SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- -----
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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 July 31, 2003, there were 32,445,931 shares outstanding of the
Registrant's common stock, $0.01 par value.
-1-
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended June 30, 2003
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2003, December 31, 2002, and
June 30, 2002
Consolidated Statements of Income for the three and six month periods
ended June 30, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the six month
periods ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2003 and 2002
Consolidated Statements of Comprehensive Income (Loss) for the three
and six month periods ended June 30, 2003 and 2002
Notes to Unaudited Interim Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Item 4 Controls and Procedures
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
-2-
NBT BANCORP INC. AND SUBSIDIARIES JUNE 30, December 31, June 30,
CONSOLIDATED BALANCE SHEETS (UNAUDITED) 2003 2002 2002
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
ASSETS
Cash and due from banks $ 143,884 $ 121,824 $ 108,456
Short-term interest bearing accounts 3,507 2,799 5,950
Trading securities, at fair value 69 203 280
Securities available for sale, at fair value 987,147 1,007,583 988,538
Securities held to maturity (fair value - $94,339, $84,517
and $89,880) 92,452 82,514 88,882
Federal Reserve and Federal Home Loan Bank stock 29,175 23,699 23,372
Loans and leases 2,496,385 2,355,932 2,336,041
Less allowance for loan and lease losses 40,858 40,167 43,719
- --------------------------------------------------------------------------------------------------------------------
Net loans and leases 2,455,527 2,315,765 2,292,322
Premises and equipment, net 61,332 61,261 61,716
Goodwill 47,558 46,121 46,121
Intangible assets, net 2,606 2,246 2,589
Bank owned life insurance 30,014 0 0
Other assets 64,186 59,711 60,716
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,917,457 $ 3,723,726 $ 3,678,942
====================================================================================================================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 470,422 $ 449,201 $ 424,615
Savings, NOW, and money market 1,304,304 1,183,603 1,119,730
Time 1,190,470 1,289,236 1,323,300
- --------------------------------------------------------------------------------------------------------------------
Total deposits 2,965,196 2,922,040 2,867,645
Short-term borrowings 211,981 105,601 122,903
Long-term debt 370,129 345,475 350,729
Other liabilities 55,301 41,228 37,903
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 3,602,607 3,414,344 3,379,180
Guaranteed preferred beneficial interests in
Company's junior subordinated debentures 17,000 17,000 17,000
Stockholders' equity:
Preferred stock, $0.01 par, none issued, 2,500,000 authorized
at June 30, 2003, December 31, 2002 and June 30, 2002 - - -
Common stock, $0.01 par value per share; shares authorized-50,000,000;
shares issued 34,401,128, 34,401,171, and 34,401,212
at June 30, 2003, December 31, 2002, and June 30, 2002, respectively 344 344 344
Additional paid-in-capital 209,769 210,443 210,445
Retained earnings 107,409 95,085 83,613
Unvested restricted stock awards (260) (127) (189)
Accumulated other comprehensive income 14,573 16,531 9,214
Treasury stock at cost 1,980,290 1,751,724,
and 1,219,970 shares at June 30, 2003, December 31, 2002
and June 30, 2002, respectively (33,985) (29,894) (20,665)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 297,850 292,382 282,762
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $3,917,457 $ 3,723,726 $3,6,78,942
====================================================================================================================
See notes to unaudited interim consolidated financial statements.
-3-
Three months ended Six months ended
NBT BANCORP INC. AND SUBSIDIARIES June 30, June 30,
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
(in thousands, except per share data)
INTEREST, FEE AND DIVIDEND INCOME:
Loans $ 39,540 $ 41,390 $ 79,155 $ 83,617
Securities available for sale 10,864 14,668 22,669 28,297
Securities held to maturity 857 1,115 1,746 2,299
Trading securities 1 2 3 4
Other 331 315 655 595
- ---------------------------------------------------------------------------------------------------
Total interest, fee and dividend income 51,593 57,490 104,228 114,812
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 12,040 16,265 24,652 33,256
Short-term borrowings 370 287 659 635
Long-term debt 3,691 3,856 7,396 7,494
- ---------------------------------------------------------------------------------------------------
Total interest expense 16,101 20,408 32,707 41,385
- ---------------------------------------------------------------------------------------------------
Net interest income 35,492 37,082 71,521 73,427
Provision for loan and lease losses 1,413 2,092 3,353 4,103
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 34,079 34,990 68,168 69,324
- ---------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Trust 1,116 804 2,008 1,623
Service charges on deposit accounts 3,764 3,239 7,367 6,289
Broker/dealer and insurance fees 1,750 1,483 3,142 2,978
Net securities (losses) gains 38 69 65 (433)
Gain on sale of branch, net - - - 220
Other 2,271 2,207 5,099 4,536
- ---------------------------------------------------------------------------------------------------
Total noninterest income 8,939 7,802 17,681 15,213
- ---------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 12,060 12,497 24,719 24,871
Office supplies and postage 1,011 1,227 2,084 2,124
Occupancy 2,182 2,096 4,708 4,265
Equipment 1,944 1,818 3,710 3,532
Professional fees and outside services 1,240 1,782 2,542 3,397
Data processing and communications 2,720 2,598 5,441 5,163
Capital securities 179 230 370 446
Amortization of intangible assets 155 208 317 433
Loan collection and other real estate owned 476 748 756 1,675
Other operating 3,881 2,858 7,093 5,368
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 25,848 26,062 51,740 51,274
- ---------------------------------------------------------------------------------------------------
Income before income taxes 17,170 16,730 34,109 33,263
Income taxes 5,362 5,464 10,735 10,920
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 11,808 $ 11,266 $ 23,374 $ 22,343
===================================================================================================
Earnings per share:
Basic $ 0.36 $ 0.34 $ 0.72 $ 0.67
Diluted $ 0.36 $ 0.34 $ 0.71 $ 0.67
===================================================================================================
See notes to unaudited interim consolidated financial statements.
-4-
NBT BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
Additional Unvested Accumulated Other
Common Paid-in Retained Restricted Comprehensive
Stock Capital Earnings Stock Income (loss)
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2001 $ 343 $ 209,176 $ 72,531 $ 3,921
Net Income 22,343
Cash Dividends - $0.34 per share (11,261)
Purchase of 72,900 treasury shares
Issuance of 162,421 shares to
employee benefits plans and
other stock plans, including
tax benefit 1 1,296
Grant of 14,648 shares of restricted
stock awards (27) (222)
Amortization of restricted stock awards 33
Other comprehensive income 5,293
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ 344 $ 210,445 $ 83,613 ($189) $ 9,214
================================================================================================================
BALANCE AT DECEMBER 31, 2002 $ 344 $ 210,443 $ 95,085 ($127) $ 16,531
Net income 23,374
Cash dividends - $0.34 per share (11,050)
Purchase of 369,313 treasury shares
Issuance of 41,980 shares in exchange
for 20,172 shares received as
consideration for the exercise of
incentive stock options (357)
Net issuance of 107,403 shares to
employee benefit plans and other
stock plans, including tax benefit (317)
Grant of 11,536 shares of restricted
stock awards (203)
Amortization of restricted stock awards 70
Other comprehensive (loss) (1,958)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $ 344 $ 209,769 $ 107,409 ($260) $ 14,573
- ----------------------------------------------------------------------------------------------------------------
Treasury
Stock Total
- -------------------------------------------------------------------------------
(in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 2001 ($19,616) $266,355
Net Income 22,343
Cash Dividends - $0.34 per share (11,261)
Purchase of 72,900 treasury shares (1,171) (1,171)
Issuance of 162,421 shares to
employee benefits plans and
other stock plans, including
tax benefit (127) 1,170
Grant of 14,648 shares of restricted
stock awards 249 -
Amortization of restricted stock awards 33
Other comprehensive income 5,293
- -------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ (20,665) $282,762
===============================================================================
BALANCE AT DECEMBER 31, 2002 $ (29,894) $292,382
Net income 23,374
Cash dividends - $0.34 per share (11,050)
Purchase of 369,313 treasury shares (6,489) (6,489)
Issuance of 41,980 shares in exchange
for 20,172 shares received as
consideration for the exercise of
incentive stock options 357 -
Net issuance of 107,403 shares to
employee benefit plans and other
stock plans, including tax benefit 1,838 1,521
Grant of 11,536 shares of restricted
stock awards 203 -
Amortization of restricted stock awards 70
Other comprehensive (loss) (1,958)
- -------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 ($33,985) $297,850
- -------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
-5-
NBT BANCORP INC. AND SUBSIDIARIES Six Months Ended June 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 2003 2002
- ------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 23,374 $ 22,343
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,353 4,103
Depreciation of premises and equipment 3,232 3,451
Net amortization (accretion) on securities 2,250 (866)
Amortization of intangible assets 317 433
Amortization of restricted stock awards 70 33
Proceeds from sale of loans held for sale 7,581 3,965
Origination of loans held for sale (2,350) (3,114)
Net losses on sales of loans - 50
Net gain on sale of other real estate owned (710) (50)
Net security losses (gains) (65) 433
Proceeds from sale of trading securities 158 -
Purchases of trading securities (60) (166)
Writedown of nonmarketable equity securities 620 -
Gain on sale of a branch, net (220)
Purchase of Bank Owned Life Insurance (30,000) -
Net (increase) decrease in other assets (3,792) 3,367
Net increase (decrease) in other liabilities 13,160 (6,245)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,138 27,517
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net cash and cash equivalents provided by acquisitions 10,594 -
Net cash paid in conjunction with branch sale - (29,171)
Securities available for sale:
Proceeds from maturities 227,529 141,582
Proceeds from sales 177,526 156,799
Purchases (390,249) (368,278)
Securities held to maturity:
Proceeds from maturities 29,473 30,000
Purchases (39,446) (17,330)
Purchases of FRB and FHLB stock (5,476) (1,588)
Net increase in loans (148,341) (6,821)
Purchase of premises and equipment, net (3,275) (3,390)
Proceeds from sales of other real estate owned 2,434 811
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (139,231) (97,386)
- ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 29,845 (13,708)
Net increase in short-term borrowings 106,380 890
Proceeds from issuance of long-term debt 125,000 80,000
Repayments of long-term debt (100,346) (1,602)
Proceeds from issuance of treasury shares to
employee benefit plans and other stock plans,
including tax benefit 1,521 1,170
Purchase of treasury stock (6,489) (1,171)
Cash dividends (11,050) (11,261)
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 144,861 54,318
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 22,768 (15,551)
Cash and cash equivalents at beginning of period 124,623 129,957
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 147,391 $ 114,406
==========================================================================================
( Continued )
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental disclosure of cash flow information: Six months Ended June 30,
2003 2002
Cash paid during the period for:
Interest $ 33,819 $ 44,898
Income taxes 6,100 6,896
===============================================================================
Loans transferred to OREO $ 1,122 $ 1,277
BRANCH DIVESTITURE:
Assets sold - $ 3,323
Liabilities sold - 34,263
ACQUISITIONS:
- -------------------------------------------------------------------------------
Fair value of assets acquired $ 1,155 -
Fair value of liabilities assumed 13,311 -
- -------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
-7-
Three months ended Six months ended
NBT Bancorp Inc. and Subsidiaries June 30, June 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------
(in thousands & unaudited)
Net Income $ 11,808 $ 11,266 $ 23,374 $ 22,343
- -----------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax
Unrealized holding (losses) gains arising during
period [pre-tax amounts of ($488), $16,103,
($2,831) and $8,369] (293) 9,662 (1,702) 5,037
Minimum Pension Liability Adjustment (217)
Less: Reclassification adjustment for net losses
included in net income [pre-tax amounts of
($38), ($70), $(65) and $425] (23) (42) (39) 256
- -----------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income (316) 9,620 (1,958) 5,293
- -----------------------------------------------------------------------------------------------------
Comprehensive income $ 11,492 $ 20,886 $ 21,416 $ 27,636
=====================================================================================================
See notes to unaudited interim consolidated financial statements.
