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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
52 SOUTH BROAD STREET 13815
NORWICH, NEW YORK (Zip Code)
(Address of principal executive office)
(607) 337-2265
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK ($0. 01 PAR VALUE PER SHARE)
STOCK PURCHASE RIGHTS PURSUANT TO STOCKHOLDERS RIGHTS PLAN
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 such shorter period 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 if disclosure of delinquent filers pursuant to item
405 of Regulation S-K (Section 299.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [X]
Based upon the closing price of the registrant's common stock as of
February 28, 2002, the aggregate market value of the voting stock, common stock,
par value, $0.01 per share, held by non-affiliates of the registrant is
$454,660,456. There were no shares of the registrant's preferred stock, par
value $0.01 per share, outstanding at that date. Rights to purchase shares of
the registrant's preferred stock Series R are attached to the shares of the
registrant's common stock.
The number of shares Common Stock outstanding as of February 28, 2002, was
33,198,072
Documents Incorporated by Reference
Portions of registrant's definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on May 2, 2002 are incorporated by reference
into Part III, Items 10, 11, 12 and 13 of this Form 10-K.
CROSS REFERENCE INDEX
Part I. Item 1 Business
Description of Business 4-9
Average Balance Sheets 19
Net Interest Income Analysis - Taxable Equivalent Basis 19
Net Interest Income and Volume/Rate Variance - Taxable Equivalent Basis 20
Securities Portfolio 24
Debt Securities - Maturity Schedule 68-69
Loans 21
Maturities and Sensitivities of Loans to Changes in Interest Rates 23
Nonperforming Assets 28
Allowance for Loan Losses 29-32
Maturity Distribution of Time Deposits 26
Return on Equity and Assets 11
Short-Term Borrowings 72-74
Item 2 Properties 9
Item 3 Legal Proceedings
In the normal course of business there are various outstanding legal proceedings.
In the opinion of management, the aggregate amount involved in such proceedings is
not material to the financial condition or results of operations of the Company. 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Part II. Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters 10,77-78
Item 6 Selected Financial Data 11-12
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-43
Item 7A Quantitative and Qualitative Disclosure About Market Risk 43-44
Item 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets at December 31, 2001 and 2000 47
Consolidated Statements of Income for each of the years in three-year period ended
December 31, 2001 48
Consolidated Statements of Changes in Stockholders' Equity for each of the years in the
three-year period ended December 31, 2001 49
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 2001 50
Consolidated Statements of Comprehensive Income for each of the years in the
three-year period ended December 31, 2001 51
Notes to Consolidated Financial Statements 52-92
Independent Auditors' Report 46
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on accounting
and financial disclosures.
2
CROSS REFERENCE INDEX
Part III. Item 10 Directors and Executive Officers of the Registrant *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management *
Item 13 Certain Relationships and Related Transactions *
Part IV. Item 14 Exhibits, Financial Statement Schedules, and Reports on 8-K
(a)(1) Financial Statements (See Item 8 for Reference).
(2) Financial Statement Schedules normally required on Form 10-K are omitted since they
are not applicable.
(3) Exhibits have been filed separately with the Commission and are available upon
written request.
(b) Reports on Form 8-K. 93-94
(c) Refer to item 14(a)(3) above.
(d) Refer to item 14(a)(2) above.
* Information called for by Part III (Items 10 through 13) is incorporated by
reference to the Registrant's Proxy Statement for the 2002 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission.
3
PART I
ITEM 1. BUSINESS
NBT Bancorp Inc. (the "Registrant" or the "Company") is a registered
financial holding company incorporated in the state of Delaware in 1986, with
its principal headquarters located in Norwich, New York. The Registrant is the
parent holding company of NBT Bank, N.A. ("the Bank"), NBT Financial Services,
Inc. ("NBT Financial"), and CNBF Capital Trust I (see Note 10 to the Notes to
Consolidated Financial Statements). Through these subsidiaries, the Company
operates as one segment focused on community banking operations. The
Registrant's primary business consists of providing commercial banking and
financial services to its customers in its market area. The principal assets of
the Registrant are all of the outstanding shares of common stock of its direct
subsidiaries, and its principal sources of revenue are the management fees and
dividends it receives from the Bank and NBT Financial.
The operating subsidiaries of the Company are the Bank and NBT Financial.
The Bank is a full service commercial bank formed in 1856, which provides a
broad range of financial products to individuals, corporations and
municipalities throughout its Central and Upstate New York and Northeastern
Pennsylvania market area. The Bank conducts business through three operating
divisions, NBT Bank, Pennstar Bank and Central National Bank.
The NBT Bank division has 42 divisional offices and 67 automated teller
machines (ATMs), located primarily in central and upstate New York. At December
31, 2001, NBT Bank had total loans of $1.2 billion and total deposits of $1.3
billion.
The Pennstar Bank division has 41 divisional offices and 51 ATMs, located
primarily in northeastern Pennsylvania. At December 31, 2001, Pennstar Bank had
total loans and leases of $616.6 million and total deposits of $773.0 million.
The Central National Bank division has 29 divisional offices and 24 ATMs
located primarily in upstate New York. At December 31, 2001, Central National
Bank had total loans and leases of $540.6 million and total deposits of $824.9
million.
The Bank has six operating subsidiaries, NBT Capital Corp., LA Lease, Inc.,
Pennstar Realty Trust, CNB Realty, Inc., Colonial Financial Services, Inc.
("CFS"), and Central Asset Management, Inc. ("CAM"). NBT Capital Corp., formed
in 1998, is a venture capital corporation formed to assist young businesses
develop and grow in the markets we serve. LA Lease, Inc., formed in 1987,
provides automobile and equipment leases to individuals and small business
entities. LA Lease, Inc. will be dissolved in the first half of 2002 and the
Bank will assume its operations. Pennstar Realty Trust, formed in 2000, is a
real estate investment trust. CNB Realty, Inc. formed in 1998, is a real estate
investment trust. CFS, formed in 2001, offers a variety of financial services
products. The Company intends to transfer ownership of CFS from the Bank to NBT
Financial in the first half of 2002. CAM, formed in 1996, offers investment
management services for a fee to a focused customer base of high net worth
individuals and businesses. CAM will be dissolved in the first half of 2002 and
the Bank will assume its operations.
NBT Financial, formed in 1999, is the parent company of two operating
subsidiaries, Pennstar Financial Services, Inc. and M. Griffith, Inc. Pennstar
Financial Services, Inc., formed in 1997, offers a variety of financial services
products. M. Griffith, Inc., formed in 1951, is a registered securities
broker-dealer which also offers financial and retirement planning as well as
life, accident and health insurance.
4
Acquisitions
To remain competitive in the rapidly changing financial services industry,
the Company has expanded the breadth of its market area by acquiring other
banking organizations and select niche financial services companies. In
addition, the Company has selectively opened key new businesses that expand our
product offerings. The following provides a chronological listing of mergers and
acquisitions that we have completed since January 1, 2000:
Date of transaction Entity/Branches Former bank holding company Transaction type
February 17, 2000 LA Bank, N.A. Lake Ariel Bancorp, Inc. (1)
May 5, 2000 M. Griffith, Inc. N/A (2)
June 2, 2000 2 branches from Mellon Bank N/A (2)
July 1, 2000 Pioneer American Bank, N.A Pioneer American Holding Co. Corp. (1)
November 10, 2000 6 branches from Sovereign Bank N/A (2)
June 1, 2001 The First National Bank of First National Bancorp, Inc. (2)
Northern New York
September 14, 2001 Deposits of 1 branch of N/A (2)
Mohawk Community Bank
November 8, 2001 Central National Bank CNB Financial Corp. (1)
(1) Transaction was accounted for as a pooling-of-interests and, accordingly,
all of our financial information for the periods prior to the acquisition
has been restated as if the acquisitions had occurred at the beginning of
the earliest reporting period presented.
(2) Transaction accounted for using the purchase accounting method.
Upon completion of their respective mergers, LA Bank, N.A. and Pioneer
American Bank, N.A. became wholly owned subsidiaries of the Registrant. LA Bank,
N.A. changed its name on November 10, 2000 to Pennstar Bank, N.A. and on
December 9, 2000, Pioneer American Bank, N.A. merged into Pennstar Bank, N.A. On
March 16, 2001, Pennstar Bank, N.A. was merged into the Bank.
COMPETITION
The banking and financial services industry in New York and Pennsylvania
generally, and in the Company's market areas specifically, is highly
competitive. The increasingly competitive environment is a result primarily of
changes in regulation, changes in technology and product delivery systems,
additional financial service providers, and the accelerating pace of
consolidation among financial services providers. The Company competes for loans
and leases, deposits, and customers with other commercial banks, savings and
loan associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the Company. In
order to compete with other financial services providers, the Company stresses
the community nature of its banking operations and principally relies upon local
promotional activities, personal relationships established by officers,
directors, and employees with their customers, and specialized services tailored
to meet the needs of the communities served.
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to extensive regulation,
supervision, and examination by the Federal Reserve System ("FRS") as its
primary federal regulator. The Company also has elected to be registered with
the FRS as a financial holding company. The Bank, as a nationally chartered
bank, is subject to extensive regulation, supervision, and examination by the
Office of the Comptroller of the Currency ("OCC") as its primary federal
regulator and, as to certain matters, by the FRS and the Federal Deposit
Insurance Corporation ("FDIC"). M. Griffith, Inc. ("MGI") is registered as a
broker-dealer and investment adviser and is subject to extensive regulation,
supervision, and examination by the Securities and Exchange Commission ("SEC").
