SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 2001, there were 24,335,800 shares outstanding of the
Registrant's common stock, $0.01 par value.
1
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended September 30, 2001
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2001, December 31,
2000 (Audited), and September 30, 2000
Consolidated Statements of Income for the three month and nine
month periods ended September 30, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the nine month
periods ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 2001 and 2000
Consolidated Statements of Comprehensive Income for the three month
and nine month periods ended September 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 September 30, December 31, September 30,
Consolidated Balance Sheets 2001 2000 2000
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data) (Unaudited) (Unaudited)
ASSETS
Cash and cash equivalents $ 82,786 $ 96,429 $ 62,964
Short-term interest bearing accounts 4,696 14,233 13,361
Trading securities, at fair value 112 20,541 228
Securities available for sale, at fair value 577,160 576,372 590,895
Securities held to maturity (fair value-$92,783,
$101,833 and $104,772 at September 30, 2001,
December 31, 2000 and September 30, 2000, respectively) 91,880 102,413 107,350
Federal Reserve and Federal Home Loan Bank stock 19,184 27,647 27,647
Loans, net 1,778,612 1,702,133 1,644,951
Premises and equipment, net 49,253 43,457 44,308
Intangible assets, net 33,829 27,739 15,648
Other assets 40,695 44,824 50,616
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,678,207 $2,655,788 $2,557,968
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 338,208 $ 302,137 $ 284,600
Savings, NOW, and money market 736,519 671,980 632,809
- ----------------------------------------------------------------------------------------------------------------------------
Time 1,004,390 1,066,121 1,019,074
Total deposits 2,079,117 2,040,238 1,936,483
Short-term borrowings 72,121 132,375 154,162
Long-term debt 269,276 234,872 236,418
Other liabilities 25,698 40,282 23,922
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,446,212 2,447,767 2,350,985
- ----------------------------------------------------------------------------------------------------------------------------
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 September 30, 2001, 30,000,000 authorized at December 31, 2000 and
September 30, 2000; issued 25,312,688, 24,237,322 and 24,213,882 at
September 30, 2001, December 31, 2000
and September 30, 2000, respectively 253 242 242
Additional paid-in-capital 199,014 185,041 184,915
Retained earnings 41,647 36,689 48,030
Accumulated other comprehensive income (loss) 8,543 (2,864) (14,921)
Common stock in treasury at cost, 976,888, 512,213
and 521,257 shares at September 30, 2001, December 31, 2000
and September 30, 2000, respectively (17,462) (11,087) (11,283)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 231,995 208,021 206,983
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,678,207 $2,655,788 $2,557,968
- ----------------------------------------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
3
Three months ended Nine months ended
NBT Bancorp Inc. and Subsidiaries September 30, September 30,
Consolidated Statements of Income 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
Interest, fee and dividend income:
Loans $36,585 $36,494 $110,314 $103,102
Securities available for sale 9,142 10,140 27,496 31,008
Securities held to maturity 1,258 1,521 3,961 4,655
Other 433 766 1,430 1,864
- ----------------------------------------------------------------------------------------------------------------------------
Total interest, fee and dividend income 47,418 48,921 143,201 140,629
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 16,381 19,018 53,245 52,792
Short-term borrowings 775 2,441 3,261 6,771
Long-term debt 3,497 3,352 9,998 10,133
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 20,653 24,811 66,504 69,696
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 26,765 24,110 76,697 70,933
Provision for loan losses 5,988 1,619 13,451 5,418
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 20,777 22,491 63,246 65,515
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust 956 784 2,752 2,455
Service charges on deposit accounts 2,702 2,068 7,702 6,036
Broker/dealer fees 1,034 1,017 2,956 1,595
Net securities gains 10 137 556 143
Gain on sale of branch building - - 1,367 -
Other 1,894 1,567 5,694 4,540
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 6,596 5,573 21,027 14,769
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 9,041 9,095 27,279 25,753
Office supplies and postage 823 716 2,635 2,155
Occupancy 1,520 1,341 4,710 4,171
Equipment 1,489 1,376 4,123 4,220
Professional fees and outside services 1,150 764 2,975 2,432
Data processing and communications 2,305 1,335 6,081 4,134
Amortization of intangible assets 771 446 2,083 1,160
Merger, acquisition and reorganization costs - 3,165 - 7,204
Deposit overdraft writeoffs - - 2,125 -
Other operating 2,646 1,890 6,746 6,300
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 19,745 20,128 58,757 57,529
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,628 7,936 25,516 22,755
Income taxes 2,544 2,781 8,089 8,251
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,084 $ 5,155 $ 17,427 $ 14,504
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.21 $ 0.22 $ 0.72 $ 0.62
Diluted $ 0.21 $ 0.22 $ 0.72 $ 0.62
- ----------------------------------------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
