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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 0-14703
NBT BANCORP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1268674
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
52 SOUTH BROAD STREET 13815
NORWICH, NEW YORK (Zip Code)
(Address of principal executive office)
(607) 337-2265
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK ($0. 01 PAR VALUE PER SHARE)
STOCK PURCHASE RIGHTS PURSUANT TO STOCKHOLDERS RIGHTS PLAN
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K (Section 299.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [X]
Based upon the closing price of the registrant's common stock as of
February 28, 2002, the aggregate market value of the voting stock, common stock,
par value, $0.01 per share, held by non-affiliates of the registrant is
$454,660,456. There were no shares of the registrant's preferred stock, par
value $0.01 per share, outstanding at that date. Rights to purchase shares of
the registrant's preferred stock Series R are attached to the shares of the
registrant's common stock.
The number of shares Common Stock outstanding as of February 28, 2002, was
33,198,072
Documents Incorporated by Reference
Portions of registrant's definitive Proxy Statement for the Registrant's Annual
Meeting of Stockholders to be held on May 2, 2002 are incorporated by reference
into Part III, Items 10, 11, 12 and 13 of this Form 10-K.
CROSS REFERENCE INDEX
Part I. Item 1 Business
Description of Business 4-9
Average Balance Sheets 19
Net Interest Income Analysis - Taxable Equivalent Basis 19
Net Interest Income and Volume/Rate Variance - Taxable Equivalent Basis 20
Securities Portfolio 24
Debt Securities - Maturity Schedule 68-69
Loans 21
Maturities and Sensitivities of Loans to Changes in Interest Rates 23
Nonperforming Assets 28
Allowance for Loan Losses 29-32
Maturity Distribution of Time Deposits 26
Return on Equity and Assets 11
Short-Term Borrowings 72-74
Item 2 Properties 9
Item 3 Legal Proceedings
In the normal course of business there are various outstanding legal proceedings.
In the opinion of management, the aggregate amount involved in such proceedings is
not material to the financial condition or results of operations of the Company. 10
Item 4 Submission of Matters to a Vote of Security Holders 10
Part II. Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters 10,77-78
Item 6 Selected Financial Data 11-12
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-43
Item 7A Quantitative and Qualitative Disclosure About Market Risk 43-44
Item 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets at December 31, 2001 and 2000 47
Consolidated Statements of Income for each of the years in three-year period ended
December 31, 2001 48
Consolidated Statements of Changes in Stockholders' Equity for each of the years in the
three-year period ended December 31, 2001 49
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 2001 50
Consolidated Statements of Comprehensive Income for each of the years in the
three-year period ended December 31, 2001 51
Notes to Consolidated Financial Statements 52-92
Independent Auditors' Report 46
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on accounting
and financial disclosures.
2
CROSS REFERENCE INDEX
Part III. Item 10 Directors and Executive Officers of the Registrant *
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial Owners and Management *
Item 13 Certain Relationships and Related Transactions *
Part IV. Item 14 Exhibits, Financial Statement Schedules, and Reports on 8-K
(a)(1) Financial Statements (See Item 8 for Reference).
(2) Financial Statement Schedules normally required on Form 10-K are omitted since they
are not applicable.
(3) Exhibits have been filed separately with the Commission and are available upon
written request.
(b) Reports on Form 8-K. 93-94
(c) Refer to item 14(a)(3) above.
(d) Refer to item 14(a)(2) above.
* Information called for by Part III (Items 10 through 13) is incorporated by
reference to the Registrant's Proxy Statement for the 2002 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission.
3
PART I
ITEM 1. BUSINESS
NBT Bancorp Inc. (the "Registrant" or the "Company") is a registered
financial holding company incorporated in the state of Delaware in 1986, with
its principal headquarters located in Norwich, New York. The Registrant is the
parent holding company of NBT Bank, N.A. ("the Bank"), NBT Financial Services,
Inc. ("NBT Financial"), and CNBF Capital Trust I (see Note 10 to the Notes to
Consolidated Financial Statements). Through these subsidiaries, the Company
operates as one segment focused on community banking operations. The
Registrant's primary business consists of providing commercial banking and
financial services to its customers in its market area. The principal assets of
the Registrant are all of the outstanding shares of common stock of its direct
subsidiaries, and its principal sources of revenue are the management fees and
dividends it receives from the Bank and NBT Financial.
The operating subsidiaries of the Company are the Bank and NBT Financial.
The Bank is a full service commercial bank formed in 1856, which provides a
broad range of financial products to individuals, corporations and
municipalities throughout its Central and Upstate New York and Northeastern
Pennsylvania market area. The Bank conducts business through three operating
divisions, NBT Bank, Pennstar Bank and Central National Bank.
The NBT Bank division has 42 divisional offices and 67 automated teller
machines (ATMs), located primarily in central and upstate New York. At December
31, 2001, NBT Bank had total loans of $1.2 billion and total deposits of $1.3
billion.
The Pennstar Bank division has 41 divisional offices and 51 ATMs, located
primarily in northeastern Pennsylvania. At December 31, 2001, Pennstar Bank had
total loans and leases of $616.6 million and total deposits of $773.0 million.
The Central National Bank division has 29 divisional offices and 24 ATMs
located primarily in upstate New York. At December 31, 2001, Central National
Bank had total loans and leases of $540.6 million and total deposits of $824.9
million.
The Bank has six operating subsidiaries, NBT Capital Corp., LA Lease, Inc.,
Pennstar Realty Trust, CNB Realty, Inc., Colonial Financial Services, Inc.
("CFS"), and Central Asset Management, Inc. ("CAM"). NBT Capital Corp., formed
in 1998, is a venture capital corporation formed to assist young businesses
develop and grow in the markets we serve. LA Lease, Inc., formed in 1987,
provides automobile and equipment leases to individuals and small business
entities. LA Lease, Inc. will be dissolved in the first half of 2002 and the
Bank will assume its operations. Pennstar Realty Trust, formed in 2000, is a
real estate investment trust. CNB Realty, Inc. formed in 1998, is a real estate
investment trust. CFS, formed in 2001, offers a variety of financial services
products. The Company intends to transfer ownership of CFS from the Bank to NBT
Financial in the first half of 2002. CAM, formed in 1996, offers investment
management services for a fee to a focused customer base of high net worth
individuals and businesses. CAM will be dissolved in the first half of 2002 and
the Bank will assume its operations.
NBT Financial, formed in 1999, is the parent company of two operating
subsidiaries, Pennstar Financial Services, Inc. and M. Griffith, Inc. Pennstar
Financial Services, Inc., formed in 1997, offers a variety of financial services
products. M. Griffith, Inc., formed in 1951, is a registered securities
broker-dealer which also offers financial and retirement planning as well as
life, accident and health insurance.
4
Acquisitions
To remain competitive in the rapidly changing financial services industry,
the Company has expanded the breadth of its market area by acquiring other
banking organizations and select niche financial services companies. In
addition, the Company has selectively opened key new businesses that expand our
product offerings. The following provides a chronological listing of mergers and
acquisitions that we have completed since January 1, 2000:
Date of transaction Entity/Branches Former bank holding company Transaction type
February 17, 2000 LA Bank, N.A. Lake Ariel Bancorp, Inc. (1)
May 5, 2000 M. Griffith, Inc. N/A (2)
June 2, 2000 2 branches from Mellon Bank N/A (2)
July 1, 2000 Pioneer American Bank, N.A Pioneer American Holding Co. Corp. (1)
November 10, 2000 6 branches from Sovereign Bank N/A (2)
June 1, 2001 The First National Bank of First National Bancorp, Inc. (2)
Northern New York
September 14, 2001 Deposits of 1 branch of N/A (2)
Mohawk Community Bank
November 8, 2001 Central National Bank CNB Financial Corp. (1)
(1) Transaction was accounted for as a pooling-of-interests and, accordingly,
all of our financial information for the periods prior to the acquisition
has been restated as if the acquisitions had occurred at the beginning of
the earliest reporting period presented.
(2) Transaction accounted for using the purchase accounting method.
Upon completion of their respective mergers, LA Bank, N.A. and Pioneer
American Bank, N.A. became wholly owned subsidiaries of the Registrant. LA Bank,
N.A. changed its name on November 10, 2000 to Pennstar Bank, N.A. and on
December 9, 2000, Pioneer American Bank, N.A. merged into Pennstar Bank, N.A. On
March 16, 2001, Pennstar Bank, N.A. was merged into the Bank.
COMPETITION
The banking and financial services industry in New York and Pennsylvania
generally, and in the Company's market areas specifically, is highly
competitive. The increasingly competitive environment is a result primarily of
changes in regulation, changes in technology and product delivery systems,
additional financial service providers, and the accelerating pace of
consolidation among financial services providers. The Company competes for loans
and leases, deposits, and customers with other commercial banks, savings and
loan associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the Company. In
order to compete with other financial services providers, the Company stresses
the community nature of its banking operations and principally relies upon local
promotional activities, personal relationships established by officers,
directors, and employees with their customers, and specialized services tailored
to meet the needs of the communities served.
SUPERVISION AND REGULATION
As a bank holding company, the Company is subject to extensive regulation,
supervision, and examination by the Federal Reserve System ("FRS") as its
primary federal regulator. The Company also has elected to be registered with
the FRS as a financial holding company. The Bank, as a nationally chartered
bank, is subject to extensive regulation, supervision, and examination by the
Office of the Comptroller of the Currency ("OCC") as its primary federal
regulator and, as to certain matters, by the FRS and the Federal Deposit
Insurance Corporation ("FDIC"). M. Griffith, Inc. ("MGI") is registered as a
broker-dealer and investment adviser and is subject to extensive regulation,
supervision, and examination by the Securities and Exchange Commission ("SEC").
5
MGI also is a member of the National Association of Securities Dealers, Inc. and
is subject to its regulation. MGI is authorized as well to engage as a broker,
dealer, and underwriter of municipal securities, and as such is subject to
regulation by the Municipal Securities Rulemaking Board. In addition, MGI and
Colonial Financial Services, Inc., are licensed insurance agencies with offices
in the state of New York and are subject to registration and supervision by the
New York State Insurance Department. Pennstar Financial Services, Inc. is a
licensed insurance agency with offices in the Commonwealth of Pennsylvania and
is subject to registration and supervision by the Pennsylvania Insurance
Department. CAM is a registered investment adviser and also is subject to
extensive regulation, examination, and supervision by the SEC.
The Company is subject to capital adequacy guidelines of the FRS. The
guidelines apply on a consolidated basis and require bank holding companies to
maintain a minimum ratio of Tier 1 capital to total average assets (or "leverage
ratio") of 4%. For the most highly rated bank holding companies, the minimum
ratio is 3%. The FRS capital adequacy guidelines also require bank holding
companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets
of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of
8%. As of December 31, 2001, the Company's leverage ratio was 6.34%, its ratio
of Tier 1 capital to risk-weighted assets was 9.43%, and its ratio of qualifying
total capital to risk weighted assets was 10.69%. The FRS may set higher
minimum capital requirements for bank holding companies whose circumstances
warrant it, such as companies anticipating significant growth or facing unusual
risks. The FRS has not advised the Company of any specific capital requirement
applicable to it.
Any bank holding company whose capital does not meet the minimum capital
adequacy guidelines is considered to be undercapitalized and is required to
submit an acceptable plan to the FRS for achieving capital adequacy. Such a
company's ability to pay dividends to its shareholders and expand its lines of
business through the acquisition of new banking or nonbanking subsidiaries also
could be restricted.
The Bank is subject to leverage and risk-based capital requirements and
minimum capital guidelines of the OCC that are similar to those applicable to
the Company. As of December 31, 2001, the Bank was in compliance with all
minimum capital requirements. The Bank's leverage ratio was 6.24%, its ratio of
Tier 1 capital to risk-weighted assets was 9.28%, and its ratio of qualifying
total capital to risk-weighted assets was 10.54%.
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits
unless it is well capitalized, or is adequately capitalized and receives a
waiver from the FDIC. In addition, these regulations prohibit any bank that is
not well capitalized from paying an interest rate on brokered deposits in excess
of three-quarters of one percentage point over certain prevailing market rates.
The Bank also is subject to substantial regulatory restrictions on its
ability to pay dividends to the Company. Under OCC regulations, the Bank may
not pay a dividend, without prior OCC approval, if the total amount of all
dividends declared during the calendar year, including the proposed dividend,
exceed the sum of its retained net income to date during the calendar year and
its retained net income over the preceding two years. The Bank's dividends to
the Company over years 2000 and 2001 exceeded net income during those years.
Therefore, the Bank's first quarter 2002 dividends exceeded the OCC dividend
limitations, and the Bank requested and received OCC approval to pay this
dividend to the Company. The Bank anticipates that it will require approval for
its second quarter 2002 dividend as well. The Bank's ability to pay dividends
also is subject to the Bank being in compliance with regulatory capital
requirements. The Bank is currently in compliance with these requirements.
Deposit Insurance Assessments. The deposits of the Bank are insured up to
regulatory limits by the FDIC and, accordingly, are subject to deposit insurance
assessments to maintain the insurance funds administered by the FDIC. The
deposits of the Bank have historically been subject to deposit insurance
assessments to maintain the Bank Insurance Fund (the "BIF"). Due to certain
branch deposit acquisitions by the Bank and its predecessors, some of the
deposits of the Bank are subject to deposit insurance assessments to maintain
the Savings Association Insurance Fund (the "SAIF").
6
The FDIC has adopted regulations establishing a permanent risk-related
deposit insurance assessment system. Under this system, the FDIC places each
insured bank in one of nine risk categories based on the bank's capitalization
and supervisory evaluations provided to the FDIC by the institution's primary
federal regulator. Each insured bank's insurance assessment rate is then
determined by the risk category in which it is classified by the FDIC.
In the light of the then-prevailing favorable financial situation of the
federal deposit insurance funds and the low number of depository institution
failures, since January 1, 1997 the annual insurance premiums on bank deposits
insured by the BIF or the SAIF have varied between $0.00 per $100 of deposits
for banks classified in the highest capital and supervisory evaluation
categories to $0.27 per $100 of deposits for banks classified in the lowest
capital and supervisory evaluation categories. Recent increases in the amount
of deposits subject to BIF FDIC insurance protection and in the number of bank
failures, and the effect of low interest rates on the FDIC's return on the
assets held in the BIF, have increased the likelihood that the annual insurance
premiums on bank deposits insured by the BIF will increase in the second half of
2002 or thereafter. BIF and SAIF assessment rates are subject to semi-annual
adjustment by the FDIC within a range of up to five basis points without public
comment. The FDIC also possesses authority to impose special assessments from
time to time.
The Deposit Insurance Funds Act provides for additional assessments to be
imposed on insured depository institutions with respect to deposits insured by
the BIF, as well as deposits insured by the SAIF, to pay for the cost of
Financing Corporation ("FICO") funding. The FICO assessments are adjusted
quarterly to reflect changes in the assessment bases of the FDIC insurance funds
and do not vary depending upon a depository institution's capitalization or
supervisory evaluations. During 2001, BIF-insured banks paid an average rate of
approximately $0.019 per $100 for purposes of funding FICO bond obligations.
The assessment rate for BIF member institutions has been set at approximately
$0.018 per $100 annually for the first and second quarters of 2002.
Transactions between the Bank and any of its affiliates, including the
Company, are governed by sections 23A and 23B of the Federal Reserve Act. An
"affiliate" of a bank is any company or entity that controls, is controlled by,
or is under common control with the bank. A subsidiary of a bank that is not
also a depository institution is not treated as an affiliate of the bank for
purposes of sections 23A and 23B, unless the subsidiary engages in activities
that are not permissible for a bank to engage in directly. Generally, sections
23A and 23B limit the extent to which a bank or its subsidiaries may engage in
covered transactions with any one affiliate and with all its affiliates in the
aggregate, and require that all such transactions be on terms that are
consistent with safe and sound banking practices.
The Gramm-Leach-Bliley Act amended the Bank Holding Company Act ("BHC Act")
and, effective March 11, 2000, expanded the permissible activities of certain
qualifying bank holding companies, known as financial holding companies. In
addition to engaging in banking and activities closely related to banking, as
determined by the FRS by regulation or order prior to November 11, 1999,
financial holding companies may engage in activities that are financial in
nature or incidental to financial activities, or activities that are
complementary to a financial activity and do not pose a substantial risk to the
safety and soundness of depository institutions or the financial system
generally.
Under the Gramm-Leach-Bliley Act, all financial institutions, including the
Company and the Bank, were required, effective July 1, 2001, to develop privacy
policies, restrict the sharing of nonpublic customer data with nonaffiliated
parties at the customer's request, and establish procedures and practices to
protect customer data from unauthorized access.
Under the International Money Laundering Abatement and Anti-Terrorism
Financing Act of 2001, adopted as Title III of the USA PATRIOT Act and signed
into law on October 26, 2001, all financial institutions, including the Company
and the Bank, are subject to additional requirements to collect customer
information, monitor customer transactions and report information to U.S. law
enforcement agencies concerning customers and their transactions. In many
cases, the specific requirements of the law will not be established until the
Secretary of the Treasury adopts implementing regulations as directed or
authorized by Congress. In general, accounts maintained by or on behalf of
"non-United States persons," broadly defined, are subject to particular
scrutiny. Correspondent accounts for or on behalf of foreign banks with
7
profiles that raise money laundering concerns are subject to even greater
scrutiny, and correspondent accounts for or on behalf of "shell banks," defined
as a foreign bank with no physical presence in any country, are barred
altogether. Financial institutions must take "reasonable steps," subject to
definition by the Secretary of the Treasury, to ensure that any correspondent
accounts with permissible foreign banks are not used for the benefit of shell
banks. The Secretary of the Treasury also is authorized to require financial
institutions to take "special measures," including new customer identification,
recordkeeping, and reporting requirements and transaction restrictions, if the
financial institutions are involved with jurisdictions, financial institutions,
or transactions of "primary money laundering concern" as determined by the
Secretary. Additional information-sharing among financial institutions,
regulators, and law enforcement authorities is encouraged by creating an
exemption from the privacy provisions of the Gramm-Leach-Bliley Act for
financial institutions that comply with this provision and authorizing the
Secretary of the Treasury to adopt rules to further encourage cooperation and
information-sharing. Upon request by an appropriate federal banking agency, a
financial institution must provide or make available information about an
account within 120 hours. All financial institutions also are required to
establish internal anti-money laundering programs. The effectiveness of a
financial institution in combating money laundering activities is a factor to be
considered in any application submitted by the financial institution after
December 31,2001, under the Federal Deposit Insurance Act, which applies to the
Bank, or the BHC Act, which applies to the Company.
8
EMPLOYEES
At December 31, 2001, the Company had 1,076 full-time employees and 190
part-time employees. The Company's employees are not presently represented by
any collective bargaining group. The Company considers its employee relations to
be good.
ITEM 2. PROPERTIES
The Company's headquarters are located at 52 South Broad Street, Norwich, New
York 13815. The Company operated the following number of community banking
branches and automated teller machines (ATMs) as of December 31, 2001:
New York State Branches ATMs
- ------------------------------ -------- ----
NBT BANK DIVISION
Albany County 1 -
Broome County 3 5
Chenango County 11 14
Clinton County 3 2
Delaware County 5 9
Essex County 3 6
Franklin County 1 1
Fulton County 3 3
Greene County - 2
Oneida County 5 8
Otsego County 2 9
St. Lawrence County 4 4
Sullivan County - 1
Tioga County 1 2
Ulster - 1
CENTRAL NATIONAL BANK DIVISION
Chenango County 1 1
Fulton County 2 3
Herkimer County 2 1
Montgomery County 6 4
Oneida County 1 1
Otsego County 9 7
Saratoga County 3 3
Schenectady County 2 2
Schoharie County 3 2
PENNSTAR BANK DIVISION
Orange County 1 1
Pennsylvania Branches ATMs
- ------------------------------ -------- ----
PENNSTAR BANK DIVISION
Lackawanna County 20 20
Luzerne County 4 10
Monroe County 4 5
Pike County 3 3
Susquehanna County 6 8
Wayne County 3 4
9
The Company leases thirty-eight of the above listed branches from third parties
under terms and conditions considered by management to be equitable to the
Company. The Company owns all other banking premises. All automated teller
machines are owned.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a party or of which their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of the Company's shareholders was held on October 16,
2001.
(b) Not applicable.
(c) At the special meeting held on October 16, 2001, the Company's shareholders
approved the issuance of the Company's common stock in connection with the
acquisition of CNB Financial Corp. There were 15,132,892 votes cast for,
644,950 votes cast against, 180,137 abstentions and 8,641,521 broker
non-votes.
(d) Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of NBT Bancorp Inc. ("Common Stock") is quoted on the Nasdaq
Stock Market National Market Tier under the symbol "NBTB". The following table
sets forth the market prices and dividends declared for the Common Stock for the
periods indicated.
--------------------------------------
HIGH LOW DIVIDEND
--------------------------------------
2000
1st quarter $ 16.50 $11.38 0.170
2nd quarter 14.50 9.38 0.170
3rd quarter 12.50 9.75 0.170
4th quarter 15.94 11.13 0.170
2001
1st quarter $ 17.50 $13.25 0.170
2nd quarter 25.42* 14.30 0.170
3rd quarter 17.30 13.50 0.170
4th quarter 15.99 12.55 0.170
======================================
* This price was reported on June 29, 2001, a day on which the Nasdaq Stock
Market experienced computerized trading disruptions which, among other things,
forced it to extend its regular trading session and cancel its late trading
session. Subsequently the Nasdaq Stock Market recalculated and republished
several closing stock prices (not including NBT Bancorp Inc., for which it had
reported a closing price of $19.30). Excluding trading on June 29, 2001, the
high sales price for the quarter ended June 30, 2001 was $16.75.
The closing price of the Common Stock on February 28, 2002 was $14.05. The
approximate number of holders of record of the Company's Common Stock on
February 28, 2002 was 9,082.
10
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial and other information about the Company is
derived from the Company's audited consolidated financial statements for each of
the five fiscal years ended December 31, 2001, 2000, 1999, 1998 and 1997:
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
Interest, fee and dividend income $ 255,434 $ 260,381 $ 220,849 $ 210,970 $ 195,973
Interest expense 117,502 133,003 102,876 100,870 91,614
Net interest income 137,932 127,378 117,973 110,100 104,359
Provision for loan losses 31,929 10,143 6,896 6,922 5,095
Noninterest income excluding
securities gains 31,826 24,854 21,327 20,078 17,140
Securities gains (losses) (7,692) (2,273) 1,000 2,183 562
Merger, acquisition and reorganization
costs 15,322 23,625 835 - -
Other noninterest expense 110,536 95,509 83,944 81,108 72,971
Income before income taxes 4,279 20,682 48,625 44,331 43,995
Net income 3,737 14,154 32,592 34,576 29,854
========================================================================================================
PER COMMON SHARE*
Basic earnings $ 0.11 $ 0.44 $ 1.01 $ 1.07 $ 0.95
Diluted earnings 0.11 0.44 1.00 1.05 0.93
Cash dividends paid ** 0.68 0.68 0.66 0.59 0.42
Stock dividends distributed - - 5% 5% 5%
Book value at year-end 8.05 8.29 7.62 8.07 7.63
Tangible book value at year-end 6.51 6.88 6.74 7.75 7.33
Average diluted common
shares outstanding 33,085 32,405 32,541 32,899 32,005
========================================================================================================
AT DECEMBER 31,
Trading securities, at fair value $ 126 $ 20,540 $ - $ - $ 1,119
Securities available for sale,
at fair value 909,341 936,757 994,492 709,905 752,786
Securities held to maturity,
at amortized cost 101,604 110,415 113,318 294,119 231,158
Loans and leases 2,339,636 2,247,655 1,924,460 1,658,194 1,504,258
Allowance for loan losses 44,746 32,494 28,240 26,615 24,828
Assets 3,638,202 3,605,506 3,294,845 2,880,943 2,653,173
Deposits 2,915,612 2,843,868 2,573,335 2,292,449 2,126,748
Borrowings 394,344 425,233 429,924 303,021 257,153
Stockholders' equity 266,355 269,641 246,095 259,604 247,162
========================================================================================================
KEY RATIOS
Return on average assets 0.10% 0.41% 1.07% 1.23% 1.17%
Return on average equity 1.32 5.57 12.66 13.59 13.65
Average equity to average assets 7.82 7.35 8.42 9.07 8.59
Net interest margin 4.19 4.02 4.23 4.30 4.51
Efficiency *** 62.89 60.92 59.18 60.94 58.36
Cash dividend per share payout 618.18 154.55 66.00 56.19 45.16
Tier 1 leverage 6.34 6.88 8.07 8.68 8.92
Tier 1 risk-based capital 9.43 9.85 12.49 13.73 14.48
Total risk-based capital 10.69 11.08 13.68 14.93 15.70
========================================================================================================
11
*All share and per share data has been restated to give retroactive effect to stock dividends, splits
and poolings of interest.
**Cash dividends per share represent the historical cash dividends per share of NBT Bancorp Inc.,
adjusted to give retroactive effect to stock dividends.
***The efficiency ratio is computed as total non-interest expense (excluding merger, acquisition and
reorganization costs as well as gains and losses on the sale of other real estate owned) divided by
fully taxable equivalent net interest income plus non-interest income (excluding net security
transactions).
SELECTED QUARTERLY FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------
2001 2000
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands, FIRST SECOND THIRD FOURTH First Second Third Fourth
except per share data)
Interest, fee and
dividend income $66,034 $64,067 $64,232 $ 61,101 $61,851 $64,402 $66,536 $67,592
Interest expense 33,655 30,562 28,923 24,362 30,054 32,233 34,377 36,339
Net interest income 32,379 33,505 35,309 36,739 31,797 32,169 32,159 31,253
Provision for loan losses 1,211 6,872 9,188 14,658 1,874 2,665 1,949 3,655
Noninterest income excluding
securities gains (losses) 8,654 7,476 8,078 7,618 5,302 6,094 6,506 6,952
Net securities gains (losses) 1,023 227 (2,327) (6,615) 313 (639) 226 (2,173)
Noninterest expense 26,650 25,154 29,342 44,712 24,199 25,917 26,282 42,736
Net income (loss) $ 9,654 $ 6,570 $ 1,469 $(13,956) $ 7,464 $ 5,981 $ 7,172 $(6,463)
Basic earnings (loss) per share $ 0.30 $ 0.20 $ 0.04 $ (0.42) $ 0.23 $ 0.19 $ 0.22 $ (0.20)
Diluted earnings (loss) per share $ 0.30 $ 0.20 $ 0.04 $ (0.42) $ 0.23 $ 0.18 $ 0.22 $ (0.20)
Net interest margin 4.06% 4.10% 4.19% 4.39% 4.19% 4.10% 3.98% 3.81%
Return (loss) on average assets 1.10% 0.73% 0.16% (1.51)% 0.90% 0.70% 0.82% (0.72)%
Return (loss) on average equity 14.42% 9.42% 2.02% (18.87)% 12.41% 9.69% 11.21% (9.72)%
Average diluted common
shares outstanding 32,702 33,112 33,500 32,999 32,256 32,433 32,532 32,396
====================================================================================================================
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of NBT Bancorp Inc.
