SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 2002.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
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 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
--- ---
As of July 31, 2002, there were 33,129,923 shares outstanding of the
Registrant's common stock, $0.01 par value.
1
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended June 30, 2002
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2002, December 31, 2001
(Audited), and June 30, 2001
Consolidated Statements of Income for the three month and six month
periods ended June 30, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the six month
periods ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2002 and 2001
Consolidated Statements of Comprehensive Income (Loss) for the three
month and six month periods ended June 30, 2002 and 2001
Notes to Unaudited Interim Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
2
NBT BANCORP INC. AND SUBSIDIARIES JUNE 30, December 31, June 30,
CONSOLIDATED BALANCE SHEETS 2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data) (UNAUDITED) (Unaudited)
ASSETS
Cash and due from banks $ 108,456 $ 123,201 $ 94,153
Short-term interest bearing accounts 5,950 6,756 6,975
Trading securities, at fair value 280 126 9,658
Securities available for sale, at fair value 988,538 909,341 965,969
Securities held to maturity (fair value - $89,880, $101,495
and $104,063) 88,882 101,604 104,477
Federal Reserve and Federal Home Loan Bank stock 23,372 21,784 23,333
Loans and leases 2,336,041 2,339,636 2,353,075
Less allowance for loan and lease losses 43,719 44,746 34,126
- -------------------------------------------------------------------------------------------------------------------------
Net loans and leases 2,292,322 2,294,890 2,318,949
Premises and equipment, net 61,716 62,685 61,166
Goodwill 15,476 15,476 15,133
Intangible assets, net 31,977 35,212 36,155
Other assets 61,129 67,127 65,261
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,678,098 $ 3,638,202 $ 3,701,229
=========================================================================================================================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 424,615 $ 431,407 $ 393,173
Savings, NOW, and money market 1,119,730 1,097,156 1,027,541
Time 1,323,300 1,387,049 1,501,387
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 2,867,645 2,915,612 2,922,101
Short-term borrowings 122,903 122,013 146,473
Long-term debt 350,729 272,331 276,865
Other liabilities 37,903 44,891 46,081
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,379,180 3,354,847 3,391,520
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures 17,000 17,000 17,000
Stockholders' equity:
Preferred stock, $0.01 par value; shares authorized-2,500,000; none issued - - -
Common stock, $0.01 par value; shares authorized-50,000,000;
shares issued 34,401,212, 34,252,661, and 34,218,062
at June 30, 2002, December 31, 2001, and June 30, 2001, respectively 344 343 342
Additional paid-in-capital 210,445 209,176 208,817
Retained earnings 82,769 72,531 95,514
Unvested restricted stock awards (189) - -
Accumulated other comprehensive income 9,214 3,921 864
Treasury stock at cost 1,219,970, 1,147,848,
and 716,793 shares at June 30, 2002, December 31, 2001
and June 30, 2001, respectively (20,665) (19,616) (12,828)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 281,918 266,355 292,709
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $ 3,678,098 $ 3,638,202 $ 3,701,229
=========================================================================================================================
See notes to unaudited interim consolidated financial statements.
3
Three months ended Six months ended
NBT BANCORP INC. AND SUBSIDIARIES June 30, June 30,
CONSOLIDATED STATEMENTS OF INCOME 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
INTEREST, FEE AND DIVIDEND INCOME:
Loans $ 41,390 $ 46,941 $ 83,617 $ 95,093
Securities available for sale 14,613 15,130 28,180 30,754
Securities held to maturity 1,170 1,330 2,416 2,708
Trading securities 2 300 4 345
Other 315 500 595 1,201
- ----------------------------------------------------------------------------------------------------
Total interest, fee and dividend income 57,490 64,201 114,812 130,101
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 16,265 25,950 33,256 54,155
Short-term borrowings 287 1,410 635 3,429
Long-term debt 3,856 3,336 7,494 6,633
- ----------------------------------------------------------------------------------------------------
Total interest expense 20,408 30,696 41,385 64,217
- ----------------------------------------------------------------------------------------------------
Net interest income 37,082 33,505 73,427 65,884
Provision for loan and lease losses 2,092 6,872 4,103 8,083
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 34,990 26,633 69,324 57,801
- ----------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Trust 1,154 1,070 2,174 2,116
Service charges on deposit accounts 3,239 3,226 6,289 5,997
Broker/dealer and insurance fees 1,483 900 2,978 1,923
Net securities (losses) gains 69 227 (433) 1,250
Gain on sale of a building - - - 1,367
Gain on sale of branch, net - - 220 -
Other 2,359 2,280 4,970 4,727
- ----------------------------------------------------------------------------------------------------
Total noninterest income 8,304 7,703 16,198 17,380
- ----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 12,649 11,569 25,305 23,302
Office supplies and postage 1,227 1,282 2,124 2,361
Occupancy 2,096 2,179 4,265 4,466
Equipment 1,818 1,700 3,532 3,433
Professional fees and outside services 1,782 1,480 3,397 2,600
Data processing and communications 2,598 2,348 5,163 5,004
Amortization of intangible assets 830 1,012 1,690 1,976
Capital securities 230 341 446 745
Deposit overdraft write-offs - - - 2,125
Loan collection and other real estate owned 781 483 1,725 807
Other operating 3,175 2,760 5,869 4,985
- ----------------------------------------------------------------------------------------------------
Total noninterest expense 27,186 25,154 53,516 51,804
- ----------------------------------------------------------------------------------------------------
Income before income taxes 16,108 9,182 32,006 23,377
Income taxes 5,261 2,612 10,507 7,153
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 10,847 $ 6,570 $ 21,499 $ 16,224
====================================================================================================
Earnings per share:
Basic $ 0.33 $ 0.20 $ 0.65 $ 0.50
Diluted $ 0.32 $ 0.20 $ 0.64 $ 0.49
====================================================================================================
See notes to unaudited interim consolidated financial statements.
4
NBT BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Unvested Other
Common Paid-in- Retained Restricted Comprehensive
Stock Capital Earnings Stock Income (loss)
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2000 $ 332 $ 195,422 $ 88,921 - $ (1,934)
Net income 16,224
Cash dividends - $0.34 per share (1) (9,631)
Retirement of 63,034 shares of
treasury stock of pooled
company (1) (708)
Purchase of 271,939 treasury shares
Issuance of 164,885 shares to
employee benefits plans and
other stock plans, including
tax benefit (1,888)
Issuance of 1,075,365 shares to
purchase First National
Bancorp, Inc. 11 15,991
Other comprehensive income 2,798
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 $ 342 $ 208,817 $ 95,514 - $ 864
==============================================================================================================================
BALANCE AT DECEMBER 31, 2001 $ 343 $ 209,176 $ 72,531 - $ 3,921
Net income 21,499
Cash dividends - $0.34 per share (11,261)
Purchase of 72,900 treasury shares
Issuance of 162,421 shares to
employee benefit plans and other
stock plans, including tax benefit 1 1,296
Grant of 14,648 shares of restricted
stock awards (27) (222)
Amortization of restricted stock
awards 33
Other comprehensive income 5,293
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ 344 $ 210,445 $ 82,769 $ (189) $ 9,214
- ------------------------------------------------------------------------------------------------------------------------------
NBT BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- ----------------------------------------------------------------------------------
Treasury
Stock Total
- ----------------------------------------------------------------------------------
(in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2000 $ (13,100) $269,641
Net income 16,224
Cash dividends - $0.34 per share (1) (9,631)
Retirement of 63,034 shares of
treasury stock of pooled
company 709 -
Purchase of 271,939 treasury shares (3,949) (3,949)
Issuance of 164,885 shares to
employee benefits plans and
other stock plans, including
tax benefit 3,512 1,624
Issuance of 1,075,365 shares to
purchase First National
Bancorp, Inc. 16,002
Other comprehensive income 2,798
- ----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 $ (12,828) $292,709
==================================================================================
BALANCE AT DECEMBER 31, 2001 $ (19,616) $266,355
Net income 21,499
Cash dividends - $0.34 per share (11,261)
Purchase of 72,900 treasury shares (1,171) (1,171)
Issuance of 162,421 shares to
employee benefit plans and other
stock plans, including tax benefit (127) 1,170
Grant of 14,648 shares of restricted
stock awards 249 --
Amortization of restricted stock
awards 33
Other comprehensive income 5,293
- ----------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ (20,665) $281,918
- ----------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
Note:
(1) For the period ended June 30, 2001, dividends per share data represents
historical dividends per share of NBT Bancorp Inc. stand-alone and the cash
dividends paid represents NBT Bancorp Inc. and CNB Financial Corp combined
as all unaudited interim consolidated financial statements have been
restated to give effect to the merger with CNB Financial Corp., which was
accounted for as a pooling-of-interests and closed on November 8, 2001.
