UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-14703
NBT BANCORP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1268674
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
52 SOUTH BROAD STREET
NORWICH, NEW YORK 13815 (Zip Code)
(Address of principal executive office)
(607) 337-2265
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock ($0. 01 par value per share)
Stock Purchase Rights Pursuant to
Stockholders Rights Plan
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K (Section 299.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [X]
Based upon the closing price of the registrant's common stock as of June 28,
2002, the aggregate market value of the voting stock, common stock, par value,
$0.01 per share, held by non-affiliates of the registrant is $569,310,801. There
were no shares of the registrant's preferred stock, par value $0.01 per share,
outstanding at that date. Rights to purchase shares of the registrant's
preferred stock Series R are attached to the shares of the registrant's common
stock.
The number of shares of Common Stock outstanding as of February 28, 2003, was
32,563,280.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on May 1, 2003 are incorporated by reference
into Part III, Items 10, 11, 12 and 13 of this Form 10-K.
This page left blank intentionally
2 ANNUAL REPORT: NBT BANCORP INC.
CROSS REFERENCE INDEX
Part Item
I 1 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-9
Average Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Net Interest Income Analysis-Taxable Equivalent Basis. . . . . . . . . . . . . . . . . . . 17
Net Interest Income and Volume/Rate Variance-Taxable Equivalent Basis. . . . . . . . . . . 18
Securities Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Debt Securities-Maturity Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Maturities and Sensitivities of Loans to Changes in Interest Rates . . . . . . . . . . . . 21
Nonperforming Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Allowance for Loan Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-28
Maturity Distribution of Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Return on Equity and Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Short-Term Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . 10
II 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . 10
6 SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . 12-39
7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. . . . . . . . . . . . . . . . . . 40-41
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets at December 31, 2002 and 2001. . . . . . . . . . . . . . . . . 44
Consolidated Statements of Income for each of the years in three-year period ended
December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Consolidated Statements of Changes in Stockholders' Equity for each of the years in the
three-year period ended December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . 46
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Consolidated Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 49-80
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . 80
ANNUAL REPORT: NBT BANCORP INC. 3
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*. . . . . . . . . . . . . . . . . . . . . 80
11 EXECUTIVE COMPENSATION*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*. . . . . . . . . . . . . . . 80
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*. . . . . . . . . . . . . . . . . . . . . . . 81
14 CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K. . . . . . . . . . . . . . . . . 81-84
(a) (1) Financial Statements (See Item 8 for Reference).
(2) Financial Statement Schedules normally required on Form 10-K
are omitted since they are not applicable.
(3) Exhibits have been filed separately with the Commission and
are available upon written request.
(b) Reports on Form 8-K.
(c) Refer to item 15(a)(3) above.
(d) Refer to item 15(a)(2) above.
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER. . . . . . . . . . . . . . . . . . . . . . . . . . 86-88
CERTIFICATIONS OF CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . . . . . . . 86-88
- ---------------
* Information called for by Part III (Items 10 through 13) is incorporated by
reference to the Registrant's Proxy Statement for the 2003 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission.
4 ANNUAL REPORT: NBT BANCORP INC.
PART I
ITEM 1. BUSINESS
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NBT Bancorp Inc. (the "Registrant" or the "Company") is a registered financial
holding company incorporated in the state of Delaware in 1986, with its
principal headquarters located in Norwich, New York. The Registrant is the
parent holding company of NBT Bank, N.A. ("the Bank"), NBT Financial Services,
Inc. ("NBT Financial"), and CNBF Capital Trust I (see Note 12 to the Notes to
Consolidated Financial Statements). Through these subsidiaries, the Company
operates as one segment focused on community banking operations. The
Registrant's primary business consists of providing commercial banking and
financial services to its customers in its market area. The principal assets of
the Registrant are all of the outstanding shares of common stock of its direct
subsidiaries, and its principal sources of revenue are the management fees and
dividends it receives from the Bank and NBT Financial.
The principal subsidiaries of the Company through which it conducts its
operations are the Bank and NBT Financial. The Bank is a full service commercial
bank formed in 1856, which provides a broad range of financial products to
individuals, corporations and municipalities throughout the central and upstate
New York and northeastern Pennsylvania market area. The Bank conducts business
through three operating divisions, NBT Bank, Pennstar Bank and Central National
Bank.
The NBT Bank division has 43 divisional offices and 69 automated teller
machines (ATMs), located primarily in central and upstate New York. At December
31, 2002, NBT Bank had total loans of $1.2 billion and total deposits of $1.4
billion.
The Pennstar Bank division has 40 divisional offices and 53 ATMs, located
primarily in northeastern Pennsylvania. At December 31, 2002, Pennstar Bank had
total loans and leases of $526.1 million and total deposits of $774.1 million.
The Central National Bank division has 26 divisional offices and 20 ATMs
located primarily in upstate New York. At December 31, 2002, Central National
Bank had total loans and leases of $612.4 million and total deposits of $716.1
million.
The Bank has five operating subsidiaries, NBT Capital Corp., LA Lease,
Inc., Pennstar Management Trust, Pennstar Services Company, and Colonial
Financial Services, Inc. ("CFS"). NBT Capital Corp., formed in 1998, is a
venture capital corporation formed to assist young businesses develop and grow
in the markets we serve. LA Lease, Inc., formed in 1987, provides automobile and
equipment leases to individuals and small business entities. Pennstar Management
Trust, formed in 2002, is the holding company for Pennstar Realty Trust and CNB
Realty Trust. Pennstar Realty Trust, formed in 2000, and CNB Realty Trust formed
in 1998, are real estate investment trusts. Pennstar Services Company, formed in
2002, provides services to the Pennstar Bank division of the Bank. CFS, formed
in 2001, offers a variety of financial services products.
NBT Financial, formed in 1999, is the parent company of two operating
subsidiaries, Pennstar Financial Services, Inc. and M. Griffith, Inc. Pennstar
Financial Services, Inc., formed in 1997, offers a variety of financial services
products. M. Griffith, Inc., formed in 1951, is a registered securities
broker-dealer which also offers financial and retirement planning as well as
life, accident and health insurance.
ACQUISITIONS
During 2002, the Company did not engage in any acquisition activity, instead
choosing to focus its efforts on integrating acquisitions completed in 2001,
streamlining operational processes, and internal growth. During 2001 and 2000,
the Company expanded the breadth of its market area by acquiring other banking
organizations and select niche financial services companies. In addition, the
Company has selectively opened key new businesses that expand our product
offerings. The following provides a chronological listing of mergers and
acquisitions the Company has completed since January 1, 2000:
ANNUAL REPORT: NBT BANCORP INC. 5
===========================================================================================================
DATE OF TRANSACTION ENTITY/BRANCHES FORMER BANK HOLDING COMPANY TRANSACTION TYPE
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February 17, 2000 LA Bank, N.A. Lake Ariel Bancorp, Inc. (1)
May 5, 2000 M. Griffith, Inc. N/A (2)
June 2, 2000 2 branches from Mellon Bank N/A (2)
July 1, 2000 Pioneer American Bank, N.A Pioneer American Holding Co. Corp. (1)
November 10, 2000 6 branches from Sovereign Bank N/A (2)
June 1, 2001 The First National Bank of First National Bancorp, Inc. (2)
Northern New York
September 14, 2001 Deposits of 1 branch of N/A (2)
Mohawk Community Bank
November 8, 2001 Central National Bank CNB Financial Corp. (1)
(1) Transaction was accounted for as a pooling-of-interests and, accordingly,
all of our financial information for the periods prior to the acquisition
has been restated as if the acquisitions had occurred at the beginning of
the earliest reporting period presented.
(2) Transaction accounted for using the purchase accounting method.
================================================================================
Upon completion of their respective mergers, LA Bank, N.A. and Pioneer
American Bank, N.A. became wholly owned subsidiaries of the Registrant. LA Bank,
N.A. changed its name on November 10, 2000 to Pennstar Bank, N.A. and on
December 9, 2000, Pioneer American Bank, N.A. merged into Pennstar Bank, N.A. On
March 16, 2001, Pennstar Bank, N.A. was merged into the Bank.
COMPETITION
The banking and financial services industry in New York and Pennsylvania
generally, and in the Company's market areas specifically, is highly
competitive. The increasingly competitive environment is a result primarily of
changes in regulation, changes in technology and product delivery systems,
additional financial service providers, and the accelerating pace of
consolidation among financial services providers. The Company competes for loans
and leases, deposits, and customers with other commercial banks, savings and
loan associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the Company. In
order to compete with other financial services providers, the Company stresses
the community nature of its banking operations and principally relies upon local
promotional activities, personal relationships established by officers,
directors, and employees with their customers, and specialized services tailored
to meet the needs of the communities served.
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to extensive regulation,
supervision, and examination by the Board of Governors of the Federal Reserve
System ("FRS") as its primary federal regulator. The Company also has elected to
be registered with the FRS as a financial holding company. The Bank, as a
nationally chartered bank, is subject to extensive regulation, supervision and
examination by the Office of the Comptroller of the Currency ("OCC") as its
primary federal regulator and, as to certain matters, by the FRS and the Federal
Deposit Insurance Corporation ("FDIC").
