SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001. OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. COMMISSION FILE NUMBER 0-14703 NBT BANCORP INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 16-1268674 (State of Incorporation) (I.R.S. Employer Identification No.) 52 SOUTH BROAD STREET NORWICH, NEW YORK 13815 (Address of Principal Executive Offices)(Zip Code) Registrant's Telephone Number, Including Area Code: (607)-337-2265 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of October 31, 2001, there were 24,335,800 shares outstanding of the Registrant's common stock, $0.01 par value. 1
NBT BANCORP INC. FORM 10-Q -- Quarter Ended September 30, 2001 TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1 Interim Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 2001, December 31, 2000 (Audited), and September 30, 2000 Consolidated Statements of Income for the three month and nine month periods ended September 30, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the nine month periods ended September 30, 2001 and 2000 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2001 and 2000 Consolidated Statements of Comprehensive Income for the three month and nine month periods ended September 30, 2001 and 2000 Notes to Unaudited Interim Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about Market Risk PART II OTHER INFORMATION Item 1 Legal Proceedings Item 2 Changes in Securities Item 3 Defaults upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Exhibits and Reports on FORM 8-K SIGNATURES INDEX TO EXHIBITS 2
<TABLE> <CAPTION> NBT Bancorp Inc. and Subsidiaries September 30, December 31, September 30, Consolidated Balance Sheets 2001 2000 2000 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share data) (Unaudited) (Unaudited) <S> <C> <C> <C> ASSETS Cash and cash equivalents $ 82,786 $ 96,429 $ 62,964 Short-term interest bearing accounts 4,696 14,233 13,361 Trading securities, at fair value 112 20,541 228 Securities available for sale, at fair value 577,160 576,372 590,895 Securities held to maturity (fair value-$92,783, $101,833 and $104,772 at September 30, 2001, December 31, 2000 and September 30, 2000, respectively) 91,880 102,413 107,350 Federal Reserve and Federal Home Loan Bank stock 19,184 27,647 27,647 Loans, net 1,778,612 1,702,133 1,644,951 Premises and equipment, net 49,253 43,457 44,308 Intangible assets, net 33,829 27,739 15,648 Other assets 40,695 44,824 50,616 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,678,207 $2,655,788 $2,557,968 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand (noninterest bearing) $ 338,208 $ 302,137 $ 284,600 Savings, NOW, and money market 736,519 671,980 632,809 - ---------------------------------------------------------------------------------------------------------------------------- Time 1,004,390 1,066,121 1,019,074 Total deposits 2,079,117 2,040,238 1,936,483 Short-term borrowings 72,121 132,375 154,162 Long-term debt 269,276 234,872 236,418 Other liabilities 25,698 40,282 23,922 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 2,446,212 2,447,767 2,350,985 - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $0.01 par value; shares authorized - 2,500,000 - - - Common stock, $0.01 par value and 50,000,000 authorized at September 30, 2001, 30,000,000 authorized at December 31, 2000 and September 30, 2000; issued 25,312,688, 24,237,322 and 24,213,882 at September 30, 2001, December 31, 2000 and September 30, 2000, respectively 253 242 242 Additional paid-in-capital 199,014 185,041 184,915 Retained earnings 41,647 36,689 48,030 Accumulated other comprehensive income (loss) 8,543 (2,864) (14,921) Common stock in treasury at cost, 976,888, 512,213 and 521,257 shares at September 30, 2001, December 31, 2000 and September 30, 2000, respectively (17,462) (11,087) (11,283) - ---------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 231,995 208,021 206,983 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,678,207 $2,655,788 $2,557,968 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to unaudited interim consolidated financial statements. 3
<TABLE> <CAPTION> Three months ended Nine months ended NBT Bancorp Inc. and Subsidiaries September 30, September 30, Consolidated Statements of Income 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) (Unaudited) <S> <C> <C> <C> <C> Interest, fee and dividend income: Loans $36,585 $36,494 $110,314 $103,102 Securities available for sale 9,142 10,140 27,496 31,008 Securities held to maturity 1,258 1,521 3,961 4,655 Other 433 766 1,430 1,864 - ---------------------------------------------------------------------------------------------------------------------------- Total interest, fee and dividend income 47,418 48,921 143,201 140,629 - ---------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 16,381 19,018 53,245 52,792 Short-term borrowings 775 2,441 3,261 6,771 Long-term debt 3,497 3,352 9,998 10,133 - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 20,653 24,811 66,504 69,696 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 26,765 24,110 76,697 70,933 Provision for loan losses 5,988 1,619 13,451 5,418 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 20,777 22,491 63,246 65,515 - ---------------------------------------------------------------------------------------------------------------------------- Noninterest income: Trust 956 784 2,752 2,455 Service charges on deposit accounts 2,702 2,068 7,702 6,036 Broker/dealer fees 1,034 1,017 2,956 1,595 Net securities gains 10 137 556 143 Gain on sale of branch building - - 1,367 - Other 1,894 1,567 5,694 4,540 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest income 6,596 5,573 21,027 14,769 - ---------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 9,041 9,095 27,279 25,753 Office supplies and postage 823 716 2,635 2,155 Occupancy 1,520 1,341 4,710 4,171 Equipment 1,489 1,376 4,123 4,220 Professional fees and outside services 1,150 764 2,975 2,432 Data processing and communications 2,305 1,335 6,081 4,134 Amortization of intangible assets 771 446 2,083 1,160 Merger, acquisition and reorganization costs - 3,165 - 7,204 Deposit overdraft writeoffs - - 2,125 - Other operating 2,646 1,890 6,746 6,300 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 19,745 20,128 58,757 57,529 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 7,628 7,936 25,516 22,755 Income taxes 2,544 2,781 8,089 8,251 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 5,084 $ 5,155 $ 17,427 $ 14,504 - ---------------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 0.21 $ 0.22 $ 0.72 $ 0.62 Diluted $ 0.21 $ 0.22 $ 0.72 $ 0.62 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to unaudited interim consolidated financial statements. 4
<TABLE> <CAPTION> NBT Bancorp Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------- Accumulated Additional Other Common Paid-in- Retained Comprehensive Treasury Stock Capital Earnings Income (Loss) Stock Total - ------------------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share data) <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 1999 $23,786 $156,112 $44,949 $(21,710) $(11,665) $191,472 Net income 14,504 14,504 Cash dividends - $0.510 per share (11,400) (11,400) Payment in lieu of fractional shares (23) (23) Issuance of 24,122 shares to employee benefits plans and other stock plans including tax benefit 6 457 382 845 Change $1.00 stated value per share to $.01 par value per share (23,554) 23,554 Issuance of 420,989 shares to purchase M. Griffith, Inc. 4 4,792 4,796 Other comprehensive income 6,789 6,789 - ------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2000 $ 242 $184,915 $48,030 $(14,921) $(11,283) $206,983 - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $ 242 $185,041 $36,689 $ (2,864) $(11,087) $208,021 Net income 17,427 17,427 Cash dividends - $0.510 per share (12,469) (12,469) Purchase of 653,603 treasury shares (10,277) (10,277) Issuance of 188,928 shares to employee benefit plans and other stock plans including tax benefit (2,018) 3,902 1,884 Issuance of 1,075,366 shares to purchase First National Bancorp, Inc. 11 15,991 16,002 Other comprehensive income 11,407 11,407 - ------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2001 $ 253 $199,014 $41,647 $ 8,543 $(17,462) $231,995 - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to unaudited interim consolidated financial statements. Note: Dividend per share data represents historical dividends per share of NBT Bancorp Inc. stand-alone. 5