5
NBT BANCORP INC. AND SUBSIDIARIES Six Months Ended June 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 2002 2001
- ------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 21,499 $ 16,224
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 4,103 8,083
Depreciation of premises and equipment 3,451 2,924
Net accretion on securities (866) (911)
Amortization of intangible assets 1,690 1,976
Amortization of restricted stock awards 33 -
Proceeds from sale of loans held for sale 3,965 11,282
Origination of loans held for sale (3,114) (12,899)
Net losses (gains) on sales of loans 50 (88)
Net (gain) loss on sale of other real estate owned (50) 211
Net security losses (gains) 433 (1,250)
Proceeds from maturities of trading securities - 775
Proceeds from sale of trading securities - 20,709
Purchases of trading securities (166) (6,588)
Gain on sale of a building - (1,367)
Gain on sale of a branch, net (220) -
Net decrease (increase) in other assets 2,954 (2,611)
Net decrease in other liabilities (6,245) (4,734)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,517 31,736
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net cash and cash equivalents provided by acquisitions - 9,509
Net cash paid in conjunction with branch sale (29,171) -
Securities available for sale:
Proceeds from maturities 141,582 144,194
Proceeds from sales 156,799 49,389
Purchases (368,278) (197,563)
Securities held to maturity:
Proceeds from maturities 30,000 23,052
Purchases (17,330) (11,548)
(Purchases ) proceeds of FRB and FHLB stock (1,588) 8,802
Net increase in loans (6,821) (39,725)
Purchase of premises and equipment, net (3,390) (3,659)
Proceeds from sales of other real estate owned 811 1,566
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (97,386) (15,983)
- ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in deposits (13,708) (30,747)
Net increase (decrease) in short-term borrowings 890 (38,701)
Proceeds from issuance of long-term debt 80,000 246,291
Repayments of long-term debt (1,602) (209,955)
Proceeds from issuance of treasury shares to
employee benefit plans and other stock plans,
including tax benefit 1,170 1,624
Purchase of treasury stock (1,171) (3,949)
Cash dividends (11,261) (9,631)
- ------------------------------------------------------------------------------------------
Net cash provided by (used) in financing activities 54,318 (45,068)
- ------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (15,551) (29,315)
Cash and cash equivalents at beginning of period 129,957 130,443
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 114,406 $ 101,128
==========================================================================================
( Continued )
6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: SIX MONTHS ENDED JUNE 30,
2002 2001
Cash paid during the period for:
Interest $ 44,898 $ 68,194
Income taxes 6,896 1,537
==============================================================================================
Loans transferred to OREO $ 1,277 1,775
Transfer of securities available for sale to trading securities - 3,804
BRANCH DIVESTITURE:
Assets sold $ 3,323 -
Liabilities sold 34,263 -
ACQUISITIONS:
- ----------------------------------------------------------------------------------------------
Fair value of assets acquired - 109,549
Fair value of liabilities assumed - 110,501
Common stock issued for acquisitions - 16,002
- ----------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
7
Three months ended Six months ended
NBT BANCORP INC. AND SUBSIDIARIES June 30, June 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Net Income $ 10,847 $ 6,570 $ 21,499 $ 16,224
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $16,103
$(2,794), $8,369 and $5,858] 9,662 (1,673) 5,037 3,423
Less: Reclassification adjustment for net (gains) losses
included in net income [pre-tax amounts of
$(70), $(1,327), $425 and $(1,040)] (42) (798) 256 (625)
- ----------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 9,620 (2,471) 5,293 2,798
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 20,467 $ 4,099 $ 26,792 $ 19,022
================================================================================================================
See notes to unaudited interim consolidated financial statements.
8
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements include the
accounts of NBT Bancorp Inc. (the Registrant) and its wholly-owned subsidiaries,
NBT Bank, N.A. (NBT or Bank), NBT Financial Services, Inc., and CNBF Capital
Trust I. 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.
The consolidated balance sheet at December 31, 2001 has been derived from
audited consolidated financial statements at that date. The accompanying
unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. For further information, refer to the consolidated financial statements
included in the Registrant's annual report on Form 10-K for the year ended
December 31, 2001 and notes thereto referred to above. The Company's unaudited
interim consolidated financial statements as of and for the periods ended June
30, 2001 have been restated to give effect to the merger with CNB Financial
Corp., which closed on November 8, 2001 and was accounted for as a
pooling-of-interests.
NOTE 2. 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 liabilites at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period, as well as the disclosures provided. Actual results could
differ from those estimates. Estimates associated with the allowance for loan
losses, fair values of financial instruments and status of contingencies are
particularly susceptible to material change in the near term.
NOTE 3. 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.
9
At June 30, 2002 and December 31, 2001, commitments to extend credit and unused
lines of credit totaled $441.3 million and $704.7 million, respectively, and
standby letters of credit totaled $21.6 million and $21.1 million, respectively
at those same dates. Since commitments to extend credit and unused lines of
credit may expire without being used, this amount does not necessarily represent
future cash commitments. Collateral obtained upon exercise of the commitment is
determined using managements credit evaluation of the borrower and may include
accounts receivable, inventory, property, land and other items.
NOTE 4. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders 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).
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 June 30, 2002 2001
- ---------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 33,157 32,874
Net income available to common shareholders $10,847 $ 6,570
- ---------------------------------------------------------------------------------
Basic EPS $ 0.33 $ 0.20
=================================================================================
Diluted EPS:
Weighted average common shares outstanding 33,157 32,874
Dilutive effect of common stock options and restricted stock 276 238
- ---------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 33,433 33,112
Net income available to common shareholders $10,847 $ 6,570
- ---------------------------------------------------------------------------------
Diluted EPS $ 0.32 $ 0.20
=================================================================================
Six months ended June 30, 2002 2001
- ---------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 33,125 32,663
Net income available to common shareholders $21,499 $16,224
- ---------------------------------------------------------------------------------
Basic EPS $ 0.65 $ 0.50
=================================================================================
Diluted EPS:
Weighted average common shares outstanding 33,125 32,663
Dilutive effect of common stock options and restricted stock 239 241
- ---------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 33,364 32,904
Net income available to common shareholders $21,499 $16,224
- ---------------------------------------------------------------------------------
Diluted EPS $ 0.64 $ 0.49
=================================================================================
10
There were 401,397 outstanding stock options for the quarter ended June 30,
2002 and 1,009,680 outstanding stock options for the quarter ended June 30, 2001
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. There were 927,943 outstanding stock options for the six
month period ended June 30, 2002 and 1,009,680 outstanding stock options for the
six month period ended June 30, 2001 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 5. MERGERS AND ACQUISITIONS
On June 1, 2001, the Company completed the acquisition of First National
Bancorp, Inc. (FNB) whereby FNB was merged with and into NBT Bancorp Inc. At
the same time FNB's subsidiary, First National Bank of Northern New York (FNB
Bank) was merged into the Bank. The acquisition was accounted for using the
purchase method. As such, both the assets and liabilities assumed have been
recorded on the consolidated balance sheet of the Company at estimated fair
value as of the date of acquisition and the results of operations are included
in the Company's consolidated statement of income from the acquisition date
forward. To complete the transaction, the Company issued approximately
1,075,000 shares of its common stock valued at $16.0 million. Goodwill,
representing the cost over net assets acquired, was approximately $7.0 million
and was being amortized prior to the adoption of SFAS No. 142 on January 1, 2002
on a straight-line basis based on a 20 year amortization period.
On September 14, 2001, the Company acquired $14.4 million in deposits from
Mohawk Community Bank. Unidentified intangible assets, accounted for in
accordance with SFAS No. 72 "Accounting for Certain Acquisitions of Banking or
Thrift Institutions" and representing the excess of cost over net assets
acquired, was $665,000 and is being amortized over 15 years on a straight-line
basis. Additionally, the Company identified $119,000 of core deposit intangible
asset.
On November 8, 2001, the Company, pursuant to a merger agreement dated June 18,
2001, completed its merger with CNB Financial Corp. (CNB) and its wholly owned
subsidiary, Central National Bank (CNB Bank), whereby CNB was merged with and
into the Company, and CNB Bank was merged with and into NBT Bank. CNB Bank then
became a division of the Bank. In connection with the merger, CNB stockholders
received 1.2 shares of the Company's common stock for each share of CNB stock
and the Company issued approximately 8.9 million shares of common stock. The
transaction was structured to be tax-free to shareholders of CNB and has been
accounted for as a pooling-of-interests. Accordingly, the June 30, 2001
unaudited consolidated financial statements have been restated to present
combined consolidated financial condition and results of operations of the
Company and CNB as if the merger had been in effect for all periods presented.
At September 30, 2001, CNB had consolidated assets of $983.1 million, deposits
of $853.7 million and equity of $62.8 million. CNB Bank operated 29 full
11
service banking offices in nine upstate New York counties.
At June 30, 2002, after payments of certain merger, acquisition and
reorganization costs, the Company had a remaining accrued liability for merger,
acquisition and reorganization costs related to the merger with CNB of $3.0
million, which was comprised mainly of severance costs (expected to be paid out
by the end of the year) and estimated costs related to branch closings (expected
to be settled by the end of the year except for certain long-term lease
commitments).