5
MGI also is a member of the National Association of Securities Dealers, Inc. and
is subject to its regulation. MGI is authorized as well to engage as a broker,
dealer, and underwriter of municipal securities, and as such is subject to
regulation by the Municipal Securities Rulemaking Board. In addition, MGI and
Colonial Financial Services, Inc., are licensed insurance agencies with offices
in the state of New York and are subject to registration and supervision by the
New York State Insurance Department. Pennstar Financial Services, Inc. is a
licensed insurance agency with offices in the Commonwealth of Pennsylvania and
is subject to registration and supervision by the Pennsylvania Insurance
Department. CAM is a registered investment adviser and also is subject to
extensive regulation, examination, and supervision by the SEC.
The Company is subject to capital adequacy guidelines of the FRS. The
guidelines apply on a consolidated basis and require bank holding companies to
maintain a minimum ratio of Tier 1 capital to total average assets (or "leverage
ratio") of 4%. For the most highly rated bank holding companies, the minimum
ratio is 3%. The FRS capital adequacy guidelines also require bank holding
companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets
of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of
8%. As of December 31, 2001, the Company's leverage ratio was 6.34%, its ratio
of Tier 1 capital to risk-weighted assets was 9.43%, and its ratio of qualifying
total capital to risk weighted assets was 10.69%. The FRS may set higher
minimum capital requirements for bank holding companies whose circumstances
warrant it, such as companies anticipating significant growth or facing unusual
risks. The FRS has not advised the Company of any specific capital requirement
applicable to it.
Any bank holding company whose capital does not meet the minimum capital
adequacy guidelines is considered to be undercapitalized and is required to
submit an acceptable plan to the FRS for achieving capital adequacy. Such a
company's ability to pay dividends to its shareholders and expand its lines of
business through the acquisition of new banking or nonbanking subsidiaries also
could be restricted.
The Bank is subject to leverage and risk-based capital requirements and
minimum capital guidelines of the OCC that are similar to those applicable to
the Company. As of December 31, 2001, the Bank was in compliance with all
minimum capital requirements. The Bank's leverage ratio was 6.24%, its ratio of
Tier 1 capital to risk-weighted assets was 9.28%, and its ratio of qualifying
total capital to risk-weighted assets was 10.54%.
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits
unless it is well capitalized, or is adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank that is
not well capitalized from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain prevailing market rates.
The Bank also is subject to substantial regulatory restrictions on its
ability to pay dividends to the Company. Under OCC regulations, the Bank may
not pay a dividend, without prior OCC approval, if the total amount of all
dividends declared during the calendar year, including the proposed dividend,
exceed the sum of its retained net income to date during the calendar year and
its retained net income over the preceding two years. The Bank's dividends to
the Company over years 2000 and 2001 exceeded net income during those years.
Therefore, the Bank's first quarter 2002 dividends exceeded the OCC dividend
limitations, and the Bank requested and received OCC approval to pay this
dividend to the Company. The Bank anticipates that it will require approval for
its second quarter 2002 dividend as well. The Bank's ability to pay dividends
also is subject to the Bank being in compliance with regulatory capital
requirements. The Bank is currently in compliance with these requirements.
Deposit Insurance Assessments. The deposits of the Bank are insured up to
regulatory limits by the FDIC and, accordingly, are subject to deposit insurance
assessments to maintain the insurance funds administered by the FDIC. The
deposits of the Bank have historically been subject to deposit insurance
assessments to maintain the Bank Insurance Fund (the "BIF"). Due to certain
branch deposit acquisitions by the Bank and its predecessors, some of the
deposits of the Bank are subject to deposit insurance assessments to maintain
the Savings Association Insurance Fund (the "SAIF").
6
The FDIC has adopted regulations establishing a permanent risk-related
deposit insurance assessment system. Under this system, the FDIC places each
insured bank in one of nine risk categories based on the bank's capitalization
and supervisory evaluations provided to the FDIC by the institution's primary
federal regulator. Each insured bank's insurance assessment rate is then
determined by the risk category in which it is classified by the FDIC.
In the light of the then-prevailing favorable financial situation of the
federal deposit insurance funds and the low number of depository institution
failures, since January 1, 1997 the annual insurance premiums on bank deposits
insured by the BIF or the SAIF have varied between $0.00 per $100 of deposits
for banks classified in the highest capital and supervisory evaluation
categories to $0.27 per $100 of deposits for banks classified in the lowest
capital and supervisory evaluation categories. Recent increases in the amount
of deposits subject to BIF FDIC insurance protection and in the number of bank
failures, and the effect of low interest rates on the FDIC's return on the
assets held in the BIF, have increased the likelihood that the annual insurance
premiums on bank deposits insured by the BIF will increase in the second half of
2002 or thereafter. BIF and SAIF assessment rates are subject to semi-annual
adjustment by the FDIC within a range of up to five basis points without public
comment. The FDIC also possesses authority to impose special assessments from
time to time.
The Deposit Insurance Funds Act provides for additional assessments to be
imposed on insured depository institutions with respect to deposits insured by
the BIF, as well as deposits insured by the SAIF, to pay for the cost of
Financing Corporation ("FICO") funding. The FICO assessments are adjusted
quarterly to reflect changes in the assessment bases of the FDIC insurance funds
and do not vary depending upon a depository institution's capitalization or
supervisory evaluations. During 2001, BIF-insured banks paid an average rate of
approximately $0.019 per $100 for purposes of funding FICO bond obligations.
The assessment rate for BIF member institutions has been set at approximately
$0.018 per $100 annually for the first and second quarters of 2002.
Transactions between the Bank and any of its affiliates, including the
Company, are governed by sections 23A and 23B of the Federal Reserve Act. An
"affiliate" of a bank is any company or entity that controls, is controlled by,
or is under common control with the bank. A subsidiary of a bank that is not
also a depository institution is not treated as an affiliate of the bank for
purposes of sections 23A and 23B, unless the subsidiary engages in activities
that are not permissible for a bank to engage in directly. Generally, sections
23A and 23B limit the extent to which a bank or its subsidiaries may engage in
covered transactions with any one affiliate and with all its affiliates in the
aggregate, and require that all such transactions be on terms that are
consistent with safe and sound banking practices.
The Gramm-Leach-Bliley Act amended the Bank Holding Company Act ("BHC Act")
and, effective March 11, 2000, expanded the permissible activities of certain
qualifying bank holding companies, known as financial holding companies. In
addition to engaging in banking and activities closely related to banking, as
determined by the FRS by regulation or order prior to November 11, 1999,
financial holding companies may engage in activities that are financial in
nature or incidental to financial activities, or activities that are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally.
Under the Gramm-Leach-Bliley Act, all financial institutions, including the
Company and the Bank, were required, effective July 1, 2001, to develop privacy
policies, restrict the sharing of nonpublic customer data with nonaffiliated
parties at the customer's request, and establish procedures and practices to
protect customer data from unauthorized access.
Under the International Money Laundering Abatement and Anti-Terrorism
Financing Act of 2001, adopted as Title III of the USA PATRIOT Act and signed
into law on October 26, 2001, all financial institutions, including the Company
and the Bank, are subject to additional requirements to collect customer
information, monitor customer transactions and report information to U.S. law
enforcement agencies concerning customers and their transactions. In many
cases, the specific requirements of the law will not be established until the
Secretary of the Treasury adopts implementing regulations as directed or
authorized by Congress. In general, accounts maintained by or on behalf of
"non-United States persons," broadly defined, are subject to particular
scrutiny. Correspondent accounts for or on behalf of foreign banks with
7
profiles that raise money laundering concerns are subject to even greater
scrutiny, and correspondent accounts for or on behalf of "shell banks," defined
as a foreign bank with no physical presence in any country, are barred
altogether. Financial institutions must take "reasonable steps," subject to
definition by the Secretary of the Treasury, to ensure that any correspondent
accounts with permissible foreign banks are not used for the benefit of shell
banks. The Secretary of the Treasury also is authorized to require financial
institutions to take "special measures," including new customer identification,
recordkeeping, and reporting requirements and transaction restrictions, if the
financial institutions are involved with jurisdictions, financial institutions,
or transactions of "primary money laundering concern" as determined by the
Secretary. Additional information-sharing among financial institutions,
regulators, and law enforcement authorities is encouraged by creating an
exemption from the privacy provisions of the Gramm-Leach-Bliley Act for
financial institutions that comply with this provision and authorizing the
Secretary of the Treasury to adopt rules to further encourage cooperation and
information-sharing. Upon request by an appropriate federal banking agency, a
financial institution must provide or make available information about an
account within 120 hours. All financial institutions also are required to
establish internal anti-money laundering programs. The effectiveness of a
financial institution in combating money laundering activities is a factor to be
considered in any application submitted by the financial institution after
December 31,2001, under the Federal Deposit Insurance Act, which applies to the
Bank, or the BHC Act, which applies to the Company.
8
EMPLOYEES
At December 31, 2001, the Company had 1,076 full-time employees and 190
part-time employees. The Company's employees are not presently represented by
any collective bargaining group. The Company considers its employee relations to
be good.
