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, 2004.
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1268674
(State of Incorporation) (I.R.S. Employer Identification No.)
52 SOUTH BROAD STREET, NORWICH, NEW YORK 13815
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (607) 337-2265
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
As of April 30, 2004, there were 32,901,424 shares outstanding of the
Registrant's common stock, $0.01 par value.
-1-
NBT BANCORP INC.
FORM 10-Q--Quarter Ended March 31, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2004, December 31, 2003, and
March 31, 2003
Consolidated Statements of Income for the three-month periods ended
March 31, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the three-month
periods ended March 31, 2004 and 2003
Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 2004 and 2003
Consolidated Statements of Comprehensive Income for the three-month
periods ended March 31, 2004 and 2003
Notes to 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 (UNAUDITED) 2004 2003 2003
- ------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
ASSETS
Cash and due from banks $ 98,552 $ 125,590 $ 123,709
Short-term interest bearing accounts 4,157 2,502 6,095
Securities available for sale, at fair value 977,950 980,961 1,008,310
Securities held to maturity (fair value - $99,020, $84,517
and $89,880) 91,205 97,204 82,155
Federal Reserve and Federal Home Loan Bank stock 30,648 34,043 23,122
Loans and leases 2,646,674 2,639,976 2,374,079
Less allowance for loan and lease losses 43,303 42,651 41,141
- ------------------------------------------------------------------------------------------------------------
Net loans 2,603,371 2,597,325 2,332,938
Premises and equipment, net 62,426 62,443 61,609
Goodwill 47,521 47,521 46,121
Intangible assets, net 2,260 2,331 2,636
Bank owned life insurance 31,200 30,815 -
Other assets 67,443 66,150 65,052
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,016,733 $ 4,046,885 $3,751,747
============================================================================================================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 464,867 $ 500,303 $ 449,051
Savings, NOW, and money market 1,482,755 1,401,825 1,249,424
Time 1,066,994 1,099,223 1,257,418
- ------------------------------------------------------------------------------------------------------------
Total deposits 3,014,616 3,001,351 2,955,893
Short-term borrowings 238,093 302,931 95,103
Long-term debt 369,679 369,700 345,345
Junior subordinated debentures 18,720 - -
Other liabilities 53,345 45,869 46,786
- ------------------------------------------------------------------------------------------------------------
Total liabilities 3,694,453 3,719,851 3,443,127
Guaranteed preferred beneficial interests in
company's junior subordinated debentures - 17,000 17,000
Stockholders' equity:
Preferred stock none issued - - -
Common stock, $0.01 par value; shares authorized-50,000,000;
shares issued 34,401,055, 34,401,088, and 34,401,152
at March 31, 2004, December 31, 2003 and March 31, 2003,
respectively 344 344 344
Additional paid-in-capital 209,331 209,267 209,884
Retained earnings 126,799 120,016 101,114
Unvested restricted stock awards (229) (197) (284)
Accumulated other comprehensive income 12,283 7,933 14,889
Treasury stock at cost 1,528,580, 1,592,435
and 2,001,772 shares at March 31, 2004, December 31, 2003
and March 31, 2003, respectively (26,248) (27,329) (34,327)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 322,280 310,034 291,620
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUN IOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $4,016,733 $ 4,046,885 $3,751,747
============================================================================================================
See notes to unaudited interim consolidated financial statements.
-3-
NBT BANCORP INC. AND SUBSIDIARIES Three months ended March 31,
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) 2004 2003
- ----------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Interest, fee and dividend income:
Interest and fees on loans and leases $ 39,894 $ 39,615
Securities available for sale 10,769 11,805
Securities held to maturity 797 889
Other 267 326
- ----------------------------------------------------------------------------------------------------
Total interest, fee and dividend income 51,727 52,635
- ----------------------------------------------------------------------------------------------------
Interest expense:
Deposits 10,045 12,612
Short-term borrowings 793 289
Long-term debt 3,615 3,705
Junior subordinated debentures 180 -
- ----------------------------------------------------------------------------------------------------
Total interest expense 14,633 16,606
- ----------------------------------------------------------------------------------------------------
Net interest income 37,094 36,029
Provision for loan and lease losses 2,124 1,940
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 34,970 34,089
- ----------------------------------------------------------------------------------------------------
Noninterest income:
Trust 1,107 892
Service charges on deposit accounts 4,037 3,603
Broker/dealer and insurance fees 1,731 1,392
Net securities gains 9 27
Bank owned life insurance income 385 -
Other 3,174 2,828
- ----------------------------------------------------------------------------------------------------
Total noninterest income 10,443 8,742
- ----------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 14,113 12,659
Office supplies and postage 1,031 1,073
Occupancy 2,598 2,526
Equipment 1,853 1,766
Professional fees and outside services 1,632 1,302
Data processing and communications 2,692 2,721
Amortization of intangible assets 71 162
Capital securities - 191
Loan collection and other real estate owned 372 280
Other operating 2,840 3,212
- ----------------------------------------------------------------------------------------------------
Total noninterest expenses 27,202 25,892
- ----------------------------------------------------------------------------------------------------
Income before income tax expense 18,211 16,939
Income tax expense 5,840 5,373
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 12,371 $ 11,566
====================================================================================================
Earnings per share:
Basic $ 0.38 $ 0.36
Diluted $ 0.37 $ 0.35
====================================================================================================
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 Earnings Stock Income Stock Total
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
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
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 benefits 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
===============================================================================================================================
BALANCE AT DECEMBER 31, 2003 $ 344 $ 209,267 $ 120,016 ($197) $ 7,933 $ (27,329) $ 310,034
Net income 12,371 12,371
Cash dividends - $0.17 per share (5,588) (5,588)
Purchase of 500 treasury shares (11) (11)
Issuance of 61,442 shares to
employee benefit plans and other
stock plans, including tax benefit 64 1,024 1,088
Grant of 3,876 shares of restricted
stock awards (85) 85 -
Amortization of restricted stock awards 36 36
Forfeited 963 shares of restricted stock 17 (17) -
Other comprehensive income 4,350 4,350
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2004 $ 344 $ 209,331 $ 126,799 ($229) $12,283 $ (26,248) $ 322,280
===============================================================================================================================
See notes to unaudited interim consolidated financial statements.