-8-
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements include the
accounts of NBT Bancorp Inc. (the Registrant) and its wholly owned subsidiaries,
NBT Bank, N.A. (NBT or Bank), NBT Financial Services, Inc., and CNBF Capital
Trust I. Collectively, the Registrant and its subsidiaries are referred to
herein as "the Company". All intercompany transactions have been eliminated in
consolidation. Amounts in the prior period financial statements are reclassified
whenever necessary to conform to current period presentation.
The consolidated balance sheet at December 31, 2002 has been derived from
audited consolidated financial statements at that date. The accompanying
unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003. For
further information, refer to the consolidated financial statements included in
the Registrant's annual report on Form 10-K for the year ended December 31, 2002
and notes thereto referred to above.
NOTE 2. USE OF ESTIMATES
Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilites at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period, as well as the disclosures provided. Actual results could
differ from those estimates. Estimates associated with the allowance for loan
losses, fair values of financial instruments and status of contingencies are
particularly susceptible to material change in the near term.
The allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
portfolio with respect to the mix between the various types of loans and their
related risk characteristics, a review of the value of collateral supporting the
loans, comprehensive reviews of the loan portfolio by the independent loan
review staff and management, as well as consideration of volume and trends of
delinquencies, nonperforming loans, and loan charge-offs. As a result of the
test of adequacy, required additions to the allowance for loan and lease losses
are made periodically by charges to the provision for loan and lease losses.
-9-
The allowance for loan and lease losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company's impaired loans are generally collateral
dependent. The Company considers the estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
impairment if those costs are expected to reduce the cash flows available to
repay or otherwise satisfy the loans.
Management believes that the allowance for loan and lease losses is adequate.
While management uses available information to recognize loan and lease losses,
future additions to the allowance for loan and lease losses may be necessary
based on changes in economic conditions or changes in the values of properties
securing loans in the process of foreclosure. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan and lease losses. Such agencies may require the
Company to recognize additions to the allowance for loan and lease losses based
on their judgments about information available to them at the time of their
examination which may not be currently available to management.
Other real estate owned (OREO) consists of properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are
recorded at the lower of fair value of the asset acquired less estimated costs
to sell or "cost" (defined as the fair value at initial foreclosure). At the
time of foreclosure, or when foreclosure occurs in-substance, the excess, if any
of the loan over the fair market value of the assets received, less estimated
selling costs, is charged to the allowance for loan and lease losses and any
subsequent valuation write-downs are charged to other expense. Operating costs
associated with the properties are charged to expense as incurred. Gains on the
sale of OREO are included in income when title has passed and the sale has met
the minimum down payment requirements prescribed by GAAP.
Income taxes are accounted for under the asset and liability method. The Company
files a consolidated tax return on the accrual basis. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
-10-
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments in the normal course of business
to meet financing needs of its customers and to reduce its own exposure to
fluctuating interest rates. These financial instruments include commitments to
extend credit, unused lines of credit, and standby letters of credit. Exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Company uses
the same credit policy to make such commitments as it uses for on-balance-sheet
items. At June 30, 2003 and December 31, 2002, commitments to extend credit and
unused lines of credit totaled $457.9 million and $409.1 million. Since
commitments to extend credit and unused lines of credit may expire without being
fully drawn upon, this amount does not necessarily represent future cash
commitments. Collateral obtained upon exercise of the commitment is determined
using management's credit evaluation of the borrower and may include accounts
receivable, inventory, property, land and other items.
The Company guarantees the obligations or performance of customers by issuing
stand-by letters of credit to third parties. These stand-by letters of credit
are frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities. The risk involved
in issuing stand-by letters of credit is essentially the same as the credit risk
involved in extending loan facilities to customers, and they are subject to the
same credit origination, portfolio maintenance and management procedures in
effect to monitor other credit and off-balance sheet products. Typically, these
instruments have terms of five years or less and expire unused; therefore, the
total amounts do not necessarily represent future cash requirements. Standby
letters of credit totaled $25.6 million at June 30, 2003, $24.7 million at
December 31, 2002. The fair value of the liability associated with the standby
letters of credit was not material at June 30, 2003.
NOTE 4. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity (such as the
Company's dilutive stock options and restricted stock).
-11-
The following is a reconciliation of basic and diluted earnings per share for
the periods presented in the consolidated statements of income.
- ----------------------------------------------------------------------------------
Three months ended June 30, 2003 2002
- ----------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,653 33,157
Net income available to common shareholders $11,808 $11,266
- ----------------------------------------------------------------------------------
Basic EPS $ 0.36 $ 0.34
==================================================================================
Diluted EPS:
Weighted average common shares outstanding 32,653 33,157
Dilutive effect of common stock options and restricted stock 282 245
- ----------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 32,935 33,402
Net income available to common shareholders $11,808 $11,266
- ----------------------------------------------------------------------------------
Diluted EPS $ 0.36 $ 0.34
==================================================================================
- ----------------------------------------------------------------------------------
Six months ended June 30, 2003 2002
- ----------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,443 33,125
Net income available to common shareholders $23,374 $22,343
- ----------------------------------------------------------------------------------
Basic EPS $ 0.72 $ 0.67
==================================================================================
Diluted EPS:
Weighted average common shares outstanding 32,443 33,125
Dilutive effect of common stock options and restricted stock 275 223
- ----------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 32,718 33,348
Net income available to common shareholders $23,374 $22,343
- ----------------------------------------------------------------------------------
Diluted EPS $ 0.71 $ 0.67
==================================================================================
There were 202,970 outstanding stock options for the quarter ended June 30,
2003 and 401,397 outstanding stock options for the quarter ended June 30, 2002
that were not considered in the calculation of diluted earnings per share since
the stock options' exercise price was greater than the average market price
during these periods. There were 368,022 outstanding stock options for the six
month period ended June 30, 2003 and 927,943 outstanding stock options for the
six month period ended June 30, 2002 that were not considered in the calculation
of diluted earnings per share since the stock options' exercise price was
greater than the average market price during these periods.