M. Griffith, Inc. ("MGI") is registered as a broker-dealer and investment
adviser and is subject to extensive regulation, supervision and examination by
the Securities and Exchange Commission ("SEC"). MGI is also a member of the
National Association of Securities Dealers, Inc. ("NASD") and is subject to its
regulations. MGI is authorized as well to engage as a broker, dealer, and
underwriter of municipal securities, and as such is subject to regulation by the
Municipal Securities Rulemaking Board. In addition, MGI and Colonial Financial
Services, Inc., are licensed insurance agencies with offices in the state of New
York and are subject to registration and supervision by the New York State
Insurance Department. Pennstar Financial Services, Inc. is a licensed insurance
agency with offices in the Commonwealth of Pennsylvania and is subject to
registration and supervision by the Pennsylvania Insurance Department.
6 ANNUAL REPORT: NBT BANCORP INC.
The Company is subject to capital adequacy guidelines of the FRS. The
guidelines apply on a consolidated basis and require bank holding companies to
maintain a minimum ratio of Tier 1 capital to total average assets (or "leverage
ratio") of 4%. For the most highly rated bank holding companies, the minimum
ratio is 3%. The FRS capital adequacy guidelines also require bank holding
companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets
of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of
8%. As of December 31, 2002, the Company's leverage ratio was 6.73%, its ratio
of Tier 1 capital to risk-weighted assets was 9.93%, and its ratio of qualifying
total capital to risk-weighted assets was 11.18%. The FRS may set higher minimum
capital requirements for bank holding companies whose circumstances warrant it,
such as companies anticipating significant growth or facing unusual risks. The
FRS has not advised the Company of any special capital requirement applicable to
it.
Any holding company whose capital does not meet the minimum capital
adequacy guidelines is considered to be undercapitalized and is required to
submit an acceptable plan to the FRS for achieving capital adequacy. Such a
company's ability to pay dividends to its shareholders and expand its lines of
business through the acquisition of new banking or nonbanking subsidiaries also
could be restricted.
The Bank is subject to leverage and risk-based capital requirements and
minimum capital guidelines of the OCC that are similar to those applicable to
the Company. As of December 31, 2002, the Bank was in compliance with all
minimum capital requirements. The Bank's leverage ratio was 6.62%, its ratio of
Tier 1 capital to risk-weighted assets was 9.86%, and its ratio of qualifying
total capital to risk-weighted assets was 11.12%.
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits
unless it is well capitalized, or is adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank that is
not well capitalized from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain prevailing market rates.
As of December 31, 2002, the total amount of brokered deposits were $150.0
million.
The Bank also is subject to substantial regulatory restrictions on its
ability to pay dividends to the Company. Under OCC regulations, the Bank may not
pay a dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the proposed dividend, exceed the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. As of December 31, 2002, approximately
$9.8 million was available for the payment of dividends without prior OCC
approval. The Bank's ability to pay dividends also is subject to the Bank being
in compliance with regulatory capital requirements. The Bank is currently in
compliance with these requirements.
The deposits of the Bank are insured up to regulatory limits by the FDIC
and, accordingly, are subject to deposit insurance assessments to maintain the
insurance funds administered by the FDIC. The deposits of the Bank historically
have been subject to deposit insurance assessments to maintain the Bank
Insurance Fund ("BIF"). Due to certain branch deposit acquisitions by the Bank
and its predecessors, some of the deposits of the Bank are subject to deposit
insurance assessments to maintain the Savings Association Insurance Fund
("SAIF").
The FDIC has adopted regulations establishing a permanent risk-related
deposit insurance assessment system. Under this system, the FDIC places each
insured bank in one of nine risk categories based on the bank's capitalization
and supervisory evaluations provided to the FDIC by the institution's primary
federal regulator. Each insured bank's insurance assessment rate is then
determined by the risk category in which it is classified by the FDIC.
In the light of the then prevailing favorable financial situation of the
federal deposit insurance funds and the low number of depository institution
failures, since January 1, 1997, the annual insurance premiums on bank deposits
insured by the BIF or the SAIF have varied between $0.00 per $100 of deposits
for banks classified in the highest capital and supervisory evaluation
categories to $0.27 per $100 of deposits for banks classified in the lowest
capital and supervisory evaluation categories. Recent increases in the amount of
deposits subject to BIF FDIC insurance protection and in the number of bank
failures, and the effect of low interest rate returns on the assets held in the
BIF, have increased the likelihood that the annual insurance premiums on bank
deposits insured by the BIF will increase in the second half of 2003 or
thereafter. BIF and SAIF assessment rates are subject to semi-annual adjustment
by the FDIC within a range of up to five basis points without public comment.
The FDIC also possesses authority to impose special assessments from time to
time.
The Federal Deposit Insurance Act provides for additional assessments to be
imposed on insured depository institutions to pay for the cost of Financing
Corporation ("FICO") funding. The FICO assessments are adjusted quarterly to
reflect changes in the assessment bases of the FDIC insurance funds and do not
vary depending upon a
ANNUAL REPORT: NBT BANCORP INC. 7
depository institution's capitalization or supervisory evaluation. During 2002,
FDIC-insured banks paid an average rate of approximately $0.017 per $100 for
purposes of funding FICO bond obligations. The assessment rate has been retained
at this rate for the first and second quarters of 2003.
Transactions between the Bank and any of its affiliates, including the
Company, are governed by sections 23A and 23B of the Federal Reserve Act. An
"affiliate" of a bank is any company or entity that controls, is controlled by,
or is under common control with the bank. A subsidiary of a bank that is not
also a depository institution is not treated as an affiliate of the bank for
purposes of sections 23A and 23B, unless the subsidiary is also controlled
through a non-bank chain of ownership by affiliates or controlling shareholders
of the bank or the subsidiary engages in activities that are not permissible for
a bank to engage in directly (except insurance agency subsidiaries). Generally,
sections 23A and 23B are intended to protect insured depository institutions
from suffering losses arising from transactions with non-insured affiliates, by
limiting the extent to which a bank or its subsidiaries may engage in covered
transactions with any one affiliate and with all affiliates of the bank in the
aggregate, and requiring that such transactions be on terms that are consistent
with safe and sound banking practices.
On October 31, 2002, the FRS adopted a new regulation, Regulation W,
effective April 1, 2003, that comprehensively implements sections 23A and 23B.
The regulation unifies and updates staff interpretations issued over the years,
incorporates several new interpretative proposals (such as to clarify when
transactions with an unrelated third party will be attributed to an affiliate),
and addresses new issues arising as a result of the expanded scope of nonbanking
activities engaged in by banks and bank holding companies in recent years and
authorized for financial holding companies under the Gramm-Leach-Bliley Act
("GLB Act").
Under the GLB Act, a qualifying bank holding company, known as a financial
holding company, may engage in certain financial activities that a bank holding
company may not otherwise engage in under the Bank Holding Company Act ("BHC
Act"). In addition to engaging in banking and activities closely related to
banking as determined by the FRS by regulation or order prior to November 11,
1999, a financial holding company may engage in activities that are financial in
nature or incidental to financial activities, or activities that are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally.
Under the GLB Act, all financial institutions, including the Company and
the Bank, are required to adopt privacy policies, restrict the sharing of
nonpublic customer data with nonaffiliated parties at the customer's request,
and establish procedures and practices to protect customer data from
unauthorized access.
Under Title III of the USA PATRIOT Act, also known as the International
Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all
financial institutions, including the Company and the Bank, are required in
general to identify their customers, adopt formal and comprehensive anti-money
laundering programs, scrutinize or prohibit altogether certain transactions of
special concern, and be prepared to respond to inquiries from U.S. law
enforcement agencies concerning their customers and their transactions.
Additional information- sharing among financial institution, regulators, and law
enforcement authorities is encouraged by the presence of an exemption from the
privacy provisions of the GLB Act for financial institutions that comply with
this provision and the authorization of the Secretary of the Treasury to adopt
rules to further encourage cooperation and information-sharing. The
effectiveness of a financial institution in combating money laundering
activities is a factor to be considered in any application submitted by the
financial institution under the Bank Merger Act, which applies to the Bank, or
the BHC Act, which applies to the Company.
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among
other issues, corporate governance, auditor independence and accounting
standards, executive compensation, insider loans, whistleblower protection, and
enhanced and timely disclosure of corporate information. The SEC has adopted or
proposed several implementing rules, and the NASD has proposed corporate
governance rules that have been presented to the SEC for review and approval.
The proposed changes are intended to allow stockholders to monitor more
effectively the performance of companies and management.
Effective August 29, 2002, as directed by section 302(a) of the
Sarbanes-Oxley Act, the Company's chief executive officer and chief financial
officer are each required to certify that the Company's quarterly and annual
reports do not contain any untrue statement of a material fact. This requirement
has several parts, including certification that these officers are responsible
for establishing, maintaining and regularly evaluating the effectiveness of the
Company's internal controls; that they have made certain disclosures to the
Company's auditors and the risk management committee of the board of directors
about the Company's internal controls; and that they have in-
8 ANNUAL REPORT: NBT BANCORP INC.
cluded information in the Company's quarterly and annual reports about their
evaluation and whether there have been significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the evaluation.
EMPLOYEES
At December 31, 2002, the Company had 1,221 full-time equivalent employees. The
Company's employees are not presently represented by any collective bargaining
group. The Company considers its employee relations to be good.
