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, 2002
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
NORWICH, NEW YORK 13815 (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 [X]
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [X]
Based upon the closing price of the registrant's common stock as of June 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 $569,310,801. 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 of Common Stock outstanding as of February 28, 2003, was
32,563,280.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on May 1, 2003 are incorporated by reference
into Part III, Items 10, 11, 12 and 13 of this Form 10-K.
This page left blank intentionally
2 ANNUAL REPORT: NBT BANCORP INC.
CROSS REFERENCE INDEX
Part Item
I 1 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9
Average Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Net Interest Income Analysis-Taxable Equivalent Basis. . . . . . . . . . . . . . . . . . . 17
Net Interest Income and Volume/Rate Variance-Taxable Equivalent Basis. . . . . . . . . . . 18
Securities Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Debt Securities-Maturity Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Maturities and Sensitivities of Loans to Changes in Interest Rates . . . . . . . . . . . . 21
Nonperforming Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-28
Maturity Distribution of Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Return on Equity and Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Short-Term Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . 10
II 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . 10
6 SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . 12-39
7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. . . . . . . . . . . . . . . . . . 40-41
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets at December 31, 2002 and 2001. . . . . . . . . . . . . . . . . 44
Consolidated Statements of Income for each of the years in three-year period ended
December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Consolidated Statements of Changes in Stockholders' Equity for each of the years in the
three-year period ended December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . 46
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Consolidated Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 49-80
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . 80
ANNUAL REPORT: NBT BANCORP INC. 3
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*. . . . . . . . . . . . . . . . . . . . . 80
11 EXECUTIVE COMPENSATION*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*. . . . . . . . . . . . . . . 80
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*. . . . . . . . . . . . . . . . . . . . . . . 81
14 CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K. . . . . . . . . . . . . . . . . 81-84
(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.
(c) Refer to item 15(a)(3) above.
(d) Refer to item 15(a)(2) above.
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER. . . . . . . . . . . . . . . . . . . . . . . . . . 86-88
CERTIFICATIONS OF CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . . . . . . . 86-88
- ---------------
* Information called for by Part III (Items 10 through 13) is incorporated by
reference to the Registrant's Proxy Statement for the 2003 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission.
4 ANNUAL REPORT: NBT BANCORP INC.
PART I
ITEM 1. BUSINESS
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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 12 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 principal subsidiaries of the Company through which it conducts its
operations are the Bank and NBT Financial. The Bank is a full service commercial
bank formed in 1856, which provides a broad range of financial products to
individuals, corporations and municipalities throughout the central and upstate
New York and northeastern Pennsylvania market area. The Bank conducts business
through three operating divisions, NBT Bank, Pennstar Bank and Central National
Bank.
The NBT Bank division has 43 divisional offices and 69 automated teller
machines (ATMs), located primarily in central and upstate New York. At December
31, 2002, NBT Bank had total loans of $1.2 billion and total deposits of $1.4
billion.
The Pennstar Bank division has 40 divisional offices and 53 ATMs, located
primarily in northeastern Pennsylvania. At December 31, 2002, Pennstar Bank had
total loans and leases of $526.1 million and total deposits of $774.1 million.
The Central National Bank division has 26 divisional offices and 20 ATMs
located primarily in upstate New York. At December 31, 2002, Central National
Bank had total loans and leases of $612.4 million and total deposits of $716.1
million.
The Bank has five operating subsidiaries, NBT Capital Corp., LA Lease,
Inc., Pennstar Management Trust, Pennstar Services Company, and Colonial
Financial Services, Inc. ("CFS"). 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. Pennstar Management
Trust, formed in 2002, is the holding company for Pennstar Realty Trust and CNB
Realty Trust. Pennstar Realty Trust, formed in 2000, and CNB Realty Trust formed
in 1998, are real estate investment trusts. Pennstar Services Company, formed in
2002, provides services to the Pennstar Bank division of the Bank. CFS, formed
in 2001, offers a variety of financial services products.
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.
ACQUISITIONS
During 2002, the Company did not engage in any acquisition activity, instead
choosing to focus its efforts on integrating acquisitions completed in 2001,
streamlining operational processes, and internal growth. During 2001 and 2000,
the Company 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 the Company has completed since January 1, 2000:
ANNUAL REPORT: NBT BANCORP INC. 5
===========================================================================================================
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 Board of Governors of 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"). MGI is also a member of the
National Association of Securities Dealers, Inc. ("NASD") and is subject to its
regulations. 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.
6 ANNUAL REPORT: NBT BANCORP INC.
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, 2002, the Company's leverage ratio was 6.73%, its ratio
of Tier 1 capital to risk-weighted assets was 9.93%, and its ratio of qualifying
total capital to risk-weighted assets was 11.18%. 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 special capital requirement applicable to
it.
Any 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, 2002, the Bank was in compliance with all
minimum capital requirements. The Bank's leverage ratio was 6.62%, its ratio of
Tier 1 capital to risk-weighted assets was 9.86%, and its ratio of qualifying
total capital to risk-weighted assets was 11.12%.
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.
As of December 31, 2002, the total amount of brokered deposits were $150.0
million.
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. As of December 31, 2002, approximately
$9.8 million was available for the payment of dividends without prior OCC
approval. 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.
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 historically
have been subject to deposit insurance assessments to maintain the Bank
Insurance Fund ("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
("SAIF").
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 rate returns 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 2003 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 Federal Deposit Insurance Act provides for additional assessments to be
imposed on insured depository institutions 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
ANNUAL REPORT: NBT BANCORP INC. 7
depository institution's capitalization or supervisory evaluation. During 2002,
FDIC-insured banks paid an average rate of approximately $0.017 per $100 for
purposes of funding FICO bond obligations. The assessment rate has been retained
at this rate for the first and second quarters of 2003.
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 is also controlled
through a non-bank chain of ownership by affiliates or controlling shareholders
of the bank or the subsidiary engages in activities that are not permissible for
a bank to engage in directly (except insurance agency subsidiaries). Generally,
sections 23A and 23B are intended to protect insured depository institutions
from suffering losses arising from transactions with non-insured affiliates, by
limiting the extent to which a bank or its subsidiaries may engage in covered
transactions with any one affiliate and with all affiliates of the bank in the
aggregate, and requiring that such transactions be on terms that are consistent
with safe and sound banking practices.
On October 31, 2002, the FRS adopted a new regulation, Regulation W,
effective April 1, 2003, that comprehensively implements sections 23A and 23B.
The regulation unifies and updates staff interpretations issued over the years,
incorporates several new interpretative proposals (such as to clarify when
transactions with an unrelated third party will be attributed to an affiliate),
and addresses new issues arising as a result of the expanded scope of nonbanking
activities engaged in by banks and bank holding companies in recent years and
authorized for financial holding companies under the Gramm-Leach-Bliley Act
("GLB Act").
Under the GLB Act, a qualifying bank holding company, known as a financial
holding company, may engage in certain financial activities that a bank holding
company may not otherwise engage in under the Bank Holding Company Act ("BHC
Act"). 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, a financial holding company 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 GLB Act, all financial institutions, including the Company and
the Bank, are required to adopt 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 Title III of the USA PATRIOT Act, also known as the International
Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all
financial institutions, including the Company and the Bank, are required in
general to identify their customers, adopt formal and comprehensive anti-money
laundering programs, scrutinize or prohibit altogether certain transactions of
special concern, and be prepared to respond to inquiries from U.S. law
enforcement agencies concerning their customers and their transactions.
Additional information- sharing among financial institution, regulators, and law
enforcement authorities is encouraged by the presence of an exemption from the
privacy provisions of the GLB Act for financial institutions that comply with
this provision and the authorization of the Secretary of the Treasury to adopt
rules to further encourage cooperation and information-sharing. 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 under the Bank Merger Act, which applies to the Bank, or
the BHC Act, which applies to the Company.
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among
other issues, corporate governance, auditor independence and accounting
standards, executive compensation, insider loans, whistleblower protection, and
enhanced and timely disclosure of corporate information. The SEC has adopted or
proposed several implementing rules, and the NASD has proposed corporate
governance rules that have been presented to the SEC for review and approval.
The proposed changes are intended to allow stockholders to monitor more
effectively the performance of companies and management.
Effective August 29, 2002, as directed by section 302(a) of the
Sarbanes-Oxley Act, the Company's chief executive officer and chief financial
officer are each required to certify that the Company's quarterly and annual
reports do not contain any untrue statement of a material fact. This requirement
has several parts, including certification that these officers are responsible
for establishing, maintaining and regularly evaluating the effectiveness of the
Company's internal controls; that they have made certain disclosures to the
Company's auditors and the risk management committee of the board of directors
about the Company's internal controls; and that they have in-
8 ANNUAL REPORT: NBT BANCORP INC.
cluded information in the Company's quarterly and annual reports about their
evaluation and whether there have been significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the evaluation.
EMPLOYEES
At December 31, 2002, the Company had 1,221 full-time equivalent employees. The
Company's employees are not presently represented by any collective bargaining
group. The Company considers its employee relations to be good.
AVAILABLE INFORMATION
The Company's website is http://www.nbtbank.com. The Company makes available
free of charge through its internet site, via a link to the Securities and
Exchange Commission's website at http://www.sec.gov, its annual reports on Form
10-K; quarterly reports on Form 10-Q; current reports on Form 8K; and any
amendments to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934 as soon as reasonably practicable after such material is
electronically filed with, or furnished to the SEC.
ITEM 2. PROPERTIES
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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, 2002:
================================================================================================================
COUNTY BRANCHES ATMS COUNTY BRANCHES ATMS COUNTY BRANCHES ATMS
- ----------------------------------- --------------------------------------- ----------------------------------
NBT BANK DIVISION CENTRAL NATIONAL BANK DIVISION PENNSTAR BANK DIVISION
NEW YORK NEW YORK NEW YORK
Broome County 4 7 Albany County 1 - Orange County 1 1
Chenango County 11 14 Fulton County 4 5
PENNSTAR BANK DIVISION
Clinton County 3 2 Herkimer County 2 1
PENNSYLVANIA
Delaware County 5 9 Montgomery County 6 5
Lackawanna County 19 23
Essex County 3 6 Otsego County 5 4
Luzerne County 4 10
Franklin County 1 1 Saratoga County 3 3
Monroe County 4 5
Greene County - 2 Schenectady County 1 1
Pike County 3 3
Oneida County 6 10 Schoharie County 4 1
Susquehanna County 6 7
Otsego County 4 11
Wayne County 3 4
St. Lawrence County 5 4
Sullivan County - 1
Tioga County 1 1
Ulster County - 1
================================================================================================================
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
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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.
ANNUAL REPORT: NBT BANCORP INC. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
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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
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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
2002
1ST QUARTER $ 15.15 $13.15 $ 0.170
2ND QUARTER 19.32 14.00 0.170
3RD QUARTER 18.50 16.36 0.170
4TH QUARTER 18.60 14.76 0.170
<FN>
* 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, 2003 was $17.52. The
approximate number of holders of record of the Company's Common Stock on
February 28, 2003 was 7,549.
================================================================================
10 ANNUAL REPORT: NBT BANCORP INC.
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, 2002, 2001, 2000, 1999 and 1998:
================================================================================================================
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
(In thousands, except per share data) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Interest, fee and dividend income $ 227,222 $ 255,434 $ 260,381 $ 220,849 $ 210,970
Interest expense 80,402 117,502 133,003 102,876 100,870
Net interest income 146,820 137,932 127,378 117,973 110,100
Provision for loan and lease losses 9,073 31,929 10,143 6,896 6,922
Noninterest income excluding securities
(losses) gains 32,852 31,826 24,854 21,327 20,078
Securities (losses) gains, net (413) (7,692) (2,273) 1,000 2,183
Merger, acquisition and reorganization
costs (recovery) (130) 15,322 23,625 835 -
Other noninterest expense 103,503 110,536 95,509 83,944 81,108
Income before income taxes 66,813 4,279 20,682 48,625 44,331
Net income 44,999 3,737 14,154 32,592 34,576
- ----------------------------------------------------------------------------------------------------------------
PER COMMON SHARE*
Basic earnings $ 1.36 $ 0.11 $ 0.44 $ 1.01 $ 1.07
Diluted earnings 1.35 0.11 0.44 1.00 1.05
Diluted earnings excluding goodwill and
unidentified intangible asset amortization 1.35 0.19 0.48 1.02 1.06
Cash dividends paid ** 0.68 0.68 0.68 0.66 0.59
Book value at year-end 8.96 8.05 8.29 7.62 8.07
Tangible book value at year-end 7.47 6.51 6.88 6.74 7.75
Average diluted common shares outstanding 33,235 33,085 32,405 32,541 32,899
- ----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
Trading securities, at fair value $ 203 $ 126 $ 20,540 $ - $ -
Securities available for sale, at fair value 1,007,583 909,341 936,757 994,492 709,905
Securities held to maturity, at amortized cost 82,514 101,604 110,415 113,318 294,119
Loans and leases 2,355,932 2,339,636 2,247,655 1,924,460 1,658,194
Allowance for loan and lease losses 40,167 44,746 32,494 28,240 26,615
Assets 3,723,726 3,638,202 3,605,506 3,294,845 2,880,943
Deposits 2,922,040 2,915,612 2,843,868 2,573,335 2,292,449
Borrowings 451,076 394,344 425,233 429,924 303,021
Stockholders' equity 292,382 266,355 269,641 246,095 259,604
- ----------------------------------------------------------------------------------------------------------------
KEY RATIOS
Return on average assets 1.23% 0.10% 0.41% 1.07% 1.23%
Return on average equity 16.13 1.32 5.57 12.66 13.59
Average equity to average assets 7.64 7.82 7.35 8.42 9.07
Net interest margin 4.43 4.19 4.02 4.23 4.30
Efficiency *** 56.44 62.89 60.92 59.18 60.94
Cash dividend per share payout 50.37 618.18 154.55 66.00 56.19
Tier 1 leverage 6.73 6.34 6.88 8.07 8.68
Tier 1 risk-based capital 9.93 9.43 9.85 12.49 13.73
Total risk-based capital 11.18 10.69 11.08 13.68 14.93
- ----------------------------------------------------------------------------------------------------------------
<FN>
* 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
and splits.
*** The efficiency ratio is computed as total non-interest expense (excluding
merger, acquisition and reorganization costs (recovery) 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).
ANNUAL REPORT: NBT BANCORP INC. 11
=====================================================================================================================
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------
2002 2001
-------------------------------------- ---------------------------------------
(Dollars in thousands,
except per share data) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------------------------------------------------
Interest, fee and
dividend income $57,322 $57,490 $57,011 $55,399 $65,900 $64,201 $64,232 $ 61,101
Interest expense 20,977 20,408 20,304 18,713 33,521 30,696 28,923 24,362
Net interest income 36,345 37,082 36,707 36,686 32,379 33,505 35,309 36,739
Provision for loan and lease losses 2,011 2,092 2,424 2,546 1,211 6,872 9,188 14,658
Noninterest income excluding net
securities (losses) gains 8,195 7,885 8,252 8,520 8,654 7,476 8,078 7,618
Net securities (losses) gains (502) 69 (6) 26 1,023 227 (2,327) (6,615)
Noninterest expense 25,494 26,214 25,525 26,140 26,650 25,154 29,342 44,712
-------------------------------------------------------------------------------
Net income (loss) $11,077 $11,266 $11,412 $11,244 $ 9,654 $ 6,570 $ 1,469 $(13,956)
===============================================================================
Basic earnings (loss) per share $ 0.33 $ 0.34 $ 0.35 $ 0.34 $ 0.30 $ 0.20 $ 0.04 $ (0.42)
Diluted earnings (loss) per share $ 0.33 $ 0.34 $ 0.34 $ 0.34 $ 0.30 $ 0.20 $ 0.04 $ (0.42)
Net interest margin 4.54% 4.48% 4.35% 4.35% 4.06% 4.10% 4.19% 4.39%
Return (loss) on average assets 1.25% 1.24% 1.23% 1.21% 1.10% 0.73% 0.16% (1.51%)
Return (loss) on average equity 16.62% 16.50% 15.95% 15.53% 14.42% 9.42% 2.02% (18.87%)
Average diluted common
shares outstanding 33,295 33,433 33,295 32,951 32,702 33,112 33,500 32,999
-------------------------------------------------------------------------------
=====================================================================================================================
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 2002 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, 2002 and 2001 and for each of the years in the three
year period ended December 31, 2002 should be read in conjunction with this
review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 2002 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 northeastern 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
12 ANNUAL REPORT: NBT BANCORP INC.
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, data processing, communications, occupancy, and equipment.
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.
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policy relating to the
allowance for loan and lease losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan and lease portfolio and the material effect that
such judgments can have on the results of operations. While management's current
evaluation of the allowance for loan and lease losses indicates that the
allowance is adequate, under adversely different conditions or assumptions, the
allowance would need to be increased. For example, if historical loan and lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions for loan and lease losses
would be required to increase the allowance. In addition, the assumptions and
estimates used in the internal reviews of the Company's non-performing loans and
potential problem loans has a significant impact on the overall analysis of the
adequacy of the allowance for loan and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral evaluations were significantly lowered, the
Company's allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
The Company's policy on the allowance for loan and lease losses is
disclosed in note 1 to the consolidated financial statements. A more detailed
description of the allowance for loan and lease losses is included in the "Risk
Management" section of this Form 10-K. All accounting policies are important,
and as such, the Company encourages the reader to review each of the policies
included in note 1 to obtain a better understanding on how the Company's
financial performance is reported.
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
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 or tax laws 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) deposit attrition, customer loss, or revenue loss
following recent mergers and acquisitions may be greater than expected; (8)
competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than the Company; and (9)
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 but not limited to those described
above, could affect the Company's financial performance
ANNUAL REPORT: NBT BANCORP INC. 13
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
The Company did not enter into any merger or acquisitions during 2002.
On June 1, 2001, the Company completed the acquisition of First National
Bancorp, Inc. (FNB) whereby FNB was merged with and into the Company. 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 Statement of Financial Accounting Standards (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 $0.7 million and is being amortized over 15 years on a
straight-line basis. Additionally, the Company identified $0.1 million of core
deposit intangible assets which is being amortized over 6 years on a
straight-line basis.
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, the Company's
consolidated financial statements were 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.
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, the
Company's consolidated financial statements were 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
northeastern 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.
14 ANNUAL REPORT: NBT BANCORP INC.
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 was being amortized prior to the adoption of SFAS No. 147
on January 1, 2002 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 Sovereign 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 was being amortized prior
to the adoption of SFAS No. 147 on January 1, 2002 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 and 2000, the following merger, acquisition, and reorganization
costs were recognized:
=========================================================
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
(Dollars in thousands) 2001 2000
- ---------------------------------------------------------
Professional fees $ 5,956 $ 8,525
Data processing 2,092 2,378
Severance 3,270 7,278
Branch closing 2,412 1,736
Advertising and supplies 313 1,337
Hardware and software write-off 402 1,428
Miscellaneous 877 943
-----------------------
Total $ 15,322 $ 23,625
-----------------------
=========================================================
As of December 31, 2002, the Company had a remaining accrued liability of
$4.0 million for merger, acquisition, and reorganization costs recognized in
2001 and 2000. The remaining accrued liability is comprised mainly of severance
costs, which will be paid out over a period of time consistent with respective
severance agreements.
OVERVIEW
The Company had net income of $45.0 million or $1.35 per diluted share for 2002,
compared to net income of $3.7 million or $0.11 per diluted share for 2001. The
improvement in 2002 results over 2001 was due to several factors. There was a
$22.9 million decrease in the provision for loan and lease losses when compared
to the same period in 2001. The increase in the 2001 provision for loan and
lease losses was due mainly to an increase in nonperforming loans and
charge-offs during 2001, resulting mainly from the process of integrating loans
from recently acquired banks and weakening business conditions. The net interest
margin improved during 2002, resulting in a $8.9 million increase in net
interest income over 2001. Noninterest income was up $8.3 million for 2002 when
compared to 2001. Driving this increase was a decrease in net securities losses
of $7.3 million in 2002 when compared to 2001, due to the sale and writedown of
several high-risk securities previously held by CNB
ANNUAL REPORT: NBT BANCORP INC. 15
during 2001. Additionally, growth in noninterest income from service charges on
deposit accounts and broker/ dealer and insurance revenue totaled $2.4 million
in 2002 compared to 2001. Offsetting these increases was a $1.4 million gain on
a sale of a branch building in 2001 compared to no such gain in 2002.
Noninterest expenses were down $22.5 million in 2002 when compared to 2001. This
decrease was driven primarily by three factors. First, there was a slight
recovery of merger costs of $0.1 million in 2002 compared to $15.3 million in
merger charges in 2001 that resulted primarily from the acquisition of CNB.
Second, the stabilization of residual values of leased automobiles resulted in
no provision for the other-than-temporary impairment in residual values of
leased automobiles in 2002 compared to a $3.5 million provision in 2001. Lastly,
because of accounting standards that became effective for the Company in fiscal
year 2002, amortization of goodwill and intangible assets decreased $3.5 million
in 2002. If these accounting standards had been applied in 2001, the decrease in
the amortization of goodwill and intangible assets would increase diluted
earnings per share by $0.07 in 2001.
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. During 2001, costs related to merger, acquisition and reorganization
activities totaled $15.3 million and net securities losses totaled $7.7 million
compared to $23.6 million related to merger, acquisition and reorganization
activities and $2.3 million in net securities loss in 2000. Net interest income
for 2001 increased 8.3% to $137.9 million compared to $127.4 million in 2000.
Net interest income for 2001 was up $10.6 million over 2000 as a result of an
improved net interest margin combined with growth in the average loan portfolio.
Noninterest income for 2001 was up $1.6 million over 2000. Net securities losses
for 2001 and 2000 totaled $7.7 million and $2.3 million, respectively. Excluding
these net securities losses, other components of noninterest income were up $7.0
million in 2001 when compared to 2000. A gain on the sale of a branch building,
service charges on deposit accounts, ATM fees, banking fees, broker/dealer fees
and insurance commissions drove the increase in noninterest income in 2001 over
2000. Noninterest expense was up $6.7 million in 2001 when compared to 2000. The
increase in non-interest expense resulted from a $3.5 million charge taken for
the other-than-temporary impairment of the residual value of leased automobiles
compared to a charge of $0.7 million in 2000, a $2.1 million charge taken for
certain deposit overdrafts, and a $10.0 million increase in expense primarily
related to the required service and support of our growth. Offsetting these
increases was a decrease in merger, acquisition, and reorganization costs of
$8.3 million.
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.
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%.