-12-
NOTE 5. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 (in thousands, except per share data):
================================================================================
THREE MONTHS ENDED
- --------------------------------------------------------------------------------
JUNE 30,
- --------------------------------------------------------------------------------
2003 2002
----------- -----------
Net income, as reported $ 11,808 $ 11,266
Add:Stock-based compensation
expense included in reported net
income, net of related tax effects 19 20
Less:Stock-based compensation
expense determined under fair
value method for all awards, net
of related tax effects (268) (257)
----------- -----------
Pro forma net income $ 11,559 $ 11,029
=========== ===========
Net income per share:
Basic - as reported $ 0.36 $ 0.34
Basic - Pro forma $ 0.36 $ 0.33
Diluted - as reported $ 0.36 $ 0.34
Diluted - Pro forma $ 0.35 $ 0.33
================================================================================
-13-
================================================================================
SIX MONTHS ENDED
- --------------------------------------------------------------------------------
JUNE 30,
- --------------------------------------------------------------------------------
2003 2002
--------- -----------
Net income, as reported $ 23,374 $ 22,343
Add: Stock-based
compensation expense
included in reported net
income, net of related tax
effects 42 20
Less: Stock-based
compensation expense
determined under fair value
method for all awards, net
of related tax effects (531) (484)
--------- -----------
Pro forma net income $ 22,885 $ 21,8799
========= ===========
Net income per share:
Basic - as reported $ 0.72 $ 0.67
Basic - Pro forma $ 0.71 $ 0.66
Diluted - as reported $ 0.71 $ 0.67
Diluted - Pro forma $ 0.70 $ 0.66
================================================================================
The Company granted 366,932 stock options during the six months ended June 30,
2003 with a weighted average exercise price of $17.53 per share compared to
482,670 stock options granted during the six months ended June 30, 2002 with a
weighted average exercise price of $14.35 per share. The per share weighted
average fair value of the stock options granted for the six months ended June
30, 2003 and 2002 was $3.92 and $2.24. The assumptions used for the grants noted
above were as follows:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
- ------------------------ ------------------------------------
DIVIDEND YIELD 3.73% - 3.97% 4.07%
EXPECTED VOLATILITY 31.35% - 31.38% 19.13%
RISK -FREE INTEREST RATE 2.98% - 3.36% 4.64% - 4.74%
EXPECTED LIFE 7 years 7 years
The fair value of stock options granted was estimated at the date of grant using
the Black-Scholes option-pricing model. This model was developed for use in
estimating fair value of publicly traded options that have no vesting
restrictions and are fully transferable. Additionally, the model requires the
input of highly subjective assumptions. Because the Company's employee and
director stock options have characteristics significantly different from those
of publicly traded stock options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the Black-Scholes option-pricing model does not necessarily provide a
reliable single measure of the fair value of the Company's employee and director
stock options.
-14-
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
A summary of goodwill by operating subsidiaries follows:
JANUARY 1, GOODWILL JUNE 30,
(In thousands) 2002 DISPOSED 2002
----------------------------------
NBT Bank, N.A. $ 44,667 $ (1,547) $ 43,120
NBT Financial Services, Inc. 3,001 - 3,001
----------------------------------
Total $ 47,668 $ (1,547) $ 46,121
==================================
JANUARY 1, GOODWILL JUNE 30,
(In thousands) 2003 ACQUIRED 2003
----------------------------------
NBT Bank, N.A. $ 43,120 $ 1,437 $ 44,557
NBT Financial Services, Inc. 3,001 - 3,001
----------------------------------
Total $ 46,121 $ 1,437 $ 47,558
==================================
The Company recorded $1.4 million in goodwill in connection with the acquisition
of a branch from a third party financial institution in June of 2003. In
connection with the sale of a branch during the three months ended March 31,
2002, $1.5 million in goodwill was included in the carrying amount of the branch
in determining the gain on disposal.
The Company has finite-lived intangible assets capitalized on its consolidated
balance sheet in the form of core deposit and other intangible assets. These
intangible assets continue to be amortized over their estimated useful lives,
which range from one to twenty-five years.
A summary of core deposit and other intangible assets follows:
JUNE 30,
2003 2002
--------------
(in thousands)
Core deposit intangibles:
Gross carrying amount $5,558 $5,433
Less: accumulated amortization 4,221 3,614
--------------
Net Carrying amount 1,337 1,819
--------------
Other intangibles:
Gross carrying amount 1,031 1,031
Less: accumulated amortization 313 261
--------------
Net Carrying amount 718 770
--------------
Other intangibles not subject to
amortization: Pension Asset
551 -
Total intangibles with definite
useful lives:
Gross carrying amount 7,140 6,464
Less: accumulated amortization 4,534 3,875
--------------
Net Carrying amount $2,606 $2,589
==============
-15-
Amortization expense on finite-lived intangible assets is expected to total $0.3
million for the remainder of 2003 and $0.3 million for each of 2004, 2005, 2006
and 2007.
NOTE 7. GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
On June 14, 1999, the CNB Financial Corp. ("CNBF") who was acquired by the
Company on November 8, 2001 established CNBF Capital Trust I (the Trust), which
is a statutory business trust. The Trust exists for the exclusive purpose of
issuing and selling 30 year guaranteed preferred beneficial interests in the
Company's junior subordinated debentures (capital securities). On August 4,
1999, the Trust issued $18.0 million in capital securities at 3-month LIBOR plus
275 basis points, which equaled 8.12% at issuance. The rate on the capital
securities resets quarterly, equal to the 3-month LIBOR plus 275 basis points
(4.04% and 4.66% for the June 30, 2003 and 2002 quarterly payments,
respectively). The capital securities are the sole asset of the Trust. The
obligations of the Trust are guaranteed by the Company. Capital securities
totaling $1.0 million were issued to the Company. These capital securities were
retired upon the merger of the Company and CNBF. The net proceeds from the sale
of the capital securities were used for general corporate purposes and to
provide a capital contribution of $15.0 million to CNB Bank, which was merged
into NBT Bank. The capital securities, with associated expense that is tax
deductible, qualify as Tier I capital under regulatory definitions, subject to
certain restrictions. The Bancorp's primary source of funds to pay interest on
the debentures owed to the Trust are current dividends from the NBT Bank.
Accordingly, the Company's ability to service the debentures is dependent upon
the continued ability of NBT Bank to pay dividends. At June 30, 2003, the
capital securities are not classified as debt for financial statement purposes
and therefore the expense associated with the capital securities is recorded as
noninterest expense in the consolidated statements of income. However, as
discussed in Note 8 below, commencing July 1, 2003, the Company's interest in
the securities will be classified as a liability and interest costs associated
with such securities will be classified as interest expense.
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN No. 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
No. 45 are effective for financial statements of interim or annual periods
ending after December 15, 2002, and were adopted in the Company's consolidated
financial statements for the year ended December 31, 2002. Implementation of the
remaining provisions of FIN No. 45 during the first quarter of 2003 did not have
any material impact on the Company's financial statements.
The FASB issued SFAS 149, "Amendment of Statement No. 133 on Derivative
Instruments and Hedging Activities". The statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
-16-
designated after June 30, 2003. This statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contacts and for hedging activities.
This statement amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, in connection with other Board projects dealing with financial instruments
and in connection with implementation issues raised in relation to the
application of the definition of a derivative. The adoption of this Statement is
not expected to have a significant impact on the Company's consolidated
financial statements.
The FASB issued SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". This statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, the Company's third quarter of 2003. This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability. Many of those instruments were previously classified as equity. As
noted previously in note 7, the Company has $17.0 million in guaranteed
preferred beneficial interests in the Company's junior subordinated debentures
at June 30, 2003. Upon adoption of FAS 150 in the third quarter of 2003, the
$17.0 million in guaranteed preferred beneficial interests in the Company's
junior subordinated debentures will be a classified as a liability, as a
component of long-term debt. Additionally, for the 2003 fiscal year, the
interest cost associated with these junior subordinated debentures ($0.4 million
for the six months ended June 30, 2003) will be reclassified from noninterest
income to interest expense.
FIN No. 46 "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51". FIN 46 establishes accounting guidance for
consolidation of variable interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE entity
is the entity that absorbs a majority of the VIE's expected losses, receives a
majority of the VIE's expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN 46, VIEs were
generally consolidated by an enterprise when the enterprise had a controlling
financial interest through ownership of a majority of voting interest in the
entity. The provisions of FIN 46 were effective immediately for all arrangements
entered into after January 31, 2003, and are otherwise effective at the
beginning of the first interim period beginning after June 15, 2003.
The Company adopted FIN 46 on July 1, 2003. In its current form, FIN 46 may
require the Company to deconsolidate its investment in the Trust in future
financial statements. It is currently unknown if, or when, the Financial
Accounting Standards Board will address this issue. In July 2003, the Board of
Governors of the Federal Reserve System issued a supervisory letter instructing
bank holding companies to continue to include the trust preferred securities in
their Tier I capital for regulatory capital 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 trust preferred securities in
Tier I capital for regulatory capital purposes. As of June 30, 2003, assuming
the Company was not allowed to include the $17.0 million in trust preferred
securities issued by the Trust in Tier I capital, the Company would still exceed
the regulatory required minimums for capital adequacy purposes.
-17-
NBT BANCORP INC. AND SUBSIDIARIES
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and results of operations of NBT
Bancorp Inc. (Bancorp) and its wholly owned subsidiaries, NBT Bank, N.A. (NBT),
NBT Financial Services, Inc., and CNBF Capital Trust I (collectively referred to
herein as the Company.) This discussion will focus on Results of Operations,
Financial Position, Capital Resources and Asset/Liability Management. Reference
should be made to the Company's consolidated financial statements and footnotes
thereto included in this Form 10-Q as well as to the Company's 2002 Form 10-K
for an understanding of the following discussion and analysis.
