1.51
|
|
|
|
There
were approximately 356,000, 386,000, and 5,000 weighted average stock options
for the years ended December 31, 2006, 2005, and 2004, respectively, that were
not considered in the calculation of diluted earnings per share since the stock
options’ exercise prices were greater than the average market price during these
periods.
(4)
|
FEDERAL
RESERVE BANK REQUIREMENT
|
The
Company is required to maintain reserve balances with the Federal Reserve Bank.
The required average total reserve for NBT Bank for the 14-day maintenance
period ending December 20, 2006 was $62.9 million.
The
amortized cost, estimated fair value, and unrealized gains and losses of
securities available for sale are as follows:
(In
thousands)
|
|
Amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Estimated
fair
value
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
10,516
|
|
$
|
-
|
|
$
|
29
|
|
$
|
10,487
|
|
Federal
Agency
|
|
|
343,529
|
|
|
550
|
|
|
2,366
|
|
|
341,713
|
|
State
& municipal
|
|
|
99,724
|
|
|
2,099
|
|
|
122
|
|
|
101,701
|
|
Mortgage-backed
|
|
|
400,549
|
|
|
628
|
|
|
11,136
|
|
|
390,041
|
|
Collateralized
mortgage obligations
|
|
|
241,984
|
|
|
198
|
|
|
3,412
|
|
|
238,770
|
|
Corporate
|
|
|
1,285
|
|
|
106
|
|
|
-
|
|
|
1,391
|
|
Other
securities
|
|
|
18,861
|
|
|
3,428
|
|
|
70
|
|
|
22,219
|
|
Total
securities available for sale
|
|
$
|
1,116,448
|
|
$
|
7,009
|
|
$
|
17,135
|
|
$
|
1,106,322
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
10,005
|
|
$
|
-
|
|
$
|
-
|
|
$
|
10,005
|
|
Federal
Agency
|
|
|
236,410
|
|
|
41
|
|
|
3,015
|
|
|
233,436
|
|
State
& municipal
|
|
|
76,574
|
|
|
2,861
|
|
|
30
|
|
|
79,405
|
|
Mortgage-backed
|
|
|
448,496
|
|
|
1,186
|
|
|
10,517
|
|
|
439,165
|
|
Collateralized
mortgage obligations
|
|
|
178,263
|
|
|
-
|
|
|
4,284
|
|
|
173,979
|
|
Corporate
|
|
|
1,184
|
|
|
137
|
|
|
-
|
|
|
1,321
|
|
Other
securities
|
|
|
13,806
|
|
|
3,394
|
|
|
37
|
|
|
17,163
|
|
Total
securities available for sale
|
|
$
|
964,738
|
|
$
|
7,619
|
|
$
|
17,883
|
|
$
|
954,474
|
|
In
the
available for sale category at December 31, 2006, federal agency securities
were
comprised of Government-Sponsored Enterprise (“GSE”) securities;
Mortgaged-backed securities were comprised of GSEs with an amortized cost of
$352.0 million and a fair value of $341.8 million and US Government Agency
securities with an amortized cost of $48.5 million and a fair value of $48.2
million; Collateralized mortgage obligations were comprised of GSEs with an
amortized cost of $164.8 million and a fair value of $163.0 million and US
Government Agency securities with an amortized cost of $77.1 million and a
fair
value of $75.8 million. At December 31, 2006, all of the mortgaged-backed
securities held to maturity were comprised of US Government Agency
securities.
In
the
available for sale category at December 31, 2005, federal agency securities
were
comprised of Government-Sponsored Enterprise (“GSE”) securities;
Mortgaged-backed securities were comprised of GSEs with an amortized cost of
$395.5 million and a fair value of $386.0 million and US Government Agency
securities with an amortized cost of $53.0 million and a fair value of $53.2
million; Collateralized mortgage obligations were comprised of GSEs with an
amortized cost of $102.6 million and a fair value of $100.2 million and US
Government Agency securities with an amortized cost of $75.7 million and a
fair
value of $73.8 million.
Other
securities include nonmarketable equity securities, including certain securities
acquired by NBT Bank’s small business investment company (SBIC) subsidiary, and
trust preferred securities.
The
following table sets forth information with regard to sales transactions of
securities available for sale:
|
|
Years
ended December 31
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Proceeds
from sales
|
|
$
|
42,292
|
|
$
|
53,044
|
|
$
|
12,950
|
|
Gross
realized gains
|
|
$
|
618
|
|
$
|
816
|
|
$
|
457
|
|
Gross
realized losses
|
|
|
(1,493
|
)
|
|
(2,052
|
)
|
|
(241
|
)
|
Net
securities (losses) gains
|
|
$
|
(875
|
)
|
$
|
(1,236
|
)
|
$
|
216
|
|
At
December 31, 2006 and 2005, securities available for sale with amortized costs
totaling $951.4 million and $887.4 million, respectively, were pledged to secure
public deposits and for other purposes required or permitted by law.
Additionally, at December 31, 2006, securities available for sale with an
amortized cost of $143.9 million were pledged as collateral for securities
sold
under the repurchase agreements.
The
amortized cost, estimated fair value, and unrealized gains and losses of
securities held to maturity are as follows:
(In
thousands)
|
|
Amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Estimated
fair
value
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
$
|
3,434
|
|
$
|
63
|
|
$
|
-
|
|
$
|
3,497
|
|
State
& municipal
|
|
|
132,213
|
|
|
345
|
|
|
435
|
|
|
132,123
|
|
Other
securities
|
|
|
667
|
|
|
-
|
|
|
-
|
|
|
667
|
|
Total
securities held to maturity
|
|
$
|
136,314
|
|
$
|
408
|
|
$
|
435
|
|
$
|
136,287
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
$
|
4,354
|
|
$
|
128
|
|
$
|
-
|
|
$
|
4,482
|
|
State
& municipal
|
|
|
87,582
|
|
|
352
|
|
|
488
|
|
|
87,446
|
|
Other
securities
|
|
|
1,773
|
|
|
-
|
|
|
-
|
|
|
1,773
|
|
Total
securities held to maturity
|
|
$
|
93,709
|
|
$
|
480
|
|
$
|
488
|
|
$
|
93,701
|
|
At
December 31, 2006, all of the mortgaged-backed securities held to maturity
were
comprised of US Government Agency securities.
The
following table sets forth information with regard to investment securities
with
unrealized losses at December 31, 2006, segregated according to the length
of
time the securities had been in a continuous unrealized loss
position:
|
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
Security
Type:
|
|
Fair
Value
|
|
Unrealized
losses
|
|
Fair
Value
|
|
Unrealized
losses
|
|
Fair
Value
|
|
Unrealized
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
5,464
|
|
$
|
(28
|
)
|
$
|
57
|
|
$
|
(1
|
)
|
$
|
5,521
|
|
$
|
(29
|
)
|
Federal
agency
|
|
|
49,149
|
|
|
(183
|
)
|
|
239,979
|
|
|
(2,182
|
)
|
|
289,128
|
|
|
(2,365
|
)
|
State
& municipal
|
|
|
2,870
|
|
|
(8
|
)
|
|
47,853
|
|
|
(549
|
)
|
|
50,723
|
|
|
(557
|
)
|
Mortgage-backed
|
|
|
81
|
|
|
-
|
|
|
338,008
|
|
|
(11,136
|
)
|
|
338,089
|
|
|
(11,136
|
)
|
Collateralized
mortgage obligations
|
|
|
32
|
|
|
-
|
|
|
189,318
|
|
|
(3,413
|
)
|
|
189,350
|
|
|
(3,413
|
)
|
Other
securities
|
|
|
-
|
|
|
-
|
|
|
484
|
|
|
(70
|
)
|
|
484
|
|
|
(70
|
)
|
Total
securities with unrealized losses
|
|
$
|
57,596
|
|
$
|
(219
|
)
|
$
|
815,699
|
|
$
|
(17,351
|
)
|
$
|
873,295
|
|
$
|
(17,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
-
|
|
$
|
-
|
|
$
|
58
|
|
$
|
-
|
|
$
|
58
|
|
$
|
-
|
|
Federal
agency
|
|
|
39,581
|
|
|
(351
|
)
|
|
183,343
|
|
|
(2,664
|
)
|
|
222,924
|
|
|
(3,015
|
)
|
State
& municipal
|
|
|
-
|
|
|
-
|
|
|
31,833
|
|
|
(519
|
)
|
|
31,833
|
|
|
(519
|
)
|
Mortgage-backed
|
|
|
-
|
|
|
-
|
|
|
388,309
|
|
|
(10,499
|
)
|
|
388,309
|
|
|
(10,499
|
)
|
Collateralized
mortgage obligations
|
|
|
-
|
|
|
-
|
|
|
170,165
|
|
|
(4,301
|
)
|
|
170,165
|
|
|
(4,301
|
)
|
Other
securities
|
|
|
-
|
|
|
-
|
|
|
559
|
|
|
(37
|
)
|
|
559
|
|
|
(37
|
)
|
Total
securities with unrealized losses
|
|
$
|
39,581
|
|
$
|
(351
|
)
|
$
|
774,267
|
|
$
|
(18,020
|
)
|
$
|
813,848
|
|
$
|
(18,371
|
)
|
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment losses,
management considers, among other things, (i) the length of time and the extent
to which the fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, and (iii) the intent and ability of
the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
Management
has the ability and intent to hold the securities classified as held to maturity
until they mature, at which time the Company will receive full value for the
securities. Furthermore, as of December 31, 2006, management also had the
ability and intent to hold the securities classified as available for sale
for a
period of time sufficient for a recovery of cost, which may be until maturity.
The unrealized losses are due to increases in market interest rates over the
yields available at the time the underlying securities were purchased. The
fair
value is expected to recover as the bonds approach their maturity date or
repricing date or if market yields for such investments decline. Management
does
not believe any of the securities are impaired due to reasons of credit quality.
Accordingly, as of December 31, 2006, management believes the impairments
detailed in the table above are temporary and no impairment loss has been
realized in the Company’s consolidated income statement.
The
following tables set forth information with regard to contractual maturities
of
debt securities at December 31, 2006:
(In
thousands)
|
|
Amortized
cost
|
|
Estimated
fair
value
|
|
Debt
securities classified as available for sale
|
|
|
|
|
|
Within
one year
|
|
$
|
61,314
|
|
$
|
61,107
|
|
From
one to five years
|
|
|
266,686
|
|
|
264,821
|
|
From
five to ten years
|
|
|
162,935
|
|
|
163,074
|
|
After
ten years
|
|
|
606,652
|
|
|
595,101
|
|
|
|
$
|
1,097,587
|
|
$
|
1,084,103
|
|
Debt
securities classified as held to maturity
|
|
|
|
|
|
|
|
Within
one year
|
|
$
|
56,501
|
|
$
|
56,494
|
|
From
one to five years
|
|
|
35,517
|
|
|
35,298
|
|
From
five to ten years
|
|
|
29,479
|
|
|
29,453
|
|
After
ten years
|
|
|
14,817
|
|
|
15,042
|
|
|
|
$
|
136,314
|
|
$
|
136,287
|
|
Maturities
of mortgage-backed, collateralized mortgage obligations and asset-backed
securities are stated based on their estimated average lives. Actual maturities
may differ from estimated average lives or contractual maturities because,
in
certain cases, borrowers have the right to call or prepay obligations with
or
without call or prepayment penalties.
