SECURITIES AND EXCHANGE COMMISSION
                                  Washington, D.C. 20549
                                         FORM 10-K
(Mark One)
 X  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  
    EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996.
                                         OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE         
    SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 of Incorporation)(I.R.S. Employer Identification No.)
                                   52 South Broad Street
                                 Norwich, New York  13815
                    (Address of principal executive offices)(Zip Code)

             Registrant's Telephone Number, Including Area Code: 607-337-6000

             Securities Registered Pursuant to Section 12(b) of the Act:  None
                Securities Registered Pursuant to Section 12(g) of the Act:
                         Common Stock, No Par, $1.00 Stated Value
                        Preferred Stock, No Par, $1.00 Stated Value
                                     (Title of Class)

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K 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_.
There are no delinquent filers to the Registrant's knowledge.

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 periods 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   ___   

As of February 28, 1997, there were 9,002,467 shares outstanding,
including 444,636 shares held in the treasury, of the Registrant's
common stock, No Par, Stated Value $1.00; of which 8,062,387 common
shares having a market value of $147,138,563 were held by
nonaffiliates of the Registrant. There were no shares of the
Registrant's preferred stock, No Par, Stated Value $1.00,
outstanding at that date.

                            Documents Incorporated by Reference
Portions of the Proxy Statement of NBT BANCORP INC. dated March 17,
1997 for the Annual Meeting of Stockholders to be held on April 19,
1997 are incorporated by reference into Part III of this FORM 10-K
as detailed therein.

An index to exhibits follows the signature page of this Form 10-K. 

                                       II-1


                        CROSS REFERENCE INDEX
Part I. Item 1 Business Description of Business II-3, 4 Average Balance Sheets II-7 Net Interest Income Analysis - Taxable Equivalent Basis II-7 Net Interest Income and Volume/Rate Variance - Taxable Equivalent Basis II-8 Securities Portfolio II-12 Securities - Maturity/Yield Schedule II-30 Loans II-12 Maturities and Sensitivities of Loans to Changes in Interest Rates II-13 Nonperforming and Risk Assets II-13 Allowance for Loan Losses II-9 Maturity Distribution of Time Deposits II-14 Return on Equity and Assets II-5 Short-Term Borrowings II-33 Item 2 Properties II-19 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. Item 4 Submission of Matters to a Vote of Security Holders There has been no submission of matters to a vote of stockholders during the quarter ended December 31, 1996. Part II. Item 5 Market for the Registrant's Common Stock and Related II-15, 35, 36 Shareholder Matters Item 6 Selected Financial Data II-5 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation II-5 thru 18 Item 8 Financial Statements and Supplementary Data Consolidated Balance Sheets at December 31, 1996 and 1995 II-23 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1996 II-24 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1996 II-25 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996 II-26 Notes to Consolidated Financial Statements II-27 thru 43 Independent Auditors' Report II-22 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. 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) No reports on Form 8-K were filed during the last quarter of the period covered by this report. (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 1997 Annual Meeting of Stockholders filed with the Securities and Exchange Commission.
II-2 DESCRIPTION OF BUSINESS REGISTRANT NBT Bancorp Inc. ("Registrant") is a registered bank holding company headquartered in Norwich, New York. The Registrant is the parent holding company of NBT Bank, N.A. ("Bank"), a nationally chartered commercial bank. The principal asset of the Registrant is all of the outstanding shares of common stock of the Bank and its principal source of revenue is dividends it receives from the Bank. The Bank is a full service bank providing a broad range of financial products including commercial and retail banking and trust services. The Bank has thirty-five locations serving an eight county area in central and northern New York. As of December 31, 1996, the Bank had 443 full-time and 87 part- time employees. The Bank is not a party to any collective bargaining agreements, and employee relations are considered to be good. COMPETITION The banking business is extremely competitive and the Bank encounters intense competition from other financial institutions located within its market area. The Bank competes not only with other commercial banks but also with other financial institutions such as thrifts, credit unions, money market and mutual funds, insurance companies, brokerage firms, and a variety of other companies offering financial services. SUPERVISION AND REGULATION The Registrant, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (Act), and is subject to the supervision of the Board of Governors of the Federal Reserve System (FRB). Generally, the Act limits the business of bank holding companies to banking, or managing or controlling banks, performing certain servicing for subsidiaries, and engaging in such other activities as the FRB may determine to be so closely related to banking as to be a proper incident thereto. The Registrant is a legal entity separate and distinct from the Bank. The principal source of the Registrant's income is the Bank's earnings, and the principal source of its cash flow is dividends from the Bank. Federal laws impose limitations on the ability of the Bank to pay dividends as discussed in the Notes to Consolidated Financial Statements. FRB policy requires bank holding companies to serve as a source of financial strength to their subsidiary banks by standing ready to use available resources to provide adequate capital funds to subsidiary banks during periods of financial stress or adversity. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Among other things, federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA identifies the following capital catagories for financial institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Rules adopted by the federal banking agencies under FDICIA provide that an institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater and the institution is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. At December 31, 1996, the Registrant and the Bank fell into the well capitalized category based on the ratios and guidelines noted above. The appropriate Federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category, but not treat a significantly undercapitalized institution as critically undercapitalized, based on supervisory information other than the capital levels of the institution. The statute provides that an institution may be reclassified if the appropriate Federal banking agency determines, after notice and opportunity for hearing, that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The Act requires prior approval of the FRB of the acquisition by the Registrant of more than 5 percent of the voting shares of any bank or any other bank holding company. Subject to certain limits, the Act allows adequately capitalized and adequately managed bank holding companies to acquire control of banks in any state. An interstate acquisition may not be approved, however, if immediately II-3 before the acquisition the acquirer controls an FDIC-insured institution or branch in the state of the institution to be acquired, and if immediately following the acquisition the acquirer would control 30 percent or more of the total FDIC-insured deposits in that state; but a state may waive the 30-percent limitation by statute, regulation, or order, or by certain nondiscriminatory administrative approvals. The Bank is subject to primary supervision, regulation, and examination by the Office of the Comptroller of the Currency (OCC), whose regulations are intended primarily for the protection of the Bank's depositors and customers rather than holders of the Registrant's securities. The Bank is subject to extensive federal statutes and regulations that significantly affect its business and activities. The Bank must file reports with its regulators concerning its activities and financial condition and obtain regulatory approval to enter into certain transactions. The Bank is also subject to periodic examinations by the OCC to ascertain compliance with various regulatory requirements. Other applicable statutes and regulations relate to insurance of deposits, allowable investments, loans, acceptance of deposits, trust activities, mergers, consolidations, payment of dividends, capital requirements, reserves against deposits, establishment of branches and certain other facilities, limitations on loans to one borrower and loans to affiliated persons, and other aspects of the business of banks. Recent federal legislation has instructed federal agencies to adopt standards or guidelines governing banks' internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation and benefits, asset quality, earnings and stock valuation, and other matters. Legislation adopted in 1994 gives the federal banking agencies greater flexibility in implementing standards on asset quality, earnings, and stock valuation. Regulatory authorities have broad authority to initiate proceedings designed to prohibit banks from engaging in unsafe and unsound banking practices. FDIC INSURANCE ASSESSMENTS The deposits of the Bank are insured, up to an applicable limit, by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). During 1995, BIF reached its statutory target of 1.25% of total insured deposits and the BIF assessment rates were reduced from .23% to .04% for the highest rated banks. For 1996, the highest rated banks were not assessed on the level of their deposits but rather paid a minimum fee of $2,000 to BIF. Until June 30, 1997, BIF-assessable deposits will be subject to an assessment schedule providing for an assessment range of 0% to .27% (with intermediate rates of .03%, .10%, .17% and .24%, depending upon an institution's supervisory risk group). Beginning on July 1, 1997, BIF-assessable deposits will be subject to an assessment schedule providing for an assessment range of .4% to .31% (with intermediate rates of .07%, .14%, .21% and .28%, depending upon an institution's supervisory risk group). BIF assessment rates are subject to semi-annual adjustment by the FDIC Board of Directors within a range of up to five basis points without public comment. The FDIC Board of Directors also possesses authority to impose special assessments from time to time. In 1996, Congress enacted the Deposit Insurance Funds Act which establishes a schedule to merge with BIF and Savings Association Insurance Fund ("SAIF") on January 1, 1999, provided a law is passed by that date merging the bank and thrift charters. The act also provides for funding Financing Corp ("FICO") bonds. BIF-assessable deposits are subject to assessment for payment on the FICO bond obligation at one-fifth the rate of SAIF-assessable deposits. Accordingly, BIF insured banks will pay a rate of .013% for purposes of funding FICO bond obligations. The estimated impact for 1997 is expected to be $116,000 for the Bank. The .013% rate will be in effect for the year 1999, after which banks and thrifts will pay equal amounts currently estimated to be .04% of assessable deposits. II-4 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------- (in thousands,except per share data) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 Interest and fee income $ 84,387 $ 77,400 $ 70,438 $ 66,957 $ 69,208 Interest expense 36,365 34,840 25,742 23,200 27,194 Net interest income 48,022 42,560 44,696 43,757 42,014 Provision for loan losses 3,175 1,553 3,071 2,281 2,362 Noninterest income excluding securities gains 7,683 6,957 6,484 8,108 8,895 Securities gains 1,179 145 555 1,573 1,108 Noninterest expense 34,422 33,024 38,674 37,298 36,093 Income before income taxes 19,287 15,085 9,990 13,859 13,562 Net income 12,179 9,329 6,508 8,505 8,043 - ----------------------------------------------------------------------------------------------------------- PER COMMON SHARE* Net income $ 1.43 $ 1.06 $ 0.73 $ 0.95 $ 0.92 Cash dividends declared $ 0.522 $ 0.450 $ 0.407 $ 0.375 $ 0.341 Stock dividends distributed 5% 5% 5% 5% 5% Book value at year end $ 12.72 $ 12.44 $ 11.12 $ 11.41 $ 10.72 Tangible book value $ 11.52 $ 11.11 $ 10.01 $ 9.93 $ 8.74 Average common shares outstanding 8,513 8,800 8,939 8,897 8,732 - ----------------------------------------------------------------------------------------------------------- AT DECEMBER 31 Assets available for sale $ 373,337 $ 399,625 $ 119,398 $219,690 $ 39,590 Securities held to maturity 42,239 40,311 272,466 108,077 215,515 Loans 654,593 588,385 574,718 559,860 539,283 Allowance for loan losses 10,473 9,120 9,026 8,652 9,245 Total assets 1,138,986 1,106,266 1,044,557 953,907 868,616 Deposits 916,319 873,032 791,443 807,228 740,749 Short-term borrowings 88,244 115,945 140,587 26,701 16,418 Other borrowings 20,195 3,012 8,734 14,457 10,320 Total stockholders' equity 106,264 108,044 98,307 101,108 94,012 - ----------------------------------------------------------------------------------------------------------- KEY RATIOS Return on average assets 1.10% 0.90% 0.64% 0.93% 0.94% Return on average equity 1.80% 9.18% 6.53% 8.79% 8.89% Average equity to average assets 9.29% 9.75% 9.88% 10.63% 10.62% Net interest margin 4.69% 4.43% 4.81% 5.26% 5.52% Efficiency ratio 60.74% 65.92% 70.22% 71.05% 69.48% Cash dividend per share payout 36.50% 42.61% 56.13% 39.19% 36.61% Tier 1 leverage ratio (Regulatory guideline 4%) 8.70% 8.80% 9.05% 9.24% 9.01% Tier 1 risk-based capital ratio (Regulatory guideline 4%) 14.06% 15.21% 16.09% 15.40% 15.30% Total risk-based capital ratio (Regulatory guideline 8%) 15.31% 16.46% 17.35% 16.66% 16.61% - ----------------------------------------------------------------------------------------------------------- *All per share data has been restated to give retroactive effect to stock dividends and splits.
II-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion and analysis is to provide the reader with a concise description of the financial condition and results of operations of NBT Bancorp Inc. (Bancorp) and its wholly owned subsidiary, NBT Bank, N.A. (Bank) collectively referred to herein as the Company. This discussion will focus on Results of Operations, Financial Position, Capital Resources, and Asset/Liability Management. OVERVIEW The Company achieved record operating performance during 1996. Net income increased to $12.2 million, a 30% gain over earnings of $9.3 million in 1995. Leading the improved earnings was an increase of $5.5 million in net interest income arising from expanded loan volume and improved yields on securities. Other (noninterest) income was $1.8 million greater than 1995 offset by an increase of $1.4 million in other (noninterest) operating expenses. The securities portfolio consists of 90% U.S. Treasury and U.S. Agency guaranteed instruments, all classified as available for sale. Net gains in 1996 of $1.2 million were realized from sales of securities classified as available for sale. A shift of approximately $95 million from U.S. Treasury to U.S. Government agencies securities provided an increase in overall portfolio tax equivalent yield of .41% (41 basis points) from December 31, 1995 to December 31, 1996. Contributing to the positive operating results was 1996 loan growth of $66 million (11.3%). Loan growth was balanced between commercial and consumer portfolios with increases of $34.7 million and $32.6 million, respectively. Mortgage loan volume continued a marginal decline mirroring the weakness in residential real estate demand in the Bank's primary markets. Deposits of $916.3 million at December 31, 1996, were $43.3 million higher (5%) than the year previous. Deposits averaged $916.7 million for the year, an 8.1% increase over 1995 average deposits. Time deposits (certificates) accounted for the increase in deposit volume. In November 1995 the Board of Directors approved a 500,000 share buyback program which extended from the date of authorization to November 1996. During this twelve month period, the Company acquired 454,000 shares or approximately 5.4% of the common stock outstanding. Shares acquired will be used primarily for employee benefits and stock option programs. In December 1996, the Company distributed a 5% stock dividend, making this the thirty-seventh consecutive year of stock dividends and/or stock splits. Throughout this report, amounts per common share and common shares outstanding have been retroactively adjusted to reflect the stock dividends. NET INTEREST INCOME Net interest income is the difference between interest and fees earned on assets and the interest paid on deposits and borrowings. Net interest income is one of the major determining factors in a financial institutions performance as it is the principal source of earnings. Table 1 presents average balance sheets and a net interest income analysis on a taxable equivalent basis for each of the years in the three-year period ended December 31, 1996. As reflected in Table 1, net interest income, on a taxable equivalent basis, increased $5.6 million, or 13.0% from $43.4 million in 1995 to $49.0 million in 1996. The increase was due to a 5.9% increase in the net interest margin from 4.4% in 1995 to 4.7% in 1996. Yields on earning assets increased 18 basis points or 2.3% whereas the cost of deposits and borrowings was reduced by 19 basis points or 4.4%. In comparing 1995 to 1994, the decline in taxable equivalent net interest income and net interest margin is attributed to increased rates paid on interest bearing liabilities. Whereas the increase in yields on earning assets was 46 basis points, or 6.1%, the average rates paid on liabilities increased 103 basis points or 31.5%. Net interest margin declined from 4.8% in 1994 to 4.4% in 1995. The decrease of $2 million in net interest income relates directly to the decline in the net interest margin rate. Average earning assets increased by $65.7 million or 6.7%, in 1996 over 1995. Average loans increased $41.8 million or 7.3% during the year and investment securities increased $26.5 million or 6.7% during 1996. During 1996, average interest bearing deposits and liabilities increased by $74.2 million, or 9.2%. Growth came primarily in time deposits (certificates) with an average increase of $53.6 million, or 14.3%. As reflected on Table 2, the net increase in interest expense of $1.5 million from 1995 to 1996 was comprised of an increase of $3.1 million arising from higher average balances and a decrease of $1.6 million due to lower interest rates. Average interest bearing deposits and liabilities increased by $23.6 million or 3.0% from 1994 to 1995, as a result of increases in interest bearing deposits. The average cost of liabilities increased from 3.3% in 1994 to 4.3% in 1995, a 31.5% rate increase. The increase arose primarily as a result of volume declines and the lower costing savings, NOW, and money market account with corresponding increases in the higher paying time deposits. The total increase in interest expense of $9.1 million from 1994 to 1995 consists of $2.1 million volume variance and $7.0 million rate variance. II-6 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 deposits and liabilities on a taxable equivalent basis. Interest income is adjusted for items exempt from Federal income taxes and assumes a 35% tax rate.
