-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F2ag4bsX6k50eS8u98S9lghgM2Rzc6EbHpHvmMsZmhsXwLGbJZRfYQ8RFDHGJnGu oJ/zHnO/MGRpsogOZKeU/A== 0001015402-02-002636.txt : 20020813 0001015402-02-002636.hdr.sgml : 20020813 20020813155857 ACCESSION NUMBER: 0001015402-02-002636 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NBT BANCORP INC CENTRAL INDEX KEY: 0000790359 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 161268674 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14703 FILM NUMBER: 02729744 BUSINESS ADDRESS: STREET 1: 52 S BROAD ST CITY: NORWICH STATE: NY ZIP: 13815 BUSINESS PHONE: 6073372265 MAIL ADDRESS: STREET 1: 52 S. BROAD STREET CITY: NORWICH STATE: NY ZIP: 13815 10-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended June 30, 2002. OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from ________ to ________. COMMISSION FILE NUMBER 0-14703 NBT BANCORP INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 16-1268674 (State of Incorporation) (I.R.S. Employer Identification No.) 52 SOUTH BROAD STREET NORWICH, NEW YORK 13815 (Address of Principal Executive Offices)(Zip Code) Registrant's Telephone Number, Including Area Code: (607)-337-2265 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of July 31, 2002, there were 33,129,923 shares outstanding of the Registrant's common stock, $0.01 par value. 1 NBT BANCORP INC. FORM 10-Q -- Quarter Ended June 30, 2002 TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1 Interim Financial Statements (Unaudited) Consolidated Balance Sheets at June 30, 2002, December 31, 2001 (Audited), and June 30, 2001 Consolidated Statements of Income for the three month and six month periods ended June 30, 2002 and 2001 Consolidated Statements of Stockholders' Equity for the six month periods ended June 30, 2002 and 2001 Consolidated Statements of Cash Flows for the six month periods ended June 30, 2002 and 2001 Consolidated Statements of Comprehensive Income (Loss) for the three month and six month periods ended June 30, 2002 and 2001 Notes to Unaudited Interim Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about Market Risk PART II OTHER INFORMATION Item 1 Legal Proceedings Item 2 Changes in Securities Item 3 Defaults upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Exhibits and Reports on FORM 8-K SIGNATURES INDEX TO EXHIBITS 2
NBT BANCORP INC. AND SUBSIDIARIES JUNE 30, December 31, June 30, CONSOLIDATED BALANCE SHEETS 2002 2001 2001 - ------------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share data) (UNAUDITED) (Unaudited) ASSETS Cash and due from banks $ 108,456 $ 123,201 $ 94,153 Short-term interest bearing accounts 5,950 6,756 6,975 Trading securities, at fair value 280 126 9,658 Securities available for sale, at fair value 988,538 909,341 965,969 Securities held to maturity (fair value - $89,880, $101,495 and $104,063) 88,882 101,604 104,477 Federal Reserve and Federal Home Loan Bank stock 23,372 21,784 23,333 Loans and leases 2,336,041 2,339,636 2,353,075 Less allowance for loan and lease losses 43,719 44,746 34,126 - ------------------------------------------------------------------------------------------------------------------------- Net loans and leases 2,292,322 2,294,890 2,318,949 Premises and equipment, net 61,716 62,685 61,166 Goodwill 15,476 15,476 15,133 Intangible assets, net 31,977 35,212 36,155 Other assets 61,129 67,127 65,261 - ------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 3,678,098 $ 3,638,202 $ 3,701,229 ========================================================================================================================= LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY Deposits: Demand (noninterest bearing) $ 424,615 $ 431,407 $ 393,173 Savings, NOW, and money market 1,119,730 1,097,156 1,027,541 Time 1,323,300 1,387,049 1,501,387 - ------------------------------------------------------------------------------------------------------------------------- Total deposits 2,867,645 2,915,612 2,922,101 Short-term borrowings 122,903 122,013 146,473 Long-term debt 350,729 272,331 276,865 Other liabilities 37,903 44,891 46,081 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 3,379,180 3,354,847 3,391,520 Guaranteed preferred beneficial interests in Company's junior subordinated debentures 17,000 17,000 17,000 Stockholders' equity: Preferred stock, $0.01 par value; shares authorized-2,500,000; none issued - - - Common stock, $0.01 par value; shares authorized-50,000,000; shares issued 34,401,212, 34,252,661, and 34,218,062 at June 30, 2002, December 31, 2001, and June 30, 2001, respectively 344 343 342 Additional paid-in-capital 210,445 209,176 208,817 Retained earnings 82,769 72,531 95,514 Unvested restricted stock awards (189) - - Accumulated other comprehensive income 9,214 3,921 864 Treasury stock at cost 1,219,970, 1,147,848, and 716,793 shares at June 30, 2002, December 31, 2001 and June 30, 2001, respectively (20,665) (19,616) (12,828) - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 281,918 266,355 292,709 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY $ 3,678,098 $ 3,638,202 $ 3,701,229 =========================================================================================================================
See notes to unaudited interim consolidated financial statements. 3
Three months ended Six months ended NBT BANCORP INC. AND SUBSIDIARIES June 30, June 30, CONSOLIDATED STATEMENTS OF INCOME 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------- (in thousands, except per share data) (Unaudited) INTEREST, FEE AND DIVIDEND INCOME: Loans $ 41,390 $ 46,941 $ 83,617 $ 95,093 Securities available for sale 14,613 15,130 28,180 30,754 Securities held to maturity 1,170 1,330 2,416 2,708 Trading securities 2 300 4 345 Other 315 500 595 1,201 - ---------------------------------------------------------------------------------------------------- Total interest, fee and dividend income 57,490 64,201 114,812 130,101 - ---------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits 16,265 25,950 33,256 54,155 Short-term borrowings 287 1,410 635 3,429 Long-term debt 3,856 3,336 7,494 6,633 - ---------------------------------------------------------------------------------------------------- Total interest expense 20,408 30,696 41,385 64,217 - ---------------------------------------------------------------------------------------------------- Net interest income 37,082 33,505 73,427 65,884 Provision for loan and lease losses 2,092 6,872 4,103 8,083 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 34,990 26,633 69,324 57,801 - ---------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Trust 1,154 1,070 2,174 2,116 Service charges on deposit accounts 3,239 3,226 6,289 5,997 Broker/dealer and insurance fees 1,483 900 2,978 1,923 Net securities (losses) gains 69 227 (433) 1,250 Gain on sale of a building - - - 1,367 Gain on sale of branch, net - - 220 - Other 2,359 2,280 4,970 4,727 - ---------------------------------------------------------------------------------------------------- Total noninterest income 8,304 7,703 16,198 17,380 - ---------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Salaries and employee benefits 12,649 11,569 25,305 23,302 Office supplies and postage 1,227 1,282 2,124 2,361 Occupancy 2,096 2,179 4,265 4,466 Equipment 1,818 1,700 3,532 3,433 Professional fees and outside services 1,782 1,480 3,397 2,600 Data processing and communications 2,598 2,348 5,163 5,004 Amortization of intangible assets 830 1,012 1,690 1,976 Capital securities 230 341 446 745 Deposit overdraft write-offs - - - 2,125 Loan collection and other real estate owned 781 483 1,725 807 Other operating 3,175 2,760 5,869 4,985 - ---------------------------------------------------------------------------------------------------- Total noninterest expense 27,186 25,154 53,516 51,804 - ---------------------------------------------------------------------------------------------------- Income before income taxes 16,108 9,182 32,006 23,377 Income taxes 5,261 2,612 10,507 7,153 - ---------------------------------------------------------------------------------------------------- NET INCOME $ 10,847 $ 6,570 $ 21,499 $ 16,224 ==================================================================================================== Earnings per share: Basic $ 0.33 $ 0.20 $ 0.65 $ 0.50 Diluted $ 0.32 $ 0.20 $ 0.64 $ 0.49 ====================================================================================================
See notes to unaudited interim consolidated financial statements. 4
