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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-14703
NBT BANCORP INC. (Exact name of registrant as specified in its charter)
DELAWARE 16-1268674
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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 led all reports required
to be led 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 le such reports) and (2) has been subject to such ling requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K (Section 299.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Based upon the closing price of the registrant's common stock as of June 30,
2003, the aggregate market value of the voting stock, common stock, par value,
$0.01 per share, held by non-affiliates of the registrant is $632,219,601.
The number of shares of Common Stock outstanding as of February 27, 2004, was
32,868,354.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on May 4, 2004 are incorporated by reference
into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.
This page left blank intentionally
PART ITEM
- -------------------------------------------------------------------------------
I 1 BUSINESS 5
Description of Business 5-8
Average Balance Sheets 14
Net Interest Income Analysis -Taxable Equivalent Basis 14
Net Interest Income and Volume/Rate
Variance-Taxable Equivalent Basis 15
Securities Portfolio 19
Debt Securities -Maturity Schedule 26
Loans 16
Maturities and Sensitivities of Loans to Changes
in Interest Rates 17
Nonperforming Assets 25
Allowance for Loan Losses 23
Maturity Distribution of Time Deposits 20
Return on Equity and Assets 10
Short-Term Borrowings 55
2 PROPERTIES 8
3 LEGAL PROCEEDINGS 9
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
II 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS 9
6 SELECTED FINANCIAL DATA 10
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OFOPERATIONS 11-32
7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 32-34
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets at December 31, 2003 and 2002 36
Consolidated Statements of Income for each
of the years in the three-year period ended
December 31, 2003 37
Consolidated Statements of Changes in Stockholders'
Equity for each of the years in the
three-year period ended December 31, 2003 38
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 2003 39-40
ANNUAL REPORT: NBT BANCORP INC. 3
Consolidated Statements of Comprehensive Income
for each of the years in the
three-year period ended December 31, 2003 40
Notes to Consolidated Financial Statements 41-69
Independent Auditors' Report 35
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 70
9A CONTROLS AND PROCEDURES 70
III 10 DIRECTORS AND EXECUTIVE OFCERS OF THE REGISTRANT* 71
11 EXECUTIVE COMPENSATION* 71
12 SECURITY OWNERSHIP OF CERTAIN BENECIAL OWNERS AND MANAGEMENT* 71
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS* 71
14 PRINCIPAL ACCOUNTANT FEES AND SERVICES* 71
IV 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K 72-75
(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.
(b) Reports on Form 8-K.
(c) Refer to item 15(a)(3)above.
(d) Refer to item 15(a)(2) above.
SIGNATURES 76
* Information called for by Part III (Items 10 through 14) is incorporated by
reference to the Registrant's Proxy Statement for the 2004 Annual Meeting
of Stockholders.
ANNUAL REPORT: NBT BANCORP INC. 4
PART I
ITEM 1. BUSINESS
- --------------------------------------------------------------------------------
NBT Bancorp Inc. (the "Registrant" or the "Company") is a registered
financial holding company incorporated in the state of Delaware in 1986, with
its principal headquarters located in Norwich, New York. The Registrant is the
parent holding company of NBT Bank, N.A. ("the Bank"), NBT Financial Services,
Inc. ("NBT Financial"), and CNBF Capital Trust I (see Note 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 out-standing 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 con-ducts business
through three geographic operating divisions, NBT Bank, Pennstar Bank and
Central National Bank.
The NBT Bank division has 44 divisional offices and 63 automated teller
machines (ATMs), located primarily in central and upstate New York. At December
31, 2003, NBT Bank had total loans of $1.4 billion and total deposits of $1.5
billion.
The Pennstar Bank division has 40 divisional offices and 51 ATMs, located
primarily in northeastern Pennsylvania. At December 31, 2003, Pennstar Bank had
total loans and leases of $581.4 million and total deposits of $799.7 million.
The Central National Bank division has 27 divisional offices and 24 ATMs
located primarily in upstate New York. At December 31, 2003, Central National
Bank had total loans and leases of $701.6 million and total deposits of $715.0
million.
The Bank has six operating subsidiaries, NBT Capital Corp., LA Lease, Inc.,
Pennstar Services Company, Colonial Financial Services, Inc. ("CFS"), Pennstar
Realty Trust, and CNB Realty Trust. 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 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, offered a
variety of financial services products and currently conducts no operations as
of December 31, 2003. Pennstar Management Trust ("PMT") formed in 2002, was the
former holding company for Pennstar Realty Trust and CNB Realty Trust. PMT was
liquidated on December 31, 2003.
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, offered a variety of financial
services products. Pennstar Financial Services conducted no operations during
2003. M. Griffith, Inc., formed in 1951 and acquired by the Company in 2000, is
a registered securities broker-dealer which also offers financial and retirement
planning as well as life, accident and health insurance.
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 ser-vices 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
ANNUAL REPORT: NBT BANCORP INC. 5
Company. In order to compete with other financial ser-vices 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
financial 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 is a licensed insurance
agency with offices in the state of New York and is 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.
The Company is subject to capital adequacy guide-lines 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, 2003, the Company's leverage ratio was 6.76%, its ratio
of Tier 1 capital to risk-weighted assets was 9.96%, and its ratio of qualifying
total capital to risk-weighted assets was 11.21%. 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 share-holders 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, 2003, the Bank was in compliance with all
minimum capital requirements. The Bank's lever-age ratio was 6.50%, its ratio of
Tier 1 capital to risk-weighted assets was 9.59%, and its ratio of qualifying
total capital to risk-weighted assets was 10.85%.
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, 2003, the total amount of brokered deposits were $170.0
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 pro-posed 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, 2003, approximately
$28.9 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
ANNUAL REPORT: NBT BANCORP INC. 6
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 de-posits
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
cap-ital and supervisory evaluation categories. 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 depository institution's capitalization or supervisory
evaluation. During 2003, FDIC-insured banks paid an aver-age rate of
approximately $0.017 per $100 for purposes of funding FICO bond obligations.
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 con-trolled 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 ad-dresses 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 GrammLeach-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 deter-mined 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
ANNUAL REPORT: NBT BANCORP INC. 7
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 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 included information
in the Company's quarterly and annual re-ports 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, 2003, the Company had 1,193 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.nbtbancorp.com. The Company makes available
free of charge through its internet site, its annual reports on Form 10-K;
quarterly reports on Form 10-Q; current reports on Form 8K; and any amendments
to those reports led or furnished pursuant to the Securities Exchange Act of
1934 as soon as reasonably practicable after such material is electronically led
with, or furnished to the SEC. The reference to our website does not constitute
incorporation by reference of the information contained in the website and
should not be considered part of this document.
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
The Company's headquarters are located at 52 South Broad Street, Norwich, New
York 13815. The Company operated the following number of community banking
branches and automated teller machines (ATMs) as of December 31, 2003:
==============================================================================================================================
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 9 Albany County 2 1 Orange County 1 1
Chenango County 11 15 Fulton County 4 5
Clinton County 3 2 Herkimer County 2 1 PENNSYLVANIA
Delaware County 6 10 Montgomery County 6 6 Lackawanna County 19 24
Essex County 3 6 Otsego County 5 5 Luzerne County 4 6
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 2 Susquehanna County 6 8
Otsego County 4 11 Wayne County 3 4
St. Lawrence County 5 4
Sullivan County - 1
Tioga County 1 1
Ulster County - 1
==============================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 8
The Company leases thirty-six of the above listed branches from third
parties under terms and conditions considered by management to be equitable to
the Company. The Company owns all other banking premises. All automated teller
machines are owned.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a party or of which their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
(a) 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
2002
1st quarter $15.15 $13.15 $ 0.17
2nd quarter 19.32 14.00 0.17
3rd quarter 18.50 16.36 0.17
4th quarter 18.60 14.76 0.17
2003
1st quarter $18.60 $16.76 $ 0.17
2nd quarter 19.94 17.37 0.17
3rd quarter 21.76 19.24 0.17
4th quarter 22.78 19.50 0.17
The closing price of the Common Stock on February 27, 2004 was $21.95.
================================================================================
Annual Report: NBT Bancorp Inc. 9
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, 2003:
===============================================================================================================
Year ended December 31,
--------------------------------------------------------------
(In thousands, except per share data) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Interest, fee and dividend income $ 207,298 $ 227,222 $ 255,434 $ 260,381 $ 220,849
Interest expense 62,874 80,402 117,502 133,003 102,876
Net interest income 144,424 146,820 137,932 127,378 117,973
Provision for loan and lease losses 9,111 9,073 31,929 10,143 6,896
Noninterest income excluding securities
gains (losses) 37,603 31,934 31,826 24,854 21,327
Securities gains (losses), net 175 (413) (7,692) (2,273) 1,000
Merger, acquisition and reorganization costs - - 15,322 23,625 835
Other noninterest expense 104,517 102,455 110,536 95,509 83,944
Income before income taxes 68,574 66,813 4,279 20,682 48,625
Net income 47,104 44,999 3,737 14,154 32,592
PER COMMON SHARE*
Basic earnings $ 1.45 $ 1.36 $ 0.11 $ 0.44 $ 1.01
Diluted earnings 1.43 1.35 0.11 0.44 1.00
Cash dividends paid ** 0.68 0.68 0.68 0.68 0.66
Book value at year-end 9.46 8.96 8.05 8.29 7.62
Tangible book value at year-end 7.94 7.47 6.51 6.88 6.74
Average diluted common shares outstanding 32,844 33,235 33,085 32,405 32,541
AT DECEMBER 31
Trading securities, at fair value $ 48 $ 203 $ 126 $ 20,540 $ -
Securities available for sale, at fair value 980,961 1,007,583 909,341 936,757 994,492
Securities held to maturity, at amortized cost 97,204 82,514 101,604 110,415 113,318
Loans and leases 2,639,976 2,355,932 2,339,636 2,247,655 1,924,460
Allowance for loan and lease losses 42,651 40,167 44,746 32,494 28,240
Assets 4,046,885 3,723,726 3,638,202 3,605,506 3,294,845
Deposits 3,001,351 2,922,040 2,915,612 2,843,868 2,573,335
Borrowings 672,631 451,076 394,344 425,233 429,924
Stockholders' equity 310,034 292,382 266,355 269,641 246,095
KEY RATIOS
Return on average assets 1.22% 1.23% 0.10% 0.41% 1.07%
Return on average equity 15.90 16.13 1.32 5.57 12.66
Average equity to average assets 7.69 7.64 7.82 7.35 8.42
Net interest margin 4.16 4.43 4.19 4.02 4.23
Dividend payout ratio 47.55 50.37 618.18 154.55 66.00
Tier 1 leverage 6.76 6.73 6.34 6.88 8.07
Tier 1 risk-based capital 9.96 9.93 9.43 9.85 12.49
Total risk-based capital 11.21 11.18 10.69 11.08 13.68
<FN>
* All share and per share data has been restated to give retroactive effect to stock dividends 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.
===============================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 10
================================================================================================================================
SELECTED QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
2003 2002
--------------------------------------- -----------------------------------------
(Dollars in thousands,
except per share data) FIRST SECOND THIRD FOURTH First Second Third Fourth
- --------------------------------------------------------------------------------------------------------------------------------
Interest, fee and dividend income $52,635 $51,593 $50,788 $52,282 $57,322 $57,490 $57,011 $55,399
Interest expense 16,606 16,101 15,210 14,957 20,977 20,408 20,304 18,713
Net interest income 36,029 35,492 35,578 37,325 36,345 37,082 36,707 36,686
Provision for loan and lease losses 1,940 1,413 2,436 3,322 2,011 2,092 2,424 2,546
Noninterest income excluding net
securities gains (losses) 8,715 8,901 9,955 10,032 7,913 7,733 8,047 8,241
Net securities gains (losses) 27 38 18 92 (502) 69 (6) 26
Noninterest expense 25,892 25,848 25,983 26,794 25,212 26,062 25,320 25,861
----------------------------------------------------------------------------------
Net income $11,566 $11,808 $11,848 $11,882 $11,077 $11,266 $11,412 $11,244
==================================================================================
Basic earnings per share $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 0.33 $ 0.34 $ 0.35 $ 0.34
Diluted earnings per share $ 0.35 $ 0.36 $ 0.36 $ 0.36 $ 0.33 $ 0.34 $ 0.34 $ 0.34
Net interest margin 4.38% 4.18% 4.02% 4.07% 4.54% 4.48% 4.35% 4.35%
Return on average assets 1.27% 1.25% 1.21% 1.17% 1.25% 1.24% 1.23% 1.21%
Return on average equity 16.05% 16.07% 16.06% 15.47% 16.62% 16.50% 15.95% 15.53%
Average diluted common shares
outstanding 32,783 32,653 32,865 33,070 33,295 33,402 33,295 32,951
----------------------------------------------------------------------------------
================================================================================================================================
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") and its wholly owned subsidiaries, NBT Bank, N.A. ("the
Bank"), NBT Financial Services, Inc. ("NBT Financial), and CNBF Capital Trust I
during 2003 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, 2003 and 2002 and for each of the years in the three year period
ended December 31, 2003 should be read in conjunction with this review. Amounts
in prior period consolidated financial statements are reclassified whenever
necessary to conform to the 2003 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
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
ANNUAL REPORT: NBT BANCORP INC. 11
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 nonperforming 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 values 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) deposit attrition, customer
loss, or revenue loss following recent mergers and acquisitions may be greater
than expected; (7) competitors may have greater financial resources and develop
products that enable such competitors to compete more successfully than the
Company; and (8) 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 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
ANNUAL REPORT: NBT BANCORP INC. 12
forward-looking statements to reflect statements to the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
OVERVIEW
The Company had net income of $47.1 million or $1.43 per diluted share for 2003,
compared to net income of $45.0 million or $1.35 per diluted share for 2002.
There were several factors driving the improvement in results in 2003 compared
to 2002. Noninterest income increased $6.3 million or 20% in 2003 compared to
2002. This increase resulted from strong growth in service charges on deposit
accounts and increases from trust revenue, broker/ dealer fees, Bank Owned Life
Insurance (BOLI) income, and other income. Offsetting this increase in
noninterest income was a decrease in net interest income of $2.4 million and an
increase in noninterest expenses of $2.1 million. The decrease in net interest
income was driven primarily by the decrease in the Company's net interest
margin, which declined from 4.43% for 2002 to 4.16% for 2003, primarily as a
result of continued low market interest rates. The decline in margin was offset
somewhat by growth in average earning assets of 5% driven primarily by loan
growth. Average loans and leases increased 6% in 2003 or $137.1 million compared
to 2002 average loans. The increase in noninterest expense resulted primarily
from increases in salaries and employee benefits, occupancy expense, and other
noninterest expense offset by decreases in professional fees and outside
services and loan collection and other real estate owned (OREO) expenses. The
provision for loan and lease losses remained relatively unchanged in 2003 from
2002, as improvements in credit quality were offset by loan growth in 2003.