16 ANNUAL REPORT: NBT BANCORP INC.
===============================================================================================================================
Table 1. Average Balances and Net Interest Income
- -------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------- ---------------------------- ------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
(Dollars in thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 12,389 403 3.25% $ 11,324 569 5.02% $ 15,031 937 6.23%
Securities available for sale(1) 947,042 56,586 5.98 933,122 61,857 6.63 1,017,617 70,918 6.97
Securities held to maturity(1) 92,981 5,620 6.04 99,835 6,644 6.65 117,513 8,086 6.88
Securities trading 208 8 3.85 5,253 649 12.35 216 8 3.70
Investment in FRB and FHLB
Banks 21,766 962 4.42 23,926 1,555 6.50 31,274 2,254 7.21
Loans and leases(2) 2,337,767 167,917 7.18 2,312,740 188,053 8.13 2,092,191 182,254 8.71
---------- -------- --------- -------- ---------- --------
Total earning assets 3,412,153 231,496 6.78 3,386,200 259,327 7.66 3,273,842 264,457 8.08
-------- -------- --------
Other non-interest earning assets 236,919 240,725 182,749
---------- ---------- ----------
Total assets $3,649,072 $3,626,925 $3,456,591
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 279,407 4,461 1.60 $ 254,735 7,052 2.77 $ 209,562 8,460 4.04
NOW deposit accounts 382,562 3,488 0.91 348,964 5,032 1.44 307,969 5,951 1.93
Savings deposits 479,312 6,887 1.44 427,102 9,385 2.20 403,106 10,511 2.61
Time deposits 1,331,281 48,496 3.64 1,476,473 77,053 5.22 1,440,173 82,371 5.72
---------- -------- --------- -------- ---------- --------
Total interest-bearing deposits 2,472,562 63,332 2.56 2,507,274 98,522 3.93 2,360,810 107,293 4.54
Short-term borrowings 87,039 1,334 1.53 123,162 5,365 4.36 194,888 11,940 6.13
Long-term debt 334,479 15,736 4.70 259,583 13,615 5.24 245,383 13,770 5.61
---------- -------- --------- -------- ---------- --------
Total interest-bearing liabilities 2,894,080 80,402 2.78 2,890,019 117,502 4.07 2,801,081 133,003 4.75
-------- -------- --------
Demand deposits 419,744 382,489 348,443
Other non-interest-bearing
liabilities 56,293 70,666 53,018
Stockholders' equity 278,955 283,751 254,049
---------- ---------- ----------
Total liabilities and stockholders'
equity $3,649,072 $3,626,925 $3,456,591
========== ========== ==========
Interest rate spread 4.00% 3.59% 3.33%
===== ===== =====
Net interest income 151,094 141,825 131,454
======= ======= =======
Net interest margin 4.43% 4.19% 4.02%
===== ===== =====
Taxable equivalent adjustment 4,274 3,893 4,076
======= ======= =======
<FN>
(1) 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.
(2) 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.
===============================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 17
NET INTEREST INCOME
On a tax equivalent basis, the Company's net interest income for 2002 was $151.1
million, up from $141.8 million for 2001. The Company's net interest margin
improved to 4.43% for 2002 from 4.19% for 2001. The improvement in net interest
income and net interest margin in 2002 were due primarily to three factors.
First, the Company benefited from the decreasing rate environment in 2002, as
interest-bearing liabilities repriced downward at a faster rate than earning
assets. Secondly, there was a slight increase in average earning assets of $26.0
million or 1%, in 2002 when compared to 2001, driven primarily by loan and lease
growth. Lastly, an improved deposit mix lowered interest expense, as lower cost
NOWs, money market, and savings accounts comprised 39% of average total
interest-bearing liabilities in 2002 compared to 36% in 2001.
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)
2002 OVER 2001 2001 over 2000
------------------------------ ------------------------------
(In thousands) VOLUME RATE TOTAL Volume Rate Total
- -----------------------------------------------------------------------------------------------------
Short-term interest-bearing accounts $ 50 $ (216) $ (166) $ (206) $ (162) $ (368)
Securities available for sale 911 (6,182) (5,271) (5,708) (3,353) (9,061)
Securities held to maturity (438) (586) (1,024) (1,184) (258) (1,442)
Securities trading (373) (268) (641) 583 58 641
Investment in FRB and FHLB Banks (130) (463) (593) (493) (206) (699)
Loans and leases 2,015 (22,151) (20,136) 18,428 (12,629) 5,799
--------------------------------------------------------------
Total interest income 1,973 (29,804) (27,831) 8,889 (14,019) (5,130)
--------------------------------------------------------------
Money market deposit accounts 629 (3,220) (2,591) 1,590 (2,998) (1,408)
NOW deposit accounts 448 (1,992) (1,544) 723 (1,642) (919)
Savings deposits 1,044 (3,542) (2,498) 599 (1,725) (1,126)
Time deposits (7,015) (21,542) (28,557) 2,036 (7,354) (5,318)
Short-term borrowings (1,256) (2,775) (4,031) (3,683) (2,892) (6,575)
Long-term debt 3,630 (1,509) 2,121 772 (927) (155)
--------------------------------------------------------------
Total interest expense 165 (37,265) (37,100) 4,113 (19,614) (15,501)
--------------------------------------------------------------
Change in FTE net interest income $ 1,808 $ 7,461 $ 9,269 $ 4,776 $ 5,595 $ 10,371
--------------------------------------------------------------
=====================================================================================================
LOANS AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The average balance of loans and leases increased 1%, totaling $2.3 billion in
2002 and 2001. The yield on average loans and leases decreased from 8.13% in
2001 to 7.18% in 2002, as a falling interest rate environment prevailed for much
of 2002. Interest income from loans and leases on a FTE basis decreased 11%,
from $188.1 million in 2001 to $167.9 million in 2002. The decrease in interest
income from loans and leases was due primarily to the decrease in yield on loans
and leases in 2002 of 95 bp when compared to 2001.
Total loans and leases increased slightly at December 31, 2002, totaling
$2.4 billion from $2.3 billion at December 31, 2001. The combination of the
Company's focus on improving the credit quality of the loan and lease portfolio
and sluggish business conditions coupled with strong competition in the
Company's market area limited loan growth opportunities for commercial and
consumer loans in 2002. However, residential real estate mortgages were $579.6
million at December 31, 2002, up $54.2 million or 10% from $525.4 million at
December 31, 2001. The increase in residential real estate mortgages was driven
primarily by the historic low interest rates for residential real estate
mortgages which
18 ANNUAL REPORT: NBT BANCORP INC.
led to an increase in demand for the product in 2002. The Company continued its
trend of strong growth for its home equity products. Home equity loans totaled
$269.6 million at December 31, 2002, up $36.9 million or 16% from the $232.6
million outstanding at December 31, 2001. Commercial loans and commercial real
estate decreased $37.7 million, to $920.3 million at December 31, 2002 from
$958.1 million at December 31, 2001. The decrease in commercial loans and
commercial real estate was driven primarily by the Company's focus to improve
the credit quality of this portfolio in 2002. Additionally, sluggish business
conditions and strong competition in a weak market factored into the decline in
the commercial loan and real estate portfolio in 2002 as well. Lastly,
nonaccrual commercial and agricultural loans and real estate decreased by $14.4
million, to $17.0 million at December 31, 2002 from $31.4 million at December
31, 2001. Consumer loans decreased $29.9 million to $357.2 million at December
31, 2002 from $387.1 million at December 31, 2001. The decrease in consumer
loans resulted primarily from a decline in revolving personal credit and loans
secured by recreational equipment and manufactured housing.
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,
----------------------------------------------------------
(In thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Residential real estate mortgages $ 579,638 $ 525,411 $ 504,590 $ 521,684 $ 494,783
Commercial and commercial real estate 920,330 958,075 948,472 755,393 601,878
Real estate construction and development 64,025 60,513 44,829 25,474 18,626
Agricultural and agricultural real estate 104,078 103,884 92,713 85,753 84,479
Consumer 357,214 387,081 357,822 320,682 294,230
Home equity 269,553 232,624 219,355 139,472 120,712
Lease financing 61,094 72,048 79,874 76,002 43,486
----------------------------------------------------------
Total loans and leases $2,355,932 $2,339,636 $2,247,655 $1,924,460 $1,658,194
----------------------------------------------------------
======================================================================================================
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 and agricultural real estate mortgages, consist
primarily of short-term and/or floating rate loans made to small to medium-sized
entities. Consumer loans consist primarily of installment credit to individuals
secured by automobiles and other personal property including manufactured
housing. Manufactured housing loans totaled $35.5 million and $41.4 million at
December 31, 2002 and 2001, respectively, and were 9.9% and 10.7% of total
consumer loans at December 31, 2002 and 2001, respectively. These decreases from
2001 to 2002 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 $61.1
million at December 31, 2002 and $72.0 million at December 31, 2001. 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.
ANNUAL REPORT: NBT BANCORP INC. 19
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 $42.8 million and $52.4 million at December 31,
2002 and 2001, respectively.
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. At December 31, 2002, the residual value
insurance coverage for leases insured by the former insurance carrier decreased
to $8.2 million as a result of maturities and prepayments of leases during 2002.
Not withstanding 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 was 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 was
other-than-temporary at December 31, 2001. Accordingly, the Company recorded an
other-than-temporary-impairment charge of $3.5 million in 2001. These charges
were included in other noninterest expenses on the consolidated statements of
income.
In 2002, competitive pressure from large automakers combined with lower
residual values on automobiles which results in higher lease payments making the
product less attractive, resulted in a 15.2% decrease in outstanding lease
financing at December 31, 2002 when compared to outstanding lease financing at
December 31, 2001. During 2002, values for used vehicles stabilized, thereby
lowering the average loss on turned-in leased vehicles during 2002 when compared
to the levels experienced in 2001. The decrease in the average loss on turned-in
leased vehicles in 2002 combined with the decrease in exposure to insurance
coverage provided by the Company's former insurance carrier discussed above,
resulted in no provision for the other-than-temporary impairment in residual
values for lease financing in 2002.
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. At December 31, 2002, the Company has
projected that 65% of its leased vehicles will be turned in. At December 31,
2001, this projection was 71%. At December 31, 2002, approximately 36% of the
Company's leasing portfolio is made up of sport utility vehicles, or SUVs, which
have experienced the greatest amount of declines in residual 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 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, 2002. Scheduled
repayments are reported in the maturity category in which the contractual
payment is due.
20 ANNUAL REPORT: NBT BANCORP INC.
=======================================================================================================================
TABLE 4. MATURITIES AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
- -----------------------------------------------------------------------------------------------------------------------
REMAINING MATURITY AT DECEMBER 31, 2002
--------------------------------------------------------------------
AFTER ONE YEAR BUT
(In thousands) WITHIN ONE YEAR WITHIN FIVE YEARS AFTER FIVE YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------
FLOATING/ADJUSTABLE RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate $ 534,502 $ 61,619 $ 1,422 $ 597,543
Real estate construction and development 10,403 8,405 282 19,090
--------------------------------------------------------------------
Total floating rate loans 544,905 70,024 1,704 616,633
--------------------------------------------------------------------
FIXED RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate 109,057 194,982 122,826 426,865
Real estate construction and development 4,374 8,251 32,310 44,935
--------------------------------------------------------------------
Total fixed rate loans 113,431 203,233 155,136 471,800
--------------------------------------------------------------------
Total $ 658,336 $ 273,257 $ 156,840 $1,088,433
--------------------------------------------------------------------
=======================================================================================================================
SECURITIES AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The average balance of securities available for sale was $947.0 million, which
is an increase of $13.9 million, or 1.5%, from $933.1 million in 2001. The
increase resulted primarily from the reinvestment of funds from maturities and
paydowns from securities held to maturity and trading securities. The yield on
average securities available for sale was 5.98% in 2002 compared to 6.63% in
2001. The decrease in yield, resulted in a decrease in interest income on
securities available for sale of $5.3 million, from $61.9 million in 2001 to
$56.6 million in 2002. The decrease in yield was caused primarily by the
reinvestment of funds at lower rates in the declining rate environment in 2002.
The average balance of securities held to maturity was $93.0 million during
2002, which is a decrease of $6.9 million, from $99.8 million in 2001. The
decrease is primarily a result of proceeds from maturities and paydowns of
securities held to maturity reinvested in securities available for sale. The
yield on securities held to maturity was 6.04% in 2002 compared to 6.65% in
2001. Interest income on securities held to maturity decreased $1.0 million,
from $6.6 million in 2001 to $5.6 million in 2002.
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.
The Company recorded a $0.7 million, $8.3 million, and $3.5 million pre-tax
charge during 2002, 2001 and 2000, 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
ANNUAL REPORT: NBT BANCORP INC. 21
income. The security with other-than-temporary impairment charges at December
31, 2002 had a remaining carrying value of $1.1 million, is classified in
securities available for sale and is on the 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,
------------------------------------------------------------------
2002 2001 2000
---------------------- -------------------- --------------------
AMORTIZED FAIR Amortized Fair Amortized Fair
(In thousands) COST VALUE Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 502 $ 514 $ 12,392 $ 11,757 $ 16,392 $ 15,924
Federal Agency and mortgage-backed 810,784 833,940 524,101 530,613 580,934 578,625
State & Municipal, collateralized mortgage
obligations and other securities 168,803 173,129 366,325 366,971 342,811 342,208
------------------------------------------------------------------
Total securities available for sale $ 980,089 $1,007,583 $ 902,818 $909,341 $ 940,137 $936,757
------------------------------------------------------------------
TRADING SECURITIES $ 203 $ 203 $ 126 $ 126 $ 20,540 $ 20,540
------------------------------------------------------------------
SECURITIES HELD TO MATURITY
Federal Agency and mortgage-backed $ 24,613 $ 25,720 $ 36,733 $ 36,623 $ 46,376 $ 45,528
State & Municipal 56,021 56,917 64,715 64,715 63,992 64,260
Other securities 1,880 1,880 156 157 47 47
------------------------------------------------------------------
Total securities held to maturity $ 82,514 $ 84,517 $ 101,604 $101,495 $ 110,415 $109,835
------------------------------------------------------------------
===============================================================================================================
The following tables summarize the securities considered to be
other-than-temporarily impaired (OTTI) at the dates indicated:
===============================================================================================================
AT DECEMBER 31, 2002 At December 31, 2001
----------------------------- -----------------------------
AMORTIZED COST Amortized Cost
(In thousands) AND FAIR VALUE OTTI CHARGE and Fair Value OTTI Charge
- ---------------------------------------------------------------------------------------------------------------
SECURITY TYPE
Asset backed security $ - $ - $ 1,820 $ 1,680
Private issue collateralized mortgage obligation 1,122 660 2,680 4,021
Corporate debt security - - - 300
------------------------------------------------------------
Total $ 1,122 $ 660 $ 4,500 $ 6,001
------------------------------------------------------------
===============================================================================================================
The cumulative writedown of the private issue collateralized mortgage
obligation at December 31, 2002 totaled $4.7 million. The asset backed security
was sold during 2002 at approximately its carrying value at December 31, 2001
and the corporate debt security was sold for $0.1 million during 2002.
Included in the securities available for sale portfolio at December 31,
2002, are certain securities (private issue CMO, asset-backed securities, and
private issue mortgaged-backed securities) previously held by CNB.
These securities contain a higher level of credit risk when compared to other
securities held in the Company's investment portfolio because they are not
guaranteed by a governmental agency or a government sponsored enterprise (GSE).
The Company's general practice is to purchase CMO and mortgage-backed securities
that are guaranteed by a governmental agency or a GSE coupled with a strong
credit rating, typically AAA, issued by Moody's or Standard and Poors.
At December 31, 2002, the amortized cost and fair
22 ANNUAL REPORT: NBT BANCORP INC.
value of these high-risk securities amounted to $12.0 million and $10.7 million,
respectively, down from $38.7 million and $38.5 million, respectively, at
December 31, 2001. The decrease at December 31, 2002, when compared to December
31, 2001, resulted primarily from sales and to a lesser extent principal
paydowns. During 2002, the Company sold $22.4 million of these securities due to
a continued deterioration in the financial condition of the underlying
collateral in 2002 related to a certain number these securities as well as the
Company's goal of reducing exposure to these types of securities. The net loss
realized from the sale of these securities was $7.4 million. Offsetting these
net losses were net gains of $7.3 million, resulting from the sale of
approximately $187.0 million in other securities available for sale during 2002.
In January 2002, the Company had 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 $0.6
million of net losses related to the adjustment of the embedded derivatives to
estimated fair value ($0.2 million 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 2001 consolidated statement of income. 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.
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 remained relatively unchanged, totaling $2.9
billion in 2002 and 2001. The rate paid on interest-bearing liabilities
decreased from 4.07% in 2001 to 2.78% in 2002.
The decrease in the rate paid on interest bearing liabilities, caused a decrease
in interest expense of $37.1 million, or 31.6%, from $117.5 million in 2001 to
$80.4 million in 2002.
DEPOSITS
Average interest bearing deposits decreased $34.7 million, or 1.4%, during 2002.
The decrease resulted primarily from a decrease in time deposits of $145.2
million, due primarily to the conscious effort to allow runoff of some higher
cost municipal time deposits as well as the sale of a branch in February 2002
which resulted in the sale of $34.3 million in deposits. Offsetting this
decrease was strong growth in core deposits in 2002. The average balance of NOW,
Money Market Deposit Accounts ("MMDA"), and savings comprised 46.2% of average
interest bearing deposits in 2002 compared to 41.1% in 2001. The average balance
of demand deposits increased $37.3 million, or 9.7%, from $382.5 million in 2001
to $419.7 million in 2002. The ratio of average demand deposits to total average
deposits increased from 11.3% in 2001 to 14.5% in 2002.
The improvement in the Company's deposit mix noted above, combined with the
falling interest rate environment prevalent in 2002, resulted in a decrease in
the rate paid on interest bearing deposits of 137 bp, from 3.93% in 2001 to
2.56% in 2002. The average rate paid on MMDAs, which are very sensitive to
changes in interest rates, declined 117 bp from 2.77% in 2001 to 1.60% in 2002.
The rate paid on average time deposits decreased 158 bp, from 5.22% in 2001 to
3.64% in 2002. The decrease in the rate paid on average time deposits, combined
with the decline in the average balance of time deposits, resulted in a $28.6
million decrease in interest expense paid on time deposits, from $77.1 million
in 2001 to $48.5 million in 2002.
The following table presents the maturity distribution of time deposits of
$100,000 or more at December 31, 2002:
====================================================================
TABLE 6. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
- --------------------------------------------------------------------
(In thousands) DECEMBER 31, 2002
- --------------------------------------------------------------------
Within three months $ 191,975
After three but within six months 35,652
After six but within twelve months 53,313
After twelve months 144,747
-----------------
Total $ 425,687
=================
====================================================================
ANNUAL REPORT: NBT BANCORP INC. 23
BORROWINGS
Average short-term borrowings decreased from $123.2 million in 2001 to $87.0
million in 2002. Consistent with the decreasing interest rate environment during
2002, the average rate paid also decreased from 4.36% in 2001 to 1.53% in 2002.
The decrease in the average balance combined with the decrease in the average
rate paid caused interest expense on short-term borrowings to decrease $4.0
million from $5.4 million in 2001 to $1.3 million in 2002. Average long-term
debt increased $74.9 million, from $259.6 million in 2001 to $334.5 million in
2002. The increase in long-term debt and the decrease in short-term borrowings
and time deposits was a result of the Company limiting its liability sensitive
position and its exposure 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 $632 million and $767 million at December 31, 2002
and 2001, 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.
24 ANNUAL REPORT: NBT BANCORP INC.
NONPERFORMING ASSETS
============================================================================================
TABLE 7. NONPERFORMING ASSETS
- --------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
-----------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------
NONACCRUAL LOANS
Commercial and agricultural loans and
real estate $16,980 $31,372 $14,054 $ 9,519 $7,819
Real estate mortgages 5,522 5,119 647 618 744
Consumer 1,507 3,719 2,402 2,671 3,106
-----------------------------------------------
Total nonaccrual loans 24,009 40,210 17,103 12,808 11,669
-----------------------------------------------
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Commercial and agricultural loans and
real estate 237 198 4,523 1,201 1,365
Real estate mortgages 1,325 1,844 3,042 641 761
Consumer 414 933 865 906 1,908
-----------------------------------------------
Total loans 90 days or more past due and
still accruing 1,976 2,975 8,430 2,748 4,034
Restructured loans 409 603 656 1,014 1,247
-----------------------------------------------
Total nonperforming loans 26,394 43,788 26,189 16,570 16,950
Other real estate owned 2,947 1,577 1,856 2,696 4,070
-----------------------------------------------
Total nonperforming loans and other
real estate owned 29,341 45,365 28,045 19,266 21,020
Nonperforming securities 1,122 4,500 1,354 1,535 -
-----------------------------------------------
Total nonperforming loans, securities, and
other real estate owned $30,463 $49,865 $29,399 $20,801 $21,020
===============================================
Total nonperforming loans to loans and
leases 1.12% 1.87% 1.17% 0.86% 1.02%
Total nonperforming loans and other real
estate owned to total assets 0.79% 1.25% 0.78% 0.58% 0.73%
Total nonperforming loans, securities, and
other real estate owned to total assets 0.82% 1.37% 0.82% 0.63% 0.73%
Total allowance for loan and lease losses
to nonperforming loans 152.18% 102.19% 124.07% 170.43% 157.02%
============================================================================================
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan 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
ANNUAL REPORT: NBT BANCORP INC. 25
reflect a 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 standards and collection, charge-offs and recoveries; 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) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Balance at January 1 $44,746 $32,494 $28,240 $26,615 $24,828
LOANS AND LEASES CHARGED-OFF
Commercial and agricultural 9,970 17,097 3,949 2,737 2,794
Real estate mortgages 2,547 783 1,007 1,165 1,139
Consumer* 5,805 4,491 2,841 2,808 2,796
------------------------------------------------
Total loans and leases charged-off 18,322 22,371 7,797 6,710 6,729
------------------------------------------------
RECOVERIES
Commercial and agricultural 3,394 1,063 503 367 529
Real estate mortgages 104 122 141 198 152
Consumer* 1,172 1,004 739 874 913
------------------------------------------------
Total recoveries 4,670 2,189 1,383 1,439 1,594
------------------------------------------------
Net loans and leases charged-off 13,652 20,182 6,414 5,271 5,135
Allowance related to purchase acquisitions - 505 525 - -
Provision for loan and lease losses 9,073 31,929 10,143 6,896 6,922
------------------------------------------------
Balance at December 31 $40,167 $44,746 $32,494 $28,240 $26,615
================================================
Allowance for loan and lease losses to loans
and leases outstanding at end of year 1.70% 1.91% 1.45% 1.47% 1.61%
Net charge-offs to average loans and leases
outstanding 0.58% 0.87% 0.31% 0.30% 0.33%
<FN>
* Consumer charge-off and recoveries include consumer, home equity, and lease
financing.
===============================================================================================
Total nonperforming assets were $30.5 million at December 31, 2002,
compared to $49.9 million at December 31, 2001. Nonperforming loans totaled
$26.4 million at December 31, 2002, down significantly from the $43.8 million
outstanding at December 31, 2001. The $17.4 million decrease in nonperforming
loans from December 31, 2001 to December 31, 2002, was due to the Company's
successful efforts in resolving certain large problematic commercial loans as
well as loan charge-offs. Non-accrual commercial and agricultural loans
decreased $14.4 million, from $31.4 million at December 31, 2001, to $17.0
million at December 31, 2002. The improvement in the Company's loan quality
ratios are a direct result of the actions the Company took in 2001 to integrate
credit
26 ANNUAL REPORT: NBT BANCORP INC.
administration functions of acquired banks into the Company's conservative
credit culture. Based on the improved trends in loan quality noted above and the
decrease in net charge-offs in 2002 when compared to 2001 highlighted in Table 8
above, the Company recorded a provision for loan and lease losses of $9.1
million for the year ended December 31, 2002, down from the $31.9 million
provided in the same period in 2001.