-5-
NBT BANCORP INC. AND SUBSIDIARIES Three Months Ended March 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 2004 2003
- ------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income $ 12,371 $ 11,566
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 2,124 1,940
Depreciation of premises and equipment 1,516 1,630
Net amortization on securities 628 940
Amortization of intangible assets 71 162
Amortization of restricted stock awards 36 38
Proceeds from sale of loans held for sale 22,547 7,015
Origination of loans held for sale (740) (2,208)
Net gain on sales of loans (108) -
Net loss on sale of premises and equipment - 14
Net gain on sale of other real estate owned (179) (580)
Net security transactions (9) (27)
Net increase in other assets (4,419) (4,497)
Net increase in other liabilities 7,477 4,645
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,315 20,638
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 85,417 117,469
Proceeds from sales 12,787 177,199
Purchases (87,564) (298,672)
Securities held to maturity:
Proceeds from maturities 12,361 12,801
Purchases (6,375) (12,461)
Net decrease in FRB and FHLB stock 3,395 577
Net increase in loans (30,157) (24,714)
Purchase of premises and equipment, net (1,499) (1,992)
Proceeds from sales of other real estate owned 1,041 1,647
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,594) (28,146)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 13,265 33,853
Net decrease in short-term borrowings (64,837) (10,498)
Proceeds from issuance of long-term debt 30,000 -
Repayments of long-term debt (30,021) (130)
Proceeds from issuance of shares to employee benefit
plans and other stock plans 1,088 599
Purchase of treasury stock (11) (5,786)
Cash dividends and payment for fractional shares (5,588) (5,537)
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (56,104) 12,501
- ------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (25,383) 4,993
Cash and cash equivalents at beginning of period 128,092 124,623
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 102,709 $ 129,616
======================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest $ 15,793 $ 17,767
Income taxes - -
======================================================================================================
Loans transferred to OREO $ 288 $ 794
See notes to unaudited interim consolidated financial statements.
-6-
NBT BANCORP INC. AND SUBSIDIARIES Three Months Ended March 31,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) 2004 2003
- --------------------------------------------------------------------------------------------------
(in thousands)
Net Income $ 12,371 $11,566
- --------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $7,244 and $(7,733)] 4,355 (1,417)
Minimum pension liability adjustment $0, $(362) - (217)
Less: Reclassification adjustment for net losses (gains)
included in net income [pre-tax amounts of $(9) and $(14)] (5) (8)
- ---------------------------------------------------------------------------------------------------
Total other comprehensive gain (loss ) 4,350 (1,642)
- ---------------------------------------------------------------------------------------------------
Comprehensive income $ 16,721 $ 9,924
- ---------------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
-7-
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 1. DESCRIPTION OF BUSINESS
NBT Bancorp Inc. (the Company or the Registrant) is a registered financial
holding company incorporated in the state of Delaware in 1986, with its
principal headquarters located in Norwich, New York. The Company is the parent
holding company of NBT Bank, N.A. (the Bank) and NBT Financial Services, Inc.
(NBT Financial). Through these subsidiaries, the Company operates as one segment
focused on community banking operations. The Company's primary business consists
of providing commercial banking and financial services to its customers in its
market area. The principal assets of the Company are all of the outstanding
shares of common stock of its direct subsidiaries, and its principal sources of
revenue are the management fees and dividends it receives from the Bank and NBT
Financial.
The principal subsidiaries of the Company through which it conducts its
operations are the Bank and NBT Financial. The Bank is a full service commercial
bank formed in 1856, which provides a broad range of financial products to
individuals, corporations and municipalities throughout the central and upstate
New York and northeastern Pennsylvania market area. The Bank conducts business
through three operating divisions, NBT Bank, Pennstar Bank and Central National
Bank.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements include the
accounts of NBT Bancorp Inc. and its wholly owned subsidiaries, NBT Bank, N.A.
and NBT Financial Services, Inc. Collectively, the Registrant and its
subsidiaries are referred to herein as "the Company". All intercompany
transactions have been eliminated in consolidation. Amounts in the prior period
financial statements are reclassified whenever necessary to conform to current
period presentation.
In December, 2003, the Financial Accounting Standards Board (FASB) issued
revisions to Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities (VIE)" or FIN No. 46-R. Prior to the effective date of FIN No. 46-R,
the Company included CNBF Capital Trust I (the Trust), a statutory business
trust established for the exclusive purpose of issuing and selling 30 year
guaranteed preferred beneficial interests in the Company's junior subordinated
debentures, in its consolidated financial statements. The guaranteed preferred
beneficial interests in the Company's junior subordinated debentures was
reported on the Company's consolidated balance sheet between total liabilities
and stockholders' equity. Since these instruments were not reported as debt on
the Company's consolidated balance sheet, the interest expense associated with
them was reported as a component of noninterest expense in the Company's
consolidated statements of income.
Upon adoption of FIN No. 46-R on January 1, 2004, the Company de-consolidated
the Trust from the Company's consolidated balance sheet. The consolidated
balance sheet at March 31, 2004 includes the Company's obligation to the Trust
as a component of liabilities, as long-term debt. The interest expense
associated with the Company's obligation to the Trust is reported as a component
of interest expense in the Company's consolidated statement of income for the
three months ended March 31, 2004. See footnote 9 for more information about the
accounting treatment of the Trust in the Company's consolidated financial
statements.
The consolidated balance sheet at December 31, 2003 has been derived from
audited consolidated financial statements at that date. The accompanying
unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
-8-
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, 2004 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2004. For
further information, refer to the consolidated financial statements included in
the Registrant's annual report on Form 10-K for the year ended December 31, 2003
and notes thereto referred to above.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN No. 46 addresses consolidation by business enterprises of
variable interest entities (VIEs). FIN No. 46 applies to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains interest after that
date. The effective date of FIN No. 46 had been July 1, 2003. The FASB postponed
the effective date to December 31, 2003 for all variable interest entities that
existed prior to February 1, 2003. In December 2003, the FASB issued a revision
to FIN No. 46 (FIN No. 46-R), which clarified and revised the accounting and
transition guidance for VIEs. As of January 1, 2004, the Company adopted FIN No.
46 -R. The effect of the Company's adoption of FIN No. 46-R are disclosed in
Notes 2 and 9 to the unaudited consolidated financial statements and was not
material to the Company's financial condition, results of operations or cash
flows.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
(revised 2003) amends employers' disclosures about pension plans and other
postretirement benefits by requiring additional disclosures such as descriptions
of the types of plan assets, investment strategies, measurement dates, plan
obligations, cash flows and components of net periodic benefit costs recognized
during interim periods. The Statement does not change the measurement or
recognition of the plans. Interim period disclosure is effective for interim
periods beginning on or after December 15, 2003. The Company adopted the interim
period disclosures on January 1, 2004. See footnote 10 to the unaudited
consolidated financial statements for further information regarding the
Company's employee benefit plans.
In January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP No. 106-1 permits a
sponsor of a postretirement healthcare plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act).
In accordance with FSP No. 106-1, the Company has elected to defer the
accounting for the effects of the Act. Management does not expect adoption of
FSP No. 106-1 to have a material effect on the Company's financial condition,
results of operations or cash flows.