Except
for U.S. Government securities, there were no holdings, when taken in the
aggregate, of any single issues that exceeded 10% of consolidated stockholders’
equity at December 31, 2006 and 2005.
(6)
|
LOANS
AND LEASES AND ALLOWANCE FOR LOAN AND LEASE
LOSSES
|
A
summary
of loans and leases, net of deferred fees and origination costs, by category
is
as follows:
|
|
At
December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Residential
real estate mortgages
|
|
$
|
739,607
|
|
$
|
701,734
|
|
Commercial
|
|
|
658,647
|
|
|
569,021
|
|
Commercial
real estate mortgages
|
|
|
581,736
|
|
|
558,684
|
|
Real
estate construction and development
|
|
|
94,494
|
|
|
69,135
|
|
Agricultural
and agricultural real estate mortgages
|
|
|
118,278
|
|
|
114,043
|
|
Consumer
|
|
|
586,922
|
|
|
463,955
|
|
Home
equity
|
|
|
546,719
|
|
|
463,848
|
|
Lease
financing
|
|
|
86,251
|
|
|
82,237
|
|
Total
loans and leases
|
|
$
|
3,412,654
|
|
$
|
3,022,657
|
|
Real
estate construction and development loans presented in 2005 have been
reclassified to conform with current year presentation which represents the
conversion of construction loans to permanent financing.
Included
in the above loans and leases are net deferred loan origination costs totaling
$2.3 million and $1.2 million at December 31, 2006 and December 31, 2005,
respectively. Also included is unearned income of $7.5 million and $7.0 million
at December 31, 2006 and 2005, respectively. Loans held for sale were $1.8
million and $3.4 million at December 31, 2006 and 2005,
respectively.
FHLB
advances are collateralized by a blanket lien on the Company’s residential real
estate mortgages. Loans classified as available for sale totaled approximately
$0.5 million at December 31, 2006.
Changes
in the allowance for loan and lease losses for the three years ended December
31, 2006, are summarized as follows:
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Balance
at January 1
|
|
$
|
47,455
|
|
$
|
44,932
|
|
$
|
42,651
|
|
Allowance
from purchase transaction
|
|
|
2,410
|
|
|
-
|
|
|
-
|
|
Provision
|
|
|
9,395
|
|
|
9,464
|
|
|
9,615
|
|
Recoveries
|
|
|
4,699
|
|
|
4,078
|
|
|
4,272
|
|
Charge-offs
|
|
|
(13,372
|
)
|
|
(11,019
|
)
|
|
(11,606
|
)
|
Balance
at December 31
|
|
$
|
50,587
|
|
$
|
47,455
|
|
$
|
44,932
|
|
The
following table sets forth information with regard to nonperforming
loans:
|
|
At
December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Loans
in nonaccrual status
|
|
$
|
13,665
|
|
$
|
13,419
|
|
$
|
14,991
|
|
Loans
contractually past due 90 days or more and still accruing
interest
|
|
|
1,642
|
|
|
878
|
|
|
1,186
|
|
Total
nonperforming loans
|
|
$
|
15,307
|
|
$
|
14,297
|
|
$
|
16,177
|
|
There
were no material commitments to extend further credit to borrowers with
nonperforming loans. There are no loans classified as troubled debt restructures
at December 31, 2006, 2005, and 2004.
Accumulated
interest on the above nonaccrual loans of approximately $1.0 million, $0.5
million, and $1.0 million would have been recognized as income in 2006, 2005,
and 2004, respectively, had these loans been in accrual status. Approximately
$0.4 million, $0.4 million, and $0.8 million of interest on the above nonaccrual
loans was collected in 2006, 2005, and 2004, respectively.
Impaired
loans, which primarily consist of nonaccruing commercial type loans, decreased
slightly, totaling $9.3 million at December 31, 2006 as compared to $9.4 million
at December 31, 2005. At December 31, 2006, $2.2 million of the total impaired
loans had a specific reserve allocation of $0.2 million or 10% compared to
$2.9
million of total impaired loans at December 31, 2005 which had no specific
reserve allocation.
The
following provides additional information on impaired loans for the periods
presented:
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Average
recorded investment on impaired loans
|
|
$
|
9,644
|
|
$
|
9,908
|
|
$
|
9,478
|
|
Interest
income recognized on impaired loans
|
|
|
384
|
|
|
207
|
|
|
499
|
|
Cash
basis interest income recognized on impaired loans
|
|
|
384
|
|
|
207
|
|
|
499
|
|
(7)
|
RELATED
PARTY TRANSACTIONS
|
In
the
ordinary course of business, the Company has made loans at prevailing rates
and
terms to directors, officers, and other related parties. Such loans, in
management’s opinion, do not present more than the normal risk of collectibility
or incorporate other unfavorable features. The aggregate amount of loans
outstanding to qualifying related parties and changes during the years are
summarized as follows:
(In
thousands)
|
|
2006
|
|
2005
|
|
Balance
at January 1
|
|
$
|
15,906
|
|
$
|
16,820
|
|
New
loans
|
|
|
11,274
|
|
|
2,823
|
|
Adjustment
due to change in composition of related parties
|
|
|
(6,233
|
)
|
|
-
|
|
Repayments
|
|
|
(5,042
|
)
|
|
(3,737
|
)
|
Balance
at December 31
|
|
$
|
15,905
|
|
$
|
15,906
|
|
(8)
|
PREMISES
AND EQUIPMENT, NET
|
A
summary
of premises and equipment follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Land,
buildings, and improvements
|
|
$
|
84,146
|
|
$
|
76,889
|
|
Equipment
|
|
|
64,465
|
|
|
62,497
|
|
Construction
in progress
|
|
|
1,307
|
|
|
236
|
|
|
|
|
149,918
|
|
|
139,622
|
|
Accumulated
depreciation
|
|
|
82,936
|
|
|
75,929
|
|
Total
premises and equipment
|
|
$
|
66,982
|
|
$
|
63,693
|
|
Land,
buildings, and improvements with a carrying value of approximately $3.5 million
and $3.8 million at December 31, 2006 and 2005, respectively, are pledged to
secure long-term borrowings. Buildings and improvements are depreciated based
on
useful lives of 15 to 40 years. Equipment is depreciated based on useful lives
of 3 to 10 years.
Rental
expense included in occupancy expense amounted to $3.2 million in 2006, $3.0
million in 2005, and $2.7 million in 2004. The future minimum rental payments
related to noncancelable operating leases with original terms of one year or
more are as follows at December 31, 2006 (in thousands):
Future
Minimum Rental Payments
|
|
|
|
|
|
2007
|
|
$
|
2,931
|
|
2008
|
|
|
2,460
|
|
2009
|
|
|
2,007
|
|
2010
|
|
|
1,651
|
|
2011
|
|
|
1,576
|
|
Thereafter
|
|
|
11,006
|
|
Total
|
|
|
21,631
|
|
(9)
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
A
summary
of goodwill by operating subsidiaries follows:
(In
thousands)
|
|
January
1,
2006
|
|
Goodwill
Acquired
|
|
Goodwill
Disposed
|
|
December
31,
2006
|
|
NBT
Bank, N.A.
|
|
$
|
44,520
|
|
$
|
55,614
|
|
$
|
-
|
|
$
|
100,134
|
|
NBT
Financial Services, Inc.
|
|
|
3,024
|
|
|
-
|
|
|
-
|
|
|
3,024
|
|
Hathaway
Agency, Inc.
|
|
|
-
|
|
|
198
|
|
|
-
|
|
|
198
|
|
Total
|
|
$
|
47,544
|
|
$
|
55,812
|
|
$
|
-
|
|
$
|
103,356
|
|
|
|
|
January
1,
2005
|
|
|
Goodwill
Acquired
|
|
|
Goodwill
Disposed
|
|
|
December
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
February 2006, the Company acquired CNB. The acquisition resulted in increases
to goodwill of $55.8 million, core deposit intangibles of $9.6 million and
other
intangibles of $0.3 million. The core deposit intangibles will be amortized
over
ten years on an accelerated basis.
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
2005, 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 2005. The negotiation
and
resolution of sale terms for M. Griffith Inc. during the fourth quarter of
2005
resulted in the goodwill impairment charge.
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.
The
Company has intangible assets with definite useful lives capitalized on its
consolidated balance sheet in the form of core deposit and other identified
intangible assets. These intangible assets are amortized over their estimated
useful lives, which range primarily from one to twelve years.
A
summary
of core deposit and other intangible assets follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Core
deposit intangibles
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
11,826
|
|
$
|
2,186
|
|
Less:
accumulated amortization
|
|
|
2,804
|
|
|
1,561
|
|
Net
carrying amount
|
|
|
9,022
|
|
|
625
|
|
|
|
|
|
|
|
|
|
Identified
intangible assets
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
|
3,533
|
|
|
3,196
|
|
Less:
accumulated amortization
|
|
|
936
|
|
|
530
|
|
Net
carrying amount
|
|
|
2,597
|
|
|
2,666
|
|
|
|
|
|
|
|
|
|
Intangibles
that will not amortize
|
|
|
365
|
|
|
517
|
|
|
|
|
|
|
|
|
|
Total
intangibles with definite useful lives
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
|
15,724
|
|
|
5,899
|
|
Less:
accumulated amortization
|
|
|
3,740
|
|
|
2,091
|
|
Net
carrying amount
|
|
$
|
11,984
|
|
$
|
3,808
|
|
Amortization
expense on intangible assets with definite useful lives totaled $1.6 million
for
2006, $0.5 million for 2005 and $0.3 million for 2004. Amortization expense
on
intangible assets with definite useful lives is expected to total $1.6 million
for 2007, 1.5 million for 2008, $1.4 million for 2009, $1.3 million for 2010,
$1.2 million for 2011 and $5.0 million thereafter.
The
following table sets forth the maturity distribution of time deposits at
December 31, 2006 (in thousands):
Time
deposits
|
|
|
|
Within
one year
|
|
$
|
1,209,143
|
|
After
one but within two years
|
|
|
291,417
|
|
After
two but within three years
|
|
|
54,430
|
|
After
three but within four years
|
|
|
11,167
|
|
After
four but within five years
|
|
|
11,469
|
|
After
five years
|
|
|
5,678
|
|
Total
|
|
$
|
1,583,304
|
|
Time
deposits of $100,000 or more aggregated $824.3 million and $591.8 million at
year end 2006 and 2005, respectively.
(11)
|
SHORT-TERM
BORROWINGS
|
Short-term
borrowings total $345.4 million and $445.0 million at December 31, 2006 and
2005, respectively, and consist of Federal funds purchased and securities sold
under repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily Federal Home Loan
Bank
(FHLB) advances, with original maturities of one year or less. The Company
has
unused lines of credit with the FHLB available for short-term financing of
approximately $297 million and $143 million at December 31, 2006 and 2005,
respectively.