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 $7.4 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 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 $23.4 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 unidentified 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.
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%.
ANNUAL REPORT: NBT BANCORP INC. 13
================================================================================================================================
TABLE 1. AVERAGE BALANCES AND NET INTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ----------------------------- ------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
(Dollars in thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 3,225 $ 80 2.48% $ 12,389 $ 403 3.25% $ 11,324 $ 569 5.02%
Securities available for
sale1 984,620 46,313 4.70 947,042 56,586 5.98 933,122 61,857 6.63
Securities held to
maturity1 90,601 4,657 5.14 92,981 5,620 6.04 99,835 6,644 6.65
Securities trading 133 4 3.01 208 8 3.85 5,253 649 12.35
Investment in FRB and
FHLB Banks 28,117 854 3.04 21,766 962 4.42 23,926 1,555 6.50
Loans and leases2 2,474,899 159,827 6.46 2,337,767 167,917 7.18 2,312,740 188,053 8.13
--------- ------- --------- ------- --------- -------
Total earning assets 3,581,595 211,735 5.91 3,412,153 231,496 6.78 3,386,200 259,327 7.66
------- ------- -------
Other non-interest earning
assets 270,928 236,919 240,725
---------- ---------- ----------
Total assets $3,852,523 $3,649,072 $3,626,925
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit
accounts $ 359,722 $ 4,332 1.20 $ 279,407 $ 4,461 1.60 $ 254,735 $ 7,052 2.77
NOW deposit accounts 411,236 2,340 0.57 382,562 3,488 0.91 348,964 5,032 1.44
Savings deposits 523,571 4,542 0.87 479,312 6,887 1.44 427,102 9,385 2.20
Time deposits 1,188,497 34,727 2.92 1,331,281 48,496 3.64 1,476,473 77,053 5.22
--------- ------ --------- ------ --------- ------
Total interest-bearing
deposits 2,483,026 45,941 1.85 2,472,562 63,332 2.56 2,507,274 98,522 3.93
Short-term borrowings 190,332 2,171 1.14 87,039 1,334 1.53 123,162 5,365 4.36
Long-term debt 360,928 14,762 4.09 334,479 15,736 4.70 259,583 13,615 5.24
--------- ------ --------- ------ --------- ------
Total interest-bearing
liabilities 3,034,286 62,874 2.07 2,894,080 80,402 2.78 2,890,019 117,502 4.07
------ ------ -------
Demand deposits 457,238 419,744 382,489
Other non-interest-
bearing
liabilities 64,723 56,293 70,666
Stockholders' equity 296,276 278,955 283,751
---------- ---------- ----------
Total liabilities and
stockholders'
equity $3,852,523 $3,649,072 $3,626,925
========== ========== ==========
Interest rate spread 3.84% 4.00% 3.59%
==== ==== ====
Tax equivalent net
interest income 148,861 151,094 141,825
Net interest margin 4.16% 4.43% 4.19%
==== ==== ====
Taxable equivalent
adjustment 4,437 4,274 3,893
------- ------- -------
Net interest income 144,424 146,820 137,932
======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
1. Securities are shown at average amortized cost. For purposes of these
computations, nonaccrual securities are included in the average securities
balances.
2. For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding.
================================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 14
NET INTEREST INCOME
On a tax equivalent basis, the Company's net interest income for 2003 was $148.9
million, down from $151.1 million for 2002. The Company's net interest margin
declined to 4.16% for 2003 from 4.43% for 2002. The decline in the net interest
margin resulted primarily from earning assets repricing downward faster than
interest bearing liabilities. The yield on earning assets decreased 87 basis
points (bp), from 6.78% for 2002 to 5.91% for 2003. Meanwhile, the rate paid on
interest bearing liabilities decreased 71 (bp), from 2.78% for 2002 to 2.07% for
2003. Additionally, historically low interest rates for residential real estate
increased prepayments and refinancing activity during 2003, which in turn
increased amortization expense of investment security premiums related to
mortgage-backed securities. Offsetting the decline in net interest margin was an
increase in average earning assets of $169.4 million or 5%, driven primarily by
a $137.1 million increase in average loans. 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)
2003 OVER 2002 2002 over 2001
-------------------------------- --------------------------------
(In thousands) VOLUME RATE TOTAL Volume Rate Total
- -------------------------------------------------------------------------------------------------
Short-term interest-
bearing accounts $ (245) $ (78) $ (323) $ 50 $ (216) $ (166)
Securities available for
sale 2,170 (12,443) (10,273) 911 (6,182) (5,271)
Securities held to
maturity (141) (822) (963) (438) (586) (1,024)
Securities trading (2) (2) (4) (373) (268) (641)
Investment in FRB and
FHLB Banks 238 (346) (108) (130) (463) (593)
Loans and leases 9,485 (17,575) (8,090) 2,015 (22,151) (20,136)
--------------------------------------------------------------------
Total interest income 11,084 (30,845) (19,761) 1,973 (29,804) (27,831)
--------------------------------------------------------------------
Money market deposit
accounts 1,112 (1,241) (129) 629 (3,220) (2,591)
NOW deposit accounts 245 (1,393) (1,148) 448 (1,992) (1,544)
Savings deposits 588 (2,933) (2,345) 1,044 (3,542) (2,498)
Time deposits (4,840) (8,929) (13,769) (7,015) (21,542) (28,557)
Short-term borrowings 1,250 (413) 837 (1,256) (2,775) (4,031)
Long-term debt 1,183 (2,157) (974) 3,630 (1,509) 2,121
--------------------------------------------------------------------
Total interest expense 3,737 (21,265) (17,528) 165 (37,265) (37,100)
--------------------------------------------------------------------
Change in FTE net
interest income $ 7,347 $ (9,580) $ (2,233) $ 1,808 $ 7,461 $ 9,269
====================================================================
=================================================================================================
LOANS AND LEASES AND CORRESPONDING INTEREST AND
FEES ON LOANS
The average balance of loans and leases increased 6%, totaling $2.5 billion in
2003 compared to $2.4 billion in 2002. The yield on average loans and leases
decreased from 7.18% in 2002 to 6.46% in 2003, as a declining interest rate
environment prevailed for much of 2003. Interest income from loans and leases on
a FTE basis decreased 5%, from $167.9 million in 2002 to $159.8 million in 2003.
The decrease in interest income from loans and leases was due primarily to the
decrease in yield on loans and leases in 2003 of 72 (bp) when compared to 2002.
Total loans and leases increased 12% at December 31, 2003, totaling $2.6 billion
from $2.4 billion at December 31, 2002. The increase in loans and leases was
driven by strong growth in residential real estate mortgages and home equity
loans. Residential real estate mortgages increased $124.3 million or 21% from
$579.6 million at
ANNUAL REPORT: NBT BANCORP INC. 15
December 31, 2002 to $703.9 million at December 31, 2003. The increase in
residential real estate mortgages was driven by a combination of historically
low interest rates increasing the demand for the product and the integration and
centralization of the mortgage origination function for the Company's three
divisional banks at the end of 2002. Centralizing the mortgage origination
function enabled the Company to provide customers with efficient service and
competitive products while strengthening the Company's market presence. Home
equity loans increased $67.0 million or 25% from $269.6 million at December 31,
2002 to $336.5 million at December 31, 2003. The increase in home equity loans
was due again to the previously mentioned increased demand from the historically
low interest rate environment combined with a strong product that has sold well
historically in the NBT bank division. The Company expanded its training
programs for the sales staff of its Pennstar and CNB bank divisions and
experienced strong sales of its home equity products in these newer markets and
maintained strong growth within its NBT bank division during 2003. All other
loan categories experienced modest increases during 2003.
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) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Residential real estate mortgages $ 703,906 $ 579,638 $ 525,411 $ 504,590 $ 521,684
Commercial and commercial real estate 954,024 920,330 958,075 948,472 755,393
Real estate construction and development 86,046 64,025 60,513 44,829 25,474
Agricultural and agricultural real estate 106,310 104,078 103,884 92,713 85,753
Consumer 390,413 357,214 387,081 357,822 320,682
Home equity 336,547 269,553 232,624 219,355 139,472
Lease financing 62,730 61,094 72,048 79,874 76,002
-----------------------------------------------------------
Total loans and leases $2,639,976 $2,355,932 $2,339,636 $2,247,655 $1,924,460
===========================================================
================================================================================
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 $29.1 million and $35.5 million at
December 31, 2003 and 2002, respectively, and were 7.4% and 9.9% of total
consumer loans at December 31, 2003 and 2002, respectively. These decreases from
2002 to 2003 are consistent with the Company's plan to de-emphasize loans
secured by manufactured housing.
The Company's automobile lease financing portfolio totaled $62.7 million at
December 31, 2003 and $61.1 million at December 31, 2002. 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,
including consideration of residual value insurance, 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
ANNUAL REPORT: NBT BANCORP INC. 16
termination of the lease. When a lease receivable asset is recorded, included in
this amount is the estimated residual value of the leased vehicle at the
termination of the lease. At termination, the lessor has the option to purchase
the vehicle or may turn the vehicle over to the Company.
The residual values included in lease financing receivables totaled $38.9
million and $42.8 million at December 31, 2003 and 2002, respectively.
The Company has acquired residual value insurance protection in order to
reduce the risk related to residual values. Based on analysis performed by
management, the Company has concluded that no other-than-temporary impairment
exists which would warrant a charge to earnings during December 31, 2003 and
2002.
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, 2003. Scheduled
repayments are reported in the maturity category in which the contractual
payment is due.
===============================================================================================================
TABLE 4. MATURITIES AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
- ---------------------------------------------------------------------------------------------------------------
Remaining maturity at December 31, 2003
-----------------------------------------------------------
Within After One Year But
(In thousands) One Year Within five years After Five Years Total
-----------------------------------------------------------
FLOATING/ADJUSTABLE RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate $ 426,721 $ 105,363 $ 28,134 $ 560,218
Real estate construction and development 23,316 5,789 246 29,351
-----------------------------------------------------------
Total floating rate loans 450,037 111,152 28,380 589,569
-----------------------------------------------------------
FIXED RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate 267,209 157,040 75,867 500,116
Real estate construction and development 47 6,740 49,908 56,695
-----------------------------------------------------------
Total fixed rate loans 267,256 163,780 125,775 556,811
-----------------------------------------------------------
Total $ 717,293 $ 274,932 $ 154,155 $1,146,380
-----------------------------------------------------------
===============================================================================================================
SECURITIES AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The average balance of securities available for sale in 2003 was $984.6 million,
an increase of $37.6 million, or 4%, from $947.0 million in 2002. The increase
resulted primarily from modest leverage during 2003. The yield on average
securities available for sale was 4.70% for 2003 compared to 5.98% in 2002. The
decrease in yield for 2003 was due to several factors. The low interest rate
environment prevalent throughout 2003 resulted in lower yields as reinvestment
of funds from maturities, sales and paydowns led to the purchase of lower
yielding securities. Additionally, the low rate environment fostered an increase
in the refinancing of residential real estate mortgages, which increased the
prepayment speeds of mortgage-backed security investments resulting in an
increase in bond premium amortization in 2003. Lastly, to manage its risk to
rising interest rates, the Company shortened the average life of securities
available for sale by increasing its investment in fifteen and ten year
mortgage-backed securities and lowering its exposure to thirty-year
mortgage-backed securities. At December 31, 2003, approximately 63% of
securities available for sale were comprised of fifteen/ten year mortgage-backed
securities and 10% were comprised of thirty/twenty year mortgaged-backed
securities. At December 31, 2002, the mix was 50% fifteen/ten year
mortgage-backed securities and 18% thirty/twenty year mortgaged-backed
securities. In the event of a rising rate environment, the Company should be
positioned to reinvest cashflows at a faster rate from shortening the expected
life of the portfolio.
The average balance of securities held to maturity decreased slightly from
$93.0 million in 2002 to $90.6 million in 2003. At December 31, 2003, securities
held to maturity were comprised primarily of tax-exempt municipal securities.
The yield on securities held to maturity declined
ANNUAL REPORT: NBT BANCORP INC. 17
from 6.04% in 2002 to 5.14% in 2003. The decline in yield was due mainly to the
previously mentioned low rate environment prevalent throughout 2003. Investments
in FRB and FHLB Banks increased to $28.1 million in 2003 from $21.8 million in
2002. This increase was driven primarily by an increase in the investment in
FHLB resulting from an increase in the Company's borrowing capacity at FHLB. The
yield from investments in FRB and FHLB Banks declined from 4.42% in 2002 to
3.04% in 2003. The decrease in yield resulted primarily from the suspension of
the October 2003 dividend by the FHLB as a result of capital concerns and credit
issues in the FHLB investment security portfolio. The FHLB has indicated that it
intends to pay quarterly dividends in 2004 if the interest rate environment
remains unchanged at a rate below 2%.
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 non-accrual 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 and $8.3 million pre-tax charge during
2002 and 2001 related to estimated other-than-temporary impairment of certain
securities classified as available for sale. The charges were recorded in net
security gains (losses) on the consolidated statements of income. The security
with other-than temporary impairment charges at December 31, 2003 had a
remaining carrying value of $0.4 million, is classified in securities available
for sale and is on non-accrual status.