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective January 1, 2001. At that time,
the Company had certain embedded derivative instruments from the recently
acquired CNB Bank investment portfolio related to a deposit product and two debt
securities that had costs and returns linked to the performance of the NASDAQ
100 index. Management determined that these debt securities and the deposit
product did not qualify for hedge accounting under SFAS No. 133. The embedded
derivatives were separated from the underlying host instruments for financial
reporting purposes and accounted for at fair value. In connection with the
adoption of SFAS No. 133 as of January 1, 2001, the Company recorded a charge to
earnings for a transition adjustment of $159,000 ($95,000, after-tax) for the
net impact of recording these embedded derivatives on the consolidated balance
sheet at fair value. Due to the insignificance of the amount, the transition
adjustment is not reflected as a cumulative effect of a change in accounting
principle on the consolidated statement of income for the six months ended June
30, 2001 but is instead recorded in net securities (losses) gains. During the
year ended December 31, 2001, and before the closing of the CNB merger, the
Company recorded a $640,000 net loss related to the adjustment of the embedded
derivatives to fair value. As of December 31, 2001, the embedded derivatives
referred to above were completely written off as these derivatives had no value.
During the first quarter of 2002, the two debt securities with embedded
derivative instruments from the recently acquired CNB Bank investment portfolio
were sold at approximately their carrying value, as the securities did not meet
the risk profile of the Company's security portfolio.
On August 16, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. This Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Under this Statement, the liability is discounted and the
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. The FASB issued
this Statement to provide consistency for the accounting and reporting of
liabilities associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Earlier
application is permitted. The Company does not expect a material impact on its
consolidated financial statements when this Statement is adopted.
On October 3, 2001, The FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement
12
also supersedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The changes in this Statement improve financial
reporting by requiring that one accounting model be used for long-lived assets
to be disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company adopted the provisions of SFAS No. 144 effective January 1, 2002 and the
adoption did not have a material impact on its consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Upon adoption of SFAS No. 145, companies will be
required to apply the criteria in Accounting Principles Board, or APB, Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining the classification of gains
and losses resulting from the extinguishment of debt. Upon adoption, companies
must reclassify prior period items that do not meet the extraordinary item
classification criteria in APB Opinion No. 30. Additionally, SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. All other provisions of SFAS No.
145 are effective for transactions occurring and/or financial statements issued
on or after May 15, 2002. The implementation of SFAS No. 145 provisions, which
were effective May 15, 2002, did not have a material impact on our financial
condition or results of operations. The implementation of the remaining
provisions is not expected to have a material impact on our financial condition
or results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144.
The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and
adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 141
requires that upon adoption of SFAS No. 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
13
goodwill. Upon adoption of SFAS No. 142, the Company is required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. In addition, to the extent
an intangible asset is identified as having an indefinite useful life, the
Company is required to test the intangible asset for impairment in accordance
with the provisions of Statement 142 within the first interim period. Goodwill
is required to be tested for impairment as of the beginning of the fiscal year
in which the Statement is adopted. An entity has six months from the date it
adopted SFAS No. 142 to complete the first step of the transitional goodwill
impairment test, which is determining whether or not goodwill is impaired. If
it is determined that goodwill is impaired, the entity has until the end of the
year of adoption to complete step two, which is to measure the impairment. Any
impairment loss for either goodwill or intangible assets with indefinite useful
lives is to be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first interim
period.
During the first quarter of 2002, upon the implementation of SFAS No. 142, the
Company performed a reevaluation of the remaining useful lives of all previously
recognized intangible assets and found no adjustment necessary. The Company has
completed its transitional goodwill impairment evaluation and has concluded
there is no impairment losses from the adoption of SFAS No. 142. The Company
has not identified any intangible assets with indefinite useful lives.
Approximately $1.5 million of unidentified intangible assets from branch
acquisitions was written off and recorded as a component of the net gain on the
sale of a branch during the three months ended March 31, 2002.
Pro forma net income and net income per share for the three and six months ended
June 30, 2001, adjusted to eliminate historical amortization of goodwill and
related tax effects, are as follows:
Three months
ended June 30, 2001
----------------------
(in thousands, except per share data)
Reported net income $6,570
Add: goodwill amortization 179
------
Pro forma net income $6,749
======
Reported net income per share:
Basic $0.20
Diluted $0.20
Pro forma net income per share:
Basic $0.20
Diluted $0.20
14
Six months
ended June 30, 2001
----------------------
(in thousands, except per share data)
Reported net income $16,224
Add: goodwill amortization 328
-------
Pro forma net income $16,552
=======
Reported net income per share:
Basic $0.50
Diluted $0.49
Pro forma net income per share:
Basic $0.50
Diluted $0.50
The unidentified intangible assets acquired in the acquisition of a bank or
thrift (including acquisitions of branches), where the fair value of the
liabilities assumed exceeds the fair value of the assets acquired, is currently
amortized to expense under SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions." The FASB has undertaken a project to determine
whether unidentifiable intangible assets recorded under SFAS No. 72 should
continue to be amortized or, instead, be accounted for using the
non-amortization approach specified for goodwill under SFAS No. 142. In an
exposure draft of a proposed statement issued in May 2002, the FASB made a
preliminary decision that any unidentified intangible asset recognized as a
result of applying SFAS No. 72 shall continue to be amortized unless both of the
following criteria are met: (1) the transaction in which the unidentifiable
intangible asset arose was a business combination as defined by SFAS No. 141,
and (2) at the date the transaction was initially recorded, the depositor
relationship intangible was recognized separate from goodwill and has been
accounted for separate from goodwill since that time. Based on this preliminary
guidance, $35.6 million of the $36.4 million in unidentified intangible assets
from branch acquisitions recorded on the Company's books at June 30, 2002 will
continued to be amoritized when a final statement is issued by the FASB. The
FASB plans to issue a final Statement by the end of 2002.
The Company's intangible assets consist of the following:
June 30, December 31, June 30,
2002 2001 2001
---------- ------------- ---------
Core deposit intangibles $5,433 5,433 5,314
Unidentified intangible assets from
branch acquisitions 36,404 37,952 37,279
Accumulated amortization (9,860) (8,173) (6,438)
---------- ------------- ---------
Intangible assets, net $31,977 35,212 36,155
========== ============= =========
15
Estimated annual amortization expense of intangible assets, absent any
impairment or change in estimated useful lives is summarized as follows for each
of the next five years:
(in thousands)
For the years ending December 31,
2002 (remaining six months) $1,587
2003 3,095
2004 2,752
2005 2,752
2006 2,752
2007 2,752
NBT BANCORP INC. AND SUBSIDIARIES
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and results of operations of NBT
Bancorp Inc. (Bancorp) and its wholly owned subsidiaries, NBT Bank, N.A. (NBT),
NBT Financial Services, Inc., and CNBF Capital Trust I (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 2001 Form 10-K
for an understanding of the following discussion and analysis.
FORWARD LOOKING STATEMENTS
Certain statements in this filing and future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, contain forward-looking statements,
as defined in the Private Securities Litigation Reform Act. These statements may
be identified by the use of phrases such as "anticipate," "believe," "expect,"
"forecasts," "projects," or other similar terms. There are a number of
factors, many of which are beyond the Company's control that could cause actual
results to differ materially from those contemplated by the forward looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) revenues may be lower
than expected; (3) changes in the interest rate environment may reduce 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,
may adversely affect the businesses in which the Company is engaged; (6) costs
or difficulties related to the integration of the businesses of the Company and
its merger partners may be greater than expected; (7) expected cost savings
associated with recent mergers and acquisitions may not be fully realized or
realized within the expected time frames; (8) deposit attrition, customer loss,
or revenue loss following recent mergers and acquisitions may be greater than
16
expected; (9) competitors may have greater financial resources and develop
products that enable such competitors to compete more successfully than the
Company; and (10) adverse changes may occur in the securities markets or with
respect to inflation.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
Unless required by law, the Company does not undertake, and specifically
disclaims any obligations to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect statements to the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
17
OVERVIEW
The following table summarizes net income for the periods indicated in
accordance with accounting principles generally accepted in the United States of
America (GAAP) as well as on a core basis. Core net income, as used throughout
this discussion, excludes items that the Company considers nonoperating in
nature and include net securities losses and gains, gain on sale of a branch,
gain on sale of a building, certain deposit overdraft write-offs, and loan
valuation gains and losses:
THREE MONTHS ENDED JUNE 30, 2002 (IN 000'S EXCEPT PER SHARE DATA)
Estimated Diluted
Pre-Tax Tax Effect After Tax EPS
GAAP net income $ 16,108 $ 5,261 $ 10,847 $ 0.32
--------- ------------ ----------- ---------
Net security gains (69) (27) (42)
Loan valuation losses 18 8 10
--------- ------------ -----------
(51) (19) (32)
--------- ------------ -----------
Core net income $ 16,057 $ 5,242 $ 10,815
========= ============ ===========
THREE MONTHS ENDED JUNE 30, 2001 (IN 000'S EXCEPT PER SHARE DATA)
Estimated Diluted
Pre-Tax Tax Effect After Tax EPS
GAAP net income $ 9,182 $ 2,612 $ 6,570 $ 0.20
--------- ------------ ----------- ---------
Net security gains (227) (91) (136)
Loan valuation gains (6) (2) (4)
--------- ------------ -----------
(233) (93) (140)
--------- ------------ -----------
Core net income $ 8,949 $ 2,519 $ 6,430
========= ============ ===========
SIX MONTHS ENDED JUNE 30, 2002 (IN 000'S EXCEPT PER SHARE DATA)
Estimated Diluted
Pre-Tax Tax Effect After Tax EPS
GAAP net income $ 32,006 $ 10,507 $ 21,499 $ 0.64
--------- ------------ ----------- --------
Net security losses 433 173 260
Gain on sale of a branch, net (220) (88) (132)
Loan valuation losses 50 20 30
--------- ------------ -----------
263 105 158
--------- ------------ -----------
Core net income $ 32,269 $ 10,612 $ 21,657
========= ============ ===========
SIX MONTHS ENDED JUNE 30, 2001 (IN 000'S EXCEPT PER SHARE DATA)
Estimated Diluted
Pre-Tax Tax Effect After Tax EPS
GAAP net income $ 23,377 $ 7,153 $ 16,224 0.49
--------- ------------ ----------- --------
Gain on sale of a building (1,367) (545) (822)
Deposit overdraft write-offs 2,125 847 1,278
Net security gains (1,250) (499) (751)
Loan valuation gains (26) (10) (16)
--------- ------------ -----------
(518) (207) (311)
--------- ------------ -----------
Core net income $ 22,859 $ 6,946 $ 15,913
========= ============ ===========
18
Net securities gains and loan valuation gains and losses had no impact on
diluted earnings per share for the three months ended June 30, 2002 and
decreased diluted earnings per share by $0.01 for the same period in 2001. Net
securities losses, gain on sale of a branch, net, and loan valuation losses
increased diluted earnings per share by $0.01 for the six months ended June 30,
2002. Gain on sale of a building, deposit overdraft write-offs, net securities
gains, and loan valuation losses decreased diluted earnings per share by $0.01
for the six months ended June 30, 2001.
