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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --
ACT OF 1934
For the quarterly period ended September 30, 2003.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --
ACT OF 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1268674
(State of Incorporation) (I.R.S. Employer Identification No.)
52 SOUTH BROAD STREET NORWICH, NEW YORK 13815
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (607) 337-2265
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
As of October 31, 2003, there were 32,732,291 shares outstanding of the
Registrant's common stock, $0.01 par value.
-1-
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended September 30, 2003
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2003, December 31,
2002, and September 30, 2002.
Consolidated Statements of Income for the three and nine month
periods ended September 30, 2003 and 2002.
Consolidated Statements of Stockholders' Equity for the nine month
periods ended September 30, 2003 and 2002.
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 2003 and 2002.
Consolidated Statements of Comprehensive Income (Loss) for the three
and nine month periods ended September 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 5 Other Information
Item 6 Exhibits and Reports on FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
-2-
NBT BANCORP INC. AND SUBSIDIARIES SEPTEMBER 30, December 31, September 30,
CONSOLIDATED BALANCE SHEETS (UNAUDITED) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
ASSETS
Cash and due from banks $ 120,905 $ 121,824 $ 133,739
Short-term interest bearing accounts 2,098 2,799 5,671
Trading securities, at fair value 57 203 237
Securities available for sale, at fair value 1,076,053 1,007,583 993,786
Securities held to maturity (fair value - $99,020, $84,517
and $89,880) 97,499 82,514 87,272
Federal Reserve and Federal Home Loan Bank stock 35,218 23,699 22,630
Loans and leases 2,550,466 2,355,932 2,367,688
Less allowance for loan and lease losses 41,672 40,167 43,330
- -----------------------------------------------------------------------------------------------------------------------
Net loans and leases 2,508,794 2,315,765 2,324,358
Premises and equipment, net 61,857 61,261 61,193
Goodwill 47,521 46,121 46,121
Intangible assets, net 2,474 2,246 2,413
Bank owned life insurance 30,412 - -
Other assets 64,349 59,711 52,527
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,047,237 $ 3,723,726 $ 3,729,947
=======================================================================================================================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S JUNIOR SUBORDINATED DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 482,703 $ 449,201 $ 452,250
Savings, NOW, and money market 1,364,568 1,183,603 1,156,204
Time 1,123,778 1,289,236 1,313,511
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 2,971,049 2,922,040 2,921,965
Short-term borrowings 331,964 105,601 113,242
Long-term debt 369,721 345,475 350,603
Other liabilities 52,813 41,228 39,485
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities $ 3,725,547 $ 3,414,344 $ 3,425,295
Guaranteed Preferred Beneficial Interests
In Company's Junior Subordinated Debentures 17,000 17,000 17,000
Stockholders' equity:
Preferred stock, none issued - - -
Common stock, $0.01 par value; shares authorized-50,000,000;
shares issued 34,401,108, 34,401,171, and 34,401,212
at September 30, 2003, December 31, 2002, and $ 344 $ 344 $ 344
September 30, 2002, respectively
Additional paid-in-capital 209,268 210,443 210,425
Retained earnings 113,707 95,085 89,399
Unvested restricted stock awards (229) (127) (142)
Accumulated other comprehensive income 10,709 16,531 16,138
Treasury stock at cost 1,695,765, 1,751,724,
and 1,219,970 shares at September 30, 2003, December 31, 2002
and September 30, 2002, respectively (29,109) (29,894) (28,512)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 304,690 $ 292,382 $ 287,652
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, GUARANTEED PREFERRED
BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
AND STOCKHOLDERS' EQUITY $ 4,047,237 $ 3,723,726 $ 3,729,947
=======================================================================================================================
See notes to unaudited interim consolidated financial statements.
-3-
Three months ended Nine months ended
NBT BANCORP INC. AND SUBSIDIARIES September 30, September 30,
CONSOLIDATED STATEMENTS OF INCOME 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
INTEREST, FEE AND DIVIDEND INCOME:
Loans $ 39,881 $ 41,970 $ 119,036 $ 125,587
Securities available for sale 9,871 13,778 32,540 42,075
Securities held to maturity 840 1,010 2,586 3,309
Trading securities 1 2 4 6
Other 195 251 850 846
- --------------------------------------------------------------------------------------------------------
Total interest, fee and dividend income 50,788 57,011 155,016 171,823
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 10,920 15,748 35,572 49,004
Short-term borrowings 704 417 1,363 1,052
Long-term debt 3,586 4,139 10,982 11,633
- --------------------------------------------------------------------------------------------------------
Total interest expense 15,210 20,304 47,917 61,689
- --------------------------------------------------------------------------------------------------------
Net interest income 35,578 36,707 107,099 110,134
Provision for loan and lease losses 2,436 2,424 5,789 6,527
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 33,142 34,283 101,310 103,607
- --------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Trust 958 743 2,966 2,366
Service charges on deposit accounts 4,164 3,531 11,531 9,820
Broker/dealer and insurance fees 1,763 1,393 4,905 4,371
Net securities gains (losses) 18 (6) 83 (439)
Bank owned life insurance income 398 - 412 -
Other 2,672 2,380 7,757 7,136
- --------------------------------------------------------------------------------------------------------
Total noninterest income 9,973 8,041 27,654 23,254
- --------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 12,486 11,720 37,205 36,591
Office supplies and postage 1,104 1,116 3,188 3,240
Occupancy 2,143 2,032 6,851 6,297
Equipment 1,909 1,672 5,619 5,204
Professional fees and outside services 1,421 1,446 3,963 4,843
Data processing and communications 2,640 2,705 8,081 7,868
Amortization of intangible assets 158 177 475 610
Loan collection and other real estate owned 448 570 1,204 2,245
Capital securities 181 221 551 667
Other operating 3,493 3,661 10,586 9,029
- --------------------------------------------------------------------------------------------------------
Total noninterest expense 25,983 25,320 77,723 76,594
- --------------------------------------------------------------------------------------------------------
Income before income taxes 17,132 17,004 51,241 50,267
Income taxes 5,284 5,592 16,019 16,512
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 11,848 $ 11,412 $ 35,222 $ 33,755
========================================================================================================
Earnings per share:
Basic $ 0.36 $ 0.35 $ 1.08 $ 1.02
Diluted $ 0.36 $ 0.34 $ 1.07 $ 1.01
========================================================================================================
See notes to unaudited interim consolidated financial statements.
-4-
NBT BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Unvested Other
Common Paid-in- Retained Restricted Comprehensive Treasury
Stock Capital Earnings Stock Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per
share data)
BALANCE AT DECEMBER 31, 2001 $ 343 $ 209,176 $ 72,531 $ 0 $ 3,921 ($19,616) $266,355
Net Income 33,755 33,755
Cash Dividends - $0.51 per share (16,887) (16,887)
Purchase of 526,833 treasury shares (9,078) (9,078)
Issuance of 138,981 shares to
employee benefits plans and
other stock plans, including
tax benefit 1 1,277 (56) 1,222
Grant of 14,648 shares of restricted
stock awards (28) (222) 250 -
Cancellation of 800 restricted
stock awards 12 (12) -
Amortization of restricted
stock award 68 68
Other comprehensive income 12,217 12,217
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 $ 344 $ 210,425 $ 89,399 ($142) $ 16,138 $ (28,512) $287,652
==============================================================================================================================
BALANCE AT DECEMBER 31, 2002 $ 344 $ 210,443 $ 95,085 ($127) $ 16,531 $ (29,894) $292,382
Net income 35,222 35,222
Cash dividends - $0.51 per share (16,600) (16,600)
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) 357 -
Issuance of 391,618 shares to
employee benefit plans and other
stock plans, including tax benefit (818) 6,714 5,896
Grant of 11,846 shares of restricted
stock awards (203) 203 -
Amortization of restricted
stock awards 101 101
Other comprehensive (loss) (5,822) (5,822)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ 344 $ 209,268 $ 113,707 ($229) $ 10,709 ($29,109) $304,690
- ------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited interim consolidated financial statements.