AVAILABLE INFORMATION
The Company's website is http://www.nbtbank.com. The Company makes available
free of charge through its internet site, via a link to the Securities and
Exchange Commission's website at http://www.sec.gov, its annual reports on Form
10-K; quarterly reports on Form 10-Q; current reports on Form 8K; and any
amendments to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934 as soon as reasonably practicable after such material is
electronically filed with, or furnished to the SEC.
ITEM 2. PROPERTIES
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The Company's headquarters are located at 52 South Broad Street, Norwich, New
York 13815. The Company operated the following number of community banking
branches and automated teller machines (ATMs) as of December 31, 2002:
================================================================================================================
COUNTY BRANCHES ATMS COUNTY BRANCHES ATMS COUNTY BRANCHES ATMS
- ----------------------------------- --------------------------------------- ----------------------------------
NBT BANK DIVISION CENTRAL NATIONAL BANK DIVISION PENNSTAR BANK DIVISION
NEW YORK NEW YORK NEW YORK
Broome County 4 7 Albany County 1 - Orange County 1 1
Chenango County 11 14 Fulton County 4 5
PENNSTAR BANK DIVISION
Clinton County 3 2 Herkimer County 2 1
PENNSYLVANIA
Delaware County 5 9 Montgomery County 6 5
Lackawanna County 19 23
Essex County 3 6 Otsego County 5 4
Luzerne County 4 10
Franklin County 1 1 Saratoga County 3 3
Monroe County 4 5
Greene County - 2 Schenectady County 1 1
Pike County 3 3
Oneida County 6 10 Schoharie County 4 1
Susquehanna County 6 7
Otsego County 4 11
Wayne County 3 4
St. Lawrence County 5 4
Sullivan County - 1
Tioga County 1 1
Ulster County - 1
================================================================================================================
The Company leases thirty-eight of the above listed branches from third
parties under terms and conditions considered by management to be equitable to
the Company. The Company owns all other banking premises. All automated teller
machines are owned.
ITEM 3. LEGAL PROCEEDINGS
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There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a party or of which their property is the subject.
ANNUAL REPORT: NBT BANCORP INC. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
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The common stock of NBT Bancorp Inc. ("Common Stock") is quoted on the Nasdaq
Stock Market National Market Tier under the symbol "NBTB." The following table
sets forth the market prices and dividends declared for the Common Stock for the
periods indicated.
================================================================================
HIGH LOW DIVIDEND
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2001
1st quarter $ 17.50 $13.25 $ 0.170
2nd quarter 25.42* 14.30 0.170
3rd quarter 17.30 13.50 0.170
4th quarter 15.99 12.55 0.170
2002
1ST QUARTER $ 15.15 $13.15 $ 0.170
2ND QUARTER 19.32 14.00 0.170
3RD QUARTER 18.50 16.36 0.170
4TH QUARTER 18.60 14.76 0.170
* This price was reported on June 29, 2001, a day on which the Nasdaq Stock
Market experienced computerized trading disruptions which, among other
things, forced it to extend its regular trading session and cancel its late
trading session. Subsequently the Nasdaq Stock Market recalculated and
republished several closing stock prices (not including NBT Bancorp Inc.,
for which it had reported a closing price of $19.30). Excluding trading on
June 29, 2001, the high sales price for the quarter ended June 30, 2001 was
$16.75.
The closing price of the Common Stock on February 28, 2003 was $17.52. The
approximate number of holders of record of the Company's Common Stock on
February 28, 2003 was 7,549.
================================================================================
10 ANNUAL REPORT: NBT BANCORP INC.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following summary financial and other information about the Company is
derived from the Company's audited consolidated financial statements for each of
the five fiscal years ended December 31, 2002, 2001, 2000, 1999 and 1998:
================================================================================================================
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
(In thousands, except per share data) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Interest, fee and dividend income $ 227,222 $ 255,434 $ 260,381 $ 220,849 $ 210,970
Interest expense 80,402 117,502 133,003 102,876 100,870
Net interest income 146,820 137,932 127,378 117,973 110,100
Provision for loan and lease losses 9,073 31,929 10,143 6,896 6,922
Noninterest income excluding securities
(losses) gains 32,852 31,826 24,854 21,327 20,078
Securities (losses) gains, net (413) (7,692) (2,273) 1,000 2,183
Merger, acquisition and reorganization
costs (recovery) (130) 15,322 23,625 835 -
Other noninterest expense 103,503 110,536 95,509 83,944 81,108
Income before income taxes 66,813 4,279 20,682 48,625 44,331
Net income 44,999 3,737 14,154 32,592 34,576
- ----------------------------------------------------------------------------------------------------------------
PER COMMON SHARE*
Basic earnings $ 1.36 $ 0.11 $ 0.44 $ 1.01 $ 1.07
Diluted earnings 1.35 0.11 0.44 1.00 1.05
Diluted earnings excluding goodwill and
unidentified intangible asset amortization 1.35 0.19 0.48 1.02 1.06
Cash dividends paid ** 0.68 0.68 0.68 0.66 0.59
Book value at year-end 8.96 8.05 8.29 7.62 8.07
Tangible book value at year-end 7.47 6.51 6.88 6.74 7.75
Average diluted common shares outstanding 33,235 33,085 32,405 32,541 32,899
- ----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
Trading securities, at fair value $ 203 $ 126 $ 20,540 $ - $ -
Securities available for sale, at fair value 1,007,583 909,341 936,757 994,492 709,905
Securities held to maturity, at amortized cost 82,514 101,604 110,415 113,318 294,119
Loans and leases 2,355,932 2,339,636 2,247,655 1,924,460 1,658,194
Allowance for loan and lease losses 40,167 44,746 32,494 28,240 26,615
Assets 3,723,726 3,638,202 3,605,506 3,294,845 2,880,943
Deposits 2,922,040 2,915,612 2,843,868 2,573,335 2,292,449
Borrowings 451,076 394,344 425,233 429,924 303,021
Stockholders' equity 292,382 266,355 269,641 246,095 259,604
- ----------------------------------------------------------------------------------------------------------------
KEY RATIOS
Return on average assets 1.23% 0.10% 0.41% 1.07% 1.23%
Return on average equity 16.13 1.32 5.57 12.66 13.59
Average equity to average assets 7.64 7.82 7.35 8.42 9.07
Net interest margin 4.43 4.19 4.02 4.23 4.30
Efficiency *** 56.44 62.89 60.92 59.18 60.94
Cash dividend per share payout 50.37 618.18 154.55 66.00 56.19
Tier 1 leverage 6.73 6.34 6.88 8.07 8.68
Tier 1 risk-based capital 9.93 9.43 9.85 12.49 13.73
Total risk-based capital 11.18 10.69 11.08 13.68 14.93
- ----------------------------------------------------------------------------------------------------------------
* All share and per share data has been restated to give retroactive effect
to stock dividends, splits and poolings of interest.
** Cash dividends per share represent the historical cash dividends per share
of NBT Bancorp Inc., adjusted to give retroactive effect to stock dividends
and splits.
*** The efficiency ratio is computed as total non-interest expense (excluding
merger, acquisition and reorganization costs (recovery) as well as gains
and losses on the sale of other real estate owned) divided by fully taxable
equivalent net interest income plus non-interest income (excluding net
security transactions).
ANNUAL REPORT: NBT BANCORP INC. 11
=====================================================================================================================
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------
2002 2001
-------------------------------------- ---------------------------------------
(Dollars in thousands,
except per share data) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- ---------------------------------------------------------------------------------------------------------------------
Interest, fee and
dividend income $57,322 $57,490 $57,011 $55,399 $65,900 $64,201 $64,232 $ 61,101
Interest expense 20,977 20,408 20,304 18,713 33,521 30,696 28,923 24,362
Net interest income 36,345 37,082 36,707 36,686 32,379 33,505 35,309 36,739
Provision for loan and lease losses 2,011 2,092 2,424 2,546 1,211 6,872 9,188 14,658
Noninterest income excluding net
securities (losses) gains 8,195 7,885 8,252 8,520 8,654 7,476 8,078 7,618
Net securities (losses) gains (502) 69 (6) 26 1,023 227 (2,327) (6,615)
Noninterest expense 25,494 26,214 25,525 26,140 26,650 25,154 29,342 44,712
-------------------------------------------------------------------------------
Net income (loss) $11,077 $11,266 $11,412 $11,244 $ 9,654 $ 6,570 $ 1,469 $(13,956)
===============================================================================
Basic earnings (loss) per share $ 0.33 $ 0.34 $ 0.35 $ 0.34 $ 0.30 $ 0.20 $ 0.04 $ (0.42)
Diluted earnings (loss) per share $ 0.33 $ 0.34 $ 0.34 $ 0.34 $ 0.30 $ 0.20 $ 0.04 $ (0.42)
Net interest margin 4.54% 4.48% 4.35% 4.35% 4.06% 4.10% 4.19% 4.39%
Return (loss) on average assets 1.25% 1.24% 1.23% 1.21% 1.10% 0.73% 0.16% (1.51%)
Return (loss) on average equity 16.62% 16.50% 15.95% 15.53% 14.42% 9.42% 2.02% (18.87%)
Average diluted common
shares outstanding 33,295 33,433 33,295 32,951 32,702 33,112 33,500 32,999
-------------------------------------------------------------------------------
=====================================================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of NBT Bancorp Inc.
