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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-14703
NBT BANCORP INC. (Exact name of registrant as specified in its charter)
DELAWARE 16-1268674
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
52 SOUTH BROAD STREET
NORWICH, NEW YORK 13815 (Zip Code)
(Address of principal executive office)
(607) 337-2265 (Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock ($0. 01
par value per share)
Stock Purchase Rights Pursuant to Stockholders Rights Plan
Indicate by check mark whether the registrant (1) has led all reports required
to be led by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to le such reports) and (2) has been subject to such ling requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K (Section 299.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Based upon the closing price of the registrant's common stock as of June 30,
2003, the aggregate market value of the voting stock, common stock, par value,
$0.01 per share, held by non-affiliates of the registrant is $632,219,601.
The number of shares of Common Stock outstanding as of February 27, 2004, was
32,868,354.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on May 4, 2004 are incorporated by reference
into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.
This page left blank intentionally
PART ITEM
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I 1 BUSINESS 5
Description of Business 5-8
Average Balance Sheets 14
Net Interest Income Analysis -Taxable Equivalent Basis 14
Net Interest Income and Volume/Rate
Variance-Taxable Equivalent Basis 15
Securities Portfolio 19
Debt Securities -Maturity Schedule 26
Loans 16
Maturities and Sensitivities of Loans to Changes
in Interest Rates 17
Nonperforming Assets 25
Allowance for Loan Losses 23
Maturity Distribution of Time Deposits 20
Return on Equity and Assets 10
Short-Term Borrowings 55
2 PROPERTIES 8
3 LEGAL PROCEEDINGS 9
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
II 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS 9
6 SELECTED FINANCIAL DATA 10
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OFOPERATIONS 11-32
7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 32-34
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets at December 31, 2003 and 2002 36
Consolidated Statements of Income for each
of the years in the three-year period ended
December 31, 2003 37
Consolidated Statements of Changes in Stockholders'
Equity for each of the years in the
three-year period ended December 31, 2003 38
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 2003 39-40
ANNUAL REPORT: NBT BANCORP INC. 3
Consolidated Statements of Comprehensive Income
for each of the years in the
three-year period ended December 31, 2003 40
Notes to Consolidated Financial Statements 41-69
Independent Auditors' Report 35
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 70
9A CONTROLS AND PROCEDURES 70
III 10 DIRECTORS AND EXECUTIVE OFCERS OF THE REGISTRANT* 71
11 EXECUTIVE COMPENSATION* 71
12 SECURITY OWNERSHIP OF CERTAIN BENECIAL OWNERS AND MANAGEMENT* 71
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS* 71
14 PRINCIPAL ACCOUNTANT FEES AND SERVICES* 71
IV 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K 72-75
(a) (1) Financial Statements (See Item 8 for Reference).
(2) Financial Statement Schedules normally required on
Form 10-K are omitted since they are not applicable.
(3) Exhibits.
(b) Reports on Form 8-K.
(c) Refer to item 15(a)(3)above.
(d) Refer to item 15(a)(2) above.
SIGNATURES 76
* Information called for by Part III (Items 10 through 14) is incorporated by
reference to the Registrant's Proxy Statement for the 2004 Annual Meeting
of Stockholders.
ANNUAL REPORT: NBT BANCORP INC. 4
PART I
ITEM 1. BUSINESS
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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 out-standing shares of common stock of its direct
subsidiaries, and its principal sources of revenue are the management fees and
dividends it receives from the Bank and NBT Financial.
The principal subsidiaries of the Company through which it conducts its
operations are the Bank and NBT Financial. The Bank is a full service commercial
bank formed in 1856, which provides a broad range of financial products to
individuals, corporations and municipalities throughout the central and upstate
New York and northeastern Pennsylvania market area. The Bank con-ducts business
through three geographic operating divisions, NBT Bank, Pennstar Bank and
Central National Bank.
The NBT Bank division has 44 divisional offices and 63 automated teller
machines (ATMs), located primarily in central and upstate New York. At December
31, 2003, NBT Bank had total loans of $1.4 billion and total deposits of $1.5
billion.
The Pennstar Bank division has 40 divisional offices and 51 ATMs, located
primarily in northeastern Pennsylvania. At December 31, 2003, Pennstar Bank had
total loans and leases of $581.4 million and total deposits of $799.7 million.
The Central National Bank division has 27 divisional offices and 24 ATMs
located primarily in upstate New York. At December 31, 2003, Central National
Bank had total loans and leases of $701.6 million and total deposits of $715.0
million.
The Bank has six operating subsidiaries, NBT Capital Corp., LA Lease, Inc.,
Pennstar Services Company, Colonial Financial Services, Inc. ("CFS"), Pennstar
Realty Trust, and CNB Realty Trust. NBT Capital Corp., formed in 1998, is a
venture capital corporation formed to assist young businesses develop and grow
in the markets we serve. LA Lease, Inc., formed in 1987, provides automobile and
equipment leases to individuals and small business entities. Pennstar Realty
Trust, formed in 2000, and CNB Realty Trust formed in 1998, are real estate
investment trusts. Pennstar Services Company, formed in 2002, provides services
to the Pennstar Bank division of the Bank. CFS, formed in 2001, offered a
variety of financial services products and currently conducts no operations as
of December 31, 2003. Pennstar Management Trust ("PMT") formed in 2002, was the
former holding company for Pennstar Realty Trust and CNB Realty Trust. PMT was
liquidated on December 31, 2003.
NBT Financial, formed in 1999, is the parent company of two operating
subsidiaries, Pennstar Financial Services, Inc. and M. Griffith, Inc. Pennstar
Financial Services, Inc., formed in 1997, offered a variety of financial
services products. Pennstar Financial Services conducted no operations during
2003. M. Griffith, Inc., formed in 1951 and acquired by the Company in 2000, is
a registered securities broker-dealer which also offers financial and retirement
planning as well as life, accident and health insurance.
COMPETITION
The banking and financial services industry in New York and Pennsylvania
generally, and in the Company's market areas specifically, is highly
competitive. The increasingly competitive environment is a result primarily of
changes in regulation, changes in technology and product delivery systems,
additional financial service providers, and the accelerating pace of
consolidation among financial ser-vices providers. The Company competes for
loans and leases, deposits, and customers with other commercial banks, savings
and loan associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the
ANNUAL REPORT: NBT BANCORP INC. 5
Company. In order to compete with other financial ser-vices providers, the
Company stresses the community nature of its banking operations and principally
relies upon local promotional activities, personal relationships established by
officers, directors, and employees with their customers, and specialized
financial services tailored to meet the needs of the communities served.
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to extensive regulation,
supervision, and examination by the Board of Governors of the Federal Reserve
System ("FRS") as its primary federal regulator. The Company also has elected to
be registered with the FRS as a financial holding company. The Bank, as a
nationally chartered bank, is subject to extensive regulation, supervision and
examination by the Office of the Comptroller of the Currency ("OCC") as its
primary federal regulator and, as to certain matters, by the FRS and the Federal
Deposit Insurance Corporation ("FDIC").
M. Griffith, Inc. ("MGI") is registered as a broker-dealer and investment
adviser and is subject to extensive regulation, supervision and examination by
the Securities and Exchange Commission ("SEC"). MGI is also a member of the
National Association of Securities Dealers, Inc. ("NASD") and is subject to its
regulations. MGI is authorized as well to engage as a broker, dealer, and
underwriter of municipal securities, and as such is subject to regulation by the
Municipal Securities Rulemaking Board. In addition, MGI is a licensed insurance
agency with offices in the state of New York and is subject to registration and
supervision by the New York State Insurance Department. Pennstar Financial
Services, Inc. is a licensed insurance agency with offices in the Commonwealth
of Pennsylvania and is subject to registration and supervision by the
Pennsylvania Insurance Department.
The Company is subject to capital adequacy guide-lines of the FRS. The
guidelines apply on a consolidated basis and require bank holding companies to
maintain a minimum ratio of Tier 1 capital to total average assets (or "leverage
ratio") of 4%. For the most highly rated bank holding companies, the minimum
ratio is 3%. The FRS capital adequacy guidelines also require bank holding
companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets
of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of
8%. As of December 31, 2003, the Company's leverage ratio was 6.76%, its ratio
of Tier 1 capital to risk-weighted assets was 9.96%, and its ratio of qualifying
total capital to risk-weighted assets was 11.21%. The FRS may set higher minimum
capital requirements for bank holding companies whose circumstances warrant it,
such as companies anticipating significant growth or facing unusual risks. The
FRS has not advised the Company of any special capital requirement applicable to
it.
Any holding company whose capital does not meet the minimum capital
adequacy guidelines is considered to be undercapitalized and is required to
submit an acceptable plan to the FRS for achieving capital adequacy. Such a
company's ability to pay dividends to its share-holders and expand its lines of
business through the acquisition of new banking or nonbanking subsidiaries also
could be restricted.
The Bank is subject to leverage and risk-based capital requirements and
minimum capital guidelines of the OCC that are similar to those applicable to
the Company. As of December 31, 2003, the Bank was in compliance with all
minimum capital requirements. The Bank's lever-age ratio was 6.50%, its ratio of
Tier 1 capital to risk-weighted assets was 9.59%, and its ratio of qualifying
total capital to risk-weighted assets was 10.85%.
