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 September 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 October 31, 2002, there were 32,730,689 shares outstanding of the
Registrant's common stock, $0.01 par value.
1
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended September 30, 2002
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2002, December 31, 2001
(Audited), and September 30, 2001
Consolidated Statements of Income for the three month and nine month
periods ended September 30, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the nine month
periods ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2002 and 2001
Consolidated Statements of Comprehensive Income (Loss) for the three
month and nine month periods ended September 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
Item 4 Controls and Procedures
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 SEPTEMBER 30, December 31, September 30,
CONSOLIDATED BALANCE SHEETS 2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data) (UNAUDITED) (Unaudited)
ASSETS
Cash and due from banks $ 133,739 $ 123,201 $ 105,112
Short-term interest bearing accounts 5,671 6,756 6,633
Trading securities, at fair value 237 126 2,531
Securities available for sale, at fair value 993,786 909,341 947,162
Securities held to maturity (fair value - $89,444, $101,495
and $97,647) 87,272 101,604 96,744
Federal Reserve and Federal Home Loan Bank stock 22,630 21,784 21,784
Loans and leases 2,367,688 2,339,636 2,354,164
Less allowance for loan and lease losses 43,330 44,746 38,034
- -------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 2,324,358 2,294,890 2,316,130
Premises and equipment, net 61,193 62,685 61,506
Goodwill 15,476 15,476 14,906
Intangible assets, net 31,178 35,212 36,074
Other assets 53,145 67,127 58,287
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,728,685 $ 3,638,202 $ 3,666,869
===============================================================================================================================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 452,250 $ 431,407 $ 421,833
Savings, NOW, and money market 1,156,204 1,097,156 1,075,835
Time 1,313,511 1,387,049 1,441,654
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 2,921,965 2,915,612 2,939,322
Short-term borrowings 113,242 122,013 101,201
Long-term debt 350,603 272,331 274,560
Other liabilities 39,485 44,891 42,266
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,425,295 3,354,847 3,357,349
- -------------------------------------------------------------------------------------------------------------------------------
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 September 30, 2002, December 31, 2001,
and September 30, 2001, respectively 344 343 342
Additional paid-in-capital 210,425 209,176 208,687
Retained earnings 88,137 72,531 92,137
Unvested restricted stock awards (142) - -
Accumulated other comprehensive income 16,138 3,921 10,955
Treasury stock at cost 1,670,403 1,147,848,
and 1,171,900 shares at September 30, 2002, December 31, 2001
and September 30, 2001, respectively (28,512) (19,616) (19,601)
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 286,390 266,355 292,520
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $ 3,728,685 $ 3,638,202 $ 3,666,869
===============================================================================================================================
All amounts for September 30, 2001 have been restated to give effect to a
pooling of interests transaction.
See notes to unaudited interim consolidated financial statements.
3
Three months ended Nine months ended
NBT BANCORP INC. AND SUBSIDIARIES September 30, September 30,
CONSOLIDATED STATEMENTS OF INCOME 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
INTEREST, FEE AND DIVIDEND INCOME:
Loans $ 41,970 $ 47,076 $ 125,587 $ 142,169
Securities available for sale 13,732 15,125 41,912 45,879
Securities held to maturity 1,056 1,265 3,472 3,973
Trading securities 2 254 6 599
Other 251 512 846 1,713
- -------------------------------------------------------------------------------------------------------
Total interest, fee and dividend income 57,011 64,232 171,823 194,333
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 15,748 24,242 49,004 78,397
Short-term borrowings 417 1,136 1,052 4,565
Long-term debt 4,139 3,545 11,633 10,178
- -------------------------------------------------------------------------------------------------------
Total interest expense 20,304 28,923 61,689 93,140
- -------------------------------------------------------------------------------------------------------
Net interest income 36,707 35,309 110,134 101,193
Provision for loan and lease losses 2,424 9,188 6,527 17,271
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 34,283 26,121 103,607 83,922
- -------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Trust 743 1,096 2,366 3,212
Service charges on deposit accounts 3,531 3,253 9,820 9,250
Broker/dealer and insurance fees 1,393 1,360 4,371 3,283
Net securities (losses) gains (6) (2,327) (439) (1,077)
Gain on sale of a building - - - 1,367
Gain on sale of branch, net - - 220 -
Other 2,585 2,369 7,555 7,096
- -------------------------------------------------------------------------------------------------------
Total noninterest income 8,246 5,751 23,893 23,131
- -------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 11,925 12,464 37,230 35,766
Office supplies and postage 1,116 1,154 3,240 3,515
Occupancy 2,032 2,111 6,297 6,577
Equipment 1,672 1,858 5,204 5,291
Professional fees and outside services 1,446 1,701 4,843 4,301
Data processing and communications 2,705 2,997 7,868 8,001
Amortization of intangible assets 799 1,103 2,489 3,079
Capital securities 221 291 667 1,036
Deposit overdraft write-offs - - - 2,125
Merger, acquisition, and reorganization costs (130) 231 (130) 231
Loan collection and other real estate owned 610 549 2,335 1,356
Other operating 3,751 4,883 9,069 9,868
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 26,147 29,342 79,112 81,146
- -------------------------------------------------------------------------------------------------------
Income before income taxes 16,382 2,530 48,388 25,907
Income taxes 5,388 1,061 15,895 8,214
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 10,994 $ 1,469 $ 32,493 $ 17,693
=======================================================================================================
Earnings per share:
Basic $ 0.33 $ 0.04 $ 0.98 $ 0.54
Diluted $ 0.33 $ 0.04 $ 0.97 $ 0.53
=======================================================================================================
All amounts for the 2001 periods have been restated to give effect to a pooling
of interests transaction.
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 Treasury
Stock Capital Earnings Stock Income (loss) Stock Total
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2000 $ 332 $ 195,422 $ 88,921 - $ (1,934) $ (13,100) $269,641
Net income 17,693 17,693
Cash dividends - $0.51 per share (1) (14,477) (14,477)
Retirement of 63,034 shares of
treasury stock of pooled
company (1) (708) 709 -
Purchase of 727,046 treasury shares (10,722) (10,722)
Net issuance of 138,981 shares to
employee benefits plans and
other stock plans, including
tax benefit (2,018) 3,512 1,494
Issuance of 1,075,365 shares to
purchase First National
Bancorp, Inc. 11 15,991 16,002
Other comprehensive income 12,889 12,889
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001 $ 342 $ 208,687 $ 92,137 - $ 10,955 $ (19,601) $292,520
===============================================================================================================================
BALANCE AT DECEMBER 31, 2001 $ 343 $ 209,176 $ 72,531 - $ 3,921 $ (19,616) $266,355
Net income 32,493 32,493
Cash dividends - $0.51 per share (16,887) (16,887)
Purchase of 526,833 treasury shares (9,078) (9,078)
Net issuance of 138,981 shares to
employee benefit plans and other
stock plans, including tax benefit 1 1,277 (56) 1,222
Grant of 14,648 shares of restricted
stock awards (28) (222) 250 -
Cancellation of 800 restricted stock
awards 12 (12) -
Amortization of restricted stock
Awards 68 68
Other comprehensive income 12,217 12,217
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 $ 344 $ 210,425 $ 88,137 $ (142) $ 16,138 $ (28,512) $286,390
===============================================================================================================================
See notes to unaudited interim consolidated financial statements.