The following table presents the amortized cost and fair market value of
the securities portfolio as of December 31 for the years indicated:
ANNUAL REPORT: NBT BANCORP INC. 18
======================================================================================================================
TABLE 5. SECURITIES PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- ------------------------ ----------------------
AMORTIZED FAIR Amortized Fair Amortized Fair
(In thousands) COST VALUE Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 58 $ 59 $ 502 $ 514 $ 12,392 $ 11,757
Federal Agency and mortgage-backed 843,777 849,686 810,784 833,940 524,101 530,613
State and Municipal, collateralized mortgage
obligations and other securities 123,570 131,216 168,803 173,129 366,325 366,971
-----------------------------------------------------------------------
Total securities available for sale $ 967,405 $980,961 $ 980,089 $1,007,583 $ 902,818 $909,341
=======================================================================
TRADING SECURITIES $ 48 $ 48 $ 203 $ 203 $ 126 $ 126
=======================================================================
SECURITIES HELD TO MATURITY
Federal Agency and mortgage-backed $ 11,363 $ 11,867 $ 24,613 $ 25,720 $ 36,733 $ 36,623
State and Municipal 85,437 86,305 56,021 56,917 64,715 64,715
Other securities 404 404 1,880 1,880 156 157
-----------------------------------------------------------------------
Total securities held to maturity $ 97,204 $ 98,576 $ 82,514 $ 84,517 $ 101,604 $101,495
=======================================================================
======================================================================================================================
THE FOLLOWING TABLE SUMMARIZES THE SECURITIES CONSIDERED TO BE
OTHER-THAN-TEMPORARILY IMPAIRED (OTTI) AT THE DATES INDICATED:
===============================================================================================================
AT DECEMBER 31, 2003 At December 31, 2002
--------------------------- ---------------------------
AMORTIZED COST Amortized Cost
(In thousands) AND FAIR VALUE OTTI CHARGE and Fair Value OTTI Charge
- ---------------------------------------------------------------------------------------------------------------
SECURITY TYPE
Private issue collateralized mortgage obligation $ 395 - $ 1,122 $ 660
========================================================
===============================================================================================================
The cumulative writedown of the private issue collateralized mortgage
obligation at December 31, 2003 totaled $4.7 million. There were no
other-than-temporary impairment writedowns during 2003. Included in the
securities available for sale portfolio at December 31, 2002, were certain
securities (private issue CMO, asset-backed securities, and private issue
mortgaged-backed securities) previously held by CNB. These securities contained
a higher level of credit risk when compared to other securities held in the
Company's investment portfolio because they are not guaranteed by a governmental
agency or a government sponsored enterprise (GSE). The Company's general
practice is to purchase CMO and mortgagebacked 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, 2003, the Company had no exposure to these high-risk
securities, as the remaining balance outstanding at December 31, 2002 were sold
during the year.
At December 31, 2002, the amortized cost and fair value of these high-risk
securities amounted to $12.0 million and $10.7 million, respectively, down from
$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
ANNUAL REPORT: NBT BANCORP INC. 19
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.
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 Federal Home Loan Bank (FHLB) advances, federal
funds purchased, securities sold under agreements to repurchase, brokered time
deposits, and long-term FHLB borrowings are utilized as necessary to support the
Company's growth in assets and to achieve interest rate sensitivity objectives.
The average balance of interest-bearing liabilities increased $140.2 million,
totaling $3.0 billion in 2003 from $2.9 billion in 2002. The rate paid on
interest-bearing liabilities decreased from 2.78% in 2002 to 2.07% in 2003. The
decrease in the rate paid on interest bearing liabilities, caused a decrease in
interest expense of $17.5 million, or 22%, from $80.4 million in 2002 to $62.9
million in 2003.
DEPOSITS
Average interest bearing deposits increased $10.5 million during 2003. The
increase resulted primarily from increases in average NOW, Money Market Deposit
Accounts ("MMDA"), and savings. The average balance of these core deposit types
increased collectively $153.2 million or 13% during 2003 when compared to 2002.
The increase in core deposits resulted primarily from continued market expansion
and the migration of funds from time deposits. Average time deposits decreased
$142.8 million or 11% during 2003 when compared to 2002. The decrease in average
time deposits resulted primarily from the low rate environment prevalent
throughout 2003. Additionally, the Company did not price time deposits
aggressively in 2003, which contributed to the increase in core deposits as well
as lead to an increase in short-term borrowings. The average balance of demand
deposits increased $37.5 million, or 9%, from $419.7 million in 2002 to $457.2
million in 2003. The ratio of average demand deposits to total average deposits
increased from 14.5% in 2002 to 15.6% in 2003.
The improvement in the Company's deposit mix noted above, combined with the
falling interest rate environment prevalent in 2003, resulted in a decrease in
the rate paid on interest bearing deposits of 71 bp, from 2.56% in 2002 to 1.85%
in 2003. The rate paid on average time deposits decreased 72 bp, from 3.64% in
2002 to 2.92% in 2003. The decrease in the rate paid on average time deposits,
combined with the decline in the average balance of time deposits, resulted in a
$13.8 million decrease in interest expense paid on time deposits, from $48.5
million in 2002 to $34.7 million in 2003. The following table presents the
maturity distribution of time deposits of $100,000 or more at December 31, 2003:
================================================================================
TABLE 6. MATURITY DISTRIBUTION OF TIME DEPOSITS OF
100,000 OR MORE
- --------------------------------------------------------------------------------
(In thousands) DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Within three months $ 110,862
After three but within six months 114,737
After six but within twelve months 105,579
After twelve months 22,592
-----------------
Total $ 353,770
=================
================================================================================
BORROWINGS
Average short-term borrowings increased from $87.0 million in 2002 to $190.3
million in 2003. Consistent with the low interest rate environment during 2003,
the average rate paid also decreased from 1.53% in 2002 to 1.14% in 2003. The
increase in the average balance offset by the decrease in the average rate paid
caused interest expense on short-term borrowings to increase $0.8 million from
$1.3 million in 2002 to $2.2 million in 2003. Average long-term debt increased
$26.4 million, from $334.5 million in 2002 to $360.9 million in 2003. The
increases in long-term debt and short-term borrowings resulted primarily from
loan growth exceeding deposit growth in 2003.
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 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 $544 million and $632 million at December 31, 2003 and 2002,
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
ANNUAL REPORT: NBT BANCORP INC. 20
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.
NONPERFORMING ASSETS
======================================================================================================
TABLE 7. NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
NONACCRUAL LOANS
Commercial and agricultural loans and
real estate $ 8,693 $16,980 $ 31,372 $14,054 $ 9,519
Real estate mortgages 2,483 5,522 5,119 647 618
Consumer 2,685 1,507 3,719 2,402 2,671
--------------------------------------------------
Total nonaccrual loans 13,861 24,009 40,210 17,103 12,808
--------------------------------------------------
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Commercial and agricultural loans and
real estate 242 237 198 4,523 1,201
Real estate mortgages 244 1,325 1,844 3,042 641
Consumer 482 414 933 865 906
--------------------------------------------------
Total loans 90 days or more past due and
still accruing 968 1,976 2,975 8,430 2,748
Restructured loans - 409 603 656 1,014
--------------------------------------------------
Total nonperforming loans 14,829 26,394 43,788 26,189 16,570
Other real estate owned 1,157 2,947 1,577 1,856 2,696
--------------------------------------------------
Total nonperforming loans and other
real estate owned 15,986 29,341 45,365 28,045 19,266
Nonperforming securities 395 1,122 4,500 1,354 1,535
--------------------------------------------------
Total nonperforming loans, securities, and
other real estate owned $16,381 $30,463 $ 49,865 $29,399 $20,801
==================================================
Total nonperforming loans to loans and leases 0.56% 1.12% 1.87% 1.17% 0.86%
Total nonperforming loans and other
real estate owned to total assets 0.40% 0.79% 1.25% 0.78% 0.58%
Total nonperforming loans, securities, and
other real estate owned to total assets 0.40% 0.82% 1.37% 0.82% 0.63%
Total allowance for loan and lease losses to
nonperforming loans 287.62% 152.18% 102.19% 124.07% 170.43%
======================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 21
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 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
and the Company's independent auditors, 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. Total nonperforming assets were $16.4
million at December 31, 2003, compared to $30.5 million at December 31, 2002.
Nonperforming loans totaled $14.8 million at December 31, 2003, down
significantly from the $26.4 million outstanding at December 31, 2002. The
decrease in nonperforming loans in 2003 resulted primarily from the Company's
successful efforts in selling certain large problematic commercial loans and a
group of nonperforming real estate mortgages at approximately their book value
during the quarter ended March 31, 2003. Additionally, the Company continued to
workout or chargeoff additional nonperforming loans for the remainder of 2003
without experiencing any significant migration of new nonperforming loans during
the year. As a result of the reduction in nonperforming loans during 2003, the
total allowance for loan and lease losses is 287.62% of non-performing loans at
December 31, 2003 as compared to 152.18% at December 31, 2002. While loans and
leases classified as non-performing have a strong likelihood of experiencing a
loss, substantially all nonperforming loans are collateralized, many to a
reasonably high percentage of the outstanding loan balance.
Impaired loans, which primarily consist of nonaccruing commercial type
loans also decreased significantly, totaling $8.7 million at December 31, 2003
as compared to $17.4 million at December 31, 2002. The related allowance for
these impaired loans is $0.2 million or 2.3% of the impaired loans at December
31, 2003 as compared to $0.5 million and 3.1%, respectively, at December 31,
2002. At December 31, 2003 and 2002 there were $7.5 million and $15.5 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 2003 totaled $6.6 million as compared to $13.7
million for 2002. The ratio of net charge-offs to average loans and leases was
0.27% for 2003 and 0.58% for 2002. The decrease in net charge-offs in 2003
resulted from the reduction in nonperforming loans and an improvement in loan
quality. However, the amount provided for loan and lease losses for 2003
remained relatively unchanged from 2002, as improvements in loan quality were
offset by strong loan growth. The provision for loan and lease losses exceeded
net charge-offs by $2.5 million in 2003 while the ratio of the allowance for
loan and lease losses to total loans and leases decreased to 1.62% at December
31, 2003 from 1.70% at December 31, 2002.
ANNUAL REPORT: NBT BANCORP INC. 22
========================================================================================================
TABLE 8. ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Balance at January 1 $40,167 $44,746 $32,494 $28,240 $26,615
LOANS AND LEASES CHARGED-OFF
Commercial and agricultural 5,619 9,970 17,097 3,949 2,737
Real estate mortgages 362 2,547 783 1,007 1,165
Consumer* 5,862 5,805 4,491 2,841 2,808
------------------------------------------------
Total loans and leases charged-off 11,843 18,322 22,371 7,797 6,710
------------------------------------------------
RECOVERIES
Commercial and agricultural 3,185 3,394 1,063 503 367
Real estate mortgages 430 104 122 141 198
Consumer* 1,601 1,172 1,004 739 874
------------------------------------------------
Total recoveries 5,216 4,670 2,189 1,383 1,439
------------------------------------------------
Net loans and leases charged-off 6,627 13,652 20,182 6,414 5,271
Allowance related to purchase acquisitions - - 505 525 -
Provision for loan and lease losses 9,111 9,073 31,929 10,143 6,896
------------------------------------------------
Balance at December 31 $42,651 $40,167 $44,746 $32,494 $28,240
================================================
Allowance for loan and lease losses to loans and
leases outstanding at end of year 1.62% 1.70% 1.91% 1.45% 1.47%
Net charge-offs to average loans and
leases outstanding 0.27% 0.58% 0.87% 0.31% 0.30%
<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. Nonaccrual 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
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, N.A. and Pioneer American Bank, N.A. (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
ANNUAL REPORT: NBT BANCORP INC. 23
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 acquired 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 was 152.18% of non-performing loans at
December 31, 2002 as compared to 102.19% at December 31, 2001.
Impaired loans, which primarily consist of nonaccruing 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 was $0.5 million or 3.1% of the impaired loans at December 31,
2002 as compared 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 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.
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:
ANNUAL REPORT: NBT BANCORP INC. 24
=================================================================================================================================
TABLE 9. ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------- ---------------------- ---------------------- ---------------------- ----------------------
Category Category Category Category Category
(Dollars in Percent of Percent of Percent of Percent of Percent of
thousands) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- --------------------------------------------------------------------------------------------------------------------------------
Commercial and
agricultural $ 25,502 67% $ 25,589 71% $ 34,682 85% $ 20,510 72% $ 14,115 62%
Real estate
mortgages 4,699 11% 3,884 10% 1,611 4% 1,669 6% 2,506 11%
Consumer 9,357 22% 7,654 19% 4,626 11% 6,379 22% 6,270 27%
Unallocated 3,093 - 3,040 - 3,827 - 3,936 - 5,349 -
----------------------------------------------------------------------------------------------------------------
Total $ 42,651 100% $ 40,167 100% $ 44,746 100% $ 32,494 100% $ 28,240 100%
----------------------------------------------------------------------------------------------------------------
=================================================================================================================================
In addition to the nonperforming loans discussed above, the Company has
also identified approximately $54.3 million in potential problem loans at
December 31, 2003 as compared to $48.5 million at December 31, 2002. Potential
problem loans are loans that are currently performing, but where known
information about possible credit problems of the related borrowers causes
management to have serious doubts as to the ability of such borrowers to comply
with the present loan repayment terms and which may result in disclosure of such
loans as non-performing 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, 2003, potential
problem loans primarily consisted of commercial and agricultural real estate and
commercial and agricultural loans. At December 31, 2003, there were eight
potential problem loans that exceeded $1.0 million, totaling $27.2 million in
aggregate. 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 nonaccrual, become restructured, or
require increased allowance coverage and provision for loan losses.
At December 31, 2003, approximately 63.7% 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, 2003,
the Company's Basic Surplus measurement was 8.9% of total assets or $359
million, which was above the Company's minimum of 5% or $202 million set forth
in its liquidity policies.
This Basic Surplus approach enables the Company to adequately manage
liquidity from both operational and contingency perspectives. By tempering the
need for cash flow liquidity with reliable borrowing facilities, the
ANNUAL REPORT: NBT BANCORP INC. 25
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, 2003, 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
$503 million at December 31, 2003.
At December 31, 2003, 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.
Net cashflows provided by operating activities totaled $44.6 million in
2003 and $60.9 million in 2002. The critical elements of net operating cashflows
include net income, provision for loan and lease losses, and depreciation and
amortization. Cash provided by opreating activities declined in 2003 primarily
from the purchase of $30.0 million in Bank Owned Life Insurance ("BOLI").
Net cash used in investing activities totaled $307.8 million in 2003 and
$132.0 million in 2002. Critical elements of investing activities are loan and
investment securities transactions. The increase in investing activities in 2003
was due primarily to the net increase in loans of $297.0 million.
Net cashflows provided by financing activities totaled $266.6 million in
2003 and $65.8 million in 2002. The critical elements of financing activities
are proceeds from deposits, long-term debt, short-term borrowings, and stock
issuances. In addition, financing activities are impacted by dividends and
treasury stock transactions. The Company increased short-term borrowings to fund
loan growth because of their lower cost compared to time deposits. Deposits,
which are also used as a primary funding source, grew $66.0 million from
increases in demand deposits, NOW, MMDA and savings due primarily to internal
growth and a migration of time deposits which experienced a decline in 2003.