Included
in the information provided above, the Company has two lines of credit available
with the FHLB, which are automatically renewed on July 30th
of each
year. The first is an overnight line of credit for approximately $100.0 million
with interest based on existing market conditions. The second is a one-month
overnight repricing line of credit for approximately $100.0 million with
interest based on existing market conditions. As of December 31, 2006, there
was
$60.0 million (included in federal funds purchased) outstanding on these lines
of credit. Borrowings on these lines are secured by FHLB stock, certain
securities and one-to-four family first lien mortgage loans. Securities
collateralizing repurchase agreements are held in safekeeping by nonaffiliated
financial institutions and are under the Company’s control.
Information
related to short-term borrowings is summarized as follows:
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Federal
funds purchased
|
|
|
|
|
|
|
|
Balance
at year-end
|
|
$
|
100,000
|
|
$
|
145,000
|
|
$
|
65,000
|
|
Average
during the year
|
|
|
76,550
|
|
|
84,845
|
|
|
62,436
|
|
Maximum
month end balance
|
|
|
122,000
|
|
|
145,000
|
|
|
106,000
|
|
Weighted
average rate during the year
|
|
|
5.10
|
%
|
|
3.55
|
%
|
|
1.48
|
%
|
Weighted
average rate at December 31
|
|
|
5.36
|
%
|
|
4.30
|
%
|
|
2.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
Balance
at year-end
|
|
$
|
95,158
|
|
$
|
74,727
|
|
$
|
73,573
|
|
Average
during the year
|
|
|
89,934
|
|
|
82,658
|
|
|
76,120
|
|
Maximum
month end balance
|
|
|
103,921
|
|
|
91,409
|
|
|
93,000
|
|
Weighted
average rate during the year
|
|
|
3.32
|
%
|
|
1.86
|
%
|
|
0.93
|
%
|
Weighted
average rate at December 31
|
|
|
3.53
|
%
|
|
2.82
|
%
|
|
0.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Other
short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
Balance
at year-end
|
|
$
|
150,250
|
|
$
|
225,250
|
|
$
|
200,250
|
|
Average
during the year
|
|
|
164,771
|
|
|
186,141
|
|
|
163,720
|
|
Maximum
month end balance
|
|
|
225,250
|
|
|
225,250
|
|
|
200,250
|
|
Weighted
average rate during the year
|
|
|
5.19
|
%
|
|
3.46
|
%
|
|
1.49
|
%
|
Weighted
average rate at December 31
|
|
|
5.44
|
%
|
|
4.41
|
%
|
|
2.41
|
%
|
Long-term
debt consists of obligations having an original maturity at issuance of more
than one year. A majority of the Company’s long-term debt is comprised of FHLB
advances collateralized by the FHLB stock owned by the Company, certain of
its
mortgage-backed securities and a blanket lien on its residential real estate
mortgage loans. A summary as of December 31, 2006 is as follows:
Maturity
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Callable
Amount
|
|
Weighted
Average
Rate
|
|
2007
|
|
|
93,700
|
|
|
4.35
|
%
|
|
2,200
|
|
|
5.62
|
%
|
2008
|
|
|
115,209
|
|
|
3.83
|
%
|
|
35,000
|
|
|
5.29
|
%
|
2009
|
|
|
75,000
|
|
|
5.25
|
%
|
|
75,000
|
|
|
5.25
|
%
|
2010
|
|
|
31,000
|
|
|
3.45
|
%
|
|
31,000
|
|
|
3.45
|
%
|
2011
|
|
|
3,815
|
|
|
5.00
|
%
|
|
3,815
|
|
|
5.00
|
%
|
2012
|
|
|
39
|
|
|
0.00
|
%
|
|
-
|
|
|
|
|
2013
|
|
|
25,000
|
|
|
3.21
|
%
|
|
25,000
|
|
|
3.21
|
%
|
2016
|
|
|
70,000
|
|
|
3.82
|
%
|
|
70,000
|
|
|
3.82
|
%
|
2025
|
|
|
3,965
|
|
|
2.75
|
%
|
|
-
|
|
|
|
|
|
|
$
|
417,728
|
|
|
|
|
$
|
242,015
|
|
|
|
|
(13) |
TRUST
PREFERRED DEBENTURES
|
The
Company has issued a total of $75 million of junior subordinated deferrable
interest debentures to three wholly owned Delaware statutory business trusts,
CNBF Capital Trust I (“CNBF Trust I”), NBT Statutory Trust I (“NBT Trust I”) and NBT
Statutory Trust II (“NBT Trust II”) collectively
referred to as the (“Trusts”). The
Trusts are considered variable interest entities for which the Company is not
the primary beneficiary. Accordingly, the accounts of the trusts are not
included in the Company’s consolidated financial statements. See Note 1 —
Summary of Significant Accounting Policies for additional information about
the
Company’s consolidation policy. Details of the Company’s transactions with these
trusts are presented below.
CNBF
Trust I
In
June
1999, CNBF Trust I issued $18 million of floating rate (three-month LIBOR plus
275 basis points) trust preferred securities, which represent beneficial
interests in the assets of the trust. The trust preferred securities will mature
on August 31, 2029 and are redeemable with the approval of the Federal Reserve
Board in whole or in part at the option of the Company at any time after
September 1, 2009 and in whole at any time upon the occurrence of certain events
affecting their tax or regulatory capital treatment. Distributions on the trust
preferred securities are payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year. CNBF
Trust I also issued $0.7 million of common equity securities to the Company.
The
proceeds of the offering of the trust preferred securities and common equity
securities were used to purchase $18.7 million of floating
rate (three-month LIBOR plus 275 basis points) junior
subordinated deferrable interest debentures issued by the Company, which have
terms substantially similar to the trust preferred securities.
NBT
Trust I
In
November 2005, NBT Trust I issued $5 million of fixed rate (at 6.30%) trust
preferred securities, which represent beneficial interests in the assets of
the
trust. The trust preferred securities will mature on December 1, 2035 and are
redeemable with the approval of the Federal Reserve Board in whole or in part
at
the option of the Corporation at any time after December 1, 2010 and in whole
at
any time upon the occurrence of certain events affecting their tax or regulatory
capital treatment. Distributions on the trust preferred securities are payable
quarterly in arrears on March 15, June 15, September 15 and December 15 of
each
year. NBT Trust I also issued $0.2 million of common equity securities to the
Company. The proceeds of the offering of the trust preferred securities and
common equity securities were used to purchase $5.2 million of fixed rate (at
6.30%) junior subordinated deferrable interest debentures issued by the
Corporation, which have terms substantially similar to the trust preferred
securities.
NBT
Trust II
In
connection with acquisition of CNB, the Company formed NBT Trust II in February
2006 to fund the cash portion of the acquisition as well as to provide
regulatory capital. NBT Trust II issued $50 million of fixed rate (at 6.195%)
trust preferred securities, which represent beneficial interests in the assets
of the trust. The trust preferred securities will mature on March 15, 2036
and
are redeemable with the approval of the Federal Reserve Board in whole or in
part at the option of the Corporation at any time after March 15, 2011 and
in
whole at any time upon the occurrence of certain events affecting their tax
or
regulatory capital treatment. Distributions on the trust preferred securities
are payable quarterly in arrears on March 15, June 15, September 15 and December
15 of each year. NBT Trust II also issued $1.5 million of common equity
securities to the Company. The proceeds of the offering of the trust preferred
securities and common equity securities were used to purchase $51.5 million
of
fixed rate (at 6.195%) junior subordinated deferrable interest debentures issued
by the Corporation, which have terms substantially similar to the trust
preferred securities.
With
respect to the Trusts, the Company has the right to defer payments of interest
on the debentures at any time or from time to time for a period of up to ten
consecutive semi-annual periods with respect to each deferral period in the
case
of the debentures issued to the Trusts. Under the terms of the debentures,
in
the event that under certain circumstances there is an event of default under
the debentures or the Company has elected to defer interest on the debentures,
the Company may not, with certain exceptions, declare or pay any dividends
or
distributions on its capital stock or purchase or acquire any of its capital
stock.
Payments
of distributions on the trust preferred securities and payments on redemption
of
the trust preferred securities are guaranteed by the Company on a limited basis.
The Company also entered into an agreement as to expenses and liabilities with
the Trusts pursuant to which it agreed, on a subordinated basis, to pay any
costs, expenses or liabilities of each trust other than those arising under
the
trust preferred securities. The obligations of the Company under the junior
subordinated debentures, the related indentures, the trust agreements
establishing the trusts, the guarantees and the agreements as to expenses and
liabilities, in the aggregate, constitute a full and unconditional guarantee
by
the Company of each trust’s obligations under the trust preferred
securities.
Despite
the fact that the accounts of CNBF Trust I, NBT Trust I, and NBT Trust II are
not included in the Company’s consolidated financial statements, the $74 million
of the $75 million in trust preferred securities issued by these subsidiary
trusts are included in the Tier 1 capital of the Company for regulatory capital
purposes as allowed by the Federal Reserve Board (NBT
Bank, NA owns $1.0 million of CNBF Trust I securities).
In
February 2006, 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 $74 million in 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.
The
significant components of income tax expense attributable to operations
are:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
13,655
|
|
$
|
22,125
|
|
$
|
13,853
|
|
State
|
|
|
732
|
|
|
585
|
|
|
482
|
|
|
|
|
14,387
|
|
|
22,710
|
|
|
14,335
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
7,754
|
|
|
(177
|
)
|
|
6,351
|
|
State
|
|
|
2,013
|
|
|
920
|
|
|
1,251
|
|
|
|
|
9,767
|
|
|
743
|
|
|
7,602
|
|
Total
income tax expense
|
|
$
|
24,154
|
|
$
|
23,453
|
|
$
|
21,937
|
|
Not
included in the above table are changes in deferred tax assets and liabilities
that were recorded to stockholders’ equity of approximately ($6.5 million),
($8.8 million), and ($3.2 million) for 2006, 2005, and 2004, respectively,
relating to unrealized gain (loss) on available for sale securities, tax
benefits recognized with respect to stock options exercised, and tax benefit
related to pension funding.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and deferred tax liabilities are as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Deferred
tax assets
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
$
|
19,202
|
|
$
|
17,975
|
|
Deferred
compensation
|
|
|
4,756
|
|
|
5,156
|
|
Postretirement
benefit obligation
|
|
|
1,247
|
|
|
1,678
|
|
Writedowns
on corporate debt securities
|
|
|
445
|
|
|
657
|
|
Accrued
liabilities
|
|
|
2,258
|
|
|
523
|
|
New
York State tax credit and net operating loss carryforward
|
|
|
527
|
|
|
784
|
|
Other
|
|
|
1,694
|
|
|
841
|
|
Total
deferred tax assets
|
|
|
30,129
|
|
|
27,614
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
Pension
and executive retirement
|
|
|
12,008
|
|
|
6,837
|
|
Premises
and equipment, primarily due to accelerated depreciation
|
|
|
2,772
|
|
|
3,039
|
|
Equipment
leasing
|
|
|
23,051
|
|
|
20,999
|
|
Deferred
loan costs
|
|
|
1,033
|
|
|
519
|
|
Intangible
amortization
|
|
|
7,381
|
|
|
3,025
|
|
Other
|
|
|
924
|
|
|
652
|
|
Total
deferred tax liabilities
|
|
|
47,169
|
|
|
35,071
|
|
Net
deferred tax liability at year-end
|
|
|
(17,040
|
)
|
|
(7,457
|
)
|
Net
deferred tax liability at beginning of year
|
|
|
(7,457
|
)
|
|
(6,382
|
)
|
Increase
in net deferred tax liability
|
|
|
9,583
|
|
|
1,075
|
|
Purchase
accounting adjustment
|
|
|
184
|
|
|
(332
|
)
|
Deferred
tax expense
|
|
$
|
9,767
|
|
$
|
743
|
|
The
above
table does not include the recorded deferred tax asset of $4.0 million as of
December 31, 2006 and the deferred tax asset of $4.1 million as of December
31,
2005 related to the net unrealized holding gain/loss in the available-for-sale
securities portfolio. The table also excludes a deferred tax asset of $5.4
million as of December 31, 2006 related to pension funding and a deferred tax
asset of $0.2 million as of December 31, 2005 related to the SERP liability.