(the "Registrant" or the "Company") and its wholly owned subsidiaries, NBT Bank,
N.A. ("the Bank"), NBT Financial Services, Inc. ("NBT Financial), and CNBF
Capital Trust I during 2001 and, in summary form, the preceding two years.
Collectively, the Registrant and its subsidiaries are referred to herein as "the
Company." Net interest margin is presented in this discussion on a fully
taxable equivalent (FTE) basis. Average balances discussed are daily averages
unless otherwise described. The audited consolidated financial statements and
related notes as of December 31, 2001 and 2000 and for each of the years in the
three year period ended December 31, 2001 should be read in conjunction with
this review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 2001 presentation.
The preparation of the consolidated financial statements requires management to
make estimates and assumptions, in the application of certain accounting
policies, about the effect of matters that are inherently uncertain. Those
estimates and assumptions affect the reported amounts of certain assets,
liabilities, revenues and expenses. Different amounts could be reported under
different conditions, or if different assumptions were used in the application
of these accounting policies.
The business of the Company is providing commercial banking and financial
services through its subsidiaries. The Company's primary market area is central
and upstate New York and northeast Pennsylvania. The Company has been, and
intends to continue to be, a community-oriented financial institution offering a
variety of financial services. The Company's principle business is attracting
deposits from customers within its market area and investing those funds
primarily in loans and leases, and, to a lesser extent, in marketable
securities. The financial condition and operating results of the Company are
dependent on its net interest income which is the difference between the
interest and dividend income earned on its earning assets and the interest
expense paid on its interest bearing liabilities, primarily consisting of
deposits and borrowings. Net income is also affected by provisions for loan and
lease losses and noninterest income, such as service charges on deposit
accounts, broker/dealer fees, trust fees, and gains/losses on securities sales;
it is also impacted by noninterest expense, such as salaries and employee
benefits, as well as merger, acquisition and reorganization costs.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards, and actions of
regulatory agencies. Future changes in applicable laws, regulations, or
government policies may have a material impact on the Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates, the state of the local
and regional economy, and the availability of funds. The ability to gather
deposits and the cost of funds are influenced by prevailing market interest
rates, fees and terms on deposit products, as well as the availability of
alternative investments including mutual funds and stocks.
FORWARD LOOKING STATEMENTS
Certain statements in this filing and future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, contain forward-looking statements,
as defined in the Private Securities Litigation Reform Act. These statements may
be identified by the use of phrases such as "anticipate," "believe," "expect,"
"forecasts," "projects," "will", "can", "would", "should", "could", "may", or
other similar terms. There are a number of factors, many of which are beyond
the Company's control that could cause actual results to differ materially from
those contemplated by the forward looking statements. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressures among depository and other financial institutions may
13
increase significantly; (2) revenues may be lower than expected; (3) changes in
the interest rate environment may reduce interest margins; (4) general economic
conditions, either nationally or regionally, may be less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and/or a reduced demand for credit; (5) legislative or regulatory changes,
including changes in accounting standards, may adversely affect the businesses
in which the Company is engaged; (6) costs or difficulties related to the
integration of the businesses of the Company and its merger partners may be
greater than expected; (7) expected cost savings associated with recent mergers
and acquisitions may not be fully realized or realized within the expected time
frames; (8) deposit attrition, customer loss, or revenue loss following recent
mergers and acquisitions may be greater than expected; (9) competitors may have
greater financial resources and develop products that enable such competitors to
compete more successfully than the Company; and (10) adverse changes may occur
in the securities markets or with respect to inflation.
The Company cautions readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and to advise readers that
various factors, including those described above, could affect the Company's
financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
Except as required by law, the Company does not undertake, and specifically
disclaims any obligations to, publicly release any revisions that may be made to
any forward-looking statements to reflect statements to the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
MERGER AND ACQUISITION ACTIVITY
On June 1, 2001, the Company completed the acquisition of First National
Bancorp, Inc. (FNB) whereby FNB was merged with and into NBT Bancorp Inc. At
the same time FNB's subsidiary, First National Bank of Northern New York (FNB
Bank) was merged into the Bank. The acquisition was accounted for using the
purchase method. As such, both the assets and liabilities assumed have been
recorded on the consolidated balance sheet of the Company at estimated fair
value as of the date of acquisition and the results of operations are included
in the Company's consolidated statement of income from the acquisition date
forward. To complete the transaction, the Company issued approximately
1,075,000 shares of its common stock valued at $16.0 million. Goodwill,
representing the cost over net assets acquired, was approximately $7.0 million
and was being amortized prior to the adoption of SFAS No. 142 on January 1, 2002
on a straight-line basis based on a 20 year amortization period.
On September 14, 2001, the Company acquired $14.4 million in deposits from
Mohawk Community Bank. Unidentified intangible assets, accounted for in
accordance with SFAS No. 72 and representing the excess of cost over net assets
acquired, was $665,000 and is being amortized over 15 years on a straight-line
basis. Additionally, the Company identified $119,000 of core deposit intangible
assets.
On November 8, 2001, the Company, pursuant to a merger agreement dated June 18,
2001, completed its merger with CNB Financial Corp. (CNB) and its wholly owned
subsidiary, Central National Bank (CNB Bank), whereby CNB was merged with and
into the Company, and CNB Bank was merged with and into the Bank. CNB Bank then
became a division of the Bank. In connection with the merger, CNB stockholders
received 1.2 shares of the Company's common stock for each share of CNB stock
and the Company issued approximately 8.9 million shares of common stock. The
transaction is structured to be tax-free to shareholders of CNB and has been
accounted for as a pooling-of-interests. Accordingly, these consolidated
financial statements have been restated to present combined consolidated
financial condition and results of operations of the Bank and CNB as if the
merger had been in effect for all years presented. At September 30, 2001, CNB
had consolidated assets of $983.1 million, deposits of $853.7 million and equity
of $62.8 million. CNB Bank operated 29 full service banking offices in nine
upstate New York counties.
On February 17, 2000, the Company completed its merger with Lake Ariel Bancorp,
Inc. (Lake Ariel) and its subsidiaries. In connection with the merger each
issued and outstanding share of Lake Ariel exchanged for 0.9961 shares of the
Company's common stock. The transaction resulted in the issuance of
approximately 5.0 million shares of Company's common stock. Lake Ariel's
commercial banking subsidiary was LA Bank, N.A.
14
On July 1, 2000, the Company completed its merger with Pioneer American Holding
Company Corp. (Pioneer Holding Company) and its subsidiary. In connection with
the merger, each issued and outstanding share of Pioneer Holding Company
exchanged for 1.805 shares of the Company's common stock. The transaction
resulted in the issuance of approximately 5.2 million shares of the Company's
common stock. Pioneer Holding Company's commercial banking subsidiary was
Pioneer American Bank, N.A.
The Lake Ariel and Pioneer Holding Company mergers qualified as tax-free
exchanges and were accounted for as poolings-of-interests. Accordingly, these
consolidated financial statements have been restated to present the combined
consolidated financial condition and results of operations of all companies as
if the mergers had been in effect for all years presented.
LA Bank, N.A. and Pioneer Bank N.A. were commercial banks headquartered in
Northeast Pennsylvania with approximately $570 million and $420 million,
respectively, in assets at December 31, 1999, and twenty-two and eighteen branch
offices, respectively, in five counties. Immediately following the Lake Ariel
and Pioneer Holding Company mergers described above, the Company was the
surviving holding company for NBT Bank, LA Bank, N.A., Pioneer American Bank,
N.A. and NBT Financial Services, Inc. On November 10, 2000, LA Bank, N.A.
changed its name to Pennstar. On December 9, 2000, Pioneer American Bank, N.A.
was merged into Pennstar. On March 16, 2001, Pennstar was merged with and into
the Bank and became a division of the Bank.
On May 5, 2000, the Company consummated the acquisition of M. Griffith, Inc. a
Utica, New York based securities firm offering investment, financial advisory
and asset-management services, primarily in the Mohawk Valley region. At that
time, M. Griffith, Inc., a full-service broker/dealer and a Registered
Investment Advisor, became a wholly-owned subsidiary of NBT Financial. The
acquisition was accounted for using the purchase method. As such, both the
assets acquired and liabilities assumed have been recorded on the consolidated
balance sheet of the Company at estimated fair value as of the date of
acquisition. M. Griffith, Inc.'s, results of operations are included in the
Company's consolidated statement of income from the date of acquisition forward.
To complete the transaction, the Company issued approximately 421,000 shares of
its common stock, valued at $4.8 million. Goodwill, representing the cost over
net assets acquired, was $3.4 million and was being amortized prior to the
adoption of SFAS No. 142 on January 1, 2002 over fifteen years on a
straight-line basis.
On June 2, 2000, Pennstar, purchased two branches from Mellon Bank. Deposits
from the Mellon Bank branches were approximately $36.7 million, including
accrued interest payable. In addition, the Company received approximately $32.2
million in cash as consideration for net liabilities assumed. The acquisition
was accounted for using the purchase method. As such, both the assets acquired
and liabilities assumed have been recorded on the consolidated balance sheet of
the Company at estimated fair value as of the date of the acquisition.
Unidentified intangible assets, accounted for in accordance with SFAS No. 72,
and representing the excess of cost over net assets acquired, was $4.3 million
and is being amortized over 15 years on the straight-line basis. The branches'
results of operations are included in the Company's consolidated statement of
income from the date of acquisition forward.
On November 10, 2000, Pennstar purchased six branches from Soverign Bank.
Deposits from the Soverign Bank branches were approximately $96.8 million,
including accrued interest payable. Pennstar also purchased commercial loans
associated with the branches with a net book balance of $42.4 million. In
addition, the Company received $40.9 million in cash consideration for net
liabilities assumed. The acquisition was accounted for using the purchase
method. As such, both the assets acquired and liabilities assumed have been
recorded on the consolidated balance sheet of the Company at estimated fair
value as of the date of the acquisition. Unidentified intangible assets,
accounted for in accordance with SFAS No. 72, and representing the excess of
cost over net assets acquired, was $12.7 million and is being amortized over 15
years on a straight-line basis. The branches' results of operations are
included in the Company's consolidated statement of income from the date of
acquisition forward.
In August 1999, CNB purchased five branches from Astoria Federal Savings and
Loan Association (Astoria). Deposits from the Astoria branches were
approximately $156.5 million, including accrued interest payable. CNB also
purchased approximately $3.7 million in branch related assets, primarily the
15
real and personal property associated with the branches, cash at the branches,
as well as a limited amount of deposit related loans. In addition, CNB received
$133.9 million in cash in consideration for net liabilities assumed. The
acquisition was accounted for using the purchase method. As such, both the
assets acquired and liabilities assumed have been recorded on the consolidated
balance sheet of the Company at estimated fair value as of the date of the
acquisition. Unidentified intangible assets, accounted for in accordance with
SFAS No. 72, and representing the excess of cost over net assets acquired, was
$19.9 million and is being amortized over 15 years on a straight-line basis.
The branches' results of operations are included in the Company's consolidated
statement of income from the date of acquisition forward.
During 2001, the following merger, acquisition and reorganization costs were
recognized:
Professional fees $ 5,956
Data processing 2,092
Severance 3,270
Branch closings 2,412
Advertising and supplies 313
Hardware and software writeoffs 402
Miscellaneous 877
-------
$15,322
=======
With the exception of hardware and software writeoffs and certain branch closing
costs, all of the above costs have been or will be paid through normal cash flow
from operations. At December 31, 2001, after payments of certain merger,
acquisition and reorganization costs, the Company had a remaining accrued
liability for merger, acquisition and reorganization costs incurred during 2001
as follows:
Professional fees $2,009
Data processing 241
Severance 3,074
Branch closings 1,601
Advertising and supplies 199
Miscellaneous 455
------
$7,579
======
With the exception of certain severance costs which will be paid out over a
period of time consistent with the respective service agreements, all of the
above liabilities are expected to be paid during 2002.
During 2000, the following merger, acquisition and reorganization costs were
recognized:
Professional fees $ 8,525
Data processing 2,378
Severance 7,278
Branch closing 1,736
Advertising and supplies 1,337
Hardware and software write-off 1,428
Miscellaneous 943
----------------------------------------
Total $23,625
----------------------------------------
16
OVERVIEW
The following table summarizes income, income per share and key financial ratios
for the periods indicated in accordance with generally accepted accounting
principles (GAAP) as well as on a recurring basis. Non-recurring items are those
that the Company considers nonoperating in nature and include merger,
acquisition, and reorganization costs, net securities losses and gains, gain on
branch sales, deposit overdraft write-offs, and mark-to-market adjustments on
loans held for sale:
YEAR ENDED DECEMBER 31, 2001 (IN 000'S, EXCEPT PER SHARE AMOUNTS)
ESTIMATED DILUTED
PRE-TAX TAX EFFECT AFTER TAX EPS
GAAP Net Income $ 4,279 542 3,737 0.11
------------ ----------- ---------- -----------
Merger, Acquisition, &
Reorganization Costs 15,322 4,102 11,220 0.34
Net Securities Losses 7,692 2,795 4,897 0.15
Gain on Branch Sale (1,367) (487) (880) (0.03)
Certain Deposit Overdraft Write-offs 2,125 757 1,368 0.04
Certain mark-to-market adjustment on
loans held for sale 50 18 32 -
------------ ----------- ---------- -----------
23,822 7,185 16,637 0.50
------------ ----------- ---------- -----------
Recurring Net Income $ 28,101 7,727 20,374 0.61
============ =========== ========== ===========
YEAR ENDED DECEMBER 31, 2000 (IN 000'S, EXCEPT PER SHARE AMOUNTS)
ESTIMATED DILUTED
PRE-TAX TAX EFFECT AFTER TAX EPS
GAAP Net Income $ 20,682 6,528 14,154 0.44
------------ ----------- ---------- -----------
Merger, Acquisition, &
Reorganization Costs 23,625 5,828 17,797 0.55
Net Securities Losses 2,273 837 1,436 0.04
Certain mark-to-market adjustment on
loans held for sale 117 48 69 -
------------ ----------- ---------- -----------
26,015 6,713 19,302 0.59
------------ ----------- ---------- -----------
Recurring Net Income $ 46,697 13,241 33,456 1.03
============ =========== ========== ===========
YEAR ENDED DECEMBER 31, 1999 (IN 000'S, EXCEPT PER SHARE AMOUNTS)
ESTIMATED DILUTED
PRE-TAX TAX EFFECT AFTER TAX EPS
GAAP Net Income $ 48,625 16,033 32,592 1.00
------------ ----------- ---------- -----------
Merger, Acquisition, &
Reorganization Costs 835 276 559 0.02
Net Securities Gains (1,000) (330) (670) (0.02)
Certain mark-to-market adjustment on
Loans held for sale (341) (113) (228) (0.01)
------------ ----------- ---------- -----------
(506) (167) (339) (0.01)
------------ ----------- ---------- -----------
Recurring Net Income $ 48,119 15,866 32,253 0.99
============ =========== ========== ===========
17
The Company had net income of $3.7 million or $0.11 per diluted share for 2001,
compared to net income of $14.2 million or $0.44 per diluted share for 2000.
Included in 2001 net income were merger, acquisition and reorganization costs,
net securities losses, gain on a branch sale, certain deposit overdraft
write-offs, and other non-operating transactions. These items totaled $23.8
million ($16.6 million after-tax, or $0.50 per diluted share) compared to $26.0
million ($19.3 million after-tax, or $0.59 per diluted share) of similar items
in 2000. During 2001, costs related to merger, acquisition and reorganization
activities totaled $15.3 million ($11.2 million after-tax, or $0.34 per diluted
share) and net securities losses totaled $7.7 million ($4.9 million after-tax,
or $0.15 per diluted share) compared to $23.6 million ($17.8 million after-tax,
or $0.55 per diluted share) related to merger, acquisition and reorganization
activities and $2.3 million ($1.4 million after tax, or $0.04 per diluted share)
in net securities loss in 2000 (see "Securities and Corresponding Interest and
Dividend Income" for further discussion related to net securities losses).
Recurring net income, which excludes the after tax effect of costs related to
merger, acquisition and reorganization activities, net securities transactions,
as well as other non-operating transactions, was $20.4 million, or $0.61 per
diluted share, for 2001 compared to $33.5 million, or $1.03 per diluted share,
for 2000. The decrease in recurring net income resulted primarily from a $31.9
million ($19.9 million after tax, or $0.60 per diluted share) provision for loan
and lease losses in 2001 compared to a provision of $10.1 million ($6.4 million
after-tax, or $0.20 per diluted share) for 2000 (see "Credit Risk" for further
discussion related to the provision for loan and lease losses). Additionally,
recurring net income for 2001 was negatively affected by a $3.5 million charge
($2.3 million after tax, or $0.07 per diluted share) for the
other-than-temporary impairment of the residual value of leased automobiles
compared to a charge of $.6 million ($.4 million after tax, or $0.01 per diluted
share) in the prior year (see "Loans and Leases and Corresponding Interest and
Fees on Loans and Leases" for further discussion related to the
other-than-temporary impairment of the residual value of leased automobiles).
Net interest income for 2001 increased 8.3% to $137.9 million compared to $127.4
million in 2000. The net interest margin for 2001 and 2000 was 4.19% and 4.02%,
respectively. The increase in net interest income and net interest margin
continues to be attributable primarily to the decline in the Company's cost of
funds period-over-period, combined with growth in the average loan portfolio.
For 2001, noninterest income, excluding net securities losses and gain on the
sale of a branch building, totaled $30.5 million compared to $24.9 million for
2000, an increase of 22.5%. Service charges on deposit accounts, ATM fees,
banking fees, broker/dealer fees and insurance commissions primarily contributed
to the increase in noninterest income. For 2001, noninterest expense, excluding
nonrecurring items such as merger, acquisition and reorganization costs and
certain deposit overdraft charge-offs, increased $12.9 million, or 13.5%, to
$108.4 million from $95.5 million in 2000. Included in the increase in
noninterest expense for 2001 was a $3.5 million charge for the
other-than-temporary impairment of the residual value of leased automobiles
compared to a charge of $.6 million in 2000. The remaining increase in
noninterest expense of $10.0 million was primarily related to the required
service and support of our growth.
Net income for 2000 decreased to $14.2 million, or $0.44 per diluted share,
compared to net income of $32.6 million, or $1.00 per diluted share for 1999.
Included in 2000 net income were merger, acquisition and reorganization costs,
net securities losses, and other nonoperating transactions. These items totaled
$26.0 million ($19.3 million after-tax, or $0.59 per diluted share) compared to
$0.5 million ($0.3 million after-tax, or $0.01 per diluted share) of similar
items in 1999. Recurring net income for 2000 was $33.5 million, up $1.2 million
compared to recurring net income of $32.3 million in 1999.
18
ASSET/LIABILITY MANAGEMENT
The Company attempts to maximize net interest income, and net income, while
actively managing its liquidity and interest rate sensitivity through the mix of
various core deposit products and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income, on a fully
tax equivalent basis, are discussed below.
TABLE 1
Average Balances and Net Interest Income
The following table includes the condensed consolidated average balance sheet,
an analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans and leases
has been adjusted to a taxable-equivalent basis using the statutory Federal
income tax rate of 35%.
2001 2000 1999
AVERAGE YIELD/ Average YielD/ Average Yield/
(dollars in thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Short-term interest bearing
accounts $ 11,324 $ 569 5.02% $ 15,031 $ 937 6.23% $ 30,846 $ 1,514 4.91%
Securities available for sale (2) 933,122 61,857 6.63 1,017,617 70,918 6.97 899,211 60,907 6.77
Securities held to maturity (2) 99,835 6,644 6.65 117,513 8,086 6.88 154,093 10,109 6.56
Securities trading 5,253 649 12.35 216 8 3.70 - - -
Investment in FRB and
FHLB Banks 23,926 1,555 6.50 31,274 2,254 7.21 29,209 1,944 6.66
Loans and leases(1) 2,312,740 188,053 8.13 2,092,191 182,254 8.71 1,773,159 150,524 8.49
---------- --------- ---------- --------- ---------- ---------
Total earning assets 3,386,200 259,327 7.66 3,273,842 264,457 8.08 2,886,518 224,998 7.79
--------- --------- ---------
Other non-interest-earning assets 240,725 182,749 170,859
---------- ---------- ----------
TOTAL ASSETS $3,626,925 $3,456,591 $3,057,377
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Money market deposit accounts $ 254,735 7,052 2.77 $ 209,562 8,460 4.04 $ 192,955 6,231 3.23
NOW deposit accounts 348,964 5,032 1.44 307,969 5,951 1.93 280,438 4,902 1.75
Savings deposits 427,102 9,385 2.20 403,106 10,511 2.61 383,617 9,682 2.52
Time deposits 1,476,473 77,053 5.22 1,440,173 82,371 5.72 1,206,470 61,661 5.11
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing deposits 2,507,274 98,522 3.93 2,360,810 107,293 4.54 2,063,480 82,476 4.00
Short-term borrowings 123,162 5,365 4.36 194,888 11,940 6.13 145,364 7,268 5.00
Long-term debt 259,583 13,615 5.24 245,383 13,770 5.61 238,612 13,132 5.50
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing liabilities 2,890,019 117,502 4.07% 2,801,081 133,003 4.75% 2,447,456 102,876 4.20%
--------- --------- ---------
Demand deposits 382,489 348,443 314,632
Other non-interest-bearing
liabilities 70,666 53,018 37,749
Stockholders' equity 283,751 254,049 257,540
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $3,626,925 $3,456,591 $3,057,377
---------- ---------- ----------
NET INTEREST INCOME $ 141,825 $ 131,454 $ 122,122
--------- --------- ---------
NET INTEREST MARGIN 4.19% 4.02% 4.23%
------ ----- -------
Interest Rate Spread 3.59% 3.33% 3.59%
Taxable equivalent
adjustment $ 3,893 $ 4,076 $ 4,149
--------- --------- ---------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding. The interest collected thereon is
included in interest income based upon the characteristics of the related
loans.
(2) Securities are shown at average amortized cost. For purposes of these
computations, nonaccrual securities are included in the average securities
balances, but the interest collected thereon is is not included in interest
income.
19
NET INTEREST INCOME
On a tax equivalent basis, the Company's net interest income for 2001 was $141.8
million, up from $131.5 million for 2000. The Company's net interest margin
improved to 4.19% for 2001 from 4.02% for 2000. The improvement in net interest
income and net interest margin in 2001 were due primarily to two factors. First,
average earning assets increased from $3.3 billion in 2000 to $3.4 billion in
2001. The increase in average earning assets was due primarily to an increase in
average loans and leases, which increased $221.5 million from $2.1 billion in
2000 to $2.3 billion in 2001. Secondly, due to the falling interest rate
environment in 2001 and the Company's interest bearing liability sensitive
position, rates paid on interest bearing liabilities declined more rapidly than
the yield on earning assets. Rates paid on interest bearing liabilities
decreased 68 basis points ("bp") to 4.07% in 2001 from 4.75% in 2000 compared to
a 42 bp decrease in yield on earnings assets to 7.66% in 2001 from 8.08% in
2000.
The following table presents changes in interest income, on a FTE basis, and
interest expense attributable to changes in volume (change in average balance
multiplied by prior year rate), changes in rate (change in rate multiplied by
prior year volume), and the net change in net interest income. The net change
attributable to the combined impact of volume and rate has been allocated to
each in proportion to the absolute dollar amounts of change.
TABLE 2
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
- ---------------------------------------------------------------------------------------------------
INCREASE (DECREASE) Increase (Decrease)
2001 OVER 2000 2000 over 1999
- ---------------------------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL Volume Rate Total
- ---------------------------------------------------------------------------------------------------
Short-term interest-bearing accounts $ (206) $ (162) $ (368) $ (914) $ 337 $ (577)
Securities available for sale (5,708) (3,353) (9,061) 8,210 1,801 10,011
Securities held to maturity (1,184) (258) (1,442) (2,497) 474 (2,023)
Securities trading 583 58 641 - - -
Investment in FRB and FHLB Banks (493) (206) (699) 143 167 310
Loans and leases 18,428 (12,629) 5,799 27,701 4,029 31,730
- ---------------------------------------------------------------------------------------------------
Total interest income 8,889 (14,019) (5,130) 31,054 8,405 39,459
- ---------------------------------------------------------------------------------------------------
Money market deposit accounts 1,590 (2,998) (1,408) 571 1,658 2,229
NOW deposit accounts 723 (1,642) (919) 506 543 1,049
Savings deposits 599 (1,725) (1,126) 502 327 829
Time deposits 2,036 (7,354) (5,318) 12,825 7,885 20,710
Short-term borrowings (3,683) (2,892) (6,575) 2,812 1,860 4,672
Long-term debt 772 (927) (155) 377 261 638
- ---------------------------------------------------------------------------------------------------
Total interest expense 4,113 (19,614) (15,501) 15,880 14,247 30,127
- ---------------------------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 4,776 $ 5,595 $ 10,371 $15,174 $(5,842) $ 9,332
===================================================================================================
Loans and leases and corresponding interest and fees on loans
The average balance of loans and leases increased 9.5%, from $2.1 billion in
2000 to $2.3 billion in 2001. The yield on average loans and leases decreased
from 8.71% in 2000 to 8.13% in 2001, as a falling interest rate environment
prevailed for much of 2001. Interest income from loans and leases increased
3.2%, from $182.3 million in 2000 to $188.1 million in 2001. The increase in
interest income from loans and leases was due to the increase in the average
balance of loans and leases of 9.5%, offset by a decrease in yield on loans and
leases in 2001 of 58 bp when compared to 2000.
Total loans and leases were $2.3 billion at December 31, 2001, up from $2.2
billion at December 31, 2000. The increase in loans and leases was primarily in
the commercial and consumer loan types, as management continued to focus on
growth in these areas. Commercial and agricultural loans were $584.9 million at
December 31, 2001, up $41.8 million or 7.7% from December 31, 2000. Consumer
20
loans also increased in 2001, from $357.8 million at December 31, 2000 to $387.1
million at December 31, 2001, an increase of $29.3 million or 8.2%. Residential
real estate mortgages increased $20.8 million or 4.1% to $525.4 million at
December 31, 2001. The increases in commercial, consumer and real estate
mortgage loans were offset by a $20.9 million or 4.2% decrease in commercial
real estate mortgages, from $498.0 million at December 31, 2000 to $477.1
million at December 31, 2001.