ITEM 2. PROPERTIES
The Company's headquarters are located at 52 South Broad Street, Norwich, New
York 13815. The Company operated the following number of community banking
branches and automated teller machines (ATMs) as of December 31, 2001:
New York State Branches ATMs
- ------------------------------ -------- ----
NBT BANK DIVISION
Albany County 1 -
Broome County 3 5
Chenango County 11 14
Clinton County 3 2
Delaware County 5 9
Essex County 3 6
Franklin County 1 1
Fulton County 3 3
Greene County - 2
Oneida County 5 8
Otsego County 2 9
St. Lawrence County 4 4
Sullivan County - 1
Tioga County 1 2
Ulster - 1
CENTRAL NATIONAL BANK DIVISION
Chenango County 1 1
Fulton County 2 3
Herkimer County 2 1
Montgomery County 6 4
Oneida County 1 1
Otsego County 9 7
Saratoga County 3 3
Schenectady County 2 2
Schoharie County 3 2
PENNSTAR BANK DIVISION
Orange County 1 1
Pennsylvania Branches ATMs
- ------------------------------ -------- ----
PENNSTAR BANK DIVISION
Lackawanna County 20 20
Luzerne County 4 10
Monroe County 4 5
Pike County 3 3
Susquehanna County 6 8
Wayne County 3 4
9
The Company leases thirty-eight of the above listed branches from third parties
under terms and conditions considered by management to be equitable to the
Company. The Company owns all other banking premises. All automated teller
machines are owned.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a party or of which their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of the Company's shareholders was held on October 16,
2001.
(b) Not applicable.
(c) At the special meeting held on October 16, 2001, the Company's shareholders
approved the issuance of the Company's common stock in connection with the
acquisition of CNB Financial Corp. There were 15,132,892 votes cast for,
644,950 votes cast against, 180,137 abstentions and 8,641,521 broker
non-votes.
(d) Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of NBT Bancorp Inc. ("Common Stock") is quoted on the Nasdaq
Stock Market National Market Tier under the symbol "NBTB". The following table
sets forth the market prices and dividends declared for the Common Stock for the
periods indicated.
--------------------------------------
HIGH LOW DIVIDEND
--------------------------------------
2000
1st quarter $ 16.50 $11.38 0.170
2nd quarter 14.50 9.38 0.170
3rd quarter 12.50 9.75 0.170
4th quarter 15.94 11.13 0.170
2001
1st quarter $ 17.50 $13.25 0.170
2nd quarter 25.42* 14.30 0.170
3rd quarter 17.30 13.50 0.170
4th quarter 15.99 12.55 0.170
======================================
* 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.
The closing price of the Common Stock on February 28, 2002 was $14.05. The
approximate number of holders of record of the Company's Common Stock on
February 28, 2002 was 9,082.
10
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial and other information about the Company is
derived from the Company's audited consolidated financial statements for each of
the five fiscal years ended December 31, 2001, 2000, 1999, 1998 and 1997:
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
Interest, fee and dividend income $ 255,434 $ 260,381 $ 220,849 $ 210,970 $ 195,973
Interest expense 117,502 133,003 102,876 100,870 91,614
Net interest income 137,932 127,378 117,973 110,100 104,359
Provision for loan losses 31,929 10,143 6,896 6,922 5,095
Noninterest income excluding
securities gains 31,826 24,854 21,327 20,078 17,140
Securities gains (losses) (7,692) (2,273) 1,000 2,183 562
Merger, acquisition and reorganization
costs 15,322 23,625 835 - -
Other noninterest expense 110,536 95,509 83,944 81,108 72,971
Income before income taxes 4,279 20,682 48,625 44,331 43,995
Net income 3,737 14,154 32,592 34,576 29,854
========================================================================================================
PER COMMON SHARE*
Basic earnings $ 0.11 $ 0.44 $ 1.01 $ 1.07 $ 0.95
Diluted earnings 0.11 0.44 1.00 1.05 0.93
Cash dividends paid ** 0.68 0.68 0.66 0.59 0.42
Stock dividends distributed - - 5% 5% 5%
Book value at year-end 8.05 8.29 7.62 8.07 7.63
Tangible book value at year-end 6.51 6.88 6.74 7.75 7.33
Average diluted common
shares outstanding 33,085 32,405 32,541 32,899 32,005
========================================================================================================
AT DECEMBER 31,
Trading securities, at fair value $ 126 $ 20,540 $ - $ - $ 1,119
Securities available for sale,
at fair value 909,341 936,757 994,492 709,905 752,786
Securities held to maturity,
at amortized cost 101,604 110,415 113,318 294,119 231,158
Loans and leases 2,339,636 2,247,655 1,924,460 1,658,194 1,504,258
Allowance for loan losses 44,746 32,494 28,240 26,615 24,828
Assets 3,638,202 3,605,506 3,294,845 2,880,943 2,653,173
Deposits 2,915,612 2,843,868 2,573,335 2,292,449 2,126,748
Borrowings 394,344 425,233 429,924 303,021 257,153
Stockholders' equity 266,355 269,641 246,095 259,604 247,162
========================================================================================================
KEY RATIOS
Return on average assets 0.10% 0.41% 1.07% 1.23% 1.17%
Return on average equity 1.32 5.57 12.66 13.59 13.65
Average equity to average assets 7.82 7.35 8.42 9.07 8.59
Net interest margin 4.19 4.02 4.23 4.30 4.51
Efficiency *** 62.89 60.92 59.18 60.94 58.36
Cash dividend per share payout 618.18 154.55 66.00 56.19 45.16
Tier 1 leverage 6.34 6.88 8.07 8.68 8.92
Tier 1 risk-based capital 9.43 9.85 12.49 13.73 14.48
Total risk-based capital 10.69 11.08 13.68 14.93 15.70
========================================================================================================
11
*All share and per share data has been restated to give retroactive effect to stock dividends, splits
and poolings of interest.
**Cash dividends per share represent the historical cash dividends per share of NBT Bancorp Inc.,
adjusted to give retroactive effect to stock dividends.
***The efficiency ratio is computed as total non-interest expense (excluding merger, acquisition and
reorganization costs as well as gains and losses on the sale of other real estate owned) divided by
fully taxable equivalent net interest income plus non-interest income (excluding net security
transactions).
SELECTED QUARTERLY FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands, FIRST SECOND THIRD FOURTH First Second Third Fourth
except per share data)
Interest, fee and
dividend income $66,034 $64,067 $64,232 $ 61,101 $61,851 $64,402 $66,536 $67,592
Interest expense 33,655 30,562 28,923 24,362 30,054 32,233 34,377 36,339
Net interest income 32,379 33,505 35,309 36,739 31,797 32,169 32,159 31,253
Provision for loan losses 1,211 6,872 9,188 14,658 1,874 2,665 1,949 3,655
Noninterest income excluding
securities gains (losses) 8,654 7,476 8,078 7,618 5,302 6,094 6,506 6,952
Net securities gains (losses) 1,023 227 (2,327) (6,615) 313 (639) 226 (2,173)
Noninterest expense 26,650 25,154 29,342 44,712 24,199 25,917 26,282 42,736
Net income (loss) $ 9,654 $ 6,570 $ 1,469 $(13,956) $ 7,464 $ 5,981 $ 7,172 $(6,463)
Basic earnings (loss) per share $ 0.30 $ 0.20 $ 0.04 $ (0.42) $ 0.23 $ 0.19 $ 0.22 $ (0.20)
Diluted earnings (loss) per share $ 0.30 $ 0.20 $ 0.04 $ (0.42) $ 0.23 $ 0.18 $ 0.22 $ (0.20)
Net interest margin 4.06% 4.10% 4.19% 4.39% 4.19% 4.10% 3.98% 3.81%
Return (loss) on average assets 1.10% 0.73% 0.16% (1.51)% 0.90% 0.70% 0.82% (0.72)%
Return (loss) on average equity 14.42% 9.42% 2.02% (18.87)% 12.41% 9.69% 11.21% (9.72)%
Average diluted common
shares outstanding 32,702 33,112 33,500 32,999 32,256 32,433 32,532 32,396
====================================================================================================================
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of NBT Bancorp Inc.
(the "Registrant" or the "Company") and its wholly owned subsidiaries, NBT Bank,
N.A. ("the Bank"), NBT Financial Services, Inc. ("NBT Financial), and CNBF
Capital Trust I during 2001 and, in summary form, the preceding two years.
Collectively, the Registrant and its subsidiaries are referred to herein as "the
Company." Net interest margin is presented in this discussion on a fully
taxable equivalent (FTE) basis. Average balances discussed are daily averages
unless otherwise described. The audited consolidated financial statements and
related notes as of December 31, 2001 and 2000 and for each of the years in the
three year period ended December 31, 2001 should be read in conjunction with
this review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 2001 presentation.
The preparation of the consolidated financial statements requires management to
make estimates and assumptions, in the application of certain accounting
policies, about the effect of matters that are inherently uncertain. Those
estimates and assumptions affect the reported amounts of certain assets,
liabilities, revenues and expenses. Different amounts could be reported under
different conditions, or if different assumptions were used in the application
of these accounting policies.
The business of the Company is providing commercial banking and financial
services through its subsidiaries. The Company's primary market area is central
and upstate New York and northeast Pennsylvania. The Company has been, and
intends to continue to be, a community-oriented financial institution offering a
variety of financial services. The Company's principle business is attracting
deposits from customers within its market area and investing those funds
primarily in loans and leases, and, to a lesser extent, in marketable
securities. The financial condition and operating results of the Company are
dependent on its net interest income which is the difference between the
interest and dividend income earned on its earning assets and the interest
expense paid on its interest bearing liabilities, primarily consisting of
deposits and borrowings. Net income is also affected by provisions for loan and
lease losses and noninterest income, such as service charges on deposit
accounts, broker/dealer fees, trust fees, and gains/losses on securities sales;
it is also impacted by noninterest expense, such as salaries and employee
benefits, as well as merger, acquisition and reorganization costs.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards, and actions of
regulatory agencies. Future changes in applicable laws, regulations, or
government policies may have a material impact on the Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates, the state of the local
and regional economy, and the availability of funds. The ability to gather
deposits and the cost of funds are influenced by prevailing market interest
rates, fees and terms on deposit products, as well as the availability of
alternative investments including mutual funds and stocks.