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 became
non-performing in 2001. Additionally, CNB Bank significantly increased its
consumer loan portfolio in recent years. Accordingly, the Company's loan growth
in general, in particular the growth in higher credit risk loan types, combined
with the fact that the recently acquired banks appeared to have used generally
less conservative underwriting and monitoring standards increased the inherent
risk of loss in the loan and lease portfolio.
As the Company's loan and lease portfolio continued to grow and the loan
mix continued to move in the direction of higher credit risk loan types, the
economy in the Company's market areas took a dramatic turn for the worse in
2001, especially in the second half of 2001. This sudden economic down turn came
at a particularly bad time for the Company given the growth in the Company's
higher credit risk loan types. The difficult economic environment experienced in
the Company's market areas was consistent with what has been experienced by the
national economy throughout 2001 and resulted in, among other things,
significant reductions in many borrowers' revenues and cash flows as well as
reduced valuations for certain real estate and other collateral. In fact,
certain large commercial relationships in the Company's portfolio reported
significant deterioration in the later part of 2001, primarily due to the
difficult economic environment.
During 2001, the Company completed the integration process with respect to
the Pennstar banking division (formerly LA Bank, N.A. and Pioneer American Bank
N.A.). The Company's integration efforts with the recently merged CNB banking
division was completed in 2002. The integration process included bringing these
banking divisions' credit administration practices in line with the Bank's
policies, adopting the Bank's credit risk grading system, and upgrading numerous
commercial real estate and other collateral appraisals. At December 31, 2001,
the credit administration function of the Pennstar and CNB banking divisions,
including workout and collections, was consolidated and standardized using the
Bank model, and key personnel from the Bank's commercial lending area were
installed at Pennstar and CNB to oversee the lending operations of the
respective divisions.
As a result of the economic downturn, and the integration processes with
respect to recently merged banks discussed above, the Company performed an
extensive review of its loan portfolio during 2001. This review focused on
consistency in the identification and classification of problematic loans and
the measurement of loss exposure on individual loans, especially in light of the
generally weakened financial performance of borrowers caused by the economic
downturn and reduced collateral values.
Non-performing loans increased from $26.2 million at December 31, 2000 to
$43.8 million at December 31, 2001. The vast majority, approximately 92%, of
nonperforming loans are in the non-accrual category. Within non-accrual loans,
all loan types experienced significant increases, however, the largest increase
was in the commercial and agricultural loans. Commercial and agricultural
non-accrual loans, increased $17.3 million from $14.1 million at December 31,
2000 to $31.4 million at December 31, 2001. Consumer non-accrual loans also
significantly increased from $2.4 million at December 31, 2000 to $3.7 million
at December 31, 2001.
As a result of the reduction in nonperforming loans during 2002, the total
allowance for loan and lease losses is 152.18% of non-performing loans at
December 31, 2002 as compared to 102.19% at December 31, 2001. While loans and
leases classified as non-performing have a strong likelihood of experiencing a
loss, substantially all non-performing loans are collateralized, many to a
reasonably high percentage of the outstanding loan balance.
Impaired loans, which primarily consist of non-accruing commercial type
loans and all loans restructured in a troubled debt restructuring, also
decreased significantly, totaling $17.4 million at December 31, 2002 as compared
to $32.0 million at December 31, 2001. The related allowance for these impaired
loans is $0.5 million or 3.1% of the impaired loans at December 31, 2002 as com-
pared to $1.4 million and 4.4%, respectively, at December 31, 2001. At December
31, 2002 and 2001 there were $15.5 million and $29.8 million, respectively, of
impaired loans which did not have an allowance for loan losses due to the
adequacy of their collateral or previous charge offs.
Total net charge-offs for 2002 totaled $13.7 million as compared to $20.2
million for 2001. The ratio of net
ANNUAL REPORT: NBT BANCORP INC. 27
charge-offs to average loans was 0.58% for 2002 and 0.87% for 2001. The decrease
in net charge-offs in 2002 resulted from the reduction in nonperforming loans
and an improvement in loan quality. However, the level of net charge-offs
experienced in 2002 was higher than the Company's net charge-off experience
prior to 2001. The higher level of net charge-offs in 2002, resulted from the
increase in nonperforming loans in 2001. Net charge-offs in 2002 exceeded the
2002 provision for loan and lease losses as a result of the Company fully
reserving certain of the 2002 charge-offs, primarily related to nonaccruing
loans in 2001. As mentioned previously, the provision for loan and lease losses
for 2002 totaled $9.1 million down from the $31.9 million provided in 2001.
For the same reasons that non-performing loans increased in 2001, the
Company also experienced a significant increase in net charge-offs in 2001 as
compared to 2000. Net charge-offs in 2001 increased $13.8 million to $20.2
million from $6.4 in 2000. Consistent with the above, the increased net
charge-offs was primarily in the commercial and agricultural portfolio, where
net charge-offs were $16.0 million in 2001 as compared to $3.4 million in 2000.
Net charge-offs as a percentage of average loans and leases and leases was .87%
in 2001 as compared to .31% in 2000. As a result of the growth in the loan and
lease portfolio, particularly the growth in higher credit risk loan types in
2001, combined with the fact that recently acquired banks appeared to have used
generally less conservative underwriting and monitoring standards, the
significant downturn in economic conditions in the Company's market areas as
well as the significant increases in non-performing loans and net charge offs,
the Company increased its provision for loan and lease losses to $31.9 million
for 2001 from $10.1 million in 2000.
The allowance for loan and lease losses decreased from $44.7 million at
December 31, 2001, or 1.91% of total loans and leases, to $40.2 million at
December 31, 2002, or 1.70%. The decrease in the allowance for loan and lease
losses is due to net loan charge-offs in 2002 exceeding the 2002 provision for
loan and lease losses, as discussed above. Based upon a thorough analysis of the
inherent risk of loss in the Company's current loan and lease portfolio,
management believes that the allowance for loan and lease losses at December 31,
2002 is adequate. However, should the economy worsen, non-performing loans, net
charge offs and provisions for loan and lease losses may increase.
The following table sets forth the allocation of the allowance for loan
losses by category, as well as the percentage of loans and leases in each
category to total loans and leases, as prepared by the Company. This allocation
is based on management's assessment of the risk characteristics of each of the
component parts of the total loan portfolio as of a given point in time and is
subject to changes as and when the risk factors of each such component part
change. The allocation is not indicative of either the specific amounts of the
loan categories in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category. The following table sets forth the allocation of the allowance for
loan losses by loan category.
=======================================================================================================================
TABLE 9. ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000 1999
----------------------- ----------------------- ----------------------- -----------------------
CATEGORY Category Category Category
(Dollars in PERCENT OF Percent of Percent of Percent of
thousands) ALLOWANCE LOANS Allowance of Loans Allowance of Loans Allowance Loans
- -----------------------------------------------------------------------------------------------------------------------
Commercial
and agricultural $ 25,589 71% $ 34,682 85% $ 20,510 72% $ 14,115 62%
Real estate
mortgages 3,884 10% 1,611 4% 1,669 6% 2,506 11%
Consumer 7,654 19% 4,626 11% 6,379 22% 6,270 27%
Unallocated 3,040 - 3,827 - 3,936 - 5,349 -
--------------------------------------------------------------------------------------------------
Total $ 40,167 100% $ 44,746 100% $ 32,494 100% $ 28,240 100%
--------------------------------------------------------------------------------------------------
-----------------------
1998
-----------------------
Category
(Dollars in Percent of
thousands) Allowance of Loans
- --------------------------------------------
Commercial
and agricultural $ 12,728 62%
Real estate
mortgages 1,621 8%
Consumer 6,304 30%
Unallocated 5,962 -
-----------------------
Total $ 26,615 100%
-----------------------
=======================================================================================================================
28 ANNUAL REPORT: NBT BANCORP INC.
In addition to the nonperforming loans discussed above, the Company has
also identified approximately $48.5 million in potential problem loans at
December 31, 2002 as compared to $48.6 million at December 31, 2001. Potential
problem loans are loans that are currently performing, but where known
information about possible credit problems of the related borrowers causes
management to have serious doubts as to the ability of such borrowers to comply
with the present loan repayment terms and which may result in disclosure of such
loans as nonperforming at some time in the future. At the Company, potential
problem loans are typically loans that are performing but are classified by the
Company's loan rating system as "substandard." At December 31, 2002, potential
problem loans primarily consisted of commercial and agricultural real estate and
commercial and agricultural loans. Management cannot predict the extent to which
economic conditions may worsen or other factors which may impact borrowers and
the potential problem loans. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on non-accrual, become
restructured, or require increased allowance coverage and provision for loan
losses.
At December 31, 2002, approximately 60.5% of the Company's loans are
secured by real estate located in central and northern New York and northeastern
Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion
of the Company's portfolio is susceptible to changes in market conditions of
those areas. Management is not aware of any material concentrations of credit to
any industry or individual borrowers.
LIQUIDITY RISK
Liquidity involves the ability to meet the cash flow requirements of customers
who may be depositors wanting to withdraw funds or borrowers needing assurance
that sufficient funds will be available to meet their credit needs. The Asset
Liability Committee (ALCO) is responsible for liquidity management and has
developed guidelines which cover all assets and liabilities, as well as off
balance sheet items that are potential sources or uses of liquidity. Liquidity
policies must also provide the flexibility to implement appropriate strategies
and tactical actions. Requirements change as loans and leases grow, deposits and
securities mature, and payments on borrowings are made. Liquidity management
includes a focus on interest rate sensitivity management with a goal of avoiding
widely fluctuating net interest margins through periods of changing economic
conditions.
The primary liquidity measurement the Company utilizes is called the Basic
Surplus which captures the adequacy of its access to reliable sources of cash
relative to the stability of its funding mix of average liabilities. This
approach recognizes the importance of balancing levels of cash flow liquidity
from short and long-term securities with the availability of dependable
borrowing sources which can be accessed when necessary. At December 31, 2002,
the Company's Basic Surplus measurement was 12.8% of total assets or $477
million, which was above the Company's minimum of 5% or $186 million set forth
in its liquidity policies.
This Basic Surplus approach enables the Company to adequately manage
liquidity from both operational and contingency perspectives. By tempering the
need for cash flow liquidity with reliable borrowing facilities, the Company is
able to operate with a more fully invested and, therefore, higher interest
income generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At December 31, 2002, the
Company considered its Basic Surplus adequate to meet liquidity needs.
A significant improvement in the economy, may lead to an increase in demand
for loan products as well as an increase in the demand for equity related
products, which in turn, could result in a decrease in the Company's deposit
base or result in loan growth exceeding deposit growth. This scenario could lead
to a decrease in its basic surplus measure below the minimum policy level of 5%.
To manage this risk, the Company has the ability to purchase brokered time
deposits, established borrowing facilities with other banks (Federal funds), and
has the ability to enter into repurchase agreements with investment companies.
The additional liquidity that could be provided by these measures amounted to
$462 million at December 31, 2002.
At December 31, 2002, a portion of the Company's loans and securities were
pledged as collateral on borrowings. Therefore, future growth of earning assets
will depend upon the Company's ability to obtain additional funding, through
growth of core deposits and collateral management, and may require further use
of brokered time deposits, or other higher cost borrowing arrangements.
OFF-BALANCE SHEET RISK
COMMITMENTS TO EXTEND CREDIT
The Company makes contractual commitments to extend credit and unused lines of
credit which are subject to the
ANNUAL REPORT: NBT BANCORP INC. 29
Company's credit approval and monitoring procedures. At December 31, 2002 and
2001, commitments to extend credit in the form of loans, including unused lines
of credit, amounted to $409.1 million and $343.1 million, respectively. In the
opinion of management, there are no material commitments to extend credit,
including unused lines of credit, that represent unusual risks. All commitments
to extend credit in the form of loans, including unused lines of credit expire
within one year.
STAND-BY LETTERS OF CREDIT
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others; an Interpretation of FASB Statements Nos. 5, 57, and 107 and rescission
of FASB Interpretation No. 34." FIN No. 45 requires certain new disclosures and
potential liability-recognition for the fair value at issuance of guarantees
that fall within its scope. Under FIN No. 45, the Company does not issue any
guarantees that would require liability-recognition or disclosure, other than
its stand-by letters of credit.
The Company guarantees the obligations or performance of customers by
issuing stand-by letters of credit to third parties. These stand-by letters of
credit are frequently issued in support of third party debt, such as corporate
debt issuances, industrial revenue bonds, and municipal securities. The risk
involved in issuing stand-by letters of credit is essentially the same as the
credit risk involved in extending loan facilities to customers, and they are
subject to the same credit origination, portfolio maintenance and management
procedures in effect to monitor other credit and off-balance sheet products.
Typically, these instruments have terms of five years or less and expire unused;
therefore, the total amounts do not necessarily represent future cash
requirements. At December 31, 2002 and 2001, outstanding stand-by letters of
credit were approximately $24.7 million and $21.0 million, respectively. The
fair value of the Company's stand-by letters of credit at December 31, 2002 was
insignificant. The following table sets forth the commitment expiration period
for stand-by-letters of credit at December 31, 2002:
================================================================================
Within one year $13,580
After one but within three years 2,832
After three but within five years 8,247
-------
Total $24,659
-------
================================================================================
LOANS SERVICED FOR OTHERS AND LOANS SOLD WITH RECOURSE
The total amount of loans serviced by the Company for unrelated third parties
was approximately $77.2 million and $93.2 million at December 31, 2002 and 2001,
respectively. At December 31, 2002 and 2001, the Company serviced $15.0 million
and $18.3 million, respectively, of loans sold with recourse.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has made loans at prevailing
rates and terms to directors, officers, and other related parties. Such loans,
in management's opinion, do not present more than the normal risk of
collectibility or incorporate other unfavorable features. The aggregate amount
of loans outstanding to qualifying related parties at December 31, 2002 and 2001
were $17.0 million and $14.6 million, respectively.
The law firm of Kowalczyk, Tolles, Deery and Johnston, of which Director
Andrew S. Kowalczyk, Jr., is a partner, provided legal services in the amount of
$116,330 to us and NBT Bank in 2002. The law firms of Harris Beach LLP, Oliver,
Price, & Rhodes, and Needle, Goldenzeil, and Pascale, of which Directors William
L. Owens, Paul D. Horger, and Gene E. Goldenziel are partners, provide legal
services to us from time to time. Arthur J. Gallagher & Co. of New York, of
which Michael H. Hutcherson is the Area President, provides insurance services
to us from time to time. Payments for services provided by Directors Owens,
Horger, Goldenziel, and Hutcherson did not exceed $60,000 during 2002. Services
from these firms were provided in the ordinary course of business and at market
terms.
CAPITAL RESOURCES
Consistent with its goal to operate a sound and profitable financial
institution, the Company actively seeks to maintain a "well-capitalized"
institution in accordance with regulatory standards. The principal source of
capital to the Company is earnings retention. The Company's capital measurements
are in excess of both regulatory minimum guidelines and meet the requirements to
be considered well capitalized.
The Company's principal source of funds to pay interest on its capital
securities and pay cash dividends to its shareholders is dividends from its
subsidiaries. Various laws and regulations restrict the ability of banks to pay
dividends to their shareholders. Generally, the payment of
30 ANNUAL REPORT: NBT BANCORP INC.
dividends by the Company in the future as well as the payment of interest on the
capital securities will require the generation of sufficient future earnings by
its subsidiaries.
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. At December 31, 2002, approximately
$9.8 million of the total stockholders' equity of the Bank was available for
payment of dividends to the Company without approval by the OCC. 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.
STOCK REPURCHASE PLAN
On July 22, 2002, the Company announced that it intended to repurchase up to one
million shares (approximately 3%) of its outstanding common stock from time to
time over the next 12 months in open market and privately negotiated
transactions. Since the announcement of the Stock Repurchase Plan, the Company
repurchased a total of 475,633 shares in 2002, at an average price of $17.52 per
share. Since the announcement on July 22, 2002, the Company's stock price during
2002 has ranged between $14.76 and $18.60. The total trading volume of the
Company's common stock for this same period was approximately 5.4 million
shares, the Company's repurchase activity during this period was 10% of the
total trading volume. Total cash allocated for these repurchases during 2002 was
$8.3 million. Under a previous Stock Repurchase Plan announced in October 2001,
the Company repurchased 148,700 shares in 2002 at an average price of $16.62.
NONINTEREST INCOME AND EXPENSES NONINTEREST INCOME
Noninterest income is a significant source of revenue for the Company and an
important factor in the Company's results of operations. The following table
sets forth information by category of noninterest income for the years
indicated:
================================================================================================================
YEARS ENDED DECEMBER 31,
----------------------------
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $13,875 $12,756 $10,193
Broker/dealer and insurance revenue 5,780 4,500 2,723
Trust 3,226 3,958 4,047
Other 9,751 9,245 7,891
----------------------------
Total before net securities losses, gain on sale of branch, net, and gain on sale
of building 32,632 30,459 24,854
Net securities (losses) (413) (7,692) (2,273)
Gain on sale of branch, net 220 - -
Gain on sale of building - 1,367 -
----------------------------
Total $32,439 $24,134 $22,581
============================
================================================================================================================
Noninterest income before securities losses, gain on sale of a branch, and
gain on sale of a building increased $2.2 million or 7.1% to $32.6 million for
2002 from $30.5 million for 2001. Broker/dealer and insurance fees increased
$1.3 million, primarily driven by one of the Company's financial services
providers, which began operations in June 2001, resulting in a full year of
revenue totaling $1.6 million in 2002 compared to seven months of revenue in
2001 totaling $0.6 million.
Fees from service charges on deposit accounts increased $1.1 million or 9%
for 2002 when compared to 2001, primarily from an increase in core deposits and
pricing adjustments. Offsetting these increases was a $0.7 million decrease in
trust revenue resulting primarily from declines in assets under management which
resulted from stock market declines in 2001 and 2002 and the level of estate
activity in 2002 when compared to 2001.
Net securities losses totaled $0.4 million in 2002, down from $7.7 million
in 2001. The decrease in net securities losses in 2002 resulted primarily from a
decrease in charges taken for the other-than-temporary impairment of certain
securities totaling $8.3 million in 2001 as compared to $0.7 million in 2002.
ANNUAL REPORT: NBT BANCORP INC. 31
NONINTEREST EXPENSE
Noninterest expenses are also an important factor in the Company's results of
operations. The following table sets forth the major components of noninterest
expense for the years indicated:
=======================================================================================================================
YEARS ENDED DECEMBER 31,
----------------------------
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 49,130 $ 48,419 44,802
Occupancy 8,333 8,704 7,761
Equipment 7,066 7,228 7,271
Data processing and communications 10,593 10,690 8,206
Professional fees and outside services 6,589 6,338 5,082
Office supplies and postage 4,446 4,639 3,976
Amortization of intangible assets 774 685 811
Amortization of unidentifiable intangible assets and goodwill - 3,563 2,238
Capital securities 839 1,278 1,633
Residual value lease losses - 3,529 664
Loan collection and other real estate owned 3,044 2,117 925
Other 12,689 11,221 12,140
----------------------------
Total noninterest expense before merger charges and certain deposit overdraft write-offs 103,503 108,411 95,509
Merger, acquisition and reorganization costs (recovery) (130) 15,322 23,625
Certain deposit overdraft write-offs - 2,125 -
----------------------------
Total noninterest expense $103,373 $125,858 119,134
----------------------------
=======================================================================================================================
Noninterest expense before merger, acquisition, and reorganization costs
and certain deposit overdraft writeoffs, decreased $4.9 million to $103.5
million for 2002 from $108.4 million for 2001. Salaries and employee benefits
increased $0.7 million to $49.1 million for 2002 from $48.4 million for 2001.
The increase in salaries and employee benefits was due primarily to increases in
benefits. Incentive compensation increased $1.3 million as a result of increased
profitability in 2002 when compared to 2001, and costs related to employee
medical insurance coverage and retirement expense increased $0.5 million.
Offsetting increases in benefits was a decrease in salary expense of $1.1
million, which resulted from a reduction in the number of full time equivalent
employees from acquisitions in 2001 and 2000. Occupancy, equipment, office
supplies, postage, and data processing decreased in 2002 when compared to 2001,
due mainly to efficiencies realized from acquisitions in 2001 and 2000.
Professional fees and outside service costs in 2002 remained relatively
consistent with 2001.
For 2003, the Company anticipates a decrease in retirement expense related
to its defined benefit plan as well as its post retirement health plan. The
anticipated decrease in pension expense is expected to amount to approximately
$0.2 million and is a result of a $12 million contribution to the defined
benefit plan funded at the end of 2002 and the beginning of 2003. The
anticipated decrease in post retirement health expense is expected to amount to
$0.3 million and is a result of a plan amendment that increases the amount of
cost sharing of health insurance for certain plan participants who had not yet
retired in the plan that is effective in 2003.
Amortization of unidentified intangible assets and goodwill decreased $3.5
million, to $0.8 million for 2002 from $4.2 million for 2001. The decrease in
amortization of unidentified intangible assets and goodwill resulted from the
adoption of SFAS No. 142 and SFAS No. 147 in 2002. Capital securities expense
decreased $0.4 million, to $0.8 million for 2002 from $1.3 million for 2001. The
decrease in capital securities expense is a result of the Company's guaranteed
preferred beneficial interests in Company's junior subordinated debentures,
which are tied to a variable interest rate index (3-month LIBOR plus 275 bp)
that was much lower for 2002 when compared 2001.
Loan collection and other real estate owned expenses increased $0.9
million, to $3.0 million for 2002 from $2.1 million for 2001. This increase is
due primarily to the increase in nonperforming loans during 2001, which
32 ANNUAL REPORT: NBT BANCORP INC.
resulted in an increase in collection activity and foreclosure costs during
2002. A charge for the other-than-temporary impairment for lease residual values
totaled $3.5 million in 2001 versus no such charge in 2002. Other operating
expense increased $1.5 million to $12.7 million in 2002 from $11.2 million in
2001. The increase in other operating expense was due mainly to increases in
contributions, insurance expense, and advertising costs.
INCOME TAXES
In 2002, income tax expense was $21.8 million, as compared to $0.5 million in
2001 and $6.5 million in 2000. The Company's effective tax rate was 32.6%,
12.7%, and 31.6% in 2002, 2001, and 2000, respectively. The decrease in the
effective tax rate during 2001 is primarily the result of lower net income
before tax, which resulted in a greater benefit, on a percentage basis, from
permanent non-taxable items such as tax-exempt interest.
2001 OPERATING RESULTS AS COMPARED TO 2000 OPERATING RESULTS
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,
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.
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
consumer and commercial loan types, as management continued to focus on growth
in these areas. Consumer loans 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. Home equity loans increased $13.3
million or 6.0% to $232.6 million at December 31, 2001. During 2001, commercial
and agricultural loans and real estate increased $9.6 million and $11.2 million,
respectively.
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 paydowns 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.
ANNUAL REPORT: NBT BANCORP INC. 33
FUNDING SOURCES AND CORRESPONDING INTEREST EXPENSE 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, 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 the reduction in average time deposits, 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.
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.
NONINTEREST INCOME
Total noninterest income excluding net securities losses and a gain on sale of a
building increased to $30.5 million in 2001, compared to $24.9 million in 2000
and $21.3 million in 1999. Broker/dealer fees and insurance revenue increased
$1.8 million in 2001 over 2000. The increase reflects twelve full months of
revenue from the Company's broker/dealer, M. Griffith, Inc., which was acquired
in May 2000. Revenues from M. Griffith, Inc. totaled $3.8 million in 2001,
compared to $2.7 million in 2000. Additionally, the Company's insurance agency
and financial services provider, CFS, which started operating in June 2001,
contributed to the increase in revenue as well. Revenues for CFS, Inc. for 2001
totaled $0.6 million.