Note:
(1) For the period ended September 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 Nine Months Ended September 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 2002 2001
- ---------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 32,493 $ 17,693
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 6,527 17,271
Depreciation of premises and equipment 5,075 4,511
Net accretion on securities (811) (1,355)
Amortization of intangible assets 2,489 3,079
Amortization of restricted stock awards 68 -
Proceeds from sale of loans held for sale 6,026 20,194
Origination of loans held for sale (5,524) (19,325)
Net losses (gains) on sales of loans 77 (243)
Net loss on disposal of premises and equipment - 118
Net (gain) loss on sale of other real estate owned (80) 211
Net security losses 439 1,077
Proceeds from maturities of trading securities - 219
Proceeds from sale of trading securities - 27,214
Purchases of trading securities (166) (6,194)
Gain on sale of a building - (1,367)
Gain on sale of a branch, net (220) -
Net decrease (increase) in other assets 7,721 (2,224)
Net decrease in other liabilities (5,052) (8,549)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 49,062 52,330
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net cash and cash equivalents provided by acquisitions - 23,067
Net cash paid in conjunction with branch sale (29,171) -
Securities available for sale:
Proceeds from maturities 254,991 223,179
Proceeds from sales 216,609 77,923
Purchases (535,222) (269,504)
Securities held to maturity:
Proceeds from maturities 40,600 37,042
Purchases (26,344) (17,824)
(Purchases ) proceeds of FRB and FHLB stock (846) 10,351
Net increase in loans (42,217) (49,598)
Purchase of premises and equipment, net (4,490) (5,704)
Proceeds from sales of other real estate owned 1,113 1,566
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (124,977) 30,498
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 40,611 (27,879)
Net (decrease) in short-term borrowings (8,772) (83,973)
Proceeds from issuance of long-term debt 80,000 246,291
Repayments of long-term debt (1,728) (212,260)
Proceeds from issuance of treasury shares to employee
benefit plans and other stock plans, including tax benefit 1,222 1,494
Purchase of treasury stock (9,078) (10,722)
Cash dividends (16,887) (14,477)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used) in financing activities 85,368 (101,526)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,453 (18,698)
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 129,957 130,443
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 139,410 $ 111,745
=========================================================================================================
(Continued)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS,CONTINUED Nine Months Ended September 30,
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 2002 2001
Cash paid during the period for:
Interest $ 66,100 $ 98,133
Income taxes 8,800 3,489
=========================================================================================================
Transfers:
Loans transferred to OREO $ 2,560 3,402
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
- ---------------------------------------------------------------------------------------------------------
All amounts for the 2001 periods have been restated to give effect to a pooling
of interests transaction.
See notes to unaudited interim consolidated financial statements.
7
Three months ended Nine months ended
NBT BANCORP INC. AND SUBSIDIARIES September 30, September 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Net Income $ 10,994 $ 1,469 $ 32,493 $ 17,693
- -------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
Unrealized holding gains arising during
period [pre-tax amounts of $11,516
$15,423, $19,893 and $21,315] 6,924 9,143 11,961 12,587
Less: Reclassification adjustment for net losses
included in net income [pre-tax amounts of
$0, $1,577, $426 and $503] - 948 256 302
- -------------------------------------------------------------------------------------------------------
Total other comprehensive income 6,924 10,091 12,217 12,889
- -------------------------------------------------------------------------------------------------------
Comprehensive income $ 17,918 $ 11,560 $ 44,710 $ 30,582
=======================================================================================================
All amounts for the 2001 periods have been restated to give effect to pooling of
interests.
See notes to unaudited interim consolidated financial statements.
8
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 September 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 September 30, 2002 and December 31, 2001, commitments to extend credit and
unused lines of credit totaled $448.4 million and $343.1 million, respectively,
and standby letters of credit totaled $30.1 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 September 30, 2002 2001
- ----------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 33,016 33,229
Net income available to common shareholders $10,994 $ 1,469
- ----------------------------------------------------------------------------------
Basic EPS $ 0.33 $ 0.04
==================================================================================
Diluted EPS:
Weighted average common shares outstanding 33,016 33,229
Dilutive effect of common stock options and restricted stock 279 271
- ----------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 33,295 33,500
Net income available to common shareholders $10,994 $ 1,469
- ----------------------------------------------------------------------------------
Diluted EPS $ 0.33 $ 0.04
==================================================================================
- ----------------------------------------------------------------------------------
Nine months ended September 30, 2002 2001
- ----------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 33,088 32,854
Net income available to common shareholders $32,493 $17,693
- ----------------------------------------------------------------------------------
Basic EPS $ 0.98 $ 0.54
==================================================================================
Diluted EPS:
Weighted average common shares outstanding 33,088 32,854
Dilutive effect of common stock options and restricted stock 242 250
- ----------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 33,330 33,104
Net income available to common shareholders $32,493 $17,693
- ----------------------------------------------------------------------------------
Diluted EPS $ 0.97 $ 0.53
==================================================================================
10
There were 387,272 outstanding stock options for the quarter ended September 30,
2002 and 949,926 outstanding stock options for the quarter ended September 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 420,743 outstanding stock options for the
nine month period ended September 30, 2002 and 949,926 outstanding stock options
for the nine month period ended September 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 September 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. Net income for the nine months
ended September 30, 2001 was $0.3 million or $0.04 per diluted share. CNB Bank
operated 29 full service banking offices in nine upstate New York counties.
11
At September 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 $1.8
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 nine months
ended September 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. The Company's core deposit intangible asset
will be measured for impairment under SFAS No. 144. 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 June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". This Statement
is effective for exit or disposal activities initiated after December 31, 2002.
Adoption of this statement is not expected to have a material effect on the
Company's consolidated financial statements.
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
13
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
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.
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.
In connection with the sale of a branch during 2002, $1.5 million in
unidentified intangible assets were included in the carrying amount of the
branch in determining the gain on disposal.