<TABLE> <CAPTION> NBT Bancorp Inc. and Subsidiaries Nine Months Ended September 30, Consolidated Statements of Cash Flows 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) (Unaudited) <S> <C> <C> Operating activities: Net income $ 17,427 $ 14,504 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 13,451 5,418 Depreciation of premises and equipment 3,512 3,727 Net accretion on securities (1,355) (188) Amortization of intangible assets 2,083 1,160 Proceeds from sale of loans held for sale 5,531 10,947 Origination and purchases of loans held for sale (4,489) (8,169) Net gain on sales of loans (27) (82) Net loss on on disposal of premises and equipment 118 39 Net (gain) loss on sale of other real estate owned (146) 99 Writedown of other real estate owned 133 235 Net security transactions (556) (143) Proceeds from sale of trading securities 20,429 - Gain on sale of branch building (1,367) - Net decrease (increase) in other assets 9,253 (6,779) Net (decrease) increase in other liabilities (15,635) 7,794 - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 48,362 28,562 - ------------------------------------------------------------------------------------------------------------------------- Investing activities: Net cash and cash equivalents provided by acquisitions 9,509 33,170 Securities available for sale: Proceeds from maturities 115,662 30,911 Proceeds from sales 1,012 10,270 Purchases (74,494) (12,148) Securities held to maturity: Proceeds from maturities 33,929 25,416 Purchases (17,824) (21,316) Net increase in loans (19,066) (207,013) Purchase of premises and equipment, net (4,993) (499) Proceeds from sales of other real estate owned 984 1,463 - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 44,719 (139,746) - ------------------------------------------------------------------------------------------------------------------------- Financing activities: Net (decrease) increase in deposits (69,079) 122,718 Net (decrease) increase in short-term borrowings (60,725) 11,895 Proceeds from issuance of long-term debt 246,291 5,000 Repayments of long-term debt (211,886) (20,552) Proceeds from issuance of treasury shares to employee benefit plans and other stock plans, including tax benefit 1,884 242 Purchase of treasury stock (10,277) - Cash dividends (12,469) (11,423) - ------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (116,261) 107,880 - ------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (23,180) (3,304) Cash and cash equivalents at beginning of period 110,662 79,629 - ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 87,482 $ 76,325 - ------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 71,534 $ 60,970 Income taxes 1,222 8,276 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to unaudited interim consolidated financial statements. 6
<TABLE> <CAPTION> NBT Bancorp Inc. and Subsidiaries Nine Months Ended September 30, Supplemental Schedule of non-cash investing and financing activities: 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) (Unaudited) <S> <C> <C> Loans transferred to other real estate owned $ 1,247 $ 1,104 Fair value of assets acquired 109,549 1,068 Fair value of liabilities assumed 110,501 37,094 Common stock issued for acquisitions 16,002 4,796 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to interim consolidated financial statements. 7
<TABLE> <CAPTION> Three months ended Nine months ended NBT Bancorp Inc. and Subsidiaries September 30, September 30, Consolidated Statements of Comprehensive Income 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- (in thousands) (Unaudited) <S> <C> <C> <C> <C> Net Income $ 5,084 $ 5,155 $ 17,427 $14,504 - ------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax Unrealized holding gains (losses) arising during period [pre-tax amounts of $14,428 $8,572, $19,325 and $11,115] 8,662 5,345 11,572 6,874 Less: Reclassification adjustment for net gains included in net income [pre-tax amounts of $(6), $(137), $(275) and $(143)] (3) (81) (165) (85) - ------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income 8,659 5,264 11,407 6,789 - ------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $13,743 $10,419 $ 28,834 $21,293 - ------------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to unaudited interim consolidated financial statements. 8
NBT BANCORP INC. and Subsidiary Notes to Unaudited Interim Consolidated Financial Statements September 30, 2001 Basis of Presentation The accompanying unaudited interim consolidated financial statements include the accounts of NBT Bancorp Inc. ("the Registrant" or "the Company") and its wholly-owned subsidiaries, NBT Bank, N.A. (NBT) and NBT Financial Services, Inc. All intercompany transactions have been eliminated in consolidation. Amounts in the prior periods' financial statements are reclassified whenever necessary to conform to current period presentation. The consolidated balance sheet at December 31, 2000 has been derived from audited consolidated financial statements at that date. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's annual report on Form 10-K for the year ended December 31, 2000. Earnings Per Share Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following is a reconciliation of basic and diluted earnings per share for the periods presented in the consolidated statements of income. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Three months ended September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) <S> <C> <C> Basic EPS: Weighted average common shares outstanding 24,493 23,587 Net income available to common shareholders $ 5,084 $ 5,155 - ------------------------------------------------------------------------------------------------------------------- Basic EPS $ 0.21 $ 0.22 - ------------------------------------------------------------------------------------------------------------------- Diluted EPS: Weighted average common shares outstanding 24,493 23,587 Dilutive common stock options 157 122 - ------------------------------------------------------------------------------------------------------------------- Weighted average common shares and common share equivalents 24,650 23,709 Net income available to common shareholders $ 5,084 $ 5,155 - ------------------------------------------------------------------------------------------------------------------- Diluted EPS $ 0.21 $ 0.22 - ------------------------------------------------------------------------------------------------------------------- 9
- ------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Basic EPS: Weighted average common shares outstanding 24,085 23,419 Net income available to common shareholders $17,427 $14,504 - ------------------------------------------------------------------------------------------------------------------- Basic EPS $ 0.72 $ 0.62 - ------------------------------------------------------------------------------------------------------------------- Diluted EPS: Weighted average common shares outstanding 24,085 23,419 Dilutive common stock options 181 128 - ------------------------------------------------------------------------------------------------------------------- Weighted average common shares and common share equivalents 24,266 23,547 Net income available to common shareholders $17,427 $14,504 - ------------------------------------------------------------------------------------------------------------------- Diluted EPS $ 0.72 $ 0.62 - ------------------------------------------------------------------------------------------------------------------- </TABLE> There were 948,126 outstanding stock options for the quarter ended September 30, 2001 and 944,690 outstanding stock options for the quarter ended September 30, 2000 that were not considered in the calculation of diluted earnings per share since the stock options' exercise price was greater than the average market price during these periods. There were 948,126 outstanding stock options for the nine month period ended September 30, 2001 and 791,174 outstanding stock options for the nine month period ended September 30, 2000 that were not considered in the calculation of diluted earnings per share since the stock options' exercise price was greater than the average market price during these periods. Mergers and Acquisitions On June 1, 2001, the Company completed the acquisition of First National Bancorp, Inc. (FNB) whereby FNB was merged with and into NBT Bancorp Inc. At the same time, FNB's subsidiary, First National Bank of Northern New York (FNB