4
NBT Bancorp Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in- Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock Total
- -------------------------------------------------------------------------------------------------------------------------------
(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 14,504 14,504
Cash dividends - $0.510 per share (11,400) (11,400)
Payment in lieu of fractional
shares (23) (23)
Issuance of 24,122 shares to
employee benefits plans and
other stock plans
including tax benefit 6 457 382 845
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 6,789 6,789
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $ 242 $184,915 $48,030 $(14,921) $(11,283) $206,983
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 242 $185,041 $36,689 $ (2,864) $(11,087) $208,021
Net income 17,427 17,427
Cash dividends - $0.510 per share (12,469) (12,469)
Purchase of 653,603 treasury shares (10,277) (10,277)
Issuance of 188,928 shares to
employee benefit plans and other
stock plans including tax benefit (2,018) 3,902 1,884
Issuance of 1,075,366 shares to
purchase First National
Bancorp, Inc. 11 15,991 16,002
Other comprehensive income 11,407 11,407
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 $ 253 $199,014 $41,647 $ 8,543 $(17,462) $231,995
- -------------------------------------------------------------------------------------------------------------------------------
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 Nine Months Ended September 30,
Consolidated Statements of Cash Flows 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Operating activities:
Net income $ 17,427 $ 14,504
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 13,451 5,418
Depreciation of premises and equipment 3,512 3,727
Net accretion on securities (1,355) (188)
Amortization of intangible assets 2,083 1,160
Proceeds from sale of loans held for sale 5,531 10,947
Origination and purchases of loans held for sale (4,489) (8,169)
Net gain on sales of loans (27) (82)
Net loss on on disposal of premises and equipment 118 39
Net (gain) loss on sale of other real estate owned (146) 99
Writedown of other real estate owned 133 235
Net security transactions (556) (143)
Proceeds from sale of trading securities 20,429 -
Gain on sale of branch building (1,367) -
Net decrease (increase) in other assets 9,253 (6,779)
Net (decrease) increase in other liabilities (15,635) 7,794
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,362 28,562
- -------------------------------------------------------------------------------------------------------------------------
Investing activities:
Net cash and cash equivalents provided by acquisitions 9,509 33,170
Securities available for sale:
Proceeds from maturities 115,662 30,911
Proceeds from sales 1,012 10,270
Purchases (74,494) (12,148)
Securities held to maturity:
Proceeds from maturities 33,929 25,416
Purchases (17,824) (21,316)
Net increase in loans (19,066) (207,013)
Purchase of premises and equipment, net (4,993) (499)
Proceeds from sales of other real estate owned 984 1,463
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 44,719 (139,746)
- -------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net (decrease) increase in deposits (69,079) 122,718
Net (decrease) increase in short-term borrowings (60,725) 11,895
Proceeds from issuance of long-term debt 246,291 5,000
Repayments of long-term debt (211,886) (20,552)
Proceeds from issuance of treasury shares to
employee benefit plans and other stock plans,
including tax benefit 1,884 242
Purchase of treasury stock (10,277) -
Cash dividends (12,469) (11,423)
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (116,261) 107,880
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (23,180) (3,304)
Cash and cash equivalents at beginning of period 110,662 79,629
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 87,482 $ 76,325
- -------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest $ 71,534 $ 60,970
Income taxes 1,222 8,276
- -------------------------------------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
6
NBT Bancorp Inc. and Subsidiaries Nine Months Ended September 30,
Supplemental Schedule of non-cash investing and financing activities: 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Loans transferred to other real estate owned $ 1,247 $ 1,104
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
- -------------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
7
Three months ended Nine months ended
NBT Bancorp Inc. and Subsidiaries September 30, September 30,
Consolidated Statements of Comprehensive Income 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Net Income $ 5,084 $ 5,155 $ 17,427 $14,504
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $14,428
$8,572, $19,325 and $11,115] 8,662 5,345 11,572 6,874
Less: Reclassification adjustment for net gains included
in net income [pre-tax amounts of
$(6), $(137), $(275) and $(143)] (3) (81) (165) (85)
- -------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income 8,659 5,264 11,407 6,789
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $13,743 $10,419 $ 28,834 $21,293
- -------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
8
NBT BANCORP INC. and Subsidiary
Notes to Unaudited Interim Consolidated Financial Statements
September 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 periods' 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 nine month periods ended September 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.
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.
