SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004.
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [_]
As of July 31, 2004, there were 32,593,477 shares outstanding of the
Registrant's common stock, $0.01 par value.
NBT BANCORP INC.
FORM 10-Q--Quarter Ended June 30, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2004, December 31, 2003, and
June 30, 2003
Consolidated Statements of Income for the three and six month periods
ended June 30, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the six month
periods ended June 30, 2004 and 2003
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2004 and 2003
Consolidated Statements of Comprehensive Income for the three and six
month periods ended June 30, 2004 and 2003
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 and Use of Proceeds
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
NBT BANCORP INC. AND SUBSIDIARIES JUNE 30, December 31, June 30,
CONSOLIDATED BALANCE SHEETS (UNAUDITED) 2004 2003 2003
- ---------------------------------------------------------------- ----------- -------------- -----------
(in thousands, except share and per share data)
ASSETS
Cash and due from banks $ 102,705 $ 125,590 $ 143,884
Short-term interest bearing accounts 7,240 2,502 3,576
Securities available for sale, at fair value 980,097 980,961 987,147
Securities held to maturity (fair value - $80,390, $98,576,
and $94,339) 79,766 97,204 92,452
Federal Reserve and Federal Home Loan Bank stock 35,994 34,043 29,175
Loans and leases 2,753,625 2,639,976 2,496,385
Less allowance for loan and lease losses 43,482 42,651 40,858
- ---------------------------------------------------------------- ----------- -------------- -----------
Net loans 2,710,143 2,597,325 2,455,527
Premises and equipment, net 62,008 62,443 61,332
Goodwill 47,521 47,521 47,558
Intangible assets, net 2,189 2,331 2,606
Bank owned life insurance 31,609 30,815 30,014
Other assets 66,102 66,150 64,186
- ---------------------------------------------------------------- ----------- -------------- -----------
TOTAL ASSETS $4,125,374 $ 4,046,885 $3,917,457
- ---------------------------------------------------------------- ----------- -------------- -----------
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 490,573 $ 500,303 $ 470,422
Savings, NOW, and money market 1,494,278 1,401,825 1,304,304
Time 1,055,758 1,099,223 1,190,470
- ---------------------------------------------------------------- ----------- -------------- -----------
Total deposits 3,040,609 3,001,351 2,965,196
Short-term borrowings 349,144 302,931 211,981
Trust preferred debentures 18,720 - -
Long-term debt 369,567 369,700 370,129
Other liabilities 39,659 45,869 55,301
- ---------------------------------------------------------------- ----------- -------------- -----------
Total liabilities 3,817,699 3,719,851 3,602,607
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures - 17,000 17,000
Stockholders' equity:
Preferred stock none issued - - -
Common stock, $0.01 par value; shares authorized- 50,000,000;
shares issued 34,401,041, 34,401,088, and 34,401,128
at June 30, 2004, December 31, 2003, and June 30, 2003,
respectively 344 344 344
Additional paid-in-capital 209,396 209,267 209,769
Retained earnings 133,146 120,016 107,409
Unvested stock awards (413) (197) (260)
Accumulated other comprehensive (loss) income (2,641) 7,933 14,573
Treasury stock at cost 1,786,211, 1,592,435,
and 1,980,290 shares at June 30, 2004, December 31, 2003
and June 30, 2003, respectively (32,157) (27,329) (33,985)
- ---------------------------------------------------------------- ----------- -------------- -----------
Total stockholders' equity 307,675 310,034 297,850
- ---------------------------------------------------------------- ----------- -------------- -----------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $4,125,374 $ 4,046,885 $3,917,457
================================================================ =========== ============== ===========
See notes to unaudited interim consolidated financial statements.
3
NBT BANCORP INC. AND SUBSIDIARIES Three months ended June 30, Six months ended June 30,
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) 2004 2003 2004 2003
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
(in thousands, except per share data)
Interest, fee and dividend income:
Interest and fees on loans and leases $ 39,635 $ 39,540 $ 79,529 $ 79,155
Securities available for sale 10,313 10,864 21,082 22,669
Securities held to maturity 755 857 1,552 1,746
Other 235 332 502 658
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Total interest, fee and dividend income 50,938 51,593 102,665 104,228
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Interest expense:
Deposits 9,674 12,040 19,719 24,652
Short-term borrowings 794 370 1,587 659
Long-term debt 3,627 3,691 7,242 7,396
Trust preferred debentures 163 - 343 -
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Total interest expense 14,258 16,101 28,891 32,707
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Net interest income 36,680 35,492 73,774 71,521
Provision for loan and lease losses 2,428 1,413 4,552 3,353
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Net interest income after provision for loan and lease losses 34,252 34,079 69,222 68,168
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Noninterest income:
Trust 1,142 1,116 2,249 2,008
Service charges on deposit accounts 4,090 3,764 8,127 7,367
Broker/dealer and insurance fees 1,783 1,750 3,514 3,142
Net securities gains 29 38 38 65
Bank owned life insurance income 409 14 794 14
Other 2,536 2,257 5,710 5,085
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Total noninterest income 9,989 8,939 20,432 17,681
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Noninterest expenses:
Salaries and employee benefits 12,542 12,060 26,655 24,719
Office supplies and postage 1,143 1,011 2,174 2,084
Occupancy 2,446 2,182 5,044 4,708
Equipment 1,781 1,944 3,634 3,710
Professional fees and outside services 1,424 1,240 3,056 2,542
Data processing and communications 2,852 2,720 5,544 5,441
Amortization of intangible assets and goodwill 71 155 142 317
Capital securities - 179 - 370
Loan collection and other real estate owned 99 476 471 756
Other operating 3,505 3,881 6,345 7,093
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Total noninterest expenses 25,863 25,848 53,065 51,740
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
Income before income tax expense 18,378 17,170 36,589 34,109
Income tax expense 5,810 5,362 11,650 10,735
- -------------------------------------------------------------- ------------- --------------- -------------- -------------
NET INCOME $ 12,568 $ 11,808 $ 24,939 $ 23,374
============================================================== ============= =============== ============== =============
Earnings per share:
Basic $ 0.38 $ 0.36 $ 0.76 $ 0.72
Diluted $ 0.38 $ 0.36 $ 0.75 $ 0.71
============================================================== ============= =============== ============== =============
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 Earning Stock (Loss)/Income Stock Total
- ----------------------------------------- ------- ------------ ---------- ------------ --------------- ---------- ---------
(in thousands, except per share data)
BALANCE AT DECEMBER 31, 2002 $ 344 $ 210,443 $ 95,085 $ (127) $ 16,531 $ (29,894) $292,382
Net income 23,374 23,374
Cash dividends - $0.34 per share (11,050) (11,050)
Purchase of 369,313 treasury shares (6,489) (6,489)
Issuance of 41,980 shares in
exchange for 20,172 shares
received as consideration for the
exercise of incentive stock options (357) 357 -
Issuance of 107,403 shares to
employee benefit plans and
other stock plans, including
tax benefit (317) 1,838 1,521
Grant of 11,536 shares of restricted
stock awards (203) 203 -
Amortization of restricted stock awards 70 70
Other comprehensive loss (1,958) (1,958)
- ----------------------------------------- ------- ------------ ---------- ------------ --------------- ---------- ---------
BALANCE AT JUNE 30, 2003 $ 344 $ 209,769 $ 107,409 $ (260) $ 14,573 $ (33,985) $297,850
========================================= ======= ============ ========== ============ =============== ========== =========
BALANCE AT DECEMBER 31, 2003 $ 344 $ 209,267 $ 120,016 $ (197) $ 7,933 $ (27,329) $310,034
Net income 24,939 24,939
Cash dividends - $0.36 per share (11,809) (11,809)
Purchase of 351,331 treasury shares (7,558) (7,558)
Issuance of 134,147 shares to
employee benefit plans and other
stock plans, including tax benefit 70 2,494 2,564
Grant of 24,371 shares of restricted
stock awards 59 (312) 253 -
Amortization of restricted stock awards 79 79
Forfeited 963 shares of restricted stock 17 (17) -
Other comprehensive loss (10,574) (10,574)
- ----------------------------------------- ------- ------------ ---------- ------------ --------------- ---------- ---------
BALANCE AT JUNE 30, 2004 $ 344 $ 209,396 $ 133,146 $ (413) $ (2,641) $ (32,157) $307,675
========================================= ======= ============ ========== ============ =============== ========== =========
See notes to unaudited interim consolidated financial statements.
