SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1268674
(State of Incorporation) (I.R.S. Employer Identification No.)
52 SOUTH BROAD STREET, NORWICH, NEW YORK 13815
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (607) 337-2265
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
As of April 30, 2003, there were 32,416,670 shares outstanding of the
Registrant's common stock, $0.01 par value.
-1-
NBT BANCORP INC.
FORM 10-Q--Quarter Ended March 31, 2003
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2003, December 31, 2002
(Audited), and March 31, 2002
Consolidated Statements of Income for the three month periods ended
March 31, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the three month
periods ended March 31, 2003 and 2002
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 2003 and 2002
Consolidated Statements of Comprehensive Income for the three month
periods ended March 31, 2003 and 2002
Notes to Unaudited Interim Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Item 4 Controls and Procedures
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
-2-
NBT BANCORP INC. AND SUBSIDIARIES MARCH 31, December 31, March 31,
CONSOLIDATED BALANCE SHEETS 2003 2002 2002
- ------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data) (UNAUDITED) (Unaudited)
ASSETS
Cash and due from banks $ 123,709 $ 121,824 $ 93,864
Short-term interest bearing accounts 5,907 2,799 7,135
Trading securities, at fair value 188 203 155
Securities available for sale, at fair value 1,008,310 1,007,583 921,750
Securities held to maturity (fair value - $84,151, $84,517
and $100,250) 82,155 82,514 101,099
Federal Reserve and Federal Home Loan Bank stock 23,122 23,699 21,630
Loans and leases 2,374,079 2,355,932 2,317,644
Less allowance for loan and lease losses 41,141 40,167 45,299
- ------------------------------------------------------------------------------------------------------------
Net loans 2,332,938 2,315,765 2,272,345
Premises and equipment, net 61,609 61,261 60,875
Goodwill 46,121 46,121 46,121
Intangible assets, net 2,636 2,246 2,797
Other assets 65,052 59,711 67,529
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,751,747 $ 3,723,726 $ 3,595,300
============================================================================================================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 449,051 $ 449,201 $ 404,186
Savings, NOW, and money market 1,249,424 1,183,603 1,109,598
Time 1,257,418 1,289,236 1,352,026
- ------------------------------------------------------------------------------------------------------------
Total deposits 2,955,893 2,922,040 2,865,810
Short-term borrowings 95,103 105,601 81,162
Long-term debt 345,345 345,475 325,933
Other liabilities 46,786 41,228 36,950
- ------------------------------------------------------------------------------------------------------------
Total liabilities 3,443,127 3,414,344 3,309,855
Guaranteed preferred beneficial interests in
company's junior subordinated debentures 17,000 17,000 17,000
Stockholders' equity:
Preferred stock none issued - - -
Common stock, $0.01 par value; shares authorized-50,000,000;
shares issued 34,401,152, 34,401,171, and 34,385,192
at March 31, 2003, December 31, 2002 and March 31, 2002,
respectively 344 344 344
Additional paid-in-capital 209,884 210,443 210,595
Retained earnings 101,114 95,085 77,993
Unvested restricted stock awards (284) (127) -
Accumulated other comprehensive income (loss) 14,889 16,531 (406)
Treasury stock at cost 2,001,772, 1,751,724,
and 1,183,868 shares at March 31, 2003, December 31, 2002
and March 31, 2002, respectively (34,327) (29,894) (20,081)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 291,620 292,382 268,445
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUN IOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $ 3,751,747 $ 3,723,726 $ 3,595,300
============================================================================================================
See notes to unaudited interim consolidated financial statements.
-3-
NBT BANCORP INC. AND SUBSIDIARIES Three months ended March 31,
CONSOLIDATED STATEMENTS OF INCOME 2003 2002
- -------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
Interest, fee and dividend income:
Interest and fees on loans and leases $39,615 $42,227
Securities available for sale 11,805 13,629
Securities held to maturity 889 1,184
Trading securities 2 2
Other 324 280
- -------------------------------------------------------------------------------------------
Total interest, fee and dividend income 52,635 57,322
- -------------------------------------------------------------------------------------------
Interest expense:
Deposits 12,612 16,991
Short-term borrowings 289 348
Long-term debt 3,705 3,638
- -------------------------------------------------------------------------------------------
Total interest expense 16,606 20,977
- -------------------------------------------------------------------------------------------
Net interest income 36,029 36,345
Provision for loan and lease losses 1,940 2,011
- -------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 34,089 34,334
- -------------------------------------------------------------------------------------------
Noninterest income:
Trust 892 819
Service charges on deposit accounts 3,603 3,050
Broker/dealer and insurance fees 1,392 1,495
Net securities (losses) gains 27 (502)
Gain on sale of a branch - 220
Other 2,828 2,329
- -------------------------------------------------------------------------------------------
Total noninterest income 8,742 7,411
- -------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 12,659 12,374
Office supplies and postage 1,073 897
Occupancy 2,526 2,169
Equipment 1,766 1,714
Professional fees and outside services 1,302 1,615
Data processing and communications 2,721 2,565
Amortization of intangible assets and goodwill 162 225
Capital securities 191 216
Loan collection and other real estate owned 280 927
Other operating 3,212 2,510
- -------------------------------------------------------------------------------------------
Total noninterest expenses 25,892 25,212
- -------------------------------------------------------------------------------------------
Income before income tax expense 16,939 16,533
Income tax expense 5,373 5,456
- -------------------------------------------------------------------------------------------
NET INCOME $11,566 $11,077
===========================================================================================
Earnings per share:
Basic $ 0.36 $ 0.33
Diluted $ 0.35 $ 0.33
===========================================================================================
See notes to unaudited interim consolidated financial statements.
-4-
NBT BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Unvested Other
Common Paid-in- Retained Restricted Comprehensive Treasury
Stock Capital Earning Stock (Loss)/Income Stock Total
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2001 $ 343 $ 209,176 $ 72,531 $ - $ 3,921 $ (19,616) $266,355
Net income 11,077 11,077
Cash dividends - $0.17 per share (5,615) (5,615)
Purchase of 10,000 treasury shares (135) (135)
Issuance of 69,572 shares in
in exchange for 40,687 shares
received as consideration for the
exercise of incentive stock options 1 580 (581) -
Issuance of 77,626 shares to
employee benefits plans and
other stock plans, including
tax benefit 839 251 1,090
Other comprehensive loss (4,327) (4,327)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2002 $ 344 $ 210,595 $ 77,993 $ - $ (406) $ (20,081) $268,445
===============================================================================================================================
BALANCE AT DECEMBER 31, 2002 $ 344 $ 210,443 $ 95,085 ($127) $ 16,531 $ (29,894) $292,382
Net income 11,566 11,566
Cash dividends - $0.17 per share (5,537) (5,537)
Purchase of 330,813 treasury shares (5,786) (5,786)
Issuance of 41,980 shares in exchange
for 20,172 shares received as
consideration for the exercise
of incentive stock options (360) 360 -
Issuance of 47,838 shares to
employee benefit plans and other
stock plans, including tax benefit (199) 798 599
Grant of 11,100 shares of restricted
stock awards (195) 195 -
Amortization of restricted stock awards 38 38
Other comprehensive loss (1,642) (1,642)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003 $ 344 $ 209,884 $ 101,114 ($284) $ 14,889 $ (34,327) $291,620
===============================================================================================================================
See notes to unaudited interim consolidated financial statements.