14
Pro forma net income and net income per share for the three and nine months
ended September 30, 2001, adjusted to eliminate historical amortization of
goodwill and related tax effects, are as follows:
Three months
ended September 30, 2001
------------------------
(in thousands, except per share data)
Reported net income $ 1,469
Add: goodwill amortization (nondeductible for tax) 238
------------------------
Pro forma net income $ 1,707
========================
Reported net income per share:
Basic $ 0.04
Diluted $ 0.04
Pro forma net income per share:
Basic $ 0.05
Diluted $ 0.05
Nine months
ended September 30, 2001
------------------------
(in thousands, except per share data)
Reported net income $ 17,693
Add: goodwill amortization (nondeductible for tax) 566
-----------------------
Pro forma net income $ 18,259
=======================
Reported net income per share:
Basic $ 0.54
Diluted $ 0.53
Pro forma net income per share:
Basic $ 0.56
Diluted $ 0.55
15
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." In October 2002, SFAS No. 147, "Acquisitions of
Certain Financial Institutions," was issued. This statement amends FASB
statements No. 72 and 144 and FASB Interpretation No. 9. Except for transactions
between two or more mutual enterprises, this Statement removes acquisitions of
financial institutions from the scope of both Statement 72 and Interpretation 9
and requires that those transactions be accounted for in accordance with SFAS
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." In addition, this Statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. The provisions of this statement are to be applied
retroactively to January 1, 2002. The Statement is effective after September 30,
2002. Upon adoption of SFAS No. 147, the Company estimates that amortization of
intangibles assets will decrease by approximately $1.9 million, from $2.5
million to $0.6 million, and net income would increase by $1.3 million or $0.04
per diluted share for the nine months ended September 30, 2002. Furthermore,
upon adoption of Statement No. 147 on October 1, 2002, approximately $30.6
million in unidentified intangible assets will be reclassified as goodwill
retroactive to January 1, 2002.
The Company's intangible assets consist of the following:
September 30, December 31, September 30,
(in thousands) 2002 2001 2001
--------------- ------------- --------------
Core deposit intangibles $ 5,433 5,433 5,433
Unidentified intangible assets from
branch acquisitions 36,404 37,952 37,952
--------------- ------------- --------------
41,837 43,385 43,385
Accumulated amortization (10,659) (8,173) (7,311)
--------------- ------------- --------------
Intangible assets, net $ 31,178 35,212 36,074
=============== ============= ==============
Estimated annual amortization expense of intangible assets, absent any
impairment or change in estimated useful lives and excluding the impact of SFAS
No. 147 is summarized as follows for each of the next five years:
(in thousands)
For the years ending December 31,
2002 (remaining three months) $ 777
2003 3,095
2004 2,752
2005 2,752
2006 2,752
16
Upon adoption of SFAS No. 147, 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 three months) $167
2003 608
2004 264
2005 264
2006 264
2007 264
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
17
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.
OVERVIEW
The Company earned net income of $11.0 million ($0.33 diluted earnings per
share) for the three months ended September 30, 2002, compared to net income of
$1.5 million ($0.04 diluted earnings per share) for the same period in 2001. The
quarter to quarter increase in net income from 2001 to 2002 was due primarily to
decreases in the provision for loan and lease losses of $6.8 million and total
noninterest expenses of $3.2 million coupled with increases in noninterest
income of $2.5 million and net interest income of $1.4 million offset by a $4.3
million increase in income tax expense.
The Company earned net income of $32.5 million ($0.97 diluted earnings per
share) for the nine months ended September 30, 2002, compared to net income of
$17.7 million ($0.53 diluted earnings per share) for the same period in 2001.
The increase in net income from 2001 to 2002 was due primarily to increases in
net interest income of $8.9 million and noninterest income of $0.8 million
coupled with decreases in the provision for loan and lease losses of $10.7
million and noninterest expense of $2.0 million, offset by an increase in income
tax expense of $7.7 million.
The above decreases noted in the provision for loan and lease losses reflects an
improvement in loan quality and lower net charge-offs in 2002 compared to 2001.
The above increases in net interest income resulted primarily from downward
re-pricing of interest-bearing liabilities (primarily time deposits) at a faster
rate than earning assets in 2002 when compared to 2001. The Company's net
interest margin for the nine months ended September 30, 2002, was 4.46%, up 34
basis points from a net interest margin of 4.12% for the same period in 2001.
The increase in noninterest income for the nine months ended September 30, 2002
when compared to the same period in 2001 was due primarily to increases in
broker/dealer and insurance fees, service charges on deposit accounts, other
income and a decrease in net securities losses offset by a decrease in trust
revenue. The decrease in noninterest expense for the nine months ended September
30, 2002 when compared to the same period in 2001 resulted primarily from a
decrease in other expense as the Company took a $1.8 million charge for the
other-than-temporary impairment in residual values on automobile leases (third
quarter 2001 event) and a $2.1 million charge taken for certain deposit
overdrafts (first quarter 2001 event), offset by increases in salaries and
employee benefits of $1.5 million and loan collection and other real estate
18
owned costs of $1.0 million. The increase in income tax expense was due
primarily to a $22.5 million increase in net income before taxes for the nine
months ended September 30, 2002, when compared to the same period in 2001.
Table 1 depicts several annualized measurements of performance using GAAP net
income. Returns on average assets and equity measure how effectively an entity
utilizes its total resources and capital, respectively. 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 THIRD YEAR TO
QUARTER QUARTER QUARTER DATE
- -----------------------------------------------------------------------
2002
Return on average assets (ROAA) 1.21% 1.19% 1.18% 1.19%
Return on average equity (ROAE) 15.98% 15.89% 15.37% 15.72%
Efficiency ratio 57.57% 58.34% 57.33% 57.75%
Net interest margin 4.54% 4.48% 4.35% 4.46%
- -----------------------------------------------------------------------
2001
ROAA 1.10% 0.73% 0.16% 0.65%
ROAE 14.42% 9.42% 2.02% 8.45%
Efficiency ratio 60.64% 60.16% 65.07% 62.03%
Net interest margin 4.06% 4.10% 4.19% 4.12%
- -----------------------------------------------------------------------
19
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 September 30,
2002 2001
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 15,374 $ 109 2.81% $ 10,256 $ 132 5.11%
Trading securities 260 2 3.05 6,239 254 16.15
Securities available for sale (2) 965,055 14,254 5.86 944,590 15,563 6.54
Securities held to maturity (2) 86,840 1,379 6.30 98,097 1,546 6.25
Investment in FRB and FHLB Banks 22,718 142 2.48 21,473 380 7.02
Loans and leases (1) 2,350,015 42,149 7.12 2,360,770 47,361 7.96
---------- --------- ---------- ---------
Total interest earning assets 3,440,263 58,035 6.69 3,441,425 65,236 7.52
--------- ---------
Other assets 242,946 240,321
---------- ----------
TOTAL ASSETS $3,683,209 $3,681,746
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 271,049 1,145 1.68 $ 243,318 1,588 2.59
NOW deposit accounts 376,641 905 0.95 348,024 1,453 1.66
Savings deposits 494,304 1,841 1.48 443,607 2,538 2.27
Time deposits 1,315,059 11,857 3.58 1,494,832 18,663 4.95
---------- --------- ---------- ---------
Total interest bearing deposits 2,457,053 15,748 2.54 2,529,781 24,242 3.80
Short-term borrowings 106,018 417 1.56 117,133 1,136 3.85
Long-term debt 350,650 4,139 4.68 274,489 3,545 5.12
---------- --------- ---------- ---------
Total interest bearing liabilities 2,913,721 20,304 2.76% 2,921,403 28,923 3.93%
--------- ---------
Demand deposits 426,733 403,980
Other liabilities (3) 58,945 67,585
Stockholders' equity 283,810 288,778
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,683,209 $3,681,746
---------- ----------
NET INTEREST INCOME $ 37,731 $ 36,313
--------- ---------
INTEREST RATE SPREAD 3.93% 3.59%
-------- --------
NET INTEREST MARGIN 4.35% 4.19%
-------- --------
Taxable equivalent adjustment $ 1,024 $ 1,004
-------- --------
(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, and include nonaccruing
securities.