In connection with its financing and operating activities, the Company has
entered into certain contractual obligations. The Company's future minimum cash
payments, excluding interest, associated with its contractual obligations
pursuant to its borrowing agreements and operating leases at December 31, 2003
are as follows:
================================================================================================================================
Payments Due by Period
---------------------------------------------------------------------
Contractual Obligations
(In thousands) 2004 2005 2006 2007 2008 Thereafter Total
- --------------------------------------------------------------------------------------------------------------------------------
Short-term debt obligations $302,931 $ - $ - $ - $ - $ - $302,931
Long-term debt obligations 30,000 65,000 25,000 10,000 90,441 149,259 369,700
Operating lease obligations 2,057 1,596 1,420 1,220 840 4,427 11,560
---------------------------------------------------------------------
Total contractual obligations $334,988 $66,596 $26,420 $11,220 $91,281 $ 153,686 $684,191
---------------------------------------------------------------------
See Notes 7, 10, and 11 to the consolidated financial statements for additional
discussion of these obligations.
================================================================================================================================
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 Company's credit approval and monitoring
procedures. At December 31, 2003 and 2002, commitments to extend credit in the
form of loans, including unused lines of credit, amounted to $473.0 million and
$409.1 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.
ANNUAL REPORT: NBT BANCORP INC. 26
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 FASBStatements 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, 2003 and 2002, outstanding stand-by letters of
credit were approximately $17.1 million and $24.7 million, respectively. The
fair value of the Company's stand-by letters of credit at December 31, 2003 and
2002 was not significant. The following table sets forth the commitment
expiration period for stand-by letters of credit at December 31, 2003:
================================================================================
Commitment Expiration of Stand-by letters of Credit
- --------------------------------------------------------------------------------
Within on year $ 5,445
After but within three years 6,518
After three but within five years 5,089
-------
Total $17,052
-------
================================================================================
LOANS SERVICED FOR OTHERS AND LOANS SOLD WITH RECOURSE
The total amount of loans serviced by the Company for unrelated third parties
was approximately $66.4 million and $77.2 million at December 31, 2003 and 2002,
respectively. At December 31, 2003 and 2002, the Company serviced $23.2 million
and $15.0 million, respectively, of loans sold with recourse. Due to collateral
on these loans, no reserve is considered necessary at December 31, 2003 and
2002.
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, 2003 and 2002
were $16.1 million and $17.0 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
$109,427 to us and NBT Bank in 2003. The law firms of Harris Beach LLP, and
Oliver, Price, & Rhodes, of which Directors William L. Owens and Paul D. Horger
are partners, provide legal services to us from time to time. Payments for
services provided by Directors Owens and Horger, did not exceed $60,000 during
2003. 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 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
ANNUAL REPORT: NBT BANCORP INC. 27
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, 2003, approximately $28.9 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 in open market and privately negotiated transactions. Since the
announcement of the Stock Repurchase Plan, the Company repurchased a total of
844,946 shares at an average price of $17.54 per share. Total cash allocated for
these repurchases during this period was $14.8 million. For 2003, the Company
repurchased 369,313 shares at an average price of $17.57 per share.
On April 28, 2003, the Company announced that it intended to repurchase up
to an additional one million shares (approximately 3%) of its outstanding common
stock from time to time in open market and privately negotiated transactions.
Currently there are 155,054 shares remaining under the previous authorization
that will be repurchased prior to the commencement of the new program.
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) 2003 2002 2001
- --------------------------------------------------------------------------------------------
Service charges on deposit accounts $15,833 $13,875 $12,756
Broker/dealer and insurance revenue 6,869 5,780 4,500
Trust 4,041 3,226 3,958
Bank Owned Life Insurance 815 - -
Other 10,045 9,053 9,245
---------------------------
Total before net securities and a gain on sale of building 37,603 31,934 30,459
Net securities gains (losses) 175 (413) (7,692)
Gain on sale of building - - 1,367
---------------------------
Total $37,778 $31,521 $24,134
---------------------------
============================================================================================
Noninterest income before securities losses increased $5.7 million or 18%
to $37.6 million for 2003 from $31.9 million for 2002. Fees from service charges
on deposit accounts increased $2.0 million or 14% for 2003 when compared to
2002, primarily from an increase in core deposits and pricing adjustments.
Broker/dealer and insurance fees increased $1.1 million, primarily driven by the
initiative implemented at the end of 2002 to offer financial service products
throughout the Company's 111 branch network. Trust revenue increased $0.8
million or 25% in 2003, primarily from growth in assets under management and
increased estate fees. Other income increased $1.0 million or 11%, in 2003, from
strong growth in ATM and other consumer banking fee income.
The Company purchased $30 million in BOLI in June 2003. BOLI represents
life insurance on the lives of certain employees who are deemed to be
significant contributors to the Company. All employees in the policy are aware
of and have consented to the coverage. Increases in the cash value of the
policies, as well as insurance proceeds that may be received, are recorded in
other noninterest income, and are not subject to income taxes. The Company
reviewed the financial strength of the insurance carriers prior to the purchase
of BOLI and will do so annually thereafter. Total BOLI income was $0.8 million
for 2003. Net securities gains stemming primarily from the call of certain debt
securities totaled $0.2 million in 2003 compared to a $0.4 million net loss in
2002 which resulted primarily from a charge taken for the other-than-temporary
impairment of a certain security totaling $0.7 million.
ANNUAL REPORT: NBT BANCORP INC. 28
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) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 49,560 $ 48,212 $ 48,419
Occupancy 9,328 8,333 8,704
Equipment 7,627 7,066 7,228
Data processing and communications 10,752 10,593 10,690
Professional fees and outside services 5,433 6,589 6,338
Office supplies and postage 4,216 4,446 4,639
Amortization of intangible assets 620 774 685
Amortization of unidentifiable intangible assets and goodwill - - 3,563
Capital securities 732 839 1,278
Residual value lease losses - - 3,529
Loan collection and other real estate owned 1,840 2,846 2,117
Other 14,409 12,757 11,221
Merger, acquisition and reorganization costs - - 15,322
Certain deposit overdraft write-offs - - 2,125
-------------------------------
Total noninterest expense $ 104,517 $102,455 $125,858
-------------------------------
=============================================================================================================
Total noninterest expense increased $2.1 million or 2% from $102.5 million
in 2002 to $104.5 million in 2003. Salaries and benefits increased $1.3 million
or 3% in 2003 from increases in salaries of $2.0 million, incentive compensation
of $0.9 million, and medical insurance of $0.3 million offset by an increase in
loan origination deferrals of $2.0 million and a decrease in pension and
postretirement health care costs of $0.4 million. The increase in salaries was
driven primarily by merit increases and an increase in full-time equivalent
employees. Incentive compensation increased from increases in bonuses, financial
services commissions and 401(K)/ESOP contributions as the Company's focus has
shifted to a sales-driven culture. Occupancy expense increased $1.0 million or
12% in 2003 from increases in depreciation and rent stemming from renovations
and expansion at the Company's corporate headquarters as well as an increase in
seasonal maintenance. Equipment expense increased $0.6 million or 6%, from ATM
upgrades and increased depreciation for office equipment from renovations at the
Company's corporate headquarters and several CNB locations. Other operating
expenses increased $1.7 million or 13% in 2003 from an $0.8 million charge for
the write-down of nonmarketable investment securities and an increase in
insurance expense of $0.6 million from higher premiums for property and casualty
insurance, and contingent auto liability insurance.
Offsetting these increases were decreases in 2003 in professional fees and
outside services of $1.2 million and loan collection and OREO costs of $1.0
million. The decrease in professional fees and outside services resulted from a
$0.4 million charge related to an adverse judgment against the Company in 2002,
legal fees of $0.3 million incurred during 2002 for the recovery of deposit
overdraft writeoffs, and $0.4 million in professional fees for a tax project in
2002. The decrease in loan collection and OREO costs resulted from gains on the
sale of OREO and a decrease in nonperforming loans.
INCOME TAXES
In 2003, income tax expense was $21.5 million, as compared to $21.8 million in
2002 and $0.5 million in 2001. The Company's effective tax rate was 31.3%,
32.6%, and 12.7% in 2003, 2002, and 2001, respectively. The decrease in the
effective rate in 2003 from 2002 resulted from an increase in tax exempt income
in 2003. The decrease in the effective tax rate during 2001 was primarily
ANNUAL REPORT: NBT BANCORP INC. 29
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.
2002 OPERATING RESULTS AS COMPARED TO 2001
OPERATING RESULTS-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.
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 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.
LEASE FINANCING
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. Accordingly, there was no provision for the
other-than-temporary impairment in residual values in 2002.
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
reinvest-
ANNUAL REPORT: NBT BANCORP INC. 30
ment 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.
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 DEPOSITS
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.
Average interest bearing deposits decreased $34.7 million 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.
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 shortterm borrowings
and time deposits was a result of the Company limiting its liability sensitive
position and its exposure to rising interest rates.
NONINTEREST INCOME
Noninterest income before securities losses and a gain on sale of a building
increased $1.5 million or 5% to $31.9 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 expense before merger, acquisition, and reorganization costs and
certain deposit overdraft writeoffs, decreased $6.0 million to $102.5 million
for 2002 from $108.4 million for 2001. 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.
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 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Company's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
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
ANNUAL REPORT: NBT BANCORP INC. 32
to changes in interest rates and fluctuations in the difference between long-
and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next repricing date (if needed), and current rates is uploaded into the model to
create an ending balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and leases and mortgage related investment
securities along with any optionality within the deposits and borrowings.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) with a static balance sheet over a 12-month
period. Three additional models are run 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 75 bp takes place over a 12 month period with a static balance
sheet. Under these scenarios, assets subject to prepayments are adjusted to
account for faster or slower prepayment assumptions. Any investment securities
or borrowings that have callable options embedded into them are handled
accordingly based on the interest rate scenario. The resultant changes in net
interest income are then measured against the flat rate scenario.
In the declining rate scenario, net interest income is projected to
increase slightly when compared to the forecasted net interest income in the
flat rate scenario through the simulation period. The increase in net interest
income is a result of interest-bearing liabilities repricing downward at a
faster 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 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/- 75
bp scenarios, as described above, is within the internal policy risk limits of
not more than a 7.5% change in net interest income. The following table
summarizes the percentage change in net interest income in the rising and
declining rate scenarios over a 12-month period from the forecasted net interest
income in the flat rate scenario using the December 31, 2003 balance sheet
position:
================================================================================
Table 10. Interest Rate Sensitivity Analysis
- --------------------------------------------------------------------------------
Change in interest rates Percent change
(In basis points) in net interest income
- --------------------------------------------------------------------------------
+200 Flat (2.09%)
+200 (1.00%)
- -75 0.24%
================================================================================
Under the flat rate scenario with a static balance sheet, net interest
income is anticipated to increase approximately 1.3% from total net interest
income for 2003. The Company anticipates under current conditions, earning
assets will continue to reprice down at a faster rate than interest bearing
liabilities. However, the growth in loans experienced in the second half of 2003
should minimize the impact of margin compression. In order to protect net
interest income from anticipated net interest margin compression, the Company
will continue to focus on increasing earning assets through loan growth and
leverage opportunities. However, if the Company cannot maintain the level of
earning assets at December 31, 2003, the Company expects net interest income to
decline in 2004.
Currently, the Company is holding fixed rate residential real estate
mortgages in its loan portfolio and mortgage related securities in its
investment portfolio. Two major factors the Company considers in holding
residential real estate mortgages is its level of core deposits and the duration
of its mortgage-related securities and loans. Current core deposit levels
combined with a shortening of duration of mortgage-related securities and loans
have enabled the Company to hold fixed rate residential real estate mortgages
without having a significant negative impact on interest rate risk, as the
Company is well matched at December 31, 2003. The Company's net interest income
is projected to decrease by 1.00% if interest rates gradually rise 200 basis
points. From December 31, 2002, we have reduced our exposure to 30- year fixed
rate mortgage related securities and loans by $41.9 million. Approximately 11.5%
of earning assets were comprised of 30-year fixed rate mortgage related
securities and loans at December 31, 2003, down from a ratio of 13.3% at
December 31, 2002. The Company closely monitors its matching of earning assets
to funding sources. If core deposit levels decrease or the rate of growth in
core deposit levels does not equal or exceed the rate in growth of 30-year fixed
rate real estate mortgage related securities or loans, the Company will
reevaluate its strategy and may sell new originations of
ANNUAL REPORT: NBT BANCORP INC. 33
fixed rate mortgages in the secondary market or may sell certain mortgage
related securities in order to limit the Company's exposure to long-term earning
assets.
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 independent directors. 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
- --------------------------------------------------------
Daryl R. Forsythe
Chairman and Chief Executive Officer
/S/ Michael J. Chewens
- --------------------------------------------------------
Michael J. Chewens
Senior Executive Vice President, Chief Financial Officer and Corporate Secretary
ANNUAL REPORT: NBT BANCORP INC. 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of NBT Bancorp Inc.:
We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc.
and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, 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.
/S/ KPMG LLP
Albany, New York
February 24, 2004
ANNUAL REPORT: NBT BANCORP INC. 35
============================================================================================================================
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
(In thousands, except share and per share data) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 125,590 $ 121,824
Short-term interest bearing accounts 2,454 2,799
Trading securities, at fair value 48 203
Securities available for sale, at fair value 980,961 1,007,583
Securities held to maturity (estimated fair value $98,576 and $84,517) 97,204 82,514
Federal Reserve and Federal Home Loan Bank stock 34,043 23,699
Loans and leases 2,639,976 2,355,932
Less allowance for loan and lease losses 42,651 40,167
-----------------------------
Net loans and leases 2,597,325 2,315,765
Premises and equipment, net 62,443 61,261
Goodwill 47,521 46,121
Intangible assets, net 2,331 2,246
Bank owned life insurance 30,815 -
Other assets 66,150 59,711
-----------------------------
Total assets $4,046,885 $3,723,726
=============================
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
JUNIOR SUBORDINATE DEBENTURES, AND STOCKHOLDERS' EQUITY
Deposits
Demand (noninterest bearing) $ 500,303 $ 449,201
Savings, NOW, and money market 1,401,825 1,183,603
Time 1,099,223 1,289,236
-----------------------------
Total deposits 3,001,351 2,922,040
Short-term borrowings 302,931 105,601
Long-term debt 369,700 345,475
Other liabilities 45,869 41,228
-----------------------------
Total liabilities 3,719,851 3,414,344
-----------------------------
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, 2003 and 2002. Authorized 2,500,000 shares
Common stock, $0.01 par value. Authorized 50,000,000 shares at December 31, 2003
and 2002; issued 34,401,088 and 34,401,171 at December 31, 2003 and 2002, respectively 344 344
Additional paid-in-capital 209,267 210,443
Unvested restricted stock (197) (127)
Retained earnings 120,016 95,085
Accumulated other comprehensive income 7,933 16,531
Common stock in treasury, at cost, 1,592,435 and 1,751,724 shares (27,329) (29,894)
-----------------------------
Total stockholders' equity 310,034 292,382
-----------------------------
Total liabilities, guaranteed preferred beneficial interests in Company's junior subordinate
debentures, and stockholders' equity $4,046,885 $3,723,726
=============================
See accompanying notes to consolidated financial statements.
