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, 2001.
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, 2001, there were 24,653,254 shares outstanding of the
Registrant's common stock, $0.01 par value.
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended June 30, 2001
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2001, December 31, 2000
(Audited), and June 30, 2000
Consolidated Statements of Income for the three month and six month
periods ended June 30, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the six month
periods ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows for the six month periods
ended June 30, 2001 and 2000
Consolidated Statements of Comprehensive Income (Loss) for the
three month and six month periods ended June 30, 2001 and 2000
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 2001 2000 2000
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(in thousands, except share and per share data) (Unaudited) (Unaudited)
ASSETS
Cash and cash equivalents $ 78,010 $ 96,429 $ 73,212
Short-term interest bearing accounts 4,433 14,233 8,709
Trading securities, at fair value 108 20,541 246
Securities available for sale, at fair value 583,297 576,372 593,857
Securities held to maturity (fair value-$97,153,
$101,833 and $101,809) 97,567 102,413 105,326
Federal Reserve and Federal Home Loan Bank stock 19,295 27,647 27,647
Loans 1,817,015 1,726,482 1,622,025
Less allowance for loan losses 25,691 24,349 22,006
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Net loans 1,791,324 1,702,133 1,600,019
Premises and equipment, net 48,953 43,457 45,433
Intangible assets, net 33,817 27,739 16,073
Other assets 46,719 44,824 50,874
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TOTAL ASSETS $2,703,523 $2,655,788 $2,521,396
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 318,283 $ 302,137 $ 270,622
Savings, NOW, and money market 711,632 671,980 626,226
Time 1,047,050 1,066,121 997,366
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Total deposits 2,076,965 2,040,238 1,894,214
Short-term borrowings 96,537 132,375 168,074
Long-term debt 271,480 234,872 238,299
Other liabilities 29,207 40,282 20,226
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Total liabilities 2,474,189 2,447,767 2,320,813
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Stockholders' equity:
Preferred stock, $0.01 par value; shares authorized - 2,500,000 - - -
Common stock, $0.01 par value and 50,000,000 authorized at
June 30, 2001, 30,000,000 authorized at December 31, 2000 and
June 30, 2000; issued 25,312,688, 24,237,322 and 24,214,498 at
June 30, 2001, December 31, 2000 and June 30, 2000, respectively 253 242 242
Additional paid-in-capital 199,144 185,041 184,925
Retained earnings 40,742 36,689 46,903
Accumulated other comprehensive loss (116) (2,864) (20,186)
Common stock in treasury at cost, 547,134, 513,523
and 522,133 shares at June 30, 2001, December 31, 2000
and June 30, 2000, respectively (10,689) (11,087) (11,301)
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Total stockholders' equity 229,334 208,021 200,583
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,703,523 $2,655,788 $2,521,396
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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 2001 2000 2001 2000
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(in thousands, except per share data) (Unaudited)
Interest, fee and dividend income:
Loans $36,453 $34,326 $73,729 $66,608
Securities available for sale 8,964 10,330 18,354 20,868
Securities held to maturity 1,325 1,553 2,703 3,134
Other 375 588 997 1,098
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Total interest, fee and dividend income 47,117 46,797 95,783 91,708
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Interest expense:
Deposits 17,336 17,708 36,864 33,774
Short-term borrowings 1,044 2,236 2,486 4,330
Long-term debt 3,272 3,331 6,501 6,781
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Total interest expense 21,652 23,275 45,851 44,885
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Net interest income 25,465 23,522 49,932 46,823
Provision for loan losses 6,512 2,345 7,463 3,799
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Net interest income after provision for loan losses 18,953 21,177 42,469 43,024
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Noninterest income:
Trust 888 811 1,796 1,671
Service charges on deposit accounts 2,679 2,020 5,000 3,968
Broker/dealer fees 900 567 1,922 578
Net securities gains 43 6 546 6
Gain on sale of branch building - - 1,367 -
Other 1,811 1,551 3,800 2,973
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Total noninterest income 6,321 4,955 14,431 9,196
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Noninterest expense:
Salaries and employee benefits 9,171 8,233 18,238 16,658
Office supplies and postage 1,013 711 1,812 1,439
Occupancy 1,548 1,371 3,190 2,830
Equipment 1,324 1,453 2,634 2,844
Professional fees and outside services 1,016 812 1,825 1,668
Data processing and communications 1,742 1,437 3,776 2,799
Amortization of intangible assets 679 393 1,312 714
Merger and acquisition costs - 2,824 - 4,039
Deposit overdraft writeoffs - - 2,125 -
Other operating 2,287 2,451 4,100 4,410
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Total noninterest expense 18,780 19,685 39,012 37,401
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Income before income taxes 6,494 6,447 17,888 14,819
Income taxes 1,789 2,378 5,545 5,470
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Net income $ 4,705 $ 4,069 $12,343 $ 9,349
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Earnings per share:
Basic $ 0.20 $ 0.17 $ 0.52 $ 0.40
Diluted $ 0.19 $ 0.17 $ 0.51 $ 0.40
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See notes to unaudited interim consolidated financial statements.
4
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Unaudited)
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Accumulated
Additional Other
Common Paid-in- Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
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(in thousands, except share and per share data)
Balance at December 31, 1999 $23,786 $156,112 $44,949 $(21,710) $(11,665) $191,472
Net income 9,349 9,349
Cash dividends - $0.340 per share (7,395) (7,395)
Issuance of 11,380 shares to
employee benefits plans and
other stock plans,
including tax benefit 6 467 364 837
Change $1.00 stated value per
share to $.01 par value
per share (23,554) 23,554 -
Issuance of 420,989 shares to
purchase M. Griffith, Inc. 4 4,792 4,796
Other comprehensive income 1,524 1,524
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Balance at June 30, 2000 $ 242 $184,925 $46,903 $(20,186) $(11,301) $200,583
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Balance at December 31, 2000 $ 242 $185,041 $36,689 $ (2,864) $(11,087) $208,021
Net income 12,343 12,343
Cash dividends - $0.340 per share (8,290) (8,290)
Purchase of 198,496 treasury
shares (3,114) (3,114)
Issuance of 164,885 shares to
employee benefit plans and
other stock plans including tax
benefit (1,888) 3,512 1,624
Issuance of 1,075,365 shares to
purchase First National
Bancorp, Inc. 11 15,991 16,002
Other comprehensive income 2,748 2,748
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Balance at June 30, 2001 $ 253 $199,144 $40,742 $ (116) $(10,689) $229,334
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See notes to unaudited interim consolidated financial statements.
