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 September 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 October 31, 2004, there were 32,802,970 shares outstanding of the
Registrant's common stock, $0.01 par value.
NBT BANCORP INC.
FORM 10-Q--Quarter Ended September 30, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2004, December 31, 2003, and September 30, 2003
Consolidated Statements of Income for the three and nine month periods ended September 30, 2004
and 2003
Consolidated Statements of Stockholders' Equity for the nine month periods ended September 30, 2004
and 2003
Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2004 and 2003
Consolidated Statements of Comprehensive Income for the three and nine month periods ended
September 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 Unregistered Sales of Equity 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 SEPTEMBER 30, December 31, September 30,
CONSOLIDATED BALANCE SHEETS (UNAUDITED) 2004 2003 2003
- ---------------------------------------------------------------- --------------- -------------- ---------------
(in thousands, except share and per share data)
ASSETS
Cash and due from banks $ 119,424 $ 125,590 $ 120,905
Short-term interest bearing accounts 7,427 2,502 2,155
Securities available for sale, at fair value 978,925 980,961 1,076,053
Securities held to maturity (fair value - $79,007, $98,576,
And $99,020) 77,826 97,204 97,499
Federal Reserve and Federal Home Loan Bank stock 37,042 34,043 35,218
Loans and leases 2,814,553 2,639,976 2,550,466
Less allowance for loan and lease losses 44,539 42,651 41,672
- ---------------------------------------------------------------- --------------- -------------- ---------------
Net loans 2,770,014 2,597,325 2,508,794
Premises and equipment, net 62,557 62,443 61,857
Goodwill 47,521 47,521 47,521
Intangible assets, net 2,084 2,331 2,474
Bank owned life insurance 31,957 30,815 30,412
Other assets 66,312 66,150 64,349
- ---------------------------------------------------------------- --------------- -------------- ---------------
TOTAL ASSETS $ 4,201,089 $ 4,046,885 $ 4,047,237
==================================================================================================================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 506,652 $ 500,303 $ 482,703
Savings, NOW, and money market 1,513,197 1,401,825 1,364,568
Time 1,070,780 1,099,223 1,123,778
- ---------------------------------------------------------------- --------------- -------------- ---------------
Total deposits 3,090,629 3,001,351 2,971,049
Short-term borrowings 319,620 302,931 331,964
Trust preferred debentures 18,720 - -
Long-term debt 394,545 369,700 369,721
Other liabilities 52,197 45,869 52,813
- ---------------------------------------------------------------- --------------- -------------- ---------------
Total liabilities 3,875,711 3,719,851 3,725,547
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures - 17,000 17,000
Stockholders' equity:
Common stock, $0.01 par value; shares authorized- 50,000,000;
Shares issued 34,401,028, 34,401,088, and 34,401,108
at September 30, 2004, December 31, 2003, and
September 30, 2003, respectively 344 344 344
Additional paid-in-capital 209,383 209,267 209,268
Retained earnings 139,558 120,016 113,707
Unvested stock awards (351) (197) (229)
Accumulated other comprehensive income 6,215 7,933 10,709
Treasury stock at cost 1,641,115, 1,592,435,
and 1,695,765 shares at September 30, 2004, December 31,
2003 and September 30, 2003, respectively (29,771) (27,329) (29,109)
- ---------------------------------------------------------------- --------------- -------------- ---------------
Total stockholders' equity 325,378 310,034 304,690
- ---------------------------------------------------------------- --------------- -------------- ---------------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $ 4,201,089 $ 4,046,885 $ 4,047,237
==================================================================================================================
See notes to unaudited interim consolidated financial statements.
3
NBT Bancorp Inc. and Subsidiaries Three months ended September 30, Nine months ended September 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 $ 41,283 $ 39,881 $ 120,812 $ 119,036
Securities available for sale 10,784 9,871 31,866 32,540
Securities held to maturity 731 841 2,283 2,586
Other 295 195 797 854
- -------------------------------------------------------------------------------------------------------------------------
Total interest, fee and dividend income 53,093 50,788 155,758 155,016
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 9,743 10,920 29,462 35,572
Short-term borrowings 1,192 704 2,779 1,363
Long-term debt 3,861 3,586 11,103 10,982
Trust preferred debentures 245 - 588 -
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 15,041 15,210 43,932 47,917
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 38,052 35,578 111,826 107,099
Provision for loan and lease losses 2,313 2,436 6,865 5,789
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan and lease losses 35,739 33,142 104,961 101,310
- -------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust 1,182 958 3,431 2,966
Service charges on deposit accounts 4,159 4,164 12,286 11,531
Broker/dealer and insurance fees 1,696 1,763 5,210 4,905
Net securities gains 18 18 56 83
Bank owned life insurance income 348 398 1,142 412
Other 2,714 2,672 8,424 7,757
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 10,117 9,973 30,549 27,654
- -------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 13,345 12,486 40,000 37,205
Office supplies and postage 1,167 1,104 3,341 3,188
Occupancy 2,445 2,143 7,489 6,851
Equipment 1,941 1,909 5,575 5,619
Professional fees and outside services 1,536 1,421 4,592 3,963
Data processing and communications 2,688 2,640 8,232 8,081
Amortization of intangible assets and goodwill 71 158 213 475
Capital securities - 181 - 551
Loan collection and other real estate owned 339 448 810 1,204
Other operating 3,773 3,493 10,118 10,586
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 27,305 25,983 80,370 77,723
- -------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 18,551 17,132 55,140 51,241
Income tax expense 5,934 5,284 17,584 16,019
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 12,617 $ 11,848 $ 37,556 $ 35,222
=========================================================================================================================
Earnings per share:
Basic $ 0.39 $ 0.36 $ 1.15 $ 1.08
Diluted $ 0.38 $ 0.36 $ 1.14 $ 1.07
=========================================================================================================================
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 Stock Comprehensive Treasury
Stock Capital Earnings Awards (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 35,222 35,222
Cash dividends - $0.51 per share (16,600) (16,600)
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 391,618 shares to
employee benefit plans and
other stock plans, including
tax benefit (818) 6,714 5,896
Grant of 11,846 shares of restricted
stock awards (203) 203 -
Amortization of restricted stock awards 101 101
Other comprehensive loss (5,822) (5,822)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ 344 $ 209,268 $ 113,707 $ (229) $ 10,709 $ (29,109) $304,690
============================================================================================================================
BALANCE AT DECEMBER 31, 2003 $ 344 $ 209,267 $ 120,016 $ (197) $ 7,933 $ (27,329) $310,034
Net income 37,556 37,556
Cash dividends - $0.55 per share (18,014) (18,014)
Purchase of 416,689 treasury shares (8,984) (8,984)
Issuance of 354,425 shares to
employee benefit plans and other
stock plans, including tax benefit 57 6,306 6,363
Grant of 14,547 shares of restricted
stock awards 59 (312) 253 -
Amortization of restricted stock awards 141 141
-
Forfeited 963 shares of restricted stock 17 (17)
Other comprehensive loss (1,718) (1,718)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2004 $ 344 $ 209,383 $ 139,558 $ (351) $ 6,215 $ (29,771) $325,378
============================================================================================================================
See notes to unaudited interim consolidated financial statements.