============================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 36
==================================================================================================
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------
December 31,
-----------------------------------
(In thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------
INTEREST, FEE, AND DIVIDEND INCOME
Interest and fees on loans and leases $159,118 $ 167,185 $187,188
Securities available for sale 43,851 54,404 60,241
Securities held to maturity 3,391 4,260 5,232
Other 938 1,373 2,773
-----------------------------------
Total interest, fee, and dividend income 207,298 227,222 255,434
-----------------------------------
INTEREST EXPENSE
Deposits 45,941 63,332 98,522
Short-term borrowings 2,171 1,334 5,365
Long-term debt 14,762 15,736 13,615
-----------------------------------
Total interest expense 62,874 80,402 117,502
-----------------------------------
Net interest income 144,424 146,820 137,932
Provision for loan losses 9,111 9,073 31,929
-----------------------------------
Net interest income after provision for loan losses 135,313 137,747 106,003
-----------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 15,833 13,875 12,756
Broker/ dealer and insurance revenue 6,869 5,780 4,500
Trust fees 4,041 3,226 3,958
Net securities gains (losses) 175 (413) (7,692)
Gain on sale of branch building - - 1,367
Bank owned life insurance 815 - -
Other 10,045 9,053 9,245
-----------------------------------
Total noninterest income 37,778 31,521 24,134
-----------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 49,560 48,212 48,419
Occupancy 9,328 8,333 8,704
Equipment 7,627 7,066 7,228
Data processing and communications 10,752 10,593 10,690
Professional fees and outside services 5,433 6,589 6,338
Office supplies and postage 4,216 4,446 4,639
Amortization of unidentified intangible assets and goodwill - - 3,563
Amortization of intangible assets 620 774 685
Merger, acquisition and reorganization costs - - 15,322
Writedowns of lease residual values - - 3,529
Deposit overdraft write-offs - - 2,125
Capital securities 732 839 1,278
Loan collection and other real estate owned 1,840 2,846 2,117
Other 14,409 12,757 11,221
-----------------------------------
Total noninterest expense 104,517 102,455 125,858
-----------------------------------
Income before income tax expense 68,574 66,813 4,279
Income tax expense 21,470 21,814 542
-----------------------------------
Net income $ 47,104 $ 44,999 $ 3,737
===================================
EARNINGS PER SHARE
Basic $ 1.45 $ 1.36 $ 0.11
Diluted 1.43 1.35 0.11
See accompanying notes to consolidated financial statements.
==================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 37
=================================================================================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, Accumulated
2003, 2002, and 2001 Additional Unvested other Common
(In thousands except share and Common paid-in- restricted Retained comprehensive stock in
per share data) stock capital stock earnings (loss)/income treasury Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
2000 $ 332 $ 195,422 $ - $ 88,921 $ (1,934) $ (13,100) $269,641
Net income - - - 3,737 - - 3,737
Cash dividends-$0.68 per share - - - (20,123) - - (20,123)
Issuance of 1,075,366 shares to
purchase First National
Bancorp, Inc. 11 15,991 - - - - 16,002
Payment in lieu of fractional
shares - - - (4) - - (4)
Purchase of 727,037 treasury
shares - - - - - (11,126) (11,126)
Issuance of 223,515 shares to
employee benefit plans and
other stock plans,
including tax benefit 1 (1,529) - - - 3,901 2,373
Retirement of 63,034 shares
of treasury stock of
pooled company (1) (708) - - - 709 -
Other comprehensive income - - - 5,855 - 5,855
-----------------------------------------------------------------------------------------
Balance at December 31, 2001 343 209,176 - 72,531 3,921 (19,616) 266,355
Net income - - - 44,999 - - 44,999
Cash dividends-$0.68 per share - - - (22,445) - - (22,445)
Purchase of 624,333 treasury
shares - - - - - (10,803) (10,803)
Issuance of 25,298 shares to the
employee stock purchase plan - 315 - - - - 315
Issuance of 53,460 shares for
the exercise of incentive
stock options - 550 - - - - 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) - - - 868 718
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 - - - 83
Other comprehensive income - - - - 12,610 - 12,610
-----------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 344 $ 210,443 $ (127) $ 95,085 $ 16,531 $ (29,894) $292,382
Net income - - - 47,104 - - 47,104
Cash dividends-$0.68 per
share - - - (22,173) - - (22,173)
Purchase of 369,313 treasury
shares - - - - - (6,489) (6,489)
Issuance of 41,980 shares in
Exchange for 20,172 shares
received as consideration
for the exercise of incentive
stock options - 360 - - - (360) -
Net issuance of 494,948 shares to
employee benefit plans and
other stock plans, including
tax benefit - (1,537) - - - 9,212 7,675
Grant of 11,846 shares of
restricted stock awards - 1 (203) - - 202 -
Amortization of restricted
stock awards - - 133 - - - 133
Other comprehensive loss - - - - (8,598) - (8,598)
-----------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 344 $ 209,267 $ (197) $ 120,016 $ 7,933 $ (27,329) $310,034
=========================================================================================
See accompanying notes to consolidated financial statements.
================================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 38
====================================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Years ended December 31
------------------------------------
(In thousands, except per share data) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 47,104 $ 44,999 $ 3,737
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Provision for loan losses 9,111 9,073 31,929
Depreciation of premises and equipment 6,507 6,573 6,197
Net amortization (accretion on) securities 4,806 210 (5,369)
Amortization of goodwill and intangible assets 620 774 4,248
Amortization of restricted stock 133 83 -
Deferred income tax expense (benefit) 6,357 8,655 (6,333)
Proceeds from sale of loans held for sale 8,886 6,676 16,570
Originations and purchases of loans held for sale (2,812) (6,824) (14,360)
Purchase of trading securities (68) (65) (6,194)
Proceeds from sales of trading securities 255 - 29,844
Net loss on disposal of premises and equipment 166 - 164
Net losses (gains) on sales of loans held for sale - 105 (27)
Net security (gains) losses (175) 413 7,692
Net gain on sales of other real estate owned (927) (80) (17)
Writedowns on other real estate owned - - 253
Gain on sale of branch building - - (1,367)
Gain on sale of branch, net - (220) -
Tax benefit from exercise of stock options 1,294 199 327
Writedown of nonmarketable securities 620 - -
Purchase of Bank Owned Life Insurance (30,000) - -
Net decrease (increase) in other assets (3,339) 1,273 (5,471)
Net (decrease) increase in other liabilities (3,923) (10,980) (8,579)
------------------------------------
Net cash provided by operating activities 44,615 60,864 53,244
------------------------------------
INVESTING ACTIVITIES
Net cash and cash equivalents provided by acquisitions 10,594 - 9,509
Net cash paid in conjunction with branch sale - (29,171) -
Securities available for sale:
Proceeds from maturities, calls, and principal paydowns 458,295 382,285 335,280
Proceeds from sales 206,754 217,471 43,318
Purchases (657,578) (677,563) (324,701)
Securities held to maturity:
Proceeds from maturities, calls, and principal paydowns 53,991 52,637 40,427
Purchases (68,752) (33,645) (26,121)
Net increase in loans (296,981) (36,315) (39,589)
Net increase (decrease) in Federal Reserve and FHLB stock (10,344) (1,915) 9,902
Purchases of premises and equipment, net (7,827) (6,851) (8,451)
Proceeds from sales of other real estate owned 4,076 1,113 3,476
------------------------------------
Net cash (used in) provided by investing activities (307,772) (131,954) 43,050
------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 66,011 40,689 (36,214)
Net increase (decrease) in short-term borrowings 197,329 (16,412) (63,437)
Proceeds from issuance of long-term debt 125,000 80,000 247,083
Repayments of long-term debt (100,775) (6,856) (215,005)
Proceeds from the issuance of shares to
employee benefit plans and other stock plans 7,675 1,583 2,046
Purchase of treasury stock (6,489) (10,803) (11,126)
Cash dividends and payment for fractional shares (22,173) (22,445) (20,127)
------------------------------------
Net cash provided by (used in) financing activities 266,578 65,756 (96,780)
------------------------------------
Net increase (decrease) in cash and cash equivalents 3,421 (5,334) (486)
Cash and cash equivalents at beginning of year 124,623 129,957 130,443
------------------------------------
Cash and cash equivalents at end of year $ 128,044 $ 124,623 $ 129,957
====================================
====================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 39
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 64,334 $ 85,224 $ 124,362
Income taxes 12,700 10,800 8,361
Noncash investing activities:
Transfer of securities available for sale to trading
securities $ - $ - $ 3,804
Transfer of loans to other real estate owned 1,363 3,352 3,400
Fair value of assets (sold) acquired 1,155 (3,323) 109,599
Fair value of liabilities (sold) assumed 13,311 (34,263) 112,134
Common stock issued for acquisitions - - 16,002
See accompanying notes to consolidated financial statements.
====================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ----------------------------------------------------------------------------------------------------
Years ended December 31,
------------------------------------
(In thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Net income $ 47,104 $ 44,999 $ 3,737
------------------------------------
Other comprehensive income, net of tax
Unrealized net holding gains (losses) arising during the
year (pre-tax amounts of ($13,764), 20,564, and $2,779) (8,276) 12,365 1,641
Minimum pension liability adjustment (pre-tax amounts of
($362), $0, and of ($362), $0, and 0) (217) - -
Less reclassification adjustment for net (gains) losses
related to securities available for sale included in net
income (pre-tax amounts of ($174), $408, and $7,124) (105) 245 4,214
------------------------------------
Total other comprehensive income (8,598) 12,610 5,855
------------------------------------
Comprehensive income $ 38,506 $ 57,609 $ 9,592
====================================
See accompanying notes to consolidated financial statements
====================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 40
NBTBANCORP INC. AND SUBSIDIARIES:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(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 another-than-temporary
impairment are generally placed on non-accrual status.
Nonmarketable equity securities are carried at cost, with the exception of
investments owned by NBT Bank's
ANNUAL REPORT: NBT BANCORP INC.
41
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.
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
ANNUAL REPORT: NBT BANCORP INC. 42
loan's initial effective interest rate or the fair value of the collateral for
certain loans where repayment of the loan is expected to be provided solely by
the underlying collateral (collateral dependent loans). The Company's impaired
loans are generally collateral dependent. The Company considers the estimated
cost to sell, on a discounted basis, when determining the fair value of
collateral in the measurement of impairment if those costs are expected to
reduce the cash flows available to repay or otherwise satisfy the loans.
Management believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize loan and
lease losses, future additions to the allowance for loan and lease losses may be
necessary based on changes in economic conditions or changes in the values of
properties securing loans in the process of foreclosure. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize additions to the allowance for
loan and lease losses based on their judgments about information available to
them at the time of their examination which may not be currently available to
management.
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-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.
ANNUAL REPORT: NBT BANCORP INC. 43
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 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, 2003, 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
2003, 2002, and 2001 was $4.03, $2.24, and $3.70, respectively. The fair value
of each award is estimated on the grant date using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
the years ended December 31:
================================================================================
Years ended December 31,
---------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Dividend yield 3.11%-3.97% 4.07% 4.26%
Expected volatility 31.34%-31.45% 19.13% 30.19%
Risk-free interest rates 2.98%-3.98% 3.48%-4.74% 4.63%-5.04%
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,
----------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
NET INCOME
As reported $ 47,104 $ 44,999 $ 3,737
Add: Stock-based compensation expense included in reported net income,
net of related tax effects 80 50 43
Deduct: Total stock-based compensation expense determined under fair value
based methods for all awards, net of related tax effects (1,072) (995) (1,330)
----------------------------------
Pro forma net income 46,112 44,054 2,450
==================================
BASIC EARNINGS PER SHARE
As reported $ 1.45 $ 1.36 $ 0.11
Pro forma 1.42 1.34 0.07
DILUTED EARNINGS PER SHARE
As reported 1.43 1.35 0.11
Pro forma 1.40 1.33 0.07
==============================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 44
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.
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).
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, minimum pension liability, 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 $1.8 billion and $1.4
billion at December 31, 2003 and 2002, respectively. Trust income is recognized
on the accrual method based on contractual rates applied to the balances of
trust accounts.
NEW ACCOUNTING PRONOUNCEMENT-GOODWILL AND OTHER INTANGIBLE ASSETS, AND CERTAIN
ACQUISITIONS OF BANKING OR THRIFT INSTITUTIONS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In accordance
with this statement, goodwill and intangible assets deemed to have indefinite
lives no longer are being amortized but will be subject to impairment tests in
accordance with the pronouncement. Other intangible assets, primarily core
deposits, will continue to be amortized over their estimated useful lives. In
2003, the Company performed the required impairment tests of goodwill and no
impairment existed as of the valuation date, as the fair value of the Company's
net assets exceeded their carrying value. If for any future period we determine
that there has been impairment in the carrying value of our goodwill balances,
we will record a charge to our earnings, which could have a material adverse
effect on our net income.
In the fourth quarter of 2002, the Company adopted SFAS No. 147,
Acquisitions of Certain Financial Institutions. As permitted by the new
accounting standard issued on October 1, 2002, we reclassified previously
recorded intangible assets associated with acquisitions totaling $30.6 million
to non amortizable goodwill. These intangible assets were previously recognized
as a component of goodwill subject to amortization.