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits
unless it is well capitalized, or is adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank that is
not well capitalized from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain prevailing market rates.
As of December 31, 2003, the total amount of brokered deposits were $170.0
million.
The Bank also is subject to substantial regulatory restrictions on its
ability to pay dividends to the Company. Under OCC regulations, the Bank may not
pay a dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the pro-posed dividend, exceed the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. As of December 31, 2003, approximately
$28.9 million was available for the payment of dividends without prior OCC
approval. The Bank's ability to pay dividends also is subject to the Bank being
in compliance with regulatory capital requirements. The Bank is currently in
compliance with these requirements.
The deposits of the Bank are insured up to regulatory limits by the FDIC
and, accordingly, are subject to deposit insurance assessments to maintain the
insurance funds administered by the FDIC. The deposits of the Bank historically
have been subject to deposit insurance assessments to maintain the Bank
Insurance Fund ("BIF"). Due to certain branch deposit acquisitions by the Bank
and its predecessors, some of the deposits of the Bank are subject
ANNUAL REPORT: NBT BANCORP INC. 6
to deposit insurance assessments to maintain the Savings Association Insurance
Fund ("SAIF").
The FDIC has adopted regulations establishing a permanent risk-related
deposit insurance assessment system. Under this system, the FDIC places each
insured bank in one of nine risk categories based on the bank's capitalization
and supervisory evaluations provided to the FDIC by the institution's primary
federal regulator. Each insured bank's insurance assessment rate is then
determined by the risk category in which it is classified by the FDIC.
In the light of the then prevailing favorable financial situation of the
federal deposit insurance funds and the low number of depository institution
failures, since January 1, 1997, the annual insurance premiums on bank de-posits
insured by the BIF or the SAIF have varied between $0.00 per $100 of deposits
for banks classified in the highest capital and supervisory evaluation
categories to $0.27 per $100 of deposits for banks classified in the lowest
cap-ital and supervisory evaluation categories. BIF and SAIF assessment rates
are subject to semi-annual adjustment by the FDIC within a range of up to five
basis points without public comment. The FDIC also possesses authority to impose
special assessments from time to time.
The Federal Deposit Insurance Act provides for additional assessments to be
imposed on insured depository institutions to pay for the cost of Financing
Corporation ("FICO") funding. The FICO assessments are adjusted quarterly to
reflect changes in the assessment bases of the FDIC insurance funds and do not
vary depending upon a depository institution's capitalization or supervisory
evaluation. During 2003, FDIC-insured banks paid an aver-age rate of
approximately $0.017 per $100 for purposes of funding FICO bond obligations.
Transactions between the Bank and any of its affiliates, including the
Company, are governed by sections 23A and 23B of the Federal Reserve Act. An
"affiliate" of a bank is any company or entity that controls, is con-trolled by,
or is under common control with the bank. A subsidiary of a bank that is not
also a depository institution is not treated as an affiliate of the bank for
purposes of sections 23A and 23B, unless the subsidiary is also controlled
through a non-bank chain of ownership by affiliates or controlling shareholders
of the bank or the subsidiary engages in activities that are not permissible for
a bank to engage in directly (except insurance agency subsidiaries). Generally,
sections 23A and 23B are intended to protect insured depository institutions
from suffering losses arising from transactions with non-insured affiliates, by
limiting the extent to which a bank or its subsidiaries may engage in covered
transactions with any one affiliate and with all affiliates of the bank in the
aggregate, and requiring that such transactions be on terms that are consistent
with safe and sound banking practices.
On October 31, 2002, the FRS adopted a new regulation, Regulation W,
effective April 1, 2003, that comprehensively implements sections 23A and 23B.
The regulation unifies and updates staff interpretations issued over the years,
incorporates several new interpretative proposals (such as to clarify when
transactions with an unrelated third party will be attributed to an affiliate),
and ad-dresses new issues arising as a result of the expanded scope of
nonbanking activities engaged in by banks and bank holding companies in recent
years and authorized for financial holding companies under the GrammLeach-Bliley
Act ("GLB Act").
Under the GLB Act, a qualifying bank holding company, known as a financial
holding company, may engage in certain financial activities that a bank holding
company may not otherwise engage in under the Bank Holding Company Act ("BHC
Act"). In addition to engaging in banking and activities closely related to
banking as deter-mined by the FRS by regulation or order prior to November 11,
1999, a financial holding company may engage in activities that are financial in
nature or incidental to financial activities, or activities that are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally.
Under the GLB Act, all financial institutions, including the Company and
the Bank, are required to adopt privacy policies, restrict the sharing of
nonpublic customer data with nonaffiliated parties at the customer's request,
and establish procedures and practices to protect customer data from
unauthorized access.
Under Title III of the USA PATRIOT Act, also known as the International
Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all
financial institutions, including the Company and the Bank, are required in
general to identify their customers, adopt formal and comprehensive anti-money
laundering programs, scrutinize or prohibit altogether certain transactions of
special concern, and be prepared to respond to inquiries from U.S. law
enforcement agencies concerning their customers and their transactions.
Additional information-sharing among financial institution, regulators, and law
enforcement authorities is encouraged by the presence of an exemption from the
privacy provisions of the GLB Act for financial institutions that comply with
this provision and the authorization of the Secretary of the Treasury to adopt
rules to further encourage cooperation and information-sharing. The
effectiveness of a financial institution in combating money laundering
activities is a factor to be considered in
ANNUAL REPORT: NBT BANCORP INC. 7
any application submitted by the financial institution under the Bank Merger
Act, which applies to the Bank, or the BHC Act, which applies to the Company.
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among
other issues, corporate governance, auditor independence and accounting
standards, executive compensation, insider loans, whistleblower protection, and
enhanced and timely disclosure of corporate information. The SEC has adopted or
proposed several implementing rules, and the NASD has proposed corporate
governance rules that have been presented to the SEC for review and approval.
The changes are intended to allow stockholders to monitor more effectively the
performance of companies and management.
Effective August 29, 2002, as directed by section 302(a) of the
Sarbanes-Oxley Act, the Company's chief executive officer and chief financial
officer are each required to certify that the Company's quarterly and annual
reports do not contain any untrue statement of a material fact. This requirement
has several parts, including certification that these officers are responsible
for establishing, maintaining and regularly evaluating the effectiveness of the
Company's internal controls; that they have made certain disclosures to the
Company's auditors and the risk management committee of the board of directors
about the Company's internal controls; and that they have included information
in the Company's quarterly and annual re-ports about their evaluation and
whether there have been significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the evaluation.
EMPLOYEES
At December 31, 2003, the Company had 1,193 full-time equivalent employees. The
Company's employees are not presently represented by any collective bargaining
group. The Company considers its employee relations to be good.
AVAILABLE INFORMATION
The Company's website is http://www.nbtbancorp.com. The Company makes available
free of charge through its internet site, its annual reports on Form 10-K;
quarterly reports on Form 10-Q; current reports on Form 8K; and any amendments
to those reports led or furnished pursuant to the Securities Exchange Act of
1934 as soon as reasonably practicable after such material is electronically led
with, or furnished to the SEC. The reference to our website does not constitute
incorporation by reference of the information contained in the website and
should not be considered part of this document.
ITEM 2. PROPERTIES
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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, 2003:
==============================================================================================================================
County Branches ATMs County Branches ATMs County Branches ATMs
- ------------------------------------------------------------------------------------------------------------------------------
NBT BANK DIVISION CENTRAL NATIONAL BANK DIVISION PENNSTAR BANK DIVISION
NEW YORK NEW YORK NEW YORK
Broome County 4 9 Albany County 2 1 Orange County 1 1
Chenango County 11 15 Fulton County 4 5
Clinton County 3 2 Herkimer County 2 1 PENNSYLVANIA
Delaware County 6 10 Montgomery County 6 6 Lackawanna County 19 24
Essex County 3 6 Otsego County 5 5 Luzerne County 4 6
Franklin County 1 1 Saratoga County 3 3 Monroe County 4 5
Greene County - 2 Schenectady County 1 1 Pike County 3 3
Oneida County 6 10 Schoharie County 4 2 Susquehanna County 6 8
Otsego County 4 11 Wayne County 3 4
St. Lawrence County 5 4
Sullivan County - 1
Tioga County 1 1
Ulster County - 1
==============================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 8
The Company leases thirty-six of the above listed branches from third
parties under terms and conditions considered by management to be equitable to
the Company. The Company owns all other banking premises. All automated teller
machines are owned.
ITEM 3. LEGAL PROCEEDINGS
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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.
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:
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High Low Dividend
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2002
1st quarter $15.15 $13.15 $ 0.17
2nd quarter 19.32 14.00 0.17
3rd quarter 18.50 16.36 0.17
4th quarter 18.60 14.76 0.17
2003
1st quarter $18.60 $16.76 $ 0.17
2nd quarter 19.94 17.37 0.17
3rd quarter 21.76 19.24 0.17
4th quarter 22.78 19.50 0.17
The closing price of the Common Stock on February 27, 2004 was $21.95.