Note: Dividend per share data represents historical dividends per share of NBT
Bancorp Inc. stand-alone.
5
NBT Bancorp Inc. and Subsidiaries Six Months Ended June 30,
Consolidated Statements of Cash Flows 2001 2000
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(in thousands) (Unaudited)
Operating activities:
Net income $ 12,343 $ 9,349
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 7,463 3,799
Depreciation of premises and equipment 2,240 2,488
Net accretion on securities (911) (981)
Amortization of intangible assets 1,312 714
Proceeds from sale of loans held for sale 2,882 8,343
Origination and purchases of loans held for sale (2,829) (6,292)
Net loss on sales of loans 26 73
Net loss on sale of other real estate owned 149 365
Net security transactions (546) (6)
Proceeds from sale of trading securities 20,709 -
Gain on sale of branch building (1,367) -
Net (increase) decrease in other assets 10,026 129
Net increase (decrease) in other liabilities (12,126) 4,314
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Net cash provided by operating activities 39,371 22,295
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Investing activities:
Net cash and cash equivalents provided by acquisitions 9,509 33,170
Securities available for sale:
Proceeds from maturities 75,511 19,476
Proceeds from sales 584 10,127
Purchases (55,122) (13,428)
Securities held to maturity:
Proceeds from maturities 21,956 18,772
Purchases (11,548) (10,824)
Net increase in loans (24,877) (159,624)
Purchase of premises and equipment, net (3,421) (1,353)
Proceeds from sales of other real estate owned 529 773
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Net cash used in investing activities 13,121 (102,911)
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Financing activities:
Net increase (decrease) in deposits (71,231) 77,330
Net increase (decrease) in short-term borrowings (36,309) 22,987
Proceeds from issuance of long-term debt 246,291 5,000
Repayments of long-term debt (209,682) (15,851)
Proceeds from issuance of treasury shares to
employee benefit plans and other stock plans,
including tax benefit 1,624 837
Purchase of treasury stock (3,114) -
Cash dividends (8,290) (7,395)
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Net cash provided by financing activities (80,711) 82,908
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Net increase (decrease) in cash and cash equivalents (28,219) 2,292
Cash and cash equivalents at beginning of period 110,662 79,629
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Cash and cash equivalents at end of period $ 82,443 $ 81,921
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Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest $ 49,540 $ 42,451
Income taxes 194 5,535
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See notes to unaudited interim consolidated financial statements.
6
NBT Bancorp Inc. and Subsidiaries Six Months Ended June 30,
Supplemental Schedule of non-cash investing and financing activities: 2001 2000
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(in thousands) (Unaudited)
Loans transferred to other real estate owned 869 785
Fair value of assets acquired 109,549 1,068
Fair value of liabilities assumed 110,501 37,094
Common stock issued for acquisitions 16,002 4,796
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See notes to 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 (Loss) 2001 2000 2001 2000
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(in thousands) (Unaudited)
Net Income $ 4,705 $ 4,069 $ 12,343 $ 9,349
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Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $(3,846)
$1,398, $4,897 and $2,537] (2,299) 858 2,910 1,524
Less: Reclassification adjustment for net gains included
in net income [pre-tax amounts of
$(24), $-, $(269) and $-] (15) - (162) -
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Total other comprehensive income (loss) (2,314) 858 2,748 1,524
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Comprehensive income $ 2,391 $ 4,927 $ 15,091 $ 10,873
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See notes to unaudited interim consolidated financial statements.
8
NBT BANCORP INC. and Subsidiary
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 2001
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of NBT Bancorp Inc. ("the Registrant" or "the Company") and
its wholly-owned subsidiaries, NBT Bank, N.A. (NBT) and NBT Financial Services,
Inc. 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, 2000 has been derived from
audited consolidated financial statements at that date. The accompanying
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles 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 generally accepted accounting principles 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 month periods ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant's annual
report on Form 10-K for the year ended December 31, 2000. The unaudited interim
consolidated financial statements as of and for the period ended June 30, 2000
have been restated to give effect to the merger with Pioneer American Holding
Company Corp., which closed on July 1, 2000 and was accounted for as a
pooling-of-interests.
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.
The following is a reconciliation of basic and diluted earnings per share
for the periods presented in the consolidated statements of income.
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Three months ended June 30, 2001 2000
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(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 24,102 23,469
Net income available to common shareholders $ 4,705 $ 4,069
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Basic EPS $ 0.20 $ 0.17
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Diluted EPS:
Weighted average common shares outstanding 24,102 23,469
Dilutive common stock options 170 115
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Weighted average common shares and common
share equivalents 24,272 23,584
Net income available to common shareholders $ 4,705 $ 4,069
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Diluted EPS $ 0.19 $ 0.17
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9
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Six months ended June 30, 2001 2000
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(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 23,878 23,333
Net income available to common shareholders $ 12,343 $ 9,349
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Basic EPS $ 0.52 $ 0.40
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Diluted EPS:
Weighted average common shares outstanding 23,878 23,333
Dilutive common stock options 193 132
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Weighted average common shares and common
share equivalents 24,071 23,465
Net income available to common shareholders $ 12,343 $ 9,349
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Diluted EPS $ 0.51 $ 0.40
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There were 955,680 outstanding stock options for the quarter ended June 30,
2001 and 896,692 outstanding stock options for the quarter ended June 30, 2000
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 955,680 outstanding stock options for the six
month period ended June 30, 2001 and 743,176 outstanding stock options for the
six month period ended June 30, 2000 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.