NEW ACCOUNTING PRONOUNCEMENT- CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). In
accordance with FIN 46, business enterprises that represent the primary
beneficiary of another entity by retaining a controlling interest in that
entity's assets, liabilities and results of operations must consolidate that
entity in its financial
ANNUAL REPORT: NBT BANCORP INC. 45
statements. Prior to the issuance of FIN 46, consolidation generally occurred
when an enterprise controlled another entity through voting interests. If
applicable, transition rules allow the restatement of financial statements or
prospective application with a cumulative effect adjustment. The Company has
determined that the provisions of FIN 46 do not require de-consolidation of
subsidiary trusts which issued guaranteed preferred beneficial interests in
subordinated debentures (Trust Preferred Securities). CNBF Capital I issued
Trust Preferred Securities. The Company consolidates the CNBF Capital I and the
consolidated balance sheet included the Trust Preferred Securities. Subsequent
to the issuance of FIN 46, the FASB issued a revised interpretation, the
provisions of which must be applied by March 31, 2004. Upon the adoption of the
revised FIN 46, CNBF Capital I must be de-consolidated and the junior
subordinated debentures of the Company owned by CNBF Capital I would be
disclosed in the liability section of the consolidated balance sheet. The Trust
Preferred Securities will no longer be included in the consolidated balance
sheet upon de-consol-idation. The Trust Preferred Securities currently qualify
as Tier 1 capital of the Company for regulatory purposes. The banking regulatory
agencies have not issued any guidance which would change the regulatory capital
treatment for the Trust Preferred Securities based on the adoption of the
revised FIN 46. The Company plans to adopt the provisions under the revised
interpretation in the first quarter of 2004. The adoption of FIN 46 and related
revisions is not expected to have any other material impact on the Company's
financial statements.
(2) MERGER AND ACQUISITION ACTIVITY
- --------------------------------------------------------------------------------
On June 20, 2003, the Company acquired one branch located in Whitney Point, New
York, from Alliance Bank. Deposits from the Whitney Point branch were
approximately $13.3 million and loans totaled approximately $1.1 million. The
Company received approximately $10.6 million in cash as consideration for net
liabilities assumed. The acquisition was accounted for in accordance with SFAS
No. 141, "Business Combinations." Goodwill accounted for in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets", was $1.4 million. Intangible
assets comprised mainly of core deposit intangibles were accounted for in
accordance with SFAS No. 147, and totaled $0.1 million and is being amortized
over seven years on a straight-line basis.
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 $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.
ANNUAL REPORT: NBT BANCORP INC. 46
(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
----------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- ---------------------------- ----------------------------
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 $47,104 32,540 $ 1.45 $44,999 32,983 $ 1.36 $ 3,737 32,897 $ 0.11
EFFECT OF DILUTIVE SECURITIES
Stock based compensation 285 205 123
Contingent shares 19 47 65
------- ------- -------
Diluted earnings per share $47,104 32,844 $ 1.43 $44,999 33,235 $ 1.35 $ 3,737 33,085 $ 0.11
======= ======= =======
========================================================================================================================
There were approximately 229,000, 416,000, and 936,000 weighted average stock
options for the years ended December 31, 2003, 2002, and 2001, 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 24, 2003 was $50.1 million.
ANNUAL REPORT: NBT BANCORP INC.
47
(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, 2003
U.S. Treasury $ 58 $ 1 $ - $ 59
Federal Agency 117,306 895 307 117,894
State and municipal 86,956 5,477 - 92,433
Mortgage-backed 726,471 8,536 3,216 731,791
Collateralized mortgage obligations 7,929 59 - 7,988
Asset-backed securities - - - -
Corporate 6,197 214 - 6,411
Other securities 22,488 1,937 40 24,385
------------------------------------------------------
Total securities available for sale $ 967,405 $ 17,119 $ 3,563 $ 980,961
======================================================
DECEMBER 31, 2002
U.S. Treasury $ 502 $ 12 $ - $ 514
Federal Agency 143,273 2,997 - 146,270
State and 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
------------------------------------------------------
=============================================================================================
The following table sets forth information with regard to sales
transactions of securities available for sale:
================================================================================================================
Years ended December 31
---------------------------------
(In thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Proceeds from sales $ 206,742 $ 217,471 $ 43,318
Gross realized gains 4,307 7,725 2,213
Gross realized losses (4,164) (7,473) (1,046)
Other-than-temporary impairment writedowns - (660) (8,291)
---------------------------------
Net security gains (losses) and writedowns on securities available for sale 143 (408) (7,124)
Net realized gains (losses) on trading securities and embedded derivatives 32 (5) (568)
---------------------------------
Net securities gains (losses) $ 175 $ (413) $ (7,692)
=================================
================================================================================================================
The security with other-than-temporary impairment charges at December 31,
2003 had a remaining carrying value, which approximated fair value, of $0.4
million, is classified as securities available for sale and is on the nonaccrual
status.
ANNUAL REPORT: NBT BANCORP INC. 48
At December 31, 2003 and 2002, securities available for sale with amortized
costs totaling $902.6 million and $519.7 million, respectively, were pledged to
secure public deposits and for other purposes required or permitted by law.
Additionally, at December 31, 2003, securities available for sale with an
amortized cost of $68.79 million were pledged as collateral for securities sold
under the 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, 2003
Mortgage-backed $ 11,363 $ 504 $ - $ 11,867
State and municipal 85,437 1,011 143 86,305
Other securities 404 - - 404
-------------------------------------------------
Total securities held to maturity $ 97,204 $ 1,515 $ 143 $ 98,576
=================================================
DECEMBER 31, 2002
Mortgage-backed $ 24,613 $ 1,107 $ - $ 25,720
State and 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
=================================================
=====================================================================================
At December 31, 2003 and 2002, 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.
Other securities include nonmarketable equity securities, including certain
securities acquired by NBT Bank's small business investment company (SBIC)
subsidiary, and trust preferred securities. The following table sets forth
information with regard to investment securities with unrealized losses at
December 31, 2003, segregated according to the length of time the securities had
been in a continuous unrealized loss position:
======================================================================================================================
Less than 12 months 12 months or longer Total
------------------------ ------------------------ ------------------------
Unrealized Unrealized Unrealized
Security type: Fair value losses Fair value losses Fair value losses
- ----------------------------------------------------------------------------------------------------------------------
Mortgaged-backed $ 243,017 $ 3,213 $ 128 $ 3 $ 243,145 $ 3,216
Federal agency 10,693 307 - - 10,693 307
State and municipal 3,745 143 3,745 143
Other securities 1,960 40 - - 1,960 40
----------------------------------------------------------------------------
Total securities with unrealized losses $ 259,415 $ 3,703 $ 128 $ 3 $ 259,543 $ 3,706
============================================================================
======================================================================================================================
The unrealized losses for the investment securities listed on the above
table resulted from current market interest rates for investment securities with
similar terms and cashflow structure exceeding the stated interest rate for
these investment securities at December 31, 2003. Interest rates are volatile
and unpredictable, therefore, the Company considers unrealized losses stemming
from interest rate changes to be temporary. Additionally, there is a low level
of credit risk associated with the above investment securities, as the majority
of the securities listed above 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.
ANNUAL REPORT: NBT BANCORP INC. 49
The following tables set forth information with regard to contractual
maturities of debt securities at December 31, 2003:
=========================================================================================
(In thousands) Amortized cost Estimated fair value
- -----------------------------------------------------------------------------------------
DEBT SECURITIES CLASSIFIED AS AVAILABLE FOR SALE
Within one year $ 5,172 $ 5,241
From one to five years 278,005 283,738
From five to ten years 617,369 620,258
After ten years 55,859 60,647
--------------------------------------
$ 956,405 $ 969,884
======================================
DEBT SECURITIES CLASSIFIED AS HELD TO MATURITY
Within one year $ 45,679 $ 45,681
From one to five years 21,727 22,272
From five to ten years 13,560 13,857
After ten years 16,238 16,766
--------------------------------------
$ 97,204 $ 98,576
======================================
=========================================================================================
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, 2003 and 2002.
(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) 2003 2002
- ----------------------------------------------------------------------------
Residential real estate mortgages $ 703,906 $ 579,638
Commercial and commercial real estate mortgages 954,024 920,330
Real estate construction and development 86,046 64,025
Agricultural and agricultural real estate mortgages 106,310 104,078
Consumer 390,413 357,214
Home equity 336,547 269,553
Lease financing 62,730 61,094
----------------------
Total loans and leases $2,639,976 $2,355,932
======================
================================================================================
FHLB advances are collateralized by a blanket lien on the Company's
residential real estate mortgages.
ANNUAL REPORT: NBT BANCORP INC. 50
Changes in the allowance for loan and lease losses for the three years
ended December 31, 2003, are summarized as follows:
===============================================================================
Years ended December 31,
----------------------------------
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------
Balance at January 1 $ 40,167 $ 44,746 $ 32,494
Allowance related to purchase acquisitions - - 505
Provision 9,111 9,073 31,929
Recoveries 5,216 4,670 2,189
Charge-offs (11,843) (18,322) (22,371)
----------------------------------
Balance at December 31 $ 42,651 $ 40,167 $ 44,746
==================================
===============================================================================
The following table sets forth information with regard to nonperforming
loans:
========================================================================
At December 31,
-------------------------
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------
Loans in nonaccrual status $13,861 $24,009 $40,210
Loans contractually past due 90 days or
more and still accruing interest 968 1,976 2,975
Restructured loans - 409 603
-------------------------
Total nonperforming loans $14,829 $26,394 $43,788
=========================
========================================================================
There were no material commitments to extend further credit to borrowers
with nonperforming loans.
Accumulated interest on the above nonaccrual loans of approximately $1.7
million, $1.9 million , and $3.2 million would have been recognized as income in
2003, 2002, and 2001, respectively, had these loans been in accrual status.
Approximately $1.2 million, $1.8 million, and $0.6 million of interest on the
above nonaccrual loans was collected in 2003, 2002, and 2001, respectively.
At December 31, 2003 and 2002, the recorded investment in loans that are
considered to be impaired totaled $8.7 million and $17.6 million, respectively,
for which the related allowance for loan losses is $0.2 million and $0.5
million, respectively. As of December 31, 2003 and 2002, there were $7.5 million
and $15.5 million, respectively, of impaired loans which did not have an
allowance for loan losses due generally to the adequacy of their collateral.
Included in total impaired loans at 2002 was $0.4 million of restructured loans.
The following provides additional information on impaired loans for the
periods presented:
========================================================================================
Years ended December 31
------------------------------
(In thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------
Average recorded investment on impaired loans $ 12,741 $ 23,549 $ 21,618
Interest income recognized on impaired loans 608 1,469 591
Cash basis interest income recognized on impaired loans 608 1,469 591
========================================================================================
ANNUAL REPORT: NBT BANCORP INC. 51
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) 2003 2002
- --------------------------------------------------
Balance at January 1 $16,959 $ 14,640
New loans 3,706 4,565
Change in Composition - 569
Repayments (4,587) (2,815)
--------------------
Balance at December 31 $16,078 $ 16,959
====================
==================================================
(7) PREMISES AND EQUIPMENT, NET
- --------------------------------------------------------------------------------
A summary of premises and equipment follows:
===========================================================
December 31
------------------
(In thousands) 2003 2002
- -----------------------------------------------------------
Land, buildings, and improvements $ 71,072 $ 66,542
Equipment 55,602 52,123
Construction in progress 17 423
------------------
126,691 119,088
Accumulated depreciation 64,248 57,827
------------------
Total premises and equipment $ 62,443 $ 61,261
==================
===========================================================
Land, buildings, and improvements with a carrying value of approximately
$4.0 million and $4.0 million at December 31, 2003 and 2002, respectively, are
pledged to secure long-term borrowings.
Rental expense included in occupancy expense amounted to $2.4 million in
2003, $2.1 million in 2002, and $2.1 million in 2001. The future minimum rental
payments related to noncancelable operating leases with original terms of one
year or more are as follows at December 31, 2003 (in thousands):
================================
2004 $ 2,057
2005 1,596
2006 1,420
2007 1,220
2008 840
Thereafter 4,427
-------
Total $11,560
=======
================================
ANNUAL REPORT: NBT BANCORP INC. 52
(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 noninterest expense and increased net income in
2002 as compared to 2001. The following table shows the pro forma effects of
applying SFAS No. 142 and SFAS No. 147 to the 2001 period:
=======================================================================
Year ended
December 31,
(In thousands, except per share amounts) 2001
GOODWILL AND UNIDENTIFIED INTANGIBLE ASSET AMORTIZATION
Pretax $ 3,563
After-tax 2,426
NET INCOME
Reported 3,737
Add back: after-tax amortization 2,426
-------------
Adjusted $ 6,163
=============
BASIC EARNINGS PER SHARE (EPS)
Reported 0.11
Add back: after-tax amortization per share 0.07
Adjusted $ 0.19
DILUTED EPS
Reported 0.11
Add back: after-tax amortization per share 0.07
Adjusted $ 0.19
=======================================================================
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) 2003 Acquired Loss 2003
- --------------------------------------------------------------------------------
NBT Bank, N.A. $ 43,120 $ 1,400 - $ 44,520
NBT Financial Services, Inc. 3,001 - - 3,001
-------------------------------------------------
Total $ 46,121 $ 1,400 - $ 47,521
=================================================
================================================================================
The Company recorded $1.4 million in goodwill in connection with the
acquisition of a branch from Alliance Bank in June of 2003. In connection with
the sale of a branch during 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.
ANNUAL REPORT: NBT BANCORP INC. 53
A summary of core deposit and other intangible assets follows:
===============================================================
December 31,
----------------
(In thousands) 2003 2002
- ---------------------------------------------------------------
CORE DEPOSIT INTANGIBLES
Gross carrying amount $5,585 $ 5,433
Less: accumulated amortization 4,497 3,931
----------------
Net carrying amount 1,088 1,502
----------------
UNIDENTIFIED INTANGIBLE ASSETS
Gross carrying amount 1,031 1,031
Less: accumulated amortization 339 287
Net carrying amount 692 744
----------------
Intangible for minimum pension liability 551 -
----------------
TOTAL INTANGIBLES WITH DEFINITE USEFUL LIVES
Gross carrying amount 7,167 6,464
Less: accumulated amortization 4,836 4,218
----------------
Net carrying amount $2,331 $ 2,246
================
===============================================================
Amortization expense on intangible assets with definite useful lives
totaled $0.6 million for 2003, and $0.8 million for 2002 and 2001, respectively.
Amortization expense on intangible assets with definite useful lives is expected
to total $0.3 million for 2004, 2005, 2006, 2007 and $0.2 million for 2008.