The Company earned net income of $10.8 million ($0.32 diluted earnings per
share) for the three months ended June 30, 2002 compared to net income of $6.6
million ($0.20 diluted earnings per share) for the same period in 2001. Core net
income was $10.8 million for the three months ended June 30, 2002 compared to
core net income of $6.4 million for the same period in 2001. The quarter to
quarter increase in core net income from 2001 to 2002 was due primarily to a
decrease in the provision for loan and lease losses of $4.8 million and
increases in net interest income of $3.6 million and noninterest income of $0.8
million, offset by increases in noninterest expense of $2.0 million and income
tax expense of $2.7 million.
The Company earned net income of $21.5 million ($0.64 diluted earnings per
share) for the six months ended June 30, 2002 compared to net income of $16.2
million ($0.49 diluted earnings per share) for the same period in 2001. Core net
income was $21.7 million for the six months ended June 30, 2002 compared to core
net income of $15.9 million for the same period in 2001. The increase in core
net income from 2001 to 2002 was due primarily to increases in net interest
income of $7.5 million and noninterest income of $1.7 million and a decrease in
the provision for loan and lease losses of $4.0 million, offset by increases in
noninterest expense of $3.8 million and income tax expense of $3.7 million.
The decrease in the provision for loan and lease losses resulted primarily from
an improvement in loan quality ratios and lower net charge-offs in 2002 compared
to 2001. The increase in net interest income resulted primarily from the
continued downward re-pricing of interest-bearing liabilities (primarily time
deposits) at a faster rate than earning assets. The Company's net interest
margin for the three months ended June 30, 2002 was 4.48%, up 38 basis points
from a net interest margin of 4.10% for the same period in 2001. The increase in
core noninterest income was due primarily to an increase in broker/dealer and
insurance fees. The increase in core noninterest expense resulted primarily from
increases in salaries and employee benefits, expenses associated with loan
collection and other real estate owned, professional fees and other operating
expenses. The increase in income tax expense was due primarily to a $9.4 million
increase in net income before taxes for the six months ended June 30, 2002.
19
Table 1 depicts several annualized measurements of performance using both GAAP
net income and core net income. Returns on average assets and equity measure how
effectively an entity utilizes its total resources and capital, respectively.
Both the return on average assets and the return on average equity ratios
increased for the quarter and year-to-date compared to the same periods in the
previous year.
Net interest margin, net federal taxable equivalent (FTE) interest income
divided by average interest-earning assets, is a measure of an entity's ability
to utilize its earning assets in relation to the cost of funding. Interest
income for tax-exempt securities and loans is adjusted to a taxable equivalent
basis using the statutory Federal income tax rate of 35%.
TABLE 1
PERFORMANCE MEASUREMENTS
- -------------------------------------------------------------
First SECOND SIX
Quarter QUARTER MONTHS
- -------------------------------------------------------------
2002
Return on average assets (ROAA) 1.21% 1.19% 1.20%
ROAA based on core net income 1.23% 1.19% 1.21%
Return on average equity (ROAE) 15.98% 15.89% 15.91%
ROAE based on core net income 16.26% 15.84% 16.03%
=============================================================
2001
Net interest margin 4.54% 4.48% 4.51%
ROAA 1.10% 0.73% 0.91%
ROAA based on core net income 1.08% 0.71% 0.90%
ROAE 14.42% 9.42% 11.87%
ROAE based on core net income 14.16% 9.22% 11.64%
Net interest margin 4.06% 4.10% 4.08%
=============================================================
20
TABLE 2
AVERAGE BALANCES AND NET INTEREST INCOME
Table 2 presents the Company's 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.
Three months ended June 30,
2002 2001
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 11,806 $ 89 3.02% $ 10,136 $ 126 4.99%
Trading securities 205 2 3.91 9,315 300 12.92
Securities available for sale (2) 964,555 15,142 6.30 933,886 15,521 6.67
Securities held to maturity (2) 98,040 1,531 6.26 100,401 1,683 6.72
Investment in FRB and FHLB Banks 20,965 226 4.32 22,767 374 6.59
Loans and leases (1) 2,317,838 41,575 7.19 2,293,641 47,169 8.25
---------- --------- ---------- ---------
Total interest earning assets 3,413,409 58,565 6.88 3,370,146 65,173 7.76
--------- ---------
Other assets 230,110 239,258
---------- ----------
TOTAL ASSETS $3,643,519 $3,609,404
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 271,762 1,086 1.60 $ 259,970 1,950 3.01
NOW deposit accounts 386,248 914 0.95 337,468 1,083 1.29
Savings deposits 479,811 1,809 1.51 417,206 2,397 2.30
Time deposits 1,357,057 12,456 3.68 1,501,767 20,520 5.48
---------- --------- ---------- ---------
Total interest bearing deposits 2,494,878 16,265 2.61 2,516,411 25,950 4.14
Short-term borrowings 75,672 287 1.52 130,239 1,410 4.34
Long-term debt 329,375 3,856 4.70 250,466 3,336 5.34
---------- --------- ---------- ---------
Total interest bearing liabilities 2,899,925 20,408 2.82% 2,897,116 30,696 4.25%
--------- ---------
Demand deposits 412,729 365,731
Other liabilities (3) 57,003 66,820
Stockholders' equity 273,862 279,737
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,643,519 $3,609,404
---------- ----------
NET INTEREST INCOME $ 38,157 $ 34,477
--------- ---------
INTEREST RATE SPREAD 4.06% 3.51%
-------- --------
NET INTEREST MARGIN 4.48% 4.10%
-------- --------
Taxable equivalent adjustment $ 1,075 $ 972
-------- --------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan and lease balances outstanding.
(2) Securities are shown at average amortized cost.
(3) Included in other liabilities is $17.0 million in the Company's guaranteed
preferred beneficial interests in Company's junior subordinated debentures.
21
Six months ended June 30,
2002 2001
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 12,674 $ 193 3.07% $ 12,754 $ 337 5.33%
Trading securities 166 4 4.86 6,913 345 10.06
Securities available for sale (2) 926,713 29,249 6.36 928,527 31,475 6.84
Securities held to maturity (2) 100,670 3,157 6.32 102,226 3,425 6.76
Investment in FRB and FHLB Banks 21,004 402 3.86 26,261 864 6.63
Loans and leases (1) 2,319,971 83,978 7.30 2,269,654 95,532 8.49
---------- --------- ---------- ---------
Total interest earning assets 3,381,198 116,983 6.98 3,346,335 131,978 7.95
--------- ---------
Other assets 232,084 236,180
---------- ----------
TOTAL ASSETS $3,613,282 $3,582,515
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 272,602 2,121 1.57 $ 254,838 4,261 3.37
NOW deposit accounts 382,498 1,828 0.96 334,636 2,622 1.58
Savings deposits 469,895 3,542 1.52 408,470 4,908 2.42
Time deposits 1,352,431 25,765 3.84 1,495,328 42,364 5.71
---------- --------- ---------- ---------
Total interest bearing deposits 2,477,426 33,256 2.71 2,493,272 54,155 4.38
Short-term borrowings 81,136 635 1.58 138,873 3,429 4.98
Long-term debt 318,935 7,494 4.74 245,419 6,633 5.45
---------- --------- ---------- ---------
Total interest bearing liabilities 2,877,497 41,385 2.90% 2,877,564 64,217 4.50%
--------- ---------
Demand deposits 409,086 359,099
Other liabilities (3) 54,209 70,174
Stockholders' equity 272,490 275,678
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,613,282 $3,582,515
---------- ----------
NET INTEREST INCOME $ 75,598 $ 67,761
--------- ---------
INTEREST RATE SPREAD 4.08% 3.45%
------- -------
NET INTEREST MARGIN 4.51% 4.08%
------- -------
Taxable equivalent adjustment $ 2,171 $ 1,877
---------- ---------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan and lease balances outstanding.