NOTE 4. USE OF ESTIMATES
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilites at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period, as well as the disclosures provided. Actual results could
differ from those estimates. Estimates associated with the allowance for loan
losses, fair values of financial instruments and status of contingencies are
particularly susceptible to material change in the near term.
The allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
-9-
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.
The allowance for loan and lease losses is maintained at a level which
represents management's estimate of all known and inherent losses in the loan
portfolio at the balance sheet date. While management uses available information
to recognize loan and lease losses, future additions to the allowance for loan
and lease losses may be necessary based on changes in economic conditions or
changes in the values of properties securing loans in the process of
foreclosure. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
and lease losses. Such agencies may require the Company to recognize additions
to the allowance for loan and lease losses based on their judgments about
information available to them at the time of their examination which may not be
currently available to management.
Other real estate owned (OREO) consists of properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are
recorded at the lower of fair value of the asset acquired less estimated costs
to sell or "cost" (defined as the fair value at initial foreclosure). At the
time of foreclosure, or when foreclosure occurs in-substance, the excess, if any
of the loan over the fair 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.
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
available carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized. Based on available evidence, gross deferred tax assets will ultimately
be realized and a valuation allowance was not deemed necessary at March 31, 2004
and 2003. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
NOTE 4. 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
-10-
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, 2004 and December 31, 2003, commitments to extend credit
and unused lines of credit totaled $520.7 million and $473.0 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 $22.6 million at March 31, 2004, and $17.1 million at
December 31, 2003. As of March 31, 2004, the fair value of standby letters of
credit was not material to the Company's consolidated financial statements.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity (such as the
Company's dilutive stock options).
The following is a reconciliation of basic and diluted earnings per share
for the periods presented in the consolidated statements of income.
- ----------------------------------------------------------------
Three months ended March 31, 2004 2003
- ----------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,796 32,517
Net income available to common shareholders $12,371 $11,566
- ----------------------------------------------------------------
Basic EPS $ 0.38 $ 0.36
================================================================
Diluted EPS:
Weighted average common shares outstanding 32,796 32,517
Dilutive potential common stock 378 266
- ----------------------------------------------------------------
Weighted average common shares and common
share equivalents 33,174 32,783
Net income available to common shareholders $12,371 $11,566
- ----------------------------------------------------------------
Diluted EPS $ 0.37 $ 0.35
================================================================
There were 321,593 stock options for the quarter ended March 31, 2004 and
407,003 stock options for the quarter ended March 31, 2003 that were not
considered in the calculation of diluted earnings per share since the stock
options' exercise price was greater than the average market price during these
periods.
-11-
NOTE 6. 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:
=============================================================
THREE MONTHS ENDED
- -------------------------------------------------------------
MARCH 31,
- -------------------------------------------------------------
2004 2003
----------- -----------
Net income, as reported $ 12,371 $ 11,566
Add: Stock-based compensation
expense included in reported net
income, net of related tax effects 23 23
Less: Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effects (283) (230)
----------- -----------
Pro forma net income $ 12,111 $ 11,359
=========== ===========
Net income per share:
Basic - as reported $ 0.38 $ 0.36
Basic - Pro forma $ 0.37 $ 0.35
Diluted - as reported $ 0.37 $ 0.35
Diluted - Pro forma $ 0.36 $ 0.35
=============================================================
The Company granted 323,723 stock options for the three months ended March 31,
2004 with a weighted average exercise price of $22.17 per share compared to
363,682 stock options granted for the three months ended March 31, 2003 with a
weighted average exercise price of $17.52 per share. The per share weighted
average fair value of the stock options granted for the three months ended March
31, 2004 and 2003 was $5.81 and $2.33. The assumptions used for the grants noted
above were as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
==================================================================
DIVIDEND YIELD 3.01%-3.14% 3.97%
EXPECTED VOLATILITY 31.48%-31.51% 19.13%
RISK -FREE INTEREST RATE 3.56%-3.90% 3.50%
EXPECTED LIFE 7 years 7 years
-12-
The fair value of stock options granted was estimated at the date of grant using
the Black-Scholes option-pricing model. This model was developed for use in
estimating fair value of publicly traded options that have no vesting
restrictions and are fully transferable. Additionally, the model requires the
input of highly subjective assumptions. Because the Company's employee and
director stock options have characteristics significantly different from those
of publicly traded stock options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the Black-Scholes option-pricing model does not necessarily provide a
reliable single measure of the fair value of the Company's employee and director
stock options.
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
A summary of goodwill by operating subsidiaries follows:
JANUARY 1, GOODWILL IMPAIRMENT MARCH 31,
(In thousands) 2003 ACQ. (DISP.) LOSS 2003
--------------------------------------------------
NBT Bank, N.A. $ 43,120 $ - $ - $ 43,120
NBT Financial Services, Inc. 3,001 - - 3,001
--------------------------------------------------
Total $ 46,121 $ - $ - $ 46,121
==================================================
JANUARY 1, GOODWILL IMPAIRMENT MARCH 31,
(In thousands) 2004 ACQ. (DISP.) LOSS 2004
--------------------------------------------------
NBT Bank, N.A. $ 44,520 $ - $ - $ 44,520
NBT Financial Services, Inc. 3,001 - - 3,001
--------------------------------------------------
Total $ 47,521 $ - $ - $ 47,521
==================================================
The Company acquired $1.4 million in goodwill in connection with the acquisition
of a branch from Alliance Bank in June of 2003.
-13-
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,
2004 2003
--------------
(in thousands)
Core deposit intangibles:
Gross carrying amount $5,585 $5,433
Less: accumulated amortization 4,555 4,079
--------------
Net Carrying amount 1,030 1,354
--------------
Other intangibles:
Gross carrying amount 1,031 1,031
Less: accumulated amortization 352 300
--------------
Net Carrying amount 679 731
--------------
Total intangible with definite useful lives
Gross carrying amount 6,616 6,464
Less: accumulated amortization 4,907 4,379
--------------
Net carrying amount 1,709 2,085
Other intangibles not subject to
amortization: Pension Asset
551 551
Intangible assets, net $2,260 $2,636
====== ======
Amortization expense on finite-lived intangible assets is expected to total $0.2
million for the remainder of 2004 and $0.3 million for each of 2005, 2006, 2007
and $0.2 million for 2008.
