form10q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2009.
OR
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________ to ________.
COMMISSION
FILE NUMBER 0-14703
NBT
BANCORP INC.
(Exact
Name of Registrant as Specified in its Charter)
DELAWARE
|
16-1268674
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
52
SOUTH BROAD STREET, NORWICH, NEW YORK 13815
(Address
of Principal Executive Offices) (Zip Code)
Registrant's
Telephone Number, Including Area Code: (607) 337-2265
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods 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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
Yes o No x
As of
April 30, 2009, there were 34,251,963 shares outstanding of the Registrant's
common stock, $0.01 par value.
FORM 10-Q--Quarter Ended March
31, 2009
TABLE
OF CONTENTS
PART
I
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Item
1
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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
1
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Item
1A
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Item
2
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Item
3
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Item
4
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Item
5
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Item
6
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Consolidated
Balance Sheets (unaudited)
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(In
thousands, except share and per share data)
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
98,753 |
|
|
$ |
107,409 |
|
Short-term
interest bearing accounts
|
|
|
80,580 |
|
|
|
2,987 |
|
Securities
available for sale, at fair value
|
|
|
1,111,372 |
|
|
|
1,119,665 |
|
Securities
held to maturity (fair value $140,423 and $141,308)
|
|
|
139,195 |
|
|
|
140,209 |
|
Trading
securities
|
|
|
1,741 |
|
|
|
1,407 |
|
Federal
Reserve and Federal Home Loan Bank stock
|
|
|
37,920 |
|
|
|
39,045 |
|
Loans
and leases
|
|
|
3,648,384 |
|
|
|
3,651,911 |
|
Less
allowance for loan and lease losses
|
|
|
59,311 |
|
|
|
58,564 |
|
Net
loans and leases
|
|
|
3,589,073 |
|
|
|
3,593,347 |
|
Premises
and equipment, net
|
|
|
64,951 |
|
|
|
65,241 |
|
Goodwill
|
|
|
114,838 |
|
|
|
114,838 |
|
Intangible
assets, net
|
|
|
22,784 |
|
|
|
23,367 |
|
Bank
owned life insurance
|
|
|
72,111 |
|
|
|
72,276 |
|
Other
assets
|
|
|
72,916 |
|
|
|
56,297 |
|
Total
assets
|
|
$ |
5,406,234 |
|
|
$ |
5,336,088 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Demand
(noninterest bearing)
|
|
$ |
688,116 |
|
|
$ |
685,495 |
|
Savings,
NOW, and money market
|
|
|
2,063,222 |
|
|
|
1,885,551 |
|
Time
|
|
|
1,324,581 |
|
|
|
1,352,212 |
|
Total
deposits
|
|
|
4,075,919 |
|
|
|
3,923,258 |
|
Short-term
borrowings
|
|
|
127,187 |
|
|
|
206,492 |
|
Long-term
debt
|
|
|
616,078 |
|
|
|
632,209 |
|
Trust
preferred debentures
|
|
|
75,422 |
|
|
|
75,422 |
|
Other
liabilities
|
|
|
69,030 |
|
|
|
66,862 |
|
Total
liabilities
|
|
|
4,963,636 |
|
|
|
4,904,243 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value. Authorized 2,500,000 shares at March 31,
2009 and December 31, 2008
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.01 par value. Authorized 50,000,000 shares at March 31,
2009 and December 31, 2008; issued 36,459,326 and 36,459,344 at
March 31, 2009 and December 31, 2008, respectively
|
|
|
365 |
|
|
|
365 |
|
Additional
paid-in-capital
|
|
|
276,877 |
|
|
|
276,418 |
|
Retained
earnings
|
|
|
251,881 |
|
|
|
245,340 |
|
Accumulated
other comprehensive loss
|
|
|
(5,377 |
) |
|
|
(8,204 |
) |
Common
stock in treasury, at cost, 3,806,659 and 3,853,548 shares
at
|
|
|
|
|
|
|
|
|
March
31, 2009 and December 31, 2008, respectively
|
|
|
(81,148 |
) |
|
|
(82,074 |
) |
Total
stockholders’ equity
|
|
|
442,598 |
|
|
|
431,845 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
5,406,234 |
|
|
$ |
5,336,088 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
NBT
Bancorp Inc. and Subsidiaries
|
|
Three
months ended March 31,
|
|
Consolidated
Statements of Income (unaudited)
|
|
2009
|
|
|
2008
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
Interest,
fee, and dividend income
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$ |
55,411 |
|
|
$ |
58,617 |
|
Securities
available for sale
|
|
|
12,375 |
|
|
|
13,746 |
|
Securities
held to maturity
|
|
|
1,234 |
|
|
|
1,514 |
|
Other
|
|
|
361 |
|
|
|
775 |
|
Total
interest, fee, and dividend income
|
|
|
69,381 |
|
|
|
74,652 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
13,839 |
|
|
|
22,698 |
|
Short-term
borrowings
|
|
|
147 |
|
|
|
2,340 |
|
Long-term
debt
|
|
|
6,197 |
|
|
|
4,302 |
|
Trust
preferred debentures
|
|
|
1,086 |
|
|
|
1,247 |
|
Total
interest expense
|
|
|
21,269 |
|
|
|
30,587 |
|
Net
interest income
|
|
|
48,112 |
|
|
|
44,065 |
|
Provision
for loan and lease losses
|
|
|
6,451 |
|
|
|
6,478 |
|
Net
interest income after provision for loan and lease losses
|
|
|
41,661 |
|
|
|
37,587 |
|
Noninterest
income
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
6,297 |
|
|
|
6,525 |
|
Insurance
and Broker/dealer revenue
|
|
|
5,338 |
|
|
|
1,107 |
|
Trust
|
|
|
1,409 |
|
|
|
1,774 |
|
Net
securities gains
|
|
|
- |
|
|
|
15 |
|
Bank
owned life insurance
|
|
|
872 |
|
|
|
807 |
|
ATM
fees
|
|
|
2,182 |
|
|
|
2,097 |
|
Retirement
plan administration fees
|
|
|
1,741 |
|
|
|
1,708 |
|
Other
|
|
|
1,751 |
|
|
|
2,062 |
|
Total
noninterest income
|
|
|
19,590 |
|
|
|
16,095 |
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
21,427 |
|
|
|
16,770 |
|
Occupancy
|
|
|
4,165 |
|
|
|
3,610 |
|
Equipment
|
|
|
2,022 |
|
|
|
1,825 |
|
Data
processing and communications
|
|
|
3,295 |
|
|
|
3,170 |
|
Professional
fees and outside services
|
|
|
2,722 |
|
|
|
3,099 |
|
Office
supplies and postage
|
|
|
1,530 |
|
|
|
1,339 |
|
Amortization
of intangible assets
|
|
|
813 |
|
|
|
391 |
|
Loan
collection and other real estate owned
|
|
|
748 |
|
|
|
567 |
|
FDIC
insurance
|
|
|
1,529 |
|
|
|
188 |
|
Other
|
|
|
4,054 |
|
|
|
3,075 |
|
Total
noninterest expense
|
|
|
42,305 |
|
|
|
34,034 |
|
Income
before income tax expense
|
|
|
18,946 |
|
|
|
19,648 |
|
Income
tax expense
|
|
|
5,874 |
|
|
|
5,932 |
|
Net
income
|
|
$ |
13,072 |
|
|
$ |
13,716 |
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.40 |
|
|
$ |
0.43 |
|
Diluted
|
|
$ |
0.40 |
|
|
$ |
0.43 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
NBT
Bancorp Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Common
|
|
|
|
|
|
|
Common
|
|
|
Paid-in-
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
in
Treasury
|
|
|
Total
|
|
(in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
365 |
|
|
$ |
273,275 |
|
|
$ |
215,031 |
|
|
$ |
(3,575 |
) |
|
$ |
(87,796 |
) |
|
$ |
397,300 |
|
Cumulative
effect adjustment to record liability for split-dollar life insurance
policies
|
|
|
|
|
|
|
|
|
|
|
(1,518 |
) |
|
|
|
|
|
|
|
|
|
|
(1,518 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
13,716 |
|
|
|
|
|
|
|
|
|
|
|
13,716 |
|
Cash
dividends - $0.20 per share
|
|
|
|
|
|
|
|
|
|
|
(6,416 |
) |
|
|
|
|
|
|
|
|
|
|
(6,416 |
) |
Purchase
of 272,840 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,939 |
) |
|
|
(5,939 |
) |
Net
issuance of 29,193 shares to employee
benefit plans and other stock plans, including tax
benefit
|
|
|
|
|
|
|
55 |
|
|
|
(104 |
) |
|
|
|
|
|
|
576 |
|
|
|
527 |
|
Stock-based
compensation
|
|
|
|
|
|
|
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
599 |
|
Forfeiture
of 8,448 shares of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(192 |
) |
|
|
(192 |
) |
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,786 |
|
|
|
|
|
|
|
7,786 |
|
Balance
at March 31, 2008
|
|
$ |
365 |
|
|
$ |
273,929 |
|
|
$ |
220,709 |
|
|
$ |
4,211 |
|
|
$ |
(93,351 |
) |
|
$ |
405,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
365 |
|
|
$ |
276,418 |
|
|
$ |
245,340 |
|
|
$ |
(8,204 |
) |
|
$ |
(82,074 |
) |
|
$ |
431,845 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
13,072 |
|
|
|
|
|
|
|
|
|
|
|
13,072 |
|
Cash
dividends - $0.20 per share
|
|
|
|
|
|
|
|
|
|
|
(6,531 |
) |
|
|
|
|
|
|
|
|
|
|
(6,531 |
) |
Net
issuance of 48,596 shares to employee
benefit plans and other stock plans, including tax
benefit
|
|
|
|
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
967 |
|
|
|
1,100 |
|
Stock-based
compensation
|
|
|
|
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285 |
|
Forfeiture
of 1,707 shares of restricted stock
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
|
|
- |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,827 |
|
|
|
|
|
|
|
2,827 |
|
Balance
at March 31, 2009
|
|
$ |
365 |
|
|
$ |
276,877 |
|
|
$ |
251,881 |
|
|
$ |
(5,377 |
) |
|
$ |
(81,148 |
) |
|
$ |
442,598 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
|
|
Three
Months Ended March 31,
|
|
Consolidated
Statements of Cash Flows (unaudited)
|
|
2009
|
|
|
2008
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income
|
|
$ |
13,072 |
|
|
$ |
13,716 |
|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities
|
|
|
|
|
|
|
|
|
Provision
for loan and lease losses
|
|
|
6,451 |
|
|
|
6,478 |
|
Depreciation
and amortization of premises and equipment
|
|
|
1,335 |
|
|
|
1,288 |
|
Net
accretion on securities
|
|
|
116 |
|
|
|
72 |
|
Amortization
of intangible assets
|
|
|
813 |
|
|
|
391 |
|
Stock
based compensation
|
|
|
285 |
|
|
|
599 |
|
Bank
owned life insurance income
|
|
|
(872 |
) |
|
|
(807 |
) |
Purchases
of trading securities
|
|
|
(436 |
) |
|
|
- |
|
Unrealized
losses in trading securities
|
|
|
102 |
|
|
|
146 |
|
Proceeds
from sales of loans held for sale
|
|
|
27,387 |
|
|
|
4,153 |
|
Originations
and purchases of loans held for sale
|
|
|
(36,586 |
) |
|
|
(3,392 |
) |
Net
gains on sales of loans held for sale
|
|
|
(166 |
) |
|
|
(13 |
) |
Net
security gains
|
|
|
- |
|
|
|
(15 |
) |
Net
gain on sales of other real estate owned
|
|
|
(12 |
) |
|
|
(76 |
) |
Net
(increase) decrease in other assets
|
|
|
(16,260 |
) |
|
|
738 |
|
Net
increase (decrease) in other liabilities
|
|
|
969 |
|
|
|
(1,297 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(3,802 |
) |
|
|
21,981 |
|
Investing
activities
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls, and principal paydowns
|
|
|
113,516 |
|
|
|
167,340 |
|
Proceeds
from sales
|
|
|
- |
|
|
|
1,140 |
|
Purchases
|
|
|
(101,283 |
) |
|
|
(150,614 |
) |
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
Proceeds
from maturities, calls, and principal paydowns
|
|
|
14,783 |
|
|
|
10,876 |
|
Purchases
|
|
|
(13,799 |
) |
|
|
(19,149 |
) |
Net
decrease (increase) in loans
|
|
|
6,524 |
|
|
|
(54,621 |
) |
Net
decrease (increase) in Federal Reserve and FHLB stock
|
|
|
1,125 |
|
|
|
(3,251 |
) |
Cash
received from death benefit
|
|
|
1,037 |
|
|
|
- |
|
Purchases
of premises and equipment
|
|
|
(1,045 |
) |
|
|
(1,548 |
) |
Proceeds
from sales of other real estate owned
|
|
|
87 |
|
|
|
266 |
|
Net
cash provided by (used in) investing activities
|
|
|
20,945 |
|
|
|
(49,561 |
) |
Financing
activities
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
152,661 |
|
|
|
(17,867 |
) |
Net
(decrease) increase in short-term borrowings
|
|
|
(79,305 |
) |
|
|
31,525 |
|
Proceeds
from issuance of long-term debt
|
|
|
121 |
|
|
|
50,000 |
|
Repayments
of long-term debt
|
|
|
(16,252 |
) |
|
|
(50,029 |
) |
Excess
tax benefit from exercise of stock options
|
|
|
32 |
|
|
|
47 |
|
Proceeds
from the issuance of shares to employee benefit plans and other stock
plans
|
|
|
1,068 |
|
|
|
288 |
|
Purchase
of treasury stock
|
|
|
- |
|
|
|
(5,939 |
) |
Cash
dividends and payment for fractional shares
|
|
|
(6,531 |
) |
|
|
(6,416 |
) |
Net
cash provided by financing activities
|
|
|
51,794 |
|
|
|
1,609 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
68,937 |
|
|
|
(25,971 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
110,396 |
|
|
|
162,946 |
|
Cash
and cash equivalents at end of period
|
|
$ |
179,333 |
|
|
$ |
136,975 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
21,014 |
|
|
$ |
32,585 |
|
Income
taxes paid
|
|
|
164 |
|
|
|
94 |
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
Loans
transferred to OREO
|
|
$ |
664 |
|
|
$ |
110 |
|
See
accompanying notes to unaudited interim consolidated financial
statements.