- -------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 24,493 23,587
Net income available to common shareholders $ 5,084 $ 5,155
- -------------------------------------------------------------------------------------------------------------------
Basic EPS $ 0.21 $ 0.22
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 24,493 23,587
Dilutive common stock options 157 122
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 24,650 23,709
Net income available to common shareholders $ 5,084 $ 5,155
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS $ 0.21 $ 0.22
- -------------------------------------------------------------------------------------------------------------------
9
- -------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 24,085 23,419
Net income available to common shareholders $17,427 $14,504
- -------------------------------------------------------------------------------------------------------------------
Basic EPS $ 0.72 $ 0.62
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 24,085 23,419
Dilutive common stock options 181 128
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 24,266 23,547
Net income available to common shareholders $17,427 $14,504
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS $ 0.72 $ 0.62
- -------------------------------------------------------------------------------------------------------------------
There were 948,126 outstanding stock options for the quarter ended
September 30, 2001 and 944,690 outstanding stock options for the quarter ended
September 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 948,126 outstanding stock
options for the nine month period ended September 30, 2001 and 791,174
outstanding stock options for the nine month period ended September 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
10
NBT Bank, N.A. The merger closed effective the close of business November 8,
2001. At September 30, 2001, CNB had consolidated assets of $983 million,
deposits of $854 million and equity of $63 million. CNB Bank operates 29 full
service banking offices in nine upstate New York counties.
The following table presents unaudited pro forma data combining certain
financial information of NBT Bancorp Inc. and CNB Financial Corp. as if the
merger had been consummated on September 30, 2001.
- ----------------------------------------------------------------------------------------------------------
As of or for the
Nine month period ended September 30, 2001 2000
- ----------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net interest income $ 101,100 $ 96,153
Net income 17,693 20,617
Diluted earnings per share 0.53 0.63
Total Assets 3,660,269 3,501,629
- ----------------------------------------------------------------------------------------------------------
The unaudited pro forma combined financial data was prepared giving effect to
the merger using the pooling of interests accounting method. The pro forma
financial information above is not necessarily indicative of the combined
financial position and results of operations that would have occurred if the
merger had been completed on September 30, 2001 or that may be attained
in the future.
New Accounting Pronouncements
The Company adopted the provisions of Statement of Financial Accounting
Standards (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 Financial Accounting Standards Board (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
11
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
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.
12
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.
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 the 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 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
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 and interim
periods within those fiscal years. The provisions of this Statement are to be
applied prospectively. The Company does not expect a material impact on its
financial statements when this Statement is adopted.
13
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 interim 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 October 22, 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
December 15, 2001 to stockholders of record as of December 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. 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
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
14
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 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). The shareholders of NBT Bancorp Inc. and CNB
approved the agreement and plan of merger at separate meetings held on October
16, 2001. The merger is expected to close in the fourth quarter of 2001. The
merger agreement also provides for the merger of CNB Bank into NBT. Upon
completion of the merger, CNB Bank will operate as a division of NBT, retaining
its name and headquarters in Canajoharie, NY. At September 30, 2001, CNB had
consolidated assets of $983 million, deposits of $854 million and equity of $63
million. CNB Bank operates 29 full service banking offices in nine upstate New
York counties.
OVERVIEW
The Company earned net income of $5.1 million, or $.21 diluted earnings per
share, for the three months ended September 30, 2001 compared to $5.2 million,
or $.22 diluted earnings per share, for the three months ended September 30,
2000. Net income for the nine months ended September 30, 2001 was $17.4 million,
or $.72 diluted earnings per share, compared to $14.5 million, or $.62 diluted
earnings per share, for the first nine 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 nine months ended September
30, 2001 compared to September 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
15
(FTE) basis, measures an entity's ability to utilize its earning assets in
relation to its cost of funding.