NBT BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------ Accumulated Additional Unvested Other Common Paid-in- Retained Restricted Comprehensive Stock Capital Earnings Stock Income (loss) - ------------------------------------------------------------------------------------------------------------------------------ (in thousands, except share and per share data) BALANCE AT DECEMBER 31, 2000 $ 332 $ 195,422 $ 88,921 - $ (1,934) Net income 16,224 Cash dividends - $0.34 per share (1) (9,631) Retirement of 63,034 shares of treasury stock of pooled company (1) (708) Purchase of 271,939 treasury shares Issuance of 164,885 shares to employee benefits plans and other stock plans, including tax benefit (1,888) Issuance of 1,075,365 shares to purchase First National Bancorp, Inc. 11 15,991 Other comprehensive income 2,798 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JUNE 30, 2001 $ 342 $ 208,817 $ 95,514 - $ 864 ============================================================================================================================== BALANCE AT DECEMBER 31, 2001 $ 343 $ 209,176 $ 72,531 - $ 3,921 Net income 21,499 Cash dividends - $0.34 per share (11,261) Purchase of 72,900 treasury shares Issuance of 162,421 shares to employee benefit plans and other stock plans, including tax benefit 1 1,296 Grant of 14,648 shares of restricted stock awards (27) (222) Amortization of restricted stock awards 33 Other comprehensive income 5,293 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JUNE 30, 2002 $ 344 $ 210,445 $ 82,769 $ (189) $ 9,214 - ------------------------------------------------------------------------------------------------------------------------------ NBT BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) - ---------------------------------------------------------------------------------- Treasury Stock Total - ---------------------------------------------------------------------------------- (in thousands, except share and per share data) BALANCE AT DECEMBER 31, 2000 $ (13,100) $269,641 Net income 16,224 Cash dividends - $0.34 per share (1) (9,631) Retirement of 63,034 shares of treasury stock of pooled company 709 - Purchase of 271,939 treasury shares (3,949) (3,949) Issuance of 164,885 shares to employee benefits plans and other stock plans, including tax benefit 3,512 1,624 Issuance of 1,075,365 shares to purchase First National Bancorp, Inc. 16,002 Other comprehensive income 2,798 - ---------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2001 $ (12,828) $292,709 ================================================================================== BALANCE AT DECEMBER 31, 2001 $ (19,616) $266,355 Net income 21,499 Cash dividends - $0.34 per share (11,261) Purchase of 72,900 treasury shares (1,171) (1,171) Issuance of 162,421 shares to employee benefit plans and other stock plans, including tax benefit (127) 1,170 Grant of 14,648 shares of restricted stock awards 249 -- Amortization of restricted stock awards 33 Other comprehensive income 5,293 - ---------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2002 $ (20,665) $281,918 - ----------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements. Note: (1) For the period ended June 30, 2001, dividends per share data represents historical dividends per share of NBT Bancorp Inc. stand-alone and the cash dividends paid represents NBT Bancorp Inc. and CNB Financial Corp combined as all unaudited interim consolidated financial statements have been restated to give effect to the merger with CNB Financial Corp., which was accounted for as a pooling-of-interests and closed on November 8, 2001. 5
NBT BANCORP INC. AND SUBSIDIARIES Six Months Ended June 30, CONSOLIDATED STATEMENTS OF CASH FLOWS 2002 2001 - ------------------------------------------------------------------------------------------ (in thousands) (Unaudited) OPERATING ACTIVITIES: Net income $ 21,499 $ 16,224 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,103 8,083 Depreciation of premises and equipment 3,451 2,924 Net accretion on securities (866) (911) Amortization of intangible assets 1,690 1,976 Amortization of restricted stock awards 33 - Proceeds from sale of loans held for sale 3,965 11,282 Origination of loans held for sale (3,114) (12,899) Net losses (gains) on sales of loans 50 (88) Net (gain) loss on sale of other real estate owned (50) 211 Net security losses (gains) 433 (1,250) Proceeds from maturities of trading securities - 775 Proceeds from sale of trading securities - 20,709 Purchases of trading securities (166) (6,588) Gain on sale of a building - (1,367) Gain on sale of a branch, net (220) - Net decrease (increase) in other assets 2,954 (2,611) Net decrease in other liabilities (6,245) (4,734) - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 27,517 31,736 - ------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Net cash and cash equivalents provided by acquisitions - 9,509 Net cash paid in conjunction with branch sale (29,171) - Securities available for sale: Proceeds from maturities 141,582 144,194 Proceeds from sales 156,799 49,389 Purchases (368,278) (197,563) Securities held to maturity: Proceeds from maturities 30,000 23,052 Purchases (17,330) (11,548) (Purchases ) proceeds of FRB and FHLB stock (1,588) 8,802 Net increase in loans (6,821) (39,725) Purchase of premises and equipment, net (3,390) (3,659) Proceeds from sales of other real estate owned 811 1,566 - ------------------------------------------------------------------------------------------ Net cash used in investing activities (97,386) (15,983) - ------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Net decrease in deposits (13,708) (30,747) Net increase (decrease) in short-term borrowings 890 (38,701) Proceeds from issuance of long-term debt 80,000 246,291 Repayments of long-term debt (1,602) (209,955) Proceeds from issuance of treasury shares to employee benefit plans and other stock plans, including tax benefit 1,170 1,624 Purchase of treasury stock (1,171) (3,949) Cash dividends (11,261) (9,631) - ------------------------------------------------------------------------------------------ Net cash provided by (used) in financing activities 54,318 (45,068) - ------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (15,551) (29,315) Cash and cash equivalents at beginning of period 129,957 130,443 - ------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 114,406 $ 101,128 ==========================================================================================
( Continued ) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: SIX MONTHS ENDED JUNE 30, 2002 2001 Cash paid during the period for: Interest $ 44,898 $ 68,194 Income taxes 6,896 1,537 ============================================================================================== Loans transferred to OREO $ 1,277 1,775 Transfer of securities available for sale to trading securities - 3,804 BRANCH DIVESTITURE: Assets sold $ 3,323 - Liabilities sold 34,263 - ACQUISITIONS: - ---------------------------------------------------------------------------------------------- Fair value of assets acquired - 109,549 Fair value of liabilities assumed - 110,501 Common stock issued for acquisitions - 16,002 - ----------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements. 7
Three months ended Six months ended NBT BANCORP INC. AND SUBSIDIARIES June 30, June 30, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------- (in thousands) (Unaudited) Net Income $ 10,847 $ 6,570 $ 21,499 $ 16,224 - ---------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax Unrealized holding gains (losses) arising during period [pre-tax amounts of $16,103 $(2,794), $8,369 and $5,858] 9,662 (1,673) 5,037 3,423 Less: Reclassification adjustment for net (gains) losses included in net income [pre-tax amounts of $(70), $(1,327), $425 and $(1,040)] (42) (798) 256 (625) - ---------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) 9,620 (2,471) 5,293 2,798 - ---------------------------------------------------------------------------------------------------------------- Comprehensive income $ 20,467 $ 4,099 $ 26,792 $ 19,022 ================================================================================================================
See notes to unaudited interim consolidated financial statements. 8 NBT BANCORP INC. AND SUBSIDIARY NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements include the accounts of NBT Bancorp Inc. (the Registrant) and its wholly-owned subsidiaries, NBT Bank, N.A. (NBT or Bank), NBT Financial Services, Inc., and CNBF Capital Trust I. Collectively, the Registrant and its subsidiaries are referred to herein as "the Company". All intercompany transactions have been eliminated in consolidation. Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation. The consolidated balance sheet at December 31, 2001 has been derived from audited consolidated financial statements at that date. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements included in the Registrant's annual report on Form 10-K for the year ended December 31, 2001 and notes thereto referred to above. The Company's unaudited interim consolidated financial statements as of and for the periods ended June 30, 2001 have been restated to give effect to the merger with CNB Financial Corp., which closed on November 8, 2001 and was accounted for as a pooling-of-interests. NOTE 2. USE OF ESTIMATES Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilites at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, as well as the disclosures provided. Actual results could differ from those estimates. Estimates associated with the allowance for loan losses, fair values of financial instruments and status of contingencies are particularly susceptible to material change in the near term. NOTE 3. COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments in the normal course of business to meet financing needs of its customers and to reduce its own exposure to fluctuating interest rates. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items. 9 At June 30, 2002 and December 31, 2001, commitments to extend credit and unused lines of credit totaled $441.3 million and $704.7 million, respectively, and standby letters of credit totaled $21.6 million and $21.1 million, respectively at those same dates. Since commitments to extend credit and unused lines of credit may expire without being used, this amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using managements credit evaluation of the borrower and may include accounts receivable, inventory, property, land and other items. NOTE 4. EARNINGS PER SHARE Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (such as the Company's dilutive stock options and restricted stock). The following is a reconciliation of basic and diluted earnings per share for the periods presented in the consolidated statements of income.