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 NBT Bank, N.A. 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 million and is presently
being amortized over twenty years on a straight-line basis.
On June 19, 2001, the Company announced the signing of a definitive
agreement to acquire CNB Financial Corp. (CNB) and its wholly owned subsidiary,
Central National Bank (CNB Bank). Under the terms of the agreement, CNB
stockholders will receive 1.2 shares of the Company's common stock. The Company
is expected to issue approximately 8.9 million shares of common stock, with a
total value of approximately $140 million based on the closing price of the
Company's common stock on June 19, 2001. The transaction is structured to be
tax-free to shareholders of CNB and will be accounted for as a pooling of
interests. The merger agreement also provides for the merger of CNB Bank into
NBT Bank, N.A. Subject to regulatory and shareholder approval, the merger is
10
expected to close in the fourth quarter of 2001. At March 31, 2001, CNB had
consolidated assets of $964 million, deposits of $830 million and equity of $65
million. CNB Bank operates 29 full service banking offices in nine upstate New
York counties.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective January 1, 2001. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Changes in the fair value of the derivative
financial instruments are reported in either net income or as a component of
comprehensive income. Consequently, there may be increased volatility in net
income, comprehensive income, and stockholders' equity on an ongoing basis as a
result of accounting for derivatives in accordance with SFAS No. 133.
Special hedge accounting treatment is permitted only if specific
criteria are met, including a requirement that the hedging relationship be
highly effective both at inception and on an ongoing basis. Accounting for
hedges varies based on the type of hedge - fair value or cash flow. Results of
effective hedges are recognized in current earnings for fair value hedges and in
other comprehensive income for cash flow hedges. Ineffective portions of hedges
are recognized immediately in earnings and are not deferred. The adoption of
SFAS No. 133 by the Company on January 1, 2001 did not have a material effect on
the Company's consolidated financial position or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
a replacement of SFAS No. 125. SFAS 140 addresses implementation issues that
were identified in applying SFAS No. 125. This statement revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125 provisions without reconsideration. SFAS 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. SFAS No. 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This statement is to be applied prospectively with certain exceptions. Other
than those exceptions, earlier or retroactive application is not permitted. The
adoption of SFAS No. 140 did not have a material effect on the Company's
consolidated financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 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. Statement 141 also
specifies the criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require 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 Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
11
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior to July
1, 2001, such as the CNB merger, which it expects to account for using the
pooling-of-interests method. The Company is required to adopt the provisions of
Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 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 Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be 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 will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will 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.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption based upon
criteria contained in Statement 142. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle in the
Company's statement of earnings.
Because of the extensive effort needed to comply with adopting Statements 141
and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements at the date of this
report, including whether any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting principle.
12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and results of operations of NBT
Bancorp Inc. ("Bancorp") and its wholly owned subsidiaries, NBT Bank N.A.
("NBT") and NBT Financial Services, Inc., collectively referred to herein as the
Company. This discussion focuses on the Company's Financial Condition, Results
of Operations, and Liquidity and Capital Resources. 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 2000 Form 10-K for an
understanding of the following discussion and analysis.
On June 23, 2001, 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, 2001 to stockholders of record as of September 1, 2001.
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. Theses 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
conditions, events or results to differ significantly from those described in
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 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 and pending 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 and pending mergers
and acquisitions may be greater than 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, those described above, could affect the Company's
13
financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
Except as required by law, the Company does not undertake, and specifically
disclaims any obligations to publicly release any revisions to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
MERGERS AND ACQUISITIONS
On June 1, 2001, the Company completed the merger of First National Bancorp,
Inc. (FNB) with and into Bancorp along with the merger of FNB's subsidiary,
First National Bank of Northern New York, into NBT. The merger was accounted for
as a purchase transaction and added approximately $126 million in assets,
including $7 million in goodwill, to the Company's consolidated balance sheet. A
systems conversion brought the six offices of the First National Bank of
Northern New York into the NBT Bank branch network effective July 27, 2001.
On June 19, 2001, the Company announced the signing of a definitive agreement to
acquire CNB Financial Corp. (CNB) and its wholly owned subsidiary, Central
National Bank (CNB Bank). Under the terms of the agreement, CNB stockholders
will receive 1.2 shares of the Company's common stock. The Company is expected
to issue approximately 8.9 million shares of common stock, with a total value of
approximately $140 million based on the closing price of the Company's common
stock on June 19, 2001. The transaction is structured to be tax-free to
shareholders of CNB and will be accounted for as a pooling of interests. The
merger agreement also provides for the merger of CNB Bank into NBT Bank, N.A.
Subject to regulatory and shareholder approval, the merger is expected to close
in the fourth quarter of 2001. At March 31, 2001, CNB had consolidated assets of
$964 million, deposits of $830 million and equity of $65 million. CNB Bank
operates 29 full service banking offices in nine upstate New York counties.
OVERVIEW
The Company earned net income of $4.7 million, or $.19 diluted earnings per
share, for the three months ended June 30, 2001 compared to $4.1 million, or
$.17 diluted earnings per share, for the three months ended June 30, 2000. Net
income for the six months ended June 30, 2001 was $12.3 million, or $.51 diluted
earnings per share, compared to $9.3 million, or $.40 diluted earnings per
share, for the first six months of 2000.
The following tables present an overview of the Company's performance ratios and
changes in average balances for the three months and six months ended June 30,
2001 compared to June 30, 2000. Table 1 depicts several measurements of
performance on an annualized basis. Returns on average assets and equity measure
how effectively an entity utilizes its total resources and capital,
respectively. Net interest margin, calculated on a federal taxable equivalent
(FTE) basis, measures an entity's ability to utilize its earning assets in
relation to its cost of funding.
14
Table 1
Performance Measurements
- ------------------------------------------------------------------------------------------
First Second Six
Quarter Quarter Months
- ------------------------------------------------------------------------------------------
2001
Return on average assets 1.19% 0.72% 0.96%
Return on average equity 14.55% 8.49% 11.45%
Net interest margin 4.21% 4.32% 4.27%
- ------------------------------------------------------------------------------------------
2000
Return on average assets 0.88% 0.66% 0.77%
Return on average equity 11.10% 8.29% 9.67%
Net interest margin 4.25% 4.16% 4.20%
- ------------------------------------------------------------------------------------------
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.