(3) Included in other liabilities are $17.0 million of the Company's junior
subordinated debentures.
20
Nine months ended September 30,
2002 2001
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 13,584 $ 302 2.97% $ 11,912 $ 469 5.26%
Trading securities 198 6 4.05 6,685 599 11.98
Securities available for sale (2) 939,634 43,503 6.19 933,941 47,038 6.73
Securities held to maturity (2) 96,009 4,536 6.32 100,835 4,971 6.59
Investment in FRB and FHLB Banks 21,582 544 3.37 24,647 1,244 6.75
Loans and leases (1) 2,330,096 126,127 7.24 2,300,360 142,893 8.31
---------- --------- ---------- ---------
Total interest earning assets 3,401,103 175,018 6.88 3,378,380 197,214 7.80
--------- ---------
Other assets 235,743 237,577
---------- ----------
TOTAL ASSETS $3,636,846 $3,615,957
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 272,078 3,266 1.60 $ 250,956 5,849 3.12
NOW deposit accounts 380,524 2,733 0.96 339,147 4,075 1.61
Savings deposits 478,122 5,383 1.51 420,311 7,446 2.37
Time deposits 1,339,836 37,622 3.75 1,495,161 61,027 5.46
---------- --------- ---------- ---------
Total interest bearing deposits 2,470,560 49,004 2.65 2,505,575 78,397 4.18
Short-term borrowings 89,521 1,052 1.57 131,547 4,565 4.64
Long-term debt 329,623 11,633 4.72 255,216 10,178 5.33
---------- --------- ---------- ---------
Total interest bearing liabilities 2,889,704 61,689 2.85% 2,892,338 93,140 4.31%
--------- ---------
Demand deposits 415,033 374,224
Other liabilities (3) 55,804 69,302
Stockholders' equity 276,305 280,093
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,636,846 $3,615,957
---------- ----------
NET INTEREST INCOME $ 113,329 $ 104,074
--------- ---------
INTEREST RATE SPREAD 4.03% 3.49%
------- -------
NET INTEREST MARGIN 4.46% 4.12%
------- -------
Taxable equivalent adjustment $ 3,195 $ 2,881
--------- ---------
(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., and include nonaccruing
securities.
(3) Included in other liabilities are $17.0 million of the Company's junior
subordinated debentures.
21
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 September 30,
---------------------------------------------------------------------
INCREASE (DECREASE)
2002 OVER 2001
---------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
---------------------------------------------------------------------
Short-term interest bearing accounts $ 66 $ (89) $ (23)
Trading securities (243) (9) (252)
Securities available for sale 337 (1,646) (1,309)
Securities held to maturity (177) 10 (167)
Investment in FRB and FHLB Banks 22 (260) (238)
Loans and leases (216) (4,996) (5,212)
---------------------------------------------------------------------
Total interest income (211) (6,990) (7,201)
---------------------------------------------------------------------
Money market deposit accounts 181 (624) (443)
NOW deposit accounts 119 (667) (548)
Savings deposits 290 (987) (697)
Time deposits (2,244) (4,562) (6,806)
Short-term borrowings (108) (611) (719)
Long-term debt 984 (390) 594
---------------------------------------------------------------------
Total interest expense (778) (7,841) (8,619)
---------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 567 $ 851 $ 1,418
=====================================================================
Nine months ended September 30,
---------------------------------------------------------------------
INCREASE (DECREASE)
2002 OVER 2001
---------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
---------------------------------------------------------------------
Short-term interest bearing accounts $ 37 $ (204) $ (167)
Trading securities (197) (396) (593)
Securities available for sale 264 (3,799) (3,535)
Securities held to maturity (228) (207) (435)
Investment in FRB and FHLB Banks (77) (623) (700)
Loans and leases 1,610 (18,376) (16,766)
---------------------------------------------------------------------
Total interest income 1,409 (23,605) (22,196)
---------------------------------------------------------------------
Money market deposit accounts 254 (2,837) (2,583)
NOW deposit accounts 297 (1,639) (1,342)
Savings deposits 651 (2,714) (2,063)
Time deposits (4,361) (19,044) (23,405)
Short-term borrowings (494) (3,019) (3,513)
Long-term debt 2,626 (1,171) 1,455
---------------------------------------------------------------------
Total interest expense (1,028) (30,423) (31,451)
---------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 2,436 $ 6,819 $ 9,255
=====================================================================
22
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 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 $1.4 million
during the three months ended September 30, 2002, compared to the same period of
2001. The increase in FTE net interest income resulted primarily from
interest-bearing liabilities repricing downward at a faster rate than earning
assets. The rate paid on interest-bearing liabilities decreased 117 basis points
("bp"), to 2.76% for the three months ended September 30, 2002, from 3.93% for
the same period in 2001. Meanwhile, the yield on earning assets decreased 83 bp,
to 6.69% for the three months ended September 30, 2002, from 7.52% for the same
period in 2001.
Total FTE interest income for the three months ended September 30, 2002,
decreased $7.2 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 $8.6 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. Average time deposits, the most significant
component of average interest-bearing liabilities, decreased to 45.1% of average
interest-bearing liabilities for the three months ended September 30, 2002, from
51.2% for the same period in 2001. Offsetting this decrease in average time
deposits, was an increase in lower cost NOW, MMDA, and Savings deposits, to
39.2% of average interest-bearing liabilities for the three months ended
September 30, 2002 from 35.4% for the same period in 2001. Total borrowings
increased slightly to 15.7% of average interest-bearing liabilities for the
three months ended September 30, 2002, from 13.4% for the same period in 2001.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin increased to 4.35% for the three months
ended September 30, 2002, up from 4.19% 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 rate paid on interest bearing liabilities exceeding the decrease in yield
on earning assets. The net interest margin declined from 4.48% for the three
months ended June 30, 2002 to 4.35% for the three months ended September 30,
2002. The above noted decline in net interest margin resulted primarily from
earning assets repricing down at a faster rate than interest bearing
liabilities. If interest rates remain static, the Company expects this trend to
continue for the next few quarters.