1996 1995 1994 ---------------------------- ----------------------------- ---------------------------- (dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Balance Interest Rates Balance Interest Rates Balance Interest Rates ------- -------- ------ ------- -------- ------ ------- -------- ------ ASSETS Interest bearing deposits $ 304 $ 16 5.26% $ 472 $ 21 4.45% $ 171 $ 8 4.68% Federal funds sold 323 18 5.57 589 34 5.77 414 13 3.14 Short-term investments available for sale 1,088 57 5.24 1,564 91 5.82 2,441 89 3.65 Securities available for sale, taxable 374,574 24,355 6.50 147,073 9,137 6.21 134,488 7,809 5.81 Loans available for sale 4,427 372 8.40 6,099 545 8.94 9,457 671 7.10 Securities held to maturity: Taxable 11,914 788 6.61 217,201 13,154 6.06 200,501 11,878 5.92 Tax exempt 33,661 2,316 6.88 29,392 2,102 7.15 30,101 1,781 5.92 ------ ----- ------- ------ ------- ------ Total securities held to maturity 45,575 3,104 6.81 246,593 15,256 6.19 230,602 13,659 5.92 Loans: Commercial 263,193 25,579 9.72 229,481 22,862 9.96 212,007 18,528 8.74 Real estate mortgage 119,993 10,184 8.49 126,280 10,358 8.20 131,615 9,555 7.26 Consumer 233,948 21,668 9.26 219,587 19,886 9.06 221,794 20,778 9.37 ------- ------ ------- ------ ------- ------ Total Loans 617,134 57,431 9.31 575,348 53,106 9.23 565,416 48,861 8.64 --------- ------ ------- ------ ------- ------ Total earning assets 1,043,425 85,353 8.18 977,738 78,190 8.00 942,989 71,110 7.54 ------ ------ ------ Cash and due from banks 36,171 35,022 35,076 Securities available for sale valuation allowance (2,752) (2,736) (3,018) Allowance for loan losses (9,657) (9,330) (8,863) Premises and equipment 16,465 15,671 15,807 Other assets 27,316 25,833 27,581 ------ ------ ------ Total assets $1,110,968 $1,042,198 $1,009,572 ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Money market deposit accounts $ 101,753 2,977 2.93 $ 108,928 3,173 2.91 $ 148,341 3,818 2.57 NOW accounts 108,806 1,873 1.72 83,807 1,582 1.89 87,041 1,407 1.62 Savings deposits 159,373 4,650 2.92 154,091 4,554 2.96 177,015 4,707 2.66 Certificates of deposit 430,464 22,442 5.21 376,852 20,374 5.41 286,818 11,551 4.03 ------- ------ ------- ------ ------- ------ Total interest bearing deposits 800,396 31,942 3.99 723,678 29,683 4.10 699,215 21,483 3.07 Short-term borrowings 73,192 3,745 5.12 80,596 4,700 5.83 73,083 3,351 4.59 Other borrowings 10,288 678 6.59 5,424 457 8.43 13,846 908 6.56 ------- ------ ------- ------ ------- ------ Total interest bearing liabilities 883,876 36,365 4.11% 809,698 34,840 4.30% 786,144 25,742 3.27% ------ ------ ------ Demand deposits 116,287 124,611 118,186 Other liabilities 7,565 6,259 5,532 Stockholders' equity 103,240 101,630 99,710 ------- ------- ------- Total liabilities and stockholders' equity $1,110,968 $1,042,198 $1,009,572 ---------- ---------- ---------- Net interest income $48,988 $43,350 $45,368 ------- ------- ------- Net interest margin 4.69% 4.43% 4.81% ----- ----- ----- Taxable equivalent adjustment $ 966 $ 790 $ 672 ------- ------- ------- (1) For purposes of these computations, nonaccrual loans are included in the average loan balances outstanding. (2) Securities are shown at average amortized cost.
II-7 TABLE 2 ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
- ------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) Increase (Decrease) 1996 OVER 1995 1995 over 1994 - ------------------------------------------------------------------------------------------------------------ (in thousands) VOLUME RATE TOTAL Volume Rate Total - ------------------------------------------------------------------------------------------------------------ Interest bearing deposits $ (8) $ 3 $ (5) $ 13 $ - $ 13 Federal funds sold (15) (1) (16) 7 14 21 Short-term securities available for sale (26) (8) (34) (39) 41 2 Securities available for sale 14,773 445 15,218 760 568 1,328 Loans available for sale (142) (31) (173) (274) 148 (126) Securities held to maturity: Taxable (13,476) 1,110 (12,366) 1,007 269 1,276 Tax exempt 296 (82) 214 (43) 364 321 Loans 3,887 438 4,325 871 3,374 4,245 - ------------------------------------------------------------------------------------------------------------ Total interest income 5,289 1,874 7,163 2,302 4,778 7,080 - ------------------------------------------------------------------------------------------------------------ Money market deposit accounts (210) 14 (196) (1,104) 459 (645) NOW accounts 440 (149) 291 (54) 229 175 Savings accounts 155 (59) 96 (646) 493 (153) Certificates of deposit 2,816 (748) 2,068 4,220 4,603 8,823 Short-term borrowings (409) (546) (955) 370 979 1,349 Other borrowings 338 (117) 221 (659) 208 (451) - ------------------------------------------------------------------------------------------------------------ Total interest expense 3,130 (1,605) 1,525 2,127 6,971 9,098 - ------------------------------------------------------------------------------------------------------------ CHANGE IN FTE NET INTEREST INCOME $ 2,159 $ 3,479 $ 5,638 $ 175 $(2,193) $(2,018) - ------------------------------------------------------------------------------------------------------------
PROVISION AND ALLOWANCE FOR LAON LOSSES The provision for loan losses is based upon management's judgement as to the adequacy of the allowance to absorb the future losses. In assessing the adequacy of the allowance for loan losses, consideration is given to historical loan loss experience, value and adequacy of collateral, level of nonperforming loans, loan concentrations, the growth and composition of the portfolio, and the results of a comprehensive in-house loan review program conducted throughout the year. Consideration is given to the results of examinations and evaluations of the overall portfolio by senior credit personnel, internal and external auditors, and regulatory examiners. Accompanying tables reflect the five years history of net charge-offs and the allocation of the allowance by loan category. Net charge-offs, both as dollar amounts and as percentages of average loans outstanding, have decreased indicating stable asset quality. Nonetheless, management considered it prudent to increase the dollar level and percentage relationship of the allowance to various asset categories as depicted in the tables. The allowance has been allocated based on identified problem credits or categorical trends. The unallocated portion is available for further unforseen or unexpected losses or unidentified problem credits. Management considers the allowance to be adequate for the reporting periods and will continue to target and maintain a minimum allowance equal to the allocated requirement plus an unallocated portion. II-8 TABLE 3 ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------- (dollars in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------- Balance at January 1 $ 9,120 $9,026 $8,652 $9,245 $9,845 Loans charged off: Real estate mortgages 204 112 154 43 34 Commercial and agricultural 1,274 967 1,409 1,222 1,742 Consumer 1,300 1,182 2,159 2,395 2,107 - ------------------------------------------------------------------------------------------------- Total loans charged off 2,778 2,261 3,722 3,660 3,883 Recoveries: Real estate mortgages 20 - - 2 5 Commercial and agricultural 274 193 291 267 355 Consumer 662 609 734 517 561 - ------------------------------------------------------------------------------------------------- Total recoveries 956 802 1,025 786 921 - ------------------------------------------------------------------------------------------------- Net loans charged off 1,822 1,459 2,697 2,874 2,962 Provision for loan losses 3,175 1,553 3,071 2,281 2,362 - ------------------------------------------------------------------------------------------------- Balance at December 31 $10,473 $9,120 $9,026 $8,652 $9,245 - ------------------------------------------------------------------------------------------------- Allowance for loan losses to loans outstanding at end of year 1.60% 1.55% 1.57% 1.55% 1.71% Allowance for loan losses to nonperforming loans 315% 189% 195% 207% 243% Nonperforming loans to total loans 0.51% 0.82% 0.81% 0.74% 0.71% Nonperforming assets to total assets 0.40% 0.62% 0.52% 0.48% 0.53% Net charge-offs to average loans outstanding 0.29% 0.25% 0.48% 0.52% 0.55% - -------------------------------------------------------------------------------------------------
TABLE 4 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- CATEGORY Category Category Category Category PERCENT Percent Percent Percent Percent (dollars in thousands) ALLOWANCE OF LOANS Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans - ---------------------------------------------------------------------------------------------------------------------------------- Real estate mortgages $ 360 18.3% $ 412 20.6% $ 630 22.5% $ 206 24.3% $ 394 29.2% Commercial and agricultural 4,341 43.1% 4,250 42.0% 3,726 37.5% 3,699 36.9% 2,788 30.9% Consumer 2,335 38.6% 2,048 37.4% 3,538 40.0% 3,767 38.8% 3,887 39.9% Unallocated 3,437 - 2,410 - 1,132 - 980 - 2,176 - - ---------------------------------------------------------------------------------------------------------------------------------- Total $10,473 100.0% $9,120 100.0% $9,026 100.0% $8,652 100.0% $9,245 100.0% - ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Noninterest income consists primarily of trust and custodian fees, service charges on deposit accounts, gains (or losses) on the sales of securities, and fees and service charges for other banking services. Total noninterest income for 1996 of $8.9 million increased $1.8 million or 24.8% over 1995. Excluding securities gains of $1.2 million, other income increased $.7 million, or 10.4%, in 1996 over 1995. Overall changes from 1994 to 1995 were not significant. TABLE 5 NONINTEREST INCOME SUMMARY
- ------------------------------------------------------------------------------------------------------------ 1996/1995 1995/1994 (dollars in thousands) 1996 1995 1994 Amount Change Amount Change - ------------------------------------------------------------------------------------------------------------ Trust income $2,642 $2,439 $2,511 203 8.32% (72) (2.87%) Deposit service charges 3,372 2,995 3,032 377 12.59% (37) (1.22%) Securities gains 1,179 145 555 1,034 713.10% (410) (73.87%) Other income 1,669 1,523 941 146 9.59% 582 61.85% - ------------------------------------------------------------------------------------------------------------ Total noninterest income $8,862 $7,102 $7,039 1,760 24.78% 63 .90% - ------------------------------------------------------------------------------------------------------------
II-9 The Trust Department of the Company has $631 million in assets (market value) under management at December 31, 1996. During 1996, trust assets grew $67 million or 12% with resultant growth in income of $.2 million. Trust fees declined from 1994 to 1995, primarily from reductions in charges to estates and personal agency accounts. Service charges on deposit accounts increased 12.6% over last year. There were no significant changes in the fee structure or in the volume of transaction accounts; however, emphasis was placed on collection vs. waiver, particularly for overdraft charges which accounted for a major part of the increase. Changes were nominal from 1994 to 1995. Net gains in 1996 of $1.2 million were realized from sales of U.S. Treasury and U.S. Government agencies securities which were all classified as available for sale. A shift of approximately $95 million from U.S. Treasury to Government agencies' securities, as well as other selected sales and purchases, provided an increase in overall portfolio tax equivalent yield of .41% (41 basis points) from December 31, 1995 to December 31, 1996. This was accomplished with minimal credit or interest rate risk and with no significant extension of average maturity. Net gains declined from 1994 to 1995 as market conditions fluctuated. Also, a major part of the U.S. Treasury and U.S. Agency securities were classified as held to maturity until December 1995 when all were reclassified to available for sale. NONINTEREST EXPENSE AND OPERATING EFFICIENCY Table 6 presents noninterest expense and operating efficiency ratios for each of the three years ending December 31, 1996. Noninterest expense as a percentage of average assets in 1996 declined slightly from 1995, being 3.1% and 3.2%, respectively. The 1995 percentage declined from 3.8% in 1994, primarily as a result of decreased FDIC insurance and a restructuring charge of $2.3 million taken in 1994. Salaries and employee benefits increased $1.5 million or 9.3%, in 1996 over 1995. Expense increases were primarily due to a $.6 million increase in performance based incentives and $.5 million increase in retirement benefits. This category reflects little difference from 1995 or 1994. Expense control efforts have held occupancy and equipment expenses relatively flat over the past three years. These expenses reflect a small improvement compared to total average assets. FDIC insurance declined from $.9 million in 1995 to $2 thousand in 1996. The decline occurred as the FDIC Bank Insurance Fund (BIF) attained congressionally mandated reserve goals during the second quarter of 1995. The 1995 FDIC insurance expense was reduced from $1.8 million in 1994 as insurance premiums were reduced from $0.23 to $0.04 per $100 of insured deposits in June 1995. The Bank has the highest rating for purposes of FDIC insurance assessment and, accordingly has historically paid the lowest deposit insurance premium. Operating expenses increased $.7 million from 1995 to 1996 as a result of $.3 million increase in amortization of intangible assets arising from the December 1995 acquisition of three branches, and an increase of $.4 million in data processing and loan origination charges, corresponding to increased volumes. Other operating expenses for 1995 declined $4.6 million from 1994 as a result of reduction and amortization of intangible assets of $2 million and $2.3 million and restructuring expense taken in 1994. II-10 TABLE 6 NONINTEREST EXPENSE AND OPERATING EFFICIENCY ANALYSIS
Years Ended December 31, 1996 1995 1994 1996/1995 1995/1994 - ----------------------------------------------------------------------------------------------------------------------------- Percent Percent Percent of of of Average Average Average Average Average (dollars in thousands) Amount Assets Amount Assets Amount Assets Amount Change Amount Change - ----------------------------------------------------------------------------------------------------------------------------- Expenses: Personnel $17,817 1.60% $16,309 1.56% $16,157 1.60% $1,508 9.25% $ 152 0.94% Occupancy and equipment 4,156 0.37% 4,055 0.39% 4,328 0.43% 101 2.49% (273) (6.31%) FDIC insurance 2 -% 941 0.09% 1,829 0.18% (939) (99.79%) (888) (48.55%) Other 12,447 1.12% 11,719 1.12% 16,360 1.62% 728 6.21% (4,641) (28.37%) - ----------------------------------------------------------------------------------------------------------------------------- Total noninterest expense $34,422 3.10% $33,024 3.17% $38,674 3.83% $1,398 4.23% $(5,650) (14.61%) - ----------------------------------------------------------------------------------------------------------------------------- Expense ratio (1) 2.41% 2.51% 2.96% Efficiency ratio (2) 60.74% 65.92% 70.22% Average assets per employee (in millions) $ 2.1 $ 1.9 $ 1.8 - ----------------------------------------------------------------------------------------------------------------------------- (1) Noninterest expense less noninterest income, not including security gains and other non- recurring income or expense, as a percentage of average assets. (2) Noninterest expense, less non-recurring expenses, as a percentage of tax-effected net interest income plus noninterest income, less security gains.