|
|
Three
months ended March 31,
|
|
Consolidated
Statements of Comprehensive Income
(unaudited)
|
|
2009
|
|
|
2008
|
|
(In
thousands)
|
|
|
|
|
|
|
Net
income
|
|
$ |
13,072 |
|
|
$ |
13,716 |
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Unrealized
net holding gains arising during the period (pre-tax amounts of $4,026 and
$13,368)
|
|
|
2,432 |
|
|
|
7,741 |
|
Reclassification
adjustment for net gains related to securities available for sale included
in net income (pre-tax amounts of ($0 and ($15))
|
|
|
- |
|
|
|
(9 |
) |
Pension
and other benefits:
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost and actuarial gains (pre-tax amounts of $658 and
$90)
|
|
|
395 |
|
|
|
54 |
|
Total
other comprehensive income
|
|
|
2,827 |
|
|
|
7,786 |
|
Comprehensive
income
|
|
$ |
15,899 |
|
|
$ |
21,502 |
|
See
accompanying notes to unaudited interim consolidated financial
statements
NBT
BANCORP INC. and Subsidiaries
NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
Note
1. Description
of Business
NBT
Bancorp Inc. (the “Registrant”) is a registered financial holding company
incorporated in the State of Delaware in 1986, with its principal headquarters
located in Norwich, New York. The Registrant is the parent holding company of
NBT Bank, N.A. (the “Bank”), NBT Financial Services, Inc. (“NBT Financial”), NBT
Holdings, Inc. (“NBT Holdings”), CNBF Capital Trust I, NBT Statutory Trust I and
NBT Statutory Trust II (the “Trusts”). Through the Bank and NBT
Financial, the Company is focused on community banking operations and other
financial services. Through NBT Holdings, the Company operates Mang
Insurance Agency, LLC (“Mang”), a full-service insurance agency. The
Trusts were organized to raise additional regulatory capital and to provide
funding for certain acquisitions. The Registrant’s primary business consists of
providing commercial banking and financial services to its customers in its
market area. The principal assets of the Registrant are all of the outstanding
shares of common stock of its direct subsidiaries, and its principal sources of
revenue are the management fees and dividends it receives from the Bank, NBT
Financial, and NBT Holdings.
The Bank
is a full service commercial bank formed in 1856, which provides a broad range
of financial products to individuals, corporations and municipalities throughout
the central and upstate New York and northeastern Pennsylvania market
area.
Note
2. Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements include the
accounts of the Registrant and its wholly owned subsidiaries, the Bank, NBT
Financial and NBT Holdings. Collectively, the Registrant and its
subsidiaries are referred to herein as “the Company.” All
intercompany transactions have been eliminated in consolidation. Amounts in the
prior period financial statements are reclassified whenever necessary to conform
to current period presentation.
Note
3. New
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued revised
SFAS No. 141, "Business Combinations," (“SFAS No. 141”) or SFAS No.
141(R). SFAS No. 141(R) retains the fundamental requirements of SFAS
No. 141 that the acquisition method of accounting (formerly the purchase method)
be used for all business combinations; that an acquirer be identified for each
business combination; and that intangible assets be identified and recognized
separately from goodwill. SFAS No. 141(R) requires the acquiring
entity in a business combination to recognize the assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. Additionally, SFAS No. 141(R) changes the requirements
for recognizing assets acquired and liabilities assumed arising from
contingencies and recognizing and measuring contingent
consideration. SFAS No. 141(R) also enhances the disclosure
requirements for business combinations. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008 and may not be applied before that date. SFAS No.
141(R) did not have a material impact on our financial condition or results of
operations upon adoption.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51," or SFAS No. 160.
SFAS No. 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Among other things, SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements and requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. SFAS No. 160 also amends SFAS No. 128,
"Earnings per Share," so that earnings per share calculations in consolidated
financial statements will continue to be based on amounts attributable to the
parent. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008 and
is applied prospectively as of the beginning of the fiscal year in which it is
initially applied, except for the presentation and disclosure requirements which
are to be applied retrospectively for all periods presented. SFAS No. 160 did
not have a material impact on our financial condition or results of operations
upon adoption.
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities” (“FSP EITF 03-6-1”), which addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method. FSP EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. FSP EITF
03-6-1 did not have a material impact on the Company’s financial condition or
results of operations upon adoption.
In April
2009, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-4 Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS
157-4”). FSP FAS 157-4 provides additional guidance for estimating
fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. In addition, FSP FAS 157-4
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. In addition, if a company
concludes that there has been a significant decrease in the volume and level of
activity in relation to the “normal” market activity, transactions or quoted
prices may not be determinative of fair value. In such cases, an
adjustment to a transaction or quoted price may be necessary to estimate fair
value or a change in valuation technique may be necessary. FSP FAS
157-4 is effective for periods ending after June 15, 2009 and early adoption is
permitted for March 31, 2009 subject to certain provisions. The
Company did not early adopt FSP FAS 157-4. FSP FAS 157-4 is not
expected to have a material impact on our financial condition or results of
operations.
In April
2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2 Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP FAS 115-2 and FSP FAS
124-2”). FSP FAS 115-2 and FSP FAS 124-2 amends the
other-than-temporary impairment guidance in U.S. Generally Accepted Accounting
Principles (“U.S. GAAP”) for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments (“OTTI”) of equity
securities. FSP FAS 115-2 and FSP FAS 124-2 focuses on triggering and
presentation of OTTI for debt securities and applies to both available for sale
(“AFS”) and held to maturity (“HTM”) debt securities. In addition, it
modifies the current “intent and ability” indicator and changes the trigger used
to assess collectibility of cash flows from “probable that the investor will be
unable to collect all amounts due” to “the entity does not expect to recover the
entire amortized cost basis of the security”. FSP FAS 115-2 and FSP
FAS 124-2 also contains new disclosure requirements, including reasons and
methodology for amounts not recognized in earnings. FSP FAS 115-2 and
FSP FAS 124-2 is effective for periods ending after June 15, 2009 and early
adoption is permitted for March 31, 2009 subject to certain
provisions. The Company did not early adopt FSP FAS 115-2 and FSP FAS
124-2. FSP FAS 115-2 and FSP FAS 124-2 is not expected to have a
material impact on our financial condition or results of
operations.
In April
2009, the FASB issued FSP FAS No. 107-1 and FSP Accounting Principals Board
(“APB”) 28-1 Interim
Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and
FSP APB 28-1”). FSP FAS 107-1 and FSP APB 28-1 amends FASB Statement
No. 107, Disclosures about
Fair Value of Financial Instruments (“FAS 107”), to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in summarized financial information at
interim reporting periods. FAS 107 disclosures will now be required
in interim financial statements for fair value of financial instruments, methods
and significant assumptions used to estimate fair value, and significant
concentrations of credit risk. FSP FAS 107-1 and APB 28-1 is
effective for periods ending after June 15, 2009 and early adoption is permitted
for March 31, 2009 subject to certain provisions. The Company did not
early adopt FSP FAS 107-1 and FSP APB 28-1. FSP FAS 107-1 and FSP APB
28-1 is not expected to have a material impact on our financial condition or
results of operations.
Note
4. Use
of Estimates
Preparing
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period, as well as the disclosures provided. Actual results could differ from
those estimates. Estimates associated with the allowance for loan and lease
losses, other real estate owned (“OREO”), income taxes, pension expense, fair
values of lease residual assets, fair values of financial instruments and status
of contingencies are particularly susceptible to material change in the near
term.
The
allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local and national 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 loans. 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.
OREO
consists of properties acquired through foreclosure or by acceptance of a deed
in lieu of foreclosure. These assets are recorded at the lower of fair value of
the asset acquired less estimated costs to sell or “cost” (defined as the fair
value at initial foreclosure). At the time of foreclosure, or when foreclosure
occurs in-substance, the excess, if any, of the loan over the fair value of the
assets received, less estimated selling costs, is charged to the allowance for
loan and lease losses and any subsequent valuation write-downs are charged to
other expense. Operating costs associated with the properties are charged to
expense as incurred. Gains on the sale of OREO are included in income when title
has passed and the sale has met the minimum down payment requirements prescribed
by U.S. GAAP.
Income
taxes are accounted for under the asset and liability method. The Company files
consolidated tax returns on the accrual basis. Deferred income taxes are
recognized for the future tax consequences and benefits attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Realization of deferred tax assets is dependent upon the
generation of future taxable income or the existence of sufficient taxable
income within the available carryback period. A valuation allowance is provided
when it is more likely than not that some portion of the deferred tax asset will
not be realized. Based on available evidence, gross deferred tax assets will
ultimately be realized and a valuation allowance was not deemed necessary at
March 31, 2009 or December 31, 2008. The effect of a change in tax rates on
deferred taxes is recognized in income in the period that includes the enactment
date. Uncertain tax positions are recognized only when it is more
likely than not (likelihood of greater than 50%), based on technical merits,
that the position would be sustained upon examination by taxing
authorities. Tax positions that meet the more than likely than not
threshold are measured using a probability-weighted approach as the largest
amount of tax benefit that is greater than 50% likely of being realized upon
settlement.
Management
is required to make various assumptions in valuing its pension assets and
liabilities. These assumptions include the expected long-term 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 assumptions used to compute pension
expense. The Company also considers the relevant indices and market interest
rates in selecting an appropriate discount rate. A cash flow analysis for
expected benefit payments from the plan is performed each year to also assist in
selecting the discount rate. In addition, the Company reviews
expected inflationary and merit increases to compensation in determining the
expected rate of increase in future compensation levels.
One of
the most significant estimates associated with leasing operations is the
estimated residual value of leased vehicles expected at the termination of the
lease. A lease receivable asset, when established, includes the estimated
residual value of the leased vehicle at the termination of the
lease. Management is required to make various assumptions to estimate
the fair value of the vehicle lease residual assets. If it is
determined that there has been a decline in the estimated fair value of the
residual that is judged by management to be other-than-temporary, an impairment
charge would be recognized and recorded with other noninterest expenses in the
consolidated statements of income.
Management
is required to estimate the fair value of securities that are not traded in
active markets or are supported by little or no market activity based on
estimates consisting of both internal and external support. See Note
9 for additional information regarding fair value measurements.
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. Management is required to make estimates
related to the likelihood of these contingencies being exercised to determine
their fair value.
Note
5. Commitments
and Contingencies
The
Company is a party to financial instruments in the normal course of business to
meet financing needs of its customers and to reduce its own exposure to
fluctuating interest rates. These financial instruments include commitments to
extend credit, unused lines of credit, and standby letters of credit. Exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Company uses
the same credit policy to make such commitments as it uses for on-balance-sheet
items. Commitments to extend credit and unused lines of credit totaled $503.7
million at March 31, 2009 and $537.6 million at December 31,
2008. Since commitments to extend credit and unused lines of credit
may expire without being fully drawn upon, this amount does not necessarily
represent future cash commitments. Collateral obtained upon exercise of the
commitment is determined using management’s credit evaluation of the borrower
and may include accounts receivable, inventory, property, land and other
items.
The
Company guarantees the obligations or performance of customers by issuing
stand-by letters of credit to third parties. These stand-by letters of credit
are frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds and municipal securities. The credit 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 guidelines, portfolio maintenance and
management procedures as other credit and off-balance sheet products. Typically,
these instruments have terms of five years or less and expire unused; therefore,
the total amounts do not necessarily represent future cash requirements. Standby
letters of credit totaled $27.4 million at March 31, 2009 and $27.6 million at
December 31, 2008. As of March 31, 2009, the fair value of standby letters of
credit was not significant to the Company’s consolidated financial
statements.