- --------------------------------------------------------------------------------- Three months ended June 30, 2002 2001 - --------------------------------------------------------------------------------- (in thousands, except per share data) Basic EPS: Weighted average common shares outstanding 33,157 32,874 Net income available to common shareholders $10,847 $ 6,570 - --------------------------------------------------------------------------------- Basic EPS $ 0.33 $ 0.20 ================================================================================= Diluted EPS: Weighted average common shares outstanding 33,157 32,874 Dilutive effect of common stock options and restricted stock 276 238 - --------------------------------------------------------------------------------- Weighted average common shares and common share equivalents 33,433 33,112 Net income available to common shareholders $10,847 $ 6,570 - --------------------------------------------------------------------------------- Diluted EPS $ 0.32 $ 0.20 ================================================================================= Six months ended June 30, 2002 2001 - --------------------------------------------------------------------------------- (in thousands, except per share data) Basic EPS: Weighted average common shares outstanding 33,125 32,663 Net income available to common shareholders $21,499 $16,224 - --------------------------------------------------------------------------------- Basic EPS $ 0.65 $ 0.50 ================================================================================= Diluted EPS: Weighted average common shares outstanding 33,125 32,663 Dilutive effect of common stock options and restricted stock 239 241 - --------------------------------------------------------------------------------- Weighted average common shares and common share equivalents 33,364 32,904 Net income available to common shareholders $21,499 $16,224 - --------------------------------------------------------------------------------- Diluted EPS $ 0.64 $ 0.49 =================================================================================
10 There were 401,397 outstanding stock options for the quarter ended June 30, 2002 and 1,009,680 outstanding stock options for the quarter ended June 30, 2001 that were not considered in the calculation of diluted earnings per share since the stock options' exercise price was greater than the average market price during these periods. There were 927,943 outstanding stock options for the six month period ended June 30, 2002 and 1,009,680 outstanding stock options for the six month period ended June 30, 2001 that were not considered in the calculation of diluted earnings per share since the stock options' exercise price was greater than the average market price during these periods. NOTE 5. MERGERS AND ACQUISITIONS On June 1, 2001, the Company completed the acquisition of First National Bancorp, Inc. (FNB) whereby FNB was merged with and into NBT Bancorp Inc. At the same time FNB's subsidiary, First National Bank of Northern New York (FNB Bank) was merged into the Bank. The acquisition was accounted for using the purchase method. As such, both the assets and liabilities assumed have been recorded on the consolidated balance sheet of the Company at estimated fair value as of the date of acquisition and the results of operations are included in the Company's consolidated statement of income from the acquisition date forward. To complete the transaction, the Company issued approximately 1,075,000 shares of its common stock valued at $16.0 million. Goodwill, representing the cost over net assets acquired, was approximately $7.0 million and was being amortized prior to the adoption of SFAS No. 142 on January 1, 2002 on a straight-line basis based on a 20 year amortization period. On September 14, 2001, the Company acquired $14.4 million in deposits from Mohawk Community Bank. Unidentified intangible assets, accounted for in accordance with SFAS No. 72 "Accounting for Certain Acquisitions of Banking or Thrift Institutions" and representing the excess of cost over net assets acquired, was $665,000 and is being amortized over 15 years on a straight-line basis. Additionally, the Company identified $119,000 of core deposit intangible asset. On November 8, 2001, the Company, pursuant to a merger agreement dated June 18, 2001, completed its merger with CNB Financial Corp. (CNB) and its wholly owned subsidiary, Central National Bank (CNB Bank), whereby CNB was merged with and into the Company, and CNB Bank was merged with and into NBT Bank. CNB Bank then became a division of the Bank. In connection with the merger, CNB stockholders received 1.2 shares of the Company's common stock for each share of CNB stock and the Company issued approximately 8.9 million shares of common stock. The transaction was structured to be tax-free to shareholders of CNB and has been accounted for as a pooling-of-interests. Accordingly, the June 30, 2001 unaudited consolidated financial statements have been restated to present combined consolidated financial condition and results of operations of the Company and CNB as if the merger had been in effect for all periods presented. At September 30, 2001, CNB had consolidated assets of $983.1 million, deposits of $853.7 million and equity of $62.8 million. CNB Bank operated 29 full 11 service banking offices in nine upstate New York counties. At June 30, 2002, after payments of certain merger, acquisition and reorganization costs, the Company had a remaining accrued liability for merger, acquisition and reorganization costs related to the merger with CNB of $3.0 million, which was comprised mainly of severance costs (expected to be paid out by the end of the year) and estimated costs related to branch closings (expected to be settled by the end of the year except for certain long-term lease commitments). NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 2001. At that time, the Company had certain embedded derivative instruments from the recently acquired CNB Bank investment portfolio related to a deposit product and two debt securities that had costs and returns linked to the performance of the NASDAQ 100 index. Management determined that these debt securities and the deposit product did not qualify for hedge accounting under SFAS No. 133. The embedded derivatives were separated from the underlying host instruments for financial reporting purposes and accounted for at fair value. In connection with the adoption of SFAS No. 133 as of January 1, 2001, the Company recorded a charge to earnings for a transition adjustment of $159,000 ($95,000, after-tax) for the net impact of recording these embedded derivatives on the consolidated balance sheet at fair value. Due to the insignificance of the amount, the transition adjustment is not reflected as a cumulative effect of a change in accounting principle on the consolidated statement of income for the six months ended June 30, 2001 but is instead recorded in net securities (losses) gains. During the year ended December 31, 2001, and before the closing of the CNB merger, the Company recorded a $640,000 net loss related to the adjustment of the embedded derivatives to fair value. As of December 31, 2001, the embedded derivatives referred to above were completely written off as these derivatives had no value. During the first quarter of 2002, the two debt securities with embedded derivative instruments from the recently acquired CNB Bank investment portfolio were sold at approximately their carrying value, as the securities did not meet the risk profile of the Company's security portfolio. On August 16, 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." Statement 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated asset retirement costs. Statement 143 applies to all entities. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Under this Statement, the liability is discounted and the accretion expense is recognized using the credit-adjusted risk-free interest rate in effect when the liability was initially recognized. The FASB issued this Statement to provide consistency for the accounting and reporting of liabilities associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is permitted. The Company does not expect a material impact on its consolidated financial statements when this Statement is adopted. On October 3, 2001, The FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement 12 also supersedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The changes in this Statement improve financial reporting by requiring that one accounting model be used for long-lived assets to be disposed of by broadening the presentation of discontinued operations to include more disposal transactions. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted the provisions of SFAS No. 144 effective January 1, 2002 and the adoption did not have a material impact on its consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which required gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS No. 145, companies will be required to apply the criteria in Accounting Principles Board, or APB, Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in determining the classification of gains and losses resulting from the extinguishment of debt. Upon adoption, companies must reclassify prior period items that do not meet the extraordinary item classification criteria in APB Opinion No. 30. Additionally, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002. All other provisions of SFAS No. 145 are effective for transactions occurring and/or financial statements issued on or after May 15, 2002. The implementation of SFAS No. 145 provisions, which were effective May 15, 2002, did not have a material impact on our financial condition or results of operations. The implementation of the remaining provisions is not expected to have a material impact on our financial condition or results of operations. In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144. The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 141 requires that upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from 13 goodwill. Upon adoption of SFAS No. 142, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Goodwill is required to be tested for impairment as of the beginning of the fiscal year in which the Statement is adopted. An entity has six months from the date it adopted SFAS No. 142 to complete the first step of the transitional goodwill impairment test, which is determining whether or not goodwill is impaired. If it is determined that goodwill is impaired, the entity has until the end of the year of adoption to complete step two, which is to measure the impairment. Any impairment loss for either goodwill or intangible assets with indefinite useful lives is to be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. During the first quarter of 2002, upon the implementation of SFAS No. 142, the Company performed a reevaluation of the remaining useful lives of all previously recognized intangible assets and found no adjustment necessary. The Company has completed its transitional goodwill impairment evaluation and has concluded there is no impairment losses from the adoption of SFAS No. 142. The Company has not identified any intangible assets with indefinite useful lives. Approximately $1.5 million of unidentified intangible assets from branch acquisitions was written off and recorded as a component of the net gain on the sale of a branch during the three months ended March 31, 2002. Pro forma net income and net income per share for the three and six months ended June 30, 2001, adjusted to eliminate historical amortization of goodwill and related tax effects, are as follows: Three months ended June 30, 2001 ---------------------- (in thousands, except per share data) Reported net income $6,570 Add: goodwill amortization 179 ------ Pro forma net income $6,749 ====== Reported net income per share: Basic $0.20 Diluted $0.20 Pro forma net income per share: Basic $0.20 Diluted $0.20 14 Six months ended June 30, 2001 ---------------------- (in thousands, except per share data) Reported net income $16,224 Add: goodwill amortization 328 ------- Pro forma net income $16,552 ======= Reported net income per share: Basic $0.50 Diluted $0.49 Pro forma net income per share: Basic $0.50 Diluted $0.50 The unidentified intangible assets acquired in the acquisition of a bank or thrift (including acquisitions of branches), where the fair value of the liabilities assumed exceeds the fair value of the assets acquired, is currently amortized to expense under SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." The FASB has undertaken a project to determine whether unidentifiable intangible assets recorded under SFAS No. 72 should continue to be amortized or, instead, be accounted for using the non-amortization approach specified for goodwill under SFAS No. 142. In an exposure draft of a proposed statement issued in May 2002, the FASB made a preliminary decision that any unidentified intangible asset recognized as a result of applying SFAS No. 72 shall continue to be amortized unless both of the following criteria are met: (1) the transaction in which the unidentifiable intangible asset arose was a business combination as defined by SFAS No. 141, and (2) at the date the transaction was initially recorded, the depositor relationship intangible was recognized separate from goodwill and has been accounted for separate from goodwill since that time. Based on this preliminary guidance, $35.6 million of the $36.4 million in unidentified intangible assets from branch acquisitions recorded on the Company's books at June 30, 2002 will continued to be amoritized when a final statement is issued by the FASB. The FASB plans to issue a final Statement by the end of 2002. The Company's intangible assets consist of the following: June 30, December 31, June 30, 2002 2001 2001 ---------- ------------- --------- Core deposit intangibles $5,433 5,433 5,314 Unidentified intangible assets from branch acquisitions 36,404 37,952 37,279 Accumulated amortization (9,860) (8,173) (6,438) ---------- ------------- --------- Intangible assets, net $31,977 35,212 36,155 ========== ============= ========= 15 Estimated annual amortization expense of intangible assets, absent any impairment or change in estimated useful lives is summarized as follows for each of the next five years: (in thousands) For the years