23
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 SEPTEMBER 30,
2002 2001
-------------- --------------
(in thousands)
Service charges on deposit accounts $ 3,531 $ 3,253
Broker/dealer and insurance fees 1,393 1,360
Trust 743 1,096
Other 2,612 2,379
-------------- --------------
Total noninterest income before net
securities and loan valuation losses 8,279 8,088
Net securities losses (6) (2,327)
Loan valuation losses (27) (10)
-------------- --------------
Total noninterest income $ 8,246 $ 5,751
============== ==============
Noninterest income excluding net securities and loan valuation losses, for the
three months ended September 30, 2002, increased 2.4% to $8.3 million from $8.1
million for the same period in 2001. The primary drivers of this increase were
service charges on deposit accounts and other income. Service charges on deposit
accounts increased $0.3 million or 8.5% for the three months ended September 30,
2002, compared to the same period in 2001. The increase in service charges on
deposit accounts was due primarily to strong growth in the Company's core
deposit base during 2002. Other income increased $0.2 million or 9.8% for the
three months ended September 30, 2002, compared to the same period in 2001. The
increase in other income resulted primarily from strong growth in fee income
generated from commercial banking activities.
Offsetting these increases in noninterest income was a decrease in trust revenue
of $0.4 million for the three months ended September 30, 2002, compared to the
same period in 2001. The decrease in trust revenue resulted primarily from
adverse stock market conditions in 2002, which resulted in a decrease in assets
managed by the Company's trust division, thereby lowering the trust division's
fee base. Broker/dealer and insurance fees remained relatively unchanged for the
three months ended September 30, 2002, compared to the same period in 2001, as
adverse stock market conditions have affected the Company's financial service
providers ability to significantly increase fee income. Additionally, during the
second and third quarters of 2002, the Company reorganized and realigned certain
delivery platforms for two of its financial service providers. This strategic
initiative limited these financial service providers sales efforts during this
period. The Company plans to roll out the new financial service platform in the
fourth quarter of 2002, and expects this new platform to result in an increase
in broker/dealer fees in 2003.
24
Net securities losses for the three months ended September 30, 2002, amounted to
less than $0.1 million. During this period, the Company sold $6.1 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 $2.6 million loss. Offsetting
these losses, were gains of $2.6 million resulting primarily from the sale of
various securities amounting to $51.1 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:
THREE MONTHS ENDED
SEPTEMBER 30,
(in thousands) 2002 2001
------------ ---------
Salaries and employee benefits $ 11,925 $ 12,464
Occupancy 2,032 2,111
Equipment 1,672 1,858
Data processing and communications 2,705 2,997
Professional fees and outside services 1,446 1,701
Office supplies and postage 1,116 1,154
Amortization of intangible assats 799 1,103
Capital securities 221 291
Loan collection and other real estate owned 610 549
Other 3,751 4,883
------------ ---------
Total noninterest expense before merger,
Acquisition and reorganazation costs 26,277 29,111
Merger, acquisition and reorganization costs (130) 231
------------ ---------
Total noninterest expense $ 26,147 $ 29,342
------------ ---------
Noninterest expense excluding merger, acquisition and reorganization costs
decreased $2.8 million or 9.7% to $26.3 million for the three months ended
September 30, 2002, from $29.1 million for the same period in 2001. Salaries and
employee benefits decreased $0.5 million or 4.3%, to $11.9 million for the three
months ended September 30, 2002, from $12.5 million for the same period in 2001.
The decrease in salaries and employee benefits resulted primarily from a
decrease in salary expense of $0.9 million due to a decrease in full time
equivalent employees, resulting from the integration of companies acquired in
2001. Offsetting this decrease was an increase in benefit costs of $0.5 million
due primarily to increases in retirement and medical costs. Other expense
decreased $1.1 million, to $3.8 million for the three months ended September 30,
2002, from $4.9 million for the same period in 2001. This decrease was driven
primarily by a $1.8 million charge taken for the other-than-temporary impairment
in residual values of automobile leases in 2001 held by CNB. Occupancy,
25
equipment, professional fees, data processing and communications decreased $0.8
million in the quarter ended September 30, 2002, when compared to the same
period in 2001, primarily due to the successful integration of companies
acquired in 2001.
Amortization of intangible assets decreased $0.3 million, to $0.8 million for
the three months ended September 30, 2002, from $1.1 million for the same period
in 2001. The decrease in amortization of intangible assets resulted from the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142. Had the
requirements of SFAS No. 142 been applied to the 2001 period, amortization of
intangible assets would have been $0.9 million.
As discussed in note 6 to the September 30, 2002 unaudited interim consolidated
financial statements, upon adoption of SFAS No. 147 on October 1, 2002, the
Company will retroactively apply the provisions of SFAS No. 147 to all quarters
in 2002. This retroactive application of SFAS No. 147 will result in a reduction
in amortization of intangible assets by $0.6 million, resulting in amortization
expense totaling $0.2 million for the three months ended September 30, 2002.
Prospectively, amortization of intangible assets will be likewise reduced, such
that amortization of intangible assets will approximate $0.2 million for the
three months end December 31, 2002, and $0.6 million for 2003.
Income Taxes
- -------------
Income tax expense for the three months ended September 30, 2002, was $5.4
million resulting in an effective tax rate of 32.9%, compared to $1.1 million,
or 41.9%, for the same period in 2001. The higher effective tax rate in the 2001
period resulted primarily from changes in tax planning strategies at CNB
resulting from its planned merger with NBT. Prior to CNB's planned merger with
NBT, it anticipated an effective tax rate for 2001 which would have been
significantly impacted by the planned purchase of tax exempt securities in the
second half of 2001. As a result of the planned merger, such purchases were not
made which increased CNB's estimated 2001 effective tax rate and therefore,
required an increase in tax expense for the three months ended September 30,
2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
Net Interest Income
- -------------------
FTE net interest income increased $9.3 million to $113.3 million for 2002
compared to $104.1 million for 2001. The net interest margin improved 34 bp from
4.12% to 4.46%. 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 146 bp, to 2.85%
for 2002, from 4.31% for 2001. Meanwhile, the yield on earning assets decreased
92 bp, to 6.88% for 2002, from 7.80% for 2001.
Total FTE interest income for 2002, decreased $22.2 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 $31.5 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,
26
decreased to 46.4% of interest-bearing liabilities for 2002 from 51.7% for 2001.