(the "Registrant" or the "Company") and its wholly owned subsidiaries, NBT Bank,
N.A. ("the Bank"), NBT Financial Services, Inc. ("NBT Financial), and CNBF
Capital Trust I during 2002 and, in summary form, the preceding two years.
Collectively, the Registrant and its subsidiaries are referred to herein as "the
Company." Net interest margin is presented in this discussion on a fully taxable
equivalent (FTE) basis. Average balances discussed are daily averages unless
otherwise described. The audited consolidated financial statements and related
notes as of December 31, 2002 and 2001 and for each of the years in the three
year period ended December 31, 2002 should be read in conjunction with this
review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 2002 presentation.
The preparation of the consolidated financial statements requires
management to make estimates and assumptions, in the application of certain
accounting policies, about the effect of matters that are inherently uncertain.
Those estimates and assumptions affect the reported amounts of certain assets,
liabilities, revenues and expenses. Different amounts could be reported under
different conditions, or if different assumptions were used in the application
of these accounting policies.
The business of the Company is providing commercial banking and financial
services through its subsidiaries. The Company's primary market area is central
and upstate New York and northeastern Pennsylvania. The Company has been, and
intends to continue to be, a community-oriented financial institution offering a
variety of financial services. The Company's principle business is attracting
deposits from customers within its market area and investing those funds
primarily in loans and leases, and, to a lesser extent, in marketable
securities. The financial condition and operating results of the Company are
dependent on its net interest income which is the difference between the
interest and dividend income earned on its earning assets and the interest
expense paid on its interest bearing liabilities, primarily consisting of
12 ANNUAL REPORT: NBT BANCORP INC.
deposits and borrowings. Net income is also affected by provisions for loan and
lease losses and noninterest income, such as service charges on deposit
accounts, broker/dealer fees, trust fees, and gains/losses on securities sales;
it is also impacted by noninterest expense, such as salaries and employee
benefits, data processing, communications, occupancy, and equipment.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards, and actions of
regulatory agencies. Future changes in applicable laws, regulations, or
government policies may have a material impact on the Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates, the state of the local
and regional economy, and the availability of funds. The ability to gather
deposits and the cost of funds are influenced by prevailing market interest
rates, fees and terms on deposit products, as well as the availability of
alternative investments including mutual funds and stocks.
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policy relating to the
allowance for loan and lease losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan and lease portfolio and the material effect that
such judgments can have on the results of operations. While management's current
evaluation of the allowance for loan and lease losses indicates that the
allowance is adequate, under adversely different conditions or assumptions, the
allowance would need to be increased. For example, if historical loan and lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions for loan and lease losses
would be required to increase the allowance. In addition, the assumptions and
estimates used in the internal reviews of the Company's non-performing loans and
potential problem loans has a significant impact on the overall analysis of the
adequacy of the allowance for loan and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral evaluations were significantly lowered, the
Company's allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
The Company's policy on the allowance for loan and lease losses is
disclosed in note 1 to the consolidated financial statements. A more detailed
description of the allowance for loan and lease losses is included in the "Risk
Management" section of this Form 10-K. All accounting policies are important,
and as such, the Company encourages the reader to review each of the policies
included in note 1 to obtain a better understanding on how the Company's
financial performance is reported.
FORWARD LOOKING STATEMENTS
Certain statements in this filing and future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, contain forward-looking statements,
as defined in the Private Securities Litigation Reform Act. These statements may
be identified by the use of phrases such as "anticipate," "believe," "expect,"
"forecasts," "projects," "will," "can," "would," "should," "could," "may," or
other similar terms. There are a number of factors, many of which are beyond the
Company's control that could cause actual results to differ materially from
those contemplated by the forward looking statements. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
increase significantly; (2) revenues may be lower than expected; (3) changes in
the interest rate environment may reduce interest margins; (4) general economic
conditions, either nationally or regionally, may be less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and/or a reduced demand for credit; (5) legislative or regulatory changes,
including changes in accounting standards or tax laws may adversely affect the
businesses in which the Company is engaged; (6) costs or difficulties related to
the integration of the businesses of the Company and its merger partners may be
greater than expected (7) deposit attrition, customer loss, or revenue loss
following recent mergers and acquisitions may be greater than expected; (8)
competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than the Company; and (9)
adverse changes may occur in the securities markets or with respect to
inflation.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including but not limited to those described
above, could affect the Company's financial performance
ANNUAL REPORT: NBT BANCORP INC. 13
and could cause the Company's actual results or circumstances for future periods
to differ materially from those anticipated or projected.
Except as required by law, the Company does not undertake, and specifically
disclaims any obligations to, publicly release any revisions that may be made to
any forward-looking statements to reflect statements to the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
MERGER AND ACQUISITION ACTIVITY
The Company did not enter into any merger or acquisitions during 2002.
On June 1, 2001, the Company completed the acquisition of First National
Bancorp, Inc. (FNB) whereby FNB was merged with and into the Company. At the
same time FNB's subsidiary, First National Bank of Northern New York (FNB Bank)
was merged into the Bank. The acquisition was accounted for using the purchase
method. As such, both the assets and liabilities assumed have been recorded on
the consolidated balance sheet of the Company at estimated fair value as of the
date of acquisition and the results of operations are included in the Company's
consolidated statement of income from the acquisition date forward. To complete
the transaction, the Company issued approximately 1,075,000 shares of its common
stock valued at $16.0 million. Goodwill, representing the cost over net assets
acquired, was approximately $7.0 million and was being amortized prior to the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on
January 1, 2002 on a straight-line basis based on a 20 year amortization period.
On September 14, 2001, the Company acquired $14.4 million in deposits from
Mohawk Community Bank. Unidentified intangible assets, accounted for in
accordance with SFAS No. 72 and representing the excess of cost over net assets
acquired, was $0.7 million and is being amortized over 15 years on a
straight-line basis. Additionally, the Company identified $0.1 million of core
deposit intangible assets which is being amortized over 6 years on a
straight-line basis.
On November 8, 2001, the Company, pursuant to a merger agreement dated June
18, 2001, completed its merger with CNB Financial Corp. (CNB) and its wholly
owned subsidiary, Central National Bank (CNB Bank), whereby CNB was merged with
and into the Company, and CNB Bank was merged with and into the Bank. CNB Bank
then became a division of the Bank. In connection with the merger, CNB
stockholders received 1.2 shares of the Company's common stock for each share of
CNB stock and the Company issued approximately 8.9 million shares of common
stock. The transaction is structured to be tax-free to shareholders of CNB and
has been accounted for as a pooling-of-interests. Accordingly, the Company's
consolidated financial statements were restated to present combined consolidated
financial condition and results of operations of the Bank and CNB as if the
merger had been in effect for all years presented. At September 30, 2001, CNB
had consolidated assets of $983.1 million, deposits of $853.7 million and equity
of $62.8 million. CNB Bank operated 29 full service banking offices in nine
upstate New York counties.
On February 17, 2000, the Company completed its merger with Lake Ariel
Bancorp, Inc. (Lake Ariel) and its subsidiaries. In connection with the merger
each issued and outstanding share of Lake Ariel exchanged for 0.9961 shares of
the Company's common stock. The transaction resulted in the issuance of
approximately 5.0 million shares of Company's common stock. Lake Ariel's
commercial banking subsidiary was LA Bank, N.A.
On July 1, 2000, the Company completed its merger with Pioneer American
Holding Company Corp. (Pioneer Holding Company) and its subsidiary. In
connection with the merger, each issued and outstanding share of Pioneer Holding
Company exchanged for 1.805 shares of the Company's common stock. The
transaction resulted in the issuance of approximately 5.2 million shares of the
Company's common stock. Pioneer Holding Company's commercial banking subsidiary
was Pioneer American Bank, N.A.
The Lake Ariel and Pioneer Holding Company mergers qualified as tax-free
exchanges and were accounted for as poolings-of-interests. Accordingly, the
Company's consolidated financial statements were restated to present the
combined consolidated financial condition and results of operations of all
companies as if the mergers had been in effect for all years presented.
LA Bank, N.A. and Pioneer Bank N.A. were commercial banks headquartered in
northeastern Pennsylvania with approximately $570 million and $420 million,
respectively, in assets at December 31, 1999, and twenty-two and eighteen branch
offices, respectively, in five counties. Immediately following the Lake Ariel
and Pioneer Holding Company mergers described above, the Company was the
surviving holding company for NBT Bank, LA Bank, N.A., Pioneer American Bank,
N.A. and NBT Financial Services, Inc. On November 10, 2000, LA Bank, N.A.
changed its name to Pennstar. On December 9, 2000, Pioneer American Bank, N.A.
was merged into Pennstar. On March 16, 2001, Pennstar was merged with and into
the Bank and became a division of the Bank.
14 ANNUAL REPORT: NBT BANCORP INC.
On May 5, 2000, the Company consummated the acquisition of M. Griffith,
Inc. a Utica, New York based securities firm offering investment, financial
advisory and asset-management services, primarily in the Mohawk Valley region.
At that time, M. Griffith, Inc., a full-service broker/dealer and a Registered
Investment Advisor, became a wholly-owned subsidiary of NBT Financial. The
acquisition was accounted for using the purchase method. As such, both the
assets acquired and liabilities assumed have been recorded on the consolidated
balance sheet of the Company at estimated fair value as of the date of
acquisition. M. Griffith, Inc.'s, results of operations are included in the
Company's consolidated statement of income from the date of acquisition forward.