Bank) was merged into NBT Bank, N.A. The acquisition was accounted for using the purchase method. As such, both the assets and liabilities assumed have been recorded on the consolidated balance sheet of the Company at estimated fair value as of the date of acquisition and the results of operations are included in the Company's consolidated statement of income from the acquisition date forward. To complete the transaction, the Company issued approximately 1,075,000 shares of its common stock valued at $16.0 million. Goodwill, representing the cost over net assets acquired, was approximately $7 million and is presently being amortized over twenty years on a straight-line basis. On June 19, 2001, the Company announced the signing of a definitive agreement to acquire CNB Financial Corp. (CNB) and its wholly owned subsidiary, Central National Bank (CNB Bank). Under the terms of the agreement, CNB stockholders will receive 1.2 shares of the Company's common stock. The Company is expected to issue approximately 8.9 million shares of common stock, with a total value of approximately $140 million based on the closing price of the Company's common stock on June 19, 2001. The transaction is structured to be tax-free to shareholders of CNB and will be accounted for as a pooling of interests. The merger agreement also provides for the merger of CNB Bank into 10
NBT Bank, N.A. The merger closed effective the close of business November 8, 2001. At September 30, 2001, CNB had consolidated assets of $983 million, deposits of $854 million and equity of $63 million. CNB Bank operates 29 full service banking offices in nine upstate New York counties. The following table presents unaudited pro forma data combining certain financial information of NBT Bancorp Inc. and CNB Financial Corp. as if the merger had been consummated on September 30, 2001. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- As of or for the Nine month period ended September 30, 2001 2000 - ---------------------------------------------------------------------------------------------------------- (in thousands, except per share data) <S> <C> <C> Net interest income $ 101,100 $ 96,153 Net income 17,693 20,617 Diluted earnings per share 0.53 0.63 Total Assets 3,660,269 3,501,629 - ---------------------------------------------------------------------------------------------------------- </TABLE> The unaudited pro forma combined financial data was prepared giving effect to the merger using the pooling of interests accounting method. The pro forma financial information above is not necessarily indicative of the combined financial position and results of operations that would have occurred if the merger had been completed on September 30, 2001 or that may be attained in the future. New Accounting Pronouncements The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of the derivative financial instruments are reported in either net income or as a component of comprehensive income. Consequently, there may be increased volatility in net income, comprehensive income, and stockholders' equity on an ongoing basis as a result of accounting for derivatives in accordance with SFAS No. 133. Special hedge accounting treatment is permitted only if specific criteria are met, including a requirement that the hedging relationship be highly effective both at inception and on an ongoing basis. Accounting for hedges varies based on the type of hedge - fair value or cash flow. Results of effective hedges are recognized in current earnings for fair value hedges and in other comprehensive income for cash flow hedges. Ineffective portions of hedges are recognized immediately in earnings and are not deferred. The adoption of SFAS No. 133 by the Company on January 1, 2001 did not have a material effect on the Company's consolidated financial position or results of operations. In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", a replacement of SFAS No. 125. SFAS 140 11
addresses implementation issues that were identified in applying SFAS No. 125. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125 provisions without reconsideration. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140 is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application is not permitted. The adoption of SFAS No. 140 did not have a material effect on the Company's consolidated financial statements. In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, such as the CNB merger, which it expects to account for using the pooling-of-interests method. The Company is required to adopt the provisions of Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. 12
In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption based upon criteria contained in Statement 142. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. On August 16, 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." Statement 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement 143 applies to all entities. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Under this Statement, the liability is discounted and the accretion expense is recognized using the credit-adjusted risk-free interest rate in effect when the liability was initially recognized. The FASB issued this Statement to provide consistency for the accounting and reporting of liabilities associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is permitted. The Company does not expect a material impact on its financial statements when this Statement is adopted. On October 3, 2001, The FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement also supersedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The changes in this Statement improve financial reporting by requiring that one accounting model be used for long-lived assets to be disposed of by broadening the presentation of discontinued operations to include more disposal transactions. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The provisions of this Statement are to be applied prospectively. The Company does not expect a material impact on its financial statements when this Statement is adopted. 13
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion and analysis is to provide the reader with a concise description of the financial condition and results of operations of NBT Bancorp Inc. ("Bancorp") and its wholly owned subsidiaries, NBT Bank N.A. ("NBT") and NBT Financial Services, Inc., collectively referred to herein as the Company. This discussion focuses on the Company's Financial Condition, Results of Operations, and Liquidity and Capital Resources. Reference should be made to the Company's consolidated interim financial statements and footnotes thereto included in this Form 10-Q as well as to the Company's 2000 Form 10-K for an understanding of the following discussion and analysis. On October 22, 2001, NBT Bancorp Inc. announced the declaration of a regular quarterly cash dividend of $0.17 per share. The cash dividend will be paid on December 15, 2001 to stockholders of record as of December 1, 2001. Forward Looking Statements Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act. These statements may be identified by the use of phrases such as "anticipate," "believe," "expect," "forecasts," "projects," or other similar terms. There are a number of factors, many of which are beyond the Company's control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) revenues may be lower than expected; (3) changes in the interest rate environment may reduce interest margins; (4) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; (5) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which the Company is engaged; (6) costs or difficulties related to the integration of the businesses of the Company and its merger partners may be greater than expected; (7) expected cost savings associated with recent and pending mergers and acquisitions may not be fully realized or realized within the expected time frames; (8) deposit attrition, customer loss, or revenue loss following recent and pending mergers and acquisitions may be greater than expected; (9) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than the Company; and (10) adverse changes may occur in the securities markets or with respect to inflation. The Company wishes to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to advise readers that various factors, those described above, could affect the Company's 14