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," "will", "can", "would", "should", "could", "may", or
other similar terms. There are a number of factors, many of which are beyond
the Company's control that could cause actual results to differ materially from
those contemplated by the forward looking statements. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
13
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
and/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 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
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 cautions 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.
Except as required by law, the Company does not undertake, and specifically
disclaims any obligations to, publicly release 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.
MERGER AND ACQUISITION ACTIVITY
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 the Bank. 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 $7.0 million
and was being amortized prior to the adoption of SFAS No. 142 on January 1, 2002
on a straight-line basis based on a 20 year amortization period.
On September 14, 2001, the Company acquired $14.4 million in deposits from
Mohawk Community Bank. Unidentified intangible assets, accounted for in
accordance with SFAS No. 72 and representing the excess of cost over net assets
acquired, was $665,000 and is being amortized over 15 years on a straight-line
basis. Additionally, the Company identified $119,000 of core deposit intangible
assets.
On November 8, 2001, the Company, pursuant to a merger agreement dated June 18,
2001, completed its merger with CNB Financial Corp. (CNB) and its wholly owned
subsidiary, Central National Bank (CNB Bank), whereby CNB was merged with and
into the Company, and CNB Bank was merged with and into the Bank. CNB Bank then
became a division of the Bank. In connection with the merger, CNB stockholders
received 1.2 shares of the Company's common stock for each share of CNB stock
and the Company issued approximately 8.9 million shares of common stock. The
transaction is structured to be tax-free to shareholders of CNB and has been
accounted for as a pooling-of-interests. Accordingly, these consolidated
financial statements have been restated to present combined consolidated
financial condition and results of operations of the Bank and CNB as if the
merger had been in effect for all years presented. At September 30, 2001, CNB
had consolidated assets of $983.1 million, deposits of $853.7 million and equity
of $62.8 million. CNB Bank operated 29 full service banking offices in nine
upstate New York counties.
On February 17, 2000, the Company completed its merger with Lake Ariel Bancorp,
Inc. (Lake Ariel) and its subsidiaries. In connection with the merger each
issued and outstanding share of Lake Ariel exchanged for 0.9961 shares of the
Company's common stock. The transaction resulted in the issuance of
approximately 5.0 million shares of Company's common stock. Lake Ariel's
commercial banking subsidiary was LA Bank, N.A.
14
On July 1, 2000, the Company completed its merger with Pioneer American Holding
Company Corp. (Pioneer Holding Company) and its subsidiary. In connection with
the merger, each issued and outstanding share of Pioneer Holding Company
exchanged for 1.805 shares of the Company's common stock. The transaction
resulted in the issuance of approximately 5.2 million shares of the Company's
common stock. Pioneer Holding Company's commercial banking subsidiary was
Pioneer American Bank, N.A.
The Lake Ariel and Pioneer Holding Company mergers qualified as tax-free
exchanges and were accounted for as poolings-of-interests. Accordingly, these
consolidated financial statements have been restated to present the combined
consolidated financial condition and results of operations of all companies as
if the mergers had been in effect for all years presented.
LA Bank, N.A. and Pioneer Bank N.A. were commercial banks headquartered in
Northeast Pennsylvania with approximately $570 million and $420 million,
respectively, in assets at December 31, 1999, and twenty-two and eighteen branch
offices, respectively, in five counties. Immediately following the Lake Ariel
and Pioneer Holding Company mergers described above, the Company was the
surviving holding company for NBT Bank, LA Bank, N.A., Pioneer American Bank,
N.A. and NBT Financial Services, Inc. On November 10, 2000, LA Bank, N.A.
changed its name to Pennstar. On December 9, 2000, Pioneer American Bank, N.A.
was merged into Pennstar. On March 16, 2001, Pennstar was merged with and into
the Bank and became a division of the Bank.
On May 5, 2000, the Company consummated the acquisition of M. Griffith, Inc. a
Utica, New York based securities firm offering investment, financial advisory
and asset-management services, primarily in the Mohawk Valley region. At that
time, M. Griffith, Inc., a full-service broker/dealer and a Registered
Investment Advisor, became a wholly-owned subsidiary of NBT Financial. The
acquisition was accounted for using the purchase method. As such, both the
assets acquired and liabilities assumed have been recorded on the consolidated
balance sheet of the Company at estimated fair value as of the date of
acquisition. M. Griffith, Inc.'s, results of operations are included in the
Company's consolidated statement of income from the date of acquisition forward.
To complete the transaction, the Company issued approximately 421,000 shares of
its common stock, valued at $4.8 million. Goodwill, representing the cost over
net assets acquired, was $3.4 million and was being amortized prior to the
adoption of SFAS No. 142 on January 1, 2002 over fifteen years on a
straight-line basis.
On June 2, 2000, Pennstar, purchased two branches from Mellon Bank. Deposits
from the Mellon Bank branches were approximately $36.7 million, including
accrued interest payable. In addition, the Company received approximately $32.2
million in cash as consideration for net liabilities assumed. The acquisition
was accounted for using the purchase method. As such, both the assets acquired
and liabilities assumed have been recorded on the consolidated balance sheet of
the Company at estimated fair value as of the date of the acquisition.
Unidentified intangible assets, accounted for in accordance with SFAS No. 72,
and representing the excess of cost over net assets acquired, was $4.3 million
and is being amortized over 15 years on the straight-line basis. The branches'
results of operations are included in the Company's consolidated statement of
income from the date of acquisition forward.
On November 10, 2000, Pennstar purchased six branches from Soverign Bank.
Deposits from the Soverign Bank branches were approximately $96.8 million,
including accrued interest payable. Pennstar also purchased commercial loans
associated with the branches with a net book balance of $42.4 million. In
addition, the Company received $40.9 million in cash consideration for net
liabilities assumed. The acquisition was accounted for using the purchase
method. As such, both the assets acquired and liabilities assumed have been
recorded on the consolidated balance sheet of the Company at estimated fair
value as of the date of the acquisition. Unidentified intangible assets,
accounted for in accordance with SFAS No. 72, and representing the excess of
cost over net assets acquired, was $12.7 million and is being amortized over 15
years on a straight-line basis. The branches' results of operations are
included in the Company's consolidated statement of income from the date of
acquisition forward.
In August 1999, CNB purchased five branches from Astoria Federal Savings and
Loan Association (Astoria). Deposits from the Astoria branches were
approximately $156.5 million, including accrued interest payable. CNB also
purchased approximately $3.7 million in branch related assets, primarily the
15
real and personal property associated with the branches, cash at the branches,
as well as a limited amount of deposit related loans. In addition, CNB received
$133.9 million in cash in consideration for net liabilities assumed. The
acquisition was accounted for using the purchase method. As such, both the
assets acquired and liabilities assumed have been recorded on the consolidated
balance sheet of the Company at estimated fair value as of the date of the
acquisition. Unidentified intangible assets, accounted for in accordance with
SFAS No. 72, and representing the excess of cost over net assets acquired, was
$19.9 million and is being amortized over 15 years on a straight-line basis.
The branches' results of operations are included in the Company's consolidated
statement of income from the date of acquisition forward.
During 2001, the following merger, acquisition and reorganization costs were
recognized:
Professional fees $ 5,956
Data processing 2,092
Severance 3,270
Branch closings 2,412
Advertising and supplies 313
Hardware and software writeoffs 402
Miscellaneous 877
-------
$15,322
=======
With the exception of hardware and software writeoffs and certain branch closing
costs, all of the above costs have been or will be paid through normal cash flow
from operations. At December 31, 2001, after payments of certain merger,
acquisition and reorganization costs, the Company had a remaining accrued
liability for merger, acquisition and reorganization costs incurred during 2001
as follows:
Professional fees $2,009
Data processing 241
Severance 3,074
Branch closings 1,601
Advertising and supplies 199
Miscellaneous 455
------
$7,579
======
With the exception of certain severance costs which will be paid out over a
period of time consistent with the respective service agreements, all of the
above liabilities are expected to be paid during 2002.