The following table reflects the loan and lease portfolio by major categories as
of December 31 for the years indicated:
TABLE 3
COMPOSITION OF LOAN AND LEASE PORTFOLIO
- -----------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
(in thousands)
Residential real estate mortgages $ 525,411 $ 504,590 $ 521,684 $ 494,783 $ 456,310
Commercial real estate mortgages 477,102 498,040 469,283 395,268 347,443
Real estate construction and
Development 60,513 44,829 25,474 18,626 12,289
Commercial and agricultural 584,857 543,145 371,863 291,089 248,454
Consumer 387,081 357,822 320,682 294,230 310,115
Home equity 232,624 219,355 139,472 120,712 106,123
Lease financing 72,048 79,874 76,002 43,486 23,524
- -----------------------------------------------------------------------------------------------
Total loans and leases $2,339,636 $2,247,655 $1,924,460 $1,658,194 $1,504,258
- -----------------------------------------------------------------------------------------------
Real estate mortgages consist primarily of loans secured by first or second
deeds of trust on primary residencies. Loans in the commercial and agricultural
category, as well as commercial real estate mortgages, consist primarily of
short-term and/or floating rate commercial loans made to small to medium-sized
companies. Consumer loans consist primarily of installment credit to individuals
secured by automobiles and other personal property including manufactured
housing. Manufactured housing loans totaled $41.4 million and $48.1 million at
December 31, 2001 and 2000, respectively, and were 10.7% and 13.4% of total
consumer loans at December 31, 2001 and 2000, respectively. These decreases from
2000 to 2001 are consistent with the Company's plan to de-emphasize loans
secured by manufactured housing.
Lease Financing
The Company maintained an automobile lease financing portfolio totaling $72.0
million at December 31, 2001 and $79.9 million at December 31, 2000. Lease
receivables primarily represent automobile financing to customers through direct
financing leases and are carried at the aggregate of the lease payments
receivable and the estimated residual values, net of unearned income and net
deferred lease origination fees and costs. Net deferred lease origination fees
and costs are amortized under the effective interest method over the estimated
lives of the leases. The estimated residual value related to the total lease
portfolio is reviewed quarterly, and if there has been a decline in the
estimated fair value of the residual that is judged by management to be
other-than-temporary, a loss is recognized. Adjustments related to such
other-than-temporary declines in estimated fair value are recorded with other
noninterest expenses in the consolidated statements of income. One of the most
significant risks associated with leasing operations is the recovery of the
residual value of the leased vehicles at the termination of the lease. When a
lease receivable asset is recorded, included in this amount is the estimated
residual value of the leased vehicle at the termination of the lease. At
termination, the lessor has the option to purchase the vehicle or may turn the
vehicle over to the Company.
The estimation of residual value is critical to the determination of the leasing
terms. The Company currently utilizes published valuations for specific vehicle
types in order to determine estimated residual values. However, from the date
of origination of the lease to the date of the termination of the lease,
valuations for used vehicles change. The residual values included in lease
financing receivables totaled $52.4 million and $56.9 million at December 31,
2001 and 2000, respectively.
21
The Company has acquired residual value insurance protection in order to reduce
the risk related to a decline in the published values of used vehicles between
the date of origination and the date of the lease termination. Residual value
insurance is designed to cover the difference between the industry-published
valuation for used vehicles at the termination of the lease, as compared to the
industry published valuation at the origination of the lease.
In 2001, the Company's then provider of this residual value insurance indicated
that they intended to change the source of the industry valuation for used
vehicles, which, in essence, reduced the insurance coverage and increased losses
the Company would realize upon disposition of the leased vehicles. In January
2000, the Company changed its residual value insurance provider to a new
carrier. However, residual value insurance coverage related to approximately
$25.0 million of the lease financing portfolio at December 31, 2001 is insured
by the former insurance carrier. While the Company believes that the change in
the source of the industry-published valuation was not allowed under the terms
of the insurance policy, the insurance carrier's position has decreased the
amount of insurance coverage that would be available to the Company with respect
to this portfolio.
Notwithstanding the issue associated with the former insurance carrier, there is
an additional risk in the leasing business with respect to recovery of residual
values of leased vehicles. While residual value insurance is designed to
protect against a drop in industry published values, and only to the extent of
any such decline, there remains a risk that the actual sales price for the
turned-in leased vehicles is less than the industry-published value. The
Company experienced significant losses in 2001 because the amounts that
turned-in leased vehicles actually sold for was less than the published industry
values.
Throughout 2001, there has been significant weakness in the market for used
vehicles. This general weakness was significantly exacerbated by the events of
September 11th as well as the extremely favorable financing opportunities
provided by large automakers for new vehicles. This situation not only softened
the demand for used vehicles, but increased the supply.
This situation, coupled with the issue associated with the former insurance
carrier discussed above, resulted in an impairment of residual values, which is
other-than-temporary at December 31, 2001 and 2000. Accordingly, the Company
recorded an other-than-temporary-impairment charge of $3.5 million in 2001 and
$664,000 in 2000. These charges were included in other noninterest expenses on
the consolidated statements of income. At December 31, 2001, the reserve related
to the other-than-temporary impairment of residual values totaled $3.7 million.
The estimation of the other-than-temporary-impairment charge was based upon the
current level of leased vehicles turned in as well as the mix of the leasing
portfolio between types of vehicles. Currently, the Company has projected that
71% of its leased vehicles will be turned in. At December 31, 2001,
approximately 37% of the Company's leasing portfolio is made up of sport utility
vehicles, or SUVs, which have experienced the greatest amount of declines in
values in the used market, as well as the highest turn-in rate. Should the
amount of vehicle turn-ins increase or values for such used vehicles continue to
decline, the level of other-than-temporary impairment might be increased.
The following table, Maturities and Sensitivities of Certain Loans to Changes in
Interest Rates, are the maturities of the commercial and agricultural and real
estate and construction development loan portfolios and the sensitivity of loans
to interest rate fluctuations at December 31, 2001. Scheduled repayments are
reported in the maturity category in which the contractual payment is due.
22
TABLE 4
MATURITIES AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES
- --------------------------------------------------------------------------
AFTER ONE
YEAR BUT AFTER
REMAINING MATURITY AT WITHIN WITHIN FIVE FIVE
DECEMBER 31, 2001 ONE YEAR YEARS YEARS TOTAL
- --------------------------------------------------------------------------
(in thousands)
Floating/adjustable rate:
Commercial and agricultural $ 138,744 $ 20,132 $ 35,567 $194,443
Real estate construction
and development 18,522 5,675 477 24,674
- --------------------------------------------------------------------------
Total floating rate loans 157,266 25,807 36,044 219,117
- --------------------------------------------------------------------------
Fixed Rate:
Commercial and agricultural 234,546 104,443 51,425 390,414
Real estate construction
and development 7,235 10,228 18,376 35,839
- --------------------------------------------------------------------------
Total fixed rate loans 241,781 114,671 69,801 426,253
- --------------------------------------------------------------------------
Total $ 399,047 $ 140,478 $105,845 $645,370
==========================================================================
Securities and corresponding interest and dividend income
The average balance of securities available for sale was $933.1 million, which
is a decrease of $84.6 million, or 8.3%, from $1.0 billion in 2000. The decrease
is primarily a result of proceeds from sales, maturities and pay-downs of
securities available for sale used to fund loan growth. The yield on average
securities available for sale was 6.63% in 2001 compared to 6.97% in 2000. The
decrease in the average balance of securities available for sale, coupled with
the decrease in yield, resulted in a decrease in interest income on securities
available for sale of $9.0 million, from $70.9 million in 2000 to $61.9 million
in 2001. The average balance of securities held to maturity was $99.8 million
during 2001, which is a decrease of $17.7 million, from $117.5 million in 2000.
As noted above, the decrease is primarily a result of proceeds from maturities
and pay-downs of securities held to maturity used to fund loan growth. The yield
on securities held to maturity was 6.65% in 2001 compared to 6.88% in 2000.
Interest income on securities held to maturity decreased $1.5 million, from $8.1
million in 2000 to $6.6 million during 2001.
The Company classifies its securities at date of purchase as either available
for sale, held to maturity or trading. Held to maturity debt securities are
those that the Company has the ability and intent to hold until maturity.
Available for sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported in stockholders' equity
as a component of accumulated other comprehensive income or loss. Held to
maturity securities are recorded at amortized cost. Trading securities are
recorded at fair value, with net unrealized gains and losses recognized
currently in income. Transfers of securities between categories are recorded at
fair value at the date of transfer. A decline in the fair value of any
available for sale or held to maturity security below cost that is deemed
other-than-temporary is charged to earnings resulting in the establishment of a
new cost basis for the security. Securities with an other-than-temporary
impairment are generally placed on nonaccrual status.
Non-marketable equity securities are carried at cost, with the exception of
small business investment company (SBIC) investments, which are carried at fair
value in accordance with SBIC rules.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the interest method. Dividend and
interest income are recognized when earned. Realized gains and losses on
securities sold are derived using the specific identification method for
determining the cost of securities sold.
23
The Company recorded a $8.3 million, $3.5 million and $1.4 million pre-tax
charge during 2001, 2000 and 1999, respectively, related to estimated
other-than-temporary impairment of certain securities classified as available
for sale. The charges were recorded in net security (losses) gains on the
consolidated statements of income. The securities with other-than-temporary
impairment charges at December 31, 2001 had remaining carrying values totaling
$4.5 million, are classified as securities available for sale and are on the
non-accrual status.
Approximately, $1.4 million of the $3.5 million other-than-temporary impairment
charge in 2000 related to the Company's decision in late 2000 to sell certain
debt securities with an amortized cost of $21.7 million. As a result of the
decision to immediately sell these securities, they were considered to be
other-than-temporarily impaired. These securities were sold in early January
2001 at a loss approximating the other-than-temporary impairment charge recorded
in 2000. These securities were presented on the Company's December 31, 2000
consolidated balance sheet as trading securities. The remaining securities with
other-than-temporary impairment charges at December 31, 2000 had carrying values
totaling $1.4 million, and at December 31, 2000, were classified as securities
available for sale and were on non-accrual status.
The following table presents the amortized cost and fair market value of the
securities portfolio as of December 31 for the years indicated.
TABLE 5
SECURITIES PORTFOLIO
As of December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR Amortized Fair Amortized Fair
(in thousands) COST VALUE Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury $ 12,392 $ 11,757 $ 16,392 $ 15,924 $ 16,369 $ 14,473
Federal Agency and mortgage-backed 524,101 530,613 580,934 578,625 632,360 602,684
State & Municipal, collateralized
mortgage obligations and other securities 366,325 366,971 342,811 342,208 387,848 377,335
- -------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 902,818 $909,341 $ 940,137 $936,757 $1,036,577 $994,492
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Trading Securities $ 126 $ 126 $ 20,540 $ 20,540 $ - $ -
- -------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
Federal Agency and mortgage-backed 36,733 36,623 46,376 45,528 51,578 48,568
State & Municipal 64,715 64,715 63,992 64,260 61,730 60,569
Other securities 156 157 47 47 10 10
- -------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 101,604 $101,495 $ 110,415 $109,835 $ 113,318 $109,147
=============================================================================================================
Included in collateralized mortgage obligations and other securities in the
securities available for sale portfolio at December 31, 2001, are three
securities that management believes are other-than-temporarily impaired. For the
year ended December 31, 2001, the Company wrote-down these securities a total of
$6.0 million. The remaining carrying value and the estimated fair value of these
three securities is $4.5 million at December 31, 2001, which management will
continue to monitor for additional other-than-temporary impairment. These
securities are not accruing interest at December 31, 2001. Also during 2001, the
Company recorded $2.3 million of other-than-temporary impairment charges related
to securities which were sold prior to year end 2001.
24
The following tables summarize the securities considered to be
other-than-temporarily impaired (OTTI) at December 31, 2001:
(in thousands) AMORTIZED
SECURITY TYPE: COST AND OTTI
FAIR VALUE CHARGE
----------- -------
Asset backed securities $ 1,820 $ 1,680
Private issue collateralized
mortgage obligation 2,680 4,021
Corporate debt security - 300
----------- -------
Total $ 4,500 $ 6,001
=========== =======
Also included in collateralized mortgage obligations and other securities in the
securities available for sale portfolio at December 31, 2001, are certain
securities previously held by the recently acquired CNB. These securities
contain a higher level of credit risk when compared to securities held in the
Company's investment portfolio because they are not guaranteed by a governmental
agency. The Company's general practice is to purchases collateralized mortgage
obligations and mortgaged-backed securities that are guaranteed by a
governmental agency coupled with a strong credit rating, typically AAA, issued
by Moody's or Standard and Poors. At December 31, 2001, these securities fair
value were not significantly below amortized cost and did not demonstrate other
characteristics that would result in a other-than-temporary impairment
classification. Management cannot, however, predict the extent to which economic
conditions may worsen or other factors may impact these securities. Accordingly,
there can be no assurance that these securities will not become
other-than-temporarily impaired in the future.
The following tables summarize the securities containing a higher level of
credit risk at December 31, 2001:
(in thousands) AMORTIZED FAIR
SECURITY TYPE: COST VALUE
---------- -------
Asset backed securities $ 30,571 $30,375
Private issue collaterallized
mortgage obligation 6,488 6,462
Private issue mortgage-backed
securities 1,642 1,668
---------- -------
Total $ 38,701 $38,505
========== =======
The Company has certain embedded derivative instruments related to two debt
securities that have returns linked to the performance of the NASDAQ 100 index.
Management determined that these debt securities do not qualify for hedge
accounting under SFAS No. 133 (see Impact of New Accounting Standards). The
embedded derivatives have been separated from the underlying host instruments
for financial reporting purposes and accounted for at fair value. During the
year ended December 31, 2001, the Company recorded $640,000 of net losses
related to the adjustment of the embedded derivatives to estimated fair value
($159,000 of which was recorded on January 1, 2001 upon the adoption of SFAS No.
133), which was recorded in net gain (loss) on securities transactions on the
consolidated statement of income. As of December 31, 2001, the embedded
derivatives related to the debt securities linked to the NASDAQ 100 index had no
fair value. The two debt securities are available for sale and classified as
other securities. At December 31, 2001, the total amortized cost and estimated
fair value of these two debt securities was $6.2 million. The two debt
securities were sold in 2002 at amounts approximating their carrying values at
December 31, 2001.
25
FUNDING SOURCES AND CORRESPONDING INTEREST EXPENSE
The Company utilizes traditional deposit products such as time, savings, NOW,
money market, and demand deposits as its primary source for funding. Other
sources, such as short-term FHLB advances, federal funds purchased, securities
sold under agreements to repurchase, brokered time deposits, and long-term FHLB
borrowings are utilized as necessary to support the Company's growth in assets
and to achieve interest rate sensitivity objectives. The average balance of
interest-bearing liabilities increased $88.9 million, or 3.2 %, from $2.8
billion in 2000 to $2.9 billion in 2001. The rate paid on interest-bearing
liabilities decreased from 4.75% in 2000 to 4.07% in 2001. The decrease in the
rate paid on interest bearing liabilities, offset by the increase in the average
balance, caused a decrease in interest expense of $15.5 million, or 11.7%, from
$133.0 million in 2000 to $117.5 million in 2001.
Deposits
Average interest bearing deposits increased $146.5 million, or 6.2%, during
2001, to $2.5 billion. The increase is due primarily to the full year effect in
2001 on average interest bearing deposits related to branch acquisitions in June
and November of 2000 as well as the FNB acquisition in June 2001. The Company
assumed $133.7 million in deposit liabilities in conjunction with those branch
acquisitions. Additionally, the Company completed the acquisition of First
National Bancorp, Inc. in June of 2001 and assumed approximately $94 million in
interest bearing liabilities. The Company's core deposit mix improved in 2001.
The average balance of NOW, Money Market Deposit Accounts ("MMDA"), and savings
comprised 41.1% of average interest bearing deposits in 2001 compared to 39.9%
in 2000. The average balance of demand deposits increased $34.1 million, or
9.8%, from $348.4 million in 2000 to $382.5 million in 2001. The ratio of
average demand deposits to total average deposits increased from 10.6% in 2000
to 11.3% in 2001.
The improvement in the Company's deposit mix noted above, combined with the
falling interest rate environment prevalent in 2001, resulted in a decrease in
the rate paid on interest bearing liabilities of 61 bp, from 4.54% in 2000 to
3.93% in 2001. The average rate paid on MMDAs, which are very sensitive to
changes in interest rates, declined 127 bp from 4.04% in 2000 to 2.77% in 2001.
The rate paid on average time deposits decreased 50 bp, from 5.72% in 2000 to
5.22% in 2001. The decrease in the rate paid on average time deposits, combined
with a change in the ratio of average time deposits to total average interest
bearing deposits from 61.0% in 2000 to 58.9% in 2001, resulted in a $5.3 million
decrease in interest expense paid on time deposits, from $82.4 million in 2000
to $77.1 million in 2001.
The Company will continue to emphasize developing strong customer relationships
to strengthen our core deposit base in 2002. The Company does not anticipate
deposit growth in 2002, due mainly to planned branch divestitures. To counter
the anticipated decrease in deposits, the Company will utilize alternative
sources of funding, such as brokered deposits and wholesale funding.
The following table presents the maturity distribution of time deposits of
$100,000 or more at December 31, 2001:
TABLE 6
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
---------------------------------------------------------------------
December 31, 2001
---------------------------------------------------------------------
(in thousands)
Within three months $288,913
After three but within six months 81,999
After six but within twelve months 76,458
After twelve months 111,252
---------------------------------------------------------------------
Total $558,622
=====================================================================
26
Borrowings
Average short-term borrowings decreased from $194.9 million in 2000 to $123.2
million in 2001. Consistent with the decreasing interest rate environment
during 2001, the average rate paid also decreased from 6.13% in 2000 to 4.36% in
2001. The decrease in the average balance combined with the decrease in the
average rate paid caused interest expense on short-term borrowings to decrease
$6.5 million from $11.9 million in 2000 to $5.4 million in 2001. Average
long-term debt increased $14.2 million, from $245.4 million in 2000 to $259.6
million in 2001. The increase in long-term debt combined with a decrease in
short-term borrowings was a result of limiting the Company's liability sensitive
position to rising interest rates.
Short-term borrowings consist of Federal funds purchased and securities sold
under repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily Federal Home Loan Bank
(FHLB) advances, with original maturities of one year or less. The Company has
unused lines of credit and access to brokered deposits available for short-term
financing of approximately $767 million and $555 million at December 31, 2001
and 2000, respectively. Securities collateralizing repurchase agreements are
held in safekeeping by non-affiliated financial institutions and are under the
Company's control. Long-term debt, which is comprised primarily of FHLB
advances, are collateralized by the FHLB stock owned by the Company, certain of
its mortgage-backed securities and a blanket lien on its residential real estate
mortgage loans.
RISK MANAGEMENT
CREDIT RISK
Credit risk is managed through a network of loan officers, credit committees,
loan policies, and oversight from the senior credit officers and Board of
Directors. Management follows a policy of continually identifying, analyzing,
and grading credit risk inherent in each loan portfolio. An ongoing independent
review, subsequent to management's review, of individual credits in the
commercial loan portfolio is performed by the independent loan review function.
These components of the Company's underwriting and monitoring functions are
critical to the timely identification, classification, and resolution of problem
credits.
27
Nonperforming Assets
TABLE 7
NONPERFORMING ASSETS
- -----------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(dollars in thousands)
Nonaccrual loans:
Commercial and agricultural and
commercial real estate $31,372 $14,054 $ 9,519 $ 7,819 $ 8,395
Real estate mortgages 5,119 647 618 744 692
Consumer 3,719 2,402 2,671 3,106 1,406
- -----------------------------------------------------------------------------------------------------
Total nonaccrual loans 40,210 17,103 12,808 11,669 10,493
- -----------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural
and commercial real estate 198 4,523 1,201 1,365 2,202
Real estate mortgages 1,844 3,042 641 761 244
Consumer 933 865 906 1,908 4,164
- -----------------------------------------------------------------------------------------------------
Total loans 90 days or more past due
and still accruing 2,975 8,430 2,748 4,034 6,610
- -----------------------------------------------------------------------------------------------------
Restructured loans 603 656 1,014 1,247 2,877
- -----------------------------------------------------------------------------------------------------
Total nonperforming loans 43,788 26,189 16,570 16,950 19,980
- -----------------------------------------------------------------------------------------------------
Other real estate owned 1,577 1,856 2,696 4,070 3,470
- -----------------------------------------------------------------------------------------------------
Total nonperforming loans and
other real estate owned 45,365 28,045 19,266 21,020 23,450
- -----------------------------------------------------------------------------------------------------
Nonperforming securities 4,500 1,354 1,535 - -
- -----------------------------------------------------------------------------------------------------
Total nonperforming loans, securities,
and other real estate owned $49,865 29,399 20,801 21,020 23,450
=====================================================================================================
Total nonperforming loans to loans and leases 1.87% 1.17% 0.86% 1.02% 1.33%
Total nonperforming loans and
other real estate owned to total assets 1.25% 0.78% 0.58% 0.73% 0.88%
Total nonperforming loans, securities, and other
real estate owned to total assets 1.37% 0.82% 0.63% 0.73% 0.88%
Total allowance for loan and lease losses
to nonperforming loans 102.19% 124.07% 170.43% 157.02% 124.26%
=====================================================================================================
The allowance for loan and lease losses is maintained at a level estimated by
management to provide adequately for risk of probable losses inherent in the
current loan and lease portfolio. The adequacy of the allowance for loan losses
is continuously monitored. It is assessed for adequacy using a methodology
designed to ensure the level of the allowance reasonably reflects the loan and
lease portfolio's risk profile. It is evaluated to ensure that it is sufficient
to absorb all reasonably estimable credit losses inherent in the current loan
and lease portfolio.
Management considers the accounting policy relating to the allowance for loan
and lease losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgements can have on
the consolidated results of operations.
For purposes of evaluating the adequacy of the allowance, the Company considers
a number of significant factors that affect the collectibility of the portfolio.
For individually analyzed loans, these include estimates of loss exposure, which
reflect the facts and circumstances that affect the likelihood of repayment of
such loans as of the evaluation date. For homogeneous pools of loans and
leases, estimates of the Company's exposure to credit loss reflect a thorough
current assessment of a number of factors, which could affect collectibility.
These factors include: past loss experience; size, trend, composition, and
nature; changes in lending policies and procedures, including underwriting
28
standards and collection, charge-off and recovery practices; trends experienced
in nonperforming and delinquent loans; current economic conditions in the
Company's market; portfolio concentrations that may affect loss experienced
across one or more components of the portfolio; the effect of external factors
such as competition, legal and regulatory requirements; and the experience,
ability, and depth of lending management and staff. In addition, various
regulatory agencies, as an integral component of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize additions to the allowance based
on their examination.
After a thorough consideration of the factors discussed above, any required
additions to the allowance for loan and lease losses are made periodically by
charges to the provision for loan and lease losses. These charges are necessary
to maintain the allowance at a level which management believes is reasonably
reflective of overall inherent risk of probable loss in the portfolio. While
management uses available information to recognize losses on loans and leases,
additions to the allowance may fluctuate from one reporting period to another.
These fluctuations are reflective of changes in risk associated with portfolio
content and/or changes in management's assessment of any or all of the
determining factors discussed above.
TABLE 8
ALLOWANCE FOR LOAN AND LEASE LOSSES
- -----------------------------------------------------------------------------------------------
(dollars in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Balance at January 1 $32,494 $28,240 $26,615 $24,828 $23,420
Loans charged-off:
Commercial and agricultural 17,097 3,949 2,737 2,794 1,924
Real estate mortgages 783 1,007 1,165 1,139 914
Consumer 4,491 2,841 2,808 2,796 3,163
- -----------------------------------------------------------------------------------------------
Total loans and leases charged-off 22,371 7,797 6,710 6,729 6,001
- -----------------------------------------------------------------------------------------------
Recoveries:
Commercial and agricultural 1,063 503 367 529 1,197
Real estate mortgages 122 141 198 152 109
Consumer 1,004 739 874 913 1,008
- -----------------------------------------------------------------------------------------------
Total recoveries 2,189 1,383 1,439 1,594 2,314
- -----------------------------------------------------------------------------------------------
Net loans and leases charged-off 20,182 6,414 5,271 5,135 3,687
Allowance related to purchase
acquisitions 505 525 - - -
Provision for loan and lease losses 31,929 10,143 6,896 6,922 5,095
- -----------------------------------------------------------------------------------------------
Balance at December 31 $44,746 $32,494 $28,240 $26,615 $24,828
===============================================================================================
Allowance for loan and lease losses to loans
and leases outstanding at end of year 1.91% 1.45% 1.47% 1.61% 1.65%
Net charge-offs to average loans and leases
outstanding 0.87% 0.31% 0.30% 0.33% 0.26%
===============================================================================================
Several significant risk factors impacted the allowance for loan and lease
losses, the provision for loan and lease losses, net loan and lease charge-offs
(net charge offs) and non-performing loans and leases in 2001. During 2001 the
Company continued to increase its loan and lease portfolio with particular
emphasis in commercial and consumer lending. Commercial and consumer lending
inherently possess higher credit risk as compared to many other loan types such
as residential real estate lending. As discussed above, the commercial and
agricultural loan portfolio increased $41.7 million or 7.7% from December 31,
2000 to December 31, 2001, and makes up 25.0% of the total loan and lease
portfolio at December 31, 2001 as compared to 24.1% at December 31, 2000 and
19.3% at December 31, 1999. The consumer loan portfolio grew $29.3 million or
29
8.2% from December 31, 2000 to December 31, 2001 and now makes up 16.6% of the
total loan portfolio at December 31, 2001 as compared to 15.9% at December 31,
2000 and 16.6% at December 31, 1999. See Table 3 for the Composition of the
Loan Portfolio.
The Company's strategic focus on loan growth, particularly in commercial
lending, was also a focus of the banks acquired by the Company in 2001 and 2000;
CNB Bank, LA Bank, NA and Pioneer American Bank, NA (see also Mergers and
Acquisition). These acquired banks underwrote numerous commercial related loans
prior to merging with the Company, based upon their respective underwriting
processes and analysis, including several larger credits which have become
non-performing in 2001. Additionally, CNB Financial significantly increased its
consumer loan portfolio in recent years. Accordingly, the Company's loan growth
in 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 has continued to grow and the loan mix
has continued to move in the direction of higher credit risk, the economy in the
Company's market areas took a dramatic turn for the worse in 2001, especially in
the second half of 2001. This sudden economic down turn came at a particularly
bad time for the Company given the recent growth in the Company's higher credit
risk loan types. The recession experienced in the Company's market areas is
consistent with what has been experienced by the national economy throughout
2001 and has 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 economic recession.
Additionally, as noted above, the recently acquired banks appeared to have
generally less conservative underwriting and monitoring standards that made
certain of the relationships originated by these acquired banks more susceptible
to being negatively impacted by the 2001 economic downturn.