5
NBT Bancorp Inc. and Subsidiaries Nine Months Ended September 30,
Consolidated Statements of Cash Flows (unaudited) 2004 2003
=====================================================================================================
(in thousands)
OPERATING ACTIVITIES:
Net income $ 37,556 $ 35,222
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 6,865 5,789
Depreciation of premises and equipment 4,541 4,886
Net amortization on securities 1,959 3,899
Amortization of intangible assets 213 475
Amortization of restricted stock awards 141 101
Proceeds from sale of loans held for sale 20,576 7,678
Origination of loans held for sale (1,363) (2,572)
Net (gains) on sale of loans (108) -
Net (gain) on sale of other real estate owned (796) (762)
Net security gains (56) (83)
Writedown of nonmarketable equity securities - 620
Purchase of Bank Owned Life Insurance - (30,000)
Net (increase) in other assets (218) (2,107)
Net decrease in other liabilities 6,328 10,672
=====================================================================================================
Net cash provided by operating activities 75,638 33,818
=====================================================================================================
INVESTING ACTIVITIES:
Net cash and cash equivalents provided by acquisitions - 10,594
Securities available for sale:
Proceeds from maturities 212,032 368,217
Proceeds from sales 12,796 207,218
Purchases (226,403) (657,585)
Securities held to maturity:
Proceeds from maturities 44,689 41,964
Purchases (25,336) (57,003)
Net (purchases) of FRB and FHLB stock (2,999) (11,519)
Net (increase) in loans (199,314) (203,974)
Purchase of premises and equipment, net (4,655) (5,454)
Proceeds from sales of other real estate owned 2,134 2,979
=====================================================================================================
Net cash (used in) investing activities (187,056) (304,563)
=====================================================================================================
FINANCING ACTIVITIES:
Net increase in deposits 89,278 35,709
Net increase in short-term borrowings 16,689 226,363
Proceeds from issuance of long-term debt 30,000 125,000
Repayments of long-term debt (5,155) (100,754)
Proceeds from issuance of treasury shares to employee benefit
plans and other stock plans, including tax benefit 6,363 5,896
Purchase of treasury stock (8,984) (6,489)
Cash dividends (18,014) (16,600)
=====================================================================================================
Net cash provided by financing activities 110,177 269,125
=====================================================================================================
Net (decrease) in cash and cash equivalents (1,241) (1,620)
Cash and cash equivalents at beginning of period 128,092 124,623
=====================================================================================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 126,851 $ 123,003
=====================================================================================================
(continued)
6
Consolidated Statements of Cash Flows, Continued Nine Months Ended September 30,
Supplemental disclosure of cash flow information: 2004 2003
Cash paid during the period for:
Interest $ 44,940 $ 50,270
Income taxes 9,516 7,900
======================================================================================
Transfers:
Loans transferred to OREO 655 1,177
======================================================================================
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 Nine months ended
September 30, September 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(unaudited) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------
(in thousands)
Net income $ 12,617 $ 11,848 $ 37,556 $ 35,222
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $14,894, $(6,408), (2,654), and
$(9,239)] 8,956 (3,853) (1,595) (5,555)
Minimum pension liability adjustment (89) - (89) (217)
Less: Reclassification adjustment for net (gains)
included in net income [pre-tax amounts of $18, $18, $56,
and $83] (11) (11) (34) (50)
- ----------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 8,856 (3,864) (1,718) (5,822)
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 21,473 $ 7,984 $ 35,838 $ 29,400
================================================================================================================
See notes to unaudited interim consolidated financial statements.
8
NBT BANCORP INC. and Subsidiary
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2004 includes the Company's obligation to the
Trust as long-term debt, a component of liabilities. 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 nine months ended September 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 nine months ended September 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.
In May 2004, the FASB issued FSP 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" (the Act). FSP 106-2 provides guidance on the accounting for the effects
of the Act for employers that sponsor post-retirement health care plans that
provide prescription drug benefits. FSP 106-2 also requires employers to provide
certain disclosures regarding the effect of the Federal subsidy provided by the
Act. Net periodic benefit costs for postretirement benefits in footnote 10 do
not reflect any amount associated with the subsidy provided by the Act because
the Company was unable to conclude whether the benefits provided by its plan are
actuarially equivalent to Medicare Part D under the Act.
In 2003, Emerging Issues Task Force (EITF) of the FASB issued EITF No. 03-01.
The EITF reached a consensus about the criteria that should be used to determine
when an investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss and how that
criteria should be applied to investments accounted for under SFAS No. 115,
"Accounting in Certain Investments in Debt and Equity Securities." EITF 03-01
also included accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. Additionally, EITF 03-01 includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, FASB
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
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
10
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 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 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 September 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
11
Company uses the same credit policy to make such commitments as it uses for
on-balance-sheet items. At September 30, 2004 and December 31, 2003,
commitments to extend credit and unused lines of credit totaled $541.7 million
and $439.3 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 $27.5 million at September 30, 2004, and $17.1 million
at December 31, 2003. As of September 30, 2004, the fair value of standby
letters of credit was not material to the Company's consolidated financial
statements.