NOTE 9. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
On June 14, 1999, the CNB Financial Corp. ("CNBF") 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
(3.91% and 4.15% for the March 31, 2004 and 2003 quarterly payments,
respectively). The junior subordinated debentures are the sole asset of the
Trust. The obligations of the Trust are guaranteed by the Company. The Trust
issued $18.7 million of junior subordinated debentures to CNBF at 3-month LIBOR
plus 275 basis points. Capital securities totaling $1.0 million were issued to
the Company. The net proceeds from the sale of the capital securities were used
for general corporate purposes and to provide a capital contribution of $15.0
million to CNB Bank, a wholly-owned subsidiary of CNBF that was merged into NBT
Bank. The capital securities, with associated expense that is tax deductible,
qualify as Tier I capital under regulatory definitions, subject to certain
restrictions. The Company's primary source of funds to pay interest on the
junior subordinated debentures owed to the Trust are current dividends from the
-14-
NBT Bank. Accordingly, the Company's ability to service the debentures is
dependent upon the continued ability of NBT Bank to pay dividends.
As noted previously, prior to the adoption of FIN No. 46-R on January 1, 2004,
the Company consolidated the capital securities of the Trust and reported the
securities as guaranteed preferred beneficial interests in the Company's junior
subordinated debentures as a separate line item between total liabilities and
stockholders' equity on the consolidated balance sheet. Since the capital
securities were not classified as debt, the interest expense associated with the
securities was reported as a component of total noninterest expense on the
Company's consolidated income statements. On January 1, 2004, the Company
de-consolidated the Trust from its consolidated balance sheet. The Company's
obligation to the Trust is now reported as Trust Preferred Debentures as
component of long-term debt on the Company's consolidated balance sheet as of
March 31, 2004. The interest expense associated with these junior subordinated
debentures is reported as a component of total interest expense in the Company's
consolidated statements of income for the three months ended March 31, 2004. As
permitted, the provisions of FIN No. 46-R were applied on a prospective basis.
Presently the beneficial interests in the Company's junior subordinated
debentures qualify as Tier I capital of the Company. In July 2003, the Board of
Governors of the Federal Reserve System issued a supervisory letter instructing
bank and financial holding companies to continue to include beneficial interests
in junior subordinated debentures in Tier I capital for regulatory purposes
until notice is given to the contrary. The Federal Reserve intends to review the
regulatory implications of any accounting treatment changes and, if necessary or
warranted, provide further appropriate guidance. There can be no assurance that
the Federal Reserve will continue to allow institutions to include beneficial
interests in junior subordinated debentures in Tier I capital for regulatory
capital purposes. As of March 31, 2004, if the Company was not allowed to
include its $17.0 million in beneficial interests in the Company's junior
subordinated debentures within Tier I capital, it would still exceed the
regulatory required minimums for capital adequacy purposes.
NOTE 10. DEFINED BENEFIT PENSION PLAN AND POSTRETIREMENT HEALTH PLAN
The Company maintains a qualified, noncontributory, defined benefit pension plan
covering substantially all employees. Benefits paid from the plan are based on
age, years of service, compensation, social security benefits, and are
determined in accordance with defined formulas. The Company's policy is to fund
the pension plan in accordance with ERISA standards. The Company does not plan
to contribute to the defined benefit pension plan in 2004. In addition, the
Company provides certain health care benefits for retired employees. Benefits
are accrued over the employees' active service period. Only employees that were
employed by NBT Bank, N.A. on or before January 1, 2000 are eligible to receive
postretirement health care benefits. The Company funds the cost of the
postretirement health plan as benefits are paid.
-15-
The Components of pension expense and postretirement expense are set forth
below:
THREE MONTHS ENDED MARCH 31,
Pension Plan: 2004 2003
---------------- ----------------
Service cost $ 427 $ 337
Interest cost 533 507
Expected return on plan assets (934) (794)
Net amortization 64 64
---------------- ----------------
Total $ 90 $ 114
================ ================
THREE MONTHS ENDED MARCH 31,
Postretirement Health Plan: 2004 2003
---------------- ----------------
Service cost $ 9 $ 33
Interest cost 68 91
Net amortization (10) 10
---------------- ----------------
Total $ 67 $ 134
================ ================
NBT BANCORP INC. AND SUBSIDIARIES
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and results of operations of NBT
Bancorp Inc. (Bancorp) and its wholly owned subsidiaries, NBT Bank, N.A. (NBT),
and NBT Financial Services, Inc. (collectively referred to herein as the
Company.) This discussion will focus on Results of Operations, Financial
Position, Capital Resources and Asset/Liability Management. Reference should be
made to the Company's consolidated financial statements and footnotes thereto
included in this Form 10-Q as well as to the Company's 2003 Form 10-K for an
understanding of the following discussion and analysis.
FORWARD LOOKING STATEMENTS
Certain statements in this filing and future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, contain forward-looking statements, as
defined in the Private Securities Litigation Reform Act. These statements may be
identified by the use of phrases such as "anticipate," "believe," "expect,"
"forecasts," "projects," or other similar terms. There are a number of
factors, many of which are beyond the Company's control that could cause actual
results to differ materially from those contemplated by the forward looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) revenues may be lower
than expected; (3) changes in the interest rate environment may effect interest
margins; (4) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit; (5)
legislative or regulatory changes, including changes in accounting standards or
tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than the Company; (7)
adverse changes may occur in the securities markets or with respect to
inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; and (10) the Company's
success in managing the risks involved in the foregoing.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
-16-
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 $12.4 million ($0.37 diluted earnings per
share) for the three months ended March 31, 2004 compared to net income of $11.6
million ($0.35 diluted earnings per share) for the three months ended March 31,
2003. The quarter to quarter increase in net income from 2004 to 2003 was
primarily the result of increases in total noninterest income of $1.7 million
and net interest income of $1.1 million offset by an increase in total
noninterest expense of $1.3 million. The increase in noninterest income was
driven primarily by increases in services charges on deposit accounts of $0.4
million, Bank Owned Life Insurance (BOLI) income of $0.4 million, broker/dealer
revenue of $0.3 million, trust fees of $0.2 million and other income of $0.3
million. The increase in net interest income resulted primarily from 12% growth
in average loans during the three months ended March 31, 2004 compared to the
same period in 2003 offset somewhat by a 28 basis point decline in net interest
margin to 4.10% for 2004 from 4.38% for 2003. The increase in total noninterest
expense resulted primarily from increases in salaries and employee benefits of
$1.5 million and professional fees and outside services of $0.3 million offset
by a $0.4 million decline in other operating expenses.
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%.
-17-
TABLE 1
PERFORMANCE MEASUREMENTS
- ---------------------------------------------------
FIRST First
QUARTER Quarter
2004 2003
- ---------------------------------------------------
Return on average assets (ROAA) 1.23% 1.27%
Return on average equity (ROE) 15.73% 16.05%
Net interest margin (FTE) 4.10% 4.38%
===================================================
NET INTEREST INCOME
Net interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest-bearing
liabilities, primarily deposits and borrowings. Net interest income is affected
by the interest rate spread, the difference between the yield on earning assets
and cost of interest-bearing liabilities, as well as the volumes of such assets
and liabilities. Net interest income is one of the major determining factors in
a financial institution's performance as it is the principal source of earnings.