5
NBT Bancorp Inc. and Subsidiaries Six Months Ended June 30,
Consolidated Statements of Cash Flows (unaudited) 2004 2003
- -------------------------------------------------------------- --------------- --------------
(in thousands)
OPERATING ACTIVITIES:
Net income $ 24,939 $ 23,374
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 4,552 3,353
Depreciation of premises and equipment 3,028 3,232
Net amortization on securities 1,459 2,250
Amortization of intangible assets 142 317
Amortization of restricted stock awards 79 70
Proceeds from sale of loans held for sale 23,398 7,581
Origination of loans held for sale (1,025) (2,350)
Net losses (gains) on sale of loans (108) -
Net loss on disposal of premises and equipment - -
Net (gain) loss on sale of other real estate owned (652) (710)
Net security (gains) losses (38) (65)
Writedown of nonmarketable equity securities - 620
Purchase of Bank Owned Life Insurance - (30,000)
Net decrease (increase) in other assets 6,198 (3,694)
Net decrease in other liabilities (6,210) 13,160
- -------------------------------------------------------------- --------------- --------------
Net cash provided by operating activities 55,762 17,138
- -------------------------------------------------------------- --------------- --------------
INVESTING ACTIVITIES:
Net cash and cash equivalents provided by acquisitions - 10,594
Securities available for sale:
Proceeds from maturities 155,276 227,529
Proceeds from sales 12,794 177,526
Purchases (185,197) (390,249)
Securities held to maturity:
Proceeds from maturities 33,999 29,473
Purchases (16,572) (39,446)
Net (Purchases) proceeds of FRB and FHLB stock (1,951) (5,476)
Net (increase) decrease in loans (140,095) (148,341)
Purchase of premises and equipment, net (2,593) (3,275)
Proceeds from sales of other real estate owned 1,899 2,434
- -------------------------------------------------------------- --------------- --------------
Net cash (used in) provided by investing activities (142,440) (139,231)
- -------------------------------------------------------------- --------------- --------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 39,253 29,845
Net (decrease) in short-term borrowings 46,214 106,380
Proceeds from issuance of long-term debt 30,000 125,000
Repayments of long-term debt (30,133) (100,346)
Proceeds from issuance of treasury shares to employee benefit
plans and other stock plans, including tax benefit 2,564 1,521
Purchase of treasury stock (7,558) (6,489)
Cash dividends (11,809) (11,050)
- -------------------------------------------------------------- --------------- --------------
Net cash provided by (used in) financing activities 68,531 144,861
- -------------------------------------------------------------- --------------- --------------
Net (decrease) increase in cash and cash equivalents (18,147) 22,768
Cash and cash equivalents at beginning of period 128,092 124,623
- -------------------------------------------------------------- --------------- --------------
CASH AND CASH EQUIVALENTS AND END OF PERIOD $ 109,945 $ 147,391
- -------------------------------------------------------------- --------------- --------------
(continued)
6
Consolidated Statements of Cash Flows, Continued Six Months Ended June 30,
Supplemental disclosure of cash flow information: 2004 2003
Cash paid during the period for:
Interest $ 29,705 $ 33,819
Income taxes 7,335 6,100
- -------------------------------------------------------------- --------------- --------------
Transfers:
Loans transferred to OREO $ 460 $ 1,122
- -------------------------------------------------------------- --------------- --------------
Acquisitions:
- -------------------------------------------------------------- --------------- --------------
Fair value of assets acquired - $ 1,155
Fair value of liabilities assumed - 13,311
See notes to unaudited interim consolidated financial statements.
7
- ----------------------------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2004 2003 2004 2003
- --------------------------------------------------- -------------- ---------------- --------------- --------------
(in thousands and unaudited)
Net income $ 12,568 $ 11,808 $ 24,939 $ 23,374
- --------------------------------------------------- -------------- ---------------- --------------- --------------
Other comprehensive (loss), net of tax
Unrealized holding (losses) arising during
period [pre-tax amounts of $(24,792) $(488),
$(17,548), and $(2,831)] (15,124) (293) (10,551) (1,702)
Minimum pension liability adjustment - - - (217)
Less: Reclassification adjustment for net (gains)
included in net income [pre-tax amounts of
$(29), $(38), $(38), and $(65)] (17) (23) (23) (39)
- --------------------------------------------------- -------------- ---------------- --------------- --------------
Total other comprehensive (loss) (15,141) (316) (10,574) (1,958)
- --------------------------------------------------- -------------- ---------------- --------------- --------------
Comprehensive income (loss) $ (2,573) $ 11,492 $ 14,365 $ 21,416
- ----------------------------------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
8
NBT BANCORP INC. and Subsidiary
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. DESCRIPTION OF BUSINESS
NBT Bancorp Inc. (the Company or the Registrant) is a registered financial
holding company incorporated in the state of Delaware in 1986, with its
principal headquarters located in Norwich, New York. The Company is the parent
holding company of NBT Bank, N.A. (the Bank) and NBT Financial Services, Inc.
(NBT Financial). Through these subsidiaries, the Company operates as one segment
focused on community banking operations. The Company's primary business consists
of providing commercial banking and financial services to its customers in its
market area. The principal assets of the Company are all of the outstanding
shares of common stock of its direct subsidiaries, and its principal sources of
revenue are the management fees and dividends it receives from the Bank and NBT
Financial.
The principal subsidiaries of the Company through which it conducts its
operations are the Bank and NBT Financial. The Bank is a full service commercial
bank formed in 1856, which provides a broad range of financial products to
individuals, corporations and municipalities throughout the central and upstate
New York and northeastern Pennsylvania market area. The Bank conducts business
through two operating divisions, NBT Bank and Pennstar Bank.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements include the
accounts of NBT Bancorp Inc. and its wholly owned subsidiaries, NBT Bank, N.A.
and NBT Financial Services, Inc. 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.
In December, 2003, the Financial Accounting Standards Board (FASB) issued
revisions to Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities (VIE)" or FIN No. 46-R. Prior to the issuance of FIN No. 46-R, the
Company included CNBF Capital Trust I (the Trust), a statutory business trust
established for the exclusive purpose of issuing and selling 30 year guaranteed
preferred beneficial interests in the Company's junior subordinated debentures,
in its consolidated financial statements. The guaranteed preferred beneficial
interests in the Company's junior subordinated debentures was reported as a
mezzanine item between total liabilities and stockholders' equity. Since these
capital securities were not reported as debt on the Company's consolidated
balance sheet, the interest expense associated with the capital securities was
reported as a component of noninterest expense in the Company's consolidated
statements of income.
Upon adoption of FIN No. 46-R on January 1, 2004, the Company de-consolidated
the Trust from the Company's consolidated balance sheet. The consolidated
balance sheet at June 30, 2004 includes the Company's obligation to the Trust as
a component of liabilities, as long-term debt. The interest expense associated
with the Company's obligation to the Trust is reported as a component of
interest expense in the Company's consolidated statements of income for the
three and six months ended June 30, 2004. See footnote 9 for more information
about the accounting treatment of the Trust in the Company's consolidated
financial statements.
The consolidated balance sheet at December 31, 2003 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
9
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. 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, 2003 and
notes thereto referred to above.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP No. 106-1 permits a
sponsor of a postretirement healthcare plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).
In accordance with FSP No. 106-1, the Company has elected to defer the
accounting for the effects of the Act. Management does not expect adoption of
FSP No. 106-1 to have a material effect on the Company's financial condition,
results of operations or cash flows.
NOTE 4. USE OF ESTIMATES
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and 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.
The allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
portfolio with respect to the mix between the various types of loans and their
related risk characteristics, a review of the value of collateral supporting the
loans, comprehensive reviews of the loan portfolio by the independent loan
review staff and management, as well as consideration of volume and trends of
delinquencies, nonperforming loans, and loan charge-offs. As a result of the
test of adequacy, required additions to the allowance for loan and lease losses
are made periodically by charges to the provision for loan and lease losses.
The allowance for loan and lease losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company's impaired loans are generally collateral
dependent. The Company considers the estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
impairment if those costs are expected to reduce the cash flows available to
repay or otherwise satisfy the loans.
Management believes that the allowance for loan and lease losses is adequate.
While management uses available information to recognize loan and lease losses,
future additions to the allowance for loan and lease losses may be necessary
based on changes in economic conditions or changes in the values of properties
securing loans in the process of foreclosure. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan and lease losses. Such agencies may require the
Company to recognize additions to the allowance for loan and lease losses based
on their judgments about information available to them at the time of their
examination which may not be
10
currently available to management.
Other real estate owned (OREO) consists of properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are
recorded at the lower of fair value of the asset acquired less estimated costs
to sell or "cost" (defined as the fair value at initial foreclosure). At the
time of foreclosure, or when foreclosure occurs in-substance, the excess, if any
of the loan over the fair market value of the assets received, less estimated
selling costs, is charged to the allowance for loan and lease losses and any
subsequent valuation write-downs are charged to other expense. Operating costs
associated with the properties are charged to expense as incurred. Gains on the
sale of OREO are included in income when title has passed and the sale has met
the minimum down payment requirements prescribed by GAAP.
Income taxes are accounted for under the asset and liability method. The Company
files a consolidated tax return on the accrual basis. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
available carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized. Based on available evidence, gross deferred tax assets will ultimately
be realized and a valuation allowance was not deemed necessary at June 30, 2004
and 2003. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments in the normal course of business
to meet financing needs of its customers and to reduce its own exposure to
fluctuating interest rates. These financial instruments include commitments to
extend credit, unused lines of credit, and standby letters of credit. Exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Company uses
the same credit policy to make such commitments as it uses for on-balance-sheet
items. At June 30, 2004 and December 31, 2003, commitments to extend credit and
unused lines of credit totaled $556.7 million and $473.0 million. Since
commitments to extend credit and unused lines of credit may expire without being
fully drawn upon, this amount does not necessarily represent future cash
commitments. Collateral obtained upon exercise of the commitment is determined
using management's credit evaluation of the borrower and may include accounts
receivable, inventory, property, land and other items.
The Company guarantees the obligations or performance of customers by issuing
stand-by letters of credit to third parties. These stand-by letters of credit
are frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities. The risk involved
in issuing stand-by letters of credit is essentially the same as the credit risk
involved in extending loan facilities to customers, and they are subject to the
same credit origination, portfolio maintenance and management procedures in
effect to monitor other credit and off-balance sheet products. Typically, these
instruments have terms of five years or less and expire unused; therefore, the
total amounts do not necessarily represent future cash requirements. Standby
letters of credit totaled $24.5 million at June 30, 2004, and $17.1 million at
December 31, 2003. As of June 30, 2004, the fair value of standby letters of
credit was not material to the Company's consolidated financial statements.