INCOME TAXES Income tax expense was $7.1 million for 1996, $5.8 million for 1995, and $3.5 million for 1994. The increases generally correspond to increased income before income taxes. Effective income tax rates were 36.9% for 1996, 38.2% for 1995, and 34.8% for 1994. At December 31, 1996, the Company has deferred tax assets of $6.4 million and deferred tax liabilities of $1.4 million. Management has determined that a valuation allowance for the deferred tax assets is not needed at December 31, 1996. Additional information on income taxes is provided in the notes to financial statements. SECURITIES The securities portfolio constituted 40.3% of average earning assets during 1996 and 1995. Investments are primarily U.S. Treasury and U.S. Governmental agency guaranteed securities classified as available for sale. Held to maturity securities are obligations of the State of New York political subdivisions and do not include any direct obligations of the state of New York. In 1995, the Company reclassified a substantial portion of the securities portfolio from held to maturity to available for sale. All subsequent purchases of U.S. Treasury and U.S. Governmental agency guaranteed securities have been classified as available for sale. All sales of securities have been made from the available for sale category. II-11 TABLE 7 SECURITIES PORTFOLIO
As of December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Amortized Fair (in thousands) Cost Value Cost Value Cost Value - --------------------------------------------------------------------------------------------------------- Securities Available For Sale U.S. Treasury $ 70,811 $ 70,269 $169,801 $171,908 $ 33,085 $ 32,914 Federal Agency and mortgage-backed 299,202 297,133 217,655 220,305 80,695 73,576 State & Municipal and other securities 1,775 1,800 1,308 1,323 1,921 1,987 - --------------------------------------------------------------------------------------------------------- Total securities available for sale $371,788 $369,202 $388,764 $393,536 $115,701 $108,477 - --------------------------------------------------------------------------------------------------------- Securities Held to Maturity U.S. Treasury $ - $ - $ - $ - $170,757 $162,919 Federal Agency and mortgage-backed - - - - 53,616 50,953 State & Municipal 32,546 32,546 28,521 28,517 37,292 37,241 Other securities 9,693 9,692 11,790 11,789 10,801 10,800 - --------------------------------------------------------------------------------------------------------- Total securities held to maturity $ 42,239 $ 42,238 $ 40,311 $ 40,306 $272,466 $261,913 - ---------------------------------------------------------------------------------------------------------
LOANS The following Table 8 sets forth the loan portfolio by major categories as of December 31 for the years indicated: TABLE 8 COMPOSITION OF LOAN PORTFOLIO
- ----------------------------------------------------------------------------------------- December 31, 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------- (in thousands) Real estate mortgages $110,288 $107,611 $125,385 $132,941 $156,457 Commercial real estate mortgages 135,061 108,902 71,631 88,487 82,509 Real estate construction and development 9,582 13,361 3,890 3,162 7,067 Commercial and agricultural 146,930 138,391 143,632 118,143 87,103 Consumer 204,641 185,276 201,359 187,179 175,214 Home equity 48,091 34,817 28,704 29,741 30,636 Lease financing - 27 117 207 297 - ----------------------------------------------------------------------------------------- Total loans $654,593 $588,385 $574,718 $559,860 $539,283 - -----------------------------------------------------------------------------------------
The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At December 31, 1996, total loans were $654.6 million, an 11.3% increase from December 31, 1995. In general, loans are internally generated and lending activity is confined to New York State, principally the eight-county area served by the Bank. The Bank does not engage in highly leveraged transactions or foreign lending activities. There were no concentration of loans exceeding 10% of total loans other than those categories reflected in Table 8. Real estate mortgages consist primarily of loans secured by first or second deeds of trust on primary residencies. Beginning in 1996 the Bank began retaining most first mortgage loans within the portfolio. For several years prior to 1996, fixed-rate mortgages were originated for sale in the secondary market. During 1996, the Bank sold $.4 million in mortgage loans compared to sales of $10 million in 1995. There were no gains or losses recognized related to sales of mortgages originated in 1996. At December 31, 1996, loans classified as available for sale consist of higher education loans with estimated fair market values equal to cost. 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. Agricultural loans total $45.2 million at December 31, 1996, and there are no other substantial loan concentrations to any one industry or to any one borrower. II-12 Consumer loans consist primarily of installment credit to individuals secured by automobiles and other personal property. Management believes underwriting guidelines to be conservative and based primarily on satisfactory credit history, down payment, and sufficient income to service monthly payments. Shown in Table 9, Maturities and Sensitivities of Loans to Changes in Interest Rates, are the maturities of the loan portfolio and the sensitivity of loans to interest rate fluctuations at December 31, 1996. Maturities are based on the earlier of contractual maturities or rate repricing. TABLE 9 MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
- ----------------------------------------------------------------------------------------------------- AFTER ONE YEAR BUT WITHIN AFTER REMAINING MATURITY AT WITHIN FIVE Five December 31, 1996 ONE YEAR YEARS YEARS TOTAL - ----------------------------------------------------------------------------------------------------- (in thousands) Floating/adjustable rate: Commercial and agricultural $226,904 $ 588 $ - $227,492 Real estate mortgages 87,097 3,781 - 90,878 Consumer 40,390 - - 40,390 - ----------------------------------------------------------------------------------------------------- Total floating rate loans 354,391 4,369 - 358,760 Fixed Rate: Commercial and agricultural 10,395 27,480 16,624 54,499 Real estate mortgages 1,718 6,500 20,774 28,992 Consumer 63,981 128,820 19,541 212,342 - ----------------------------------------------------------------------------------------------------- Total fixed rate loans 76,094 162,800 56,939 295,833 - ----------------------------------------------------------------------------------------------------- Total loans $430,485 $167,169 $56,939 $654,593 - -----------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS Nonperforming assets and past due loans are reflected in Table 10 below for the years indicated. TABLE 10 NONPERFORMING ASSETS AND RISK ELEMENTS
- ------------------------------------------------------------------------------------------------------ December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------ (dollars in thousands) Impaired commercial and agricultural loans $2,441 $3,945 $ - $ - $ - Other nonaccrual loans: Real estate mortgages 251 332 783 365 76 Commercial and agricultural - - 3,552 3,693 3,276 Consumer 628 540 304 112 450 - ------------------------------------------------------------------------------------------------------ Total nonaccrual loans 3,320 4,817 4,639 4,170 3,802 - ------------------------------------------------------------------------------------------------------ Other real estate owned 1,242 2,000 840 430 804 - ------------------------------------------------------------------------------------------------------ Total nonperforming assets 4,562 6,817 5,479 4,600 4,606 - ------------------------------------------------------------------------------------------------------ Loans 90 days or more past due and still accruing: Real estate mortgages 344 448 287 956 1,398 Commercial and agricultural 418 559 133 410 1,133 Consumer 289 325 451 1,819 424 - ------------------------------------------------------------------------------------------------------ Total 1,051 1,332 871 3,185 2,955 - ------------------------------------------------------------------------------------------------------ Restructured loans, in compliance with modified terms: - 142 - - - - ------------------------------------------------------------------------------------------------------ Total assets containing risk elements $5,613 $8,291 $6,350 $7,785 $7,561 - ------------------------------------------------------------------------------------------------------ Total nonperforming assets to loans 0.70% 1.16% 0.95% 0.82% 0.85% Total assets containing risk elements to loans 0.86% 1.41% 1.10% 1.39% 1.40% Total nonperforming assets to assets 0.40% 0.62% 0.52% 0.48% 0.53% Total assets containing risk elements to assets 0.49% 0.75% 0.61% 0.82% 0.87% - ------------------------------------------------------------------------------------------------------
II-13 Total nonperforming assets decreased $2.3 million, or 33.1%, from 1995 to 1996; total assets containing risk elements declined $2.7 million or 32.3% in 1996. The changes in nonaccrual and impaired loans is presented in Table 11 below. The effect of nonaccrual and impaired loans on interest income is presented in Table 11 following: TABLE 11 NONACCRUAL AND IMPAIRED LOANS INTEREST INCOME
- ------------------------------------------------------------------------------------------------- December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------- (in thousands) Income that would have been accrued at original contract rates $1,125 $765 $465 $284 $276 Amount recognized as income 593 344 216 105 96 - ------------------------------------------------------------------------------------------------- Interest income not accrued $ 532 $421 $249 $179 $180 - -------------------------------------------------------------------------------------------------
TABLE 12 CHANGES IN NONACCRUAL AND IMPAIRED LOANS
- ----------------------------------------------------------------------------------- (in thousands) 1996 1995 - ----------------------------------------------------------------------------------- Balance at January 1 $ 4,817 $ 4,639 Loans placed on nonaccrual 6,126 4,313 Charge-offs (1,710) (1,175) Payments (3,593) (1,864) Transfers to OREO (680) (1,096) Loans returned to accrual (1,640) - - ----------------------------------------------------------------------------------- Balance at December 31 $ 3,320 $ 4,817 - ----------------------------------------------------------------------------------- CHANGES IN OREO - ----------------------------------------------------------------------------------- (in thousands) 1996 1995 - ----------------------------------------------------------------------------------- Balance at January 1 $2,000 $ 840 Additions 758 1,622 Sales (1,233) (339) Charge-offs and write-downs (283) (123) - ----------------------------------------------------------------------------------- Balance at December 31 $1,242 $ 2,000 - -----------------------------------------------------------------------------------
DEPOSITS Deposits are the largest component of the Company's liabilities and account for the greatest portion of interest expense. At December 31, 1996, total deposits were $916.3 million an increase of 5.0% from December 31, 1995. Average deposits for 1996 of $916.7 million were 8.1% higher than averages for 1995. The preceding Table 1 presents average deposits with accompanying average rates. TABLE 13 MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
- ------------------------------------------------------------------------------------- December 31, 1996 1995 - ------------------------------------------------------------------------------------- (in thousands) Within three months $154,328 $100,430 After three but within six months 24,820 10,162 After six but within twelve months 5,994 6,949 After twelve months 6,201 8,552 - ------------------------------------------------------------------------------------- Total $191,343 $126,093 - -------------------------------------------------------------------------------------
BORROWED FUNDS Short-term borrowings include federal funds purchased, securities sold under agreement to repurchase, and other short-term borrowings which consist primarily of FHLB advances with an original maturity of one day up to one year. Other borrowings includes a 366 day advance, hence one day longer than would qualify for short-term classification, maturing in 1997. There was little change in borrowed funds from 1995 to 1996 as amounts totaled $108.4 million and $119.0 million at December 31, 1996 and 1995, respectively. In 1995, the Company granted its then Chairman stock options in connection with the discharge of severance obligations of the Company and the Bank under his employment agreement. The agreement issued options covering 136,437 and 28,593 shares with exercise prices of $14.69 and $15.33, respectively, and an expiration date of II-14 January 31, 1997 (the number of shares under option and the option price per share have been adjusted for stock dividends). The Company filed a registration statement relating to these option shares which will be issued, upon payment of the exercise price, from authorized, but unissued common stock, or shares held in the treasury. These stock options do not serve to reduce the number available under the previously mentioned Plans. The former Chairman exercised 1,000 options in November 1996 and 164,030 in January 1997 resulting in no further shares available for exercise. Shares were issued from authorized, but unissued common stock. CAPITAL AND DIVIDENDS TABLE 14 CAPITAL MEASUREMENTS
- --------------------------------------------------------------------------------------------- December 31, 1996 1995 - --------------------------------------------------------------------------------------------- Tier 1 leverage ratio 8.70% 8.80% Tier 1 capital ratio 14.06% 15.21% Total risk-based capital ratio 15.31% 16.46% Cash dividends as a percentage of net income 36.10% 42.47% Per common share: Book value $12.72 $12.44 Tangible book value $11.52 $11.11 - ---------------------------------------------------------------------------------------------
TABLE 15 QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- ----------------------------------------------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------------------------------------------- (restated to give retroactive effect to stock dividends) CASH Cash DIVIDENDS Dividends QUARTER ENDING HIGH LOW CLOSE DECLARED High Low Close Declared - ----------------------------------------------------------------------------------------------------- March 31 $16.22 $15.24 $16.19 $0.124 $15.42 $14.51 $14.51 $0.109 June 30 16.67 15.60 15.60 0.124 14.96 14.29 14.74 0.109 September 30 16.43 15.00 16.07 0.124 15.19 14.29 14.96 0.109 December 31 19.00 16.07 18.00 0.150 17.14 14.51 16.67 0.123 - ----------------------------------------------------------------------------------------------------- For the year $19.00 $15.00 $18.00 $0.522 $17.14 $14.29 $16.67 $0.450 - -----------------------------------------------------------------------------------------------------
On a per share basis, cash dividends declared have been increased both in 1996 and 1995. These dividend increases reflect the Company's earnings and capital strength. The Company does not have a target dividend payout ratio, rather the Board of Directors considers the Company's earnings position and earnings potential when making dividend decisions. Additionally, 1996 was the thirty- seventh consecutive year that the Company declared a stock dividend. The accompanying table, Quarterly Common Stock and Dividend Information, sets forth the high, low and closing sales price for the common stock as reported on the NASDAQ National Market System, and cash dividends declared per share of common stock. At December 31, 1996, the total market capitalization of the Company's common stock was approximately $150 million compared with $145 million at December 31, 1995. The change in market capitalization is due to changes in the market price net of increased shares held in treasury. The Company's price to book value ratio was 1.42, 1.34, and 1.34 at December 31, 1996, 1995 and 1994, respectively. The Company's price was 13, 16, and 20 times earnings at December 31, 1996, 1995 and 1994, respectively. Capital is an important factor in ensuring the safety of depositors' accounts. During both 1996 and 1995, the Company earned the highest possible national safety and soundness rating from two national bank rating services, Bauer Financial Services and Veribanc, Inc. Their ratings are based on capital levels, loan portfolio quality, and security portfolio strength. The Company remains well capitalized as depicted by the capital ratios in the table. Capital measurements are significantly in excess of both regulatory minimum guidelines and meet the requirements to be considered well capitalized for all periods presented. Tier 1 and Total Risk-Based Capital ratios have regulatory minimum guidelines of 4% and 8%, respectively, with requirements to be considered well capitalized of 6% and 10%, respectively. II-15 LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT The primary objectives of asset and liability management are to provide for the safety of depositor and investor funds, assure adequate liquidity, and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. Liquidity management 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 Management 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 must also provide the flexibility to implement appropriate strategies and tactical actions. Requirements change as loans grow, deposits and securities mature, and payments on borrowings are made. Interest rate sensitivity management seeks to avoid widely fluctuating net interest margins and to ensure consistent net interest income through periods of changing economic conditions. Given the above, liquidity to the Company is defined as the ability to raise cash quickly at a reasonable cost without principal loss. 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. Accordingly, the Company has established borrowing facilities with other banks (federal funds), the Federal Home Loan Bank of New York (short and long-term borrowings which are denoted as advances), and repurchase agreements with investment companies. This Basic Surplus approach enables the Company to adequately manage liquidity from both tactical 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, 1996 and 1995, the Company's Basic Surplus ratios (net access to cash and secured borrowings as a percentage of total assets) were approximately 12% and 17%, respectively, compared to the present internal minimum guideline range of 5% to 7%. The December 31, 1996 Basic Surplus ratio was in excess of the guidelines. During 1995, the Company took steps to absorb its substantial capacity to support income yielding assets, utilizing, and therefore reducing, its Basic Surplus ratio. The Company had unused lines of credit available totalling $407 million to meet its short-term liquidity needs at December 31, 1996 and considered the Basic Surplus adequate to meet liquidity needs. Interest rate risk is determined by the relative sensitivities of earning asset yields and interest bearing liability costs to changes in interest rates. Overnight federal funds on which rates change daily and loans which are tied to the prime rate differ considerably from long-term investment securities and fixed rate loans. Similarly, time deposits over $100,000 and money market deposit accounts are much more interest sensitive than NOW and savings accounts. The method by which banks evaluate interest rate risk is to look at the interest sensitivity gap, the difference between interest sensitive assets and interest sensitive liabilities repricing during the same period, measured at a specific point in time. The funding matrix depicted in the accompanying table is utilized as a primary tool in managing interest rate risk. The matrix arrays repricing opportunities along a time line for both assets and liabilities. The time line for sources of funds, liabilities and equity, is depicted on the left hand side of the matrix. The longest term, most fixed rate sources, are presented in the upper left hand corner while the shorter term, most variable rate items, are at the lower left. Similarly, uses of funds, assets, are arranged across the top moving from left to right. The body of the matrix is derived by allocating the longest fixed rate funding sources to the longest fixed rate assets (upper left corner) and shorter term variable sources to shorter term variable uses (lower right corner). The result is a graphical depiction of the time periods over which the Company is expected to experience exposure to rising or falling rates. Since the scales of the liability (left) and asset (top) sides are identical, all numbers in the matrix would fall within the diagonal lines if the Company was perfectly matched across all repricing time frames. Numbers outside the diagonal lines represent two general types of mismatches: i) liability sensitive, where rate sensitive liabilities exceed the amount of rate sensitive assets repricing within applicable time frames (items to the left of/below the diagonal lines) and ii) asset sensitive, where rate sensitive assets exceed the amount of rate sensitive liabilities repricing within applicable time frames (items to the right of/above the diagonal lines). Generally, the lower the amount of this gap, the less sensitive are earnings to interest rate changes. The matrix indicates that the Company is structurally asset sensitive and supports management's contention that the Company is positioned to benefit from a higher II-16 interest rate environment. The nature and timing of the benefit will be initially impacted by the extent to which core deposit and borrowing rates are increased as rates rise. While the static gap evaluation of interest rate sensitivity is useful, it is not indicative of the impact of fluctuating interest rates on net interest income. Once the Company determines the extent of gap sensitivity, the next step is to quantify the potential impact of the interest sensitivity on net interest income. The Company runs various earnings simulation scenarios used to evaluate the effect on net interest income in a rising or declining rate environment over an extended time horizon. At December 31, 1996, a 100 basis point gradual increase or decline in interest rates was estimated to have less than a 1.5% impact on net interest income relative to a flat rate environment over the next twelve month period. TABLE 16 SUMMARY STATIC GAP FUNDING MATRIX (in millions)
- -------------------------------------------------------------------------------------------------------------------------- (ASSETS) OVER 60 37-60 25-36 13-24 7-12 4-6 -USES- MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MAR 97 FEB 97 JAN 97 ONE DAY TOTALS - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES 249 135 93 109 115 75 18 22 321 2 1,139 -SOURCES- TOTALS - -------------------------------------------------------------------------------------------------------------------------- OVER 60 472 249 135 88 Long Liabilities 472 MONTHS Short Assets 37-60 15 5 10 15 MONTHS 25-36 16 16 16 MONTHS 13-24 51 51 51 MONTHS 7-12 87 32 55 87 MONTHS 4-6 70 60 10 70 MONTHS MAR 97 117 65 18 22 12 117 FEB 97 43 43 43 JAN 97 220 Long Assets 220 220 Short Liabilities ONE DAY 48 46 2 48 - -------------------------------------------------------------------------------------------------------------------------- TOTALS 1,139 249 135 93 109 115 75 18 22 321 2 1,139 - --------------------------------------------------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers of Servicing of Financial Assets and extinguishment of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers of servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is based on a consistent application of a financial-components approach that focuses on control. The statement provides consistent standards for distinguishing transfers of financial assets that are sales, from transfers that are secured borrowings. In December 1996, the FASB deferred for one year the effective date of SFAS 125 as it relates to transfers of financial assets and secured borrowings and collateral. The Company will prospectively adopt SFAS No. 125 effective January 1, 1997 and management does not believe the adoption will have a material impact on the Company's financial condition or results of operations. FOURTH QUARTER RESULTS Selected quarterly results are presented in Table 17, Selected Quarterly Financial Data. Quarterly net income for the fourth quarter of 1996 achieved the second highest level in the Company's history, exceeded only by the prior quarters results. Net income for the fourth quarter 1996 of $3.2 million, $0.38 per share, was up II-17 $0.6 million or 24.5% from the $2.6 million, $0.29 per share, earned in the fourth quarter 1995. Average earning assets for the fourth quarter 1996 were $61 million, or 6.0%, higher than for the fourth quarter 1995, and average loans increased 9.4% from an average of $588 million for the fourth quarter 1995 to $643 million for the fourth quarter of 1996. All performance ratios for the fourth quarter 1996 reflected improvement over fourth quarter 1995 ratios. The 1996 fourth quarter return on average assets of 1.12% exceeded the comparable 1995 ratio of .95%, an 18% improvement. The return on average equity for the fourth quarter 1996 of 12.11% is 24.3% higher than the fourth quarter 1995 ratio of 9.74%. Expense and efficiency ratios of 2.33% and 58.52%, respectively, for the fourth quarter 1996, improved over the comparable 1995 ratios of 2.45% and 65.02%. TABLE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) FIRST SECOND THIRD FOURTH First Second Third Fourth - --------------------------------------------------------------------------------------------------------------------------- Interest and fee income $20,003 $20,815 $21,678 $21,891 $17,942 $19,143 $19,983 $20,332 Interest expense 8,670 9,007 9,367 9,321 7,981 8,566 8,942 9,351 Net interest income 11,333 11,808 12,311 12,570 9,961 10,577 11,041 10,981 Provision for loan losses 600 700 875 1,000 330 508 340 375 Noninterest income excluding securities gains 1,792 1,848 1,932 2,111 1,767 1,743 1,704 1,743 Securities gains (losses) 792 219 194 (26) - 11 82 52 Noninterest expense 8,586 8,636 8,460 8,740 8,413 8,235 8,115 8,261 Net income 2,911 2,737 3,338 3,193 1,907 2,221 2,637 2,564 Net income per common share $ 0.34 $ 0.32 $ 0.39 $ 0.38 $ 0.22 $ 0.25 $ 0.30 $ 0.29 Net interest margin 4.66% 4.64% 4.70% 4.77% 4.30% 4.49% 4.54% 4.40% Return on average assets 1.09% 0.99% 1.18% 1.12% 0.76% 0.87% 1.00% 0.95% Return on average equity 10.94% 10.90% 13.28% 12.11% 7.83% 8.79% 10.28% 9.74% Average common shares outstanding 8,685 8,547 8,404 8,422 8,877 8,844 8,753 8,727 - ---------------------------------------------------------------------------------------------------------------------------
II-18 PROPERTIES The Bank operates the following community banking offices: Date Square Name of Office Location County Established Footage Norwich 52 S. Broad St., Norwich, NY Chenango 07-15-1856 77,000 Afton 182 Main St., Afton, NY Chenango 09-01-1962 2,779 Bainbridge 9 N. Main St., Bainbridge, NY Chenango 12-07-1938 4,897 Deposit 105 Front St., Deposit, NY Broome 02-12-1971 3,550 Earlville 2 S. Main St., Earlville, NY Chenango 08-07-1937 1,222 Grand Gorge Rt. 23 & 30, Grand Gorge, NY Delaware 11-01-1957 3,000 Margaretville Main St., Margaretville, NY Delaware 09-03-1963 3,152 New Berlin 2 S. Main St., New Berlin, NY Chenango 12-21-1946 2,195 Sherburne 30 N. Main St., Sherburne, NY Chenango 08-07-1937 3,393 South Otselic Gladding St., S. Otselic, NY Chenango 10-01-1945 1,326 North Plaza Rt. 12 & 320, Norwich, NY Chenango 10-15-1986 1,849 South Plaza Rt. 12 S., Norwich, NY Chenango 08-20-1986 1,200 Newark Valley 2 N. Main St., Newark Valley, NY Tioga 10-01-1973 3,893 Maine 67 Main St., Maine, NY Broome 10-01-1973 1,458 Hobart Maple Ave., Hobart, NY Delaware 06-28-1974 2,308 Sidney 13 Division St., Sidney, NY Delaware 12-31-1978 3,500 Oxford State St., Oxford, NY Chenango 08-01-1984 3,559 Greene 80 S. Chenango St., Greene, NY Chenango 12-15-1986 3,200 Hancock 1 E. Main St., Hancock, NY Delaware 10-01-1989 7,500 Hamden Rt. 10, Hamden, NY Delaware 10-01-1989 1,250 Gloversville 199 Second Ave. Ext., Gloversville, NY Fulton 10-01-1989 4,263 Northville 192 N. Main St., Northville, NY Fulton 10-01-1989 3,000 Vail Mills Rt. 30, Vail Mills, NY Fulton 10-01-1989 1,000 Clinton 1 Kirkland Ave., Clinton, NY Oneida 10-01-1989 7,960 New Hartford 8549 Seneca Turnpike, New Hartford, NY Oneida 12-16-1995 4,179 Rome Westgate Plaza, Erie Blvd. W., Rome, NY Oneida 10-01-1989 1,950 Lake Placid 81 Main St., Lake Placid, NY Essex 10-01-1989 8,500 Cold Brook Plaza Saranac Ave., Lake Placid, NY Essex 10-01-1989 1,300 Saranac Lake 2 Lake Flower Ave., Saranac Lake, NY Essex 10-01-1989 2,400 Binghamton 1256 Front St., Binghamton, NY Broome 03-29-1993 1,900 Plattsburgh 30 Brinkerhoff St., Plattsburgh, NY Clinton 05-28-1993 4,396 Plattsburgh North Rt. 9, Plattsburgh, NY Clinton 08-28-1993 3,000 Ellenburg Depot 5084 Rt. 11, Ellenburg Depot, NY Clinton 08-28-1993 2,346 Utica Business Pk 555 French Road, New Hartford, NY Oneida 10-01-1994 3,396 Utica Downtown 162 Genesee St., Utica, NY Oneida 12-16-1995 4,350 The South Otselic, Binghamton, Vail Mills, Plattsburgh North, Rome, Utica Downtown Business Park and Utica Offices are leased. All other banking premises are owned by the Bank. The Bank also has free-standing automated banking units. The Bank has notified the Office of the Comptroller of the Currency and the appropriate customers the Utica Downtown Office will be closing on March 28, 1997.