Table 2 represents an analysis of net interest income on a federal taxable
equivalent basis.
Federal taxable equivalent (FTE) net interest income increased $1.1 million
during the three months ended March 31, 2004 compared to the same period of
2003. The increase in FTE net interest income resulted primarily from 12% growth
in average loans. Offsetting the effect of the growth in loans was a 20 basis
point (bp) decline in the Company's net interest spread, as earning assets
repriced downward at a faster rate than interest-bearing liabilities. The yield
on earning assets declined 67 bp to 5.67% for the three months ended March 31,
2004 from 6.34% for the same period in 2003. Meanwhile, the rate paid on
interest-bearing liabilities decreased 47 bp, to 1.84% for the three months
ended March 31, 2004 from 2.31% for the same period in 2003.
Total FTE interest income for the three months ended March 31, 2004 decreased
$0.9 million compared to the same period in 2003, 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 2003 and the first quarter of 2004. The low
interest rate environment fostered an increase in refinancing of mortgage
related earning assets, resulting in an increase in repayments of loans and
securities which have been reinvested at lower rates. Minimizing the effect of
the decline in yield was an 8% increase in average earning assets during the
three months ended March 31, 2004 when compared to the same period in 2003. As
mentioned previously, the growth in earning assets during the period was driven
primarily by growth in average loans of 12%. The growth in average loans
resulted primarily from strong growth in the consumer loan and residential real
estate mortgage portfolios.
-18-
During the same time period, total interest expense decreased $2.0 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 34.2% of interest-bearing liabilities for the three months ended
March 31, 2004 from 43.2% for the same period in 2003. Offsetting this decrease
in the interest-bearing liabilities mix, was an increase in lower cost NOW,
MMDA, and Savings deposits, to 44.6% of interest-bearing liabilities for the
three months ended March 31, 2004 from 41.6% for the same period in 2003.
Additionally, offsetting the decline in time deposits was an increase in
short-term borrowings, comprising 9.1% of average interest-bearing liabilities
for the three months ended March 31, 2004 compared to 3.4% for the same period
in 2003. Meanwhile, long-term debt increased slightly, comprising 11.6% and
11.8% of average interest-bearing liabilities for the three months ended March
31, 2004 and 2003.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin decreased to 4.10% for the three months
ended March 31, 2004, from 4.38% for the comparable period in 2003. The decrease
in the net interest margin can be primarily attributed to the previously
mentioned decrease in the interest rate spread driven by the decrease in yield
from earning assets exceeding the decrease in rates on interest-bearing
liabilities.
-19-
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,
2004 2003
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------------
ASSETS
===========================================================================================================
Short-term interest bearing accounts $ 2,779 $ 91 13.16% $ 5,185 $ 26 2.04%
Securities available for sale (2) 964,648 11,381 4.74 977,901 12,417 5.16
Securities held to maturity (2) 95,954 1,138 4.77 80,342 1,183 5.98
Investment in FRB and FHLB Banks 33,994 176 2.08 23,482 300 5.19
Loans (1) 2,646,114 40,027 6.08 2,354,636 39,804 6.86
---------- --------- ---------- ---------
Total earning assets 3,743,489 52,813 5.67 3,441,546 53,730 6.34
--------- ---------
Other assets 288,794 255,997
---------- ----------
TOTAL ASSETS $4,032,283 $3,697,543
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 420,870 1,200 1.15 $ 323,015 1,110 1.40
NOW deposit accounts 451,514 582 0.52 394,626 691 0.71
Savings deposits 554,612 1,004 0.73 495,411 1,230 1.01
Time deposits 1,094,450 7,259 2.67 1,262,254 9,581 3.08
---------- --------- ---------- --------
Total interest bearing deposits 2,521,446 10,045 1.60 2,475,306 12,612 2.07
Short-term borrowings 289,616 793 1.10 98,499 289 1.19
Long-term debt 369,689 3,615 3.93 345,674 3,705 4.35
Junior subordinated debentures 17,019 180 4.25 - - 0.00
---------- --------- ---------- --------
Total interest bearing liabilities 3,197,770 14,633 1.84% 2,919,479 16,606 2.31%
--------- --------
Demand deposits 468,722 430,097
Other liabilities (3) 49,727 55,424
Stockholders' equity 316,064 292,543
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,032,283 $3,697,543
---------- ----------
NET INTEREST INCOME (FTE BASIS) 38,180 37,124
--------- --------
INTEREST RATE SPREAD 3.83% 4.03%
----- -----
NET INTEREST MARGIN 4.10% 4.38%
----- -----
Taxable equivalent adjustment 1,086 1,095
--------- --------
NET INTEREST INCOME $ 37,094 $36,029
========= ========
<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 for 2003 is $17.0 million in the Company's
guaranteed preferred beneficial interests in Company's junior subordinated
debentures. See note 9 in the notes to interim consolidated financial
statements for more information about the accounting treatment for junior
subordinated debentures.
-20-
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)
2004 OVER 2003
- -------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- -------------------------------------------------------------------
Short-term interest bearing accounts $ (18) $ 83 $ 65
Securities available for sale (166) (696) (862)
Securities held to maturity 212 (161) 51
Investment in FRB and FHLB Banks 100 (224) (124)
Loans 4,648 (4,386) 262
- -------------------------------------------------------------------
Total (FTE) interest income 4,503 (5,111) (608)
- -------------------------------------------------------------------
Money market deposit accounts 300 (210) 90
NOW deposit accounts 90 (199) (109)
Savings deposits 135 (361) (226)
Time deposits (1,191) (1,131) (2,322)
Short-term borrowings 525 (21) 504
Long-term debt 247 (337) (90)
Trust preferred debentures 180 0 180
- -------------------------------------------------------------------
Total interest expense 1,481 (3,454) (1,973)
- -------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 3,022 $(1,657) $ 1,365
===================================================================
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,
2004 2003
---------------- --------------
(in thousands)
Service charges on deposit accounts $ 4,037 $ 3,603
Broker/dealer and insurance fees 1,731 1,392
Trust 1,107 892
Other 3,174 2,828
Net securities (losses) gains 9 27
Bank owned life insurance income 385 0
---------------- --------------
Total $ 10,443 $ 8,742
================ ==============
-21-
Total noninterest income increased $1.7 million, or 19% from $8.7 million for
the three months ended March 31, 2003 to $10.4 million for the same period in
2004. Service charges on deposit accounts increased $0.4 million, due primarily
to pricing adjustments made during the second half of 2003. Bank Owned Life
Insurance ("BOLI") income increased $0.4 million, resulting from the $30.0
million BOLI purchase in June 2003. Broker/dealer revenue increased $0.3 million
or 24% for the three months ended March 31, 2004 over the same period in 2003,
due primarily to the Company's initiative in delivering financial service
related products through its 111-branch network, which was implemented at the
end of 2002. Trust revenue increased $0.2 million or 24%, due in part to an
increase in assets under management from a combination of growth in managed
personal trust accounts and an increase in equity markets. Other income
increased $0.3 million, primarily from an increase in credit-group-life
insurance fees.