financial performance and could cause the Company's actual results or circumstances for future periods to differ materially from those anticipated or projected. Except as required by law, the Company does not undertake, and specifically disclaims any obligations to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. MERGERS AND ACQUISITIONS On June 1, 2001, the Company completed the acquisition of First National Bancorp, Inc. (FNB) whereby FNB was merged with and into NBT Bancorp Inc. At the same time, FNB's subsidiary, First National Bank of Northern New York (FNB Bank) was merged into NBT Bank, N.A. The acquisition was accounted for using the purchase method. As such, both the assets and liabilities assumed have been recorded on the consolidated balance sheet of the Company at estimated fair value as of the date of acquisition and the results of operations are included in the Company's consolidated statement of income from the acquisition date forward. To complete the transaction, the Company issued approximately 1,075,000 shares of its common stock valued at $16.0 million. Goodwill, representing the cost over net assets acquired, was approximately $7 million and is presently being amortized over twenty years on a straight-line basis. On June 19, 2001, the Company announced the signing of a definitive agreement to acquire CNB Financial Corp. (CNB) and its wholly owned subsidiary, Central National Bank (CNB Bank). The shareholders of NBT Bancorp Inc. and CNB approved the agreement and plan of merger at separate meetings held on October 16, 2001. The merger is expected to close in the fourth quarter of 2001. The merger agreement also provides for the merger of CNB Bank into NBT. Upon completion of the merger, CNB Bank will operate as a division of NBT, retaining its name and headquarters in Canajoharie, NY. At September 30, 2001, CNB had consolidated assets of $983 million, deposits of $854 million and equity of $63 million. CNB Bank operates 29 full service banking offices in nine upstate New York counties. OVERVIEW The Company earned net income of $5.1 million, or $.21 diluted earnings per share, for the three months ended September 30, 2001 compared to $5.2 million, or $.22 diluted earnings per share, for the three months ended September 30, 2000. Net income for the nine months ended September 30, 2001 was $17.4 million, or $.72 diluted earnings per share, compared to $14.5 million, or $.62 diluted earnings per share, for the first nine months of 2000. The following tables present an overview of the Company's performance ratios and changes in average balances for the three months and nine months ended September 30, 2001 compared to September 30, 2000. Table 1 depicts several measurements of performance on an annualized basis. Returns on average assets and equity measure how effectively an entity utilizes its total resources and capital, respectively. Net interest margin, calculated on a federal taxable equivalent 15
(FTE) basis, measures an entity's ability to utilize its earning assets in relation to its cost of funding. <TABLE> <CAPTION> Table 1 Performance Measurements - ---------------------------------------------------------------------------------------------------- First Second Third Nine Quarter Quarter Quarter Months - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 2001 Return on average assets 1.19% 0.72% 0.75% 0.88% Return on average equity 14.55% 8.49% 8.73% 10.49% Net interest margin 4.21% 4.32% 4.36% 4.30% - ---------------------------------------------------------------------------------------------------- 2000 Return on average assets 0.88% 0.66% 0.81% 0.78% Return on average equity 11.10% 8.29% 10.14% 9.83% Net interest margin 4.25% 4.16% 4.12% 4.17% - ---------------------------------------------------------------------------------------------------- </TABLE> 16
Table 2 presents the Company's condensed consolidated average balance sheet, an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest bearing liabilities on a taxable equivalent basis. <TABLE> <CAPTION> Table 2 Average Balances and Net Interest Income Three months ended September 30, 2001 2000 Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Rates Balance Interest Rates - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> ASSETS Short-term interest bearing accounts $ 7,873 $ 101 5.09% $ 10,517 $ 170 6.43% Securities available for sale (2)(3) 576,434 9,455 6.51 621,066 10,402 6.66 Securities held to maturity (2)(3) 91,817 1,588 6.86 108,141 1,903 7.00 Investment in FRB and FHLB Banks 18,876 332 6.98 27,647 594 8.55 Loans (1) (3) 1,816,657 36,804 8.04 1,642,830 36,713 8.89 --------- ------ --------- ------ Total interest earning assets 2,511,657 48,280 7.63 2,410,201 49,782 8.22 ------ ------ Other assets 181,456 127,257 ------- ------- Total assets $2,693,113 $2,537,458 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Money market deposit accounts $ 168,558 1,030 2.42 $ 140,912 1,323 3.74 NOW deposit accounts 240,812 1,011 1.67 210,530 975 1.84 Savings deposits 304,271 1,548 2.02 276,763 1,740 2.50 Time deposits 1,038,807 12,792 4.89 1,004,507 14,980 5.93 --------- ------ --------- ------ Total interest bearing deposits 1,752,448 16,381 3.71 1,632,712 19,018 4.63 Short-term borrowings 80,068 775 3.84 155,655 2,441 6.24 Long-term debt 270,065 3,497 5.14 237,128 3,352 5.62 ------- ----- ------- ----- Total interest bearing liabilities 2,102,581 20,653 3.90% 2,025,495 24,811 4.87% ------ ------ Demand deposits 327,125 282,380 Other liabilities 32,239 27,263 Stockholders' equity 231,168 202,320 ------- ------- Total liabilities and stockholders' equity $2,693,113 $2,537,458 ---------- ---------- Net interest income $27,627 $24,971 ------- ------- Interest rate spread 3.73% 3.35% ----- ----- Net interest margin 4.36% 4.12% ----- ----- Taxable equivalent adjustment (3) $ 862 $ 861 ----- ----- </TABLE> 17
<TABLE> <CAPTION> Nine months ended September 30, 2001 2000 Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Rates Balance Interest Rates - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Short-term interest bearing accounts $ 9,930 $ 369 4.97% $ 7,570 $ 347 6.12% Securities available for sale (2)(3) 572,127 28,369 6.63 630,724 31,804 6.74 Securities held to maturity (2)(3) 93,865 4,959 7.06 111,938 5,817 6.94 Investment in FRB and FHLB Banks 21,094 1,061 6.72 27,650 1,512 7.30 Loans (1) (3) 1,766,923 110,972 8.40 1,575,191 103,751 8.80 --------- ------- --------- ------- Total interest earning assets 2,463,939 145,730 7.91 2,353,073 143,231 8.13 ------- ------- Other assets 169,995 119,743 ------- ------- Total assets $2,633,934 $2,472,816 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Money market deposit accounts $ 165,075 3,700 3.00 $ 134,886 3,465 3.43 NOW deposit accounts 237,467 2,812 1.58 204,809 2,748 1.79 Savings deposits 286,658 4,620 2.15 270,402 5,043 2.49 Time deposits 1,040,749 42,113 5.41 980,977 41,536 5.66 --------- ------ ------- ------ Total interest bearing deposits 1,729,949 53,245 4.12 1,591,074 52,792 4.43 Short-term borrowings 94,271 3,261 4.62 151,801 6,771 5.96 Long-term debt 250,759 9,998 5.33 240,946 10,133 5.62 ------- ----- ------- ------ Total interest bearing liabilities 2,074,979 66,504 4.29% 1,983,821 69,696 4.69% ------ ------ Demand deposits 302,975 267,953 Other liabilities 33,950 23,983 Stockholders' equity 222,030 197,059 ------- ------- Total liabilities and stockholders' equity $2,633,934 $2,472,816 ---------- ---------- Net interest income $79,226 $73,535 ------- ------- Interest rate spread 3.62% 3.44% ----- ----- Net interest margin 4.30% 4.17% ----- ----- Taxable equivalent adjustment (3) $ 2,529 $ 2,602 --------- ------- </TABLE> (1) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding. (2) Securities are shown at average amortized cost. (3) Interest income for tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 35%. Table 3 presents the changes in interest income, interest expense and net interest income due to changes in volume and changes in rate. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of change. 18