The
changes in these deferred assets are recorded directly in stockholders
equity.
Realization
of deferred tax assets is dependent upon the generation of future taxable income
or the existence of sufficient taxable income within the available carryback
period. A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. Based on available
evidence, gross deferred tax assets will ultimately be realized and a valuation
allowance was not deemed necessary at December 31, 2006 and 2005.
At
December 31, 2006, the Company has a New York State tax credit carryforward
of
$0.8 million which may be carried forward indefinitely.
The
proposed 2007 New York State budget bill contains a provision that would
disallow the exclusion of dividends paid by a real estate investment trust
subsidiary (“REIT”). The bill, if enacted as proposed would be effective for
taxable years beginning on or after January 1, 2007, and the Company would
lose
the tax benefit associated with the REIT. Had the provision been effective
in
2006, it would have resulted in an increase in financial statement tax expense
of $0.7 million.
The
following is a reconciliation of the provision for income taxes to the amount
computed by applying the applicable Federal statutory rate of 35% to income
before taxes:
|
|
Years
ended December 31
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Federal
income tax at statutory rate
|
|
$
|
28,035
|
|
$
|
26,562
|
|
$
|
25,193
|
|
Tax
exempt income
|
|
|
(3,164
|
)
|
|
(2,577
|
)
|
|
(2,427
|
)
|
Net
increase in CSV of life insurance
|
|
|
(869
|
)
|
|
(808
|
)
|
|
(756
|
)
|
State
taxes, net of federal tax benefit
|
|
|
1,785
|
|
|
978
|
|
|
1,125
|
|
Other,
net
|
|
|
(1,633
|
)
|
|
(702
|
)
|
|
(1,198
|
)
|
Income
tax expense
|
|
$
|
24,154
|
|
$
|
23,453
|
|
$
|
21,937
|
|
(15) |
STOCKHOLDERS’
EQUITY
|
Certain
restrictions exist regarding the ability of the subsidiary bank to transfer
funds to the Company in the form of cash dividends. The approval of the Office
of Comptroller of the Currency (OCC) is required to pay dividends when a bank
fails to meet certain minimum regulatory capital standards or when such
dividends are in excess of a subsidiary bank’s earnings retained in the current
year plus retained net profits for the preceding two years (as defined in the
regulations). At December 31, 2006, approximately $68.1 million of the total
stockholders’ equity of the Bank was available for payment of dividends to the
Company without approval by the OCC. The Bank’s ability to pay dividends also is
subject to the Bank being in compliance with regulatory capital requirements.
The Bank is currently in compliance with these requirements. Under the State
of
Delaware Business Corporation Law, the Company may declare and pay dividends
either out of accumulated net retained earnings or capital surplus.
In
October 2004, the Company adopted a Stockholder Rights Plan (Plan) designed
to
ensure that any potential acquirer of the Company negotiate with the board
of
directors and that all Company stockholders are treated equitably in the event
of a takeover attempt. At that time, the Company paid a dividend of one
Preferred Share Purchase Right (Right) for each outstanding share of common
stock of the Company. Similar rights are attached to each share of the Company’s
common stock issued after November 16, 2004. Under the Plan, the Rights will
not
be exercisable until a person or group acquires beneficial ownership of 15%
or
more of the Company’s outstanding common stock, begins a tender or exchange
offer for 15% or more of the Company’s outstanding common stock. Additionally,
until the occurrence of such an event, the Rights are not severable from the
Company’s common stock and, therefore, the Rights will be transferred upon the
transfer of shares of the Company’s common stock. Upon the occurrence of such
events, each Right entitles the holder to purchase one one-hundredth of a share
of Series A Junior Participating Preferred Stock, no par value, and $0.01 stated
value per share of the Company at a price of $70.
The
Plan
also provides that upon the occurrence of certain specified events, the holders
of Rights will be entitled to acquire additional equity interests, in the
Company or in the acquiring entity, such interests having a market value of
two
times the Right’s exercise price of $70. The Rights, which expire October 24,
2014, are redeemable in whole, but not in part, at the Company’s option prior to
the time they are exercisable, for a price of $0.001 per Right.
(16) |
REGULATORY
CAPITAL REQUIREMENTS
|
Bancorp
and NBT Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by
regulators that, if undertaken, could have a direct material effect on the
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, NBT Bank must meet specific
capital guidelines that involve quantitative measures of NBT Bank’s assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and NBT Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 Capital to risk-weighted assets, and of Tier
1
capital to average assets. As of December 31, 2006 and 2005, the Company and
NBT
Bank meet all capital adequacy requirements to which they were
subject.
Under
their prompt corrective action regulations, regulatory authorities are required
to take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions could
have a direct material effect on an institution’s financial statements. The
regulations establish a framework for the classification of banks into five
categories: well capitalized, adequately capitalized, under capitalized,
significantly under capitalized, and critically under capitalized. As of
December 31, 2006, the most recent notification from NBT Bank’s regulators
categorized NBT Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized NBT Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 capital to average
asset ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed NBT Bank’s category.
The
Company and NBT Bank’s actual capital amounts and ratios are presented as
follows:
|
|
Actual
|
|
Regulatory
ratio requirements
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Ratio
|
|
Minimum
capital
adequacy
|
|
For
classification
as
well
capitalized
|
|
As
of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
Company
combined
|
|
$
|
419,433
|
|
|
11.67
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
NBT
Bank
|
|
|
397,252
|
|
|
11.09
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
Tier
I Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
combined
|
|
|
374,436
|
|
|
10.42
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
NBT
Bank
|
|
|
352,391
|
|
|
9.83
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
Tier
I Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
combined
|
|
|
374,436
|
|
|
7.57
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
NBT
Bank
|
|
|
352,391
|
|
|
7.16
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
combined
|
|
$
|
350,819
|
|
|
11.05
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
NBT
Bank
|
|
|
336,900
|
|
|
10.65
|
%
|
|
8.00
|
%
|
|
10.00
|
%
|
Tier
I Capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
combined
|
|
|
311,033
|
|
|
9.80
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
NBT
Bank
|
|
|
297,255
|
|
|
9.40
|
%
|
|
4.00
|
%
|
|
6.00
|
%
|
Tier
I Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
combined
|
|
|
311,033
|
|
|
7.16
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
NBT
Bank
|
|
|
297,255
|
|
|
6.89
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
(17) |
EMPLOYEE
BENEFIT PLANS
|
DEFINED
BENEFIT POSTRETIREMENT PLANS
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all of its employees at December 31, 2006. Benefits paid from
the
plan are based on age, years of service, compensation, social security benefits,
and are determined in accordance with defined formulas. The Company’s policy is
to fund the pension plan in accordance with ERISA standards. Assets of the
plan
are invested in publicly traded stocks and bonds. Prior to January 1, 2000,
the
Company’s plan was a traditional defined benefit plan based on final average
compensation. On January 1, 2000, the plan was converted to a cash balance
plan
with grandfathering provisions for existing participants.
In
addition to the pension plan, the Company also provides supplemental employee
retirement plans to certain current and former executives. These supplemental
employee retirement plans and the defined benefit pension plan are collectively
referred to herein as “Pension Benefits”.
Also,
the
Company provides certain health care benefits for retired employees. Benefits
are accrued over the employees’ active service period. Only employees that were
employed by NBT Bank on or before January 1, 2000 are eligible to receive
postretirement health care benefits. The plan is contributory for participating
retirees, requiring participants to absorb certain deductibles and coinsurance
amounts with contributions adjusted annually to reflect cost sharing provisions
and benefit limitations called for in the plan. Employees become eligible for
these benefits if they reach normal retirement age while working for the
Company. The Company funds the cost of postretirement health care as benefits
are paid. The Company elected to recognize the transition obligation on a
delayed basis over twenty years. These postretirement benefits are referred
to
herein as “Other Benefits”.
As
discussed in Note 1, the Company adopted SFAS No. 158 effective December 31,
2006. SFAS No. 158 requires an employer to: (1) recognize the overfunded or
underfunded status of defined benefit postretirement plans, which is measured
as
the difference between plan assets at fair value and the benefit obligation,
as
an asset or liability in its balance sheet; (2) recognize changes in that funded
status in the year in which the changes occur through comprehensive income,
except in year of adoption; and (3) measure the defined benefit plan assets
and
obligations as of the date of its year-end balance sheet. SFAS No. 158 does
not
change how an employer measures plan assets and benefit obligations as of the
date of its balance sheet or how it determines the amount of net periodic
benefit cost. The following table details the impact of adoption of SFAS No.
158
on individual line items in the consolidated balance sheet at December 31,
2006:
(in
thousands)
|
|
Before
Adoption
of
SFAS No. 158
|
|
12/31/06
Adjustments
|
|
After
Adoption
of
SFAS No. 158
|
|
|
|
|
|
|
|
|
|
Prepaid
pension
|
|
$
|
30,831
|
|
$
|
(11,919
|
)
|
$
|
18,912
|
|
Total
assets
|
|
$
|
5,099,491
|
|
$
|
(11,919
|
)
|
$
|
5,087,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
postretirement benefit cost
|
|
$
|
3,277
|
|
$
|
562
|
|
$
|
3,839
|
|
Accrued
supplemental pension cost
|
|
|
6,258
|
|
|
13
|
|
|
6,271
|
|
Deferred
tax liabilities, net
|
|
|
12,521
|
|
|
(4,873
|
)
|
|
7,648
|
|
Total
liabilities
|
|
$
|
4,688,053
|
|
$
|
(4,298
|
)
|
$
|
4,683,755
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
$
|
(6,393
|
)
|
$
|
(7,621
|
)
|
$
|
(14,014
|
)
|
Total
stockholders' equity
|
|
$
|
411,438
|
|
$
|
(7,621
|
)
|
$
|
403,817
|
|
The
components of accumulated other comprehensive loss, which have not yet been
recognized as components of net periodic benefit cost, related to pensions
and
other postretirement benefits, net of tax, at December 31, 2006 are summarized
below. The Company expects that $0.5 million in net actuarial loss and $0.1
million in prior service cost will be recognized as components of net periodic
benefit cost in 2007.