(2) Securities are shown at average amortized cost.
(3) Included in other liabilities is $17.0 million in the Company's guaranteed
preferred beneficial interests in Company's junior subordinated debentures.
22
Table 3 presents the changes in interest income, interest expense and net
interest income due to changes in volume and changes in rate. The net change
attributable to the combined impact of volume and rate has been allocated to
each in proportion to the absolute dollar amounts of change.
TABLE 3
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
Three months ended June 30,
- --------------------------------------------------------------------------------
INCREASE (DECREASE)
2002 OVER 2001
- --------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- --------------------------------------------------------------------------------
Short-term interest bearing accounts $ 18 $ (55) $ (37)
Trading securities (174) (124) (298)
Securities available for sale 499 (878) (379)
Securities held to maturity (39) (113) (152)
Investment in FRB and FHLB Banks (28) (120) (148)
Loans and leases 493 (6,087) (5,594)
- --------------------------------------------------------------------------------
Total interest income 827 (7,435) (6,608)
- --------------------------------------------------------------------------------
Money market deposit accounts 85 (949) (864)
NOW deposit accounts 142 (311) (169)
Savings deposits 322 (910) (588)
Time deposits (1,830) (6,234) (8,064)
Short-term borrowings (440) (683) (1,123)
Long-term debt 959 (439) 520
- --------------------------------------------------------------------------------
Total interest expense 30 (10,318) (10,288)
- --------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 797 $ 2,883 $ 3,680
================================================================================
Six months ended June 30,
- --------------------------------------------------------------------------------
INCREASE (DECREASE)
2002 OVER 2001
- --------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- --------------------------------------------------------------------------------
Short-term interest bearing accounts $ (2) $ (142) $ (144)
Trading securities (223) (118) (341)
Securities available for sale (61) (2,165) (2,226)
Securities held to maturity (51) (217) (268)
Investment in FRB and FHLB Banks (150) (312) (462)
Loans and leases 2,077 (13,631) (11,554)
- --------------------------------------------------------------------------------
Total interest income 1,362 (16,357) (14,995)
- --------------------------------------------------------------------------------
Money market deposit accounts 279 (2,419) (2,140)
NOW deposit accounts 336 (1,130) (794)
Savings deposits 659 (2,025) (1,366)
Time deposits (3,749) (12,850) (16,599)
Short-term borrowings (1,057) (1,737) (2,794)
Long-term debt 1,806 (945) 861
- --------------------------------------------------------------------------------
Total interest expense (1) (22,831) (22,832)
- --------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 1,363 $6,474 $ 7,837
================================================================================
23
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net Interest Income
- ---------------------
Net interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest-bearing
liabilities, primarily deposits and borrowings. Net interest income is affected
by the interest rate spread, the difference between the yield on earning assets
and cost of interest-bearing liabilities, as well as the volumes of such assets
and liabilities. Net interest income is one of the major determining factors in
a financial institution's performance as it is the principal source of earnings.
Table 2 represents an analysis of net interest income on a federal taxable
equivalent basis.
Federal taxable equivalent (FTE) net interest income increased $3.7 million
during the three months ended June 30, 2002 compared to the same period of 2001.
The increase in FTE net interest income resulted primarily from interest-bearing
liabilities re-pricing downward at a faster rate than earning assets. The rate
paid on interest-bearing liabilities decreased 143 basis points ("bp"), to 2.82%
for the three months ended June 30, 2002, from 4.25% for the same period in
2001. Meanwhile, the yield on earning assets decreased 88 bp, to 6.88% for the
three months ended June 30, 2002, from 7.76% for the same period in 2001.
Total FTE interest income for the three months ended June 30, 2002 decreased
$6.6 million compared to the same period in 2001, a result of the previously
mentioned decrease in yield on earning assets. The decrease in the yield on
earning assets can be primarily attributed to the falling rate environment in
2001. During the same time period, total interest expense decreased $10.3
million, primarily the result of the falling rate environment mentioned above,
as well as an improvement in the mix of the Company's interest-bearing
liabilities. Time deposits, the most significant component of interest-bearing
liabilities, decreased to 46.8% of interest-bearing liabilities for the three
months ended June 30, 2002 from 51.8% for the same period in 2001. Offsetting
this decrease in the interest-bearing liabilities mix, was an increase in lower
cost NOW, MMDA, and Savings deposits, to 39.2% of interest-bearing liabilities
for the three months ended June30, 2002 from 35.0% for the same period in 2001.
Total borrowings remained relatively unchanged, comprising 14.0% and 13.2% of
interest-bearing liabilities for the three months ended June 30, 2002 and 2001,
respectively.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin increased to 4.48% for the three months
ended June 30, 2002, up from 4.10% for the comparable period in 2001. The
increase in the net interest margin can be primarily attributed to the
previously mentioned increase in the interest rate spread driven by the decrease
in the cost of interest bearing liabilities exceeding the decrease in yield on
earning assets. Additionally, the net interest margin improved from the increase
in average noninterest-bearing demand deposits, which increased 12.9% from an
average of $365.7 million for the three months ended June 30, 2001 to $412.7
million for the same period in 2002. For the three months ended June 30, 2002,
average noninterest-bearing demand deposits comprised 12.5% of total average
interest-bearing liabilities and noninterest-bearing demand deposits, up from
11.2% for the same period in 2001.
24
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 JUNE 30,
2002 2001
------- ------
(in thousands)
Service charges on deposit accounts $3,239 $3,226
Broker/dealer and insurance fees 1,483 900
Trust 1,154 1,070
Other 2,377 2,274
------- ------
Total core noninterest income 8,253 7,470
Net securities gains 69 227
Loan valuation (losses) gains (18) 6
------- ------
Total $8,304 $7,703
====== ======
Core noninterest income for the three months ended June 30, 2002, which excludes
net securities gains and losses and loan valuation gains and losses, increased
10.5% to $8.3 million from $7.5 million for the same period in 2001. The primary
driver of this increase was the increase of $0.6 million in broker/dealer and
insurance fees. The increase in broker/dealer and insurance fees resulted
primarily from one of the Company's financial services providers, Colonial
Financial Services, Inc., which began operations in June 2001, resulting in a
full quarter of revenue of $0.4 million in the second quarter of 2002.
Included in noninterest income were net securities gains totaling $0.1 million
for the three months ended June 30, 2002. During the three month period end June
30, 2002, the Company sold $5.4 million of asset backed securities previously
held by CNB Financial Corp. (CNB), which the Company acquired on November 8,
2001, containing a higher level of credit risk due to a rapid deterioration in
the financial condition of the underlying collateral during the quarter,
resulting in a $4.5 million loss. Offsetting these losses, were gains of $4.6
million resulting primarily from the sale of various securities amounting to
$130.5 million. The securities sold were considered to generally contain a high
risk of rapid pre-payments in a falling rate environment. The proceeds from the
sale of these securities were invested in short duration, stable cash flow
producing mortgage-backed securities and short callable agency securities. These
transactions enabled the Company to improve the credit quality and stabilize the
cash flow stream of its investment portfolio.
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:
25
THREE MONTHS ENDED JUNE 30,
2002 2001
------- -------
(in thousands)
Salaries and employee benefits $12,649 $11,569
Occupancy 2,096 2,179
Equipment 1,818 1,700
Data processing and communications 2,598 2,348
Professional fees and outside services 1,782 1,480
Office supplies and postage 1,227 1,282
Amortization of intangible assets 830 1,012
Capital securities 230 341
Loan collection and other real estate owned 781 483
Other 3,175 2,760
------- -------
Total noninterest expense $27,186 $25,154
======= =======
Noninterest expense increased $2.0 million or 8.1% to $27.2 million for the
three months ended June 30, 2002 from $25.2 million for the same period in 2001.
Salaries and employee benefits increased $1.1 million or 9.3%, to $12.6 million
for the three months ended June 30, 2002 from $11.6 million for the same period
in 2001. The increase in salaries and employee benefits was due primarily to an
increase in incentive compensation of $0.9 million, resulting from improved
operating performance. Other expense increased $0.4 million, to $3.2 million for
the three months ended June 30, 2002 from $2.8 million for the same period in
2001. There were no significant increases for the various items that comprise
other expense. Professional fees and costs of outside services increased $0.3
million, to $1.8 million for the three months ended June 30, 2002 from $1.5
million for the same period in 2001. The increase in professional fees and costs
of outside services resulted mainly from professional fees for legal matters.