-5-
NBT BANCORP INC. AND SUBSIDIARIES Three Months Ended March 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS 2003 2002
- ---------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 11,566 $ 11,077
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,940 2,011
Depreciation of premises and equipment 1,630 1,724
Net amortization (accretion) on securities 940 (434)
Amortization of intangible assets 162 225
Amortization of restricted stock awards 38 -
Proceeds from sale of loans held for sale 7,015 1,416
Origination of loans held for sale (2,208) (2,722)
Net losses on sales of loans - 32
Net loss on sale of premises and equipment 14 -
Net gain on sale of other real estate owned (580) (17)
Net security transactions (27) 502
Proceeds from sale of trading securities 28 -
Purchases of trading securities - (28)
Gain on sale of a building - (220)
Net (increase) decrease in other assets (4,525) 2,841
Net increase (decrease) in other liabilities 4,645 (7,255)
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 20,638 9,152
- ---------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net cash paid in conjunction with branch sale - (29,171)
Securities available for sale:
Proceeds from maturities 117,469 74,611
Proceeds from sales 177,199 20,095
Purchases (298,672) (114,390)
Securities held to maturity:
Proceeds from maturities 12,801 8,219
Purchases (12,461) (7,738)
Net decrease in FRB and FHLB stock 577 154
Net (increase) decrease in loans (24,714) 17,960
Purchase of premises and equipment, net (1,992) (765)
Proceeds from sales of other real estate owned 1,647 367
- ---------------------------------------------------------------------------------
Net cash used in investing activities (28,146) (30,658)
- ---------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 33,853 (15,543)
Net (decrease) in short-term borrowings (10,498) (40,851)
Proceeds from issuance of long-term debt - 55,000
Repayments of long-term debt (130) (1,398)
Proceeds from issuance of shares to employee benefit
plans and other stock plans 599 1,090
Purchase of treasury stock (5,786) (135)
Cash dividends and payment for fractional shares (5,537) (5,615)
- ---------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 12,501 (7,452)
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,993 (28,958)
Cash and cash equivalents at beginning of period 124,623 129,957
- ---------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 129,616 $ 100,999
=================================================================================
(Continued)
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
THREE MONTHS ENDED
MARCH 31, March 31,
2003 2002
Cash paid during the period for:
Interest $ 17,767 $ 23,202
Income taxes - -
==========================================================
Loans transferred to OREO $ 794 $ 733
BRANCH DIVESTITURE:
Asstes sold $ - $ 3,323
Liabilities sold - 34,263
See notes to unaudited interim consolidated financial statements.
-7-
- ----------------------------------------------------------------------------------------------------=
NBT BANCORP INC. AND SUBSIDIARIES Three Months Ended March 31,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2003 2002
- ----------------------------------------------------------------------------------------------------=
(in thousands) (Unaudited)
Net Income $11,566 $11,077
- ----------------------------------------------------------------------------------------------------=
Other comprehensive (loss) income, net of tax
Unrealized holding (losses) gains arising during
period [pre-tax amounts of $(2,356) and $(7,733)] (1,417) (4,629)
Minimum pension liability adjustment (217) -
Less: Reclassification adjustment for net losses (gains) included
in net income [pre-tax amounts of $(14) and $502] (8) 302
- -----------------------------------------------------------------------------------------------------
Total other comprehensive loss (1,642) (4,327)
- -----------------------------------------------------------------------------------------------------
Comprehensive income $ 9,924 $ 6,750
=====================================================================================================
See notes to unaudited interim consolidated financial statements.
-8-
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements include the
accounts of NBT Bancorp Inc. (the Registrant) and its wholly owned subsidiaries,
NBT Bank, N.A. (NBT or Bank), NBT Financial Services, Inc., and CNBF Capital
Trust I. Collectively, the Registrant and its subsidiaries are referred to
herein as "the Company". All intercompany transactions have been eliminated in
consolidation. Amounts in the prior period financial statements are reclassified
whenever necessary to conform to current period presentation.
The consolidated balance sheet at December 31, 2002 has been derived from
audited consolidated financial statements at that date. The accompanying
unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2003 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003. For
further information, refer to the consolidated financial statements included in
the Registrant's annual report on Form 10-K for the year ended December 31, 2002
and notes thereto referred to above.
NOTE 2. USE OF ESTIMATES
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilites at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period, as well as the disclosures provided. Actual results could
differ from those estimates. Estimates associated with the allowance for loan
losses, fair values of financial instruments and status of contingencies are
particularly susceptible to material change in the near term.
The allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
portfolio with respect to the mix between the various types of loans and their
related risk characteristics, a review of the value of collateral supporting the
loans, comprehensive reviews of the loan portfolio by the independent loan
review staff and management, as well as consideration of volume and trends of
delinquencies, nonperforming loans, and loan charge-offs. As a result of the
test of adequacy, required additions to the allowance for loan and lease losses
are made periodically by charges to the provision for loan and lease losses.
The allowance for loan and lease losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company's impaired loans are generally collateral
dependent. The Company considers the estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
impairment if those costs are expected to reduce the cash flows available to
repay or otherwise satisfy the loans.
Management believes that the allowance for loan and lease losses is adequate.
While management uses available information to recognize loan and lease losses,
future additions to the allowance for loan and lease losses may be necessary
based on changes in economic conditions or changes in the values of properties
securing loans in the process of foreclosure. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan and lease losses. Such agencies may require the
Company to recognize additions to the allowance for loan and lease losses based
on their judgments about information available to them at the time of their
examination which may not be currently available to management.
-9-
Other real estate owned (OREO) consists of properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are
recorded at the lower of fair value of the asset acquired less estimated costs
to sell or "cost" (defined as the fair value at initial foreclosure). At the
time of foreclosure, or when foreclosure occurs in-substance, the excess, if any
of the loan over the fair market value of the assets received, less estimated
selling costs, is charged to the allowance for loan and lease losses and any
subsequent valuation write-downs are charged to other expense. Operating costs
associated with the properties are charged to expense as incurred. Gains on the
sale of OREO are included in income when title has passed and the sale has met
the minimum down payment requirements prescribed by GAAP.
Income taxes are accounted for under the asset and liability method. The Company
files a consolidated tax return on the accrual basis. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments in the normal course of business
to meet financing needs of its customers and to reduce its own exposure to
fluctuating interest rates. These financial instruments include commitments to
extend credit, unused lines of credit, and standby letters of credit. Exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Company uses
the same credit policy to make such commitments as it uses for on-balance-sheet
items. At March 31, 2003 and December 31, 2002, commitments to extend credit and
unused lines of credit totaled $407.6 million and $409.1 million. Since
commitments to extend credit and unused lines of credit may expire without being
fully drawn upon, this amount does not necessarily represent future cash
commitments. Collateral obtained upon exercise of the commitment is determined
using management's credit evaluation of the borrower and may include accounts
receivable, inventory, property, land and other items.
The Company guarantees the obligations or performance of customers by issuing
stand-by letters of credit to third parties. These stand-by letters of credit
are frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities. The risk involved
in issuing stand-by letters of credit is essentially the same as the credit risk
involved in extending loan facilities to customers, and they are subject to the
same credit origination, portfolio maintenance and management procedures in
effect to monitor other credit and off-balance sheet products. Typically, these
instruments have terms of five years or less and expire unused; therefore, the
total amounts do not necessarily represent future cash requirements. Standby
letters of credit totaled $30.1 million at March 31, 2003, $24.7 million at
December 31, 2002.
NOTE 4. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity (such as the
Company's dilutive stock options).
-10-
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 March 31, 2003 2002
----------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,517 33,092
Net income available to common shareholders $11,566 $11,077
----------------------------------------------------------------
Basic EPS $ 0.36 $ 0.33
================================================================
Diluted EPS:
Weighted average common shares outstanding 32,517 33,092
Dilutive potential common stock 266 203
----------------------------------------------------------------
Weighted average common shares and common
share equivalents 32,783 33,295
Net income available to common shareholders $11,566 $11,077
----------------------------------------------------------------
Diluted EPS $ 0.35 $ 0.33
================================================================
There were 407,003 stock options for the quarter ended March 31, 2003 and
1,742,003 stock options for the quarter ended March 31, 2002 that were not
considered in the calculation of diluted earnings per share since the stock
options' exercise price was greater than the average market price during these
periods.