ending December 31, 2002 (remaining six months) $1,587 2003 3,095 2004 2,752 2005 2,752 2006 2,752 2007 2,752 NBT BANCORP INC. AND SUBSIDIARIES Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion and analysis is to provide the reader with a concise description of the financial condition and results of operations of NBT Bancorp Inc. (Bancorp) and its wholly owned subsidiaries, NBT Bank, N.A. (NBT), NBT Financial Services, Inc., and CNBF Capital Trust I (collectively referred to herein as the Company) This discussion will focus on Results of Operations, Financial Position, Capital Resources and Asset/Liability Management. Reference should be made to the Company's consolidated financial statements and footnotes thereto included in this Form 10-Q as well as to the Company's 2001 Form 10-K for an understanding of the following discussion and analysis. FORWARD LOOKING STATEMENTS Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act. These statements may be identified by the use of phrases such as "anticipate," "believe," "expect," "forecasts," "projects," or other similar terms. There are a number of factors, many of which are beyond the Company's control that could cause actual results to differ materially from those contemplated by the forward looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) revenues may be lower than expected; (3) changes in the interest rate environment may reduce interest margins; (4) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (5) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which the Company is engaged; (6) costs or difficulties related to the integration of the businesses of the Company and its merger partners may be greater than expected; (7) expected cost savings associated with recent mergers and acquisitions may not be fully realized or realized within the expected time frames; (8) deposit attrition, customer loss, or revenue loss following recent mergers and acquisitions may be greater than 16 expected; (9) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than the Company; and (10) adverse changes may occur in the securities markets or with respect to inflation. The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including those described above, could affect the Company's financial performance and could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected. Unless required by law, the Company does not undertake, and specifically disclaims any obligations to publicly release the result of any revisions that may be made to any forward-looking statements to reflect statements to the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 17 OVERVIEW The following table summarizes net income for the periods indicated in accordance with accounting principles generally accepted in the United States of America (GAAP) as well as on a core basis. Core net income, as used throughout this discussion, excludes items that the Company considers nonoperating in nature and include net securities losses and gains, gain on sale of a branch, gain on sale of a building, certain deposit overdraft write-offs, and loan valuation gains and losses:
THREE MONTHS ENDED JUNE 30, 2002 (IN 000'S EXCEPT PER SHARE DATA) Estimated Diluted Pre-Tax Tax Effect After Tax EPS GAAP net income $ 16,108 $ 5,261 $ 10,847 $ 0.32 --------- ------------ ----------- --------- Net security gains (69) (27) (42) Loan valuation losses 18 8 10 --------- ------------ ----------- (51) (19) (32) --------- ------------ ----------- Core net income $ 16,057 $ 5,242 $ 10,815 ========= ============ ===========
THREE MONTHS ENDED JUNE 30, 2001 (IN 000'S EXCEPT PER SHARE DATA) Estimated Diluted Pre-Tax Tax Effect After Tax EPS GAAP net income $ 9,182 $ 2,612 $ 6,570 $ 0.20 --------- ------------ ----------- --------- Net security gains (227) (91) (136) Loan valuation gains (6) (2) (4) --------- ------------ ----------- (233) (93) (140) --------- ------------ ----------- Core net income $ 8,949 $ 2,519 $ 6,430 ========= ============ ===========
SIX MONTHS ENDED JUNE 30, 2002 (IN 000'S EXCEPT PER SHARE DATA) Estimated Diluted Pre-Tax Tax Effect After Tax EPS GAAP net income $ 32,006 $ 10,507 $ 21,499 $ 0.64 --------- ------------ ----------- -------- Net security losses 433 173 260 Gain on sale of a branch, net (220) (88) (132) Loan valuation losses 50 20 30 --------- ------------ ----------- 263 105 158 --------- ------------ ----------- Core net income $ 32,269 $ 10,612 $ 21,657 ========= ============ ===========
SIX MONTHS ENDED JUNE 30, 2001 (IN 000'S EXCEPT PER SHARE DATA) Estimated Diluted Pre-Tax Tax Effect After Tax EPS GAAP net income $ 23,377 $ 7,153 $ 16,224 0.49 --------- ------------ ----------- -------- Gain on sale of a building (1,367) (545) (822) Deposit overdraft write-offs 2,125 847 1,278 Net security gains (1,250) (499) (751) Loan valuation gains (26) (10) (16) --------- ------------ ----------- (518) (207) (311) --------- ------------ ----------- Core net income $ 22,859 $ 6,946 $ 15,913 ========= ============ ===========
18 Net securities gains and loan valuation gains and losses had no impact on diluted earnings per share for the three months ended June 30, 2002 and decreased diluted earnings per share by $0.01 for the same period in 2001. Net securities losses, gain on sale of a branch, net, and loan valuation losses increased diluted earnings per share by $0.01 for the six months ended June 30, 2002. Gain on sale of a building, deposit overdraft write-offs, net securities gains, and loan valuation losses decreased diluted earnings per share by $0.01 for the six months ended June 30, 2001. The Company earned net income of $10.8 million ($0.32 diluted earnings per share) for the three months ended June 30, 2002 compared to net income of $6.6 million ($0.20 diluted earnings per share) for the same period in 2001. Core net income was $10.8 million for the three months ended June 30, 2002 compared to core net income of $6.4 million for the same period in 2001. The quarter to quarter increase in core net income from 2001 to 2002 was due primarily to a decrease in the provision for loan and lease losses of $4.8 million and increases in net interest income of $3.6 million and noninterest income of $0.8 million, offset by increases in noninterest expense of $2.0 million and income tax expense of $2.7 million. The Company earned net income of $21.5 million ($0.64 diluted earnings per share) for the six months ended June 30, 2002 compared to net income of $16.2 million ($0.49 diluted earnings per share) for the same period in 2001. Core net income was $21.7 million for the six months ended June 30, 2002 compared to core net income of $15.9 million for the same period in 2001. The increase in core net income from 2001 to 2002 was due primarily to increases in net interest income of $7.5 million and noninterest income of $1.7 million and a decrease in the provision for loan and lease losses of $4.0 million, offset by increases in noninterest expense of $3.8 million and income tax expense of $3.7 million. The decrease in the provision for loan and lease losses resulted primarily from an improvement in loan quality ratios and lower net charge-offs in 2002 compared to 2001. The increase in net interest income resulted primarily from the continued downward re-pricing of interest-bearing liabilities (primarily time deposits) at a faster rate than earning assets. The Company's net interest margin for the three months ended June 30, 2002 was 4.48%, up 38 basis points from a net interest margin of 4.10% for the same period in 2001. The increase in core noninterest income was due primarily to an increase in broker/dealer and insurance fees. The increase in core noninterest expense resulted primarily from increases in salaries and employee benefits, expenses associated with loan collection and other real estate owned, professional fees and other operating expenses. The increase in income tax expense was due primarily to a $9.4 million increase in net income before taxes for the six months ended June 30, 2002. 19 Table 1 depicts several annualized measurements of performance using both GAAP net income and core net income. Returns on average assets and equity measure how effectively an entity utilizes its total resources and capital, respectively. Both the return on average assets and the return on average equity ratios increased for the quarter and year-to-date compared to the same periods in the previous year. Net interest margin, net federal taxable equivalent (FTE) interest income divided by average interest-earning assets, is a measure of an entity's ability to utilize its earning assets in relation to the cost of funding. Interest income for tax-exempt securities and loans is adjusted to a taxable equivalent basis using the statutory Federal income tax rate of 35%.
TABLE 1 PERFORMANCE MEASUREMENTS - ------------------------------------------------------------- First SECOND SIX Quarter QUARTER MONTHS - ------------------------------------------------------------- 2002 Return on average assets (ROAA) 1.21% 1.19% 1.20% ROAA based on core net income 1.23% 1.19% 1.21% Return on average equity (ROAE) 15.98% 15.89% 15.91% ROAE based on core net income 16.26% 15.84% 16.03% ============================================================= 2001 Net interest margin 4.54% 4.48% 4.51% ROAA 1.10% 0.73% 0.91% ROAA based on core net income 1.08% 0.71% 0.90% ROAE 14.42% 9.42% 11.87% ROAE based on core net income 14.16% 9.22% 11.64% Net interest margin 4.06% 4.10% 4.08% =============================================================
20 TABLE 2 AVERAGE BALANCES AND NET INTEREST INCOME Table 2 presents the Company's condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest bearing liabilities on a taxable equivalent basis.
Three months ended June 30, 2002 2001 AVERAGE YIELD/ Average Yield/ (dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates - ------------------------------------------------------------------------------------------------------------- ASSETS Short-term interest bearing accounts $ 11,806 $ 89 3.02% $ 10,136 $ 126 4.99% Trading securities 205 2 3.91 9,315 300 12.92 Securities available for sale (2) 964,555 15,142 6.30 933,886 15,521 6.67 Securities held to maturity (2) 98,040 1,531 6.26 100,401 1,683 6.72 Investment in FRB and FHLB Banks 20,965 226 4.32 22,767 374 6.59 Loans and leases (1) 2,317,838 41,575 7.19 2,293,641 47,169 8.25 ---------- --------- ---------- --------- Total interest earning assets 3,413,409 58,565 6.88 3,370,146 65,173 7.76 --------- --------- Other assets 230,110 239,258 ---------- ---------- TOTAL ASSETS $3,643,519 $3,609,404 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Money market deposit accounts $ 271,762 1,086 1.60 $ 259,970 1,950 3.01 NOW deposit accounts 386,248 914 0.95 337,468 1,083 1.29 Savings deposits 479,811 1,809 1.51 417,206 2,397 2.30 Time deposits 1,357,057 12,456 3.68 1,501,767 20,520 5.48 ---------- --------- ---------- --------- Total interest bearing deposits 2,494,878 16,265 2.61 2,516,411 25,950 4.14 Short-term borrowings 75,672 287 1.52 130,239 1,410 4.34 Long-term debt 329,375 3,856 4.70 250,466 3,336 5.34 ---------- --------- ---------- --------- Total interest bearing liabilities 2,899,925 20,408 2.82% 2,897,116 30,696 4.25% --------- --------- Demand deposits 412,729 365,731 Other liabilities (3) 57,003 66,820 Stockholders' equity 273,862 279,737 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,643,519 $3,609,404 ---------- ---------- NET INTEREST INCOME $ 38,157 $ 34,477 --------- --------- INTEREST RATE SPREAD 4.06% 3.51% -------- -------- NET INTEREST MARGIN 4.48% 4.10% -------- -------- Taxable equivalent adjustment $ 1,075 $ 972 -------- --------
(1) For purposes of these computations, nonaccrual loans are included in the average loan and lease balances outstanding. (2) Securities are shown at average amortized cost. (3) Included in other liabilities is $17.0 million in the Company's guaranteed preferred beneficial interests in Company's junior subordinated debentures. 21
Six months ended June 30, 2002 2001 AVERAGE YIELD/ Average Yield/ (dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates - ----------------------------------------------------------------------------------------------------------- ASSETS Short-term interest bearing accounts $ 12,674 $ 193 3.07% $ 12,754 $ 337 5.33% Trading securities 166 4 4.86 6,913 345 10.06 Securities available for sale (2) 926,713 29,249 6.36 928,527 31,475 6.84 Securities held to maturity (2) 100,670 3,157 6.32 102,226 3,425 6.76 Investment in FRB and FHLB Banks 21,004 402 3.86 26,261 864 6.63 Loans and leases (1) 2,319,971 83,978 7.30 2,269,654 95,532 8.49 ---------- --------- ---------- --------- Total interest earning assets 3,381,198 116,983 6.98 3,346,335 131,978 7.95 --------- --------- Other assets 232,084 236,180 ---------- ---------- TOTAL ASSETS $3,613,282 $3,582,515 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Money market deposit accounts $ 272,602 2,121 1.57 $ 254,838 4,261 3.37 NOW deposit accounts 382,498 1,828 0.96 334,636 2,622 1.58 Savings deposits 469,895 3,542 1.52 408,470 4,908 2.42 Time deposits 1,352,431 25,765 3.84 1,495,328 42,364 5.71 ---------- --------- ---------- --------- Total interest bearing deposits 2,477,426 33,256 2.71 2,493,272 54,155 4.38 Short-term borrowings 81,136 635 1.58 138,873 3,429 4.98 Long-term debt 318,935 7,494 4.74 245,419 6,633 5.45 ---------- --------- ---------- --------- Total interest bearing liabilities 2,877,497 41,385 2.90% 2,877,564 64,217 4.50% --------- --------- Demand deposits 409,086 359,099 Other liabilities (3) 54,209 70,174 Stockholders' equity 272,490 275,678 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,613,282 $3,582,515 ---------- ---------- NET INTEREST INCOME $ 75,598 $ 67,761 --------- --------- INTEREST RATE SPREAD 4.08% 3.45% ------- ------- NET INTEREST MARGIN 4.51% 4.08% ------- ------- Taxable equivalent adjustment $ 2,171 $ 1,877 ---------- ---------
(1) For purposes of these computations, nonaccrual loans are included in the average loan and lease balances outstanding. (2) Securities are shown at average amortized cost. (3) Included in other liabilities is $17.0 million in the Company's guaranteed preferred beneficial interests in Company's junior subordinated debentures. 22 Table 3 presents the changes in interest income, interest expense and net interest income due to changes in volume and changes in rate. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change.