11
NOTE 6. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity (such as the
Company's dilutive stock options).
The following is a reconciliation of basic and diluted earnings per share for
the periods presented in the consolidated statements of income.
- ---------------------------------------------------------------------------------
Three months ended June 30, 2004 2003
- --------------------------------------------------------------- ------- -------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,758 32,653
Net income available to common shareholders $12,568 $11,808
- --------------------------------------------------------------- ------- -------
Basic EPS $ 0.38 $ 0.36
=============================================================== ======= =======
Diluted EPS:
Weighted average common shares outstanding 32,758 32,653
Dilutive potential common stock 326 282
- --------------------------------------------------------------- ------- -------
Weighted average common shares and common
share equivalents 33,084 32,935
Net income available to common shareholders $12,568 $11,808
- --------------------------------------------------------------- ------- -------
Diluted EPS $ 0.38 $ 0.36
=============================================================== ======= =======
=================================================================================
Six months ended June 30, 2004 2003
- --------------------------------------------------------------- ------- -------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,777 32,443
Net income available to common shareholders $24,939 $23,374
- --------------------------------------------------------------- ------- -------
Basic EPS $ 0.76 $ 0.72
=============================================================== ======= =======
Diluted EPS:
Weighted average common shares outstanding 32,777 32,443
Dilutive effect of common stock options and restricted stock 352 275
- --------------------------------------------------------------- ------- -------
Weighted average common shares and common
share equivalents 33,129 32,718
Net income available to common shareholders $24,939 $23,374
- --------------------------------------------------------------- ------- -------
Diluted EPS $ 0.75 $ 0.71
=================================================================================
There were 337,393 stock options for the quarter ended June 30, 2004 and 202,970
stock options for the quarter ended June 30, 2003 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
337,393 stock options for the six months ended June 30, 2004 and 368,022 stock
options for the six months ended June 30, 2003 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.
12
NOTE 7. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" to SFAS No. 123 "Accounting for
Stock-Based Compensation," which accounts for stock-based compensation using the
fair value method of accounting, if a company so elects. The Company currently
accounts for stock-based employee compensation under APB No. 25. As such,
compensation expense would be recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. Because the
fair value on the date of grant of the underlying stock of all stock options
granted by the Company is equal to the exercise price of the options granted, no
compensation cost has been recognized for stock options in the accompanying
consolidated statements of income. Compensation expense for restricted stock
awards is based on the market price of the stock on the date of grant and is
recognized ratably over the vesting period of the award.
Had the Company determined compensation cost based on the fair value at the date
of grant for its stock options and employee stock purchase plan under SFAS No.
123, the Company's net income and net income per share would have been reduced
to the pro forma amounts indicated below:
=========================================================================
THREE MONTHS ENDED
JUNE 30,
- -------------------------------------------------------------------------
(in thousands, except per share data) 2004 2003
-------------- --------------
Net income, as reported $ 12,568 $ 11,808
Add: Stock-based compensation
expense included in reported net
income, net of related tax effects 26 19
Less: Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effects (289) (268)
----------- -----------
Pro forma net income $ 12,305 $ 11,559
=========== ===========
Net income per share:
Basic - as reported $ 0.38 $ 0.36
Basic - Pro forma $ 0.38 $ 0.36
Diluted - as reported $ 0.38 $ 0.36
Diluted - Pro forma $ 0.37 $ 0.35
=========================================================================
13
===============================================================
SIX MONTHS ENDED
JUNE 30,
- ---------------------------------------------------------------
(in thousands, except per share data) 2004 2003
----------- -----------
Net income, as reported $ 24,939 $ 23,374
Add: Stock-based compensation
Expense in reported net income,
Net of related tax effects 49 42
Less: Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effects (571) (531)
----------- -----------
Pro forma net income $ 24,417 $ 22,885
=========== ===========
Net income per share:
Basic - as reported $ 0.76 $ 0.72
Basic - Pro forma $ 0.74 $ 0.71
Diluted - as reported $ 0.75 $ 0.71
Diluted - Pro forma $ 0.74 $ 0.70
===============================================================
The Company granted 343,552 stock options for the six months ended June 30, 2004
with a weighted average exercise price of $22.15 per share compared to 366,392
stock options granted for the six months ended June 30, 2003 with a weighted
average exercise price of $17.53 per share. The per share weighted average fair
value of the stock options granted for the six months ended June 30, 2004 and
2003 was $5.81 and $3.92. The assumptions used for the grants noted above were
as follows:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
=============================================================
DIVIDEND YIELD 3.01% - 3.74% 3.73% - 3.97%
EXPECTED VOLATILITY 31.48% - 31.65% 31.35% - 31.38%
RISK-FREE INTEREST RATE 3.56% - 4.41% 2.98% - 3.36%
EXPECTED LIFE 7 years 7 years
The fair value of stock options granted was estimated at the date of grant using
the Black-Scholes option-pricing model. This model was developed for use in
estimating fair value of publicly traded options that have no vesting
restrictions and are fully transferable. Additionally, the model requires the
input of highly subjective assumptions. Because the Company's employee and
director stock options have characteristics significantly different from those
of publicly traded stock options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the Black-Scholes option-pricing model does not necessarily provide a
reliable single measure of the fair value of the Company's employee and director
stock options.
14
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
A summary of goodwill by operating subsidiaries follows:
JANUARY 1, GOODWILL JUNE 30,
(in thousands) 2003 ACQ. (DISP.) 2003
-------------------------------------
NBT Bank, N.A. $ 43,120 $ 1,437 - $ 44,557
NBT Financial Services, Inc. 3,001 - 3,001
-------------------------------------
Total $ 46,121 $ 1,437 - $ 47,558
=====================================
JANUARY 1, GOODWILL JUNE 30,
(in thousands) 2004 ACQ. (DISP.) 2004
-------------------------------------
NBT Bank, N.A. $ 44,520 $ - $ 44,520
NBT Financial Services, Inc. 3,001 - 3,001
-------------------------------------
Total $ 47,521 $ - $ 47,521
=====================================
The Company acquired $1.4 million in goodwill in connection with the acquisition
of a branch from Alliance Bank in June of 2003.
The Company has finite-lived intangible assets capitalized on its consolidated
balance sheet in the form of core deposit and other intangible assets. These
intangible assets continue to be amortized over their estimated useful lives,
which range from one to twenty-five years.
A summary of core deposit and other intangible assets follows:
JUNE 30,
2004 2003
--------------
(in thousands)
Core deposit intangibles:
Gross carrying amount $5,558 $5,558
Less: accumulated amortization 4,587 4,221
--------------
Net Carrying amount 971 1,337
--------------
Other intangibles:
Gross carrying amount 1,031 1,031
Less: accumulated amortization 364 313
--------------
Net Carrying amount 667 718
--------------
Other intangibles not subject to
amortization: Pension asset 551 551
Total intangibles with definite
useful lives:
Gross carrying amount 7,140 7,140
Less: accumulated amortization 4,951 4,534
--------------
Net Carrying amount $2,189 $2,606
==============
15
Amortization expense on finite-lived intangible assets is expected to total $0.1
million for the remainder of 2004 and $0.3 million for each of 2005, 2006, 2007
and $0.2 million for 2008.
NOTE 9. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
On June 14, 1999, the CNB Financial Corp. ("CNBF") who was acquired by the
Company on November 8, 2001 established CNBF Capital Trust I (the Trust), which
is a statutory business trust. The Trust exists for the exclusive purpose of
issuing and selling 30 year guaranteed preferred beneficial interests in the
Company's junior subordinated debentures (capital securities). On August 4,
1999, the Trust issued $18.0 million in capital securities at 3-month LIBOR plus
275 basis points, which equaled 8.12% at issuance. The rate on the capital
securities resets quarterly, equal to the 3-month LIBOR plus 275 basis points
(3.86% and 4.04% for the June 30, 2004 and 2003 quarterly payments,
respectively). The capital securities are the sole asset of the Trust. The
obligations of the Trust are guaranteed by the Company.
Capital securities totaling $1.0 million were issued to the Company. The net
proceeds from the sale of the capital securities were used for general corporate
purposes and to provide a capital contribution of $15.0 million to CNB Bank,
which was merged into NBT Bank. The capital securities, with associated expense
that is tax deductible, qualify as Tier I capital under regulatory definitions,
subject to certain restrictions. The Company's primary source of funds to pay
interest on the debentures owed to the Trust are current dividends from the
Bank. Accordingly, the Company's ability to service the debentures is dependent
upon the continued ability of NBT Bank to pay dividends.
As noted previously, prior to the adoption of FIN No. 46-R on January 1, 2004,
the Company consolidated the capital securities of the Trust and reported the
securities as guaranteed preferred beneficial interests in the Company's junior
subordinated debentures as a mezzanine item between total liabilities and
stockholders' equity on the consolidated balance sheet. Since the capital
securities were not classified as debt, the interest expense associated with the
securities was reported as a component of total noninterest expense on the
Company's consolidated income statements. On January 1, 2004, the Company
de-consolidated the Trust from its consolidated balance sheet. The Company's
obligation to the Trust is now reported as Trust Preferred Debentures as a
component of long-term debt on the Company's consolidated balance sheet as of
June 30, 2004. The interest expense associated with these debentures is reported
as a component of total interest expense in the Company's consolidated
statements of income for the three and six months ended June 30, 2004. As
permitted, the provisions of FIN No. 46-R were applied on a prospective basis.