NOTE 5. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" to SFAS No. 123 "Accounting for
Stock-Based Compensation," which accounts for stock-based compensation using the
fair value method of accounting, if a company so elects. The Company currently
accounts for stock-based employee compensation under APB No. 25. As such,
compensation expense would be recorded only if the market price of the
underlying stock on the date of grant exceeded the exercise price. Because the
fair value on the date of grant of the underlying stock of all stock options
granted by the Company is equal to the exercise price of the options granted, no
compensation cost has been recognized for stock options in the accompanying
consolidated statements of income. Compensation expense for restricted stock
awards is based on the market price of the stock on the date of grant and is
recognized ratably over the vesting period of the award.
Had the Company determined compensation cost based on the fair value at the date
of grant for its stock options and employee stock purchase plan under SFAS No.
123, the Company's net income and net income per share would have been reduced
to the pro forma amounts indicated below:
-11-
THREE MONTHS ENDED
- --------------------------------------------------------
MARCH 31,
- --------------------------------------------------------
2003 2002
-------- --------
Net income, as reported $11,566 $11,077
Add: Stock-based compensation
expense included in reported net
income, net of related tax effects 23 -
Less: Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effects (230) (226)
-------- --------
Pro forma net income $11,359 $10,851
======== ========
Net income per share:
Basic - as reported $ 0.36 $ 0.33
Basic - Pro forma $ 0.35 $ 0.33
Diluted - as reported $ 0.35 $ 0.33
Diluted - Pro forma $ 0.35 $ 0.33
========================================================
The Company granted 363,682 stock options for the three months ended March 31,
2003 with a weighted average exercise price of $17.52 per share compared to
482,670 stock options granted for the three months ended March 31, 2002 with a
weighted average exercise price of $14.35 per share. The per share weighted
average fair value of the stock options granted for the three months ended March
31, 2003 and 2002 was $2.33 and $2.24. The assumptions used for the grants noted
above were as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
=================================================================
DIVIDEND YIELD 3.97% 4.07%
EXPECTED VOLATILITY 19.13% 19.13%
RISK -FREE INTEREST RATE 3.50% 4.64% - 4.74%
EXPECTED LIFE 7 years 7 years
The fair value of stock options granted was estimated at the date of grant using
the Black-Scholes option-pricing model. This model was developed for use in
estimating fair value of publicly traded options that have no vesting
restrictions and are fully transferable. Additionally, the model requires the
input of highly subjective assumptions. Because the Company's employee and
director stock options have characteristics significantly different from those
of publicly traded stock options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the Black-Scholes option-pricing model does not necessarily provide a
reliable single measure of the fair value of the Company's employee and director
stock options.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
A summary of goodwill by operating subsidiaries follows:
JANUARY 1, GOODWILL IMPAIRMENT MARCH 31,
(In thousands) 2002 DISPOSED LOSS 2002
----------------------------------------------
NBT Bank, N.A. $ 44,667 $ (1,547) $ - $43,120
NBT Financial Services, Inc. 3,001 - - 3,001
----------------------------------------------
Total $ 47,668 $ (1,547) $ - $46,121
==============================================
-12-
JANUARY 1, GOODWILL IMPAIRMENT MARCH 31,
(In thousands) 2003 DISPOSED LOSS 2003
----------------------------------------------
NBT Bank, N.A. $ 43,120 $ - $ - $43,120
NBT Financial Services, Inc. 3,001 - - 3,001
----------------------------------------------
Total $ 46,121 $ - $ - $46,121
==============================================
In connection with the sale of a branch during the three months ended March 31,
2002, $1.5 million in goodwill was included in the carrying amount of the branch
in determining the gain on disposal.
The Company has finite-lived intangible assets capitalized on its consolidated
balance sheet in the form of core deposit and other intangible assets. These
intangible assets continue to be amortized over their estimated useful lives,
which range from one to twenty-five years.
A summary of core deposit and other intangible assets follows:
MARCH 31,
2003 2002
--------------
(in thousands)
Core deposit intangibles:
Gross carrying amount $5,433 $5,433
Less: accumulated amortization 4,079 3,448
--------------
Net Carrying amount 1,354 1,985
--------------
Other intangibles:
Gross carrying amount 1,031 1,031
Less: accumulated amortization 300 219
--------------
Net Carrying amount 731 812
--------------
Other intangibles not subject to
amortization: Pension Asset 551 -
Total intangibles with definite
useful lives:
Gross carrying amount 7,015 6,464
Less: accumulated amortization 4,379 3,667
--------------
Net Carrying amount $2,636 $2,797
==============
Amortization expense on finite-lived intangible assets is expected to total $0.5
million for the remainder of 2003 and $0.3 million for each of 2004, 2005, 2006
and 2007.
NOTE 7. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
On June 14, 1999, the CNB Financial Corp. ("CNBF") who was acquired by the
Company on November 8, 2001 established CNBF Capital Trust I (the Trust), which
is a statutory business trust. The Trust exists for the exclusive purpose of
issuing and selling 30 year guaranteed preferred beneficial interests in the
Company's junior subordinated debentures (capital securities). On August 4,
1999, the Trust issued $18.0 million in capital securities at 3-month LIBOR plus
275 basis points, which equaled 8.12% at issuance. The rate on the capital
securities resets quarterly, equal to the 3-month LIBOR plus 275 basis points
(4.15% and 4.66% for the March 31, 2003 and 2002 quarterly payments,
-13-
respectively). The capital securities are the sole asset of the Trust. The
obligations of the Trust are guaranteed by the Company. Capital securities
totaling $1.0 million were issued to the Company. These capital securities were
retired upon the merger of the Company and CNBF. The net proceeds from the sale
of the capital securities were used for general corporate purposes and to
provide a capital contribution of $15.0 million to CNB Bank, which was merged
into NBT Bank. The capital securities, with associated expense that is tax
deductible, qualify as Tier I capital under regulatory definitions, subject to
certain restrictions. The Bancorp's primary source of funds to pay interest on
the debentures owed to the Trust are current dividends from the NBT Bank.
Accordingly, the Company's ability to service the debentures is dependent upon
the continued ability of NBT Bank to pay dividends. The capital securities are
not classified as debt for financial statement purposes and therefore the
expense associated with the capital securities is recorded as non-interest
expense in the consolidated statements of income.
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN No. 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
No. 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002, and were adopted in the Company's consolidated
financial statements for the year ended December 31, 2002. Implementation of the
remaining provisions of FIN No. 45 during the first quarter of 2003 did not have
any impact on the Company's financial statements.
NBT BANCORP INC. AND SUBSIDIARIES
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and results of operations of NBT
Bancorp Inc. (Bancorp) and its wholly owned subsidiaries, NBT Bank, N.A. (NBT),
NBT Financial Services, Inc., and CNBF Capital Trust I (collectively referred to
herein as the Company.) This discussion will focus on Results of Operations,
Financial Position, Capital Resources and Asset/Liability Management. Reference
should be made to the Company's consolidated financial statements and footnotes
thereto included in this Form 10-Q as well as to the Company's 2002 Form 10-K
for an understanding of the following discussion and analysis.
FORWARD LOOKING STATEMENTS
Certain statements in this filing and future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, contain forward-looking statements, as
defined in the Private Securities Litigation Reform Act. These statements may be
identified by the use of phrases such as "anticipate," "believe," "expect,"
"forecasts," "projects," or other similar terms. There are a number of
factors, many of which are beyond the Company's control that could cause actual
results to differ materially from those contemplated by the forward looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) revenues may be lower
than expected; (3) changes in the interest rate environment may effect interest
margins; (4) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit; (5)
legislative or regulatory changes, including changes in accounting standards or
tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than the Company; (7)
adverse changes may occur in the securities markets or with respect to
inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; and (10) the Company's
success in managing the risks involved in the foregoing.