FORWARD LOOKING STATEMENTS
Certain statements in this filing and future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, contain forward-looking statements, as
defined in the Private Securities Litigation Reform Act. These statements may be
identified by the use of phrases such as "anticipate," "believe," "expect,"
"forecasts," "projects," or other similar terms. There are a number of
factors, many of which are beyond the Company's control that could cause actual
results to differ materially from those contemplated by the forward looking
statements. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) revenues may be lower
than expected; (3) changes in the interest rate environment may effect interest
margins; (4) general economic conditions, either nationally or regionally, may
be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit; (5)
legislative or regulatory changes, including changes in accounting standards or
tax laws, may adversely affect the businesses in which the Company is engaged;
(6) competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than the Company; (7)
adverse changes may occur in the securities markets or with respect to
inflation; (8) acts of war or terrorism; (9) the costs and effects of litigation
and of unexpected or adverse outcomes in such litigation; and (10) the Company's
success in managing the risks involved in the foregoing.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
Unless required by law, the Company does not undertake, and specifically
disclaims any obligations to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect statements to the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
-18-
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 loan and lease loss
experience significantly worsened from historical levels or if current economic
conditions significantly deteriorated, additional provisions for loan and lease
losses would be required to increase the allowance. In addition, the assumptions
and estimates used in the internal reviews of the Company's non-performing loans
and potential problem loans has a significant impact on the overall analysis of
the adequacy of the allowance for loan and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral evaluations were significantly lowered, the
Company's allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
OVERVIEW
The Company earned net income of $11.8 million ($0.36 diluted earnings per
share) for the three months ended June 30, 2003 compared to net income of $11.3
million ($0.34 diluted earnings per share) for the three months ended June 30,
2002. The quarter to quarter increase in net income from 2002 to 2003 was
primarily the result of an increase in total noninterest income of $1.1 million
and a $0.7 million decrease in the provision for loan and lease losses offset by
a decrease in net interest income of $1.6 million. The increase in noninterest
income was driven primarily by increases in services charges on deposit accounts
of $0.5 million, trust income of $0.3 million and broker/dealer and insurance
revenue of $0.3 million. The decline in the provision for loan and lease losses
reflects lower net charge-offs for the three months ended June 30, 2003 compared
to the same period in 2002 as well as a decrease in nonperforming loans. The
decline in net interest income resulted primarily from a decline in the
Company's net interest margin from 4.46% for the three months ended June 30,
2002 to 4.18% for the same period in 2003.
The Company earned net income of $23.4 million ($0.71 diluted earnings per
share) for the six months ended June 30, 2003 compared to net income of $22.3
million ($0.67 diluted earnings per share) for the six months ended June 30,
2002. The increase in net income from 2002 to 2003 was primarily the result of
an increase in total noninterest income of $2.5 million and a $0.8 million
decrease in the provision for loan and lease losses offset by a decrease in net
interest income of $1.9 million and an increase in total noninterest expense of
$0.5 million. The increase in noninterest income was driven primarily by
increases in services charges and deposit accounts of $1.1 million, other income
of $0.5 million, and trust income of $0.4 million, as well as a $0.1 million net
gain on securities transactions for the six months ended June 30, 2003 compared
to $0.4 million in net losses on securities transactions for the same period in
2002. The decline in the provision for loan and lease losses reflects lower net
charge-offs for the six months ended June 30, 2003 compared to the same period
in 2002 as well as a decrease in nonperforming loans. The decline in net
-19-
interest income resulted primarily from a decline in the Company's net interest
margin from 4.51% for the six months ended June 30, 2002 to 4.29% for the same
period in 2003. The increase in total noninterest expense resulted primarily
from increases in other operating expense of $1.7 million and occupancy expense
of $0.4 million offset by declines in loan collection and other real estate
owned costs of $0.9 million and professional fees and outside services of $0.9
million.
Table 1 depicts 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%.
TABLE 1
PERFORMANCE MEASUREMENTS
- -------------------------------------------------------------
First SECOND SIX
Quarter QUARTER MONTHS
- -------------------------------------------------------------
2003
Return on average assets (ROAA) 1.27% 1.25% 1.26%
Return on average equity (ROAE) 16.05% 16.07% 16.08%
Net interest margin 4.38% 4.18% 4.29%
============================================================
2002
ROAA 1.25% 1.24% 1.25%
ROAE 16.62% 16.50% 16.54%
Net interest margin 4.54% 4.48% 4.51%
============================================================
-20-
TABLE 2
AVERAGE BALANCES AND NET INTEREST INCOME
Table 2 presents the Company's condensed consolidated average balance sheet, an
analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis.
Three months ended June 30,
2003 2002
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 4,122 $ 17 1.65% $ 11,806 $ 89 3.02%
Trading securities 209 1 1.92% 205 2 3.91%
Securities available for sale (2) 975,929 11,483 4.72% 964,555 15,197 6.32%
Securities held to maturity (2) 86,400 1,164 5.40% 98,040 1,475 6.03%
Investment in FRB and FHLB Banks 23,987 314 5.25% 20,965 226 4.32%
Loans and leases (1) 2,417,364 39,732 6.59% 2,317,838 41,576 7.19%
---------- --------- ---------- ---------
Total interest earning assets 3,508,011 52,711 6.03% 3,413,409 58,565 6.88%
--------- ---------
Other assets 265,449 230,110
---------- ----------
TOTAL ASSETS $3,773,460 $3,643,519
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 343,941 1,126 1.31% $ 271,762 1,086 1.60%
NOW deposit accounts 395,978 636 0.64% 386,248 914 0.95%
Savings deposits 518,189 1,236 0.96% 479,811 1,809 1.51%
Time deposits 1,221,528 9,042 2.97% 1,357,057 12,456 3.68%
---------- --------- ---------- ---------
Total interest bearing deposits 2,479,636 12,040 1.95% 2,494,878 16,265 2.61%
Short-term borrowings 122,794 370 1.21% 75,672 287 1.52%
Long-term debt 358,119 3,691 4.13% 329,375 3,856 4.70%
---------- --------- ---------- ---------
Total interest bearing liabilities 2,960,549 16,101 2.18% 2,899,925 20,408 2.82%
--------- ---------
Demand deposits 448,597 412,729
Other liabilities (3) 69,655 57,003
Stockholders' equity 294,659 273,862
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,773,460 $3,643,519
---------- ----------
NET INTEREST INCOME (FTE BASIS) 36,610 38,157
INTEREST RATE SPREAD 3.85% 4.06%
NET INTEREST MARGIN 4.18% 4.48%
Taxable equivalent adjustment 1,118 1,075
--------- ---------
NET INTEREST INCOME $ 35,492 $ 37,082
========= =========
(1) For purposes of these computations, nonaccrual loans are included in the
average loan and lease balances outstanding.
(2) Securities are shown at average amortized cost.
(3) Included in other liabilities is $17.0 million in the Company's guaranteed
preferred beneficial interests in Company's junior subordinated debentures.
-21-
Six months ended June 30,
2003 2002
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- -----------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 4,554 $ 41 1.82% $ 12,674 $ 193 3.07%
Trading securities 202 3 3.00% 166 4 4.86%
Securities available for sale (2) 976,909 23,900 4.94% 926,713 29,366 6.39%
Securities held to maturity (2) 83,388 2,347 5.69% 100,670 3,040 6.09%
Investment in FRB and FHLB Banks 23,736 614 5.23% 21,004 402 3.86%
Loans and leases (1) 2,386,173 79,536 6.73% 2,319,971 83,978 7.30%
---------- --------- ---------- ---------
Total interest earning assets 3,474,962 106,441 6.19% 3,381,198 116,983 6.98%
--------- ---------
Other assets 260,749 232,084
---------- ----------
TOTAL ASSETS $3,735,711 $3,613,282
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 333,536 2,236 1.35% $ 272,602 2,121 1.57%
NOW deposit accounts 395,306 1,327 0.68% 382,498 1,828 0.96%
Savings deposits 506,863 2,466 0.98% 469,895 3,542 1.52%
Time deposits 1,241,778 18,623 3.03% 1,352,431 25,765 3.84%
---------- --------- ---------- ---------
Total interest bearing deposits 2,477,483 24,652 2.01% 2,477,426 33,256 2.71%
Short-term borrowings 110,713 659 1.20% 81,136 635 1.58%
Long-term debt 351,931 7,396 4.25% 318,935 7,494 4.74%
---------- --------- ---------- ---------
Total interest bearing liabilities 2,940,127 32,707 2.25% 2,877,497 41,385 2.91%
--------- ---------
Demand deposits 439,398 409,086
Other liabilities (3) 62,579 54,209
Stockholders' equity 293,607 272,490
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,735,711 $3,613,282
---------- ----------
NET INTEREST INCOME (FTE BASIS) 73,734 75,598
--------- ---------
INTEREST RATE SPREAD 3.94% 4.08%
NET INTEREST MARGIN 4.29% 4.51%
TAXABLE EQUIVALENT ADJUSTMENT 2,213 2,171
--------- ----------
NET INTEREST INCOME $ 71,521 $ 73,427
========= ==========
(1) For purposes of these computations, nonaccrual loans are included in the
average loan and lease balances outstanding.
(2) Securities are shown at average amortized cost.
(3) Included in other liabilities is $17.0 million in the Company's
guaranteed preferred beneficial interests in Company's junior subordinated
debentures.
-22-
Table 3 presents the changes in interest income, interest expense and net
interest income due to changes in volume and changes in rate. The net change
attributable to the combined impact of volume and rate has been allocated to
each in proportion to the absolute dollar amounts of change.