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.) and has made significant progress in its integration efforts with the
recently merged CNB banking division. 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, has been consolidated and standardized using
the Bank model, and key personnel from the Bank's commercial lending area have
been installed at Pennstar and CNB to oversee the lending operations of the
respective divisions.
As a result of the economic downturn, and the integration processes with respect
to recently merged banks discussed above, the Company performed an extensive
review of its loan portfolio during 2001. This review focused on consistency in
the identification and classification of problematic loans and the measurement
of loss exposure on individual loans, especially in light of the generally
weakened financial performance of borrowers caused by the economic downturn and
reduced collateral values.
Non-performing loans increased from $26.2 million at December 31, 2000 to $43.8
million at December 31, 2001. The vast majority, approximately 92%, of
non-performing 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. While there have been numerous loans added to the
non-accruing loan category, approximately $12.9 million of the total
non-accruing loans is made up of 6 loan relationships. Management believes that
the allowance for loan losses related to these relationships as well as
nonperforming loans is adequate at December 31, 2001.
30
The total allowance for loan and lease losses is 102.2% of non-performing loans
at December 31, 2001 as compared to 124.1% at December 31, 2000. While loans
and leases classified as non-performing have a strong likelihood of experiencing
a loss, substantially all non-performing loans are collateralized, many to a
reasonably high percentage of the outstanding loan balance. As such, it is
unlikely that 100% of the balance of non-performing loans will result in a loss
to the Company. However, if the current economic recession results in further
deterioration of collateral values, loss exposure on all loans and leases could
increase.
Impaired loans, which primarily consist of non-accruing commercial type loans
and all loans restructured in a troubled debt restructuring, also increased
significantly, totaling $32.0 million at December 31, 2001 as compared to $14.7
million at December 31, 2000. The related allowance for these impaired loans is
$1.4 million or 4.4% of the impaired loans at December 31, 2001 as compared to
$1.5 million and 10.2%, respectively, at December 31, 2000. At December 31,
2001 and 2000 there were $29.8 million and $10.8 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.
Non-performing loans are expected to remain at levels higher than historically
experienced. Non-accrual loans will negatively impact interest income in 2002.
Management intends to work closely with borrowers to monitor and improve credit
classifications. The Company does anticipate some migration of non-performing
loans from the non-accrual category to the troubled debt restructuring category,
as the Company works to resolve troubled loans. Furthermore, management expects
that the level of loan growth recently experienced will slow down in 2002 due to
the economic downturn in the Company's market areas and management's focus on
positively resolving current problematic loans.
For the same reasons that non-performing loans increased in 2001, the Company
also experienced a significant increase in net charge-offs in 2001 as compared
to 2000. Net charge-offs in 2001 increased $13.8 million to $20.2 million from
$6.4 in 2000. Consistent with the above, the increased net charge-offs was
primarily in the commercial and agricultural portfolio, where net charge-offs
were $16.0 million in 2001 as compared to $3.4 million in 2000. Net charge offs
of consumer loans and leases also experienced a significant increase in 2001 as
compared to 2000. Net charge-offs as a percentage of average loans and leases
and leases was .87% in 2001 as compared to .31% in 2000. While management does
not anticipate any significant increase in net charge-offs in 2002, future net
charge-offs are expected to be greater than historical charge-offs levels prior
to 2001.
As a result of the growth in the loan and lease portfolio, particularly the
growth in higher credit risk loan types, combined with the fact that recently
acquired banks appeared to have used generally less conservative underwriting
and monitoring standards, the significant downturn in economic conditions in the
Company's market areas as well as the significant increases in non-performing
loans and net charge offs, the Company increased its provision for loan and
lease losses to $31.9 million for 2001 from $10.1 million in 2000.
The allowance for loan and lease losses increased from $32.5 million at December
31, 2000, or 1.45% of total loans and leases, to $44.7 million at December 31,
2001, or 1.91%. Management believes that the level of non-performing loans, the
allowance for loan and lease losses and net charge offs experienced in 2001 are
reflective of the credit risk inherent in the current loan portfolio. Based
upon a thorough analysis of the inherent risk of loss in the Company's current
loan portfolio, management believes that the allowance for loan and lease losses
at December 31, 2001 is adequate. However, should the current economic recession
be prolonged or worsen, non-performing loans, net charge offs and provisions for
loan and lease losses may increase.
The following table sets forth the allocation of the allowance for loan losses
by category, as well as the percentage of loans and leases in each category to
total loans and leases, as prepared by the Company. This allocation is based on
management's assessment of the risk characteristics of each of the component
parts of the total loan portfolio as of a given point in time and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts of the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category. The following table sets forth the allocation of the allowance for
loan losses by loan category.
31
TABLE 9
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CATEGORY Category Category Category Category
PERCENT Percent Percent Percent Percent
OF of of of of
(dollars in thousands) ALLOWANCE LOANS Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ---------------------------------------------------------------------------------------------------------------------------
Commercial
and agricultural $ 34,682 85% $ 20,510 72% $ 14,115 62% $ 12,728 62% $ 9,961 62%
Real estate
mortgages 1,611 4% 1,669 6% 2,506 11% 1,621 8% 1,548 10%
Consumer 4,626 11% 6,379 22% 6,270 27% 6,304 30% 4,583 28%
Unallocated 3,827 - 3,936 - 5,349 - 5,962 - 8,736 -
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 44,746 100% $ 32,494 100% $ 28,240 100% $ 26,615 100% $ 24,828 100%
===========================================================================================================================
In addition to the nonperforming loans discussed above, the Company has also
identified approximately $48.6 million in potential problem loans at December
31, 2001 as compared to $26.1 million at December 31, 2000. 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, 2001, potential
problem loans primarily consisted of commercial real estate and commercial and
agricultural loans. Management cannot predict the extent to which economic
conditions may worsen or other factors which may impact borrowers and the
potential problem loans. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on non-accrual, become
restructured, or require increased allowance coverage and provision for loan
losses.
At December 31, 2001, approximately 52.8% of the Company's loans are secured by
real estate located in central and northern New York and northeastern
Pennsylvania, respectively. 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, 2001,
the Company's Basic Surplus measurement was 9.4% of total assets, which was
above the Company's minimum of 5% set forth in its liquidity policies.
Accordingly, the Company has purchased brokered time deposits, established
borrowing facilities with other banks (Federal funds), including the Federal
Home Loan Bank of New York (short and long-term borrowings which are denoted as
advances), and has entered into repurchase agreements with investment companies.
32
This Basic Surplus approach enables the Company to adequately manage liquidity
from both operational and contingency perspectives. By tempering the need for
cash flow liquidity with reliable borrowing facilities, the Company is able to
operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At December 31, 2001, the
Company considered its Basic Surplus adequate to meet liquidity needs.
At December 31, 2001, a large percentage of the Company's loans and securities
are pledged as collateral on borrowings. Therefore, future growth of earning
assets will depend upon the Company's ability to obtain additional funding,
through growth of core deposits and collateral management, and may require
further use of brokered time deposits, or other higher cost borrowing
arrangements.
OFF-BALANCE SHEET RISK
Commitments to Extend Credit
The Company makes contractual commitments to extend credit and unused lines of
credit which are subject to the Company's credit approval and monitoring
procedures. At December 31, 2001 and 2000, commitments to extend credit in the
form of loans, including unused lines of credit, amounted to $704.7 million and
$394.7 million, respectively. In the opinion of management, there are no
material commitments to extend credit, including unused lines of credit, that
represent unusual risks. All commitments to extend credit in the form of loans,
including unused lines of credit expire within one year.
Stand-By Letters of Credit
The Company guarantees the obligations or performance of customers by issuing
stand-by letters of credit to third parties. These stand-by letters of credit
are frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds, and municipal securities. The risk
involved in issuing stand-by letters of credit is essentially the same as the
credit risk involved in extending loan facilities to customers, and they are
subject to the same credit origination, portfolio maintenance and management
procedures in effect to monitor other credit and off-balance sheet products. At
December 31, 2001 and 2000, outstanding stand-by letters of credit were
approximately $21.1 million and $6.2 million, respectively. The following table
sets forth the commitment expiration period for stand-by-letters of credit at
December 31, 2001:
Within one year $ 3,628
After one but within three years 3,238
After three but within five years 14,206
-------
Total $21,072
=======
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has made loans at prevailing
rates and terms to directors, officers, and other related parties. Such loans,
in management's opinion, do not present more than the normal risk of
collectibility or incorporate other unfavorable features. The aggregate amount
of loans outstanding to qualifying related parties at December 31, 2001 and 2000
were $6.3 million and $6.8 million, respectively.
The Company has entered into repurchase agreements with entities which have
certain executive officers who are directors and significant stockholders of the
Company. These repurchase agreements are entered into in the ordinary course of
business at market terms. These repurchase agreements resulted in approximately
$25.4 million and $18.1 million being owed to these entities at December 31,
2001 and 2000, respectively.
33
The law firm of Kowalczyk, Tolles, Deery and Johnston, of which Director Andrew
S. Kowalczyk, Jr., is a partner, provides legal services to us and NBT Bank from
time to time as does the law firm of Harris Beach LLP, of which Director William
L. Owens is a partner. The law firm of Needle, Goldenziel and Pascale, of which
Director Gene Goldenziel is a partner, provides legal services to us from time
to time as does the law firm of Oliver, Price & Rhodes of which Director Paul
Horger is a partner.
CAPITAL RESOURCES
Consistent with its goal to operate a sound and profitable financial
institution, the Company actively seeks to maintain a "well-capitalized"
institution in accordance with regulatory standards. The principal source of
capital to the Company is earnings retention. The Company's capital measurements
are in excess of both regulatory minimum guidelines and meet the requirements to
be considered well capitalized.
The Company's principal source of funds to pay interest on its capital
securities and pay cash dividends to its shareholders is dividends from its
subsidiaries. Various laws and regulations restrict the ability of banks to pay
dividends to their shareholders. The payment of dividends by the Company in the
future as well as the payment of interest on the capital securities will require
the generation of sufficient future earnings by its subsidiaries.
The Bank also is subject to substantial regulatory restrictions on its ability
to pay dividends to the Company. Under OCC regulations, the Bank may not pay a
dividend, without prior OCC approval, if the total amount of all dividends
declared during the calendar year, including the proposed dividend, exceed the
sum of its retained net income to date during the calendar year and its retained
net income over the preceding two years. The Bank's dividends to the Company
over years 2000 and 2001 exceeded net income during those years. Therefore, the
Bank's first quarter 2002 dividends exceeded the OCC dividend limitations, and
the Bank requested and received OCC approval to pay this dividend to the
Company. The Bank anticipates that it will require approval for its second
quarter 2002 dividend as well. The Bank's ability to pay dividends also is
subject to the Bank being in compliance with regulatory capital requirements.
The Bank is currently in compliance with these requirements.
NONINTEREST INCOME AND EXPENSES
NONINTEREST INCOME
Noninterest income is a significant source of revenue for the Company and an
important factor in the Company's results of operations. The following table
sets forth information by category of noninterest income for the years
indicated:
YEARS ENDED DECEMBER 31,
2001 2000 1999
-------- -------- -------
(in thousands)
Service charges on deposit accounts $12,756 $10,193 $ 9,278
Broker/dealer and insurance revenue 4,500 2,723 46
Trust 3,958 4,047 3,959
Other 9,245 7,891 8,044
-------- -------- -------
Total recurring 30,459 24,854 21,327
Net securities (losses) gains (7,692) (2,273) 1,000
Gain on sale of branch building 1,367 - -
-------- -------- -------
Total $24,134 $22,581 $22,327
======== ======== =======
34
Total recurring noninterest income increased to $30.5 million in 2001, compared
to $24.9 million in 2000 and $21.3 million in 1999. The increase in recurring
noninterest income resulted primarily from a $2.6 million increase in service
charges on deposit accounts, $1.8 million increase in broker/dealer fees and a
$1.3 million increase in other income. The increase in service charges on
deposit accounts resulted primarily from the Company's branch network growth
combined with an increase in fees.
The increase in broker/dealer fees and insurance revenue reflects twelve full
months of revenue from the Company's broker/dealer, M. Griffith, Inc., which was
acquired in May 2000. Revenues from M. Griffith, Inc. totaled $3.8 million in
2001, compared to $2.7 million in 2000. Additionally, the Company's insurance
agency and financial services provider, Colonial Financial Services, Inc., which
started operating in June 2001, contributed to the increase in revenue as well.
Revenues for Colonial Financial Services, Inc. for 2001 totaled $621,000.
Income from trust services decreased slightly in 2001 when compared to 2000. The
decrease is primarily attributable to a decrease in the market value of the
assets held by the Company in a fiduciary capacity. The decrease in the market
value of assets held by the Company in a fiduciary capacity resulted from the
decline in all the major stock indexes during 2001. Trust income is primarily
derived from contractual rates applied to the balances of trust accounts, and as
market values declined, trust income did not experience growth despite an
increase in the number of accounts managed. The number of accounts managed by
the Company's Trust Department increased from 1,577 at December 31, 2000 to
1,629 at December 31, 2001.
The increase in other income resulted primarily from increases in ATM fees and
other banking fees. Total ATM fees and other banking fees amounted to $4.4
million and $1.6 million, respectively, for 2001 compared to $3.8 million and
$639,000, respectively, for 2000. The increase in ATM fees resulted from the
combination of an increase in ATMs deployed and increases in ATM convenience
fees. The increase in banking fees resulted primarily from the continued focus
in business banking activities.
Transactions excluded from recurring noninterest income were net securities
losses of $7.7 million in 2001 compared to $2.3 million in 2000 and a gain on
sale of a branch building totaling $1.4 million in 2001. The increase in net
securities losses in 2001 resulted primarily from charges totaling $8.3 million
taken for the other-than-temporary impairment of certain securities compared to
$3.5 million in 2000, as discussed above.
35
NONINTEREST EXPENSE
Noninterest expenses are also an important factor in the Company's results of
operations. The following table sets forth the major components of noninterest
expense for the years indicated:
YEARS ENDED DECEMBER 31,
2001 2000 1999
-------- -------- -------
(in thousands)
Salaries and employee benefits $ 48,419 $ 44,802 $40,527
Occupancy 8,704 7,761 6,804
Equipment 7,228 7,271 7,046
Data processing and communications 10,690 8,206 7,544
Professional fees and outside services 6,338 5,082 4,252
Office supplies and postage 4,639 3,976 4,106
Amortization of intangible assets 4,248 3,049 1,764
Capital securities 1,278 1,633 582
Residual value lease losses 3,529 664 27
Other 13,338 13,065 11,292
-------- -------- -------
Total recurring noninterest expense 108,411 95,509 83,944
Merger, acquisition and reorganization costs 15,322 23,625 835
Certain deposit overdraft write-offs 2,125 - -
-------- -------- -------
Total noninterest expense $125,858 $119,134 $84,779
======== ======== =======
For 2001, recurring noninterest expense increased $12.9 million, or 13.5%, to
$108.4 million compared to $95.5 million in 2000. This increase was due to
several factors. Expenses for data processing and communications and
professional fees and outside services increased period-over-period by $3.7
million or 28.1%, principally due to the Company's expanded branch network,
costs associated with enhanced technologies and expanded data processing volume
capacities resulting from recent data processing conversions. It is anticipated
that the expanded data processing capacity will allow the Company to reduce data
processing costs in 2002.
Salaries and employee benefits expense increased $3.6 million, or 8.1%, to $48.4
million compared to $44.8 million in 2000. Occupancy expense increased $943,000,
or 12.2%, to $8.7 million compared to $7.8 million in 2000. The increases in
salaries and employee benefits expense and occupancy expense resulted primarily
from twelve full months of expenses in 2001 from the eight branches and the
Company's broker/dealer, M. Griffith, Inc., all of which were acquired during
2000, and an increase in expense resulting from the acquisition of FNB Bancorp,
Inc. on June 1, 2001.
Office supplies and postage increased from $4.0 million in 2000 to $4.6 million
in 2001. The increase resulted primarily from the growth of the Company's branch
network during 2000 and 2001. Capitals securities expense decreased from $1.6
million in 2000 to $1.3 million in 2001. The decrease resulted from a decrease
during 2001 in the index the capital securities interest rate is tied to.
Residual value lease losses increased from $664,000 in 2000 to $3.5 million in
2001. The increase was due to the charge taken for the other-than-temporary
impairment of residual values of leased automobiles in 2001. There was an
increase in expenses relating to the amortization of intangible assets from
certain recently completed acquisitions. Amortization expenses increased $1.2
million for the twelve months ended December 31, 2001 as compared to 2000. As a
result of the adoption of SFAS No. 142 on January 1, 2002, amortization of
intangible assets is expected to be lower in 2002. See "New Accounting
Pronouncement - Business Combinations and Goodwill and Other Intangible Assets".
36
Merger, acquisition and reorganization costs amounted to $15.3 million in 2001
compared to $23.6 million in 2000. The Company completed one merger and one
acquisition in 2001 and completed two mergers, one acquisition, and purchased 8
branches in 2000. Additionally, in 2000, the Company cancelled one proposed
merger. During 2001, the Company recognized $2.1 million in deposit overdraft
write-offs related to two large check-kiting incidents.
INCOME TAXES
In 2001, income tax expense was $542,000, as compared to $6.5 million in 2000
and $16.0 million in 1999. The Company's effective tax rate was 12.7%, 31.6%,
and 33.0% in 2001, 2000, and 1999, respectively. The decrease in the effective
tax rate during 2001 is primarily the result of lower net income before tax,
which resulted in a greater benefit, on a percentage basis, from permanent
non-taxable items such as tax-exempt interest.
2000 OPERATING RESULTS AS COMPARED TO 1999 OPERATING RESULTS
NET INTEREST INCOME
Net interest income for 2000 on a FTE basis was $131.5 million, up from $122.1
million in 1999. The increase was primarily the result of the increase in
average earning assets of $387.3 million offset somewhat by a decrease in the
Company's net interest margin from 4.23% for 1999 to 4.02% for 2000. The
decrease in net interest margin in 2000 when compared to 1999 primarily resulted
from interest bearing liabilities repricing faster than earning assets resulting
from the rising rate environment prevalent for most of 2000.
EARNING ASSETS
Total average earning assets increased $387.3 million, from $2.9 billion in 1999
to $3.3 billion in 2000. The increase was primarily the result of loan growth of
$319.0 million, particularly in commercial loan types, and an increase in
securities of $91.8 million. The increase in earning assets in 2000 was
primarily funded from an increase in deposits, which were assumed from various
branch acquisitions in 1999 and 2000 as well as an increase in borrowings.
Interest income increased $39.5 million, from $225.0 million in 1999 to $264.5
million in 2000. The increase in interest income was caused by increases in
earning assets and yields. The yield on earning assets increased from 7.79% in
1999 to 8.08% in 2000. The increase in yield was primarily the result of the
rising interest rate environment that prevailed for most of 2000.
LOANS AND LEASES AND CORRESPONDING INTEREST AND FEES ON LOANS
The average balance of loans and leases increased from $1.8 billion in 1999 to
$2.1 billion in 2000. The yield on average loans and leases increased from
8.49% in 1999 to 8.71% in 2000, as a rising interest rate environment prevailed
for much of 2000. The increase in the average balance of loans and leases,
coupled with the increase in yields, caused interest income on loans and leases
to increase $31.8 million, or 21.1%, from $150.5 million in 1999 to $182.3
million in 2000. Total loans and leases were $2.2 billion at December 31, 2000,
up from $1.9 billion at December 31, 1999. The increase in loans and leases was
primarily in the commercial and consumer loan types. Commercial and agricultural
loans were $543.1 million at December 31, 2000, up $171.2 million or 46.0% from
December 31, 1999. Home equity loans increased $79.9 million to $219.4 million
at December 31, 2000. Consumer loans increased $37.1 million, or 11.5%, to
$357.8 million at December 31, 2000 as compared to December 31, 1999.
37
SECURITIES AND CORRESPONDING INTEREST AND DIVIDEND INCOME
The average balance of securities available for sale was $1.0 billion during
2000, which is an increase of $128.4 million from $889.2 million in 1999. The
increase is primarily the result of investing excess funds from deposits assumed
from branch transactions during 1999 and 2000. The yield on average securities
available for sale was 6.97% in 2000 compared to 6.77% in 1999. The increase in
the average balance, coupled with the increase in yield, resulted in an increase
in interest income on securities available for sale of $10.0 million, from $60.9
million in 1999 to $70.9 million in 2000.
The average balance of securities held to maturity was $117.5 million during
2000, which is a decrease of $36.6 million, from $154.1 million in 1999. The
decrease was primarily a result of Central National Bank transferring all of its
investment securities held to maturity to securities available for sale in 1999.
The transfer was made for asset/liability management purposes and to allow CNB
flexibility with certain tax planning strategies. Subsequent to this transfer,
CNB no longer maintained a held to maturity portfolio. The yield on securities
held to maturity was 6.88% in 2000 compared to 6.56% in 1999.
FUNDING SOURCES AND CORRESPONDING INTEREST EXPENSE
DEPOSITS
Average interest bearing deposits increased $297.3 million during 2000, to $2.4
billion compared to $2.1 billion in 1999. The increase in interest bearing
deposits resulted primarily from the 3 branch acquisitions in 2000 and 1999. The
Company purchased approximately $133.7 million in deposits in conjunction with
the purchase of branches from Mellon Bank and Sovereign Bank in June and
November of 2000, respectively. In August of 1999, the Company purchased
approximately $156.5 million in deposits in conjunction with the purchase of
branches from Astoria Federal Savings and Loan Association.
The average rate paid on interest bearing deposits increased from 4.00% in 1999
to 4.54% in 2000. The increase in the average rate paid was primarily
attributable to time deposits, which are the most expensive interest bearing
deposits. The average rate paid on time deposits during 2000 was 5.72%, as
compared to 5.11% during 1999. Time deposits also made up a greater percentage
of total interest bearing liabilities. During 1999, time deposits were 58.5% of
interest bearing deposits, while in 2000, time deposits made up 61.0% of total
interest bearing deposits. The increase in the average rates paid for interest
bearing deposits during 2000 was also consistent with the rising interest rate
environment that prevailed for most of the year. The increase in the average
balance of interest bearing time deposits, coupled with the increase in the
average rate paid, caused interest expense on interest bearing deposits to
increase $24.8 million, from $82.5 million in 1999 to $107.3 million in 2000.
BORROWINGS
Average short-term borrowings increased from $145.4 million in 1999 to $194.9
million in 2000. Consistent with the increasing interest rate environment
during most of 2000, the average rate paid also increased from 5.00% in 1999 to
6.13% in 2000. The increase in the average balance combined with the increase
in the average rate paid caused interest expense on short-term borrowings to
increase $4.6 million from $7.3 million in 1999 to $11.9 million in 2000.
Average long-term debt increased $6.8 million, from $238.6 million in 1999 to
$245.4 million in 2000.
38
CREDIT RISK
Nonperforming loans at December 31, 2000 were $26.2 million as compared to $16.6
million at December 31, 1999. This increase is primarily the result of the
beginning of the process of integrating newly acquired banks into the Company
given the Company's more conservative approach to identifying and resolving
nonperforming loans. Net charge-offs increased during 2000 by $1.1 million, to
$6.4 million for the year. The increase in net charge-offs was primarily in the
area of commercial and agricultural loans. This increase was consistent with
the increase in commercial and agricultural loans discussed above. The
provision for loan and lease losses in 2000 was $10.1 million, as compared to
$6.9 million in 1999. The increase in the provision in 2000 as compared to 1999
was primarily due to the increase in the total loan and lease portfolio, the mix
of the portfolio, the increase in nonperforming loans and leases, and net loan
and lease charge-offs. The allowance as a percentage of loans and leases
outstanding was 1.45% at December 31, 2000 and 1.47% at December 31, 1999.
NONINTEREST INCOME
Recurring noninterest income, as presented above, increased $3.6 million, from
$21.3 million in 1999 to $24.9 million in 2000. The $3.6 million, or 16.9%,
increase in 2000 is primarily the result of an increase in broker/dealer fees of
approximately $2.7 million. The increase in broker/dealer fees is the direct
result of the Company's acquisition of M. Griffith, Inc., a full service
broker/dealer and registered investment advisor, on May 5, 2000. Service
charges on deposit accounts increased $915,000, from $9.3 million in 1999 to
$10.2 million in 2000. The increase in service charges on deposit accounts
resulted primarily from the branch acquisitions in 1999 and 2000. All other
categories of recurring noninterest income remained consistent from 1999 to
2000. Net securities losses totaled $2.3 million in 2000 as compared to $1.0
million in gains in 1999. The net securities losses in 2001 resulted primarily
from the $3.5 million in charges taken for the other-than-temporary impairment
of certain securities.
NONINTEREST EXPENSE
For 2000, recurring noninterest expense, as presented above, increased $11.6
million, or 13.8%, to $95.5 million compared to $83.9 million in 1999. This
increase was due to several factors. Salaries and employee benefits expense
increased $4.3 million, or 10.6%, to $44.8 million compared to $40.5 million in
1999. The increase in salaries and employee benefits expense resulted primarily
from the eight branches and the Company's broker/dealer, M. Griffith, Inc.,
which were acquired during 2000, and a full twelve months of expense in 2000
resulting from the acquisition of 5 branches from Astoria in August of 1999.
Residual value lease losses increased $637,000, from $27,000 for 1999 to
$664,000 in 2000. The increase is primarily attributable to a $595,000 charge
taken in 2000 due to a decline in residual values of leased vehicles considered
to be other-than-temporary.
Other operating expenses increased $1.8 million, or 15.7%, to $13.1 million in
2000 from $11.3 million in 1999. The increase on other operating expenses
resulted primarily from advertising expense, which increased $840,000 in 2000
when compared to 1999. The increase in advertising expense primarily resulted
from advertising campaigns associated with the new branches the Company acquired
in 2000 and 1999.
Capital securities expense increased $1.0 million, to $1.6 million in 2000 from
$582,000 in 1999. The increase in capital securities expense reflects a full
twelve months of expense in 2000 from the obligations issued by the Company in
August 1999. Lastly, there was an increase in expenses relating to the
amortization of intangible assets due to certain of the recently completed
acquisitions. Amortization expense increased $1.2 million from $1.8 million in
1999 to $3.0 million in 2000.
39
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of
the Company's operations. Unlike most industrial companies, nearly all assets
and liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. In addition, interest rates do not necessarily move in the
direction of, or to the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective January 1, 2001. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Changes in the fair value of the derivative financial instruments
are reported in either net income or as a component of comprehensive income.
Consequently, there may be increased volatility in net income, comprehensive
income, and stockholders' equity on an ongoing basis as a result of accounting
for derivatives in accordance with SFAS No. 133.
Special hedge accounting treatment is permitted only if specific criteria are
met, including a requirement that the hedging relationship be highly effective
both at inception and on an ongoing basis. Accounting for hedges varies based on
the type of hedge - fair value or cash flow. Results of effective hedges are
recognized in current earnings for fair value hedges and in other comprehensive
income for cash flow hedges. Ineffective portions of hedges are recognized
immediately in earnings and are not deferred.