-14-
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
Unless required by law, the Company does not undertake, and specifically
disclaims any obligations to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect statements to the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policy relating to the
allowance for loan and lease losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan and lease portfolio and the material effect that
such judgments can have on the results of operations. While management's current
evaluation of the allowance for loan and lease losses indicates that the
allowance is adequate, under adversely different conditions or assumptions, the
allowance would need to be increased. For example, if historical loan and lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions for loan and lease losses
would be required to increase the allowance. In addition, the assumptions and
estimates used in the internal reviews of the Company's non-performing loans and
potential problem loans has a significant impact on the overall analysis of the
adequacy of the allowance for loan and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral evaluations were significantly lowered, the
Company's allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
OVERVIEW
The Company earned net income of $11.6 million ($0.35 diluted earnings per
share) for the three months ended March 31, 2003 compared to net income of $11.1
million ($0.33 diluted earnings per share) for the three months ended March 31,
2002. The quarter to quarter increase in net income from 2002 to 2003 was
primarily the result of an increase in total noninterest income of $1.3 million
offset by a decrease in net interest income of $0.3 million and an increase in
total noninterest expense of $0.7 million. The increase in noninterest income
was driven primarily by increases in services charges and deposit accounts of
$0.6 million and other income of $0.5 million, as well as a slight net gain on
securities transactions for the three months ended March 31, 2003 compared to
$0.5 million in net losses on securities transactions for the same period in
2002. The decline in net interest income resulted primarily from a decline in
the Company's net interest margin from 4.54% for the three months ended March
31, 2002 to 4.38% for the same period in 2003. The increase in total noninterest
expense resulted primarily from increases in other operating expense of $0.7
million, occupancy expense of $0.4 million and salaries and employee benefits of
$0.3 million offset by declines in loan collection and other real estate owned
costs of $0.6 million and professional fees and outside services of $0.3
million.
Table 1 depicts several annualized measurements of performance using GAAP net
income. Returns on average assets and equity measure how effectively an entity
utilizes its total resources and capital, respectively. Net interest margin,
which is the net federal taxable equivalent (FTE) interest income divided by
average earning assets, is a measure of an entity's ability to utilize its
earning assets in relation to the cost of funding. Interest income for
tax-exempt securities and loans is adjusted to a taxable equivalent basis using
the statutory Federal income tax rate of 35%.
-15-
TABLE 1
PERFORMANCE MEASUREMENTS
---------------------------------------------------
FIRST First
QUARTER Quarter
2003 2002
---------------------------------------------------
Return on average assets (ROAA) 1.27% 1.25%
Return on average equity (ROE) 16.05% 16.62%
Net interest margin (FTE) 4.38% 4.54%
---------------------------------------------------
NET INTEREST INCOME
Net interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest-bearing
liabilities, primarily deposits and borrowings. Net interest income is affected
by the interest rate spread, the difference between the yield on earning assets
and cost of interest-bearing liabilities, as well as the volumes of such assets
and liabilities. Net interest income is one of the major determining factors in
a financial institution's performance as it is the principal source of earnings.
Table 2 represents an analysis of net interest income on a federal taxable
equivalent basis.
Federal taxable equivalent (FTE) net interest income decreased $0.3 million
during the three months ended March 31, 2003 compared to the same period of
2002. The decrease in FTE net interest income resulted primarily from earning
assets repricing down at a faster rate than interest-bearing liabilities offset
by an increase in average earning assets. The yield on earning assets decreased
74 basis points ('bp"), to 6.34% for the three months ended March 31, 2003 from
7.08% for the same period in 2002. Meanwhile, the rate paid on interest-bearing
liabilities decreased 67 bp, to 2.31% for the three months ended March 31, 2003
from 2.98% for the same period in 2002. Average earning assets for the three
months ended March 31, 2003 increased by $93.4 million, or 3% over the average
for the same period in 2002.
Total FTE interest income for the three months ended March 31, 2003 decreased
$4.7 million compared to the same period in 2002, a result of the previously
mentioned decrease in yield on earning assets. The decrease in the yield on
earning assets can be primarily attributed to the historically low interest rate
environment prevalent for all of 2002 and the first quarter of 2003. The low
interest rate environment fostered a significant increase in refinancing of
mortgage related earning assets, resulting in a significant increase in
repayments of loans and securities which have been reinvested at lower rates.
During the same time period, total interest expense decreased $4.4 million,
primarily the result of the low rate environment mentioned above, as well as an
improvement in the mix of the Company's interest-bearing liabilities. Time
deposits, the most significant component of interest-bearing liabilities,
decreased to 43.2% of interest-bearing liabilities for the three months ended
March 31, 2003 from 47.2% for the same period in 2002. Offsetting this decrease
in the interest-bearing liabilities mix, was an increase in lower cost NOW,
MMDA, and Savings deposits, to 41.6% of interest-bearing liabilities for the
three months ended March 31, 2003 from 39.0% for the same period in 2002. Total
short-term and long-term borrowings increased slightly, comprising 15.2% and
13.8% of interest-bearing liabilities for the three months ended March 31, 2003
and 2002.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin decreased to 4.38% for the three months
ended March 31, 2003, from 4.54% for the comparable period in 2002. The decrease
in the net interest margin can be primarily attributed to the previously
mentioned decrease in the interest rate spread driven by the decrease in yield
from earning assets exceeding the decrease in rates on interest-bearing
liabilities.
-16-
TABLE 2
AVERAGE BALANCES AND NET INTEREST INCOME
The following table includes the condensed consolidated average balance sheet,
an analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans has been
adjusted to a taxable-equivalent basis using the statutory Federal income tax
rate of 35%.
Three months ended March 31,
2003 2002
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------------
ASSETS
===========================================================================================================
Short-term interest bearing accounts $ 4,990 $ 24 1.95% $ 13,050 $ 104 3.23%
Trading Securities 195 2 4.16 128 2 6.34
Securities available for sale (2) 977,901 12,417 5.16 888,450 14,009 6.44
Securities held to maturity (2) 80,342 1,183 5.98 103,328 1,724 6.38
Investment in FRB and FHLB Banks 23,482 300 5.19 21,045 176 3.39
Loans (1) 2,354,636 39,804 6.86 2,322,129 42,403 7.41
---------- --------- ---------- ---------
Total earning assets 3,441,546 53,730 6.34 3,348,130 58,418 7.08
--------- ---------
Other assets 255,997 233,755
---------- ----------
TOTAL ASSETS $3,697,543 $3,581,885
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 323,015 1,110 1.40 $ 273,451 1,029 1.53
NOW deposit accounts 394,626 691 0.71 378,706 919 0.98
Savings deposits 495,411 1,230 1.01 459,872 1,735 1.53
Time deposits 1,262,254 9,581 3.08 1,347,752 13,308 4.00
---------- --------- ---------- ---------
Total interest bearing deposits 2,475,306 12,612 2.07 2,459,781 16,991 2.80
Short-term borrowings 98,499 289 1.19 86,661 348 1.63
Long-term debt 345,674 3,705 4.35 308,378 3,638 4.78
---------- --------- ---------- ---------
Total interest bearing liabilities 2,919,479 16,606 2.31% 2,854,820 20,977 2.98%
--------- ---------
Demand deposits 430,097 405,401
Other liabilities (3) 55,424 51,288
Stockholders' equity 292,543 270,376
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,697,543 $3,581,885
---------- ----------
NET INTEREST INCOME (FTE BASIS) $ 37,124 $ 37,441
--------- ---------
INTEREST RATE SPREAD 4.03% 4.10%
------- -------
NET INTEREST MARGIN 4.38% 4.54%
------- -------
Taxable equivalent adjustment 1,095 1,096
--------- ---------
NET INTEREST INCOME $ 36,029 $ 36,345
========= =========
<FN>
(1) For purposes of these computations, nonaccrual loans are included in the average loan
balances outstanding.
(2) Securities are shown at average amortized cost.
(3) Included in other liabilities is $17.0 million in the Company's guaranteed preferred beneficial
interests in Company's junior subordinated debentures.