Income from trust services decreased $0.1 million in 2001 when compared to
2000. The decrease is primarily attributable to a decrease in the market value
of the assets held by the Company in a fiduciary capacity. The decrease in the
market value of assets held by the Company in a fiduciary capacity resulted from
the decline in all the major stock indexes during 2001. Other income increased
$1.4 million in 2001 when compared to 2000. The increase in other income
resulted primarily from increases in ATM fees and other banking fees. Total ATM
fees and other banking fees amounted to $4.4 million and $1.6 million,
respectively, for 2001 compared to $3.8 million and $0.6 million, respectively,
for 2000. The increase in ATM fees resulted from the combination of an increase
in ATMs deployed and increases in ATM convenience fees. The increase in banking
fees resulted primarily from the continued focus in business banking activities.
Net securities losses totaled $7.7 million in 2001 compared to $2.3 million
in 2000. The increase in net securities losses in 2001 resulted primarily from
charges totaling $8.3 million taken for the other-than-temporary impairment of
certain securities compared to $3.5 million in 2000. The Company sold a branch
building in 2001which resulted in a gain of $1.4 million.
NONINTEREST EXPENSE
For 2001, noninterest expense excluding merger charges and certain deposit
overdraft writeoffs increased $12.9 million, or 13.5%, to $108.4 million
compared to $95.5 million in 2000. This increase was due to several factors.
Expenses for data processing and communications and professional fees and
outside services increased period-over-period by $3.7 million or 28.1%,
principally due to the Company's expanded branch network, costs associated with
enhanced technologies and expanded data
34 ANNUAL REPORT: NBT BANCORP INC.
processing volume capacities resulting from recent data processing conversions.
Salaries and employee benefits expense increased $3.6 million, or 8.1%, to
$48.4 million compared to $44.8 million in 2000. Occupancy expense increased
$943,000, or 12.2%, to $8.7 million compared to $7.8 million in 2000. The
increases in salaries and employee benefits expense and occupancy expense
resulted primarily from twelve full months of expenses in 2001 from eight
branches and the Company's broker/dealer, M. Griffith, Inc., all of which were
acquired during 2000, and an increase in expense resulting from the acquisition
of FNB Bancorp, Inc. on June 1, 2001.
Office supplies and postage increased from $4.0 million in 2000 to $4.6
million in 2001. The increase resulted primarily from the growth of the
Company's branch network during 2000 and 2001. Capitals securities expense
decreased from $1.6 million in 2000 to $1.3 million in 2001. The decrease
resulted from a decrease during 2001 in the index the capital securities
interest rate is tied to.
Residual value lease losses increased from $0.6 million in 2000 to $3.5
million in 2001. The increase was due to the charge taken for the
other-than-temporary impairment of residual values of leased automobiles in
2001. There was an increase in expenses relating to the amortization of
intangible assets from certain recently completed acquisitions. Amortization
expenses increased $1.2 million for 2001 as compared to 2000.
Merger, acquisition and reorganization costs amounted to $15.3 million in
2001 compared to $23.6 million in 2000. The Company completed one merger and one
acquisition in 2001 and completed two mergers, one acquisition, and purchased 8
branches in 2000. Additionally, in 2000, the Company cancelled one proposed
merger. During 2001, the Company recognized $2.1 million in deposit overdraft
write-offs related to two large check-kiting incidents.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of the
Company's operations. Unlike most industrial companies, nearly all assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. In addition, interest rates do not necessarily move in the
direction of, or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective January 1, 2001. At that time,
the Company had certain embedded derivative instruments from the recently
acquired CNB Bank related to a deposit product and two debt securities that had
costs and returns linked to the performance of the NASDAQ 100 Index. Management
determined that these debt securities and the deposit product did not qualify
for hedge accounting under SFAS No. 133. The embedded derivatives were separated
from the underlying host instruments for financial reporting purposes and
accounted for at fair value. In connection with the adoption of SFAS No. 133 as
of January 1, 2001, the Company recorded a charge to earnings for a transition
adjustment of $159,000 ($95,000, after-tax) for the net impact of recording
these embedded derivatives on the consolidated balance sheet at fair value. Due
to the insignificance of the amount, the transition adjustment was not reflected
as a cumulative effect of a change in accounting principle on the 2001
consolidated statement of income , but was instead recorded in net securities
(losses) gains. During the year ended December 31, 2001, and before the closing
of the CNB merger, the Company recorded a $640,000 net loss related to the
adjustment of the embedded derivatives to fair value. As of December 31, 2001,
the embedded derivatives referred to above were completely written off as these
derivatives had no value. During the first quarter of 2002, the two debt
securities with embedded derivative instruments noted above were sold at
approximately their carrying value, as the securities did not meet the risk
profile of the Company's security portfolio.
At December 31, 2002, the Company has no other derivatives as currently
defined by SFAS No. 133.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
On August 16, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. This Statement
ANNUAL REPORT: NBT BANCORP INC. 35
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. Under this Statement, the
liability is discounted and the accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was
initially recognized. The FASB issued this Statement to provide consistency for
the accounting and reporting of liabilities associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Earlier application is permitted. The Company
does not expect a material impact on its consolidated financial statements when
this Statement is adopted.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS
On October 3, 2001, The FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This Statement also
supersedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The changes in this Statement improve financial
reporting by requiring that one accounting model be used for long-lived assets
to be disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. The Company's core deposit intangible asset
will be measured for impairment under SFAS No. 144. This Statement is effective
for financial statements issued for fiscal years beginning after December 15,
2001. The Company adopted the provisions of SFAS No. 144 effective January 1,
2002, and the adoption did not have a material impact on its consolidated
financial statements.
NEW ACCOUNTING PRONOUNCEMENT-RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Upon adoption of SFAS No. 145, companies will be
required to apply the criteria in Accounting Principles Board, or APB, Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining the classification of gains
and losses resulting from the extinguishment of debt. Upon adoption, companies
must reclassify prior period items that do not meet the extraordinary item
classification criteria in APB Opinion No. 30. Additionally, SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. All other provisions of SFAS No.
145 are effective for transactions occurring and/or financial statements issued
on or after May 15, 2002. The implementation of SFAS No. 145 provisions, which
were effective May 15, 2002, did not have a material impact on our consolidated
financial condition or results of operations. The implementation of the
remaining provisions is not expected to have a material impact on our
consolidated financial condition or results of operations.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR
DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
is effective for exit or disposal activities initiated after December 31, 2002.
The Company will review the impact of applying this standard to any exit or
disposal activities initiated after December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND
OTHER INTANGIBLES, AND CERTAIN ACQUISITION OF BANKING OR THRIFT INSTITUTIONS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other
36 ANNUAL REPORT: NBT BANCORP INC.
Intangible Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001, as well as
all purchase method business combinations completed after June 30, 2001. SFAS
No. 141 also specifies criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144.
The Company adopted the provisions of SFAS No. 141 effective July 1, 2001,
and adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No.
141 requires that upon adoption of SFAS No. 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Upon adoption of SFAS No. 142, the Company was required to reassess
the useful lives and residual values of all intangible assets acquired in
purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset was identified as having an indefinite useful
life, the Company is required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Goodwill is required to be tested for impairment, by the end of 2002, with
impairment adjustments, if any, recorded as of the beginning of 2002.
During the first quarter of 2002, upon the implementation of SFAS No. 142,
the Company performed a reevaluation of the remaining useful lives of all
previously recognized intangible assets and found no adjustment necessary. The
Company has completed its transitional goodwill impairment evaluation and has
concluded there is no impairment losses from the adoption of SFAS No. 142. The
Company has not identified any intangible assets with indefinite useful lives.
The unidentified intangible assets acquired in the acquisition of a bank or
thrift (including acquisitions of branches meeting certain conditions), where
the fair value of the liabilities assumed exceeds the fair value of the assets
acquired, was amortized to expense under SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions." In October 2002, SFAS No. 147,
"Acquisitions of Certain Financial Institutions," was issued. This Statement
amends SFAS No. 72 and 144 and FIN No. 9. Except for transactions between two or
more mutual enterprises, this Statement removes acquisitions of financial
institutions from the scope of both SFAS No. 72 and FIN No. 9 and requires that
those transactions be accounted for in accordance with SFAS No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." Accordingly,
unidentified intangibles related to certain branch acquisitions are no longer
amortized, but are subject to impairment testing under SFAS No. 142. In
addition, this Statement amends SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor-and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. SFAS No. 147 is effective October 1, 2002, with the
application of its provisions applied retroactively to January 1, 2002.
Upon the adoption of SFAS No.142 on January 1, 2002, the Company ceased
amortizing its goodwill. Upon the adoption of SFAS No. 147 on October 1, 2002,
approximately $30.6 million of unidentified intangible assets were reclassified
to goodwill retroactive to January 1, 2002. The adoption of SFAS No. 142 and
SFAS No. 147 decreased noninterest expense and increased net income in 2002 as
compared to 2001 and 2000. The following table shows the pro forma effects of
applying SFAS No. 142 and SFAS No. 147 to the 2001 and 2000 periods, and a
summary of goodwill by operating subsidiaries follows:
ANNUAL REPORT: NBT BANCORP INC. 37
======================================================================================
YEARS ENDED DECEMBER 31,
----------------------------
(In thousands, except per share amounts) 2001 2000
- --------------------------------------------------------------------------------------
GOODWILL AND UNIDENTIFIED INTANGIBLE ASSET AMORTIZATION
Pretax $ 3,563 $ 2,238
After-tax 2,426 1,553
NET INCOME
Reported 3,737 14,154
Add back: after-tax amortization 2,426 1,553
----------------------------
Adjusted 6,163 15,707
============================
BASIC EARNINGS PER SHARE (EPS)
Reported $ 0.11 $ 0.44
Add back: after-tax amortization per share 0.07 0.05
Adjusted $ 0.19 $ 0.49
DILUTED EPS
Reported $ 0.11 $ 0.44
Add back: after-tax amortization per share 0.07 0.05
Adjusted $ 0.19 $ 0.48
======================================================================================
JANUARY 1, GOODWILL IMPAIRMENT DECEMBER 31,
(In thousands) 2002 DISPOSED LOSS 2002
- ----------------------------------------------------------------------------------
NBT Bank, N.A. $ 44,667 $ (1,547) $ - $ 43,120
NBT Financial Services, Inc. 3,001 - - 3,001
---------------------------------------------------
Total $ 47,668 $ (1,547) $ - $ 46,121
---------------------------------------------------
==================================================================================
In connection with the sale of a branch during 2002, $1.5 million in
goodwill were included in the carrying amount of the branch in determining the
gain on disposal.
The Company has finite-lived intangible assets capitalized on its balance
sheet in the form of core deposit and other intangible assets. These intangible
assets continue to be amortized over their estimated useful lives in accordance
with SFAS No. 142, which range from one to twenty-five years. There were no
adjustments to the useful lives of these intangible assets as a result of the
adoption of SFAS No. 142.
A summary of core deposit and other intangible assets follows:
==============================================================
DECEMBER 31,
---------------
(In thousands) 2002 2001
- --------------------------------------------------------------
CORE DEPOSIT INTANGIBLES
Gross carrying amount $5,433 $ 5,433
Less: accumulated amortization 3,931 3,282
---------------
Net carrying amount 1,502 2,151
---------------
UNIDENTIFIED INTANGIBLE ASSETS
Gross carrying amount 1,031 36,921
Less: accumulated amortization 287 4,729
---------------
Net carrying amount 744 32,192
---------------
TOTAL INTANGIBLES WITH DEFINITE USEFUL LIVES
Gross carrying amount 6,464 42,354
Less: accumulated amortization 4,218 8,011
---------------
Net carrying amount $2,246 $34,343
===============
==============================================================
38 ANNUAL REPORT: NBT BANCORP INC.
Amortization expense on finite-lived intangible assets totaled $0.8 million
for each of 2002, 2001, and 2000, respectively. Amortization expense on
finite-lived intangible assets is expected to total $0.6 million for 2003 and
$0.3 million for each of 2004, 2005, 2006 and 2007.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR STOCK BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides guidance on how to
transition from the intrinsic value method of accounting for stock-based
employee compensation under APB No. 25 to SFAS No. 123's fair value method of
accounting, if a company so elects. The Company currently intends to continue to
account for stock-based employee compensation under APB No. 25 in 2003.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR GUARANTEES
In November 2002, the FASB issued (FIN No. 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation expands the disclosures to be made
by a guarantor in its financial statements about its obligations under certain
guarantees and requires the guarantor to recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN No. 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies," relating to
guarantees. In general, FIN No. 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying that is related to an asset,
liability, or equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and recognition requirements of
this interpretation, including, among others, guarantees relating to employee
compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in a
special purpose entity, and guarantees of a company's own future performance.
Other guarantees are subject to the disclosure requirements of FIN No. 45 but
not to the recognition provisions and include, among others, a guarantee
accounted for as a derivative instrument under SFAS No. 133, a parent's
guarantee of debt owed to a third party by its subsidiary or vice versa, and a
guarantee which is based on performance not price. The disclosure requirements
of FIN No. 45 are effective for the Company as of December 31, 2002, and require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. The Company does not expect the requirements of FIN No. 45 to have a
material impact on results of the Company's consolidated operations, financial
position, or liquidity.
NEW ACCOUNTING PRONOUNCEMENT-CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." The objective of this interpretation is to provide guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, noncontrolling interests, and results of operations of a VIE need
to be included in a company's consolidated financial statements. A company that
holds variable interests in an entity will need to consolidate the entity if the
company's interest in the VIE is such that the company will absorb a majority of
the VIE's expected losses and/or receive a majority of the entity's expected
residual returns, if they occur. FIN No. 46 also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. The
provisions of this interpretation became effective upon issuance. The
requirements of FIN No. 46 will not have a material impact on the Company's
consolidated results of operations, financial position, or liquidity.
ANNUAL REPORT: NBT BANCORP INC. 39
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- --------------------------------------------------------------------------------
MARKET RISK
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Company's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interestbearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net interest income.
In an attempt to manage the Company's exposure to changes in interest
rates, management monitors the Company's interest rate risk. Management's
asset/liability committee (ALCO) meets monthly to review the Company's interest
rate risk position and profitability, and to recommend strategies for
consideration by the Board of Directors. Management also reviews loan and
deposit pricing, and the Company's securities portfolio, formulates investment
and funding strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. Notwithstanding the Company's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
the net interest margin. At times, depending on the level of general interest
rates, the relationship between long and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to changes in interest rates and fluctuations in the
difference between long and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next re-pricing date (if needed), and current rates is uploaded into the model
to create an ending balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and leases and mortgage related investment
securities along with any optionality within the deposits and borrowings.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) with a static balance sheet over a 12-month
period. Three additional models are run in which a gradual increase of 200 bp, a
gradual increase of 200 bp where the long end of the yield curve remains flat
(the long end of the yield curve is defined as 5 years and longer) and a gradual
decrease of 100 bp takes place over a 12 month period with a static balance
sheet. Under these scenarios, assets subject to prepayments are adjusted to
account for faster or slower prepayment assumptions. Any investment securities
or borrowings that have callable options embedded into them are handled
accordingly based on the interest rate scenario. The resultant changes in net
interest income are then measured against the flat rate scenario.
In the declining rate scenarios, net interest income is projected to
decrease slightly when compared to the forecasted net interest income in the
flat rate scenario through the simulation period. The decrease in net interest
income is a result of interest-bearing liabilities repricing downward at a
slower rate than earning assets. The inability to effectively lower deposit
rates will likely reduce or eliminate the benefit of lower interest rates. In
the rising rate scenarios, net interest income is also projected to experience a
decline from the flat rate scenario. Net interest income is projected to remain
at lower levels than in a flat rate scenario through the simulation period
primarily due to a lag in assets repricing while funding costs increase. The
potential impact on earnings is dependent on the ability to lag deposit
repricing.
Net interest income for the next twelve months in the +200/+ 200 flat/100
bp scenarios, as described above, is within the internal policy risk limits of
not more than a 7.5% change in net interest income. The following table
summarizes the percentage change in net interest income in the rising and
declining rate scenarios over a 12-month period from the forecasted net interest
income in the flat rate scenario using the December 31, 2002 balance sheet
position:
40 ANNUAL REPORT: NBT BANCORP INC.
==================================================
TABLE 10. INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------
CHANGE IN INTEREST RATES PERCENT CHANGE IN
(In basis points) NET INTEREST INCOME
- --------------------------------------------------
+ 200 Flat (0.97%)
+ 200 (0.08%)
- - 100 (0.53%)
==================================================
Under the flat rate scenario with a static balance sheet, net interest
income is anticipated to decrease approximately 3.0% from total net interest
income for 2002. The Company anticipates under current conditions, earning
assets will continue to reprice at a faster rate than interest bearing
liabilities. In order to protect net interest income from anticipated net
interest margin compression, the Company will continue to focus on increasing
low cost core funding as well as growing earning assets through loan growth and
leverage opportunities. However, if the Company cannot increase low cost core
funding and earning assets, the Company expects net interest income to decline
in 2003.
Currently, the Company is holding fixed rate residential real estate
mortgages in its loan portfolio. One of the major factors the Company considers
in holding residential real estate mortgages is its level of core deposits.
Current core deposit levels have enabled the Company to hold fixed rate
residential real estate mortgages without having a negative impact on interest
rate risk, as the Company is well matched at December 31, 2002. The Company's
net interest income is projected to decrease by only 0.08% if interest rates
rise 200 basis points. The Company closely monitors its matching of earning
assets to funding sources. If core deposit levels decrease or the rate of growth
in core deposit levels does not equal or exceed the rate in growth of fixed rate
residential real estate mortgages, the Company will reevaluate its strategy and
may sell new originations of fixed rate mortgages in the secondary market in
order to limit the Company's exposure to long-term earning assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Responsibility for the integrity, objectivity, consistency, and fair
presentation of the financial information presented in this Annual Report rests
with NBT Bancorp Inc. management. The accompanying consolidated financial
statements and related information have been prepared in conformity with
accounting principles generally accepted in the United States of America
consistently applied and include, where required, amounts based on informed
judgments and management's best estimates.
Management maintains a system of internal controls and accounting policies
and procedures to provide reasonable assurance of the accountability and
safeguarding of Company assets and of the accuracy of financial information.
These procedures include management evaluations of asset quality and the impact
of economic events, organizational arrangements that provide an appropriate
segregation of responsibilities and a program of internal audits to evaluate
independently the adequacy and application of financial and operating controls
and compliance with Company policies and procedures.
The Board of Directors has appointed a Risk Management Committee composed
entirely of directors who are not employees of the Company. The Risk Management
Committee is responsible for recommending to the Board the independent auditors
to be retained for the coming year. The Risk Management Committee meets
periodically, both jointly and privately, with the independent auditors, with
our internal auditors, as well as with representatives of management, to review
accounting, auditing, internal control structure and financial reporting
matters. The Risk Management Committee reports to the Board on its activities
and findings.
/S/ Daryl R. Forsythe /S/ Michael J. Chewens
- ---------------------------------- ---------------------------------------
Daryl R. Forsythe Michael J. Chewens
President, Chief Executive Officer Senior Executive Vice President
Chief Financial Officer and
Corporate Secretary
ANNUAL REPORT: NBT BANCORP INC. 41
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42 ANNUAL REPORT: NBT BANCORP INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NBT Bancorp Inc.:
We have audited the accompanying consolidated balance sheets of NBT Bancorp
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in stockholders' equity, cash flows,
and comprehensive income for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NBT Bancorp
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," as of January 1, 2002, and as a result ceased
amortizing goodwill. Also as discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No.
147, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," as
of October 1, 2002, and as a result reclassified certain unidentified intangible
assets to goodwill retroactive to January 1, 2002.
KPMG LLP
Albany, New York
January 27, 2003
ANNUAL REPORT: NBT BANCORP, INC. 43
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
======================================================================================================
DECEMBER 31,
------------------------
(In thousands, except share and per share data) 2002 2001
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 121,824 $ 123,201
Short-term interest bearing accounts 2,799 6,756
Trading securities, at fair value 203 126
Securities available for sale, at fair value 1,007,583 909,341
Securities held to maturity (fair value $84,517 and $101,495) 82,514 101,604
Federal Reserve and Federal Home Loan Bank stock 23,699 21,784
Loans and leases 2,355,932 2,339,636
Less allowance for loan and lease losses 40,167 44,746
------------------------
Net loans and leases 2,315,765 2,294,890
Premises and equipment, net 61,261 62,685
Goodwill 46,121 16,345
Intangible assets, net 2,246 34,343
Other assets 59,711 67,127
------------------------
Total assets $3,723,726 $3,638,202
========================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATE DEBENTURES, AND STOCKHOLDERS' EQUITY
Deposits
Demand (noninterest bearing) $ 449,201 $ 431,407
Savings, NOW, and money market 1,183,603 1,097,156
Time 1,289,236 1,387,049
------------------------
Total deposits 2,922,040 2,915,612
Short-term borrowings 105,601 122,013
Long-term debt 345,475 272,331
Other liabilities 41,228 44,891
------------------------
Total liabilities 3,414,344 3,354,847
------------------------
Guaranteed preferred beneficial interests in Company's junior
subordinate debentures (capital securities) 17,000 17,000
------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par at December 31, 2002 and 2001.
Authorized 2,500,000 shares
Common stock, $0.01 par value. Authorized 50,000,000 shares
at December 31, 2002 and 2001; issued 34,401,171 and
34,252,661 at December 31, 2002 and 2001 respectively 344 343
Additional paid-in-capital 210,443 209,176
Unvested restricted stock (127) -
Retained earnings 95,085 72,531
Accumulated other comprehensive income 16,531 3,921
Common stock in treasury, at cost, 1,751,724 and 1,147,848 shares (29,894) (19,616)
------------------------
Total stockholders' equity 292,382 266,355
------------------------
Total liabilities, guaranteed preferred beneficial interests in Company's
junior subordinate debentures, and stockholders' equity $3,723,726 $3,638,202
========================
<FN>
See accompanying notes to consolidated financial statements.