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Annual Report: NBT Bancorp Inc. 9
ITEM 6. SELECTED FINANCIAL DATA
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The following summary financial and other information about the Company is
derived from the Company's audited consolidated financial statements for each of
the five fiscal years ended December 31, 2003:
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Year ended December 31,
--------------------------------------------------------------
(In thousands, except per share data) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Interest, fee and dividend income $ 207,298 $ 227,222 $ 255,434 $ 260,381 $ 220,849
Interest expense 62,874 80,402 117,502 133,003 102,876
Net interest income 144,424 146,820 137,932 127,378 117,973
Provision for loan and lease losses 9,111 9,073 31,929 10,143 6,896
Noninterest income excluding securities
gains (losses) 37,603 31,934 31,826 24,854 21,327
Securities gains (losses), net 175 (413) (7,692) (2,273) 1,000
Merger, acquisition and reorganization costs - - 15,322 23,625 835
Other noninterest expense 104,517 102,455 110,536 95,509 83,944
Income before income taxes 68,574 66,813 4,279 20,682 48,625
Net income 47,104 44,999 3,737 14,154 32,592
PER COMMON SHARE*
Basic earnings $ 1.45 $ 1.36 $ 0.11 $ 0.44 $ 1.01
Diluted earnings 1.43 1.35 0.11 0.44 1.00
Cash dividends paid ** 0.68 0.68 0.68 0.68 0.66
Book value at year-end 9.46 8.96 8.05 8.29 7.62
Tangible book value at year-end 7.94 7.47 6.51 6.88 6.74
Average diluted common shares outstanding 32,844 33,235 33,085 32,405 32,541
AT DECEMBER 31
Trading securities, at fair value $ 48 $ 203 $ 126 $ 20,540 $ -
Securities available for sale, at fair value 980,961 1,007,583 909,341 936,757 994,492
Securities held to maturity, at amortized cost 97,204 82,514 101,604 110,415 113,318
Loans and leases 2,639,976 2,355,932 2,339,636 2,247,655 1,924,460
Allowance for loan and lease losses 42,651 40,167 44,746 32,494 28,240
Assets 4,046,885 3,723,726 3,638,202 3,605,506 3,294,845
Deposits 3,001,351 2,922,040 2,915,612 2,843,868 2,573,335
Borrowings 672,631 451,076 394,344 425,233 429,924
Stockholders' equity 310,034 292,382 266,355 269,641 246,095
KEY RATIOS
Return on average assets 1.22% 1.23% 0.10% 0.41% 1.07%
Return on average equity 15.90 16.13 1.32 5.57 12.66
Average equity to average assets 7.69 7.64 7.82 7.35 8.42
Net interest margin 4.16 4.43 4.19 4.02 4.23
Dividend payout ratio 47.55 50.37 618.18 154.55 66.00
Tier 1 leverage 6.76 6.73 6.34 6.88 8.07
Tier 1 risk-based capital 9.96 9.93 9.43 9.85 12.49
Total risk-based capital 11.21 11.18 10.69 11.08 13.68
* All share and per share data has been restated to give retroactive effect to stock dividends and
poolings of interest.
** Cash dividends per share represent the historical cash dividends per share of NBT Bancorp Inc., adjusted
to give retroactive effect to stock dividends.
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ANNUAL REPORT: NBT BANCORP INC. 10
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SELECTED QUARTERLY FINANCIAL DATA
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2003 2002
--------------------------------------- -----------------------------------------
(Dollars in thousands,
except per share data) FIRST SECOND THIRD FOURTH First Second Third Fourth
- --------------------------------------------------------------------------------------------------------------------------------
Interest, fee and dividend income $52,635 $51,593 $50,788 $52,282 $57,322 $57,490 $57,011 $55,399
Interest expense 16,606 16,101 15,210 14,957 20,977 20,408 20,304 18,713
Net interest income 36,029 35,492 35,578 37,325 36,345 37,082 36,707 36,686
Provision for loan and lease losses 1,940 1,413 2,436 3,322 2,011 2,092 2,424 2,546
Noninterest income excluding net
securities gains (losses) 8,715 8,901 9,955 10,032 7,913 7,733 8,047 8,241
Net securities gains (losses) 27 38 18 92 (502) 69 (6) 26
Noninterest expense 25,892 25,848 25,983 26,794 25,212 26,062 25,320 25,861
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Net income $11,566 $11,808 $11,848 $11,882 $11,077 $11,266 $11,412 $11,244
==================================================================================
Basic earnings per share $ 0.36 $ 0.36 $ 0.36 $ 0.36 $ 0.33 $ 0.34 $ 0.35 $ 0.34
Diluted earnings per share $ 0.35 $ 0.36 $ 0.36 $ 0.36 $ 0.33 $ 0.34 $ 0.34 $ 0.34
Net interest margin 4.38% 4.18% 4.02% 4.07% 4.54% 4.48% 4.35% 4.35%
Return on average assets 1.27% 1.25% 1.21% 1.17% 1.25% 1.24% 1.23% 1.21%
Return on average equity 16.05% 16.07% 16.06% 15.47% 16.62% 16.50% 15.95% 15.53%
Average diluted common shares
outstanding 32,783 32,653 32,865 33,070 33,295 33,402 33,295 32,951
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================================================================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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GENERAL
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of NBT Bancorp Inc.
(the "Registrant") and its wholly owned subsidiaries, NBT Bank, N.A. ("the
Bank"), NBT Financial Services, Inc. ("NBT Financial), and CNBF Capital Trust I
during 2003 and, in summary form, the preceding two years. Collectively, the
Registrant and its subsidiaries are referred to herein as "the Company." Net
interest margin is presented in this discussion on a fully taxable equivalent
(FTE) basis. Average balances discussed are daily averages unless otherwise
described. The audited consolidated financial statements and related notes as of
December 31, 2003 and 2002 and for each of the years in the three year period
ended December 31, 2003 should be read in conjunction with this review. Amounts
in prior period consolidated financial statements are reclassified whenever
necessary to conform to the 2003 presentation.
The preparation of the consolidated financial statements requires
management to make estimates and assumptions, in the application of certain
accounting policies, about the effect of matters that are inherently uncertain.
Those estimates and assumptions affect the reported amounts of certain assets,
liabilities, revenues and expenses. Different amounts could be reported under
different conditions, or if different assumptions were used in the application
of these accounting policies.
The business of the Company is providing commercial banking and financial
services through its subsidiaries. The Company's primary market area is central
and upstate New York and northeastern Pennsylvania. The Company has been, and
intends to continue to be, a community-oriented financial institution offering a
variety of financial services. The Company's principle business is attracting
deposits from customers within its market area and investing those funds
primarily in loans and leases, and, to a lesser extent, in marketable
securities. The financial condition and operating results of the Company are
dependent on its net interest income which is the difference between the
interest and dividend income earned on its earning assets and the interest
expense paid on its interest bearing liabilities, primarily consisting of
deposits and borrowings. Net income is also affected by provisions for loan and
lease losses and noninterest income, such as service charges on deposit
accounts, broker/dealer fees, trust fees, and gains/losses
ANNUAL REPORT: NBT BANCORP INC. 11
on securities sales; it is also impacted by noninterest expense, such as
salaries and employee benefits, data processing, communications, occupancy, and
equipment.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards, and actions of
regulatory agencies. Future changes in applicable laws, regulations, or
government policies may have a material impact on the Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates, the state of the local
and regional economy, and the availability of funds. The ability to gather
deposits and the cost of funds are influenced by prevailing market interest
rates, fees and terms on deposit products, as well as the availability of
alternative investments including mutual funds and stocks.
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policy relating to the
allowance for loan and lease losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan and lease portfolio and the material effect that
such judgments can have on the results of operations. While management's current
evaluation of the allowance for loan and lease losses indicates that the
allowance is adequate, under adversely different conditions or assumptions, the
allowance would need to be increased. For example, if historical loan and lease
loss experience significantly worsened or if current economic conditions
significantly deteriorated, additional provisions for loan and lease losses
would be required to increase the allowance. In addition, the assumptions and
estimates used in the internal reviews of the Company's nonperforming loans and
potential problem loans has a significant impact on the overall analysis of the
adequacy of the allowance for loan and lease losses. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral values were significantly lowered, the
Company's allowance for loan and lease policy would also require additional
provisions for loan and lease losses.
The Company's policy on the allowance for loan and lease losses is
disclosed in note 1 to the consolidated financial statements. A more detailed
description of the allowance for loan and lease losses is included in the "Risk
Management" section of this Form 10-K. All accounting policies are important,
and as such, the Company encourages the reader to review each of the policies
included in note 1 to obtain a better understanding on how the Company's
financial performance is reported.
FORWARD LOOKING STATEMENTS
Certain statements in this filing and future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, contain forward-looking statements,
as defined in the Private Securities Litigation Reform Act. These statements may
be identified by the use of phrases such as "anticipate," "believe," "expect,"
"forecasts," "projects," "will," "can," "would," "should," "could," "may," or
other similar terms. There are a number of factors, many of which are beyond the
Company's control that could cause actual results to differ materially from
those contemplated by the forward looking statements. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
increase significantly; (2) revenues may be lower than expected; (3) changes in
the interest rate environment may reduce interest margins; (4) general economic
conditions, either nationally or regionally, may be less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and/or a reduced demand for credit; (5) legislative or regulatory changes,
including changes in accounting standards or tax laws may adversely affect the
businesses in which the Company is engaged; (6) deposit attrition, customer
loss, or revenue loss following recent mergers and acquisitions may be greater
than expected; (7) competitors may have greater financial resources and develop
products that enable such competitors to compete more successfully than the
Company; and (8) adverse changes may occur in the securities markets or with
respect to inflation.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including but not limited to those described
above, could affect the Company's financial performance and could cause the
Company's actual results or circumstances for future periods to differ
materially from those anticipated or projected.