Note
6. Earnings
Per Share
Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity (such as the
Company’s dilutive stock options and restricted stock).
In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities
(“FSP EITF 03-6-1”), which addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in computing earnings
per share under the two-class method. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. FSP EITF 03-6-1 did not
have a material impact on the Company’s financial condition or results of
operations.
The
following is a reconciliation of basic and diluted earnings per share for the
periods presented in the consolidated statements of income.
Three
months ended March 31,
|
|
2009
|
|
|
2008
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
32,478 |
|
|
|
32,054 |
|
Net
income available to common shareholders
|
|
|
13,072 |
|
|
|
13,716 |
|
Basic
EPS
|
|
$ |
0.40 |
|
|
$ |
0.43 |
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
32,478 |
|
|
|
32,054 |
|
Dilutive
effect of common stock options and restricted stock
|
|
|
167 |
|
|
|
197 |
|
Weighted
average common shares and common share equivalents
|
|
|
32,645 |
|
|
|
32,251 |
|
Net
income available to common shareholders
|
|
|
13,072 |
|
|
|
13,716 |
|
Diluted
EPS
|
|
$ |
0.40 |
|
|
$ |
0.43 |
|
There
were 1,216,128 stock options for the quarter ended March 31, 2009 and 1,215,439
stock options for the quarter ended March 31, 2008 that were not considered in
the calculation of diluted earnings per share since the stock options’ exercise
price was greater than the average market price during these
periods.
Note
7. Defined
Benefit Postretirement Plans
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all of its employees at March 31, 2009. Benefits paid
from the plan are based on age, years of service, compensation, social security
benefits, and are determined in accordance with defined formulas. The Company’s
policy is to fund the pension plan in accordance with Employee Retirement Income
Security Act (“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 the Company 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. Eligibility is contingent upon the direct transition
from active employment status to retirement without any break in employment from
the Company. Employees also must be participants in the Company’s
medical plan prior to their retirement. 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.”
The
components of pension expense and postretirement expense are set forth below (in
thousands):
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
Three
months ended March 31,
|
|
|
Three
months ended March 31,
|
|
Components
of net periodic benefit cost:
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
Cost
|
|
$ |
587 |
|
|
$ |
573 |
|
|
$ |
6 |
|
|
$ |
6 |
|
Interest
Cost
|
|
|
862 |
|
|
|
804 |
|
|
|
56 |
|
|
|
60 |
|
Expected
return on plan assets
|
|
|
(1,401 |
) |
|
|
(1,502 |
) |
|
|
- |
|
|
|
- |
|
Net
amortization
|
|
|
671 |
|
|
|
96 |
|
|
|
(13 |
) |
|
|
(6 |
) |
Total
cost (benefit)
|
|
$ |
719 |
|
|
$ |
(29 |
) |
|
$ |
49 |
|
|
$ |
60 |
|
The
Company is not required to make contributions to the plans in
2009. However, the Company made contributions to the plans totaling
approximately $12.0 million during the first quarter of 2009. The
Company recorded approximately $0.4 million, net of tax, as amortization of
pension amounts previously recognized in Accumulated Other Comprehensive Loss
during the three months ended March 31, 2009.
Recent
market conditions have resulted in an unusually high degree of volatility and
increased the risks and short term liquidity associated with certain investments
held by the Company’s defined benefit pension plan (“the Plan”) which could
impact the value of these investments.
Note
8. Trust
Preferred Debentures
CNBF
Capital Trust I is a Delaware statutory business trust formed in 1999, for the
purpose of issuing $18 million in trust preferred securities and lending the
proceeds to the Company. NBT Statutory Trust I is a Delaware statutory business
trust formed in 2005, for the purpose of issuing $5 million in trust preferred
securities and lending the proceeds to the Company. NBT Statutory
Trust II is a Delaware statutory business trust formed in 2006, for the purpose
of issuing $50 million in trust preferred securities and lending the proceeds to
the Company to provide funding for the acquisition of CNB Bancorp, Inc. These
three statutory business trusts are collectively referred herein to as “the
Trusts.” The Company guarantees, on a limited basis, payments of
distributions on the trust preferred securities and payments on redemption of
the trust preferred securities. The Trusts are variable interest
entities (“VIEs”) for which the Company is not the primary beneficiary, as
defined in FASB 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.
As of
March 31, 2009, the Trusts had the following issues of trust preferred
debentures, all held by the Trusts, outstanding (dollars in
thousands):
Description
|
Issuance
Date
|
|
Trust
Preferred Securities Outstanding
|
|
Interest
Rate
|
|
Trust
Preferred Debt Owed To Trust
|
|
Final
Maturity date
|
CNBF
Capital Trust I
|
August
1999
|
|
|
18,000 |
|
3-month
LIBOR
plus
2.75%
|
|
$ |
18,720 |
|
August
2029
|
|
|
|
|
|
|
|
|
|
|
|
|
NBT
Statutory Trust I
|
November
2005
|
|
|
5,000 |
|
6.30%
Fixed *
|
|
|
5,155 |
|
December
2035
|
|
|
|
|
|
|
|
|
|
|
|
|
NBT
Statutory Trust II
|
February
2006
|
|
|
50,000 |
|
6.195%
Fixed *
|
|
|
51,547 |
|
March
2036
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Fixed for 5 years, converts to floating at 3-month LIBOR plus 140 basis
points (“bp”).
|
|
|
|
|
|
The
Company owns all of the common stock of the Trusts, which have issued trust
preferred securities in conjunction with the Company issuing trust preferred
debentures to the Trusts. The terms of the trust preferred debentures are
substantially the same as the terms of the trust preferred securities. In
February 2005, the Federal Reserve Board issued a final rule that allows the
continued inclusion of trust preferred securities in the Tier 1 capital of bank
holding companies. The Board’s final rule limits the aggregate amount of
restricted core capital elements (which includes trust preferred securities,
among other things) that may be included in the Tier 1 capital of most bank
holding companies to 25% of all core capital elements, including restricted core
capital elements, net of goodwill less any associated deferred tax liability.
Large, internationally active bank holding companies (as defined) are subject to
a 15% limitation. Amounts of restricted core capital elements in excess of these
limits generally may be included in Tier 2 capital. The final rule provides a
five-year transition period, ending March 31, 2009, for application of the
quantitative limits. The quantitative limits do not preclude the Company from
including the trust preferred securities in Tier 1 capital. However, the trust
preferred securities could be redeemed without penalty if they were no longer
permitted to be included in Tier 1 capital.
Note
9. Fair
Value Measurements and Fair Value of Financial Instruments
The
Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),
effective January 1, 2008. SFAS No. 157 clarifies that fair
value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. Under SFAS No. 157, fair value measurements are not
adjusted for transaction costs. SFAS No. 157 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurements) and the
lowest priority to unobservable inputs (level 3 measurements). The three levels
of the fair value hierarchy under SFAS No. 157 are described below:
Level 1 -
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
Level 2 -
Quoted prices for similar assets or liabilities in active markets, quoted prices
in markets that are not active, or inputs that are observable, either directly
or indirectly, for substantially the full term of the asset or
liability;
Level 3 -
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e., supported by little or no
market activity).
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
The types
of instruments valued based on quoted market prices in active markets include
most U.S. government and agency securities, many other sovereign government
obligations, liquid mortgage products, active listed equities and most money
market securities. Such instruments are generally classified within level 1 or
level 2 of the fair value hierarchy. As required by SFAS No. 157, the
Company does not adjust the quoted price for such instruments.
The types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade and high-yield
corporate bonds, less liquid mortgage products, less liquid agency securities,
less liquid listed equities, state, municipal and provincial obligations, and
certain physical commodities. Such instruments are generally classified within
level 2 of the fair value hierarchy.
Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management’s best estimate
will be used. Management’s best estimate consists of both internal and external
support on certain Level 3 investments. Subsequent to inception, management only
changes level 3 inputs and assumptions when corroborated by evidence such as
transactions in similar instruments, completed or pending third-party
transactions in the underlying investment or comparable entities, subsequent
rounds of financing, recapitalizations and other transactions across the capital
structure, offerings in the equity or debt markets, and changes in financial
ratios or cash flows.
The
following table sets forth the Company’s financial assets and liabilities
measured on a recurring basis that were accounted for at fair
value. Assets and liabilities are classified in their entirety based
on the lowest level of input that is significant to the fair value measurement
(in thousands):
|
|
Quoted
Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Other
|
|
|
Unobservable
|
|
|
Balance
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Inputs
|
|
|
as
of
|
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
March
31, 2009
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Available for Sale
|
|
$ |
7,214 |
|
|
$ |
1,104,158 |
|
|
$ |
- |
|
|
$ |
1,111,372 |
|
Trading
Securities
|
|
|
1,741 |
|
|
|
- |
|
|
|
- |
|
|
|
1,741 |
|
Total
|
|
$ |
8,955 |
|
|
$ |
1,104,158 |
|
|
$ |
- |
|
|
$ |
1,113,113 |
|
Fair
values for securities are based on quoted market prices or dealer quotes, where
available. Where quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. When
necessary, the Company utilizes matrix pricing from a third party pricing vendor
to determine fair value pricing. Matrix prices are based on quoted
prices for securities with similar coupons, ratings, and maturities, rather than
on specific bids and offers for the designated security.
SFAS No.
157 requires disclosure of assets and liabilities measured and recorded at fair
value on a nonrecurring basis such as goodwill, loans held for sale, other real
estate owned, lease residuals, collateral-dependent impaired loans, mortgage
servicing rights, and held-to-maturity securities. In accordance with
the provisions of SFAS No. 114, “Accounting by Creditors for Impairment of a
Loan--an amendment of FASB Statements No. 5 and 15” (“SFAS No. 114”), the
Company had collateral dependent impaired loans with a carrying value of
approximately $4.5 million which had specific reserves included in the allowance
for loan and lease losses of $0.7 million at March 31, 2009. During
the three month period ended March 31, 2009, the Company established specific
reserves of approximately $0.2 million, which were included in the provision for
loan and lease losses for the respective periods. The Company uses
the fair value of underlying collateral to estimate the specific reserves for
collateral dependent impaired loans. Based on the valuation
techniques used, the fair value measurements for collateral dependent impaired
loans are classified as Level 3.
NBT
BANCORP INC. and Subsidiaries
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The
purpose of this discussion and analysis is to provide a concise description of
the financial condition and results of operations of NBT Bancorp Inc. (“the
Registrant”) and its wholly owned consolidated subsidiaries, NBT Bank, N.A. (the
“Bank”), NBT Financial Services, Inc. (“NBT Financial”), and NBT Holdings,
Inc.(“NBT Holdings”) (collectively referred to herein as the “Company”). This
discussion will focus on Results of Operations, Financial Position, Capital
Resources and Asset/Liability Management. Reference should be made to the
Company's consolidated financial statements and footnotes thereto included in
this Form 10-Q as well as to the Company's 2008 Form 10-K for an understanding
of the following discussion and analysis.
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 commercial
banking and 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. Through its non-bank subsidiaries, the Company also provided
insurance brokerage services and retirement plan consulting and recordkeeping
services. 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, insurance and 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.
Because
the Company has not actively pursued the types of loans, such as subprime, alt-A
and no-interest loans, that have been the most problematic for many banks,
the Company has not made substantial changes to its core business of investing
deposit funds in loans and leases in its market areas in response to the recent
and continuing economic crisis. However, in light of increased margin
pressures due in part to the economic crisis, the Company has recently increased
its focus on earning noninterest income, including through increases in ATM fees
and the Company’s acquisition of Mang Insurance Agency in September of 2008. The
Company has also recently increased its underwriting standards on certain
portfolios and increased its resources for collecting on past due
loans.
Forward-looking
Statements
Certain
statements in this filing and future filings by the Company with the Securities
and Exchange Commission, in the Company’s press releases or other public or
shareholder communications, contain forward-looking statements, as defined in
the Private Securities Litigation Reform Act. These statements may be identified
by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,”
“projects,” or other similar terms. There are a number of
factors, many of which are beyond the Company’s control that could cause actual
results to differ materially from those contemplated by the forward-looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following: (1) competitive pressures among depository and other financial
institutions may increase significantly; (2) revenues may be lower than
expected; (3) changes in the interest rate environment may affect interest
margins; (4) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit; (5)
legislative or regulatory changes, including changes in accounting standards or
tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than the Company; (7)
adverse changes may occur in the securities markets or with respect to
inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; (10) internal control
failures; and (11) the Company’s success in managing the risks involved in the
foregoing.
The
Company cautions readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and advises readers that
various factors, including those described above and other factors discussed in
the Company’s annual and quarterly reports previously filed with the Securities
and Exchange Commission, could affect the Company’s financial performance and
could cause the Company’s actual results or circumstances for future periods to
differ materially from those anticipated or projected.