TABLE 3
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
Three months ended June 30,
- ---------------------------------------------------------------------------------
INCREASE (DECREASE)
2003 OVER 2002
- ---------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------
Short-term interest bearing accounts $ (42) $ (30) $ (72)
Trading securities - (1) (1)
Securities available for sale 177 (3,891) (3,714)
Securities held to maturity (165) (146) (311)
Investment in FRB and FHLB Banks 35 53 88
Loans and leases 1,735 (3,579) (1,844)
- ---------------------------------------------------------------------------------
Total interest income 1,586 (7,440) (5,854)
- ---------------------------------------------------------------------------------
Money market deposit accounts 257 (217) 40
NOW deposit accounts 22 (300) (278)
Savings deposits 135 (708) (573)
Time deposits (1,162) (2,252) (3,414)
Short-term borrowings 151 (68) 83
Long-term debt 320 (485) (165)
- ---------------------------------------------------------------------------------
Total interest expense 418 (4,725) (4,307)
- ---------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 1,168 $ (2,715) $ (1,547)
=================================================================================
Six months ended June 30,
- ---------------------------------------------------------------------------------
INCREASE (DECREASE)
2003 OVER 2002
- ---------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------
Short-term interest bearing accounts $ (93) $ (59) $ (152)
Trading securities 1 (2) (1)
Securities available for sale 1,521 (6,987) (5,466)
Securities held to maturity (496) (197) (693)
Investment in FRB and FHLB Banks 57 155 212
Loans and leases 2,346 (6,788) (4,442)
- ---------------------------------------------------------------------------------
Total interest income 3,172 (13,714) (10,542)
- ---------------------------------------------------------------------------------
Money market deposit accounts 434 (319) 115
NOW deposit accounts 59 (560) (501)
Savings deposits 261 (1,337) (1,076)
Time deposits (1,983) (5,159) (7,142)
Short-term borrowings 198 (174) 24
Long-term debt 735 (833) (98)
- ---------------------------------------------------------------------------------
Total interest expense 883 (9,561) (8,678)
- ---------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 2,289 $ (4,153) $ (1,864)
=================================================================================
-23-
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net Interest Income
- ---------------------
Net interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest-bearing
liabilities, primarily deposits and borrowings. Net interest income is affected
by the interest rate spread, the difference between the yield on earning assets
and cost of interest-bearing liabilities, as well as the volumes of such assets
and liabilities. Net interest income is one of the major determining factors in
a financial institution's performance as it is the principal source of earnings.
Table 2 represents an analysis of net interest income on a federal taxable
equivalent basis.
Federal taxable equivalent (FTE) net interest income decreased $1.5 million
during the three months ended June 30, 2003 compared to the same period of 2002.
The decrease in FTE net interest income resulted primarily from interest earning
assets repricing downward at a faster rate than interest-bearing liabilities.
The yield on average earning assets decreased 85 basis points ("bp"), to 6.03%
for the three months ended June 30, 2003, from 6.88% for the same period in
2002. Meanwhile, the rate paid on average interest-bearing liabilities decreased
64 bp, to 2.18% for the three months ended June 30, 2003, from 2.82% for the
same period in 2002.
Total FTE interest income for the three months ended June 30, 2003 decreased
$5.9 million compared to the same period in 2002, a result of the previously
mentioned decrease in yield on earning assets. The decrease in the yield on
average earning assets can be primarily attributed to the low rate environment
prevalent for the last several quarters. During the same time period, total
interest expense decreased $4.3 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 41.3% of
interest-bearing liabilities for the three months ended June 30, 2003 from 46.8%
for the same period in 2002. Offsetting this change in the interest-bearing
liabilities mix, was an increase in lower cost NOW, MMDA, and savings deposits,
to 42.5% of interest-bearing liabilities for the three months ended June30, 2003
from 39.2% for the same period in 2002. Total borrowings increased to 16.2% of
total average interest-bearing liabilities for the three months ended June 30,
2003 from 14.0% for the same period in 2002.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin decreased to 4.18% for the three months
ended June 30, 2003, down from 4.48% for the comparable period in 2002. The
decrease in the net interest margin can be primarily attributed to the
previously mentioned decrease in the interest rate spread driven by the decrease
in yield on earning assets exceeding the decrease in the cost of
interest-bearing liabilities.
-24-
Noninterest Income
- -------------------
Noninterest income is a significant source of revenue for the Company and an
important factor in the Company's results of operations. The following table
sets forth information by category of noninterest income for the periods
indicated:
THREE MONTHS ENDED JUNE 30,
2003 2002
--------------- --------------
(in thousands)
Service charges on deposit accounts $ 3,764 $ 3,239
Broker/dealer and insurance fees 1,750 1,483
Trust 1,116 804
Other 2,271 2,207
Net securities gains 38 69
--------------- --------------
Total $ 8,939 $ 7,802
=============== ==============
Noninterest income for the quarter ended June 30, 2003 was $8.9 million, up $1.1
million or 15% from $7.8 million for the same period in 2002. Service charges on
deposit accounts for the quarter ended June 30, 2003 increased $0.5 million or
16% over the same period in 2002. The increase in service charges on deposit
accounts resulted primarily from higher fees collected for insufficient funds on
deposit accounts. The increase in fees for insufficient funds was driven
primarily by the combination of continued growth in core deposit products as
well as several pricing adjustments implemented during 2002. Revenue from trust
services increased $0.3 million or 39% for the quarter ended June 30, 2003 over
the same period in 2002, due in part to an increase in estate management
services. Broker/dealer and insurance revenue increased $0.3 million or 18% for
the quarter ended June 30, 2003 over the same period in 2002, due primarily to
the Company's initiative in delivering financial service related products
through its 110-branch network, which was implemented at the end of 2002.
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 JUNE 30,
2003 2002
--------------- --------------
(in thousands)
Salaries and employee benefits $ 12,060 $ 12,497
Occupancy 2,182 2,096
Equipment 1,944 1,818
Data processing and communications 2,720 2,598
Professional fees and outside services 1,240 1,782
Office supplies and postage 1,011 1,227
Capital securities 179 230
Amortization of intangible assets 155 208
Loan collection and other real estate owned 476 748
Other 3,881 2,858
--------------- --------------
Total noninterest expense $ 25,848 $ 26,062
=============== ==============
-25-
Noninterest expense for the quarter ended June 30, 2003 was $25.8 million, down
$0.2 million or 1% from $26.1 million for the same period in 2002. The reduction
in noninterest expense resulted from decreases in several line items and was
partially offset by an increase in other operating expense. Professional fees
and outside services decreased $0.5 million due to lower legal fees. Loan
collection and other real estate owned ("OREO") expense decreased $0.3 million,
due to a decrease in nonperforming loans and gains on the sale of OREO. Other
operating expense increased $1.0 million, due mainly to charges of $0.3 million
for the writedown of venture capital investments in the quarter ended June 30,
2003.
Income Taxes
- -------------
Income tax expense for the three months ended June 30, 2003 was $5.4 million for
an effective tax rate of 31.2%, compared to $5.5 million, or 32.7%, for the same
period in 2002. The lower effective tax rate in the 2003 period resulted
primarily from an increase in tax exempt income when compared to the same period
in 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net Interest Income
- ---------------------
Net interest income on a federal taxable equivalent basis (FTE) decreased $1.9
million to $73.7 million for 2003 compared to $75.6 million for 2002. The net
interest margin declined 22 bp from 4.51% to 4.29%. The decrease in FTE net
interest income resulted primarily from earning assets re-pricing downward at a
faster rate than interest-bearing liabilities. The yield on earning assets
decreased 79 bp, to 6.19% for 2003, from 6.98% for 2002. Meanwhile, the rate
paid on interest-bearing liabilities decreased 66 bp, to 2.25% for 2003, from
2.91% for 2002.
Total FTE interest income for 2003 decreased $10.5 million compared to 2002, a
result of the previously mentioned decrease in yield on earning assets. During
the same time period, total interest expense decreased $8.7 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 42.2% of interest-bearing liabilities for 2003 from 47.0% for 2002.
Offsetting this change in the interest-bearing liabilities mix, was an increase
in lower cost NOW, MMDA, and savings deposits, to 42% of interest-bearing
liabilities for 2003 from 39.1% for 2002. Total borrowings increased to 15.7% of
interest-bearing liabilities for 2003 from 13.9% for 2002.
-26-
- ------
Noninterest Income
- -------------------
The following table sets forth information by category of noninterest income for
the periods indicated:
SIX MONTHS ENDED JUNE 30,
2003 2002
------------- ---------------
(in thousands)
Service charges on deposit accounts $ 7,367 $ 6,289
Broker/dealer and insurance fees 3,142 2,978
Trust 2,008 1,623
Other 5,085 4,536
Gain on sale of a branch, net - 220
Bank owned life insurance income 14 -
Net securities (losses) gains 65 (433)
------------- ---------------
Total $ 17,681 $ 15,213
============= ===============
Noninterest income for the six months ended June 30, 2003 was $17.7 million, up
$2.5 million or 16% from $15.2 million for the same period in 2002. Service
charges on deposit accounts for the six months ended June 30, 2003 increased
$1.1 million or 17% over the same period in 2002. The increase in service
charges on deposit accounts resulted primarily from higher fees collected for
insufficient funds on deposit accounts and continued growth from core deposits.