(In
thousands)
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
Total
|
|
Transition
asset
|
|
$
|
(244
|
)
|
$
|
-
|
|
$
|
(244
|
)
|
Net
actuarial loss
|
|
|
6,817
|
|
|
1,493
|
|
|
8,310
|
|
Prior
service cost
|
|
|
1,021
|
|
|
(1,150
|
)
|
|
(129
|
)
|
Total
amounts recognized in accumulated other comprehensive loss
|
|
$
|
7,594
|
|
$
|
343
|
|
$
|
7,937
|
|
A
December 31 measurement date is used for the pension, supplemental pension
and
postretirement benefit plans. The following table sets forth changes in benefit
obligation, changes in plan assets, and the funded status of the pension plans
and other postretirement benefits:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
45,987
|
|
$
|
43,789
|
|
$
|
3,852
|
|
$
|
4,841
|
|
Merger
with CNB Plan
|
|
|
7,704
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Service
cost
|
|
|
2,019
|
|
|
2,226
|
|
|
3
|
|
|
3
|
|
Interest
cost
|
|
|
2,776
|
|
|
2,455
|
|
|
185
|
|
|
211
|
|
Plan
participants' contributions
|
|
|
-
|
|
|
-
|
|
|
304
|
|
|
282
|
|
Actuarial
(loss) gain
|
|
|
(21
|
)
|
|
623
|
|
|
(347
|
)
|
|
(711
|
)
|
Amendments
|
|
|
-
|
|
|
292
|
|
|
537
|
|
|
-
|
|
Benefits
paid
|
|
|
(5,609
|
)
|
|
(3,428
|
)
|
|
(695
|
)
|
|
(774
|
)
|
Prior
service cost
|
|
|
47
|
|
|
30
|
|
|
-
|
|
|
-
|
|
Projected
benefit obligation at end of year
|
|
|
52,903
|
|
|
45,987
|
|
|
3,839
|
|
|
3,852
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
44,656
|
|
|
44,500
|
|
|
-
|
|
|
-
|
|
Merger
with CNB Plan
|
|
|
5,415
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Actual
return on plan assets
|
|
|
5,514
|
|
|
1,922
|
|
|
-
|
|
|
-
|
|
Employer
contributions
|
|
|
15,568
|
|
|
1,662
|
|
|
391
|
|
|
492
|
|
Plan
participants' contributions
|
|
|
-
|
|
|
-
|
|
|
304
|
|
|
282
|
|
Benefits
paid
|
|
|
(5,609
|
)
|
|
(3,428
|
)
|
|
(695
|
)
|
|
(774
|
)
|
Fair
value of plan assets at end of year
|
|
|
65,544
|
|
|
44,656
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status at year end
|
|
$
|
12,641
|
|
$
|
(1,331
|
)
|
$
|
(3,839
|
)
|
$
|
(3,852
|
)
|
The
funded status of the pension and other postretirement benefit plans has been
recognized as follows in the consolidated balance sheet at December 31, 2006.
An
asset is recognized for an overfunded plan and a liability is recognized for
an
underfunded plan.
(In
thousands)
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
Other
assets
|
|
$
|
18,912
|
|
$
|
-
|
|
Other
liabilities
|
|
|
(6,271
|
)
|
|
(3,839
|
)
|
Funded
status
|
|
$
|
12,641
|
|
$
|
(3,839
|
)
|
Information
concerning the funded status of the pension and other postretirement benefits
plans and the amounts recognized in the consolidated balance sheet at December
31, 2005, prior to the adoption of SFAS No. 158, is summarized
below:
(In
thousands)
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
Funded
status
|
|
$
|
(1,331
|
)
|
$
|
(3,852
|
)
|
Unrecognized
prior service cost
|
|
|
1,891
|
|
|
(2,688
|
)
|
Unrecognized
net loss
|
|
|
13,817
|
|
|
2,953
|
|
Unrecognized
transition asset
|
|
|
(598
|
)
|
|
-
|
|
Additional
minimum liability
|
|
|
(1,256
|
)
|
|
-
|
|
Net
amount recognized
|
|
$
|
12,523
|
|
$
|
(3,587
|
)
|
Components
of net amount recognized:
|
|
|
|
|
|
|
|
Prepaid
benefit cost
|
|
$
|
17,423
|
|
$
|
-
|
|
Accrued
benefit liability
|
|
|
(4,900
|
)
|
|
(3,587
|
)
|
Net
amount recognized
|
|
$
|
12,523
|
|
$
|
(3,587
|
)
|
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted
average assumptions:
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.80
|
%
|
|
5.50
|
%
|
|
5.75
|
%
|
Expected
long-term return on plan assets (for defined benefit pension plan
only)
|
|
|
8.50
|
%
|
|
8.50
|
%
|
|
8.75
|
%
|
Rate
of compensation increase (for pension benefits only)
|
|
|
3.09
|
%
|
|
3.75
|
%
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The
following assumptions were used to determine net periodic pension
cost:
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.50
|
%
|
|
5.75
|
%
|
|
6.00
|
%
|
Expected
long-term return on plan assets
|
|
|
8.50
|
%
|
|
8.75
|
%
|
|
8.75
|
%
|
Rate
of compensation increase
|
|
|
3.75
|
%
|
|
3.75
|
%
|
|
3.75
|
%
|
Net
periodic benefit cost for the years ended December 31 included the following
components:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
Components
of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2,019
|
|
$
|
2,226
|
|
$
|
2,026
|
|
$
|
3
|
|
$
|
3
|
|
$
|
35
|
|
Interest
cost
|
|
|
2,776
|
|
|
2,455
|
|
|
2,377
|
|
|
185
|
|
|
212
|
|
|
277
|
|
Expected
return on plan assets
|
|
|
3,952
|
|
|
3,828
|
|
|
3,740
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of transition obligation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
23
|
|
|
38
|
|
Amortization
of initial unrecognized asset
|
|
|
(192
|
)
|
|
(192
|
)
|
|
(192
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of prior service cost
|
|
|
236
|
|
|
572
|
|
|
235
|
|
|
(266
|
)
|
|
(265
|
)
|
|
(265
|
)
|
Amortization
of unrecognized net gain
|
|
|
838
|
|
|
1,265
|
|
|
542
|
|
|
160
|
|
|
167
|
|
|
187
|
|
Net
periodic pension cost
|
|
$
|
9,629
|
|
$
|
10,154
|
|
$
|
8,728
|
|
$
|
82
|
|
$
|
140
|
|
$
|
272
|
|
The
following table sets forth estimated future benefit payments for the pension
plans and other postretirement benefit plans:
Estimated
future benefit
payments
(in thousands)
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
2007
|
|
$
|
3,804
|
|
$
|
310
|
|
2008
|
|
|
3,819
|
|
|
274
|
|
2009
|
|
|
3,958
|
|
|
254
|
|
2010
|
|
|
3,969
|
|
|
260
|
|
2011
|
|
|
3,963
|
|
|
249
|
|
2012
- 2016
|
|
|
21,499
|
|
|
1,379
|
|
The
Company is not required to make contributions to the plan in 2007
PLAN
INVESTMENT POLICY AS OF DECEMBER 31, 2006:
The
Company’s key investment objectives in managing its defined benefit plan assets
are to ensure that present and future benefit obligations to all participants
and beneficiaries are met as they become due; to provide a total return that,
over the long-term, maximizes the ratio of the plan assets to liabilities,
while
minimizing the present value of required Company contributions, at the
appropriate levels of risk; to meet statutory requirements and regulatory
agencies’ requirements; and to satisfy applicable accounting standards. The
Company periodically evaluates the asset allocations, funded status, rate of
return assumption and contribution strategy for satisfaction of our investment
objectives. Generally, the investment manager allocates investments as follows:
of 20-40% of the total portfolio in fixed income, 40-80% in equities, and 0-20%
in cash. Only high-quality bonds should be included in the portfolio. All issues
that are rated lower than A by Standard and Poor’s should be excluded. Equity
securities at December 31, 2006 and 2005 do not include any NBT Bancorp Inc.
common stock.
The
following is a summary of the plan’s weighted average asset allocation at
December 31, 2006:
(In
thousands)
|
|
Actual
Allocation
|
|
Percentage
Allocation
|
|
Cash
and Cash Equivalents
|
|
$
|
14,381
|
|
|
21.9
|
%
|
Equity
Mutual Funds
|
|
$
|
12,083
|
|
|
18.4
|
%
|
US
Government Bonds
|
|
|
13,780
|
|
|
21.0
|
%
|
Corporate
Bonds
|
|
|
3,444
|
|
|
5.3
|
%
|
Common
Stock
|
|
|
17,657
|
|
|
27.0
|
%
|
Preferred
Stock
|
|
|
780
|
|
|
1.2
|
%
|
Partnerships
|
|
|
873
|
|
|
1.3
|
%
|
Foreign
Equity
|
|
|
2,546
|
|
|
3.9
|
%
|
Total
|
|
$
|
65,544
|
|
|
100.0
|
%
|
DETERMINATION
OF ASSUMED RATE OF RETURN
The
expected long-term rate-of-return on plan assets reflects long-term earnings
expectations on existing plan assets. In estimating that rate, appropriate
consideration is given to historical returns earned by plan assets as well
as
historical returns of comparable market indexes aligned with the Company’s plan
assets. Average rates of return over the past 10 and 15 year periods were
considered and the results are summarized as follows:
|
Percentage
Allocation
|
|
Comparable
Market Index
|
Expected
Return
Average
|
Money
Market & Equivalents
|
22.30%
|
|
Lipper
Money market Index
|
3.50%
|
Taxable
Bonds
|
27.80%
|
|
Lehman
Bros. Interm Govt. Index
|
5.30%
|
International
Equities
|
3.50%
|
|
MSCI
EAFE Gross Index
|
7.40%
|
US
Equities
|
46.40%
|
|
S&P
500 Stock Index
|
9.70%
|
Total
|
100.00%
|
|
Expected
Average Return:
|
8.10%
|
For
measurement purposes, the annual rates of increase in the per capita cost of
covered medical and prescription drug benefits for fiscal year 2006 were assumed
to be 10.0 and 13.0 percent, respectively. The rates were assumed to decrease
gradually to 5.0 percent for fiscal year 2014 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect
on
amounts reported for health care plans. A one-percentage point change in the
health care trend rates would have the following effects as of and for the
year
ended December 31, 2006:
(In
thousands)
|
|
1-Percentage
point
increase
|
|
1-Percentage
point
decrease
|
|
Increase
(decrease) on total service and interest cost components
|
|
$
|
16
|
|
$
|
(14
|
)
|
Increase
(decrease) on postretirement accumulated benefit
obligation
|
|
|
307
|
|
|
(269
|
)
|
EMPLOYEE
401(K) AND EMPLOYEE STOCK OWNERSHIP PLANS
At
December 31, 2006, the Company maintains a 401(k) and employee stock ownership
plan (the Plan). The Company contributes to the Plan based on employees’
contributions out of their annual salary. In addition, the Company may also
make
discretionary contributions to the Plan based on profitability. Participation
in
the plan is contingent upon certain age and service requirements. The recorded
expenses associated with this plan were $1.4 million in 2006, $1.6 million
in
2005, and $1.4 million in 2004.