The Company has certain embedded derivative instruments related to a deposit
product and two debt securities that have costs and returns linked to the
performance of the NASDAQ 100 index. Management determined that these debt
securities and the deposit product do not qualify for hedge accounting under
SFAS No. 133. The embedded derivatives have been separated from the underlying
host instruments for financial reporting purposes and accounted for at fair
value. In connection with the adoption of SFAS No. 133 as of January 1, 2001,
the Company recorded a charge to earnings for a transition adjustment of
$159,000 ($95,000, after-tax) for the net impact of recording these embedded
derivatives on the consolidated balance sheet at fair value. Due to the
insignificance of the amount, the transition adjustment is not reflected as a
cumulative effect of a change in accounting principle or the consolidated
statement of income for the year ended December 31, 2001 but is instead recorded
in net securities losses.
The total amortized cost and estimated fair value of these two debt securities
(including the embedded derivatives, which are classified in the consolidated
balance sheet with the underlying host instrument) is $6.2 million and $6.2
million, respectively, at December 31, 2001 and $7.0 and $6.7, respectively, at
December 31, 2000. The securities' rate of return is based on an original
NASDAQ 100 index value, with the index value resetting annually over a five-year
period. The rate or return is capped on these debt securities as follows:
$3.000 million have a 35% annual rate of return cap and $4.000 million have a
25% annual rate of return cap. The $4.000 million security has a guaranteed
rate of return of 2% regardless of the performance of the NASDAQ 100 index over
its five year period. The securities are scheduled to mature in 2005 and the
Company is guaranteed to receive the face value of the securities at maturity.
These two debt securities are valued similar to zero coupon bonds coupled with
the value of NASDAQ 100 futures contracts. The primary purpose of these debt
securities is to provide a certain level of hedging related to a deposit product
the Company offered in 2000 that has similar characteristics to the bonds. The
two debt securities were sold in 2002 approximating their carrying values at
December 31, 2001.
40
As of December 31, 2001 and 2000, the face value of the NASDAQ 100 deposit
product was $1.3 million and $1.4 million, respectively, with an estimated fair
value (including the embedded derivative, which is classified in the
consolidated balance sheet with the underlying host instrument) of $1.0 million
and $1.2 million, respectively. The NASDAQ 100 deposit product is a five year
certificate of deposit with a maturity date in July 2005. The deposit's
interest rate is based on an original NASDAQ 100 index value, with the index
value resetting annually over a five-year period. The maximum annual interest
rate is 20%, and the Company has guaranteed the return of the original deposit
balance to the customer (i.e. the minimum rate for the five period cannot be
negative). The Company does not currently offer the NASDAQ 100 deposit product
and does not currently intend to re-introduce this product in the foreseeable
future.
As of January 1, 2001, the Company had recorded on its consolidated balance
sheet an asset of $800,000 and a liability of $160,000 representing the
estimated fair values of both embedded derivatives related to the debt
securities and time deposit product, respectively, linked to the NASDAQ 100
index. During the year ended December 31, 2001, the Company recorded a $640,000
net loss related to the adjustment of the embedded derivatives to estimated fair
value, which was recorded in net gain (loss) on securities transactions on the
consolidated statement of income. As of December 31, 2001, both the embedded
derivatives related to the debt securities and time deposit product linked to
the NASDAQ 100 index were completely written-off as these embedded derivatives
had no value.
At December 31, 2001, the Company has no other derivatives as currently defined
by SFAS No. 133.
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR CERTAIN TRANSITIONS INVOLVING
STOCK COMPENSATION
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". FASB Interpretation No. 44
clarifies the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" for certain issues. The adoption of
this Interpretation on July 1, 2000 did not have a material effect on the
Company's consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", a replacement
of SFAS No. 125. SFAS No. 140 addresses implementation issues that were
identified in applying SFAS No. 125. This statement revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of the
provisions of SFAS No. 125 without reconsideration. SFAS No. 140 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. SFAS No. 140 is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. This statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application is
not permitted. The adoption of SFAS No. 140 did not have a material effect on
the Company's consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENT - BUSINESS COMBINATIONS AND GOODWILL AND OTHER
INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. In addition, the provisions of Statement No. 141 apply to all
purchase method business combinations completed after June 30, 2001. SFAS 141
also specifies the criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
41
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Effective January 1, 2002, SFAS No. 121 was superceded by SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Currently, the FASB has stated that the unidentifiable intangible asset acquired
in the acquisition of a bank or thrift (including acquisitions of branches),
where the fair value of the liabilities assumed exceeds the fair value of the
assets acquired, should continue to be accounted for under SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions." Under
SFAS No. 72, all of the intangible assets associated with branch acquisitions
recorded on the Company's consolidated balance sheet as of December 31, 2001
will continue to be amortized. The FASB has announced that additional research
will be performed to decide whether unidentifiable intangible assets recorded
under SFAS No. 72 should be accounted for similarly to goodwill under SFAS No.
142. However, issuance of final opinion with respect to this matter is not
expected until the fourth quarter of 2002.
The Company adopted the provisions of Statement 141 in 2001. The adoption of
this Statement did not have an impact on the Company's consolidated financial
statements. The Company is required to adopt the provisions of Statement 142
effective January 1, 2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 continued to be amortized prior to
the adoption of Statement 142.
SFAS No. 141 will require upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. Upon adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible assets is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
requires the Company to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption based upon criteria
contained in SFAS No. 142. Any transitional impairment loss would be recognized
as the cumulative effect of a change in accounting principle in the Company's
consolidated statement of income. At this time, the Company has not completed
its transitional goodwill impairment evaluation. However, the Company does not
anticipate there will be any significant transitional impairment losses from the
adoption of SFAS No. 142.
Prior to the adoption of SFAS No. 142, goodwill and other intangible assets were
being amortized on a straight-line basis over periods ranging from 10 years to
25 years from the acquisition date. The Company reviewed goodwill and other
intangible assets on a periodic basis for events or changes in circumstances
that may have indicated that the carrying amount of goodwill was not
recoverable.
At December 31, 2001, the Company had unamortized goodwill related to its
acquisitions of First National Bancorp, Inc. (FNB) in June 2001, M. Griffith
Inc. in May 2000 (see note 2) and other bank acquisitions totaling $15.5
million. The amortization of this goodwill amounted to $.8 million for the year
ended December 31, 2001 ($1.0 million when annualized for a full year's
amortization of the FNB goodwill). In accordance with SFAS No. 142, the Company
will no longer amortize this goodwill subsequent to December 31, 2001, which
will reduce non-interest expenses by $.8 million in 2002, as compared to 2001.
At December 31, 2001, the Company had unidentified intangible assets accounted
for under SFAS No. 72 of approximately $33.0 million related to various branch
acquisitions (see note 2). This intangible asset is currently excluded for the
scope of SFAS No. 142. The amortization expense related to these unidentified
intangible assets totaled $2.7 million for the year ended December 31, 2001. As
noted above, while the FASB is reconsidering the exclusion of this type of
intangible asset from the scope of SFAS No. 142, at the present time this
intangible asset will continue to be amortized.
42
At December 31, 2001, the Company had core deposit intangible assets related to
various branch acquisitions of $2.2 million. The amortization of these
intangible assets amounted to $.7 million during the years ended December 31,
2001. In accordance with SFAS No. 142, these intangible assets will continue to
be amortized.
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
On August 16, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. This Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Under this Statement, the liability is discounted and the
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. The FASB issued
this Statement to provide consistency for the accounting and reporting of
liabilities associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Earlier
application is permitted. The Company does not expect a material impact on its
consolidated financial statements when this Statement is adopted.
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS
On October 3, 2001, The FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement
also supersedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The changes in this Statement improve financial
reporting by requiring that one accounting model be used for long-lived assets
to be disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The provisions of this Statement are to be
applied prospectively. The Company does not expect a material impact on its
consolidated financial statements when this Statement is adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on the Company's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net interest income.
In an attempt to manage the Company's exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's
asset/liability committee (ALCO) meets monthly to review the Company's interest
rate risk position and profitability, and to recommend strategies for
consideration by the Board of Directors. Management also reviews loan and
deposit pricing, and the Company's securities portfolio, formulates investment
and funding strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. Notwithstanding the Company's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have an adverse effect on net income.
43
In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's interest rate risk while enhancing the net
interest margin. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to changes in interest rates and fluctuations in the
difference between long- and short-term interest rates.
The primary tool utilized by ALCO to manage interest rate risk is a balance
sheet/income statement simulation model (interest rate sensitivity analysis).
Information such as principal balance, interest rate, maturity date, cash flows,
next repricing date (if needed), and current rates is uploaded into the model to
create an ending balance sheet. In addition, ALCO makes certain assumptions
regarding prepayment speeds for loans and leases and mortgage related investment
securities along with any optionality within the deposits and borrowings.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) with a static balance sheet over a 12-month
period. A second and third model are run in which a gradual increase of 200 bp
and a gradual decrease of 150 bp takes place over a 12 month period. A fourth
and fifth model are run in which a gradual increase and decrease, respectively,
of 100 bp takes place over a 12 month period. Under these scenarios, assets
subject to prepayments are adjusted to account for faster or slower prepayment
assumptions. Any investment securities or borrowings that have callable options
embedded into them are handled accordingly based on the interest rate scenario.
The resultant changes in net interest income are then measured against the flat
rate scenario.
In the declining rate scenarios, net interest income is projected to remain
relatively unchanged when compared to the flat rate scenario through the
simulation period. The level of net interest income remaining unchanged is a
result of adjustable rate loans repricing, and increased cash flow as a result
of higher prepayments on loans reinvested at lower market rates, callable
securities reinvested at lower market rates offset by continued time deposits
re-pricing downward.
In the rising rate scenarios, net interest income is projected to experience a
decline from the flat rate scenario. Net interest income is projected to remain
at lower levels than in a flat rate scenario through the simulation period
primarily due to a lag in assets repricing while funding costs increase. The
potential impact on earnings is dependent on the ability to lag deposit
repricing.
Net interest income for the next twelve months in a + 200/- 150 bp scenario is
within the internal policy risk limits of a not more than a 5% change in net
interest income. The following table summarizes the percentage change in net
interest income in the rising and declining rate scenarios over a 12 month
period from the forecasted net interest income in the flat rate scenario using
the December 31, 2001 balance sheet position:
INTEREST RATE SENSITIVITY ANALYSIS
---------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
---------------------------------------------------------
+200 (1.54%)
+100 (0.63%)
-100 0.16%
-150 (0.01%)
---------------------------------------------------------
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Responsibility for the integrity, objectivity, consistency, and fair
presentation of the financial information presented in this Annual Report rests
with NBT Bancorp Inc. management. The accompanying consolidated financial
statements and related information have been prepared in conformity with
accounting principles generally accepted in the United States of America
consistently applied and include, where required, amounts based on informed
judgments and management's best estimates.
Management maintains a system of internal controls and accounting policies
and procedures to provide reasonable assurance of the accountability and
safeguarding of Company assets and of the accuracy of financial information.
These procedures include management evaluations of asset quality and the impact
of economic events, organizational arrangements that provide an appropriate
segregation of responsibilities and a program of internal audits to evaluate
independently the adequacy and application of financial and operating controls
and compliance with Company policies and procedures.
The Board of Directors has appointed a Risk Management Committee composed
entirely of directors who are not employees of the Company. The Risk Management
Committee is responsible for recommending to the Board the independent auditors
to be retained for the coming year. The Risk Management Committee meets
periodically, both jointly and privately, with the independent auditors, with
our internal auditors, as well as with representatives of management, to review
accounting, auditing, internal control structure and financial reporting
matters. The Risk Management Committee reports to the Board on its activities
and findings.
/s/ Daryl R. Forsythe
Daryl R. Forsythe
President and Chief Executive Officer
/s/ Michael J. Chewens
Michael J. Chewens, CPA
Senior Executive Vice President
Chief Financial Officer and Corporate Secretary
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NBT Bancorp Inc.:
We have audited the accompanying consolidated balance sheets of NBT Bancorp Inc.
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' equity, cash flows and
comprehensive income for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NBT Bancorp Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Albany, New York
January 28, 2002
46
NBT BANCORP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(in thousands, except share and per share data)
ASSETS 2001 2000
----------- ----------
Cash and due from banks $ 123,201 114,848
Short term interest bearing accounts 6,756 15,595
Trading securities, at fair value 126 20,540
Securities available for sale, at fair value 909,341 936,757
Securities held to maturity (fair value $101,495 and $109,835) 101,604 110,415
Federal Reserve and Federal Home Loan Bank stock 21,784 31,686
Loans and leases 2,339,636 2,247,655
Less allowance for loan and lease losses 44,746 32,494
----------- ----------
Net loans and leases 2,294,890 2,215,161
Premises and equipment, net 62,685 56,116
Goodwill and intangible assets, net 50,688 45,908
Other assets 67,127 58,480
----------- ----------
Total assets $3,638,202 3,605,506
=========== ==========
LIABILITIES, GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN COMPANY'S JUNIOR SUBORDINATE
DEBENTURES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 431,407 372,181
Savings, NOW, and money market 1,097,156 970,859
Time 1,387,049 1,500,828
----------- ----------
Total deposits 2,915,612 2,843,868
Short-term borrowings 122,013 184,704
Long-term debt 272,331 240,529
Other liabilities 44,891 49,764
----------- ----------
Total liabilities 3,354,847 3,318,865
----------- ----------
Guaranteed preferred beneficial interests in Company's junior
subordinate debentures ("capital securities") 17,000 17,000
Stockholders' equity:
Preferred stock, $0.01 par at December 31, 2001 and 2000;
shares authorized - 2,500,000
Common stock, $0.01 par value
and 30,000,000 shares authorized at December 31, 2001
and 2000; issued 34,252,661 and 33,205,742 at December 31, 2001
and 2000, respectively 343 332
Additional paid-in-capital 209,176 195,422
Retained earnings 72,531 88,921
Accumulated other comprehensive income (loss) 3,921 (1,934)
Common stock in treasury, at cost, 1,147,848 and 672,773 shares (19,616) (13,100)
----------- ----------
Total stockholders' equity 266,355 269,641
----------- ----------
Total liabilities, guaranteed preferred beneficial interests in
Company's junior subordinate debentures and stockholders'
equity $3,638,202 3,605,506
=========== ==========
See accompanying notes to consolidated financial statements.
47
NBT BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999
(in thousands, except per share data)
2001 2000 1999
--------- -------- -------
Interest, fee, and dividend income:
Interest and fees on loans and leases $187,188 181,699 149,999
Securities available for sale 60,241 69,346 58,911
Securities held to maturity 5,232 6,137 8,480
Trading securities 649 8 1
Other 2,124 3,191 3,458
--------- -------- -------
Total interest, fee, and dividend income 255,434 260,381 220,849
--------- -------- -------
Interest expense:
Deposits 98,522 107,293 82,476
Short-term borrowings 5,365 11,940 7,268
Long-term debt 13,615 13,770 13,132
--------- -------- -------
Total interest expense 117,502 133,003 102,876
--------- -------- -------
Net interest income 137,932 127,378 117,973
Provision for loan losses 31,929 10,143 6,896
--------- -------- -------
Net interest income after provision for loan losses 106,003 117,235 111,077
--------- -------- -------
Noninterest income:
Service charges on deposit accounts 12,756 10,193 9,278
Broker/dealer and insurance revenue 4,500 2,723 46
Trust 3,958 4,047 3,959
Net securities (losses) gains (7,692) (2,273) 1,000
Gain on sale of branch building 1,367 - -
Other 9,245 7,891 8,044
--------- -------- -------
Total noninterest income 24,134 22,581 22,327
--------- -------- -------
Noninterest expense:
Salaries and employee benefits 48,419 44,802 40,527
Occupancy 8,704 7,761 6,804
Equipment 7,228 7,271 7,046
Data processing and communications 10,690 8,206 7,544
Professional fees and outside services 6,338 5,082 4,252
Office supplies and postage 4,639 3,976 4,106
Amortization of intangible assets 4,248 3,049 1,764
Merger, acquisition and reorganization costs 15,322 23,625 835
Writedowns of lease residual values 3,529 664 27
Deposit overdraft write-offs 2,125 - -
Capital securities 1,278 1,633 582
Other 13,338 13,065 11,292
--------- -------- -------
Total noninterest expense 125,858 119,134 84,779
--------- -------- -------
Income before income tax expense 4,279 20,682 48,625
Income tax expense 542 6,528 16,033
--------- -------- -------
Net income $ 3,737 14,154 32,592
========= ======== =======
Earnings per share:
Basic $ 0.11 0.44 1.01
========= ======== =======
Diluted $ 0.11 0.44 1.00
========= ======== =======
See accompanying notes to consolidated financial statements.
Note: All per share data has been restated to give retroactive effect to stock
dividends and pooling-of-interests.
48
NBT BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
(in thousands except share and per share data)
ACCUMULATED
ADDITIONAL OTHER COMPRE- COMMON
COMMON PAID-IN- RETAINED HENSIVE STOCK IN
STOCK CAPITAL EARNINGS (LOSS)/INCOME TREASURY TOTAL
------------ -------------- --------- -------------- --------- --------
Balance at December 31, 1998 $ 32,300 149,924 87,982 2,360 (12,962) 259,604
Net income - - 32,592 - - 32,592
Issuance of 621,143 shares for a stock dividend 621 10,994 (11,615) - - -
Cash dividends - $0.656 per share - - (15,729) - - (15,729)
Payment in lieu of fractional shares - - (16) - - (16)
Purchase of 563,391 treasury shares - - - - (9,628) (9,628)
Issuance of 436,957 shares to employee benefit
plans and other stock plans, including tax benefit 116 (20) - - 7,026 7,122
Retirement of 205,999 shares of treasury stock
of pooled companies (206) (2,398) - - 2,604 -
Other comprehensive loss - - - (29,117) - (29,117)
------------ -------------- --------- -------------- --------- --------
Balance at December 31, 1999 32,831 158,500 93,214 (26,757) (12,960) 244,828
Net income - - 14,154 - - 14,154
Cash dividends - $0.68 per share - - (18,424) - - (18,424)
Payment in lieu of fractional shares - - (23) - - (23)
Purchase of 139,393 treasury shares - - - - (1,680) (1,680)
Issuance of 56,606 shares to employee benefit plans
and other stock plans, including tax benefit 7 582 - - 578 1,167
Change of $1.00 stated value per share to $0.01
par value per share (32,509) 32,509 - - - -
Issuance of 420,989 shares to purchase
M. Griffith, Inc. 4 4,792 - - - 4,796
Retirement of 75,763 shares of treasury stock of
pooled Company (1) (961) - - 962 -
Other comprehensive income - - - 24,823 - 24,823
------------ -------------- --------- -------------- --------- --------
Balance at December 31, 2000 332 195,422 88,921 (1,934) (13,100) 269,641
Net income - - 3,737 - - 3,737
Cash dividends - $0.68 per share - - (20,123) - - (20,123)
Issuance of 1,075,366 shares to purchase First
National Bancorp, Inc. 11 15,991 - - - 16,002
Payment in lieu of fractional shares - - (4) - - (4)
Purchase of 727,037 treasury shares - - - - (11,126) (11,126)
Issuance of 223,515 shares to employee benefit plans
and other stock plans, including tax benefit 1 (1,529) - - 3,901 2,373
Retirement of 63,034 shares of treasury stock of
pooled company (1) (708) - - 709 -
Other comprehensive income - - - 5,855 - 5,855
------------ -------------- --------- -------------- --------- --------
Balance at December 31, 2001 $ 343 209,176 72,531 3,921 (19,616) 266,355
============ ============== ========= ============== ========= ========
See accompanying notes to consolidated financial statements.
Note: Cash dividends per share represent the historical cash dividends per share
of NBT Bancorp Inc., adjusted to give retroactive effect to stock
dividends. All other share and per share data is adjusted to give
retroactive effect to stock dividends and pooling-of-interests.
49
NBT BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
---------- --------- ---------
Operating activities:
Net income $ 3,737 14,154 32,592
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 31,929 10,143 6,896
Depreciation of premises and equipment 6,197 6,646 6,253
Net accretion on securities (5,369) (678) (1,211)
Amortization of intangible assets 4,248 3,049 1,764
Deferred income tax (benefit) expense (6,333) (2,194) 2,067
Proceeds from sale of loans held for sale 16,570 25,425 41,899
Originations and purchases of loans held for sale (14,360) (20,950) (40,471)
Purchase of trading securities (6,194) (5,250) (24,257)
Proceeds from sales of trading securities 29,844 5,261 24,305
Net loss on disposal of premises and equipment 164 - -
Net gains on sales of loans held for sale (27) (172) (342)
Net security losses (gains) 7,692 2,273 (1,000)
Net (gain) loss on sales of other real estate owned (17) 28 (159)
Writedowns on other real estate owned 253 235 220
Gain on sale of branch building (1,367) - -
Tax benefit from exercise of stock options 327 660 296
Net decrease (increase) in other assets (5,471) (1,725) 1,221
Net (decrease) increase in other liabilities (8,579) 24,784 1,622
---------- --------- ---------
Net cash provided by operating activities 53,244 61,689 51,695
---------- --------- ---------
Investing activities:
Net cash and cash equivalents provided by acquisitions 9,509 74,434 116,911
Securities available for sale:
Proceeds from maturities, calls and principal paydowns 335,280 98,755 139,519
Proceeds from sales 43,318 128,889 189,202
Purchases (324,701) (159,984) (469,044)
Securities held to maturity:
Proceeds from maturities, calls, and principal paydowns 40,427 34,347 41,952
Purchases (26,121) (23,445) (45,292)
Net increase in loans (39,589) (306,113) (276,761)
Net decrease (increase) in Federal Reserve and FHLB stock 9,902 (505) (4,553)
Purchases of premises and equipment, net (8,451) (1,642) (11,602)
Proceeds from sales of other real estate owned 3,476 4,272 5,451
---------- --------- ---------
Net cash provided by (used in) investing activities 43,050 (150,992) (314,217)
---------- --------- ---------
Financing activities:
Net (decrease) increase in deposits (36,214) 132,950 144,106
Net (decrease) increase in short-term borrowings (63,437) 13,129 59,328
Proceeds from issuance of long-term debt 247,083 5,000 75,000
Repayments of long-term debt (215,005) (22,543) (7,425)
Proceeds from the issuance of shares to employee
benefit plans and other stock plans 2,046 507 6,826
Issuance of capital securities - - 17,000
Purchase of treasury stock (11,126) (1,680) (9,628)
Cash dividends and payment for fractional shares (20,127) (18,447) (15,745)
---------- --------- ---------
Net cash (used in) provided by financing activities (96,780) 108,916 269,462
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents (486) 19,613 6,940
Cash and cash equivalents at beginning of year 130,443 110,830 103,890
---------- --------- ---------
Cash and cash equivalents at end of year $ 129,957 130,443 110,830
========== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 124,362 125,886 100,590
Income taxes 8,361 10,093 15,121
========== ========= =========
Noncash investing activities:
Transfer of securities available for sale to trading securities $ 3,804 20,286 -
Adjustment of securities AFS to fair value and decrease
in net unrealized loss on securities AFS transferred
to investment securities held to maturity, net of tax - 24,823 29,117
Transfer of held to maturity securities to securities
available for sale $ - - 184,007
Transfer of loans to other real estate owned $ 3,400 3,634 4,138
Fair value of assets acquired $ 109,599 43,873 -
Fair value of liabilities assumed $ 112,134 133,891 136,780
Common stock issued for acquisitions $ 16,002 4,796 -
========== ========= =========
See accompanying notes to consolidated financial statements.
50
NBT BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------ ------ --------
Net income $3,737 14,154 32,592
------ ------ --------
Other comprehensive income (loss), net of tax:
Unrealized net holding gains (losses) arising
during the year (pre-tax amounts of $2,779;
$36,323 and $(50,196)) 1,641 23,334 (32,015)
Net unrealized gain on securities transferred from
investment securities held to maturity to
securities available for sale (pre tax amounts of
$-, $- and $4,877) - - 3,414
Less: Reclassification adjustment for net losses
(gains) related to securities available for sale
included in net income (pre-tax amounts
of $7,124; $2,320 and ($1,000)) 4,214 1,489 (516)
------ ------ --------
Total other comprehensive income (loss) 5,855 24,823 (29,117)
------ ------ --------
Comprehensive income $9,592 38,977 3,475
====== ====== ========
See accompanying notes to consolidated financial statements
51
NBT BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of NBT Bancorp Inc. ("Bancorp") and
its subsidiaries, NBT Bank, N.A. (NBT Bank) and NBT Financial Services,
Inc. conform, in all material respects, to accounting principles generally
accepted in the United States of America ("GAAP") and to general practices
within the banking industry. Collectively, Bancorp and its subsidiaries are
referred to herein as "the Company".
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
The following is a description of significant policies and practices:
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Bancorp and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation. Amounts previously
reported in the consolidated financial statements are reclassified whenever
necessary to conform with the current year's presentation. In the "Parent
Company Financial Information," the investment in subsidiaries is carried
under the equity method of accounting.
SEGMENT REPORTING
The Company's operations are solely in the community banking industry and
include the provision of traditional banking services. The Company operates
solely in the geographical regions of central and northern New York and
northeastern Pennsylvania. Management makes operating decisions and
assesses performance based on an ongoing review of its community banking
operations, which constitute the Company's only reportable segment.
CASH EQUIVALENTS
The Company considers amounts due from correspondent banks, cash items in
process of collection and institutional money market mutual funds to be
cash equivalents for purposes of the consolidated statements of cash flows.
52
SECURITIES
The Company classifies its securities at date of purchase as either
available for sale, held to maturity or trading. Held to maturity debt
securities are those that the Company has the ability and intent to hold
until maturity. Available for sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available for sale securities are excluded from earnings and are reported
in stockholders' equity as a component of accumulated other comprehensive
income or loss. Held to maturity securities are recorded at amortized cost.
Trading securities are recorded at fair value, with net unrealized gains
and losses recognized currently in income. Transfers of securities between
categories are recorded at fair value at the date of transfer. A decline in
the fair value of any available for sale or held to maturity security below
cost that is deemed other-than-temporary is charged to earnings resulting
in the establishment of a new cost basis for the security. Securities with
an other-than-temporary impairment are generally placed on nonaccrual
status.
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.
Investments in Federal Reserve and Federal Home Loan Bank stock are
required for membership in those organizations and are carried at cost
since there is no market value available.
LOANS, LEASES, AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans are recorded at their current unpaid principal balance, net of
unearned income and unamortized loan fees and expenses, which are amortized
under the effective interest method over the estimated lives of the loans.
Interest income on loans is primarily accrued based on the principal amount
outstanding.