Except as required by law, the Company does not undertake, and specifically
disclaims any obligations to, publicly release any revisions that may be made to
any
ANNUAL REPORT: NBT BANCORP INC. 12
forward-looking statements to reflect statements to the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
OVERVIEW
The Company had net income of $47.1 million or $1.43 per diluted share for 2003,
compared to net income of $45.0 million or $1.35 per diluted share for 2002.
There were several factors driving the improvement in results in 2003 compared
to 2002. Noninterest income increased $6.3 million or 20% in 2003 compared to
2002. This increase resulted from strong growth in service charges on deposit
accounts and increases from trust revenue, broker/ dealer fees, Bank Owned Life
Insurance (BOLI) income, and other income. Offsetting this increase in
noninterest income was a decrease in net interest income of $2.4 million and an
increase in noninterest expenses of $2.1 million. The decrease in net interest
income was driven primarily by the decrease in the Company's net interest
margin, which declined from 4.43% for 2002 to 4.16% for 2003, primarily as a
result of continued low market interest rates. The decline in margin was offset
somewhat by growth in average earning assets of 5% driven primarily by loan
growth. Average loans and leases increased 6% in 2003 or $137.1 million compared
to 2002 average loans. The increase in noninterest expense resulted primarily
from increases in salaries and employee benefits, occupancy expense, and other
noninterest expense offset by decreases in professional fees and outside
services and loan collection and other real estate owned (OREO) expenses. The
provision for loan and lease losses remained relatively unchanged in 2003 from
2002, as improvements in credit quality were offset by loan growth in 2003.
The Company had net income of $45.0 million or $1.35 per diluted share for
2002, compared to net income of $3.7 million or $0.11 per diluted share for
2001. The improvement in 2002 results over 2001 was due to several factors.
There was a $22.9 million decrease in the provision for loan and lease losses
when compared to the same period in 2001. The increase in the 2001 provision for
loan and lease losses was due mainly to an increase in nonperforming loans and
charge-offs during 2001, resulting mainly from the process of integrating loans
from recently acquired banks and weakening business conditions. The net interest
margin improved during 2002, resulting in a $8.9 million increase in net
interest income over 2001. Noninterest income was up $7.4 million for 2002 when
compared to 2001. Driving this increase was a decrease in net securities losses
of $7.3 million in 2002 when compared to 2001, due to the sale and writedown of
several high-risk securities previously held by CNB during 2001. Additionally,
growth in noninterest income from service charges on deposit accounts and
broker/ dealer and insurance revenue totaled $2.4 million in 2002 compared to
2001. Offsetting these increases was a $1.4 million gain on a sale of a branch
building in 2001 compared to no such gain in 2002. Noninterest expenses were
down $23.4 million in 2002 when compared to 2001. This decrease was driven
primarily by three factors. First, there was a slight recovery of merger costs
of $0.1 million in 2002 compared to $15.3 million in merger charges in 2001 that
resulted primarily from the acquisition of CNB. Second, the stabilization of
residual values of leased automobiles resulted in no provision for the
other-than temporary impairment in residual values of leased automobiles in 2002
compared to a $3.5 million provision in 2001. Lastly, because of accounting
standards that became effective for the Company in fiscal year 2002,
amortization of goodwill and unidentified intangible assets decreased $3.5
million in 2002. If these accounting standards had been applied in 2001, the
decrease in the amortization of goodwill and intangible assets would increase
diluted earnings per share by $0.07 in 2001.
ASSET/LIABILITY MANAGEMENT
The Company attempts to maximize net interest income, and net income, while
actively managing its liquidity and interest rate sensitivity through the mix of
various core deposit products and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income, on a fully
tax equivalent basis, are discussed below.
The following table includes the condensed consolidated average balance
sheet, an analysis of interest income/ expense and average yield/rate for each
major category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans and leases
has been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
ANNUAL REPORT: NBT BANCORP INC. 13
================================================================================================================================
TABLE 1. AVERAGE BALANCES AND NET INTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ----------------------------- ------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
(Dollars in thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 3,225 $ 80 2.48% $ 12,389 $ 403 3.25% $ 11,324 $ 569 5.02%
Securities available for
sale1 984,620 46,313 4.70 947,042 56,586 5.98 933,122 61,857 6.63
Securities held to
maturity1 90,601 4,657 5.14 92,981 5,620 6.04 99,835 6,644 6.65
Securities trading 133 4 3.01 208 8 3.85 5,253 649 12.35
Investment in FRB and
FHLB Banks 28,117 854 3.04 21,766 962 4.42 23,926 1,555 6.50
Loans and leases2 2,474,899 159,827 6.46 2,337,767 167,917 7.18 2,312,740 188,053 8.13
--------- ------- --------- ------- --------- -------
Total earning assets 3,581,595 211,735 5.91 3,412,153 231,496 6.78 3,386,200 259,327 7.66
------- ------- -------
Other non-interest earning
assets 270,928 236,919 240,725
---------- ---------- ----------
Total assets $3,852,523 $3,649,072 $3,626,925
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit
accounts $ 359,722 $ 4,332 1.20 $ 279,407 $ 4,461 1.60 $ 254,735 $ 7,052 2.77
NOW deposit accounts 411,236 2,340 0.57 382,562 3,488 0.91 348,964 5,032 1.44
Savings deposits 523,571 4,542 0.87 479,312 6,887 1.44 427,102 9,385 2.20
Time deposits 1,188,497 34,727 2.92 1,331,281 48,496 3.64 1,476,473 77,053 5.22
--------- ------ --------- ------ --------- ------
Total interest-bearing
deposits 2,483,026 45,941 1.85 2,472,562 63,332 2.56 2,507,274 98,522 3.93
Short-term borrowings 190,332 2,171 1.14 87,039 1,334 1.53 123,162 5,365 4.36
Long-term debt 360,928 14,762 4.09 334,479 15,736 4.70 259,583 13,615 5.24
--------- ------ --------- ------ --------- ------
Total interest-bearing
liabilities 3,034,286 62,874 2.07 2,894,080 80,402 2.78 2,890,019 117,502 4.07
------ ------ -------
Demand deposits 457,238 419,744 382,489
Other non-interest-
bearing
liabilities 64,723 56,293 70,666
Stockholders' equity 296,276 278,955 283,751
---------- ---------- ----------
Total liabilities and
stockholders'
equity $3,852,523 $3,649,072 $3,626,925
========== ========== ==========
Interest rate spread 3.84% 4.00% 3.59%
==== ==== ====
Tax equivalent net
interest income 148,861 151,094 141,825
Net interest margin 4.16% 4.43% 4.19%
==== ==== ====
Taxable equivalent
adjustment 4,437 4,274 3,893
------- ------- -------
Net interest income 144,424 146,820 137,932
======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
1. Securities are shown at average amortized cost. For purposes of these
computations, nonaccrual securities are included in the average securities
balances.
2. For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding.
================================================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 14
NET INTEREST INCOME
On a tax equivalent basis, the Company's net interest income for 2003 was $148.9
million, down from $151.1 million for 2002. The Company's net interest margin
declined to 4.16% for 2003 from 4.43% for 2002. The decline in the net interest
margin resulted primarily from earning assets repricing downward faster than
interest bearing liabilities. The yield on earning assets decreased 87 basis
points (bp), from 6.78% for 2002 to 5.91% for 2003. Meanwhile, the rate paid on
interest bearing liabilities decreased 71 (bp), from 2.78% for 2002 to 2.07% for
2003. Additionally, historically low interest rates for residential real estate
increased prepayments and refinancing activity during 2003, which in turn
increased amortization expense of investment security premiums related to
mortgage-backed securities. Offsetting the decline in net interest margin was an
increase in average earning assets of $169.4 million or 5%, driven primarily by
a $137.1 million increase in average loans. The following table presents changes
in interest income, on a FTE basis, and interest expense attributable to changes
in volume (change in average balance multiplied by prior year rate), changes in
rate (change in rate multiplied by prior year volume), and the net change in net
interest income. The net change attributable to the combined impact of volume
and rate has been allocated to each in proportion to the absolute dollar amounts
of change.