Table 1
Performance Measurements
- ----------------------------------------------------------------------------------------------------
First Second Third Nine
Quarter Quarter Quarter Months
- ----------------------------------------------------------------------------------------------------
2001
Return on average assets 1.19% 0.72% 0.75% 0.88%
Return on average equity 14.55% 8.49% 8.73% 10.49%
Net interest margin 4.21% 4.32% 4.36% 4.30%
- ----------------------------------------------------------------------------------------------------
2000
Return on average assets 0.88% 0.66% 0.81% 0.78%
Return on average equity 11.10% 8.29% 10.14% 9.83%
Net interest margin 4.25% 4.16% 4.12% 4.17%
- ----------------------------------------------------------------------------------------------------
16
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 September 30,
2001 2000
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rates Balance Interest Rates
- ------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 7,873 $ 101 5.09% $ 10,517 $ 170 6.43%
Securities available for sale (2)(3) 576,434 9,455 6.51 621,066 10,402 6.66
Securities held to maturity (2)(3) 91,817 1,588 6.86 108,141 1,903 7.00
Investment in FRB and FHLB Banks 18,876 332 6.98 27,647 594 8.55
Loans (1) (3) 1,816,657 36,804 8.04 1,642,830 36,713 8.89
--------- ------ --------- ------
Total interest earning assets 2,511,657 48,280 7.63 2,410,201 49,782 8.22
------ ------
Other assets 181,456 127,257
------- -------
Total assets $2,693,113 $2,537,458
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 168,558 1,030 2.42 $ 140,912 1,323 3.74
NOW deposit accounts 240,812 1,011 1.67 210,530 975 1.84
Savings deposits 304,271 1,548 2.02 276,763 1,740 2.50
Time deposits 1,038,807 12,792 4.89 1,004,507 14,980 5.93
--------- ------ --------- ------
Total interest bearing deposits 1,752,448 16,381 3.71 1,632,712 19,018 4.63
Short-term borrowings 80,068 775 3.84 155,655 2,441 6.24
Long-term debt 270,065 3,497 5.14 237,128 3,352 5.62
------- ----- ------- -----
Total interest bearing
liabilities 2,102,581 20,653 3.90% 2,025,495 24,811 4.87%
------ ------
Demand deposits 327,125 282,380
Other liabilities 32,239 27,263
Stockholders' equity 231,168 202,320
------- -------
Total liabilities and
stockholders' equity $2,693,113 $2,537,458
---------- ----------
Net interest income $27,627 $24,971
------- -------
Interest rate spread 3.73% 3.35%
----- -----
Net interest margin 4.36% 4.12%
----- -----
Taxable equivalent adjustment (3) $ 862 $ 861
----- -----
17
Nine months ended September 30,
2001 2000
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rates Balance Interest Rates
- ----------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 9,930 $ 369 4.97% $ 7,570 $ 347 6.12%
Securities available for
sale (2)(3) 572,127 28,369 6.63 630,724 31,804 6.74
Securities held to maturity (2)(3) 93,865 4,959 7.06 111,938 5,817 6.94
Investment in FRB and FHLB Banks 21,094 1,061 6.72 27,650 1,512 7.30
Loans (1) (3) 1,766,923 110,972 8.40 1,575,191 103,751 8.80
--------- ------- --------- -------
Total interest earning assets 2,463,939 145,730 7.91 2,353,073 143,231 8.13
------- -------
Other assets 169,995 119,743
------- -------
Total assets $2,633,934 $2,472,816
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 165,075 3,700 3.00 $ 134,886 3,465 3.43
NOW deposit accounts 237,467 2,812 1.58 204,809 2,748 1.79
Savings deposits 286,658 4,620 2.15 270,402 5,043 2.49
Time deposits 1,040,749 42,113 5.41 980,977 41,536 5.66
--------- ------ ------- ------
Total interest bearing deposits 1,729,949 53,245 4.12 1,591,074 52,792 4.43
Short-term borrowings 94,271 3,261 4.62 151,801 6,771 5.96
Long-term debt 250,759 9,998 5.33 240,946 10,133 5.62
------- ----- ------- ------
Total interest bearing
liabilities 2,074,979 66,504 4.29% 1,983,821 69,696 4.69%
------ ------
Demand deposits 302,975 267,953
Other liabilities 33,950 23,983
Stockholders' equity 222,030 197,059
------- -------
Total liabilities and
stockholders' equity $2,633,934 $2,472,816
---------- ----------
Net interest income $79,226 $73,535
------- -------
Interest rate spread 3.62% 3.44%
----- -----
Net interest margin 4.30% 4.17%
----- -----
Taxable equivalent adjustment (3) $ 2,529 $ 2,602
--------- -------
(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.