Unless
required by law, the Company does not undertake, and specifically disclaims any
obligations to publicly release any revisions to any forward-looking statements
to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
Critical
Accounting Policies
Management
of the Company considers the accounting policy relating to the allowance for
loan and lease losses to be a critical accounting policy given the judgment in
evaluating the level of the allowance required to cover credit losses inherent
in the loan and lease portfolio and the material effect that such judgments can
have on the results of operations. While management’s current evaluation of the
allowance for loan and lease losses indicates that the allowance is adequate,
under adversely different conditions or assumptions, the allowance may need to
be increased. For example, if historical loan and lease loss experience
significantly worsened or if current economic conditions further deteriorated,
particularly in the Company’s primary market area, additional provisions for
loan and lease losses may 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 evaluations were
significantly lowered, the Company’s allowance for loan and lease policy may
require additional provisions for loan and lease losses.
Management
of the Company considers the accounting policy relating to pension accounting to
be a critical accounting policy. Management is required to make various
assumptions in valuing its pension assets and liabilities. These assumptions
include the expected rate of return on plan assets, the discount rate, and the
rate of increase in future compensation levels. Changes to these assumptions
could impact earnings in future periods. The Company takes into account the plan
asset mix, funding obligations, and expert opinions in determining the various
rates used to estimate pension expense. The Company also considers relevant
indices and market interest rates in setting the appropriate discount rate. In
addition, the Company reviews expected inflationary and merit increases to
compensation in determining the rate of increase in future compensation
levels.
Management
of the Company considers the accounting policy relating to other-than-temporary
impairment to be a critical accounting policy. Management
systematically evaluates certain assets for other-than-temporary declines in
market value, primarily investment securities and lease residual
assets. Management considers historical values and current market
conditions as a part of the assessment. Assets for which declines in
market value are deemed to be other-than-temporary are written down to current
market value and the resultant changes are included in earnings as noninterest
expense.
Overview
The
following information should be considered in connection with the Company's
results for the first three months of 2009:
|
·
|
FDIC
premiums increased in comparison to the first quarter of 2008 based
on rate increases primarily due to current economic
conditions. The Company expects FDIC premiums to remain at
these increased levels during the remainder of 2009. In addition,
unless repealed or amended by the FDIC, there will be a one-time special
assessment of 20 additional basis points in FDIC premiums during the
second quarter of 2009, which will be collected on September 30,
2009.
|
|
·
|
Pension
expenses increased in comparison to the first quarter of 2008 primarily
due to the impact of market declines on pension assets.
The Company expects pension expense to remain at these increased
levels during the remainder of
2009.
|
|
·
|
The
Company's results for the quarter, unlike the first quarter of 2008,
include the results of Mang, which was acquired by the Company on
September 1, 2008. Mang provides brokered insurance
products to individuals and businesses from locations in 18 upstate
New York communities.
|
|
·
|
The
Company's common stock was added to the Standard & Poor's SmallCap 600
Index during the first quarter of 2009. Simultaneously with being
added to the index, the Company launched a public offering of its common
stock, which was completed during the second quarter of
2009.
|
The
Company earned net income of $13.1 million ($0.40 diluted earnings per share)
for the three months ended March 31, 2009, down slightly from net income of
$13.7 million ($0.43 diluted earnings per share) for the three months ended
March 31, 2008. Net interest income increased approximately $4.0
million, or 9.2%, for the three months ended March 31, 2009 as compared to the
same period in 2008. The increase in net interest income was due
primarily to a decrease in interest expense of approximately $9.3 million, or
30.5%. In addition, noninterest income increased $3.5 million, or
21.7%, for the three months ended March 31, 2009 as compared to the first
quarter of 2008. The increases in net interest income and noninterest
income were offset by a $8.3 million, or 24.3%, increase in noninterest expense
for the three months ended March 31, 2009 as compared with the same period in
2008.
Table 1
depicts several annualized measurements of performance using U.S. GAAP net
income that management reviews in analyzing the Company’s performance. Returns
on average assets and equity measure how effectively an entity utilizes its
total resources and capital, respectively. Net interest margin, which is the net
federal taxable equivalent (FTE) interest income divided by average earning
assets, is a measure of an entity's ability to utilize its earning assets in
relation to the cost of funding. Interest income for tax-exempt securities and
loans is adjusted to a taxable equivalent basis using the statutory Federal
income tax rate of 35%.
Table
1 - Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
2009
|
|
|
2008
|
|
Return
on average assets (ROAA)
|
|
|
0.99 |
% |
|
|
1.07 |
% |
Return
on average equity (ROAE)
|
|
|
12.14 |
% |
|
|
13.68 |
% |
Net
Interest Margin
|
|
|
4.09 |
% |
|
|
3.84 |
% |
Net
Interest Income
Net interest income is the
difference between interest income on earning assets, primarily loans and
securities, and interest expense on interest bearing liabilities, primarily
deposits and borrowings. Net interest income is affected by the
interest rate spread, the difference between the yield on earning assets and
cost of interest bearing liabilities, as well as the volumes of such assets and
liabilities. Net interest income is one of the major determining factors
in a financial institution’s performance as it is the principal source of
earnings. In response to the financial crisis, the Federal Open Market Committee
lowered the target Federal Funds rate 500 bp, from 5.25% to 0.25% from September
2007 to December 2008 resulting in a corresponding drop in the Prime Rate from
8.25% to 3.25%. As a result of the lower rate environment, interest
earning assets are repricing downward and the Company has lowered rates paid on
interest-bearing liabilities. The impact of these actions is further
explained in Table
2, which represents an analysis of net interest income on a FTE
basis.
FTE net
interest income increased $4.0 million, or 8.7%, during the three months ended
March 31, 2009, compared to the same period of 2008. The increase in FTE net
interest income resulted primarily from a decrease in the rate paid on interest
bearing liabilities of 98 bp, to 2.07% for the three months ended March 31, 2009
from 3.05% for the same period in 2008. The interest rate spread
increased 42 bp during the three months ended March 31, 2009 compared to the
same period in 2008. The net interest margin increased by 25 bp to
4.09% for the three months ended March 31, 2009, compared with 3.84% for the
same period in 2008. For the three months ended March 31, 2009, total
FTE interest income decreased $5.3 million, or 7.0%. The yield on
earning assets for the period decreased 57 bp to 5.84% for the three months
ended March 31, 2009 from 6.41% for the same period in 2008. This
decrease was partially offset by an increase in average interest earning assets
of $143.0 million, or 3.0%, for the three months ended March 31, 2009 when
compared to the same period in 2008, principally from growth in average loans
and leases.
For the
quarter ended March 31, 2009, total interest expense decreased $9.3 million, or
30.5%, primarily the result of the 200 bp decrease in the Federal Funds target
rate since March 31, 2008, which impacts the Company’s short-term borrowing,
money market account and time deposit rates. Additionally, average interest
bearing liabilities increased $130.8 million, or 3.2%, for the three months
ended March 31, 2009 when compared to the same period in 2008, principally from
growth in long-term debt and money market deposit accounts. Total
average interest bearing deposits increased $79.6 million, or 2.5%, for the
three months ended March 31, 2009 when compared to the same period in
2008. The rate paid on average interest bearing deposits decreased
113 bp from 2.82% for the three months ended March 31, 2008 to 1.69% for the
same period in 2009. For the three months ended March 31, 2009, the
Company experienced a shift in its deposit mix from time deposits to money
market deposit accounts and NOW accounts. Average time deposit accounts
decreased approximately $271.8 million, or 16.8%, when compared to the same
period in 2008, while money market accounts and NOW accounts collectively
increased approximately $334.7 million, or 28.9%.
Total
average borrowings, including trust preferred debentures, increased $51.2
million, or 6.4%, for the three months ended March 31, 2009 compared with the
same period in 2008. Average short-term borrowings decreased by
$155.1 million, or 51.1%, from $303.6 million for the three months ended March
31, 2008 to $148.4 million for the three months ended March 31,
2009. Interest expense from short-term borrowings decreased $2.2
million, or 93.7%. The rate paid on short-term borrowings decreased
270 bp from 3.10% for the three months ended March 31, 2008 to 0.40% for the
same period in 2009. Average long-term debt increased $206.4 million,
or 48.6%, for the three months ended March 31, 2009, compared with the same
period in 2008. The rate paid on long-term debt decreased to 3.98%
for the three months ended March 31, 2009, compared with 4.07% for the same
period in 2008. As a result of the increase in the average balance of
long-term debt, interest paid on long-term debt increased $1.9 million, or
44.0%, for the three months ended March 31, 2009 as compared to the same period
in 2008.
Table
2
Average
Balances and Net Interest Income
The
following tables include the condensed consolidated average balance sheet, an
analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans has been
adjusted to a taxable-equivalent basis using the statutory Federal income tax
rate of 35%.
Three
months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
(dollars
in thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Rates
|
|
|
Balance
|
|
|
Interest
|
|
|
Rates
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
interest bearing accounts
|
|
$ |
2,684 |
|
|
$ |
13 |
|
|
|
1.98 |
% |
|
$ |
8,400 |
|
|
$ |
79 |
|
|
|
3.78 |
% |
Securities
available for sale (1)(excluding unrealized gains or
losses)
|
|
|
1,089,512 |
|
|
|
13,114 |
|
|
|
4.88 |
% |
|
|
1,120,257 |
|
|
|
14,419 |
|
|
|
5.18 |
% |
Securities
held to maturity (1)
|
|
|
138,700 |
|
|
|
1,861 |
|
|
|
5.44 |
% |
|
|
152,860 |
|
|
|
2,285 |
|
|
|
6.01 |
% |
Investment
in FRB and FHLB Banks
|
|
|
38,852 |
|
|
|
349 |
|
|
|
3.64 |
% |
|
|
37,509 |
|
|
|
697 |
|
|
|
7.47 |
% |
Loans
and leases (2)
|
|
|
3,658,682 |
|
|
|
55,626 |
|
|
|
6.17 |
% |
|
|
3,466,360 |
|
|
|
58,830 |
|
|
|
6.83 |
% |
Total
interest earning assets
|
|
|
4,928,430 |
|
|
|
70,963 |
|
|
|
5.84 |
% |
|
|
4,785,386 |
|
|
|
76,310 |
|
|
|
6.41 |
% |
Other
assets
|
|
|
423,046 |
|
|
|
|
|
|
|
|
|
|
|
378,958 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
5,351,476 |
|
|
|
|
|
|
|
|
|
|
|
5,164,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposit accounts
|
|
|
942,223 |
|
|
|
3,109 |
|
|
|
1.34 |
% |
|
|
709,962 |
|
|
|
4,178 |
|
|
|
2.37 |
% |
NOW
deposit accounts
|
|
|
550,241 |
|
|
|
786 |
|
|
|
0.58 |
% |
|
|
447,852 |
|
|
|
995 |
|
|
|
0.89 |
% |
Savings
deposits
|
|
|
478,033 |
|
|
|
210 |
|
|
|
0.18 |
% |
|
|
461,307 |
|
|
|
762 |
|
|
|
0.66 |
% |
Time
deposits
|
|
|
1,342,097 |
|
|
|
9,734 |
|
|
|
2.94 |
% |
|
|
1,613,878 |
|
|
|
16,763 |
|
|
|
4.18 |
% |
Total
interest bearing deposits
|
|
|
3,312,594 |
|
|
|
13,839 |
|
|
|
1.69 |
% |
|
|
3,232,999 |
|
|
|
22,698 |
|
|
|
2.82 |
% |
Short-term
borrowings
|
|
|
148,448 |
|
|
|
147 |
|
|
|
0.40 |
% |
|
|
303,576 |
|
|
|
2,340 |
|
|
|
3.10 |
% |
Trust
preferred debentures
|
|
|
75,422 |
|
|
|
1,086 |
|
|
|
5.84 |
% |
|
|
75,422 |
|
|
|
1,247 |
|
|
|
6.65 |
% |
Long-term
debt
|
|
|
631,238 |
|
|
|
6,197 |
|
|
|
3.98 |
% |
|
|
424,872 |
|
|
|
4,302 |
|
|
|
4.07 |
% |
Total
interest bearing liabilities
|
|
|
4,167,702 |
|
|
|
21,269 |
|
|
|
2.07 |
% |
|
|
4,036,869 |
|
|
|
30,587 |
|
|
|
3.05 |
% |
Demand
deposits
|
|
|
680,835 |
|
|
|
|
|
|
|
|
|
|
|
659,417 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
66,254 |
|
|
|
|
|
|
|
|
|
|
|
64,893 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
436,685 |
|
|
|
|
|
|
|
|
|
|
|
403,165 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
5,351,476 |
|
|
|
|
|
|
|
|
|
|
$ |
5,164,344 |
|
|
|
|
|
|
|
|
|
Net
interest income (FTE)
|
|
|
|
|
|
|
49,694 |
|
|
|
|
|
|
|
|
|
|
|
45,723 |
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
3.77 |
% |
|
|
|
|
|
|
|
|
|
|
3.36 |
% |
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.09 |
% |
|
|
|
|
|
|
|
|
|
|
3.84 |
% |
Taxable
equivalent adjustment
|
|
|
|
|
|
|
1,582 |
|
|
|
|
|
|
|
|
|
|
|
1,658 |
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
48,112 |
|
|
|
|
|
|
|
|
|
|
$ |
44,065 |
|
|
|
|
|
|
(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
following table presents changes in interest income and interest expense
attributable to changes in volume (change in average balance multiplied by prior
year rate), changes in rate (change in rate multiplied by prior year volume),
and the net change in net interest income. The net change attributable to the
combined impact of volume and rate has been allocated to each in proportion to
the absolute dollar amounts of change.