-5-
NBT BANCORP INC. AND SUBSIDIARIES Nine Months Ended September 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 2003 2002
- ------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 35,222 $ 33,755
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 5,789 6,527
Depreciation of premises and equipment 4,886 5,075
Net amortization (accretion) on securities 3,899 (811)
Amortization of intangible assets 475 610
Amortization of restricted stock awards 101 68
Proceeds from sale of loans held for sale 7,678 6,026
Origination of loans held for sale (2,572) (5,524)
Net losses on sales of loans - 77
Net (gain) on sale of other real estate owned (762) (80)
Net security (gains) losses (83) 439
Proceeds from sales of trading securities 184 -
Purchases of trading securities (62) (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 (2,229) 8,338
Net increase (decrease) in other liabilities 10,672 (5,052)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 33,818 49,062
- ------------------------------------------------------------------------------------------------
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 368,217 254,991
Proceeds from sales 207,218 216,609
Purchases (657,585) (535,222)
Securities held to maturity:
Proceeds from maturities 41,964 40,600
Purchases (57,003) (26,344)
Purchases of FRB and FHLB stock (11,519) (846)
Net increase in loans (203,974) (42,217)
Purchase of premises and equipment, net (5,454) (4,490)
Proceeds from sales of other real estate owned 2,979 1,113
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (304,563) (124,977)
- ------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 35,709 40,611
Net increase (decrease) in short-term borrowings 226,363 (8,772)
Proceeds from issuance of long-term debt 125,000 80,000
Repayments of long-term debt (100,754) (1,728)
Proceeds from issuance of treasury shares to
employee benefit plans and other stock plans,
including tax benefit 5,896 1,222
Purchase of treasury stock (6,489) (9,078)
Cash dividends (16,600) (16,887)
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 269,125 85,368
- ------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,620) 9,453
Cash and cash equivalents at beginning of period 124,623 129,957
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,003 $ 139,410
================================================================================================
( Continued )
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
- --------------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 50,270 $ 66,100
Income taxes 7,900 8,800
Loans transferred to OREO 1,177 2,560
BRANCH DIVESTITURE:
======================================================================================
Assets sold - $ 3,323
Liabilities sold - 34,263
BRANCH 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 Nine months ended
NBT BANCORP INC. AND SUBSIDIARIES September 30, September 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited) (Unaudited)
Net Income $ 11,848 $ 11,412 $ 35,222 $ 33,755
Other comprehensive (loss) income, net of tax
Unrealized holding (losses) gains arising during
period [pre-tax amounts of ($6,408), $11,516,
($9,239) and $19,893] (3,853) 6,924 (5,555) 11,961
Minimum Pension Liability Adjustment - - (217) -
Less: Reclassification adjustment for net (gains) losses
included in net income [pre-tax amounts of
($18), -, ($83) and $426] (11) - (50) 256
- -------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income (3,864) 6,924 (5,822) 12,217
- -------------------------------------------------------------------------------------------------------------
Comprehensive income $ 7,984 $ 18,336 $ 29,400 $ 45,972
=============================================================================================================
See notes to unaudited interim consolidated financial statements.
-8-
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 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 nine months ended September 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
and lease losses, fair values of financial instruments and status of
contingencies are particularly susceptible to material change in the near term.
The allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
portfolio with respect to the mix between the various types of loans and their
related risk characteristics, a review of the value of collateral supporting the
loans, comprehensive reviews of the loan portfolio by the independent loan
review staff and management, as well as consideration of volume and trends of
delinquencies, nonperforming loans, and loan charge-offs. As a result of the
test of adequacy, required additions to the allowance for loan and lease losses
are made periodically by charges to the provision for loan and lease losses.
The allowance for loan and lease losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company's impaired loans are generally collateral
dependent. The Company considers the estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
-9-
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.
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
available carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized. Based on available evidence, gross deferred tax assets will ultimately
be realized and a valuation allowance was not deemed necessary at September 30,
2003 and 2002. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments in the normal course of business
to meet financing needs of its customers and to reduce its own exposure to
fluctuating interest rates. These financial instruments include commitments to
extend credit, unused lines of credit, and standby letters of credit. Exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Company uses
the same credit policy to make such commitments as it uses for on-balance-sheet
items. At September 30, 2003 and December 31, 2002, commitments to extend credit
and unused lines of credit totaled $472.1 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.
-10-
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 $25.1 million at September 30, 2003, and $24.7 million
at December 31, 2002. As of September 30, 2003, the fair value of standby
letters of credit was not material to the Company's consolidated financial
statements.
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).
The following is a reconciliation of basic and diluted earnings per share for
the periods presented in the consolidated statements of income.
- ---------------------------------------------------------------------------------
Three months ended September 30, 2003 2002
- ---------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,534 33,016
Net income available to common shareholders $11,848 $11,412
- ---------------------------------------------------------------------------------
Basic EPS $ 0.36 $ 0.35
=================================================================================
Diluted EPS:
Weighted average common shares outstanding 32,534 33,016
Dilutive effect of common stock options and restricted stock 331 279
- ---------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 32,865 33,295
Net income available to common shareholders $11,848 $11,412
- ---------------------------------------------------------------------------------
Diluted EPS $ 0.36 $ 0.34
=================================================================================
- ---------------------------------------------------------------------------------
Nine months ended September 30, 2003 2002
- ---------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 32,474 33,088
Net income available to common shareholders $35,222 $33,755
- ---------------------------------------------------------------------------------
Basic EPS $ 1.08 $ 1.02
=================================================================================
Diluted EPS:
Weighted average common shares outstanding 32,474 33,088
Dilutive effect of common stock options and restricted stock 293 242
- ---------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 32,767 33,330
Net income available to common shareholders $35,222 $33,755
- ---------------------------------------------------------------------------------
Diluted EPS $ 1.07 $ 1.01
=================================================================================
-11-
There were 197,400 average outstanding stock options for the quarter ended
September 30, 2003 and 387,272 average outstanding stock options for the quarter
ended September 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 229,515 outstanding
average stock options for the nine month period ended September 30, 2003 and
420,743 average outstanding stock options for the nine month period ended
September 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.