18
Table 3
Analysis of Changes in Taxable Equivalent Net Interest Income
- --------------------------------------------------------------------------------
Three months ended September 30,
Increase (Decrease)
2001 over 2000
- --------------------------------------------------------------------------------
(in thousands) Volume Rate Total
- --------------------------------------------------------------------------------
Short-term interest bearing accounts $ (38) $ (31) $ (69)
Securities available for sale (736) (211) (947)
Securities held to maturity (283) (32) (315)
Investment in FRB and FHLB Banks (167) (95) (262)
Loans 3,692 (3,601) 91
- --------------------------------------------------------------------------------
Total interest income 2,041 (3,543) (1,502)
- --------------------------------------------------------------------------------
Money market deposit accounts 227 (520) (293)
NOW deposit accounts 132 (96) 36
Savings deposits 162 (354) (192)
Time deposits 497 (2,685) (2,188)
Short-term borrowings (932) (734) (1,666)
Long-term debt 441 (296) 145
- --------------------------------------------------------------------------------
Total interest expense 914 (5,072) (4,158)
- --------------------------------------------------------------------------------
Change in FTE net interest income $ 1,127 $ 1,529 $ 2,656
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nine months ended September 30,
Increase (Decrease)
2001 over 2000
- --------------------------------------------------------------------------------
(in thousands) Volume Rate Total
- --------------------------------------------------------------------------------
Short-term interest bearing accounts $ 95 $ (73) $ 22
Securities available for sale (2,913) (522) (3,435)
Securities held to maturity (953) 95 (858)
Investment in FRB and FHLB Banks (337) (114) (451)
Loans 12,204 (4,983) 7,221
- --------------------------------------------------------------------------------
Total interest income 6,629 (4,130) 2,499
- --------------------------------------------------------------------------------
Money market deposit accounts 713 (478) 235
NOW deposit accounts 409 (345) 64
Savings deposits 291 (714) (423)
Time deposits 2,466 (1,889) 577
Short-term borrowings (2,204) (1,306) (3,510)
Long-term debt 403 (538) (135)
- --------------------------------------------------------------------------------
Total interest expense 3,106 (6,298) (3,192)
- --------------------------------------------------------------------------------
Change in FTE net interest income $ 3,523 $ 2,168 $ 5,691
- --------------------------------------------------------------------------------
19
RESULTS OF OPERATIONS
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Net Income
The Company earned net income of $5.1 million, or $.21 diluted earnings per
share, for the three months ended September 30, 2001 compared to $5.2 million,
or $.22 diluted earnings per share, for the three months ended September 30,
2000. Third quarter 2001 results included a loan loss provision of $6.0 million
compared to a loan loss provision of $1.6 million for the third quarter of 2000.
Results for the three months ended September 30, 2000 included $3.2 million of
pre-tax merger, acquisition and reorganization costs.
Net Interest Income
Net interest income on a federal taxable equivalent basis (FTE) increased $2.7
million to $27.6 million in 2001 compared to $25.0 million in 2000. The
Company's interest rate spread improved 38 basis points from 3.35% for 2000 to
3.73% for 2001. The interest rate margin improved 24 basis points from 4.12% to
4.36%. The improvement in net interest income came primarily from the
significant decline in the Company's cost of funds and related interest expense,
reflecting a greater degree of downward repricing of the Company's deposits and
short term borrowings compared to its earning assets.
Average loans for the three months ended September 30, 2001 increased $173.8
million compared to the same period for 2000. Average loans represented 72% of
earning assets for the quarter ended September 30, 2001 compared to 68% in 2000.
Lower yielding securities, correspondingly, declined as a percentage of average
assets from 30% for 2000 to 27% for 2001.
The yield on earning assets declined 59 basis points from 8.22% for 2000 to
7.63% for 2001, while the cost of interest bearing liabilities declined 97 basis
points from 4.87% for 2000 to 3.90% for 2001. The 10.6% year over year growth in
average loans combined with the increase in loans as a percentage of average
assets helped soften the decline in the Company's yield on earning assets when
compared to the general decline in market interest rates. The decrease in the
Company's cost of funds was driven almost exclusively by the effect of lower
rates combined with the use of deposits to replace short-term borrowings.
Noninterest Income
Noninterest income increased 18.4% from $5.6 million for 2000 to $6.6 million
for 2001. Income from service charges on deposit accounts increased 30.7%, or
$634,000, to $2.7 million, the result of increases in both the number of deposit
accounts and the related fees. In addition, fee income from trust services
increased 21.9%, or $172,000.
20
Noninterest Expense
Noninterest expense, excluding costs of merger, acquisition and reorganization
activities, totaled $19.7 million for 2001, compared to $17.0 million for 2000.
Expenses for data processing and communications and professional and outside
services increased year over year, principally due to the Company's expanded
branch network, costs associated with enhanced technologies and expanded data
processing volume capacities resulting from recent data processing conversions.
The expanded data processing capabilities will allow the Company to take on
additional data processing volume in the future with little additional marginal
costs.
Income Taxes
Income tax expense for 2001 was $2.5 million for an effective tax rate of 33.4%,
compared to $2.8 million, or 35.0%, for 2000. The effective tax rate was
slightly higher for 2000 primarily as a result of nondeductible merger and
acquisition expenses in that period.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Net Income
Net income for the nine months ended September 30, 2001 was $17.4 million, or
$.72 diluted earnings per share, compared to $14.5 million, or $.62 diluted
earnings per share, for the first nine months of 2000. Through September 30,
2001, revenues from net interest income and noninterest income increased $5.8
million and $6.3 million, respectively, compared to the same period in 2000. The
loan loss provision increased $8.0 million for 2001 compared to 2000. In the
first nine months of 2000, the Company incurred $7.2 million in pre-tax merger,
acquisition and reorganization costs with no comparable expense in the first
nine months of 2001.