Table 2
Average Balances and Net Interest Income
Three months ended June 30,
2001 2000
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rates Balance Interest Rates
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 6,101 $ 79 5.19% $ 8,238 $ 125 6.10%
Securities available for
sale (2) (3) 562,198 9,244 6.60 631,801 10,597 6.75
Securities held to
maturity (2) (3) 93,674 1,652 7.07 112,582 1,940 6.93
Investment in FRB and FHLB Banks 18,727 296 6.34 27,649 460 6.69
Loans (1) (3) 1,761,996 36,681 8.35 1,579,869 34,544 8.79
--------- ------ --------- ------
Total interest earning assets 2,442,696 47,952 7.87 2,360,139 47,666 8.12
------ ------
Other assets 167,069 118,813
------- -------
Total assets $2,609,765 $2,478,952
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 163,237 1,216 2.99 $ 130,046 1,073 3.32
NOW deposit accounts 236,190 661 1.12 203,960 890 1.76
Savings deposits 284,291 1,464 2.07 268,822 1,661 2.49
Time deposits 1,035,842 13,995 5.42 1,000,032 14,084 5.66
--------- ------ --------- ------
Total interest bearing deposits 1,719,560 17,336 4.04 1,602,860 17,708 4.44
Short-term borrowings 93,578 1,044 4.47 149,153 2,236 6.03
Long-term debt 246,017 3,272 5.33 238,986 3,331 5.61
------- ----- ------- -----
Total interest bearing
liabilities 2,059,155 21,652 4.22% 1,990,999 23,275 4.70%
------ ------
Demand deposits 295,182 266,236
Other liabilities 33,310 24,307
Stockholders' equity 222,118 197,410
------- -------
Total liabilities and
stockholders' equity $2,609,765 $2,478,952
---------- ----------
Net interest income $26,300 $24,391
------- -------
Interest rate spread 3.65% 3.42%
----- -----
Net interest margin 4.32% 4.16%
----- -----
Taxable equivalent adjustment (3) $ 835 $ 869
------- -------
15
Six months ended June 30,
2001 2000
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rates Balance Interest Rates
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 10,087 $ 268 5.36% $ 6,080 $ 177 5.85%
Securities available for
sale (2) (3) 569,937 18,914 6.69 635,608 21,402 6.77
Securities held to maturity (2) (3) 95,097 3,371 7.15 113,856 3,914 6.91
Investment in FRB and FHLB Banks 22,222 729 6.62 27,651 918 6.68
Loans (1) (3) 1,741,062 74,168 8.59 1,540,999 67,038 8.75
--------- ------ --------- ------
Total interest earning assets 2,438,405 97,450 8.06 2,324,194 93,449 8.09
------ ------
Other assets 163,928 115,944
------- -------
Total assets $2,602,333 $2,440,138
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 163,305 2,670 3.30 $ 131,841 2,142 3.27
NOW deposit accounts 235,767 1,801 1.54 201,917 1,773 1.77
Savings deposits 277,705 3,072 2.23 267,187 3,303 2.49
Time deposits 1,041,737 29,321 5.68 969,082 26,556 5.51
--------- ------ ------- ------
Total interest bearing deposits 1,718,514 36,864 4.33 1,570,027 33,774 4.33
Short-term borrowings 100,601 2,486 4.98 149,853 4,330 5.81
Long-term debt 240,945 6,501 5.44 242,874 6,781 5.61
------- ----- ------- -----
Total interest bearing
liabilities 2,060,060 45,851 4.49% 1,962,754 44,885 4.60%
------ ------
Demand deposits 290,700 260,660
Other liabilities 34,118 22,325
Stockholders' equity 217,455 194,399
------- -------
Total liabilities and
stockholders' equity $2,602,333 $2,440,138
---------- ----------
Net interest income $51,599 $48,564
------- -------
Interest rate spread 3.57% 3.49%
----- -----
Net interest margin 4.27% 4.20%
----- -----
Taxable equivalent
adjustment (3) $ 1,667 $ 1,741
------- -------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding.
(2) Securities are shown at average amortized cost.
(3) Interest income for tax-exempt securities and loans has been adjusted
to a taxable-equivalent basis using the statutory Federal income tax rate
of 35%.
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.
16
Table 3
Analysis of Changes in Taxable Equivalent Net Interest Income
- --------------------------------------------------------------------------------------------
Three months ended June 30,
Increase (Decrease)
2001 over 2000
- --------------------------------------------------------------------------------------------
(in thousands) Volume Rate Total
- --------------------------------------------------------------------------------------------
Short-term interest bearing accounts $ (29) $ (17) $ (46)
Securities available for sale (1,148) (205) (1,353)
Securities held to maturity (333) 45 (288)
Investment in FRB and FHLB Banks (142) (22) (164)
Loans 3,847 (1,710) 2,137
- --------------------------------------------------------------------------------------------
Total interest income 1,641 (1,355) 286
- --------------------------------------------------------------------------------------------
Money market deposit accounts 255 (112) 143
NOW deposit accounts 125 (354) (229)
Savings deposits 91 (288) (197)
Time deposits 495 (584) (89)
Short-term borrowings (707) (485) (1,192)
Long-term debt 96 (155) (59)
- --------------------------------------------------------------------------------------------
Total interest expense 776 (2,399) (1,623)
- --------------------------------------------------------------------------------------------
Change in FTE net interest income $ 865 $ 1,044 $ 1,909
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Six months ended June 30,
Increase (Decrease)
2001 over 2000
- --------------------------------------------------------------------------------------------
(in thousands) Volume Rate Total
- --------------------------------------------------------------------------------------------
Short-term interest bearing accounts $ 108 $ (17) $ 91
Securities available for sale (2,183) (305) (2,488)
Securities held to maturity (662) 119 (543)
Investment in FRB and FHLB Banks (178) (11) (189)
Loans 8,547 (1,417) 7,130
- --------------------------------------------------------------------------------------------
Total interest income 4,567 (566) 4,001
- --------------------------------------------------------------------------------------------
Money market deposit accounts 514 14 528
NOW deposit accounts 275 (247) 28
Savings deposits 126 (357) (231)
Time deposits 2,031 734 2,765
Short-term borrowings (1,280) (564) (1,844)
Long-term debt (54) (226) (280)
- --------------------------------------------------------------------------------------------
Total interest expense 2,187 (1,221) 966
- --------------------------------------------------------------------------------------------
Change in FTE net interest income $ 2,380 $ 655 $ 3,035
- --------------------------------------------------------------------------------------------
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
NET INCOME
The Company earned net income of $4.7 million, or $.19 diluted earnings per
share, for the three months ended June 30, 2001 compared to $4.1 million, or
$.17 diluted earnings per share, for the three months ended June 30, 2000.