<TABLE> <CAPTION> Table 3 Analysis of Changes in Taxable Equivalent Net Interest Income - -------------------------------------------------------------------------------- Three months ended September 30, Increase (Decrease) 2001 over 2000 - -------------------------------------------------------------------------------- (in thousands) Volume Rate Total - -------------------------------------------------------------------------------- <S> <C> <C> <C> Short-term interest bearing accounts $ (38) $ (31) $ (69) Securities available for sale (736) (211) (947) Securities held to maturity (283) (32) (315) Investment in FRB and FHLB Banks (167) (95) (262) Loans 3,692 (3,601) 91 - -------------------------------------------------------------------------------- Total interest income 2,041 (3,543) (1,502) - -------------------------------------------------------------------------------- Money market deposit accounts 227 (520) (293) NOW deposit accounts 132 (96) 36 Savings deposits 162 (354) (192) Time deposits 497 (2,685) (2,188) Short-term borrowings (932) (734) (1,666) Long-term debt 441 (296) 145 - -------------------------------------------------------------------------------- Total interest expense 914 (5,072) (4,158) - -------------------------------------------------------------------------------- Change in FTE net interest income $ 1,127 $ 1,529 $ 2,656 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Nine months ended September 30, Increase (Decrease) 2001 over 2000 - -------------------------------------------------------------------------------- (in thousands) Volume Rate Total - -------------------------------------------------------------------------------- Short-term interest bearing accounts $ 95 $ (73) $ 22 Securities available for sale (2,913) (522) (3,435) Securities held to maturity (953) 95 (858) Investment in FRB and FHLB Banks (337) (114) (451) Loans 12,204 (4,983) 7,221 - -------------------------------------------------------------------------------- Total interest income 6,629 (4,130) 2,499 - -------------------------------------------------------------------------------- Money market deposit accounts 713 (478) 235 NOW deposit accounts 409 (345) 64 Savings deposits 291 (714) (423) Time deposits 2,466 (1,889) 577 Short-term borrowings (2,204) (1,306) (3,510) Long-term debt 403 (538) (135) - -------------------------------------------------------------------------------- Total interest expense 3,106 (6,298) (3,192) - -------------------------------------------------------------------------------- Change in FTE net interest income $ 3,523 $ 2,168 $ 5,691 - -------------------------------------------------------------------------------- </TABLE> 19
RESULTS OF OPERATIONS Three months ended September 30, 2001 compared to three months ended September 30, 2000 Net Income The Company earned net income of $5.1 million, or $.21 diluted earnings per share, for the three months ended September 30, 2001 compared to $5.2 million, or $.22 diluted earnings per share, for the three months ended September 30, 2000. Third quarter 2001 results included a loan loss provision of $6.0 million compared to a loan loss provision of $1.6 million for the third quarter of 2000. Results for the three months ended September 30, 2000 included $3.2 million of pre-tax merger, acquisition and reorganization costs. Net Interest Income Net interest income on a federal taxable equivalent basis (FTE) increased $2.7 million to $27.6 million in 2001 compared to $25.0 million in 2000. The Company's interest rate spread improved 38 basis points from 3.35% for 2000 to 3.73% for 2001. The interest rate margin improved 24 basis points from 4.12% to 4.36%. The improvement in net interest income came primarily from the significant decline in the Company's cost of funds and related interest expense, reflecting a greater degree of downward repricing of the Company's deposits and short term borrowings compared to its earning assets. Average loans for the three months ended September 30, 2001 increased $173.8 million compared to the same period for 2000. Average loans represented 72% of earning assets for the quarter ended September 30, 2001 compared to 68% in 2000. Lower yielding securities, correspondingly, declined as a percentage of average assets from 30% for 2000 to 27% for 2001. The yield on earning assets declined 59 basis points from 8.22% for 2000 to 7.63% for 2001, while the cost of interest bearing liabilities declined 97 basis points from 4.87% for 2000 to 3.90% for 2001. The 10.6% year over year growth in average loans combined with the increase in loans as a percentage of average assets helped soften the decline in the Company's yield on earning assets when compared to the general decline in market interest rates. The decrease in the Company's cost of funds was driven almost exclusively by the effect of lower rates combined with the use of deposits to replace short-term borrowings. Noninterest Income Noninterest income increased 18.4% from $5.6 million for 2000 to $6.6 million for 2001. Income from service charges on deposit accounts increased 30.7%, or $634,000, to $2.7 million, the result of increases in both the number of deposit accounts and the related fees. In addition, fee income from trust services increased 21.9%, or $172,000. 20
Noninterest Expense Noninterest expense, excluding costs of merger, acquisition and reorganization activities, totaled $19.7 million for 2001, compared to $17.0 million for 2000. Expenses for data processing and communications and professional and outside services increased year over year, principally due to the Company's expanded branch network, costs associated with enhanced technologies and expanded data processing volume capacities resulting from recent data processing conversions. The expanded data processing capabilities will allow the Company to take on additional data processing volume in the future with little additional marginal costs. Income Taxes Income tax expense for 2001 was $2.5 million for an effective tax rate of 33.4%, compared to $2.8 million, or 35.0%, for 2000. The effective tax rate was slightly higher for 2000 primarily as a result of nondeductible merger and acquisition expenses in that period. Nine months ended September 30, 2001 compared to nine months ended September 30, 2000 Net Income Net income for the nine months ended September 30, 2001 was $17.4 million, or $.72 diluted earnings per share, compared to $14.5 million, or $.62 diluted earnings per share, for the first nine months of 2000. Through September 30, 2001, revenues from net interest income and noninterest income increased $5.8 million and $6.3 million, respectively, compared to the same period in 2000. The loan loss provision increased $8.0 million for 2001 compared to 2000. In the first nine months of 2000, the Company incurred $7.2 million in pre-tax merger, acquisition and reorganization costs with no comparable expense in the first nine months of 2001. Net Interest Income Net interest income on a federal taxable equivalent basis (FTE) increased $5.7 million to $79.2 million for 2001 compared to $73.5 million for 2000. The Company's interest rate spread improved 18 basis points from 3.44% for 2000 to 3.62% for 2001. The interest rate margin improved 13 basis points from 4.17% to 4.30%. The improvement in net interest income was primarily a result of the increase in interest income generated by the year over year growth in average loans combined with a decrease in interest expense caused by the decline in the average cost of deposits and borrowings. Average loans for the nine months ended September 30, 2001 increased $191.7 million, or 12.2%, compared to the same period in 2000. As a percentage of earning assets, average loans increased from 67% for 2000 to 72% for 2001. Correspondingly, lower yielding securities declined as a percentage of average assets from 32% for 2000 to 27% for 2001. Average interest bearing deposits, which generally have a lower cost than borrowings, increased from 80% of average interest bearing liabilities for 2000 21