NOTE 6. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity (such as the
Company's dilutive stock options).
The following is a reconciliation of basic and diluted earnings per share for
the periods presented in the consolidated statements of income.
- ----------------------------------------------------------------
Three months ended September 30, 2004 2003
- ----------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,619 32,534
Net income available to common shareholders $12,617 $11,848
- ----------------------------------------------------------------
Basic EPS $ 0.39 $ 0.36
================================================================
Diluted EPS:
Weighted average common shares outstanding 32,619 32,534
Dilutive potential common stock 316 331
- ----------------------------------------------------------------
Weighted average common shares and common
share equivalents 32,935 32,865
Net income available to common shareholders $12,617 $11,848
- ----------------------------------------------------------------
Diluted EPS $ 0.38 $ 0.36
================================================================
12
=================================================================================
Nine months ended September 30, 2004 2003
- ---------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,724 32,474
Net income available to common shareholders $37,556 $35,222
- ---------------------------------------------------------------------------------
Basic EPS $ 1.15 $ 1.08
=================================================================================
Diluted EPS:
Weighted average common shares outstanding 32,724 32,474
Dilutive effect of common stock options and restricted stock 340 293
- ---------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 33,064 32,767
Net income available to common shareholders $37,556 $35,222
- ---------------------------------------------------------------------------------
Diluted EPS $ 1.14 $ 1.07
=================================================================================
There were 28,665 stock options for the quarter ended September 30, 2004 and
197,400 stock options for the quarter ended September 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 347,078 stock options for the nine months ended September
30, 2004 and 229,515 stock options for the nine months ended September 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.
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.
13
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
SEPTEMBER 30,
- ---------------------------------------------------------------
(in thousands, except per share data) 2004 2003
Net income, as reported $ 12,617 $ 11,848
Add: Stock-based compensation
expense included in reported net
income, net of related tax effects 37 19
Less: Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effects (323) (260)
--- ---
Pro forma net income $ 12,331 $ 11,607
========== ============
Net income per share:
Basic - as reported $ 0.39 $ 0.36
Basic - Pro forma $ 0.38 $ 0.36
Diluted - as reported $ 0.38 $ 0.36
Diluted - Pro forma $ 0.37 $ 0.35
===============================================================
===============================================================
NINE MONTHS ENDED
SEPTEMBER 30,
- ---------------------------------------------------------------
(in thousands, except per share data) 2004 2003
---- ----
Net income, as reported $ 37,556 $ 35,222
Add: Stock-based compensation
Expense in reported net income,
Net of related tax effects 85 61
Less: Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effects (893) (790)
--- ---
Pro forma net income $ 36,748 $ 34,493
========== ===========
Net income per share:
Basic - as reported $ 1.15 $ 1.08
Basic - Pro forma $ 1.12 $ 1.06
Diluted - as reported $ 1.14 $ 1.07
Diluted - Pro forma $ 1.11 $ 1.05
===============================================================
The Company granted 375,897 stock options for the nine months ended September
30, 2004 with a weighted average exercise price of $22.17 per share compared to
394,482 stock options granted for the nine months ended September 30, 2003 with
a weighted average exercise price of $17.69 per share. The per share weighted
average fair value of the stock options granted for the nine months ended
September 30, 2004 and 2003 was $5.80 and $4.02. The assumptions used for the
grants noted above were as follows:
14
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
=================================================================
DIVIDEND YIELD 3.01% - 3.74% 3.41% - 3.97%
EXPECTED VOLATILITY 29.82% - 31.65% 31.34% - 31.42%
RISK-FREE INTEREST RATE 3.56% - 4.41% 2.98% - 3.98%
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.
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
A summary of goodwill by operating subsidiaries follows:
JANUARY 1, GOODWILL SEPTEMBER 30,
(in thousands) 2003 ACQ. (DISP.) 2003
------------------------------------------
NBT Bank, N.A. $ 43,120 $ 1,400 $ 44,520
NBT Financial Services, Inc. 3,001 - 3,001
------------------------------------------
Total $ 46,121 $ 1,400 $ 47,521
==========================================
JANUARY 1, GOODWILL SEPTEMBER 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.
15
A summary of core deposit and other intangible assets follows:
SEPTEMBER 30,
2004 2003
-----------------
(in thousands)
Core deposit intangibles:
Gross carrying amount $ 2,186 $ 4,985
Less: accumulated amortization 1,272 3,767
-----------------
Net Carrying amount 914 1,218
-----------------
Other intangibles:
Gross carrying amount 857 857
Less: accumulated amortization 204 152
-----------------
Net Carrying amount 653 705
-----------------
Other intangibles not subject to
amortization: Pension asset 517 551
Total intangibles with definite
useful lives:
Gross carrying amount 3,560 7,167
Less: accumulated amortization 1,476 4,693
-----------------
Net Carrying amount $ 2,084 $ 2,474
=================
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") which was acquired by the
Company on November 8, 2001, established CNBF Capital Trust I (the Trust), 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 (4.34% and
3.85% for the September 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
16
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 September 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 nine months ended September 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.
The Components of pension expense and postretirement expense are set forth below
(in thousands):
THREE MONTHS ENDED SEPTEMBER 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 SEPTEMBER 30,
---------------------------------------
Postretirement Health Plan: 2004 2003
Service cost $ 9 $ 33
Interest cost 68 91
Net amortization (10) 10
------------------- ------------------
Total $ 67 $ 134
=================== ==================
17
NINE MONTHS ENDED SEPTEMBER 30,
Pension plan: 2004 2003
------------------------------------
Service cost $ 1,281 $ 674
Interest cost 1,599 1,014
Expected return on plan assets (2,802) (1,588)
Net amortization 192 128
------------------- ---------------
Total $ 270 $ 228
=================== ===============
NINE MONTHS ENDED SEPTEMBER 30,
Postretirement Health Plan: 2004 2003
------------------------------------
Service cost $ 27 $ 66
Interest cost 204 182
Net amortization (30) 20
------------------- ---------------
Total $ 201 $ 268
=================== ===============
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; (10) internal control
failures; and (11) 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
18
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.