To complete the transaction, the Company issued approximately 421,000 shares of
its common stock, valued at $4.8 million. Goodwill, representing the cost over
net assets acquired, was $3.4 million and was being amortized prior to the
adoption of SFAS No. 142 on January 1, 2002 over fifteen years on a
straight-line basis.
On June 2, 2000, Pennstar, purchased two branches from Mellon Bank.
Deposits from the Mellon Bank branches were approximately $36.7 million,
including accrued interest payable. In addition, the Company received
approximately $32.2 million in cash as consideration for net liabilities
assumed. The acquisition was accounted for using the purchase method. As such,
both the assets acquired and liabilities assumed have been recorded on the
consolidated balance sheet of the Company at estimated fair value as of the date
of the acquisition. Unidentified intangible assets, accounted for in accordance
with SFAS No. 72, and representing the excess of cost over net assets acquired,
was $4.3 million and was being amortized prior to the adoption of SFAS No. 147
on January 1, 2002 over 15 years on the straight-line basis. The branches'
results of operations are included in the Company's consolidated statement of
income from the date of acquisition forward.
On November 10, 2000, Pennstar purchased six branches from Sovereign Bank.
Deposits from the Soverign Bank branches were approximately $96.8 million,
including accrued interest payable. Pennstar also purchased commercial loans
associated with the branches with a net book balance of $42.4 million. In
addition, the Company received $40.9 million in cash consideration for net
liabilities assumed. The acquisition was accounted for using the purchase
method. As such, both the assets acquired and liabilities assumed have been
recorded on the consolidated balance sheet of the Company at estimated fair
value as of the date of the acquisition. Unidentified intangible assets,
accounted for in accordance with SFAS No. 72, and representing the excess of
cost over net assets acquired, was $12.7 million and was being amortized prior
to the adoption of SFAS No. 147 on January 1, 2002 over 15 years on a
straight-line basis. The branches' results of operations are included in the
Company's consolidated statement of income from the date of acquisition forward.
During 2001 and 2000, the following merger, acquisition, and reorganization
costs were recognized:
=========================================================
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
(Dollars in thousands) 2001 2000
- ---------------------------------------------------------
Professional fees $ 5,956 $ 8,525
Data processing 2,092 2,378
Severance 3,270 7,278
Branch closing 2,412 1,736
Advertising and supplies 313 1,337
Hardware and software write-off 402 1,428
Miscellaneous 877 943
-----------------------
Total $ 15,322 $ 23,625
-----------------------
=========================================================
As of December 31, 2002, the Company had a remaining accrued liability of
$4.0 million for merger, acquisition, and reorganization costs recognized in
2001 and 2000. The remaining accrued liability is comprised mainly of severance
costs, which will be paid out over a period of time consistent with respective
severance agreements.
OVERVIEW
The Company had net income of $45.0 million or $1.35 per diluted share for 2002,
compared to net income of $3.7 million or $0.11 per diluted share for 2001. The
improvement in 2002 results over 2001 was due to several factors. There was a
$22.9 million decrease in the provision for loan and lease losses when compared
to the same period in 2001. The increase in the 2001 provision for loan and
lease losses was due mainly to an increase in nonperforming loans and
charge-offs during 2001, resulting mainly from the process of integrating loans
from recently acquired banks and weakening business conditions. The net interest
margin improved during 2002, resulting in a $8.9 million increase in net
interest income over 2001. Noninterest income was up $8.3 million for 2002 when
compared to 2001. Driving this increase was a decrease in net securities losses
of $7.3 million in 2002 when compared to 2001, due to the sale and writedown of
several high-risk securities previously held by CNB
ANNUAL REPORT: NBT BANCORP INC. 15
during 2001. Additionally, growth in noninterest income from service charges on
deposit accounts and broker/ dealer and insurance revenue totaled $2.4 million
in 2002 compared to 2001. Offsetting these increases was a $1.4 million gain on
a sale of a branch building in 2001 compared to no such gain in 2002.
Noninterest expenses were down $22.5 million in 2002 when compared to 2001. This
decrease was driven primarily by three factors. First, there was a slight
recovery of merger costs of $0.1 million in 2002 compared to $15.3 million in
merger charges in 2001 that resulted primarily from the acquisition of CNB.
Second, the stabilization of residual values of leased automobiles resulted in
no provision for the other-than-temporary impairment in residual values of
leased automobiles in 2002 compared to a $3.5 million provision in 2001. Lastly,
because of accounting standards that became effective for the Company in fiscal
year 2002, amortization of goodwill and intangible assets decreased $3.5 million
in 2002. If these accounting standards had been applied in 2001, the decrease in
the amortization of goodwill and intangible assets would increase diluted
earnings per share by $0.07 in 2001.
The Company had net income of $3.7 million or $0.11 per diluted share for
2001, compared to net income of $14.2 million or $0.44 per diluted share for
2000. During 2001, costs related to merger, acquisition and reorganization
activities totaled $15.3 million and net securities losses totaled $7.7 million
compared to $23.6 million related to merger, acquisition and reorganization
activities and $2.3 million in net securities loss in 2000. Net interest income
for 2001 increased 8.3% to $137.9 million compared to $127.4 million in 2000.
Net interest income for 2001 was up $10.6 million over 2000 as a result of an
improved net interest margin combined with growth in the average loan portfolio.
Noninterest income for 2001 was up $1.6 million over 2000. Net securities losses
for 2001 and 2000 totaled $7.7 million and $2.3 million, respectively. Excluding
these net securities losses, other components of noninterest income were up $7.0
million in 2001 when compared to 2000. A gain on the sale of a branch building,
service charges on deposit accounts, ATM fees, banking fees, broker/dealer fees
and insurance commissions drove the increase in noninterest income in 2001 over
2000. Noninterest expense was up $6.7 million in 2001 when compared to 2000. The
increase in non-interest expense resulted from a $3.5 million charge taken for
the other-than-temporary impairment of the residual value of leased automobiles
compared to a charge of $0.7 million in 2000, a $2.1 million charge taken for
certain deposit overdrafts, and a $10.0 million increase in expense primarily
related to the required service and support of our growth. Offsetting these
increases was a decrease in merger, acquisition, and reorganization costs of
$8.3 million.
ASSET/LIABILITY MANAGEMENT
The Company attempts to maximize net interest income, and net income, while
actively managing its liquidity and interest rate sensitivity through the mix of
various core deposit products and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income, on a fully
tax equivalent basis, are discussed below.
The following table includes the condensed consolidated average balance
sheet, an analysis of interest income/expense and average yield/rate for each
major category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans and leases
has been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
16 ANNUAL REPORT: NBT BANCORP INC.
===============================================================================================================================
Table 1. Average Balances and Net Interest Income
- -------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------- ---------------------------- ------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
(Dollars in thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 12,389 403 3.25% $ 11,324 569 5.02% $ 15,031 937 6.23%
Securities available for sale(1) 947,042 56,586 5.98 933,122 61,857 6.63 1,017,617 70,918 6.97
Securities held to maturity(1) 92,981 5,620 6.04 99,835 6,644 6.65 117,513 8,086 6.88
Securities trading 208 8 3.85 5,253 649 12.35 216 8 3.70
Investment in FRB and FHLB
Banks 21,766 962 4.42 23,926 1,555 6.50 31,274 2,254 7.21
Loans and leases(2) 2,337,767 167,917 7.18 2,312,740 188,053 8.13 2,092,191 182,254 8.71
---------- -------- --------- -------- ---------- --------
Total earning assets 3,412,153 231,496 6.78 3,386,200 259,327 7.66 3,273,842 264,457 8.08
-------- -------- --------
Other non-interest earning assets 236,919 240,725 182,749
---------- ---------- ----------
Total assets $3,649,072 $3,626,925 $3,456,591
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 279,407 4,461 1.60 $ 254,735 7,052 2.77 $ 209,562 8,460 4.04
NOW deposit accounts 382,562 3,488 0.91 348,964 5,032 1.44 307,969 5,951 1.93
Savings deposits 479,312 6,887 1.44 427,102 9,385 2.20 403,106 10,511 2.61
Time deposits 1,331,281 48,496 3.64 1,476,473 77,053 5.22 1,440,173 82,371 5.72
---------- -------- --------- -------- ---------- --------
Total interest-bearing deposits 2,472,562 63,332 2.56 2,507,274 98,522 3.93 2,360,810 107,293 4.54
Short-term borrowings 87,039 1,334 1.53 123,162 5,365 4.36 194,888 11,940 6.13
Long-term debt 334,479 15,736 4.70 259,583 13,615 5.24 245,383 13,770 5.61
---------- -------- --------- -------- ---------- --------
Total interest-bearing liabilities 2,894,080 80,402 2.78 2,890,019 117,502 4.07 2,801,081 133,003 4.75
-------- -------- --------
Demand deposits 419,744 382,489 348,443
Other non-interest-bearing
liabilities 56,293 70,666 53,018
Stockholders' equity 278,955 283,751 254,049
---------- ---------- ----------
Total liabilities and stockholders'
equity $3,649,072 $3,626,925 $3,456,591
========== ========== ==========
Interest rate spread 4.00% 3.59% 3.33%
===== ===== =====
Net interest income 151,094 141,825 131,454
======= ======= =======
Net interest margin 4.43% 4.19% 4.02%
===== ===== =====
Taxable equivalent adjustment 4,274 3,893 4,076
======= ======= =======
(1) Securities are shown at average amortized cost. For purposes of these
computations, nonaccrual securities are included in the average securities
balances, but the interest collected thereon is is not included in interest
income.