Net Interest Income
Net interest income on a federal taxable equivalent basis (FTE) increased $5.7
million to $79.2 million for 2001 compared to $73.5 million for 2000. The
Company's interest rate spread improved 18 basis points from 3.44% for 2000 to
3.62% for 2001. The interest rate margin improved 13 basis points from 4.17% to
4.30%. The improvement in net interest income was primarily a result of the
increase in interest income generated by the year over year growth in average
loans combined with a decrease in interest expense caused by the decline in the
average cost of deposits and borrowings.
Average loans for the nine months ended September 30, 2001 increased $191.7
million, or 12.2%, compared to the same period in 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.
Average interest bearing deposits, which generally have a lower cost than
borrowings, increased from 80% of average interest bearing liabilities for 2000
21
to 83% for 2001 while the average cost of those deposits declined from 4.43% in
2000 to 4.12% in 2001. Consistent with the decline in general market interest
rates, all categories of the Company's deposits reflected a lower average cost
in 2001 compared to 2000.
As a result of the increase in average deposits, average short-term borrowings
declined $57.5 million, or 37.9%, from $151.8 million for 2000 to $94.3 million
for 2001; the average cost of these borrowings also declined from 5.96% for 2000
to 4.62% for 2001. The rate paid on total interest bearing liabilities decreased
40 basis points from 4.69% for 2000 to 4.29% for 2001.
Noninterest Income
Noninterest income, excluding net securities gains and the gain on the sale of a
branch building, totaled $19.1 million for 2001 compared to $14.6 million for
2000, an increase of 30.6%. Service charges on deposit accounts totaled $7.7
million for 2001, increasing $1.7 million, or 27.6%, compared to 2000,
principally due to the increase in deposit accounts and related fees.
Broker/dealer fees increased $1.4 million, or 85.3%, to $3.0 million for 2001.
The increase in broker/dealer fees reflects a full nine months of revenue in
2001 from the Company's broker/dealer, M. Griffith, Inc., which was acquired on
May 5, 2000.
Noninterest Expense
Noninterest expense, excluding nonrecurring items such as merger, acquisition
and reorganization costs and certain deposit overdraft writeoffs, totaled $56.6
million for 2001, an increase of $6.3 million, or 12.5%, compared to 2000.
Increases in 2001 for salaries and benefits, supplies and postage, occupancy,
professional fees and outside services and data processing and communications
are primarily attributable to the Company's growth through acquisition including
the expansion of its branch network and data processing capabilities. The
expense for the amortization of intangible assets also increased from $1.2
million for 2000 to $2.1 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) deteriorated slightly from 56.94% for 2000 to 57.64% for
2001.
At September 30, 2001, the Company has a remaining accrued liability for merger,
acquisition and reorganization costs of $2.6 million, consisting primarily of
severance costs which will be paid out over a period of time consistent with the
respective severance agreements.
22
Income Taxes
Income tax expense for 2001 was $8.1 million for an effective tax rate of 31.7%,
compared to $8.3 million, or 36.3%, 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 $1,807.6 million, or 67.5% of assets, at September 30, 2001,
compared to $1,726.5 million, or 65.0%, at December 31, 2000, and $1,667.6
million, or 65.2%, at September 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 modest growth in its loan portfolio, primarily residential mortgages,
which has increased as a result of the refinance activity triggered by the
decline in market interest rates during 2001. At September 30, 2001, commercial
loans, including commercial mortgages, represented approximately 48% of the loan
portfolio, while consumer loans and residential mortgages represented 26% and
26%, 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.
23
Table 4
Allowance For Loan Losses
- --------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $25,691 $22,005 $23,349 $19,711
Recoveries 794 418 1,464 918
Chargeoffs (3,438) (1,360) (10,734) (3,365)
- --------------------------------------------------------------------------------------------------------------------------------
Net chargeoffs (2,644) (942) (9,270) (2,447)
Allowance related to purchase
acquisition - - 505 -
Provision for loan losses 5,988 1,619 13,451 5,418
- --------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $29,035 $22,682 $29,035 $22,682
- --------------------------------------------------------------------------------------------------------------------------------
Composition of Net Chargeoffs
- --------------------------------------------------------------------------------------------------------------------------------
Commercial and agricultural $(1,822) 69% $ (363) 39% $(7,060) 76% $ (982) 40%
Real estate mortgage (218) 8% (160) 17% (340) 4% (432) 18%
Consumer (604) 23% (419) 44% (1,870) 20% (1,033) 42%
- --------------------------------------------------------------------------------------------------------------------------------
Net chargeoffs $(2,644) 100% $ (942) 100% $(9,270) 100% $(2,447) 100%
- --------------------------------------------------------------------------------------------------------------------------------
Annualized net chargeoffs
to average loans 0.58% 0.23% 0.70% 0.21%
- --------------------------------------------------------------------------------------------------------------------------------
Net chargeoffs to average loans for the year ended December 31, 2000 0.28%
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets were $29.5 million at September 30, 2001 compared to $25.6
million at June 30, 2001, $22.2 million at December 31, 2000 and $13.0 million
at September 30, 2000. Table 5 presents the components of nonperforming assets
at September 30, 2001 and 2000.