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:
============================================================
THREE MONTHS ENDED
- ------------------------------------------------------------
SEPTEMBER 30,
- ------------------------------------------------------------
2003 2002
----------- -----------
Net income, as reported $ 11,848 $ 11,412
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 (260) (268)
----------- -----------
Pro forma net income $ 11,607 $ 11,164
=========== ===========
Net income per share:
Basic - as reported $ 0.36 $ 0.35
Basic - Pro forma $ 0.36 $ 0.34
Diluted - as reported $ 0.36 $ 0.34
Diluted - Pro forma $ 0.35 $ 0.34
============================================================
-12-
======================================================
NINE MONTHS ENDED
- ------------------------------------------------------
SEPTEMBER 30,
- ------------------------------------------------------
2003 2002
---------- -----------
Net income, as reported $ 35,222 $ 33,755
Add: Stock-based
compensation expense
included in reported net
income, net of related tax
effects 61 41
Less: Stock-based
compensation expense
determined under fair value
method for all awards, net of
related tax effects (790) (752)
---------- -----------
Pro forma net income $ 34,493 $ 33,044
========== ===========
Net income per share:
Basic - as reported $ 1.08 $ 1.02
Basic - Pro forma $ 1.06 $ 1.00
Diluted - as reported $ 1.07 $ 1.01
Diluted - Pro forma $ 1.05 $ 0.99
======================================================
The Company granted 394,482 stock options during the nine months ended September
30, 2003 with a weighted average exercise price of $17.69 per share compared to
497,670 stock options granted during the nine months ended September 30, 2002
with a weighted average exercise price of $14.40 per share. The per share
weighted average fair value of the stock options granted for the nine months
ended September 30, 2003 and 2002 was $4.02 and $2.41. The assumptions used for
the grants noted above were as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
==================================================================
DIVIDEND YIELD 3.41% - 3.97% 4.07%
EXPECTED VOLATILITY 31.34% - 31.42% 19.13%
RISK -FREE INTEREST RATE 2.98% - 3.98% 3.48% - 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.
-13-
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
A summary of goodwill by subsidiaries follows:
JANUARY 1, GOODWILL SEPTEMBER 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 SEPTEMBER 30,
(In thousands) 2003 ACQUIRED 2003
---------------------------------------
NBT Bank, N.A. $ 43,120 $ 1,400 $ 44,520
NBT Financial Services, Inc. 3,001 - 3,001
---------------------------------------
Total $ 46,121 $ 1,400 $ 47,521
=======================================
The Company acquired $1.4 million in goodwill in connection with the acquisition
of a branch from Alliance Bank in June of 2003. 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:
SEPTEMBER 30,
2003 2002
-----------------
(in thousands)
Core deposit intangibles:
Gross carrying amount $ 5,585 $ 5,433
Less: accumulated amortization 4,367 3,777
-----------------
Net Carrying amount 1,218 1,656
-----------------
Other intangibles:
Gross carrying amount 1,031 1,031
Less: accumulated amortization 326 274
-----------------
Net Carrying amount 705 757
-----------------
Other intangibles not subject to
amortization: Pension Asset
551 -
Total intangibles with definite
useful lives:
Gross carrying amount 7,167 6,464
Less: accumulated amortization 4,693 4,051
-----------------
Net Carrying amount $ 2,474 $ 2,413
=================
Amortization expense on finite-lived intangible assets is expected to total $0.2
million for the remainder of 2003 and $0.3 million for each of 2004, 2005, 2006
and 2007.
-14-
NOTE 7. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
On June 14, 1999, CNB Financial Corp. ("CNBF") which 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. On August 4, 1999, the Trust issued $18.0
million in capital securities at 3-month LIBOR plus 275 basis points, which
equaled 8.12% at issuance. The rate on the capital securities resets quarterly,
equal to the 3-month LIBOR plus 275 basis points (3.85% and 4.61% for the
September 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.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
established standards for how entities classify and measure certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS No. 150 are effective for financial instruments entered into or modified
after May 31, 2003, and otherwise are effective at the beginning of the first
interim period beginning after June 15, 2003. In the Company's earnings release
issued October 27, 2003, the guaranteed preferred beneficial interests in
Company's junior subordinated debentures were reported as a liability in the
Company's balance sheet, and the distributions ("capital securities") on these
capital securities on and after July 1, 2003 were included as interest expense
in accordance with the provisions of SFAS No. 150. Subsequent to the earnings
release, but prior to the filing of these financial statements, the FASB issued
FASB Staff Position No. 150-3, which deferred indefinitely the classification
and measurement provisions of SFAS No. 150 for the Company's capital securities.
Accordingly $181,000 of trust preferred distributions for the three months ended
September 30, 2003 which were classified as interest expense in the October 27,
2003 earnings release have been reported in these consolidated financial
statements as distributions on capital securities. Also these capital securities
are reported in the same manner as minority interest in the accompanying
consolidated interim balance sheet as of September 30, 2003. This reporting is
consistent with the Company's previous quarterly and annual financial reporting.
SFAS No. 150 has no other impact on the Company's consolidated financial
statements.
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued Financial Accounting Standards Board Interpretation (FIN) No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others - an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34."
FIN No. 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN No. 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002, and were adopted in the Company's
consolidated financial statements for the year ended December 31, 2002.
Implementation of the remaining provisions of FIN No. 45 during the first
quarter of 2003 did not have any impact on the Company's financial statements.
-15-
The FASB issued FAS 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
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 Statement 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.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN No. 46 addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains interest after that date. The effective date of FIN No. 46
had been July 1, 2003. The FASB postponed the effective date to December 31,
2003 for all variable interest entities that existed prior to February 1, 2003.
The Company is evaluating the effects of FIN No. 46 but currently expects it
will not have a significant impact on the Company's consolidated financial
statements.
In its current form, FIN No. 46 may require the Company to deconsolidate its
investment in its guaranteed preferred beneficial interests in junior
subordinated debentures in future financial statements. Presently the beneficial
interests in the Company's junior subordinated debentures qualify as Tier I
capital of the Company. In July 2003, the Board of Governors of the Federal
Reserve System issued a supervisory letter instructing bank and financial
holding companies to continue to include beneficial interests in junior
subordinated debentures in Tier I capital for regulatory purposes until notice
is given to the contrary. The Federal Reserve intends to review the regulatory
implications of any accounting treatment changes and, if necessary or warranted,
provide further appropriate guidance. There can be no assurance that the Federal
Reserve will continue to allow institutions to include beneficial interests in
junior subordinated debentures in Tier I capital for regulatory capital
purposes. As of September 30, 2003, if the Company was not allowed to include
its $17.0 million in beneficial interests in the Company's junior subordinated
debentures within Tier I capital, it would still exceed the regulatory required
minimums for capital adequacy purposes.
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 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
-16-
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.
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policy relating to the
allowance for loan and lease losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan and lease portfolio and the material effect that
such judgments can have on the results of operations. While management's current
evaluation of the allowance for loan and lease losses indicates that the
allowance is adequate, under adversely different conditions or assumptions, the
allowance would need to be increased. For example, if historical loan and lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions for loan and lease losses
would be required to increase the allowance. In addition, the assumptions and
estimates used in the internal reviews of the Company's non-performing loans and
potential problem loans has a significant impact on the overall analysis of the
adequacy of the allowance for loan and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral evaluations were significantly lowered, the
Company's allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
OVERVIEW
The Company earned net income of $11.8 million ($0.36 diluted earnings per
share) for the three months ended September 30, 2003 compared to net income of
$11.4 million ($0.34 diluted earnings per share) for the three months ended
September 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 $1.9
million offset by a decrease in net interest income of $1.1 million. The
increase in noninterest income was driven primarily by increases in services
charges on deposit accounts of $0.6 million, broker/dealer and insurance revenue
of $0.4 million, Bank Owned Life Insurance income of $0.4 million, trust income
of $0.2 million and other income of $0.3 million. The decline in net interest
income resulted primarily from a decline in the Company's net interest margin
from 4.35% for the three months ended September 30, 2002 to 4.02% for the same
period in 2003.