(2) For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding. The interest collected thereon is
included in interest income based upon the characteristics of the related
loans.
===============================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 17
NET INTEREST INCOME
On a tax equivalent basis, the Company's net interest income for 2002 was $151.1
million, up from $141.8 million for 2001. The Company's net interest margin
improved to 4.43% for 2002 from 4.19% for 2001. The improvement in net interest
income and net interest margin in 2002 were due primarily to three factors.
First, the Company benefited from the decreasing rate environment in 2002, as
interest-bearing liabilities repriced downward at a faster rate than earning
assets. Secondly, there was a slight increase in average earning assets of $26.0
million or 1%, in 2002 when compared to 2001, driven primarily by loan and lease
growth. Lastly, an improved deposit mix lowered interest expense, as lower cost
NOWs, money market, and savings accounts comprised 39% of average total
interest-bearing liabilities in 2002 compared to 36% in 2001.
The following table presents changes in interest income, on a FTE basis,
and interest expense attributable to changes in volume (change in average
balance multiplied by prior year rate), changes in rate (change in rate
multiplied by prior year volume), and the net change in net interest income. The
net change attributable to the combined impact of volume and rate has been
allocated to each in proportion to the absolute dollar amounts of change.
=====================================================================================================
TABLE 2. ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) Increase (Decrease)
2002 OVER 2001 2001 over 2000
------------------------------ ------------------------------
(In thousands) VOLUME RATE TOTAL Volume Rate Total
- -----------------------------------------------------------------------------------------------------
Short-term interest-bearing accounts $ 50 $ (216) $ (166) $ (206) $ (162) $ (368)
Securities available for sale 911 (6,182) (5,271) (5,708) (3,353) (9,061)
Securities held to maturity (438) (586) (1,024) (1,184) (258) (1,442)
Securities trading (373) (268) (641) 583 58 641
Investment in FRB and FHLB Banks (130) (463) (593) (493) (206) (699)
Loans and leases 2,015 (22,151) (20,136) 18,428 (12,629) 5,799
--------------------------------------------------------------
Total interest income 1,973 (29,804) (27,831) 8,889 (14,019) (5,130)
--------------------------------------------------------------
Money market deposit accounts 629 (3,220) (2,591) 1,590 (2,998) (1,408)
NOW deposit accounts 448 (1,992) (1,544) 723 (1,642) (919)
Savings deposits 1,044 (3,542) (2,498) 599 (1,725) (1,126)
Time deposits (7,015) (21,542) (28,557) 2,036 (7,354) (5,318)
Short-term borrowings (1,256) (2,775) (4,031) (3,683) (2,892) (6,575)
Long-term debt 3,630 (1,509) 2,121 772 (927) (155)
--------------------------------------------------------------
Total interest expense 165 (37,265) (37,100) 4,113 (19,614) (15,501)
--------------------------------------------------------------
Change in FTE net interest income $ 1,808 $ 7,461 $ 9,269 $ 4,776 $ 5,595 $ 10,371
--------------------------------------------------------------
=====================================================================================================
LOANS AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The average balance of loans and leases increased 1%, totaling $2.3 billion in
2002 and 2001. The yield on average loans and leases decreased from 8.13% in
2001 to 7.18% in 2002, as a falling interest rate environment prevailed for much
of 2002. Interest income from loans and leases on a FTE basis decreased 11%,
from $188.1 million in 2001 to $167.9 million in 2002. The decrease in interest
income from loans and leases was due primarily to the decrease in yield on loans
and leases in 2002 of 95 bp when compared to 2001.
Total loans and leases increased slightly at December 31, 2002, totaling
$2.4 billion from $2.3 billion at December 31, 2001. The combination of the
Company's focus on improving the credit quality of the loan and lease portfolio
and sluggish business conditions coupled with strong competition in the
Company's market area limited loan growth opportunities for commercial and
consumer loans in 2002. However, residential real estate mortgages were $579.6
million at December 31, 2002, up $54.2 million or 10% from $525.4 million at
December 31, 2001. The increase in residential real estate mortgages was driven
primarily by the historic low interest rates for residential real estate
mortgages which
18 ANNUAL REPORT: NBT BANCORP INC.
led to an increase in demand for the product in 2002. The Company continued its
trend of strong growth for its home equity products. Home equity loans totaled
$269.6 million at December 31, 2002, up $36.9 million or 16% from the $232.6
million outstanding at December 31, 2001. Commercial loans and commercial real
estate decreased $37.7 million, to $920.3 million at December 31, 2002 from
$958.1 million at December 31, 2001. The decrease in commercial loans and
commercial real estate was driven primarily by the Company's focus to improve
the credit quality of this portfolio in 2002. Additionally, sluggish business
conditions and strong competition in a weak market factored into the decline in
the commercial loan and real estate portfolio in 2002 as well. Lastly,
nonaccrual commercial and agricultural loans and real estate decreased by $14.4
million, to $17.0 million at December 31, 2002 from $31.4 million at December
31, 2001. Consumer loans decreased $29.9 million to $357.2 million at December
31, 2002 from $387.1 million at December 31, 2001. The decrease in consumer
loans resulted primarily from a decline in revolving personal credit and loans
secured by recreational equipment and manufactured housing.
The following table reflects the loan and lease portfolio by major
categories as of December 31 for the years indicated:
======================================================================================================
TABLE 3. COMPOSITION OF LOAN AND LEASE PORTFOLIO
- ------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------------------
(In thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Residential real estate mortgages $ 579,638 $ 525,411 $ 504,590 $ 521,684 $ 494,783
Commercial and commercial real estate 920,330 958,075 948,472 755,393 601,878
Real estate construction and development 64,025 60,513 44,829 25,474 18,626
Agricultural and agricultural real estate 104,078 103,884 92,713 85,753 84,479
Consumer 357,214 387,081 357,822 320,682 294,230
Home equity 269,553 232,624 219,355 139,472 120,712
Lease financing 61,094 72,048 79,874 76,002 43,486
----------------------------------------------------------
Total loans and leases $2,355,932 $2,339,636 $2,247,655 $1,924,460 $1,658,194
----------------------------------------------------------
======================================================================================================
Real estate mortgages consist primarily of loans secured by first or second
deeds of trust on primary residencies. Loans in the commercial and agricultural
category, as well as commercial and agricultural real estate mortgages, consist
primarily of short-term and/or floating rate loans made to small to medium-sized
entities. Consumer loans consist primarily of installment credit to individuals
secured by automobiles and other personal property including manufactured
housing. Manufactured housing loans totaled $35.5 million and $41.4 million at
December 31, 2002 and 2001, respectively, and were 9.9% and 10.7% of total
consumer loans at December 31, 2002 and 2001, respectively. These decreases from
2001 to 2002 are consistent with the Company's plan to de-emphasize loans
secured by manufactured housing.
LEASE FINANCING
The Company maintained an automobile lease financing portfolio totaling $61.1
million at December 31, 2002 and $72.0 million at December 31, 2001. Lease
receivables primarily represent automobile financing to customers through direct
financing leases and are carried at the aggregate of the lease payments
receivable and the estimated residual values, net of unearned income and net
deferred lease origination fees and costs. Net deferred lease origination fees
and costs are amortized under the effective interest method over the estimated
lives of the leases. The estimated residual value related to the total lease
portfolio is reviewed quarterly, and if there has been a decline in the
estimated fair value of the residual that is judged by management to be
other-than-temporary, a loss is recognized. Adjustments related to such
other-than-temporary declines in estimated fair value are recorded with other
noninterest expenses in the consolidated statements of income. One of the most
significant risks associated with leasing operations is the recovery of the
residual value of the leased vehicles at the termination of the lease. When a
lease receivable asset is recorded, included in this amount is the estimated
residual value of the leased vehicle at the termination of the lease. At
termination, the lessor has the option to purchase the vehicle or may turn the
vehicle over to the Company.
ANNUAL REPORT: NBT BANCORP INC. 19
The estimation of residual value is critical to the determination of the
leasing terms. The Company currently utilizes published valuations for specific
vehicle types in order to determine estimated residual values. However, from the
date of origination of the lease to the date of the termination of the lease,
valuations for used vehicles change. The residual values included in lease
financing receivables totaled $42.8 million and $52.4 million at December 31,
2002 and 2001, respectively.
The Company has acquired residual value insurance protection in order to
reduce the risk related to a decline in the published values of used vehicles
between the date of origination and the date of the lease termination. Residual
value insurance is designed to cover the difference between the
industry-published valuation for used vehicles at the termination of the lease,
as compared to the industry published valuation at the origination of the lease.
In 2001, the Company's then provider of this residual value insurance
indicated that they intended to change the source of the industry valuation for
used vehicles, which, in essence, reduced the insurance coverage and increased
losses the Company would realize upon disposition of the leased vehicles. In
January 2000, the Company changed its residual value insurance provider to a new
carrier. However, residual value insurance coverage related to approximately
$25.0 million of the lease financing portfolio at December 31, 2001 is insured
by the former insurance carrier. At December 31, 2002, the residual value
insurance coverage for leases insured by the former insurance carrier decreased
to $8.2 million as a result of maturities and prepayments of leases during 2002.