Analysis
of Changes in Taxable Equivalent Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
2009
over 2008
|
|
(in
thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
interest bearing accounts
|
|
$ |
(39 |
) |
|
$ |
(27 |
) |
|
$ |
(66 |
) |
Securities
available for sale
|
|
|
(424 |
) |
|
|
(881 |
) |
|
|
(1,305 |
) |
Securities
held to maturity
|
|
|
(209 |
) |
|
|
(215 |
) |
|
|
(424 |
) |
Investment
in FRB and FHLB Banks
|
|
|
26 |
|
|
|
(374 |
) |
|
|
(348 |
) |
Loans
and leases
|
|
|
4,314 |
|
|
|
(7,518 |
) |
|
|
(3,204 |
) |
Total
interest income
|
|
|
3,668 |
|
|
|
(9,015 |
) |
|
|
(5,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposit accounts
|
|
|
3,254 |
|
|
|
(4,323 |
) |
|
|
(1,069 |
) |
NOW
deposit accounts
|
|
|
388 |
|
|
|
(597 |
) |
|
|
(209 |
) |
Savings
deposits
|
|
|
29 |
|
|
|
(581 |
) |
|
|
(552 |
) |
Time
deposits
|
|
|
(2,549 |
) |
|
|
(4,480 |
) |
|
|
(7,029 |
) |
Short-term
borrowings
|
|
|
(811 |
) |
|
|
(1,382 |
) |
|
|
(2,193 |
) |
Trust
preferred debentures
|
|
|
- |
|
|
|
(161 |
) |
|
|
(161 |
) |
Long-term
debt
|
|
|
1,986 |
|
|
|
(91 |
) |
|
|
1,895 |
|
Total
interest expense
|
|
|
2,297 |
|
|
|
(11,615 |
) |
|
|
(9,318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in FTE net interest income
|
|
$ |
1,371 |
|
|
$ |
2,600 |
|
|
$ |
3,971 |
|
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 periods
indicated:
|
|
Three
months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
(in
thousands)
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$ |
6,297 |
|
|
$ |
6,525 |
|
Insurance
and Broker/dealer revenue
|
|
|
5,338 |
|
|
|
1,107 |
|
Trust
|
|
|
1,409 |
|
|
|
1,774 |
|
Net
securities gains
|
|
|
- |
|
|
|
15 |
|
Bank
owned life insurance
|
|
|
872 |
|
|
|
807 |
|
ATM
fees
|
|
|
2,182 |
|
|
|
2,097 |
|
Retirement
plan administration fees
|
|
|
1,741 |
|
|
|
1,708 |
|
Other
|
|
|
1,751 |
|
|
|
2,062 |
|
Total
noninterest income
|
|
$ |
19,590 |
|
|
$ |
16,095 |
|
Noninterest
income for the three months ended March 31, 2009 was $19.6 million, up $3.5
million or 21.7% from $16.1 million for the same period in 2008. The
increase in noninterest income was due primarily to an increase in insurance and
broker/dealer revenue of approximately $4.2 million for the three months ended
March 31, 2009, primarily due to the acquisition of Mang Insurance Agency, LLC
during the third quarter of 2008. This increase was partially offset
by a decrease in trust administration income of $0.4 million for the three
months ended March 31, 2009, compared with the same period in
2008. This decrease was primarily the result of a decline in the
value of trust assets under administration.
Noninterest
Expense
Noninterest
expenses are also an important factor in the Company’s results of
operations. The following table sets forth the major components of
noninterest expense for the periods indicated:
|
|
Three
months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
(in
thousands)
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$ |
21,427 |
|
|
$ |
16,770 |
|
Occupancy
|
|
|
4,165 |
|
|
|
3,610 |
|
Equipment
|
|
|
2,022 |
|
|
|
1,825 |
|
Data
processing and communications
|
|
|
3,295 |
|
|
|
3,170 |
|
Professional
fees and outside services
|
|
|
2,722 |
|
|
|
3,099 |
|
Office
supplies and postage
|
|
|
1,530 |
|
|
|
1,339 |
|
Amortization
of intangible assets
|
|
|
813 |
|
|
|
391 |
|
Loan
collection and other real estate owned
|
|
|
748 |
|
|
|
567 |
|
FDIC
insurance
|
|
|
1,529 |
|
|
|
188 |
|
Other
|
|
|
4,054 |
|
|
|
3,075 |
|
Total
noninterest expense
|
|
$ |
42,305 |
|
|
$ |
34,034 |
|
Noninterest
expense for the three months ended March 31, 2009 was $42.3 million, up from
$34.0 million for the same period in 2008. Salaries and employee
benefits increased $4.7 million, or 27.8%, for the three months ended March 31,
2009, compared with the same period in 2008. The Company experienced
increases of approximately $0.8 million and $0.4 million in pension and medical
expenses, respectively, for the three months ended March 31, 2009 as compared
with the same period in 2008. The balance of the increase was due
primarily to increases in full-time-equivalent employees during 2009, largely
due to new branch activity and the aforementioned acquisition. In
addition, Occupancy, equipment and data processing and communications
expenses were $9.5 million for the three months ended March 31, 2009, up $0.9
million, or 10.2%, from $8.6 million for the three months ended March 31,
2008. This increase was due primarily to an increase in expenses
related to new branch activity during the past nine
months. Professional fees and outside services decreased $0.4 million
for the three months ended March 31, 2009, compared with the same period in
2008, due primarily to professional fees incurred in 2008 related to noninterest
income initiatives. Amortization of intangible assets was $0.8
million for the three months ended March 31, 2009, up from $0.4 million for same
period in 2008 due to the aforementioned acquisition. FDIC insurance
increased approximately $1.3 million for the three months ended March 31, 2009,
compared with the same period in 2008. Other operating expenses were
$4.1 million for the three months ended March 31, 2009, up $1.0 million from
$3.1 million for the three months ended March 31, 2008. This increase
resulted primarily from various nonrecurring recoveries in 2008.
Income
Taxes
Income
tax expense for the three months ended March 31, 2009 and 2008 was $5.9
million. The effective rates were 31.0% and 30.2% for the three
months ended March 31, 2009 and 2008, respectively.
ANALYSIS
OF FINANCIAL CONDITION
Securities
The
Company classifies its securities at date of purchase as available for sale,
held to maturity or trading. Held to maturity debt securities are
those that the Company has the ability and intent to hold until
maturity. Held to maturity securities are recorded at amortized
cost. 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. Trading securities are recorded at fair
value, with net unrealized gains and losses recognized currently in
income. Transfers of securities between categories are recorded at
fair value at the date of transfer. A decline in the fair value of
any available for sale or held to maturity security below cost that is deemed
other-than-temporary is charged to earnings resulting in the establishment of a
new cost basis for the security. Securities with an
other-than-temporary impairment are generally placed on nonaccrual
status.
Held to
maturity securities experienced a very slight decline from December 31, 2008 to
March 31, 2009. At March 31, 2009, the balance of securities held to
maturity was $139.2 million, as compared with $140.2 million at December 31,
2008. Available for sale securities also experienced a very slight
decline. At March 31, 2009, the balance of available for sale
securities declined by approximately $8.3 million, or less than 1%, from
December 31, 2008.
Average
total earning securities decreased $44.9 million, or 3.5%, for the three months
ended March 31, 2009 when compared to the same period in 2008. The
average balance of securities available for sale decreased $30.7 million, or
2.7%, for the three months ended March 31, 2009 when compared to the same period
in 2008. The average balance of securities held to maturity decreased
$14.2 million, or 9.3%, for the three months ended March 31, 2009, compared to
the same period in 2008. The average total securities portfolio represents 24.9%
of total average earning assets for the three months ended March 31, 2009, down
from 26.6% for the same period in 2008.
The
balance of securities available for sale decreased $8.3 million, or 0.7%, for
the three months ended March 31, 2009 when compared to the same period in
2008. The balance of securities held to maturity decreased $1.0
million, or 0.7%, for the three months ended March 31, 2009, compared to the
same period in 2008.
The
following table details the composition of securities available for sale,
securities held to maturity and regulatory investments for the periods
indicated:
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
With
maturities 15 years or less
|
|
|
21 |
% |
|
|
22 |
% |
With
maturities greater than 15 years
|
|
|
6 |
% |
|
|
6 |
% |
Collateral
mortgage obligations
|
|
|
28 |
% |
|
|
29 |
% |
Municipal
securities
|
|
|
21 |
% |
|
|
20 |
% |
US
agency notes
|
|
|
19 |
% |
|
|
17 |
% |
Other
|
|
|
5 |
% |
|
|
6 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
Loans and
Leases
A summary
of loans and leases, net of deferred fees and origination costs, by category for
the periods indicated follows:
(In
thousands)
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Residential
real estate mortgages
|
|
$ |
708,343 |
|
|
$ |
722,723 |
|
Commercial
|
|
|
572,974 |
|
|
|
572,059 |
|
Commercial
real estate mortgages
|
|
|
670,399 |
|
|
|
669,720 |
|
Real
estate construction and development
|
|
|
73,454 |
|
|
|
67,859 |
|
Agricultural
and agricultural real estate mortgages
|
|
|
111,418 |
|
|
|
113,566 |
|
Consumer
|
|
|
812,787 |
|
|
|
795,123 |
|
Home
equity
|
|
|
615,917 |
|
|
|
627,603 |
|
Lease
financing
|
|
|
83,092 |
|
|
|
83,258 |
|
Total
loans and leases
|
|
$ |
3,648,384 |
|
|
$ |
3,651,911 |
|
Total
loans and leases were $3.6 billion, or 67.5% of assets at March 31, 2009 and
$3.7 billion, or 68.4% of assets at December 31, 2008. Total loans
and leases decreased nominally from December 31, 2008. Residential
real estate mortgages decreased by approximately $14.4 million, or 2.0%, from
December 31, 2008 to March 31, 2009 due to an increase in refinancing activity
in the low rate environment. In addition, the Company has increased
sales of newly originated loans to secondary markets. Home equity
loans decreased by approximately $11.7 million, or 1.9%, from December 31, 2008
to March 31, 2009 as the Company decreased home equity loan originations in the
first quarter of 2009.
Allowance for Loan and Lease
Losses, Provision for Loan and Lease Losses, and Nonperforming
Assets
The
allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for
loan and lease losses is continuously monitored using a methodology designed to
ensure the level of the allowance reasonably reflects the loan portfolio’s risk
profile. It is evaluated to ensure that it is sufficient to absorb all
reasonably estimable credit losses inherent in the current loan and lease
portfolio.
Management
considers the accounting policy relating to the allowance for loan and lease
losses to be a critical accounting policy given the degree of judgment exercised
in evaluating the level 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 factors include
estimates of loss exposure, which reflect the facts and circumstances that
affect the likelihood of repayment of such loans as of the evaluation
date. For homogeneous pools of loans and leases, estimates of the
Company’s exposure to credit loss reflect a thorough current assessment of a
number of factors, which could affect collectibility. These factors include:
past loss experience; the size, trend, composition, and nature of the loans and
leases; changes in lending policies and procedures, including
underwriting standards and collection, charge-off and recovery
practices; trends experienced in nonperforming and delinquent loans
and leases; current economic conditions in the Company’s market; portfolio
concentrations that may affect loss experienced across one or more components of
the portfolio; the effect of external factors such as competition, legal and
regulatory requirements; and the experience, ability, and depth of lending
management and staff. In addition, various regulatory agencies, as an
integral component of their examination process, periodically review the
Company’s allowance for loan and lease losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgment about information available to them at the time of their examination,
which may not be currently available to management.
After a
thorough consideration and validation of the factors discussed above, required
additions to the allowance for loan and lease losses are made periodically by
charges to the provision for loan and lease losses. These charges are
necessary to maintain the allowance at a level which management believes is
reasonably reflective of the overall inherent risk of probable loss in the
portfolio. While management uses available information to recognize
losses on loans and leases, additions to the allowance may fluctuate from one
reporting period to another. These fluctuations are reflective of
changes in risk associated with portfolio content and/or changes in management’s
assessment of any or all of the determining factors discussed
above. The allowance for loan and lease losses to outstanding loans
and leases at March 31, 2009 was 1.63% compared with 1.60% at December 31,
2008. Management considers the allowance for loan losses to be
adequate based on evaluation and analysis of the loan portfolio.