STOCK
OPTION PLANS
As
discussed in Note 1, the Company adopted SFAS No. 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. The adoption
of
SFAS No. 123R lowered income before income tax expense by approximately $1.8
million for the year ended December 31, 2006, compared to if we had continued
to
account for share-based compensation under APB No. 25, Accounting for Stock
Issued to Employees.
At
December 31, 2006, the Company had two stock option plans (Plans). Under the
terms of the Plans, options are granted to directors and key employees to
purchase shares of the Company’s common stock at a price equal to the fair
market value of the common stock on the date of the grant. Options granted
have
a vesting period of four years and terminate eight or ten years from the date
of
the grant. Shares issued as a result of stock option exercises are funded from
the Company’s treasury stock.
The
per
share weighted average fair value of stock options granted during 2006, 2005,
and 2004 was $5.26, $5.88, and $5.81, respectively. The fair value of each
award
is estimated on the grant date using the Black-Scholes option pricing model
with
the following weighted average assumptions used for grants in the years ended
December 31. Historical information was the primary basis for the selection
of
the expected volatility, expected dividend yield and the expected lives of
the
options. The risk-free interest rate was selected based upon yields of the
U.S.
treasury issues with a term equal to the expected life of the option being
valued:
|
Years
ended December 31,
|
|
2006
|
2005
|
2004
|
Dividend
yield
|
3.08%-3.52%
|
3.05%-3.70%
|
3.01%-3.74%
|
Expected
volatility
|
28.26%-28.62%
|
28.67%-30.00%
|
29.82%-31.65%
|
Risk-free
interest rates
|
4.36%-5.04%
|
3.85%-4.36%
|
3.56%-4.41%
|
Expected
life
|
7
years
|
7
years
|
7
years
|
Had
the
Company determined compensation cost based on the estimated fair value at the
grant date for its stock options under SFAS No. 123, the Company’s net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Net
income
|
|
|
|
|
|
As
reported
|
|
$
|
52,438
|
|
$
|
50,047
|
|
Add:
Stock-based compensation expense included in reported net income,
net of
related tax effects
|
|
$
|
370
|
|
$
|
119
|
|
Deduct:
Total stock-based compensation expense determined under fair value
based
methods for all awards, net of related tax effects
|
|
|
(1,571
|
)
|
|
(1,215
|
)
|
Pro
forma net income
|
|
$
|
51,237
|
|
$
|
48,951
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1.62
|
|
$
|
1.53
|
|
Pro
forma
|
|
|
1.58
|
|
|
1.50
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
|
1.60
|
|
|
1.51
|
|
Pro
forma
|
|
|
1.56
|
|
|
1.48
|
|
The
following table summarizes information concerning stock options outstanding
at
December 31, 2006:
|
|
Number
of Shares
|
|
Weighted
average
exercise
price
|
|
Weighted
Average
Remaining
Contractual
Term
(in yrs)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2005
|
|
|
1,916,624
|
|
$
|
18.79
|
|
|
|
|
|
|
|
Granted
|
|
|
332,422
|
|
|
22.36
|
|
|
|
|
|
|
|
Granted
in Connection with CNB Purchase
|
|
|
237,278
|
|
|
16.76
|
|
|
|
|
|
|
|
Exercised
|
|
|
(603,627
|
)
|
|
16.76
|
|
|
|
|
|
|
|
Forfeited
and Lapsed
|
|
|
(71,677
|
)
|
|
22.03
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,811,020
|
|
$
|
19.73
|
|
|
6.33
|
|
$
|
10,469,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
1,169,611
|
|
$
|
18.51
|
|
|
5.37
|
|
$
|
8,185,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
to Vest
|
|
|
574,934
|
|
$
|
22.21
|
|
|
8.27
|
|
$
|
1,896,562
|
|
The
weighted-average fair market value of stock options granted for the twelve
months ended December 31, 2006, was $5.26 per share. Total stock-based
compensation expense for stock option awards totaled $1.8 million for the year
ended December 31, 2006. The tax benefit recognized on stock-based compensation
expense for stock option awards during 2006 totaled $0.7 million. Cash proceeds,
tax benefits and intrinsic value related to total stock options exercised is
as
follows:
|
|
Year
ended
|
|
(dollars
in thousands)
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Proceeds
from stock options exercised
|
|
$
|
10,131
|
|
$
|
6,795
|
|
Tax
benefits related to stock options exercised
|
|
|
1,428
|
|
|
1,057
|
|
Intrinsic
value of stock options exercised
|
|
|
4,010
|
|
|
2,913
|
|
The
Company has outstanding restricted and deferred stock awards granted from
various plans at December 31, 2006. The Company recognized $0.8 million in
stock-based compensation expense related to these stock awards for the year
ended December 31, 2006 and $0.7 million for the year ended December 31, 2005.
The tax benefit recognized on restricted and deferred stock-based compensation
expense during 2006 totaled $0.3 million and $0.3 million during 2005.
Unrecognized compensation cost related to restricted stock awards totaled $1.4
million at December 31, 2006 and will be recognized over 3.5 years on a weighted
average basis. Shares issued are funded from the Company’s treasury stock. The
following table summarizes information for unvested restricted stock awards
outstanding as of December 31, 2006:
|
|
Number
of
Shares
|
|
Weighted-Average
Grant
Date Fair
Value
|
|
|
|
|
|
|
|
Unvested
Restricted Stock Awards
|
|
|
|
|
|
Unvested
at January 1, 2006
|
|
|
37,935
|
|
$
|
21.46
|
|
Forfeited
|
|
|
(3,725
|
)
|
$
|
22.66
|
|
Vested
|
|
|
(24,778
|
)
|
$
|
20.85
|
|
Granted
|
|
|
81,415
|
|
$
|
22.43
|
|
Unvested
at December 31, 2006
|
|
|
90,847
|
|
$
|
22.45
|
|
The
Company has 2.1 million securities remaining available to be granted as part
of
the stock option, restricted and all other equity compensation plans at December
31, 2006.
(18) |
COMMITMENTS
AND CONTINGENT LIABILITIES
|
The
Company’s concentrations of credit risk are reflected in the consolidated
balance sheets. The concentrations of credit risk with standby letters of
credit, unused lines of credit, commitments to originate new loans and loans
sold with recourse generally follow the loan classifications.
At
December 31, 2006, approximately 58.6% of the Company’s loans are secured by
real estate located in central and northern New York and northeastern
Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion
of the Company’s portfolio is susceptible to changes in market conditions of
those areas. Management is not aware of any material concentrations of credit
to
any industry or individual borrowers.
The
Company is a party to certain financial instruments with off balance sheet
risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, unused lines
of credit, standby letters of credit, and as certain mortgage loans sold to
investors with recourse. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend credit, unused
lines of credit, standby letters of credit, and loans sold with recourse is
represented by the contractual amount of those instruments. The Company uses
the
same credit standards in making commitments and conditional obligations as
it
does for on balance sheet instruments.
The
total
amount of loans serviced by the Company for unrelated third parties was
approximately $105.0 million and $81.2 million at December 31, 2006 and 2005,
respectively.
In
the
normal course of business there are various outstanding legal proceedings.
In
the opinion of management, the aggregate amount involved in such proceedings
is
not material to the consolidated balance sheets or results of operations of
the
Company.
|
|
At
December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Unused
lines of credit
|
|
$
|
249,194
|
|
$
|
230,863
|
|
Commitments
to extend credits, primarily variable rate
|
|
|
287,104
|
|
|
266,274
|
|
Standby
letters of credit
|
|
|
30,752
|
|
|
42,866
|
|
Loans
sold with recourse
|
|
|
5,741
|
|
|
5,750
|
|
The
Company does not issue any guarantees that would require liability-recognition
or disclosure, other than its standby letters of credit.
The
Company guarantees the obligations or performance of customers by issuing
stand-by letters of credit to third parties. These stand-by letters of credit
are frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities. The risk involved
in issuing stand-by letters of credit is essentially the same as the credit
risk
involved in extending loan facilities to customers, and they are subject to
the
same credit origination, portfolio maintenance and management procedures in
effect to monitor other credit and off-balance sheet products. Typically, these
instruments have terms of five years or less and expire unused; therefore,
the
total amounts do not necessarily represent future cash requirements. The fair
value of the Company’s stand-by letters of credit at December 31, 2006 and 2005
was not significant.