-17-
The Company earned net income of $35.2 million ($1.07 diluted earnings per
share) for the nine months ended September 30, 2003 compared to net income of
$33.8 million ($1.01 diluted earnings per share) for the nine months ended
September 30, 2002. The increase in net income from 2002 to 2003 was primarily
the result of an increase in total noninterest income of $4.4 million and a $0.7
million decrease in the provision for loan and lease losses offset by a decrease
in net interest income of $3.0 million and an increase in total noninterest
expense of $1.1 million. The increase in noninterest income was driven primarily
by increases in services charges on deposit accounts of $1.7 million, other
income of $0.6 million, trust income of $0.6 million, broker/dealer and
insurance revenue of $0.5 million, Bank Owned Life Insurance income of $0.4
million, as well as a $0.1 million net gain on securities transactions for the
nine months ended September 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 nine
months ended September 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 4.47% for the
nine months ended September 30, 2002 to 4.19% for the same period in 2003. The
increase in total noninterest expense resulted primarily from increases in other
operating expense of $1.6 million, salaries and employee benefits of $0.6
million and occupancy expense of $0.6 million offset by declines in loan
collection and other real estate owned costs of $1.0 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 THIRD NINE
Quarter Quarter QUARTER MONTHS
- ----------------------------------------------------------------------
2003
Return on average assets (ROAA) 1.27% 1.25% 1.21% 1.24%
Return on average equity (ROAE) 16.05% 16.07% 16.06% 16.09%
Net interest margin 4.38% 4.18% 4.02% 4.19%
======================================================================
2002
ROAA 1.25% 1.24% 1.23% 1.24%
ROAE 16.62% 16.50% 15.95% 16.37%
Net interest margin 4.54% 4.48% 4.35% 4.47%
======================================================================
-18-
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 September 30,
2003 2002
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- --------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 1,573 $ 16 4.04% $ 15,374 $ 109 2.81%
Trading securities 69 1 5.75% 260 2 3.05%
Securities available for sale (2) 966,254 10,481 4.31% 965,055 14,300 5.88%
Securities held to maturity (2) 99,812 1,170 4.65% 86,840 1,333 6.09%
Investment in FRB and FHLB Banks 29,469 179 2.41% 22,718 142 2.48%
Loans and leases (1) 2,527,099 40,065 6.29% 2,350,015 42,149 7.12%
----------- ----------- ---------- ---------
Total interest earning assets 3,624,276 51,912 5.69% 3,440,262 58,035 6.69%
----------- ---------
Other assets 278,333 242,947
----------- ----------
TOTAL ASSETS $3,902,609 $3,683,209
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 376,700 982 1.03% $ 271,049 1,145 1.68%
NOW deposit accounts 414,057 461 0.44% 376,641 905 0.95%
Savings deposits 542,344 1,043 0.76% 494,304 1,841 1.48%
Time deposits 1,158,366 8,434 2.89% 1,315,059 11,857 3.58%
----------- ----------- ---------- ---------
Total interest bearing deposits 2,491,467 10,920 1.74% 2,457,053 15,748 2.54%
Short-term borrowings 212,568 704 1.31% 106,018 417 1.56%
Long-term debt 369,843 3,586 3.85% 350,650 4,139 4.68%
----------- ----------- ---------- ---------
Total interest bearing liabilities 3,073,878 15,210 1.96% 2,913,721 20,304 2.76%
----------- ---------
Demand deposits 469,432 426,733
Other liabilities (3) 66,413 58,945
Stockholders' equity 292,886 283,810
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,902,609 $3,683,209
----------- ----------
NET INTEREST INCOME (FTE BASIS) 36,702 37,731
----------- ---------
INTEREST RATE SPREAD 3.73% 3.93%
NET INTEREST MARGIN 4.02% 4.35%
Taxable equivalent adjustment 1,124 1,024
----------- ----------
NET INTEREST INCOME $ 35,578 $ 36,707
=========== ==========
(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 for the three months ended September 30, 2003
and 2002 are $17.0 million in the Company's guaranteed preferred beneficial
interests in Company's junior subordinated debentures.
-19-
Nine months ended September 30,
2003 2002
AVERAGE YIELD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATES Balance Interest Rates
- --------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing accounts $ 3,549 $ 57 2.15% $ 13,584 $ 302 2.97%
Trading securities 157 4 3.41% 198 6 4.05%
Securities available for sale (2) 973,318 34,381 4.73% 939,634 43,666 6.21%
Securities held to maturity (2) 88,923 3,517 5.30% 96,009 4,373 6.09%
Investment in FRB and FHLB Banks 25,668 793 4.14% 21,582 544 3.37%
Loans and leases (1) 2,433,665 119,601 6.59% 2,330,096 126,127 7.24%
----------- ----------- ---------- ---------
Total interest earning assets 3,525,280 158,353 6.02% 3,401,103 175,018 6.88%
----------- ---------
Other assets 266,675 235,743
----------- ----------
TOTAL ASSETS $3,791,955 $3,636,846
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 348,082 3,219 1.24% $ 272,078 3,266 1.60%
NOW deposit accounts 401,625 1,786 0.60% 380,524 2,733 0.96%
Savings deposits 518,819 3,510 0.91% 478,122 5,383 1.51%
Time deposits 1,213,669 27,057 2.99% 1,339,836 37,622 3.75%
----------- ----------- ---------- ---------
Total interest bearing deposits 2,482,195 35,572 1.92% 2,470,560 49,004 2.65%
Short-term borrowings 145,038 1,363 1.26% 89,521 1,052 1.57%
Long-term debt 357,967 10,982 4.11% 329,623 11,633 4.72%
----------- ----------- ---------- ---------
Total interest bearing liabilities 2,985,200 47,917 2.15% 2,889,704 61,689 2.85%
----------- ---------
Demand deposits 449,520 415,033
Other liabilities (3) 63,871 55,804
Stockholders' equity 293,364 276,305
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $3,791,955 $3,636,846
----------- ----------
NET INTEREST INCOME (FTE BASIS) 110,436 113,329
----------- ----------
INTEREST RATE SPREAD 3.87% 4.03%
NET INTEREST MARGIN 4.19% 4.47%
TAXABLE EQUIVALENT ADJUSTMENT 3,337 3,195
----------- ----------
NET INTEREST INCOME $ 107,099 $ 110,134
=========== ==========
(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
for the nine months ended September 30, 2003 and 2002.