(9) DEPOSITS
- --------------------------------------------------------------------------------
The following table sets forth the maturity distribution of time deposits at
December 31, 2003 (in thousands):
=============================================
TIME DEPOSITS
- ---------------------------------------------
Within one year $ 684,616
After one but within two years 265,461
After two but within three years 65,378
After three but within four years 55,170
After four but within five years 19,875
After five years 8,723
----------
Total $1,099,223
==========
=============================================
Time deposits of $100,000 or more aggregated $353.8 million and $428.7
million at year end 2003 and 2002, respectively.
ANNUAL REPORT: NBT BANCORP INC. 54
(10) SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings total $302.9 million and $105.6 million at December 31,
2003 and 2002, 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 $559 million and $562
million at December 31, 2003 and 2002, respectively.
Included in the information provided above, the Company has two lines of
credit, expiring on November 6, 2004, which are available with the FHLB. The
first is an overnight line of credit for approximately $100.0 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, 2003, there was $84.0
million (included in federal funds purchased) outstanding on these 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) 2003 2002 2001
- ---------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED
Balance at year-end $ 59,000 $53,500 $31,000
Average during the year 55,797 17,404 30,752
Maximum month end balance 89,000 53,500 47,200
Weighted average rate during the year 1.22% 1.83% 4.79%
Weighted average rate at December 31 1.14% 1.35% 1.35%
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year-end $ 68,681 $51,851 $64,973
Average during the year 68,044 63,470 56,408
Maximum month end balance 101,192 69,477 64,973
Weighted average rate during the year 1.02% 1.43% 3.38%
Weighted average rate at December 31 0.92% 1.16% 1.62%
OTHER SHORT-TERM BORROWINGS
Balance at year-end $175,250 $ 250 $26,040
Average during the year 66,491 6,165 36,002
Maximum month end balance 175,250 25,787 71,654
Weighted average rate during the year 1.20% 1.75% 5.35%
Weighted average rate at December 31 1.20% 1.10% 5.11%
===========================================================================
ANNUAL REPORT: NBT BANCORP INC. 55
(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, 2003 is as follows:
=============================================================
As of December 31, 2003
-----------------------------------------
Weighted Weighted
Average Callable Average
Maturity Amount Rate Amount Rate
- -------------------------------------------------------------
2004 $ 30,000 3.42% $ -
2005 65,000 4.17% 25,000 4.40%
2006 25,000 4.45% -
2007 10,000 2.90% -
2008 90,441 3.80% 35,000 5.29%
2009 75,000 5.25% 75,000 5.25%
2010 25,000 3.07% -
2012 20,000 2.02% 20,000 2.02%
2013 25,000 3.21% 25,000 3.21%
2025 4,259 1.96% -
-------- ---------
$369,700 $ 180,000
======== =========
=============================================================
(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 (3.89% and
4.55% for the December 31, 2003 and 2002 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 Company's primary
source of funds to pay interest on the debentures owed to the Trust are current
dividends from the NBT Bank. Accordingly, the Company's ability to service the
debentures is dependent upon the continued ability of NBT Bank to pay dividends
(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. As noted previously, upon the adoption of the revised FIN
No. 46 during the first quarter of 2004, the Trust will be de-consolidated from
our balance sheet. The Trust obligation will be classified as component of
liabilities as long-term debt and interest paid to the Trust will be treated as
component of interest expense in 2004. The Capital Securities will not be
included in the consolidated balance sheet upon deconsolidation of the Trust.
(13) INCOME TAXES
- --------------------------------------------------------------------------------
The significant components of income tax expense attributable to operations are:
ANNUAL REPORT: NBT BANCORP INC. 56
============================================================
Years ended December 31
--------------------------------
2003 2002 2001
- ------------------------------------------------------------
CURRENT
Federal $ 12,723 $ 12,569 $ 5,404
State 2,390 590 1,471
--------------------------------
15,113 13,159 6,875
--------------------------------
DEFERRED
Federal 7,980 7,048 (4,963)
State (1,623) 1,607 (1,370)
--------------------------------
6,357 8,655 (6,333)
--------------------------------
Total income tax expense $ 21,470 $ 21,814 $ 542
================================
============================================================
Not included in the above table is income tax expense (benefit) of
approximately ($6.9 million), $8.1 million, and $3.7 million for 2003, 2002, and
2001, 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.
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) 2003 2002
- --------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Allowance for loan and lease losses $16,251 $15,532
Deferred compensation 4,744 3,887
Postretirement benefit obligation 1,793 1,672
Writedowns on corporate debt securities 2,341 2,123
Accrued severance and contract termination costs 135 142
Other real estate owned 80 86
Purchase accounting adjustments, net 41 100
Accrued liabilities 958 1,313
Intangible amortization - 752
Capital loss carryforward - 553
Net operating loss and tax credits carryforward 1,866 318
Other 541 285
------------------
Total deferred tax assets 28,750 26,763
------------------
DEFERRED TAX LIABILITIES
Pension and executive retirement 6,503 2,377
Premises and equipment, primarily due to accelerated depreciation 3,343 3,222
Equipment leasing 15,365 11,071
Securities discount accretion 466 630
Deferred loan costs 656 651
Tax bad debt reserve - 114
Intangible amortization 995 -
Other 202 220
Undistributed income of subsidiaries - 901
------------------
Total deferred tax liabilities 27,530 19,186
------------------
Net deferred tax asset at year-end 1,220 7,577
Net deferred tax asset at beginning of year 7,577 16,232
------------------
(Decrease) increase in net deferred tax asset $(6,357) $(8,655)
==================
======================================================================================
ANNUAL REPORT: NBT BANCORP INC. 57
The above table does not include the recorded deferred tax liability of
$5.4 million as of December 31, 2003 and $11.0 million as of December 31, 2002
related to the net unrealized holding gain/loss in the available-for-sale
securities portfolio. The table also excludes a deferred tax asset of $145,000
as of December 31, 2003 related to the minimum SERP liability. The changes in
these deferred assets and liabilities are recorded directly in stockholders'
equity.
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,
2003 and 2002.
At December 31, 2003, the Company has a state net operating loss
carryforward of $25.8 million which will expire at various dates through 2023.
The utilization of the tax net operating losss carryforward 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, 2003, the Company also has a state charitable contribution
carryforward of $1.0 million which expires at various dates through 2008 and a
New York State tax credit carryforwards of $1.4 million which may be carried
forward indefinitely.
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) 2003 2002 2001
- ---------------------------------------------------------------------------
Federal Income tax at statutory rate $ 24,001 $ 23,384 $ 1,498
Tax exempt income (2,545) (2,493) (2,475)
Nondeductible expenses 205 122 400
Nondeductible merger expenses - - 1,419
Net increase in CSV of life insurance (513) (153) (121)
Divident received deduction (219) (177) (142)
State taxes, net of federal tax benefit 499 1,428 66
Other, net 40 (297) (103)
---------------------------------
Income tax expense $ 21,470 $ 21,814 $ 542
---------------------------------
===========================================================================
(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, 2003, approximately $28.9 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
ANNUAL REPORT: NBT BANCORP INC. 58
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
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 NBT Bank 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, 2003 and 2002, 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, 2003, 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.
ANNUAL REPORT: NBT BANCORP INC. 59
The Company and NBT Bank's actual capital amounts and ratios are presented
as follows:
===================================================================================================
Regulatory ratio requirements
Actual ---------------------------------------
---------------- Minimum For classification
(Dollars in thousands) Amount Ratio capital adequacy as well capitalized
- ---------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2003
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Company combined $303,117 11.21% 8.00% 10.00%
NBT Bank 291,226 10.85% 8.00% 10.00%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
Company combined 269,222 9.96% 4.00% 6.00%
NBT Bank 257,303 9.59% 4.00% 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS)
Company combined 269,222 6.76% 4.00% 5.00%
NBT Bank 257,303 6.50% 4.00% 5.00%
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%
===================================================================================================
(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, 2003. 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.
ANNUAL REPORT: NBT BANCORP INC. 60
The net periodic pension expense and the funded status of the plan are as
follows:
===============================================================================================================
Years ended December 31
---------------------------------
(In thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 1,347 $ 1,484 $ 1,968
Interest cost 2,028 2,041 2,038
Expected return on plan assets (3,175) (2,549) (2,703)
Amortization of initial unrecognized asset (192) (192) (196)
Amortization of prior service cost 153 160 234
Amortization of unrecognized net gain 295 - (23)
---------------------------------
Net periodic pension cost $ 456 $ 944 $ 1,318
---------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at beginning of year $ (31,942) $ (31,846) $(28,867)
Service cost (1,347) (1,484) (1,968)
Interest cost (2,028) (2,041) (2,038)
Actuarial loss (3,512) (1,238) (1,438)
Benefits paid 2,412 3,348 2,465
Prior service cost (374) 1,319 -
---------------------------------
Projected benefit obligation at end of year $ (36,791) $ (31,942) $(31,846)
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 32,602 $ 29,548 $ 28,666
Actual return on plan assets 5,216 (1,598) (814)
Employer contributions 8,500 8,000 3,950
Benefits paid (2,412) (3,348) (2,465)
Actuarial gain due to measurement date prior to December 31 - - 211
Fair value of plan assets at end of year $ 43,906 $ 32,602 $ 29,548
---------------------------------
Plan assets in excess of (less than) projected benefit obligation $ 7,115 $ 660 $ (2,298)
Unrecognized portion of net asset at transition (981) (1,172) (1,364)
Unrecognized net actuarial loss 9,475 8,298 2,913
Unrecognized prior service cost 1,748 1,527 3,006
---------------------------------
Prepaid (accrued) pension cost $ 17,357 $ 9,313 $ 2,257
=================================
ACCUMULATED BENEFIT OBLIGATION $ (35,381) $ (31,022) $(28,433)
=================================
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 6.00% 6.50% 7.00%
Expected long-term return on plan assets 8.75% 8.75% 9.00%
Rate of compensation increase 3.75% 4.00% 4.00%
The following assumptions were used to determine net periodic pension cost:
Discount rate 6.50% 7.00% 7.25%
Exopected long-term return on plan assets 8.75% 9.00% 9.00%
Rate of compensation expense 4.00% 4.00% 4.00%
===============================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 61
The following is a summary of the plan's weighted average asset allocation
at December 31, 2003:
====================================================
Actual Percentage
(In thousands) Allocation Allocation
- ----------------------------------------------------
Cash and Cash Equivalents $ 2,295 5.23%
US Government Bonds 13,159 29.97%
Corporate Bonds 4,876 11.11%
Foreign Bonds 251 0.57%
Common Stock 21,229 48.35%
Preferred Stock 1,175 2.68%
Foreign Equity 921 2.10%
------------------------
Total $ 43,906 100.00%
========================
====================================================
PLAN INVESTMENT POLICY AS OF DECEMBER 31, 2003:
The Company's key investment objectives in managing its defined benefit
plan assets are to ensure that present and future benefit obligations to
all participants and beneficiaries are met as they become due; to provide a
total return that, over the long-term, maximizes the ratio of the plan
assets to liabilities, while minimizing the present value of required
Company contributions, at the appropriate levels of risk; to meet statutory
requirements and regulatory agencies' requirements; and to satisfy
applicable accounting standards. The Company periodically evaluates the
asset allocations, funded status, rate of return assumption and
contribution strategy for satisfaction of our investment objectives.
Generally, the investment manager allocates investments as follows: of
20-40% of the total portfolio in fixed income, 40-80% in equities, and
0-20% in cash. Only high-quality bonds should be included in the portfolio.
All issues that are rated lower than A by Standard and Poor's should be
excluded. Equity securities at December 31, 2003 and 2002 do not include
any NBT Bancorp Inc. common stock.
DETERMINATION OF ASSUMED RATE OF RETURN
The Company has selected the assumed rate of return based on the following:
=======================================================================================================
Expected Expected
Percentage 10-Year Return Weighted
Allocation Comparable Market Index Average Return
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 5.20% 4.00% 0.21%
US Government Bonds 30.00% Lehman Bros. Inter. Term Govt Index 6.33% 1.90%
Corporate Bonds 11.10% AAA Corporate Bonds 7.22% 0.80%
Foreign Bonds 0.60% Lehman Bros. Govt/Corp Index 6.98% 0.04%
Common Stock 48.30% S&P 500 11.07% 5.35%
Preferred Stock 2.70% S&P 500 11.07% 0.30%
Foreign Equity 2.10% MSCI World Index 7.14% 0.15%
---------
Expected Average Return: 8.75%
=========
<FN>
In addition, the Plan's assets have had an average annual return of 9.43% during the last ten fiscal
years.
The Company expects to make no contributions to the plan in 2004.
=======================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 62
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
$8.5 million and $7.1 million at December 31, 2003 and 2002, respectively. The
charges to expense with respect to these plans amounted to $1.0 million, $1.0
million, and $0.4 million for the years ended December 31, 2003, 2002, and 2001,
respectively. The discount rate used in determining the actuarial present values
of the projected benefit obligations was 6.00%, 6.50%, and 7.00%, at December
31, 2003, 2002, and 2001, 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 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.
================================================================================
Years ended December 31
---------------------------------
(In thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 131 $ 221 $ 175
Interest cost 365 454 300
Amortization of transition obligation 39 39 39
Amortization of losses 161 141 31
Amortization of unrecognized prior service cost (159) (27) (14)
---------------------------------
Net periodic postretirement benefit cost $ 537 $ 828 $ 531
---------------------------------
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Benefit obligation at beginning of the year $ 7,516 $ 5,399 $ 4,738
Service cost 131 221 175
Interest cost 365 454 300
Plan participants' contributions - - -
Actuarial loss (gain) 117 1,976 1,640
Amendments (3,045) (168) (1,224)
Benefits paid (304) (366) (230)
---------------------------------
Accumulated benefit obligation at end of year $ 4,780 $ 7,516 $ 5,399
---------------------------------
COMPONENTS OF ACCRUED BENEFIT COST
Accumulated benefit obligation at end of year $ (4,780) $ (7,516) $ (5,399)
Unrecognized transition obligation 62 101 139
Unrecognized prior service cost (3,219) (333) (192)
Unrecognized actuarial net loss 3,866 3,912 2,077
---------------------------------
Accrued benefit cost $ (4,071) $ (3,836) $ (3,375)
---------------------------------
Weighted average discount rate 6.00% 6.50% 7.00%
===================================================================================
ANNUAL REPORT: NBT BANCORP INC. 63
For measurement purposes, the annual rates of increase in the per capita
cost of covered medical and prescription drug benefits for fiscal year 2003 were
assumed to be 8.5 and 12.0 percent, respectively. The rates were assumed to
decrease gradually to 5.0 percent for fiscal year 2010 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
amounts reported for health care plans. A one-percentage point change in the
health care trend rates would have the following effects as of and for the year
ended December 31, 2003:
=========================================================================================================
1-Percentage 1-Percentage
(In thousands) point increase point decrease
- ---------------------------------------------------------------------------------------------------------
Increase (descrease) on total service and interest cost components $ 41 $ (36)
Increase (descrease) on postretirement accumulated benefit obligation 566 (506)
=========================================================================================================
EMPLOYEE 401(K) AND EMPLOYEE STOCK OWNERSHIP PLANS
At December 31, 2003, 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.