Other income for the six months ended June 30, 2003 increased $0.5 million or
12% over the same period in 2002. The increase in other income was driven
primarily by strong growth in ATM fees. Securities transactions resulted in a
$0.1 million net gain for the six months ended June 30, 2003 and a $0.4 million
net loss resulting from a write-down of an impaired security for the same period
in 2002. Revenue from trust services increased $0.4 million or 24% for the six
months ended June 30, 2003 over the same period in 2002, due in part to higher
fees collected for estate management services as well as an increase in assets
under management resulting from improved stock market conditions and an increase
in managed trust accounts.
-27-
Noninterest Expense
- --------------------
The following table sets forth information by category of noninterest expense
for the periods indicated:
SIX MONTHS ENDED JUNE 30,
2003 2002
------------- --------------
(in thousands)
Salaries and employee benefits $ 24,719 $ 24,871
Occupancy 4,708 4,265
Equipment 3,710 3,532
Data processing and communications 5,441 5,163
Professional fees and outside services 2,542 3,397
Office supplies and postage 2,084 2,124
Capital securities 370 446
Amortization of intangible assets 317 433
Loan collection and other real estate owned 756 1,675
Other 7,093 5,368
------------- --------------
Total noninterest expense $ 51,740 $ 51,274
============= ==============
Noninterest expense for the six months ended June 30, 2003 was $51.7 million, up
$0.5 million or 1% from $51.3 million for the same period in 2002. The increase
in noninterest expense was due primarily to increases in other operating expense
and occupancy expense partially offset by decreases in loan collection and OREO
expenses and professional fees and outside services. Other operating expense
increased $1.7 million, primarily from a $0.6 million charge for the writedown
of venture capital investments. Loan collection and OREO expenses decreased $0.9
million from gains on the sale of OREO and a decrease in nonperforming loans.
Professional fees and outside services decreased $0.9 million primarily from a
$0.4 million charge related to an adverse judgement against the Company in 2002
as well as legal fees incurred during 2002 for the recovery of deposit overdraft
writeoffs.
Income Taxes
- -------------
Income tax expense for 2003 was $10.7 million for an effective tax rate of
31.5%, compared to $10.9 million, or 32.8%, for 2002. The lower tax rate in the
2003 period resulted primarily from an increase in tax exempt income when
compared to the same period in 2002.
-28-
ANALYSIS OF FINANCIAL CONDITION
Loans and Leases
- ------------------
A summary of loans and leases, net of deferred fees and origination costs, by
category for the periods indicated follows:
June 30, December 31, June 30,
(in thousands) 2003 2002 2002
-------------------------------------
Commercial and commercial mortgages* $1,116,892 $ 1,057,815 $1,059,046
Residential real estate mortgages 642,227 610,256 612,018
Consumer 674,490 626,767 597,703
Leases 62,776 61,094 67,274
-------------------------------------
Total loans and leases $2,496,385 $ 2,355,932 $2,336,041
-------------------------------------
-------------------------------------
*Includes agricultural loans
Total loans and leases were $2.5 billion, or 63.7% of assets, at June 30, 2003,
compared to $2.4 billion, or 63.3%, at December 31, 2002, and $2.3 billion, or
63.5%, at June 30, 2002. Total loans and leases increased $140.5 million at June
30, 2003 when compared to December 31, 2002. The increase in total loans and
leases during the year resulted mainly from consumer loans, which increased
$47.7 million from December 31, 2002, or 7.6%. The increase in consumer loans
was due primarily to the Company's home equity products, which were well
received by our customers during the first half of 2003. Additionally,
commercial loans and commercial mortgages increased $59.1 million, from December
31, 2002, or 5.6%. The increase in commercial loans and commercial mortgages
resulted from continued growth within existing markets combined with an expanded
presence in newer markets now served by the Company.
-29-
Securities
- ----------
Average total securities increased $32.9 million for the six months ended June
30, 2003 when compared to the same period in 2002. The average balance of
securities available for sale increased $50.2 million for the six months ended
June 30, 2003 when compared to the same period in 2002. The average balance of
securities held to maturity decreased $17.3 million for the six months ended
June 30, 2003, when compared to the same period in 2002. The net increase in
securities resulted from modest leveraging of the balance sheet. The average
total securities portfolio represented 28.4% of total average earning assets for
the six months ended June 30, 2003 and 2002.
At June 30, 2003, approximately 66.8% of the Company's investment securities
were comprised of either mortgage-backed securities ("MBS") or collateralized
mortgage obligations ("CMO") compared to 69.9% at June 30, 2002. During the
period between June 30, 2002 and June 30, 2003, the Company's MBS and CMO
experienced increases in prepayments resulting from the low interest rate
environment. As the Company received the cash flows due to accelerated
prepayments from MBS and CMO, the Company reinvested these funds primarily into
short-term MBS, which generally contain a stated maturity of 10/15 years and a
expected duration ranging from 3 to 5 years as opposed to 20/30 year MBS which
exhibit an expected duration ranging from 5 to 7 years. As such, the Company is
positioned to take advantage of deploying funds in a rising rate environment, as
sufficient cash flow should be generated by 10/15-year MBS securities. At June
30, 2003, approximately 69.6% of MBS and CMO were comprised of 10/15-year MBS as
compared to 46.0% at June 30, 2002.
There is one security with an other-than-temporary impairment charge at June 30,
2003 and 2002, which had a remaining carrying value of $0.7 million and $1.6
million, respectively, and is classified as a security available for sale on
nonaccrual status. The Company recorded a $0.7 million pre-tax charge during the
three months ended March 31, 2002, related to the other-than-temporarily
impaired security classified as available for sale. The charge was recorded in
net security (losses) gains on the consolidated statements of income.
Included in the securities available for sale portfolio at June 30, 2002 and
December 31, 2002 were certain securities (private issue CMO, asset-backed
securities, and private issue MBS) previously held by CNB. These securities
contained a higher level of credit risk when compared to other securities held
in the Company's investment portfolio because they were not guaranteed by a
governmental agency or a government sponsored enterprise (GSE). The Company's
general practice is to purchase CMO and MBS that are guaranteed by a
governmental agency or a GSE coupled with a strong credit rating, typically AAA,
issued by Moody's or Standard and Poors.
At December 31, 2002, the amortized cost and fair value of these high-risk
securities amounted to $12.0 million and $10.7 million, respectively, down from
$27.5 million and $26.8 million, respectively, at June 30, 2002. The decrease at
December 31, 2002, when compared to June 30, 2002, resulted primarily from sales
and to a lesser extent principal paydowns. During 2002, the Company sold $22.4
million of these securities due to both a rapid deterioration in the financial
condition of the underlying collateral in 2002 related to a certain number of
these securities as well as the Company's goal of reducing exposure to these
types of securities in general. The net loss realized from the sale of these
securities was $7.4 million. Offsetting these net losses were net gains of $7.3
million, resulting from the sale of approximately $187.0 million in other
-30-
securities available for sale during 2002. At June 30, 2003, the Company had no
exposure to these high-risk securities, as the remaining $12.0 million at
December 31, 2002 were sold during the three months ended March 31, 2003 at a
net loss of $3.9 million. Offsetting these net losses, were net gains of $3.9
million from the sale of approximately $157.4 million in other securities
available for sale during the first quarter of 2003.
Allowance for Loan Losses, Nonperforming Assets and the Provision for Loan
- --------------------------------------------------------------------------------
Losses
- ------
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan portfolio's risk profile. It is evaluated to ensure that it is
sufficient to absorb all reasonably estimable credit losses inherent in the
current loan and lease portfolio.
Management considers the accounting policy relating to the allowance for loan
and lease losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgements can have on
the consolidated results of operations.
For purposes of evaluating the adequacy of the allowance, the Company considers
a number of significant factors that affect the collectibility of the portfolio.
For individually analyzed loans, these include estimates of loss exposure, which
reflect the facts and circumstances that affect the likelihood of repayment of
such loans as of the evaluation date. For homogeneous pools of loans and leases,
estimates of the Company's exposure to credit loss reflect a thorough current
assessment of a number of factors, which could affect collectibility. These
factors include: past loss experience; the size, trend, composition, and nature
of the loans and leases; changes in lending policies and procedures, including
underwriting standards and collection, charge-off and recovery practices; trends
experienced in nonperforming and delinquent loans and leases; current economic
conditions in the Company's market; portfolio concentrations that may affect
loss experienced across one or more components of the portfolio; the effect of
external factors such as competition, legal and regulatory requirements; and the
experience, ability, and depth of lending management and staff. In addition,
various regulatory agencies, as an integral component of their examination
process, periodically review the Company's allowance for loan and lease losses.
Such agencies may require the Company to recognize additions to the allowance
based on their judgment about information available to them at the time of their
examination, which may not be currently available to management.
After a thorough consideration and validation of the factors discussed above,
required additions to the allowance for loan and lease losses are made
periodically by charges to the provision for loan and lease losses. These
charges are necessary to maintain the allowance at a level which management
believes is reasonably reflective of overall inherent risk of probable loss in
the portfolio. While management uses available information to recognize losses
on loans and leases, additions to the allowance may fluctuate from one reporting
period to another. These fluctuations are reflective of changes in risk
associated with portfolio content or changes in management's assessment of any
or all of the determining factors discussed above. The allowance for loan and
lease losses to outstanding loans and leases at June 30, 2003 was 1.64% compared
to 1.87% at
-31-
June 30, 2002. Management considers the allowance for loan losses to be adequate
based on evaluation and analysis of the loan portfolio.