NOTE 10. DEFINED BENEFIT PENSION PLAN AND POSTRETIREMENT HEALTH PLAN
The Company maintains a qualified, noncontributory, defined benefit pension plan
covering substantially all employees. Benefits paid from the plan are based on
age, years of service, compensation, social security benefits, and are
determined in accordance with defined formulas. The Company's policy is to fund
the pension plan in accordance with ERISA standards. The Company does not plan
to contribute to the defined benefit pension plan in 2004. In addition, the
Company provides certain health care benefits for retired employees. Benefits
are accrued over the employees' active service period. Only employees that were
employed by NBT Bank, N.A. on or before January 1, 2000 are eligible to receive
postretirement health care benefits. The Company funds the cost of the
postretirement health plan as benefits are paid.
16
The Components of pension expense and postretirement expense are set forth
below:
THREE MONTHS ENDED JUNE 30,
Pension plan: 2004 2003
---------------------------------
Service cost $ 427 $ 337
Interest cost 533 507
Expected return on plan assets (934) (794)
Net amortization 64 64
--------------- ----------------
Total $ 90 $ 114
=============== ================
THREE MONTHS ENDED JUNE 30,
Postretirement Health Plan: 2004 2003
---------------------------------
Service cost $ 9 $ 33
Interest cost 68 91
Net amortization (10) 10
--------------- ----------------
Total $ 67 $ 134
=============== ================
SIX MONTHS ENDED JUNE 30,
Pension plan: 2004 2003
---------------------------------
Service cost $ 854 $ 674
Interest cost 1,066 1,014
Expected return on plan assets (1,868) (1,588)
Net amortization 128 128
--------------- ----------------
Total $ 180 $ 228
=============== ================
SIX MONTHS ENDED JUNE 30,
Postretirement Health Plan: 2004 2003
---------------------------------
Service cost $ 18 $ 66
Interest cost 136 182
Net amortization (20) 20
--------------- ----------------
Total $ 134 $ 268
=============== ================
17
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),
and NBT Financial Services, Inc. (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 2003 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, 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 effect interest
margins; (4) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit; (5)
legislative or regulatory changes, including changes in accounting standards or
tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than the Company; (7)
adverse changes may occur in the securities markets or with respect to
inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; and (10) the Company's
success in managing the risks involved in the foregoing.
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.
18
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policy relating to the
allowance for loan and lease losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan and lease portfolio and the material effect that
such judgments can have on the results of operations. While management's current
evaluation of the allowance for loan and lease losses indicates that the
allowance is adequate, under adversely different conditions or assumptions, the
allowance would need to be increased. For example, if historical loan and lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions for loan and lease losses
would be required to increase the allowance. In addition, the assumptions and
estimates used in the internal reviews of the Company's non-performing loans and
potential problem loans has a significant impact on the overall analysis of the
adequacy of the allowance for loan and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral evaluations were significantly lowered, the
Company's allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
OVERVIEW
The Company earned net income of $12.6 million ($0.38 diluted earnings per
share) for the three months ended June 30, 2004 compared to net income of $11.8
million ($0.36 diluted earnings per share) for the three months ended June 30,
2003. The quarter to quarter increase in net income from 2004 to 2003 was
primarily the result of increases in total noninterest income of $1.1 million
and net interest income of $1.2 million offset by an increase in the provision
for loan and lease losses of $1.0 million. The increase in noninterest income
was driven primarily by increases in services charges on deposit accounts of
$0.3 million, Bank Owned Life Insurance (BOLI) income of $0.4 million, and other
income of $0.3 million. The increase in net interest income resulted primarily
from 12% growth in average loans during the three months ended June 30, 2004
compared to the same period in 2003 offset somewhat by a 19 basis point decline
in net interest margin to 3.99% for 2004 from 4.18% for 2003. The increase in
provision for loan and lease losses resulted primarily from loan growth and
higher net charge-offs for the quarter ended June 30, 2004 compared to the same
period in 2003.
The Company earned net income of $24.9 million ($0.75 diluted earnings per
share) for the six months ended June 30, 2004 compared to net income of $23.4
million ($0.71 diluted earnings per share) for the six months ended June 30,
2003. The increase in net income from 2004 to 2003 was primarily the result of
increases in total noninterest income of $2.8 million and net interest income of
$2.3 million offset by increases in the provision for loan and lease losses of
$1.2 million, total noninterest expense of $1.3 million and income tax expense
of $0.9 million. The increase in noninterest income was driven primarily by
increases in services charges on deposit accounts of $0.8 million, Bank Owned
Life Insurance (BOLI) income of $0.8 million, broker/dealer and insurance
revenue of $0.4 million and other income of $0.6 million. The increase in net
interest income resulted primarily from 12% growth in average loans during the
six months ended June 30, 2004 compared to the same period in 2003 offset
somewhat by a 25 basis point decline in net interest margin to 4.04% for 2004
from 4.29% for 2003. The increase in provision for loan and lease losses
resulted primarily from loan growth and higher net charge-offs noted above. The
increase in income tax expense resulted primarily from an increase in income
before taxes of $2.5 million period over period.
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. Net interest margin,
which is the net federal taxable equivalent (FTE) interest income divided by
average earning assets, is a measure of an entity's ability to utilize its
earning assets in relation to the cost of funding. Interest income for
tax-exempt securities and loans is adjusted to a taxable equivalent basis
19
using the statutory Federal income tax rate of 35%.
TABLE 1
PERFORMANCE MEASUREMENTS
- ------------------------------------------------------------
FIRST SECOND SIX
2004 QUARTER QUARTER MONTHS
- ------------------------------- -------- -------- -------
Return on average assets (ROAA) 1.23% 1.24% 1.24%
- ------------------------------- -------- -------- -------
Return on average equity (ROE) 15.73% 16.05% 15.89%
Net interest margin (FTE) 4.10% 3.99% 4.04%
=============================== ======== ======== =======
2003
ROAA 1.27% 1.25% 1.26%
ROE 16.05% 16.07% 16.08%
Net interest margin 4.38% 4.18% 4.29%
=============================== ======== ======== =======
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 $1.2 million
during the three months ended June 30, 2004 compared to the same period of 2003.
The increase in FTE net interest income resulted primarily from 12% growth in
average loans. Offsetting the effect of the growth in loans was a 13 basis point
(bp) decline in the Company's net interest spread, as earning assets repriced
downward at a faster rate than interest-bearing liabilities. The yield on
earning assets declined 53 bp to 5.50% for the three months ended June 30, 2004
from 6.03% for the same period in 2003. Meanwhile, the rate paid on
interest-bearing liabilities decreased 40 bp, to 1.78% for the three months
ended June 30, 2004 from 2.18% for the same period in 2003.
Total FTE interest income for the three months ended June 30, 2004 decreased
$0.7 million compared to the same period in 2003, 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 historically low interest rate
environment prevalent for all of 2003 and the first-half of 2004. The low
interest rate environment fostered an increase in refinancing of mortgage
related earning assets, resulting in an increase in repayments of loans and
securities which have been reinvested at lower rates. Minimizing the effect of
the decline in yield was an 8% increase in average earning assets during the
three months ended June 30, 2004 when compared to the same period in 2003. As
mentioned previously, the growth in earning assets during the period was driven
primarily by growth in average loans and leases of 12%. The growth in average
loans and leases resulted primarily from strong growth in the consumer loan,
commercial loan and residential real estate mortgage mix of the portfolio.
During the same time period, total interest expense decreased $1.8 million,
primarily the result of the low rate environment mentioned above, as well as an
improvement in the mix of the Company's interest-bearing liabilities. Time
deposits, the most significant component of interest-bearing liabilities,
decreased to 32.9% of interest-bearing liabilities for the three months ended
June 30, 2004 from 41.3% for the same period in 2003. Offsetting this decrease
in the interest-bearing liabilities mix, was an increase in lower cost NOW,
20
MMDA, and Savings deposits, to 46.3% of interest-bearing liabilities for the
three months ended June 30, 2004 from 42.5% for the same period in 2003.
Additionally, offsetting the decline in time deposits was an increase in
short-term borrowings, comprising 8.8% of average interest-bearing liabilities
for the three months ended June 30, 2004 compared to 4.1% for the same period in
2003. Meanwhile, long-term debt decreased slightly, comprising 11.5% and 12.1%
of average interest-bearing liabilities for the three months ended June 30, 2004
and 2003.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin decreased to 3.99% for the three months
ended June 30, 2004, from 4.18% for the comparable period in 2003. The decrease
in the net interest margin can be primarily attributed to the previously
mentioned decrease in the interest rate spread driven by the decrease in yield
from earning assets exceeding the decrease in rates on interest-bearing
liabilities.
Federal taxable equivalent (FTE) net interest income increased $2.2 million
during the six months ended June 30, 2004 compared to the same period of 2003.
The increase in FTE net interest income resulted primarily from 12% growth in
average loans. Offsetting the effect of the growth in loans was a 17bp decline
in the Company's net interest spread, as earning assets repriced downward at a
faster rate than interest-bearing liabilities. The yield on earning assets
declined 61bp to 5.58% for the six months ended June 30, 2004 from 6.19% for the
same period in 2003. Meanwhile, the rate paid on interest-bearing liabilities
decreased 44 bp, to 1.81% for the six months ended June 30, 2004 from 2.25% for
the same period in 2003. Net interest margin decreased to 4.04% for the six
months ended June 30, 2004, from 4.29% for the comparable period in 2003. The
decrease in the net interest margin can be primarily attributed to the
previously mentioned decrease in the interest rate spread driven by the decrease
in yield from earning assets exceeding the decrease in rates on interest-bearing
liabilities.