Not withstanding the issue associated with the former insurance carrier,
there is an additional risk in the leasing business with respect to recovery of
residual values of leased vehicles. While residual value insurance is designed
to protect against a drop in industry published values, and only to the extent
of any such decline, there remains a risk that the actual sales price for the
turned-in leased vehicles is less than the industry-published value. The Company
experienced significant losses in 2001 because the amounts that turned-in leased
vehicles actually sold for was less than the published industry values.
Throughout 2001, there was significant weakness in the market for used
vehicles. This general weakness was significantly exacerbated by the events of
September 11th as well as the extremely favorable financing opportunities
provided by large automakers for new vehicles. This situation not only softened
the demand for used vehicles, but increased the supply.
This situation, coupled with the issue associated with the former insurance
carrier discussed above, resulted in an impairment of residual values, which was
other-than-temporary at December 31, 2001. Accordingly, the Company recorded an
other-than-temporary-impairment charge of $3.5 million in 2001. These charges
were included in other noninterest expenses on the consolidated statements of
income.
In 2002, competitive pressure from large automakers combined with lower
residual values on automobiles which results in higher lease payments making the
product less attractive, resulted in a 15.2% decrease in outstanding lease
financing at December 31, 2002 when compared to outstanding lease financing at
December 31, 2001. During 2002, values for used vehicles stabilized, thereby
lowering the average loss on turned-in leased vehicles during 2002 when compared
to the levels experienced in 2001. The decrease in the average loss on turned-in
leased vehicles in 2002 combined with the decrease in exposure to insurance
coverage provided by the Company's former insurance carrier discussed above,
resulted in no provision for the other-than-temporary impairment in residual
values for lease financing in 2002.
The estimation of the other-than-temporary-impairment charge was based upon
the current level of leased vehicles turned in as well as the mix of the leasing
portfolio between types of vehicles. At December 31, 2002, the Company has
projected that 65% of its leased vehicles will be turned in. At December 31,
2001, this projection was 71%. At December 31, 2002, approximately 36% of the
Company's leasing portfolio is made up of sport utility vehicles, or SUVs, which
have experienced the greatest amount of declines in residual values in the used
market, as well as the highest turn-in rate. Should the amount of vehicle
turn-ins increase or values for such used vehicles decline, the level of
other-than-temporary impairment might be increased.
The following table, Maturities and Sensitivities of Certain Loans to
Changes in Interest Rates, are the maturities of the commercial and agricultural
and real estate and construction development loan portfolios and the sensitivity
of loans to interest rate fluctuations at December 31, 2002. Scheduled
repayments are reported in the maturity category in which the contractual
payment is due.
20 ANNUAL REPORT: NBT BANCORP INC.
=======================================================================================================================
TABLE 4. MATURITIES AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
- -----------------------------------------------------------------------------------------------------------------------
REMAINING MATURITY AT DECEMBER 31, 2002
--------------------------------------------------------------------
AFTER ONE YEAR BUT
(In thousands) WITHIN ONE YEAR WITHIN FIVE YEARS AFTER FIVE YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------
FLOATING/ADJUSTABLE RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate $ 534,502 $ 61,619 $ 1,422 $ 597,543
Real estate construction and development 10,403 8,405 282 19,090
--------------------------------------------------------------------
Total floating rate loans 544,905 70,024 1,704 616,633
--------------------------------------------------------------------
FIXED RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate 109,057 194,982 122,826 426,865
Real estate construction and development 4,374 8,251 32,310 44,935
--------------------------------------------------------------------
Total fixed rate loans 113,431 203,233 155,136 471,800
--------------------------------------------------------------------
Total $ 658,336 $ 273,257 $ 156,840 $1,088,433
--------------------------------------------------------------------
=======================================================================================================================
SECURITIES AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The average balance of securities available for sale was $947.0 million, which
is an increase of $13.9 million, or 1.5%, from $933.1 million in 2001. The
increase resulted primarily from the reinvestment of funds from maturities and
paydowns from securities held to maturity and trading securities. The yield on
average securities available for sale was 5.98% in 2002 compared to 6.63% in
2001. The decrease in yield, resulted in a decrease in interest income on
securities available for sale of $5.3 million, from $61.9 million in 2001 to
$56.6 million in 2002. The decrease in yield was caused primarily by the
reinvestment of funds at lower rates in the declining rate environment in 2002.
The average balance of securities held to maturity was $93.0 million during
2002, which is a decrease of $6.9 million, from $99.8 million in 2001. The
decrease is primarily a result of proceeds from maturities and paydowns of
securities held to maturity reinvested in securities available for sale. The
yield on securities held to maturity was 6.04% in 2002 compared to 6.65% in
2001. Interest income on securities held to maturity decreased $1.0 million,
from $6.6 million in 2001 to $5.6 million in 2002.
The Company classifies its securities at date of purchase as either
available for sale, held to maturity or trading. Held to maturity debt
securities are those that the Company has the ability and intent to hold until
maturity. Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported in stockholders' equity
as a component of accumulated other comprehensive income or loss. Held to
maturity securities are recorded at amortized cost. Trading securities are
recorded at fair value, with net unrealized gains and losses recognized
currently in income. Transfers of securities between categories are recorded at
fair value at the date of transfer. A decline in the fair value of any available
for sale or held to maturity security below cost that is deemed
other-than-temporary is charged to earnings resulting in the establishment of a
new cost basis for the security. Securities with an other-than-temporary
impairment are generally placed on nonaccrual status.
Non-marketable equity securities are carried at cost, with the exception of
small business investment company (SBIC) investments, which are carried at fair
value in accordance with SBIC rules.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the interest method. Dividend
and interest income are recognized when earned. Realized gains and losses on
securities sold are derived using the specific identification method for
determining the cost of securities sold.
The Company recorded a $0.7 million, $8.3 million, and $3.5 million pre-tax
charge during 2002, 2001 and 2000, respectively, related to estimated
other-than-temporary impairment of certain securities classified as available
for sale. The charges were recorded in net security (losses) gains on the
consolidated statements of
ANNUAL REPORT: NBT BANCORP INC. 21
income. The security with other-than-temporary impairment charges at December
31, 2002 had a remaining carrying value of $1.1 million, is classified in
securities available for sale and is on the non-accrual status.
The following table presents the amortized cost and fair market value of
the securities portfolio as of December 31 for the years indicated.
===============================================================================================================
TABLE 5. SECURITIES PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000
---------------------- -------------------- --------------------
AMORTIZED FAIR Amortized Fair Amortized Fair
(In thousands) COST VALUE Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 502 $ 514 $ 12,392 $ 11,757 $ 16,392 $ 15,924
Federal Agency and mortgage-backed 810,784 833,940 524,101 530,613 580,934 578,625
State & Municipal, collateralized mortgage
obligations and other securities 168,803 173,129 366,325 366,971 342,811 342,208
------------------------------------------------------------------
Total securities available for sale $ 980,089 $1,007,583 $ 902,818 $909,341 $ 940,137 $936,757
------------------------------------------------------------------
TRADING SECURITIES $ 203 $ 203 $ 126 $ 126 $ 20,540 $ 20,540
------------------------------------------------------------------
SECURITIES HELD TO MATURITY
Federal Agency and mortgage-backed $ 24,613 $ 25,720 $ 36,733 $ 36,623 $ 46,376 $ 45,528
State & Municipal 56,021 56,917 64,715 64,715 63,992 64,260
Other securities 1,880 1,880 156 157 47 47
------------------------------------------------------------------
Total securities held to maturity $ 82,514 $ 84,517 $ 101,604 $101,495 $ 110,415 $109,835
------------------------------------------------------------------
===============================================================================================================
The following tables summarize the securities considered to be
other-than-temporarily impaired (OTTI) at the dates indicated:
===============================================================================================================
AT DECEMBER 31, 2002 At December 31, 2001
----------------------------- -----------------------------
AMORTIZED COST Amortized Cost
(In thousands) AND FAIR VALUE OTTI CHARGE and Fair Value OTTI Charge
- ---------------------------------------------------------------------------------------------------------------
SECURITY TYPE
Asset backed security $ - $ - $ 1,820 $ 1,680
Private issue collateralized mortgage obligation 1,122 660 2,680 4,021
Corporate debt security - - - 300
------------------------------------------------------------
Total $ 1,122 $ 660 $ 4,500 $ 6,001
------------------------------------------------------------
===============================================================================================================
The cumulative writedown of the private issue collateralized mortgage
obligation at December 31, 2002 totaled $4.7 million. The asset backed security
was sold during 2002 at approximately its carrying value at December 31, 2001
and the corporate debt security was sold for $0.1 million during 2002.
Included in the securities available for sale portfolio at December 31,
2002, are certain securities (private issue CMO, asset-backed securities, and
private issue mortgaged-backed securities) previously held by CNB.
These securities contain a higher level of credit risk when compared to other
securities held in the Company's investment portfolio because they are not
guaranteed by a governmental agency or a government sponsored enterprise (GSE).
The Company's general practice is to purchase CMO and mortgage-backed securities
that are guaranteed by a governmental agency or a GSE coupled with a strong
credit rating, typically AAA, issued by Moody's or Standard and Poors.