Lease receivables primarily represent automobile financing to customers
through direct financing leases and are carried at the aggregate of the
lease payments receivable and the estimated residual values, net of
unearned income and net deferred lease origination fees and costs. Net
deferred lease origination fees and costs are amortized under the effective
interest method over the estimated lives of the leases. The estimated
residual value related to the total lease portfolio is reviewed quarterly,
and if there has been a decline in the estimated fair value of the total
residual value that is judged by management to be other-than-temporary, a
loss is recognized. Adjustments related to such other-than-temporary
declines in estimated fair value are recorded in noninterest expense in the
consolidated statements of income.
53
Loans and leases are placed on nonaccrual status when timely collection of
principal and interest in accordance with contractual terms is doubtful.
Loans and leases are transferred to a nonaccrual basis generally when
principal or interest payments become ninety days delinquent, unless the
loan is well secured and in the process of collection, or sooner when
management concludes circumstances indicate that borrowers may be unable to
meet contractual principal or interest payments. When a loan or lease is
transferred to a nonaccrual status, all interest previously accrued in the
current period but not collected is reversed against interest income in
that period. Interest accrued in a prior period and not collected is
charged-off against the allowance for loan and lease losses.
If ultimate repayment of a non-accrual loan is expected, any payments
received are applied in accordance with contractual terms. If ultimate
repayment of principal is not expected, any payment received on a
non-accrual loan is applied to principal until ultimate repayment becomes
expected. Nonaccrual loans are returned to accrual status when they become
current as to principal and interest or demonstrate a period of performance
under the contractual terms and, in the opinion of management, are fully
collectible as to principal and interest. When in the opinion of management
the collection of principal appears unlikely, the loan balance is
charged-off in total or in part.
Commercial type loans are considered impaired when it is probable that the
borrower will not repay the loan according to the original contractual
terms of the loan agreement, and all loan types are considered impaired if
the loan is restructured in a troubled debt restructuring.
A loan is considered to be a trouble debt restructured loan (TDR) when the
Company grants a concession to the borrower because of the borrower's
financial condition that it would not otherwise consider. Such concessions
include the reduction of interest rates, forgiveness of principal or
interest or other modifications at interest rates that are less than the
current market rate for new obligations with similar risk. TDR loans that
are in compliance with their modified terms and that yield a market rate
may be removed from the TDR status after a period of performance.
The allowance for loan and lease losses is the amount which, in the opinion
of management, is necessary to absorb probable losses inherent in the loan
and lease portfolio. The allowance is determined based upon numerous
considerations, including local economic conditions, the growth and
composition of the loan portfolio with respect to the mix between the
various types of loans and their related risk characteristics, a review of
the value of collateral supporting the loans, comprehensive reviews of the
loan portfolio by the Independent Loan Review staff and management, as well
as consideration of volume and trends of delinquencies, non-performing
loans, and loan charge-offs. As a result of the test of adequacy, required
additions to the allowance for loan and lease losses are made periodically
by charges to the provision for loan and lease losses.
The allowance for loan and lease losses related to impaired loans is based
on discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain loans where repayment of
the loan is expected to be provided solely by the underlying collateral
(collateral dependent loans). The Company's impaired loans are generally
collateral dependent. The Company considers the estimated cost to sell, on
a discounted basis, when determining the fair value of collateral in the
measurement of impairment if those costs are expected to reduce the cash
flows available to repay or otherwise satisfy the loans.
54
Management believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize loan and
lease losses, future additions to the allowance for loan and lease losses
may be necessary based on changes in economic conditions or changes in the
values of properties securing loans in the process of foreclosure. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
and lease losses. Such agencies may require the Company to recognize
additions to the allowance for loan and lease losses based on their
judgements about information available to them at the time of their
examination which may not be currently available to management.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation of premises and equipment is determined using the straight
line method over the estimated useful lives of the respective assets.
Expenditures for maintenance, repairs, and minor replacements are charged
to expense as incurred.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") consists of properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. These assets
are recorded at the lower of fair value of the asset acquired less
estimated costs to sell or "cost" (defined as the fair value at initial
foreclosure). At the time of foreclosure, or when foreclosure occurs
in-substance, the excess, if any of the loan over the fair market value of
the assets received, less estimated selling costs, is charged to the
allowance for loan losses and any subsequent valuation write-downs are
charged to other expense. Operating costs associated with the properties
are charged to expense as incurred. Gains on the sale of OREO are included
in income when title has passed and the sale has met the minimum down
payment requirements prescribed by GAAP.
TREASURY STOCK
Treasury stock acquisitions are recorded at cost. Subsequent sales of
treasury stock are recorded on an average cost basis. Gains on the sale of
treasury stock are credited to additional paid-in-capital. Losses on the
sale of treasury stock are charged to additional paid-in-capital to the
extent of previous gains, otherwise charged to retained earnings.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. The
Company files a consolidated tax return on the accrual basis. Deferred
income taxes are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
55
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. On
January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period the fair
value of all stock based awards measured on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma net income per share disclosures for employee stock-based grants made
in 1995 and thereafter as if the fair value based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures of
SFAS No. 123.
PER SHARE AMOUNTS
Basic earnings per share (EPS) excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity (such as the Company's dilutive stock options).
All share and per share data has been restated to give retroactive effect
to pooling-of-interests and stock dividends.
OTHER FINANCIAL INSTRUMENTS
The Company is a party to certain other financial instruments with
off-balance-sheet risk such as commitments to extend credit, unused lines
of credit, and standby letters of credit, as well as certain mortgage loans
sold to investors with recourse. The Company's policy is to record such
instruments when funded.
COMPREHENSIVE INCOME
At the Company, comprehensive income represents net income plus other
comprehensive income, which consists of the net change in unrealized gains
or losses on securities available for sale, net unrealized gains from the
transfer of held to maturity securities to available for sale, net of
income taxes, for the period. Accumulated other comprehensive income
represents the net unrealized gains or losses on securities available for
sale, net of income taxes, as of the consolidated balance sheet dates.
PENSION COSTS
The Company maintains a non contributory, defined benefit pension plan
covering substantially all employees, as well as supplemental employee
retirement plans covering certain executives. Costs associated with these
plans, based on actuarial computations of current and future benefits for
employees, are charged to current operating expenses.
56
TRUST
Assets held by the Company in a fiduciary or agency capacity for its
customers are not included in the accompanying consolidated balance sheets,
since such assets are not assets of the Company. Such assets totaled $1.3
billion and $1.4 billion at December 31, 2001 and 2000, respectively. Trust
income is recognized on the accrual method based on contractual rates
applied to the balances of trust accounts.
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective January 1, 2001.
This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Changes in the fair
value of the derivative financial instruments are reported in either net
income or as a component of comprehensive income. Consequently, there may
be increased volatility in net income, comprehensive income, and
stockholders' equity on an ongoing basis as a result of accounting for
derivatives in accordance with SFAS No. 133.
Special hedge accounting treatment is permitted only if specific criteria
are met, including a requirement that the hedging relationship be highly
effective both at inception and on an ongoing basis. Accounting for hedges
varies based on the type of hedge - fair value or cash flow. Results of
effective hedges are recognized in current earnings for fair value hedges
and in other comprehensive income for cash flow hedges. Ineffective
portions of hedges are recognized immediately in earnings and are not
deferred.
The Company has certain embedded derivative instruments related to a
deposit product and two debt securities that have costs and returns linked
to the performance of the NASDAQ 100 index. Management determined that
these debt securities and the deposit product do not qualify for hedge
accounting under SFAS No. 133. The embedded derivatives have been separated
from the underlying host instruments for financial reporting purposes and
accounted for at fair value. In connection with the adoption of SFAS No.
133 as of January 1, 2001, the Company recorded a charge to earnings for a
transition adjustment of $159,000 ($95,000, after-tax) for the net impact
of recording these embedded derivatives on the consolidated balance sheet
at fair value. Due to the insignificance of the amount, the transition
adjustment is not reflected as a cumulative effect of a change in
accounting principle or the consolidated statement of income for the year
ended December 31, 2001 but is instead recorded in net securities (losses)
gains.
57
The total amortized cost and estimated fair value of these two debt
securities (including the embedded derivatives, which are classified in the
consolidated balance sheet with the underlying host instrument) is $6.2
million and $6.2 million, respectively, at December 31, 2001 and $7.0
million and $6.4 million, respectively, at December 31, 2000. The
securities' rate of return is based on an original NASDAQ 100 index value,
with the index value resetting annually over a five-year period. The rate
or return is capped on these debt securities as follows: $3.0 million have
a 35% annual rate of return cap and $4.0 million have a 25% annual rate of
return cap. The $4.000 million security has a guaranteed rate of return of
2% regardless of the performance of the NASDAQ 100 index over its five year
period. The securities are scheduled to mature in 2005 and the Company is
guaranteed to receive the face value of the securities at maturity. These
two debt securities are valued similar to zero coupon bonds coupled with
the value of NASDAQ 100 futures contracts. The primary purpose of these
debt securities is to provide a certain level of hedging related to a
deposit product the Company offered in 2000 that has similar
characteristics to the bonds. The two debt securities were sold in 2002 at
amounts approximating their carrying values at December 31, 2001.
As of December 31, 2001 and 2000, the face value of the NASDAQ 100 deposit
product was $1.3 million and $1.4 million, respectively, with an estimated
fair value (including the embedded derivative, which is classified in the
consolidated balance sheet with the underlying host instrument) of $1.0
million and $1.2 million, respectively. The NASDAQ 100 deposit product is a
five year certificate of deposit with a maturity date in July 2005. The
deposit's interest rate is based on an original NASDAQ 100 index value,
with the index value resetting annually over a five-year period. The
maximum annual interest rate is 20%, and the Company has guaranteed the
return of the original deposit balance to the customer (i.e. the minimum
rate for the five period cannot be negative). The Company does not
currently offer the NASDAQ 100 deposit product and does not currently
intend to re-introduce this product in the foreseeable future.
As of January 1, 2001, the Company had recorded on its consolidated balance
sheet an asset of $800,000 and a liability of $160,000 representing the
estimated fair values of both the embedded derivatives related to the debt
securities and time deposit product, respectively, linked to the NASDAQ 100
index. During the year ended December 31, 2001, the Company recorded a
$640,000 net loss related to the adjustment of the embedded derivatives to
estimated fair value, which was recorded in net gain (loss) on securities
transactions on the consolidated statement of income. As of December 31,
2001, the embedded derivatives related to the debt securities and time
deposit product linked to the NASDAQ 100 index had no value.
At December 31, 2001, the Company has no other derivatives as currently
defined by SFAS No. 133.
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR CERTAIN TRANSITIONS INVOLVING
STOCK COMPENSATION
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". FASB Interpretation No.
44 clarifies the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" for certain issues. The adoption
of this Interpretation on July 1, 2000 did not have a material effect on
the Company's consolidated financial statements.
58
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", a
replacement of SFAS No. 125. SFAS No. 140 addresses implementation issues
that were identified in applying SFAS No. 125. This statement revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions of SFAS No. 125 without
reconsideration. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. SFAS No. 140 is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. This statement
is to be applied prospectively with certain exceptions. Other than those
exceptions, earlier or retroactive application is not permitted. The
adoption of SFAS No. 140 did not have a material effect on the Company's
consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENT - BUSINESS COMBINATIONS AND GOODWILL AND OTHER
INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001. In addition, the provisions of Statement No.
141 apply to all purchase method business combinations completed after June
30, 2001. SFAS 141 also specifies the criteria intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. SFAS 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 will also require that intangible assets
with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Effective
January 1, 2002, SFAS No. 121 was superceded by SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."
Currently, the FASB has stated that the unidentifiable intangible asset
acquired in the acquisition of a bank or thrift (including acquisitions of
branches), where the fair value of the liabilities assumed exceeds the fair
value of the assets acquired, should continue to be accounted for under
SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions." Under SFAS No. 72, all of the intangible assets associated
with branch acquisitions recorded on the Company's consolidated balance
sheet as of December 31, 2001 will continue to be amortized. The FASB has
announced that additional research will be performed to decide whether
unidentifiable intangible assets recorded under SFAS No. 72 should be
accounted for similarly to goodwill under SFAS No. 142. However, issuance
of final opinion with respect to this matter is not expected until the
fourth quarter of 2002.
The Company adopted the provisions of Statement 141 in 2001. The adoption
of this Statement did not have an impact on the Company's consolidated
financial statements. The Company is required to adopt the provisions of
Statement 142 effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 continued
to be amortized prior to the adoption of Statement 142.
59
SFAS No. 141 will require upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in
a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141
for recognition apart from goodwill. Upon adoption of SFAS No. 142, the
Company will be required to reassess the useful lives and residual values
of all intangible assets acquired in purchase business combinations, and
make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible
assets is identified as having an indefinite useful life, the Company will
be required to test the intangible asset for impairment in accordance with
the provisions of SFAS No. 142 within the first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption based
upon criteria contained in SFAS No. 142. Any transitional impairment loss
would be recognized as the cumulative effect of a change in accounting
principle in the Company's consolidated statement of income. At this time,
the Company has not completed its transitional goodwill impairment
evaluation. However, the Company does not anticipate there will be any
significant transitional impairment losses from the adoption of SFAS No.
142.
Prior to the adoption of SFAS No. 142, goodwill and other intangible assets
were being amortized on a straight-line basis over periods ranging from 10
years to 25 years from the acquisition date. The Company reviewed goodwill
and other intangible assets on a periodic basis for events or changes in
circumstances that may have indicated that the carrying amount of goodwill
was not recoverable.
At December 31, 2001, the Company had unamortized goodwill related to its
acquisitions of First National Bancorp, Inc. (FNB) in June 2001, M.
Griffith Inc. in May 2000 (see note 2) and other bank acquisitions totaling
$15.5 million. The amortization of this goodwill amounted to $.8 million
for the year ended December 31, 2001 ($1.0 million when annualized for a
full year's amortization of the FNB goodwill). In accordance with SFAS No.
142, the Company will no longer amortize this goodwill subsequent to
December 31, 2001, which will reduce non-interest expenses by $.8 million
in 2002, as compared to 2001.
At December 31, 2001, the Company had unidentified intangible assets
accounted for under SFAS No. 72 of approximately $33.0 million related to
various branch acquisitions (see note 2). This intangible asset is
currently excluded for the scope of SFAS No. 142. The amortization expense
related to these unidentified intangible assets totaled $2.7 million for
the year ended December 31, 2001. As noted above, while the FASB is
reconsidering the exclusion of this type of intangible asset from the scope
of SFAS No. 142, at the present time this intangible asset will continue to
be amortized.
At December 31, 2001, the Company had core deposit intangible assets
related to various branch acquisitions of $2.2 million. The amortization of
these intangible assets amounted to $.7 million during the year ended
December 31, 2001. In accordance with SFAS No. 142, these intangible assets
will continue to be amortized.
60
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
On August 16, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to
all entities. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it
is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. Under this Statement, the liability is
discounted and the accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was
initially recognized. The FASB issued this Statement to provide consistency
for the accounting and reporting of liabilities associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. The Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Earlier application
is permitted. The Company does not expect a material impact on its
consolidated financial statements when this Statement is adopted.
NEW ACCOUNTING PRONOUNCEMENT - ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS
On October 3, 2001, The FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement supersedes SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." This Statement also supersedes the accounting and reporting
provisions of APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The changes in this Statement improve financial reporting by
requiring that one accounting model be used for long-lived assets to be
disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. This Statement is effective for
financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The provisions of this
Statement are to be applied prospectively. The Company does not expect a
material impact on its consolidated financial statements when this
Statement is adopted.
(2) MERGER AND ACQUISITION ACTIVITY
On June 1, 2001, the Company completed the acquisition of First National
Bancorp, Inc. (FNB) whereby FNB was merged with and into NBT Bancorp Inc.
At the same time FNB's subsidiary, First National Bank of Northern New York
(FNB Bank) was merged into NBT Bank, N.A. The acquisition was accounted for
using the purchase method. As such, both the assets and liabilities assumed
have been recorded on the consolidated balance sheet of the Company at
estimated fair value as of the date of acquisition and the results of
operations are included in the Company's consolidated statement of income
from the acquisition date forward. To complete the transaction, the Company
issued approximately 1,075,000 shares of its common stock valued at $16.0
million. Goodwill, representing the cost over net assets acquired, was
approximately $7.0 million and was being amortized through December 31,
2001 on a straight-line basis based on a twenty year amortization period.
61
On September 14, 2001, the Company acquired $14.4 million in deposits from
Mohawk Community Bank. Unidentified intangible assets, accounted for in
accordance with SFAS No. 72 and representing the excess of cost over net
assets acquired, was $665,000 and is being amortized over 15 years on a
straight-line basis. Additionally, the Company identified $119,000 of core
deposit intangible asset.
On November 8, 2001, the Company, pursuant to a merger agreement dated June
18, 2001, completed its merger with CNB Financial Corp. (CNB) and its
wholly owned subsidiary, Central National Bank (CNB Bank), whereby CNB was
merged with and into NBT, and CNB Bank was merged with and into NBT Bank.
CNB Bank then became a division of NBT Bank. In connection with the merger,
CNB stockholders received 1.2 shares of the Company's common stock for each
share of CNB stock and the Company issued approximately 8.9 million shares
of common stock. The transaction is structured to be tax-free to
shareholders of CNB and has been accounted for as a pooling-of-interests.
Accordingly, these consolidated financial statements have been restated to
present combined consolidated financial condition and results of operations
of NBT and CNB as if the merger had been in effect for all years presented.
At September 30, 2001, CNB had consolidated assets of $983.1 million,
deposits of $853.7 million and equity of $62.8 million. CNB Bank operated
29 full service banking offices in nine upstate New York counties.
The following table presents net interest income, net income, and earnings
per share reported by CNB, NBT and the Company on a combined basis:
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2001 2000
------------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net interest income:
NBT $ 76,697 70,933
CNB 24,496 25,192
------------------- ------------------
Combined $ 101,193 96,125
=================== ==================
Net income:
NBT $ 17,427 14,504
CNB 266 6,113
------------------- ------------------
Combined $ 17,693 20,617
=================== ==================
Basic earnings per share:
NBT $ 0.72 0.62
CNB 0.04 0.82
Combined 0.54 0.64
Diluted earnings per share:
NBT $ 0.72 0.62
CNB 0.04 0.81
Combined 0.54 0.63
62
On February 17, 2000, the Company consummated a merger, whereby Lake Ariel
Bancorp, Inc. (Lake Ariel) and its subsidiaries were merged with and into
the Company with each issued and outstanding share of Lake Ariel exchanged
for 0.9961 shares of Bancorp common stock. The transaction resulted in the
issuance of approximately 5.0 million shares of Bancorp common stock. Lake
Ariel's commercial banking subsidiary was LA Bank, N.A.
On July 1, 2000, the Company consummated a merger, whereby Pioneer American
Holding Company Corp. (Pioneer Holding Company) and its subsidiary were
merged with and into the Company with each issued and outstanding share of
Pioneer Holding Company exchanged for 1.805 shares of Bancorp common stock.
The transaction resulted in the issuance of approximately 5.2 million
shares of Bancorp common stock. Pioneer Holding Company's commercial
banking subsidiary was Pioneer American Bank, N.A.
The Lake Ariel and Pioneer Holding Company mergers qualified as tax-free
exchanges and were accounted for as poolings-of-interests. Accordingly,
these consolidated financial statements have been restated to present the
combined consolidated financial condition and results of operations of all
companies as if the mergers had been in effect for all years presented.
LA Bank, N.A. and Pioneer Bank N.A. were commercial banks headquartered in
Northeast Pennsylvania with approximately $570 million and $420 million,
respectively, in assets at December 31, 1999, and twenty-two and eighteen
branch offices, respectively, in five counties. Immediately following the
Lake Ariel and Pioneer Holding Company mergers described above, Bancorp was
the surviving holding company for NBT Bank, LA Bank, N.A., Pioneer American
Bank, N.A. and NBT Financial Services, Inc. On November 10, 2000, LA Bank,
N.A. changed its name to Pennstar. On December 9, 2000, Pioneer American
Bank, N.A. was merged into Pennstar. On March 16, 2001, Pennstar was merged
with and into NBT Bank and became a division of NBT Bank.
On May 5, 2000, the Company consummated the acquisition of M. Griffith,
Inc. a Utica, New York based securities firm offering investment, financial
advisory and asset-management services, primarily in the Mohawk Valley
region. At that time, M. Griffith, Inc., a full-service broker/dealer and a
Registered Investment Advisor, became a wholly-owned subsidiary of NBT
Financial Services, Inc. The acquisition was accounted for using the
purchase method. As such, both the assets acquired and liabilities assumed
have been recorded on the consolidated balance sheet of the Company at
estimated fair value as of the date of acquisition. M. Griffith, Inc.'s,
results of operations are included in the Company's consolidated statement
of income from the date of acquisition forward. To complete the
transaction, the Company issued approximately 421,000 shares of its common
stock, valued at $4.8 million. Goodwill, representing the cost over net
assets acquired, was $3.4 million and was being amortized, prior to the
adoption of SFAS No. 142 on January 1, 2002, over fifteen years on a
straight-line basis.
63
On June 2, 2000, one of Bancorp's subsidiaries, LA Bank, N.A. (subsequently
renamed Pennstar), purchased two branches from Mellon Bank. Deposits from
the Mellon Bank branches were approximately $36.7 million, including
accrued interest payable. In addition, the Company received approximately
$32.2 million in cash as consideration for net liabilities assumed. The
acquisition was accounted for using the purchase method. As such, both the
assets acquired and liabilities assumed have been recorded on the
consolidated balance sheet of the Company at estimated fair value as of the
date of the acquisition. Unidentified intangible assets, accounted for in
accordance with SFAS No. 72 and representing the excess of cost over net
assets acquired, was $4.3 million and is being amortized over 15 years on
the straight-line basis. The branches' results of operations are included
in the Company's consolidated statement of income from the date of
acquisition forward.
On November 10, 2000, Pennstar purchased six branches from Soverign Bank.
Deposits from the Soverign Bank branches were approximately $96.8 million,
including accrued interest payable. Pennstar. also purchased commercial
loans associated with the branches with a net book balance of $42.4
million. In addition, the Company received $40.9 million in cash
consideration for net liabilities assumed. The acquisition was accounted
for using the purchase method. As such, both the assets acquired and
liabilities assumed have been recorded on the consolidated balance sheet of
the Company at estimated fair value as of the date of the acquisition.
Unidentified intangible assets, accounted for in accordance with SFAS No.
72 and representing the excess of cost over net assets acquired, was $12.7
million and is being amortized over 15 years on a straight-line basis. The
branches' results of operations are included in the Company's consolidated
statement of income from the date of acquisition forward.
In August 1999, CNB purchased five branches from Astoria Federal Savings
and Loan. Deposits from the Astoria branches were approximately $156.5
million, including accrued interest payable. CNB also purchased
approximately $3.7 million in branch related assets, primarily the real and
personal property associated with the branches, cash at the branches, as
well as a limited amount of deposit related loans. In addition, CNB
received $133.9 million in cash considerations for net liabilities assumed.
The acquisition was accounted for using the purchase method. As such, both
the assets acquired and liabilities assumed have been recorded on the
consolidated balance sheet of the Company at estimated fair value as of the
date of the acquisition. Unidentified intangible assets, accounted for in
accordance with SFAS No. 72 and representing the excess of cost over net
assets acquired, was $19.9 million and is being amortized over 15 years on
a straight-line basis. The branches' results of operations are included in
the Company's consolidated statement of income from the date of acquisition
forward.
During 2001, the following merger, acquisition and reorganization costs
were recognized:
Professional fees $ 5,956
Data processing 2,092
Severance 3,270
Branch closings 2,412
Advertising and supplies 313
Hardware and software writeoffs 402
Miscellaneous 877
-------
$15,322
=======
64
With the exception of hardware and software writeoffs and certain branch
closing costs, all of the above costs have been or will be paid through
normal cash flow from operations. At December 31, 2001, after payments of
certain merger, acquisition and reorganization costs, the Company had a
remaining accrued liability for merger, acquisition and reorganization
costs incurred during 2001 as follows:
Professional fees $2,009
Data processing 241
Severance 3,074
Branch closings 1,601
Advertising and supplies 199
Miscellaneous 455
------
$7,579
======
With the exception of certain severance costs which will be paid out over a
period of time consistent with the respective severance agreements, all of
the above liabilities are expected to be paid during 2002.
During 2000, the following merger, acquisition and reorganization costs
were recognized:
Professional fees $ 8,525
Data processing 2,378
Severance 7,278
Branch closings 1,736
Advertising and supplies 1,337
Hardware and software write-off 1,428
Miscellaneous 943
-------
Total $23,625
=======
(3) EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share
for the years presented in the consolidated statements of income:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- ---------------------------
WEIGHTED PER WEIGHTED PER WEIGHTED PER
NET AVERAGE SHARE NET AVERAGE SHARE NET AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- ------- ------- --------- ------- ------- --------- -------
(In thousands, except per share data)
Basic Earnings per Share $ 3,737 32,897 $ 0.11 $14,154 32,291 $ 0.44 $32,592 32,181 $ 1.01
Effect of dilutive securities:
Stock based compensation 123 45 360
Contingent shares 65 69 -
--------- --------- ---------
Diluted earnings per share $ 3,737 33,085 $ 0.11 $14,154 32,405 $ 0.44 $32,592 32,541 $ 1.00
========= ========= =========
65
There were approximately 936,000, 923,000 and 289,000 stock options for the
years ended December 31, 2001, 2000 and 1999, respectively, that were not
considered in the calculation of diluted earnings per share since the stock
options' exercise prices were greater than the average market price during
these periods.
(4) FEDERAL RESERVE BANK REQUIREMENT
The Company is required to maintain reserve balances with the Federal
Reserve Bank. The required average total reserve for NBT Bank for the 14
day maintenance period ending December 26, 2001 was $38.0 million.
(5) SECURITIES
The amortized cost, estimated fair value and unrealized gains and losses of
securities available for sale are as follows:
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIRVALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
December 31, 2001:
U.S. Treasury $ 12,392 64 699 11,757
Federal Agency 111,020 1,810 254 112,576
State & municipal 92,982 576 1,573 91,985
Mortgage-backed 413,081 5,639 683 418,037
Collateralized mortgage
obligations 184,777 2,335 826 186,286
Asset-backed securities 32,391 642 838 32,195
Corporate 42,468 836 1,126 42,178
Other securities 13,707 687 67 14,327
---------- ---------- ---------- ---------
Total securities
available for sale $ 902,818 12,589 6,066 909,341
========== ========== ========== =========
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIRVALUE
---------- ---------- ---------- ---------
(IN THOUSANDS)
December 31, 2000:
U.S. Treasury $ 16,392 5 473 15,924
Federal Agency 193,533 2,430 3,434 192,529
State & municipal 60,375 531 605 60,301
Mortgage-backed 387,401 1,770 3,075 386,096
Collateralized mortgage
obligations 169,765 3,187 2,553 170,399
Asset-backed securities 18,841 376 268 18,949
Corporate 75,408 1,450 2,918 73,940
Other securities 18,422 477 300 18,619
---------- ---------- ---------- ---------
Total securities
available for sale $ 940,137 10,226 13,626 936,757
========== ========== ========== =========
Other securities include non-marketable equity securities, including
certain securities acquired by the Company's small business investment
company (SBIC) subsidiary, and trust preferred securities. Collateralized
mortgage obligations at December 31, 2001 include securities with an
amortized cost of $9.2 million and estimated fair value of $9.1 million
that are privately issued and are not backed by Federal agencies. The
remaining collateralized mortgage obligations were issued or backed by
Federal agencies.