Table 5
Nonperforming Assets and Risk Elements
- --------------------------------------------------------------------------------------------------------------------------------
September 30, September 30,
(dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Commercial and agricultural $19,498 76% $7,810 85%
Real estate mortgage 3,851 15% 491 5%
Consumer 2,443 9% 956 10%
- --------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 25,792 100% 9,257 100%
- --------------------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 70 3% 314 14%
Real estate mortgage 1,469 66% 1,595 72%
Consumer 702 31% 315 14%
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 2,241 100% 2,224 100%
- --------------------------------------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: 606 747
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 28,639 12,228
- --------------------------------------------------------------------------------------------------------------------------------
Other real estate owned 893 745
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $29,532 $12,973
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans to loans 1.58% 0.73%
Total nonperforming assets to assets 1.10% 0.51%
Total allowance for loan losses to nonperforming loans 101.38% 185.49%
- --------------------------------------------------------------------------------------------------------------------------------
24
Nonperforming loans at September 30, 2001 were $28.6 million compared to
$24.8 million at June 30, 2001 and $12.2 million at September 30, 2000. The
ratio of the allowance for loan losses to total loans was 1.61% at September 30,
2001, 1.41% at June 30, 2001 and 1.36% at September 30, 2000. The allowance for
loan losses as a percentage of nonperforming loans was 101.38% at September 30,
2001 compared to 103.57% at June 30, 2001 and 185.49% at September 30, 2000.
Net charge-offs during the third quarter of 2001 were $2.6 million,
compared to $.9 million during the three months ended September 30, 2000, and
$5.5 million in the second quarter of 2001. The increased net charge-offs in
third quarter 2001 over the same period in the prior year were primarily a
result of problem loans identified at the Pennstar division of our Bank during
the Pennstar integration process, which was completed in the second quarter
2001. While the net charge-offs in the third quarter are down from the second
quarter, management expects charge-offs to continue to be higher than
experienced in 2000.
In addition to increased net charge-offs, the Company also experienced an
increase in nonperforming loans and classified loans during the second and third
quarters of 2001. The increase during the second quarter was the result of the
completion of the integration of the Pennstar Bank credit administration
function. The increase in classified loans in the third quarter is primarily due
to two large credits in the New York banking division, and the increase in
nonperforming loans during the third quarter is due primarily to one credit in
the New York banking division.
As a result of the above, as well as consideration of a weakening economy
in the Bank's market area in the third quarter and growth in the
commercial-related loan portfolio, a provision of $6.0 million was recorded in
the third quarter of 2001, as compared to $1.6 million in the third quarter of
2000. As a result, the allowance for loans increased to 1.61% of total loans at
September 30, 2001 as compared to 1.36% at September 30, 2000.
Management considers the allowance for loan losses at September 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 $669.2 million, or 25.0% of assets, at September 30, 2001,
compared to $699.3 million, or 26.3%, at December 31, 2000, and $698.5 million,
or 27.3%, at September 30, 2000. The Company's acquisition of FNB in September
2001 added approximately $27.8 million in securities. The overall net decrease
in the portfolio compared to the prior periods was primarily used to fund the
Company's loan growth. At September 30, 2001, the portfolio consisted of 86%
securities available for sale and 14% securities held to maturity.
Deposits
Total deposits were $2,079.1 million at September 30, 2001, an increase of $38.9
million, or 1.9%, from year end 2000, and $142.6 million, or 7.4%, from the
prior year. Total average deposits increased $164.5 million, or 8.6%, from
25
September 30, 2000 to September 30, 2001. 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 September 2001 added approximately $108 million in deposits. The Company has
focused on maintaining and growing its base of lower costing checking, savings
and money market accounts while allowing runoff of some of its higher costing
time deposits, particularly brokered and jumbo time deposits.
Borrowings
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $72.1 million at September 30, 2001 compared
to $132.4 million and $154.2 million at December 31, and September 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 $269.3 million at September 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 $232.0 million represents 8.7% of total assets at
September 30, 2001, compared with $207.0 million, or 8.1% 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.