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 September 30, 2004 compared to net income of
$11.8 million ($0.36 diluted earnings per share) for the three months ended
September 30, 2003. The quarter to quarter increase in net income from 2004 to
2003 was primarily the result of an increase in net interest income of $2.5
million offset by increases in total noninterest expense of $1.3 million and
income tax expense of $0.6 million. The increase in net interest income resulted
primarily from 10% growth in average loans during the three months ended
September 30, 2004 compared to the same period in 2003. The increase in total
noninterest expense was due primarily to increases in salaries and employee
benefits of $0.9 million, occupancy expense of $0.3 million and other operating
expenses of $0.3 million. The increase in income tax expense resulted primarily
from an increase in income before taxes of $1.4 million period over period.
The Company earned net income of $37.6 million ($1.14 diluted earnings per
share) for the nine months ended September 30, 2004 compared to net income of
$35.2 million ($1.07 diluted earnings per share) for the nine months ended
September 30, 2003. The increase in net income from 2004 to 2003 was primarily
the result of increases in net interest income of $4.7 million and total
noninterest income of $2.9 million offset by increases in the provision for loan
and lease losses of $1.1 million, total noninterest expense of $2.6 million and
income tax expense of $1.6 million. The increase in net interest income resulted
primarily from 11% growth in average loans during the nine months ended
September 30, 2004 compared to the same period in 2003 offset somewhat by a 16
basis point decline in net interest margin to 4.03% for 2004 from 4.19% for
2003. The increase in noninterest income was driven primarily by increases in
services charges on deposit accounts of $0.8 million, trust revenue of $0.5
million, Bank Owned Life Insurance (BOLI) income of $0.7 million, broker/dealer
and insurance revenue of $0.3 million and other income of $0.7 million. The
increase in provision for loan and lease losses resulted primarily from loan and
lease growth and higher net charge-offs. The increase in income tax expense
resulted primarily from an increase in income before taxes of $3.9 million
period over period.
19
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 using
the statutory Federal income tax rate of 35%.
TABLE 1
PERFORMANCE MEASUREMENTS
- ----------------------------------------------------------------------
FIRST SECOND THIRD NINE
2004 QUARTER QUARTER QUARTER MONTHS
- ----------------------------------------------------------------------
Return on average assets (ROAA) 1.23% 1.24% 1.20% 1.23%
Return on average equity (ROE) 15.73% 16.05% 15.94% 15.91%
Net interest margin (FTE) 4.10% 3.99% 3.99% 4.03%
======================================================================
2003
ROAA 1.27% 1.25% 1.21% 1.24%
ROE 16.05% 16.07% 16.06% 16.09%
Net interest margin 4.38% 4.18% 4.02% 4.19%
======================================================================
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 $2.4 million
during the three months ended September 30, 2004 compared to the same period of
2003. The increase in FTE net interest income resulted primarily from 7% growth
in average earning assets. The yield on earning assets declined 16 bp to 5.53%
for the three months ended September 30, 2004 from 5.69% for the same period in
2003. Meanwhile, the rate paid on interest-bearing liabilities decreased 15 bp,
to 1.81% for the three months ended September 30, 2004 from 1.96% for the same
period in 2003.
Total FTE interest income for the three months ended September 30, 2004
increased $2.2 million compared to the same period in 2003, a result of the
previously mentioned increase in average earning assets offset somewhat by a
decline in yield on earning assets of 16 bp. The growth in earning assets during
the period was driven primarily by growth in average loans and leases of 10%.
The growth in average loans and leases resulted primarily from growth in the
consumer loans and leases, commercial loans and the residential real estate
mortgage mix of the portfolio. 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 nine months of 2004.
During the same time period, total interest expense decreased $0.2 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 32.1% of interest-bearing liabilities for the three months ended
September 30, 2004 from 37.7% for the same period in 2003. Offsetting this
decrease in the interest-bearing liabilities mix, was an increase in lower cost
20
NOW, MMDA, and Savings deposits, to 45.3% of interest-bearing liabilities for
the three months ended September 30, 2004 from 43.4% for the same period in
2003. Additionally, offsetting the decline in time deposits was an increase in
short-term borrowings, comprising 10.2% of average interest-bearing liabilities
for the three months ended September 30, 2004 compared to 6.9% for the same
period in 2003. Meanwhile, long-term debt increased slightly, comprising 12.5%
and 12.0% of average interest-bearing liabilities for the three months ended
September 30, 2004 and 2003.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin decreased slightly to 3.99% for the three
months ended September 30, 2004, from 4.02% for the comparable period in 2003.
The margin remained stable for the three months ended September 30, 2004,
despite three recent increases in the discount rate from 2.00% to 2.75% charged
by the Federal Reserve Bank which drives short-term interest rates. The Company
thus far has been successful in lagging deposit pricing increases and offsetting
the impact of increased short-term borrowing costs from increases in prime-based
earning assets and investing cash flow from loan and securities repayments at
higher rates.
Federal taxable equivalent (FTE) net interest income increased $4.6 million
during the nine months ended September 30, 2004 compared to the same period of
2003. The increase in FTE net interest income resulted primarily from 11% growth
in average loans and leases. Offsetting the effect of the growth in loans and
leases was a 12bp decline in the Company's net interest spread, as earning
assets repriced downward at a faster rate than interest-bearing liabilities
during the period. The yield on earning assets declined 46bp to 5.56% for the
nine months ended September 30, 2004 from 6.02% for the same period in 2003.
Meanwhile, the rate paid on interest-bearing liabilities decreased 34 bp, to
1.81% for the nine months ended September 30, 2004 from 2.15% for the same
period in 2003.