During 2000, the following merger, acquisition and reorganization costs were
recognized:
Professional fees $ 8,525
Data processing 2,378
Severance 7,278
Branch closing 1,736
Advertising and supplies 1,337
Hardware and software write-off 1,428
Miscellaneous 943
----------------------------------------
Total $23,625
----------------------------------------
16
OVERVIEW
The following table summarizes income, income per share and key financial ratios
for the periods indicated in accordance with generally accepted accounting
principles (GAAP) as well as on a recurring basis. Non-recurring items are those
that the Company considers nonoperating in nature and include merger,
acquisition, and reorganization costs, net securities losses and gains, gain on
branch sales, deposit overdraft write-offs, and mark-to-market adjustments on
loans held for sale:
YEAR ENDED DECEMBER 31, 2001 (IN 000'S, EXCEPT PER SHARE AMOUNTS)
ESTIMATED DILUTED
PRE-TAX TAX EFFECT AFTER TAX EPS
GAAP Net Income $ 4,279 542 3,737 0.11
------------ ----------- ---------- -----------
Merger, Acquisition, &
Reorganization Costs 15,322 4,102 11,220 0.34
Net Securities Losses 7,692 2,795 4,897 0.15
Gain on Branch Sale (1,367) (487) (880) (0.03)
Certain Deposit Overdraft Write-offs 2,125 757 1,368 0.04
Certain mark-to-market adjustment on
loans held for sale 50 18 32 -
------------ ----------- ---------- -----------
23,822 7,185 16,637 0.50
------------ ----------- ---------- -----------
Recurring Net Income $ 28,101 7,727 20,374 0.61
============ =========== ========== ===========
YEAR ENDED DECEMBER 31, 2000 (IN 000'S, EXCEPT PER SHARE AMOUNTS)
ESTIMATED DILUTED
PRE-TAX TAX EFFECT AFTER TAX EPS
GAAP Net Income $ 20,682 6,528 14,154 0.44
------------ ----------- ---------- -----------
Merger, Acquisition, &
Reorganization Costs 23,625 5,828 17,797 0.55
Net Securities Losses 2,273 837 1,436 0.04
Certain mark-to-market adjustment on
loans held for sale 117 48 69 -
------------ ----------- ---------- -----------
26,015 6,713 19,302 0.59
------------ ----------- ---------- -----------
Recurring Net Income $ 46,697 13,241 33,456 1.03
============ =========== ========== ===========
YEAR ENDED DECEMBER 31, 1999 (IN 000'S, EXCEPT PER SHARE AMOUNTS)
ESTIMATED DILUTED
PRE-TAX TAX EFFECT AFTER TAX EPS
GAAP Net Income $ 48,625 16,033 32,592 1.00
------------ ----------- ---------- -----------
Merger, Acquisition, &
Reorganization Costs 835 276 559 0.02
Net Securities Gains (1,000) (330) (670) (0.02)
Certain mark-to-market adjustment on
Loans held for sale (341) (113) (228) (0.01)
------------ ----------- ---------- -----------
(506) (167) (339) (0.01)
------------ ----------- ---------- -----------
Recurring Net Income $ 48,119 15,866 32,253 0.99
============ =========== ========== ===========
17
The Company had net income of $3.7 million or $0.11 per diluted share for 2001,
compared to net income of $14.2 million or $0.44 per diluted share for 2000.
Included in 2001 net income were merger, acquisition and reorganization costs,
net securities losses, gain on a branch sale, certain deposit overdraft
write-offs, and other non-operating transactions. These items totaled $23.8
million ($16.6 million after-tax, or $0.50 per diluted share) compared to $26.0
million ($19.3 million after-tax, or $0.59 per diluted share) of similar items
in 2000. During 2001, costs related to merger, acquisition and reorganization
activities totaled $15.3 million ($11.2 million after-tax, or $0.34 per diluted
share) and net securities losses totaled $7.7 million ($4.9 million after-tax,
or $0.15 per diluted share) compared to $23.6 million ($17.8 million after-tax,
or $0.55 per diluted share) related to merger, acquisition and reorganization
activities and $2.3 million ($1.4 million after tax, or $0.04 per diluted share)
in net securities loss in 2000 (see "Securities and Corresponding Interest and
Dividend Income" for further discussion related to net securities losses).
Recurring net income, which excludes the after tax effect of costs related to
merger, acquisition and reorganization activities, net securities transactions,
as well as other non-operating transactions, was $20.4 million, or $0.61 per
diluted share, for 2001 compared to $33.5 million, or $1.03 per diluted share,
for 2000. The decrease in recurring net income resulted primarily from a $31.9
million ($19.9 million after tax, or $0.60 per diluted share) provision for loan
and lease losses in 2001 compared to a provision of $10.1 million ($6.4 million
after-tax, or $0.20 per diluted share) for 2000 (see "Credit Risk" for further
discussion related to the provision for loan and lease losses). Additionally,
recurring net income for 2001 was negatively affected by a $3.5 million charge
($2.3 million after tax, or $0.07 per diluted share) for the
other-than-temporary impairment of the residual value of leased automobiles
compared to a charge of $.6 million ($.4 million after tax, or $0.01 per diluted
share) in the prior year (see "Loans and Leases and Corresponding Interest and
Fees on Loans and Leases" for further discussion related to the
other-than-temporary impairment of the residual value of leased automobiles).
Net interest income for 2001 increased 8.3% to $137.9 million compared to $127.4
million in 2000. The net interest margin for 2001 and 2000 was 4.19% and 4.02%,
respectively. The increase in net interest income and net interest margin
continues to be attributable primarily to the decline in the Company's cost of
funds period-over-period, combined with growth in the average loan portfolio.
For 2001, noninterest income, excluding net securities losses and gain on the
sale of a branch building, totaled $30.5 million compared to $24.9 million for
2000, an increase of 22.5%. Service charges on deposit accounts, ATM fees,
banking fees, broker/dealer fees and insurance commissions primarily contributed
to the increase in noninterest income. For 2001, noninterest expense, excluding
nonrecurring items such as merger, acquisition and reorganization costs and
certain deposit overdraft charge-offs, increased $12.9 million, or 13.5%, to
$108.4 million from $95.5 million in 2000. Included in the increase in
noninterest expense for 2001 was a $3.5 million charge for the
other-than-temporary impairment of the residual value of leased automobiles
compared to a charge of $.6 million in 2000. The remaining increase in
noninterest expense of $10.0 million was primarily related to the required
service and support of our growth.
Net income for 2000 decreased to $14.2 million, or $0.44 per diluted share,
compared to net income of $32.6 million, or $1.00 per diluted share for 1999.
Included in 2000 net income were merger, acquisition and reorganization costs,
net securities losses, and other nonoperating transactions. These items totaled
$26.0 million ($19.3 million after-tax, or $0.59 per diluted share) compared to
$0.5 million ($0.3 million after-tax, or $0.01 per diluted share) of similar
items in 1999. Recurring net income for 2000 was $33.5 million, up $1.2 million
compared to recurring net income of $32.3 million in 1999.
18
ASSET/LIABILITY MANAGEMENT
The Company attempts to maximize net interest income, and net income, while
actively managing its liquidity and interest rate sensitivity through the mix of
various core deposit products and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income, on a fully
tax equivalent basis, are discussed below.
TABLE 1
Average Balances and Net Interest Income
The following table includes the condensed consolidated average balance sheet,
an analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans and leases
has been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
2001 2000 1999
AVERAGE YIELD/ Average YielD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 11,324 $ 569 5.02% $ 15,031 $ 937 6.23% $ 30,846 $ 1,514 4.91%
Securities available for sale (2) 933,122 61,857 6.63 1,017,617 70,918 6.97 899,211 60,907 6.77
Securities held to maturity (2) 99,835 6,644 6.65 117,513 8,086 6.88 154,093 10,109 6.56
Securities trading 5,253 649 12.35 216 8 3.70 - - -
Investment in FRB and
FHLB Banks 23,926 1,555 6.50 31,274 2,254 7.21 29,209 1,944 6.66
Loans and leases(1) 2,312,740 188,053 8.13 2,092,191 182,254 8.71 1,773,159 150,524 8.49
---------- --------- ---------- --------- ---------- ---------
Total earning assets 3,386,200 259,327 7.66 3,273,842 264,457 8.08 2,886,518 224,998 7.79
--------- --------- ---------
Other non-interest-earning assets 240,725 182,749 170,859
---------- ---------- ----------
TOTAL ASSETS $3,626,925 $3,456,591 $3,057,377
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 254,735 7,052 2.77 $ 209,562 8,460 4.04 $ 192,955 6,231 3.23
NOW deposit accounts 348,964 5,032 1.44 307,969 5,951 1.93 280,438 4,902 1.75
Savings deposits 427,102 9,385 2.20 403,106 10,511 2.61 383,617 9,682 2.52
Time deposits 1,476,473 77,053 5.22 1,440,173 82,371 5.72 1,206,470 61,661 5.11
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing deposits 2,507,274 98,522 3.93 2,360,810 107,293 4.54 2,063,480 82,476 4.00
Short-term borrowings 123,162 5,365 4.36 194,888 11,940 6.13 145,364 7,268 5.00
Long-term debt 259,583 13,615 5.24 245,383 13,770 5.61 238,612 13,132 5.50
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing liabilities 2,890,019 117,502 4.07% 2,801,081 133,003 4.75% 2,447,456 102,876 4.20%
--------- --------- ---------
Demand deposits 382,489 348,443 314,632
Other non-interest-bearing
liabilities 70,666 53,018 37,749
Stockholders' equity 283,751 254,049 257,540
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $3,626,925 $3,456,591 $3,057,377
---------- ---------- ----------
NET INTEREST INCOME $ 141,825 $ 131,454 $ 122,122
--------- --------- ---------
NET INTEREST MARGIN 4.19% 4.02% 4.23%
------ ----- -------
Interest Rate Spread 3.59% 3.33% 3.59%
Taxable equivalent
adjustment $ 3,893 $ 4,076 $ 4,149
--------- --------- ---------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding. The interest collected thereon is
included in interest income based upon the characteristics of the related
loans.
(2) Securities are shown at average amortized cost. For purposes of these
computations, nonaccrual securities are included in the average securities
balances, but the interest collected thereon is is not included in interest
income.