-17-
The following table presents changes in interest income and interest expense
attributable to changes in volume (change in average balance multiplied by prior
year rate), changes in rate (change in rate multiplied by prior year volume),
and the net change in net interest income. The net change attributable to the
combined impact of volume and rate has been allocated to each in proportion to
the absolute dollar amounts of change.
TABLE 3
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
Three months ended March 31,
-------------------------------------------------------------------
INCREASE (DECREASE)
2003 OVER 2002
-------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
-------------------------------------------------------------------
Short-term interest bearing accounts $ (49) $ (31) $ (80)
Trading securities 1 (1) 0
Securities available for sale 1,317 (2,909) (1,592)
Securities held to maturity (354) (187) (541)
Investment in FRB and FHLB Banks 22 102 124
Loans 587 (3,186) (2,599)
-------------------------------------------------------------------
Total (FTE) interest income 1,594 (6,282) (4,688)
-------------------------------------------------------------------
Money market deposit accounts 176 (95) 81
NOW deposit accounts 37 (265) (228)
Savings deposits 126 (631) (505)
Time deposits (802) (2,925) (3,727)
Short-term borrowings 43 (102) (59)
Long-term debt 417 (350) 67
-------------------------------------------------------------------
Total interest expense 465 (4,836) (4,371)
-------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 1,129 $(1,446) $ (317)
===================================================================
NONINTEREST INCOME
Noninterest income is a significant source of revenue for the Company and an
important factor in the Company's results of operations. The following table
sets forth information by category of noninterest income for the years
indicated:
THREE MONTHS ENDED MARCH 31,
2003 2002
------ -------
(in thousands)
Service charges on deposit accounts $3,603 $3,050
Broker/dealer and insurance fees 1,392 1,495
Trust 892 819
Other 2,828 2,329
Net securities (losses) gains 27 (502)
Gain on sale of a branch, net - 220
------ -------
Total $8,742 $7,411
====== =======
Total noninterest income increased $1.3 million, or 18% from $7.4 million for
the three months ended March 31, 2002 to $8.7 million for the same period in
2003. Service charges on deposit accounts increased $0.6 million, due primarily
to an increase in transaction related deposit accounts (NOW and demand
-18-
deposits), the average balance of which increased 5.2% for the three months
ended March 31, 2003 when to compared the same period in 2002, as well as
pricing adjustments made during 2002. Net losses from securities transactions
totaled $0.5 million for the three months ended March 31, 2002 compared to a
slight net gain from securities transactions for the same period in 2003. Other
income increased $0.5 million, due primarily to growth from ATM fees, which were
driven by the growth in transaction related deposit accounts noted above and an
increase in fees from the sale of insurance products to loan customers. Trust
revenue increased $0.1 million, or 9% due primarily to a new business initiative
focusing on high net worth customers.
Offsetting these increases was a decrease in broker/dealer and insurance revenue
of $0.1 million driven primarily by continued weak stock market conditions
during the first quarter of 2003. Additionally, there was a $0.2 million gain on
the sale of a branch during the three months ended March 31, 2002 versus no such
gain during the same period in 2003.
NONINTEREST EXPENSE
Noninterest expenses are also an important factor in the Company's results of
operations. The following table sets forth the major components of noninterest
expense for the periods indicated:
THREE MONTHS ENDED MARCH 31,
2003 2002
------- -------
(in thousands)
Salaries and employee benefits $12,659 $12,374
Occupancy 2,526 2,169
Equipment 1,766 1,714
Data processing and communications 2,721 2,565
Professional fees and outside services 1,302 1,615
Office supplies and postage 1,073 897
Amortization of intangible assets 162 225
Capital securities 191 216
Loan collection and other real estate owned 280 927
Other 3,212 2,510
------- -------
Total noninterest expense $25,892 $25,212
======= =======
Total noninterest expense for the three months ended March 31, 2003 increased
$0.7 million or 3% over the same period in 2002. The increase in total
noninterest expense resulted from increases in other operating expense of $0.7
million, occupancy of $0.4 million and salaries and employee benefits of $0.3
million offset by decreases in loan collection and other real estate owned
("OREO) expense of $0.6 million and professional fees and outside services of
$0.3 million.
The $0.7 million increase in other operating expense was driven primarily by
$0.4 million charge taken for the other-than-temporary impairment of a
non-marketable equity security. The $0.4 million increase in occupancy expense
was driven primarily by higher maintenance costs associated with several severe
winter storms that occurred during the first quarter of 2003. The $0.3 million
increase in salaries and employee benefits was driven primarily by higher
incentive compensation costs offset by decreases in retirement expenses and
health insurance costs.
-19-
The $0.6 million decline in loan collection and OREO expense was driven
primarily by the sale of several OREO properties, which resulted in a net gain
of $0.6 million for the three months ended March 31, 2003. The $0.3 million
decrease in professional fees and outside services resulted primarily from a
$0.4 million charge taken during the three months ended March 31, 2002 related
to an adverse judgement against the Company arising from litigation.
INCOME TAXES
Income tax expense was $5.4 million for the three months ended March 31, 2003
compared to $5.5 million for the same period in 2002. The effective tax rate was
31.7% for the three months ended March 31, 2003 and 33.0% for the same period in
2002.
ANALYSIS OF FINANCIAL CONDITION
LOANS AND LEASES
- ------------------
A summary of loans and leases, net of deferred fees and origination costs, by
category for the periods indicated follows:
March 31, December 31, March 31,
2003 2002 2002
-------------------------------------
(in thousands)
Commercial and commercial mortgages* $1,066,446 $ 1,057,815 $1,040,451
Residential real estate mortgages 613,093 610,256 610,870
Consumer 631,802 626,767 595,624
Leases 62,738 61,094 70,699
-------------------------------------
Total loans and leases $2,374,079 $ 2,355,932 $2,317,644
=====================================
<FN>
* Includes agricultural loans
Total loans and leases were $2.4 billion, or 63.3% of assets, at March 31, 2003,
and December 31, 2002, and $2.3 billion, or 64.5%, at March 31, 2002. Total
loans and leases increased $56.4 million at March 31, 2003 when compared to
March 31, 2002. There were slight increases in all the major loan categories at
March 31, 2003 when compared to March 31, 2002. The modest loan growth
experienced by the Company was due primarily to weak economic business
conditions, strong competition, and the Company's focus on lowering
nonperforming loans and improving the credit quality of the loan and lease
portfolio. At March 31, 2003, commercial loans, including commercial mortgages,
represented approximately 45% of the loan and lease portfolio, while consumer
loans and leases and residential mortgages represented 29% and 26%,
respectively.
SECURITIES
- ----------
The Company classifies its securities at date of purchase as available for sale,
held to maturity or trading. Held to maturity debt securities are those that
the Company has the ability and intent to hold until maturity. Available for
sale securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, on available for sale securities are
excluded from earnings and are reported in stockholders' equity as a component
of accumulated other comprehensive income or loss. Held to maturity securities
are recorded at amortized cost. Trading securities are recorded at fair value,
with net unrealized gains and losses recognized currently in income. Transfers
of securities between categories are recorded at fair value at the date of
transfer. A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other-than-temporary is charged to
earnings resulting in the establishment of a new cost basis for the security.
Securities with an other-than-temporary impairment are generally placed on
nonaccrual status.
-20-
Average total securities increased $82.4 million for the three months ended
March 31, 2003 when compared to the same period in 2002. The average balance of
securities available for sale increased $105.3 million for the three months
ended March 31, 2003 when compared to the same period in 2002. The average
balance of securities held to maturity decreased $23.0 million for the three
months ended March 31, 2003 when compared to the same period in 2002. The net
increase in securities resulted from a combination of deposit growth exceeding
loan growth and modest leveraging of the balance sheet. The average total
securities portfolio represented 30.8% of total average earning assets for the
three months ended March 31, 2003 compared to 29.6% for the same period in 2002.