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,
2004 2003
--------------- ---------------
(in thousands)
Salaries and employee benefits $ 14,113 $ 12,659
Occupancy 2,598 2,526
Equipment 1,853 1,766
Data processing and communications 2,692 2,721
Professional fees and outside services 1,632 1,302
Office supplies and postage 1,031 1,073
Amortization of intangible assets 71 162
Capital securities - 191
Loan collection and other real estate owned 372 280
Other 2,840 3,212
--------------- ---------------
Total noninterest expense $ 27,202 $ 25,892
=============== ===============
Total noninterest expense increased $1.3 million or 5% to $27.2 million for the
three months ended March 31, 2004 from $25.9 million for the same period in
2003. Salaries and employee benefits increased $1.5 million to $14.1 million for
the three months ended March 31, 2004 from $12.7 million for the same period in
2003. The increase in salaries and benefits resulted from increases in salaries
expense of $0.6 million (primarily from merit increases), incentive compensation
of $0.5 million (from increases in bonuses and commissions as the Company has
shifted to a sales driven culture), and medical insurance expense of $0.2
million. Professional fees and outside services increased $0.3 million for the
three months ended March 31, 2004 when compared to the same period in 2003, from
increases in legal fees and ATM related services. Other operating expenses
decreased $0.4 million for the three months ended March 31, 2004 when compared
to the same period in 2003, primarily from a $0.4 million charge taken for the
other-than-temporary impairment of a nonmarketable equity security in 2003.
INCOME TAXES
Income tax expense was $5.8 million for the three months ended March 31, 2004
compared to $5.4 million for the same period in 2003. The effective tax rate was
32.1% for the three months ended March 31, 2004 and 31.7% for the same period in
2003.
-22-
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,
2004 2003 2003
-------------------------------------
(in thousands)
Commercial and commercial mortgages* $1,133,170 $ 1,085,605 $1,066,446
Residential real estate mortgages 721,991 764,681 613,093
Consumer 726,960 726,960 631,802
Leases 64,553 62,730 62,738
-------------------------------------
Total loans and leases $2,646,674 $ 2,639,976 $2,374,079
=====================================
<FN>
* Includes agricultural loans
Total loans and leases were $2.6 billion, or 65.9% of assets, at March 31, 2004,
and $2.6 billion, or 65.2% at December 31, 2003, and $2.4 billion, or 63.3%, at
March 31, 2003. Total loans and leases increased $272.6 million or 11% at March
31, 2004 when compared to March 31, 2003. The solid year over year loan growth
was driven mainly by increases in residential real estate mortgages, which
increased $108.9 million or 18%. The increase in residential real estate
mortgages resulted from a combination of low interest rates increasing product
demand and centralizing the mortgage origination function at the end of 2002,
leading to stronger market presence, a streamlined process, and competitive
products. Additionally, consumer loans increased $95.2 million or 15%, due in
part to strong growth in home equity loans and indirect automobile installment
loans. Lastly, commercial loans and commercial mortgages increased $66.7 million
or 6% year over year. At March 31, 2004, commercial loans, including commercial
mortgages, represented approximately 43% of the loan and lease portfolio, while
consumer loans and leases and residential mortgages represented 30% and 27%,
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.
Average total securities remained relatively unchanged for the three months
ended March 31, 2004 when compared to the same period in 2003. The average
balance of securities available for sale decreased $13.3 million for the three
months ended March 31, 2004 when compared to the same period in 2003. The
average balance of securities held to maturity increased $15.6 million for the
three months ended March 31, 2004, when compared to the same period in 2003. The
average total securities portfolio represented 28% of total average earning
assets for the three months ended March 31, 2004 down from 31% for the same
period in 2003.
-23-
The following details the composition of securities available for sale,
securities held to maturity and regulatory investments for the periods
indicated:
AT MARCH 31
2004 2003
---------------
Mortgage-backed securities
With maturities 15 years or less 54% 56%
With maturities greater than 15 years 11% 12%
Collateral mortgage obligations 5% 1%
Municipal securities 16% 16%
US agency notes 10% 11%
Other 4% 4%
---------------
Total 100% 100%
===============
ALLOWANCE FOR LOAN AND LEASE LOSSES, PROVISION FOR LOAN AND LEASE LOSSES, AND
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS
- ---------------------
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan portfolio's risk profile. It is evaluated to ensure that it is
sufficient to absorb all reasonably estimable credit losses inherent in the
current loan and lease portfolio.
Management considers the accounting policy relating to the allowance for loan
and lease losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgements can have on
the consolidated results of operations.
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.
-24-
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, 2004 was 1.64%
compared to 1.73% at March 31, 2003. 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.
TABLE 4
ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------
Three months ended March 31,
(dollars in thousands) 2004 2003
- ---------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 42,651 $ 40,167
Recoveries 829 1,698
Charge-offs (2,301) (2,664)
- ---------------------------------------------------------------------------------------------------------
Net charge-offs (1,472) (966)
Provision for loan losses 2,124 1,940
- ---------------------------------------------------------------------------------------------------------
Balance, end of period $ 43,303 $ 41,141
=========================================================================================================
COMPOSITION OF NET CHARGE-OFFS
Commercial and agricultural $ (124) 9% $ (90) 9%
Real estate mortgage (22) 1% 18 (2)%
Consumer (1,326) 90% (894) 93%
- ---------------------------------------------------------------------------------------------------------
Net charge-offs $ (1,472) 100% $ (966) 100%
- ---------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans 0.22% 0.17%
=========================================================================================================
Net charge-offs to average loans for the quarter ended
March 31, 2004 0.06%
=========================================================================================================
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.