Net interest margin decreased to 4.03% for the nine months September 30, 2004,
from 4.19% 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 September 30,
2004 2003
------------------------------------- -------------------------------
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -------------------------------------------------------------------------------------------------------------------
ASSETS
===================================================================================================================
Short-term interest bearing accounts $ 7,395 $ 39 2.10% $ 1,642 $ 17 4.12%
Securities available for sale (2) 985,202 11,350 4.58% 966,254 10,481 4.31%
Securities held to maturity (2) 78,310 1,055 5.36% 99,812 1,170 4.65%
Investment in FRB and FHLB Banks 37,012 256 2.75% 29,469 179 2.41%
Loans (1) 2,784,851 41,406 5.91% 2,527,099 40,065 6.29%
--------- ------ --------- ------
Total earning assets 3,892,770 54,106 5.53% 3,624,276 51,912 5.69%
------ ------
Other assets 275,615 278,333
------- -------
Total assets $4,168,385 $ 3,902,609
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 444,554 $ 1,364 1.22% $ 376,700 $ 982 1.03%
NOW deposit accounts 458,593 484 0.42% 414,057 461 0.44%
Savings deposits 590,331 959 0.65% 542,344 1,043 0.76%
Time deposits 1,057,259 6,936 2.61% 1,158,366 8,434 2.89%
--------- ----- --------- -----
Total interest bearing deposits 2,550,737 9,743 1.52% 2,491,467 10,920 1.74%
Short-term borrowings 336,077 1,192 1.41% 212,568 704 1.31%
Trust preferred debentures 18,720 245 5.21% - - 0.00%
Long-term debt 392,927 3,861 3.91% 369,843 3,586 3.85%
------------------------- --------------------
Total interest bearing liabilities 3,298,461 15,041 1.81% 3,073,878 15,210 1.96%
------ ------
Demand deposits 504,457 469,432
Other liabilities (3) 50,521 66,413
Stockholders' equity 314,946 292,886
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,168,385 $ 3,902,609
---------- -----------
NET INTEREST INCOME (FTE BASIS) 39,065 36,702
------ ------
INTEREST RATE SPREAD 3.72% 3.73%
----- -----
NET INTEREST MARGIN 3.99% 4.02%
----- -----
Taxable equivalent adjustment 1,013 1,124
------ ------
NET INTEREST INCOME $ 38,052 $ 35,578
============= =========
(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
Nine months ended September 30,
2004 2003
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -------------------------------------------------------------------------------------------------------------------
ASSETS
===================================================================================================================
Short-term interest bearing accounts $ 7,638 $ 187 3.27% $ 3,706 $ 61 2.20%
Securities available for sale (2) 974,671 33,652 4.61% 973,318 34,381 4.73%
Securities held to maturity (2) 87,322 3,275 5.01% 88,923 3,517 5.30%
Investment in FRB and FHLB Banks 34,778 610 2.34% 25,668 793 4.14%
Loans (1) 2,710,147 121,195 5.97% 2,433,665 119,601 6.59%
--------- ------- --------- -------
Total earning assets 3,814,556 158,919 5.56% 3,525,280 158,353 6.02%
------- -------
Other assets 276,996 266,675
------- -------
Total assets $4,091,552 $ 3,791,955
---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 440,350 $ 3,900 1.18% $ 348,082 $ 3,219 1.24%
NOW deposit accounts 455,817 1,603 0.47% 401,625 1,786 0.60%
Savings deposits 575,565 2,889 0.67% 518,819 3,510 0.91%
Time deposits 1,070,889 21,070 2.63% 1,213,669 27,057 2.99%
--------- ------ --------- ------
Total interest bearing deposits 2,542,621 29,462 1.55% 2,482,195 35,572 1.92%
Short-term borrowings 303,251 2,779 1.22% 145,038 1,363 1.26%
Trust preferred debentures 18,155 588 4.33% - - 0.00%
Long-term debt 377,466 11,103 3.93% 357,967 10,982 4.11%
------- ------ ------- ------
Total interest bearing liabilities 3,241,493 43,932 1.81% 2,985,200 47,917 2.15%
------ ------
Demand deposits 485,679 449,520
Other liabilities (3) 49,052 63,871
Stockholders' equity 315,328 293,364
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,091,552 $ 3,791,955
---------- -------------
NET INTEREST INCOME (FTE BASIS) 114,987 110,436
------- -------
INTEREST RATE SPREAD 3.75% 3.87%
----- -----
NET INTEREST MARGIN 4.03% 4.19%
----- -----
Taxable equivalent adjustment 3,161 3,337
----- -----
NET INTEREST INCOME $ 111,826 $ 107,099
----------- ---------
(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.
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 September 30,
- ----------------------------------------------------------------------------------------------
INCREASE (DECREASE)
2004 OVER 2003
- ----------------------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- ----------------------------------------------------------------------------------------------
Short-term interest bearing accounts $ 34 $ (12) $ 22
Securities available for sale 209 660 869
Securities held to maturity (274) 159 (115)
Investment in FRB and FHLB Banks 50 27 77
Loans 3,929 (2,588) 1,341
- ----------------------------------------------------------------------------------------------
Total (FTE) interest income 3,764 (1,570) 2,194
- ----------------------------------------------------------------------------------------------
Money market deposit accounts 193 189 382
NOW deposit accounts 48 (25) 23
Savings deposits 87 (171) (84)
Time deposits (702) (796) (1,498)
Short-term borrowings 435 53 488
Long-term debt and trust preferred debentures 415 105 520
- ----------------------------------------------------------------------------------------------
Total interest expense 1,069 (1,238) (169)
- ----------------------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 2,695 $ (332) $ 2,363
==============================================================================================
- ----------------------------------------------------------------------------------------------
INCREASE (DECREASE)
Nine months ended September 30, 2004 OVER 2003
- ----------------------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- ----------------------------------------------------------------------------------------------
Short-term interest bearing accounts $ 86 $ 40 $ 126
Securities available for sale 48 (777) (729)
Securities held to maturity (62) (180) (242)
Investment in FRB and FHLB Banks 227 (410) (183)
Loans 12,905 (11,311) 1,594
- ----------------------------------------------------------------------------------------------
Total (FTE) interest income 12,494 (11,928) 566
- ----------------------------------------------------------------------------------------------
Money market deposit accounts 822 (141) 681
NOW deposit accounts 221 (404) (183)
Savings deposits 354 (975) (621)
Time deposits (2,995) (2,992) (5,987)
Short-term borrowings 1,451 (35) 1,416
Long-term debt and trust preferred debentures 1,124 (415) 709
- ----------------------------------------------------------------------------------------------
Total interest expense 3,886 (7,871) (3,985)
- ----------------------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 8,608 $ (4,057) $ 4,551
==============================================================================================
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Service charges on deposit accounts $ 4,159 $ 4,164 $ 12,286 $ 11,531
Broker/dealer and insurance fees 1,696 1,763 5,210 4,905
Trust 1,182 958 3,431 2,966
Other 2,714 2,672 8,424 7,757
Net securities (losses) gains 18 18 56 83
Bank owned life insurance income 348 398 1,142 412
---------------------------------------------
Total $ 10,117 $ 9,973 $ 30,549 $ 27,654
=============================================
Total noninterest income remained relatively stable at $10.1 million for the
three months ended September 30, 2004 compared to $10.0 million for the three
months ended September 30, 2003. Trust revenue increased $0.2 million or 23%,
from higher personal agency and trust fees due primarily to account growth and
increased fees.