At March 31, 2003, approximately 67.8% of the Company's investment securities
were comprised of either mortgage-backed securities ("MBS") or collateralized
mortgage obligations ("CMO") compared to 63.8% at March 31, 2002. During the
period between March 31, 2002 and March 31, 2003, the Company's MBS and CMO
experienced significant increases in prepayments resulting from the low interest
rate environment. As the Company received the cash flows due to accelerated
prepayments from MBS and CMO, the Company reinvested these funds primarily into
short-term MBS, which generally contain a stated maturity of 10/15 years and a
expected duration ranging from 3 to 5 years as opposed to 20/30 year MBS which
exhibit an expected duration ranging from 5 to 7 years. As such, the Company is
positioned to take advantage of deploying funds in a rising rate environment, as
sufficient cash flow should be generated by 10/15-year MBS securities. At March
31, 2003, approximately 65.7% of MBS and CMO were comprised of 10/15-year MBS as
compared to 25.5% at March 31, 2002.
There is one security with the other-than-temporary impairment charge at March
31, 2003 and 2002, which had a remaining carrying value of $0.9 million and $1.9
million, respectively, and is classified in securities available for sale and is
on the nonaccrual status. The Company recorded a $0.7 million pre-tax charge
during the three months ended March 31, 2002, related to the
other-than-temporarily impaired security classified as available for sale. The
charge was recorded in net security (losses) gains on the consolidated
statements of income.
Included in the securities available for sale portfolio at March 31, 2002 and
December 31, 2002 were certain securities (private issue CMO, asset-backed
securities, and private issue MBS) previously held by CNB. These securities
contained a higher level of credit risk when compared to other securities held
in the Company's investment portfolio because they were not guaranteed by a
governmental agency or a government sponsored enterprise (GSE). The Company's
general practice is to purchase CMO and MBS that are guaranteed by a
governmental agency or a GSE coupled with a strong credit rating, typically AAA,
issued by Moody's or Standard and Poors.
At December 31, 2002, the amortized cost and fair value of these high-risk
securities amounted to $12.0 million and $10.7 million, respectively, down from
$32.9 million and $31.1 million, respectively, at March 31, 2002. The decrease
at December 31, 2002, when compared to March 31, 2002, resulted primarily from
sales and to a lesser extent principal paydowns. During 2002, the Company sold
$22.4 million of these securities due to both a rapid deterioration in the
financial condition of the underlying collateral in 2002 related to a certain
number of these securities as well as the Company's goal of reducing exposure to
these types of securities in general. The net loss realized from the sale of
these securities was $7.4 million. Offsetting these net losses were net gains of
$7.3 million, resulting from the sale of approximately $187.0 million in other
securities available for sale during 2002. At March 31, 2003, the Company had no
exposure to these high-risk securities, as the remaining $12.0 million were sold
during the three months ended March 31, 2003 at a net loss of $3.9 million.
Offsetting these net losses, were net gains of $3.9 million from the sale of
approximately $157.4 million in other securities available for sale during the
first quarter of 2003.
-21-
ALLOWANCE FOR LOAN AND LEASE LOSSES, PROVISION FOR LOAN AND LEASE LOSSES, AND
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
- ---------------------
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan portfolio's risk profile. It is evaluated to ensure that it is
sufficient to absorb all reasonably estimable credit losses inherent in the
current loan and lease portfolio.
Management considers the accounting policy relating to the allowance for loan
and lease losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgements can have on
the consolidated results of operations.
For purposes of evaluating the adequacy of the allowance, the Company considers
a number of significant factors that affect the collectibility of the portfolio.
For individually analyzed loans, these include estimates of loss exposure, which
reflect the facts and circumstances that affect the likelihood of repayment of
such loans as of the evaluation date. For homogeneous pools of loans and
leases, estimates of the Company's exposure to credit loss reflect a thorough
current assessment of a number of factors, which could affect collectibility.
These factors include: past loss experience; the size, trend, composition, and
nature of the loans and leases; changes in lending policies and procedures,
including underwriting standards and collection, charge-off and recovery
practices; trends experienced in nonperforming and delinquent loans and leases;
current economic conditions in the Company's market; portfolio concentrations
that may affect loss experienced across one or more components of the portfolio;
the effect of external factors such as competition, legal and regulatory
requirements; and the experience, ability, and depth of lending management and
staff. In addition, various regulatory agencies, as an integral component of
their examination process, periodically review the Company's allowance for loan
and lease losses. Such agencies may require the Company to recognize additions
to the allowance based on their judgment about information available to them at
the time of their examination, which may not be currently available to
management.
After a thorough consideration and validation of the factors discussed above,
required additions to the allowance for loan and lease losses are made
periodically by charges to the provision for loan and lease losses. These
charges are necessary to maintain the allowance at a level which management
believes is reasonably reflective of overall inherent risk of probable loss in
the portfolio. While management uses available information to recognize losses
on loans and leases, additions to the allowance may fluctuate from one reporting
period to another. These fluctuations are reflective of changes in risk
associated with portfolio content and/or changes in management's assessment of
any or all of the determining factors discussed above. The allowance for loan
and lease losses to outstanding loans and leases at March 31, 2003 was 1.73%
compared to 1.95% at March 31, 2002. Management considers the allowance for
loan losses to be adequate based on evaluation and analysis of the loan
portfolio.
Table 3 reflects changes to the allowance for loan and lease losses for the
periods presented. The allowance is increased by provisions for losses charged
to operations and is reduced by net charge-offs. Charge-offs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan and lease losses.
-22-
TABLE 4
ALLOWANCE FOR LOAN LOSSES
-------------------------------------------------------------------------------------
Three months ended March 31,
(dollars in thousands) 2003 2002
-------------------------------------------------------------------------------------
Balance, beginning of period $40,167 $44,746
Recoveries 1,698 1,362
Charge-offs (2,664) (2,820)
-------------------------------------------------------------------------------------
Net charge-offs (966) (1,458)
Provision for loan losses 1,940 2,011
-------------------------------------------------------------------------------------
Balance, end of period $41,141 $45,299
=====================================================================================
COMPOSITION OF NET CHARGE-OFFS
Commercial and agricultural $ (90) 9% $ 103 (7)%
Real estate mortgage 18 (2)% (220) 15%
Consumer (894) 93% (1,341) 92%
-------------------------------------------------------------------------------------
Net charge-offs $ (966) 100% $(1,458) 100%
-------------------------------------------------------------------------------------
Annualized net charge-offs to average loans 0.17% 0.25%
=====================================================================================
Net charge-offs to average loans for the year ended
March 31, 2003 0.04%
=====================================================================================
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past
due, restructured loans, other real estate owned (OREO), and nonperforming
securities. Loans are generally placed on nonaccrual when principal or interest
payments become ninety days past due, unless the loan is well secured and in the
process of collection. Loans may also be placed on nonaccrual when circumstances
indicate that the borrower may be unable to meet the contractual principal or
interest payments. OREO represents property acquired through foreclosure and is
valued at the lower of the carrying amount or fair market value, less any
estimated disposal costs. Nonperforming securities include securities which
management believes are other-than-temporarily impaired, carried at their
estimated fair value and are not accruing interest.
Total nonperforming assets were $22.0 million at March 31, 2003, compared to
$30.5 million at December 31, 2002, and $43.7 million at March 31, 2002. The
decrease in nonperforming assets resulted primarily from the Company's focus on
reducing nonperforming loans. Nonperforming loans totaled $18.4 million at March
31, 2003, down from the $26.4 million outstanding at December 31, 2002. The $8.0
million decrease in nonperforming loans from December 31, 2002 to March 31, 2003
was due primarily to the Company's successful efforts in selling certain large
problematic commercial loans as well as a group of nonperforming real estate
mortgages at approximately their book value. Nonaccrual commercial and
agricultural loans decreased $3.7 million, from $17.0 million at December 31,
2002, to $13.3 million at March 31, 2003. Nonaccrual real estate mortgages
decreased $3.0 million, from $5.5 million at December 31, 2002, to $2.5 million
at March 31, 2003.