TABLE 3 ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME Three months ended June 30, - -------------------------------------------------------------------------------- INCREASE (DECREASE) 2002 OVER 2001 - -------------------------------------------------------------------------------- (in thousands) VOLUME RATE TOTAL - -------------------------------------------------------------------------------- Short-term interest bearing accounts $ 18 $ (55) $ (37) Trading securities (174) (124) (298) Securities available for sale 499 (878) (379) Securities held to maturity (39) (113) (152) Investment in FRB and FHLB Banks (28) (120) (148) Loans and leases 493 (6,087) (5,594) - -------------------------------------------------------------------------------- Total interest income 827 (7,435) (6,608) - -------------------------------------------------------------------------------- Money market deposit accounts 85 (949) (864) NOW deposit accounts 142 (311) (169) Savings deposits 322 (910) (588) Time deposits (1,830) (6,234) (8,064) Short-term borrowings (440) (683) (1,123) Long-term debt 959 (439) 520 - -------------------------------------------------------------------------------- Total interest expense 30 (10,318) (10,288) - -------------------------------------------------------------------------------- CHANGE IN FTE NET INTEREST INCOME $ 797 $ 2,883 $ 3,680 ================================================================================ Six months ended June 30, - -------------------------------------------------------------------------------- INCREASE (DECREASE) 2002 OVER 2001 - -------------------------------------------------------------------------------- (in thousands) VOLUME RATE TOTAL - -------------------------------------------------------------------------------- Short-term interest bearing accounts $ (2) $ (142) $ (144) Trading securities (223) (118) (341) Securities available for sale (61) (2,165) (2,226) Securities held to maturity (51) (217) (268) Investment in FRB and FHLB Banks (150) (312) (462) Loans and leases 2,077 (13,631) (11,554) - -------------------------------------------------------------------------------- Total interest income 1,362 (16,357) (14,995) - -------------------------------------------------------------------------------- Money market deposit accounts 279 (2,419) (2,140) NOW deposit accounts 336 (1,130) (794) Savings deposits 659 (2,025) (1,366) Time deposits (3,749) (12,850) (16,599) Short-term borrowings (1,057) (1,737) (2,794) Long-term debt 1,806 (945) 861 - -------------------------------------------------------------------------------- Total interest expense (1) (22,831) (22,832) - -------------------------------------------------------------------------------- CHANGE IN FTE NET INTEREST INCOME $ 1,363 $6,474 $ 7,837 ================================================================================
23 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 Net Interest Income - --------------------- Net interest income is the difference between interest income on earning assets, primarily loans and securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. Net interest income is affected by the interest rate spread, the difference between the yield on earning assets and cost of interest-bearing liabilities, as well as the volumes of such assets and liabilities. Net interest income is one of the major determining factors in a financial institution's performance as it is the principal source of earnings. Table 2 represents an analysis of net interest income on a federal taxable equivalent basis. Federal taxable equivalent (FTE) net interest income increased $3.7 million during the three months ended June 30, 2002 compared to the same period of 2001. The increase in FTE net interest income resulted primarily from interest-bearing liabilities re-pricing downward at a faster rate than earning assets. The rate paid on interest-bearing liabilities decreased 143 basis points ("bp"), to 2.82% for the three months ended June 30, 2002, from 4.25% for the same period in 2001. Meanwhile, the yield on earning assets decreased 88 bp, to 6.88% for the three months ended June 30, 2002, from 7.76% for the same period in 2001. Total FTE interest income for the three months ended June 30, 2002 decreased $6.6 million compared to the same period in 2001, a result of the previously mentioned decrease in yield on earning assets. The decrease in the yield on earning assets can be primarily attributed to the falling rate environment in 2001. During the same time period, total interest expense decreased $10.3 million, primarily the result of the falling rate environment mentioned above, as well as an improvement in the mix of the Company's interest-bearing liabilities. Time deposits, the most significant component of interest-bearing liabilities, decreased to 46.8% of interest-bearing liabilities for the three months ended June 30, 2002 from 51.8% for the same period in 2001. Offsetting this decrease in the interest-bearing liabilities mix, was an increase in lower cost NOW, MMDA, and Savings deposits, to 39.2% of interest-bearing liabilities for the three months ended June30, 2002 from 35.0% for the same period in 2001. Total borrowings remained relatively unchanged, comprising 14.0% and 13.2% of interest-bearing liabilities for the three months ended June 30, 2002 and 2001, respectively. Another important performance measurement of net interest income is the net interest margin. Net interest margin increased to 4.48% for the three months ended June 30, 2002, up from 4.10% for the comparable period in 2001. The increase in the net interest margin can be primarily attributed to the previously mentioned increase in the interest rate spread driven by the decrease in the cost of interest bearing liabilities exceeding the decrease in yield on earning assets. Additionally, the net interest margin improved from the increase in average noninterest-bearing demand deposits, which increased 12.9% from an average of $365.7 million for the three months ended June 30, 2001 to $412.7 million for the same period in 2002. For the three months ended June 30, 2002, average noninterest-bearing demand deposits comprised 12.5% of total average interest-bearing liabilities and noninterest-bearing demand deposits, up from 11.2% for the same period in 2001. 24 Noninterest Income - ------------------- Noninterest income is a significant source of revenue for the Company and an important factor in the Company's results of operations. The following table sets forth information by category of noninterest income for the periods indicated: THREE MONTHS ENDED JUNE 30, 2002 2001 ------- ------ (in thousands) Service charges on deposit accounts $3,239 $3,226 Broker/dealer and insurance fees 1,483 900 Trust 1,154 1,070 Other 2,377 2,274 ------- ------ Total core noninterest income 8,253 7,470 Net securities gains 69 227 Loan valuation (losses) gains (18) 6 ------- ------ Total $8,304 $7,703 ====== ====== Core noninterest income for the three months ended June 30, 2002, which excludes net securities gains and losses and loan valuation gains and losses, increased 10.5% to $8.3 million from $7.5 million for the same period in 2001. The primary driver of this increase was the increase of $0.6 million in broker/dealer and insurance fees. The increase in broker/dealer and insurance fees resulted primarily from one of the Company's financial services providers, Colonial Financial Services, Inc., which began operations in June 2001, resulting in a full quarter of revenue of $0.4 million in the second quarter of 2002. Included in noninterest income were net securities gains totaling $0.1 million for the three months ended June 30, 2002. During the three month period end June 30, 2002, the Company sold $5.4 million of asset backed securities previously held by CNB Financial Corp. (CNB), which the Company acquired on November 8, 2001, containing a higher level of credit risk due to a rapid deterioration in the financial condition of the underlying collateral during the quarter, resulting in a $4.5 million loss. Offsetting these losses, were gains of $4.6 million resulting primarily from the sale of various securities amounting to $130.5 million. The securities sold were considered to generally contain a high risk of rapid pre-payments in a falling rate environment. The proceeds from the sale of these securities were invested in short duration, stable cash flow producing mortgage-backed securities and short callable agency securities. These transactions enabled the Company to improve the credit quality and stabilize the cash flow stream of its investment portfolio. Noninterest Expense - -------------------- Noninterest expenses are also an important factor in the Company's results of operations. The following table sets forth the major components of noninterest expense for the periods indicated: 25 THREE MONTHS ENDED JUNE 30, 2002 2001 ------- ------- (in thousands) Salaries and employee benefits $12,649 $11,569 Occupancy 2,096 2,179 Equipment 1,818 1,700 Data processing and communications 2,598 2,348 Professional fees and outside services 1,782 1,480 Office supplies and postage 1,227 1,282 Amortization of intangible assets 830 1,012 Capital securities 230 341 Loan collection and other real estate owned 781 483 Other 3,175 2,760 ------- ------- Total noninterest expense $27,186 $25,154 ======= ======= Noninterest expense increased $2.0 million or 8.1% to $27.2 million for the three months ended June 30, 2002 from $25.2 million for the same period in 2001. Salaries and employee benefits increased $1.1 million or 9.3%, to $12.6 million for the three months ended June 30, 2002 from $11.6 million for the same period in 2001. The increase in salaries and employee benefits was due primarily to an increase in incentive compensation of $0.9 million, resulting from improved operating performance. Other expense increased $0.4 million, to $3.2 million for the three months ended June 30, 2002 from $2.8 million for the same period in 2001. There were no significant increases for the various items that comprise other expense. Professional fees and costs of outside services increased $0.3 million, to $1.8 million for the three months ended June 30, 2002 from $1.5 million for the same period in 2001. The increase in professional fees and costs of outside services resulted mainly from professional fees for legal matters. Loan collection and other real estate owned expenses increased $0.3 million, to $0.8 million for the three months ended June 30, 2002 from $0.5 million for the same period in 2001. This increase is due primarily to the increase in nonperforming loans during 2001, which resulted in an increase in collection activity and foreclosure costs during the three months ended June 30, 2002. Given the increase in nonperforming loans in 2001, the Company anticipates an increase in costs associated with loan collection and foreclosure activity when compared to historical amounts. Amortization of intangible assets decreased $0.2 million, to $0.8 million for the three months ended June 30, 2002 from $1.0 million for the same period in 2001. The decrease in amortization of intangible assets resulted from the adoption of SFAS No. 142. Had the requirements of SFAS No. 142 been applied to the 2001 period, amortization of intangible assets would have been $0.8 million. 