19
NET INTEREST INCOME
On a tax equivalent basis, the Company's net interest income for 2001 was $141.8
million, up from $131.5 million for 2000. The Company's net interest margin
improved to 4.19% for 2001 from 4.02% for 2000. The improvement in net interest
income and net interest margin in 2001 were due primarily to two factors. First,
average earning assets increased from $3.3 billion in 2000 to $3.4 billion in
2001. The increase in average earning assets was due primarily to an increase in
average loans and leases, which increased $221.5 million from $2.1 billion in
2000 to $2.3 billion in 2001. Secondly, due to the falling interest rate
environment in 2001 and the Company's interest bearing liability sensitive
position, rates paid on interest bearing liabilities declined more rapidly than
the yield on earning assets. Rates paid on interest bearing liabilities
decreased 68 basis points ("bp") to 4.07% in 2001 from 4.75% in 2000 compared to
a 42 bp decrease in yield on earnings assets to 7.66% in 2001 from 8.08% in
2000.
The following table presents changes in interest income, on a FTE basis, and
interest expense attributable to changes in volume (change in average balance
multiplied by prior year rate), changes in rate (change in rate multiplied by
prior year volume), and the net change in net interest income. The net change
attributable to the combined impact of volume and rate has been allocated to
each in proportion to the absolute dollar amounts of change.
TABLE 2
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
- ---------------------------------------------------------------------------------------------------
INCREASE (DECREASE) Increase (Decrease)
2001 OVER 2000 2000 over 1999
- ---------------------------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL Volume Rate Total
- ---------------------------------------------------------------------------------------------------
Short-term interest-bearing accounts $ (206) $ (162) $ (368) $ (914) $ 337 $ (577)
Securities available for sale (5,708) (3,353) (9,061) 8,210 1,801 10,011
Securities held to maturity (1,184) (258) (1,442) (2,497) 474 (2,023)
Securities trading 583 58 641 - - -
Investment in FRB and FHLB Banks (493) (206) (699) 143 167 310
Loans and leases 18,428 (12,629) 5,799 27,701 4,029 31,730
- ---------------------------------------------------------------------------------------------------
Total interest income 8,889 (14,019) (5,130) 31,054 8,405 39,459
- ---------------------------------------------------------------------------------------------------
Money market deposit accounts 1,590 (2,998) (1,408) 571 1,658 2,229
NOW deposit accounts 723 (1,642) (919) 506 543 1,049
Savings deposits 599 (1,725) (1,126) 502 327 829
Time deposits 2,036 (7,354) (5,318) 12,825 7,885 20,710
Short-term borrowings (3,683) (2,892) (6,575) 2,812 1,860 4,672
Long-term debt 772 (927) (155) 377 261 638
- ---------------------------------------------------------------------------------------------------
Total interest expense 4,113 (19,614) (15,501) 15,880 14,247 30,127
- ---------------------------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 4,776 $ 5,595 $ 10,371 $15,174 $(5,842) $ 9,332
===================================================================================================
Loans and leases and corresponding interest and fees on loans
The average balance of loans and leases increased 9.5%, from $2.1 billion in
2000 to $2.3 billion in 2001. The yield on average loans and leases decreased
from 8.71% in 2000 to 8.13% in 2001, as a falling interest rate environment
prevailed for much of 2001. Interest income from loans and leases increased
3.2%, from $182.3 million in 2000 to $188.1 million in 2001. The increase in
interest income from loans and leases was due to the increase in the average
balance of loans and leases of 9.5%, offset by a decrease in yield on loans and
leases in 2001 of 58 bp when compared to 2000.
Total loans and leases were $2.3 billion at December 31, 2001, up from $2.2
billion at December 31, 2000. The increase in loans and leases was primarily in
the commercial and consumer loan types, as management continued to focus on
growth in these areas. Commercial and agricultural loans were $584.9 million at
December 31, 2001, up $41.8 million or 7.7% from December 31, 2000. Consumer
20
loans also increased in 2001, from $357.8 million at December 31, 2000 to $387.1
million at December 31, 2001, an increase of $29.3 million or 8.2%. Residential
real estate mortgages increased $20.8 million or 4.1% to $525.4 million at
December 31, 2001. The increases in commercial, consumer and real estate
mortgage loans were offset by a $20.9 million or 4.2% decrease in commercial
real estate mortgages, from $498.0 million at December 31, 2000 to $477.1
million at December 31, 2001.
The following table reflects the loan and lease portfolio by major categories as
of December 31 for the years indicated:
TABLE 3
COMPOSITION OF LOAN AND LEASE PORTFOLIO
- -----------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
(in thousands)
Residential real estate mortgages $ 525,411 $ 504,590 $ 521,684 $ 494,783 $ 456,310
Commercial real estate mortgages 477,102 498,040 469,283 395,268 347,443
Real estate construction and
Development 60,513 44,829 25,474 18,626 12,289
Commercial and agricultural 584,857 543,145 371,863 291,089 248,454
Consumer 387,081 357,822 320,682 294,230 310,115
Home equity 232,624 219,355 139,472 120,712 106,123
Lease financing 72,048 79,874 76,002 43,486 23,524
- -----------------------------------------------------------------------------------------------
Total loans and leases $2,339,636 $2,247,655 $1,924,460 $1,658,194 $1,504,258
- -----------------------------------------------------------------------------------------------
Real estate mortgages consist primarily of loans secured by first or second
deeds of trust on primary residencies. Loans in the commercial and agricultural
category, as well as commercial real estate mortgages, consist primarily of
short-term and/or floating rate commercial loans made to small to medium-sized
companies. Consumer loans consist primarily of installment credit to individuals
secured by automobiles and other personal property including manufactured
housing. Manufactured housing loans totaled $41.4 million and $48.1 million at
December 31, 2001 and 2000, respectively, and were 10.7% and 13.4% of total
consumer loans at December 31, 2001 and 2000, respectively. These decreases from
2000 to 2001 are consistent with the Company's plan to de-emphasize loans
secured by manufactured housing.
Lease Financing
The Company maintained an automobile lease financing portfolio totaling $72.0
million at December 31, 2001 and $79.9 million at December 31, 2000. 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 residual 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 with other
noninterest expenses in the consolidated statements of income. One of the most
significant risks associated with leasing operations is the recovery of the
residual value of the leased vehicles at the termination of the lease. When a
lease receivable asset is recorded, included in this amount is the estimated
residual value of the leased vehicle at the termination of the lease. At
termination, the lessor has the option to purchase the vehicle or may turn the
vehicle over to the Company.
The estimation of residual value is critical to the determination of the leasing
terms. The Company currently utilizes published valuations for specific vehicle
types in order to determine estimated residual values. However, from the date
of origination of the lease to the date of the termination of the lease,
valuations for used vehicles change. The residual values included in lease
financing receivables totaled $52.4 million and $56.9 million at December 31,
2001 and 2000, respectively.
21
The Company has acquired residual value insurance protection in order to reduce
the risk related to a decline in the published values of used vehicles between
the date of origination and the date of the lease termination. Residual value
insurance is designed to cover the difference between the industry-published
valuation for used vehicles at the termination of the lease, as compared to the
industry published valuation at the origination of the lease.
In 2001, the Company's then provider of this residual value insurance indicated
that they intended to change the source of the industry valuation for used
vehicles, which, in essence, reduced the insurance coverage and increased losses
the Company would realize upon disposition of the leased vehicles. In January
2000, the Company changed its residual value insurance provider to a new
carrier. However, residual value insurance coverage related to approximately
$25.0 million of the lease financing portfolio at December 31, 2001 is insured
by the former insurance carrier. While the Company believes that the change in
the source of the industry-published valuation was not allowed under the terms
of the insurance policy, the insurance carrier's position has decreased the
amount of insurance coverage that would be available to the Company with respect
to this portfolio.
Notwithstanding the issue associated with the former insurance carrier, there is
an additional risk in the leasing business with respect to recovery of residual
values of leased vehicles. While residual value insurance is designed to
protect against a drop in industry published values, and only to the extent of
any such decline, there remains a risk that the actual sales price for the
turned-in leased vehicles is less than the industry-published value. The
Company experienced significant losses in 2001 because the amounts that
turned-in leased vehicles actually sold for was less than the published industry
values.
Throughout 2001, there has been significant weakness in the market for used
vehicles. This general weakness was significantly exacerbated by the events of
September 11th as well as the extremely favorable financing opportunities
provided by large automakers for new vehicles. This situation not only softened
the demand for used vehicles, but increased the supply.
This situation, coupled with the issue associated with the former insurance
carrier discussed above, resulted in an impairment of residual values, which is
other-than-temporary at December 31, 2001 and 2000. Accordingly, the Company
recorded an other-than-temporary-impairment charge of $3.5 million in 2001 and
$664,000 in 2000. These charges were included in other noninterest expenses on
the consolidated statements of income. At December 31, 2001, the reserve related
to the other-than-temporary impairment of residual values totaled $3.7 million.
The estimation of the other-than-temporary-impairment charge was based upon the
current level of leased vehicles turned in as well as the mix of the leasing
portfolio between types of vehicles. Currently, the Company has projected that
71% of its leased vehicles will be turned in. At December 31, 2001,
approximately 37% of the Company's leasing portfolio is made up of sport utility
vehicles, or SUVs, which have experienced the greatest amount of declines in
values in the used market, as well as the highest turn-in rate. Should the
amount of vehicle turn-ins increase or values for such used vehicles continue to
decline, the level of other-than-temporary impairment might be increased.