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $51.3 million in potential problem loans at March 31,
2003 as compared to $48.5 million at December 31, 2002. Potential problem loans
are loans that are currently performing, but where known information about
possible credit problems of the related borrowers causes management to have
serious doubts as to the ability of such borrowers to comply with the present
loan repayment terms and which may result in disclosure of such loans as
nonperforming at some time in the future. At the Company, potential problem
loans are typically loans that are performing but are classified by the
Company's loan rating system as "substandard." At March 31, 2003, potential
problem loans primarily consisted of commercial real estate and commercial and
agricultural loans. Management cannot predict the extent to which economic
conditions may worsen or other factors which may impact borrowers and the
potential problem loans. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on non-accrual, become
restructured, or require increased allowance coverage and provision for loan
losses.
-23-
Net charge-offs totaled $1.0 million for the three months ended March 31, 2003,
down $0.5 million from the $1.5 million charged-off during the same period in
2002. Despite the improvement in net charge-offs and the reductions in
nonperforming loans, the Company's provision for the quarter did not decline
significantly when compared to the same period in 2002. The provision for loan
and lease losses totaled $1.9 million for the three months ended March 31, 2003,
down slightly from the $2.0 million provided during the same period in 2002. The
level of provision for loan and lease losses required for the three months ended
March 31, 2003 resulted primarily from the increase in potential problem loans
noted above and the continued weakness in the overall economy.
TABLE 5
NONPERFORMING ASSETS
--------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(dollars in thousands) 2003 2002 2002
--------------------------------------------------------------------------------------------------
Commercial and agricultural $ 13,285 $ 16,980 $ 29,237
Real estate mortgage 2,535 5,522 5,600
Consumer 1,258 1,507 3,938
--------------------------------------------------------------------------------------------------
Total nonaccrual loans 17,078 24,009 38,775
--------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 602 237 228
Real estate mortgage 144 1,325 29
Consumer 328 414 226
--------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 1,074 1,976 483
--------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: 297 409 531
--------------------------------------------------------------------------------------------------
Total nonperforming loans 18,449 26,394 39,789
--------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 2,609 2,947 1,960
--------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 21,058 29,341 41,749
--------------------------------------------------------------------------------------------------
Nonperforming securities 925 1,122 1,957
--------------------------------------------------------------------------------------------------
Total nonperforming assets $ 21,983 $ 30,463 $ 43,706
==================================================================================================
Total nonperforming loans to loans and leases 0.78% 1.12% 1.72%
Total nonperforming assets to assets 0.59% 0.82% 1.22%
Total allowance for loan and lease losses
to nonperforming loans 223.00% 152.18% 113.85%
==================================================================================================
DEPOSITS
- --------
Total deposits were $3.0 billion at March 31, 2003, an increase of $33.9
million, or 1%, from year-end 2002, and an increase of $90.1 million, or 3%,
from the same period in the prior year. Total average deposits increased $40.2
million, or 1%, from March 31, 2002 to March 31, 2003. The Company experienced a
decline in time deposits, as average time deposits declined $85.5 million or 6%,
from March 31, 2002 to March 31, 2003. Meanwhile, average core deposits
increased 125.7 million or 8%, from March 31, 2002 to March 31, 2003. The
Company has focused on maintaining and growing its base of lower cost checking,
savings and money market accounts while allowing runoff of some of its higher
cost time deposits, particularly brokered and jumbo time deposits. At March 31,
2003, total checking, savings and money market accounts represented 57.5% of
total deposits compared to 52.8% at March 31, 2002.
-24-
BORROWED FUNDS
- ---------------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $95.1 million at March 31, 2003 compared to
$105.6 million and $81.2 million at December 31, and March 31, 2002,
respectively. Long-term debt was $345.3 million at March 31, 2003, compared to
$345.5 million and $325.9 million at December 31, and March 31, 2002,
respectively.
CAPITAL RESOURCES
- ------------------
Stockholders' equity of $291.6 million represents 7.8% of total assets at March
31, 2003, compared with $268.4 million, or 7.5% in the comparable period of the
prior year, and $292.4 million, or 7.9% at December 31, 2002. The Company does
not have a target dividend payout ratio, rather the Board of Directors considers
the Company's earnings position and earnings potential when making dividend
decisions.
As the capital ratios in Table 6 indicate, the Company remains well capitalized.
Capital measurements are significantly in excess of regulatory minimum
guidelines and meet the requirements to be considered well capitalized for all
periods presented. Tier 1 leverage, Tier 1 capital and Risk-based capital ratios
have regulatory minimum guidelines of 3%, 4% and 8% respectively, with
requirements to be considered well capitalized of 5%, 6% and 10%, respectively.
TABLE 6
CAPITAL MEASUREMENTS
----------------------------------------------------
FIRST First
QUARTER Quarter
2003 2002
----------------------------------------------------
Tier 1 leverage ratio 6.71% 6.70%
Tier 1 capital ratio 9.77% 9.97%
Total risk-based capital ratio 11.02% 11.23%
Cash dividends as a percentage
of net income 47.87% 50.69%
Per common share:
Book value $ 9.00 $ 8.09
Tangible book value $ 7.50 $ 6.61
====================================================
The accompanying Table 7 presents the high, low and closing sales price for the
common stock as reported on the NASDAQ Stock Market, and cash dividends declared
per share of common stock. The Company's price to book value ratio was 1.94 at
March 31, 2002 and 1.82 in the comparable period of the prior year. The
Company's price was 12.5 times annualized earnings at March 31, 2003, compared
to 11.2 times for the same period last year.
TABLE 7
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
-------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
-------------------------------------------------
-------------------------------------------------
2002
-------------------------------------------------
March 31 $15.15 $13.15 $14.74 $ 0.170
June 30 19.32 14.00 18.07 0.170
September 30 18.50 16.36 17.27 0.170
December 31 18.60 14.76 17.07 0.170
=================================================
2003
-------------------------------------------------
MARCH 31 $18.60 $16.76 $17.43 $ 0.170
=================================================
-25-
STOCK REPURCHASE PLAN
- -----------------------
On July 22, 2002, the Company announced that it intended to repurchase up to one
million shares (approximately 3%) of its outstanding common stock from time to
time over the next 12 months in open market and privately negotiated
transactions. Since the announcement of the Stock Repurchase Plan, the Company
repurchased a total of 807,346 shares at an average price of $17.51 per share.
Total cash allocated for these repurchases during this period was $14.1 million.
For the three months ended March 31, 2003, the Company repurchased 330,813
shares at an average price of $17.49 per share.
On April 28, 2003, the Company announced that it intended to repurchase up to an
additional one million shares (approximately 3%) of its outstanding common stock
from time to time over the next 12 months in open market and privately
negotiated transactions. Currently there are 192,954 shares remaining under the
previous authorization that will be repurchased prior to the commencement of the
new program.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
MARKET RISK
Interest rate risk is among the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities. Interest rate risk is defined as an exposure to
a movement in interest rates that could have an adverse effect on the Company's
net interest income. Net interest income is susceptible to interest rate risk
to the degree that interest-bearing liabilities mature or reprice on a different
basis than earning assets. When interest-bearing liabilities mature or reprice
more quickly than earning assets in a given period, a significant increase in
market rates of interest could adversely affect net interest income. Similarly,
when earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income.
In an attempt to manage the Company's exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's Asset
Liability Committee (ALCO) meets monthly to review the Company's interest rate
risk position and profitability, and to recommend strategies for consideration
by the Board of Directors. Management also reviews loan and deposit pricing,
and the Company's securities portfolio, formulates investment and funding
strategies, and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while enhancing the net
interest margin. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to changes in interest rates and fluctuations in the
difference between long- and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next repricing date (if needed), and current rates is uploaded into the model to
create an ending balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and leases and mortgage related investment
securities along with any optionality within the deposits and borrowings.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) with a static balance sheet over a 12-month
period. Three additional models are run with static balance sheets; (1) a
gradual increase of 200 bp, (2) a gradual increase of 200 bp where the long end
of the yield curve remains flat (the long end of the yield curve is defined as 5
years and longer) and (3) a gradual decrease of 100 bp takes place over a 12
month period with a static balance sheet. Under these scenarios, assets subject
to prepayments are adjusted to account for faster or slower prepayment
assumptions. Any investment securities or borrowings that have callable options
embedded into them are handled accordingly based on the interest rate scenario.