21
TABLE 2
AVERAGE BALANCES AND NET INTEREST INCOME
The following table includes the condensed consolidated average balance sheet,
an analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans has been
adjusted to a taxable-equivalent basis using the statutory Federal income tax
rate of 35%.
Three months ended June 30,
2004 2003
------------------------------ ------------------------------
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------------
ASSETS
===========================================================================================================
Short-term interest bearing accounts $ 7,282 $ 58 3.20% $ 4,331 $ 18 1.67%
Securities available for sale (2) 974,046 10,922 4.51% 975,929 11,483 4.72%
Securities held to maturity (2) 87,802 1,082 4.95% 86,400 1,164 5.40%
Investment in FRB and FHLB Banks 33,301 178 2.15% 23,987 314 5.25%
Loans (1) 2,698,654 39,762 5.92% 2,417,364 39,732 6.59%
---------- --------- ---------- ---------
Total earning assets 3,801,085 52,002 5.50% 3,508,011 52,711 6.03%
--------- ---------
Other assets 272,059 265,449
---------- ----------
Total assets $4,073,144 $3,773,460
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 455,579 1,335 1.18% $ 343,941 1,126 1.31%
NOW deposit accounts 457,314 538 0.47% 395,978 636 0.64%
Savings deposits 581,589 926 0.64% 518,189 1,236 0.96%
Time deposits 1,061,108 6,875 2.60% 1,221,528 9,042 2.97%
---------- --------- ---------- ---------
Total interest bearing deposits 2,555,590 9,674 1.52% 2,479,636 12,040 1.95%
Short-term borrowings 283,701 794 1.13% 122,794 370 1.21%
Trust preferred debentures 18,720 163 3.50% - - -
Long-term debt 369,611 3,627 3.94% 358,119 3,691 4.13%
--------------------- ---------------------
Total interest bearing liabilities 3,227,622 14,258 1.78% 2,960,549 16,101 2.18%
--------- ---------
Demand deposits 483,650 448,597
Other liabilities (3) 46,892 69,655
Stockholders' equity 314,980 294,659
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,073,144 $3,773,460
---------- ----------
NET INTEREST INCOME (FTE BASIS) 37,744 36,610
--------- ---------
INTEREST RATE SPREAD 3.72% 3.84%
------- -------
NET INTEREST MARGIN 3.99% 4.18%
------- -------
Taxable equivalent adjustment 1,064 1,118
--------- ---------
NET INTEREST INCOME $ 36,680 $ 35,492
========= =========
(1) For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding.
(2) Securities are shown at average amortized cost.
(3) Included in other liabilities for 2003 is $17.0 million in the Company's
guaranteed preferred beneficial interests in Company's junior subordinated
debentures.
22
Six months ended June 30,
2004 2003
------------------------------ ------------------------------
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------------
ASSETS
===========================================================================================================
Short-term interest bearing accounts $ 7,761 $ 149 3.86% $ 4,756 $ 44 1.82%
Securities available for sale (2) 969,347 22,309 4.63% 976,909 23,900 4.94%
Securities held to maturity (2) 91,878 2,227 4.87% 83,388 2,347 5.69%
Investment in FRB and FHLB Banks 33,648 354 2.11% 23,736 614 5.23%
Loans (1) 2,672,384 79,789 6.00% 2,386,173 79,536 6.73%
---------- --------- ---------- ---------
Total earning assets 3,775,018 104,828 5.58% 3,474,962 106,441 6.19%
--------- ---------
Other assets 277,696 260,749
---------- ----------
Total assets $4,052,714 $3,735,711
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 438,225 2,536 1.16% $ 333,536 2,236 1.35%
NOW deposit accounts 454,414 1,119 0.49% 395,306 1,327 0.68%
Savings deposits 568,101 1,930 0.68% 506,863 2,466 0.98%
Time deposits 1,077,779 14,134 2.64% 1,241,778 18,623 3.03%
---------- --------- ---------- ---------
Total interest bearing deposits 2,538,519 19,719 1.56% 2,477,483 24,652 2.01%
Short-term borrowings 286,658 1,587 1.11% 110,713 659 1.20%
Trust preferred debentures 17,869 357 4.02% - - 0.00%
Long-term debt 369,650 7,241 3.94% 351,931 7,396 4.25%
---------- --------- ---------- ---------
Total interest bearing liabilities 3,212,696 28,904 1.81% 2,940,127 32,707 2.25%
--------- ---------
Demand deposits 476,186 439,398
Other liabilities (3) 48,310 62,579
Stockholders' equity 315,522 293,607
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,052,714 $3,735,711
---------- ----------
NET INTEREST INCOME (FTE BASIS) 75,924 73,734
--------- ---------
INTEREST RATE SPREAD 3.77% 3.94%
------- -------
NET INTEREST MARGIN 4.04% 4.29%
------- -------
Taxable equivalent adjustment 2,150 2,213
--------- ---------
NET INTEREST INCOME $ 73,774 $ 71,521
========= =========
(1) For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding.
(2) Securities are shown at average amortized cost.
(4) Included in other liabilities for 2003 is $17.0 million in the Company's
guaranteed preferred beneficial interests in Company's junior subordinated
debentures.
23
The following table presents changes in interest income and interest expense
attributable to changes in volume (change in average balance multiplied by prior
year rate), changes in rate (change in rate multiplied by prior year volume),
and the net change in net interest income. The net change attributable to the
combined impact of volume and rate has been allocated to each in proportion to
the absolute dollar amounts of change.
TABLE 3
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
Three months ended June 30,
- -----------------------------------------------------------------------------
INCREASE (DECREASE)
2004 OVER 2003
- -----------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- -----------------------------------------------------------------------------
Short-term interest bearing accounts $ 19 $ 21 $ 40
Securities available for sale (22) (539) (561)
Securities held to maturity 19 (101) (82)
Investment in FRB and FHLB Banks 93 (229) (136)
Loans 4,370 (4,340) 30
- -----------------------------------------------------------------------------
Total (FTE) interest income 4,216 (4,925) (709)
- -----------------------------------------------------------------------------
Money market deposit accounts 337 (128) 209
NOW deposit accounts 89 (187) (98)
Savings deposits 138 (448) (310)
Time deposits (1,112) (1,055) (2,167)
Short-term borrowings 452 (28) 424
Long-term debt and trust preferred debentures 301 (202) 99
- -----------------------------------------------------------------------------
Total interest expense 1,364 (3,207) (1,843)
- -----------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 2,852 $ (1,718) $ 1,134
=============================================================================
- -----------------------------------------------------------------------------
INCREASE (DECREASE)
Six months ended June 30, 2004 OVER 2003
- -----------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- -----------------------------------------------------------------------------
Short-term interest bearing accounts $ 43 $ 62 $ 105
Securities available for sale (184) (1,407) (1,591)
Securities held to maturity 225 (345) (120)
Investment in FRB and FHLB Banks 194 (454) (260)
Loans 9,008 (8,755) 253
- -----------------------------------------------------------------------------
Total (FTE) interest income 8,783 (10,396) (1,613)
- -----------------------------------------------------------------------------
Money market deposit accounts 635 (335) 300
NOW deposit accounts 179 (387) (208)
Savings deposits 272 (808) (536)
Time deposits (2,301) (2,188) (4,489)
Short-term borrowings 977 (49) 928
Long-term debt and trust preferred debentures 718 (516) 202
- -----------------------------------------------------------------------------
Total interest expense 2,843 (6,646) (3,803)
- -----------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 5,940 $ (3,750) 2,190
=============================================================================
24
NONINTEREST INCOME
Noninterest income is a significant source of revenue for the Company and an
important factor in the Company's results of operations. The following table
sets forth information by category of noninterest income for the years
indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------- ---------- --------- ---------
(in thousands)
Service charges on deposit accounts $ 4,090 $ 3,764 $ 8,127 $ 7,367
Broker/dealer and insurance fees 1,783 1,750 3,514 3,142
Trust 1,142 1,116 2,249 2,008
Other 2,536 2,257 5,710 5,085
Net securities (losses) gains 29 38 38 65
Bank owned life insurance income 409 14 794 14
--------------------------------------------
Total $ 9,989 $ 8,939 $ 20,432 $ 17,681
============================================
Total noninterest income increased $1.1 million, or 12% from $8.9 million for
the three months ended June 30, 2003 to $10.0 million for the same period in
2004. Service charges on deposit accounts increased $0.3 million, due primarily
to higher overdraft fees from pricing adjustments made during the second half of
2003. Bank Owned Life Insurance ("BOLI") income increased $0.4 million,
resulting from the $30.0 million BOLI purchase in June 2003. Other income
increased $0.3 million, primarily from increases in retail and commercial
banking fees.
Total noninterest income increased $2.8 million, or 16% from $17.7 million for
the six months ended June 30, 2003 to $20.4 million for the same period in 2004.
Service charges on deposit accounts increased $0.8 million, due primarily to the
previously mentioned higher overdraft fees from pricing adjustments made during
the second half of 2003. Bank Owned Life Insurance ("BOLI") income increased
$0.4 million, resulting from the $30.0 million BOLI purchase in June 2003.
Broker/dealer revenue increased $0.4 million for the six months ended June 30,
2004 over the same period in 2003, due primarily to the Company's initiative in
delivering financial service related products through its 112-branch network,
which was implemented at the end of 2002. Other income increased $0.6 million,
primarily from an increase in credit-group-life insurance fees and from
increases in retail and commercial banking fees.