26 Income Taxes - ------------- Income tax expense for the three months ended June 30, 2002 was $5.3 million for an effective tax rate of 32.7%, compared to $2.6 million, or 28.4%, for the same period in 2001. The lower tax rate in the 2001 period resulted primarily from lower net income before tax when compared to the 2002 period, which resulted in a greater benefit from favorable permanent differences. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 Net Interest Income - --------------------- Net interest income on a federal taxable equivalent basis (FTE) increased $7.8 million to $75.6 million for 2002 compared to $67.8 million for 2001. The net interest margin improved 43 bp from 4.08% to 4.51%. The increase in FTE net interest income resulted primarily from interest-bearing liabilities re-pricing downward at a faster rate than earning assets. The rate paid on interest-bearing liabilities decreased 160 basis points ("bp"), to 2.90% for 2002, from 4.50% for 2001. Meanwhile, the yield on earning assets decreased 97 bp, to 6.98% for 2002, from 7.95% for 2001. Total FTE interest income for 2002 decreased $15.0 million compared to 2001, a result of the previously mentioned decrease in yield on earning assets. During the same time period, total interest expense decreased $22.8 million, primarily the result of the falling rate environment mentioned above, as well as an improvement in the mix of the Company's interest-bearing liabilities. Time deposits, the most significant component of interest-bearing liabilities, decreased to 47.0% of interest-bearing liabilities for 2002 from 52.0% for 2001. Offsetting this decrease in the interest-bearing liabilities mix, was an increase in lower cost NOW, MMDA, and Savings deposits, to 39.1% of interest-bearing liabilities for 2002 from 34.7% for 2001. Total borrowings remained relatively unchanged, comprising 13.9% and 13.3% of interest-bearing liabilities for 2002 and 2001, respectively. Noninterest Income - ------------------- The following table sets forth information by category of noninterest income for the periods indicated: SIX MONTHS ENDED JUNE 30, 2002 2001 -------- ------- (in thousands) Service charges on deposit accounts $6,289 $5,997 Broker/dealer and insurance fees 2,978 1,923 Trust 2,174 2,116 Other 5,020 4,701 -------- ------- Total core noninterest income 16,461 14,737 Net securities (losses) gains (433) 1,250 Loan valuation (losses) gains (50) 26 Gain on sale of a branch, net 220 - Gain on sale of a building - 1,367 -------- ------- Total $16,198 $17,380 ======== ======= 27 Core noninterest income increased $1.7 million or 11.7% to $16.5 million for 2002 from $14.7 million for the same period in 2001. Broker/dealer and insurance fees increased $1.1 million primarily from one of the Company's financial services providers, Colonial Financial Services, Inc., which began operations in June 2001, resulting in six months of revenue totaling $0.8 million in 2002. Service charges on deposit accounts in 2002 increased $0.3 million or 4.9% over the same period a year earlier as a result of the Company's expanded branch network. Other income increased $0.3 million in 2002 when compared to 2001, due mainly to an increase in other banking fees. Noninterest Expense - -------------------- The following table sets forth information by category of noninterest expense for the periods indicated: SIX MONTHS ENDED JUNE 30, 2002 2001 ------- ------- (in thousands) Salaries and employee benefits $25,305 $23,302 Occupancy 4,265 4,466 Equipment 3,532 3,433 Data processing and communications 5,163 5,004 Professional fees and outside services 3,397 2,600 Office supplies and postage 2,124 2,361 Amortization of intangible assets 1,690 1,976 Capital securities 446 745 Loan collection and other real estate owned 1,725 807 Other 5,869 4,985 ------- ------- Total core noninterest expense 53,516 49,679 ------- ------- Certain deposit overdraft write-offs - 2,125 Total noninterest expense $53,516 $51,804 ======= ======= Core noninterest expense, which excludes certain deposit overdraft write-offs, increased $3.8 million or 7.7% to $53.5 million for 2002 from $49.7 million for 2001. Salaries and employee benefits increased $2.0 million or 8.6%, to $25.3 million for 2002 from $23.3 million for 2001. The increase in salaries and employee benefits was due primarily to increases in incentive compensation of $1.2 million, employee medical costs of $0.3 million and retirement expense of $0.3 million. Professional fees and costs of outside services increased $0.8 million, to $3.4 million for 2002 from $2.6 million for 2001. The increase in professional fees and costs of outside services resulted mainly from professional fees for legal matters. Loan collection and other real estate owned expenses increased $0.9 million, to $1.7 million for 2002 from $0.8 million for 2001. This increase is due primarily to the increase in nonperforming loans during 2001, which resulted in an increase in collection activity and foreclosure costs during 2002. Other expense increased $0.9 million, to $5.9 million for 2002 from $5.0 million for 2001. The increase in other expense was due to a $0.3 million of expense related to a noncompetition agreement, an increase in marketing expense of $0.3 million and a $0.2 million charge related to a probable sales tax assessment. 28 Occupancy and office supplies & postage experienced decreases for 2002 when compared to 2001. These decreases resulted primarily from cost savings realized from recent acquisitions completed during 2001 and 2000. Data processing and equipment experienced increases for 2002 when compared to 2001 as a result of costs related to enhancements made to the data processing capabilities of the Company. Amortization of intangible assets decreased $0.3 million, to $1.7 million for 2002 from $2.0 million for 2001. The decrease in amortization of intangible assets resulted from the adoption of SFAS No. 142. Had the requirements of SFAS No. 142 been applied to 2001, amortization of intangible assets would have been $1.6 million. Capital securities expense decreased $0.3 million, to $0.4 million for 2002 from $0.7 million for 2001. The decrease in capital securities expense is a result of the Company's guaranteed preferred beneficial interests in Company's junior subordinated debentures, which are tied to a variable interest rate index (3-month LIBOR plus 275 bp) that was much lower for the first six months of 2002 than the same period in 2001. Income Taxes - ------------- Income tax expense for 2002 was $10.5 million for an effective tax rate of 32.8%, compared to $7.2 million, or 30.6%, for 2001. The lower tax rate in the 2001 period resulted primarily from lower net income before tax when compared to the 2002 period, which resulted in a greater benefit from favorable permanent differences. ANALYSIS OF FINANCIAL CONDITION Loans and Leases - ------------------ A summary of loans and leases, net of deferred fees and origination costs, by category for the periods indicated follows: June 30, December 31, June,30 2002 2001 2001 ------------------------------------- (in thousands) Commercial and commercial mortgages* $1,059,046 $1,053,416 $1,066,356 Residential real estate mortgages 612,018 594,206 549,915 Consumer 592,218 613,631 645,725 Leases 67,274 72,048 81,681 Other loans 5,485 6,335 9,398 ------------------------------------- Total loans and leases $2,336,041 $2,339,636 $2,353,075 ===================================== * - Includes agricultural loans Total loans and leases were $2.3 billion, or 63.5% of assets, at June 30, 2002, compared to $2.3 billion, or 64.3%, at December 31, 2001, and $2.4 billion, or 63.6%, at June 30, 2001. Total loans and leases decreased $3.6 million at June 30, 2002 when compared to December 31, 2001. The slight decrease in total loans and leases during the year resulted mainly from the Company's on going efforts to improve the credit administration functions at its recently acquired banks and continued focus on resolving troubled loans. 