Second quarter 2001 results included a loan loss provision of $6.5 million
compared to a loan loss provision of $2.3 million for the second quarter of
2000. Results for the three months ended June 30, 2000 included $2.8 million of
pre-tax merger and acquisition costs.
NET INTEREST INCOME
Net interest income on a federal taxable equivalent basis (FTE) increased $1.9
million to $26.3 million in 2001 compared to $24.4 million in 2000. The
Company's interest rate spread improved 23 basis points from 3.42% for 2000 to
3.65% for 2001. The interest rate margin improved 16 basis points from 4.16% to
4.32%. The improvement in net interest income resulted principally from the
growth in average loans, somewhat offset by the decrease in yield, and the
significant decline in the Company's cost of funds.
Average loans for the three months ended June 30, 2001 increased $182.1 million
compared to the same period for 2000. As a percentage of earning assets, average
loans increased from 67% for 2000 to 72% for 2001. Correspondingly, lower
yielding securities declined as a percentage of average assets from 32% for 2000
to 27% for 2001.
Declines in general economic interest rates in 2001 compared to 2000 resulted in
a drop in the Company's yield on its earning assets and the cost of its
liabilities. The yield on earning assets declined 25 basis points from 8.12% for
2000 to 7.87% for 2001, while the cost of interest bearing liabilities declined
48 basis points from 4.70% for 2000 to 4.22% for 2001. The significant decline
in the expense of interest bearing liabilities resulted from a reduction in the
average balance of short-term borrowings from $149.2 million for 2000 to $93.6
million for 2001 combined with a decline in the average cost of those borrowings
from 6.03% for 2000 to 4.47% for 2001. In addition, average interest bearing
deposits, which generally have a lower cost than borrowings, increased from 81%
of average interest bearing liabilities for 2000 to 84% for 2001 while the
average cost of those deposits declined from 4.44% to 4.04%.
NONINTEREST INCOME
Noninterest income increased 27.6% from $5.0 million for 2000 to $6.3 million
for 2001. Income from service charges on deposit accounts increased 32.6%, or
$659,000, due to increases in both the number of deposit accounts and the
related fees. Broker/dealer fees increased 58.7%, or $333,000, due to a full
three months of revenue for the second quarter of 2001 from the Company's
broker/dealer, M. Griffith, Inc., which was acquired on May 5, 2000.
18
NONINTEREST EXPENSE
Excluding merger and acquisition costs of $2.8 million incurred for 2000,
noninterest expense increased $1.9 million, or 11.4%, for 2001 compared to 2000.
The Company's growth through acquisition was the primary reason for the increase
in salaries and benefits, supplies and postage, professional fees and outside
services, and data processing and communications.
INCOME TAXES
Income tax expense for 2001 was $1.8 million for an effective tax rate of 27.6%,
compared to $2.4 million, or 36.9%, for 2000. The effective tax rate was higher
for 2000 primarily as a result of nondeductible merger and acquisition expenses
in that year. In addition, the Company implemented certain tax planning
strategies that resulted in a lower effective rate for 2001.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
NET INCOME
Net income for the six months ended June 30, 2001 was $12.3 million, or $.51
diluted earnings per share, compared to $9.3 million, or $.40 diluted earnings
per share, for the first six months of 2000. The loan loss provision for the
first six months of 2001 amounted to $7.5 million compared to $3.8 million for
the same period for 2000. In addition, the Company incurred $4.0 million in
pre-tax merger and acquisition costs for the first six months of 2000.
NET INTEREST INCOME
Net interest income on a federal taxable equivalent basis (FTE) increased $3.0
million to $51.6 million for 2001 compared to $48.6 million for 2000. The
Company's interest rate spread improved 8 basis points from 3.49% for 2000 to
3.57% for 2001. The interest rate margin improved 7 basis points from 4.20% to
4.27%. The improvement in net interest income was primarily a result of the
increase in average loans, which are the highest yielding asset, as a percentage
of total earning assets offset in part by an increase in total interest expense.
Average loans for the six months ended June 30, 2001 increased $200.1 million
compared to the same period in 2000. As a percentage of earning assets, average
loans increased from 66% for 2000 to 71% for 2001. Correspondingly, lower
yielding securities declined as a percentage of average assets from 32% for 2000
to 27% for 2001.
Average interest bearing deposits, which generally have a lower cost than
borrowings, increased from 80% of average interest bearing liabilities for 2000
to 83% for 2001 with an average cost of 4.33% for both periods. Time deposits,
the most expensive and the largest component of interest bearing deposits,
increased from an average of $969 million for 2000 to $1,042 million for 2001,
but declined as a percentage of total interest bearing deposits from 62% for
2000 to 61% for 2001. The rate paid on time deposits for 2001 was 5.68%, up from
the 5.51% average rate on time deposits for 2000. The increase in the cost of
time deposits for 2001 compared to 2000 is primarily due to the increase in
19
average brokered deposits and time deposits greater than $100,000 that were
primarily added during the latter half of the year 2000.