-25-
Total nonperforming assets were $14.7 million at March 31, 2004, compared to
$16.4 million at December 31, 2003, and $22.0 million at March 31, 2003. The
decrease in nonperforming assets resulted primarily from decreases in
nonperforming loans and OREO. Nonperforming loans totaled $13.7 million at March
31, 2004, down from the $14.8 million outstanding at December 31, 2003 and $18.4
million at March 31, 2003. The decrease in nonperforming loans resulted
primarily from decreases in commercial and agricultural nonperforming loans to
$8.0 million at March 31, 2004 from $13.3 million at March 31, 2003. OREO
decreased from $2.6 million at March 31, 2003 to $0.8 million at March 31, 2004.
The improvement in nonperforming loans and OREO resulted primarily from
effective workout strategies as well as conservative underwriting standards and
strong credit administration, minimizing the migration of performing loans into
nonperforming status.
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $53.9 million in potential problem loans at March 31,
2004 as compared to $54.3 million at December 31, 2003. 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, 2004, 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.
Net charge-offs totaled $1.5 million for the three months ended March 31, 2004,
up $0.5 million from the $1.0 million charged-off during the same period in
2003. The increase in net charge-offs resulted primarily from large recoveries
during the three months ended March 31, 2003 and an increase in consumer net
charge-offs during the three months ended March 31, 2004. The provision for loan
and lease losses totaled $2.1 million for the three months ended March 31, 2004,
up slightly from the $1.9 million provided during the same period in 2003. The
level of provision for loan and lease losses required for the three months ended
March 31, 2004 resulted primarily from a slight increase in loan growth and net
charge-offs, offset by decreases in nonperforming loans and potential problem
loans.
-26-
TABLE 5
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(dollars in thousands) 2004 2003 2003
- --------------------------------------------------------------------------------------------------
Commercial and agricultural $ 7,960 $ 8,693 $ 13,285
Real estate mortgage 2,672 2,483 2,535
Consumer 2,626 2,685 1,258
- --------------------------------------------------------------------------------------------------
Total nonaccrual loans 13,258 13,861 17,078
- --------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 99 242 602
Real estate mortgage - 244 144
Consumer 379 482 328
- --------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 478 968 1,074
- --------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: - - 297
- --------------------------------------------------------------------------------------------------
Total nonperforming loans 13,736 14,829 18,449
- --------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 757 1,157 2,609
- --------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 14,493 15,986 21,058
==================================================================================================
Nonperforming securities 215 395 925
- --------------------------------------------------------------------------------------------------
Total nonperforming assets $ 14,708 $ 16,381 $ 21,983
==================================================================================================
Total nonperforming loans to loans and leases 0.52% 0.56% 0.78%
Total nonperforming assets to assets 0.37% 0.40% 0.59%
Total allowance for loan and lease losses
to nonperforming loans 315.25% 287.62% 223.00%
==================================================================================================
BANK OWNED LIFE INSURANCE ("BOLI")
- --------------------------------------
The Company purchased $30 million in BOLI in June 2003. BOLI represents life
insurance on the lives of certain employees who are deemed to be significant
contributors to the Company. All employees in the policy are aware of and have
consented to the coverage. Increases in the cash value of the policies, as well
as insurance proceeds that may be received, are recorded in other noninterest
income, and are not subject to income taxes. The Company reviewed the financial
strength of the insurance carriers prior to the purchase of BOLI and will do so
annually thereafter.
DEPOSITS
- --------
Total deposits were $3.0 billion at March 31, 2004, up slightly from year-end
2003, and an increase of $58.7 million, or 2%, from the same period in the prior
year. Total average deposits increased $84.8 million, or 3%, from March 31,
2003 to March 31, 2004. The Company experienced a decline in time deposits, as
average time deposits declined $167.8 million or 13%, from March 31, 2003 to
March 31, 2004. Meanwhile, average core deposits increased $252.6 million or
15%, from March 31, 2003 to March 31, 2004. 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.
At March 31, 2004, total checking, savings and money market accounts represented
64.6% of total deposits compared to 57.5% at March 31, 2003.
-27-
BORROWED FUNDS
- ---------------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $238.1 million at March 31, 2004 compared to
$302.9 million and $95.1 million at December 31, and March 31, 2003,
respectively. The increase from March 31, 2004 when compared to the same period
in 2003 was due primarily to a much higher rate of loan growth when compared to
deposit growth. Long-term debt was $369.7 million at March 31, 2004 and December
31, 2003 and was $345.3 million March 31, 2003. For more information about the
Company's borrowing capacity and liquidity position, see the section with the
title caption of "Liquidity Risk" on page 31 in this discussion.
CAPITAL RESOURCES
- ------------------
Stockholders' equity of $322.3 million represents 8.0% of total assets at March
31, 2004, compared with $291.6 million, or 7.8% in the comparable period of the
prior year, and $310.0 million, or 7.7% at December 31, 2003. The Company does
not have a target dividend payout ratio, rather the Board of Directors considers
the Company's earnings position and earnings potential when making dividend
decisions.
On April 26, 2004, the Company announced that the NBT Board of Directors
declared a second quarter 2004 cash dividend of $0.19, representing a $0.02 per
share or 12% increase from the cash dividend of $0.17 per share declared during
the previous quarter. The dividend will be paid on June 15, 2004, to
shareholders of record as of June 1, 2004. This dividend increase will increase
the quarterly cash outlay for dividends by approximately $650K and is not
expected to have a material impact on stockholders' equity or regulatory capital
ratios.
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
2004 2003
- ----------------------------------------------------
Tier 1 leverage ratio 6.96% 6.71%
Tier 1 capital ratio 10.12% 9.77%
Total risk-based capital ratio 11.37% 11.02%
Cash dividends as a percentage
of net income 45.20% 47.87%
Per common share:
Book value $ 9.80 $ 9.00
Tangible book value $ 8.29 $ 7.50
====================================================
-28-
The accompanying Table 7 presents the high, low and closing sales price for the
common stock as reported on the NASDAQ Stock Market, and cash dividends declared
per share of common stock. The Company's price to book value ratio was 2.30 at
March 31, 2004 and 1.94 in the comparable period of the prior year. The
Company's price was 15.2 times annualized earnings at March 31, 2004, compared
to 12.5 times for the same period last year.
TABLE 7
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- ----------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- ----------------------------------------------------
2003
- ----------------------------------------------------
March 31 $18.60 $16.76 $17.43 $ 0.170
June 30 19.94 17.37 19.36 0.170
September 30 21.76 19.24 20.25 0.170
December 31 22.78 19.50 21.44 0.170
====================================================
2004
- ----------------------------------------------------
MARCH 31 $23.00 $21.21 $22.50 $ 0.170
====================================================
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).
-29-
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 75 bp takes place over a 12
month period with a static balance sheet. Under these scenarios, assets subject
to prepayments are adjusted to account for faster or slower prepayment
assumptions. Any investment securities or borrowings that have callable options
embedded into them are handled accordingly based on the interest rate scenario.