Table 3
reflects changes to the allowance for loan and lease losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net charge-offs. Charge-offs are made when the
ability to collect loan principal within a reasonable time becomes unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan and lease losses.
Table
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
For Loan and Lease Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
(dollars
in thousands)
|
|
March
31, 2009
|
|
|
|
|
|
March
31, 2008
|
|
|
|
|
Balance,
beginning of period
|
|
$ |
58,564 |
|
|
|
|
|
$ |
54,183 |
|
|
|
|
Recoveries
|
|
|
1,155 |
|
|
|
|
|
|
1,077 |
|
|
|
|
Chargeoffs
|
|
|
(6,859 |
) |
|
|
|
|
|
(5,238 |
) |
|
|
|
Net
chargeoffs
|
|
|
(5,704 |
) |
|
|
|
|
|
(4,161 |
) |
|
|
|
Provision
for loan losses
|
|
|
6,451 |
|
|
|
|
|
|
6,478 |
|
|
|
|
Balance,
end of period
|
|
$ |
59,311 |
|
|
|
|
|
$ |
56,500 |
|
|
|
|
Composition
of Net Chargeoffs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and agricultural
|
|
$ |
(2,188 |
) |
|
|
38 |
% |
|
$ |
(2,451 |
) |
|
|
59 |
% |
Real
estate mortgage
|
|
|
(202 |
) |
|
|
4 |
% |
|
|
(118 |
) |
|
|
3 |
% |
Consumer
|
|
|
(3,314 |
) |
|
|
58 |
% |
|
|
(1,592 |
) |
|
|
38 |
% |
Net
chargeoffs
|
|
$ |
(5,704 |
) |
|
|
100 |
% |
|
$ |
(4,161 |
) |
|
|
100 |
% |
Annualized
net chargeoffs to average loans and leases
|
|
|
0.63 |
% |
|
|
|
|
|
|
0.48 |
% |
|
|
|
|
Nonperforming
assets consist of nonaccrual loans, loans 90 days or more past due and still
accruing, restructured loans, OREO, and nonperforming securities. Loans are
generally placed on nonaccrual when principal or interest payments become ninety
days past due, unless the loan is well secured and in the process of collection.
Loans may also be placed on nonaccrual when circumstances indicate that the
borrower may be unable to meet the contractual principal or interest payments.
OREO represents property acquired through foreclosure and is valued at the lower
of the carrying amount or fair market value, less any estimated disposal costs.
Nonperforming securities include securities which management believes are
other-than-temporarily impaired, carried at their estimated fair value and are
not accruing interest.
Nonperforming
Assets
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
Nonaccrual
loans
|
|
|
|
|
|
|
Commercial
and agricultural loans and real estate
|
|
$ |
15,987 |
|
|
$ |
15,891 |
|
Real
estate mortgages
|
|
|
3,445 |
|
|
|
3,803 |
|
Consumer
|
|
|
4,335 |
|
|
|
3,468 |
|
Troubled
debt restructured loans
|
|
|
980 |
|
|
|
1,029 |
|
Total
nonaccrual loans
|
|
|
24,747 |
|
|
|
24,191 |
|
Loans
90 days or more past due and still accruing
|
|
|
|
|
|
|
|
|
Commercial
and agricultural loans and real estate
|
|
|
- |
|
|
|
12 |
|
Real
estate mortgages
|
|
|
383 |
|
|
|
770 |
|
Consumer
|
|
|
2,154 |
|
|
|
1,523 |
|
Total
loans 90 days or more past due and still accruing
|
|
|
2,537 |
|
|
|
2,305 |
|
Total
nonperforming loans
|
|
|
27,284 |
|
|
|
26,496 |
|
Other
real estate owned (OREO)
|
|
|
1,254 |
|
|
|
665 |
|
Total
nonperforming assets
|
|
|
28,538 |
|
|
|
27,161 |
|
Total
nonperforming loans to total loans and leases
|
|
|
0.75 |
% |
|
|
0.73 |
% |
Total
nonperforming assets to total assets
|
|
|
0.53 |
% |
|
|
0.51 |
% |
Total
allowance for loan and lease losses to nonperforming loans
|
|
|
217.38 |
% |
|
|
221.03 |
% |
In
addition to nonperforming loans, the Company has also identified approximately
$94.0 million in potential problem loans at March 31, 2009 as compared to $95.4
million at December 31, 2008. Potential problem loans are loans that
are currently performing, but known information about possible credit problems
of the borrowers causes management to have serious doubts as to the ability of
such borrowers to comply with the present loan repayment terms and which may
result in classification of such loans as nonperforming at some time in the
future. At the Company, potential problem loans are typically loans
that are performing but are classified by the Company’s loan rating system as
“substandard.” At March 31, 2009, potential problem loans primarily
consisted of commercial real estate and commercial and agricultural
loans. Management cannot predict the extent to which economic
conditions may worsen or other factors which may impact borrowers and the
potential problem loans. Accordingly, there can be no assurance that
other loans will not become 90 days or more past due, be placed on nonaccrual,
become restructured, or require increased allowance coverage and provision for
loan losses.
The
Company recorded a provision for loan and lease losses of $6.5 million during
the first quarter of 2009 and 2008. The provision remained at similar
levels primarily due to an increase in net charge-offs during the quarter
ended March 31, 2009 compared with the quarter ended March 31,
2008. This was offset by a decreased in nonperforming loans during
the same period. Net charge-offs totaled $5.7 million for the three
month period ending March 31, 2009, up from $4.2 million for the three months
ended March 31, 2008. The increase in net charge-offs for the three
months ended March 31, 2009 compared to the three months ended March 31, 2008
was due primarily to increased charge-offs in the first quarter of 2009 related
to commercial and agricultural loans.
Subprime
mortgage lending, which has been the riskiest sector of the residential housing
market, is not a market that the Company has ever actively
pursued. The market does not apply a uniform definition of what
constitutes “subprime” lending. Our reference to subprime lending
relies upon the “Statement on Subprime Mortgage Lending” issued by the OTS and
the other federal bank regulatory agencies, or the Agencies, on June 29, 2007,
which further referenced the “Expanded Guidance for Subprime Lending Programs,”
or the Expanded Guidance, issued by the Agencies by press release dated January
31, 2001. In the Expanded Guidance, the Agencies indicated that
subprime lending does not refer to individual subprime loans originated and
managed, in the ordinary course of business, as exceptions to prime risk
selection standards. The Agencies recognize that many prime loan
portfolios will contain such accounts. The Agencies also excluded
prime loans that develop credit problems after acquisition and community
development loans from the subprime arena. According to the Expanded
Guidance, subprime loans are other loans to borrowers which display one or more
characteristics of reduced payment capacity. Five specific criteria,
which are not intended to be exhaustive and are not meant to define specific
parameters for all subprime borrowers and may not match all markets or
institutions’ specific subprime definitions, are set forth, including having a
FICO score of 660 or below. Based upon the definition and exclusions
described above, the Company is a prime lender. Within the loan
portfolio, there are loans that, at the time of origination, had FICO scores of
660 or below. However, since the Company is a portfolio lender, it
reviews all data contained in borrower credit reports and does not base
underwriting decisions solely on FICO scores. We believe the
aforementioned loans, when made, were amply collateralized and otherwise
conformed to our prime lending standards. The Company has not
originated Alt A loans or no interest loans.
Deposits
Total
deposits were $4.1 billion at March 31, 2009, up $152.7 million, or 3.9%, from
December 31, 2008. The increase in deposits compared with December
31, 2008 was driven primarily by increases in money market accounts and NOW
accounts.
Total
average deposits for the three months ended March 31, 2009 increased $101.0
million, or 2.6%, from the same period in 2008. The Company experienced an
increase in average money market accounts of $232.3 million, or 32.7%, for the
three months ended March 31, 2009 compared to the same period in
2008. Average NOW accounts increased $102.4 million, or 22.9%, to
$550.2 million for the three months ended March 31, 2009 from $447.9 million for
the same period in 2008. This increase in average money market and
NOW accounts was primarily due to a shift from time deposit accounts to money
market accounts and NOW accounts. Average savings accounts increased
$16.7 million, or 3.6%, for the three month period ending March 31, 2009 as
compared to the same period in 2008. Average time deposits decreased
$271.8 million, or 16.8%, for the three months ended March 31, 2009 from the
same period in 2008. Average demand deposit accounts increased $21.4
million, or 3.2%, for the three months ended March 31, 2009 as compared to the
same period in 2008. This was due primarily to an increasing customer
base, as the Company continues to expand into new markets.
Borrowed
Funds
The
Company's borrowed funds consist of short-term borrowings and long-term debt.
Short-term borrowings totaled $127.2 million at March 31, 2009 compared to
$206.5 million at December 31, 2008. Long-term debt was $616.1
million at March 31, 2009, as compared to $632.2 million at December 31,
2008. For more information about the Company’s borrowing capacity and
liquidity position, see the section with the title caption of “Liquidity Risk”
on page 36 of this report.
Capital
Resources
Stockholders'
equity of $442.6 million represented 8.2% of total assets at March 31, 2009,
compared with $431.8 million, or 8.1% as of December 31, 2008. The
Company did not purchase shares of its common stock during the three month
period ended March 31, 2009. At March 31, 2009, there were 1,000,000
shares available for repurchase under previously announced plans.
The Board
of Directors considers the Company's earnings position and earnings potential
when making dividend decisions. The Company does not have a target
dividend pay out ratio.
As the
capital ratios in Table 4 indicate, the Company remains “well
capitalized.” Capital measurements are well in excess of regulatory
minimum guidelines and meet the requirements to be considered well capitalized
for all periods presented. Tier 1 leverage, Tier 1 capital and Risk-based
capital ratios have regulatory minimum guidelines of 3%, 4% and 8% respectively,
with requirements to be considered well capitalized of 5%, 6% and 10%,
respectively.
Table
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Measurements
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Tier
1 leverage ratio
|
|
|
7.47 |
% |
|
|
7.17 |
% |
Tier
1 capital ratio
|
|
|
10.11 |
% |
|
|
9.75 |
% |
Total
risk-based capital ratio
|
|
|
11.36 |
% |
|
|
11.00 |
% |
Cash
dividends as a percentage of net income
|
|
|
49.96 |
% |
|
|
44.27 |
% |
Per
common share:
|
|
|
|
|
|
|
|
|
Book
value
|
|
$ |
13.55 |
|
|
$ |
13.24 |
|
Tangible
book value
|
|
$ |
9.34 |
|
|
$ |
9.01 |
|
Table 5
presents the high, low and closing sales price for the common stock as reported
on the NASDAQ Stock Market, and cash dividends declared per share of common
stock. The Company's price to book value ratio was 1.60 at March 31, 2009 and
1.75 in the comparable period of the prior year. The Company's price was 12.3
times trailing twelve months earnings at March 31, 2009, compared to 14.5 times
for the same period last year.
Table
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Common Stock and Dividend Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends
|
|
Quarter
Endings
|
|
High
|
|
|
Low
|
|
|
Close
|
|
|
Declared
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$ |
28.37 |
|
|
$ |
15.42 |
|
|
$ |
21.64 |
|
|
$ |
0.20 |
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$ |
23.65 |
|
|
$ |
17.95 |
|
|
$ |
22.20 |
|
|
$ |
0.20 |
|
June
30
|
|
|
25.00 |
|
|
|
20.33 |
|
|
|
20.61 |
|
|
|
0.20 |
|
September
30
|
|
|
36.47 |
|
|
|
19.05 |
|
|
|
29.92 |
|
|
|
0.20 |
|
December
31
|
|
|
30.83 |
|
|
|
21.71 |
|
|
|
27.96 |
|
|
|
0.20 |
|
On April
27, 2009, the Company announced the declaration of a regular quarterly cash
dividend of $0.20 per share. The cash dividend will be paid on June
15, 2009 to stockholders of record as of June 1, 2009.
Liquidity
and Interest Rate Sensitivity Management
Market
Risk
Interest
rate risk is among the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency
exchange rate risk and commodity price risk, do not arise in the normal course
of the Company’s business activities. Interest rate risk is defined
as an exposure to a movement in interest rates that could have an adverse effect
on the Company’s net interest income. Net interest income is
susceptible to interest rate risk to the degree that interest bearing
liabilities mature or reprice on a different basis than earning
assets. When interest bearing liabilities mature or reprice more
quickly than earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest
income. Similarly, when earning assets mature or reprice more quickly
than interest bearing liabilities, falling interest rates could result in a
decrease in net interest income.