Loan collection and other real estate owned expenses increased $0.3 million, to
$0.8 million for the three months ended June 30, 2002 from $0.5 million for the
same period in 2001. This increase is due primarily to the increase in
nonperforming loans during 2001, which resulted in an increase in collection
activity and foreclosure costs during the three months ended June 30, 2002.
Given the increase in nonperforming loans in 2001, the Company anticipates an
increase in costs associated with loan collection and foreclosure activity when
compared to historical amounts.
Amortization of intangible assets decreased $0.2 million, to $0.8 million for
the three months ended June 30, 2002 from $1.0 million for the same period in
2001. The decrease in amortization of intangible assets resulted from the
adoption of SFAS No. 142. Had the requirements of SFAS No. 142 been applied to
the 2001 period, amortization of intangible assets would have been $0.8 million.
26
Income Taxes
- -------------
Income tax expense for the three months ended June 30, 2002 was $5.3 million for
an effective tax rate of 32.7%, compared to $2.6 million, or 28.4%, for the same
period in 2001. The lower tax rate in the 2001 period resulted primarily from
lower net income before tax when compared to the 2002 period, which resulted in
a greater benefit from favorable permanent differences.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Interest Income
- ---------------------
Net interest income on a federal taxable equivalent basis (FTE) increased $7.8
million to $75.6 million for 2002 compared to $67.8 million for 2001. The net
interest margin improved 43 bp from 4.08% to 4.51%. The increase in FTE net
interest income resulted primarily from interest-bearing liabilities re-pricing
downward at a faster rate than earning assets. The rate paid on interest-bearing
liabilities decreased 160 basis points ("bp"), to 2.90% for 2002, from 4.50% for
2001. Meanwhile, the yield on earning assets decreased 97 bp, to 6.98% for 2002,
from 7.95% for 2001.
Total FTE interest income for 2002 decreased $15.0 million compared to 2001, a
result of the previously mentioned decrease in yield on earning assets. During
the same time period, total interest expense decreased $22.8 million, primarily
the result of the falling rate environment mentioned above, as well as an
improvement in the mix of the Company's interest-bearing liabilities. Time
deposits, the most significant component of interest-bearing liabilities,
decreased to 47.0% of interest-bearing liabilities for 2002 from 52.0% for 2001.
Offsetting this decrease in the interest-bearing liabilities mix, was an
increase in lower cost NOW, MMDA, and Savings deposits, to 39.1% of
interest-bearing liabilities for 2002 from 34.7% for 2001. Total borrowings
remained relatively unchanged, comprising 13.9% and 13.3% of interest-bearing
liabilities for 2002 and 2001, respectively.
Noninterest Income
- -------------------
The following table sets forth information by category of noninterest income for
the periods indicated:
SIX MONTHS ENDED JUNE 30,
2002 2001
-------- -------
(in thousands)
Service charges on deposit accounts $6,289 $5,997
Broker/dealer and insurance fees 2,978 1,923
Trust 2,174 2,116
Other 5,020 4,701
-------- -------
Total core noninterest income 16,461 14,737
Net securities (losses) gains (433) 1,250
Loan valuation (losses) gains (50) 26
Gain on sale of a branch, net 220 -
Gain on sale of a building - 1,367
-------- -------
Total $16,198 $17,380
======== =======
27
Core noninterest income increased $1.7 million or 11.7% to $16.5 million for
2002 from $14.7 million for the same period in 2001. Broker/dealer and insurance
fees increased $1.1 million primarily from one of the Company's financial
services providers, Colonial Financial Services, Inc., which began operations in
June 2001, resulting in six months of revenue totaling $0.8 million in 2002.
Service charges on deposit accounts in 2002 increased $0.3 million or 4.9% over
the same period a year earlier as a result of the Company's expanded branch
network. Other income increased $0.3 million in 2002 when compared to 2001, due
mainly to an increase in other banking fees.
Noninterest Expense
- --------------------
The following table sets forth information by category of noninterest expense
for the periods indicated:
SIX MONTHS ENDED JUNE 30,
2002 2001
------- -------
(in thousands)
Salaries and employee benefits $25,305 $23,302
Occupancy 4,265 4,466
Equipment 3,532 3,433
Data processing and communications 5,163 5,004
Professional fees and outside services 3,397 2,600
Office supplies and postage 2,124 2,361
Amortization of intangible assets 1,690 1,976
Capital securities 446 745
Loan collection and other real estate owned 1,725 807
Other 5,869 4,985
------- -------
Total core noninterest expense 53,516 49,679
------- -------
Certain deposit overdraft write-offs - 2,125
Total noninterest expense $53,516 $51,804
======= =======
Core noninterest expense, which excludes certain deposit overdraft
write-offs, increased $3.8 million or 7.7% to $53.5 million for 2002 from $49.7
million for 2001. Salaries and employee benefits increased $2.0 million or 8.6%,
to $25.3 million for 2002 from $23.3 million for 2001. The increase in salaries
and employee benefits was due primarily to increases in incentive compensation
of $1.2 million, employee medical costs of $0.3 million and retirement expense
of $0.3 million. Professional fees and costs of outside services increased $0.8
million, to $3.4 million for 2002 from $2.6 million for 2001. The increase in
professional fees and costs of outside services resulted mainly from
professional fees for legal matters.
Loan collection and other real estate owned expenses increased $0.9 million, to
$1.7 million for 2002 from $0.8 million for 2001. This increase is due primarily
to the increase in nonperforming loans during 2001, which resulted in an
increase in collection activity and foreclosure costs during 2002. Other expense
increased $0.9 million, to $5.9 million for 2002 from $5.0 million for 2001. The
increase in other expense was due to a $0.3 million of expense related to a
noncompetition agreement, an increase in marketing expense of $0.3 million and a
$0.2 million charge related to a probable sales tax assessment.
28
Occupancy and office supplies & postage experienced decreases for 2002 when
compared to 2001. These decreases resulted primarily from cost savings realized
from recent acquisitions completed during 2001 and 2000. Data processing and
equipment experienced increases for 2002 when compared to 2001 as a result of
costs related to enhancements made to the data processing capabilities of the
Company.
Amortization of intangible assets decreased $0.3 million, to $1.7 million for
2002 from $2.0 million for 2001. The decrease in amortization of intangible
assets resulted from the adoption of SFAS No. 142. Had the requirements of SFAS
No. 142 been applied to 2001, amortization of intangible assets would have been
$1.6 million. Capital securities expense decreased $0.3 million, to $0.4 million
for 2002 from $0.7 million for 2001. The decrease in capital securities expense
is a result of the Company's guaranteed preferred beneficial interests in
Company's junior subordinated debentures, which are tied to a variable interest
rate index (3-month LIBOR plus 275 bp) that was much lower for the first six
months of 2002 than the same period in 2001.
Income Taxes
- -------------
Income tax expense for 2002 was $10.5 million for an effective tax rate of
32.8%, compared to $7.2 million, or 30.6%, for 2001. The lower tax rate in the
2001 period resulted primarily from lower net income before tax when compared to
the 2002 period, which resulted in a greater benefit from favorable permanent
differences.
ANALYSIS OF FINANCIAL CONDITION
Loans and Leases
- ------------------
A summary of loans and leases, net of deferred fees and origination costs, by
category for the periods indicated follows:
June 30, December 31, June,30
2002 2001 2001
-------------------------------------
(in thousands)
Commercial and commercial mortgages* $1,059,046 $1,053,416 $1,066,356
Residential real estate mortgages 612,018 594,206 549,915
Consumer 592,218 613,631 645,725
Leases 67,274 72,048 81,681
Other loans 5,485 6,335 9,398
-------------------------------------
Total loans and leases $2,336,041 $2,339,636 $2,353,075
=====================================
* - Includes agricultural loans
Total loans and leases were $2.3 billion, or 63.5% of assets, at June 30, 2002,
compared to $2.3 billion, or 64.3%, at December 31, 2001, and $2.4 billion, or
63.6%, at June 30, 2001. Total loans and leases decreased $3.6 million at June
30, 2002 when compared to December 31, 2001. The slight decrease in total loans
and leases during the year resulted mainly from the Company's on going efforts
to improve the credit administration functions at its recently acquired banks
and continued focus on resolving troubled loans.
29
Securities
- ----------
Average total securities were $2.6 million less for the first six months of 2002
than for the same period of 2001. Decreases in securities held to maturity and
trading securities from maturities and sales were reinvested into the securities
available for sale portfolio. During the first six months of 2002, the
securities portfolio represented 30.6% of average earning assets compared to
31.0% for the same period in 2001. At June 30, 2002, the securities portfolio
was comprised of 90% available for sale and 10% held to maturity securities.