=================================================================================================
TABLE 2. ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
- -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) Increase (Decrease)
2003 OVER 2002 2002 over 2001
-------------------------------- --------------------------------
(In thousands) VOLUME RATE TOTAL Volume Rate Total
- -------------------------------------------------------------------------------------------------
Short-term interest-
bearing accounts $ (245) $ (78) $ (323) $ 50 $ (216) $ (166)
Securities available for
sale 2,170 (12,443) (10,273) 911 (6,182) (5,271)
Securities held to
maturity (141) (822) (963) (438) (586) (1,024)
Securities trading (2) (2) (4) (373) (268) (641)
Investment in FRB and
FHLB Banks 238 (346) (108) (130) (463) (593)
Loans and leases 9,485 (17,575) (8,090) 2,015 (22,151) (20,136)
--------------------------------------------------------------------
Total interest income 11,084 (30,845) (19,761) 1,973 (29,804) (27,831)
--------------------------------------------------------------------
Money market deposit
accounts 1,112 (1,241) (129) 629 (3,220) (2,591)
NOW deposit accounts 245 (1,393) (1,148) 448 (1,992) (1,544)
Savings deposits 588 (2,933) (2,345) 1,044 (3,542) (2,498)
Time deposits (4,840) (8,929) (13,769) (7,015) (21,542) (28,557)
Short-term borrowings 1,250 (413) 837 (1,256) (2,775) (4,031)
Long-term debt 1,183 (2,157) (974) 3,630 (1,509) 2,121
--------------------------------------------------------------------
Total interest expense 3,737 (21,265) (17,528) 165 (37,265) (37,100)
--------------------------------------------------------------------
Change in FTE net
interest income $ 7,347 $ (9,580) $ (2,233) $ 1,808 $ 7,461 $ 9,269
====================================================================
=================================================================================================
LOANS AND LEASES AND CORRESPONDING INTEREST AND
FEES ON LOANS
The average balance of loans and leases increased 6%, totaling $2.5 billion in
2003 compared to $2.4 billion in 2002. The yield on average loans and leases
decreased from 7.18% in 2002 to 6.46% in 2003, as a declining interest rate
environment prevailed for much of 2003. Interest income from loans and leases on
a FTE basis decreased 5%, from $167.9 million in 2002 to $159.8 million in 2003.
The decrease in interest income from loans and leases was due primarily to the
decrease in yield on loans and leases in 2003 of 72 (bp) when compared to 2002.
Total loans and leases increased 12% at December 31, 2003, totaling $2.6 billion
from $2.4 billion at December 31, 2002. The increase in loans and leases was
driven by strong growth in residential real estate mortgages and home equity
loans. Residential real estate mortgages increased $124.3 million or 21% from
$579.6 million at
ANNUAL REPORT: NBT BANCORP INC. 15
December 31, 2002 to $703.9 million at December 31, 2003. The increase in
residential real estate mortgages was driven by a combination of historically
low interest rates increasing the demand for the product and the integration and
centralization of the mortgage origination function for the Company's three
divisional banks at the end of 2002. Centralizing the mortgage origination
function enabled the Company to provide customers with efficient service and
competitive products while strengthening the Company's market presence. Home
equity loans increased $67.0 million or 25% from $269.6 million at December 31,
2002 to $336.5 million at December 31, 2003. The increase in home equity loans
was due again to the previously mentioned increased demand from the historically
low interest rate environment combined with a strong product that has sold well
historically in the NBT bank division. The Company expanded its training
programs for the sales staff of its Pennstar and CNB bank divisions and
experienced strong sales of its home equity products in these newer markets and
maintained strong growth within its NBT bank division during 2003. All other
loan categories experienced modest increases during 2003.
The following table reflects the loan and lease portfolio by major
categories as of December 31 for the years indicated:
=====================================================================================================
TABLE 3. COMPOSITION OF LOAN AND LEASE PORTFOLIO
- -----------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------
(In thousands) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Residential real estate mortgages $ 703,906 $ 579,638 $ 525,411 $ 504,590 $ 521,684
Commercial and commercial real estate 954,024 920,330 958,075 948,472 755,393
Real estate construction and development 86,046 64,025 60,513 44,829 25,474
Agricultural and agricultural real estate 106,310 104,078 103,884 92,713 85,753
Consumer 390,413 357,214 387,081 357,822 320,682
Home equity 336,547 269,553 232,624 219,355 139,472
Lease financing 62,730 61,094 72,048 79,874 76,002
-----------------------------------------------------------
Total loans and leases $2,639,976 $2,355,932 $2,339,636 $2,247,655 $1,924,460
===========================================================
================================================================================
Real estate mortgages consist primarily of loans secured by first or second
deeds of trust on primary residencies. Loans in the commercial and agricultural
category, as well as commercial and agricultural real estate mortgages, consist
primarily of short-term and/or floating rate loans made to small to medium-sized
entities. Consumer loans consist primarily of installment credit to individuals
secured by automobiles and other personal property including manufactured
housing. Manufactured housing loans totaled $29.1 million and $35.5 million at
December 31, 2003 and 2002, respectively, and were 7.4% and 9.9% of total
consumer loans at December 31, 2003 and 2002, respectively. These decreases from
2002 to 2003 are consistent with the Company's plan to de-emphasize loans
secured by manufactured housing.
The Company's automobile lease financing portfolio totaled $62.7 million at
December 31, 2003 and $61.1 million at December 31, 2002. Lease receivables
primarily represent automobile financing to customers through direct financing
leases and are carried at the aggregate of the lease payments receivable and the
estimated residual values, net of unearned income and net deferred lease
origination fees and costs. Net deferred lease origination fees and costs are
amortized under the effective interest method over the estimated lives of the
leases. The estimated residual value related to the total lease portfolio is
reviewed quarterly, and if there has been a decline in the estimated fair value
of the residual that is judged by management to be other-than temporary,
including consideration of residual value insurance, a loss is recognized.
Adjustments related to such other-than-temporary declines in estimated fair
value are recorded with other noninterest expenses in the consolidated
statements of income. One of the most significant risks associated with leasing
operations is the recovery of the residual value of the leased vehicles at the
ANNUAL REPORT: NBT BANCORP INC. 16
termination of the lease. When a lease receivable asset is recorded, included in
this amount is the estimated residual value of the leased vehicle at the
termination of the lease. At termination, the lessor has the option to purchase
the vehicle or may turn the vehicle over to the Company.
The residual values included in lease financing receivables totaled $38.9
million and $42.8 million at December 31, 2003 and 2002, respectively.
The Company has acquired residual value insurance protection in order to
reduce the risk related to residual values. Based on analysis performed by
management, the Company has concluded that no other-than-temporary impairment
exists which would warrant a charge to earnings during December 31, 2003 and
2002.
The following table, Maturities and Sensitivities of Certain Loans to
Changes in Interest Rates, are the maturities of the commercial and agricultural
and real estate and construction development loan portfolios and the sensitivity
of loans to interest rate fluctuations at December 31, 2003. Scheduled
repayments are reported in the maturity category in which the contractual
payment is due.
===============================================================================================================
TABLE 4. MATURITIES AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
- ---------------------------------------------------------------------------------------------------------------
Remaining maturity at December 31, 2003
-----------------------------------------------------------
Within After One Year But
(In thousands) One Year Within five years After Five Years Total
-----------------------------------------------------------
FLOATING/ADJUSTABLE RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate $ 426,721 $ 105,363 $ 28,134 $ 560,218
Real estate construction and development 23,316 5,789 246 29,351
-----------------------------------------------------------
Total floating rate loans 450,037 111,152 28,380 589,569
-----------------------------------------------------------
FIXED RATE
Commercial, commercial real estate, agricultural,
and agricultural real estate 267,209 157,040 75,867 500,116
Real estate construction and development 47 6,740 49,908 56,695
-----------------------------------------------------------
Total fixed rate loans 267,256 163,780 125,775 556,811
-----------------------------------------------------------
Total $ 717,293 $ 274,932 $ 154,155 $1,146,380
-----------------------------------------------------------
===============================================================================================================
SECURITIES AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The average balance of securities available for sale in 2003 was $984.6 million,
an increase of $37.6 million, or 4%, from $947.0 million in 2002. The increase
resulted primarily from modest leverage during 2003. The yield on average
securities available for sale was 4.70% for 2003 compared to 5.98% in 2002. The
decrease in yield for 2003 was due to several factors. The low interest rate
environment prevalent throughout 2003 resulted in lower yields as reinvestment
of funds from maturities, sales and paydowns led to the purchase of lower
yielding securities. Additionally, the low rate environment fostered an increase
in the refinancing of residential real estate mortgages, which increased the
prepayment speeds of mortgage-backed security investments resulting in an
increase in bond premium amortization in 2003. Lastly, to manage its risk to
rising interest rates, the Company shortened the average life of securities
available for sale by increasing its investment in fifteen and ten year
mortgage-backed securities and lowering its exposure to thirty-year
mortgage-backed securities. At December 31, 2003, approximately 63% of
securities available for sale were comprised of fifteen/ten year mortgage-backed
securities and 10% were comprised of thirty/twenty year mortgaged-backed
securities. At December 31, 2002, the mix was 50% fifteen/ten year
mortgage-backed securities and 18% thirty/twenty year mortgaged-backed
securities. In the event of a rising rate environment, the Company should be
positioned to reinvest cashflows at a faster rate from shortening the expected
life of the portfolio.
The average balance of securities held to maturity decreased slightly from
$93.0 million in 2002 to $90.6 million in 2003. At December 31, 2003, securities
held to maturity were comprised primarily of tax-exempt municipal securities.