-20-
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 September 30,
- ---------------------------------------------------------------------
INCREASE (DECREASE)
2003 OVER 2002
- ---------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- ---------------------------------------------------------------------
Short-term interest bearing accounts $ (127) $ 34 $ (93)
Trading securities (2) 1 (1)
Securities available for sale 18 (3,837) (3,819)
Securities held to maturity 181 (344) (163)
Investment in FRB and FHLB Banks 41 (4) 37
Loans and leases 3,031 (5,115) (2,084)
- ---------------------------------------------------------------------
Total interest income 2,982 (9,105) (6,123)
- ---------------------------------------------------------------------
Money market deposit accounts 360 (523) (163)
NOW deposit accounts 82 (526) (444)
Savings deposits 164 (962) (798)
Time deposits (1,309) (2,114) (3,423)
Short-term borrowings 362 (75) 287
Long-term debt 217 (770) (553)
- ---------------------------------------------------------------------
Total interest expense 992 (6,086) (5,094)
- ---------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 1,990 $ (3,019) $ (1,029)
=====================================================================
Nine months ended September 30,
- ---------------------------------------------------------------------
INCREASE (DECREASE)
2003 OVER 2002
- ---------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL
- ---------------------------------------------------------------------
Short-term interest bearing accounts $ (178) $ (67) $ (245)
Trading securities 1,517 (10,802) (9,285)
Securities available for sale (307) (549) (856)
Securities held to maturity (1) (1) (2)
Investment in FRB and FHLB Banks 114 135 249
Loans and leases 5,438 (11,964) (6,526)
- ---------------------------------------------------------------------
Total interest income 6,209 (22,874) (16,665)
- ---------------------------------------------------------------------
Money market deposit accounts 797 (844) (47)
NOW deposit accounts 144 (1,091) (947)
Savings deposits 426 (2,299) (1,873)
Time deposits (3,314) (7,251) (10,565)
Short-term borrowings 554 (243) 311
Long-term debt 948 (1,599) (651)
- ---------------------------------------------------------------------
Total interest expense 1,911 (15,683) (13,772)
- ---------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 4,298 $ (7,191) $ (2,893)
=====================================================================
-21-
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
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 $1.0 million
during the three months ended September 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 earning assets decreased 100 basis points ("bp"), to
5.69% for the three months ended September 30, 2003, from 6.69% for the same
period in 2002. Meanwhile, the rate paid on interest-bearing liabilities
decreased 80 bp, to 1.96% for the three months ended September 30, 2003, from
2.76% for the same period in 2002.
Total FTE interest income for the three months ended September 30, 2003
decreased $6.1 million compared to the same period in 2002, a result of the
previously mentioned decrease in yield on earning assets. The decrease in the
yield on earning assets can be primarily attributed to the low rate environment
prevalent for the last several quarters. Additionally, the low rate environment
resulted in an acceleration of prepayments of mortgage related assets, which led
to a high level of amortization of investment securities premiums. The high
level of amortization experienced during the three months ended September 30,
2003 was a factor in the 157 basis point decrease in yield on securities
available for sale when compared to the same period in 2002. Another factor
driving the decrease in yield on investment securities is the Company's decision
to invest in shorter-term securities which have lower yields, while providing
greater flexibility to deploy funds in a rising rate environment (for more
information about the Company's investment securities and asset/liability
position see the sections under the captions "Securities" and "Market Risk"
further in this discussion).
During the same time period, total interest expense decreased $5.1 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 37.7% of interest-bearing liabilities for the three months ended
September 30, 2003 from 45.1% for the same period in 2002. Offsetting this
decrease in the interest-bearing liabilities mix, was an increase in lower cost
NOW, MMDA, and Savings deposits, to 43.4% of interest-bearing liabilities for
the three months ended September 30, 2003 from 39.2% for the same period in
2002. Total borrowings increased to 18.9% for the three months ended September
30, 2003 from 15.7% for the same period in 2002.
Another important performance measurement of net interest income is the net
interest margin. Net interest margin decreased to 4.02% for the three months
ended September 30, 2003, down from 4.35% 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.
-22-
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 SEPTEMBER 30,
2003 2002
------------------ -----------------
(in thousands)
Service charges on deposit accounts $ 4,164 $ 3,531
Broker/dealer and insurance fees 1,763 1,393
Trust 958 743
Bank owned life insurance income 398 -
Net securities gains (losses) 18 (6)
Other 2,672 2,380
- ---------------------------------------------------------------------------
Total $ 9,973 $ 8,041
===========================================================================
Noninterest income for the quarter ended September 30, 2003 was $10.0 million,
up $1.9 million or 24% from $8.0 million for the same period in 2002. Service
charges on deposit accounts for the quarter ended September 30, 2003 increased
$0.6 million or 18% over the same period in 2002. The increase in service
charges on deposit accounts resulted primarily from overdraft fees from deposit
accounts. The increase in overdraft fees was driven primarily by the combination
of several pricing adjustments implemented during 2002 and 2003 as well as
continued growth in core deposit products. Revenue from trust services increased
$0.2 million or 29% for the quarter ended September 30, 2003 over the same
period in 2002, due in part to an increase in estate management services.
Broker/dealer and insurance revenue increased $0.4 million or 27% for the
quarter ended September 30, 2003 over the same period in 2002, due primarily to
the Company's initiative in delivering financial service related products
through its 111-branch network, which was implemented at the end of 2002. Bank
Owned Life Insurance ("BOLI") income increased $0.4 million for the quarter
ended September 30, 2003 when compared to the same period in 2002, resulting
from the $30.0 million BOLI purchase in June 2003.
-23-
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 SEPTEMBER 30,
(in thousands) 2003 2002
----------------- -----------------
Salaries and employee benefits $ 12,486 $ 11,720
Occupancy 2,143 2,032
Equipment 1,909 1,672
Data processing and communications 2,640 2,705
Professional fees and outside services 1,421 1,446
Office supplies and postage 1,104 1,116
Amortization of intangible assets 158 177
Loan collection and other real estate owned 448 570
Capital securities 181 221
Other 3,493 3,661
----------------- -----------------
Total noninterest expense $ 25,983 $ 25,320
================= =================
Noninterest expense for the quarter ended September 30, 2003 was $26.0 million,
up $0.7 million or 3% from $25.3 million for the same period in 2002. The
increase in noninterest expense resulted primarily from an increase in salaries
and employee benefits of $0.8 million or 7%. This increase resulted primarily
from an increase in salaries resulting from increases in merit adjustments and
full time equivalent employees.
Income Taxes
- -------------
Income tax expense for the three months ended September 30, 2003 was $5.3
million for an effective tax rate of 30.8%, compared to $5.6 million, or 32.9%,
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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net Interest Income
- ---------------------
Net interest income on a federal taxable equivalent basis (FTE) decreased $2.9
million to $110.4 million for 2003 compared to $113.3 million for 2002. The net
interest margin declined 28 bp from 4.47% to 4.19%. 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 86 bp, to 6.02% for 2003, from 6.88% for 2002. Meanwhile, the rate
paid on interest-bearing liabilities decreased 70 bp, to 2.15% for 2003, from
2.85% for 2002.
-24-
Total FTE interest income for 2003 decreased $16.7 million compared to 2002, a
result of the previously mentioned decrease in yield on earning assets. The
decline in yield on earning assets resulted primarily from an increase in
prepayment activity from mortgage-related securities and loans. The prepayments
from mortgage-related securities and loans were subsequently reinvested at lower
rates. Furthermore, prepayments on mortgage-related securities resulted in an
accelerated level of amortization of securities premiums, leading to a decrease
in interest income. The yield on securities available for sale declined 148 bp
from 6.21% for the nine months ended September 30, 2002 to 4.73% for the same
period in 2003. During the same time period, total interest expense decreased
$13.6 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.