Average short-term borrowings declined $49.3 million from $149.9 million for
2000 to $100.6 million for 2001; the average cost of these borrowings also
declined from 5.81% for 2000 to 4.98% for 2001. The rate paid on total interest
bearing liabilities decreased 11 basis points from 4.60% for 2000 to 4.49% for
2001.
NONINTEREST INCOME
Noninterest income, excluding net securities gains and the gain on the sale of a
branch building, totaled $12.5 million for 2001 compared to $9.2 million for
2000, an increase of 36.2%. Service charges on deposit accounts increased $1.0
million, or 26.0%, for 2001 compared to 2000 principally due to increases for
the number of deposit accounts and the level of fees. Broker/dealer fees
increased $1.3 million, or 232.5%, representing six months of income for 2001
compared to two months for 2000 from M. Griffith, Inc., the subsidiary of NBT
Financial Services, acquired on May 5, 2000.
NONINTEREST EXPENSE
Noninterest expense, excluding nonrecurring items such as merger and acquisition
costs and certain deposit overdraft writeoffs, increased $3.5 million, or 10.6%,
for 2001 compared to 2000. Increases in 2001 for salaries and benefits, supplies
and postage, occupancy, and data processing and communications are primarily
attributable to the Company's growth through acquisition including the expansion
of its branch network. The expense for the amortization of intangible assets
also increased from $0.7 million for 2000 to $1.3 million for 2001 in connection
with the Company's growth through acquisition. The Company's efficiency ratio,
which measures noninterest expense (excluding nonrecurring charges) as a
percentage of income (net interest income plus noninterest income excluding net
securities gains and nonrecurring income) was 57.75% for 2001 compared to 57.31%
for 2000.
At June 30, 2001, the Company has a remaining accrued liability for merger,
acquisition and reorganization costs of $2.9 million, consisting primarily
of severance costs which will be paid out over a period of time consistent
with the respective severance agreements.
20
INCOME TAXES
Income tax expense for 2001 was $5.5 million for an effective tax rate of 31.0%,
compared to $5.5 million, or 36.9%, for 2000. The effective tax rate was higher
for 2000 primarily as a result of nondeductible merger and acquisition expenses
in that year. In addition, the Company implemented certain tax planning
strategies that resulted in a lower effective rate for 2001.
ANALYSIS OF FINANCIAL CONDITION
LOANS
Total loans were $1,817.0 million, or 67.2% of assets, at June 30, 2001,
compared to $1,726.5 million, or 65.0%, at December 31, 2000, and $1,622.0
million, or 64.3%, at June 30, 2000. The Company acquired approximately $42
million for loans in connection with its purchase of branches from Sovereign
Bank in November 2000 and an additional $73 million in loans in connection with
its acquisition of FNB in June 2001. In addition, the Company continues to
experience growth in its loan portfolio. At June 30, 2001, commercial loans,
including commercial mortgages, represented approximately 49% of the loan
portfolio, while consumer loans and residential mortgages represented 26% and
25%, respectively.
ALLOWANCE FOR LOAN LOSSES, NONPERFORMING ASSETS AND THE PROVISION FOR LOAN
LOSSES
The allowance for loan losses is maintained at a level estimated by management
to provide adequately for risk of probable losses inherent in the current loan
portfolio. The adequacy of the allowance for loan losses is continuously
monitored. It is assessed for adequacy using a methodology designed to ensure
the level of the allowance reasonably reflects the loan portfolio's risk
profile. It is evaluated to ensure that it is sufficient to absorb all
reasonably estimable credit losses inherent in the current loan portfolio.
Table 4 reflects changes to the allowance for loan losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net chargeoffs. Chargeoffs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan losses.
21
Table 4
Allowance For Loan Losses
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $24,209 $20,688 $24,349 $19,711
Recoveries 318 239 670 500
Chargeoffs (5,853) (1,266) (7,296) (2,004)
- --------------------------------------------------------------------------------------------------------------------------------
Net chargeoffs (5,535) (1,027) (6,626) (1,504)
Allowance related to purchase
acquisition 505 - 505 -
Provision for loan losses 6,512 2,345 7,463 3,799
- --------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $25,691 $22,006 $25,691 $22,006
- --------------------------------------------------------------------------------------------------------------------------------
Composition of Net Chargeoffs
- --------------------------------------------------------------------------------------------------------------------------------
Commercial and agricultural $(4,734) 85% $ (522) 51% $(5,238) 79% $ (619) 41%
Real estate mortgage (46) 1% (155) 15% (122) 2% (271) 18%
Consumer (755) 14% (350) 34% (1,266) 19% (614) 41%
- --------------------------------------------------------------------------------------------------------------------------------
Net chargeoffs $(5,535) 100% $(1,027) 100% $(6,626) 100% $(1,504) 100%
- --------------------------------------------------------------------------------------------------------------------------------
Annualized net chargeoffs
to average loans 1.26% 0.26% 0.77% 0.20%
- --------------------------------------------------------------------------------------------------------------------------------
Net chargeoffs to average loans for the year ended December 31, 2000 0.28%
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets were $25.6 million at June 30, 2001 compared to $23.3
million at March 31, 2001, $22.2 million at December 31, 2000 and $13.6 million
at June 30, 2000. Table 5 presents the components of nonperforming assets at
June 30, 2001 and 2000.
Table 5
Nonperforming Assets and Risk Elements
- --------------------------------------------------------------------------------------------------------------------------------
June 30, June 30,
(dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Commercial and agricultural $17,949 77% $ 6,090 64%
Real estate mortgage 3,331 14% 2,703 28%
Consumer 1,964 9% 730 8%
- --------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 23,244 100% 9,523 100%
- --------------------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 13 1% 255 12%
Real estate mortgage 594 56% 1,317 63%
Consumer 464 43% 513 25%
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 1,071 100% 2,085 100%
- --------------------------------------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: 491 902
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 24,806 12,510
- --------------------------------------------------------------------------------------------------------------------------------
Other real estate owned 809 1,085
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $25,615 $13,595
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans to loans 1.37% 0.77%
Total nonperforming assets to assets 0.95% 0.54%
Total allowance for loan losses to nonperforming loans 103.57% 175.91%
- --------------------------------------------------------------------------------------------------------------------------------
22
Through June 2001, the Company had been completing the process of integrating
its newly acquired banks, specifically LA Bank and Pioneer American Bank, now
known jointly as the Pennstar Bank division of NBT Bank (Pennstar), into the
Company's more conservative approach to identifying and resolving problem loans.