The yield on securities held to maturity declined
ANNUAL REPORT: NBT BANCORP INC. 17
from 6.04% in 2002 to 5.14% in 2003. The decline in yield was due mainly to the
previously mentioned low rate environment prevalent throughout 2003. Investments
in FRB and FHLB Banks increased to $28.1 million in 2003 from $21.8 million in
2002. This increase was driven primarily by an increase in the investment in
FHLB resulting from an increase in the Company's borrowing capacity at FHLB. The
yield from investments in FRB and FHLB Banks declined from 4.42% in 2002 to
3.04% in 2003. The decrease in yield resulted primarily from the suspension of
the October 2003 dividend by the FHLB as a result of capital concerns and credit
issues in the FHLB investment security portfolio. The FHLB has indicated that it
intends to pay quarterly dividends in 2004 if the interest rate environment
remains unchanged at a rate below 2%.
The Company classifies its securities at date of purchase as either
available for sale, held to maturity or trading. Held to maturity debt
securities are those that the Company has the ability and intent to hold until
maturity. Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported in stockholders' equity
as a component of accumulated other comprehensive income or loss. Held to
maturity securities are recorded at amortized cost. Trading securities are
recorded at fair value, with net unrealized gains and losses recognized
currently in income. Transfers of securities between categories are recorded at
fair value at the date of transfer. A decline in the fair value of any available
for sale or held to maturity security below cost that is deemed
other-than-temporary is charged to earnings resulting in the establishment of a
new cost basis for the security. Securities with an other than- temporary
impairment are generally placed on non-accrual status.
Non-marketable equity securities are carried at cost, with the exception of
small business investment company (SBIC) investments, which are carried at fair
value in accordance with SBIC rules.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the interest method. Dividend
and interest income are recognized when earned. Realized gains and losses on
securities sold are derived using the specific identification method for
determining the cost of securities sold.
The Company recorded a $0.7 million and $8.3 million pre-tax charge during
2002 and 2001 related to estimated other-than-temporary impairment of certain
securities classified as available for sale. The charges were recorded in net
security gains (losses) on the consolidated statements of income. The security
with other-than temporary impairment charges at December 31, 2003 had a
remaining carrying value of $0.4 million, is classified in securities available
for sale and is on non-accrual status.
The following table presents the amortized cost and fair market value of
the securities portfolio as of December 31 for the years indicated:
ANNUAL REPORT: NBT BANCORP INC. 18
======================================================================================================================
TABLE 5. SECURITIES PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- ------------------------ ----------------------
AMORTIZED FAIR Amortized Fair Amortized Fair
(In thousands) COST VALUE Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
U.S. Treasury $ 58 $ 59 $ 502 $ 514 $ 12,392 $ 11,757
Federal Agency and mortgage-backed 843,777 849,686 810,784 833,940 524,101 530,613
State and Municipal, collateralized mortgage
obligations and other securities 123,570 131,216 168,803 173,129 366,325 366,971
-----------------------------------------------------------------------
Total securities available for sale $ 967,405 $980,961 $ 980,089 $1,007,583 $ 902,818 $909,341
=======================================================================
TRADING SECURITIES $ 48 $ 48 $ 203 $ 203 $ 126 $ 126
=======================================================================
SECURITIES HELD TO MATURITY
Federal Agency and mortgage-backed $ 11,363 $ 11,867 $ 24,613 $ 25,720 $ 36,733 $ 36,623
State and Municipal 85,437 86,305 56,021 56,917 64,715 64,715
Other securities 404 404 1,880 1,880 156 157
-----------------------------------------------------------------------
Total securities held to maturity $ 97,204 $ 98,576 $ 82,514 $ 84,517 $ 101,604 $101,495
=======================================================================
======================================================================================================================
THE FOLLOWING TABLE SUMMARIZES THE SECURITIES CONSIDERED TO BE
OTHER-THAN-TEMPORARILY IMPAIRED (OTTI) AT THE DATES INDICATED:
===============================================================================================================
AT DECEMBER 31, 2003 At December 31, 2002
--------------------------- ---------------------------
AMORTIZED COST Amortized Cost
(In thousands) AND FAIR VALUE OTTI CHARGE and Fair Value OTTI Charge
- ---------------------------------------------------------------------------------------------------------------
SECURITY TYPE
Private issue collateralized mortgage obligation $ 395 - $ 1,122 $ 660
========================================================
===============================================================================================================
The cumulative writedown of the private issue collateralized mortgage
obligation at December 31, 2003 totaled $4.7 million. There were no
other-than-temporary impairment writedowns during 2003. Included in the
securities available for sale portfolio at December 31, 2002, were certain
securities (private issue CMO, asset-backed securities, and private issue
mortgaged-backed securities) previously held by CNB. These securities contained
a higher level of credit risk when compared to other securities held in the
Company's investment portfolio because they are not guaranteed by a governmental
agency or a government sponsored enterprise (GSE). The Company's general
practice is to purchase CMO and mortgagebacked securities that are guaranteed by
a governmental agency or a GSE coupled with a strong credit rating, typically
AAA, issued by Moody's or Standard and Poors.
At December 31, 2003, the Company had no exposure to these high-risk
securities, as the remaining balance outstanding at December 31, 2002 were sold
during the year.
At December 31, 2002, the amortized cost and fair value of these high-risk
securities amounted to $12.0 million and $10.7 million, respectively, down from
$38.7 million and $38.5 million, respectively, at December 31, 2001. The
decrease at December 31, 2002, when compared to December 31, 2001, resulted
primarily from sales and to a lesser extent principal paydowns. During 2002, the
Company sold $22.4 million of these securities due to a continued deterioration
in the financial condition of the underlying collateral in 2002 related to a
certain number these securities as well as the Company's goal of reducing
exposure to these types of securities. The net loss realized from the
ANNUAL REPORT: NBT BANCORP INC. 19
sale of these securities was $7.4 million. Offsetting these net losses were
net gains of $7.3 million, resulting from the sale of approximately $187.0
million in other securities available for sale during 2002.
FUNDING SOURCES AND CORRESPONDING INTEREST EXPENSE
The Company utilizes traditional deposit products such as time, savings, NOW,
money market, and demand deposits as its primary source for funding. Other
sources, such as short-term Federal Home Loan Bank (FHLB) advances, federal
funds purchased, securities sold under agreements to repurchase, brokered time
deposits, and long-term FHLB borrowings are utilized as necessary to support the
Company's growth in assets and to achieve interest rate sensitivity objectives.
The average balance of interest-bearing liabilities increased $140.2 million,
totaling $3.0 billion in 2003 from $2.9 billion in 2002. The rate paid on
interest-bearing liabilities decreased from 2.78% in 2002 to 2.07% in 2003. The
decrease in the rate paid on interest bearing liabilities, caused a decrease in
interest expense of $17.5 million, or 22%, from $80.4 million in 2002 to $62.9
million in 2003.
DEPOSITS
Average interest bearing deposits increased $10.5 million during 2003. The
increase resulted primarily from increases in average NOW, Money Market Deposit
Accounts ("MMDA"), and savings. The average balance of these core deposit types
increased collectively $153.2 million or 13% during 2003 when compared to 2002.
The increase in core deposits resulted primarily from continued market expansion
and the migration of funds from time deposits. Average time deposits decreased
$142.8 million or 11% during 2003 when compared to 2002. The decrease in average
time deposits resulted primarily from the low rate environment prevalent
throughout 2003. Additionally, the Company did not price time deposits
aggressively in 2003, which contributed to the increase in core deposits as well
as lead to an increase in short-term borrowings. The average balance of demand
deposits increased $37.5 million, or 9%, from $419.7 million in 2002 to $457.2
million in 2003. The ratio of average demand deposits to total average deposits
increased from 14.5% in 2002 to 15.6% in 2003.
The improvement in the Company's deposit mix noted above, combined with the
falling interest rate environment prevalent in 2003, resulted in a decrease in
the rate paid on interest bearing deposits of 71 bp, from 2.56% in 2002 to 1.85%
in 2003. The rate paid on average time deposits decreased 72 bp, from 3.64% in
2002 to 2.92% in 2003. The decrease in the rate paid on average time deposits,
combined with the decline in the average balance of time deposits, resulted in a
$13.8 million decrease in interest expense paid on time deposits, from $48.5
million in 2002 to $34.7 million in 2003. The following table presents the
maturity distribution of time deposits of $100,000 or more at December 31, 2003:
================================================================================
TABLE 6. MATURITY DISTRIBUTION OF TIME DEPOSITS OF
100,000 OR MORE
- --------------------------------------------------------------------------------
(In thousands) DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Within three months $ 110,862
After three but within six months 114,737
After six but within twelve months 105,579
After twelve months 22,592
-----------------
Total $ 353,770
=================
================================================================================
BORROWINGS
Average short-term borrowings increased from $87.0 million in 2002 to $190.3
million in 2003. Consistent with the low interest rate environment during 2003,
the average rate paid also decreased from 1.53% in 2002 to 1.14% in 2003. The
increase in the average balance offset by the decrease in the average rate paid
caused interest expense on short-term borrowings to increase $0.8 million from
$1.3 million in 2002 to $2.2 million in 2003. Average long-term debt increased
$26.4 million, from $334.5 million in 2002 to $360.9 million in 2003. The
increases in long-term debt and short-term borrowings resulted primarily from
loan growth exceeding deposit growth in 2003.