Noninterest Income
- -------------------
The following table sets forth information by category of noninterest income for
the periods indicated:
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
---------------- ------------------
Service charges on deposit accounts $ 11,531 $ 9,820
Broker/dealer and insurance fees 4,905 4,371
Trust 2,966 2,366
Bank Owned Life Insurance income 412 -
Net securities gains (losses) 83 (439)
Other 7,757 7,136
---------------- ------------------
Total $ 27,654 $ 23,254
================ ==================
Noninterest income for the nine months ended September 30, 2003 was $27.7
million, up $4.4 million or 19% from $23.3 million for the same period in 2002.
Service charges on deposit accounts for the nine months ended September 30, 2003
increased $1.7 million or 17% over the same period in 2002. The increase in
service charges on deposit accounts resulted primarily from higher overdraft
fees resulting from recent pricing changes and continued growth from core
deposits. Other income for the nine months ended September 30, 2003 increased
$0.6 million or 9% 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 nine months ended September 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 $0.6 million
or 25% for the nine months ended September 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. Broker/dealer and
insurance revenue increased $0.5 million or 12% for the nine months ended
September 30, 2003 over the same period in 2002, due primarily to the Company's
initiative in delivering financial service related products through its
111-branch network, which was implemented at the end of 2002. Bank Owned Life
Insurance ("BOLI") income increased $0.4 million for the nine months ended
September 30, 2003 when compared to the same period in 2002, resulting from the
$30.0 million BOLI purchase in June 2003.
-25-
Noninterest Expense
- --------------------
The following table sets forth information by category of noninterest expense
for the periods indicated:
NINE MONTHS ENDED SEPTEMBER 30,
(in thousands) 2003 2002
----------------- ----------------
Salaries and employee benefits $ 37,205 $ 36,591
Occupancy 6,851 6,297
Equipment 5,619 5,204
Data processing and communications 8,081 7,868
Professional fees and outside services 3,963 4,843
Office supplies and postage 3,188 3,240
Amortization of intangible assets 475 610
Loan collection and other real estate owned 1,204 2,245
Capital securities 551 667
Other 10,586 9,029
----------------- ----------------
Total noninterest expense $ 77,723 $ 76,594
================= ================
Noninterest expense for the nine months ended September 30, 2003 was $77.7
million, up $1.1 million or 1% from $76.6 million for the same period in 2002.
The increase in noninterest expense was due primarily to increases in other
operating expense, salaries and employee benefits and occupancy expense
partially offset by decreases in loan collection and OREO expenses and
professional fees and outside services. Other operating expense increased $1.6
million, primarily from a $0.6 million charge for the writedown of venture
capital investments (during the second quarter of 2003) and other miscellaneous
charges. Salaries and employee benefits increased $0.6 million, due primarily to
increased incentive compensation costs. The $0.6 million increase in occupancy
expense was driven primarily by the opening of a new operations facility located
at the Company's headquarters in Norwich, New York during the first quarter of
2003 and higher maintenance costs associated with several severe winter storms.
Loan collection and OREO expenses decreased $1.0 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 $16.0 million for an effective tax rate of
31.3%, compared to $16.5 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.
-26-
ANALYSIS OF FINANCIAL CONDITION
Loans and Leases
- ------------------
Loans are recorded at their current unpaid principal balance, net of unearned
income and unamortized loan fees and expenses, which are amortized under the
effective interest method over the estimated lives of the loans. Interest income
on loans is primarily accrued based on the principal amount outstanding.
Lease receivables primarily represent automobile financing to customers through
direct financing leases and are carried at the aggregate of the lease payments
receivable and the estimated residual values, net of unearned income and net
deferred lease origination fees and costs. Net deferred lease origination fees
and costs are amortized under the effective interest method over the estimated
lives of the leases. The estimated residual value related to the total lease
portfolio is reviewed quarterly, and if there has been a decline in the
estimated fair value of the total residual value that is judged by management to
be other-than-temporary, a loss is recognized. Adjustments related to such
other-than-temporary declines in estimated fair value are recorded in
noninterest expense in the consolidated statements of income.
A summary of loans and leases, net of deferred fees and origination costs, by
category for the periods indicated follows:
September 30, December 31, September 30,
(in thousands) 2003 2002 2002
---------------------------------------------
Commercial and commercial mortgages* $ 1,095,463 $ 1,057,815 $ 1,056,201
Residential real estate mortgages 677,540 610,256 626,838
Consumer 717,216 626,767 621,040
Leases 60,247 61,094 63,609
---------------------------------------------
Total loans and leases $ 2,550,466 $ 2,355,932 $ 2,367,688
=============================================
*Includes agricultural loans
Total loans and leases were $2.6 billion, or 63.0% of assets, at September 30,
2003, compared to $2.4 billion, or 63.3%, at December 31, 2002, and $2.4
billion, or 63.5%, at September 30, 2002. Total loans and leases increased
$194.5 million at September 30, 2003 when compared to December 31, 2002.
Consumer loans increased $90.4 million, from December 31, 2002 or 14.4%. The
increase in consumer loans was due primarily to strong growth from home equity
and indirect loan products. Residential real estate mortgages increased $67.3
million, from December 31, 2002 or 14.7%. Additionally, commercial loans and
commercial mortgages increased $37.7 million, from December 31, 2002, or 4.7%.
The increase in these loan categories resulted from continued growth within
existing markets combined with an expanded presence in newer markets now served
by the Company.
-27-
Securities
- ----------
The Company classifies its securities at date of purchase as available for sale,
held to maturity or trading. Held to maturity debt securities are those that
the Company has the ability and intent to hold until maturity. Available for
sale securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, on available for sale securities are
excluded from earnings and are reported in stockholders' equity as a component
of accumulated other comprehensive income or loss. Held to maturity securities
are recorded at amortized cost. Trading securities are recorded at fair value,
with net unrealized gains and losses recognized currently in income. Transfers
of securities between categories are recorded at fair value at the date of
transfer. A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other-than-temporary is charged to
earnings resulting in the establishment of a new cost basis for the security.
Securities with an other-than-temporary impairment are generally placed on
nonaccrual status.
Average total securities increased $26.6 million for the nine months ended
September 30, 2003 when compared to the same period in 2002. The average balance
of securities available for sale increased $33.7 million for the nine months
ended September 30, 2003 when compared to the same period in 2002. The average
balance of securities held to maturity decreased $7.1 million for the nine
months ended September 30, 2003, when compared to the same period in 2002. The
net increase in securities resulted from pre-investing expected fourth quarter
investment securities cash flows. The average total securities portfolio
represented 28% of total average earning assets for the nine months ended
September 30, 2003 and 2002.
At September 30, 2003, approximately 64.6% of the Company's investment
securities were comprised of either mortgage-backed securities ("MBS") or
collateralized mortgage obligations ("CMO") compared to 67.7% at September 30,
2002. During the period between September 30, 2002 and September 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 from
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 generally have 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 September 30, 2003, approximately 79.7% of MBS and
CMO were comprised of securities containing 10/15-year term as compared to 59.4%
at September 30, 2002.
There is one security with the other-than-temporary impairment charge at
September 30, 2003 and 2002, which had a remaining carrying value of $0.6
million and $1.1 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 September 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.
-28-
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 September 30, 2002. The
decrease at December 31, 2002, when compared to September 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 securities available for sale during 2002. At September 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.