The following table, Maturities and Sensitivities of Certain Loans to Changes in
Interest Rates, are the maturities of the commercial and agricultural and real
estate and construction development loan portfolios and the sensitivity of loans
to interest rate fluctuations at December 31, 2001. Scheduled repayments are
reported in the maturity category in which the contractual payment is due.
22
TABLE 4
MATURITIES AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
- --------------------------------------------------------------------------
AFTER ONE
YEAR BUT AFTER
REMAINING MATURITY AT WITHIN WITHIN FIVE FIVE
DECEMBER 31, 2001 ONE YEAR YEARS YEARS TOTAL
- --------------------------------------------------------------------------
(in thousands)
Floating/adjustable rate:
Commercial and agricultural $ 138,744 $ 20,132 $ 35,567 $194,443
Real estate construction
and development 18,522 5,675 477 24,674
- --------------------------------------------------------------------------
Total floating rate loans 157,266 25,807 36,044 219,117
- --------------------------------------------------------------------------
Fixed Rate:
Commercial and agricultural 234,546 104,443 51,425 390,414
Real estate construction
and development 7,235 10,228 18,376 35,839
- --------------------------------------------------------------------------
Total fixed rate loans 241,781 114,671 69,801 426,253
- --------------------------------------------------------------------------
Total $ 399,047 $ 140,478 $105,845 $645,370
==========================================================================
Securities and corresponding interest and dividend income
The average balance of securities available for sale was $933.1 million, which
is a decrease of $84.6 million, or 8.3%, from $1.0 billion in 2000. The decrease
is primarily a result of proceeds from sales, maturities and pay-downs of
securities available for sale used to fund loan growth. The yield on average
securities available for sale was 6.63% in 2001 compared to 6.97% in 2000. The
decrease in the average balance of securities available for sale, coupled with
the decrease in yield, resulted in a decrease in interest income on securities
available for sale of $9.0 million, from $70.9 million in 2000 to $61.9 million
in 2001. The average balance of securities held to maturity was $99.8 million
during 2001, which is a decrease of $17.7 million, from $117.5 million in 2000.
As noted above, the decrease is primarily a result of proceeds from maturities
and pay-downs of securities held to maturity used to fund loan growth. The yield
on securities held to maturity was 6.65% in 2001 compared to 6.88% in 2000.
Interest income on securities held to maturity decreased $1.5 million, from $8.1
million in 2000 to $6.6 million during 2001.
The Company classifies its securities at date of purchase as either 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.
Non-marketable equity securities are carried at cost, with the exception of
small business investment company (SBIC) investments, which are carried at fair
value in accordance with SBIC rules.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the interest method. Dividend and
interest income are recognized when earned. Realized gains and losses on
securities sold are derived using the specific identification method for
determining the cost of securities sold.
23
The Company recorded a $8.3 million, $3.5 million and $1.4 million pre-tax
charge during 2001, 2000 and 1999, respectively, related to estimated
other-than-temporary impairment of certain securities classified as available
for sale. The charges were recorded in net security (losses) gains on the
consolidated statements of income. The securities with other-than-temporary
impairment charges at December 31, 2001 had remaining carrying values totaling
$4.5 million, are classified as securities available for sale and are on the
non-accrual status.
Approximately, $1.4 million of the $3.5 million other-than-temporary impairment
charge in 2000 related to the Company's decision in late 2000 to sell certain
debt securities with an amortized cost of $21.7 million. As a result of the
decision to immediately sell these securities, they were considered to be
other-than-temporarily impaired. These securities were sold in early January
2001 at a loss approximating the other-than-temporary impairment charge recorded
in 2000. These securities were presented on the Company's December 31, 2000
consolidated balance sheet as trading securities. The remaining securities with
other-than-temporary impairment charges at December 31, 2000 had carrying values
totaling $1.4 million, and at December 31, 2000, were classified as securities
available for sale and were on non-accrual status.
The following table presents the amortized cost and fair market value of the
securities portfolio as of December 31 for the years indicated.
TABLE 5
SECURITIES PORTFOLIO
As of December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR Amortized Fair Amortized Fair
(in thousands) COST VALUE Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury $ 12,392 $ 11,757 $ 16,392 $ 15,924 $ 16,369 $ 14,473
Federal Agency and mortgage-backed 524,101 530,613 580,934 578,625 632,360 602,684
State & Municipal, collateralized
mortgage obligations and other securities 366,325 366,971 342,811 342,208 387,848 377,335
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 902,818 $909,341 $ 940,137 $936,757 $1,036,577 $994,492
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Trading Securities $ 126 $ 126 $ 20,540 $ 20,540 $ - $ -
- -------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
Federal Agency and mortgage-backed 36,733 36,623 46,376 45,528 51,578 48,568
State & Municipal 64,715 64,715 63,992 64,260 61,730 60,569
Other securities 156 157 47 47 10 10
- -------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 101,604 $101,495 $ 110,415 $109,835 $ 113,318 $109,147
=============================================================================================================
Included in collateralized mortgage obligations and other securities in the
securities available for sale portfolio at December 31, 2001, are three
securities that management believes are other-than-temporarily impaired. For the
year ended December 31, 2001, the Company wrote-down these securities a total of
$6.0 million. The remaining carrying value and the estimated fair value of these
three securities is $4.5 million at December 31, 2001, which management will
continue to monitor for additional other-than-temporary impairment. These
securities are not accruing interest at December 31, 2001. Also during 2001, the
Company recorded $2.3 million of other-than-temporary impairment charges related
to securities which were sold prior to year end 2001.
24
The following tables summarize the securities considered to be
other-than-temporarily impaired (OTTI) at December 31, 2001:
(in thousands) AMORTIZED
SECURITY TYPE: COST AND OTTI
FAIR VALUE CHARGE
----------- -------
Asset backed securities $ 1,820 $ 1,680
Private issue collateralized
mortgage obligation 2,680 4,021
Corporate debt security - 300
----------- -------
Total $ 4,500 $ 6,001
=========== =======
Also included in collateralized mortgage obligations and other securities in the
securities available for sale portfolio at December 31, 2001, are certain
securities previously held by the recently acquired CNB. These securities
contain a higher level of credit risk when compared to securities held in the
Company's investment portfolio because they are not guaranteed by a governmental
agency. The Company's general practice is to purchases collateralized mortgage
obligations and mortgaged-backed securities that are guaranteed by a
governmental agency coupled with a strong credit rating, typically AAA, issued
by Moody's or Standard and Poors. At December 31, 2001, these securities fair
value were not significantly below amortized cost and did not demonstrate other
characteristics that would result in a other-than-temporary impairment
classification. Management cannot, however, predict the extent to which economic
conditions may worsen or other factors may impact these securities. Accordingly,
there can be no assurance that these securities will not become
other-than-temporarily impaired in the future.
The following tables summarize the securities containing a higher level of
credit risk at December 31, 2001:
(in thousands) AMORTIZED FAIR
SECURITY TYPE: COST VALUE
---------- -------
Asset backed securities $ 30,571 $30,375
Private issue collaterallized
mortgage obligation 6,488 6,462
Private issue mortgage-backed
securities 1,642 1,668
---------- -------
Total $ 38,701 $38,505
========== =======
The Company has certain embedded derivative instruments related to two debt
securities that have returns linked to the performance of the NASDAQ 100 index.
Management determined that these debt securities do not qualify for hedge
accounting under SFAS No. 133 (see Impact of New Accounting Standards). The
embedded derivatives have been separated from the underlying host instruments
for financial reporting purposes and accounted for at fair value. During the
year ended December 31, 2001, the Company recorded $640,000 of net losses
related to the adjustment of the embedded derivatives to estimated fair value
($159,000 of which was recorded on January 1, 2001 upon the adoption of SFAS No.
133), which was recorded in net gain (loss) on securities transactions on the
consolidated statement of income. As of December 31, 2001, the embedded
derivatives related to the debt securities linked to the NASDAQ 100 index had no
fair value. The two debt securities are available for sale and classified as
other securities. At December 31, 2001, the total amortized cost and estimated
fair value of these two debt securities was $6.2 million. The two debt
securities were sold in 2002 at amounts approximating their carrying values at
December 31, 2001.
25
FUNDING SOURCES AND CORRESPONDING INTEREST EXPENSE
The Company utilizes traditional deposit products such as time, savings, NOW,
money market, and demand deposits as its primary source for funding. Other
sources, such as short-term FHLB advances, federal funds purchased, securities
sold under agreements to repurchase, brokered time deposits, and long-term FHLB
borrowings are utilized as necessary to support the Company's growth in assets
and to achieve interest rate sensitivity objectives. The average balance of
interest-bearing liabilities increased $88.9 million, or 3.2 %, from $2.8
billion in 2000 to $2.9 billion in 2001. The rate paid on interest-bearing
liabilities decreased from 4.75% in 2000 to 4.07% in 2001. The decrease in the
rate paid on interest bearing liabilities, offset by the increase in the average
balance, caused a decrease in interest expense of $15.5 million, or 11.7%, from
$133.0 million in 2000 to $117.5 million in 2001.
Deposits
Average interest bearing deposits increased $146.5 million, or 6.2%, during
2001, to $2.5 billion. The increase is due primarily to the full year effect in
2001 on average interest bearing deposits related to branch acquisitions in June
and November of 2000 as well as the FNB acquisition in June 2001. The Company
assumed $133.7 million in deposit liabilities in conjunction with those branch
acquisitions. Additionally, the Company completed the acquisition of First
National Bancorp, Inc. in June of 2001 and assumed approximately $94 million in
interest bearing liabilities. The Company's core deposit mix improved in 2001.