======================================================================================================
44 ANNUAL REPORT: NBT BANCORP INC.
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------
=============================================================================================
DECEMBER 31,
-------------------------------
(In thousands, except per share data) 2002 2001 2000
- ---------------------------------------------------------------------------------------------
INTEREST, FEE, AND DIVIDEND INCOME
Interest and fees on loans and leases $167,185 $187,188 $181,699
Securities available for sale 54,404 60,241 69,346
Securities held to maturity 4,260 5,232 6,137
Trading securities 8 649 8
Other 1,365 2,124 3,191
-------------------------------
Total interest, fee, and dividend income 227,222 255,434 260,381
-------------------------------
INTEREST EXPENSE
Deposits 63,332 98,522 107,293
Short-term borrowings 1,334 5,365 11,940
Long-term debt 15,736 13,615 13,770
-------------------------------
Total interest expense 80,402 117,502 133,003
-------------------------------
Net interest income 146,820 137,932 127,378
Provision for loan losses 9,073 31,929 10,143
-------------------------------
Net interest income after provision for loan losses 137,747 106,003 117,235
-------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 13,875 12,756 10,193
Broker/dealer and insurance revenue 5,780 4,500 2,723
Trust 3,226 3,958 4,047
Net securities losses (413) (7,692) (2,273)
Gain on sale of branch, net 220 - -
Gain on sale of branch building - 1,367 -
Other 9,751 9,245 7,891
-------------------------------
Total noninterest income 32,439 24,134 22,581
-------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 49,130 48,419 44,802
Occupancy 8,333 8,704 7,761
Equipment 7,066 7,228 7,271
Data processing and communications 10,593 10,690 8,206
Professional fees and outside services 6,589 6,338 5,082
Office supplies and postage 4,446 4,639 3,976
Amortization of unidentified intangible assets and goodwill - 3,563 2,238
Amortization of intangible assets 774 685 811
Merger, acquisition and reorganization costs (recovery) (130) 15,322 23,625
Writedowns of lease residual values - 3,529 664
Deposit overdraft write-offs - 2,125 -
Capital securities 839 1,278 1,633
Loan collection and other real estate owned 3,044 2,117 925
Other 12,689 11,221 12,140
-------------------------------
Total noninterest expense 103,373 125,858 119,134
-------------------------------
Income before income tax expense 66,813 4,279 20,682
Income tax expense 21,814 542 6,528
-------------------------------
Net income $ 44,999 $ 3,737 $ 14,154
===============================
EARNINGS PER SHARE
Basic $ 1.36 $ 0.11 $ 0.44
Diluted 1.35 0.11 0.44
<FN>
Note: All per share data has been restated to give retroactive effect to pooling-of-interests.
See accompanying notes to consolidated financial statements.
=============================================================================================
ANNUAL REPORT: NBT BANCORP, INC. 45
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
ACCUMULATED
YEARS ENDED DECEMBER 31, ADDITIONAL UNVESTED OTHER COMMON
2002, 2001, AND 2000 COMMON PAID-IN RESTRICTED RETAINED COMPREHENSIVE STOCK IN
(In thousands except share and per share data) STOCK CAPITAL STOCK EARNINGS (LOSS)/INCOME TREASURY
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 32,831 $ 158,500 $ - $ 93,214 $ (26,757) $ (12,960)
Net income - - - 14,154 - -
Cash dividends-$0.68 per share - - - (18,424) - -
Payment in lieu of fractional shares - - - (23) - -
Purchase of 139,393 treasury shares - - - - - (1,680)
Issuance of 56,606 shares to employee
benefit plans and other stock plans,
including tax benefit 7 582 - - - 578
Change of $1.00 stated value per share to
$0.01 par value per share (32,509) 32,509 - - - -
Issuance of 420,989 shares to purchase
M. Griffith, Inc. 4 4,792 - - - -
Retirement of 75,763 shares of treasury
stock of pooled Company (1) (961) - - - 962
Other comprehensive income - - - - 24,823 -
------------------------------------------------------------------------------
Balance at December 31, 2000 332 195,422 - 88,921 (1,934) (13,100)
Net income - - - 3,737 - -
Cash dividends-$0.68 per share - - - (20,123) - -
Issuance of 1,075,366 shares to purchase
First National Bancorp, Inc. 11 15,991 - - - -
Payment in lieu of fractional shares - - - (4) - -
Purchase of 727,037 treasury shares - - - - - (11,126)
Issuance of 223,515 shares to employee
benefit plans and other stock plans,
including tax benefit 1 (1,529) - - - 3,901
Retirement of 63,034 shares of treasury
stock of pooled company (1) (708) - - - 709
Other comprehensive income - - - 5,855 -
------------------------------------------------------------------------------
Balance at December 31, 2001 343 209,176 - 72,531 3,921 (19,616)
Net income - - - 44,999 - -
Cash dividends-$0.68 per share - - - (22,445) - -
Purchase of 624,333 treasury shares - - - - - (10,803)
Issuance of 25,298 shares to the employee
stock purchase plan - 315 - - - -
Issuance of 53,460 shares for the exercise
of incentive stock options - 550 - - - -
Issuance of 69,752 shares in exchange for
40,687 treasury shares for the exercise
of incentive stock options 1 580 - - - (581)
Issuance of 47,296 shares for the
exercise
of incentive and nonqualified stock
options, including tax benefit - (150) - - - 868
Grant of 14,648 shares of restricted
stock
awards - (28) (222) - - 250
Cancellation of 800 restricted stock
awards - - 12 - - (12)
Amortization of restricted stock awards - - 83 - - -
Other comprehensive income - - - - 12,610 -
------------------------------------------------------------------------------
Balance at December 31, 2002 $ 344 $ 210,443 $ (127) $ 95,085 $ 16,531 $ (29,894)
==============================================================================
YEARS ENDED DECEMBER 31,
2002, 2001, AND 2000
(In thousands except share and per share data) TOTAL
- ---------------------------------------------------------
Balance at December 31, 1999 $244,828
Net income 14,154
Cash dividends-$0.68 per share (18,424)
Payment in lieu of fractional shares (23)
Purchase of 139,393 treasury shares (1,680)
Issuance of 56,606 shares to employee
benefit plans and other stock plans,
including tax benefit 1,167
Change of $1.00 stated value per share to
$0.01 par value per share -
Issuance of 420,989 shares to purchase
M. Griffith, Inc. 4,796
Retirement of 75,763 shares of treasury
stock of pooled Company -
Other comprehensive income 24,823
----------
Balance at December 31, 2000 269,641
Net income 3,737
Cash dividends-$0.68 per share (20,123)
Issuance of 1,075,366 shares to purchase
First National Bancorp, Inc. 16,002
Payment in lieu of fractional shares (4)
Purchase of 727,037 treasury shares (11,126)
Issuance of 223,515 shares to employee
benefit plans and other stock plans,
including tax benefit 2,373
Retirement of 63,034 shares of treasury
stock of pooled company -
Other comprehensive income 5,855
----------
Balance at December 31, 2001 266,355
Net income 44,999
Cash dividends-$0.68 per share (22,445)
Purchase of 624,333 treasury shares (10,803)
Issuance of 25,298 shares to the employee
stock purchase plan 315
Issuance of 53,460 shares for the exercise
of incentive stock options 550
Issuance of 69,752 shares in exchange for
40,687 treasury shares for the exercise
of incentive stock options -
Issuance of 47,296 shares for the
exercise
of incentive and nonqualified stock
options, including tax benefit 718
Grant of 14,648 shares of restricted
stock
awards -
Cancellation of 800 restricted stock
awards -
Amortization of restricted stock awards 83
Other comprehensive income 12,610
----------
Balance at December 31, 2002 $ 292,382
==========
=========================================================
<FN>
Note: Cash dividends per share represent the historical cash dividends per
share of NBT Bancorp Inc. All other share and per share data is
adjusted to give retroactive effect to pooling-of-interests.
See accompanying notes to consolidated financial statements.
46 ANNUAL REPORT: NBT BANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------
=========================================================================================================================
YEARS ENDED DECEMBER 31,
----------------------------------
(In thousands, except per share data) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 44,999 $ 3,737 $ 14,154
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Provision for loan losses 9,073 31,929 10,143
Depreciation of premises and equipment 6,573 6,197 6,646
Net amortization (accretion on) securities 210 (5,369) (678)
Amortization of goodwill and intangible assets 774 4,248 3,049
Amortization of restricted stock 83 - -
Deferred income tax expense (benefit) 8,655 (6,333) (2,194)
Proceeds from sale of loans held for sale 6,676 16,570 25,425
Originations and purchases of loans held for sale (6,824) (14,360) (20,950)
Purchase of trading securities (65) (6,194) (5,250)
Proceeds from sales of trading securities - 29,844 5,261
Net loss on disposal of premises and equipment - 164 -
Net losses (gains) on sales of loans held for sale 105 (27) (172)
Net security losses 413 7,692 2,273
Net (gain) loss on sales of other real estate owned (80) (17) 28
Writedowns on other real estate owned - 253 235
Gain on sale of branch building - (1,367) -
Gain on sale of branch, net (220) - -
Tax benefit from exercise of stock options 199 327 660
Net decrease (increase) in other assets 1,273 (5,471) (1,725)
Net (decrease) increase in other liabilities (10,980) (8,579) 24,784
----------------------------------
Net cash provided by operating activities 60,864 53,244 61,689
----------------------------------
INVESTING ACTIVITIES
Net cash and cash equivalents provided by acquisitions - 9,509 74,434
Net cash paid in conjunction with branch sale (29,171) - -
Securities available for sale
Proceeds from maturities, calls, and principal paydowns 382,285 335,280 98,755
Proceeds from sales 217,471 43,318 128,889
Purchases (677,563) (324,701) (159,984
Securities held to maturity
Proceeds from maturities, calls, and principal paydowns 52,637 40,427 34,347
Purchases (33,645) (26,121) (23,445)
Net increase in loans (36,315) (39,589) (306,113
Net (increase) decrease in Federal Reserve and FHLB stock (1,915) 9,902 (505)
Purchases of premises and equipment, net (6,851) (8,451) (1,642)
Proceeds from sales of other real estate owned 1,113 3,476 4,272
----------------------------------
Net cash (used in) provided by investing activities (131,954) 43,050 (150,992)
----------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 40,689 (36,214) 132,950
Net (decrease) increase in short-term borrowings (16,412) (63,437) 13,129
Proceeds from issuance of long-term debt 80,000 247,083 5,000
Repayments of long-term debt (6,856) (215,005) (22,543)
Proceeds from the issuance of shares to employee benefit plans and other stock plans 1,583 2,046 507
Purchase of treasury stock (10,803) (11,126) (1,680)
Cash dividends and payment for fractional shares (22,445) (20,127) (18,447)
----------------------------------
Net cash provided by (used in) financing activities 65,756 (96,780) 108,916
----------------------------------
Net (decrease) increase in cash and cash equivalents (5,334) (486) 19,613
Cash and cash equivalents at beginning of year 129,957 130,443 110,830
----------------------------------
Cash and cash equivalents at end of year $ 124,623 $ 129,957 $ 130,443
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 85,224 $ 124,362 $ 125,886
Income taxes 10,800 8,361 10,093
Noncash investing activities:
Transfer of securities available for sale to trading securities $ - $ 3,804 $ 20,286
Adjustment of securities AFS to fair value and decrease in net unrealized loss on
securities AFS transferred to investment securities held to maturity, net of tax - - 24,823
Transfer of loans to other real estate owned 3,352 3,400 3,634
Fair value of assets (sold) acquired (3,323) 109,599 43,873
Fair value of liabilities (sold) assumed (34,263) 112,134 133,891
Common stock issued for acquisitions - 16,002 4,796
<FN>
See accompanying notes to consolidated financial statements.
=========================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 47
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
YEARS ENDED DECEMBER 31,
------------------------
(In thousands)| 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net Income $44,999 $3,737 $14,154
------------------------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized net holding gains arising during the year (ore-tax amounts of
$20,564, $2,779, and $36,323) 12,365 1,641 23,334
Less reclassification adjustment for net losses related to securities available for sale
included in net income (pre-tax amounts of $408, $7,124, and $2,320) 245 4,214 1,489
------------------------
Total other comprehensive income 12,610 5,855 24,823
------------------------
Comprehensive income $57,609 $9,592 $38,977
========================
See accompanying notes to consolidated financial statements
===================================================================================================================
48 ANNUAL REPORT: NBT BANCORP INC.
NBT BANCORP INC. AND SUBSIDIARIES:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The accounting and reporting policies of NBT Bancorp Inc. (Bancorp) and its
subsidiaries, NBT Bank, N.A. (NBT Bank) NBT Financial Services, Inc., and CNBF
Capital Trust I, conform, in all material respects, to accounting principles
generally accepted in the United States of America (GAAP) and to general
practices within the banking industry. Collectively, Bancorp and its
subsidiaries are referred to herein as "the Company."
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan and lease
losses and the valuation of other real estate owned acquired in connection with
foreclosures. In connection with the determination of the allowance for loan and
lease losses and the valuation of other real estate owned, management obtains
appraisals for properties.
The following is a description of significant policies and practices:
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Bancorp and its wholly owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation. Amounts previously reported
in the consolidated financial statements are reclassified whenever necessary to
conform with the current year's presentation. In the "Parent Company Financial
Information," the investment in subsidiaries is carried under the equity method
of accounting.
SEGMENT REPORTING
The Company's operations are primarily in the community banking industry and
include the provision of traditional banking services. The Company operates
solely in the geographical regions of central and northern New York and
northeastern Pennsylvania. The Company has identified separate operating
segments; however, these segments did not meet the quantitative thresholds for
separate disclosure.
CASH EQUIVALENTS
The Company considers amounts due from correspondent banks, cash items in
process of collection, and institutional money market mutual funds to be cash
equivalents for purposes of the consolidated statements of cash flows.
SECURITIES
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.
Nonmarketable equity securities are carried at cost, with the exception of
investments owned by NBT Bank's small business investment company (SBIC)
subsidiary, which are carried at fair value with net unrealized gains and losses
recognized currently in income in accordance with SBIC rules.
ANNUAL REPORT: NBT BANCORP INC. 49
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.
Investments in Federal Reserve and Federal Home Loan Bank stock are
required for membership in those organizations and are carried at cost since
there is no market value available.
LOANS AND LEASES
Loans are recorded at their current unpaid principal balance, net of unearned
income and unamortized loan fees and expenses, which are amortized under the
effective interest method over the estimated lives of the loans. Interest income
on loans is accrued based on the principal amount outstanding.
Lease receivables primarily represent automobile financing to customers
through direct financing leases and are carried at the aggregate of the lease
payments receivable and the estimated residual values, net of unearned income
and net deferred lease origination fees and costs. Net deferred lease
origination fees and costs are amortized under the effective interest method
over the estimated lives of the leases. The estimated residual value related to
the total lease portfolio is reviewed quarterly, and if there has been a decline
in the estimated fair value of the total residual value that is judged by
management to be other-than-temporary, a loss is recognized. Adjustments related
to such other-than-temporary declines in estimated fair value are recorded in
noninterest expense in the consolidated statements of income.
Loans and leases are placed on nonaccrual status when timely collection of
principal and interest in accordance with contractual terms is doubtful. Loans
and leases are transferred to a nonaccrual basis generally when principal or
interest payments become ninety days delinquent, unless the loan is well secured
and in the process of collection, or sooner when management concludes
circumstances indicate that borrowers may be unable to meet contractual
principal or interest payments. When a loan or lease is transferred to a
nonaccrual status, all interest previously accrued in the current period but not
collected is reversed against interest income in that period. Interest accrued
in a prior period and not collected is charged-off against the allowance for
loan and lease losses.
If ultimate repayment of a nonaccrual loan is expected, any payments
received are applied in accordance with contractual terms. If ultimate repayment
of principal is not expected, any payment received on a nonaccrual loan is
applied to principal until ultimate repayment becomes expected. Nonaccrual loans
are returned to accrual status when they become current as to principal and
interest or demonstrate a period of performance under the contractual terms and,
in the opinion of management, are fully collectible as to principal and
interest. When in the opinion of management the collection of principal appears
unlikely, the loan balance is charged-off in total or in part.
Commercial type loans are considered impaired when it is probable that the
borrower will not repay the loan according to the original contractual terms of
the loan agreement, and all loan types are considered impaired if the loan is
restructured in a troubled debt restructuring.
A loan is considered to be a trouble debt restructured loan (TDR) when the
Company grants a concession to the borrower because of the borrower's financial
condition that it would not otherwise consider. Such concessions include the
reduction of interest rates, forgiveness of principal or interest, or other
modifications at interest rates that are less than the current market rate for
new obligations with similar risk. TDR loans that are in compliance with their
modified terms and that yield a market rate may be removed from the TDR status
after a period of performance.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent in the loan and
lease portfolio. The allowance is determined based upon numerous considerations,
including local economic conditions, the growth and composition of the loan
portfolio with respect to the mix between the various types of loans and their
related risk characteristics, a review of the value of collateral supporting the
loans, comprehensive reviews of the loan portfolio by the independent loan
review staff and management, as well as consideration of volume and trends of
delinquencies, nonperforming loans, and loan charge-offs. As a result of the
test of adequacy, required additions to the allowance for loan and lease losses
are made periodically by charges to the provision for loan and lease losses.
The allowance for loan and lease losses related to impaired loans is based
on discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company's impaired loans are generally collateral
dependent. The
50 ANNUAL REPORT: NBT BANCORP INC.
Company considers the estimated cost to sell, on a discounted basis, when
determining the fair value of collateral in the measurement of impairment if
those costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
Management believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize loan and
lease losses, future additions to the allowance for loan and lease losses may be
necessary based on changes in economic conditions or changes in the values of
properties securing loans in the process of foreclosure. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize additions to the allowance for
loan and lease losses based on their judgments about information available to
them at the time of their examination which may not be currently available to
management.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation of premises and equipment is determined using the straight-line
method over the estimated useful lives of the respective assets. Expenditures
for maintenance, repairs, and minor replacements are charged to expense as
incurred.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are
recorded at the lower of fair value of the asset acquired less estimated costs
to sell or "cost" (defined as the fair value at initial foreclosure). At the
time of foreclosure, or when foreclosure occurs in-substance, the excess, if
any, of the loan over the fair market value of the assets received, less
estimated selling costs, is charged to the allowance for loan losses and any
subsequent valuation write-downs are charged to other expense. Operating costs
associated with the properties are charged to expense as incurred. Gains on the
sale of OREO are included in income when title has passed and the sale has met
the minimum down payment requirements prescribed by GAAP.
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 (see "New
Accounting Pronouncement-Business Combinations, Goodwill and Other Intangible
Assets, and Certain Acquisitions of Banking of Thrift Institutions"), goodwill,
which represents the excess of the purchase price over the fair value of net
assets acquired, was being amortized over 15 to 40 years on a straight-line
basis. Other intangible assets, which included core deposit intangible ("CDI")
and unidentified intangible assets, were being amortized over their expected
useful lives, which range from 5 to 25 years, on a straight-line basis. The
Company reviewed goodwill and other intangible assets on a periodic basis for
events or changes in circumstances that may have indicated that the carrying
amount of goodwill and other intangible assets were not recoverable. See "New
Accounting Pronouncement-Business Combinations, Goodwill and Other Intangible
Assets, and Certain Acquisitions of Banking of Thrift Institutions" for further
information regarding the accounting for goodwill and other intangible assets
subsequent to December 31, 2001.
TREASURY STOCK
Treasury stock acquisitions are recorded at cost. Subsequent sales of treasury
stock are recorded on an average cost basis. Gains on the sale of treasury stock
are credited to additional paid-in-capital. Losses on the sale of treasury stock
are charged to additional paid-in-capital to the extent of previous gains,
otherwise charged to retained earnings.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. The Company
files a consolidated tax return on the accrual basis. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for
ANNUAL REPORT: NBT BANCORP INC. 51
Stock Issued to Employees, and related interpretations. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the estimated
fair value of all stock based awards measured on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma net income
per share disclosures for employee stock-based grants made in 1995 and
thereafter as if the fair value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123.
At December 31, 2002, the Company has two stock option plans (Plans). Under
the terms of the plans, options are granted to directors and key employees to
purchase shares of the Company's common stock at a price equal to the fair
market value of the common stock on the date of the grant. Options granted have
a vesting period of four years and terminate eight or ten years from the date of
the grant.
The per share weighted average fair value of stock options granted during
2002, 2001, and 2000 was $2.24, $3.70, and $3.35, respectively. The fair value
of each award is estimated on the grant date using the BlackScholes option
pricing model with the following weighted average assumptions used for grants in
the years ended December 31:
===============================================================
YEARS ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
- ---------------------------------------------------------------
Dividend yield 4.07% 4.26% 5.34%
Expected volatility 19.13% 30.19% 29.88%
Risk-free interest rates 3.48%-4.74% 4.63%-5.04% 6.04%-6.62%
Expected life 7 YEARS 7 years 7 years
===============================================================
Had the Company determined compensation cost based on the estimated fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
==============================================================================================================
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
NET INCOME
As reported $44,999 $ 3,737 $14,154
Add: Stock-based compensation expense included in reported net income,
net of related tax effects 50 43 40
Deduct: Total stock-based compensation expense determined under fair value
based methods for all awards, net of related tax effects (995) (1,330) (933)
----------------------------------
Pro forma net income 44,054 2,450 13,261
==================================
BASIC EARNINGS PER SHARE
As reported 1.36 0.11 0.44
Pro forma 1.34 0.07 0.41
DILUTED EARNINGS PER SHARE
As reported 1.35 0.11 0.44
Pro forma 1.33 0.07 0.41
==============================================================================================================
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the Black-Scholes
model was developed, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
52 ANNUAL REPORT: NBT BANCORP INC.
PER SHARE AMOUNTS
Basic earnings per share (EPS) excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity (such as the Company's
dilutive stock options and restricted stock).
All share and per share data is restated to give retroactive effect to
pooling-of-interests and stock dividends.
OTHER FINANCIAL INSTRUMENTS
The Company is a party to certain other financial instruments with
off-balance-sheet risk such as commitments to extend credit, unused lines of
credit, and standby letters of credit, as well as certain mortgage loans sold to
investors with recourse. The Company's policy is to record such instruments when
funded.
COMPREHENSIVE INCOME
At the Company, comprehensive income represents net income plus other
comprehensive income, which consists of the net change in unrealized gains or
losses on securities available for sale, net unrealized gains from the transfer
of held to maturity securities to available for sale, net of income taxes, for
the period. Accumulated other comprehensive income represents the net unrealized
gains or losses on securities available for sale, net of income taxes, as of the
consolidated balance sheet dates.
PENSION COSTS
The Company maintains a noncontributory, defined benefit pension plan covering
substantially all employees, as well as supplemental employee retirement plans
covering certain executives. Costs associated with these plans, based on
actuarial computations of current and future benefits for employees, are charged
to current operating expenses.
TRUST
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the accompanying consolidated balance sheets, since such
assets are not assets of the Company. Such assets totaled $1.4 billion and $1.3
billion at December 31, 2002 and 2001, respectively. Trust income is recognized
on the accrual method based on contractual rates applied to the balances of
trust accounts.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective January 1, 2001. At that time,
the Company had certain embedded derivative instruments from the recently
acquired CNB Bank related to a deposit product and two debt securities that had
costs and returns linked to the performance of the NASDAQ 100 index. Management
determined that these debt securities and the deposit product did not qualify
for hedge accounting under SFAS No. 133. The embedded derivatives were separated
from the underlying host instruments for financial reporting purposes and
accounted for at fair value. In connection with the adoption of SFAS No. 133 as
of January 1, 2001, the Company recorded a charge to earnings for a transition
adjustment of $159,000 ($95,000, after-tax) for the net impact of recording
these embedded derivatives on the consolidated balance sheet at fair value. Due
to the insignificance of the amount, the transition adjustment was not reflected
as a cumulative effect of a change in accounting principle on the consolidated
statement of income for the year ended December 31, 2001, but was instead
recorded in net securities (losses) gains. During the year ended December 31,
2001, and before the closing of the CNB merger, the Company recorded a $640,000
net loss related to the adjustment of the embedded derivatives to fair value. As
of December 31, 2001, the embedded derivatives referred to above were completely
written off as these derivatives had no value. During the first quarter of 2002,
the two debt securities with embedded derivative instruments noted above were
sold at approximately their carrying value, as the securities did not meet the
risk profile of the Company's security portfolio.