29 Securities - ---------- Average total securities were $2.6 million less for the first six months of 2002 than for the same period of 2001. Decreases in securities held to maturity and trading securities from maturities and sales were reinvested into the securities available for sale portfolio. During the first six months of 2002, the securities portfolio represented 30.6% of average earning assets compared to 31.0% for the same period in 2001. At June 30, 2002, the securities portfolio was comprised of 90% available for sale and 10% held to maturity securities. At December 31, 2001, nonperforming securities were comprised of a private issue collateralized mortgage obligation (CMO) valued at $2.7 million and an asset backed security valued at $1.8 million compared to a $1.6 million private issue CMO at June 30, 2002. The decrease in nonperforming securities during the first six months of 2002 resulted mainly from the sale of the asset backed security at approximately its carrying value and a $0.7 million write-down of the CMO during the first quarter of 2002 due to other-than-temporary impairment. The Company received $0.4 million in payments from the impaired CMO during the second quarter of 2002, resulting in a reduction in the carrying amount of the CMO to $1.6 million. Included in the securities available for sale portfolio at June 30, 2002, are certain securities (private issue CMO, asset backed securities, and private issue mortgaged-backed securities) previously held by CNB. These securities contain a higher level of credit risk when compared to securities held in the Company's investment portfolio because they are not guaranteed by a governmental agency. The Company's general practice is to purchases CMO and mortgaged-backed securities that are guaranteed by a governmental agency coupled with a strong credit rating, typically AAA, issued by Moody's or Standard and Poors. At June 30, 2002, the amortized cost and fair value of these securities amounted to $27.5 million and $26.8 million, respectively, down from $38.7 million and $38.5 million, respectively, at December 31, 2001. The decrease at June 30, 2002 when compared to December 31, 2001, resulted primarily from sales and principal paydowns. As noted previously, the Company sold $5.4 million of asset backed securities containing a higher level of credit risk due to a rapid deterioration in the financial condition of the underlying collateral related to the asset backed securities during the second quarter of 2002, resulting in a $4.5 million loss. Management cannot predict the extent to which economic conditions may worsen or other factors may impact these securities. Accordingly, there can be no assurance that these securities will not become other-than-temporarily impaired in the future. At December 31, 2001, the Company had certain embedded derivative instruments from the CNB Bank investment portfolio related to two debt securities that have returns linked to the performance of the NASDAQ 100 index. As of December 31, 2001, the embedded derivatives related to the debt securities linked to the NASDAQ 100 index had no fair value. The two debt securities were classified as available for sale. At December 31, 2001, the total amortized cost and estimated fair value of these two debt securities was $6.2 million. The two debt securities were sold in 2002 at amounts approximating their carrying values at December 31, 2001 as these two securities did not meet the risk profile of the Company's security portfolio. 30 Allowance for Loan Losses, Nonperforming Assets and the Provision for Loan - --------------------------------------------------------------------------- Losses - ------ The allowance for loan and lease losses is maintained at a level estimated by management to provide adequately for risk of probable losses inherent in the current loan and lease portfolio. The adequacy of the allowance for loan and lease losses is continuously monitored. It is assessed for adequacy using a methodology designed to ensure that the level of the allowance reasonably reflects the loan portfolio's risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable credit losses inherent in the current loan and lease portfolio. Management considers the accounting policy relating to the allowance for loan and lease losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgements can have on the consolidated results of operations. For purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectibility of the portfolio. For individually analyzed loans, these include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans and leases, estimates of the Company's exposure to credit loss reflect a thorough current assessment of a number of factors, which could affect collectibility. These factors include: past loss experience; the size, trend, composition, and nature; changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; trends experienced in nonperforming and delinquent loans and leases; current economic conditions in the Company's market; portfolio concentrations that may affect loss experienced across one or more components of the portfolio; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability, and depth of lending management and staff. In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company's allowance for loan and lease losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination, which may not be currently available to management. After a thorough consideration and validation of the factors discussed above, required additions to the allowance for loan and lease losses are made periodically by charges to the provision for loan and lease losses. These charges are necessary to maintain the allowance at a level which management believes is reasonably reflective of overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans and leases, additions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management's assessment of any or all of the determining factors discussed above. The allowance for loan and lease losses to outstanding loans and leases at June 30, 2002 was 1.87% compared to 1.45% at June 30, 2001. Management considers the allowance for loan losses to be adequate based on evaluation and analysis of the loan portfolio. 31 Table 4 reflects changes to the allowance for loan losses for the periods presented. The allowance is increased by provisions for losses charged to operations and is reduced by net chargeoffs. Chargeoffs are made when the collectability of loan principal within a reasonable time is unlikely. Any recoveries of previously charged-off loans are credited directly to the allowance for loan losses.
TABLE 4 ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, (dollars in thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------- Balance, beginning of period $45,299 $32,486 $44,746 $32,494 Recoveries 938 408 2,300 840 Chargeoffs (4,610) (6,145) (7,430) (7,796) - -------------------------------------------------------------------------------------------------------------------- Net chargeoffs (3,672) (5,737) (5,130) (6,956) Allowance related to purchase acquisition - 505 - 505 Provision for loan losses 2,092 6,872 4,103 8,083 - -------------------------------------------------------------------------------------------------------------------- Balance, end of period $43,719 $34,126 $43,719 $34,126 ==================================================================================================================== COMPOSITION OF NET CHARGEOFFS - -------------------------------------------------------------------------------------------------------------------- Commercial and agricultural $(2,420) 66% $(4,734) 83% $(2,317) 45% $(5,215) 75% Real estate mortgage (151) 4% (100) 2% (371) 7% (208) 3% Consumer (1,101) 30% (903) 15% (2,442) 48% (1,533) 22% - -------------------------------------------------------------------------------------------------------------------- Net chargeoffs $(3,672) 100% $(5,737) 100% $(5,130) 100% $(6,956) 100% - -------------------------------------------------------------------------------------------------------------------- Annualized net chargeoffs to average loans 0.64% 1.00% 0.45% 0.61% - -------------------------------------------------------------------------------------------------------------------- Net chargeoffs to average loans for theyear ended December 31, 2001 0.87% ====================================================================================================================
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due, restructured loans, other real estate owned (OREO), and nonperforming securities. Loans are generally placed on nonaccrual when principal or interest payments become ninety days past due, unless the loan is well secured and in the process of collection. Loans may also be placed on nonaccrual when circumstances indicate that the borrower may be unable to meet the contractual principal or interest payments. OREO represents property acquired through foreclosure and is valued at the lower of the carrying amount or fair market value, less any estimated disposal costs. Nonperforming securities include securities which management believes are other-than-temporarily impaired, carried at their estimated fair value and are not accruing interest. Total nonperforming assets were $34.5 million at June 30, 2002 compared to $49.9 million at December 31, 2001 and $33.9 million at June 30, 2001. The increase from June 30, 2001 to December 31, 2001 can be primarily attributed to a $13.9 million increase in nonperforming loans. This increase was primarily the result of integrating newly acquired banks into the Company as well as adverse economic conditions. Nonperforming loans totaled $31.1 million at June 30, 2002, down from the $43.8 million outstanding at December 31, 2001. The $12.5 million decrease in nonperforming loans from December 31, 2001 to June 30, 2002 was due primarily to the Company's successful efforts in resolving certain large problematic commercial loans. Nonaccrual commercial and agricultural loans decreased $10.5 million, from $31.4 million at December 31, 2001 to $20.8 32 million at June 30, 2002. Based on the improved trends in loan quality noted above and the decrease in net charge-offs in 2002 when compared to 2001 highlighted in Table 4 above, the Company recorded a provision for loan and lease losses of $2.1 million and $4.1 million, respectively, for the three and six months ended June 30, 2002, down from the $6.9 million and $8.1 million provided in the same periods in 2001.