-26-
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 decrease
slightly when compared to the forecasted net interest income in the flat rate
scenario through the simulation period. The decrease in net interest income is a
result of interest-bearing liabilities repricing downward at a slower rate than
earning assets. The inability to effectively lower deposit rates will likely
reduce or eliminate the benefit of lower interest rates. In the rising rate
scenario where the long end of the yield curve remains flat and the short end of
the curve increases 200bp gradually, net interest income is also projected to
experience a decline from the flat rate scenario. Net interest income is
projected to remain at lower levels than in a flat rate scenario through the
simulation period primarily due to a lag in assets repricing while funding costs
increase. The potential impact on earnings is dependent on the ability to lag
deposit repricing. In a rising rate scenario where rates increase gradually
200bp, net interest income is projected to increase slightly from the flat rate
scenario.
Net interest income for the next twelve months in the + 200/+ 200 flat/- 100 bp
scenarios, as described above, is within the internal policy risk limits of not
more than a 7.5% change in net interest income. The following table summarizes
the percentage change in net interest income in the rising and declining rate
scenarios over a 12-month period from the forecasted net interest income in the
flat rate scenario using the March 31, 2003 balance sheet position:
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
-----------------------------------------------
CHANGE IN INTEREST RATES PERCENT CHANGE IN
(IN BASIS POINTS) NET INTEREST INCOME
-----------------------------------------------
+ 200 FLAT (0.77%)
+ 200 0.08%
- 100 (0.61%)
-----------------------------------------------
Under the flat rate scenario with a static balance sheet, net interest income is
anticipated to decrease approximately 1.4% from annualized net interest income
for the three months ended March 31, 2003. The Company anticipates under current
conditions, earning assets will continue to reprice at a faster rate than
interest bearing liabilities. In order to protect net interest income from
anticipated net interest margin compression, the Company will continue to focus
on increasing low cost core funding as well as growing earning assets through
loan growth and leverage opportunities. However, if the Company cannot increase
low cost core funding and earning assets, the Company expects net interest
income to decline for the remainder of 2003.
Currently, the Company is holding fixed rate residential real estate mortgages
in its loan portfolio and mortgage related securities in its investment
portfolio. Two major factors the Company considers in holding residential real
estate mortgages is its level of core deposits and the duration of its
mortgage-related securities and loans. Current core deposit levels combined with
a shortening of duration of mortgage-related securities and loans have enabled
the Company to hold fixed rate residential real estate mortgages without having
a significant negative impact on interest rate risk, as the Company is well
matched at March 31, 2003. The Company's net interest income is projected to
increase by 0.08% if interest rates gradually rise 200 basis points. The
Company's exposure to 30-year fixed rate mortgage related securities and loans
have decreased approximately $150.5 million from March 31, 2002 to March 31,
2003. From December 31, 2002, we have reduced our exposure to 30-year fixed rate
mortgage related securities and loans by $27.2 million. Approximately 13.1% of
earning assets were comprised of 30-year fixed rate mortgage related securities
and loans at March 31, 2003, down from a ratio of 18.0% at March 31, 2002. The
Company closely monitors its matching of earning assets to funding sources. If
core deposit levels decrease or the rate of growth in core deposit levels does
not equal or exceed the rate in growth of 30-year fixed rate real estate
mortgage related securities or loans, the Company will reevaluate its strategy
and may sell new originations of fixed rate mortgages in the secondary market or
may sell certain mortgage related securities in order to limit the Company's
exposure to long-term earning assets.
-27-
LIQUIDITY RISK
Liquidity involves the ability to meet the cash flow requirements of customers
who may be depositors wanting to withdraw funds or borrowers needing assurance
that sufficient funds will be available to meet their credit needs. The ALCO is
responsible for liquidity management and has developed guidelines which cover
all assets and liabilities, as well as off balance sheet items that are
potential sources or uses of liquidity. Liquidity policies must also provide the
flexibility to implement appropriate strategies and tactical actions.
Requirements change as loans and leases grow, deposits and securities mature,
and payments on borrowings are made. Liquidity management includes a focus on
interest rate sensitivity management with a goal of avoiding widely fluctuating
net interest margins through periods of changing economic conditions.
The primary liquidity measurement the Company utilizes is called the Basic
Surplus which captures the adequacy of its access to reliable sources of cash
relative to the stability of its funding mix of average liabilities. This
approach recognizes the importance of balancing levels of cash flow liquidity
from short- and long-term securities with the availability of dependable
borrowing sources which can be accessed when necessary. At March 31, 2003, the
Company's Basic Surplus measurement was 14.3% of total assets or $533 million,
which was above the Company's minimum of 5% or $188 million set forth in its
liquidity policies.
This Basic Surplus approach enables the Company to adequately manage liquidity
from both operational and contingency perspectives. By tempering the need for
cash flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At March 31, 2003, the
Company considered its Basic Surplus adequate to meet liquidity needs.
The Company's primary source of funds is from its subsidiary, NBT Bank. Certain
restrictions exist regarding the ability of the Company's subsidiary bank to
transfer funds to the Company in the form of cash dividends. The approval of the
Office of Comptroller of the Currency (OCC) is required to pay dividends when a
bank fails to meet certain minimum regulatory capital standards or when such
dividends are in excess of a subsidiary bank's earnings retained in the current
year plus retained net profits for the preceding two years (as defined in the
regulations). At March 31, 2003, approximately $10.0 million of the total
stockholders' equity of NBT Bank was available for payment of dividends to the
Company without approval by the OCC. NBT Bank's ability to pay dividends also is
subject to the Bank being in compliance with regulatory capital requirements.
NBT Bank is currently in compliance with these requirements. Under the State of
Delaware Business Corporation Law, the Company may declare and pay dividends
either out of accumulated net retained earnings or capital surplus.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information called for by Item 3 is contained in the Liquidity and Interest Rate
Sensitivity Management section of the Management Discussion and Analysis.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in timely alerting them to any material
information relating to the Company and its subsidiaries required to be included
in the Company's periodic SEC filings.
There were no significant changes made in the Company's internal controls or in
other factors that that could significantly affect these internal controls
subsequent to the date of the evaluation performed by the Company's Chief
Executive Officer and Chief Financial Officer.
-28-
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, there are no material legal
proceedings, other than ordinary routine litigation incidental to business to
which the Company is a party or of which any of its property is subject.
Item 2 -- Changes in Securities and Use of Proceeds
None.
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
On April 28, 2003, NBT Bancorp Inc. announced the declaration of a regular
quarterly cash dividend of $0.17 per share. The cash dividend will be paid on
June 15, 2003 to stockholders of record as of June 1, 2003.
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Additional Exhibit - Written Statement of the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Additional Exhibit - Written Statement of the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) During the first quarter ended March 31, 2003, the Company filed the
following Current Reports on Form 8-K:
None filed.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on FORM 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized, this 13th day of May, 2003.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
----------------------------------
Michael J. Chewens, CPA
Senior Executive Vice President
Chief Financial Officer and Corporate Secretary
-30-
CERTIFICATIONS
I, Daryl R. Forsythe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
By: /s/ Daryl R. Forsythe
----------------------------
Chairman and Chief Executive
Officer
-31-
I, Michael J. Chewens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBT Bancorp Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
By: /s/ Michael J. Chewens
--------------------------------
Senior Executive Vice President,
Chief Financial Officer and
Corporate Secretary
-32-
Index to Exhibits
99.1 Written Statement of the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Written Statement of the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
-33-