25
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------- ---------- --------- ---------
(in thousands)
Salaries and employee benefits $ 12,542 $ 12,060 $ 26,655 $ 24,719
Occupancy 2,446 2,182 5,044 4,708
Equipment 1,781 1,944 3,634 3,710
Data processing and communications 2,852 2,720 5,544 5,441
Professional fees and outside services 1,424 1,240 3,056 2,542
Office supplies and postage 1,143 1,011 2,174 2,084
Amortization of intangible assets 71 155 142 317
Capital securities - 179 - 370
Loan collection and other real estate owned 99 476 471 756
Other 3,505 3,881 6,345 7,093
--------------------------------------------
Total noninterest expense $ 25,863 $ 25,848 $ 53,065 $ 51,740
============================================
Noninterest expense for the quarter ended June 30, 2004 was $25.9 million, up
slightly from $25.8 million for the same period in 2003. Salaries and employee
benefits for the three months ended June 30, 2004 increased $0.5 million or 4%
over the same period in 2003 mainly from higher salaries from merit increases
and higher employee medical insurance costs. Occupancy expense for the three
months ended June 30, 2004 increased $0.3 million or 12% over the same period in
2003 primarily from branch expansion in the Albany market. Offsetting these
increases were decreases in loan collection and other real estate owned ("OREO")
costs and other operating expenses. Loan collection and OREO costs for the three
months ended June 30, 2004 decreased $0.4 million when compared to the same
period in 2003 mainly from a $0.3 million gain from the sale of OREO during the
current quarter. Other operating expense for the three months ended June 30,
2004 decreased $0.4 million when compared to the same period in 2003 mainly from
a $0.6 million charge for the writedown of a nonmarketable security in 2003.
Noninterest expense for the six months ended June 30, 2004 was $53.1 million, up
$1.3 million or 3% from $51.7 million for the same period in 2003. The increase
in noninterest expense was due primarily to increases in salaries and employee
benefits and professional fees and outside services partially offset by
decreases in loan collection and OREO costs and other operating expense.
Salaries and employee benefits increased $1.9 million, mainly from a $1.1
million increase in salary expense from merit increases and an increase in
employee medical costs of $0.5 million. Professional fees and outside services
increased $0.5 million mainly from increased courier, legal and audit costs.
Loan collection and OREO costs decreased $0.3 million from a decrease in OREO
expenses resulting from a decline in the number of OREO properties under
management as OREO totaled $0.4 million at June 30, 2004 compared to $2.3
million at June 30, 2003. Other operating expense decreased $0.7 million mainly
from the previously mentioned $0.6 million charge for the writedown of a
nonmarketable security in 2003.
26
INCOME TAXES
Income tax expense was $5.8 million for the three months ended June 30, 2004
compared to $5.4 million for the same period in 2003. The effective tax rate was
31.6% for the three months ended June 30, 2004 and 31.2% for the same period in
2003. Income tax expense was $11.7 million for the six months ended June 30,
2004 compared to $10.7 million for the same period in 2003. The effective tax
rate was 31.8% for the six months ended June 30, 2004 and 31.5% for the same
period in 2003.
ANALYSIS OF FINANCIAL CONDITION
LOANS AND LEASES
- ------------------
A summary of loans and leases, net of deferred fees and origination costs, by
category for the periods indicated follows:
June 30, December 31, June 30,
2004 2003 2003
-------------------------------------
(in thousands)
Commercial and commercial mortgages* $1,180,837 $ 1,085,605 $1,116,892
Residential real estate mortgages 724,590 764,681 642,227
Consumer 778,499 726,960 674,490
Leases 69,699 62,730 62,776
-------------------------------------
Total loans and leases $2,753,625 $ 2,639,976 $2,496,385
=====================================
* Includes agricultural loans
Total loans and leases were $2.8 billion, or 66.8% of assets, at June 30, 2004,
and $2.6 billion, or 65.2% at December 31, 2003, and $2.5 billion, or 63.7%, at
June 30, 2003. Total loans and leases increased $257.2 million or 10% at June
30, 2004 when compared to June 30, 2003. The solid year over year loan growth
was driven mainly by increases in consumer loans of $104.0 million or 15%, due
in part to strong growth in home equity loans and indirect automobile
installment loans. Additionally, residential real estate mortgages, increased
$82.4 million or 13%. The increase in residential real estate mortgages resulted
from a combination of low interest rates increasing product demand and
centralizing the mortgage origination function at the end of 2002, leading to
stronger market presence, competitive products and efficient customer service.
Lastly, commercial loans and commercial mortgages increased $63.9 million or 6%
year over year. At June 30, 2004, commercial loans, including commercial
mortgages, represented approximately 43% of the loan and lease portfolio, while
consumer loans and leases and residential mortgages represented 31% and 26%,
respectively.
SECURITIES
- ----------
The Company classifies its securities at date of purchase as available for sale,
held to maturity or trading. Held to maturity debt securities are those that
the Company has the ability and intent to hold until maturity. Available for
sale securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, on available for sale securities are
excluded from earnings and are reported in stockholders' equity as a component
of accumulated other comprehensive income or loss. Held to maturity securities
are recorded at amortized cost. Trading securities are recorded at fair value,
with net unrealized gains and losses recognized currently in income. Transfers
of securities between categories are recorded at fair value at the date of
transfer. A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other-than-temporary is charged to
earnings resulting in the
27
establishment of a new cost basis for the security. Securities with an
other-than-temporary impairment are generally placed on nonaccrual status.
Average total securities remained relatively unchanged for the three months
ended June 30, 2004 when compared to the same period in 2003. The average
balance of securities available for sale decreased $1.9 million for the three
months ended June 30, 2004 when compared to the same period in 2003. The average
balance of securities held to maturity increased $1.4 million for the three
months ended June 30, 2004, when compared to the same period in 2003. The
average total securities portfolio represents 28% of total average earning
assets for the three months ended June 30, 2004 down from 30% for the same
period in 2003.
The following details the composition of securities available for sale,
securities held to maturity and regulatory investments for the periods
indicated:
AT JUNE 30,
2004 2003
---------------
Mortgage-backed securities:
With maturities 15 years or less 51% 46%
With maturities greater than 15 years 9% 18%
Collateral mortgage obligations 9% 2%
Municipal securities 14% 15%
US agency notes 12% 15%
Other 5% 4%
---------------
Total 100% 100%
===============
ALLOWANCE FOR LOAN AND LEASE LOSSES, PROVISION FOR LOAN AND LEASE LOSSES, AND
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
- ---------------------
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan portfolio's risk profile. It is evaluated to ensure that it is
sufficient to absorb all reasonably estimable credit losses inherent in the
current loan and lease portfolio.
Management considers the accounting policy relating to the allowance for loan
and lease losses to be a critical accounting policy given the 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 of the loans and leases; changes in lending policies and procedures,
including underwriting standards and collection, charge-off and recovery
practices; trends experienced in nonperforming and delinquent loans and leases;
current economic conditions in the Company's market; portfolio concentrations
that may affect loss experienced across one or more components of the portfolio;
the effect
28
of external factors such as competition, legal and regulatory requirements; and
the experience, ability, and depth of lending management and staff. In
addition, various regulatory agencies, as an integral component of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgment about information available to them at the
time of their examination, which may not be currently available to management.
After a thorough consideration and validation of the factors discussed above,
required additions to the allowance for loan and lease losses are made
periodically by charges to the provision for loan and lease losses. These
charges are necessary to maintain the allowance at a level which management
believes is reasonably reflective of overall inherent risk of probable loss in
the portfolio. While management uses available information to recognize losses
on loans and leases, additions to the allowance may fluctuate from one reporting
period to another. These fluctuations are reflective of changes in risk
associated with portfolio content and/or changes in management's assessment of
any or all of the determining factors discussed above. The allowance for loan
and lease losses to outstanding loans and leases at June 30, 2004 was 1.58%
compared to 1.64% at June 30, 2003. 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 and lease losses for the
periods presented. The allowance is increased by provisions for losses charged
to operations and is reduced by net charge-offs. Charge-offs are made when the
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 and lease losses.
TABLE 4
ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
(dollars in thousands) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $43,303 $41,141 42,651 $ 40,167
Recoveries 722 1,219 1,551 2,917
Charge-offs (2,971) (2,915) (5,272) (5,579)
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs (2,249) (1,696) (3,721) (2,662)
Provision for loan losses 2,428 1,413 4,552 3,353
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $43,482 $40,858 $ 43,482 $ 40,858
===========================================================================================================================
COMPOSITION OF NET CHARGE-OFFS
Commercial and agricultural $(1,190) 53% $ (760) 45% $ (1,314) 35% $ (850) 32%
Real estate mortgage (50) 2% 60 (4)% (69) 2% 78 (3)%
Consumer (1,009) 45% (996) 59% (2,338) 63% (1,890) 71%
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs $(2,249) 100% $(1,696) 100% $ (3,721) 100% $ (2,662) 100%
- ---------------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans 0.34% 0.28% 0.28% 0.23%
===========================================================================================================================
===========================================================================================================================
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.