Total noninterest income increased $2.9 million, or 10% from $27.7 million for
the nine months ended September 30, 2003 to $30.5 million for the same period in
2004. Service charges on deposit accounts increased $0.8 million, due primarily
to higher overdraft fees from pricing adjustments made during the second half of
2003. Bank Owned Life Insurance ("BOLI") income increased $0.7 million,
resulting from the $30.0 million BOLI purchase in June 2003. Broker/dealer
revenue increased $0.3 million due primarily to the Company's initiative in
delivering financial service related products through its 113-branch network,
which was implemented at the end of 2002. Trust revenue increased $0.5 million
from account growth and increased fees. Other income increased $0.7 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Salaries and employee benefits $ 13,345 $ 12,486 $ 40,000 $ 37,205
Occupancy 2,445 2,143 7,489 6,851
Equipment 1,941 1,909 5,575 5,619
Data processing and communications 2,688 2,640 8,232 8,081
Professional fees and outside services 1,536 1,421 4,592 3,963
Office supplies and postage 1,167 1,104 3,341 3,188
Amortization of intangible assets 71 158 213 475
Capital securities - 181 - 551
Loan collection and other real estate owned 339 448 810 1,204
Other 3,773 3,493 10,118 10,586
---------------------------------------------
Total noninterest expense $ 27,305 $ 25,983 $ 80,370 $ 77,723
=============================================
Noninterest expense for the three months ended September 30, 2004 was $27.3
million, up $1.3 million from $26.0 million for the same period in 2003.
Salaries and employee benefits for the three months ended September 30, 2004
increased $0.9 million or 7% over the same period in 2003 mainly from higher
compensation from merit and FTE increases and higher employee medical insurance
costs. Occupancy expense for the three months ended September 30, 2004 increased
$0.3 million or 14% over the same period in 2003 primarily from branch expansion
in the Albany and Binghamton markets. Other operating expenses for the three
months ended September 30, 2004 were up $0.3 million compared to the same period
in 2003, mainly from increases in insurance expense.
Noninterest expense for the nine months ended September 30, 2004 was $80.4
million, up $2.6 million or 3% from $77.7 million for the same period in 2003.
The increase in noninterest expense was due primarily to increases in salaries
and employee benefits, occupancy expense 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 $2.8 million,
mainly from increases of $1.6 million in salary expense from merit and FTE
increases, employee medical costs of $0.8 million, and incentive compensation of
$0.8 million offset by a decrease in retirement expense of $0.3 million.
Occupancy expense increased $0.6 million from the previously mentioned expansion
in the Albany and Binghamton markets. Professional fees and outside services
increased $0.6 million mainly from increased courier, legal and audit costs.
Loan collection and OREO costs decreased $0.4 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 September 30, 2004 compared to $1.8
million at September 30, 2003. Other operating expense decreased $0.5 million
mainly from a $0.6 million charge for the writedown of a nonmarketable security
in 2003.
26
INCOME TAXES
Income tax expense was $5.9 million for the three months ended September 30,
2004 compared to $5.3 million for the same period in 2003. The effective tax
rate was 32.0% for the three months ended September 30, 2004 and 30.8% for the
same period in 2003. Income tax expense was $17.6 million for the nine months
ended September 30, 2004 compared to $16.0 million for the same period in 2003.
The effective tax rate was 31.9% for the nine months ended September 30, 2004
and 31.3% 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:
SEPTEMBER 30, December 31, September 30,
2004 2003 2003
---------------------------------------------
(in thousands)
Commercial and commercial mortgages* $ 1,195,929 $ 1,085,605 $ 1,095,463
Residential real estate mortgages 738,681 764,681 677,540
Consumer 802,510 726,960 717,216
Leases 77,433 62,730 60,247
---------------------------------------------
Total loans and leases $ 2,814,553 $ 2,639,976 $ 2,550,466
=============================================
* Includes agricultural loans
Total loans and leases were $2.8 billion, or 67.0% of assets, at September 30,
2004, and $2.6 billion, or 65.2% at December 31, 2003, and $2.6 billion, or
63.0%, at September 30, 2003. Total loans and leases increased $264.1 million or
10% at September 30, 2004 when compared to September 30, 2003. The solid year
over year loan growth was driven mainly by increases in consumer loans of $85.2
million or 12%, due in part to strong growth in home equity loans and indirect
automobile installment loans. Additionally, residential real estate mortgages,
increased $61.1 million or 9% when compared to September 30, 2003. 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. Residential real estate mortgages are
down $26.0 million from December 31, 2003. The decrease can be attributed to the
sale of approximately $21 million in mortgage loans during the first quarter of
2004, as well as the Company's continued focus on limiting its exposure to
30-year fixed rate mortgages (see the discussion under the caption "Market Risk"
on page 35 for additional information regarding the Company's approach to
managing its exposure to 30-year fixed rate mortgages). Commercial loans and
commercial mortgages increased $100.5 million or 9% year over year, as the
Company has been successful in generating new business in the Albany,
Binghamton, and Northeastern Pennsylvania markets. Lastly, leases increased
$17.2 million or 29% from an expanded presence in the Northeastern Pennsylvania
market. At September 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.