(19) |
PARENT
COMPANY FINANCIAL INFORMATION
|
|
|
December
31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
15,054
|
|
$
|
10,229
|
|
Securities
available for sale, at estimated fair value
|
|
|
11,071
|
|
|
11,345
|
|
Investment
in subsidiaries, on equity basis
|
|
|
463,633
|
|
|
342,699
|
|
Other
assets
|
|
|
26,182
|
|
|
17,363
|
|
Total
assets
|
|
$
|
515,940
|
|
$
|
381,636
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
112,123
|
|
$
|
47,693
|
|
Stockholders’
equity
|
|
|
403,817
|
|
|
333,943
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
515,940
|
|
$
|
381,636
|
|
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Dividends
from subsidiaries
|
|
$
|
26,000
|
|
$
|
35,400
|
|
$
|
29,732
|
|
Management
fee from subsidiaries
|
|
|
59,933
|
|
|
54,373
|
|
|
47,872
|
|
Interest
and other dividend income
|
|
|
951
|
|
|
839
|
|
|
258
|
|
Net
gain on sale of securities available for sale
|
|
|
-
|
|
|
-
|
|
|
4
|
|
Total
revenue
|
|
|
86,884
|
|
|
90,612
|
|
|
77,866
|
|
Operating
expenses
|
|
|
60,180
|
|
|
55,201
|
|
|
50,442
|
|
Income
before income tax benefit and equity in undistributed income of
subsidiaries
|
|
|
26,704
|
|
|
35,411
|
|
|
27,424
|
|
Income
tax benefit
|
|
|
(301
|
)
|
|
(728
|
)
|
|
(993
|
)
|
Equity
in undistributed income of subsidiaries
|
|
|
28,942
|
|
|
16,299
|
|
|
21,630
|
|
Net
income
|
|
$
|
55,947
|
|
$
|
52,438
|
|
$
|
50,047
|
|
|
|
Years
ended December 31,
|
|
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
55,947
|
|
$
|
52,438
|
|
$
|
50,047
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
Net
gains on sale of securities available for sale
|
|
|
-
|
|
|
-
|
|
|
8
|
|
Tax
benefit from exercise of stock options
|
|
|
-
|
|
|
1,057
|
|
|
1,336
|
|
Equity
in undistributed income of subsidiaries in excess of
distributions
|
|
|
(28,942
|
)
|
|
(16,299
|
)
|
|
(21,630
|
)
|
Other,
net
|
|
|
838
|
|
|
5,540
|
|
|
(2,061
|
)
|
Net
cash provided by operating activities
|
|
|
27,843
|
|
|
42,736
|
|
|
27,700
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of securities available for sale
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
Cash
used in CNB Bancorp, Inc. merger
|
|
|
(39,037
|
)
|
|
-
|
|
|
-
|
|
Purchases
of premises and equipment
|
|
|
(2,892
|
)
|
|
(2,834
|
)
|
|
(2,342
|
)
|
Net
cash used in investing activities
|
|
|
(41,929
|
)
|
|
(2,834
|
)
|
|
(1,342
|
)
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of shares to employee benefit plans and other stock
plans
|
|
|
10,131
|
|
|
7,161
|
|
|
6,964
|
|
Payment
on long-term debt
|
|
|
(104
|
)
|
|
(100
|
)
|
|
(90
|
)
|
Proceeds
from the issuance of trust preferred debentures
|
|
|
51,547
|
|
|
5,155
|
|
|
-
|
|
Purchase
of treasury shares
|
|
|
(17,111
|
)
|
|
(23,165
|
)
|
|
(9,149
|
)
|
Cash
dividends and payment for fractional shares
|
|
|
(26,018
|
)
|
|
(24,673
|
)
|
|
(24,251
|
)
|
Tax
benefit from exercise of stock options
|
|
|
466
|
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
18,911
|
|
|
(35,622
|
)
|
|
(26,526
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,825
|
|
|
4,280
|
|
|
(168
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
10,229
|
|
|
5,949
|
|
|
6,117
|
|
Cash
and cash equivalents at end of year
|
|
$
|
15,054
|
|
$
|
10,229
|
|
$
|
5,949
|
|
A
statement of changes in stockholders’ equity has not been presented since it is
the same as the consolidated statement of changes in stockholders’ equity
previously presented.
(20) |
FAIR
VALUES OF FINANCIAL INSTRUMENTS
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments.
SHORT
TERM INSTRUMENTS
For
short-term instruments, such as cash and cash equivalents, accrued interest
receivable, accrued interest payable, and short term borrowings, carrying value
approximates fair value.
SECURITIES
Fair
values for securities are based on quoted market prices or dealer quotes, where
available. Where quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
LOANS
For
variable rate loans that reprice frequently and have no significant credit
risk,
fair values are based on carrying values. The fair values for fixed rate loans
are estimated through discounted cash flow analysis using interest rates
currently being offered for loans with similar terms and credit quality.
Nonperforming loans are valued based upon recent loss history for similar
loans.
DEPOSITS
The
fair
values disclosed for savings, money market, and noninterest bearing accounts
are, by definition, equal to their carrying values at the reporting date. The
fair value of fixed maturity time deposits is estimated using a discounted
cash
flow analysis that applies interest rates currently offered to a schedule of
aggregated expected monthly maturities on time deposits.
LONG-TERM
DEBT
The
fair
value of long-term debt has been estimated using discounted cash flow analysis
that applies interest rates currently offered for notes with similar
terms.
COMMITMENTS
TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The
fair
value of commitments to extend credit and standby letters of credit are
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present credit
worthiness of the counterparties. Carrying amounts, which are comprised of
the
unamortized fee income, are not significant.
TRUST
PREFERRED DEBENTURES
A
significant portion of the outstanding balance at December 31, 2006 is variable
rate in nature, as such the carrying value approximates fair value.
Estimated
fair values of financial instruments at December 31 are as follows:
|
|
2006
|
|
2005
|
|
(In
thousands)
|
|
Carrying
amount
|
|
Estimated
fair
value
|
|
Carrying
amount
|
|
Estimated
fair
value
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
138,793
|
|
$
|
138,793
|
|
$
|
142,488
|
|
$
|
142,488
|
|
Securities
available for sale
|
|
|
1,106,322
|
|
|
1,106,322
|
|
|
954,474
|
|
|
954,474
|
|
Securities
held to maturity
|
|
|
136,314
|
|
|
136,287
|
|
|
93,709
|
|
|
93,701
|
|
Loans
(1)
|
|
|
3,412,654
|
|
|
3,320,727
|
|
|
3,022,657
|
|
|
2,949,799
|
|
Less
allowance for loan losses
|
|
|
50,587
|
|
|
-
|
|
|
47,455
|
|
|
-
|
|
Net
loans
|
|
|
3,362,067
|
|
|
3,320,727
|
|
|
2,975,202
|
|
|
2,949,799
|
|
Accrued
interest receivable
|
|
|
24,765
|
|
|
24,765
|
|
|
19,008
|
|
|
19,008
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,
NOW, and money market
|
|
$
|
1,566,557
|
|
$
|
1,566,557
|
|
$
|
1,325,166
|
|
$
|
1,325,166
|
|
Time
deposits
|
|
|
1,583,304
|
|
|
1,575,494
|
|
|
1,241,608
|
|
|
1,234,680
|
|
Noninterest
bearing
|
|
|
646,377
|
|
|
646,377
|
|
|
593,422
|
|
|
593,422
|
|
Short-term
borrowings
|
|
|
345,408
|
|
|
345,408
|
|
|
444,977
|
|
|
444,977
|
|
Long-term
debt
|
|
|
417,728
|
|
|
411,161
|
|
|
414,330
|
|
|
407,783
|
|
Accrued
interest payable
|
|
|
11,639
|
|
|
11,639
|
|
|
8,077
|
|
|
8,077
|
|
Trust
preferred debentures
|
|
|
75,422
|
|
|
75,422
|
|
|
23,875
|
|
|
23,875
|
|
1.
|
Lease
receivables, although excluded from the scope of SFAS No. 107, are
included in the estimated fair value amounts at their carrying
amounts.
|
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates
do
not reflect any premium or discount that could result from offering for sale
at
one time the Company’s entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics
of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair
value estimates are based on existing on and off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust and
investment management operation that contributes net fee income annually. The
trust and investment management operation is not considered a financial
instrument, and its value has not been incorporated into the fair value
estimates. Other significant assets and liabilities include the benefits
resulting from the low-cost funding of deposit liabilities as compared to the
cost of borrowing funds in the market, and premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in the estimate of fair value.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
As
of the
end of the period covered by this Annual Report on Form 10-K, an evaluation
was
carried out by the Company’s management, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective as of the end of the period covered
by
this report. No changes were made to the Company’s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) during the last fiscal quarter that materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Management
Report on Internal Controls Over Financial Reporting
The
management of NBT Bancorp, Inc. (the “Company”) is responsible for establishing
and maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is a process designed under
the supervision of the Company’s Chief Executive Officer and Chief Financial
Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s consolidated financial statements
for external purposes in accordance with generally accepted accounting
principles.
As
of
December 31, 2006, management assessed the effectiveness of the Company’s
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in “Internal Control —
Integrated Framework,” issued by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission. Based on the assessment, management
determined that the Company maintained effective internal control over financial
reporting as of December 31, 2006, based on those criteria.
KPMG
LLP,
the independent registered public accounting firm that audited the consolidated
financial statements of the Company included in this Annual Report on Form
10-K,
has issued an attestation report on management’s assessment of the effectiveness
of the Company’s internal control over financial reporting as of December 31,
2006. The report, which expresses unqualified opinions on management’s
assessment and on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2006, is included in this Item under
the
heading “Report of Independent Registered Public Accounting Firm.”
Report
of Independent Registered Public Accounting
Firm
To
the Board of Directors and Stockholders of NBT Bancorp
Inc.
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting,
that
NBT Bancorp Inc. (the Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established
in
Internal
Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the NBT Bancorp Inc. maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in
Internal
Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the criteria established in Internal
Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of NBT Bancorp
Inc. and subsidiaries as of December 31, 2006 and 2005 and the related
consolidated statements of income, changes in stockholders’ equity, cash flows,
and comprehensive income for each of the years in the three-year period ended
December 31, 2006, and our report dated February 27, 2007 expressed an
unqualified opinion on those financial statements.
/s/
KPMG
LLP
Albany,
NY
February
27, 2007
None.
PART
III
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
information required by this item is incorporated herein by reference to the
Company’s definitive Proxy Statement for its annual meeting of shareholders to
be held on May 1, 2007 (the “Proxy Statement”), which will be filed with the
Securities and Exchange Commission within 120 days of the Company’s 2006 fiscal
year end.
The
information required by this item is incorporated herein by reference to the
Company’s definitive Proxy Statement for its annual meeting of shareholders to
be held on May 1, 2007 (the “Proxy Statement”), which will be filed with the
Securities and Exchange Commission within 120 days of the Company’s 2006 fiscal
year end.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED
MATTERS
|
EQUITY
COMPENSATION PLAN INFORMATION
As
of
December 31, 2006, the following table summarizes the Company’s equity
compensation plans:
Plan
Category
|
|
A.
Number of securities to
be
issued upon exercise of
outstanding
options
|
|
B.
Weighted-average
exercise
price of
outstanding
options
|
|
Number
of securities
remaining
available for future
issuance
under equity
compensation
plans
(excluding
securities reflected
in
column A.)
|
|
Equity
compensation plans approved by stockholders
|
|
|
1,811,020
|
|
$
|
19.73
|
|
|
2,136,065
|
|
Equity
compensation plans not approved by stockholders
|
|
|
None
|
|
|
None
|
|
|
None
|
|
The
remaining information required by this item is incorporated herein by reference
to the Proxy Statement.
ITEM
13.
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS
AND DIRECTOR
INDEPENDENCE
|
The
information required by this item is incorporated herein by reference to the
Proxy Statement.
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
The
information required by this item is incorporated herein by reference to the
Proxy Statement.
PART
IV
ITEM
15.
|
EXHIBITS
AND
FINANCIAL STATEMENT
SCHEDULES
|
(a)(1)
The following Consolidated Financial Statements are included in Part II, Item
8
hereof:
Report
of
Independent Registered Public Accounting Firm.
Consolidated
Balance Sheets as of December 31, 2006 and 2005.
Consolidated
Statements of Income for each of the three years ended December 31, 2006, 2005
and 2004.
Consolidated
Statements of Changes in Stockholders’ Equity for each of the three years ended
December 31, 2006, 2005 and 2004.
Consolidated
Statements of Cash Flows for each of the three years ended December 31, 2006,
2005 and 2004.
Consolidated
Statements of Comprehensive Income for each of the three years ended December
31, 2006, 2005 and 2004.
Notes
to
the Consolidated Financial Statements.
