NBT Bancorp Corresp 3-29-2007
NBT
BANCORP INC.
52
South
Broad Street
Norwich,
New York 13815
March
29,
2007
Via
EDGAR AND FACSIMILE
John
P.
Nolan
Accounting
Branch Chief
United
States Securities and Exchange Commission
Washington,
D.C. 20549
Form
10-K
for the Fiscal Year Ended December 31, 2006
Filed
March 1, 2007
File
No.
000-14703
Dear
Mr.
Nolan:
This
letter responds to your comment letter dated March 15, 2007 in connection with
the above-referenced filing. In preparing this letter, the NBT Bancorp Inc.
(NBT) response is keyed to the identically numbered comment in your March 15
letter.
Comment
1:
In
2006,
prior to adoption of the December 2006 Interagency Policy Statement on the
Allowance for Loan Losses (“Interagency Guidance”), NBT revised the manner in
which loss rates are estimated on graded commercial and agricultural loan
portfolios. This change was done based on discussions with regulatory staff
of
the Office of the Comptroller of the Currency, and in anticipation of the
Interagency Guidance about which OCC staff advised NBT. While NBT believes
its
methodology is consistent with the Interagency Guidance, NBT does not believe,
and did not mean to imply, that the Interagency Guidance changed the manner
in
which the allowance for loan losses should be estimated.
Prior
to
2006, NBT estimated loss rates by starting with loss percentages customarily
used by bank regulators for such graded loans, and adjusted the resulting
amounts based upon credit quality trending data such as charge-off experience,
trending in non-performing loans, and delinquency trends. Further consideration
was given to economic and environmental factors.
For
2006,
the sole change was simply to start the estimate of loss rates with actual
loan
charge off levels. This starting point is similarly adjusted for qualitative
factors, including credit quality trending data such as trending in
non-performing loans, delinquency trends, and economic and environmental
factors. Thus, while NBT’s starting point is different, assuming the adjustments
are correctly analyzed, the results should be generally the same under either
methodology. However, under the revised system, NBT believes that using
historical loss rates should give a more accurate (rather than arbitrary)
starting point.
Estimated
loss rates used in NBT’s allowance for loan loss analysis at December 31, 2006
for the commercial and agricultural loan portfolios were improved over 2005
due
to certain improvements that occurred during 2006, such as positive trends
in
nonperforming loans to total loans, potential problem loans to total loans,
and
delinquencies. The improvement in the loss rates for the commercial and
agricultural loan portfolio during 2006 resulted in a 40 basis point decline
in
the amount of allowance for loan losses allocated to this portfolio, from 2.3%
at December 31, 2005 to 1.9% in 2006. As noted above, NBT does not believe
the
result would have been significantly different under the approach to estimating
the allowance for loan losses used at December 31, 2005 or the approach used
at
December 31, 2006, because both approaches would have incorporated the positive
trends discussed above in a similar manner.
The
above
described revision in the manner in which loss rates are estimated relates
only
to the commercial and agricultural loan portfolio. There was no change with
respect to the manner in which the loss rates are estimated for the real estate
mortgage or consumer loan portfolios. Historically, estimation of loss rates
for
the real estate and consumer portfolios has been based on actual historical
charge-off levels, adjusted for environmental factors. Each quarter, NBT
challenges and reassess the environmental loss factors used in the allowance
calculation. During 2006, NBT increased the environmental loss factors for
the
consumer portfolio based on recent environmental changes and trends. These
loss
factor increases were caused by an increase in delinquencies, rising interest
rates and their impact on variable rate loan customers’ paying capacity, and
concerns over real estate values that collateralize home equity lines of credit.
These considerations resulted in an increase to the environmental factors
relative to the consumer portfolio, which resulted in a 19 basis point increase
in the amount of allowance allocated to this portfolio, from 1.23% at December
31, 2005 to 1.42% at December 31, 2006. The amount allocated to the real estate
portfolio remained relatively flat (45 basis points at December 31, 2005 and
46
basis points at December 31, 2006) as delinquencies have improved in this
portfolio. The improvement in delinquencies was offset by concerns over real
estate values and rising interest rates, as noted above.
Comment
2:
NBT
has
identified the following operating segments in accordance with paragraphs 10
-
15 of Statement of Financial Accounting Standards (SFAS) No. 131 Disclosures
about Segments of an Enterprise and Related Information:
|
·
|
Broker/dealer
and insurance
|
They
are
considered operating segments at NBT because (a) they each represent business
activities from which the Company earns revenues and incurs expenses; (b) the
Company’s chief operating decision maker (the CEO) regularly reviews the
operating results of these components of the Company in order to make decisions
about resources to be allocated to the segment and assess their performance;
and
(c) financial information is available for each of these components of the
Company.
The
Company determined that the trust and broker/dealer and insurance operating
segments do not meet the criteria for separate disclosure because they do not
meet the quantitative thresholds, as described in paragraph 18 of SFAS No.
131.
These operating segments combined had approximately $9.6 million in revenues
and
$2.1 million in net income for the year ended December 31, 2006. Total assets
of
these operating segments totaled $5.0 million at December 31, 2006. As NBT’s
consolidated revenue and net income in 2006 totaled approximately $337.5 million
and $55.9 million, respectively, and consolidated assets at December 31, 2006
totaled approximately $5.1 billion, the revenues, absolute profit and total
assets of these segments were not greater than 10% of the respective combined
revenue, profits and assets of all operating segments.
The
two
geographic operating divisions noted in your comment letter, Pennstar Bank
and
NBT Bank, are considered part of the community banking operating segment and
are
not separate operating segments. In fact, they are one legal entity - NBT Bank,
National Association. The primary purpose behind using two names for NBT’s
community banking operation is merely geographic nomenclature. Because so much
of NBT’s banking segment was obtained by acquisition and merger, NBT uses the
marketing nomenclatures in order to maintain as much of a local feel as possible
to both New York and Pennsylvania customers. This is a common approach to
community banking. NBT Bank is used on the New York area branches, and Pennstar
is used on the Pennsylvania locations. These are contiguous geographic areas,
with generally contiguous and similar local economies.
The
financial results are prepared and reviewed internally on a single bank basis.
The chief operating decision maker of the bank and NBT both rely on results
of
the entire combined community banking segment in order to make decisions about
resource allocation and performance assessment.
All
operational functions, including, for example, loan underwriting, and items
processing, are centralized. As noted above, there is only one bank charter
in
NBT, and it has only one branch network. Customers are able to bank at any
branch in the combined network. OCC examiners review only one bank, and
financial statements are prepared and filed with bank regulators solely for
one
bank. All of the community bank’s operations are overseen by one individual
(President of Retail Banking), who reports directly to NBT’s CEO. Incentive
compensation for employees of the community banking segment is based on the
results of the entire bank. Asset and liability management decisions, including
the determination of loan and deposit rates, are centralized for the bank.
As
such, Pennstar Bank and NBT Bank are not considered separate operating segments.
*
* *
In
filing
this response, NBT acknowledges that:
·
|
NBT
is responsible for the adequacy and accuracy of the disclosure in
the
filing;
|
·
|
Staff
comments or changes to disclosure in response to staff comments do
not
foreclose the Commission from taking any action with respect to the
filing; and
|
·
|
NBT
may not assert staff comments as a defense in any proceeding initiated
by
the Commission or any person under the federal securities law of
the
United States.
|
Please
call me at (607-337-6520) if you have any further comments or questions.
Sincerely,
/S/
Michael J. Chewens
Senior
Executive Vice President, Chief Financial Officer and Corporate
Secretary