In an
attempt to manage the Company's exposure to changes in interest rates,
management monitors the Company’s interest rate risk. Management’s
Asset Liability Committee (“ALCO”) meets monthly to review the Company’s
interest rate risk position and profitability, and to recommend strategies for
consideration by the Board of Directors. Management also reviews loan
and deposit pricing, and the Company’s securities portfolio, formulates
investment and funding strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board’s objectives in the most
effective manner. Notwithstanding the Company’s interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In
adjusting the Company’s asset/liability position, the Board and management
attempt to manage the Company’s interest rate risk while minimizing net interest
margin compression. At times, depending on the level of general
interest rates, the relationship between long- and short-term interest rates,
market conditions and competitive factors, the Board and management may
determine to increase the Company’s interest rate risk position somewhat in
order to increase its net interest margin. The Company’s results of
operations and net portfolio values remain vulnerable to changes in interest
rates and fluctuations in the difference between long- and short-term interest
rates.
The
primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity
analysis). Information such as principal balance, interest rate,
maturity date, cash flows, next repricing date (if needed), and current rates is
uploaded into the model to create an ending balance sheet. In
addition, ALCO makes certain assumptions regarding prepayment speeds for loans
and leases and mortgage related investment securities along with any optionality
within the deposits and borrowings.
The model
is first run under an assumption of a flat rate scenario (i.e. no change in
current interest rates) with a static balance sheet over a 12-month
period. Two additional models are run with static balance sheets: (1)
a gradual increase of 200 bp, (2) and a gradual decrease of 100 bp taking place
over a 12-month period with a static balance sheet. Under these scenarios,
assets subject to prepayments are adjusted to account for faster or slower
prepayment assumptions. Any investment securities or borrowings that
have callable options embedded into them are handled accordingly based on the
interest rate scenario. The resultant changes in net interest income are then
measured against the flat rate scenario.
In the
declining rate scenario, net interest income is projected to decrease when
compared to the forecasted net interest income in the flat rate scenario through
the simulation period. The decrease in net interest income is a result of
earning assets repricing downward at a faster rate than interest bearing
liabilities. The inability to effectively lower deposit rates will likely reduce
or eliminate the benefit of lower interest rates. In the rising rate scenarios,
net interest income is projected to experience a decline from the flat rate
scenario. Net interest income is projected to remain at lower levels than in a
flat rate scenario through the simulation period primarily due to a lag in
assets repricing while funding costs increase. The potential impact on earnings
is dependent on the ability to lag deposit repricing. If short-term rates
continue to increase, the Company expects competitive pressures will likely lead
to core deposit pricing increases, which will likely continue compression of the
net interest margin.
Net
interest income for the next 12 months in the + 200/- 100 bp scenarios, as
described above, is within the internal policy risk limits of not more than a
7.5% change in net interest income. The following table summarizes the
percentage change in net interest income in the rising and declining rate
scenarios over a 12-month period from the forecasted net interest income in the
flat rate scenario using the March 31, 2009 balance sheet position:
Table
6
|
|
Interest
Rate Sensitivity Analysis
|
|
Change
in interest rates
|
Percent
change in
|
(in
bp points)
|
net
interest income
|
+200
|
(1.06%)
|
-100
|
(0.95%)
|
The
Company has taken several measures to mitigate exposure to an upward rate
scenario. The Company has extended short term wholesale borrowings
(three months or less) into longer term borrowings with maturities of three,
four and five years along with purchasing monthly floating rate
investments. In addition, the Company will continue to focus on
growing noninterest bearing demand deposits and prudently managing deposit
costs. Lastly, the Company originates 15-year, 20-year and 30-year
residential real estate mortgages with the intent to sell.
Liquidity
Risk
Liquidity
involves the ability to meet the cash flow requirements of customers who may be
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. The ALCO is
responsible for liquidity management and has developed guidelines which cover
all assets and liabilities, as well as off balance sheet items that are
potential sources or uses of liquidity. Liquidity policies must also provide the
flexibility to implement appropriate strategies and tactical actions.
Requirements change as loans and leases grow, deposits and securities mature,
and payments on borrowings are made. Liquidity management includes a focus on
interest rate sensitivity management with a goal of avoiding widely fluctuating
net interest margins through periods of changing economic
conditions.
The
primary liquidity measurement the Company utilizes is called the Basic Surplus,
which captures the adequacy of its access to reliable sources of cash relative
to the stability of its funding mix of average liabilities. This approach
recognizes the importance of balancing levels of cash flow liquidity from short-
and long-term securities with the availability of dependable borrowing sources
which can be accessed when necessary. At March 31, 2009, the Company’s Basic
Surplus measurement was 7.6% of total assets or $411 million as compared to the
December 31, 2008 Basic Surplus of 6.6%, but was above the Company’s minimum of
5% or $270 million set forth in its liquidity policies.
This
Basic Surplus approach enables the Company to adequately manage liquidity from
both operational and contingency perspectives. By tempering the need for cash
flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position.
The
Company’s primary source of funds is the Bank. Certain restrictions exist
regarding the ability of the Bank to transfer funds to the Company in the form
of cash dividends. The approval of the Office of Comptroller of the Currency
(OCC) is required to pay dividends when a bank fails to meet certain minimum
regulatory capital standards or when such dividends are in excess of a
subsidiary bank’s earnings retained in the current year plus retained net
profits for the preceding two years (as defined in the regulations). At March
31, 2009, approximately $22.4 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 is also 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 General
Corporation Law, the Company may declare and pay dividends either out of
accumulated net retained earnings or capital surplus.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
Information
called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity
Management section of the Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Item
4. Controls and Procedures
The Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as
amended) as of September 30, 2008. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the evaluation date, the Company's disclosure controls and
procedures were effective in timely alerting them to any material information
relating to the Company and its subsidiaries required to be included in the
Company's periodic SEC filings.
There
were no changes made in the Company's internal controls over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect the Company's
internal controls over financial reporting.
PART
II. OTHER INFORMATION
Item 1
– Legal Proceedings
There are
no material legal proceedings, other than ordinary routine litigation incidental
to business to which the Company is a party or of which any of its property is
subject.
The
Company has revised the risk factors it previously disclosed in its Form 10-K
for the year ended December 31, 2008. The risk factors set forth in this Item 1A
supersede and replace the risk factors in the 2008 Form 10-K.
Deterioration
in local economic conditions may negatively impact our financial
performance.
The
Company’s success depends primarily on the general economic conditions of
upstate New York and northeastern Pennsylvania and the specific local markets in
which the Company operates. Unlike larger national or other regional banks that
are more geographically diversified, the Company provides banking and financial
services to customers primarily in the upstate New York areas of Norwich,
Oneonta, Amsterdam-Gloversville, Albany, Binghamton, Utica-Rome, Plattsburg, and
Ogdensburg-Massena and the northeastern Pennsylvania areas of Scranton,
Wilkes-Barre and East Stroudsburg. The local economic conditions in these areas
have a significant impact on the demand for the Company’s products and services
as well as the ability of the Company’s customers to repay loans, the value of
the collateral securing loans and the stability of the Company’s deposit funding
sources.
As a
lender with the majority of our loans secured by real estate or made to
businesses in New York and Pennsylvania, a downturn in the local economy could
cause significant increases in nonperforming loans, which could hurt our
profits. Declines in real estate values in our market areas could cause any of
our loans to become inadequately collateralized, which would expose us to
greater risk of loss. Additionally, a decline in real estate values could
adversely impact our portfolio of residential and commercial real estate loans
and could result in the decline of originations of such loans, as most of our
loans, and the collateral securing our loans, are located in those
areas.
Variations
in interest rates may negatively affect our financial performance.
The
Company’s earnings and financial condition are largely dependent upon net
interest income, which is the difference between interest earned from loans and
investments and interest paid on deposits and borrowings. The narrowing of
interest rate spreads could adversely affect the Company’s earnings and
financial condition. The Company cannot predict with certainty or control
changes in interest rates. Regional and local economic conditions and the
policies of regulatory authorities, including monetary policies of the Federal
Reserve Board, affect interest income and interest expense. High
interest rates could also affect the amount of loans that the Company can
originate, because higher rates could cause customers to apply for fewer
mortgages, or cause depositors to shift funds from accounts that have a
comparatively lower cost, to accounts with a higher cost or experience customer
attrition due to competitor pricing. With short-term interest rates at historic
lows and the current Federal Funds target rate at 25 bp, the Company’s
interest-bearing deposit accounts, particulary core deposits, are repricing at
historic lows as well. In the future, we anticipate that the interest
rate environment will increase and the Federal funds target rate will start to
increase. Depending on the nature and scale of those increases, the
company’s challenge will be managing the magnitude and scope of the
repricing. If the cost of interest-bearing deposits increases at a
rate greater than the yields on interest-earning assets increase, net interest
income will be negatively affected. Changes in the asset and liability mix may
also affect net interest income. Similarly, lower interest rates cause higher
yielding assets to prepay and floating or adjustable rate assets to reset to
lower rates. If the Company is not able to reduce its funding costs
sufficiently, due to either competitive factors or the maturity schedule of
existing liabilities, then the Company’s net interest margin will
decline.
Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
Company’s results of operations, any substantial, unexpected, or prolonged
change in market interest rates could have a material adverse effect on the
Company’s financial condition and results of operations. See the section
captioned “Net Interest Income” in Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations and Item 3. Quantitative and
Qualitative Disclosure About Market Risk located elsewhere in this report for
further discussion related to the Company’s management of interest rate
risk.
Our
lending, and particularly our emphasis on commercial and construction lending,
exposes us to the risk of losses upon borrower default.
There are
inherent risks associated with the Company’s lending activities. These risks
include, among other things, the impact of changes in interest rates and changes
in the economic conditions in the markets where the Company operates as well as
those across the States of New York and Pennsylvania, and the entire United
States. Increases in interest rates and/or weakening economic conditions could
adversely impact the ability of borrowers to repay outstanding loans or the
value of the collateral securing these loans. The Company is also subject to
various laws and regulations that affect its lending activities. Failure to
comply with applicable laws and regulations could subject the Company to
regulatory enforcement action that could result in the assessment of significant
civil money penalties against the Company.
As of
March 31, 2009, approximately 38% of the Company’s loan and lease portfolio
consisted of commercial, agricultural, construction and commercial real estate
loans. These types of loans generally expose a lender to greater risk of
non-payment and loss than residential real estate loans because repayment of the
loans often depends on the successful operation of the property, the income
stream of the borrowers and, for construction loans, the accuracy of the
estimate of the property’s value at completion of construction and the estimated
cost of constructions. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to residential real
estate loans. Because the Company’s loan portfolio contains a significant number
of commercial and industrial, construction and commercial real estate loans with
relatively large balances, the deterioration of one or a few of these loans
could cause a significant increase in nonperforming loans. An increase in
nonperforming loans could result in a net loss of earnings from these loans, an
increase in the provision for loan losses and/or an increase in loan
charge-offs, all of which could have a material adverse effect on the Company’s
financial condition and results of operations. See the section captioned “Loans
and Leases” in Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations located elsewhere in this report for further
discussion related to commercial and industrial, construction and commercial
real estate loans.
If
our allowance for loan and lease losses is not sufficient to cover actual loan
and lease losses, our earnings will decrease.
The
Company maintains an allowance for loan and lease losses, which is an allowance
established through a provision for loan and lease losses charged to expense,
that represents management’s best estimate of probable losses that could be
incurred within the existing portfolio of loans and leases. The allowance, in
the judgment of management, is necessary to reserve for estimated loan and lease
losses and risks inherent in the loan and lease portfolio. The level of the
allowance reflects management’s continuing evaluation of industry
concentrations; specific credit risks; loan loss experience; current loan and
lease portfolio quality; present economic, political and regulatory conditions
and unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the allowance for loan and lease
losses inherently involves a high degree of subjectivity and requires the
Company to make significant estimates of current credit risks and future trends,
all of which may undergo material changes. Changes in economic conditions
affecting borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of the
Company’s control, may require an increase in the allowance for loan losses. In
addition, bank regulatory agencies periodically review the Company’s allowance
for loan losses and may require an increase in the provision for loan losses or
the recognition of further loan charge-offs, based on judgments different than
those of management. In addition, if charge-offs in future periods exceed the
allowance for loan and lease losses, the Company will need additional provisions
to increase the allowance for loan and lease losses. These increases in the
allowance for loan and lease losses will result in a decrease in net income and,
possibly, capital, and may have a material adverse effect on the Company’s
financial condition and results of operations. See the section captioned
“Allowance for Loan and Lease Losses, Provision for Loan and Lease Losses, and
Nonperforming Assets” in Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations located elsewhere in this report
for further discussion related to the Company’s process for determining the
appropriate level of the allowance for loan and losses.
Strong
competition within our industry and market area could hurt our performance and
slow our growth.