to 83% for 2001 while the average cost of those deposits declined from 4.43% in 2000 to 4.12% in 2001. Consistent with the decline in general market interest rates, all categories of the Company's deposits reflected a lower average cost in 2001 compared to 2000. As a result of the increase in average deposits, average short-term borrowings declined $57.5 million, or 37.9%, from $151.8 million for 2000 to $94.3 million for 2001; the average cost of these borrowings also declined from 5.96% for 2000 to 4.62% for 2001. The rate paid on total interest bearing liabilities decreased 40 basis points from 4.69% for 2000 to 4.29% for 2001. Noninterest Income Noninterest income, excluding net securities gains and the gain on the sale of a branch building, totaled $19.1 million for 2001 compared to $14.6 million for 2000, an increase of 30.6%. Service charges on deposit accounts totaled $7.7 million for 2001, increasing $1.7 million, or 27.6%, compared to 2000, principally due to the increase in deposit accounts and related fees. Broker/dealer fees increased $1.4 million, or 85.3%, to $3.0 million for 2001. The increase in broker/dealer fees reflects a full nine months of revenue in 2001 from the Company's broker/dealer, M. Griffith, Inc., which was acquired on May 5, 2000. Noninterest Expense Noninterest expense, excluding nonrecurring items such as merger, acquisition and reorganization costs and certain deposit overdraft writeoffs, totaled $56.6 million for 2001, an increase of $6.3 million, or 12.5%, compared to 2000. Increases in 2001 for salaries and benefits, supplies and postage, occupancy, professional fees and outside services and data processing and communications are primarily attributable to the Company's growth through acquisition including the expansion of its branch network and data processing capabilities. The expense for the amortization of intangible assets also increased from $1.2 million for 2000 to $2.1 million for 2001 in connection with the Company's growth through acquisition. The Company's efficiency ratio, which measures noninterest expense (excluding nonrecurring charges) as a percentage of income (net interest income plus noninterest income excluding net securities gains and nonrecurring income) deteriorated slightly from 56.94% for 2000 to 57.64% for 2001. At September 30, 2001, the Company has a remaining accrued liability for merger, acquisition and reorganization costs of $2.6 million, consisting primarily of severance costs which will be paid out over a period of time consistent with the respective severance agreements. 22
Income Taxes Income tax expense for 2001 was $8.1 million for an effective tax rate of 31.7%, compared to $8.3 million, or 36.3%, for 2000. The effective tax rate was higher for 2000 primarily as a result of nondeductible merger and acquisition expenses in that year. In addition, the Company implemented certain tax planning strategies that resulted in a lower effective rate for 2001. ANALYSIS OF FINANCIAL CONDITION Loans Total loans were $1,807.6 million, or 67.5% of assets, at September 30, 2001, compared to $1,726.5 million, or 65.0%, at December 31, 2000, and $1,667.6 million, or 65.2%, at September 30, 2000. The Company acquired approximately $42 million for loans in connection with its purchase of branches from Sovereign Bank in November 2000 and an additional $73 million in loans in connection with its acquisition of FNB in June 2001. In addition, the Company continues to experience modest growth in its loan portfolio, primarily residential mortgages, which has increased as a result of the refinance activity triggered by the decline in market interest rates during 2001. At September 30, 2001, commercial loans, including commercial mortgages, represented approximately 48% of the loan portfolio, while consumer loans and residential mortgages represented 26% and 26%, respectively. Allowance for Loan Losses, Nonperforming Assets and the Provision for Loan Losses The allowance for loan losses is maintained at a level estimated by management to provide adequately for risk of probable losses inherent in the current loan portfolio. The adequacy of the allowance for loan losses is continuously monitored. It is assessed for adequacy using a methodology designed to ensure the level of the allowance reasonably reflects the loan portfolio's risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable credit losses inherent in the current loan portfolio. Table 4 reflects changes to the allowance for loan losses for the periods presented. The allowance is increased by provisions for losses charged to operations and is reduced by net chargeoffs. Chargeoffs are made when the collectability of loan principal within a reasonable time is unlikely. Any recoveries of previously charged-off loans are credited directly to the allowance for loan losses. 23
<TABLE> <CAPTION> Table 4 Allowance For Loan Losses - -------------------------------------------------------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, (dollars in thousands) 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance, beginning of period $25,691 $22,005 $23,349 $19,711 Recoveries 794 418 1,464 918 Chargeoffs (3,438) (1,360) (10,734) (3,365) - -------------------------------------------------------------------------------------------------------------------------------- Net chargeoffs (2,644) (942) (9,270) (2,447) Allowance related to purchase acquisition - - 505 - Provision for loan losses 5,988 1,619 13,451 5,418 - -------------------------------------------------------------------------------------------------------------------------------- Balance, end of period $29,035 $22,682 $29,035 $22,682 - -------------------------------------------------------------------------------------------------------------------------------- Composition of Net Chargeoffs - -------------------------------------------------------------------------------------------------------------------------------- Commercial and agricultural $(1,822) 69% $ (363) 39% $(7,060) 76% $ (982) 40% Real estate mortgage (218) 8% (160) 17% (340) 4% (432) 18% Consumer (604) 23% (419) 44% (1,870) 20% (1,033) 42% - -------------------------------------------------------------------------------------------------------------------------------- Net chargeoffs $(2,644) 100% $ (942) 100% $(9,270) 100% $(2,447) 100% - -------------------------------------------------------------------------------------------------------------------------------- Annualized net chargeoffs to average loans 0.58% 0.23% 0.70% 0.21% - -------------------------------------------------------------------------------------------------------------------------------- Net chargeoffs to average loans for the year ended December 31, 2000 0.28% - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> Nonperforming assets were $29.5 million at September 30, 2001 compared to $25.6 million at June 30, 2001, $22.2 million at December 31, 2000 and $13.0 million at September 30, 2000. Table 5 presents the components of nonperforming assets at September 30, 2001 and 2000. <TABLE> <CAPTION> Table 5 Nonperforming Assets and Risk Elements - -------------------------------------------------------------------------------------------------------------------------------- September 30, September 30, (dollars in thousands) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Commercial and agricultural $19,498 76% $7,810 85% Real estate mortgage 3,851 15% 491 5% Consumer 2,443 9% 956 10% - -------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 25,792 100% 9,257 100% - -------------------------------------------------------------------------------------------------------------------------------- Loans 90 days or more past due and still accruing: Commercial and agricultural 70 3% 314 14% Real estate mortgage 1,469 66% 1,595 72% Consumer 702 31% 315 14% - -------------------------------------------------------------------------------------------------------------------------------- Total loans 90 days or more past due and still accruing 2,241 100% 2,224 100% - -------------------------------------------------------------------------------------------------------------------------------- Restructured loans in compliance with modified terms: 606 747 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 28,639 12,228 - -------------------------------------------------------------------------------------------------------------------------------- Other real estate owned 893 745 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $29,532 $12,973 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans to loans 1.58% 0.73% Total nonperforming assets to assets 1.10% 0.51% Total allowance for loan losses to nonperforming loans 101.38% 185.49% - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> 24