Table 4 reflects changes to the allowance for loan losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net chargeoffs. Chargeoffs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan losses.
TABLE 4
ALLOWANCE FOR LOAN AND LEASE LOSSES
- ------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 41,141 $ 45,299 $ 40,167 $44,746
Recoveries 1,219 938 2,917 2,300
Chargeoffs (2,915) (4,610) (5,579) (7,430)
- ------------------------------------------------------------------------------------------------------------------
Net chargeoffs (1,696) (3,672) (2,662) (5,130)
Provision for loan losses 1,413 2,092 3,353 4,103
- ------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 40,858 $ 43,719 $ 40,858 $43,719
==================================================================================================================
COMPOSITION OF NET CHARGEOFFS
- ------------------------------------------------------------------------------------------------------------------
Commercial and agricultural $ (760) 45% $ (2,420) 66% $ (850) 32% $(2,317) 45%
Real estate mortgage 60 (4)% (151) 4% 78 (3)% (371) 7%
Consumer (996) 59% (1,101) 30% (1,890) 71% (2,442) 48%
Net chargeoffs $ (1,696) 100% $ (3,672) 100% $(2,662) 100% $(5,130) 100%
- ------------------------------------------------------------------------------------------------------------------
Annualized net chargeoffs
to average loans 0.28% 0.64% 0.23% 0.45%
==================================================================================================================
Net chargeoffs to average loans and leases
for the six months ended June 30, 2003 0.11%
- ------------------------------------------------------------------------------------------------------------------
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past
due, restructured loans, other real estate owned (OREO), and nonperforming
securities. Loans are generally placed on nonaccrual when principal or interest
payments become ninety days past due, unless the loan is well secured and in the
process of collection. Loans may also be placed on nonaccrual when circumstances
indicate that the borrower may be unable to meet the contractual principal or
interest payments. OREO represents property acquired through foreclosure and is
valued at the lower of the carrying amount or fair market value, less any
estimated disposal costs. Nonperforming securities include securities which
management believes are other-than-temporarily impaired, carried at their
estimated fair value and are not accruing interest.
Total nonperforming assets were $19.9 million at June 30, 2003, compared to
$30.5 million at December 31, 2002, and $34.9 million at June 30, 2002. The
decrease in nonperforming assets resulted primarily from the Company's focus on
reducing nonperforming loans. Nonperforming loans totaled $16.8 million at June
30, 2003, down from the $26.4 million outstanding at December 31, 2002. The $9.6
million decrease in nonperforming loans from December 31, 2002 to June 30, 2003
was due primarily to the Company's successful efforts in selling certain large
problematic commercial loans as well as a group of nonperforming real estate
mortgages at approximately their book value. Nonaccrual commercial and
agricultural loans decreased $5.6 million, from $17.0 million at December 31,
2002, to $11.4 million at June 30, 2003. Nonaccrual
-32-
real estate mortgages decreased $4.4 million, from $5.5 million at December 31,
2002, to $1.1 million at June 30, 2003.
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $55.3 million in potential problem loans at June 30,
2003 as compared to $48.5 million at December 31, 2002. Potential problem loans
are loans that are currently performing, but where known information about
possible credit problems of the related borrowers causes management to have
serious doubts as to the ability of such borrowers to comply with the present
loan repayment terms and which may result in disclosure of such loans as
nonperforming at some time in the future. At the Company, potential problem
loans are typically loans that are performing but are classified by the
Company's loan rating system as "substandard" or lower. At June 30, 2003,
potential problem loans primarily consisted of commercial real estate and
commercial and agricultural loans. Management cannot predict the extent to which
economic conditions may worsen or other factors which may impact borrowers and
the potential problem loans. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on non-accrual, become
restructured, or require increased allowance coverage and provision for loan
losses.
Net charge-offs totaled $1.7 million for the three months ended June 30, 2003,
down $2.0 million from the $3.7 million charged-off during the same period in
2002. The provision for loan and lease losses totaled $1.4 million for the three
months ended June 30, 2003, down from the $2.1 million provided during the same
period in 2002. Net charge-offs totaled $2.7 million for the six months ended
June 30, 2003, down $2.5 million from the $5.1 million charged-off during the
same period in 2002. The provision for loan and lease losses totaled $3.4
million for the six months ended June 30, 2003, down from the $4.1 million
provided during the same period in 2002. The reduction in the provision for loan
and lease losses for the three and six months ended June 30, 2003 when compared
to the same periods in 2002, resulted primarily from lower net charge-offs and a
decrease in nonperforming loans.
-33-
TABLE 5
NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(dollars in thousands) 2003 2002 2002
- ------------------------------------------------------------------------------------------------
Commercial and agricultural $ 11,352 $ 16,980 $ 20,835
Real estate mortgage 1,096 5,522 5,935
Consumer 3,458 1,507 3,757
- ------------------------------------------------------------------------------------------------
Total nonaccrual loans 15,906 24,009 30,527
- ------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural - 237 -
Real estate mortgage 133 1,325 14
Consumer 509 414 239
- ------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 642 1,976 253
- ------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms: 295 409 530
- ------------------------------------------------------------------------------------------------
Total nonperforming loans 16,843 26,394 31,310
- ------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 2,280 2,947 2,047
- ------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 19,123 29,341 33,357
================================================================================================
Nonperforming securities 735 1,122 1,560
- ------------------------------------------------------------------------------------------------
Total nonperforming assets $ 19,858 $ 30,463 $ 34,917
================================================================================================
Total nonperforming loans to loans and leases 0.67% 1.12% 1.34%
Total nonperforming assets to assets 0.51% 0.82% 0.95%
Total allowance for loan and lease losses
to nonperforming loans 242.58% 152.18% 139.63%
================================================================================================
Deposits
- --------
Total deposits were $3.0 billion at June 30, 2003, an increase of $43.2 million,
or 1%, from year-end 2002, and an increase of $97.6 million, or 3%, from the
same period in the prior year. Total average deposits increased $20.6 million,
or 1%, from the three months ended June 30, 2002 to the same period in 2003. The
Company experienced a decline in time deposits, as average time deposits
declined $135.5 million or 10%, from the three months ended June 30, 2002 to the
same period in 2003. Meanwhile, the total of average demand deposits, money
market deposits, NOW, and savings increased $156.2 million or 10%, from the
three months ended June 30, 2002 to the same period in 2003. The Company has
focused on maintaining and growing its base of lower cost checking, savings and
money market accounts while allowing runoff of some of its higher cost time
deposits, particularly brokered and jumbo time deposits. At June 30, 2003, total
checking, savings and money market accounts represented 59.9% of total deposits
compared to 53.9% at June 30, 2002.
Borrowings
- ----------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $212.0 million at June 30, 2003 compared to
$105.6 million and $122.9 million at December 31, and June 30, 2002,
respectively. The increase in short-term borrowings resulted from strong loan
growth during the three months ended June 30, 2003 and a reduction in time
deposits for the first half of 2003. Long-term debt was $370.1 million at June
30, 2003, compared to $345.5 million and $350.7 million at December 31, and June
30, 2002, respectively.
-34-
CAPITAL RESOURCES
Stockholders' equity of $297.9 million represents 7.6% of total assets at June
30, 2003, compared with $282.8 million, or 7.7% at June 30, 2002, and $292.4
million, or 7.9% at December 31, 2002. The Company does not have a target
dividend payout ratio, rather the Board of Directors considers the Company's
earnings position and earnings potential when making dividend decisions.
As the capital ratios in Table 6 indicate, the Company remains well capitalized.
Capital measurements are significantly in excess of regulatory minimum
guidelines and meet the requirements to be considered well capitalized for all
periods presented. Tier 1 leverage, Tier 1 capital and Risk-based capital ratios
have regulatory minimum guidelines of 3%, 4% and 8% respectively, with
requirements to be considered well capitalized of 5%, 6% and 10%, respectively.
TABLE 6
CAPITAL MEASUREMENTS
- ----------------------------------------------------------------------------------
As of and for the quarter ended
March 31 June 30
- ----------------------------------------------------------------------------------
2003
Tier 1 leverage ratio 6.71% 6.72%
Tier 1 capital ratio 9.77% 9.44%
Total risk-based capital ratio 11.02% 10.70%
Cash dividends as a percentage of net income 47.87% 46.68%
Per common share:
Book value $ 9.00 $ 9.19
Tangible book value $ 7.50 $ 7.64
==================================================================================
2002
Tier 1 leverage ratio 6.70% 6.78%
Tier 1 capital ratio 9.97% 10.04%
Total risk-based capital ratio 11.23% 11.30%
Cash dividends as a percentage of net income 50.69% 50.12%
Per common share:
Book value $ 8.09 $ 8.52
Tangible book value $ 6.61 $ 7.05
==================================================================================
-35-
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 2.11 at June 30, 2003
and 2.12 a year ago. The per share market price was 13.63 times annualized
earnings at June 30, 2003 and 13.49 times annualized earnings at June 30, 2002.