Bank Owned Life Insurance ("BOLI")
- --------------------------------------
The Company purchased $30 million in BOLI in June 2003. BOLI represents life
insurance on the lives of certain employees who are deemed to be significant
contributors to the Company. All employees in the policy are aware of and have
consented to the coverage. Increases in the cash value of the policies, as well
as insurance proceeds that may be received, are recorded in other noninterest
income, and are not subject to income taxes. The Company reviewed the financial
strength of the insurance carriers prior to the purchase of BOLI and will do so
annually thereafter.
Allowance for Loan and Lease Losses, Nonperforming Assets and the Provision for
- --------------------------------------------------------------------------------
Loan and Lease 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
-29-
and lease losses. Such agencies may require the Company to recognize additions
to the allowance based on their judgment about information available to them at
the time of their examination, which may not be currently available to
management.
After a thorough consideration and validation of the factors discussed above,
required additions to the allowance for loan and lease losses are made
periodically by charges to the provision for loan and lease losses. These
charges are necessary to maintain the allowance at a level which management
believes is reasonably reflective of overall inherent risk of probable loss in
the portfolio. While management uses available information to recognize losses
on loans and leases, additions to the allowance may fluctuate from one reporting
period to another. These fluctuations are reflective of changes in risk
associated with portfolio content and/or changes in management's assessment of
any or all of the determining factors discussed above. The allowance for loan
and lease losses to outstanding loans and leases at September 30, 2003 was 1.63%
compared to 1.83% at September 30, 2002. Management considers the allowance for
loan and lease losses to be adequate based on evaluation and analysis of the
loan portfolio.
Table 4 reflects changes to the allowance for loan and lease losses for the
periods presented. The allowance is increased by provisions for losses charged
to operations and is reduced by net 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 Nine months ended
September 30, September 30,
(dollars in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------
Balance, beginning of period $40,858 $ 43,719 $40,167 $44,746
Recoveries 1,369 1,014 4,286 3,314
Chargeoffs (2,991) (3,827) (8,570) (11,257)
- --------------------------------------------------------------------------------------------------------
Net chargeoffs (1,622) (2,813) (4,284) (7,943)
Provision for loan losses 2,436 2,424 5,789 6,527
- --------------------------------------------------------------------------------------------------------
Balance, end of period $41,672 $43,330 $41,672 $43,330
========================================================================================================
COMPOSITION OF NET CHARGEOFFS
- --------------------------------------------------------------------------------------------------------
Commercial and agricultural $ (603) 37% ($1,895) 67% $(1,453) 33% ($4,212) 53%
Real estate mortgage (2) 1% (204) 7% 76 0% (575) 7%
Consumer (1,017) 62% (714) 26% (2,907) 67% (3,156) 40%
- --------------------------------------------------------------------------------------------------------
Net chargeoffs $(1,622) 100% ($2,813) 100% $(4,284) 100% ($7,943) 100%
- --------------------------------------------------------------------------------------------------------
Annualized net chargeoffs
to average loans 0.25% 0.48% 0.24% 0.46%
========================================================================================================
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past
due, trouble debt 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 $19.0 million at September 30, 2003, compared to
$30.5 million at December 31, 2002, and $35.1 million at September 30, 2002. The
decrease in nonperforming assets resulted primarily from the Company's focus on
reducing nonperforming loans. Nonperforming loans totaled $16.5 million at
September 30, 2003, down from the $26.4 million outstanding at December 31,
-30-
2002. The $9.9 million decrease in nonperforming loans from December 31, 2002 to
September 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 $6.1 million, from $17.0
million at December 31, 2002, to $10.8 million at September 30, 2003. Nonaccrual
real estate mortgages decreased $3.7 million, from $5.5 million at December 31,
2002, to $1.9 million at September 30, 2003.
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $56.5 million in potential problem loans at September
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 September 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 $1.6 million for the three months ended September 30,
2003, down $1.2 million from the $2.8 million charged-off during the same period
in 2002. Despite improvements in nonperforming loans and lower net charge-offs,
the provision for loan and leases loss remained relatively unchanged, totaling
$2.4 million for the three months ended September 30, 2003 and 2002. The amount
of provision for the three months ended September 30, 2003 was driven primarily
by strong loan growth during the period (11% annualized growth rate from
December 31, 2002) and weak local economic conditions, offset by the decrease in
net charge-offs and nonperforming loans.
Net charge-offs totaled $4.3 million for the nine months ended September 30,
2003, down $3.7 million from the $7.9 million charged-off during the same period
in 2002. The provision for loan and lease losses totaled $5.8 million for the
nine months ended September 30, 2003, down from the $6.5 million provided during
the same period in 2002.
-31-
TABLE 5
NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(dollars in thousands) 2003 2002 2002
- ----------------------------------------------------------------------------------------------------------
Commercial and agricultural $ 10,841 $ 16,980 $ 19,457
Real estate mortgage 1,857 5,522 8,024
Consumer 2,576 1,507 2,000
- ----------------------------------------------------------------------------------------------------------
Total nonaccrual loans 15,274 24,009 29,481
- ----------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 71 237 88
Real estate mortgage 721 1,325 625
Consumer 402 414 125
- ----------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due and still accruing 1,194 1,976 838
- ----------------------------------------------------------------------------------------------------------
Restructured loans in compliance with modified terms - 409 412
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans 16,468 26,394 30,731
- ----------------------------------------------------------------------------------------------------------
Other real estate owned (OREO) 1,871 2,947 3,092
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans and OREO 18,339 29,341 33,823
==========================================================================================================
Nonperforming securities 619 1,122 1,312
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 18,958 $ 30,463 $ 35,135
==========================================================================================================
Total nonperforming loans to loans and leases 0.65% 1.12% 1.30%
Total nonperforming assets to assets 0.47% 0.82% 0.94%
Total allowance for loan and lease losses
to nonperforming loans 253.05% 152.18% 141.00%
==========================================================================================================
Deposits
- --------
Total deposits were $3.0 billion at September 30, 2003, an increase of $49.0
million, or 2%, from December 31, 2002, and an increase of $49.1 million, or 2%,
from the same period in the prior year. Total average deposits increased $34.4
million, or 1%, from the three months ended September 30, 2002 to the same
period in 2003. The Company experienced a decline in time deposits, as average
time deposits declined $156.7 million or 12%, from the three months ended
September 30, 2002 to the same period in 2003. Meanwhile, the total of average
demand deposits, money market deposits, NOW, and savings increased $233.8
million or 15%, from the three months ended September 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 municipal and jumbo time
deposits. The Company may price municipal and jumbo time deposits more
aggressively if liquidity needs increase. At September 30, 2003, total checking,
savings and money market accounts represented 62% of total deposits compared to
55% at September 30, 2002.
Borrowings
- ----------
The Company's borrowed funds consist of short-term borrowings and long-term
debt. Short-term borrowings totaled $332.0 million at September 30, 2003
compared to $105.6 million and $113.3 million at December 31, and September 30,
2002, respectively. The increase in short-term borrowings resulted from strong
loan growth during the year and pre-investment of expected fourth quarter
investment securities cash flows at the end of September 2003. Long-term debt
was $369.7 million at September 30, 2003, compared to $345.5 million and $350.6
million at December 31, and September 30, 2002, respectively.