Nonperforming loans at September 30, 2001 were $28.6 million compared to $24.8 million at June 30, 2001 and $12.2 million at September 30, 2000. The ratio of the allowance for loan losses to total loans was 1.61% at September 30, 2001, 1.41% at June 30, 2001 and 1.36% at September 30, 2000. The allowance for loan losses as a percentage of nonperforming loans was 101.38% at September 30, 2001 compared to 103.57% at June 30, 2001 and 185.49% at September 30, 2000. Net charge-offs during the third quarter of 2001 were $2.6 million, compared to $.9 million during the three months ended September 30, 2000, and $5.5 million in the second quarter of 2001. The increased net charge-offs in third quarter 2001 over the same period in the prior year were primarily a result of problem loans identified at the Pennstar division of our Bank during the Pennstar integration process, which was completed in the second quarter 2001. While the net charge-offs in the third quarter are down from the second quarter, management expects charge-offs to continue to be higher than experienced in 2000. In addition to increased net charge-offs, the Company also experienced an increase in nonperforming loans and classified loans during the second and third quarters of 2001. The increase during the second quarter was the result of the completion of the integration of the Pennstar Bank credit administration function. The increase in classified loans in the third quarter is primarily due to two large credits in the New York banking division, and the increase in nonperforming loans during the third quarter is due primarily to one credit in the New York banking division. As a result of the above, as well as consideration of a weakening economy in the Bank's market area in the third quarter and growth in the commercial-related loan portfolio, a provision of $6.0 million was recorded in the third quarter of 2001, as compared to $1.6 million in the third quarter of 2000. As a result, the allowance for loans increased to 1.61% of total loans at September 30, 2001 as compared to 1.36% at September 30, 2000. Management considers the allowance for loan losses at September 30, 2001 to be adequate based on its evaluation and analysis of the inherent risk of loss in the current loan portfolio. Securities Securities totaled $669.2 million, or 25.0% of assets, at September 30, 2001, compared to $699.3 million, or 26.3%, at December 31, 2000, and $698.5 million, or 27.3%, at September 30, 2000. The Company's acquisition of FNB in September 2001 added approximately $27.8 million in securities. The overall net decrease in the portfolio compared to the prior periods was primarily used to fund the Company's loan growth. At September 30, 2001, the portfolio consisted of 86% securities available for sale and 14% securities held to maturity. Deposits Total deposits were $2,079.1 million at September 30, 2001, an increase of $38.9 million, or 1.9%, from year end 2000, and $142.6 million, or 7.4%, from the prior year. Total average deposits increased $164.5 million, or 8.6%, from 25
September 30, 2000 to September 30, 2001. The Company purchased approximately $97 million in deposits in conjunction with the purchase of branches from Sovereign Bank in November, 2000. In addition, the Company's acquisition of FNB in September 2001 added approximately $108 million in deposits. The Company has focused on maintaining and growing its base of lower costing checking, savings and money market accounts while allowing runoff of some of its higher costing time deposits, particularly brokered and jumbo time deposits. Borrowings The Company's borrowed funds consist of short-term borrowings and long-term debt. Short-term borrowings totaled $72.1 million at September 30, 2001 compared to $132.4 million and $154.2 million at December 31, and September 30, 2000, respectively. The previously mentioned increase in deposits enabled the Company to pay down a portion of its existing short-term debt. In addition, certain higher rate short-term borrowings were paid down with proceeds from long-term borrowings. Long-term debt was $269.3 million at September 30, 2001, up approximately 15% from year end and from the prior year, as the Company took advantage of lower interest rates and locked in longer term advances. CAPITAL RESOURCES Stockholders' equity of $232.0 million represents 8.7% of total assets at September 30, 2001, compared with $207.0 million, or 8.1% a year previous, and $208.0 million, or 7.8% at December 31, 2000. As the capital ratios in Table 6 indicate, the Company remains well capitalized. Capital measurements are significantly in excess of regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. Tier 1 leverage, Tier 1 capital and Total risk-based capital ratios have regulatory minimum guidelines of 4%, 4% and 8% respectively, with requirements to be considered well capitalized of 5%, 6% and 10%, respectively. 26
<TABLE> <CAPTION> Table 6 Capital Measurements - ------------------------------------------------------------------------------------------------------ As of and for the quarter ended March 31 June 30 Sptember 30 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> 2001 Tier 1 leverage ratio 7.32% 7.59% 7.13% Tier 1 capital ratio 11.18% 10.76% 10.66% Total risk-based capital ratio 12.43% 12.01% 11.92% Cash dividends as a percentage of net income 52.98% 67.16% 71.55% Per common share: Book value $ 9.13 $ 9.26 $ 9.53 Tangible book value $ 7.99 $ 7.89 $ 8.14 - ------------------------------------------------------------------------------------------------------ 2000 Tier 1 leverage ratio 8.59% 8.26% 8.11% Tier 1 capital ratio 13.24% 12.62% 12.54% Total risk-based capital ratio 14.40% 13.81% 13.75% Cash dividends as a percentage of net income 69.11% 79.10% 78.60% Per common share: Book value $ 8.36 $ 8.47 $ 8.74 Tangible book value $ 7.99 $ 7.79 $ 8.08 - ------------------------------------------------------------------------------------------------------ </TABLE> Table 7 presents the high, low and closing sales price for the common stock as reported on the NASDAQ Stock Market, and cash dividends declared per share of common stock. The Company's price to book value ratio was 1.50 at September 30, 2001 and 1.37 a year ago. The per share market price was 14.86 times annualized earnings at September 30, 2001 and 14.49 times annualized earnings at September 30, 2000. <TABLE> <CAPTION> Table 7 Quarterly Common Stock and Dividend Information - ---------------------------------------------------------------------------------------------- Cash Dividends Quarter Ending High Low Close Declared - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 2000 March 31 $16.50 $11.38 $14.50 $0.170 June 30 14.50 9.38 10.69 0.170 September 30 12.50 9.75 12.00 0.170 December 31 15.94 11.13 14.63 0.170 - ---------------------------------------------------------------------------------------------- 2001 March 31 $17.50 $13.25 $16.69 $0.170 June 30 25.42* 14.30 19.30 0.170 September 30 17.30 13.50 14.30 0.170 - ---------------------------------------------------------------------------------------------- </TABLE> * This price was reported on June 29, 2001, a day on which the Nasdaq Stock Market experienced computerized trading disruptions which, among other things, forced it to extend its regular trading session and cancel its late trading session. Subsequently the Nasdaq Stock Market recalculated and republished several closing stock prices (not including NBT Bancorp Inc., for which it had reported a closing price of $19.30). Excluding trading on June 29, 2001, the high sales price for the quarter ended June 30, 2001 was $16.75. In connection with its acquisition of First National Bancorp, Inc., the Company had announced on January 2, 2001 its intention to buy back up to 1.03 million shares of its common stock. In order for the merger with CNB to be accounted for 27