The resultant changes in net interest income are then measured against the flat
rate scenario.
In the declining rate scenarios, net interest income is projected to remain
relatively unchanged when compared to the forecasted net interest income in the
flat rate scenario through the simulation period. The inability to effectively
lower deposit rates will likely reduce or eliminate the benefit of lower
interest rates. In the rising rate scenarios of rates rising gradually 200 bp
and the long end of the yield curve remains flat and the short end of the curve
increases 200 bp gradually, net interest income is projected to experience a
decline from the flat rate scenario. Net interest income is projected to remain
at lower levels than in a rising rate scenario through the simulation period
primarily due to a lag in assets repricing while funding costs increase.
Net interest income for the next twelve months in the + 200/+ 200 flat/- 75 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, 2004 balance sheet position:
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
- -----------------------------------------------
CHANGE IN INTEREST RATES PERCENT CHANGE IN
(IN BASIS POINTS) NET INTEREST INCOME
- -----------------------------------------------
+ 200 FLAT (1.44%)
+ 200 (0.53%)
- - 75 0.04%
- -----------------------------------------------
Under the flat rate scenario with a static balance sheet, net interest income is
anticipated to decrease approximately 2.7% from annualized net interest income
for the three months ended March 31, 2004. 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, and the yield curve flattens or
remains unchanged from the March 31, 2004 measurement date, the Company expects
net interest income to decline for the remainder of 2004.
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
-30-
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. Furthermore, in an effort
to improve the Company's interest rate risk exposure to rising interest rates,
the Company sold approximately $22 million in residential real estate mortgages
during the three month period ended March 31, 2004. These measures have the
Company's interest rate risk position well matched at March 31, 2004, as the
Company's net interest income is projected to decrease by 0.53% 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 $39.8
million from March 31, 2004 to March 31, 2003. From December 31, 2003, we have
reduced our exposure to 30-year fixed rate mortgage related securities and loans
by $25.2 million. Approximately 11.1% of earning assets were comprised of
30-year fixed rate mortgage related securities and loans at March 31, 2004, down
from a ratio of 13.1% at March 31, 2003. 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 continue to 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.
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, 2004, the
Company's Basic Surplus measurement was 10.1% of total assets or $403 million,
which was above the Company's minimum of 5% or $201 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, 2004, 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, 2004, approximately $40.4 million of the total
-31-
stockholders' equity of NBT Bank was available for payment of dividends to the
Company without approval by the OCC. NBT Bank's ability to pay dividends also is
subject to the Bank being in compliance with regulatory capital requirements.
NBT Bank is currently in compliance with these requirements. Under the State of
Delaware Business Corporation Law, the Company may declare and pay dividends
either out of accumulated net retained earnings or capital surplus.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information called for by Item 3 is contained in the Liquidity and Interest Rate
Sensitivity Management section of the Management Discussion and Analysis.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this report. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, the
Company's disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions
rules and forms.
There were no changes made in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
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.
-32-
Item 2 -- Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The table below sets forth the information with respect to purchases made by the
Company (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of
1934), of our common stock during the three months ended March 31, 2004:
TOTAL NUMBER OF MAXIMUM
SHARES PURCHASED NUMBER OF SHARES
AS PART OF THAT MAY YET BE
TOTAL NUMBER OF AVERAGE PRICE PUBLICLY PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE ANNOUNCED PLANS THE PLANS (1)
- ---------------- ---------------- --------------- ---------------- -----------------
1/1/04 - 1/31/04 - - - 1,155,054
- ---------------- ---------------- --------------- ---------------- -----------------
2/1/04 - 2/29/04 500 $ 21.68 500 1,154,554
- ---------------- ---------------- --------------- ---------------- -----------------
3/1/04 - 3/31/04 - - - 1,154,554
- ---------------- ---------------- --------------- ---------------- -----------------
Total 500 $ 21.68 500
- ---------------- ---------------- --------------- ---------------- -----------------
<FN>
(1) On July 22, 2002, we announced that our Board of Directors had approved a share
repurchase program, pursuant to which up to 1,000,000 shares of our common stock may be
repurchased. On April 23, 2003, we announced the Board of Directors had approved a share
repurchase program, pursuant to which an additional 1,000,000 shares of our common stock
may be repurchased. On January 26, 2004, the Board of Directors approved a resolution to
combine the July 22, 2002 and April 23, 2003 repurchase programs. At that time, the
available shares for repurchase under the July 22, 2002 program totaled 155,054 shares
and there were 1,000,000 shares available for repurchase under the April 23, 2003
program, resulting in an aggregate number of shares available for repurchase to
1,155,054 shares. The repurchase program has no set expiration or termination date.
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
On April 26, 2004, NBT Bancorp Inc. announced the declaration of a regular
quarterly cash dividend of $0.19 per share, an increase of $0.02 per share over
the previous quarter. The cash dividend will be paid on June 15, 2004 to
stockholders of record as of June 1, 2004.
-33-
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of NBT Bancorp Inc. as amended through
July 23, 2001 (filed as Exhibit 3.1 to Registrant's Form 10-K for the
year ended December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
3.2 By-laws of NBT Bancorp Inc. as amended and restated through July 23,
2001 (filed as Exhibit 3.2 to Registrant's Form 10-K for the year
ended December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
3.3 Rights Agreement, dated as of November 15, 1994, between NBT Bancorp
Inc. and American Stock Transfer Trust Company as Rights Agent (filed
as Exhibit 4.1 to Registrant's Form 8-A, file number 0-14703, filed on
November 25, 1994, and incorporated by reference herein).
3.4 Amendment No. 1 to Rights Agreement, dated as of December 16, 1999,
between NBT Bancorp Inc. and American Stock Transfer Trust Company as
Rights Agent (filed as Exhibit 4.2 to Registrant's Form 8-A/A, file
number 0-14703, filed on December 21, 1999, and incorporated by
reference herein).
3.5 Amendment No. 2 to Rights Agreement, dated as of April 19, 2000,
between NBT Bancorp Inc. and American Stock Transfer Trust Company as
Rights Agent (filed as Exhibit 4.3 to Registrant's Form 8-A12G/A, file
number 0-14703, filed on May 25, 2000, and incorporated by reference
herein).
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Written Statement of the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Written Statement of the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) During the quarter ended March 31, 2004, the Company filed the following
Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated January 28, 2004,
which contained a press release announcing financial results for the quarter and
year ended December 31, 2003 and a dividend declaration to be paid on March 15,
2004 to stockholders of record as of March 1, 2004.
-34-
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 3rd day of May, 2004.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
-------------------------
Michael J. Chewens, CPA
Senior Executive Vice President
Chief Financial Officer and Corporate Secretary
-35-