At December 31, 2002, the Company has no other derivatives as currently
defined by SFAS No. 133.
ANNUAL REPORT: NBT BANCORP INC. 53
NEW ACCOUNTING PRONOUNCEMENT-BUSINESS COMBINATIONS, GOODWILL AND OTHER
INTANGIBLE ASSETS, AND CERTAIN ACQUISITIONS OF BANKING OR THRIFT INSTITUTIONS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142. SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30, 2001. SFAS No.
141 also specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
accounting for the impairment or disposal of long-lived assets.
The Company adopted the provisions of SFAS No. 141 effective July 1, 2001,
and adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No.
141 requires that upon adoption of SFAS No. 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill.
During the first quarter of 2002, upon the implementation of SFAS No. 142,
the Company performed a reevaluation of the remaining useful lives of all
previously recognized intangible assets and found no adjustment necessary. The
Company has completed its transitional goodwill impairment evaluation and has
concluded there is no impairment losses from the adoption of SFAS No. 142. The
Company has not identified any intangible assets with indefinite useful lives.
The unidentified intangible assets acquired in the acquisition of a bank or
thrift (including acquisitions of branches), where the fair value of the
liabilities assumed exceeds the fair value of the assets acquired, meeting
certain conditions was amortized to expense under SFAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions. In October 2002, SFAS
No. 147, Acquisitions of Certain Financial Institutions, was issued. This
Statement amends SFAS No. 72 and 144 and Financial Accounting Standards Board
(FASB) Interpretation FIN No. 9. Except for transactions between two or more
mutual enterprises, this Statement removes acquisitions of financial
institutions from the scope of both SFAS No. 72 and FIN No. 9 and requires that
those transactions be accounted for in accordance with SFAS No. 141 and No. 142.
Accordingly, unidentified intangibles related to certain branch acquisitions are
no longer amortized but are subject to impairment testing under SFAS No. 142. In
addition, this Statement amends SFAS No. 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. The Statement is effective after September 30, 2002,
with the application of its provisions applied retroactively to January 1, 2002.
Upon adoption of SFAS No. 142, the Company is required to reassess the useful
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
is required to test the intangible asset for impairment in accordance with the
provisions of Statement 142 within the first interim period. Goodwill is
required to be tested for impairment by the end of 2002, with impairment
adjustments, if any, recorded as of the beginning of 2002.
Note 8 provides further detail on the accounting for goodwill and other
intangible assets under the standards set forth by SFAS No. 142 and No. 147 and
the impact on the adoption on the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
On August 16, 2001, the FASB issued SFAS No. 143 Accounting for Asset Retirement
Obligations. Statement 143 addresses financial accounting and reporting for
obligations associated with retirement of tangible long-lived assets and the
associated asset retirement costs. Statement 143 applies to all entities. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. Under this
Statement,
54 ANNUAL REPORT: NBT BANCORP INC.
the liability is discounted and the accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was
initially recognized. The FASB issued this Statement to provide consistency for
the accounting and reporting of liabilities associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Earlier application is permitted. The Company
does not expect a material impact on its consolidated financial statements when
this Statement is adopted.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS
On October 3, 2001, The FASB issued SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes SFAS No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. This Statement also
supersedes the accounting and reporting provisions of APB Opinion No. 30
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. The changes in this Statement improve financial
reporting by requiring that one accounting model be used for long-lived assets
to be disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The Company adopted the provisions of SFAS
No. 144 effective January 1, 2002, and the adoption did not have a material
impact on its consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENT-RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Upon adoption of SFAS No. 145, companies will be
required to apply the criteria in Accounting Principles Board, or APB, Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" in determining the classification of gains
and losses resulting from the extinguishment of debt. Upon adoption, companies
must reclassify prior period items that do not meet the extraordinary item
classification criteria in APB Opinion No. 30. Additionally, SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases," to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are effective
for fiscal years beginning after May 15, 2002. All other provisions of SFAS No.
145 are effective for transactions occurring and/or financial statements issued
on or after May 15, 2002. The implementation of SFAS No. 145 provisions, which
were effective May 15, 2002, did not have a material impact on our consolidated
financial condition or results of operations. The implementation of the
remaining provisions is not expected to have a material impact on our
consolidated financial condition or results of operations.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR
DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
is effective for exit or disposal activities initiated after December 31, 2002.
The Company will review the impact of applying this standard to any exit or
disposal activities initiated after December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR STOCK BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides guidance on how to
transition from the intrinsic value method of accounting for
ANNUAL REPORT: NBT BANCORP INC. 55
stock-based employee compensation under APB No. 25 to SFAS No. 123's fair value
method of accounting, if a company so elects. The Company currently intends to
continue to account for stock-based employee compensation under APB No. 25 in
2003.
NEW ACCOUNTING PRONOUNCEMENT-ACCOUNTING FOR GUARANTEES
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or equity security of the guaranteed party.
Certain guarantee contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees under
capital lease arrangements, commercial letters of credit, loan commitments,
subordinated interests in an a special purpose entity, and guarantees of a
company's own future performance. Other guarantees are subject to the disclosure
requirements of FIN 45 but not to the recognition provisions and include, among
others, a guarantee accounted for as a derivative instrument under SFAS No. 133,
a parent's guarantee of debt owed to a third party by its subsidiary or vice
versa, and a guarantee which is based on performance not price. The disclosure
requirements of FIN 45 are effective for the Company as of December 31, 2002,
and require disclosure of the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after December 31,
2002. The requirements of FIN 45 will not have a material impact on the
Company's consolidated results of operations, financial position, or liquidity.
NEW ACCOUNTING PRONOUNCEMENT-CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. The provisions of this
interpretation became effective upon issuance. The requirements of FIN 46 will
not have a material impact on the Company's consolidated results of operations,
financial position, or liquidity.
(2) MERGER AND ACQUISITION ACTIVITY
- --------------------------------------------------------------------------------
The Company did not enter into any mergers or acquisitions during 2002.
On June 1, 2001, the Company completed the acquisition of First National
Bancorp, Inc. (FNB) whereby FNB was merged with and into NBT Bancorp Inc. At the
same time FNB's subsidiary, First National Bank of Northern New York (FNB Bank)
was merged into NBT Bank, N.A. The acquisition was accounted for using the
purchase method. As such, both the assets and liabilities assumed have been
recorded on the consolidated balance sheet of the Company at estimated fair
value as of the date of acquisition and the results of operations are included
in the Company's consolidated statement of income from the acquisition date
forward. To complete the transaction, the Company issued approximately 1,075,000
shares of its common stock valued at $16.0 million. Goodwill, representing the
cost over net assets acquired, was approximately $7.0 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 twenty year amortization period.
On September 14, 2001, the Company acquired
56 ANNUAL REPORT: NBT BANCORP INC.
$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 asset which is being amortized over 6 years on a
straight-line basis.
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 NBT, and CNB Bank was merged with and into NBT Bank. CNB Bank then
became a division of NBT 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, the Company's consolidated
financial statements were restated to present combined consolidated financial
condition and results of operations of NBT 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 consummated a merger, whereby Lake Ariel
Bancorp, Inc. (Lake Ariel) and its subsidiaries were merged with and into the
Company with each issued and outstanding share of Lake Ariel exchanged for
0.9961 shares of Bancorp common stock. The transaction resulted in the issuance
of approximately 5.0 million shares of Bancorp common stock. Lake Ariel's
commercial banking subsidiary was LA Bank, N.A.
On July 1, 2000, the Company consummated a merger, whereby Pioneer American
Holding Company Corp. (Pioneer Holding Company) and its subsidiary were merged
with and into the Company with each issued and outstanding share of Pioneer
Holding Company exchanged for 1.805 shares of Bancorp common stock. The
transaction resulted in the issuance of approximately 5.2 million shares of
Bancorp 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, the
Company's consolidated financial statements were 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, Bancorp 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 NBT Bank and
became a division of NBT 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 Services,
Inc. 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, one of Bancorp's subsidiaries, LA Bank, N.A. (subsequently
renamed 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
ANNUAL REPORT: NBT BANCORP INC. 57
of cost over net assets acquired, was $4.3 million and was being amortized over
15 years on the straight-line basis prior to the adoption of SFAS No. 147 on
January 1, 2002. 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 was being amortized over 15
years on a straight-line basis prior to the adoption of SFAS No. 147 as of
January 1, 2002. The branches' results of operations are included in the
Company's consolidated statement of income from the date of acquisition forward.
During 2001 and 2000, the following merger, acquisition and reorganization
costs were recognized:
=================================================
YEARS ENDED
DECEMBER 31,
----------------
2001 2000
- -------------------------------------------------
Professional fees $ 5,956 $ 8,525
Data processing 2,092 2,378
Severance 3,270 7,278
Branch closing 2,412 1,736
Advertising and supplies 313 1,337
Hardware and software write-off 402 1,428
Miscellaneous 877 943
----------------
Total $15,322 $23,625
================
=================================================
As of December 31, 2002, the Company had a remaining accrued liability of
$4.0 million for merger, acquisition, and reorganization costs recognized in
2001 and 2000. The remaining accrued liability is comprised mainly of severance
costs, which will be paid out over a period of time consistent with respective
severance agreements.
(3) EARNINGS PER SHARE
- --------------------------------------------------------------------------------
The following is a reconciliation of basic and diluted earnings per share for
the years presented in the consolidated statements of income:
===========================================================================================================================
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ------------------------------ ----------------------------
WEIGHTED Weighted Weighted
(In thousands, NET AVERAGE PER SHARE Net average Per share Net average Per share
except per share data) INCOME SHARES AMOUNT income shares amount income shares amount
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $44,999 32,983 $ 1.36 $ 3,737 32,897 $ 0.11 $14,154 32,291 $ 0.44
EFFECT OF DILUTIVE SECURITIES
Stock based compensation 205 123 45
Contingent shares 47 65 69
-------- -------- --------
Diluted earnings per share $44,999 33,235 $ 1.35 $ 3,737 33,085 $ 0.11 $14,154 32,405 $ 0.44
-------- -------- --------
===========================================================================================================================
58 ANNUAL REPORT: NBT BANCORP INC.
There were approximately 416,000, 936,000, and 923,000 weighted average
stock options for the years ended December 31, 2002, 2001, and 2000,
respectively, that were not considered in the calculation of diluted earnings
per share since the stock options' exercise prices were greater than the average
market price during these periods.
(4) FEDERAL RESERVE BANK REQUIREMENT
- --------------------------------------------------------------------------------
The Company is required to maintain reserve balances with the Federal Reserve
Bank. The required average total reserve for NBT Bank for the 14 day maintenance
period ending December 25, 2002 was $51.5 million.
(5) SECURITIES
- --------------------------------------------------------------------------------
The amortized cost, estimated fair value, and unrealized gains and losses of
securities available for sale are as follows:
==============================================================================================
UNREALIZED UNREALIZED ESTIMATED
(In thousands) AMORTIZED COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------
DECEMBER 31, 2002
U.S. TREASURY $ 502 $ 12 $ - $ 514
FEDERAL AGENCY 143,273 2,997 - 146,270
STATE & MUNICIPAL 88,237 4,126 19 92,344
MORTGAGE-BACKED 667,511 20,164 5 687,670
COLLATERALIZED MORTGAGE OBLIGATIONS 32,714 482 26 33,170
ASSET-BACKED SECURITIES 11,339 222 1,573 9,988
CORPORATE 14,024 330 138 14,216
OTHER SECURITIES 22,489 942 20 23,411
------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 980,089 $ 29,275 $ 1,781 $ 1,007,583
======================================================
December 31, 2001
U.S. Treasury $ 12,392 $ 64 $ 699 $ 11,757
Federal Agency 111,020 1,810 254 112,576
State & municipal 92,982 576 1,573 91,985
Mortgage-backed 413,081 5,639 683 418,037
Collateralized mortgage obligations 184,777 2,335 826 186,286
Asset-backed securities 32,391 642 838 32,195
Corporate 42,468 836 1,126 42,178
Other securities 13,707 687 67 14,327
------------------------------------------------------
Total securities available for sale $ 902,818 $ 12,589 $ 6,066 $ 909,341
======================================================
==============================================================================================
Other securities include non-marketable equity securities, including
certain securities acquired by NBT Bank's small business investment company
(SBIC) subsidiary, and trust preferred securities. Collateralized mortgage
obligations at December 31, 2002 and 2001, include securities with an amortized
cost of $1.8 million and $9.2 million, respectively and estimated fair value of
$1.8 million and $9.1 million, respectively, that are privately issued and are
not backed by Federal agencies. The remaining collateralized mortgage
obligations were issued or backed by Federal agencies.
ANNUAL REPORT: NBT BANCORP INC. 59
The following table sets forth information with regard to sales
transactions of securities available for sale:
===============================================================================================================
YEARS ENDED DECEMBER 31
------------------------------
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Proceeds from sales $217,471 $43,318 $128,889
Gross realized gains 7,725 2,213 1,751
Gross realized losses (7,473) (1,046) (604)
Other-than-temporary impairment write-downs (660) (8,291) (3,467)
------------------------------
Net security (losses) gains and write-downs on securities available for sale (408) (7,124) (2,320)
Net realized (losses) gains on trading securities and embedded derivatives (5) (568) 47
------------------------------
Net securities (losses) gains $ (413) $(7,692) $ (2,273)
==============================
===============================================================================================================
The security with other-than-temporary impairment charges at December 31,
2002 had a remaining carrying value, which approximated fair value, of $1.1
million, is classified as securities available for sale and is on the
non-accrual status.
Approximately, $1.4 million of the other-than temporary impairment charge
in 2000 related to the Company's decision in late 2000 to sell certain debt
securities available for sale 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 amounts approximating their carrying values. The remaining
securities with other than temporary impairment charges at December 31, 2000 had
carrying values totaling $1.4 million, which approximated fair value, at
December 31, 2000, are classified as securities available for sale and are on
the non-accrual status.
At December 31, 2002 and 2001, securities available for sale with amortized
costs totaling $519.7 million and $628.8 million, respectively, were pledged to
secure public deposits and for other purposes required or permitted by law.
Additionally, at December 31, 2002, securities available for sale with an
amortized cost of $51.9 million were pledged as collateral for securities sold
under repurchase agreements.
The amortized cost, estimated fair value, and unrealized gains and losses
of securities held to maturity are as follows:
=======================================================================================
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
(In thousands) COST GAINS LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------
DECEMBER 31, 2002
MORTGAGE-BACKED 24,613 $ 1,107 $ - $ 25,720
STATE & MUNICIPAL 56,021 897 1 56,917
OTHER SECURITIES 1,880 - - 1,880
-------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY 82,514 $ 2,004 $ 1 $ 84,517
=================================================
December 31, 2001
Mortgage-backed 36,733 $ 295 $ 405 36,623
State & municipal 64,715 - - 64,715
Other securities 156 1 - 157
-------------------------------------------------
Total securities held to maturity $ 101,604 296 $ 405 $ 101,495
=================================================
=======================================================================================
At December 31, 2002 and 2001, substantially all of the mortgage-backed
securities available for sale and held to maturity held by the Company were
issued or backed by Federal agencies.
60 ANNUAL REPORT: NBT BANCORP INC.
The following tables set forth information with regard to contractual
maturities of debt securities at December 31, 2002:
=========================================================================================
(In thousands) AMORTIZED COST ESTIMATED FAIR VALUE
- -----------------------------------------------------------------------------------------
DEBT SECURITIES CLASSIFIED AS AVAILABLE FOR SALE
Within one year $ 42,932 $ 43,526
From one to five years 300,036 308,927
From five to ten years 485,380 497,864
After ten years 142,083 146,766
--------------------------------------
$ 970,431 $ 997,083
======================================
DEBT SECURITIES CLASSIFIED AS HELD TO MATURITY
Within one year $ 25,744 $ 25,751
From one to five years 26,015 26,905
From five to ten years 15,211 15,721
After ten years 15,544 16,140
--------------------------------------
$ 82,514 $ 84,517
======================================
=========================================================================================
Maturities of mortgage-backed, collateralized mortgage obligations and
asset-backed securities are stated based on their estimated average lives.
Actual maturities may differ from estimated average lives or contractual
maturities because, in certain cases, borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
Except for U.S. Government securities, there were no holdings, when taken
in the aggregate, of any single issues that exceeded 10% of consolidated
stockholders' equity at December 31, 2002 and 2001.
(6) LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------
A summary of loans and leases, net of deferred fees and origination costs, by
category is as follows:
============================================================================
DECEMBER 31
----------------------
(In thousands) 2002 2001
- ----------------------------------------------------------------------------
Residential real estate mortgages $ 579,638 $ 525,411
Commercial and commercial real estate mortgages 920,330 958,075
Real estate construction and development 64,025 60,513
Agricultural and agricultural real estate mortgages 104,078 103,884
Consumer 357,214 387,081
Home equity 269,553 232,624
Lease financing 61,094 72,048
----------------------
Total loans and leases $2,355,932 $2,339,636
----------------------
============================================================================
ANNUAL REPORT: NBT BANCORP INC. 61
FHLB advances are collateralized by a blanket lien on the Company's
residential real estate mortgages.
Changes in the allowance for loan and lease losses for the three years
ended December 31, 2002, are summarized as follows:
==========================================================================
YEARS ENDED DECEMBER 31,=
------------------------------
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------
Balance at January 1 $ 44,746 $ 32,494 $28,240
Allowance related to purchase acquisitions - 505 525
Provision 9,073 31,929 10,143
Recoveries 4,670 2,189 1,383
Charge-offs (18,322) (22,371) (7,797)
------------------------------
Balance at December 31 $ 40,167 $ 44,746 $32,494
==============================
===========================================================================
The following table sets forth information with regard to nonperforming
loans:
====================================================================================================
AT DECEMBER 31,
-------------------------
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Loans in nonaccrual status $24,009 $40,210 $17,103
Loans contractually past due 90 days or more and still accruing interest 1,976 2,975 8,430
Restructured loans 409 603 656
-------------------------
Total nonperforming loans $26,394 $43,788 $26,189
=========================
====================================================================================================
There were no material commitments to extend further credit to borrowers
with nonperforming loans.
Accumulated interest on the above nonaccrual loans of approximately $1.9
million, $3.2 million , and $1.0 million would have been recognized as income in
2002, 2001, and 2000, respectively, had these loans been in accrual status.
Approximately $1.8 million, $0.6 million, and $0.5 million of interest on the
above nonaccrual loans was collected in 2002, 2001, and 2000, respectively.
At December 31, 2002 and 2001, the recorded investment in loans that are
considered to be impaired totaled $17.4 million and $32.0 million, respectively,
for which the related allowance for loan losses is $0.5 million and $1.4
million, respectively. As of December 31, 2002 and 2001, there were $15.5
million and $23.7 million, respectively, of impaired loans which did not have an
allowance for loan losses due to the adequacy of their collateral. Included in
total impaired loans at December 31, 2002 and 2001 were $0.4 million and $0.6
million, respectively, of restructured loans.
The following provides additional information on impaired loans for the
periods presented:
===================================================================================
YEARS ENDED DECEMBER 31
-------------------------
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------
Average recorded investment on impaired loans $23,549 $21,618 $12,191
Interest income recognized on impaired loans 1,469 591 308
Cash basis interest income recognized on impaired loans 1,469 591 308
===================================================================================
62 ANNUAL REPORT: NBT BANCORP INC.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has made loans at prevailing
rates and terms to directors, officers, and other related parties. Such loans,
in management's opinion, do not present more than the normal risk of
collectibility or incorporate other unfavorable features. The aggregate amount
of loans outstanding to qualifying related parties and changes during the years
are summarized as follows:
===================================================================
(In thousands) 2002 2001
- -------------------------------------------------------------------
Balance at January 1 $ 14,640 $ 6,847
New loans 4,565 10,866
Change in Composition 569 603
Repayments (2,815) (3,676)
--------------------
Balance at December 31 $ 16,959 $ 14,640
====================
===================================================================
(7) PREMISES AND EQUIPMENT, NET
- --------------------------------------------------------------------------------
A summary of premises and equipment follows:
===================================================================
DECEMBER 31
--------------------
(In thousands) 2002 2001
Land, buildings, and improvements $ 66,542 $ 65,350
Equipment 52,123 50,752
Construction in progress 423 443
--------------------
119,088 116,545
Accumulated depreciation 57,827 53,860
--------------------
Total premises and equipment $ 61,261 $ 62,685
====================
===================================================================
Land, buildings, and improvements with a carrying value of approximately
$4.0 million and $4.1 million at December 31, 2002 and 2001, respectively, are
pledged to secure long-term borrowings.
Rental expense included in occupancy expense amounted to $2.1 million in
2002, $2.1 million in 2001, and $1.9 million in 2000. The future minimum rental
payments related to noncancelable operating leases with original terms of one
year or more are as follows at December 31, 2002 (in thousands):
=========================================================
2003 $ 1,886
2004 1,571
2005 1,378
2006 1,237
2007 1,115
Thereafter 5,129
-------
Total $12,316
=======
=========================================================
ANNUAL REPORT: NBT BANCORP INC. 63
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
Upon the adoption of SFAS No.142 on January 1, 2002, and SFAS No. 147 on October
1, 2002, with retroactive application to January 1, 2002, the Company ceased
amortizing its goodwill and unidentifiable intangible assets related to branch
acquisitions, which decreased non-interest expense and increased net income in
2002 as compared to 2001 and 2000. The following table shows the pro forma
effects of applying SFAS No. 142 and SFAS No. 147 to the 2001 and 2000 periods:
=========================================================================
YEARS ENDED
DECEMBER 31,
---------------
(In thousands, except per share amounts) 2001 2000
- -------------------------------------------------------------------------
GOODWILL AND UNIDENTIFIED INTANGIBLE ASSET AMORTIZATION
Pretax $3,563 2,238
After-tax 2,426 1,553
NET INCOME
Reported 3,737 14,154
Add back: after-tax amortization 2,426 1,553
---------------
Adjusted $6,163 $15,707
===============
BASIC EARNINGS PER SHARE (EPS)
Reported 0.11 0.44
Add back: after-tax amortization per share 0.07 0.05
Adjusted $ 0.19 $ 0.49
DILUTED EPS
Reported 0.11 0.44
Add back: after-tax amortization per share 0.07 0.05
Adjusted $ 0.19 0.48
=========================================================================
Upon the adoption of SFAS No. 147 on October 1, 2002, approximately $30.6
million of unidentified intangible assets were reclassified to goodwill
retroactive to January 1, 2002.
A summary of goodwill by operating subsidiaries follows:
=================================================================================
JANUARY 1, GOODWILL IMPAIRMENT DECEMBER 31,
(In thousands) 2002 DISPOSED LOSS 2002
- ---------------------------------------------------------------------------------
NBT Bank, N.A. $ 44,667 $ (1,547) - $ 43,120
NBT Financial Services, Inc. 3,001 - - 3,001
--------------------------------------------------
Total $ 47,668 $ (1,547) - $ 46,121
==================================================
=================================================================================
In connection with the sale of a branch during 2002, $1.5 million in
goodwill were included in the carrying amount of the branch in determining the
gain on disposal.
The Company has intangible assets with definite useful lives capitalized on
its consolidated balance sheet in the form of core deposit and unidentified
intangible assets. These intangible assets continue to be amortized over their
estimated useful lives in accordance with SFAS No. 142, which range from one to
twenty-five years. There were no adjustments to the useful lives of these
intangible assets as a result of the adoption of SFAS No. 142.