TABLE 5 NONPERFORMING ASSETS - ------------------------------------------------------------------------------------------------ JUNE 30, December 31, June 30, (dollars in thousands) 2002 2001 2001 - ------------------------------------------------------------------------------------------------ Commercial and agricultural $ 20,835 $ 31,372 $ 21,504 Real estate mortgage 5,935 5,119 3,806 Consumer 3,757 3,719 2,366 - ------------------------------------------------------------------------------------------------ Total nonaccrual loans 30,527 40,210 27,676 - ------------------------------------------------------------------------------------------------ Loans 90 days or more past due and still accruing: Commercial and agricultural - 198 13 Real estate mortgage 14 1,844 594 Consumer 239 933 1,079 - ------------------------------------------------------------------------------------------------ Total loans 90 days or more past due and still accruing 253 2,975 1,686 - ------------------------------------------------------------------------------------------------ Restructured loans in compliance with modified terms: 530 603 491 - ------------------------------------------------------------------------------------------------ Total nonperforming loans 31,310 43,788 29,853 - ------------------------------------------------------------------------------------------------ Other real estate owned (OREO) 2,047 1,577 1,750 - ------------------------------------------------------------------------------------------------ Total nonperforming loans and OREO 33,357 45,365 31,603 ================================================================================================ Nonperforming securities 1,560 4,500 2,309 - ------------------------------------------------------------------------------------------------ Total nonperforming assets $ 34,917 $ 49,865 $ 33,912 ================================================================================================ Total nonperforming loans to loans and leases 1.34% 1.87% 1.45% Total nonperforming assets to assets 0.95% 1.37% 1.27% Total allowance for loan and lease losses to nonperforming loans 139.63% 102.19% 114.31% ================================================================================================
In addition to the nonperforming loans discussed above, the Company has also identified approximately $37.2 million in potential problem loans at June 30, 2002 as compared to $48.6 million at December 31, 2001. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as non-performing at some time in the future. At the Company, potential problem loans are typically loans that are performing but are classified by the Company's loan rating system as "substandard." At June 30, 2002, potential problem loans primarily consisted of commercial real estate and commercial and agricultural loans. Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on non-accrual, become restructured, or require increased allowance coverage and provision for loan losses. 33 Deposits - -------- Total deposits were $2.9 billion at June 30, 2002, a slight decrease of $48.0 million, or 1.6%, from year end 2001. Total average deposits increased $34.1 million, or 1.2%, from June 30, 2001 to June 30, 2002. The Company's acquisition of FNB in June 2001 added approximately $108.0 million in deposits offset by the sale of a branch in February 2002 which resulted in the decrease of approximately $34.3 million in deposits. The Company has focused on maintaining and growing its base of lower cost checking, savings and money market accounts while allowing runoff of some of its higher cost time deposits, particularly brokered and jumbo time deposits. At June 30, 2002, total checking, savings and money market accounts represented 53.9% of total deposits compared to 48.6% at June 30, 2001. Borrowings - ---------- The Company's borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $122.9 million at June 30, 2002 compared to $122.0 million and $146.5 million at December 31, and June 30, 2001, respectively. Long-term debt was $350.7 million at June 30, 2002, compared to $272.3 million and $276.9 million at December 31, and June 30, 2001, respectively, as the Company took advantage of lower interest rates and locked in longer term advances. CAPITAL RESOURCES Stockholders' equity of $281.9 million represents 7.7% of total assets at June 30, 2002, compared with $292.7 million, or 7.9% in the comparable period of the prior year, and $266.4 million, or 7.3% at December 31, 2001. The Company does not have a target dividend payout ratio, rather the Board of Directors considers the Company's earnings position and earnings potential when making dividend decisions. 34 The following table presents the actual capital amounts and ratios for the periods presented. Capital measurements are significantly in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. Tier 1 leverage, Tier 1 capital and Risk-based capital ratios have regulatory minimum guidelines of 3%, 4% and 8% respectively, with requirements to be considered well capitalized of 5%, 6% and 10%, respectively. TABLE 6 CAPITAL MEASUREMENTS - ------------------------------------------------------------------- As of and for the quarter ended March 31 June 30 - ------------------------------------------------------------------- 2002 Tier 1 leverage ratio 6.71% 6.87% Tier 1 capital ratio 9.94% 9.99% Total risk-based capital ratio 11.20% 11.24% Cash dividends as a percentage of net income 52.71% 52.38% Per common share: Book value $ 8.07 $ 8.50 Tangible book value $ 6.62 $ 7.07 =================================================================== 2001 Tier 1 leverage ratio 7.18% 7.07% Tier 1 capital ratio 10.70% 10.00% Total risk-based capital ratio 11.95% 11.23% Cash dividends as a percentage of net income 48.89% 59.36% Per common share: Book value $ 8.60 $ 8.74 Tangible book value $ 7.22 $ 7.21 =================================================================== Table 7 presents the high, low and closing sales price for the common stock as reported on the NASDAQ Stock Market, and cash dividends declared per share of common stock. The Company's price to book value ratio was 2.24 at June 30, 2002 and 2.27 a year ago. The per share market price was 14.11 times annualized earnings at June 30, 2002 and 19.69 times annualized earnings at June 30, 2001. TABLE 7 QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION* - -------------------------------------------------------------------------------- Cash Dividends Quarter Ending High Low Close Declared - -------------------------------------------------------------------------------- 2001 - -------------------------------------------------------------------------------- September 30 17.30 13.50 14.30 0.170 December 31 15.99 12.55 14.49 0.170 ================================================================================ 2002 - -------------------------------------------------------------------------------- MARCH 31 $15.15 $13.15 $14.74 $0.170 JUNE 30 $19.32 $14.00 $18.07 $0.170 ================================================================================ On July 22, 2002 the Company announced that it intends to repurchase up to one million shares (approximately 3%) of its outstanding common stock from time to time over the next 12 months in open market and privately negotiated transactions. 35 LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT MARKET RISK Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company's net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. In an attempt to manage the Company's exposure to changes in interest rates, management monitors the Company's interest rate risk. Management's asset/liability committee (ALCO) meets monthly to review the Company's interest rate risk position and profitability, and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing, and the Company's securities portfolio, formulates investment and funding strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting the Company's asset/liability position, the Board and management attempt to manage the Company's interest rate risk while enhancing the net interest margin. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to changes in interest rates and fluctuations in the difference between long- and short-term interest rates. The primary tool utilized by ALCO to manage interest rate risk is a balance sheet/income statement simulation model (interest rate sensitivity analysis). Information such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed), and current rates is uploaded into the model to create an ending balance sheet. In addition, ALCO makes certain assumptions regarding prepayment speeds for loans and leases and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet over a 12-month period. A second and third model are run in which a gradual increase of 200 bp and a gradual decrease of 150 bp takes place over a 12 month period. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that 36 have callable options embedded into them are handled accordingly based on the interest rate scenario. The resultant changes in net interest income are then measured against the flat rate scenario. In the declining rate scenarios, net interest income is projected to increase when compared to the flat rate scenario through the simulation period. The level of net interest income increasing is a result of interest-bearing liabilities repricing downward at a faster rate than earning assets. In the rising rate scenarios, net interest income is projected to experience a decline from the flat rate scenario. Net interest income is projected to remain at lower levels than in a flat rate scenario through the simulation period primarily due to a lag in assets repricing while funding costs increase. The potential impact on earnings is dependent on the ability to lag deposit repricing. Net interest income for the next twelve months in a + 200/- 150 bp scenario is within the internal policy risk limits of a not more than a 5% change in net interest income. The following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12 month period from the forecasted net interest income in the flat rate scenario using the June 30, 2002 balance sheet position: TABLE 10 INTEREST RATE SENSITIVITY ANALYSIS -------------------------------------------------------- Change in interest rates Percent change in (in basis points) net interest income -------------------------------------------------------- +200 (2.28%) -150 0.41% -------------------------------------------------------- LIQUIDITY RISK Liquidity involves the ability to meet the cash flow requirements of customers who may be depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Asset Liability Committee (ALCO) is responsible for liquidity management and has developed guidelines which cover all assets and liabilities, as well as off balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies and tactical actions. Requirements change as loans and leases grow, deposits and securities mature, and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. The primary liquidity measurement the Company utilizes is called the Basic Surplus which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short- and long-term securities with the availability of dependable borrowing sources which can be accessed when necessary. At June 30, 2002, the Company's Basic Surplus measurement was 10.32% of total assets, which was above the Company's minimum of 5% set forth in its liquidity policies. If the Company's liquidity position tightens and its Basic Surplus measurement decreases, the Company has the ability to manage its liquidity through brokered time deposits, established borrowing facilities, primarily with the Federal Home Loan Bank, and entering into repurchase agreements with investment companies. 37 This Basic Surplus approach enables the Company to adequately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating, securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. At June 30, 2002, the Company considered its Basic Surplus adequate to meet liquidity needs. At June 30, 2002, a large percentage of the Company's loans and securities are pledged as collateral on borrowings. Therefore, future growth of earning assets will depend upon the Company's ability to obtain additional funding, through growth of core deposits and collateral management, and may require further use of brokered time deposits, or other higher cost borrowing arrangements. SARBANES-OXLEY ACT OF 2002 - ----------------------------- On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, landmark legislation on accounting reform and corporate governance. Although much of the act is still being assessed, we do not anticipate any significant changes in the operations of, and reporting by the Company as a result of the Act. In accordance with requirements of the Sarbanes-Oxley Act, written certifications for this quarterly report on Form 10-Q by the chief executive officer and chief financial officer accompany this report as filed with the SEC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Information called for by Item 3 is contained in the Liquidity and Interest Rate Sensitivity Management section of the Management Discussion and Analysis. 38 PART II. OTHER INFORMATION Item 1 -- Legal Proceedings There are no material pending legal proceedings other than ordinary routine litigation incidental to the business, to which the Company, or any of its subsidiaries is a party or which their property is subject. Item 2 -- Changes in Securities None. Item 3 -- Defaults Upon Senior Securities None Item 4 -- Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on May 2, 2002. Stockholders approved the following proposals: A proposal to fix the number of directors to sixteen was approved. There were 24,043,045 votes cast for the proposal, 599,832 votes cast against the proposal and 175,167 broker non-votes regarding this matter. The following directors were elected with terms expiring at the annual meeting in 2005: Richard Chojnowski 24,128,402 votes for election, 516,689 votes against election Dr. Peter B. Gregory 24,423,792 votes for election, 221,299 votes against election Paul O. Stillman 24,430,632 votes for election, 214,459 votes against election Joseph A Santangelo 24,364,931 votes for election, 280,160 votes against election Janet H. Ingraham 24,424,468 votes for election, 220,623 votes against election Paul D. Horger 24,422,268 votes for election, 222,369 votes against election The following directors were elected with terms expiring at the annual meeting in 2003: Michael H. Hutcherson 24,393,049 votes for election, 252,042 votes against election Michael M. Murphy 24,043,045 votes for election, 599,832 votes against election Item 5 -- Other Information On July 22, 2002, NBT Bancorp Inc. announced the declaration of a regular quarterly cash dividend of $0.17 per share. The cash dividend will be paid on September 15, 2002 to stockholders of record as of September 1, 2002. 39 Item 6 -- Exhibits and Reports on Form 8-K (a) none. (b) During the quarter ended June 30, 2002, the Company filed the following Current Reports on Form 8-K: None filed. 40 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on FORM 10-Q to be signed on its behalf by the undersigned thereunto duly authorized, this 13th day of August 2002. NBT BANCORP INC. By: /s/ MICHAEL J. CHEWENS ----------------------- Michael J. Chewens, CPA Executive Vice President Chief Financial Officer and Secretary 41 -----END PRIVACY-ENHANCED MESSAGE-----