66
The following table sets forth information with regard to sales
transactions of securities available for sale:
FOR THE YEARS ENDED DECEMBER 31,
2001 2000 1999
-------- -------- --------
(in thousands)
Proceeds from sales $43,318 128,889 189,202
======== ======== ========
Gross realized gains $ 2,213 1,751 2,431
Gross realized losses (1,046) (604) (39)
Other-than-temporary impairment writedowns (8,291) (3,467) (1,392)
-------- -------- --------
Net security (losses) gains and writedowns on
securities available for sale (7,124) (2,320) 1,000
Net realized (losses) gains on trading securities
and embedded derivatives (568) 47 -
-------- -------- --------
Net securities (losses) gains $(7,692) (2,273) 1,000
======== ======== ========
The Company recorded a $8.3 million, $3.5 million and $1.4 million pre-tax
charge during 2001, 2000 and 1999, respectively, related to estimated
other-than-temporary impairment of certain securities classified as
available for sale. The charges were recorded in net security (losses)
gains on the consolidated statements of income. The securities with
other-than-temporary impairment charges at December 31, 2001 had remaining
carrying values totaling $4.5 million, are classified as securities
available for sale and are on the non-accrual status.
Approximately, $1.4 million of the other-than-temporary impairment charge
in 2000 related to the Company's decision in late 2000 to sell certain debt
securities available for sale with an amortized cost of $21.7 million. As a
result of the decision to immediately sell these securities, they were
considered to be other-than-temporarily impaired. These securities were
sold in early January 2001 at amounts approximating their carrying values.
These securities were presented on the Company's December 31, 2000
consolidated balance sheet as trading securities. The remaining securities
with other-than-temporary impairment charges at December 31, 2000 had
carrying values totaling $1.4 million, at December 31, 2000, are classified
as securities available for sale and are on the non-accrual status.
During 1999, Lake Ariel adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In connection with its adoption of
SFAS No. 133, Lake Ariel transferred approximately $71.1 million of
securities from its held to maturity portfolio to its available for sale
portfolio. These securities were subsequently sold during 1999 at a net
realized gain of $0.18 million.
During 1999, CNB transferred all of its investment securities held to
maturity to securities available for sale. At the date of transfer, the
amortized cost of investment securities held to maturity was approximately
$112.9 million and the estimated fair value was approximately $117.7
million. The transfer was made for asset/liability management purposes and
to allow CNB flexibility with respect to certain tax planning strategies.
Subsequent to this transfer, CNB no longer maintained a held to maturity
portfolio.
67
At December 31, 2001 and 2000, securities available for sale with amortized
costs totaling $628.8 million and $695.3 million, respectively, were
pledged to secure public deposits and for other purposes required or
permitted by law. Additionally, at December 31, 2001, securities available
for sale with an amortized cost of $74.4 were pledged as collateral for
securities sold under repurchase agreements.
The amortized cost, estimated fair value, and unrealized gains and losses
of securities held to maturity are as follows:
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- -------
(IN THOUSANDS)
December 31, 2001:
Mortgage-backed $ 36,733 295 405 36,623
State & municipal 64,715 - - 64,715
Other securities 156 1 - 157
---------- ---------- ---------- -------
Total securities held
to maturity $ 101,604 296 405 101,495
========== ========== ========== =======
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- -------
(IN THOUSANDS)
December 31, 2000:
Mortgage-backed $ 46,376 70 918 45,528
State & municipal 63,992 460 192 64,260
Other securities 47 - - 47
---------- ---------- ---------- -------
Total securities held
to maturity $ 110,415 530 1,110 109,835
========== ========== ========== =======
At December 31, 2001 and 2000, substantially all of the mortgage-backed
securities available for sale and held to maturity held by the Company were
issued or backed by Federal agencies.
The following tables set forth information with regard to contractual
maturities of debt securities at December 31, 2001:
Debt Securities Classified AMORTIZED ESTIMATED
as Available for Sale COST FAIR VALUE
- --------------------------- ---------- ----------
(in thousands)
Within one year $ 133,741 134,721
From one to five years 264,734 266,525
From five to ten years 239,872 243,122
After ten years 250,764 250,646
---------- ----------
$ 889,111 895,014
========== ==========
68
Debt Securities Classified AMORTIZED ESTIMATED
as Held to Maturity COST FAIR VALUE
- --------------------------- ---------- ----------
(in thousands)
Within one year $ 34,016 33,903
From one to five years 29,552 29,352
From five to ten years 6,737 6,691
After ten years 31,299 31,549
---------- ----------
$ 101,604 101,495
========== ==========
Maturities of mortgage-backed, collateralized mortgage obligations and
asset-backed securities are stated based on their estimated average lives.
Actual maturities may differ from estimated average lives or contractual
maturities because, in certain cases, borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
Except for U.S. Government securities, there were no holdings, when taken
in the aggregate, of any single issues that exceeded 10% of consolidated
stockholders' equity at December 31, 2001 and 2000.
(6) LOANS ON LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of loans and leases, net of deferred fees and origination costs,
by category is as follows:
DECEMBER 31,
2001 2000
---------- ---------
(IN THOUSANDS)
Residential real estate mortgages $ 525,411 504,590
Commercial real estate mortgages 477,102 498,040
Real estate construction and development 60,513 44,829
Commercial and agricultural 584,857 543,145
Consumer 387,081 357,822
Home equity 232,624 219,355
Lease financing 72,048 79,874
---------- ---------
Total loans $2,339,636 2,247,655
========== =========
FHLB advances are collateralized by a blanket lien on the Company's
residential real estate mortgages.
69
Changes in the allowance for loan and lease losses for the three years
ended December 31, 2001, are summarized as follows:
2001 2000 1999
--------- ------- -------
(IN THOUSANDS)
Balance at January 1, $ 32,494 28,240 26,615
Allowance related to
purchase acquisitions 505 525 -
Provision 31,929 10,143 6,896
Recoveries 2,189 1,383 1,439
Charge-offs (22,371) (7,797) (6,710)
--------- ------- -------
Balance at December 31, $ 44,746 32,494 28,240
========= ======= =======
The following table sets forth information with regard to non-performing loans:
AT DECEMBER 31,
-----------------------
2001 2000 1999
------- ------ ------
(IN THOUSANDS)
Loans in non-accrual status $40,210 17,103 12,808
Loans contractually past due
90 days or more and still
accruing interest 2,975 8,430 2,748
Restructured loans 603 656 1,014
------- ------ ------
Total non-performing
loans $43,788 26,189 16,570
======= ====== ======
There were no material commitments to extend further credit to borrowers
with non-performing loans.
Accumulated interest on the above non-accrual loans of approximately
$3,241,000, $1,043,000, and $966,000 would have been recognized as income
in 2001, 2000, and 1999, respectively, had these loans been in accrual
status. Approximately $591,000, $534,000, and $493,000 of interest on the
above non-accrual loans was collected in 2001, 2000, and 1999,
respectively.
At December 31, 2001 and 2000, the recorded investment in loans that are
considered to be impaired totaled $32.0 million and $14.7 million,
respectively, for which the related allowance for loan losses is $1.4
million and $1.5 million, respectively. As of December 31, 2001 and 2000,
there were $23.7 million and $10.8 million, respectively, of impaired loans
which did not have an allowance for loan losses due to the adequacy of
their collateral. Included in total impaired loans at December 31, 2001 and
2000 were $603,000 and $656,000, respectively, of restructured loans.
70
The following provides additional information on impaired loans for the
periods presented:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
----------- ---------- ----------
(IN THOUSANDS)
Average recorded investment
on impaired loans $ 21,618 12,191 8,900
Interest income recognized
on impaired loans 591 308 200
Cash basis interest income
recognized on impaired
loans 591 308 200
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has made loans at
prevailing rates and terms to directors, officers, and other related
parties. Such loans, in management's opinion, do not present more than the
normal risk of collectibility or incorporate other unfavorable features.
The aggregate amount of loans outstanding to qualifying related parties and
changes during the years are summarized as follows:
2001 2000
-------- -------
(IN THOUSANDS)
Balance at January 1, $ 6,847 6,790
New loans 3,114 3,007
Repayments (3,676) (2,950)
-------- -------
Balance at December 31, $ 6,285 6,847
======== =======
(7) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment follows:
DECEMBER 31,
2001 2000
-------- -------
(IN THOUSANDS)
Land, buildings and improvements $ 65,350 60,559
Equipment 50,752 40,775
Construction in progress 443 350
-------- -------
116,545 101,684
Accumulated depreciation 53,860 45,568
-------- -------
Total premises and equipment $ 62,685 56,116
======== =======
71
Land, buildings and improvements with a carrying value of approximately
$4.1 million and $4.2 million at December 31, 2001 and 2000, respectively,
are pledged to secure long-term borrowings.
Rental expense included in occupancy expense amounted to $2.1 million in
2001, $1.9 million in 2000, and $1.7 million in 1999. The future minimum
rental payments related to noncancellable operating leases with original
terms of one year or more are as follows at December 31, 2001:
(IN THOUSANDS)
2002 $ 1,583
2003 1,053
2004 846
2005 645
2006 504
Thereafter 4,333
---------------
Total $ 8,964
===============
(8) DEPOSITS
The following table sets forth the maturity distribution of time deposits
at December 31, 2001:
(IN THOUSANDS)
Within one year $ 1,081,821
After one but within two years 155,001
After two but within three years 85,955
After three but within four years 43,149
After four but within five years 10,385
After five years 10,738
---------------
Total $ 1,387,049
===============
Time deposits of $100,000 or more aggregated $558.6 million and $646.0
million at year end 2001 and 2000, respectively.
(9) SHORT-TERM BORROWINGS
Short-term borrowings total $122.0 million and $184.7 million at December
31, 2001 and 2000, respectively, and consist of Federal funds purchased and
securities sold under repurchase agreements, which generally represent
overnight borrowing transactions, and other short-term borrowings,
primarily Federal Home Loan Bank (FHLB) advances, with original maturities
of one year or less. The Company has unused lines of credit with the FHLB
available for short-term financing and access to brokered deposits of
approximately $767 million and $555 million at December 31, 2001 and 2000,
respectively.
72
In addition, the Company has two other lines of credit, expiring on
November 6, 2002, which are available with the FHLB. The first is an
overnight line of credit for approximately $50.0 million with interest
based on existing market conditions. The second is a one-month overnight
repricing line of credit for approximately $50.0 million with interest
based on existing market conditions. As of December 31, 2001, there was
$31.0 million (included in federal funds purchased) and $7.7 million
(included in other short-term borrowings), respectively, outstanding on
these overnight lines of credit. Borrowings on these lines are secured by
FHLB stock, certain securities and one-to-four family first lien mortgage
loans.
Securities collateralizing repurchase agreements are held in safekeeping by
non-affiliated financial institutions and are under the Company's control.
Information related to short-term borrowings is summarized as follows:
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
FEDERAL FUNDS PURCHASED:
Balance at year-end $31,000 50,000 58,130
Average during the year 30,752 52,218 45,628
Maximum month end balance 47,200 70,695 88,140
Weighted average rate
during the year 4.79% 5.95% 5.23%
Weighted average rate at
December 31 1.35% 6.66% 5.46%
SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS:
Balance at year-end $64,973 46,050 68,241
Average during the year 56,408 57,679 51,719
Maximum month end balance 64,973 130,262 81,790
Weighted average rate
during the year 3.38% 5.02% 4.49%
Weighted average rate
at December 31 1.62% 4.76% 4.52%
OTHER SHORT-TERM
BORROWINGS:
Balance at year-end $26,040 88,654 45,480
Average during the year 36,002 84,991 48,017
Maximum month end balance 71,654 131,077 108,161
Weighted average rate
during the year 5.35% 6.42% 5.23%
Weighted average rate
at December 31 5.11% 6.65% 5.45%
73
The Company has entered into repurchase agreements with entities which have
certain executive officers who are directors and significant stockholders
of the Company. These repurchase agreements are entered into in the
ordinary course of business at market terms. These repurchase agreements
resulted in approximately $25.4 million and $18.1 million being owed to
these entities at December 31, 2001 and 2000, respectively.
(10) LONG-TERM DEBT
Long-term debt consists of obligations having an original maturity at
issuance of more than one year. A summary as of December 31, 2001 is as
follows:
MATURITY DATE INTEREST RATE AMOUNT
-------------- -------------- -----------
(DOLLARS IN THOUSANDS)
FHLB advance 2002 1.98-6.45% $ 36,276
FHLB advance 2003 4.50-6.27% 90,757
FHLB advance 2005 4.40-6.41% 30,000
FHLB advance 2008 5.06-7.20% 35,599
FHLB advance 2009 4.97-5.50% 75,000
Note payable 2010 6.50% 275
IDA bonds 2025 4.44% 4,424
-----------
Total $ 272,331
===========
FHLB advances are collateralized by the FHLB stock owned by the Company,
certain of its mortgage-backed securities and a blanket lien on its
residential real estate mortgage loans.
(11) GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES
On June 14, 1999, CNB established CNBF Capital Trust I (the Trust), which
is a statutory business trust. The Trust exists for the exclusive purpose
of issuing and selling 30 year guaranteed preferred beneficial interests in
the Company's junior subordinated debentures (capital securities). On
August 4, 1999, the Trust issued $18.0 million in capital securities at
3-month LIBOR plus 275 basis points, which equaled 8.12% at issuance. The
rate on the capital securities resets quarterly, equal to the 3-month LIBOR
plus 275 basis points (5.35% and 9.57% for the December 31, 2001 and 2000
quarterly payments, respectively). The capital securities are the sole
asset of the Trust. The obligations of the Trust are guaranteed by Bancorp.
Capital securities totaling $1.0 million were issued to NBT. These capital
securities were retired upon the merger of NBT and CNB (see note 2). The
net proceeds from the sale of the capital securities were used for general
corporate purposes and to provide a capital contribution of $15.0 million
to CNB Bank, which was merged into NBT Bank. The capital securities, with
associated expense that is tax deductible, qualify as Tier I capital under
regulatory definitions, subject to certain restrictions. The Bancorp's
primary source of funds to pay interest on the debentures owed to the Trust
are current dividends from the NBT Bank. Accordingly, the Bancorp's ability
to service the debentures is dependent upon the continued ability of NBT
Bank to pay dividends (see also note 13). The capital securities are not
classified as debt for financial statement purposes and therefore the
expense associated with the capital securities is recorded as non-interest
expense in the consolidated statements of income.
74
(12) INCOME TAXES
The significant components of income tax expense attributable to operations
are:
YEARS ENDED DECEMBER 31,
-------------------------
2001 2000 1999
-------- ------- ------
(IN THOUSANDS)
Current:
Federal $ 5,404 7,887 11,383
State 1,471 835 2,583
-------- ------- ------
6,875 8,722 13,966
Deferred:
Federal (4,963) (1,766) 1,412
State (1,370) (428) 655
-------- ------- ------
(6,333) (2,194) 2,067
-------- ------- ------
Total income tax
expense $ 542 6,528 16,033
======== ======= ======
Not included in the above table is income tax expense (benefit) of
approximately $3.7 million, $13.2 million and ($17.5 million) for 2001,
2000 and 1999, respectively, relating to unrealized gain (loss) on
available for sale securities and tax benefits recognized with respect to
stock options exercised, which were recorded directly in stockholders'
equity.
75
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
DECEMBER 31,
---------------
2001 2000
------- ------
(IN THOUSANDS)
Deferred tax assets:
Allowance for loan and lease losses $17,140 12,508
Deferred compensation 2,873 3,198
Postretirement benefit obligation 1,437 1,594
Loss on trading securities - 504
Writedowns on corporate debt securities 2,868 1,328
Accrued severance and contract termination costs 1,097 678
Pension and executive retirement 311 -
Other real estate owned 193 73
Purchase accounting adjustments, net 223 -
Accrued liabilities 1,905 199
Alternate minimum tax credit carry forward 521 2,202
New York State tax credit carryforward 207 214
Intangible amortization 663 493
Other 346 610
------- ------
Total deferred tax assets 29,784 23,601
------- ------
Deferred tax liabilities:
Pension and executive retirement - 823
Premises and equipment, primarily due
to accelerated depreciation 1,491 1,739
Equipment leasing 10,335 11,771
Securities discount accretion 600 588
Deferred loan costs 547 165
Tax bad debt reserve 302 437
Other 277 174
------- ------
Total deferred tax liabilities 13,552 15,697
------- ------
Net deferred tax asset at year-end 16,232 7,904
------- ------
Net deferred tax asset at beginning of year 7,904 5,710
------- ------
Increase in net deferred tax asset 8,328 2,194
Net deferred tax assets acquired 1,995 -
------- ------
Deferred tax benefit $ 6,333 2,194
======= ======
The above table does not include the recorded deferred tax liability of
$2.6 million as of December 31, 2001 and deferred tax asset of $1.5 million
as of December 31, 2000 related to the net unrealized holding gain/loss in
the available-for-sale securities portfolio.
76
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within
the available carryback period. A valuation allowance is provided when it
is more likely than not that some portion of the deferred tax asset will
not be realized. Based on available evidence, gross deferred tax assets
will ultimately be realized and a valuation allowance was not deemed
necessary at December 31, 2001 and 2000.
As of December 31, 2001 and 2000, the Company had alternative minimum tax
(AMT) credit carryforwards of $521,000 and $2.2 million, respectively. AMT
credits may be used indefinitely to reduce regular Federal income taxes to
the extent regular Federal income taxes exceed the related alternative
minimum tax otherwise due. As of December 31, 2001 and 2000, the Company
had New York State tax credit carryforwards of $207,000 and $214,000,
respectively. These credits may be used indefinitely to reduce New York
State taxes due.
The following is a reconciliation of the provision for income taxes to the
amount computed by applying the applicable Federal statutory rate of 35% to
income before taxes:
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)
Federal income tax at statutory rate $ 1,498 7,144 16,934
Tax exempt income (2,475) (2,677) (2,880)
Non-deductible expenses 400 274 443
Non-deductible merger expenses 1,419 2,122 -
Net increase in CSV of life insurance (121) (230) (95)
Dividend received deduction (142) (139) (77)
State taxes, net of federal tax benefit 66 264 2,105
Other, net (103) (230) (397)
-------- ------- -------
Income tax expense $ 542 6,528 16,033
======== ======= =======
(13) STOCKHOLDERS' EQUITY
Certain restrictions exist regarding the ability of the subsidiary bank to
transfer funds to the Company in the form of cash dividends. The approval
of the Office of Comptroller of the Currency (OCC) is required to pay
dividends when a bank fails to meet certain minimum regulatory capital
standards or when such dividends are in excess of a subsidiary bank's
earnings retained in the current year plus retained net profits for the
preceding two years (as defined in the regulations). The Bank's dividends
to the Company over years 2000 and 2001 exceeded net income during those
years. Therefore, the Bank's first quarter 2002 dividends exceeded the OCC
dividend limitations, and the Bank requested and received OCC approval to
pay this dividend to the Company. The Bank anticipates that it will require
approval for its second quarter 2002 dividend as well. The Bank's ability
to pay dividends also is subject to the Bank being in compliance with
regulatory capital requirements. The Bank is currently in compliance with
these requirements. Under the State of Delaware Business Corporation Law,
the Company may declare and pay dividends either out of accumulated net
retained earnings or capital surplus.
77
In November 1994, the Company adopted a Stockholder Rights Plan (Plan)
designed to ensure that any potential acquiror of the Company negotiate
with the Board of Directors and that all Company stockholders are treated
equitably in the event of a takeover attempt. At that time, the Company
paid a dividend of one Preferred Share Purchase Right (Right) for each
outstanding share of common stock of the Company. Similar rights are
attached to each share of the Company's common stock issued after November
15, 1994. Under the Plan, the Rights will not be exercisable until a person
or group acquires beneficial ownership of 20 percent or more of the
Company's outstanding common stock, begins a tender or exchange offer for
25 percent or more of the Company's outstanding common stock, or an adverse
person, as declared by the Board of Directors, acquires 10 percent or more
of the Company's outstanding common stock. Additionally, until the
occurrence of such an event, the Rights are not severable from the
Company's common stock and, therefore, the Rights will be transferred upon
the transfer of shares of the Company's common stock. Upon the occurrence
of such events, each Right entitles the holder to purchase one
one-hundredth of a share of Series R Preferred Stock, no par value, and
$0.01 stated value per share of the Company at a price of $100.
The Plan also provides that upon the occurrence of certain specified
events, the holders of Rights will be entitled to acquire additional equity
interests, in the Company or in the acquiring entity, such interests having
a market value of two times the Right's exercise price of $100. The Rights,
which expire November 14, 2004, are redeemable in whole, but not in part,
at the Company's option prior to the time they are exercisable, for a price
of $0.01 per Right.
(14) REGULATORY CAPITAL REQUIREMENTS
Bancorp and the subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the subsidiary banks must meet specific capital
guidelines that involve quantitative measures of the banks' assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the subsidiary banks to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 Capital to
risk-weighted assets, and of Tier 1 capital to average assets. As of
December 31, 2001 and 2000, the Company and the subsidiary banks meet all
capital adequacy requirements to which they were subject.
Under their prompt corrective action regulations, regulatory authorities
are required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution.
Such actions could have a direct material effect on an institution's
financial statements. The regulations establish a framework for the
classification of banks into five categories: well capitalized, adequately
capitalized, under capitalized, significantly under capitalized, and
critically under capitalized. As of December 31, 2001, the most recent
notification from NBT Bank's regulators categorized NBT Bank as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized NBT Bank must maintain minimum total
risk-based, Tier 1 risk-based, Tier 1 capital to average asset ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the NBT Bank's category.
78
The Company and the subsidiary banks' actual capital amounts and ratios are
presented as follows:
REGULATORY
RATIO REQUIREMENTS
-----------------------
FOR
ACTUAL MINIMUM CLASSIFICATION
------------------ CAPITAL AS WELL
(DOLLARS IN THOUSANDS) AMOUNT RATIO ADEQUACY CAPITALIZED
-------- -------- --------- ------------
As of December 31, 2001:
Total capital (to risk weighted assets):
Company combined $259,316 10.69% 8.00% 10.00%
NBT Bank 253,401 10.54% 8.00% 10.00%
Tier I Capital (to risk weighted assets):
Company combined 228,803 9.43% 4.00% 6.00%
NBT Bank 223,170 9.28% 4.00% 6.00%
Tier I Capital (to average assets):
Company combined 228,803 6.34% 4.00% 5.00%
NBT Bank 223,170 6.24% 4.00% 5.00%
As of December 31, 2000:
Total capital (to risk weighted assets):
Company combined $272,716 11.08% 8.00% 10.00%
NBT Bank 123,419 11.73% 8.00% 10.00%
Pennstar 63,263 8.97% 8.00% 10.00%
CNB Bank 67,814 10.30% 8.00% 10.00%
Tier I Capital (to risk weighted assets):
Company combined 242,576 9.85% 4.00% 6.00%
NBT Bank 109,973 10.48% 4.00% 6.00%
Pennstar 54,981 7.80% 4.00% 6.00%
CNB Bank 59,669 9.10% 4.00% 6.00%
Tier I Capital (to average assets):
Company combined 242,576 6.88% 4.00% 5.00%
NBT Bank 109,973 7.40% 4.00% 5.00%
Pennstar 54,981 5.12% 4.00% 5.00%
CNB Bank 59,669 6.40% 4.00% 5.00%
79
(14) EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a qualified, noncontributory, defined benefit pension plan
covering substantially all of its employees at December 31, 2001. M.
Griffith, Inc. and the former Pennstar (and its predecessors Lake Ariel and
Pioneer Holding Company) did not provide for pension benefits to employees
through January 1, 2001. As such, M. Griffith, Inc. and Pennstar employees
are not included in this plan at December 31, 2000. M. Griffith, Inc. and
Pennstar employees began to participate and accrue benefits under this Plan
as of January 1, 2001. No benefit credit was provided in the Company's plan
for service with M. Griffith, Inc. and the former Pennstar (and its
predecessors Lake Ariel or Pioneer Holding Company). Benefits paid from the
plan are based on age, years of service, compensation, social security
benefits, and are determined in accordance with defined formulas. The
Company's policy is to fund the pension plan in accordance with ERISA
standards. Assets of the plan are invested in publicly traded stocks and
bonds. Prior to January 1, 2000, the Company's plan was a traditional
defined benefit plan based on final average compensation. On January 1,
2000, the plan was converted to a cash balance plan with grandfathering
provisions for existing participants.
Prior to December 31, 2001, the Company maintained two noncontributory
defined benefit retirement plans, the NBT Bancorp Inc. Defined Benefit
Pension Plan and the Central National Bank, Canajoharie Pension Plan.
Effective December 31, 2001, the Company merged those two plans.