II-19 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------- (in thousands, except per share data) 1996 1995 % CHANGE - --------------------------------------------------------------------------------------------- FOR THE YEAR Interest and fee income $ 84,387 $ 77,400 9.0% Interest expense 36,365 34,840 4.4% Net interest income 48,022 42,560 12.8% Provision for loan losses 3,175 1,553 104.4% Noninterest income 8,862 7,102 24.8% Noninterest expense 34,422 33,024 4.2% Net income 12,179 9,329 30.5% - --------------------------------------------------------------------------------------------- PER COMMON SHARE Net income $ 1.43 $ 1.06 34.9% Cash dividends $ 0.522 $ 0.450 16.0% Book value at year end $ 12.72 $ 12.44 2.3% Tangible book value at year end $ 11.52 $ 11.11 3.7% Average common shares outstanding 8,513,016 8,799,728 (3.3%) Market price: High $ 19.00 $ 17.14 10.9% Low $ 15.00 $ 14.29 5.0% End of year $ 18.00 $ 16.67 8.0% - --------------------------------------------------------------------------------------------- AT YEAR END Assets $ 1,138,986 $ 1,106,266 3.0% Earning assets 1,073,705 1,024,534 4.8% Loans 654,593 588,385 11.3% Allowance for loan losses 10,473 9,120 14.8% Deposits 916,319 873,032 5.0% Stockholders' equity 106,264 108,044 (1.6%) Common shares outstanding 8,356,988 8,685,641 (3.8%) - --------------------------------------------------------------------------------------------- AVERAGE BALANCES Assets $ 1,110,968 $ 1,042,198 6.6% Earning assets 1,043,425 977,738 6.7% Loans 617,810 575,736 7.3% Deposits 916,683 848,289 8.1% Stockholders' equity 103,240 101,630 1.6% - --------------------------------------------------------------------------------------------- ASSET QUALITY Allowance to loans 1.60% 1.55% 3.2% Nonperforming assets to assets 0.40% 0.62% (35.5%) Allowance to nonperforming loans 315% 189% 66.7% - --------------------------------------------------------------------------------------------- KEY RATIOS Return on average assets 1.10% 0.90% 22.2% Return on average equity 11.80% 9.18% 28.5% Net interest margin 4.69% 4.43% 5.9% Tier 1 leverage ratio 8.70% 8.80% (1.1%) Tier 1 risk-based capital ratio 14.06% 15.21% (7.6%) Total risk-based capital ratio 15.31% 16.46% (7.0%) - --------------------------------------------------------------------------------------------- All per share data has been restated to give retroactive effect to stock dividends.
II-20 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 financial statements and related information have been prepared in conformity with generally accepted accounting principles 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 an Audit Committee composed entirely of directors who are not employees of the Company. The Audit Committee is responsible for recommending to the Board the independent auditors to be retained for the coming year, subject to stockholder ratification. The Audit 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 Committee reports to the Board on its activities and findings. /s/DARYL R. FORSYTHE Daryl R. Forsythe President and Chief Executive Officer /s/JOE C. MINOR Joe C. Minor Vice President Chief Financial Officer and Treasurer II-21 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 subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Syracuse, New York January 17, 1997 II-22 NBT BANCORP INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------- December 31, 1996 1995 (in thousands, except per share data) - -------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 35,790 $ 44,379 Loans available for sale 4,135 6,089 Securities available for sale, at fair value 369,202 393,536 Securities held to maturity (fair value-$42,238 and $40,306) 42,239 40,311 Loans: Commercial and agricultural 281,991 247,320 Real estate mortgage 119,870 120,972 Consumer 252,732 220,093 - -------------------------------------------------------------------------------------------------------- Total loans 654,593 588,385 Less allowance for loan losses 10,473 9,120 - -------------------------------------------------------------------------------------------------------- Net loans 644,120 579,265 Premises and equipment, net 16,307 16,467 Intangible assets, net 9,953 11,551 Other assets 17,240 14,668 - -------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,138,986 $1,106,266 - -------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand (noninterest bearing) $ 122,115 $ 131,227 Savings, NOW, and money market 359,141 352,221 Time 435,063 389,584 - -------------------------------------------------------------------------------------------------------- Total deposits 916,319 873,032 Short-term borrowings 88,244 115,945 Other borrowings 20,195 3,012 Other liabilities 7,964 6,233 - -------------------------------------------------------------------------------------------------------- Total liabilities 1,032,722 998,222 - -------------------------------------------------------------------------------------------------------- Commitments and contingencies Stockholders' equity: Preferred stock, no par, stated value $1.00; shares authorized-2,500,000 - - Common stock, no par, stated value $1.00; shares authorized-12,500,000; shares issued 8,838,437 and 8,864,430 8,838 8,442 Capital surplus 82,731 75,464 Retained earnings 24,208 24,076 Unrealized gain (loss) on securities available for sale, net of income tax effect (1,529) 2,822 Common stock in treasury at cost, 481,449 and 170,275 shares (7,984) (2,760) - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 106,264 108,044 - -------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,138,986 $1,106,266 - -------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements
II-23 NBT BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- (in thousands, except per share data) Interest and fee income: Loans and loans available for sale $57,660 $53,602 $49,486 Securities - taxable 25,109 22,277 19,672 Securities - tax exempt 1,527 1,375 1,170 Other 91 146 110 - -------------------------------------------------------------------------------------------------------- Total interest and fee income 84,387 77,400 70,438 - -------------------------------------------------------------------------------------------------------- Interest expense: Deposits 31,942 29,683 21,483 Short-term borrowings 3,745 4,700 3,351 Other borrowings 678 457 908 - -------------------------------------------------------------------------------------------------------- Total interest expense 36,365 34,840 25,742 - -------------------------------------------------------------------------------------------------------- Net interest income 48,022 42,560 44,696 Provision for loan losses 3,175 1,553 3,071 - -------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 44,847 41,007 41,625 - -------------------------------------------------------------------------------------------------------- Noninterest income: Trust income 2,642 2,439 2,511 Service charges on deposit accounts 3,372 2,995 3,032 Securities gains 1,179 145 555 Other income 1,669 1,523 941 - -------------------------------------------------------------------------------------------------------- Total noninterest income 8,862 7,102 7,039 - -------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits 17,817 16,309 16,157 Net occupancy expense 2,391 2,361 2,295 Equipment expense 1,765 1,694 2,033 FDIC insurance 2 941 1,829 Amortization of intangible assets 1,580 1,271 3,222 Restructuring expense - - 2,264 Other operating expense 10,867 10,448 10,874 - -------------------------------------------------------------------------------------------------------- Total noninterest expense 34,422 33,024 38,674 - -------------------------------------------------------------------------------------------------------- Income before income taxes 19,287 15,085 9,990 Income taxes 7,108 5,756 3,482 - -------------------------------------------------------------------------------------------------------- NET INCOME $12,179 $ 9,329 $ 6,508 - -------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 1.43 $ 1.06 $ 0.73 - -------------------------------------------------------------------------------------------------------- AVERAGE COMMON SHARES OUTSTANDING 8,513 8,800 8,939 - -------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements
II-24 NBT BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------- Unrealized Gain(Loss) On Securities Common Capital Retained Available Treasury Stock Surplus Earnings For Sale Stock Total - -------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) BALANCE AT DECEMBER 31, 1993 $7,668 $64,518 $28,431 $ 769 $ (278) $101,108 Net income 6,508 6,508 5% stock dividend 380 5,508 (5,888) - Cash dividends - $0.407 per share (3,594) (3,594) Payment in lieu of fractional shares (11) (11) Common stock issued to dividend reinvestment and other stock plans 2 29 31 Purchase of 210,911 treasury shares (3,555) (3,555) Sale of 190,456 treasury shares to dividend reinvestment and other stock plans (386) 3,248 2,862 Unrealized loss on securities available for sale, net of tax effect of $3,503 (5,042) (5,042) - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 8,050 69,669 25,446 (4,273) (585) 98,307 Net income 9,329 9,329 5% stock dividend 392 6,333 (6,725) - Cash dividends - $0.450 per share (3,962) (3,962) Payment in lieu of fractional shares (12) (12) Purchase of 436,293 treasury shares (7,075) (7,075) Sale of 302,147 treasury shares to dividend reinvestment and other stock plans (538) 4,900 4,362 Unrealized gain on securities available for sale, net of tax effect of $4,900 7,095 7,095 - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 8,442 75,464 24,076 2,822 (2,760) 108,044 Net income 12,179 12,179 5% stock dividend 396 7,254 (7,650) - Cash dividends - $0.522 per share (4,384) (4,384) Payment in lieu of fractional shares (13) (13) Purchase of 433,848 treasury shares (7,241) (7,241) Sale of 122,675 treasury shares to dividend reinvestment and other stock plans 13 2,017 2,030 Unrealized loss on securities available for sale, net of tax effect of $3,005 (4,351) (4,351) - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $8,838 $82,731 $24,208 $(1,529) $(7,984) $106,264 - -------------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements
II-25 NBT BANCORP INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- (in thousands) OPERATING ACTIVITIES: Net income $ 12,179 $ 9,329 $ 6,508 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,175 1,553 3,071 Depreciation and amortization of premises and equipment 1,513 1,478 1,636 Amortization of premiums and accretion of discounts on securities 254 (153) 402 Amortization of intangible assets 1,580 1,271 3,222 Deferred income tax benefit (660) (288) (194) Provisions for restructuring charges - - 2,264 Proceeds from sale of loans originated for sale 4,268 14,704 12,358 Loans originated for sale (4,089) (11,872) (13,921) Realized gains on sales of securities (1,179) (145) (555) (Increase) decrease in interest receivable 1,048 450 (2,137) Increase in interest payable 1 676 175 Payments of restructuring liabilities - (1,513) (613) Other, net 2,973 1,827 (25) - ----------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 21,063 17,317 12,191 - ----------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Securities available for sale: Proceeds from maturities 43,924 40,206 21,504 Proceeds from sales 217,134 2,808 70,258 Purchases (244,333) (99,030) (1,001) Securities held to maturity: Proceeds from maturities 31,811 59,918 30,468 Purchases (33,741) (44,682) (194,650) Net increase in loans (66,255) (15,126) (17,555) Purchase of premises and equipment, net (1,353) (2,020) (2,034) Acquisition of branches, net of cash acquired - (2,960) - - ----------------------------------------------------------------------------------------------------------- Net cash used in investing activities (52,813) (60,886) (93,010) - ----------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase (decrease) in deposits 43,287 81,589 (15,785) Net increase (decrease) in short-term borrowings (27,701) (24,642) 113,886 Proceeds from issuance of other borrowings 20,050 - - Repayments of other borrowings (2,867) (5,722) (5,723) Common stock issued, including treasury shares reissued 2,030 4,362 2,893 Purchase of treasury stock (7,241) (7,075) (3,555) Cash dividends and payment for fractional shares (4,397) (3,974) (3,605) - ----------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 23,161 44,538 88,111 - ----------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (8,589) 969 7,292 Cash and cash equivalents at beginning of year 44,379 43,410 36,118 - ----------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 35,790 $ 44,379 $ 43,410 - ----------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 36,364 $ 34,164 $ 25,567 Income taxes 7,569 5,791 3,941 Noncash investing activity: Transfer of loans available for sale to loans held to maturity 1,775 - - Transfer of securities held to maturity to securities available for sale - 220,681 - - ----------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements
II-26 NBT BANCORP INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NBT Bancorp Inc. (Bancorp) and its subsidiary follow generally accepted accounting principles and reporting practices applicable to the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles 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 consolidated financial statements include the accounts of Bancorp and its wholly owned subsidiary, NBT Bank, N.A. (Bank) collectively referred to herein as the Company. All significant intercompany transactions have been eliminated in consolidation. Certain amounts previously reported in the financial statements have been reclassified to conform with the current presentation. BUSINESS The Bank provides loan and deposit services to its customers, primarily in its eight county service area. Its only business segment is domestic commercial banking and the Bank is subject to competition from other financial institutions. The Bank and the Company are subject to the regulations of certain federal agencies and undergo periodic examinations by those regulatory agencies. TRUST Assets held by the Bank 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 Bank. Trust income is recognized on the accrual method based on contractual rates applied to the balances of trust accounts. CASH AND CASH EQUIVALENTS The Company considers cash on hand, amounts due from correspondent banks, cash items in process of collection, and federal funds sold, as well as federal mutual funds, to be cash and cash equivalents. SECURITIES The Company classifies its debt securities at date of purchase as either available for sale or held to maturity as the Company does not hold any securities considered to be trading. Held to maturity securities are those that the Company has the ability and intent to hold until maturity. All other securities not included as held to maturity are classified as available for sale. Available for sale securities are recorded at fair value. Held to maturity securities are recorded at amortized cost. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. 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. Premiums and discounts are amortized or accredited over the life of the related security as an adjustment to yield using the interest method. Dividends 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. LOANS AND LOANS AVAILABLE FOR SALE Loans are recorded at their current unpaid principal balance, net of unearned income. Loans classified as available for sale, primarily higher education loans, are carried at the lower of aggregate cost or estimated fair value. Interest income on loans is primarily accrued based on the principal amount outstanding. The Bank's classification of a loan as a nonaccrual loan is based in part on bank regulatory guidelines. Nonaccrual classification does not mean that the loan principal will not be collected; rather, that timely collection of interest is doubtful. When in the opinion of management the collection of principal appears unlikely, the loan balance is charged-off in total or in part. Loans 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 when management concludes circumstances indicate that borrowers may be unable to meet contractual principal or interest payments. Accrual of interest is discontinued if the loan is placed on nonaccrual status. When a loan is transferred to a nonaccrual status, any unpaid accrued interest is reversed and charged against income. II-27 Management, considering current information and events regarding the borrowers' ability to repay the obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Payments received on nonaccrual and impaired loans are first applied to principal. Depending on management's assessment of the ultimate collectiblity of the loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to accrual status when management determines that the financial condition of the borrower has improved significantly to the extent that there has been a sustained period of repayment performance so that the loan is brought current and the collectibility of both principal and interest appears assured. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights," on a prospective basis. SFAS No. 122 requires the Company to recognize rights to service mortgage loans for others as separate assets however those servicing rights are acquired. It also requires the Company to assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. The adoption of SFAS No. 122 did not have a material impact on the Company's financial condition or results of operations. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is the amount which, in the opinion of management, is necessary to absorb potential losses in the loan portfolio when taken as a whole. The allowance is determined by reference to the market area the Bank serves, local economic conditions, the growth and composition of its 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, and the result of comprehensive reviews of the loan portfolio by the Loan Review staff and management. BANK PREMISES AND EQUIPMENT Bank 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. Gains and losses on the disposal of bank premises and equipment are included in the results of current operations. 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 cost or appraised fair value, less estimated costs of disposal. Loan losses arising from the acquisition of such assets are 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 Generally Accepted Accounting Principals. INTANGIBLE ASSETS Certain identified intangible assets, including a covenant not to compete and core deposit intangible assets are carried at appraised fair values, net of accumulated amortization, and are being amortized by the straight line method in amounts sufficient to write-off those fair values over their estimated useful lives; such fair values and useful lives are reviewed annually for events or changes in circumstances that may indicate that the carrying amount of the assets are not recoverable. Goodwill, the excess of cost over the fair value of the net assets acquired, is being amortized over twenty- five years on the straight line method. TREASURY STOCK Treasury stock acquisitions are recorded at cost. Subsequent sales of treasury stock are recorded on an average cost basis with the difference between proceeds and cost recognized as an adjustment of capital surplus. POSTRETIREMENT BENEFITS The Company uses actuarial based accrual accounting for its postretirement health care plans, electing to recognize the transition obligation on a delayed basis over the plan participants' future service periods, estimated to be twenty years. II-28 STOCK-BASED COMPENSATION Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. 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 on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years 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 disclosure provisions of SFAS No. 123. INCOME TAXES 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. PER SHARE AMOUNTS Net income per common share is computed on the basis of the weighted average number of common shares and common share equivalents outstanding during each period after giving retroactive effect to stock dividends and stock splits. FEDERAL RESERVE BOARD REQUIREMENT The Bank is required to maintain a reserve balance with the Federal Reserve Bank of New York. The required average total reserve for the 14 day maintenance period ending January 1, 1997, was $9.7 million of which $1.8 million was required to be on deposit with the Federal Reserve Bank and the remaining $7.9 million was represented by cash on hand. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company does not engage in the use of derivative financial instruments and currently the Company's only financial instruments with off-balance sheet risk consist of commitments to originate loans and commitments under unused lines of credit. SECURITIES The amortized cost, estimated fair value and unrealized gains and losses of securities available for sale are as follows:
- ----------------------------------------------------------------------------------------------- Amortized Unrealized Fair (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- DECEMBER 31, 1996 - ----------------------------------------------------------------------------------------------- U.S. Treasury $ 70,811 $ 61 $ 603 $ 70,269 Federal Agency 94,313 169 922 93,560 State & Municipal 1,450 6 8 1,448 Mortgage-backed 204,889 509 1,825 203,573 Other securities 325 27 - 352 - ----------------------------------------------------------------------------------------------- Total $371,788 $ 772 $3,358 $369,202 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- December 31, 1995 - ----------------------------------------------------------------------------------------------- U.S. Treasury $169,801 $2,212 $ 105 $171,908 Federal Agency 63,246 1,176 - 64,422 State & Municipal 986 - 13 973 Mortgage-backed 154,409 2,397 923 155,883 Other securities 322 28 - 350 - ----------------------------------------------------------------------------------------------- Total $388,764 $5,813 $1,041 $393,536 - -----------------------------------------------------------------------------------------------
II-29 Gross realized gains, gross realized losses and gross proceeds on the sale of securities available for sale were $1.6 million, $.4 million and $217.1 million, respectively, in 1996. Gross realized gains and gross proceeds were $0.1 million and $2.8 million, respectively in 1995, and $0.6 million and $70.3 million in 1994. At December 31, 1996 and 1995, securities with amortized costs totalling $316.4 million and $246.4 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. The amortized cost, estimated fair value, and unrealized gains and losses of securities held to maturity are as follows:
- ------------------------------------------------------------------------------------------ Amortized Unrealized Fair (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------------------ DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------ State & Municipal $32,546 $- $- $32,546 Other securities 1,518 - 1 1,517 Federal Home Loan Bank 8,175 - - 8,175 - ------------------------------------------------------------------------------------------ Total $42,239 $- $1 $42,238 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ December 31, 1995 - ------------------------------------------------------------------------------------------ State & Municipal $28,521 $- $4 $28,517 Other securities 1,518 - 1 1,517 Federal Home Loan Bank 10,272 - - 10,272 - ------------------------------------------------------------------------------------------ Total $40,311 $- $5 $40,306 - ------------------------------------------------------------------------------------------
The Company holds the required investment in Federal Home Loan Bank stock. In November 1995, the FASB published "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" (Guide). Concurrent with the initial adoption of the Guide but no later than December 31, 1995, the Company was permitted to reassess the appropriateness of the classifications of all securities held at that time and implement reclassification without calling into question the intent of the Company to hold other debt securities to maturity in the future. Effective December 1, 1995 the Company transferred U.S. Treasury, Federal Agency, and Mortgage-backed securities with amortized costs totalling $217.2 million, having fair values of $220.7 million, from the held to maturity portfolio to the available for sale portfolio. The gross unrealized gains and losses were $3.7 million and $0.2 million, respectively. The transferred securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of related taxes. As required by the Guide, financial statements prior to adoption were not restated. At December 31, 1996 and 1995 substantially all of the mortgage- backed securities held by the Company were issued or backed by Federal agencies. REMAINING MATURITIES OF SECURITIES AT DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------- After One Year After Five Years Within But Within But Within After Ten Total One Year Five Years Ten Years Years Portfolio (dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - -------------------------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE: U.S. Treasury $ - -% $ 70,811 5.70% $ - -% $ - -% $ 70,811 5.70% Federal Agency 16,053 7.52 47,996 7.00 17,584 7.25 12,680 7.41 94,313 7.20 State & Municipal 456 5.03 525 5.38 469 7.28 - - 1,450 5.89 Mortgage-backed - - 10,980 7.09 32,788 6.64 161,121 7.12 204,889 7.04 Other securities - - - - - - 325 3.23 325 3.23 - -------------------------------------------------------------------------------------------------------------------------------- Amortized cost $16,509 7.45% $130,312 6.29% $50,841 6.86% $174,126 7.14% $371,788 6.82% - -------------------------------------------------------------------------------------------------------------------------------- Fair value $16,416 $129,478 $50,719 $172,589 $369,202 - -------------------------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY: State & Municipal $ 28,315 6.32% $ 3,235 7.83% $ 695 9.90% $ 301 10.09% $ 32,546 6.58% Other securities - - - - 10 5.50 9,683 6.51 9,693 6.50 - -------------------------------------------------------------------------------------------------------------------------------- Amortized cost $ 28,315 6.32% $ 3,235 7.83% $ 705 9.83% $ 9,984 6.62% $ 42,239 6.57% - -------------------------------------------------------------------------------------------------------------------------------- Fair value $ 28,315 $ 3,235 $ 704 $ 9,984 $ 42,238 - --------------------------------------------------------------------------------------------------------------------------------
In the tables setting forth the maturity distribution and weighted average taxable equivalent yield of securities at December 31, 1996, yields on amortized cost have been calculated based on effective yields weighted for the scheduled maturity of each security using the marginal II-30 federal tax rate of 35%. Approximately $40.6 million of mortgage-backed debt securities have adjustable interest rate provisions and have been included in the tables based upon the period that relates to their adjustable characteristics. Fixed rate mortgage-backed debt securities are included based on contractual maturity date which may differ from actual maturity date due to unscheduled customer loan prepayments. LOANS AVAILABLE FOR SALE The Company carries loans available for sale at the lower of aggregate cost or estimated fair value. At December 31, 1996, the aggregate cost and estimated fair value of loans available for sale were $4.1 million, while at December 31, 1995 aggregate cost and estimated market value were $6.1 million. It is the Company's practice to sell its higher education loans to the Student Loan Marketing Association at the Company's cost after the student leaves school. During 1996, $3.8 million of such loans were sold. During 1996, $0.4 million in mortgage loans were sold with servicing retained. At December 31, 1996, the Company serviced $29.6 million of real estate mortgages on behalf or other financial intermediaries; such loans are not reflected in the Company's balance sheet. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the three years ended December 31, 1996, are summarized as follows:
- -------------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------- Balance at January 1 $ 9,120 $ 9,026 $ 8,652 Provision 3,175 1,553 3,071 Recoveries 956 802 1,025 - -------------------------------------------------------------------------------------------- 13,251 11,381 12,748 Loans charged off 2,778 2,261 3,722 - -------------------------------------------------------------------------------------------- Balance at December 31 $10,473 $ 9,120 $ 9,026 - --------------------------------------------------------------------------------------------
NONPERFORMING ASSETS The Bank's concentrations of credit risk are reflected in the balance sheet. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications. A substantial portion of the Bank's loans are secured by real estate located in central and northern New York. Accordingly, the ultimate collectiblity of a substantial portion of the Bank'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 effect of nonaccrual loans on interest income for the years ended December 31, 1996, 1995, and 1994 was not material. The Bank is not committed to advance additional funds to these borrowers. Nonaccrual loans were $3.3 million and $4.8 million at December 31, 1996 and 1995, respectively. Included in impaired loans at December 31, 1996 is $0.6 million of impaired loans for which the specifically allocated allowance for loan losses is $0.1 million. Impaired loans at December 31, 1995 were $1.4 million with a specific allocated allowance of $0.2 million. There are no impaired loans that do not have a specifically allocated allowance for loan losses as they have been written down to estimated fair value or as a result of interest payments applied to reduce principal. The average investment in impaired loans for the year ended December 31, 1996 was $1.2 million and $1.5 million for 1995. During the years ended December 31, 1996 and 1995 the Company recognized $0.5 million and $0.3 million, respectively, of interest income on impaired loans, all of which was recognized using the cash basis of income recognition. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has made loans at prevailing rates and terms to directors, officers, and other related parties. Such loans, in management's opinion, did not present more than the normal risk of collectiblity or incorporate other unfavorable features. The aggregate amount of loans outstanding to qualifying related parties and changes during the years are summarized as follows:
- ---------------------------------------------------------------------- December 31, 1996 1995 - ---------------------------------------------------------------------- (in thousands) Balance at January 1 $ 3,933 $3,330 New loans 3,417 1,485 Repayments (3,112) (882) - ---------------------------------------------------------------------- Total $ 4,238 $3,933 - ----------------------------------------------------------------------
II-31 PREMISES AND EQUIPMENT A summary of premises and equipment follows:
- ----------------------------------------------------------------------------- December 31, 1996 1995 - ----------------------------------------------------------------------------- (in thousands) Bank premises $19,394 $18,998 Equipment 17,211 16,474 Construction in progress 253 145 - ----------------------------------------------------------------------------- 36,858 35,617 Accumulated depreciation 20,551 19,150 - ----------------------------------------------------------------------------- Total premises and equipment $16,307 $16,467 - -----------------------------------------------------------------------------
Depreciation and amortization of premises and equipment totaled $1.5 million, $1.5 million and $1.6 million in 1996, 1995 and 1994, respectively. Rental expense included in operating expense amounted to $0.3 million in 1996, $0.3 million in 1995, and $0.3 million in 1994. The future minimum rental commitments as of December 31, 1996, for noncancellable operating leases were as follows: 1997--$0.2 million; 1998--$0.2 million; 1999--$0.1 million; and 2000--and beyond--$0.1 million. INTANGIBLE ASSETS The Bank, in a cash transaction, acquired deposits totalling $42.6 million and selected loans totalling $1.1 million, of three branches from Community Bank Systems Inc. effective December 16, 1995. Also included were related accrued interest payable and receivable and premises and equipment, the amounts of which were not material. All assets and liabilities acquired were recorded at appraised fair values at that date, creating additional core deposit intangible assets and goodwill. Branch acquisition costs for 1996 are adjustments or reclassification of amounts recorded for the December 1995 transaction. The table below presents significant balances, amortization and the respective periods of amortization:
- ------------------------------------------------------------------------------------------------------ December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ (in thousands) Goodwill (25 yrs.): Beginning balance $ 6,318 $ 6,544 $ 6,875 Branch acquisition 41 105 - Amortization (337) (331) (331) - ------------------------------------------------------------------------------------------------------ Ending balance 6,022 6,318 6,544 - ------------------------------------------------------------------------------------------------------ Covenant not to compete (5 yrs.): Beginning balance - - 1,335 Amortization - - (1,335) - ------------------------------------------------------------------------------------------------------ Ending balance - - - - ------------------------------------------------------------------------------------------------------ Core deposit intangible assets (3-12 yrs.): Beginning balance 5,233 3,318 4,874 Branch acquisition (59) 2,855 - Amortization (1,243) (940) (1,556) - ------------------------------------------------------------------------------------------------------ Ending balance 3,931 5,233 3,318 - ------------------------------------------------------------------------------------------------------ Total intangible assets, net $ 9,953 $11,551 $ 9,862 - ------------------------------------------------------------------------------------------------------
DEPOSITS Time deposits of $100,000 or more aggregated $191.3 million at December 31, 1996 and $126.1 million at December 31, 1995. Interest expense on such deposits was approximately $9.4 million, $8.6 million, and $3.5 million for 1996, 1995, and 1994, respectively. II-32 The following table sets forth the maturity distribution of time certificates of deposit:
- ------------------------------------------------------------------------------------ December 31, 1996 1995 - ------------------------------------------------------------------------------------ (in thousands) Within one year $351,816 $305,813 After one but within two years 51,478 44,397 After two but within three years 16,579 21,414 After three but within four years 10,414 12,243 After four but within five years 4,679 5,501 After five years 97 216 - ------------------------------------------------------------------------------------ Total $435,063 $389,584 - ------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS 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 Bank has unused lines of credit available for short- term financing of $325 million as well as the capacity for additional FHLB advances of $82 million at December 31, 1996. Securities collateralizing repurchase agreements are held in safekeeping by a non- affiliated financial institutions. The details of short-term borrowings are as follows:
- ------------------------------------------------------------------------------------------------------ (dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED Balance at year end $48,000 $78,000 $80,000 Average during the year 30,929 30,682 30,158 Maximum month end balance 56,000 78,000 87,000 Weighted average rate during the year 5.53% 5.99% 4.94% Weighted average rate at December 31 7.38% 5.73% 5.64% - ------------------------------------------------------------------------------------------------------ SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Balance at year end $40,244 $17,945 $10,587 Average during the year 23,893 16,516 24,418 Maximum month end balance 40,244 20,225 61,370 Weighted average rate during the year 4.32% 5.23% 4.19% Weighted average rate at December 31 4.43% 4.84% 4.83% - ------------------------------------------------------------------------------------------------------ OTHER SHORT-TERM BORROWINGS Balance at year end $ - $20,000 $50,000 Average during the year 18,370 33,398 18,507 Maximum month end balance 50,000 50,000 50,000 Weighted average rate during the year 5.45% 5.98% 4.53% Weighted average rate at December 31 -% 5.88% 6.13% - ------------------------------------------------------------------------------------------------------
OTHER BORROWINGS Other borrowings consists of obligations having an original maturity at issuance of more than one year. A summary of other borrowings follows:
Maturity Interest Year end outstanding (dollars in thousands) Date Rate 1996 1995 - ------------------------------------------------------------------------------------------- Company: Promissory note - 10.89% $ - $2,857 Bank: FHLB advance 1997 5.59 20,000 - FHLB advance 2008 5.33 145 155 FHLB advance 2008 7.20 50 - - ------------------------------------------------------------------------------------------- Total $20,195 $3,012 - -------------------------------------------------------------------------------------------
FHLB advances are collateralized by the FHLB stock owned by the Bank and certain of its real estate mortgage loans. II-33 INCOME TAXES Deferred income taxes are recognized for temporary differences between the financial statement carrying amount and tax basis of assets and liabilities. Total income taxes were allocated as follows:
- -------------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------- (in thousands) Income before income taxes $ 7,108 $ 5,756 $ 3,482 Stockholders' equity, capital surplus, stock options exercised (36) (388) (147) Stockholders' equity, unrealized gain (loss) on securities (3,005) 4,900 (3,503) - -------------------------------------------------------------------------------------------------- Total $ 4,067 $10,268 $ (168) - --------------------------------------------------------------------------------------------------
The significant components of income taxes are:
- -------------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------- (in thousands) Current: Federal $ 6,331 $ 4,718 $ 2,926 State 1,437 1,326 750 7,768 6,044 3,676 - -------------------------------------------------------------------------------------------------- Deferred: Federal (472) (237) (171) State (188) (51) (23) - -------------------------------------------------------------------------------------------------- (660) (288) (194) - -------------------------------------------------------------------------------------------------- Total $ 7,108 $ 5,756 $ 3,482 - --------------------------------------------------------------------------------------------------
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, 1996 1995 - ----------------------------------------------------------------------------------------------- (in thousands) Deferred tax assets: Allowance for loan losses $4,103 $3,557 Unrealized loss on securities available for sale 1,057 - Deferred compensation 195 336 Postretirement benefit obligation 557 380 Other 446 191 - ----------------------------------------------------------------------------------------------- Total gross deferred tax assets 6,358 4,464 - ----------------------------------------------------------------------------------------------- Deferred tax liabilities: Premises and equipment, primarily due to accelerated depreciation and valuation allowances 582 496 Differences in assigned values and tax bases of assets recognized in acquisitions 121 247 Undistributed earnings of subsidiary 379 - Unrealized gain on securities available for sale - 1,950 Securities discount accretion 54 495 Other 279 - - ----------------------------------------------------------------------------------------------- Total gross deferred tax liabilities 1,415 3,186 - ----------------------------------------------------------------------------------------------- Net deferred tax assets $4,943 $1,276 - -----------------------------------------------------------------------------------------------
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the 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. II-34 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:
- --------------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - --------------------------------------------------------------------------------------------------- (in thousands) Federal income tax at statutory rate $6,751 $5,280 $3,497 Benefit of federal tax rates below statutory rate (10) (100) (100) Tax exempt income (627) (496) (428) Non-deductible expenses 241 241 212 State taxes, net of federal tax benefit 812 829 468 Other, net (59) 2 (167) - --------------------------------------------------------------------------------------------------- Income taxes $7,108 $5,756 $3,482 - ---------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Included in the other operating expense category are supplies, communication and promotional expense of $2.6 million, $2.7 million, and $2.6 million, and professional fees of $2.4 million, $2.4 million, and $3.0 million, in years 1996, 1995, and 1994, respectively. Also included in the other operating expense category are data processing fees of $1.5 million, $1.3 million, and $1.1 million in years 1996, 1995, and 1994, respectively. The future minimum annual commitments for data processing services as of December 31, 1996 were as follows: 1997--$1.4 million; and 1998--$0.9 million. The Company will require similar data processing services after the existing contract expires in August, 1998. RESTRUCTURING EXPENSE During 1994, the Company implemented a restructuring plan that included a reduction in work force and the closing of three branch offices. Charges of $1.2 million related to the termination benefits of 35 employees and exit costs relating to the closure of the three offices and professional fees related to the terminations totalling $1.1 million, including $0.7 million for the impairment of long-lived assets, were recognized. Of the activities considered in the exit plan, all the employees were terminated in 1994. Termination benefits of $1.2 million and exit costs totalling $0.3 million were paid and charged to the liability for the restructuring plan. Long lived assets were disposed of at a loss of $0.7 million which was charged to the valuation allowance related to the restructuring. An adjustment reversing the remaining $0.1 million restructuring liability for exit costs was made in 1995 as a reduction in other expense. COMMITMENTS AND CONTINGENT LIABILITIES The Bank is a party to 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 and standby letters of credit. The Bank's exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit standards in making commitments and conditional obligations as it does for on balance sheet instruments. At December 31, 1996, off balance sheet commitments to extend credit for primarily variable rate loans, amounted to $99.3 million secured by $54.2 million in collateral value. The amount of standby letters of credit at December 31, 1996, amounted to $1.9 million secured by $0.2 million in cash. At December 31, 1996 and 1995, the Company held no off balance sheet derivative financial instruments such as interest rate swaps, forward contracts, futures, options on financial futures, or interest rate caps and floors, and was not subject to the market risk associated with such derivative financial instruments. 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. STOCKHOLDERS' EQUITY The Company has a Dividend Reinvestment Plan for stockholders under which no new shares of common stock were issued in 1996 and 1995. There were 499,116 shares of common stock reserved for future issuance under the plan at December 31, 1996 (the number of shares available has been adjusted for stock dividends and splits). II-35 Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends. The approval of the Comptroller of the Currency is required to pay dividends in excess of the Bank's earnings retained in the current year plus retained net profits for the preceding two years or when the Bank fails to meet certain minimum regulatory capital standards. At December 31, 1996, the Bank has the ability to pay $9.3 million in dividends to the Company without obtaining prior regulatory approval. 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. The Company currently is authorized to issue 2.5 million shares of preferred stock, no par value, $1.00 stated value. The Board of Directors is authorized to fix the particular designations, preferences, rights, qualifications, and restrictions for each series of preferred stock issued. 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, subject to adjustment. 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 $1.00 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. REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification 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 Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1996, that the Company and the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from The Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company and the Bank's actual capital amounts and ratios are also presented in the following table. II-36
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: - ----------------------------------------------------------------------------------------------------------- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------- As of December 31, 1996: Total Capital (to Risk Weighted Assets): Company Consolidated $106,559 15.31% $ 55,663 8.00% $ 69,579 10.00% Bank $104,487 15.03% $ 55,603 8.00% $ 69,504 10.00% Tier 1 Capital (to Risk Weighted Assets): Company Consolidated $ 97,840 14.06% $ 27,831 4.00% $ 41,747 6.00% Bank $ 95,777 13.78% $ 27,802 4.00% $ 41,702 6.00% Tier 1 Capital (to Average Assets): Company Consolidated $ 97,840 8.70% $ 44,971 4.00% $ 56,214 5.00% Bank $ 95,777 8.53% $ 44,910 4.00% $ 56,137 5.00% - ----------------------------------------------------------------------------------------------------------- As of December 31, 1995 Total Capital (to Risk Weighted Assets): Company Consolidated $101,386 16.46% $ 49,264 8.00% $ 61,580 10.00% Bank $ 99,121 16.12% $ 49,194 8.00% $ 61,493 10.00% Tier 1 Capital (to Risk Weighted Assets): Company Consolidated $ 93,671 15.21% $ 24,632 4.00% $ 36,948 6.00% Bank $ 91,417 14.87% $ 24,597 4.00% $ 36,896 6.00% Tier 1 Capital (to Average Assets): Company Consolidated $ 93,671 8.80% $ 42,581 4.00% $ 53,226 5.00% Bank $ 91,417 8.63% $ 42,375 4.00% $ 52,969 5.00% - -----------------------------------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Nonpension benefits are accrued over the employees' active service period, defined as the date of employment up to the date of the employees' eligibility for such benefits. The Company provides certain health care benefits for retired employees. The health care plans are contributory for participating retirees and also requires them to absorb deductibles and coinsurance with contributions adjusted annually to reflect cost sharing provisions and benefit limitations. Substantially all of the employees may become eligible for these benefits if they reach normal retirement age while working for the Company or its subsidiaries. The benefits are provided by the participants choice of health maintenance organizations with community rated premiums or self-insured plans administered by insurance companies, whose premiums are based on the claims paid during the year. The Company funds the cost of post retirement health care as benefits are paid. The Company elected to recognize the transition obligation in the balance sheets and statements of income on a delayed basis over the plan participant's future service periods, estimated to be twenty years. The Company used a health care trend rate in calculating its postretirement benefit obligation of 8.5% to 9.5% for 1997, grading down uniformly to 5.5% for 2005 and thereafter. Based on the 1996 beginning of the year weighted average discount rate of 7.50%, the effect of a one-percentage-point increase in the assumed health care cost trend rates for each future year on the aggregate of the service and interest cost components of net periodic postretirement health care benefit cost and the accumulated postretirement benefit obligation for health care benefits would increase this amount for 1996 by 20%, to $0.5 million, and by 19%, to $3.0 million, respectively. II-37 The net postretirement health benefits expense and funded status are as follows:
- ------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------- (in thousands) Service cost $ 124 $ 90 $ 102 Interest cost 183 183 178 Net amortization and deferral 85 102 105 - ------------------------------------------------------------------------------------------- Net postretirement benefit cost $ 392 $ 375 $ 385 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- December 31, 1996 1995 - ------------------------------------------------------------------------------------------- (dollars in thousands) Fair value of plan assets $ - $ - - ------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retired participants 1,114 1,185 Fully eligible participants 337 345 Other active participants 1,257 1,220 - ------------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 2,708 2,750 - ------------------------------------------------------------------------------------------- Deficit of plan assets to projected postretirement benefit obligation (2,708) (2,750) Unrecognized net actuarial loss 226 147 Unrecognized transition obligation 1,358 1,787 - ------------------------------------------------------------------------------------------- Accrued post retirement benefit cost included in other liabilities $(1,124) $ (816) - ------------------------------------------------------------------------------------------- Weighted average discount rate 7.50% 7.50% - -------------------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN The Company has a qualified Employee Stock Ownership Plan for employees who meet certain age and service requirements under which contributions are made by the Bank to a separate trust for the benefit of participating employees. Provisions for contributions to the Plan amounted to $0.6 million in 1996, $0.5 million in 1995, and $0.5 million in 1994. RETIREMENT SAVINGS PLAN The Company sponsors a savings plan for employees and matched employee contributions up to 3% for 1996, 2% for 1995, and 1% for 1994. Expenses of $0.2 million, $0.1 million, and $0.1 million were recognized for 1996, 1995 and 1994, respectively. PENSION PLAN The Company has a qualified, noncontributory pension plan covering substantially all employees. Benefits paid from the plan are based on age, years of service, compensation prior to retirement, 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. II-38 The net pension expense and the funded status of the plan are as follows:
- ---------------------------------------------------------------------------------------------- Year ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------- (in thousands) Service cost $ 454 $ 384 $ 609 Interest cost 1,119 843 736 Actual (return) loss on plan assets (2,072) (3,380) 25 Net amortization and deferral 856 2,230 (1,189) - ---------------------------------------------------------------------------------------------- Net pension expense $ 357 $ 77 $ 181 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- December 31, 1996 1995 - ---------------------------------------------------------------------------------------------- (dollars in thousands) Plan assets, fair value of primarily listed stocks and fixed income securities $15,589 $14,879 - ---------------------------------------------------------------------------------------------- Actuarial present value of benefits for services rendered to date: Accumulated benefit obligation, including vested benefits of $14,605 in 1996 and $10,837 in 1995 14,670 10,898 Additional benefits based on estimated future salary levels 1,240 1,386 - ---------------------------------------------------------------------------------------------- Projected benefit obligation 15,910 12,284 - ---------------------------------------------------------------------------------------------- Excess (deficit) of plan assets over projected benefit obligation (321) 2,595 Unrecognized net actuarial gain (2,673) (2,078) Unamortized prior service cost 4,448 1,151 Unamortized transition asset (1,413) (1,522) - ---------------------------------------------------------------------------------------------- Prepaid pension expense included in other assets $ 41 $ 146 - ---------------------------------------------------------------------------------------------- Weighted average discount rate 7.50% 7.50% Assumed increase in future salary 4.00% 4.00% Expected rate of return on plan assets 9.00% 9.00% - ----------------------------------------------------------------------------------------------
STOCK OPTION PLANS The Company has two stock option plans (Plans). At December 31, 1996, there were 596,538 shares of the Company's common stock reserved for issuance under the Plans. Under the terms of the Plans, options were granted to 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. Under the Plans, options may be designated as Incentive Stock Options or as Nonqualified Stock Options. Options granted terminate eight or ten years from the date of the grant. In 1995, the Company granted its then Chairman stock options in connection with the discharge of severance obligations of the Company and the Bank under his employment agreement. The agreement issued options covering 136,437 and 28,593 shares with exercise prices of $14.69 and $15.33, respectively, and an expiration date of January 31, 1997 (the number of shares under option and the option price per share have been adjusted for stock dividends). The Company filed a registration statement relating to these option shares which will be issued, upon payment of the exercise price, from authorized, but unissued common stock, or shares held in the treasury. These stock options do not serve to reduce the number available under the previously mentioned Plans. At December 31, 1996, there were 319,554 additional shares available for grant under the Plans. The per share weighted-average fair value of stock options granted during 1996 and 1995 was $3.32 and $2.93, respectively on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1996-expected dividend yield 3.16%, risk-free interest rate of 6.42%, and an expected life of 7 years; 1995 - expected dividend yield 2.96%, risk-free interest rate of 5.57%, and an expected life of 7 years. During 1995, there were also options granted in conjunction with a severance agreement, as previously discussed, with a per share weighted-average fair value of $1.45 using the Black Scholes option- pricing model with the following weighted-average assumptions: 1995- expected dividend yield 2.96%, risk-free interest rate of 5.15%, and an expected life of 2 years. II-39 The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1996 1995 - ------------------------------------------------------------------------ Net income As reported $12,179 $9,329 Pro forma 11,801 8,527 Earnings per share As reported $ 1.43 $ 1.06 Pro forma 1.39 0.97 - ------------------------------------------------------------------------
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of 4 years and compensation cost for options granted prior to January 1, 1995 is not considered. The following is a summary of changes in options outstanding:
Number Weighted Average of of Exercise Price of Options Options Under Plan - ----------------------------------------------------------------------- Balance, December 31, 1994 392,122 $11.47 - ----------------------------------------------------------------------- Granted 273,787 14.82 Exercised (213,155) 10.37 Lapsed (97,513) 14.55 - ----------------------------------------------------------------------- Balance, December 31, 1995 355,241 $13.87 - ----------------------------------------------------------------------- Granted 113,925 15.70 Exercised (17,234) 12.34 Lapsed (10,918) 15.38 - ----------------------------------------------------------------------- Balance, December 31, 1996 441,014 $14.37 - -----------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and exercisable options:
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 - ------------------------------------------------------------------------------------------------------------------ $ 9 - $11 36,465 2.62 $ 9.55 36,465 $ 9.55 $11 - $13 34,404 4.13 11.69 30,162 11.70 $13 - $15 210,923 2.92 14.72 167,090 14.70 $15 - $16 159,223 7.21 15.58 42,207 15.33 - ------------------------------------------------------------------------------------------------------------------ $ 9 - $16 441,015 4.66 $14.37 275,924 $13.79 - ------------------------------------------------------------------------------------------------------------------