TABLE 7
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION*
- --------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- --------------------------------------------------
2002
- --------------------------------------------------
March 31 $15.15 $13.15 $14.74 $ 0.170
June 30 19.32 14.00 18.07 0.170
September 30 18.50 16.36 17.27 0.170
December 31 18.60 14.76 17.07 0.170
==================================================
2003
- --------------------------------------------------
MARCH 31 $18.60 $16.76 $17.43 $ 0.170
JUNE 30 $19.94 $17.37 $19.36 $ 0.170
==================================================
STOCK REPURCHASE PLAN
- -----------------------
On July 22, 2002, the Company announced that it approved a stock repurchase plan
(the "Stock Repurchase Plan") pursuant to which the Company may repurchase up to
one million shares (approximately 3%) of its outstanding common stock. Since the
announcement of the Stock Repurchase Plan, the Company repurchased a total of
844,946 shares at an average price of $17.54 per share. Total cash allocated for
these repurchases during this period was $14.8 million. For the six months ended
June 30, 2003, the Company repurchased 369,313 shares at an average price of
$17.57 per share.
On April 28, 2003, the Company announced that it approved a program to
repurchase up to an additional one million shares (approximately 3%) of its
outstanding common stock from time to time over the next 12 months in open
market and privately negotiated transactions. This program will begin after
completion of the previously authorized Stock Repurchase Plan. Currently there
are 192,954 shares remaining under the previous Stock Repurchase Plan that will
be repurchased prior to the commencement of the new program.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
MARKET RISK
Interest rate risk is among the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Company's
business activities. Interest rate risk is defined as an exposure to a movement
in interest rates that could have an adverse effect on the Company's net
interest income. Net interest income is susceptible to interest rate risk to the
degree that interest-bearing liabilities mature or reprice on a different basis
than earning assets. When interest-bearing liabilities mature or reprice more
quickly than earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income.
-36-
Similarly, when earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income.
In an attempt to manage the Company's exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's Asset
Liability Committee (ALCO) meets monthly to review the Company's interest rate
risk position and profitability, and to recommend strategies for consideration
by the Board of Directors. Management also reviews loan and deposit pricing, and
the Company's securities portfolio, formulates investment and funding
strategies, and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while enhancing the net
interest margin. At times, depending on the level of general interest rates, the
relationship between long- and short-term interest rates, market conditions and
competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to changes in interest rates and fluctuations in the
difference between long- and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next repricing date (if needed), and current rates is uploaded into the model to
create an ending balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and leases and mortgage related investment
securities along with any optionality within the deposits and borrowings.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) with a static balance sheet over a 12-month
period. Three additional models are run with static balance sheets; (1) a
gradual increase of 200 bp, (2) a gradual increase of 200 bp where the long end
of the yield curve remains flat (the long end of the yield curve is defined as 5
years and longer) and (3) a gradual decrease of 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 scenario, net interest income is projected to decrease
slightly when compared to the forecasted net interest income in the flat rate
scenario through the simulation period. The decrease in net interest income is a
result of interest-bearing liabilities repricing downward at a slower rate than
earning assets. The inability to effectively lower deposit rates will likely
reduce or eliminate the benefit of lower interest rates. In the rising rate
scenario where the long end of the yield curve remains flat and the short end of
the curve increases 200bp gradually, net interest income is also projected to
experience a decline from the flat rate scenario. Net interest income is
projected to remain at lower levels than in a flat rate scenario through the
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simulation period primarily due to a lag in assets repricing while funding costs
increase. The potential impact on earnings is dependent on the ability to lag
deposit repricing.
Net interest income for the next twelve months in 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 June 30, 2003 balance sheet position:
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
---------------------------------------------------------
CHANGE IN INTEREST RATES PERCENT CHANGE IN
(IN BASIS POINTS) NET INTEREST INCOME
---------------------------------------------------------
+ 200 FLAT (0.74%)
+ 200 (0.11)%
- 75 (0.49%)
---------------------------------------------------------
Currently, the Company is holding fixed rate residential real estate mortgages
in its loan portfolio and mortgage related securities in its investment
portfolio. Two major factors the Company considers in holding residential real
estate mortgages is its level of core deposits and the duration of its
mortgage-related securities and loans. Current core deposit levels combined with
a shortening of duration of mortgage-related securities and loans have enabled
the Company to hold fixed rate residential real estate mortgages without having
a significant negative impact on interest rate risk, as the Company is well
matched at June 30, 2003. The Company's net interest income is projected to
decrease by 0.11% 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 $118.9 million from June 30, 2002 to June 30, 2003.
From December 31, 2002, we have reduced our exposure to 30-year fixed rate
mortgage related securities and loans by $36.6 million. Approximately 12.5% of
earning assets were comprised of 30-year fixed rate mortgage related securities
and loans at June 30, 2003, down from a ratio of 16.5% at June 30, 2002. The
Company closely monitors its matching of earning assets to funding sources. If
core deposit levels decrease or the rate of growth in core deposit levels does
not equal or exceed the rate in growth of 30-year fixed rate real estate
mortgage related securities or loans, the Company will reevaluate its strategy
and may sell new originations of fixed rate mortgages in the secondary market or
may sell certain mortgage related securities in order to limit the Company's
exposure to long-term earning assets.
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.
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The primary liquidity measurement the Company utilizes is called the Basic
Surplus which captures the adequacy of its access to reliable sources of cash
relative to the stability of its funding mix of average liabilities. This
approach recognizes the importance of balancing levels of cash flow liquidity
from short- and long-term securities with the availability of dependable
borrowing sources which can be accessed when necessary. At June 30, 2003, the
Company's Basic Surplus measurement was 10.3% of total assets or $405 million,
which was above the Company's minimum of 5% or $196 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 June 30, 2003, the Company
considered its Basic Surplus adequate to meet liquidity needs.
The Company's primary source of funds is from its subsidiary, NBT Bank. Certain
restrictions exist regarding the ability of the Company's subsidiary bank to
transfer funds to the Company in the form of cash dividends. The approval of the
Office of Comptroller of the Currency (OCC) is required to pay dividends when a
bank fails to meet certain minimum regulatory capital standards or when such
dividends are in excess of a subsidiary bank's earnings retained in the current
year plus retained net profits for the preceding two years (as defined in the
regulations). At June 30, 2003, approximately $16.3 million of the total
stockholders' equity of NBT Bank was available for payment of dividends to the
Company without approval by the OCC. NBT Bank's ability to pay dividends also is
subject to the Bank being in compliance with regulatory capital requirements.
NBT Bank is currently in compliance with these requirements. Under the State of
Delaware Business Corporation Law, the Company may declare and pay dividends
either out of accumulated net retained earnings or capital surplus.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information called for by Item 3 is contained in the Liquidity and Interest Rate
Sensitivity Management section of the Management Discussion and Analysis.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) 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 are 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.
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There were no significant changes in the Company's internal control 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 control 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.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 1, 2003.
Stockholders approved the following proposals:
A proposal to fix the number of directors to sixteen was approved. There were
23,830,934 votes cast for the proposal, 452,383 votes cast against the proposal,
and 227,983 abstentions.
The following directors were elected with terms expiring at the annual meeting
in 2006:
Michael H. Hutcherson 23,676,766 votes for election, 834,534 votes withheld
Andrew S. Kowalczyk, Jr. 22,032,162 votes for election, 2,479,139 votes withheld
John C. Mitchell 23,552,588 votes for election, 958,713 votes withheld
Michael M. Murphy 23,458,518 votes for election, 1,052,783 votes withheld
Joseph G. Nasser 23,576,438 votes for election, 934,862 votes withheld
Continuing directors with terms expiring in 2004
Richard Chojnowski
Dr. Peter B. Gregory
Paul O. Stillman
Joseph A. Santangelo
Janet H. Ingraham
Paul D. Horger
Patricia T. Civil
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Continuing directors with terms expiring in 2005
Daryl R. Forsythe
William C. Gumble
William L. Owens
Gene E. Goldenziel
Van Ness D. Robinson
A proposal to adopt the NBT Bancorp Inc. Non-employee Directors' Restricted and
Deferred Stock Plan was approved. There were 22,239,245 votes cast for the
proposal, 1,853,798 votes cast against the proposal, and 418,253 abstentions.
A proposal to adopt the NBT Bancorp Inc. Performance Share Plan was approved.
There were 22,800,033 votes cast for the proposal, 1,230,019 votes cast against
the proposal, and 463,247 abstentions.
Item 5 -- Other Information
On July 28, 2003, NBT Bancorp Inc. announced the declaration of a regular
quarterly cash dividend of $0.17 per share. The cash dividend will be paid on
September 15, 2003 to stockholders of record as of September 1, 2003.
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Principal Executive Officer Pursuant to Rule 13a-15(e)
or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer Pursuant to Rule 13a-15(e)
or 15d-15(e) of the Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.3 Written Statement of the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.4 Written Statement of the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) During the quarter ended June 30, 2003, the Company filed the following
Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated April 28, 2003 ,
which contained a press release announcing financial results for the quarter
ended March 31, 2003 and a dividend declaration to be paid on June 15, 2003 to
stockholders of record as of June 1, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on FORM 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized, this 13th day of August 2003.
NBT BANCORP INC.
By: /s/ MICHAEL J. CHEWENS
----------------------------------
Michael J. Chewens, CPA
Senior Executive Vice President
Chief Financial Officer and Corporate Secretary
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Index to Exhibits
99.1 Certification of Principal Executive Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.3 Written Statement of the Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.4 Written Statement of the Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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