Short-term borrowings consist of Federal funds purchased and securities
sold under repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily FHLB advances, with
original maturities of one year or less. The Company has unused lines of credit
and access to brokered deposits available for short-term financing of
approximately $544 million and $632 million at December 31, 2003 and 2002,
respectively. Securities collateralizing repurchase agreements are held in
safekeeping by non-affiliated financial institutions and are under the Company's
control. Long-term debt, which is comprised primarily of FHLB advances, are
collateralized by the
ANNUAL REPORT: NBT BANCORP INC. 20
FHLB stock owned by the Company, certain of its mortgage-backed securities and a
blanket lien on its residential real estate mortgage loans.
RISK MANAGEMENT-CREDIT RISK
Credit risk is managed through a network of loan officers, credit committees,
loan policies, and oversight from the senior credit officers and Board of
Directors. Management follows a policy of continually identifying, analyzing,
and grading credit risk inherent in each loan portfolio. An ongoing independent
review, subsequent to management's review, of individual credits in the
commercial loan portfolio is performed by the independent loan review function.
These components of the Company's underwriting and monitoring functions are
critical to the timely identification, classification, and resolution of problem
credits.
NONPERFORMING ASSETS
======================================================================================================
TABLE 7. NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
NONACCRUAL LOANS
Commercial and agricultural loans and
real estate $ 8,693 $16,980 $ 31,372 $14,054 $ 9,519
Real estate mortgages 2,483 5,522 5,119 647 618
Consumer 2,685 1,507 3,719 2,402 2,671
--------------------------------------------------
Total nonaccrual loans 13,861 24,009 40,210 17,103 12,808
--------------------------------------------------
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Commercial and agricultural loans and
real estate 242 237 198 4,523 1,201
Real estate mortgages 244 1,325 1,844 3,042 641
Consumer 482 414 933 865 906
--------------------------------------------------
Total loans 90 days or more past due and
still accruing 968 1,976 2,975 8,430 2,748
Restructured loans - 409 603 656 1,014
--------------------------------------------------
Total nonperforming loans 14,829 26,394 43,788 26,189 16,570
Other real estate owned 1,157 2,947 1,577 1,856 2,696
--------------------------------------------------
Total nonperforming loans and other
real estate owned 15,986 29,341 45,365 28,045 19,266
Nonperforming securities 395 1,122 4,500 1,354 1,535
--------------------------------------------------
Total nonperforming loans, securities, and
other real estate owned $16,381 $30,463 $ 49,865 $29,399 $20,801
==================================================
Total nonperforming loans to loans and leases 0.56% 1.12% 1.87% 1.17% 0.86%
Total nonperforming loans and other
real estate owned to total assets 0.40% 0.79% 1.25% 0.78% 0.58%
Total nonperforming loans, securities, and
other real estate owned to total assets 0.40% 0.82% 1.37% 0.82% 0.63%
Total allowance for loan and lease losses to
nonperforming loans 287.62% 152.18% 102.19% 124.07% 170.43%
======================================================================================================
ANNUAL REPORT: NBT BANCORP INC. 21
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan and
lease losses is continuously monitored. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably reflects
the loan and lease portfolio's risk profile. It is evaluated to ensure that it
is sufficient to absorb all reasonably estimable credit losses inherent in the
current loan and lease portfolio.
Management considers the accounting policy relating to the allowance for
loan and lease losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgements can have on
the consolidated results of operations.
For purposes of evaluating the adequacy of the allowance, the Company
considers a number of significant factors that affect the collectibility of the
portfolio. For individually analyzed loans, these include estimates of loss
exposure, which reflect the facts and circumstances that affect the likelihood
of repayment of such loans as of the evaluation date. For homogeneous pools of
loans and leases, estimates of the Company's exposure to credit loss reflect a
current assessment of a number of factors, which could affect collectibility.
These factors include: past loss experience; size, trend, composition, and
nature; changes in lending policies and procedures, including underwriting
standards and collection, charge-offs and recoveries; trends experienced in
nonperforming and delinquent loans; current economic conditions in the Company's
market; portfolio concentrations that may affect loss experienced across one or
more components of the portfolio; the effect of external factors such as
competition, legal and regulatory requirements; and the experience, ability, and
depth of lending management and staff. In addition, various regulatory agencies
and the Company's independent auditors, as an integral component of their
examination process, periodically review the Company's allowance for loan and
lease losses. Such agencies may require the Company to recognize additions to
the allowance based on their examination.
After a thorough consideration of the factors discussed above, any required
additions to the allowance for loan and lease losses are made periodically by
charges to the provision for loan and lease losses. These charges are necessary
to maintain the allowance at a level which management believes is reasonably
reflective of overall inherent risk of probable loss in the portfolio. While
management uses available information to recognize losses on loans and leases,
additions to the allowance may fluctuate from one reporting period to another.
These fluctuations are reflective of changes in risk associated with portfolio
content and/or changes in management's assessment of any or all of the
determining factors discussed above. Total nonperforming assets were $16.4
million at December 31, 2003, compared to $30.5 million at December 31, 2002.
Nonperforming loans totaled $14.8 million at December 31, 2003, down
significantly from the $26.4 million outstanding at December 31, 2002. The
decrease in nonperforming loans in 2003 resulted primarily from the Company's
successful efforts in selling certain large problematic commercial loans and a
group of nonperforming real estate mortgages at approximately their book value
during the quarter ended March 31, 2003. Additionally, the Company continued to
workout or chargeoff additional nonperforming loans for the remainder of 2003
without experiencing any significant migration of new nonperforming loans during
the year. As a result of the reduction in nonperforming loans during 2003, the
total allowance for loan and lease losses is 287.62% of non-performing loans at
December 31, 2003 as compared to 152.18% at December 31, 2002. While loans and
leases classified as non-performing have a strong likelihood of experiencing a
loss, substantially all nonperforming loans are collateralized, many to a
reasonably high percentage of the outstanding loan balance.
Impaired loans, which primarily consist of nonaccruing commercial type
loans also decreased significantly, totaling $8.7 million at December 31, 2003
as compared to $17.4 million at December 31, 2002. The related allowance for
these impaired loans is $0.2 million or 2.3% of the impaired loans at December
31, 2003 as compared to $0.5 million and 3.1%, respectively, at December 31,
2002. At December 31, 2003 and 2002 there were $7.5 million and $15.5 million,
respectively, of impaired loans which did not have an allowance for loan losses
due to the adequacy of their collateral or previous charge offs.
Total net charge-offs for 2003 totaled $6.6 million as compared to $13.7
million for 2002. The ratio of net charge-offs to average loans and leases was
0.27% for 2003 and 0.58% for 2002. The decrease in net charge-offs in 2003
resulted from the reduction in nonperforming loans and an improvement in loan
quality. However, the amount provided for loan and lease losses for 2003
remained relatively unchanged from 2002, as improvements in loan quality were
offset by strong loan growth. The provision for loan and lease losses exceeded
net charge-offs by $2.5 million in 2003 while the ratio of the allowance for
loan and lease losses to total loans and leases decreased to 1.62% at December
31, 2003 from 1.70% at December 31, 2002.
ANNUAL REPORT: NBT BANCORP INC. 22
========================================================================================================
TABLE 8. ALLOWANCE FOR LOAN AND LEASE LOSSES
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Balance at January 1 $40,167 $44,746 $32,494 $28,240 $26,615
LOANS AND LEASES CHARGED-OFF
Commercial and agricultural 5,619 9,970 17,097 3,949 2,737
Real estate mortgages 362 2,547 783 1,007 1,165
Consumer* 5,862 5,805 4,491 2,841 2,808
------------------------------------------------
Total loans and leases charged-off 11,843 18,322 22,371 7,797 6,710
------------------------------------------------
RECOVERIES
Commercial and agricultural 3,185 3,394 1,063 503 367
Real estate mortgages 430 104 122 141 198
Consumer* 1,601 1,172 1,004 739 874
------------------------------------------------
Total recoveries 5,216 4,670 2,189 1,383 1,439
------------------------------------------------
Net loans and leases charged-off 6,627 13,652 20,182 6,414 5,271
Allowance related to purchase acquisitions - - 505 525 -
Provision for loan and lease losses 9,111 9,073 31,929 10,143 6,896
------------------------------------------------
Balance at December 31 $42,651 $40,167 $44,746 $32,494 $28,240
================================================
Allowance for loan and lease losses to loans and
leases outstanding at end of year 1.62% 1.70% 1.91% 1.45% 1.47%
Net charge-offs to average loans and
leases outstanding 0.27% 0.58% 0.87% 0.31% 0.30%
* Consumer charge-off and recoveries include consumer, home equity, and lease
financing.
========================================================================================================
Total nonperforming assets were $30.5 million at December 31, 2002,
compared to $49.9 million at December 31, 2001. Nonperforming loans totaled
$26.4 million at December 31, 2002, down significantly from the $43.8 million
outstanding at December 31, 2001. The $17.4 million decrease in nonperforming
loans from December 31, 2001 to December 31, 2002, was due to the Company's
successful efforts in resolving certain large problematic commercial loans as
well as loan charge-offs. Nonaccrual commercial and agricultural loans decreased
$14.4 million, from $31.4 million at December 31, 2001, to $17.0 million at
December 31, 2002. The improvement in the Company's loan quality ratios are a
direct result of the actions the Company took in 2001 to integrate credit
administration functions of acquired banks into the Company's conservative
credit culture. Based on the improved trends in loan quality noted above and the
decrease in net charge-offs in 2002 when compared to 2001 highlighted in Table 8
above, the Company recorded a provision for loan and lease losses of $9.1
million for the year ended December 31, 2002, down from the $31.9 million
provided in the same period in 2001.