Offsetting this decrease in interest-bearing liabilities, was an increase in
lower cost NOW, MMDA, and Savings deposits, to 39.1% of interest-bearing
liabilities for 2002 from 34.9% for 2001. Total borrowings remained relatively
unchanged, comprising 14.5% and 13.4% 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:
For the nine months ended
September 30,
(in thousands) 2002 2001
------------------------------
Service charges on deposit accounts $ 9,820 $ 9,250
Broker/dealer and insurance fees 4,371 3,283
Trust 2,366 3,212
Other 7,632 7,080
------------------------------
Total noninterest income before securities,
loan valuation, branch, and building sales
transactions 24,189 22,825
Net securities (losses) (439) (1,077)
Loan valuation (losses) gains (77) 16
Gain on sale of a branch, net 220 -
Gain on sale of a building - 1,367
------------------------------
Total $ 23,893 $ 23,131
------------------------------
Noninterest income before securities losses, loan valuation losses and gains,
gain on sale of a branch, and gain on sale of a building increased $1.4 million
or 6.0% to $24.2 million for 2002 from $22.8 million for the same period in
2001. Broker/dealer and insurance fees increased $1.1 million, primarily driven
by one of the Company's financial services providers, Colonial Financial
Services, Inc., which began operations in June 2001, resulting in a full nine
months of revenue totaling $1.2 million in 2002 compared to four months of
revenue in 2001 totaling $0.3 million. Service charges on deposit accounts in
2002 increased $0.6 million or 6.2% over the same period a year earlier as a
result of the Company's acquisition of FNB in June of 2001, which added 6
branches to the Company's branch network. Additionally, the Company has
experienced a strong increase in core deposits during 2002 resulting in higher
fee income from deposit accounts. Other income increased $0.6 million or 7.8% in
2002 when compared to 2001, due mainly to the Company's market expansion,
driving growth in fees from retail banking activities. Offsetting these
increases was a decrease in trust revenue of $0.8 million or 26.3% for 2002 when
compared to 2001. This decrease in trust revenue resulted primarily from adverse
stock market conditions in 2002, which lead to a decrease in assets under
management in the trust division, thereby lowering the trust division's fee
base. Additionally, the number of estate accounts serviced by the trust division
decreased in 2002 compared to 2001.
27
Noninterest Expense
- -------------------
The following table sets forth information by category of noninterest expense
for the periods indicated:
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---------------- ---------------
(in thousands)
Salaries and employee benefits $ 37,230 $ 35,766
Occupancy 6,297 6,577
Equipment 5,204 5,291
Data processing and communications 7,868 8,001
Professional fees and outside services 4,843 4,301
Office supplies and postage 3,240 3,515
Amortization of intangible assets 2,489 3,079
Capital securities 667 1,036
Loan collection and other real estate owned 2,335 1,356
Other 9,069 9,868
---------------- ---------------
Total noninterest expense before the below
noted items 79,242 78,790
Merger, acquisition, and reorganization costs (130) 231
Certain deposit overdraft write-offs - 2,125
---------------- ---------------
Total noninterest expense $ 79,112 $ 81,146
================ ===============
Noninterest expense before merger, acquisition, and reorganization costs and
certain deposit overdraft write-offs, increased $0.5 million or 0.6% to $79.2
million for 2002 from $78.8 million for 2001. Salaries and employee benefits
increased $1.5 million or 4.1%, to $37.2 million for 2002 from $35.8 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 $0.5 million offset by a decrease in
salary expense of $0.6 million. Professional fees and costs of outside services
increased $0.5 million, to $4.8 million for 2002 from $4.3 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 $1.0 million, to
$2.3 million for 2002 from $1.4 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
decreased $0.8 million, to $9.1 million for 2002 from $9.9 million for 2001. The
decrease in other expense was due primarily to a $1.8 million charge taken in
2001 for the other-than-temporary impairment in residual values for leased
automobiles from CNB offset by increases related to $0.3 million of expense
related to a noncompetition agreement, and an increase in marketing expense of
$0.3 million. Occupancy, equipment, data processing, communications, 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.
28
Capital securities expense decreased $0.4 million, to $0.7 million for 2002 from
$1.0 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 nine months of
2002 when compared to the same period in 2001.
Amortization of intangible assets decreased $0.6 million, to $2.5 million for
2002 from $3.1 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
$0.6 million.
As discussed in note 6 to the unaudited interim consolidated financial
statements, upon adoption of SFAS No. 147 on October 1, 2002, the Company will
retroactively apply the provision of SFAS No. 147 to all quarters in 2002. This
retroactive application of SFAS No. 147 will result in a reduction in
amortization of intangible assets by $1.9 million, resulting in amortization
expense totaling $0.6 million for the nine months ended September 30, 2002.
Income Taxes
- -------------
Income tax expense for 2002 was $15.9 million for an effective tax rate of
32.8%, compared to $8.2 million, or 31.7%, for 2001. The lower effective tax
rate in the 2001 period resulted primarily from lower net income before tax when
compared to the 2002 period.
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:
September 30, December 31, September 30,
2002 2001 2001
---------------------------------------------
(in thousands)
Commercial and commercial mortgages* $ 1,056,201 $ 1,053,416 $ 1,052,224
Residential real estate mortgages 626,838 594,206 583,135
Consumer 615,207 613,631 634,995
Leases 63,609 72,048 76,811
Other loans 5,833 6,335 6,999
---------------------------------------------
Total loans and leases $ 2,367,688 $ 2,339,636 $ 2,354,164
=============================================
* Includes agricultural loans
Total loans and leases were $2.4 billion, or 63.5% of assets, at September 30,
2002, compared to $2.3 billion, or 64.3%, at December 31, 2001, and $2.4
billion, or 64.2%, at September 30, 2001. Total loans and leases increased $28.1
million or 1.2% at September 30, 2002, when compared to December 31, 2001. The
slight increase in total loans and leases during the year resulted mainly from
sluggish economic conditions experienced during 2002 in the Company's markets
which had limited loan growth opportunities. Furthermore, the Company's on going
29
efforts to improve the credit administration functions at its recently acquired
banks and its continued focus on resolving troubled loans placed limits on the
Company's ability to increase loans. The increase in loans and leases in 2002
was driven primarily from residential real estate mortgages, which increased
$32.6 million or 5.5%, due primarily to increased demand driven by historically
low mortgage rates for the fixed rate residential real estate mortgage product
lines in 2002.
Securities
- ----------
Average total securities were $5.6 million less for the first nine 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 nine months of 2002,
the securities portfolio represented 30.5% of average earning assets compared to
30.8% for the same period in 2001. At September 30, 2002, the securities
portfolio was comprised of 92% available for sale and 8% 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 $1.3 million private issue
CMO at September 30, 2002. The decrease in nonperforming securities during the
first nine 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 $0.7 million in payments from the impaired CMO during 2002,
resulting in a reduction in the carrying amount of the CMO to $1.3 million.
Included in the securities available for sale portfolio at September 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 other securities held in
the Company's investment portfolio because they are not guaranteed by a
governmental agency or a government sponsored enterprise (GSE). The Company's
general practice is to purchase CMO and mortgage-backed securities that are
guaranteed by a governmental agency or a GSE coupled with a strong credit
rating, typically AAA, issued by Moody's or Standard and Poors.