64 ANNUAL REPORT: NBT BANCORP INC.
A summary of core deposit and other intangible assets follows:
==============================================================
DECEMBER 31,
---------------
(In thousands) 2002 2001
- --------------------------------------------------------------
CORE DEPOSIT INTANGIBLES
Gross carrying amount $5,433 $ 5,433
Less: accumulated amortization 3,931 3,282
---------------
Net carrying amount 1,502 2,151
---------------
UNIDENTIFIED INTANGIBLE ASSETS
Gross carrying amount 1,031 36,921
Less: accumulated amortization 287 4,729
---------------
Net carrying amount 744 32,192
---------------
TOTAL INTANGIBLES WITH DEFINITE USEFUL LIVES
Gross carrying amount 6,464 42,354
Less: accumulated amortization 4,218 8,011
---------------
Net carrying amount $2,246 $34,343
---------------
===============================================================
Amortization expense on intangible assets with definite useful lives
totaled $0.8 million for each of 2002, 2001, and 2000, respectively.
Amortization expense on intangible assets with definite useful lives is expected
to total $0.6 million for 2003 and $0.3 million for 2004, 2005, 2006 and 2007.
(9) DEPOSITS
- --------------------------------------------------------------------------------
The following table sets forth the maturity distribution of time deposits at
December 31, 2002 (in thousands):
================================================================================
Within one year $ 815,818
After one but within two years 235,981
After two but within three years 172,308
After three but within four years 18,076
After four but within five years 36,882
After five years 10,171
----------
Total $1,289,236
==========
================================================================================
Time deposits of $100,000 or more aggregated $425.7 million and $558.6
million at year end 2002 and 2001, respectively.
ANNUAL REPORT: NBT BANCORP INC. 65
(10) SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings total $105.6 million and $122.0 million at December 31,
2002 and 2001, respectively, and 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 with the FHLB available for short-term
financing and access to brokered deposits of approximately $562 million and $767
million at December 31, 2002 and 2001, respectively.
In addition, the Company has two other lines of credit, expiring on
November 6, 2003, which are available with the FHLB. The first is an overnight
line of credit for approximately $80.0 million with interest based on existing
market conditions. The second is a one-month overnight repricing line of credit
for approximately $50.0 million with interest based on existing market
conditions. As of December 31, 2002, there was $53.5 million (included in
federal funds purchased) outstanding on the overnight lines of credit.
Borrowings on these lines are secured by FHLB stock, certain securities and
one-to-four family first lien mortgage loans.
Securities collateralizing repurchase agreements are held in safekeeping by
nonaffiliated financial institutions and are under the Company's control.
Information related to short-term borrowings is summarized as follows:
===========================================================================
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED
Balance at year-end $53,500 $31,000 $ 50,000
Average during the year 17,404 30,752 52,218
Maximum month end balance 53,500 47,200 70,695
Weighted average rate during the year 1.83% 4.79% 5.95%
Weighted average rate at December 31 1.35% 1.35% 6.66%
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year-end $51,851 $64,973 $ 46,050
Average during the year 63,470 56,408 57,679
Maximum month end balance 69,477 64,973 130,262
Weighted average rate during the year 1.43% 3.38% 5.02%
Weighted average rate at December 31 1.16% 1.62% 4.76%
OTHER SHORT-TERM BORROWINGS
Balance at year-end $ 250 $26,040 $ 88,654
Average during the year 6,165 36,002 84,991
Maximum month end balance 25,787 71,654 131,077
Weighted average rate during the year 1.75% 5.35% 6.42%
Weighted average rate at December 31 1.10% 5.11% 6.65%
===========================================================================
66 ANNUAL REPORT: NBT BANCORP INC.
(11) LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consists of obligations having an original maturity at issuance
of more than one year. A majority of the Company's long-term debt is comprised
of FHLB advances 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. A summary as of December 31, 2002 is as follows:
===================================================
AS OF DECEMBER 31, 2002
-----------------------------------------
WEIGHTED WEIGHTED
AVERAGE CALLABLE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
- ---------------------------------------------------
2003 $100,334 4.94% $ -
2004 30,000 3.42% -
2005 55,000 4.59% 25,000 4.40%
2006 25,000 4.45% -
2008 35,522 5.31% 35,000 5.29%
2009 75,000 5.25% 75,000 5.25%
2012 20,000 2.02% 20,000 2.02%
2025 4,619 1.55% -
-------- ---------
$345,475 $ 155,000
======== =========
===================================================
(12) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES
- --------------------------------------------------------------------------------
On June 14, 1999, CNB established CNBF Capital Trust I (the Trust), which is a
statutory business trust. The Trust exists for the exclusive purpose of issuing
and selling 30 year guaranteed preferred beneficial interests in the Company's
junior subordinated debentures (capital securities). On August 4, 1999, the
Trust issued $18.0 million in capital securities at 3-month LIBOR plus 275 basis
points, which equaled 8.12% at issuance. The rate on the capital securities
resets quarterly, equal to the 3-month LIBOR plus 275 basis points (4.55% and
5.35% for the December 31, 2002 and 2001 quarterly payments, respectively). The
capital securities are the sole asset of the Trust. The obligations of the Trust
are guaranteed by Bancorp. Capital securities totaling $1.0 million were issued
to NBT. These capital securities were retired upon the merger of NBT and CNB
(see note 2). The net proceeds from the sale of the capital securities were used
for general corporate purposes and to provide a capital contribution of $15.0
million to CNB Bank, which was merged into NBT Bank. The capital securities,
with associated expense that is tax deductible, qualify as Tier I capital under
regulatory definitions, subject to certain restrictions. The Bancorp's primary
source of funds to pay interest on the debentures owed to the Trust are current
dividends from the NBT Bank. Accordingly, the Bancorp's ability to service the
debentures is dependent upon the continued ability of NBT Bank to pay dividends
(see also note 14). The capital securities are not classified as debt for
financial statement purposes and therefore the expense associated with the
capital securities is recorded as non-interest expense in the consolidated
statements of income.
ANNUAL REPORT: NBT BANCORP INC. 67
(13) Income Taxes
- --------------------------------------------------------------------------------
The significant components of income tax expense attributable to operations are:
======================================================
YEARS ENDED DECEMBER 31
---------------------------
(In thousands) 2002 2001 2000
- ------------------------------------------------------
CURRENT
Federal $12,569 $ 5,404 $ 7,887
State 590 1,471 835
---------------------------
13,159 6,875 8,722
---------------------------
DEFERRED
Federal 7,048 (4,963) (1,766)
State 1,607 (1,370) (428)
---------------------------
8,655 (6,333) (2,194)
---------------------------
Total income tax expense $21,814 $ 542 $ 6,528
===========================
======================================================
Not included in the above table is income tax expense (benefit) of
approximately $8.1 million, $3.7 million, and $13.2 million for 2002, 2001, and
2000, respectively, relating to unrealized gain (loss) on available for sale
securities and tax benefits recognized with respect to stock options exercised,
which were recorded directly in stockholders' equity.
68 ANNUAL REPORT: NBT BANCORP INC.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
=====================================================================================
DECEMBER 31
-----------------
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Allowance for loan and lease losses $15,532 $17,140
Deferred compensation 3,887 2,873
Postretirement benefit obligation 1,672 1,437
Writedowns on corporate debt securities 2,123 2,868
Accrued severance and contract termination costs 142 1,097
Pension and executive retirement - 311
Other real estate owned 86 193
Purchase accounting adjustments, net 100 223
Accrued liabilities 1,313 1,905
Alternate minimum tax credit carry forward 164 521
New York State tax credit carryforward - 207
Intangible amortization 752 663
Capital loss carryforward 553 -
Net operating loss carryforward 154 -
Other 285 346
-----------------
Total deferred tax assets 26,763 29,784
-----------------
DEFERRED TAX LIABILITIES
Pension and executive retirement 2,377 -
Premises and equipment, primarily due to accelerated depreciation 3,222 1,491
Equipment leasing 11,071 10,335
Securities discount accretion 630 600
Deferred loan costs 651 547
Tax bad debt reserve 114 302
Other 220 277
Undistributed income of subsidiaries 901 -
-----------------
Total deferred tax liabilities 19,186 13,552
-----------------
Net deferred tax asset at year-end 7,577 16,232
Net deferred tax asset at beginning of year 16,232 7,904
-----------------
(Decrease) increase in net deferred tax asset (8,655) 8,328
Net deferred tax assets acquired - 1,995
-----------------
Deferred tax benefit $(8,655) $ 6,333
=================
=====================================================================================
The above table does not include the recorded deferred tax liability of
$11.0 million as of December 31, 2002 and $2.6 million as of December 31, 2001
related to the net unrealized holding gain/loss in the available-for-sale
securities portfolio.
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within the
available carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized. Based on available evidence, gross deferred tax assets will ultimately
be realized and a valuation allowance was not deemed necessary at December 31,
2002 and 2001.
At December 31, 2002, the Company has Federal and state net operating loss
carryforwards of $410,000 and
ANNUAL REPORT: NBT BANCORP INC. 69
$292,000, respectively, which expire in 2021. At December 31, 2002 and 2001, the
Company had alternative minimum tax credit carryforward of $164,000 and
$521,000, respectively, which may be carried forward indefinitely. The
utilization of the tax net operating loss and alternative minimum tax credit
carryforwards is subject to limitations imposed by the Internal Revenue Code.
The Company believes these limitations will not prevent the carryforward
benefits from being realized. At December 31, 2002, the Company also has a
capital loss carryforward of $1,436,000 which expires in 2007.
The following is a reconciliation of the provision for income taxes to the
amount computed by applying the applicable Federal statutory rate of 35% to
income before taxes:
======================================================================
YEARS ENDED DECEMBER 31
----------------------------
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Federal income tax at statutory rate $23,384 $ 1,498 $ 7,239
Tax exempt income (2,493) (2,475) (2,677
Nondeductible expenses 122 400 274
Nondeductible merger expenses - 1,419 2,122
Net increase in CSV of life insurance (153) (121) (230)
Dividend received deduction (177) (142) (139)
State taxes, net of federal tax benefit 1,428 66 264
Other, net (297) (103) (325)
----------------------------
Income tax expense $21,814 $ 542 $ 6,528
======================================================================
(14) STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Certain restrictions exist regarding the ability of the subsidiary bank to
transfer funds to the Company in the form of cash dividends. The approval of the
Office of Comptroller of the Currency (OCC) is required to pay dividends when a
bank fails to meet certain minimum regulatory capital standards or when such
dividends are in excess of a subsidiary bank's earnings retained in the current
year plus retained net profits for the preceding two years (as defined in the
regulations). At December 31, 2002, approximately $9.8 million of the total
stockholders' equity of the Bank was available for payment of dividends to the
Company without approval by the OCC. 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. Under the State of
Delaware Business Corporation Law, the Company may declare and pay dividends
either out of accumulated net retained earnings or capital surplus.
In November 1994, the Company adopted a Stockholder Rights Plan (Plan)
designed to ensure that any potential acquirer of the Company negotiate with the
board of directors and that all Company stockholders are treated equitably in
the event of a takeover attempt. At that time, the Company paid a dividend of
one Preferred Share Purchase Right (Right) for each outstanding share of common
stock of the Company. Similar rights are attached to each share of the Company's
common stock issued after November 15, 1994. Under the Plan, the Rights will not
be exercisable until a person or group acquires beneficial ownership of 20% or
more of the Company's outstanding common stock, begins a tender or exchange
offer for 25% or more of the Company's outstanding common stock, or an adverse
person, as declared by the board of directors, acquires 10% or more of the
Company's outstanding common stock. Additionally, until the occurrence of such
an event, the Rights are not severable from the Company's common stock and,
therefore, the Rights will be transferred upon the transfer of shares of the
Company's common stock. Upon the occurrence of such events, each Right entitles
the holder to purchase one one-hundredth of a share of Series R Preferred Stock,
no par value, and $0.01 stated value per share of the Company at a price of
$100.
The Plan also provides that upon the occurrence of certain specified
events, the holders of Rights will be entitled to acquire additional equity
interests, in the Company or in the acquiring entity, such interests having a
70 ANNUAL REPORT: NBT BANCORP INC.
market value of two times the Right's exercise price of $100. The Rights, which
expire November 14, 2004, are redeemable in whole, but not in part, at the
Company's option prior to the time they are exercisable, for a price of $0.01
per Right.
(15) REGULATORY CAPITAL REQUIREMENTS
- --------------------------------------------------------------------------------
Bancorp and NBT Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, NBT Bank
must meet specific capital guidelines that involve quantitative measures of NBT
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the NBT Bank's to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 Capital to risk-weighted
assets, and of Tier 1 capital to average assets. As of December 31, 2002 and
2001, the Company and NBT Bank meet all capital adequacy requirements to which
they were subject.
Under their prompt corrective action regulations, regulatory authorities
are required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution. Such
actions could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification of
banks into five categories: well capitalized, adequately capitalized, under
capitalized, significantly under capitalized, and critically under capitalized.
As of December 31, 2002, the most recent notification from NBT Bank's regulators
categorized NBT Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized NBT Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 capital to average
asset ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed NBT Bank's category.
The Company and NBT Bank's actual capital amounts and ratios are presented
as follows:
ANNUAL REPORT: NBT BANCORP INC. 71
====================================================================================================
REGULATORY RATIO REQUIREMENTS
ACTUAL ---------------------------------------
---------------- MINIMUM FOR CLASSIFICATION
(Dollars in thousands) AMOUNT RATIO CAPITAL ADEQUACY AS WELL CAPITALIZED
- ----------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2002
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
COMPANY COMBINED $275,954 11.18% 8.00% 10.00%
NBT BANK 270,435 11.12% 8.00% 10.00%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
COMPANY COMBINED 244,992 9.93% 4.00% 6.00%
NBT BANK 239,904 9.86% 4.00% 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS)
COMPANY COMBINED 244,992 6.73% 4.00% 5.00%
NBT BANK 239,904 6.62% 4.00% 5.00%
As of December 31, 2001
Total capital (to risk weighted assets)
Company combined $259,316 10.69% 8.00% 10.00%
NBT Bank 253,401 10.54% 8.00% 10.00%
Tier I Capital (to risk weighted assets)
Company combined 228,803 9.43% 4.00% 6.00%
NBT Bank 223,170 9.28% 4.00% 6.00%
Tier I Capital (to average assets)
Company combined 228,803 6.34% 4.00% 5.00%
NBT Bank 223,170 6.24% 4.00% 5.00%
====================================================================================================
(16) EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
PENSION PLAN
The Company has a qualified, noncontributory, defined benefit pension plan
covering substantially all of its employees at December 31, 2001. M. Griffith,
Inc. and the former Pennstar (and its predecessors Lake Ariel and Pioneer
Holding Company) did not provide for pension benefits to employees through
January 1, 2001. As such, M. Griffith, Inc. and Pennstar employees are not
included in this plan at December 31, 2000. M. Griffith, Inc. and Pennstar
employees began to participate and accrue benefits under this plan as of January
1, 2001. No benefit credit was provided in the Company's plan for service with
M. Griffith, Inc. and the former Pennstar (and its predecessors Lake Ariel or
Pioneer Holding Company). Benefits paid from the plan are based on age, years of
service, compensation, social security benefits, and are determined in
accordance with defined formulas. The Company's policy is to fund the pension
plan in accordance with ERISA standards. Assets of the plan are invested in
publicly traded stocks and bonds. Prior to January 1, 2000, the Company's plan
was a traditional defined benefit plan based on final average compensation. On
January 1, 2000, the plan was converted to a cash balance plan with
grandfathering provisions for existing participants.
Prior to December 31, 2001, the Company maintained two noncontributory
defined benefit retirement plans, the NBT Bancorp Inc. Defined Benefit Pension
Plan and the Central National Bank, Canajoharie Pension Plan. Effective December
31, 2001, the Company merged those two plans.
The net periodic pension expense and the funded status of the plan are as
follows:
72 ANNUAL REPORT: NBT BANCORP INC.
===================================================================================================
YEARS ENDED DECEMBER 31
-------------------------------
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 1,484 $ 1,968 $ 1,382
Interest cost 2,041 2,038 2,041
Expected return on plan assets (2,549) (2,703) (2,790)
Amortization of initial unrecognized asset (192) (196) (196)
Amortization of prior service cost 160 234 233
Amortization of unrecognized net gain - (23) (117)
-------------------------------
Net periodic pension cost $ 944 $ 1,318 $ 553
===============================
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at beginning of year $(31,846) $(28,867) $(27,364)
Service cost (1,484) (1,968) (1,382)
Interest cost (2,041) (2,038) (2,041)
Actuarial (loss) gain (1,238) (1,438) (1,309)
Benefits paid 3,348 2,465 2,933
Prior service cost 1,319 - 296
-------------------------------
Projected benefit obligation at end of year $(31,942) $(31,846) $(28,867)
===============================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 29,548 $ 28,666 $ 31,091
Actual return on plan assets (1,598) (814) 302
Employer contributions 8,000 3,950 -
Benefits paid (3,348) (2,465) (2,933)
Actuarial gain due to measurement date prior to December 31 - 211 206
-------------------------------
Fair value of plan assets at end of year $ 32,602 $ 29,548 $ 28,666
===============================
Plan assets (less than) in excess of projected benefit obligation $ 660 $ (2,298) $ (201)
Unrecognized portion of net asset at transition (1,172) (1,364) (1,560)
Unrecognized net actuarial loss (gain) 8,298 2,913 (1,854)
Unrecognized prior service cost 1,527 3,006 3,240
-------------------------------
Prepaid (accrued) pension cost $ 9,313 $ 2,257 $ (375)
===============================
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 6.50% 7.00% 7.25%
Expected long-term return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.00% 4.00%
===================================================================================================
In addition to the Company's noncontributory defined benefit retirement and
pension plan, the Company provides a supplemental employee retirement plans to
certain current and former executives. The amount of the liabilities recognized
in the Company's consolidated balance sheets associated with these plans was
$7.1 million and $6.4 million at December 31, 2002 and 2001, respectively. The
charges to expense with respect to these plans amounted to $1.0 million, $0.4
million, and $1.7 million for the years ended December 31, 2002, 2001, and 2000,
respectively. The discount rate used in determining the actuarial present values
of the projected benefit obligations was 6.50%, 7.00%, and 7.25%, at December
31, 2002, 2001, and 2000, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care benefits for retired employees.
Benefits are accrued over the employees' active service period. Only employees
that were employed by NBT Bank on or before January 1, 2000 are eligible to
receive postretirement health care
ANNUAL REPORT: NBT BANCORP INC. 73
benefits. The plan is contributory for participating retirees, requiring
participants to absorb certain deductibles and coinsurance amounts with
contributions adjusted annually to reflect cost sharing provisions and benefit
limitations called for in the plan. Employees become eligible for these benefits
if they reach normal retirement age while working for the Company. The Company
funds the cost of postretirement health care as benefits are paid. The Company
elected to recognize the transition obligation on a delayed basis over twenty
years.
The net postretirement health benefits expense and obligations (the plan is
unfunded) are as follows:
===============================================================================
YEARS ENDED DECEMBER 31
-----------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 221 $ 175 $ 199
Interest cost 454 300 304
Amortization of transition obligation 39 39 124
Amortization of (gains) and losses 141 31 (15)
Amortization of unrecognized prior service cost (27) (14) -
-----------------------------
Net periodic postretirement benefit cost $ 828 $ 531 $ 612
=============================
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Benefit obligation at beginning of the year $ 5,399 $ 4,738 $ 3,959
Service cost 221 175 199
Interest cost 454 300 304
Plan participants' contributions - - 129
Actuarial loss (gain) 1,976 1,640 439
Amendments (168) (1,224) -
Benefits paid (366) (230) (292)
-----------------------------
Accumulated benefit obligation at end of year $ 7,516 $ 5,399 $ 4,738
=============================
COMPONENTS OF ACCRUED BENEFIT COST
Accumulated benefit obligation at end of year $( 7,516) $(5,399) $(4,738)
Unrecognized transition obligation 101 139 1,196
Unrecognized prior service cost (333) (192) -
Unrecognized actuarial net loss 3,912 2,077 468
-----------------------------
Accrued benefit cost $ (3,836) $(3,375) (3,074)
=============================
Weighted average discount rate 6.50% 7.00% 7.25%
===============================================================================
The Company used a health care trend rate in calculating the postretirement
cost of 9.0% during December 31, 2002, grading down uniformly to 5.0% for 2010
and thereafter.
Assumed health care cost trend rates have a significant effect on amounts
reported for health care plans. A onepercentage point change in the health care
trend rates would have the following effects as of and for the year ended
December 31, 2002:
===========================================================================================
1-PERCENTAGE 1-PERCENTAGE
(IN THOUSANDS) POINT INCREASE POINT DECREASE
- -------------------------------------------------------------------------------------------
Effect on total service and interest cost components $ 152 $ (122)
Effect on postretirement accumulated benefit obligation 1,391 (1,151)
===========================================================================================
74 ANNUAL REPORT: NBT BANCORP INC.
EMPLOYEE 401(K) AND EMPLOYEE STOCK OWNERSHIP PLANS
At December 31, 2002, the Company maintains a 401(k) and employee stock
ownership plan (the Plan). The Company contributes to the Plan based on
employees' contributions out of their annual salary. In addition, the Company
may also make discretionary contributions to the Plan based on profitability.
Participation in the plan is contingent upon certain age and service
requirements.
Through December 31, 2000, Pennstar maintained a profit-sharing plan and a
401(k) savings plan for employees of the former LA Bank, N.A. and maintained an
ESOP and a savings and investment plan for employees of the former Pioneer
American Bank, N.A. On January 1, 2001, these plans were merged into the
Company's plan. CNB maintained a 401(k) plan. On January 1, 2002, the CNB plan
was merged into the company's plan. The recorded expenses associated with these
plans was $1.3 million in 2002, $0.8 million in 2001, and $1.7 million in 2000.
STOCK OPTION PLANS
The following is a summary of changes in options outstanding:
============================================================================
WEIGHTED AVERAGE OF
EXERCISE PRICE OF OPTIONS
NUMBER OF OPTIONS UNDER THE PLANS
- ----------------------------------------------------------------------------
Balance at December 31, 1999 1,290,252 $ 13.73
Granted 515,369 13.67
Exercised (277,880) 7.32
Lapsed (49,917) 14.14
----------------------------------------------
Balance at December 31, 2000 1,477,824 13.59
Granted 726,746 15.13
Exercised (219,659) 8.92
Lapsed (79,036) 15.83
----------------------------------------------
Balance at December 31, 2001 1,905,875 14.61
Granted 497,670 14.40
Exercised (170,661) 9.69
Lapsed (40,661) 14.09
----------------------------------------------
BALANCE AT DECEMBER 31, 2002 2,192,223 $ 14.96
==============================================
============================================================================
The following table summarizes information concerning stock options
outstanding at December 31, 2002:
========================================================================================================
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------
$4.01-8.50 30,696 1.99 $ 6.37 30,696 $ 6.37
8.51-13.00 406,614 4.75 10.67 387,413 10.68
13.01-17.50 1,367,641 8.12 15.17 446,918 15.42
17.51-22.00 387,272 5.86 19.39 331,069 19.33
- --------------------------------------------------------------------------------------------------------
$4.01-22.00 2,192,223 7.01 $ 14.96 1,196,096 $ 14.73
========================================================================================================
========================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 75
(17) COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
The Company's concentrations of credit risk are reflected in the consolidated
balance sheets. The concentrations of credit risk with standby letters of
credit, unused lines of credit, commitments to originate new loans and loans
sold with recourse generally follow the loan classifications.