At December 31, 2001, nonperforming securities were comprised of a private issue
collateralized mortgage obligation (CMO) valued at $2.7 million and an asset
backed security valued at $1.8 million compared to a $1.6 million private issue
CMO at June 30, 2002. The decrease in nonperforming securities during the first
six months of 2002 resulted mainly from the sale of the asset backed security at
approximately its carrying value and a $0.7 million write-down of the CMO during
the first quarter of 2002 due to other-than-temporary impairment. The Company
received $0.4 million in payments from the impaired CMO during the second
quarter of 2002, resulting in a reduction in the carrying amount of the CMO to
$1.6 million.
Included in the securities available for sale portfolio at June 30, 2002, are
certain securities (private issue CMO, asset backed securities, and private
issue mortgaged-backed securities) previously held by CNB. These securities
contain a higher level of credit risk when compared to securities held in the
Company's investment portfolio because they are not guaranteed by a governmental
agency. The Company's general practice is to purchases CMO and mortgaged-backed
securities that are guaranteed by a governmental agency coupled with a strong
credit rating, typically AAA, issued by Moody's or Standard and Poors.
At June 30, 2002, the amortized cost and fair value of these securities amounted
to $27.5 million and $26.8 million, respectively, down from $38.7 million and
$38.5 million, respectively, at December 31, 2001. The decrease at June 30, 2002
when compared to December 31, 2001, resulted primarily from sales and principal
paydowns. As noted previously, the Company sold $5.4 million of asset backed
securities containing a higher level of credit risk due to a rapid deterioration
in the financial condition of the underlying collateral related to the asset
backed securities during the second quarter of 2002, resulting in a $4.5 million
loss. Management cannot predict the extent to which economic conditions may
worsen or other factors may impact these securities. Accordingly, there can be
no assurance that these securities will not become other-than-temporarily
impaired in the future.
At December 31, 2001, the Company had certain embedded derivative instruments
from the CNB Bank investment portfolio related to two debt securities that have
returns linked to the performance of the NASDAQ 100 index. As of December 31,
2001, the embedded derivatives related to the debt securities linked to the
NASDAQ 100 index had no fair value. The two debt securities were classified as
available for sale. At December 31, 2001, the total amortized cost and estimated
fair value of these two debt securities was $6.2 million. The two debt
securities were sold in 2002 at amounts approximating their carrying values at
December 31, 2001 as these two securities did not meet the risk profile of the
Company's security portfolio.
30
Allowance for Loan Losses, Nonperforming Assets and the Provision for Loan
- ---------------------------------------------------------------------------
Losses
- ------
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure that the level of the allowance reasonably
reflects the loan portfolio's risk profile. It is evaluated to ensure that it is
sufficient to absorb all reasonably estimable credit losses inherent in the
current loan and lease portfolio.
Management considers the accounting policy relating to the allowance for loan
and lease losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgements can have on
the consolidated results of operations.
For purposes of evaluating the adequacy of the allowance, the Company considers
a number of significant factors that affect the collectibility of the portfolio.
For individually analyzed loans, these include estimates of loss exposure, which
reflect the facts and circumstances that affect the likelihood of repayment of
such loans as of the evaluation date. For homogeneous pools of loans and
leases, estimates of the Company's exposure to credit loss reflect a thorough
current assessment of a number of factors, which could affect collectibility.
These factors include: past loss experience; the size, trend, composition, and
nature; changes in lending policies and procedures, including underwriting
standards and collection, charge-off and recovery practices; trends experienced
in nonperforming and delinquent loans and leases; current economic conditions in
the Company's market; portfolio concentrations that may affect loss experienced
across one or more components of the portfolio; the effect of external factors
such as competition, legal and regulatory requirements; and the experience,
ability, and depth of lending management and staff. In addition, various
regulatory agencies, as an integral component of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize additions to the allowance based
on their judgment about information available to them at the time of their
examination, which may not be currently available to management.
After a thorough consideration and validation of the factors discussed above,
required additions to the allowance for loan and lease losses are made
periodically by charges to the provision for loan and lease losses. These
charges are necessary to maintain the allowance at a level which management
believes is reasonably reflective of overall inherent risk of probable loss in
the portfolio. While management uses available information to recognize losses
on loans and leases, additions to the allowance may fluctuate from one reporting
period to another. These fluctuations are reflective of changes in risk
associated with portfolio content and/or changes in management's assessment of
any or all of the determining factors discussed above. The allowance for loan
and lease losses to outstanding loans and leases at June 30, 2002 was 1.87%
compared to 1.45% at June 30, 2001. Management considers the allowance for loan
losses to be adequate based on evaluation and analysis of the loan portfolio.
31
Table 4 reflects changes to the allowance for loan losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net chargeoffs. Chargeoffs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan losses.
TABLE 4
ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $45,299 $32,486 $44,746 $32,494
Recoveries 938 408 2,300 840
Chargeoffs (4,610) (6,145) (7,430) (7,796)
- --------------------------------------------------------------------------------------------------------------------
Net chargeoffs (3,672) (5,737) (5,130) (6,956)
Allowance related to purchase
acquisition - 505 - 505
Provision for loan losses 2,092 6,872 4,103 8,083
- --------------------------------------------------------------------------------------------------------------------
Balance, end of period $43,719 $34,126 $43,719 $34,126
====================================================================================================================
COMPOSITION OF NET CHARGEOFFS
- --------------------------------------------------------------------------------------------------------------------
Commercial and agricultural $(2,420) 66% $(4,734) 83% $(2,317) 45% $(5,215) 75%
Real estate mortgage (151) 4% (100) 2% (371) 7% (208) 3%
Consumer (1,101) 30% (903) 15% (2,442) 48% (1,533) 22%
- --------------------------------------------------------------------------------------------------------------------
Net chargeoffs $(3,672) 100% $(5,737) 100% $(5,130) 100% $(6,956) 100%
- --------------------------------------------------------------------------------------------------------------------
Annualized net chargeoffs
to average loans 0.64% 1.00% 0.45% 0.61%
- --------------------------------------------------------------------------------------------------------------------
Net chargeoffs to average loans for theyear ended December 31, 2001 0.87%
====================================================================================================================
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past
due, restructured loans, other real estate owned (OREO), and nonperforming
securities. Loans are generally placed on nonaccrual when principal or interest
payments become ninety days past due, unless the loan is well secured and in the
process of collection. Loans may also be placed on nonaccrual when circumstances
indicate that the borrower may be unable to meet the contractual principal or
interest payments. OREO represents property acquired through foreclosure and is
valued at the lower of the carrying amount or fair market value, less any
estimated disposal costs. Nonperforming securities include securities which
management believes are other-than-temporarily impaired, carried at their
estimated fair value and are not accruing interest.
Total nonperforming assets were $34.5 million at June 30, 2002 compared to
$49.9 million at December 31, 2001 and $33.9 million at June 30, 2001. The
increase from June 30, 2001 to December 31, 2001 can be primarily attributed to
a $13.9 million increase in nonperforming loans. This increase was primarily the
result of integrating newly acquired banks into the Company as well as adverse
economic conditions. Nonperforming loans totaled $31.1 million at June 30, 2002,
down from the $43.8 million outstanding at December 31, 2001. The $12.5 million
decrease in nonperforming loans from December 31, 2001 to June 30, 2002 was due
primarily to the Company's successful efforts in resolving certain large
problematic commercial loans. Nonaccrual commercial and agricultural loans
decreased $10.5 million, from $31.4 million at December 31, 2001 to $20.8
32
million at June 30, 2002. Based on the improved trends in loan quality noted
above and the decrease in net charge-offs in 2002 when compared to 2001
highlighted in Table 4 above, the Company recorded a provision for loan and
lease losses of $2.1 million and $4.1 million, respectively, for the three and
six months ended June 30, 2002, down from the $6.9 million and $8.1 million
provided in the same periods in 2001.
TABLE 5
NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(dollars in thousands) 2002 2001 2001
- ------------------------------------------------------------------------------------------------
Commercial and agricultural $ 20,835 $ 31,372 $ 21,504
Real estate mortgage 5,935 5,119 3,806
Consumer 3,757 3,719 2,366
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 30,527 40,210 27,676
- ------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural - 198 13
Real estate mortgage 14 1,844 594
Consumer 239 933 1,079
- ------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 253 2,975 1,686
- ------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: 530 603 491
- ------------------------------------------------------------------------------------------------
Total nonperforming loans 31,310 43,788 29,853
- ------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 2,047 1,577 1,750
- ------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 33,357 45,365 31,603
================================================================================================
Nonperforming securities 1,560 4,500 2,309
- ------------------------------------------------------------------------------------------------
Total nonperforming assets $ 34,917 $ 49,865 $ 33,912
================================================================================================
Total nonperforming loans to loans and leases 1.34% 1.87% 1.45%
Total nonperforming assets to assets 0.95% 1.37% 1.27%
Total allowance for loan and lease losses
to nonperforming loans 139.63% 102.19% 114.31%
================================================================================================
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $37.2 million in potential problem loans at June 30,
2002 as compared to $48.6 million at December 31, 2001. Potential problem loans
are loans that are currently performing, but where known information about
possible credit problems of the related borrowers causes management to have
serious doubts as to the ability of such borrowers to comply with the present
loan repayment terms and which may result in disclosure of such loans as
non-performing 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 June 30, 2002, potential
problem loans primarily consisted of commercial real estate and commercial and
agricultural loans. Management cannot predict the extent to which economic
conditions may worsen or other factors which may impact borrowers and the
potential problem loans. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on non-accrual, become
restructured, or require increased allowance coverage and provision for loan
losses.