(a)(2)
There are no financial statement schedules that are required to be filed as
part
of this form since they are not applicable or the information is included in
the
consolidated financial statements.
(a)(3)
See below for all exhibits filed herewith and the Exhibit Index.
2.1
|
Agreement
and Plan of Merger by and between NBT Bancorp Inc., and CNB Bancorp,
Inc.,
dated as of June 13, 2005 (filed as Exhibit 2.1 to Registrant’s
Form 8-K, filed on June 14, 2005 and incorporated herein by
reference).
|
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
|
NBT
Bancorp Inc. 1993 Stock Option Plan (filed as Exhibit 99.1 to Registrant's
Form S-8 Registration Statement, file number 333-71830 filed on October
18, 2001 and incorporated by reference herein).
|
10.2
|
NBT
Bancorp Inc. Non-Employee Director, Divisional Director and Subsidiary
Director Stock Option Plan (filed as Exhibit 99.1 to Registrant's
Form S-8
Registration Statement, file number 333-73038 filed on November 9,
2001
and incorporated by reference herein).
|
10.3
|
CNB
Bancorp, Inc. Stock Option Plan (incorporated by reference to Exhibit
A of
CNB Bancorp, Inc.’s definitive proxy statement filed with the SEC on
September 4, 1998 and incorporated by reference
herein).
|
10.4
|
NBT
Bancorp Inc. Employee Stock Purchase Plan. (filed as Exhibit 10.11
to
Registrant's Form 10-K for the year ended December 31, 2001, filed
on
March 29, 2002 and incorporated herein by
reference).
|
10.5
|
NBT
Bancorp Inc. Non-employee Directors Restricted and Deferred Stock
Plan
(filed as Appendix A of Registrant's Definitive Proxy Statement on
Form
14A filed on April 4, 2003, and incorporated herein by reference).
|
10.6
|
NBT
Bancorp Inc. Performance Share Plan (filed as Appendix B of Registrant's
Definitive Proxy Statement on Form 14A filed on April 4, 2003, and
incorporated herein by reference).
|
|
NBT
Bancorp Inc. 2007 Executive Incentive Compensation Plan.
|
10.8
|
CNB
Bancorp, Inc. Long-Term Incentive Compensation Plan (incorporated
by
reference to Appendix B of CNB Bancorp, Inc.’s definitive proxy statement
filed with the SEC on March 14, 2002 and incorporated herein by
reference).
|
10.9
|
2006
Non-Executive Restricted Stock Plan. (filed as Exhibit 99.1 to
Registrant’s Form S-8 Registration Statement, file number 333-139956,
filed on January 12, 2007, and incorporated herein by
reference).
|
10.10
|
Form
of Employment Agreement between NBT Bancorp Inc. and Daryl R. Forsythe
made as of August 2, 2003. (filed as Exhibit 10.1 to Registrant's
Form
10-Q for the quarterly period ended September 30, 2003, filed on
November
13, 2003 and incorporated herein by reference)
|
10.11
|
Amendment
dated December 19, 2005 to Form of Employment Agreement between NBT
Bancorp Inc. and Daryl R. Forsythe made as of August 2, 2003. (filed
as
Exhibit 10.10 to Registrant’s Form 10-K for the year ended December 31,
2005, filed on March 15, 2006 and incorporated herein by
reference).
|
10.12
|
Supplemental
Retirement Agreement between NBT Bancorp Inc., NBT Bank, National
Association and Daryl R. Forsythe as amended and restated Effective
January 1, 2005. (filed as Exhibit 10.11 to Registrant’s Form 10-K for the
year ended December 31, 2005, filed on March 15, 2006 and incorporated
herein by reference).
|
10.13
|
Death
Benefits Agreement between NBT Bancorp Inc., NBT Bank, National
Association and Daryl R. Forsythe made August 22, 1995. (filed as
Exhibit
10.12 to Registrant’s Form 10-K for the year ended December 31, 2005,
filed on March 15, 2006 and incorporated herein by
reference).
|
10.14
|
Amendment
dated January 28, 2002 to Death Benefits Agreement between NBT Bancorp
Inc., NBT Bank, National Association and Daryl R. Forsythe made August
22,
1995. (filed as Exhibit 10.18 to Registrant's Form 10-K for the year
ended
December 31, 2001, filed on March 29, 2002 and incorporated herein
by
reference).
|
10.15
|
Form
of Employment Agreement between NBT Bancorp Inc. and Martin A. Dietrich
as
amended and restated January 1, 2006. (filed as Exhibit 10.1 to
Registrant’s Form 10-Q for the quarterly period ended March 31, 2006,
filed on May 9, 2006 and incorporated herein by
reference).
|
10.16
|
Supplemental
Executive Retirement Agreement between NBT Bancorp Inc. and Martin
A.
Dietrich as amended and restated January 20, 2006. (filed as Exhibit
10.16
to Registrant’s Form 10-K for the year ended December 31, 2005, filed on
March 15, 2006 and incorporated herein by reference).
|
10.17
|
First
Amendment to Supplemental Executive Retirement Agreement between
NBT
Bancorp Inc. and Martin A. Dietrich effective January 1, 2006. (filed
as
Exhibit 10.2 to Registrant’s Form 10-Q for the quarterly period ended
March 31, 2006, filed on May 9, 2006 and incorporated herein by
reference).
|
10.18
|
Change
in control agreement with Martin A. Dietrich as amended and restated
July
23, 2001 (filed as Exhibit 10.3 to Registrant's Form 10-Q for the
quarterly period ended September 30, 2001, filed on November 14,
2001 and
incorporated herein by reference).
|
10.19
|
Form
of Employment Agreement between NBT Bancorp Inc. and Michael J. Chewens
as
amended and restated January 1, 2005. (filed as Exhibit 10.18 to
Registrant’s Form 10-K for the year ended December 31, 2005, filed on
March 15, 2006 and incorporated herein by reference).
|
10.20
|
Supplemental
Executive Retirement Agreement between NBT Bancorp Inc. and Michael
J.
Chewens made as of July 23, 2001 (filed as Exhibit 10.12 to Registrant's
Form 10-Q for the quarterly period ended September 30, 2001, filed
on
November 14, 2001 and incorporated by reference
herein).
|
10.21
|
Change
in control agreement with Michael J. Chewens as amended and restated
July
23, 2001 (filed as Exhibit 10.1 to Registrant's Form 10-Q for the
quarterly period ended September 30, 2001, filed on November 14,
2001 and
incorporated herein by reference).
|
10.22
|
Form
of Employment Agreement between NBT Bancorp Inc. and David E. Raven
as
amended and restated January 1, 2005. (filed as Exhibit 10.21 to
Registrant’s Form 10-K for the year ended December 31, 2005, filed on
March 15, 2006 and incorporated herein by reference).
|
10.23
|
Change
in control agreement with David E. Raven as amended and restated
July 23,
2001 (filed as Exhibit 10.7 to Registrant's Form 10-Q for the quarterly
period ended September 30, 2001, filed on November 14, 2001 and
incorporated by reference herein).
|
10.24
|
Supplemental
Executive Retirement Agreement between NBT Bancorp Inc. and David
E. Raven
made as of January 1, 2004. (filed as Exhibit 10.35 to Registrant's
Form
10-K for the year ended December 31, 2003, filed on March 15, 2004
and
incorporated herein by reference).
|
10.25
|
Form
of Employment Agreement between NBT Bancorp Inc. and Ronald M. Bentley
made as of August 16, 2005 (filed as Exhibit 10.24 to Registrant’s Form
10-K for the year ended December 31, 2005, filed on March 15, 2006
and
incorporated herein by reference).
|
10.26
|
Change
in control agreement with Ronald M. Bentley dated August 22, 2005
(filed
as Exhibit 10.25 to Registrant’s Form 10-K for the year ended December 31,
2005, filed on March 15, 2006 and incorporated herein by
reference).
|
|
Description
for Arrangement for Directors Fees.
|
|
A
list of the subsidiaries of the Registrant.
|
|
Consent
of KPMG LLP.
|
|
Certification
by the Chief Executive Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e)
of the Securities and Exchange Act of 1934.
|
|
Certification
by the Chief Financial Officer pursuant to Rules 13(a)-14(a)/15(d)-14(e)
of the Securities and Exchange Act of 1934.
|
|
Certification
by the Chief Executive Officer pursuant to 18 U.S.C 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
(b)
|
Exhibits
to this Form 10-K are attached or incorporated herein by reference
as
noted above.
|
|
|
(c)
|
Not
applicable
|
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
of
1934, NBT Bancorp Inc. has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
NBT
BANCORP INC. (Registrant)
March
1,
2007
/S/
Martin A. Dietrich
|
Martin
A. Dietrich
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/S/
Daryl R. Forsythe
|
Daryl
R. Forsythe
|
Chairman
and Director
|
Date:
|
March
1, 2007
|
/S/
Martin A. Dietrich
|
Martin
A. Dietrich
|
NBT
Bancorp
Inc.
President, CEO, and Director (Principal Executive
Officer)
|
Date:
|
March
1, 2007
|
/S/
John C.
Mitchell
|
|
|
John
C. Mitchell,
Director
|
Date:
|
March
1, 2007
|
/S/
Joseph
G. Nasser
|
|
Joseph
G.
Nasser,
Director
|
Date:
|
March
1, 2007
|
/S/
Peter B. Gregory
|
|
Peter
B. Gregory, Director
|
Date:
|
March
1, 2007
|
/S/
William C. Gumble
|
|
|
William
C. Gumble, Director
|
Date:
|
March
1, 2007
|
/S/
Michael H. Hutcherson
|
|
|
Michael
H. Hutcherson, Director
|
Date:
|
March
1, 2007
|
/S/
Richard Chojnowski
|
|
Richard
Chojnowski, Director
|
Date:
|
March
1, 2007
|
/S/
Michael M. Murphy
|
|
Michael
M. Murphy, Director
|
Date:
|
March
1, 2007
|
/S/
Michael J. Chewens
|
Michael
J. Chewens
|
Chief
Financial Officer
|
(Principal
Financial Officer and Principal Accounting Officer)
|
Date:
|
March
1, 2007
|
/S/
William L. Owens
|
|
|
William
L. Owens, Director
|
Date:
|
March
1, 2007
|
/S/
Van Ness D. Robinson
|
|
|
Van
Ness D. Robinson, Director
|
Date:
|
March
1, 2007
|
/S/
Joseph A. Santangelo
|
|
|
Joseph
A. Santangelo, Director
|
Date:
|
March
1, 2007
|
/S/
Janet H. Ingraham
|
|
Janet
H. Ingraham, Director
|
Date:
|
March
1, 2007
|
/S/
Paul D. Horger
|
|
Paul
D. Horger, Director
|
Date:
|
March
1, 2007
|
/S/
Robert A. Wadsworth
|
|
|
Robert
A. Wadsworth, Director
|
Date:
|
March
1, 2007
|
/S/
Patricia T. Civil
|
|
|
Patricia
T. Civil, Director
|
Date:
|
March
1, 2007
|
95