The process was completed in June 2001 and the credit administration function of
Pennstar, including workout and collections, has now been consolidated and
standardized using the NBT Bank model, and a new senior vice president of
commercial lending has been installed at Pennstar to oversee the NBT business
lending operations in Pennsylvania.
The completion of the integration process at Pennstar resulted in an increase in
nonperforming loans as described below. Nonperforming loans increased to $24.8
million at June 30, 2001 from $22.5 million at March 31, 2001 and $12.5 million
at June 30, 2000. In addition to the increase in total nonperforming loans,
there was also a significant increase in the nonaccrual category of
nonperforming loans and a significant decrease in the category of loans 90 days
or more past due and still accruing. This change was primarily due to the
transfer of certain loans 90 days or more past due and still accruing to the
nonaccrual status. The integration process described above included bringing
Pennstar's credit administration practices in line with NBT's policies, adopting
NBT's credit risk grading system, and upgrading numerous commercial real estate
appraisals in accordance with appropriate regulatory guidelines. This process
resulted in the determination that the nonaccrual category was more appropriate
for certain loans than the 90 days and still accruing category because of
reduced appraised values and the resulting situation where certain credits were
no longer considered to be well secured. In addition, the integration process
also resulted in a significant increase in net chargeoffs for the second quarter
of 2001. Net chargeoffs for the second quarter of 2001 amounted to $5.5 million,
compared to $1.0 million for the second quarter of 2000.
The integration process and the resulting increase for nonperforming loans, the
mix of nonperforming loans, and the amount of net chargeoffs, as well as the
continued growth in the Company's entire loan portfolio, but especially
commercial related loans, resulted in a significant increase in the provision
for loan losses for the second quarter of 2001. The provision for loan losses
was $6.5 million for the second quarter of 2001, compared to $2.3 million for
the second quarter of 2000. For the six months ended June 30, 2001 the provision
was $7.5 million compared to $3.8 million for the first six months of 2000. The
allowance for loan losses to outstanding loans at June 30, 2001 was 1.41%
compared to 1.40% at March 31, 2001 and 1.36% at June 30, 2000. The allowance
for loan losses as a percentage of nonperforming loans was 103.57% at June 30,
2001, 107.57% at March 31, 2001, and 175.91% at June 30, 2000.
Management considers the allowance for loan losses at June 30, 2001 to be
adequate based on its evaluation and analysis of the inherent risk of loss in
the current loan portfolio.
SECURITIES
Securities totaled $681.0 million, or 25.2% of assets, at June 30, 2001,
compared to $699.3 million, or 26.3%, at December 31, 2000, and $699.4 million,
or 27.7%, at June 30, 2000. The Company's acquisition of FNB in June 2001 added
approximately $27.8 million in securities. The overall net decrease in the
23
portfolio compared to the prior periods was primarily used to fund the Company's
loan growth. At June 30, 2001, the portfolio consisted of 86% securities
available for sale and 14% securities held to maturity.
DEPOSITS
Total deposits were $2,077.0 million at June 30, 2001, an increase of $36.7
million, or 1.8%, from year end 2000, and $182.8 million, or 9.6%, from the
prior year. The Company purchased approximately $97 million in deposits in
conjunction with the purchase of branches from Sovereign Bank in November, 2000.
In addition, the Company's acquisition of FNB in June 2001 added approximately
$108 million in deposits. Time deposits as a percentage of total deposits
declined to approximately 50% at June 30, 2001, compared to 52% and 53% at
December 31 and June 30, 2000, respectively. Brokered CD's were $130.0 million,
$130.5 million and $120.5 million at June 30, 2001, December 31, 2000 and June
30, 2000, respectively. Time deposits greater than $100,000 were $434.2 million,
$503.8 million and $454.2 million at June 30, 2001, December 31, 2000 and June
30, 2000, respectively.
BORROWINGS
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $96.5 million at June 30, 2001 compared to
$132.4 million and $168.1 million at December 31, and June 30, 2000,
respectively. The previously mentioned increase in deposits enabled the Company
to pay down a portion of its existing short-term debt. In addition, certain
higher rate short-term borrowings were paid down with proceeds from long-term
borrowings. Long-term debt was $271.5 million at June 30, 2001, up approximately
15% from year end and from the prior year, as the Company took advantage of
lower interest rates and locked in longer term advances.
CAPITAL RESOURCES
Stockholders' equity of $229.3 million represents 8.5% of total assets at June
30, 2001, compared with $200.6 million, or 8.0% a year previous, and $208.0
million, or 7.8% at December 31, 2000. As the capital ratios in Table 6
indicate, the Company remains well capitalized. Capital measurements are
significantly in excess of regulatory minimum guidelines and meet the
requirements to be considered well capitalized for all periods presented. Tier 1
leverage, Tier 1 capital and Total risk-based capital ratios have regulatory
minimum guidelines of 4%, 4% and 8% respectively, with requirements to be
considered well capitalized of 5%, 6% and 10%, respectively.
24
Table 6
Capital Measurements
- ----------------------------------------------------------------------------------------
As of and for the quarter ended
March 31 June 30
- ----------------------------------------------------------------------------------------
2001
Tier 1 leverage ratio 7.32% 7.59%
Tier 1 capital ratio 11.18% 10.76%
Total risk-based capital ratio 12.43% 12.01%
Cash dividends as a percentage of net income 52.98% 67.16%
Per common share:
Book value $ 9.13 $ 9.26
Tangible book value $ 7.99 $ 7.89
- ----------------------------------------------------------------------------------------
2000
Tier 1 leverage ratio 8.59% 8.26%
Tier 1 capital ratio 13.24% 12.62%
Total risk-based capital ratio 14.40% 13.81%
Cash dividends as a percentage of net income 69.11% 79.10%
Per common share:
Book value $ 8.36 $ 8.47
Tangible book value $ 7.99 $ 7.79
- ----------------------------------------------------------------------------------------
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 2.08 at June 30, 2001
and 1.26 a year ago. The per share market price was 18.77 times annualized
earnings at June 30, 2001 and 13.29 times annualized earnings at June 30, 2000.