27
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 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 September 30, 2004 when compared to the same period in 2003. The average
balance of securities available for sale increased $18.9 million for the three
months ended September 30, 2004 when compared to the same period in 2003. The
average balance of securities held to maturity decreased $21.5 million for the
three months ended September 30, 2004, when compared to the same period in 2003.
The average total securities portfolio represents 27% of total average earning
assets for the three months ended September 30, 2004 down from 29% 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 SEPTEMBER 30,
2004 2003
--------------------
Mortgage-backed securities:
With maturities 15 years or less 49% 46%
With maturities greater than 15 years 8% 18%
Collateral mortgage obligations 12% 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.
28
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 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 September 30, 2004 was 1.58%
compared to 1.62% at December 31, 2003 and 1.63% at September 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.
29
TABLE 4
ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
(dollars in thousands) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Balance, beginning of period $43,482 $40,858 $42,651 $40,167
Recoveries 1,479 1,369 3,029 4,286
Charge-offs (2,735) (2,991) (8,006) (8,570)
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs (1,256) (1,622) (4,977) (4,284)
Provision for loan losses 2,313 2,436 6,865 5,789
- ---------------------------------------------------------------------------------------------------------------
Balance, end of period $44,539 $41,672 $44,539 $41,672
===============================================================================================================
COMPOSITION OF NET CHARGE-OFFS
Commercial and agricultural $ (51) 4% $ (603) 37% $(1,366) 27% $(1,453) 33%
Real estate mortgage (118) 10% (2) 1% (187) 4% 76 0%
Consumer (1,087) 86% (1,017) 62% (3,424) 69% (2,907) 67%
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs $(1,256) 100% $(1,622) 100% $(4,977) 100% $(4,284) 100%
- ---------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans 0.18% 0.25% 0.25% 0.24%
===============================================================================================================
===============================================================================================================
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past
due, restructured loans, other real estate owned (OREO), and nonperforming
securities. Loans are generally placed on nonaccrual when principal or interest
payments become ninety days past due, unless the loan is well secured and in the
process of collection. Loans may also be placed on nonaccrual when circumstances
indicate that the borrower may be unable to meet the contractual principal or
interest payments. OREO represents property acquired through foreclosure and is
valued at the lower of the carrying amount or fair market value, less any
estimated disposal costs. Nonperforming securities include securities which
management believes are other-than-temporarily impaired, carried at their
estimated fair value and are not accruing interest.
Total nonperforming assets were $16.4 million at both September 30, 2004 and
December 31, 2003, and $18.3 million at September 30, 2003. The decrease in
nonperforming assets when compared to September 30, 2003 resulted primarily from
a slight decrease in nonperforming loans and decreases in OREO and nonperforming
securities. Nonperforming loans totaled $16.0 million at September 30, 2004, up
from the $14.8 million outstanding at December 31, 2003 and down from $16.5
million at September 30, 2003. The increase in nonperforming loans when compared
to December 31, 2003 resulted primarily from increases in commercial and
agricultural nonperforming loans (from several small credits ranging in size
from $0.1 million to $0.5 million) to $9.5 million at September 30, 2004 from
$8.7 million at December 31, 2003. OREO decreased from $1.9 million at September
30, 2003 to $0.4 million at September 30, 2004.
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $44.4 million in potential problem loans at September
30, 2004 as compared to $54.3 million at December 31, 2003. The decrease in
potential problem loans from December 31, 2003 was due primarily to the
improvement of one large commercial credit relationship (approximately $5
million) as well as several upgrades and payouts of smaller commercial credit
relationships offset by downgrades of several commercial credit relationships.
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 September 30, 2004, potential
problem loans primarily consisted of commercial real estate and commercial and
agricultural loans. Management cannot
30
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 $1.3 million for the three months ended September 30,
2004, down $0.3 million from the $1.6 million charged-off during the same period
in 2003. The decrease in net charge-offs resulted primarily from lower
commercial net charge-offs during the three months ended September 30, 2004. The
provision for loan and lease losses totaled $2.3 million for the three months
ended September 30, 2004, down slightly from the $2.4 million provided during
the same period in 2003. The slight decrease in the provision for loan and lease
losses for the three months ended September 30, 2004 resulted primarily from the
decrease in net charge-offs mentioned above offset by loan growth.
Net charge-offs totaled $5.0 million for the nine months ended September 30,
2004, up $0.7 million from the $4.3 million charged-off during the same period
in 2003. The increase in net charge-offs resulted primarily from larger
recoveries during the nine months ended September 30, 2003. The provision for
loan and lease losses totaled $6.9 million for the nine months ended September
30, 2004, up from the $5.8 million provided during the same period in 2003. The
increase in the provision for loan and lease losses required for the nine months
ended September 30, 2004 resulted primarily from the previously mentioned loan
growth and increased net charge-offs during the nine months ended September 30,
2004.
TABLE 5
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(dollars in thousands) 2004 2003 2003
- ----------------------------------------------------------------------------------------------------------
Commercial and agricultural $ 9,524 $ 8,693 $ 10,841
Real estate mortgage 2,725 2,483 1,857
Consumer 2,369 2,685 2,576
- ----------------------------------------------------------------------------------------------------------
Total nonaccrual loans 14,618 13,861 15,274
- ----------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 3 242 71
Real estate mortgage 888 244 721
Consumer 456 482 402
- ----------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 1,347 968 1,194
- ----------------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: - - -
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans 15,965 14,829 16,468
- ----------------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 446 1,157 1,871
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 16,411 15,986 18,339
==========================================================================================================
Nonperforming securities - 395 619
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 16,411 $ 16,381 $ 18,958
==========================================================================================================
Total nonperforming loans to loans and leases 0.57% 0.56% 0.65%
Total nonperforming assets to assets 0.39% 0.40% 0.47%
Total allowance for loan and lease losses
to nonperforming loans 278.98% 287.62% 253.05%
==========================================================================================================
DEPOSITS
- --------
Total deposits were $3.1 billion at September 30, 2004, up slightly from
year-end 2003, and an increase of $119.6 million, or 4%, from the same period in
the prior year. Total average deposits for the nine months ended September 30,
2004 increased $96.6 million, or 3%, for the same period in 2003. The Company
experienced a decline in time deposits, as average time deposits declined $142.8
million or 12%, for the
31
nine months ended September 30, 2004 compared to the same period in 2003.