At September 30, 2002, the amortized cost and fair value of these securities
amounted to $13.5 million and $13.5 million, respectively, down from $38.7
million and $38.5 million, respectively, at December 31, 2001. The decrease at
September 30, 2002, when compared to December 31, 2001, resulted primarily from
sales and principal paydowns. During 2002, the Company sold $11.5 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, resulting in a $7.1 million loss. Offsetting these
losses were gains of $7.2 million, resulting from the sale of approximately
$181.6 million in securities available for sale during 2002. 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
remaining securities totaling $13.5 million 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,
30
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.
Allowance for Loan and Lease Losses, Nonperforming Assets and the Provision for
- --------------------------------------------------------------------------------
Loan and Lease 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
31
and lease losses to outstanding loans and leases at September 30, 2002, was
1.83% compared to 1.62% at September 30, 2001. Management considers the
allowance for loan losses to be adequate based on evaluation and analysis of the
loan portfolio.
Table 4 reflects changes to the allowance for loan 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 AND LEASE LOSSES
- -------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $43,719 $34,126 $ 44,746 $ 32,494
Recoveries 1,014 913 3,314 1,753
Chargeoffs (3,827) (6,193) (11,257) (13,989)
- -------------------------------------------------------------------------------------------------------------------
Net chargeoffs (2,813) (5,280) (7,943) (12,236)
Allowance related to purchase
acquisition - - - 505
Provision for loan losses 2,424 9,188 6,527 17,271
- -------------------------------------------------------------------------------------------------------------------
Balance, end of period $43,330 $38,034 $ 43,330 $ 38,034
===================================================================================================================
COMPOSITION OF NET CHARGEOFFS
- -------------------------------------------------------------------------------------------------------------------
Commercial and agricultural $(1,895) 67% $(4,276) 81% $ (4,212) 53% $ (9,491) 78%
Real estate mortgage (204) 7% (217) 4% (575) 7% (425) 3%
Consumer (714) 26% (787) 15% (3,156) 40% (2,320) 19%
- -------------------------------------------------------------------------------------------------------------------
Net chargeoffs $(2,813) 100% $(5,280) 100% $ (7,943) 100% $(12,236) 100%
- -------------------------------------------------------------------------------------------------------------------
Annualized net chargeoffs
to average loans and leases 0.48% 0.89% 0.46% 0.71%
===================================================================================================================
Net chargeoffs to average loans and
leases for the year 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 $35.1 million at September 30, 2002, compared to
$49.9 million at December 31, 2001, and $37.1 million at September 30, 2001. The
increase from September 30, 2001, to December 31, 2001, can be primarily
attributed to a $8.5 million increase in nonperforming loans. This increase was
primarily the result of integrating newly acquired banks into the Company's more
conservative credit culture as well as adverse economic conditions.
Nonperforming loans totaled $30.7 million at September 30, 2002, down from the
32
$43.8 million outstanding at December 31, 2001. The $13.1 million decrease in
nonperforming loans from December 31, 2001 to September 30, 2002, was due
primarily to the Company's successful efforts in resolving certain large
problematic commercial loans. Nonaccrual commercial and agricultural loans
decreased $11.9 million, from $31.4 million at December 31, 2001, to $19.5
million at September 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 $2.4 million and $6.5 million, respectively, for the three and
nine months ended September 30, 2002, down from the $9.2 million and $17.3
million provided in the same periods in 2001.
As anticipated, net charge-offs exceeded the provision for loan and lease losses
for the three and nine months ended September 30, 2002 when compared to the same
periods in 2001 as a result of the Company fully reserving for charge-offs of
large problematic loans in prior periods. As the Company continues to resolve
problematic loans previously identified, and if the level of problematic loans
continues to decline, the Company expects that net charge-offs may exceed the
provision for loan and lease losses in the next few quarters.
TABLE 5
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(dollars in thousands) 2002 2001 2001
- ----------------------------------------------------------------------------------------------------------
Commercial and agricultural $ 19,457 $ 31,372 $ 24,472
Real estate mortgage 8,024 5,119 4,717
Consumer 2,000 3,719 2,566
- ----------------------------------------------------------------------------------------------------------
Total nonaccrual loans 29,481 40,210 31,755
- ----------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 88 198 169
Real estate mortgage 625 1,844 1,489
Consumer 125 933 902
- ----------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 838 2,975 2,560
- ----------------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: 412 603 606
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans 30,731 43,788 34,921
- ----------------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 3,092 1,577 1,643
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 33,823 45,365 36,564
==========================================================================================================
Nonperforming securities 1,312 4,500 557
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 35,135 $ 49,865 $ 37,121
==========================================================================================================
Total nonperforming loans to loans and leases 1.30% 1.87% 1.48%
Total nonperforming assets to assets 0.94% 1.37% 1.01%
Total allowance for loan and lease losses
to nonperforming loans 141.00% 102.19% 108.91%
==========================================================================================================
One of the standard practices of the Company's credit administration function is
to rate loans on a periodic basis based on the loans level of risk. Under the
Company's current loan ratings system, "substandard" rated loans that are not
classified as nonperforming are considered to be potential problem loans.
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 September 30, 2002, the
Company identified $46.0 million in potential problem loans, down from the $48.6
33
million in potential problem loans at December 31, 2001. At September 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.
Deposits
- --------
Total deposits were $2.9 billion at September 30, 2002, and 2001, and year-end
2001. Total average deposits increased $5.8 million, or 0.2%, from September
30, 2001 to September 30, 2002. The Company's acquisition of FNB in September
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 jumbo and municipal time
deposits. At September 30, 2002, total checking, savings and money market
accounts represented 55.0% of total deposits compared to 51.0% at September 30,
2001.
Borrowings
- ----------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $113.2 million at September 30, 2002,
compared to $122.0 million and $101.2 million at December 31, and September 30,
2001, respectively. Long-term debt was $350.6 million at September 30, 2002,
compared to $272.3 million and $274.6 million at December 31, and September 30,
2001, respectively, as the Company took advantage of lower interest rates and
locked in longer term advances.