II-40 PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------ DECEMBER 31, 1996 1995 - ------------------------------------------------------------------------------------------------------ (in thousands) ASSETS Cash $ 1,799 $ 699 Due from subsidiary bank 20 99 Securities available for sale 352 4,354 Loans 20 20 Investment in subsidiary bank 104,185 105,766 Other assets 36 96 - ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $106,412 $111,034 - ------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 148 $ 133 Long-term debt - 2,857 - ------------------------------------------------------------------------------------------------------ Total liabilities 148 2,990 Stockholders' equity 106,264 108,044 - ------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $106,412 $111,034 - ------------------------------------------------------------------------------------------------------ CONDENSED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ (in thousands) Dividends from subsidiary bank $ 9,700 $ 4,250 $ 5,000 Interest and dividend income 180 343 291 Gain on sale of securities available for sale 3 145 - - ------------------------------------------------------------------------------------------------------ 9,883 4,738 5,291 Interest expense 234 369 447 Operating expense 402 304 617 - ------------------------------------------------------------------------------------------------------ Income before income taxes and equity in undistributed income of subsidiary bank 9,247 4,065 4,227 Income tax benefit (170) (66) (306) Equity in undistrubuted income of subsidiary bank 2,762 5,198 1,975 - ------------------------------------------------------------------------------------------------------ NET INCOME $ 12,179 $ 9,329 $ 6,508 - ------------------------------------------------------------------------------------------------------
II-41 CONDENSED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ (in thousands) OPERATING ACTIVITIES: Net income $ 12,179 $ 9,329 $ 6,508 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premiums and accretion of discounts on securities (15) (27) 13 Realized gains on sale of securities available for sale (3) (145) - (Increase) decrease in other assets 62 23 (6) Increase (decrease) in other liabilities 15 (28) (8) Undistributed net income of subsidiary bank (2,762) (5,198) (1,975) Other, net 8 25 1 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 9,484 3,979 4,533 - ------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Securities available for sale: Proceeds from maturities - - 1,000 Proceeds from sales of securities 4,979 7,953 - Purchases (977) (5,158) (1,001) Other, net - 34 (49) - ------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 4,002 2,829 (50) - ------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Repayment of long-term debt (2,857) (714) (714) Common stock issued, including treasury shares reissued 2,030 4,362 2,893 Purchase of treasury stock (7,241) (7,075) (3,555) Cash dividends and payment for fractional shares (4,397) (3,974) (3,605) - ------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (12,465) (7,401) (4,981) - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 1,021 (593) (498) Cash and cash equivalents at beginning of year 798 1,391 1,889 - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,819 $ 798 $ 1,391 - ------------------------------------------------------------------------------------------------------------
FAIR VALUES OF FINANCIAL INSTRUMENTS A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that imposes the obligation to deliver, receive, or exchange cash or other financial instruments between willing entities on potentially favorable or unfavorable terms. There are no off balance sheet derivative financial instruments at December 31, 1996 and 1995. The following methods and assumptions were used to estimate the fair value of each class of financial instruments. CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD For these short-term instruments, 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 analyses using interest rates currently being offered for loans with similar terms and credit quality. The fair value of loans available for sale on an aggregate basis, are based on quoted market prices. Nonperforming loans are valued based upon recent loss history for similar loans. ACCRUED INTEREST RECEIVABLE AND PAYABLE For these short-term instruments, carrying value approximates fair value. II-42 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 certificates of deposit is estimated using a discounted cash flow analysis that applies interest rates currently offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM BORROWINGS For short-term borrowings, carrying value approximates fair value. OTHER BORROWINGS The fair value of other borrowings has been estimated using discounted cash flow analyses that apply interest rates currently being 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 immaterial. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS - ---------------------------------------------------------------------------------------------------------
December 31, 1996 1995 - --------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - --------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks $ 35,790 $ 35,790 $ 44,379 $ 44,379 Loans available for sale 4,135 4,135 6,089 6,089 Securities available for sale 369,202 369,202 393,536 393,536 Securities held to maturity 42,239 42,238 40,311 40,306 Loans: Commercial and agricultural 281,991 280,342 247,320 247,136 Real estate mortgage 119,870 120,346 120,972 121,257 Consumer 252,732 255,108 220,093 221,884 - --------------------------------------------------------------------------------------------------------- Total loans 654,593 655,796 588,385 590,277 Less allowance for loan losses 10,473 - 9,120 - - --------------------------------------------------------------------------------------------------------- Net loans 644,120 655,796 579,265 590,277 Accrued interest receivable 7,919 7,919 8,967 8,967 - --------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES Deposits: Interest bearing: Savings and money market 359,141 359,141 352,221 352,221 Certificates of deposit 435,063 442,933 389,584 397,845 Noninterest bearing 122,115 122,115 131,227 131,227 - --------------------------------------------------------------------------------------------------------- Total deposits 916,319 924,189 873,032 881,293 Short-term borrowings 88,244 88,244 115,945 115,945 Other borrowings 20,195 20,185 3,012 3,325 Accrued interest payable $ 2,431 $ 2,431 $ 2,430 $ 2,430 - ---------------------------------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. 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. II-43 DESCRIPTION OF EXHIBITS Certificate of Incorporation of NBT BANCORP INC., as Amended through April 22, 1995. By-laws of NBT BANCORP INC., as amended and restated through November 15, 1995. NBT BANCORP INC. Employee Stock Ownership Plan Amended and restated as of January 1, 1989, including amendments adopted through December 31, 1994. NBT BANCORP INC. Employee Stock Ownership Plan Amendment #1 dated November 13, 1995. NBT BANCORP INC. Defined Benefit Pension Plan Amended and restated as of October 1, 1989, including Amendments adopted through December 31, 1994. Amendment #1 dated February 21, 1995 to NBT BANCORP INC. Defined Benefit Pension Plan Amended and restated as of October 1, 1989, including Amendments adopted through December 31, 1994. Amendment #2 dated May 23, 1995 to NBT BANCORP INC. Defined Benefit Pension Plan Amended and restated as of October 1, 1989, including Amendments adopted through December 31, 1994. NBT BANCORP INC. Defined Benefit Pension Plan Amendment #3 dated November 13, 1995. NBT BANCORP INC. Defined Benefit Pension Plan Amendment #4 dated January 22, 1996. NBT Bancorp 401(k) Retirement Plan Adoption Agreement. Amendment dated November 11, 1994 to the Scudder prototype 401(k) Plan adopted as the NBT Bancorp Inc. 401(k) Retirement Plan. Amendment dated November 15, 1994 to the 401(k) Plan Adoption Agreement for the NBT Bancorp Inc. 401(k) Retirement Plan. Amendment #1 dated February 21, 1995 to the NBT Bancorp Inc. 401(k) Retirement Plan. NBT BANCORP INC. 401(k) Plan Adoption Agreement Amendment dated November 13, 1995. NBT BANCORP INC. Stock Option Plan dated November 26, 1986, as amended through February 16, 1993. Amendment dated April 24, 1993 to the NBT BANCORP INC. Stock Option Plan dated November 26, 1986, as amended through February 16, 1993. NBT BANCORP INC. 1993 Stock Option Plan. NBT BANCORP INC. 1997 Executive Incentive Compensation Plan. Lease of Binghamton Office. Lease and Lease Extension of Vail Mills Office. Lease extension of Vail Mills Office. Lease of Plattsburgh North Office. Lease of Rome Office. Lease and Lease Extensions of South Otselic Office. Lease of Utica Business Park Office. Lease of Utica Downtown Office. Change in control agreement with Daryl R. Forsythe. Supplemental Retirement Agreement between NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe made as of January 1, 1995. Death Benefits Agreement between NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe made August 22, 1995. Wage Continuation Plan between NBT Bancorp Inc., NBT Bank, National Association and Daryl R. Forsythe made as of August 1, 1995. NBT Bancorp Inc. and Subsidiaries Master Deferred Compensation Plan of Directors, adopted February 11, 1992. Wage Continuation Plan between NBT Bancorp Inc., NBT Bank, National Association and (Key Management Group) made as of January 2, 1997. Restricted Stock Agreement between NBT Bancorp Inc. and (Director) made January 1, 1997. Restricted Stock Agreement between NBT Bank, National Association and (Director) made January 1, 1997. Restricted Stock Agreement between NBT Bank, National Association and Daryl R. Forsythe made January 1, 1997. A list of the subsidiaries of the registrant. Consent of KPMG Peat Marwick LLP. Financial Data Schedule. COPIES OF EXHIBITS ARE AVAILABLE UPON PAYMENT OF REPRODUCTION COSTS. SUBMIT YOUR WRITTEN REQUEST TO JOE C. MINOR, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER OF NBT BANCORP INC. II-44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on FORM 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, this eleventh day of March, 1997. NBT BANCORP INC. (Registrant) By: /s/ DARYL R. FORSYTHE Daryl R. Forsythe, President and Chief Executive Officer /s/ JOE C. MINOR Joe C. Minor, Vice President Treasurer and Chief Financial 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 in the capacities and on the date indicated. /s/ DARYL R. FORSYTHE March 11, 1997 - --------------------------- -------------- Daryl R. Forsythe, Director DATE /s/ EVERETT A. GILMOUR March 11, 1997 - ---------------------------- -------------- Everett A. Gilmour, Director DATE /s/ PETER B. GREGORY March 11, 1997 - -------------------------- -------------- Peter B. Gregory, Director DATE /s/ ANDREW S. KOWALCZYK March 11, 1997 - ----------------------------- -------------- Andrew S. Kowalczyk, Director DATE /s/ JOHN C. MITCHELL March 11, 1997 - -------------------------- -------------- John C. Mitchell, Director DATE /s/ PAUL O. STILLMAN March 11, 1997 - -------------------------- -------------- Paul O. Stillman, Director DATE II-45 EXHIBIT INDEX The following documents are attached as Exhibits to this FORM 10-K or, if annotated by the symbol *, are incorporated by reference as Exhibits as indicated by the page number or exhibit cross-reference to the prior filings of the Registrant with the Commission.
FORM 10-K Exhibit Exhibit Cross Number Reference 3.1 Certificate of Incorporation of NBT BANCORP INC., as * Amended through April 22, 1995. FORM 10-Q for the quarterly period ended June 30, 1995, filed August 14, 1995 -- Exhibit 3.1. 3.2 By-laws of NBT BANCORP INC., as amended and restated * through November 15, 1995. FORM 10-K for the year ended December 31, 1994, filed March 31, 1995 -- Exhibit 3.3. 10.1 NBT BANCORP INC. Employee Stock Ownership Plan Amended * and restated as of January 1, 1989, including amendments adopted through December 31, 1994. FORM 10-K for the year ended December 31, 1994, filed March 31, 1995 -- Exhibit 10.1. 10.2 NBT BANCORP INC. Employee Stock Ownership Plan * Amendment #1 dated November 13, 1995. FORM 10-K for the year ended December 31, 1995, filed March 25, 1996 -- Exhibit 10.2. 10.3 NBT BANCORP INC. Defined Benefit Pension Plan Amended and * restated as of October 1, 1989, including Amendments adopted through December 31, 1994. FORM 10-K for the year ended December 31, 1994, filed March 31, 1995 -- Exhibit 10.2. 10.4 Amendment #1 dated February 21, 1995 to NBT BANCORP INC. * Defined Benefit Pension Plan Amended and restated as of October 1, 1989, including Amendments adopted through December 31, 1994. FORM 10-Q for the quarterly period ended June 30, 1995, filed August 7, 1995 -- Exhibit 10.1. 10.5 Amendment #2 dated May 23, 1995 to NBT BANCORP INC. * Defined Benefit Pension Plan Amended and restated as of October 1, 1989, including Amendments adopted through December 31, 1994. FORM 10-Q for the quarterly period ended June 30, 1995, filed August 14, 1995 -- Exhibit 10.2. 10.6 NBT BANCORP INC. Defined Benefit Pension Plan Amendment * #3 dated November 13, 1995. FORM 10-K for the year ended December 31, 1995, filed March 25, 1996 --Exhibit 10.6. 10.7 NBT BANCORP INC. Defined Benefit Pension Plan Amendment * #4 dated January 22, 1996. FORM 10-K for the year ended December 31, 1995, filed March 25, 1996 -- Exhibit 10.7. 10.8 NBT Bancorp 401(k) Retirement Plan Adoption Agreement. * FORM 10-Q for the quarterly period ended September 30, 1994 -- Exhibit 10.2. 10.9 Amendment dated November 11, 1994 to the Scudder prototype * 401(k) Plan adopted as the NBT Bancorp Inc. 401(k) Retirement Plan. FORM 10-Q for the quarterly period ended June 30, 1995, filed August 14, 1995 -- Exhibit 10.3.
II-46 EXHIBIT INDEX (continued)
FORM 10-K Exhibit Exhibit Cross Number Reference 10.10 Amendment dated November 15, 1994 to the 401(k) Plan * Adoption Agreement for the NBT Bancorp Inc. 401(k) Retirement Plan. FORM 10-Q for the quarterly period ended June 30, 1995, filed August 14, 1995 -- Exhibit 10.4. 10.11 Amendment #1 dated February 21, 1995 to the NBT Bancorp * Inc. 401(k) Retirement Plan. FORM 10-Q for the quarterly period ended June 30, 1995, filed August 14, 1995 -- Exhibit 10.5. 10.12 NBT BANCORP INC. 401(k) Plan Adoption Agreement * Amendment dated November 13, 1995. FORM 10-K for the year end December 31, 1995, filed March 25, 1996 -- Exhibit 10.12. 10.13 NBT BANCORP INC. Stock Option Plan dated November 26, * 1986, as amended through February 16, 1993. FORM 10-K for the year ended December 31, 1992, filed March 31, 1993 -- Exhibit 10.17. 10.14 Amendment dated April 24, 1993 to the NBT BANCORP INC. * Stock Option Plan dated November 26, 1986, as amended through February 16, 1993. Proxy Statement dated March 15, 1993 for the annual meeting to be held April 24, 1993, filed March 23, 1993 -- Annex A NBT BANCORP INC. 1993 Stock Option Plan, Paragraph 22. 10.15 NBT BANCORP INC. 1993 Stock Option Plan. * Proxy Statement dated March 15, 1993 for the annual meeting to be held April 24, 1993, filed March 23, 1993 -- Annex A. 10.16 NBT BANCORP INC. 1997 Executive Incentive Compensation Herein Plan. Document is attached as Exhibit 10.16. 10.17 Lease of Binghamton Office. * FORM 10-K for the year ended December 31, 1993, filed March 30, 1994 -- Exhibit 10.21. 10.20 Lease and Lease Extension of Vail Mills Office. * FORM 10-K for the year ended December 31, 1993, filed March 30, 1994 -- Exhibit 10.23. 10.21 Lease extension of Vail Mills Office. * FORM 10-Q for the quarterly period ended September 30, 1996, filed November 14, 1996 -- Exhibit 10.1. 10.22 Lease of Plattsburgh North Office. * FORM 10-K for the year ended December 31, 1993, filed March 30, 1994 -- Exhibit 10.24. 10.23 Lease of Rome Office. * FORM 10-K for the year ended December 31, 1993, filed March 30, 1994 -- Exhibit 10.25. 10.24 Lease and Lease Extensions of South Otselic Office. * FORM 10-K for the year ended December 31, 1993, filed March 30, 1994 -- Exhibit 10.26. 10.25 Lease of Utica Business Park Office. * FORM 10-Q for the quarterly period ended September 30, 1994, filed November 14, 1994 -- Exhibit 10.01. 10.26 Lease of Utica Downtown Office. * FORM 10-K for the year ended December 31, 1995, filed March 25, 1996 -- Exhibit 10.26.
II-47 EXHIBIT INDEX (continued)
FORM 10-K Exhibit Exhibit Cross Number Reference 10.27 Change in control agreement with Daryl R. Forsythe. * FORM 10-K for the year ended December 31, 1994, filed March 31, 1995 -- Exhibit 10.21. 10.28 Supplemental Retirement Agreement between NBT Bancorp * Inc., NBT Bank, National Association and Daryl R. Forsythe made as of January 1, 1995. FORM 10-Q for the quarterly period ended September 30, 1995, filed November 13, 1995 -- Exhibit 10.1. 10.29 Death Benefits Agreement between NBT Bancorp Inc., NBT * Bank, National Association and Daryl R. Forsythe made August 22, 1995. FORM 10-Q for the quarterly period ended September 30, 1995, filed November 13, 1995 -- Exhibit 10.2. 10.30 Wage Continuation Plan between NBT Bancorp Inc., NBT Bank, * National Association and Daryl R. Forsythe made as of August 1, 1995. FORM 10-Q for the quarterly period ended September 30, 1995, filed November 13, 1995 -- Exhibit 10.4. 10.31 NBT Bancorp Inc. and Subsidiaries Master Deferred * Compensation Plan of Directors, adopted February 11, 1992. FORM 10-Q for the quarterly period ended September 30, 1995, filed November 13, 1995 -- Exhibit 10.3. 10.40 Wage Continuation Plan between NBT Bancorp Inc., NBT Herein Bank, National Association and (Key Management Group) made as of January 2, 1997. Document is attached as Exhibit 10.40. Substantially identical contracts for the following have been omitted: John R. Bradley, Senior Vice President, Commercial Banking Division Head; Martin A. Dietrich, Senior Vice President, Retail Division Head; Joe C. Minor, Senior Vice President, Chief Financial Officer and Treasurer; and John D. Roberts, Senior Vice President, Trust Division Head. 10.45 Restricted Stock Agreement between NBT Bancorp Inc. and Herein (Director) made January 1, 1997. Document is attached as 10.45. Substantially identical contracts for the following directors have been omitted: Andrew S. Kowalczyk, Jr.; Paul O. Stillman; John C. Mitchell; Evertt A. Gilmour and Peter B. Gregory. 10.50 Restricted Stock Agreement between NBT Bank, National Herein Association and (Director) made January 1, 1997. Document is attached as 10.50. Substantially identical contracts for the following directors have been omitted: Dan B. Marshman; Kenneth M. Axtell; J. Peter Chaplin; Andrew S. Kowalxzyk, Jr.; Paul O. Stillman; William L. Owens; C. Vernon Stratton; John C. Mitchell; Janet H. Ingraham; Everett A. Gilmour; Richard F. Monroe and Peter B. Gregory. 10.55 Restricted Stock Agreement between NBT Bank, National Herein Association and Daryl R. Forsythe made January 1, 1997. Document is attached as 10.55. 21 A list of the subsidiaries of the registrant is attached Herein as Exhibit 21. 23 Consent of KPMG Peat Marwick LLP. Herein Document is attached as Exhibit 23. 27 Financial Data Schedule. Herein Document is attached as Exhibit 27.