Meanwhile, average core deposits increased $239.4 million or 14%, for the nine
months ended September 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. The Company does not anticipate that this trend will continue as its
liquidity position is expected to tighten from continued loan growth (see the
caption "Liquidity Risk" on page 35 for additional information pertaining to the
Company's liquidity needs). At September 30, 2004, total checking, savings and
money market accounts represented 65.4% of total deposits compared to 62.1% at
September 30, 2003.
BORROWED FUNDS
- ---------------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $319.6 million at September 30, 2004
compared to $302.9 million and $332.0 million at December 31, and September 30,
2003, respectively. Long-term debt was $394.5 million at September 30, 2004 and
was $369.7 million December 31, 2003 and 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.
CAPITAL RESOURCES
- ------------------
Stockholders' equity of $325.4 million represents 7.8% of total assets at
September 30, 2004, compared with $304.7 million, or 7.5% 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 quarter ended
- ---------------------------------------------------------------------------
CAPITAL MEASUREMENTS
2004 March 31 June 30 September 30
- ---------------------------------------------------------------------------
Tier 1 leverage ratio 6.96% 6.90% 6.96%
Tier 1 capital ratio 10.12% 9.74% 9.61%
Total risk-based capital ratio 11.37% 11.00% 10.86%
Cash dividends as a percentage
of net income 45.20% 49.50% 47.97%
Per common share:
Book value $ 9.80 $ 9.43 $ 9.93
Tangible book value $ 8.29 $ 7.91 $ 8.42
===========================================================================
2003
Tier 1 leverage ratio 6.71% 6.72% 6.77%
Tier 1 capital ratio 9.77% 9.44% 9.78%
Total risk-based capital ratio 11.02% 10.70% 11.03%
Cash dividends as a percentage
of net income 47.87% 46.68% 47.13%
Per common share:
Book value $ 9.00 $ 9.19 $ 9.32
Tangible book value $ 7.50 $ 7.64 $ 7.79
===========================================================================
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 2.36 at
September 30, 2004 and 2.17 in the comparable period of the prior year. The
Company's price was 15.7 times trailing twelve months earnings at September 30,
2004, compared to 14.2 times for the same period last year.
TABLE 7
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- -----------------------------------------------------------------------
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
SEPTEMBER 30 $ 23.65 $ 21.02 $ 23.43 $ 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 100 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 scenario, net interest income is projected to decrease
slightly when compared to the forecasted net interest income in the flat rate
scenario through the simulation period. The decrease in net interest income is a
result of earning assets repricing downward at a faster rate than interest
bearing liabilities. The inability to effectively lower deposit rates will
likely reduce or eliminate the benefit of lower interest rates. In the rising
rate 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/- 100 bp
scenarios, as described above, is within the internal policy risk limits of not
more than a 7.5% change in net interest income. The following table summarizes
the percentage change in net interest income in the rising and declining rate
scenarios over a 12-month period from the forecasted net interest income in the
flat rate scenario using the September 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 -0.94%
+200 -0.60%
- -100 -0.58%
=========================================================
Under the flat rate scenario with a static balance sheet, net interest income is
anticipated to decrease approximately 1.3% from annualized net interest income
for the three months ended September 30, 2004. The decrease is a result of a
flattening yield curve, as short-term rates have increased (a majority of
interest-bearing liabilities are priced to short-term rate indexes) and
long-term rates have decreased (a majority of earning assets are priced to
long-term rate indexes).
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 September 30, 2004. The Company's net interest income is
projected to decrease by 0.60% if interest rates gradually rise 200 basis points
when compared to a flat rate scenario. From December 31, 2003, we have reduced
our exposure to 30-year fixed rate mortgage related securities and loans by
$20.1 million. Approximately 10.8% of earning assets were comprised of 30-year
fixed rate mortgage related securities and loans at September 30, 2004, down
from a ratio of 11.5% at September 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 September 30, 2004,
the Company's Basic Surplus measurement was 7.2% of total assets or $302
million, which was above the Company's minimum of 5% or $210 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 September 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 more 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 September 30, 2004, approximately $48.8 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 September 30, 2004. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures were effective in timely
alerting them to any material information relating to the Company and its
subsidiaries required to be included in the Company's periodic SEC
filings.
There were no changes made in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect the
Company's internal controls over financial reporting.
Although as stated above we have not made any significant changes in our
internal controls over financial reporting in the most recent fiscal quarter,
based on our documentation and testing to date, we have made improvements in the
documentation, design or effectiveness of internal controls over financial
reporting. However, given the risks inherent in the design and operation of
internal controls over financial reporting, we can provide no assurance as to
our, or our independent auditor's conclusions at December 31, 2004 with respect
to the effectiveness of our 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
(a) Not applicable
(b) Not applicable
(c) 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 quarter ended
September 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)
- -----------------------------------------------------------------------------------------
At 6/30/04 - - - 803,723
- -----------------------------------------------------------------------------------------
7/1/07 - 7/31/04 36,071 $ 21.84 36,071 767,652
- -----------------------------------------------------------------------------------------
8/1/04 - 8/31/04 20,930 $ 21.61 20,930 746,722
- -----------------------------------------------------------------------------------------
9/1/04 - 9/30/04 8,357 $ 22.37 8,357 738,365
- -----------------------------------------------------------------------------------------
Total 65,358 $ 21.83 65,358
- -----------------------------------------------------------------------------------------
(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
None
Item 5 -- Other Information
On October 25, 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
December 15, 2004 to stockholders of record as of December 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.
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 5th day of November 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: November 5, 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: November 5, 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 September
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
November 5, 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 September
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
November 5, 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.