-32-
CAPITAL RESOURCES
Stockholders' equity of $304.7 million represents 7.5% of total assets at
September 30, 2003, compared with $287.6 million, or 7.7% in the comparable
period of the prior year, and $292.4 million, or 7.9% at December 31, 2002. The
Company does not have a target dividend payout ratio, rather the Board of
Directors considers the Company's earnings position and earnings potential when
making dividend decisions.
As the capital ratios in Table 6 indicate, the Company remains well capitalized.
Capital measurements are significantly in excess of regulatory minimum
guidelines and meet the requirements to be considered well capitalized for all
periods presented. Tier 1 leverage, Tier 1 capital and Risk-based capital ratios
have regulatory minimum guidelines of 3%, 4% and 8% respectively, with
requirements to be considered well capitalized of 5%, 6% and 10%, respectively.
TABLE 6
CAPITAL MEASUREMENTS
- -----------------------------------------------------------------------------------
As of and for the quarter ended
March 31 June 30 September 30
- -----------------------------------------------------------------------------------
2003
Tier 1 leverage ratio 6.71% 6.72% 6.77%
Tier 1 capital ratio 9.77% 9.44% 9.78%
Total risk-based capital ratio 11.02% 10.70% 11.03%
Cash dividends as a percentage of net income 47.87% 46.68% 47.13%
Per common share:
Book value $ 9.00 $ 9.19 $ 9.32
Tangible book value $ 7.50 $ 7.64 $ 7.79
===================================================================================
2002
Tier 1 leverage ratio 6.70% 6.78% 6.60%
Tier 1 capital ratio 9.97% 10.04% 9.74%
Total risk-based capital ratio 11.23% 11.30% 10.98%
Cash dividends as a percentage of net income 50.69% 50.12% 50.03%
Per common share:
Book value $ 8.09 $ 8.52 $ 8.79
Tangible book value $ 6.61 $ 7.05 $ 7.31
===================================================================================
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 2.17 at September 30,
2003 and 1.96 a year ago. The per share market price was 14.19 times annualized
earnings at September 30, 2003 and 12.82 times annualized earnings at September
30, 2002.
TABLE 7
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
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2002
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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
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2003
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MARCH 31 $ 18.60 $16.76 $17.43 $ 0.170
JUNE 30 19.94 17.37 19.36 0.170
SEPTEMBER 30 21.76 19.24 20.25 0.170
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STOCK REPURCHASE PLAN
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On July 22, 2002, the Company announced that it intended to repurchase up to one
million shares (approximately 3%) of its outstanding common stock from time to
time in open market and privately negotiated transactions. 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 nine months
ended September 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 intended to repurchase up to an
additional one million shares (approximately 3%) of its outstanding common stock
from time to time in open market and privately negotiated transactions.
Currently there are 155,054 shares remaining under the previous authorization
that will be repurchased prior to the commencement of the new program.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
MARKET RISK
Interest rate risk is among the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities. Interest rate risk is defined as an exposure to
a movement in interest rates that could have an adverse effect on the Company's
net interest income. Net interest income is susceptible to interest rate risk
to the degree that interest-bearing liabilities mature or reprice on a different
basis than earning assets. When interest-bearing liabilities mature or reprice
more quickly than earning assets in a given period, a significant increase in
market rates of interest could adversely affect net interest income. Similarly,
when earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income.
In an attempt to manage the Company's exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's Asset
Liability Committee (ALCO) meets monthly to review the Company's interest rate
risk position and profitability, and to recommend strategies for consideration
by the Board of Directors. Management also reviews loan and deposit pricing,
and the Company's securities portfolio, formulates investment and funding
strategies, and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while enhancing the net
interest margin. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to changes in interest rates and fluctuations in the
difference between long- and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next repricing date (if needed), and current rates is uploaded into the model to
create an ending balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and leases and mortgage related investment
securities along with any optionality within the deposits and borrowings.
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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
scenarios of rates rising gradually 200 bp and the long end of the yield curve
remains flat and the short end of the curve increases 200 bp gradually, net
interest income is also projected to experience declines from the flat rate
scenario. Net interest income is projected to remain at lower levels than in a
flat rate scenario through the simulation period primarily due to a lag in
assets repricing while funding costs increase. The potential impact on earnings
is dependent on the ability to lag deposit repricing.
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 September 30, 2003 balance sheet position:
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
------------------------------------------------------------
CHANGE IN INTEREST RATES PERCENT CHANGE IN
(IN BASIS POINTS) NET INTEREST INCOME
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+ 200 FLAT (2.04%)
+ 200 (1.11%)
- 75 (0.06%)
------------------------------------------------------------
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 September 30, 2003. The Company's net interest income is projected to
decrease by 1.11% 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 $91.8 million from September 30, 2002 to September
30, 2003. From December 31, 2002, we have reduced our exposure to 30-year fixed
rate mortgage related securities and loans by $54.4 million. Approximately 11.5%
of earning assets were comprised of 30-year fixed rate mortgage related
securities and loans at September 30, 2003, down from a ratio of 15.1% at
September 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
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the secondary market or may sell certain mortgage related securities in order to
limit the Company's exposure to long-term earning assets.
LIQUIDITY RISK
Liquidity involves the ability to meet the cash flow requirements of customers
who may be depositors wanting to withdraw funds or borrowers needing assurance
that sufficient funds will be available to meet their credit needs. The ALCO is
responsible for liquidity management and has developed guidelines which cover
all assets and liabilities, as well as off balance sheet items that are
potential sources or uses of liquidity. Liquidity policies must also provide the
flexibility to implement appropriate strategies and tactical actions.
Requirements change as loans and leases grow, deposits and securities mature,
and payments on borrowings are made. Liquidity management includes a focus on
interest rate sensitivity management with a goal of avoiding widely fluctuating
net interest margins through periods of changing economic conditions.
The primary liquidity measurement the Company utilizes is called the Basic
Surplus which captures the adequacy of its access to reliable sources of cash
relative to the stability of its funding mix of average liabilities. This
approach recognizes the importance of balancing levels of cash flow liquidity
from short- and long-term securities with the availability of dependable
borrowing sources which can be accessed when necessary. At September 30, 2003,
the Company's Basic Surplus measurement was 9.0% of total assets or $366
million, which was above the Company's minimum of 5% or $202 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 September 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 September 30, 2003, approximately $22.5 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.
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ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this report. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, the
Company's disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions
rules and forms.
There were no changes made in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 5 -- Other Information
On October 27, 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
December 15, 2003 to stockholders of record as of December 1, 2003.
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Form of Employment Agreement between NBT Bancorp Inc. and Daryl
R. Forsythe made as of August 2, 2003.
10.2 Form of Employment Agreement between NBT Bancorp Inc. and Martin
A. Dietrich made as of August 2, 2003.
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Written Statement of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Written Statement of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) During the quarter ended September 30, 2003, the Company filed the
following Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated July 29, 2003,
which contained a press release announcing financial results for the quarter and
six months ended June 30, 2003 and a dividend declaration to be paid on
September 15, 2003 to stockholders of record as of September 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 12th day of November 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
10.1 Form of Employment Agreement between NBT Bancorp Inc. and Daryl
R. Forsythe made as of August 2, 2003.
10.2 Form of Employment Agreement between NBT Bancorp Inc. and Martin
A. Dietrich made as of August 2, 2003.
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Written Statement of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Written Statement of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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