29
Total nonperforming assets were $14.2 million at June 30, 2004, compared to
$16.4 million at December 31, 2003, and $19.9 million at June 30, 2003. The
decrease in nonperforming assets resulted primarily from decreases in
nonperforming loans and OREO. Nonperforming loans totaled $13.8 million at June
30, 2004, down from the $14.8 million outstanding at December 31, 2003 and $16.8
million at June 30, 2003. The decrease in nonperforming loans resulted primarily
from decreases in commercial and agricultural nonperforming loans to $8.3
million at June 30, 2004 from $11.4 million at June 30, 2003. OREO decreased
from $2.3 million at June 30, 2003 to $0.4 million at June 30, 2004. The
improvement in nonperforming loans and OREO resulted primarily from effective
workout strategies as well as conservative underwriting standards and strong
credit administration, minimizing the migration of performing loans into
nonperforming status.
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $49.8 million in potential problem loans at June 30,
2004 as compared to $54.3 million at December 31, 2003. 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
nonperforming at some time in the future. At the Company, potential problem
loans are typically loans that are performing but are classified by the
Company's loan rating system as "substandard." At June 30, 2004, 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.
Net charge-offs totaled $2.2 million for the three months ended June 30, 2004,
up $0.6 million from the $1.7 million charged-off during the same period in
2003. The increase in net charge-offs resulted primarily from larger recoveries
during the three months ended June 30, 2003. The provision for loan and lease
losses totaled $2.4 million for the three months ended June 30, 2004, up from
the $1.4 million provided during the same period in 2003. The level of provision
for loan and lease losses required for the three months ended June 30, 2004
resulted primarily from loan growth and an increase in net charge-offs mentioned
above.
Net charge-offs totaled $3.7 million for the six months ended June 30, 2004, up
$1.1 million from the $2.7 million charged-off during the same period in 2003.
The increase in net charge-offs resulted primarily from larger recoveries during
the six months ended June 30, 2003. The provision for loan and lease losses
totaled $4.6 million for the six months ended June 30, 2004, up from the $3.4
million provided during the same period in 2003. The level of provision for loan
and lease losses required for the six months ended June 30, 2004 resulted
primarily from the previously mentioned loan growth and increased net
charge-offs during the quarter ended June 30, 2004.
30
TABLE 5
NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(dollars in thousands) 2004 2003 2003
- ------------------------------------------------------------------------------------------------
Commercial and agricultural $ 8,282 $ 8,693 $ 11,352
Real estate mortgage 2,353 2,483 1,096
Consumer 2,605 2,685 3,458
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 13,240 13,861 15,906
- ------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 92 242 -
Real estate mortgage 185 244 133
Consumer 264 482 509
- ------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 541 968 642
- ------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: - - 295
- ------------------------------------------------------------------------------------------------
Total nonperforming loans 13,781 14,829 16,843
- ------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 365 1,157 2,280
- ------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 14,146 15,986 19,123
================================================================================================
Nonperforming securities 52 395 735
- ------------------------------------------------------------------------------------------------
Total nonperforming assets $ 14,198 $ 16,381 $ 19,858
================================================================================================
Total nonperforming loans to loans and leases 0.50% 0.56% 0.67%
Total nonperforming assets to assets 0.34% 0.40% 0.51%
Total allowance for loan and lease losses
to nonperforming loans 315.52% 287.62% 242.58%
================================================================================================
DEPOSITS
- --------
Total deposits were $3.0 billion at June 30, 2004, up slightly from year-end
2003, and an increase of $75.4 million, or 3%, from the same period in the prior
year. Total average deposits for the six months ended June 30, 2004 increased
$97.8 million, or 3%, for the same period in 2003. The Company experienced a
decline in time deposits, as average time deposits declined $164.0 million or
13%, for the six months ended June 30, 2004 compared to the same period in 2003.
Meanwhile, average core deposits increased $261.8 million or 16%, for the six
months ended June 30, 2004 compared to the same period in 2003. 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. At June 30, 2004, total checking, savings and money market accounts
represented 65.3% of total deposits compared to 59.9% at June 30, 2003.
BORROWED FUNDS
- ---------------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $349.1 million at June 30, 2004 compared to
$302.9 million and $212.0 million at December 31, and June 30, 2003,
respectively. The increase from June 30, 2004 when compared to the same period
in 2003 was due primarily to a much higher rate of loan growth when compared to
deposit growth. Long-term debt was $369.6 million at March 31, 2004 and was
$370.1 million June 30, 2003. For more information about the Company's
borrowing capacity and liquidity position, see the section with the title
caption of "Liquidity Risk" on page 35 in this discussion.
31
CAPITAL RESOURCES
- ------------------
Stockholders' equity of $307.7 million represents 7.5% of total assets at June
30, 2004, compared with $297.9 million, or 7.6% in the comparable period of the
prior year, and $310.0 million, or 7.7% at December 31, 2003. 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.
As the capital ratios in Table 6 indicate, the Company remains well capitalized.
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 As of and for the
CAPITAL MEASUREMENTS quarter ended
- -------------------------------------------------------
2004 March 31 June 30
- -------------------------------------------------------
Tier 1 leverage ratio 6.96% 6.90%
Tier 1 capital ratio 10.12% 9.74%
Total risk-based capital ratio 11.37% 11.00%
Cash dividends as a percentage
of net income 45.20% 49.50%
Per common share:
Book value $ 9.80 $ 9.43
Tangible book value $ 8.29 $ 7.91
=======================================================
2003
Tier 1 leverage ratio 6.71% 6.72%
Tier 1 capital ratio 9.77% 9.44%
Total risk-based capital ratio 11.02% 10.70%
Cash dividends as a percentage
of net income 47.87% 46.68%
Per common share:
Book value $ 9.00 $ 9.19
Tangible book value $ 7.50 $ 7.64
=======================================================
32
The accompanying Table 7 presents the high, low and closing sales price for the
common stock as reported on the NASDAQ Stock Market, and cash dividends declared
per share of common stock. The Company's price to book value ratio was 2.37 at
June 30, 2004 and 2.11 in the comparable period of the prior year. The Company's
price was 15.2 times trailing twelve months earnings at June 30, 2004, compared
to 13.9 times for the same period last year.
TABLE 7
QUARTERLY COMMON STOCK AND DIVIDEND IN FORMATION
- -------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- -------------------------------------------------------------
2003
- -------------------------------------------------------------
March 31 $ 18.60 $ 16.76 $ 17.43 $ 0.170
June 30 19.94 17.37 19.36 0.170
September 30 21.76 19.24 20.25 0.170
December 31 22.78 19.50 21.44 0.170
=============================================================
2004
=============================================================
MARCH 31 $ 23.00 $ 21.21 $ 22.50 $ 0.170
JUNE 30 $ 23.18 $ 19.92 $ 22.34 $ 0.190
=============================================================
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
MARKET RISK
Interest rate risk is among the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities. Interest rate risk is defined as an exposure to
a movement in interest rates that could have an adverse effect on the Company's
net interest income. Net interest income is susceptible to interest rate risk
to the degree that interest-bearing liabilities mature or reprice on a different
basis than earning assets. When interest-bearing liabilities mature or reprice
more quickly than earning assets in a given period, a significant increase in
market rates of interest could adversely affect net interest income. Similarly,
when earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income.
In an attempt to manage the Company's exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's Asset
Liability Committee (ALCO) meets monthly to review the Company's interest rate
risk position and profitability, and to recommend strategies for consideration
by the Board of Directors. Management also reviews loan and deposit pricing, and
the Company's securities portfolio, formulates investment and funding
strategies, and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while 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.
33
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 with static balance sheets; (1) a
gradual increase of 200 bp, (2) 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 (3) a gradual decrease of 75 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 forecasted net interest income in the flat rate
scenario through the simulation period. The increase in net interest income is a
result of interest-bearing liabilities repricing downward at a faster rate than
earning assets. The inability to effectively lower deposit rates will likely
reduce or eliminate the benefit of lower interest rates. In the rising rate
scenario where the long end of the yield curve remains flat and the short end of
the curve increases 200bp gradually, 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. In a rising rate scenario where rates increase gradually
200bp, net interest income is projected to decrease as well from the flat rate
scenario.
Net interest income for the next twelve months in the + 200/+ 200 flat/- 75 bp
scenarios, as described above, is within the internal policy risk limits of not
more than a 7.5% change in net interest income. The following table summarizes
the percentage change in net interest income in the rising and declining rate
scenarios over a 12-month period from the forecasted net interest income in the
flat rate scenario using the June 30, 2004 balance sheet position:
TABLE 8
INTEREST RATE SENSITIVITY ANALYSIS
=========================================================
CHANGE IN INTEREST RATES PERCENT CHANGE IN
(IN BASIS POINTS) NET INTEREST INCOME
=========================================================
+200 FLAT (1.97%)
+200 (1.30%)
- -75 0.29%
=========================================================
Under the flat rate scenario with a static balance sheet, net interest income is
anticipated to increase approximately 1.4% from annualized net interest income
for the three months ended June 30, 2004. The increase is a result of the strong
loan growth during the second quarter of 2004. The Company anticipates under
current conditions, its net interest margin will range between 3.90% and 4.10%
for the remainder of 2004. This forecast is dependent on earning assets
benefiting from a modest increase in interest rates as well as the ability of
the Company to lag increases in core deposit rates.