The average balance of NOW, Money Market Deposit Accounts ("MMDA"), and savings
comprised 41.1% of average interest bearing deposits in 2001 compared to 39.9%
in 2000. The average balance of demand deposits increased $34.1 million, or
9.8%, from $348.4 million in 2000 to $382.5 million in 2001. The ratio of
average demand deposits to total average deposits increased from 10.6% in 2000
to 11.3% in 2001.
The improvement in the Company's deposit mix noted above, combined with the
falling interest rate environment prevalent in 2001, resulted in a decrease in
the rate paid on interest bearing liabilities of 61 bp, from 4.54% in 2000 to
3.93% in 2001. The average rate paid on MMDAs, which are very sensitive to
changes in interest rates, declined 127 bp from 4.04% in 2000 to 2.77% in 2001.
The rate paid on average time deposits decreased 50 bp, from 5.72% in 2000 to
5.22% in 2001. The decrease in the rate paid on average time deposits, combined
with a change in the ratio of average time deposits to total average interest
bearing deposits from 61.0% in 2000 to 58.9% in 2001, resulted in a $5.3 million
decrease in interest expense paid on time deposits, from $82.4 million in 2000
to $77.1 million in 2001.
The Company will continue to emphasize developing strong customer relationships
to strengthen our core deposit base in 2002. The Company does not anticipate
deposit growth in 2002, due mainly to planned branch divestitures. To counter
the anticipated decrease in deposits, the Company will utilize alternative
sources of funding, such as brokered deposits and wholesale funding.
The following table presents the maturity distribution of time deposits of
$100,000 or more at December 31, 2001:
TABLE 6
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
---------------------------------------------------------------------
December 31, 2001
---------------------------------------------------------------------
(in thousands)
Within three months $288,913
After three but within six months 81,999
After six but within twelve months 76,458
After twelve months 111,252
---------------------------------------------------------------------
Total $558,622
=====================================================================
26
Borrowings
Average short-term borrowings decreased from $194.9 million in 2000 to $123.2
million in 2001. Consistent with the decreasing interest rate environment
during 2001, the average rate paid also decreased from 6.13% in 2000 to 4.36% in
2001. The decrease in the average balance combined with the decrease in the
average rate paid caused interest expense on short-term borrowings to decrease
$6.5 million from $11.9 million in 2000 to $5.4 million in 2001. Average
long-term debt increased $14.2 million, from $245.4 million in 2000 to $259.6
million in 2001. The increase in long-term debt combined with a decrease in
short-term borrowings was a result of limiting the Company's liability sensitive
position to rising interest rates.
Short-term borrowings consist of Federal funds purchased and securities sold
under repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily Federal Home Loan Bank
(FHLB) advances, with original maturities of one year or less. The Company has
unused lines of credit and access to brokered deposits available for short-term
financing of approximately $767 million and $555 million at December 31, 2001
and 2000, respectively. Securities collateralizing repurchase agreements are
held in safekeeping by non-affiliated financial institutions and are under the
Company's control. Long-term debt, which is comprised primarily of FHLB
advances, are collateralized by the FHLB stock owned by the Company, certain of
its mortgage-backed securities and a blanket lien on its residential real estate
mortgage loans.
RISK MANAGEMENT
CREDIT RISK
Credit risk is managed through a network of loan officers, credit committees,
loan policies, and oversight from the senior credit officers and Board of
Directors. Management follows a policy of continually identifying, analyzing,
and grading credit risk inherent in each loan portfolio. An ongoing independent
review, subsequent to management's review, of individual credits in the
commercial loan portfolio is performed by the independent loan review function.
These components of the Company's underwriting and monitoring functions are
critical to the timely identification, classification, and resolution of problem
credits.
27
Nonperforming Assets
TABLE 7
NONPERFORMING ASSETS
- -----------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans:
Commercial and agricultural and
commercial real estate $31,372 $14,054 $ 9,519 $ 7,819 $ 8,395
Real estate mortgages 5,119 647 618 744 692
Consumer 3,719 2,402 2,671 3,106 1,406
- -----------------------------------------------------------------------------------------------------
Total nonaccrual loans 40,210 17,103 12,808 11,669 10,493
- -----------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural
and commercial real estate 198 4,523 1,201 1,365 2,202
Real estate mortgages 1,844 3,042 641 761 244
Consumer 933 865 906 1,908 4,164
- -----------------------------------------------------------------------------------------------------
Total loans 90 days or more past due
and still accruing 2,975 8,430 2,748 4,034 6,610
- -----------------------------------------------------------------------------------------------------
Restructured loans 603 656 1,014 1,247 2,877
- -----------------------------------------------------------------------------------------------------
Total nonperforming loans 43,788 26,189 16,570 16,950 19,980
- -----------------------------------------------------------------------------------------------------
Other real estate owned 1,577 1,856 2,696 4,070 3,470
- -----------------------------------------------------------------------------------------------------
Total nonperforming loans and
other real estate owned 45,365 28,045 19,266 21,020 23,450
- -----------------------------------------------------------------------------------------------------
Nonperforming securities 4,500 1,354 1,535 - -
- -----------------------------------------------------------------------------------------------------
Total nonperforming loans, securities,
and other real estate owned $49,865 29,399 20,801 21,020 23,450
=====================================================================================================
Total nonperforming loans to loans and leases 1.87% 1.17% 0.86% 1.02% 1.33%
Total nonperforming loans and
other real estate owned to total assets 1.25% 0.78% 0.58% 0.73% 0.88%
Total nonperforming loans, securities, and other
real estate owned to total assets 1.37% 0.82% 0.63% 0.73% 0.88%
Total allowance for loan and lease losses
to nonperforming loans 102.19% 124.07% 170.43% 157.02% 124.26%
=====================================================================================================
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 losses
is continuously monitored. It is assessed for adequacy using a methodology
designed to ensure the level of the allowance reasonably reflects the loan and
lease 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; size, trend, composition, and
nature; changes in lending policies and procedures, including underwriting
28
standards and collection, charge-off and recovery practices; trends experienced
in nonperforming and delinquent loans; current economic conditions in the
Company's market; portfolio concentrations that may affect loss experienced
across one or more components of the portfolio; the effect of external factors
such as competition, legal and regulatory requirements; and the experience,
ability, and depth of lending management and staff. In addition, various
regulatory agencies, as an integral component of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize additions to the allowance based
on their examination.
After a thorough consideration of the factors discussed above, any 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.
TABLE 8
ALLOWANCE FOR LOAN AND LEASE LOSSES
- -----------------------------------------------------------------------------------------------
(dollars in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Balance at January 1 $32,494 $28,240 $26,615 $24,828 $23,420
Loans charged-off:
Commercial and agricultural 17,097 3,949 2,737 2,794 1,924
Real estate mortgages 783 1,007 1,165 1,139 914
Consumer 4,491 2,841 2,808 2,796 3,163
- -----------------------------------------------------------------------------------------------
Total loans and leases charged-off 22,371 7,797 6,710 6,729 6,001
- -----------------------------------------------------------------------------------------------
Recoveries:
Commercial and agricultural 1,063 503 367 529 1,197
Real estate mortgages 122 141 198 152 109
Consumer 1,004 739 874 913 1,008
- -----------------------------------------------------------------------------------------------
Total recoveries 2,189 1,383 1,439 1,594 2,314
- -----------------------------------------------------------------------------------------------
Net loans and leases charged-off 20,182 6,414 5,271 5,135 3,687
Allowance related to purchase
acquisitions 505 525 - - -
Provision for loan and lease losses 31,929 10,143 6,896 6,922 5,095
- -----------------------------------------------------------------------------------------------
Balance at December 31 $44,746 $32,494 $28,240 $26,615 $24,828
===============================================================================================
Allowance for loan and lease losses to loans
and leases outstanding at end of year 1.91% 1.45% 1.47% 1.61% 1.65%
Net charge-offs to average loans and leases
outstanding 0.87% 0.31% 0.30% 0.33% 0.26%
===============================================================================================
Several significant risk factors impacted the allowance for loan and lease
losses, the provision for loan and lease losses, net loan and lease charge-offs
(net charge offs) and non-performing loans and leases in 2001. During 2001 the
Company continued to increase its loan and lease portfolio with particular
emphasis in commercial and consumer lending. Commercial and consumer lending
inherently possess higher credit risk as compared to many other loan types such
as residential real estate lending. As discussed above, the commercial and
agricultural loan portfolio increased $41.7 million or 7.7% from December 31,
2000 to December 31, 2001, and makes up 25.0% of the total loan and lease
portfolio at December 31, 2001 as compared to 24.1% at December 31, 2000 and
19.3% at December 31, 1999. The consumer loan portfolio grew $29.3 million or
29
8.2% from December 31, 2000 to December 31, 2001 and now makes up 16.6% of the
total loan portfolio at December 31, 2001 as compared to 15.9% at December 31,
2000 and 16.6% at December 31, 1999. See Table 3 for the Composition of the
Loan Portfolio.
The Company's strategic focus on loan growth, particularly in commercial
lending, was also a focus of the banks acquired by the Company in 2001 and 2000;
CNB Bank, LA Bank, NA and Pioneer American Bank, NA (see also Mergers and
Acquisition). These acquired banks underwrote numerous commercial related loans
prior to merging with the Company, based upon their respective underwriting
processes and analysis, including several larger credits which have become
non-performing in 2001. Additionally, CNB Financial significantly increased its
consumer loan portfolio in recent years. Accordingly, the Company's loan growth
in gene