At December 31, 2002, approximately 62% of the Company's loans are secured
by real estate located in central and northern New York and northeastern
Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion
of the Company's portfolio is susceptible to changes in market conditions of
those areas. Management is not aware of any material concentrations of credit to
any industry or individual borrowers.
The Company is a party to certain financial instruments with off balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
unused lines of credit, standby letters of credit, and as certain mortgage loans
sold to investors with recourse. The Company's exposure to credit loss in the
event of nonperformance by the other party to the commitments to extend credit,
unused lines of credit, standby letters of credit, and loans sold with recourse
is represented by the contractual amount of those instruments. The Company uses
the same credit standards in making commitments and conditional obligations as
it does for on balance sheet instruments.
===========================================================================
AT DECEMBER 31
------------------
(In thousands) 2002 2001
- ---------------------------------------------------------------------------
Unused lines of credit $ 72,458 $ 58,315
Commitments to extend credits, primarily variable rate 336,665 285,130
Standby letters of credit 24,659 20,984
Loans sold with recourse $ 15,022 $ 18,258
===========================================================================
The total amount of loans serviced by the Company for unrelated third
parties was approximately $77.2 million and $93.2 million at December 31, 2002
and 2001, respectively.
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 consolidated balance sheets or results of
operations of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others; an Interpretation of
FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.
34." FIN No. 45 requires certain new disclosures and potential
liability-recognition for the fair value at issuance of guarantees that fall
within its scope. Under FIN No. 45, the Company does not issue any guarantees
that would require liability-recognition or disclosure, other than its standby
letters of credit.
The Company guarantees the obligations or performance of customers by
issuing stand-by letters of credit to third parties. These stand-by letters of
credit are frequently issued in support of third party debt, such as corporate
debt issuances, industrial revenue bonds, and municipal securities. The risk
involved in issuing stand-by letters of credit is essentially the same as the
credit risk involved in extending loan facilities to customers, and they are
subject to the same credit origination, portfolio maintenance and management
procedures in effect to monitor other credit and off-balance sheet products.
Typically, these instruments have terms of five years or less and expire unused;
therefore, the total amounts do not necessarily represent future cash
requirements.
76 ANNUAL REPORT: NBT BANCORP INC.
(18) PARENT COMPANY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
===========================================================================
DECEMBER 31
------------------
(In thousands) 2002 2001
- ---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 5,038 $ 1,971
Securities available for sale, at estimated fair value 6,624 8,401
Investment in subsidiaries, on equity basis 305,080 279,725
Other assets 13,243 11,654
------------------
Total assets $329,985 $301,751
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ 37,603 $ 35,396
Stockholders' equity 292,382 266,355
------------------
Total liabilities and stockholders' equity $329,985 $301,751
==================
===========================================================================
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
-----------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Gain on sale of building $ 220 $ - $ -
Dividends from subsidiaries 32,803 27,775 35,270
Management fee from subsidiaries 43,377 25,860 17,266
Interest and other dividend income 540 1,273 1,578
Net gain on sale of securities available for sale 341 294 151
-----------------------------
77,281 55,202 54,265
44,513 41,535 36,374
Income before income tax (benefit) expense and (distributions in
equity in excess of) undistributed income of subsidiaries 32,768 13,667 17,891
Income tax (benefit) expense 22 (3,907) (5,738)
Equity in (distributions in excess of) undistributed income of subsidiaries 12,253 (13,837) (9,475)
-----------------------------
$44,999 $ 3,737 $14,154
=============================
=========================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 77
CONDENSED STATEMENTS OF CASH FLOWS
========================================================================================
YEARS ENDED DECEMBER 31
-------------------------------
(IN THOUSANDS) 2002 2001 2000
- ----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 44,999 $ 3,737 $ 14,154
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net gains on sale of securities available for sale (341) (294) (151)
Tax benefit from exercise of stock options 199 327 660
Distributions in excess of (equity in undistributed)
income of subsidiaries (12,253) 13,837 9,475
Other, net 3,058 4,354 2,242
-------------------------------
Net cash provided by operating activities 35,662 21,961 26,380
-------------------------------
INVESTING ACTIVITIES
SECURITIES AVAILABLE FOR SALE
Proceeds from sales 732 4,458 384
Purchases of securities available for sale - (390) (1,742)
Purchases of premises and equipment (1,582) (2,603) (4)
-------------------------------
Net cash (used in) provided by investing activities (850) 1,465 (1,362)
-------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of shares to employee
benefit plans and other stock plans 1,583 2,046 507
Payment on long-term debt (80) (75) (65)
Purchase of treasury shares (10,803) (11,126) (1,680)
Cash dividends and payment for fractional shares (22,445) (20,127) (18,447)
-------------------------------
Net cash by (used in) financing activities (31,745) (29,282) (19,685)
-------------------------------
Net (decrease) increase in cash and cash equivalents 3,067 (5,856) 5,333
Cash and cash equivalents at beginning of year 1,971 7,827 2,494
-------------------------------
Cash and cash equivalents at end of year $ 5,038 $ 1,971 $ 7,827
===============================
========================================================================================
(19) FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
SHORT TERM INSTRUMENTS
For short-term instruments, such as cash and cash equivalents, accrued interest
receivable, accrued interest payable, and short term borrowings, carrying value
approximates fair value.
SECURITIES
Fair values for securities are based on quoted market prices or dealer quotes,
where available. Where quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
LOANS
For variable rate loans that reprice frequently and have no significant credit
risk, fair values are based on carrying values. The fair values for fixed rate
loans are estimated
78 ANNUAL REPORT: NBT BANCORP INC.
through discounted cash flow analysis using interest rates currently being
offered for loans with similar terms and credit quality. Nonperforming loans are
valued based upon recent loss history for similar loans.
DEPOSITS
The fair values disclosed for savings, money market, and noninterest bearing
accounts are, by definition, equal to their carrying values at the reporting
date. The fair value of fixed maturity time deposits is estimated using a
discounted cash flow analysis that applies interest rates currently offered to a
schedule of aggregated expected monthly maturities on time deposits.
LONG-TERM DEBT
The fair value of long-term debt has been estimated using discounted cash flow
analysis that applies interest rates currently offered for notes with similar
terms.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of credit are
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present credit
worthiness of the counterparties. Carrying amounts, which are comprised of the
unamortized fee income, are not significant.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES
Given the variable rate nature of this financial instrument, the carrying value
approximates fair value.
Estimated fair values of financial instruments at December 31 are as
follows:
================================================================================================================
2002 2001
----------------------- -----------------------
CARRYING ESTIMATED Carrying Estimated
(In thousands) AMOUNT FAIR VALUE amount fair value
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 124,623 $ 124,623 $ 129,957 $ 129,957
Trading securities 203 203 126 126
Securities available for sale 1,007,583 1,007,583 909,341 909,341
Securities held to maturity 82,514 84,517 101,604 101,495
Loans (1) 2,355,932 2,423,172 2,339,636 2,399,044
Less allowance for loan losses 40,167 - 44,746 -
Net loans 2,315,765 2,423,172 2,294,890 2,399,044
Accrued interest receivable $ 16,885 $ 16,885 $ 18,152 $ 18,152
----------------------- -----------------------
FINANCIAL LIABILITIES
DEPOSITS
INTEREST BEARING
Savings, NOW, and money market $1,183,603 $ 1,183,603 $1,097,156 $ 1,097,156
Time deposits 1,289,236 1,301,742 1,387,049 1,400,996
Noninterest bearing 449,201 449,201 431,407 431,407
Short-term borrowings 105,601 105,601 122,013 122,013
Long-term debt 345,476 374,751 272,331 282,426
Accrued interest payable 8,333 8,333 13,145 13,145
Guaranteed preferred beneficial interests in company's junior
subordinated debentures $ 17,000 $ 17,000 $ 17,000 $ 17,000
----------------------- -----------------------
================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 79
(1) LEASE RECEIVABLES, ALTHOUGH EXCLUDED FROM THE SCOPE OF SFAS NO. 107, ARE
INCLUDED IN THE ESTIMATED FAIR VALUE AMOUNTS AT THEIR CARRYING AMOUNTS.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust and
investment management operation that contributes net fee income annually. The
trust and investment management operation is not considered a financial
instrument, and its value has not been incorporated into the fair value
estimates. Other significant assets and liabilities include the benefits
resulting from the low-cost funding of deposit liabilities as compared to the
cost of borrowing funds in the market, and premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in the estimate of fair value.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
The information required is incorporated herein by reference from the Company's
definitive Proxy Statement for its annual meeting of shareholders to be held on
May 1, 2003 (the "Proxy Statement"), which will be filed with the Securities and
Exchange Commission within 120 days of the Company's 2002 fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The information required is incorporated herein by reference from the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
- --------------------------------------------------------------------------------
As of December 31, 2002, the following table summarizes the Company's equity
compensation plans:
80 ANNUAL REPORT: NBT BANCORP INC.
========================================================================================================================
NUMBER OF SECURITIES REMAINING
A. AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE B. UNDER EQUITY COMPENSATION
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE PLANS (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS PRICE OF OUTSTANDING OPTIONS REFLECTED IN COLUMN A.
- ------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS 2,192,223 $ 14.96 2,908,784
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS NONE NONE NONE
========================================================================================================================
The remaining information required is incorporated herein by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The information required is incorporated herein by reference from the Proxy
Statement.
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in timely alerting them to any material
information relating to the Company and its subsidiaries required to be included
in the Company's periodic SEC filings.
There were no significant changes made in the Company's internal controls
or in other factors that that could significantly affect these internal controls
subsequent to the date of the evaluation performed by the Company's Chief
Executive Officer and Chief Financial Officer.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a)(1) EXHIBIT INDEX The following exhibits are either filed as part of this
annual report on Form 10-K or, are incorporated herein by reference.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Income for each of the three years ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Changes in Stockholders' Equity for each of
the three years ended December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2002, 2001 and 2000.
Consolidated Statements of Comprehensive Income for each of the three
years ended December 31, 2002, 2001 and 2000.
Notes to the Consolidated Financial Statements.
ANNUAL REPORT: NBT BANCORP INC. 81
(a)(2) There are no financial statement schedules that are required to be
filed as part of this form since they are not applicable or the
information is included in the consolidated financial statements.
(a)(3) See (c) below for all exhibits filed herewith and the Exhibit Index.
(b) Reports on Form 8-K
None
(c) Exhibits. The following exhibits are either filed as part of this
annual report on Form 10-K, or are incorporated herein by reference:
3.1 Certificate of Incorporation of NBT Bancorp Inc. as amended
through July 23, 2001 (filed as Exhibit
3.1 to Registrant's Form 10-K for the year ended December 31,
2001, filed on March 29, 2002 and incorporated herein by
reference).
3.2 By-laws of NBT Bancorp Inc. as amended and restated through
July 23, 2001 (filed as Exhibit 3.2 to Registrant's Form 10-K
for the year ended December 31, 2001, filed on March 29, 2002
and incorporated herein by reference).
3.3 Rights Agreement, dated as of November 15, 1994, between NBT
Bancorp Inc. and American Stock Transfer Trust Company as
Rights Agent (filed as Exhibit 4.1 to Registrant's Form 8-A,
file number 0-14703, filed on November 25, 1994, and
incorporated by reference herein).
3.4 Amendment No. 1 to Rights Agreement, dated as of December 16,
1999, between NBT Bancorp Inc. and American Stock Transfer
Trust Company as Rights Agent (filed as Exhibit 4.2 to
Registrant's Form 8-A/A, file number 0-14703, filed on
December 21, 1999, and incorporated by reference herein).
3.5 Amendment No. 2 to Rights Agreement, dated as of April 19,
2000, between NBT Bancorp Inc. and American Stock Transfer
Trust Company as Rights Agent (filed as Exhibit 4.3 to
Registrant's Form 8A12G/A, file number 0-14703, filed on May
25, 2000, and incorporated by reference herein).
10.1 NBT Bancorp Inc. 401(K) and Employee Stock Ownership Plan made
as of January 1, 2001 (filed as Exhibit 10.1 to Registrant's
Form 10-K for the year ended December 31, 2000, filed on March
29, 2001 and incorporated by reference herein).
10.2 First Amendment to the NBT Bancorp Inc. 401(k) and Employee
Stock Ownership Plan effective July 2, 2001. (filed as Exhibit
10.2 to Registrant's Form 10-K for the year ended December 31,
2001, filed on March 29, 2002 and incorporated herein by
reference).
10.3 Second Amendment to the NBT Bancorp Inc. 401(k) and Employee
Stock Ownership Plan effective July 2, 2001. (filed as Exhibit
10.3 to Registrant's Form 10-K for the year ended December 31,
2001, filed on March 29, 2002 and incorporated herein by
reference).
10.4 Third Amendment to the NBT Bancorp Inc. 401(k) and Employee
Stock Ownership Plan effective January 1, 2002. (filed as
Exhibit 10.4 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.5 Fourth Amendment to the NBT Bancorp Inc. 401(k) and Employee
Stock Ownership Plan effective January 1, 2002. (filed as
Exhibit 10.5 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.6 Fifth Amendment to the NBT Bancorp Inc. 401(k) and Employee
Stock Ownership Plan effective January 1, 2002. (filed as
Exhibit 10.6 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.7 NBT Bancorp Inc. Defined Benefit Pension Plan, Amended and
Restated Effective as of January 1, 2000 (filed as Exhibit
10.2 to Registrant's Form 10-K for the year ended December 31,
2000, filed on March 29, 2001 and incorporated by reference
herein).
10.8 Amendment Number One to NBT Bancorp Inc. Defined Benefit
Pension Plan effective December 31,
82 ANNUAL REPORT: NBT BANCORP INC.
2001. (filed as Exhibit 10.8 to Registrant's Form 10-K for the
year ended December 31, 2001, filed on March 29, 2002 and
incorporated herein by reference).
10.9 Amendment Number Two to NBT Bancorp Inc. Defined Benefit
Pension Plan effective January 1, 2002.
10.10 Amendment Number Three to NBT Bancorp Inc. Defined Benefit
Pension Plan effective January 1, 2002.
10.11 NBT Bancorp Inc. 1993 Stock Option Plan (filed as Exhibit 99.1
to Registrant's Form S-8 Registration Statement, file number
333-71830 filed on October 18, 2001 and incorporated by
reference herein).
10.12 NBT Bancorp Inc. Non-Employee Director, Divisional Director
and Subsidiary Director Stock Option Plan (filed as Exhibit
99.1 to Registrant's Form S-8 Registration Statement, file
number 333-73038 filed on November 9, 2001 and incorporated by
reference herein).
10.13 NBT Bancorp Inc. Employee Stock Purchase Plan. (filed as
Exhibit 10.11 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.14 NBT Bancorp Inc. Directors Restricted Stock Plan (filed as
Exhibit 99.1 to Registrant's Form S-8 Registration Statement,
file number 333-72772 filed on November 5, 2001, and
incorporated by reference herein).
10.15 NBT Bancorp Inc. 2003 Executive Incentive Compensation Plan.
10.16 Change in control agreement with Daryl R. Forsythe made as of
February 21, 1995 and revised on July 23, 2001 (filed as
Exhibit 10.4 to the Registrant's Form 10-Q for the quarterly
period ended September 30, 2001, filed on November 14, 2001
and incorporated herein by reference).
10.17 Form of Employment Agreement between NBT Bancorp Inc. and
Daryl R. Forsythe made as of January 1, 2002. (filed as
Exhibit 10.15 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.18 Supplemental Retirement Agreement between NBT Bancorp Inc.,
NBT Bank, National Association and Daryl R. Forsythe as
Amended and Restated Effective January 28, 2002. (filed as
Exhibit 10.16 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.19 Death Benefits Agreement between NBT Bancorp Inc., NBT Bank,
National Association and Daryl R. Forsythe made August 22,
1995 (filed as Exhibit 10.8 to Registrant's Form 10-K for the
year ended December 31, 2000, filed on March 29, 2001 and
incorporated herein by reference).
10.20 Amendment dated January 28, 2002 to Death Benefits Agreement
between NBT Bancorp Inc., NBT Bank, National Association and
Daryl R. Forsythe made August 22, 1995. (filed as Exhibit
10.18 to Registrant's Form 10-K for the year ended December
31, 2001, filed on March 29, 2002 and incorporated herein by
reference).
10.21 Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank,
National Association and Daryl R. Forsythe made January 25,
2002.
10.22 Wage Continuation Plan between NBT Bancorp Inc., NBT Bank,
National Association and Daryl R. Forsythe made as of August
1, 1995 (filed as Exhibit 10.9 to Registrant's Form 10-K for
the year ended December 31, 2000, filed on March 29, 2001 and
incorporated herein by reference).
10.23 Form of Employment Agreement between NBT Bancorp Inc. and
Martin A. Dietrich made as of January 1, 2002. (filed as
Exhibit 10.21 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.24 Supplemental Executive Retirement Agreement between NBT
Bancorp Inc. and Martin A. Dietrich
ANNUAL REPORT: NBT BANCORP INC. 83
made as of July 23, 2001(filed as Exhibit 10.13 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 2001, filed on November 14, 2001 and
incorporated herein by reference).
10.25 Change in control agreement with Martin A. Dietrich dated
January 2, 1997 and revised on July 23, 2001 (filed as Exhibit
10.3 to Registrant's Form 10-Q for the quarterly period ended
September 30, 2001, filed on November 14, 2001 and
incorporated herein by reference).
10.26 Form of Employment Agreement between NBT Bancorp Inc. and
Michael J. Chewens made as of January 1, 2002. (filed as
Exhibit 10.24 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.27 Supplemental Executive Retirement Agreement between NBT
Bancorp Inc. and Michael J. Chewens made as of July 23, 2001
(filed as Exhibit 10.12 to Registrant's Form 10-Q for the
quarterly period ended September 30, 2001, filed on November
14, 2001 and incorporated by reference herein).
10.28 Change in control agreement with Michael J. Chewens dated
January 1, 1998 and revised on July 23, 2001 (filed as Exhibit
10.1 to Registrant's Form 10-Q for the quarterly period ended
September 30, 2001, filed on November 14, 2001 and
incorporated herein by reference).
10.29 Form of Employment Agreement between NBT Bancorp Inc. and
David E. Raven made as of January 1, 2002. (filed as Exhibit
10.27 to Registrant's Form 10-K for the year ended December
31, 2001, filed on March 29, 2002 and incorporated herein by
reference).
10.30 Change in control agreement with David E. Raven dated January
1, 1998 and revised on July 23, 2001 (filed as Exhibit 10.7 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 2001, filed on November 14, 2001 and
incorporated by reference herein).
10.31 Form of Employment Agreement between NBT Bancorp Inc. and
Lance D. Mattingly made as of January 1, 2002. (filed as
Exhibit 10.29 to Registrant's Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002 and incorporated
herein by reference).
10.32 Change in control agreement with Lance D. Mattingly dated July
23, 2001 (filed as Exhibit 10.5 to Registrant's Form 10-Q for
the quarterly period ended September 30, 2001, filed on
November 14, 2001 and incorporated by reference herein).
10.33 Change in control agreement with Tom Delduchetto dated January
28, 2002 (filed as Exhibit 10.33 to Registrant's Form 10-K for
the year ended December 31, 2001, filed on March 29, 2002 and
incorporated herein by reference).
10.34 NBT Bancorp Inc. and Subsidiaries Master Deferred Compensation
Plan of Directors, adopted February 11, 1992 (filed as Exhibit
10.9 to Registrant's Form 10-K for the year ended December 31,
2000, filed on March 29, 2001 and incorporated herein by
reference).
10.35 Agreement and Plan of Merger among NBT Bancorp Inc., NBT Bank,
National Association, CNB Financial Corp. and Central National
Bank, Canajoharie dated as of June 19, 2001 (filed as Appendix
A to Registrant's Form S-4/A Registration Statement, file
number 333-66472, filed on August 27, 2001, and incorporated
by reference herein).
21 A list of the subsidiaries of the Registrant.
23 Consent of KPMG LLP.
99.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
84 ANNUAL REPORT: NBT BANCORP INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, NBT Bancorp Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NBT BANCORP INC. (Registrant)
March 24, 2003
/S/ Daryl R. Forsythe
- -----------------------------------------
Daryl R. Forsythe
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/S/ Daryl R. Forsythe /S/ Michael J. Chewens
- ------------------------------------------ -----------------------------------
Daryl R. Forsythe Michael J. Chewens
President, Chief Executive Officer Chief Financial Officer (Principal
and Chairman (Principal Executive Officer) Financial Officer)
Date: March 24, 2003 Date: March 24, 2003
/S/ John C. Mitchell /S/ William L. Owens
- ------------------------------------------ -----------------------------------
John C. Mitchell, William L. Owens,
Director Director
Date: March 24, 2003 Date: March 24, 2003
/S/ Joseph G. Nasser /S/ Van Ness D. Robinson
- ------------------------------------------ -----------------------------------
Joseph G. Nasser, Van Ness D. Robinson,
Director Director
Date: March 24, 2003 Date: March 24, 2003
/S/ Gene E. Goldenziel /S/ Joseph A. Santangelo
- ------------------------------------------ -----------------------------------
Gene E. Goldenziel, Joseph A. Santangelo,
Director Director
Date: March 24, 2003 Date: March 24, 2003
/S/ Peter B. Gregory /S/ Paul O. Stillman
- ------------------------------------------ -----------------------------------
Peter B. Gregory, Paul O. Stillman,
Director Director
Date: March 24, 2003 Date: March 24, 2003
/S/ William C. Gumble /S/ Janet H. Ingraham
- ------------------------------------------ -----------------------------------
William C. Gumble, Janet H. Ingraham,
Director Director
Date: March 24, 2003 Date: March 24, 2003
/S/ Michael Hutcherson /S/ Paul Horger
- ------------------------------------------ -----------------------------------
Michael Hutcherson, Paul Horger,
Director Director
Date: March 24, 2003 Date: March 24, 2003
/S/ Richard Chojnowski /S/ Andrew S. Kowalczyk, Jr
- ------------------------------------------ -----------------------------------
Richard Chojnowski, Andrew S. Kowalczyk, Jr.,
Director Director
Date: March 24, 2003 Date: March 24, 2003
/S/ Michael Murphy
- ------------------------------------------ -----------------------------------
Michael Murphy,
Director
Date: March 24, 2003
ANNUAL REPORT: NBT BANCORP INC. 85
CERTIFICATION
I, Daryl R. Forsythe, certify that:
1. I have reviewed this annual report on Form 10-K of NBT Bancorp Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 24, 2003
/S/ Daryl R. Forsythe
- -----------------------------------------
Daryl R. Forsythe
Chairman and Chief Executive Officer
86 ANNUAL REPORT: NBT BANCORP INC.
CERTIFICATION
I, Michael J. Chewens, certify that:
1. I have reviewed this annual report on Form 10-K of NBT Bancorp Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 24, 2003
/S/ Michael J. Chewens
- -----------------------------------------------
Michael J. Chewens
Senior Executive Vice President,
Chief Financial Officer and Corporate Secretary
ANNUAL REPORT: NBT BANCORP INC. 87