CAPITAL RESOURCES
Stockholders' equity of $286.4 million represents 7.7% of total assets at
September 30, 2002, compared with $292.5 million, or 8.0% 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
REGULATORY CAPITAL
- -------------------
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, SEPTEMBER 30,
- --------------------------------------------------------------------------------------
2002
----
Tier 1 leverage ratio 6.71% 6.87% 6.61%
Tier 1 capital ratio 9.94% 9.99% 9.75%
Total risk-based capital ratio 11.20% 11.24% 11.01%
Cash dividends as a percentage of net income 52.71% 52.38% 51.17%
Per common share:
Book Value $ 8.07 $ 8.50 $ 8.75
Tangible book value $ 6.62 $ 7.07 $ 7.32
- --------------------------------------------------------------------------------------
2001
----
Tier 1 leverage ratio 7.18% 7.07% 6.82%
Tier 1 capital ratio 10.70% 10.00% 10.09%
Total risk-based capital ratio 11.95% 11.23% 11.34%
Cash dividends as a percentage of net income 48.89% 59.36% 329.88%
Per common share:
Book Value $ 8.60 $ 8.74 $ 8.84
Tangible book value $ 7.22 $ 7.21 $ 7.30
- --------------------------------------------------------------------------------------
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 1.97 at September 30,
2002, and 1.62 a year ago. The per share market price was 13.28 times annualized
diluted earnings at September 30, 2002, and 20.14 times annualized diluted
earnings at September 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
SEPTEMBER 30 $18.50 $16.36 $17.27 $ 0.170
=======================================================
35
STOCK REPURCHASE PLAN
- -----------------------
On July 22, 2002, the Company announced that it intended 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. Since the announcement of the Stock Repurchase Plan, the Company
repurchased a total of 437,954 shares in the three months ended September 30,
2002, at an average price of $17.43 per share. Since the announcement on July
22, 2002, the Company's stock price has ranged between $16.36 and $18.50. The
total trading volume of the Company's common stock for this same period was
approximately 2.7 million shares, the Company's repurchase activity during this
period was 16% of the total trading volume. Total cash allocated for these
repurchases during the three months ended September 30, 2002 was $7.6 million.
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.
36
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. Three additional models are run in which a gradual increase of 200 bp,
a gradual increase of 200 bp where the long end of the yield curve remains flat
(the long end of the yield curve is defined as 5 years and longer) and a gradual
decrease of 150 bp takes place over a 12 month period with a static balance
sheet. Under these scenarios, assets subject to prepayments are adjusted to
account for faster or slower prepayment assumptions. Any investment securities
or borrowings that have callable options embedded into them are handled
accordingly based on the interest rate scenario. The resultant changes in net
interest income are then measured against the flat rate scenario.
In the declining rate scenarios, net interest income is projected to increase
slightly 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. The
inability to effectively lower deposit rates on deposits might reduce or
eliminate the benefit of lower rates. In the rising rate scenarios, net interest
income is projected to experience a decline from the flat rate scenario. Net
interest income is projected to remain at lower levels than in a flat rate
scenario through the simulation period primarily due to a lag in assets
repricing while funding costs increase. The potential impact on earnings is
dependent on the ability to lag deposit repricing.
Net interest income for the next twelve months in a + 200/+ 200 flat/- 150 bp
scenario is within the internal policy risk limits of a not more than a 7.5%
change in net interest income. The following table summarizes the percentage
change in net interest income in the rising and declining rate scenarios over a
12 month period from the forecasted net interest income in the flat rate
scenario using the September 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 Flat (1.10%)
+ 200 (0.34%)
- 150 0.06%
---------------------------------------------------------
Under the flat rate scenario with a static balance sheet, net interest income is
anticipated to decrease approximately 2.2% from annualized total net interest
income for the three months ended September 30, 2002. The Company anticipates
under current conditions, earning assets will continue to reprice at a faster
rate than interest bearing liabilities. In order to protect net interest income
from anticipated net interest margin compression, the Company will continue to
37
focus on increasing low cost core funding and grow earning assets through loan
growth and leverage opportunities. However, if the Company cannot increase low
cost core funding and earning assets, the Company expects net interest income to
decline in 2003.
Currently, the Company is holding fixed rate residential real estate mortgages
in its loan portfolio. One of the major factors the Company considers in holding
residential real estate mortgages is its level of core deposits. Current core
deposit levels have enabled the Company to hold fixed rate residential real
estate mortgages without having a negative impact on interest rate risk, as the
Company is well matched at September 30, 2002. The Company's net interest income
is projected to decrease by only 0.34% if interest rates rise 200 basis points.
The Company closely monitors its matching of earning assets to funding sources.
If core deposit levels decrease or the rate of growth in core deposit levels
does not equal or exceed the rate in growth of fixed rate residential real
estate mortgages, the Company will reevaluate its strategy and may sell new
originations of fixed rate mortgages in the secondary market in order to limit
the Company's exposure to long-term earning assets.
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 September 30, 2002,
the Company's Basic Surplus measurement was 13.91% of total assets, which was
above the Company's minimum of 5% set forth in its liquidity policies. The
Company's liquidity position at September 30, 2002, is considered adequate to
meet liquidity needs. However, 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.
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.
38
At September 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.
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.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in timely alerting them to any material
information relating to the Company and its subsidiaries required to be included
in the Company's periodic SEC filings.
There were no significant changes made in the Company's internal controls or in
other factors that that could significantly affect these internal controls
subsequent to the date of the evaluation performed by the Company's Chief
Executive Officer and Chief Financial Officer.
39
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
None
Item 5 -- Other Information
On October 28, 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
December 15, 2002, to stockholders of record as of December 1, 2002.
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Written Statement of the Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) During the quarter ended September 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 November 2002.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
----------------------------------
Michael J. Chewens, CPA
Senior Executive Vice President
Chief Financial Officer and Corporate Secretary
41
CERTIFICATIONS
I, Daryl R. Forsythe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Daryl R. Forsythe
----------------------------
Chairman and Chief Executive
Officer
42
I, Michael J. Chewens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Michael J. Chewens
--------------------------------
Senior Executive Vice President,
Chief Financial Officer and
Corporate Secretary
43
Index to Exhibits
99.1 Written Statement of the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Written Statement of the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
44
Exhibit 99.1
Written Statement of the Chief Executive Officer Pursuant to Section 906 of the
----------
Sarbanes-Oxley Act of 2002
- -----------------------------
The undersigned, the Chief Executive Officer of NBT Bancorp Inc. (the
"Company"), hereby certifies that to his knowledge on the date hereof:
(a) the Form 10-Q of the Company for the Quarterly Period Ended September
30, 2002, filed on the date hereof with the Securities and Exchange
Commission (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Daryl R. Forsythe
----------------------
Daryl R. Forsythe
Chairman and Chief Executive Officer
November 13, 2002
45
Exhibit 99.2
Written Statement of the Chief Financial Officer Pursuant to Section 906 of the
----------
Sarbanes-Oxley Act of 2002
- -----------------------------
The undersigned, the Chief Financial Officer of NBT Bancorp Inc. (the
"Company"), hereby certifies that to his knowledge on the date hereof:
(a) the Form 10-Q of the Company for the Quarterly Period Ended September
30, 2002, filed on the date hereof with the Securities and Exchange
Commission (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Michael J. Chewens
-------------------------
Michael J. Chewens
Senior Executive Vice President
Chief Financial Officer and
Corporate Secretary
November 13, 2002
46