The Company's strategic focus on loan growth, particularly in commercial
lending, was also a focus of the banks acquired by the Company in 2001 and 2000;
CNB Bank, LA Bank, N.A. and Pioneer American Bank, N.A. (see also Mergers and
Acquisition). These acquired banks underwrote numerous commercial related loans
prior to merging with the Company, based upon their respective underwriting
processes and analysis, including several larger credits which became
non-performing in 2001. Additionally, CNB Bank significantly increased its
consumer loan portfolio in recent years. Accordingly, the Company's loan growth
in general, in particular the growth in higher credit risk loan types, combined
with the fact that the recently acquired banks appeared to have used generally
less conservative underwriting and monitoring standards increased the inherent
risk of loss in the loan and lease portfolio.
As the Company's loan and lease portfolio continued to grow and the loan
mix continued to move in the direction of higher credit risk loan types, the
economy in the Company's market areas took a dramatic turn for the worse in
2001, especially in the second half of 2001. This
ANNUAL REPORT: NBT BANCORP INC. 23
sudden economic down turn came at a particularly bad time for the Company given
the growth in the Company's higher credit risk loan types. The difficult
economic environment experienced in the Company's market areas was consistent
with what has been experienced by the national economy throughout 2001 and
resulted in, among other things, significant reductions in many borrowers'
revenues and cash flows as well as reduced valuations for certain real estate
and other collateral. In fact, certain large commercial relationships in the
Company's portfolio reported significant deterioration in the later part of
2001, primarily due to the difficult economic environment.
During 2001, the Company completed the integration process with respect to
the Pennstar banking division (formerly LA Bank, N.A. and Pioneer American Bank
N. A.). The Company's integration efforts with the recently merged CNB banking
division was completed in 2002. The integration process included bringing these
banking divisions' credit administration practices in line with the Bank's
policies, adopting the Bank's credit risk grading system, and upgrading numerous
commercial real estate and other collateral appraisals. At December 31, 2001,
the credit administration function of the Pennstar and CNB banking divisions,
including workout and collections, was consolidated and standardized using the
Bank model, and key personnel from the Bank's commercial lending area were
installed at Pennstar and CNB to oversee the lending operations of the
respective divisions.
As a result of the economic downturn, and the integration processes with
respect to acquired banks discussed above, the Company performed an extensive
review of its loan portfolio during 2001. This review focused on consistency in
the identification and classification of problematic loans and the measurement
of loss exposure on individual loans, especially in light of the generally
weakened financial performance of borrowers caused by the economic downturn and
reduced collateral values.
Non-performing loans increased from $26.2 million at December 31, 2000 to
$43.8 million at December 31, 2001. The vast majority, approximately 92%, of
nonperforming loans are in the non-accrual category. Within non-accrual loans,
all loan types experienced significant increases, however, the largest increase
was in the commercial and agricultural loans. Commercial and agricultural
non-accrual loans, increased $17.3 million from $14.1 million at December 31,
2000 to $31.4 million at December 31, 2001. Consumer non-accrual loans also
significantly increased from $2.4 million at December 31, 2000 to $3.7 million
at December 31, 2001.
As a result of the reduction in nonperforming loans during 2002, the total
allowance for loan and lease losses was 152.18% of non-performing loans at
December 31, 2002 as compared to 102.19% at December 31, 2001.
Impaired loans, which primarily consist of nonaccruing commercial type
loans and all loans restructured in a troubled debt restructuring, also
decreased significantly, totaling $17.4 million at December 31, 2002 as
compared to $32.0 million at December 31, 2001. The related allowance for these
impaired loans was $0.5 million or 3.1% of the impaired loans at December 31,
2002 as compared to $1.4 million and 4.4%, respectively, at December 31, 2001.
At December 31, 2002 and 2001 there were $15.5 million and $29.8 million,
respectively, of impaired loans which did not have an allowance for loan losses
due to the adequacy of their collateral or previous charge offs.
Total net charge-offs for 2002 totaled $13.7 million as compared to $20.2
million for 2001. The ratio of net charge-offs to average loans was 0.58% for
2002 and 0.87% for 2001. The decrease in net charge-offs in 2002 resulted from
the reduction in nonperforming loans and an improvement in loan quality.
However, the level of net charge-offs experienced in 2002 was higher than the
Company's net charge-off experience prior to 2001. The higher level of net
charge-offs in 2002, resulted from the increase in nonperforming loans in 2001.
Net charge-offs in 2002 exceeded the 2002 provision for loan and lease losses as
a result of the Company fully reserving certain of the 2002 charge-offs,
primarily related to nonaccruing loans in 2001. As mentioned previously, the
provision for loan and lease losses for 2002 totaled $9.1 million down from the
$31.9 million provided in 2001.
The following table sets forth the allocation of the allowance for loan
losses by category, as well as the percentage of loans and leases in each
category to total loans and leases, as prepared by the Company. This allocation
is based on management's assessment of the risk characteristics of each of the
component parts of the total loan portfolio as of a given point in time and is
subject to changes as and when the risk factors of each such component part
change. The allocation is not indicative of either the specific amounts of the
loan categories in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category. The following table sets forth the allocation of the allowance for
loan losses by loan category:
ANNUAL REPORT: NBT BANCORP INC. 24
=================================================================================================================================
TABLE 9. ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------- ---------------------- ---------------------- ---------------------- ----------------------
Category Category Category Category Category
(Dollars in Percent of Percent of Percent of Percent of Percent of
thousands) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- --------------------------------------------------------------------------------------------------------------------------------
Commercial and
agricultural $ 25,502 67% $ 25,589 71% $ 34,682 85% $ 20,510 72% $ 14,115 62%
Real estate
mortgages 4,699 11% 3,884 10% 1,611 4% 1,669 6% 2,506 11%
Consumer 9,357 22% 7,654 19% 4,626 11% 6,379 22% 6,270 27%
Unallocated 3,093 - 3,040 - 3,827 - 3,936 - 5,349 -
----------------------------------------------------------------------------------------------------------------
Total $ 42,651 100% $ 40,167 100% $ 44,746 100% $ 32,494 100% $ 28,240 100%
----------------------------------------------------------------------------------------------------------------
=================================================================================================================================
In addition to the nonperforming loans discussed above, the Company has
also identified approximately $54.3 million in potential problem loans at
December 31, 2003 as compared to $48.5 million at December 31, 2002. Potential
problem loans are loans that are currently performing, but where known
information about possible credit problems of the related borrowers causes
management to have serious doubts as to the ability of such borrowers to comply
with the present loan repayment terms and which may result in disclosure of such
loans as non-performing at some time in the future. At the Company, potential
problem loans are typically loans that are performing but are classified by the
Company's loan rating system as "substandard." At December 31, 2003, potential
problem loans primarily consisted of commercial and agricultural real estate and
commercial and agricultural loans. At December 31, 2003, there were eight
potential problem loans that exceeded $1.0 million, totaling $27.2 million in
aggregate. Management cannot predict the extent to which economic conditions may
worsen or other factors which may impact borrowers and the potential problem
loans. Accordingly, there can be no assurance that other loans will not become
90 days or more past due, be placed on nonaccrual, become restructured, or
require increased allowance coverage and provision for loan losses.
At December 31, 2003, approximately 63.7% of the Company's loans are
secured by real estate located in central and northern New York and northeastern
Pennsylvania. Accordingly, the ultimate collectibility of a substantial portion
of the Company's portfolio is susceptible to changes in market conditions of
those areas. Management is not aware of any material concentrations of credit to
any industry or individual borrowers.
LIQUIDITY RISK
Liquidity involves the ability to meet the cash flow requirements of customers
who may be depositors wanting to withdraw funds or borrowers needing assurance
that sufficient funds will be available to meet their credit needs. The Asset
Liability Committee (ALCO) is responsible for liquidity management and has
developed guidelines which cover all assets and liabilities, as well as off
balance sheet items that are potential sources or uses of liquidity. Liquidity
policies must also provide the flexibility to implement appropriate strategies
and tactical actions. Requirements change as loans and leases grow, deposits and
securities mature, and payments on borrowings are made. Liquidity management
includes a focus on interest rate sensitivity management with a goal of avoiding
widely fluctuating net interest margins through periods of changing economic
conditions.
The primary liquidity measurement the Company utilizes is called the Basic
Surplus which captures the adequacy of its access to reliable sources of cash
relative to the stability of its funding mix of average liabilities. This
approach recognizes the importance of balancing levels of cash flow liquidity
from short- and long-term securities with the availability of dependable
borrowing sources which can be accessed when necessary. At December 31, 2003,
the Company's Basic Surplus measurement was 8.9% of total assets or $359
million, which was above the Company's minimum of 5% or $202 million set forth
in its liquidity policies.
This Basic Surplus approach enables the Company to adequately manage
liquidity from both operational and contin