34
Currently, the Company is holding fixed rate residential real estate mortgages
in its loan portfolio and mortgage related securities in its investment
portfolio. Two major factors the Company considers in holding residential real
estate mortgages is its level of core deposits and the duration of its
mortgage-related securities and loans. Current core deposit levels combined with
a shortening of duration of mortgage-related securities and loans have enabled
the Company to hold fixed rate residential real estate mortgages without having
a significant negative impact on interest rate risk, as the Company is somewhat
liability sensitive at June 30, 2004. The Company's net interest income is
projected to decrease by 1.30% if interest rates gradually rise 200 basis
points. The Company's exposure to 30-year fixed rate mortgage related securities
and loans have decreased approximately $150.5 million from June 30, 2003 to June
30, 2004. From December 31, 2003, we have reduced our exposure to 30-year fixed
rate mortgage related securities and loans by $27.2 million. Approximately 13.1%
of earning assets were comprised of 30-year fixed rate mortgage related
securities and loans at June 30, 2004, down from a ratio of 18.0% at June 30,
2003. Additionally, in March of 2004, the Company sold approximately $25 million
in 30 year fixed rate mortgages. 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
30-year fixed rate real estate mortgage related securities or loans, the Company
will reevaluate its strategy and may sell new originations of fixed rate
mortgages in the secondary market or may sell certain mortgage related
securities, or extend the term of borrowings 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 ALCO is
responsible for liquidity management and has developed guidelines which cover
all assets and liabilities, as well as off balance sheet items that are
potential sources or uses of liquidity. Liquidity policies must also provide the
flexibility to implement appropriate strategies and tactical actions.
Requirements change as loans and leases grow, deposits and securities mature,
and payments on borrowings are made. Liquidity management includes a focus on
interest rate sensitivity management with a goal of avoiding widely fluctuating
net interest margins through periods of changing economic conditions.
The primary liquidity measurement the Company utilizes is called the Basic
Surplus which captures the adequacy of its access to reliable sources of cash
relative to the stability of its funding mix of average liabilities. This
approach recognizes the importance of balancing levels of cash flow liquidity
from short- and long-term securities with the availability of dependable
borrowing sources which can be accessed when necessary. At June 30, 2004, the
Company's Basic Surplus measurement was 8.3% of total assets or $340 million,
which was above the Company's minimum of 5% or $206 million set forth in its
liquidity policies.
This Basic Surplus approach enables the Company to adequately manage liquidity
from both operational and contingency perspectives. By tempering the need for
cash flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At June 30, 2004, the
Company Basic Surplus is tightening, as the Basic Surplus has decreased from
10.1% at March 31, 2004. If the Company's Basic Surplus continues to tighten,
the Company may have to utilize brokered time deposits or price retail time
deposits competitively to fund loan and lease growth in the near term. These
sources of funds are typically more costly than FHLB borrowings and may have an
adverse effect on the Company's net interest margin.
35
The Company's primary source of funds is from its subsidiary, NBT Bank. Certain
restrictions exist regarding the ability of the Company's subsidiary bank to
transfer funds to the Company in the form of cash dividends. The approval of the
Office of Comptroller of the Currency (OCC) is required to pay dividends when a
bank fails to meet certain minimum regulatory capital standards or when such
dividends are in excess of a subsidiary bank's earnings retained in the current
year plus retained net profits for the preceding two years (as defined in the
regulations). At June 30, 2004, approximately $36.0 million of the total
stockholders' equity of NBT Bank was available for payment of dividends to the
Company without approval by the OCC. NBT Bank's ability to pay dividends also is
subject to the Bank being in compliance with regulatory capital requirements.
NBT Bank is currently in compliance with these requirements. Under the State of
Delaware Business Corporation Law, the Company may declare and pay dividends
either out of accumulated net retained earnings or capital surplus.
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-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended)
as of June 30, 2004 (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 over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially, or are reasonably likely to materially affect the
Company's internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
There are no material legal proceedings, other than ordinary routine litigation
incidental to business to which the Company is a party or of which any of its
property is subject.
36
Item 2 -- Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securitries
The table below sets forth the information with respect to purchases made by the
Company (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of
1934), of our common stock during the six months ended June 30, 2004:
- ----------------------------------------------------------------------------------------
TOTAL NUMBER OF MAXIMUM
SHARES PURCHASED NUMBER OF SHARES
AS PART OF THAT MAY YET BE
TOTAL NUMBER OF AVERAGE PRICE PUBLICLY PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE ANNOUNCED PLANS THE PLANS (1)
- ----------------------------------------------------------------------------------------
1/1/04 - 1/31/04 - - - 1,155,054
- ----------------------------------------------------------------------------------------
2/1/04 - 2/29/04 500 $ 21.68 500 1,154,554
- ----------------------------------------------------------------------------------------
3/1/04 - 3/31/04 - - - 1,154,554
- ----------------------------------------------------------------------------------------
4/1/04 - 4/30/04 28,130 $ 21.26 28,130 1,126,424
- ----------------------------------------------------------------------------------------
5/1/04 - 5/31/04 189,189 $ 21.21 189,189 937,235
- ----------------------------------------------------------------------------------------
6/1/04 - 6/30/04 133,512 $ 21.99 133,512 803,723
- ----------------------------------------------------------------------------------------
Total 351,331 $ 21.51 351,331
- ----------------------------------------------------------------------------------------
(1) On July 22, 2002, we announced that our Board of Directors had approved a
share repurchase program, pursuant to which up to 1,000,000 shares of our
common stock may be repurchased. On April 23, 2003, we announced the Board
of Directors had approved a share repurchase program, pursuant to which an
additional 1,000,000 shares of our common stock may be repurchased. On
January 26, 2004, the Board of Directors approved a resolution to combine
the July 22, 2002 and April 23, 2003 repurchase programs. At that time, the
available shares for repurchase under the July 22, 2002 program totaled
155,054 shares and there were 1,000,000 shares available for repurchase
under the April 23, 2003 program, resulting in an aggregate number of
shares available for repurchase to 1,155,054 shares. The repurchase program
has no set expiration or termination date.
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 4, 2004. At the
Annual Meeting, stockholders approved the following:
1) A proposal to fix the number of directors to sixteen. There were 25,568,437
votes cast for the proposal, 546,526 votes cast against the proposal, and
245,568 abstentions.
2) The following directors were elected with terms expiring at the 2007 annual
meeting of stockholders:
Daryl R. Forsythe: 25,783,748 votes for election; 576,783 votes withheld.
William C. Gumble: 25,637,253 votes for election; 723,279 votes withheld.
William L Owens: 22,956,764 votes for election; 3,403,768 votes withheld.
Van Ness D. Robinson: 25,598,498 votes for election; 762,034 votes withheld.
Patricia T. Civil: 25,893,880 votes for election; 466,651 votes withheld.
Continuing directors with terms expiring in 2006
Andrew S. Kowalczyk, Jr.
John C. Mitchell
Joseph G. Nasser
Michael H. Hutcherson
Michael M. Murphy
Continuing directors with terms expiring in 2005
Richard Chojnowski
Dr. Peter B. Gregory
Paul O. Stillman
Joseph A. Santangelo
Janet H. Ingraham
Paul D. Horger
Item 5 -- Other Information
On July 26, 2004, NBT Bancorp Inc. announced the declaration of a regular
quarterly cash dividend of $0.19 per share. The cash dividend will be paid on
September 15, 2004 to stockholders of record as of September 1, 2004.
37
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of NBT Bancorp Inc. as amended through
July 23, 2001 (filed as Exhibit 3.1 to Registrant's Form 10-K for the
year ended December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
3.2 By-laws of NBT Bancorp Inc. as amended and restated through July 23,
2001 (filed as Exhibit 3.2 to Registrant's Form 10-K for the year
ended December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
3.3 Rights Agreement, dated as of November 15, 1994, between NBT Bancorp
Inc. and American Stock Transfer Trust Company as Rights Agent (filed
as Exhibit 4.1 to Registrant's Form 8-A, file number 0-14703, filed on
November 25, 1994, and incorporated by reference herein).
3.4 Amendment No. 1 to Rights Agreement, dated as of December 16, 1999,
between NBT Bancorp Inc. and American Stock Transfer Trust Company as
Rights Agent (filed as Exhibit 4.2 to Registrant's Form 8-A/A, file
number 0-14703, filed on December 21, 1999, and incorporated by
reference herein).
3.5 Amendment No. 2 to Rights Agreement, dated as of April 19, 2000,
between NBT Bancorp Inc. and American Stock Transfer Trust Company as
Rights Agent (filed as Exhibit 4.3 to Registrant's Form 8-A12G/A, file
number 0-14703, filed on May 25, 2000, and incorporated by reference
herein).
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Written Statement of the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Written Statement of the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) During the quarter ended June 30, 2004, the Company filed the following
Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated April 27, 2004, which
contained a press release announcing financial results for the quarter ended
March 31, 2004 and a dividend declaration of $0.19 per share to be paid on June
15, 2004 to stockholders of record as of June 1, 2004.
38
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 6th day of August 6, 2004.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
---------------------------
Michael J. Chewens, CPA
Senior Executive Vice President
Chief Financial Officer and Corporate Secretary
39
EXHIBIT 31.1
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-15(e) and 15(d)-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operations of internal controls which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; 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 over
financial reporting.
Date: August 6, 2004
By: /s/ Daryl R. Forsythe
------------------------------
Chairman and Chief Executive
Officer
EXHIBIT 31.2
CERTIFICATIONS
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-15(e) and 15(d)-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 and presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operations of internal controls which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; 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 over
financial reporting.
Date: August 6, 2004
By: /s/ Michael J. Chewens
--------------------------------
Senior Executive Vice President,
Chief Financial Officer and
Corporate Secretary
EXHIBIT 32.1
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 June 30,
2004, 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
August 6, 2004
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to NBT Bancorp Inc. and will be
retained by NBT Bancorp Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
EXHIBIT 32.2
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 June 30,
2004, 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
August 6, 2004
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to NBT Bancorp Inc. and will be
retained by NBT Bancorp Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.