80
The net periodic pension expense and the funded status of the plan are as
follows:
YEARS ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
--------- -------- --------
(IN THOUSANDS)
Components of net periodic benefit cost:
Service cost $ 1,968 1,382 1,368
Interest cost 2,038 2,041 1,989
Expected return on plan assets (2,703) (2,790) (2,817)
Amortization of initial unrecognized asset (196) (196) (196)
Amortization of prior service cost 234 233 268
Amortization of unrecognized net gain (23) (117) (12)
--------- -------- --------
Net periodic pension cost $ 1,318 553 600
========= ======== ========
Change in projected benefit obligation:
Benefit obligation at beginning of year (28,867) (27,364) (29,543)
Service cost (1,968) (1,382) (1,368)
Interest cost (2,038) (2,041) (1,989)
Actuarial (loss) gain (1,438) (1,309) 3,415
Benefits paid 2,465 2,933 2,121
Prior service cost - 296 -
--------- -------- --------
Projected benefit obligation
at end of year $(31,846) (28,867) (27,364)
========= ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year 28,666 31,091 30,757
Actual return on plan assets (814) 302 1,272
Employer contributions 3,950 - 550
Benefits paid (2,465) (2,933) (2,121)
Actuarial gain due to measurement date
prior to December 31 211 206 633
--------- -------- --------
Fair value of plan assets at end of year $ 29,548 28,666 31,091
========= ======== ========
Plan assets (less than) in excess of projected benefit
obligation $ (2,298) (201) 3,727
Unrecognized portion of net asset at transition (1,364) (1,560) (1,756)
Unrecognized net actuarial loss (gain) 2,913 (1,854) (5,563)
Unrecognized prior service cost 3,006 3,240 3,770
--------- -------- --------
Prepaid (accrued) pension cost $ 2,257 (375) 178
========= ======== ========
Weighted average assumptions as of December 31,
Discount rate 7.00% 7.25% 7.75%
Expected long-term return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.00% 4.00%
========= ======== ========
81
In addition to the Company's noncontributory defined benefit retirement and
pension plan, the Company provides a supplemental employee retirement plans
to certain current and former executives. The amount of the liabilities
recognized in the Company's consolidated balance sheets associated with
these plans was $7.1 million and $4.8 million at December 31, 2001 and
2000, respectively. The charges to expense with respect to these plans
amounted to $0.4 million, $1.7 million, and $0.2 million for the years
ended December 31, 2001, 2000, and 1999, respectively. The discount rate
used in determining the actuarial present values of the projected benefit
obligations was 7.00%, 7.25% and 7.75%, at December 31, 2001, 2000, and
1999, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care benefits for retired employees.
Benefits are accrued over the employees' active service period. Pennstar
(and its predecessors Lake Ariel and Pioneer Holding Company) did not
provide such benefits to retired employees. As such, Pennstar employees are
not included in this plan as of December 31, 2000. Pennstar employees began
to participate in this plan and to accrue benefits under this plan as of
January 1, 2001. The plan is contributory for participating retirees,
requiring participants to absorb certain deductibles and coinsurance
amounts with contributions adjusted annually to reflect cost sharing
provisions and benefit limitations called for in the plan. Employees become
eligible for these benefits if they reach normal retirement age while
working for the Company. The Company funds the cost of postretirement
health care as benefits are paid. The Company elected to recognize the
transition obligation on a delayed basis over twenty years.
82
The net postretirement health benefits expense and obligations (the plan is
unfunded) are as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)
Components of net periodic benefit cost:
Service cost $ 175 199 235
Interest cost 300 304 288
Amortization of
transition obligation 39 124 124
Amortization of (gains)
and losses 31 (15) 9
Amortization of unrecognized
prior service cost (14) - -
-------- ------- -------
Net periodic postretirement
benefit cost $ 531 612 656
======== ======= =======
Change in accumulated benefit
obligation:
Benefit obligation at beginning
of the year 4,738 3,959 4,517
Service cost 175 199 235
Interest cost 300 304 288
Plan participants' contributions - 129 106
Actuarial loss (gain) 1,640 439 (935)
Amendments (1,224) - -
Benefits paid (230) (292) (252)
-------- ------- -------
Accumulated benefit
obligation at end of year $ 5,399 4,738 3,959
======== ======= =======
Components of accrued
benefit cost:
Accumulated benefit obligation
at end of year $(5,399) (4,738) (3,959)
Unrecognized
transition obligation 139 1,196 1,320
Unrecognized prior service cost (192) - -
Unrecognized actuarial
net loss 2,077 468 14
-------- ------- -------
Accrued benefit cost $(3,375) (3,074) (2,625)
======== ======= =======
Weighted average discount rate 7.00% 7.25% 7.75%
======== ======= =======
The Company used a health care trend rate in calculating the postretirement cost
of 7.5% during December 31, 2001, grading down uniformly to 5.5% for 2005 and
thereafter.
83
Assumed health care cost trend rates have a significant effect on amounts
reported for health care plans. A one-percentage point change in the health
care trend rates would have the following effects as of and for the year ended
December 31, 2001:
1-PERCENTAGE 1-PERCENTAGE
POINT POINT
INCREASE DECREASE
------------- --------------
(IN THOUSANDS)
Effect on total service and interest cost
components $ 111 (88)
============= ==============
Effect on postretirement accumulated
benefit obligation $ 1,026 (844)
============= ==============
EMPLOYEE 401(K) AND EMPLOYEE STOCK OWNERSHIP PLANS
At December 31, 2001, the Company maintains a 401(k) and employee stock
ownership plan (the Plan). The Company contributes to the Plan based on
employees' contributions out of their annual salary. In addition, the Company
may also make discretionary contributions to the Plan based on profitability.
Participation in the Plan is contingent upon certain age and service
requirements.
Through December 31, 2000, Pennstar maintained a profit-sharing plan and a
401(k) savings plan for employees of the former LA Bank, N.A. and maintained an
ESOP and a savings and investment plan for employees of the former Pioneer
American Bank, N.A. On January 1, 2001, these plans were merged into the
Company's Plan. CNB maintained a 401(k) plan. On January 1, 2002, the CNB plan
was merged into the Company's Plan. The recorded expenses associated with these
plans was $794,000 in 2001, $1.7 million in 2000 and $1.6 million in 1999.
STOCK OPTION PLANS
At December 31, 2001, the Company has two stock option plans (Plans). Under the
terms of the plans, options are granted to directors and key employees to
purchase shares of the Company's common stock at a price equal to the fair
market value of the common stock on the date of the grant. Options granted have
a vesting period of four years and terminate eight or ten years from the date of
the grant.
The per share weighted-average fair value of stock options granted during 2001,
2000 and 1999 was $3.70, $3.35 and $5.47, respectively. The fair value of each
award is estimated on the grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in the
years ended December 31:
2001 2000 1999
------------- ----------- -----------
Dividend yield 4.26% 5.34% 3.72%
Expected volatility 30.19% 29.88% 29.05%
Risk-free interest rates 4.63% - 5.04% 6.04%-6.62% 4.63%-6.16%
Expected life 7 years 7 years 7 years
84
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in accounting for its Plans and, accordingly, no compensation cost
has been recognized for its stock options in the consolidated financial
statements. Had the Company determined compensation cost based on the estimated
fair value at the grant date for its stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
2001 2000 1999
------ ------ ------
Net income:
As reported $3,737 14,154 32,592
Pro forma 2,450 13,261 31,824
Basic earnings per share:
As reported 0.11 0.44 1.01
Pro forma 0.07 0.41 0.99
Diluted earnings per share:
As reported 0.11 0.44 1.00
Pro forma 0.07 0.41 0.98
Because the Company's employee stock options have characteristics significantly
different from those of traded options for which the Black-Scholes model was
developed, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
85
The following is a summary of changes in options outstanding:
WEIGHTED
AVERAGE OF
EXERCISE PRICE
NUMBER OF OF OPTIONS
OPTIONS UNDER THE PLANS
--------------- ----------------
Balance at December 31, 1998 1,248,782 $ 8.85
--------------- ----------------
Granted 242,417 20.36
Exercised (177,812) 7.21
Lapsed (23,135) 15.83
--------------- ----------------
Balance at December 31, 1999 1,290,252 13.73
--------------- ----------------
Granted 515,369 13.67
Exercised (277,880) 7.32
Lapsed (49,917) 14.14
--------------- ----------------
Balance at December 31, 2000 1,477,824 13.59
--------------- ----------------
Granted 726,746 15.13
Exercised (219,659) 8.92
Lapsed (79,036) 15.83
--------------- ----------------
Balance at December 31, 2001 1,905,875 $ 14.61
=============== ================
The following table summarizes information concerning stock options outstanding
at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------- ----------- -------------- ------------- ----------- ------------
$ 4.01-$ 8.50 87,690 3.06 $ 6.52 87,690 $ 6.52
$ 8.51-$13.00 492,781 6.23 10.56 463,980 10.59
$13.01-$17.50 949,911 8.26 15.54 187,151 14.58
$17.51-$22.00 375,493 6.65 19.41 258,877 19.29
- ------------- ----------- -------------- ------------- ----------- ------------
$ 4.01-$22.00 1,905,875 7.18 $ 14.61 997,698 $ 13.24
============= =========== ============== ============= =========== ============
86
(15) COMMITMENTS AND CONTINGENT LIABILITIES
The Company's concentrations of credit risk are reflected in the
consolidated balance sheets. The concentrations of credit risk with standby
letters of credit, unused lines of credit and commitments to originate new
loans and loans sold with recourse generally follow the loan
classifications. At December 31, 2001, approximately 52.8% of the Company's
loans are secured by real estate located in central and northern New York
and northeastern Pennsylvania, respectively. Accordingly, the ultimate
collectibility of a substantial portion of the Company's portfolio is
susceptible to changes in market conditions of those areas. Management is
not aware of any material concentrations of credit to any industry or
individual borrowers.
The Company is a party to certain financial instruments with off balance
sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend
credit, unused lines of credit, and standby letters of credit, as well as
certain mortgage loans sold to investors with recourse. The Company's
exposure to credit loss in the event of nonperformance by the other party
to the commitments to extend credit, unused lines of credit, standby
letters of credit and loans sold with recourse is represented by the
contractual amount of those instruments. The Company uses the same credit
standards in making commitments and conditional obligations as it does for
on balance sheet instruments.
AT DECEMBER 31,
2001 2000
-------- -------
(IN THOUSANDS)
Commitments to extend credits, primarily
variable rate $509,750 230,668
Unused lines of credit 194,931 164,062
Standby letters of credit 21,072 6,249
Loans sold with recourse 18,258 20,000
The total amount of loans serviced by the Company for unrelated third parties
was approximately $173.3 million and $208.3 million at December 31, 2001 and
2000, respectively.
In the normal course of business there are various outstanding legal
proceedings. In the opinion of management, the aggregate amount involved in such
proceedings is not material to the consolidated balance sheets or results of
operations of the Company.
87
(16) PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
- ------------------------
DECEMBER 31,
ASSETS 2001 2000
-------- -------
(IN THOUSANDS)
Cash and cash equivalents $ 1,971 7,827
Securities available for sale, at estimated fair value 8,401 8,774
Investment in subsidiaries, on equity basis 279,725 285,770
Other assets 11,654 8,317
-------- -------
Total assets $301,751 310,688
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ 35,396 41,047
-------- -------
Stockholders' equity 266,355 269,641
-------- -------
Total liabilities and stockholders' equity $301,751 310,688
======== =======
CONDENSED STATEMENTS OF INCOME
- ------------------------------
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000 1999
--------- ------- ------
(IN THOUSANDS)
Dividends from subsidiaries $ 27,775 35,270 22,649
Management fee from
subsidiaries 25,860 17,266 -
Interest and other dividend
income 1,273 1,578 1,125
Net gain on sale of securities
available for sale 294 151 1,036
--------- ------- ------
55,202 54,265 24,810
Operating expense 41,535 36,374 2,400
--------- ------- ------
Income before income tax (benefit)
expense and (distributions in
excess of) equity in undistributed
income of subsidiaries 13,667 17,891 22,410
Income tax (benefit) expense (3,907) (5,738) 223
(Distributions in excess of)
equity in undistributed
income of subsidiaries (13,837) (9,475) 10,405
--------- ------- ------
Net income $ 3,737 14,154 32,592
========= ======= ======
88
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
--------- -------- --------
(IN THOUSANDS)
Operating activities:
Net income $ 3,737 14,154 32,592
Adjustments to reconcile net
income to net cash provided
by operating activities:
Net gains on sale of securities
available for sale (294) (151) (1,036)
Tax benefit from exercise of
stock options 327 660 296
Distributions in excess of
(equity in undistributed)
income of subsidiaries 13,837 9,475 (10,405)
Other, net 4,354 2,242 (956)
--------- -------- --------
Net cash provided by
operating activities 21,961 26,380 20,491
--------- -------- --------
Investing activities:
Securities available for sale:
Proceeds from sales 4,458 384 2,301
Purchases of securities
available for sale (390) (1,742) (6,514)
Maturities and calls of securities
available for sale - - 1,000
Investment in bank subsidiary - - (15,000)
Investment in non-bank subsidiaries - - (720)
Purchases of premises and equipment (2,603) (4) (55)
--------- -------- --------
Net cash provided by (used in)
investing activities 1,465 (1,362) (18,988)
Financing activities:
Proceeds from the issuance of shares
to employee benefit plans and other stock
plans 2,046 507 6,826
Payment on long-term debt (75) (65) (66)
Issuance of liability to subsidiary
related to capital securities - - 17,000
Purchase of treasury shares (11,126) (1,680) (9,628)
Cash dividends and payment for
fractional shares (20,127) (18,447) (15,745)
--------- -------- --------
Net cash provided by (used in)
financing activities (29,282) (19,685) (1,613)
Net (decrease) increase in
cash and cash equivalents (5,856) 5,333 (110)
Cash and cash equivalents at beginning
of year 7,827 2,494 2,604
--------- -------- --------
Cash and cash equivalents at end
of year $ 1,971 7,827 2,494
========= ======== ========
89
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments.
SHORT TERM INSTRUMENTS
For short-term instruments, such as cash and cash equivalents, accrued
interest receivable, accrued interest payable and short term borrowings,
carrying value approximates fair value.
SECURITIES
Fair values for securities are based on quoted market prices or dealer
quotes, where available. Where quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
LOANS
For variable rate loans that reprice frequently and have no significant
credit risk, fair values are based on carrying values. The fair values for
fixed rate loans are estimated through discounted cash flow analysis using
interest rates currently being offered for loans with similar terms and
credit quality. Nonperforming loans are valued based upon recent loss
history for similar loans.
DEPOSITS
The fair values disclosed for savings, money market, and noninterest
bearing accounts are, by definition, equal to their carrying values at the
reporting date. The fair value of fixed maturity time deposits is estimated
using a discounted cash flow analysis that applies interest rates currently
offered to a schedule of aggregated expected monthly maturities on time
deposits.
LONG-TERM DEBT
The fair value of long-term debt has been estimated using discounted cash
flow analysis that applies interest rates currently offered for notes with
similar terms.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of
credit are estimated using fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present credit worthiness of the counterparts. Carrying amounts, which
are comprised of the unamortized fee income, are not significant.
90
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES.
Given the variable rate nature of this financial instrument, the carrying value
approximates fair value.
Estimated fair values of financial instruments at December 31 are as follows:
2001 2000
-------------------------- -------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------------- --------- --------------
(IN THOUSANDS)
FINANCIAL ASSETS
Cash and cash equivalents $ 129,957 129,957 130,443 130,443
Trading securities 126 126 20,540 20,540
Securities available for sale 909,341 909,341 936,757 936,757
Securities held to maturity 101,604 101,495 110,415 109,835
Loans (1) 2,339,636 2,399,044 2,247,655 2,232,573
Less allowance for loan losses 44,746 - 32,494 -
---------- -------------- --------- --------------
Net loans 2,294,890 2,399,044 2,215,161 2,232,573
Accrued interest receivable 18,152 18,152 21,043 21,043
FINANCIAL LIABILITIES
Deposits:
Interest bearing:
Savings, NOW and
money market $1,097,156 1,097,156 970,859 970,859
Time deposits 1,387,049 1,400,996 1,500,828 1,503,756
Noninterest bearing 431,407 431,407 372,181 372,181
Short-term borrowings 122,013 122,013 184,704 184,704
Long-term debt 272,331 282,426 240,529 241,396
Accrued interest payable 13,145 13,145 17,041 17,041
Guaranteed preferred beneficial
interests in company's junior
subordinated debentures 17,000 17,000 17,000 17,000
(1) Lease receivables, although excluded from the scope of SFAS No. 107, are
included in the estimated fair value amounts at their carrying amounts.
91
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has a
substantial trust and investment management operation that contributes net
fee income annually. The trust and investment management operation is not
considered a financial instrument, and its value has not been incorporated
into the fair value estimates. Other significant assets and liabilities
include the benefits resulting from the low-cost funding of deposit
liabilities as compared to the cost of borrowing funds in the market, and
premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the estimate
of fair value.
92
93
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is incorporated herein by reference from the Company's
definitive Proxy Statement for its annual meeting of shareholders to be held on
May 2, 2002 (the "Proxy Statement"), which will be filed with the Securities and
Exchange Commission within 120 days of the Company's 2001 fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated herein by reference from the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated herein by reference from the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated herein by reference from the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are incorporated by
reference from Item 8 hereof:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Income for each of the three years ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Changes in Stockholders' Equity for each
of the three years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Comprehensive Income for each of the
three years ended December 31, 2001, 2000 and 1999. Notes to the
Consolidated Financial Statements.
(a)(2) There are no financial statement schedules that are required to be
filed as part of this form since they are not applicable or the
information is included in the consolidated financial statements.
(a)(3) See (c) below for all exhibits filed herewith and the Exhibit
Index.
(b) Reports on Form 8-K
-94-
The Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission on November 13, 2001 (date of report November 8, 2001) (announcing
the completion of the Company's acquisition of CNB Financial Corp. and the
appointment of Messrs. Van Ness Robinson, John P. Woods, Jr., and Joseph A.
Santangelo to serve as members of the Company's Board of Directors).
(c) Exhibits. The following exhibits are either filed as part of this
annual report on Form 10-K, or are incorporated herein by reference:
Exhibit
Number
3.1 Certificate of Incorporation of NBT Bancorp Inc.
3.2 Amended and Restated By-laws of NBT Bancorp Inc.
3.3 Rights Agreement, dated as of November 15, 1994, between NBT Bancorp
Inc. and American Stock Transfer Trust Company as Rights Agent (filed as
Exhibit 4.1 to Registrant's Form 8-A, file number 0-14703, filed on
November 25, 1994, and incorporated by reference herein).
3.4 Amendment No. 1 to Rights Agreement, dated as of December 16, 1999,
between NBT Bancorp Inc. and American Stock Transfer Trust Company as
Rights Agent (filed as Exhibit 4.2 to Registrant's Form 8-A/A, file
number 0-14703, filed on December 21, 1999, and incorporated by
reference herein).
3.5 Amendment No. 2 to Rights Agreement, dated as of April 19, 2000, between
NBT Bancorp Inc. and American Stock Transfer Trust Company as Rights
Agent (filed as Exhibit 4.3 to Registrant's Form 8-A12G/A, file number
0-14703, filed on May 25, 2000, and incorporated by reference herein).
10.1 NBT Bancorp Inc. 401(K) and Employee Stock Ownership Plan made as of
January 1, 2001 (filed as Exhibit 10.1 to Registrant's Form 10-K for the
year ended December 31, 2000, filed on March 29, 2001 and incorporated
by reference herein).
10.2 First Amendment to the NBT Bancorp Inc. 401(k) and Employee Stock
Ownership Plan effective July 2, 2001.
10.3 Second Amendment to the NBT Bancorp Inc. 401(k) and Employee Stock
Ownership Plan effective July 2, 2001.
10.4 Third Amendment to the NBT Bancorp Inc. 401(k) and Employee Stock
Ownership Plan effective January 1, 2002.
10.5 Fourth Amendment to the NBT Bancorp Inc. 401(k) and Employee Stock
Ownership Plan effective January 1, 2002.
10.6 Fifth Amendment to the NBT Bancorp Inc. 401(k) and Employee Stock
Ownership Plan effective January 1, 2002.
10.7 NBT Bancorp Inc. Defined Benefit Pension Plan, Amended and Restated
Effective as of January 1, 2000 (filed as Exhibit 10.2 to Registrant's
Form 10-K for the year ended December 31, 2000, filed on March 29, 2001
and incorporated by reference herein).
10.8 Amendment Number One to NBT Bancorp Inc. Defined Benefit Pension Plan
effective December 31, 2001.
10.9 NBT Bancorp Inc. 1993 Stock Option Plan (filed as Exhibit 99.1 to
Registrant's Form S-8 Registration Statement, file number 333-71830
filed on October 18, 2001 and incorporated by reference herein).
10.10 NBT Bancorp Inc. Non-Employee Director, Divisional Director and
Subsidiary Director Stock Option Plan (filed as Exhibit 99.1 to
Registrant's Form S-8 Registration Statement, file number 333-73038
filed on November 9, 2001 and incorporated by reference herein).
-95-
EXHIBIT INDEX (continued)
Exhibit
Number
10.11 NBT Bancorp Inc. Employee Stock Purchase Plan.
10.12 NBT Bancorp Inc. Directors Restricted Stock Plan (filed as Exhibit
99.1 to Registrant's Form S-8 Registration Statement, file number
333-72772 filed on November 5, 2001, and incorporated by reference
herein).
10.13 NBT Bancorp Inc. 2002 Executive Incentive Compensation Plan.
10.14 Change in control agreement with Daryl R. Forsythe (filed as Exhibit
10.4 to the Registrant's Form 10-Q for the quarterly period ended
September 30, 2001, filed on November 14, 2001 and incorporated herein
by reference).
10.15 Form of Employment Agreement between NBT Bancorp Inc. and Daryl R.
Forsythe made as of January 1, 2002.
10.16 Supplemental Retirement Agreement between NBT Bancorp Inc., NBT Bank,
National Association and Daryl R. Forsythe as Amended and Restated
Effective January 28, 2002.
10.17 Death Benefits Agreement between NBT Bancorp Inc., NBT Bank, National
Association and Daryl R. Forsythe made August 22, 1995 (filed as Exhibit
10.8 to Registrant's Form 10-K for the year ended December 31, 2000,
filed on March 29, 2001 and incorporated herein by reference).
10.18 Amendment dated January 28, 2002 to Death Benefits Agreement between
NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe
made August 22, 1995.
10.19 Split-Dollar Agreement between NBT Bancorp Inc., NBT Bank, National
Association and Daryl R. Forsythe made August 22, 1995.
10.20 Wage Continuation Plan between NBT Bancorp Inc., NBT Bank, National
Association and Daryl R. Forsythe made as of August 1, 1995 (filed as
Exhibit 10.9 to Registrant's Form 10-K for the year ended December 31,
2000, filed on March 29, 2001 and incorporated herein by reference).
10.21 Form of Employment Agreement between NBT Bancorp Inc. and Martin A.
Dietrich made as of January 1, 2002.
10.22 Supplemental Executive Retirement Agreement between NBT Bancorp Inc.
and Martin A. Dietrich made as of July 23, 2001(filed as Exhibit 10.13
to Registrant's Form 10-Q for the quarterly period ended September 30,
2001, filed on November 14, 2001 and incorporated herein by reference).
10.23 Change in control agreement with Martin A. Dietrich (filed as Exhibit
10.3 to Registrant's Form 10-Q for the quarterly period ended September
30, 2001, filed on November 14, 2001 and incorporated herein by
reference).
10.24 Form of Employment Agreement between NBT Bancorp Inc. and Michael J.
Chewens made as of January 1, 2002.
10.25 Supplemental Executive Retirement Agreement between NBT Bancorp Inc.
and Michael J. Chewens made as of July 23, 2001 (filed as Exhibit 10.12
to Registrant's Form 10-Q for the quarterly period ended September 30,
2001, filed on November 14, 2001 and incorporated by reference herein).
10.26 Change in control agreement with Michael J. Chewens (filed as Exhibit
10.1 to Registrant's Form 10-Q for the quarterly period ended September
30, 2001, filed on November 14, 2001 and incorporated herein by
reference).
10.27 Form of Employment Agreement between NBT Bancorp Inc. and David E.
Raven made as of January 1, 2002.
10.28 Change in control agreement with David E. Raven (filed as Exhibit 10.7
to Registrant's Form 10-Q for the quarterly period ended September 30,
2001, filed on November 14, 2001 and incorporated by reference herein).
10.29 Form of Employment Agreement between NBT Bancorp Inc. and Lance D.
Mattingly made as of January 1, 2002.
-96-
10.30 Change in control agreement with Lance D. Mattingly (filed as Exhibit
10.5 to Registrant's Form 10-Q for the quarterly period ended September
30, 2001, filed on November 14, 2001 and incorporated by reference
herein).
10.31 Form of Employment Agreement between NBT Bancorp Inc. and Peter Corso
made as of January 1, 2002.
10.32 Change in control agreement with Peter Corso (filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarterly period ended September 30,
2001, filed on November 14, 2001 and incorporated herein by reference).
10.33 Change in control agreement with Tom Delduchetto
10.34 NBT Bancorp Inc. and Subsidiaries Master Deferred Compensation Plan of
Directors, adopted February 11, 1992 (filed as Exhibit 10.9 to
Registrant's Form 10-K for the year ended December 31, 2000, filed on
March 29, 2001 and incorporated herein by reference).
10.35 Agreement and Plan of Merger by and between NBT Bancorp Inc. and First
National Bancorp, Inc., dated as of January 2, 2001 (filed as Annex A to
Registrant's Form S-4 Registration Statement, file number 333-55360,
filed on February 9, 2001, and incorporated by reference herein).
-97-
EXHIBIT INDEX (continued)
Exhibit
Number
10.36 Agreement and Plan of Merger among NBT Bancorp Inc., NBT Bank,
National Association, CNB Financial Corp. and Central National Bank,
Canajoharie dated as of June 19, 2001 (filed as Appendix A to
Registrant's Form S-4/A Registration Statement, file number 333-66472,
filed on August 27, 2001, and incorporated by reference herein).
21 A list of the subsidiaries of the Registrant.
23 Consent of KPMG LLP.
-98-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, NBT Bancorp Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NBT BANCORP INC. (Registrant)
March 25, 2002
/s/ Daryl R. Forsythe
- ----------------------
Daryl R. Forsythe
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Daryl R. Forsythe /s/ Michael J. Chewens
- -------------------------------------------- ----------------------------------
Daryl R. Forsythe Michael J. Chewens
President, Chief Executive Officer Chief Financial Officer (Principal
and Chairman (Principal Executive Officer) Financial Officer)
Date: March 25, 2002 Date: March 25, 2002
/s/ J. Peter Chaplin /s/ John C. Mitchell
- -------------------------------------------- ----------------------------------
J. Peter Chaplin, Director John C. Mitchell, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ Richard Chojnowski, /s/ Joseph G. Nasser
- -------------------------------------------- ----------------------------------
Richard Chojnowski, Director Joseph G. Nasser, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ Gene E. Goldenziel /s/ William L. Owens
- -------------------------------------------- ----------------------------------
Gene E. Goldenziel, Director William L. Owens, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ Peter B. Gregory /s/ Van Ness D. Robinson
- -------------------------------------------- ----------------------------------
Peter B. Gregory, Director Van Ness D. Robinson, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ William C. Gumble /s/ Joseph A. Santangelo
- -------------------------------------------- ----------------------------------
William C. Gumble, Director Joseph A. Santangelo, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ Bruce D. Howe /s/ Paul O. Stillman
- -------------------------------------------- ----------------------------------
Bruce D. Howe, Director Paul O. Stillman, Director
Date: March 25, 2002 Date: March 25, 2002
/s/ Andrew S. Kowalczyk, Jr. /s/ John P. Woods, Jr.
- -------------------------------------------- ----------------------------------
Andrew S. Kowalczyk, Jr., Director John P. Woods, Director
Date: March 25, 2002 Date: March 25, 2002
-99-