The
Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include national, regional, and
community banks within the various markets the Company operates. Additionally,
various out-of-state banks continue to enter or have announced plans to enter
the market areas in which the Company currently operates. The Company also faces
competition from many other types of financial institutions, including, without
limitation, savings and loans, credit unions, finance companies, brokerage
firms, insurance companies, and other financial intermediaries. The financial
services industry could become even more competitive as a result of legislative,
regulatory and technological changes and continued consolidation. Banks,
securities firms and insurance companies can merge under the umbrella of a
financial holding company, which can offer virtually any type of financial
service, including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. Also, technology has lowered barriers to
entry and made it possible for non-banks to offer products and services
traditionally provided by banks, such as automatic transfer and automatic
payment systems. Many of the Company’s competitors have fewer regulatory
constraints and may have lower cost structures. Additionally, due to their size,
many competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for
those products and services than the Company can.
The
Company’s ability to compete successfully depends on a number of factors,
including, among other things:
• The
ability to develop, maintain and build upon long-term customer relationships
based on top quality service, high ethical standards and safe, sound
assets.
• The
ability to expand the Company’s market position.
• The
scope, relevance and pricing of products and services offered to meet customer
needs and demands.
• The
rate at which the Company introduces new products and services relative to its
competitors.
•
Customer satisfaction with the Company’s level of service.
•
Industry and general economic trends.
Failure
to perform in any of these areas could significantly weaken the Company’s
competitive position, which could adversely affect the Company’s growth and
profitability, which, in turn, could have a material adverse effect on the
Company’s financial condition and results of operations.
There
can be no assurance that recent government action will help stabilize the U.S.
financial system and will not have unintended adverse consequences.
In recent
periods, the U.S. government and various federal agencies and bank regulators
have taken steps to stabilize and stimulate the financial services industry.
Changes also have been made in tax policy for financial
institutions. The Emergency Economic Stabilization Act of 2008 (the
“EESA”) was an initial legislative response to the financial crises affecting
the banking system and financial markets and going concern threats to financial
institutions. Pursuant to the EESA, the U.S. Treasury will have the authority
to, among other things, purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial instruments from
financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets. As an initial program, the U.S. Treasury is
exercising its authority to purchase an aggregate of $250 billion of capital
instruments from financial entities throughout the United
States. Other government action, such as the recently announced
Homeowner Affordability and Stability Plan are intended to prevent mortgage
defaults and foreclosures, which may provide benefits to the economy as a whole,
but may reduce the value of certain mortgage loans or related mortgage-related
securities investors such as the Company may hold. There can be no
assurance as to the actual impact that these or other government actions will
have on the financial markets, including the extreme levels of volatility and
limited credit availability currently being experienced. The failure of the EESA
and other measures to help stabilize the financial markets and a continuation or
worsening of current financial market conditions could materially and adversely
affect the Company’s business, financial condition, results of operations,
access to credit or the trading price of its common stock.
We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.
The
Company, primarily through the Bank and certain non-bank subsidiaries, is
subject to extensive federal regulation and supervision. Banking regulations are
primarily intended to protect depositors’ funds, federal deposit insurance funds
and the banking system as a whole, not shareholders. These regulations affect
the Company’s lending practices, capital structure, investment practices,
dividend policy and growth, among other things. Congress and federal regulatory
agencies continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect the Company in substantial and unpredictable ways. Such
changes could subject the Company to additional costs, limit the types of
financial services and products the Company may offer and/or increase the
ability of non-banks to offer competing financial services and products, among
other things. Failure to comply with laws, regulations or policies could result
in sanctions by regulatory agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on the Company’s business,
financial condition and results of operations. While the Company has policies
and procedures designed to prevent any such violations, there can be no
assurance that such violations will not occur. See the section captioned
“Supervision and Regulation” which is located in Item 1. Business in the
Company’s Annual Report on Form 10-K.
Our
ability to service our debt, pay dividends and otherwise pay our obligations as
they come due is substantially dependent on capital distributions from our
subsidiaries.
The
Company is a separate and distinct legal entity from its subsidiaries. It
receives substantially all of its revenue from dividends from its subsidiaries.
These dividends are the principal source of funds to pay dividends on the
Company’s common stock and interest and principal on the Company’s debt. Various
federal and/or state laws and regulations limit the amount of dividends that the
Bank may pay to the Company. Also, the Company’s right to participate in a
distribution of assets upon a subsidiary’s liquidation or reorganization is
subject to the prior claims of the subsidiary’s creditors. In the event the Bank
is unable to pay dividends to the Company, the Company may not be able to
service debt, pay obligations or pay dividends on the Company’s common stock.
The inability to receive dividends from the Bank could have a material adverse
effect on the Company’s business, financial condition and results of
operations.
We
are subject to security and operational risks relating to our use of technology
that could damage our reputation and our business.
The
Company relies heavily on communications and information systems to conduct its
business. Any failure, interruption or breach in security of these systems could
result in failures or disruptions in the Company’s customer relationship
management, general ledger, deposit, loan and other systems. While the Company
has policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of its information systems, there can
be no assurance that any such failures, interruptions or security breaches will
not occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures, interruptions or security breaches of the Company’s
information systems could damage the Company’s reputation, result in a loss of
customer business, subject the Company to additional regulatory scrutiny, or
expose the Company to civil litigation and possible financial liability, any of
which could have a material adverse effect on the Company’s financial condition
and results of operations.
We
continually encounter technological change and the failure to understand and
adapt to these changes could hurt our business.
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. The Company’s future
success depends, in part, upon its ability to address the needs of its customers
by using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in the Company’s
operations. Many of the Company’s competitors have substantially greater
resources to invest in technological improvements. The Company may not be able
to effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers. Failure to
successfully keep pace with technological changes affecting the financial
services industry could have a material adverse impact on the Company’s business
and, in turn, the Company’s financial condition and results of
operations.
Provisions
of our certificate of incorporation, by-laws and stockholder rights plan, as
well as Delaware law and certain banking laws, could delay or prevent a takeover
of us by a third party.
Provisions
of the Company’s certificate of incorporation and by-laws, the Company’s stock
purchase rights plan, the corporate law of the State of Delaware and state and
federal banking laws, including regulatory approval requirements, could delay,
defer or prevent a third party from acquiring the Company, despite the possible
benefit to the Company’s stockholders, or otherwise adversely affect the market
price of the Company’s common stock. These provisions include: supermajority
voting requirements for certain business combinations; the election of directors
to staggered terms of three years; and advance notice requirements for
nominations for election to the Company’s board of directors and for proposing
matters that stockholders may act on at stockholder meetings. In addition, the
Company is subject to Delaware law, which among other things prohibits the
Company from engaging in a business combination with any interested stockholder
for a period of three years from the date the person became an interested
stockholder unless certain conditions are met. These provisions may discourage
potential takeover attempts, discouraging bids for the Company’s common stock at
a premium over market price or adversely affect the market price of, and the
voting and other rights of the holders of, the Company’s common stock. These
provisions could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors other than candidates nominated by
the Board.
Recent
negative developments in the housing market, financial industry and the domestic
and international credit markets may adversely affect our operations and
results.
Dramatic
declines in the housing market over the past year, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of mortgage loans and resulted in significant
write-downs of asset values by financial institutions. Reflecting
concern about the stability of the financial markets generally and the strength
of counterparties, many lenders and institutional investors have reduced or
ceased providing funding to borrowers, including to other financial
institutions. This market turmoil and tightening of credit have led to an
increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction of business
activity generally.
The
resulting economic pressure on consumers and lack of confidence in the financial
markets has adversely affected our business, financial condition and results of
operations. In particular, we have seen increases in foreclosures in our
markets, increases in expenses such as FDIC premiums and pension expenses, and a
declining reinvestment rate environment. We do not expect that the
difficult conditions in the financial and housing markets are likely to improve
in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions. In particular, we may be affected in one or more of the following
ways:
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We
expect to face increased regulation of our industry. Compliance with such
regulation may increase our costs and limit our ability to pursue business
opportunities.
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Customer
confidence levels may continue to decline and increase delinquencies and
default rates, which could impact our charge-offs and provision for loan
losses.
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Our
ability to borrow from other financial institutions or to access the debt
or equity capital markets on favorable terms or at all could be adversely
affected by further disruptions in the capital
markets.
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Competition
in our industry could intensify as a result of the increasing
consolidation of financial services companies in connection with current
market conditions.
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We
will continue to be required to pay significantly higher FDIC premiums
than in the past.
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We
are subject to other-than-temporary impairment risk which could negatively
impact our financial performance.
The
Company recognizes an impairment charge when the decline in the fair value of
equity, debt securities and cost-method investments below their cost basis are
judged to be other-than-temporary. Significant judgment is used to identify
events or circumstances that would likely have a significant adverse effect on
the future use of the investment. The Company considers various factors in
determining whether an impairment is other-than-temporary, including the
severity and duration of the impairment, forecasted recovery, the financial
condition and near-term prospects of the investee, and our ability and intent to
hold the investment for a period of time sufficient to allow for any anticipated
recovery in market value. Information about unrealized gains and losses is
subject to changing conditions. The values of securities with unrealized gains
and losses will fluctuate, as will the values of securities that we identify as
potentially distressed. Our current evaluation of other-than-temporary
impairments reflects our intent to hold securities for a reasonable period of
time sufficient for a forecasted recovery of fair value. However, our intent to
hold certain of these securities may change in future periods as a result of
facts and circumstances impacting a specific security. If our intent to hold a
security with an unrealized loss changes, and we do not expect the security to
fully recover prior to the expected time of disposition, we will write down the
security to its fair value in the period that our intent to hold the security
changes.
The
process of evaluating the potential impairment of goodwill and other intangibles
is highly subjective and requires significant judgment. The Company estimates
expected future cash flows of its various businesses and determines the carrying
value of these businesses. The Company exercises judgment in
assigning and allocating certain assets and liabilities to these businesses. The
Company then compares the carrying value, including goodwill and other
intangibles, to the discounted future cash flows. If the total of future cash
flows is less than the carrying amount of the assets, an impairment loss is
recognized based on the excess of the carrying amount over the fair value of the
assets. Estimates of the future cash flows associated with the assets are
critical to these assessments. Changes in these estimates based on changed
economic conditions or business strategies could result in material impairment
charges in future periods.
We
may be adversely affected by the soundness of other financial
institutions.
The
Company owns common stock of FHLB of New York in order to qualify for membership
in the FHLB system, which enables it to borrow funds under the FHLB of New
York’s advance program. The carrying value and fair market value of
our FHLB of New York common stock was $37.9 million as of March 31,
2009.
There are
12 branches of the FHLB, including New York. Several members have
warned that they have either breached risk-based capital requirements or that
they are close to breaching those requirements. To conserve capital,
some FHLB branches are suspending dividends, cutting dividend payments, and not
buying back excess FHLB stock that members hold. FHLB of New York has
stated that they expect to be able to continue to pay dividends, redeem excess
capital stock, and provide competively priced advances in the
future. The most severe problems in FHLB have been at some of the
other FHLB branches. Nonetheless, the 12 FHLB branches are jointly
liable for the consolidated obligations of the FHLB system. To the
extent that one FHLB branch cannot meet its obligations to pay its share of the
system’s debt, other FHLB branches can be called upon to make the
payment.
Item 2 –
Unregistered Sales of Equity Securities and Use of
Proceeds
(c)
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The
Company made no purchases of its equity securities during the quarter
ended March 31, 2009. At March 31, 2009, there were 1,000,000
shares available for repurchase under the stock repurchase plan authorized
on January 28, 2008, in the amount of 1,000,000 shares. This
plan expires on December 31, 2009.
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Item 3
– Defaults Upon Senior Securities
None
Item 4
– Submission of Matters to a Vote of Security Holders
None
Item 5
– Other Information
None
3.1 Certificate
of Incorporation of NBT Bancorp Inc. as amended through July 23, 2001 (filed as
Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2008,
filed on March 2, 2009 and incorporated herein by reference).
3.2 By-laws
of NBT Bancorp Inc. as amended and restated through July 23, 2001 (filed as
Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2008,
filed on March 2, 2009 and incorporated herein by reference).
3.3 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 4.3 to the
Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed on
December 27, 2005 and incorporated herein by reference).
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1
Written Statement of the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2
Written Statement of the Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized, this 11th day of May 2009.
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NBT
BANCORP INC.
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By:
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/s/
Michael J. Chewens
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Michael
J. Chewens, CPA
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Senior
Executive Vice President
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Chief
Financial Officer and Corporate Secretary
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3.1 Certificate
of Incorporation of NBT Bancorp Inc. as amended through July 23, 2001 (filed as
Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2008,
filed on March 2, 2009 and incorporated herein by reference).
3.2 By-laws
of NBT Bancorp Inc. as amended and restated through July 23, 2001 (filed as
Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2008,
filed on March 2, 2009 and incorporated herein by reference).
3.3 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 4.3 to the
Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed on
December 27, 2005 and incorporated herein by reference).
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Written Statement of the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Written Statement of the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
43