under the pooling-of-interest method, the Company has reduced this repurchase program to 680 thousand shares. As of September 30, 2001, the Company had completed the purchase of 649 thousand shares. LIQUIDITY Liquidity management involves the ability to meet the cash flow requirements of customers who may be depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Asset Liability Committee (ALCO) is responsible for liquidity management and has developed guidelines which cover all assets and liabilities, as well as off balance sheet items that are potential sources or uses of liquidity. Liquidity policies must also provide the flexibility to implement appropriate strategies and tactical actions. Requirements change as loans grow, deposits and securities mature, and payments on borrowings are made. Liquidity management includes a focus on interest rate sensitivity management with a goal of avoiding widely fluctuating net interest margins through periods of changing economic conditions. The primary liquidity measurement the Company utilizes is called the Basic Surplus which captures the adequacy of its access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short and long-term securities with the availability of dependable borrowing sources, which can be accessed when necessary. Accordingly, the Company has purchased brokered time deposits, established borrowing facilities with other banks (Federal funds), the Federal Home Loan Bank of New York (short and long-term borrowings which are denoted as advances), and repurchase agreements with investment companies. This Basic Surplus approach enables the Company to adequately manage liquidity from both operational and contingency perspectives. By tempering the need for cash flow liquidity with reliable borrowing facilities, the Company is able to operate with a more fully invested and, therefore, higher interest income generating, securities portfolio. The makeup and term structure of the securities portfolio is, in part, impacted by the overall interest rate sensitivity of the balance sheet. Investment decisions and deposit pricing strategies are impacted by the liquidity position. At September 30, 2001, the Company considered its Basic Surplus adequate to meet liquidity needs. At September 30, 2001, a large percentage of the Company's loans and securities were pledged as collateral on borrowings. Therefore, future growth of earning assets will depend upon the Company's ability to obtain additional funding, through growth of core deposits and collateral management, and may require further use of brokered time deposits, or other higher cost borrowing arrangements. 28
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on the Company's net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than earning assets. When interest-bearing liabilities mature or reprice more quickly than earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. In an attempt to manage its exposure to changes in interest rates, management monitors the Company's interest rate risk. ALCO meets monthly to review the Company's interest rate risk position and profitability, and to recommend strategies for consideration by the Board of Directors. Management also reviews loan and deposit pricing, and the Company's securities portfolio, formulates investment and funding strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income. In adjusting the Company's asset/liability position, the Board and management attempt to manage the Company's interest rate risk while enhancing the net interest margin. At times, depending on the level of general interest rates, the relationship between long and short term interest rates, market conditions and competitive factors, the Board and management may determine to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to changes in interest rates and to fluctuations in the difference between long and short-term interest rates. The primary tool utilized by ALCO to manage interest rate risk is a balance sheet/income statement simulation model (interest rate sensitivity analysis). Information such as principal balance, interest rate, maturity date, cash flows, next repricing date (if needed), and current rates is uploaded into the model to create an ending balance sheet. In addition, ALCO makes certain assumptions regarding prepayment speeds for loans and mortgage related investment securities along with any optionality within the deposits and borrowings. The model is first run under an assumption of a flat rate scenario (i.e. no change in current interest rates) with a static balance sheet over a 12-month period. A second and third model are run in which a gradual increase and decrease, respectively, of 200 basis points takes place over a 12 month period. 29
A fourth and fifth model are run in which a gradual increase and decrease, respectively, of 100 basis points takes place over a 12 month period. Under these scenarios, assets subject to prepayments are adjusted to account for faster or slower prepayment assumptions. Any investment securities or borrowings that have callable options embedded into them are handled accordingly based on the interest rate scenario. The resultant changes in net interest income are then measured against the flat rate scenario. In the declining rate scenarios, net interest income is projected to be below the flat rate scenario through the simulation period. Net interest income experiences a reduction as a result of adjustable rate loans repricing, and increased cash flow as a result of higher prepayments on loans reinvested at lower market rates, callable securities reinvested at lower market rates and limited continued deposit pricing reductions. In the plus 100 basis points scenario, net interest income is projected to be relatively stable compared to the flat rate scenario. However, in the plus 200 basis point scenario, net interest income is projected to be at lower levels than in a flat rate scenario through the simulation period primarily due to a lag in assets repricing while funding costs increase. The potential impact on earnings is dependent on the ability to lag deposit repricing. Net interest income for the next twelve months in a +/- 200 basis point scenario is within the internal policy risk limits of a not more than a 5% change in net interest income. Using the September 30, 2001 balance sheet position, the following table summarizes the percentage change in net interest income in the rising and declining rate scenarios over a 12-month period from the forecasted net interest income in the flat rate scenario. <TABLE> <CAPTION> Interest Rate Sensitivity Analysis - -------------------------------------------------------------------------------- Change in interest rates Percent change in (in basis points) net interest income - -------------------------------------------------------------------------------- <S> <C> +200 (0.94)% +100 0.19 % -100 (1.55)% -200 (2.38)% - -------------------------------------------------------------------------------- </TABLE> 30
PART II. OTHER INFORMATION Item 1 -- Legal Proceedings None. Item 2 -- Changes in Securities None. Item 3 -- Defaults Upon Senior Securities Not applicable. Item 4 -- Submission of Matters to a Vote of Security Holders Not applicable. Item 5 -- Other Information Not Applicable. Item 6 -- Exhibits and Reports on FORM 8-K (a) An index to exhibits follows the signature page of this FORM 10-Q. (b) During the quarter ended September 30, 2001, the Company filed the following Current Reports on Form 8-K: Current report on Form 8K, Items 5 and 7, filed with the Securities and Exchange Commission on July 27, 2001; and 31
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on FORM 10-Q to be signed on its behalf by the undersigned thereunto duly authorized, this 14th day of November 2001. NBT BANCORP INC. By: /s/ MICHAEL J. CHEWENS ------------------------------------------- Michael J. Chewens, CPA Executive Vice President Chief Financial Officer and Secretary 32
INDEX TO EXHIBITS The following documents are attached as Exhibits to this FORM 10-Q or, if annotated by the symbol *, are incorporated by reference as Exhibits as indicated by the page number or exhibit cross-reference to the prior filings of the Registrant with the Commission. <TABLE> <CAPTION> FORM 10-Q Exhibit Exhibit Number Cross-Reference <S> <C> <C> 10.1 Change in control agreement with Michael J. Chewens Herein 10.2 Change in control agreement with Peter Corso Herein 10.3 Change in control agreement with Martin A. Dietrich Herein 10.4 Change in control agreement with Daryl R. Forsythe Herein 10.5 Change in control agreement with Lance D. Mattingly Herein 10.6 Change in control agreement with Jane E. Neal Herein 10.7 Change in control agreement with David E. Raven Herein 10.8 Form of Employment Agreement between NBT Bancorp Inc. and Peter Corso made as of October 18, 2001 Herein 10.9 Form of Employment Agreement between NBT Bancorp Inc. and Daryl R. Forsythe made as of January 1, 2000, and revised on January 22, 2001 Herein 10.10 Form of Employment Agreement between NBT Bancorp Inc. and Lance D. Mattingly made as of May 1, 2001 Herein 10.11 Form of Employment Agreement between NBT Bancorp Inc. and David E. Raven made as of August 1, 2001 Herein 10.12 Supplemental Executive Retirement Agreement between NBT Bancorp Inc. and Michael J. Chewens made as of July 23, 2001 Herein 10.13 Supplemental Executive Retirement Agreement between NBT Bancorp Inc. and Martin A. Dietrich made as of July 23, 2001 Herein 10.14 Supplemental Retirement Agreement between NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe made as of January 1, 1995, and as revised on April 28, 1998, January 1, 2000, and on January 22, 2001 Herein </TABLE> 33