26
Table 6
Capital Measurements
- ------------------------------------------------------------------------------------------------------
As of and for the quarter ended
March 31 June 30 Sptember 30
- ------------------------------------------------------------------------------------------------------
2001
Tier 1 leverage ratio 7.32% 7.59% 7.13%
Tier 1 capital ratio 11.18% 10.76% 10.66%
Total risk-based capital ratio 12.43% 12.01% 11.92%
Cash dividends as a percentage of net income 52.98% 67.16% 71.55%
Per common share:
Book value $ 9.13 $ 9.26 $ 9.53
Tangible book value $ 7.99 $ 7.89 $ 8.14
- ------------------------------------------------------------------------------------------------------
2000
Tier 1 leverage ratio 8.59% 8.26% 8.11%
Tier 1 capital ratio 13.24% 12.62% 12.54%
Total risk-based capital ratio 14.40% 13.81% 13.75%
Cash dividends as a percentage of net income 69.11% 79.10% 78.60%
Per common share:
Book value $ 8.36 $ 8.47 $ 8.74
Tangible book value $ 7.99 $ 7.79 $ 8.08
- ------------------------------------------------------------------------------------------------------
Table 7 presents the high, low and closing sales price for the common stock as
reported on the NASDAQ Stock Market, and cash dividends declared per share of
common stock. The Company's price to book value ratio was 1.50 at September 30,
2001 and 1.37 a year ago. The per share market price was 14.86 times annualized
earnings at September 30, 2001 and 14.49 times annualized earnings at September
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
September 30 17.30 13.50 14.30 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.
In connection with its acquisition of First National Bancorp, Inc., the Company
had announced on January 2, 2001 its intention to buy back up to 1.03 million
shares of its common stock. In order for the merger with CNB to be accounted for
27
under the pooling-of-interest method, the Company has reduced this repurchase
program to 680 thousand shares. As of September 30, 2001, the Company had
completed the purchase of 649 thousand 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 September 30, 2001, the
Company considered its Basic Surplus adequate to meet liquidity needs. At
September 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.
28
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.
29
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 September 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.
Interest Rate Sensitivity Analysis
- --------------------------------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
- --------------------------------------------------------------------------------
+200 (0.94)%
+100 0.19 %
-100 (1.55)%
-200 (2.38)%
- --------------------------------------------------------------------------------
30
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
Not applicable.
Item 5 -- Other Information
Not Applicable.
Item 6 -- Exhibits and Reports on FORM 8-K
(a) An index to exhibits follows the signature page of this FORM 10-Q.
(b) During the quarter ended September 30, 2001, the Company filed the
following Current Reports on Form 8-K:
Current report on Form 8K, Items 5 and 7, filed with the Securities and
Exchange Commission on July 27, 2001; and
31
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 November 2001.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
-------------------------------------------
Michael J. Chewens, CPA
Executive Vice President
Chief Financial Officer and Secretary
32
INDEX TO EXHIBITS
The following documents are attached as Exhibits to this FORM 10-Q or, if
annotated by the symbol *, are incorporated by reference as Exhibits as
indicated by the page number or exhibit cross-reference to the prior filings of
the Registrant with the Commission.
FORM 10-Q
Exhibit Exhibit
Number Cross-Reference
10.1 Change in control agreement with Michael J. Chewens Herein
10.2 Change in control agreement with Peter Corso Herein
10.3 Change in control agreement with Martin A. Dietrich Herein
10.4 Change in control agreement with Daryl R. Forsythe Herein
10.5 Change in control agreement with Lance D. Mattingly Herein
10.6 Change in control agreement with Jane E. Neal Herein
10.7 Change in control agreement with David E. Raven Herein
10.8 Form of Employment Agreement between NBT Bancorp Inc.
and Peter Corso made as of October 18, 2001 Herein
10.9 Form of Employment Agreement between NBT Bancorp Inc.
and Daryl R. Forsythe made as of January 1, 2000, and revised
on January 22, 2001 Herein
10.10 Form of Employment Agreement between NBT Bancorp Inc.
and Lance D. Mattingly made as of May 1, 2001 Herein
10.11 Form of Employment Agreement between NBT Bancorp Inc.
and David E. Raven made as of August 1, 2001 Herein
10.12 Supplemental Executive Retirement Agreement between NBT Bancorp Inc.
and Michael J. Chewens made as of July 23, 2001 Herein
10.13 Supplemental Executive Retirement Agreement between NBT Bancorp Inc.
and Martin A. Dietrich made as of July 23, 2001 Herein
10.14 Supplemental Retirement Agreement between NBT Bancorp Inc.,
NBT Bank, National Association and Daryl R. Forsythe made
as of January 1, 1995, and as revised on April 28, 1998,
January 1, 2000, and on January 22, 2001 Herein
33