33
Deposits
- --------
Total deposits were $2.9 billion at June 30, 2002, a slight decrease of $48.0
million, or 1.6%, from year end 2001. Total average deposits increased $34.1
million, or 1.2%, from June 30, 2001 to June 30, 2002. The Company's acquisition
of FNB in June 2001 added approximately $108.0 million in deposits offset by the
sale of a branch in February 2002 which resulted in the decrease of
approximately $34.3 million in deposits. The Company has focused on maintaining
and growing its base of lower cost checking, savings and money market accounts
while allowing runoff of some of its higher cost time deposits, particularly
brokered and jumbo time deposits. At June 30, 2002, total checking, savings and
money market accounts represented 53.9% of total deposits compared to 48.6% at
June 30, 2001.
Borrowings
- ----------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $122.9 million at June 30, 2002 compared to
$122.0 million and $146.5 million at December 31, and June 30, 2001,
respectively. Long-term debt was $350.7 million at June 30, 2002, compared to
$272.3 million and $276.9 million at December 31, and June 30, 2001,
respectively, as the Company took advantage of lower interest rates and locked
in longer term advances.
CAPITAL RESOURCES
Stockholders' equity of $281.9 million represents 7.7% of total assets at June
30, 2002, compared with $292.7 million, or 7.9% in the comparable period of the
prior year, and $266.4 million, or 7.3% at December 31, 2001. The Company does
not have a target dividend payout ratio, rather the Board of Directors considers
the Company's earnings position and earnings potential when making dividend
decisions.
34
The following table presents the actual capital amounts and ratios for the
periods presented. Capital measurements are significantly in excess of
regulatory minimum guidelines and meet the requirements to be considered well
capitalized for all periods presented. Tier 1 leverage, Tier 1 capital and
Risk-based capital ratios have regulatory minimum guidelines of 3%, 4% and 8%
respectively, with requirements to be considered well capitalized of 5%, 6% and
10%, respectively.
TABLE 6
CAPITAL MEASUREMENTS
- -------------------------------------------------------------------
As of and for the quarter ended
March 31 June 30
- -------------------------------------------------------------------
2002
Tier 1 leverage ratio 6.71% 6.87%
Tier 1 capital ratio 9.94% 9.99%
Total risk-based capital ratio 11.20% 11.24%
Cash dividends as a percentage of net income 52.71% 52.38%
Per common share:
Book value $ 8.07 $ 8.50
Tangible book value $ 6.62 $ 7.07
===================================================================
2001
Tier 1 leverage ratio 7.18% 7.07%
Tier 1 capital ratio 10.70% 10.00%
Total risk-based capital ratio 11.95% 11.23%
Cash dividends as a percentage of net income 48.89% 59.36%
Per common share:
Book value $ 8.60 $ 8.74
Tangible book value $ 7.22 $ 7.21
===================================================================
Table 7 presents the high, low and closing sales price for the common stock as
reported on the NASDAQ Stock Market, and cash dividends declared per share of
common stock. The Company's price to book value ratio was 2.24 at June 30, 2002
and 2.27 a year ago. The per share market price was 14.11 times annualized
earnings at June 30, 2002 and 19.69 times annualized earnings at June 30, 2001.
TABLE 7
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION*
- --------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- --------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------
September 30 17.30 13.50 14.30 0.170
December 31 15.99 12.55 14.49 0.170
================================================================================
2002
- --------------------------------------------------------------------------------
MARCH 31 $15.15 $13.15 $14.74 $0.170
JUNE 30 $19.32 $14.00 $18.07 $0.170
================================================================================
On July 22, 2002 the Company announced that it intends to repurchase up to one
million shares (approximately 3%) of its outstanding common stock from time to
time over the next 12 months in open market and privately negotiated
transactions.
35
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
MARKET RISK
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
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 enhancing the net
interest margin. 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. A second and third model are run in which a gradual increase of 200 bp
and a gradual decrease of 150 bp takes place over a 12 month period. Under these
scenarios, assets subject to prepayments are adjusted to account for faster or
slower prepayment assumptions. Any investment securities or borrowings that
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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 scenarios, net interest income is projected to increase
when compared to the flat rate scenario through the simulation period. The level
of net interest income increasing is a result of interest-bearing liabilities
repricing downward at a faster rate than earning assets. 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.
Net interest income for the next twelve months in a + 200/- 150 bp scenario is
within the internal policy risk limits of a not more than a 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 June 30, 2002 balance sheet position:
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
--------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
--------------------------------------------------------
+200 (2.28%)
-150 0.41%
--------------------------------------------------------
LIQUIDITY RISK
Liquidity involves the ability to meet the cash flow requirements of customers
who may be depositors wanting to withdraw funds or borrowers needing assurance
that sufficient funds will be available to meet their credit needs. The Asset
Liability Committee (ALCO) is responsible for liquidity management and has
developed guidelines which cover all assets and liabilities, as well as off
balance sheet items that are potential sources or uses of liquidity. Liquidity
policies must also provide the flexibility to implement appropriate strategies
and tactical actions. Requirements change as loans and leases grow, deposits and
securities mature, and payments on borrowings are made. Liquidity management
includes a focus on interest rate sensitivity management with a goal of avoiding
widely fluctuating net interest margins through periods of changing economic
conditions.
The primary liquidity measurement the Company utilizes is called 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 June 30, 2002, the
Company's Basic Surplus measurement was 10.32% of total assets, which was above
the Company's minimum of 5% set forth in its liquidity policies. If the
Company's liquidity position tightens and its Basic Surplus measurement
decreases, the Company has the ability to manage its liquidity through brokered
time deposits, established borrowing facilities, primarily with the Federal Home
Loan Bank, and entering into repurchase agreements with investment companies.
37
This Basic Surplus approach enables the Company to adequately manage liquidity
from both operational and contingency perspectives. By tempering the need for
cash flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At June 30, 2002, the
Company considered its Basic Surplus adequate to meet liquidity needs.
At June 30, 2002, a large percentage of the Company's loans and securities are
pledged as collateral on borrowings. Therefore, future growth of earning assets
will depend upon the Company's ability to obtain additional funding, through
growth of core deposits and collateral management, and may require further use
of brokered time deposits, or other higher cost borrowing arrangements.
SARBANES-OXLEY ACT OF 2002
- -----------------------------
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002,
landmark legislation on accounting reform and corporate governance. Although
much of the act is still being assessed, we do not anticipate any significant
changes in the operations of, and reporting by the Company as a result of the
Act. In accordance with requirements of the Sarbanes-Oxley Act, written
certifications for this quarterly report on Form 10-Q by the chief executive
officer and chief financial officer accompany this report as filed with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information called for by Item 3 is contained in the Liquidity and
Interest Rate Sensitivity Management section of the Management
Discussion and Analysis.
38
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
There are no material pending legal proceedings other than ordinary routine
litigation incidental to the business, to which the Company, or any of its
subsidiaries is a party or which their property is subject.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 2, 2002.
Stockholders approved the following proposals:
A proposal to fix the number of directors to sixteen was approved. There were
24,043,045 votes cast for the proposal, 599,832 votes cast against the proposal
and 175,167 broker non-votes regarding this matter.
The following directors were elected with terms expiring at the annual meeting
in 2005:
Richard Chojnowski 24,128,402 votes for election,
516,689 votes against election
Dr. Peter B. Gregory 24,423,792 votes for election,
221,299 votes against election
Paul O. Stillman 24,430,632 votes for election,
214,459 votes against election
Joseph A Santangelo 24,364,931 votes for election,
280,160 votes against election
Janet H. Ingraham 24,424,468 votes for election,
220,623 votes against election
Paul D. Horger 24,422,268 votes for election,
222,369 votes against election
The following directors were elected with terms expiring at the annual meeting
in 2003:
Michael H. Hutcherson 24,393,049 votes for election,
252,042 votes against election
Michael M. Murphy 24,043,045 votes for election,
599,832 votes against election
Item 5 -- Other Information
On July 22, 2002, NBT Bancorp Inc. announced the declaration of a regular
quarterly cash dividend of $0.17 per share. The cash dividend will be paid on
September 15, 2002 to stockholders of record as of September 1, 2002.
39
Item 6 -- Exhibits and Reports on Form 8-K
(a) none.
(b) During the quarter ended June 30, 2002, the Company filed the following
Current Reports on Form 8-K:
None filed.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on FORM 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized, this 13th day of August 2002.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
-----------------------
Michael J. Chewens, CPA
Executive Vice President
Chief Financial Officer and Secretary
41