Table 7
Quarterly Common Stock and Dividend Information
- ----------------------------------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- ----------------------------------------------------------------------------------------------------------
2000
March 31 $16.50 $11.38 $14.50 $0.170
June 30 14.50 9.38 10.69 0.170
September 30 12.50 9.75 12.00 0.170
December 31 15.94 11.13 14.63 0.170
- ----------------------------------------------------------------------------------------------------------
2001
March 31 $17.50 $13.25 $16.69 $0.170
June 30 25.42* 14.30 19.30 0.170
- ----------------------------------------------------------------------------------------------------------
* This price was reported on June 29, 2001, a day on which the Nasdaq Stock
Market experienced computerized trading disruptions which, among other things,
forced it to extend its regular trading session and cancel its late trading
session. Subsequently the Nasdaq Stock Market recalculated and republished
several closing stock prices (not including NBT Bancorp Inc., for which it had
reported a closing price of $19.30). Excluding trading on June 29, 2001, the
high sales price for the quarter ended June 30, 2001 was $16.75.
25
The Company announced on January 2, 2001 its intention to buy back up to 1.03
million shares of its common stock. As of June 30, 2001, the Company had
completed the purchase of 227,896 shares.
LIQUIDITY
Liquidity management 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 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. Accordingly, the
Company has purchased brokered time deposits, established borrowing facilities
with other banks (Federal funds), the Federal Home Loan Bank of New York
(short and long-term borrowings which are denoted as advances), and repurchase
agreements with investment companies.
This Basic Surplus approach enables the Company to adequately manage liquidity
from both operational and contingency perspectives. By tempering the need for
cash flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At June 30, 2001, the Company
considered its Basic Surplus adequate to meet liquidity needs. At June 30, 2001,
a large percentage of the Company's loans and securities were 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.
26
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT 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 its exposure to changes in interest rates, management
monitors the Company's interest rate risk. 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 to 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 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 and
decrease, respectively, of 200 basis points takes place over a 12 month period.
27
A fourth and fifth model are run in which a gradual increase and decrease,
respectively, of 100 basis points 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 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 be below
the flat rate scenario through the simulation period. Net interest income
experiences a reduction as a result of adjustable rate loans repricing, and
increased cash flow as a result of higher prepayments on loans reinvested at
lower market rates, callable securities reinvested at lower market rates and
limited continued deposit pricing reductions.
In the plus 100 basis points scenario, net interest income is projected to be
relatively stable compared to the flat rate scenario. However, in the plus 200
basis point scenario, net interest income is projected to be 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 basis point scenario
is within the internal policy risk limits of a not more than a 5% change in net
interest income. Using the June 30, 2001 balance sheet position, 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. Because the systems conversion for FNB had not
been completed as of June 30, 2001, the modeling results presented in this table
do not include the assets and liabilities acquired as part of that acquisition.
Management believes that the effect of FNB is not material to the overall
sensitivity of the Company.
Interest Rate Sensitivity Analysis
--------------------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
--------------------------------------------------------------------
+200 (2.27)%
+100 (0.28)%
-100 (0.70)%
-200 (1.18)%
--------------------------------------------------------------------
28
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
None.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
Not applicable.
Item 4 -- Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 3, 2001.
Stockholders approved the following proposals:
a. A proposal to fix the number of directors at thirteen was approved. Daryl
R. Forsythe, William C. Gumble, William L. Owens and Gene E. Goldenziel were
elected as directors with terms of office to expire at the 2004 Annual Meeting
of Stockholders.
Daryl R. Forsythe was elected, with 17,888,784 votes FOR, and 1,210,794
votes WITHHELD. William C. Gumble was elected, with 17,903,341 votes FOR,
and 1,196,240 votes WITHHELD.
William L. Owens was elected, with 17,768,014 votes FOR, and 1,331,564
votes WITHHELD.
Gene E. Goldenziel was elected, with 17,336,069 votes FOR, and 1,763,510
votes WITHHELD.
b. Proposal to approve the amendment to Article Fourth of NBT's Certificate of
Incorporation to increase the number of authorized shares of common stock from
30 million to 50 million.
The proposal was approved, with 17,349,390 votes FOR, 1,686,905 votes
AGAINST, and 318,714 votes ABSTAINING.
c. Proposal to approve the NBT Non-Employee Director, Divisional Director and
Subsidiary Director Stock Option Plan and the reservation of 500,000 shares
of common stock for issuance under the plan.
The proposal was approved, with 13,359,982 votes FOR, 2,760,287 votes
AGAINST, and 464,254 votes ABSTAINING.
d. Proposal to approve an amendment to the NBT 1993 Stock Option Plan to
increase the number of shares of common stock authorized for issuance under
the plan and to approve the reservation of 2,500,000 shares of common stock
for issuance under the plan.
29
The proposal was approved, with 13,274,129 votes FOR, 2,890,468 votes
AGAINST, and 419,931 votes ABSTAINING.
Item 5 -- Other Information
Not Applicable.
Item 6 -- Exhibits and Reports on FORM 8-K
(a) Exhibits Filed - None
(b) During the first quarter ended June 30, 2001, the Company filed the
following Current Reports on Form 8-K:
Current report on Form 8K, Item 5, filed with the Securities and Exchange
Commission on June 5, 2001; and
Current report on Form 8K, Items 5 and 7, filed with the Securities and
Exchange Commission on June 22, 2001
30
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 14th day of August 2001.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
--------------------------------------------
Michael J. Chewens, CPA
Executive Vice President
Chief Financial Officer and Secretary