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
$1.5 million in 2003, $1.3 million in 2002, and $0.8 million in 2001.
STOCK OPTION PLANS
The following is a summary of changes in options outstanding:
The following table summarizes information concerning stock options
outstanding at December 31, 2003:
============================================================================
Weighted average of
exercise price of options
Number of options under the plans
- ----------------------------------------------------------------------------
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
Granted 398,888 17.72
Exercised (489,253) 12.42
Lapsed (37,284) 14.89
----------------------------------------------
Balance at December 31, 2003 2,064,574 $ 16.09
==============================================
============================================================================
ANNUAL REPORT: NBT BANCORP INC. 64
========================================================================================================
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
- --------------------------------------------------------------------------------------------------------
$9.00-$12.25 148,696 5.05 $ 10.62 141,087 $ 10.63
$12.26-$15.50 692,286 7.26 14.54 395,187 14.61
$15.51-$18.75 989,716 7.31 16.97 476,221 16.80
$18.76-$22.00 233,876 5.79 20.47 201,920 20.55
- --------------------------------------------------------------------------------------------------------
$9.00-$22.00 2,064,574 6.96 $ 16.09 1,214,415 $ 16.00
========================================================================================================
(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, 2003, 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.
The total amount of loans serviced by the Company for unrelated third
parties was approximately $66.4 million and $77.2 million at December 31, 2003
and 2002, respectively.
===========================================================================
At December 31
------------------
(In thousands) 2003 2002
- ---------------------------------------------------------------------------
Unused lines of credit $ 74,646 $ 72,458
Commitments to extend credits, primarily variable rate 398,360 336,665
Standby letters of credit 17,052 24,659
Loans sold with recourse 10,824 15,022
===========================================================================
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.
ANNUAL REPORT: NBT BANCORP INC. 65
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. The fair value of the Company's stand-by lettters of credit at
December 31, 2003 and 2002 was not significant.
(18) PARENT COMPANY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
===========================================================================
CONDENSED BALANCE SHEETS
- ---------------------------------------------------------------------------
December 31
------------------
(In thousands) 2003 2002
- ---------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 6,117 $ 5,038
Securities available for sale, at estimated fair value 7,601 6,624
Investment in subsidiaries, on equity basis 315,842 305,080
Other assets 18,384 13,243
------------------
Total assets $347,944 $329,985
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ 37,910 $ 37,603
Stockholders' equity 310,034 292,382
------------------
Total liabilities and stockholders' equity $347,944 $329,985
==================
===========================================================================
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------
Years ended December 31
--------------------------------
(In thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------
Gain on sale of building $ - $ 220 $ -
- ---------------------------------------------------------------- --------- -------- ----------
Dividends from subsidiaries 28,715 32,803 27,775
Management fee from subsidiaries 44,736 43,377 25,860
Interest and other dividend income 206 540 1,273
Net gain on sale of securities available for sale - 341 294
-------------------------------
73,657 77,281 55,202
Operating expense 45,692 44,513 41,535
Income before income tax (benefit) expense and (distributions
in excess of) equity in undistributed income of subsidiaries 27,965 32,768 13,667
Income tax expense (benefit) 272 22 (3,907)
Equity in undistributed income of (distributions in excess of)
subsidiaries 19,411 12,253 (13,837)
-------------------------------
Net income $ 47,104 $ 44,999 $ 3,737
===============================
=================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 66
========================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------
Years ended December 31
---------------------------------
(In thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 47,104 $ 44,999 $ 3,737
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net gains on sale of securities available for sale - (341) (294)
Tax benefit from exercise of stock options 1,294 199 327
Distributions in excess of (equity in undistributed) income of subsidiaries (19,411) (12,253) 13,837
Other, net (5,302) 3,058 4,354
---------------------------------
Net cash provided by operating activities 23,685 35,662 21,961
---------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale - 732 4,458
Purchases of securities available for sale - - (390)
Purchases of premises and equipment (1,534) (1,582) (2,603)
---------------------------------
Net cash (used in) provided by investing activities (1,534) (850) 1,465
---------------------------------
FINANCING ACTIVITIES
Proceeds from the issuance of shares to employee benefit plans and other stock plans 7,675 1,583 2,046
Payment on long-term debt (85) (80) (75)
Purchase of treasury shares (6,489) (10,803) (11,126)
Cash dividends and payment for fractional shares (22,173) (22,445) (20,127)
---------------------------------
Net cash (used in) financing activities (21,072) (31,745) (29,282)
---------------------------------
Net increase (decrease) in cash and cash equivalents 1,079 3,067 (5,856)
Cash and cash equivalents at beginning of year 5,038 1,971 7,827
---------------------------------
Cash and cash equivalents at end of year $ 6,117 $ 5,038 $ 1,971
=================================
========================================================================================================================
(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 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
ANNUAL REPORT: NBT BANCORP INC. 67
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:
=========================================================================================================
2003 2002
----------------------- -----------------------
Carrying Estimated Carrying Estimated
(In thousands) amount fair value amount fair value
- ---------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 128,044 $ 128,044 $ 124,623 $ 124,623
Trading securities 48 48 203 203
Securities available for sale 980,961 980,961 1,007,583 1,007,583
Securities held to maturity 97,204 98,576 82,514 84,517
Loans1 2,639,976 2,626,166 2,355,932 2,423,172
Less allowance for loan losses 42,651 - 40,167 -
Net loans 2,597,325 2,626,166 2,315,765 2,423,172
Accrued interest receivable $ 15,690 $ 15,690 $ 16,885 $ 16,885
================================================
FINANCIAL LIABILITIES
DEPOSITS
INTEREST BEARING
Savings, NOW, and money market $1,401,825 $ 1,401,825 $1,183,603 $ 1,183,603
Time deposits 1,099,223 1,105,461 1,289,236 1,301,742
Noninterest bearing 500,303 500,303 449,201 449,201
Short-term borrowings 302,931 302,931 105,601 105,601
Long-term debt 369,700 395,122 345,476 374,751
Accrued interest payable 6,873 6,873 8,333 8,333
Guaranteed preferred beneficial interests in company's
junior subordinated debentures $ 17,000 $ 17,000 $ 17,000 $ 17,000
================================================
<FN>
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, exists for a
significant portion of the Company's financial based on relevant market
information and information instruments, fair value estimates are based on
judgments about the financial instrument. These estimates do not re-regarding
future expected loss experience, current ecoflect any premium or discount that
could result from of-nomic conditions, risk characteristics of various financial
fering for sale at one time the Company's entire holdings instruments, and other
factors. These estimates are sub-of a particular financial instrument. Because
no market jective in nature and involve uncertainties and matters of
ANNUAL REPORT: NBT BANCORP INC. 68
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.
ANNUAL REPORT: NBT BANCORP INC. 69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
As of the end of the period covered by this report, we carried out an evaluation
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure of
controls and procedures were effective in ensuring that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There were no changes in our internal controls over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ANNUAL REPORT: NBT BANCORP INC. 70
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 4, 2004 (the "Proxy Statement"), which will be filed with the Securities and
Exchange Commission within 120 days of the Company's 2003 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, 2003, the following table summarizes the Company's equity
compensation plans:
==================================================================================================================================
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 2,064,574 $ 16.09 2,998,860
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. PRINCIPAL ACCOUNTING FEES AND SERVICES
- --------------------------------------------------------------------------------
The information required is incorporated herein by reference from the Proxy
Statement.
ANNUAL REPORT: NBT BANCORP INC. 71
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a)(1) The following Consolidated Financial Statements are included in Part II,
Item 8 hereof:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for each of the three years ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Changes in Stockholders' Equity for each of
the three years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Comprehensive Income for each of the three
years ended December 31, 2003, 2002 and 2001.
Notes to the Consolidated Financial Statements.
(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.
We filed a Form 8-K with the SEC on October 28, 2003, under "Item 9.
Regulation FD Disclosure," and provided under Item 12, reporting our
full year and third quarter earnings; and, on December 4, 2003, under
"Item 11. Temporary Suspension of Trading Under Registrant's Employee
Benefit Plans," reporting a blackout period for the Company's 401(k) and
Employee Stock Ownership Plan.
(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 8-
A12G/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).
ANNUAL REPORT: NBT BANCORP INC. 72
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 Sixth Amendment to the NBT Bancorp Inc. 401(k) and Employee Stock
Ownership Plan effective January 1, 2002.
10.8 Seventh Amendment to the NBT Bancorp Inc. 401(k) and Employee Stock
Ownership Plan effective January 1, 2004.
10.9 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).
10.10 Amendment Number One to NBT Bancorp Inc. Defined Benefit Pension
Plan effective December 31, 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).
10.11 Amendment Number Two to NBT Bancorp Inc. Defined Benefit Pension
Plan effective January 1, 2002 (filed as Exhibit 10.9 to
Registrant's Form 10-K for the year ended December 31, 2002, filed
on March 28, 2003 and incorporated herein by reference).
10.12 Amendment Number Three to NBT Bancorp Inc. Defined Benefit Pension
Plan effective January 1, 2002 (filed as Exhibit 10.10 to
Registrant's Form 10-K for the year ended December 31, 2002, filed
on March 28, 2003 and incorporated herein by reference).
10.13 Amendment Number Four to NBT Bancorp Inc. Defined Benefit Pension
Plan effective January 1, 2004.
10.14 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).
10.15 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).
10.16 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).
10.17 NBT Bancorp Inc. Non-employee Directors Restricted and Deferred
Stock Plan (filed as Appendix A of Registrant's Definitive Proxy
Statement on Form 14A filed on April 4, 2003, and incorporated by
reference herein).
10.18 NBT Bancorp Inc. Performance Share Plan (filed as Appendix B of
Registrant's Definitive Proxy Statement on Form 14A filed on April
4, 2003, and incorporated by reference herein).
ANNUAL REPORT: NBT BANCORP INC. 73
10.19 NBT Bancorp Inc. 2004 Executive Incentive Compensation Plan.
10.20 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).
10.21 Form of Employment Agreement between NBT Bancorp Inc. and Daryl R.
Forsythe made as of August 2, 2003. (filed as Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended September 30,
2003, filed on November 13, 2003 and incorporated herein by
reference).
10.22 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).
10.23 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).
10.24 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).
10.25 Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank,
National Association and Daryl R. Forsythe made January 25, 2002.
10.26 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).
10.27 Form of Employment Agreement between NBT Bancorp Inc. and Martin
A. Dietrich made as of January 1, 2000 and revised on January 1,
2002 and again on August 2, 2003. (filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarterly period ended September 30,
2003, filed on November 13, 2003 and incorporated herein by
reference).
10.28 Supplemental Executive Retirement Agreement between NBT Bancorp
Inc. and Martin A. Dietrich 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).
10.29 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).
10.30 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).
10.31 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).
10.32 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).
10.33 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).
10.34 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).
ANNUAL REPORT: NBT BANCORP INC. 74
10.35 Supplemental Executive Retirement Agreement between NBT Bancorp
Inc. and David E. Raven made as of January 1, 2004.
10.36 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).
10.37 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).
10.38 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).
21 A list of the subsidiaries of the Registrant.
23. Consent of KPMG LLP.
31.1 Certification by the Chief Executive Officer pursuant to Rules
13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
31.2 Certification by the Chief Financial Officer pursuant to Rules
13(a)-14(a)/15(d)-14(e) of the Securities and Exchange Act of 1934.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
ANNUAL REPORT: NBT BANCORP INC. 75
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 15, 2004
/S/ Daryl R. Forsythe
- --------------------------------------------------------------------------------
Daryl R. Forsythe
Chairman 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
- --------------------------------------------
Daryl R. Forsythe
Chairman and Chief Executive Officer
Date: March 15, 2004
/S/ John C. Mitchell
- --------------------------------------------
John C. Mitchell, Director
Date: March 15, 2004
/S/ Joseph G. Nasser
- --------------------------------------------
Joseph G. Nasser, Director
Date: March 15, 2004
/S/ Peter B. Gregory
- --------------------------------------------
Peter B. Gregory, Director
Date: March 15, 2004
/S/ William C. Gumble
- --------------------------------------------
William C. Gumble, Director
Date: March 15, 2004
/S/ Michael Hutcherson
- --------------------------------------------
Michael Hutcherson, Director
Date: March 15, 2004
/S/ Richard Chojnowski
- --------------------------------------------
Richard Chojnowski, Director
Date: March 15, 2004
/S/ Michael Murphy
- --------------------------------------------
Michael Murphy, Director
Date: March 15, 2004
/S/ Michael J. Chewens
- --------------------------------------------
Michael J. Chewens
Chief Financial Officer
(Principal Financial Officer)
Date: March 15, 2004
/S/ William L. Owens
- --------------------------------------------
William L. Owens, Director
Date: March 15, 2004
/S/ Van Ness D. Robinson
- --------------------------------------------
Van Ness D. Robinson, Director
Date: March 15, 2004
/S/ Joseph A. Santangelo
- --------------------------------------------
Joseph A. Santangelo, Director
Date: March 15, 2004
/S/ Paul O. Stillman
- --------------------------------------------
Paul O. Stillman, Director
Date: March 15, 2004
/S/ Janet H. Ingraham
- --------------------------------------------
Janet H. Ingraham, Director
Date: March 15, 2004
/S/ Paul Horger
- --------------------------------------------
Paul Horger, Director
Date: March 15, 2004
/S/ Andrew S. Kowalczyk, Jr
- --------------------------------------------
Andrew S. Kowalczyk, Jr., Director
Date: March 15, 2004
/S/ Patricia T. Civil
- --------------------------------------------
Patricia T. Civil, Director
Date: March 15, 2004
ANNUAL REPORT: NBT BANCORP INC. 76
This page left blank intentionally