At December 31, 2002, the amortized cost and fair
22 ANNUAL REPORT: NBT BANCORP INC.
value of these high-risk securities amounted to $12.0 million and $10.7 million,
respectively, down from $38.7 million and $38.5 million, respectively, at
December 31, 2001. The decrease at December 31, 2002, when compared to December
31, 2001, resulted primarily from sales and to a lesser extent principal
paydowns. During 2002, the Company sold $22.4 million of these securities due to
a continued deterioration in the financial condition of the underlying
collateral in 2002 related to a certain number these securities as well as the
Company's goal of reducing exposure to these types of securities. The net loss
realized from the sale of these securities was $7.4 million. Offsetting these
net losses were net gains of $7.3 million, resulting from the sale of
approximately $187.0 million in other securities available for sale during 2002.
In January 2002, the Company had certain embedded derivative instruments
related to two debt securities that have returns linked to the performance of
the NASDAQ 100 index. Management determined that these debt securities do not
qualify for hedge accounting under SFAS No. 133 (see Impact of New Accounting
Standards). The embedded derivatives have been separated from the underlying
host instruments for financial reporting purposes and accounted for at fair
value. During the year ended December 31, 2001, the Company recorded $0.6
million of net losses related to the adjustment of the embedded derivatives to
estimated fair value ($0.2 million of which was recorded on January 1, 2001 upon
the adoption of SFAS No. 133), which was recorded in net gain (loss) on
securities transactions on the 2001 consolidated statement of income. At
December 31, 2001, the total amortized cost and estimated fair value of these
two debt securities was $6.2 million. The two debt securities were sold in 2002
at amounts approximating their carrying values at December 31, 2001.
FUNDING SOURCES AND CORRESPONDING INTEREST EXPENSE
The Company utilizes traditional deposit products such as time, savings, NOW,
money market, and demand deposits as its primary source for funding. Other
sources, such as short-term FHLB advances, federal funds purchased, securities
sold under agreements to repurchase, brokered time deposits, and long-term FHLB
borrowings are utilized as necessary to support the Company's growth in assets
and to achieve interest rate sensitivity objectives. The average balance of
interest-bearing liabilities remained relatively unchanged, totaling $2.9
billion in 2002 and 2001. The rate paid on interest-bearing liabilities
decreased from 4.07% in 2001 to 2.78% in 2002.
The decrease in the rate paid on interest bearing liabilities, caused a decrease
in interest expense of $37.1 million, or 31.6%, from $117.5 million in 2001 to
$80.4 million in 2002.
DEPOSITS
Average interest bearing deposits decreased $34.7 million, or 1.4%, during 2002.
The decrease resulted primarily from a decrease in time deposits of $145.2
million, due primarily to the conscious effort to allow runoff of some higher
cost municipal time deposits as well as the sale of a branch in February 2002
which resulted in the sale of $34.3 million in deposits. Offsetting this
decrease was strong growth in core deposits in 2002. The average balance of NOW,
Money Market Deposit Accounts ("MMDA"), and savings comprised 46.2% of average
interest bearing deposits in 2002 compared to 41.1% in 2001. The average balance
of demand deposits increased $37.3 million, or 9.7%, from $382.5 million in 2001
to $419.7 million in 2002. The ratio of average demand deposits to total average
deposits increased from 11.3% in 2001 to 14.5% in 2002.
The improvement in the Company's deposit mix noted above, combined with the
falling interest rate environment prevalent in 2002, resulted in a decrease in
the rate paid on interest bearing deposits of 137 bp, from 3.93% in 2001 to
2.56% in 2002. The average rate paid on MMDAs, which are very sensitive to
changes in interest rates, declined 117 bp from 2.77% in 2001 to 1.60% in 2002.
The rate paid on average time deposits decreased 158 bp, from 5.22% in 2001 to
3.64% in 2002. The decrease in the rate paid on average time deposits, combined
with the decline in the average balance of time deposits, resulted in a $28.6
million decrease in interest expense paid on time deposits, from $77.1 million
in 2001 to $48.5 million in 2002.
The following table presents the maturity distribution of time deposits of
$100,000 or more at December 31, 2002:
====================================================================
TABLE 6. MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
- --------------------------------------------------------------------
(In thousands) DECEMBER 31, 2002
- --------------------------------------------------------------------
Within three months $ 191,975
After three but within six months 35,652
After six but within twelve months 53,313
After twelve months 144,747
-----------------
Total $ 425,687
=================
====================================================================
ANNUAL REPORT: NBT BANCORP INC. 23
BORROWINGS
Average short-term borrowings decreased from $123.2 million in 2001 to $87.0
million in 2002. Consistent with the decreasing interest rate environment during
2002, the average rate paid also decreased from 4.36% in 2001 to 1.53% in 2002.
The decrease in the average balance combined with the decrease in the average
rate paid caused interest expense on short-term borrowings to decrease $4.0
million from $5.4 million in 2001 to $1.3 million in 2002. Average long-term
debt increased $74.9 million, from $259.6 million in 2001 to $334.5 million in
2002. The increase in long-term debt and the decrease in short-term borrowings
and time deposits was a result of the Company limiting its liability sensitive
position and its exposure to rising interest rates.
Short-term borrowings consist of Federal funds purchased and securities
sold under repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily Federal Home Loan Bank
(FHLB) advances, with original maturities of one year or less. The Company has
unused lines of credit and access to brokered deposits available for short- term
financing of approximately $632 million and $767 million at December 31, 2002
and 2001, respectively. Securities collateralizing repurchase agreements are
held in safekeeping by non-affiliated financial institutions and are under the
Company's control. Long-term debt, which is comprised primarily of FHLB
advances, are collateralized by the FHLB stock owned by the Company, certain of
its mortgage-backed securities and a blanket lien on its residential real estate
mortgage loans.
RISK MANAGEMENT
CREDIT RISK
Credit risk is managed through a network of loan officers, credit committees,
loan policies, and oversight from the senior credit officers and Board of
Directors. Management follows a policy of continually identifying, analyzing,
and grading credit risk inherent in each loan portfolio. An ongoing independent
review, subsequent to management's review, of individual credits in the
commercial loan portfolio is performed by the independent loan review function.
These components of the Company's underwriting and monitoring functions are
critical to the timely identification, classification, and resolution of problem
credits.
24 ANNUAL REPORT: NBT BANCORP INC.
NONPERFORMING ASSETS
============================================================================================
TABLE 7. NONPERFORMING ASSETS
- --------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
-----------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------
NONACCRUAL LOANS
Commercial and agricultural loans and
real estate $16,980 $31,372 $14,054 $ 9,519 $7,819
Real estate mortgages 5,522 5,119 647 618 744
Consumer 1,507 3,719 2,402 2,671 3,106
-----------------------------------------------
Total nonaccrual loans 24,009 40,210 17,103 12,808 11,669
-----------------------------------------------
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Commercial and agricultural loans and
real estate 237 198 4,523 1,201 1,365
Real estate mortgages 1,325 1,844 3,042 641 761
Consumer 414 933 865 906 1,908
-----------------------------------------------
Total loans 90 days or more past due and
still accruing 1,976 2,975 8,430 2,748 4,034
Restructured loans 409 603 656 1,014 1,247
-----------------------------------------------
Total nonperforming loans 26,394 43,788 26,189 16,570 16,950
Other real estate owned 2,947 1,577 1,856 2,696 4,070
-----------------------------------------------
Total nonperforming loans and other
real estate owned 29,341 45,365 28,045 19,266 21,020
Nonperforming securities 1,122 4,500 1,354 1,535 -
-----------------------------------------------
Total nonperforming loans, securities, and
other real estate owned $30,463 $49,865 $29,399 $20,801 $21,020
===============================================
Total nonperforming loans to loans and
leases 1.12% 1.87% 1.17% 0.86% 1.02%
Total nonperforming loans and other real
estate owned to total assets 0.79% 1.25% 0.78% 0.58% 0.73%
Total nonperforming loans, securities, and
other real estate owned to total assets 0.82% 1.37% 0.82% 0.63% 0.73%
Total allowance for loan and lease losses
to nonperforming loans 152.18% 102.19% 124.07% 170.43% 157.02%
============================================================================================
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan and lease portfolio's risk profile. It is evaluated to ensure that it
is sufficient to absorb all reasonably estimable credit losses inherent in the
current loan and lease portfolio.
Management considers the accounting policy relating to the allowance for
loan and lease losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgements can have on
the consolidated results of operations.
For purposes of evaluating the adequacy of the allowance, the Company
considers a number of significant factors that affect the collectibility of the
portfolio. For individually analyzed loans, these include estimates of loss
exposure, which reflect the facts and circumstances that affect the likelihood
of repayment of such loans as of the evaluation date. For homogeneous pools of
loans and leases, estimates of the Company's exposure to credit loss
ANNUAL REPORT: NBT BANCORP INC. 25
reflect a current assessment of a number of factors, which could affect
collectibility. These factors include: past loss experience; size, trend,
composition, and nature; changes in lending policies and procedures, including
underwriting standards and collection, charge-offs and recoveries; trends
experienced in nonperforming and delinquent loans; current economic conditions
in the Company's market; portfolio concentrations that may affect loss
experienced across one or more components of the portfolio; the effect of
external factors such as competition, legal and regulatory requirements; and the
experience, ability, and depth of lending management and staff. In addition,
various regulatory agencies, as an integral component of their examination
process, periodically review the Company's allowance for loan and lease losses.
Such agencies may require