II-48 EXHIBIT 10.16 NBT BANCORP INC. 1997 Executive Incentive Compensation Plan January 28, 1997 NBT BANCORP INC. Norwich, New York 1997 EXECUTIVE INCENTIVE COMPENSATION PLAN NBT BANCORP INC. Norwich, New York 1997 EXECUTIVE INCENTIVE COMPENSATION PLAN ------------------------------------------ Table of Contents Page Introduction 1-2 Incentive Plan Section I - Definitions 3 Section II - Participation 4 Section III - Activating the Plan 4 Section IV - Calculation of Awards 4 Section V - President's Special Recommendations 4 Section VI - Distribution of Awards 5 Section VII - Plan Administration 6 Section VIII - Amendment, Modification, Suspension or Termination 6 Section IX - Effective Date 6 Section X - Employer Relations with Participants 6 Section XI - Governing Law 6 Incentive Plan Participants Appendix A Distribution of Awards Appendix B NBT BANCORP INC. NORWICH, NEW YORK Introduction ------------ It is important to examine the benefits which accrue to the organization through the operation of the Executive Incentive Compensation Plan. The Plan impacts directly on senior and middle management - those critical to the organization's success - and its purpose can be summarized as follows: * PROVIDES MOTIVATION: The opportunity for incentive awards provides executives with the impetus to "stretch" for challenging, yet attainable, goals. * PROVIDES RETENTION: by enhancing the organization's competitive compensation posture. * PROVIDES MANAGEMENT TEAM BUILDING: by making the incentive award dependent on the attainment of organization goals, a "team orientation" is fostered among the participant group. * PROVIDES INDIVIDUAL MOTIVATION: by making a portion of the incentive award dependent on the attainment of individual goals, a participant is encouraged to make significant personal contribution to the corporate effort. * PROVIDES COMPETITIVE COMPENSATION STRATEGY: The implementation of incentive arrangements is competitive with current practice in the banking industry. -1- Highlights of the 1997 Executive Incentive Compensation Plan included in the following pages are as follows: 1. The Plan is competitive compared with similar sized banking organizations and the banking industry in general. 2. The Compensation Committee of the Board of Directors controls all aspects of the Plan. 3. Management employees are eligible for participation. 4. The financial criteria necessary for Plan operation consist of Return on Average Assets (25% Weight) and Return of Equity (50% Weight) and Profit Improvement (25% Weight). 5. Incentive distributions will be made during the first quarter of the year following the Plan Year. 6. Incentive awards will be based on attainment of corporate goals. Total Incentive Awards contain both Corporate and Individual components; the corporate component awarded by virtue of corporate performance related to corporate goals and the individual component awarded by virtue of individual performance related to individual goals. Component percentages are shown in Appendix B. 7. Incentive distributions will be based on matrix in Appendix B. -2- NBT BANCORP INC. Norwich, New York The Board of Directors of NBT Bancorp Inc. has established this 1997 Executive Incentive Compensation Plan. The purpose of the Plan is to meet and exceed financial goals and to promote a superior level of performance relative to the bank's competition in its market area. Through payment of incentive compensation beyond base salaries, the Plan provides reward for meeting and exceeding the bank's financial goals. SECTION I - DEFINITIONS ----------- Various terms used in the Plan are defined as follows: BASE SALARY: the base salary at the end of the Plan year, excluding any bonuses, contributions to employee benefit programs, or other compensation not designated as salary. BOARD OF DIRECTORS: The Board of Directors of NBT Bancorp Inc. PRESIDENT & CEO: President and CEO of NBT Bancorp Inc. CORPORATE GOALS: Those pre-set objectives and goals which are required to activate distribution of awards under the Plan. INDIVIDUAL GOALS: Key objectives mutually agreed upon between participants and superior, and approved by the CEO. COMPENSATION COMMITTEE: The Compensation Committee of the Board of Directors of the Bank. PLAN PARTICIPANT: An eligible employee of the bank designated by the President & CEO and approved by the Compensation Committee for participation for the Plan Year. PLAN YEAR: The 1997 calendar year. -3- SECTION II - ELIGIBILITY TO PARTICIPATE -------------------------- To be eligible for an award under the Plan, a Plan participant must be an officer in the full-time service of the bank at the start and close of the calendar year and at the time of the award unless the CEO by special exception recommends to the Compensation Committee a special arrangement for a newly hired executive who may be designated by the CEO and approved by the Compensation Committee as eligible for an award as determined in the employment agreement. A Plan participant must be in the same or equivalent position, at year end as they were when named a participant or have been promoted during the course of the year, to be eligible for an award. If a Plan participant voluntarily leaves the employ of the bank prior to the payment of the award, he/she is not eligible to receive an award. However, if the active full-time service of a participant in the Plan is terminated by death, disability, retirement, or if the participant is on an approved leave of absence, the President should recommend an award to such a participant based on the proportion of the Plan year that he/she was in active service with the bank. SECTION III - ACTIVATING THE PLAN ------------------- The operation of the Plan is predicated on attaining and exceeding management performance goals. The goals will consist of return on average assets, return on shareholder's equity and profit improvement. The Corporation must achieve a minimum net income set forth in Appendix B to trigger an award pursuant to the terms of this plan. SECTION IV - CALCULATION OF AWARDS --------------------- The Compensation Committee designates the incentive formula as shown in Appendix B. The actual rate of distribution is based upon Company performance. The Compensation Committee will make final decisions with respect to all incentive awards and will have final approval over all incentive awards. The individual participant data regarding maximum award and formulas used in calculation has been customized and appears as Appendex A. SECTION V - PRESIDENT'S SPECIAL RECOMMENDATIONS ----------------------------------- The President & CEO will recommend to the Compensation Committee the amounts to be awarded to individual participants in the incentive Plan. The President & CEO may recommend a change beyond the formula to a bonus award (increase or decrease) to an individual participant by a specified percentage based on assessment of special individual performance beyond the individual goals. The Compensation Committee may amend the President & CEO's bonus award. The amount of the adjustment is from 0%-20% of the actual award. No award will be granted to an officer whose performance is unacceptable. -4- SECTION VI - DISTRIBUTION OF AWARDS ---------------------- Unless a participant elects the deferred option outlined in the following paragraph, distribution of awards will be made during the first quarter of the year following the Plan year. Distribution of the bonus award must be approved by the Compensation Committee. A participant may elect by written notice to the Committee at any time during the month of December of the Plan Year preceding the year to which the award relates to have all or a portion of his award deferred (Deferred Award). Any such election shall be irrevocable except unforeseeable financial emergency. Any portion of participant's award that is deferred shall bear interest commencing on the Award Date based on the lowest balance in the participant's account during the month, as if invested at an annual rate equal to the highest annual rate offered at NBT on any customer deposit account in effect on the last day of the preceding calendar year. Interest shall be computed monthly, and credited to the participant's account as of the last day of each calendar month. The Deferred Award shall be paid in five (5) annual installments upon the participant's ceasing to be actively employed by the Company for any reason. Payment shall begin on the 31st day of January following the year in which the participant ceases to be actively employed with the Company. However, a participant with the consent of the Committee, prior to termination of employment, may elect in writing to have the aggregate amount in his or her Deferred Award Account paid to him or her in a lump sum on a designated date. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be constructed to create a trust of any kind, or a fiduciary relationship between NBT and the participant, his or her designated beneficiary or any other person, nor shall the participant or any designated beneficiary have any preferred claim on, any title to, or any beneficial interest in, the assets of NBT or the payments deferred hereunder prior to the time such payments are actually paid to the participant pursuant to the terms herein. To the extent that the participant, his or her designated beneficiary or any person acquires a right to receive payments from NBT under this Plan, such right shall be no greater than the right of any unsecured general creditor of NBT. The intent of this Section of the Plan is to create a voluntary, non-qualified, unfunded, deferred executive incentive compensation Plan which will defer the deduction of such incentive compensation for tax purposes by NBT and which will correspondingly defer the recognition of such compensation by the participant until such compensation is actually paid. It is therefore intended, and this Plan shall be construed and where necessary modified, so that the participants shall not be deemed to have constructively received such deferred compensation. In the event of death, any approved award earned under the provisions of this plan will become payable to the beneficiary designated under this Plan; or if no such designation, to the designated beneficiary of the participant as recorded under the bank's group life insurance program; or in the absence of a valid designation, to the participant's estate. -5- SECTION VII - PLAN ADMINISTRATION ------------------- The Compensation Committee shall, with respect to the Plan have full power and authority to construe, interpret and manage, control and administer this Plan, and to pass and decide upon cases in conformity with the objectives of the Plan under such rules as the Board of Directors of the bank may establish. Any decision made or action taken by the Bank, the Board of Directors, or the Compensation Committee arising out of, or in connection with, the administration, interpretation, and effect of the Plan shall be at their absolute discretion and will be conclusive and binding on all parties. No member of the Board of Directors, Compensation Committee, or employee of the bank shall be liable for any act or action hereunder, whether of omission or commission, by a Plan participant or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated in accordance with the provision of the Plan. SECTION VIII - AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION -------------------------------------------------- The bank reserves the right, by and through its Board of Directors to amend, modify, suspend, reinstate or terminate all or part of the Plan at any time. The Compensation Committee will give prompt written notice to each participant of any amendment, suspension or termination or any material modification of the Plan. In the event of a merger or acquisition, the Plan and related financial formulas will be reviewed and, if necessary, revised to take into account the financial status of any merged institution. SECTION IX - EFFECTIVE DATE OF THE PLAN -------------------------- The effective date of the Plan shall be January 1, 1997. SECTION X - EMPLOYER RELATION WITH PARTICIPANTS ----------------------------------- Neither establishment nor the maintenance of the Plan shall be construed as conferring any legal rights upon any participant or any person for a continuation of employment, nor shall it interfere with the right of an employer to discharge any participant or otherwise deal with him/her without regard to the existence of the Plan. SECTION XI - GOVERNING LAW ------------- Except to the extent pre-empted under federal law, the provisions of the Plan shall be construed, administered and enforced in accordance with the domestic internal law of the State of New York. In the event of relevant changes in the Internal Revenue Code, related rulings and regulations, changes imposed by other regulatory agencies affecting the continued appropriateness of the Plan and awards made thereunder, the Board may, at its sole discretion, accelerate or change the manner of payments of any unpaid awards or amend the provisions of the Plan. -6- DEFERRED COMPENSATION PLAN FOR OFFICERS OF NBT BANCORP & SUBSIDIARIES ELECTION AGREEMENT I, ____________________, hereby elect [ ] to [ ] not to participate in the Deferred Compensation Plan for officers of NBT with respect to Executive Incentive Compensation (EICP) awards which I may receive for the calendar year of __________. I hereby elect to defer the payment of __________ (__________%) of the EICP award which I would otherwise be entitled to receive. [ ] Please defer payment of the percentage of my EICP award specified above until the earlier of the following dates: [ ] Until ____________________ (Specify date which may not be later than the date on which I will retire). [ ] Until the date of my death. [ ] Begin annual payments of deferred balance on ____________________ in the amount of 1/5th the balance each year until the balance has been paid in full (5 year payout). [ ] Because terms of the plan have changed since my election to defer EICP awards, please discontinue my deferral election and: [ ] Roll my deferred account proceeds into the following account at the institution indicated: ___________________________________________________________________ ___________________________________________________________________ [ ] Please pay me out in cash, the balance of my account, at this time. [ ] I hereby designate the following person or persons as beneficiary hereunder in the event of my death: Primary Beneficiary ____________________________________________________ Secondary Beneficiary __________________________________________________ I hereby revoke any prior election that may be inconsistent with the above. I acknowledge that I have reviewed the plan and understand that my participation will be subject to the terms and conditions contained in the plan. Words and phrases used in this Election Agreement shall have the meanings assigned by the plan. Dated this _____ day of _____, 199_. ___________________________________ EXHIBIT 10.40 Wage Continuation Plan between NBT Bancorp Inc., NBT Bank, National Association and (Key Management Group) January 2, 1997 Dear Mr. : NBT Bancorp Inc. (which, together with its wholly-owned subsidiary, NBT Bank, National Association, is referred to as the "Company") considers the stability of its key management group to be essential to the best interests of the Company and its shareholders. The Company recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control may arise and that the attendant uncertainty may result in the departure or distraction of key management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to encourage members of the Company's key management group to continue as employees notwithstanding the possibility of a change in control of the Company. The Board also believes it important that, in the event of a proposal for transfer of control of the Company, you be able to assess the proposal and advise the Board without being influenced by the uncertainties of your own situation. In order to induce you to remain in the employ of the Company, this Agreement, which has been approved by the Board, sets forth the severance compensation which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control" of the Company under the circumstances described below. 1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE. (a) TERMINATION PRIOR TO CERTAIN OFFERS. Except as otherwise provided in paragraph (b) below, or in any written employment agreement between you and the Company, the Company or you may terminate your employment at any time. If, and only if, such termination occurs after a change in control of the Company (as defined in Section 6), the provisions of this Agreement regarding payment of severance compensation and benefits shall apply. (B) TERMINATION SUBSEQUENT TO CERTAIN OFFERS. In the event a tender offer or exchange offer is made by a person (as defined in Section 6) for more than 30 percent of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors ("Voting Securities"), including shares of common stock, no par value, of the Company (the "Company Shares"), you agree that you will not leave the employ of the Company (other than as a result of Disability as such term is defined in Section 6) and will render services to the Company in the capacity in which you then serve until such tender offer or exchange offer has been abandoned or terminated or a change in control of the Company has occurred as a result of such tender offer or exchange offer. If, during the period you are obligated to continue in the employ of the Company pursuant to this Section 1 (b), the Company reduces your compensation, your obligations under this Section 1(b) shall thereupon terminate. 2. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 1998, provided, however, that commencing December 31, 1997 and each December 31 thereafter, the remaining term of this Agreement shall automatically be extended for one additional year (to a total of two years) unless at least 90 days prior to such December 31, the Company or you shall have given notice that this Agreement shall not be extended; and provided, however, that if a change in control of the Company shall occur while this Agreement is in effect, this Agreement shall automatically be extended for 24 months from the date the change in control occurs. This Agreement shall terminate if you or the Company terminates your employment prior to a change in control of the Company but without prejudice to any remedy the Company may have for breach of your obligations, if any, under Section 1(b). 3. SEVERANCE PAYMENT AND BENEFITS IF TERMINATION OCCURS FOLLOWING CHANGE IN CONTROL FOR DISABILITY, WITHOUT CAUSE, OR WITH GOOD REASON. If, within 24 months from the date of occurrence of any event constituting a change in control of the Company (it being recognized that more than one such event may occur in which case the 24-month period shall run from the date of occurrence of each such event), your employment with the Company is terminated (i) by the Company for Disability, (ii) by the Company without Cause, or (iii) by you with Good Reason (as defined in Section 6), you shall be entitled to a severance payment and other benefits as follows: (a) DISABILITY. If your employment with the Company is terminated for Disability, your benefits shall thereafter be determined in accordance with the Company's long-term disability income insurance plan. If the Company's long-term disability income insurance plan is modified or terminated following a change in control, the Company shall substitute such a plan with benefits applicable to you substantially similar to those provided by such plan prior to its modification or termination. During any period that you fail to perform your duties hereunder as a result of incapacity due to 2 physical or mental illness, you shall continue to receive your full base salary at the rate then in effect until your employment is terminated by the Company for Disability. (b) TERMINATION WITHOUT CAUSE OR WITH GOOD REASON. If your employment with the Company is terminated without Cause by the Company or with Good Reason by you, then the Company shall pay to you, upon demand, the following amounts (net of applicable payroll taxes): (i) Your full base salary plus year-to-date accrued vacation through the Date of Termination at the rate in effect on the date the change in control occurs. (ii) As severance pay, an amount equal to the product of your "Base Amount" multiplied by the number 2. As used in the previous sentence, your "Base Amount" is your average annual compensation includible in your gross income for federal income tax purposes for the five years immediately preceding the year in which the change in control occurs (or, if you shall have been employed by the Company for less than those five years, for the number of those years during which you shall have been employed by the Company, with any partial year annualized), including base salary, non-deferred amounts under annual incentive, long-term performance, and profit-sharing plans, distributions of previously deferred amounts under such plans, and ordinary income recognized with respect to stock options. (c) RELATED BENEFITS. Unless you die or your employment is terminated by the Company for Cause or Disability, or by you other than for Good Reason, the Company shall maintain in full force and effect, for the continued benefit of you for one year after the Date of Termination, all noncash employee benefit plans, programs, or arrangements (including, without limitation, pension and retirement plans and arrangements, stock option plans, life insurance and health and accident plans and arrangements, medical insurance plans, disability plans, and vacation plans) in which you were entitled to participate immediately prior to the Date of Termination provided that your continued participation is possible after Termination under the general terms and provisions of such plans, programs, and arrangements; provided, however, that if you become eligible to participate in a benefit plan, program, or arrangement of another employer which confers substantially similar benefits upon you, you shall cease to receive benefits under this subsection in respect of such plan, program, or arrangement. In the event that your participation in any such plan, program, or arrangement is barred, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans, programs and arrangements. 4. PAYMENT IF TERMINATION OCCURS FOLLOWING CHANGE IN CONTROL, BECAUSE OF DEATH, FOR CAUSE, OR WITHOUT GOOD REASON. If your employment shall be terminated following any event constituting a change in control of the Company because of your death, or by the Company for Cause, or 3 by you other than for Good Reason, the Company shall pay you your full base salary plus year-to-date accrued vacation through the Date of Termination at the rate in effect on the date of the change in control occurs. The Company shall have no further obligations to you under this Agreement. 5. NO MITIGATION. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor, except as expressly set forth herein, shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. 6. DEFINITIONS OF CERTAIN TERMS. For the purpose of this Agreement, the terms defined in this Section 6 shall have the meanings assigned to them herein. (a) CAUSE. Termination of your employment by the Company for "Cause" shall mean termination because, and only because, you committed an act of fraud, embezzlement, or theft constituting a felony or an act of intentionally against the interests of the Company which causes the Company material injury. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct constituting Cause as defined above and specifying the particulars thereof in detail. (b) CHANGE IN CONTROL. A "Change in Control" of the Company shall mean: (i) A change in control of a nature that would be required to be reported in response to Item 6 (e) of Schedule 14A of Regulation 14A as in effect on the date hereof pursuant to the Securities Exchange Act of 1934 (the "Exchange Act'); provided that, without limitation, such a change in control shall be deemed to have occurred at such time as any Person hereafter becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30 percent or more of the combined voting power of the Company's Voting Securities; or (ii) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved 4 by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or (iii) There shall be consummated (x) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Voting Securities would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of Voting Securities immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (y) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all of the assets of the Company, provided that any such consolidation, merger, sale, lease, exchange or other transfer consummated at the insistence of an appropriate banking regulatory agency shall not constitute a change in control; or (iv) Approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company. (c) DATE OF TERMINATION. "Date of Termination" shall mean (i) if your employment is terminated by the Company for Disability, 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30-day period), and (ii) if your employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within 30 days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties or by a final judgment, order, or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). The term of this Agreement shall be extended until the Date of Termination. (d) DISABILITY. Termination of your employment by the Company for "Disability" shall mean termination because of your absence from your duties with the Company on a full-time basis for 180 consecutive days as a result of your incapacity due to physical or mental illness and your failure to return to the performance of your duties on a full-time basis during the 30-day period after Notice of Termination is given. (e) GOOD REASON. Termination by you of your employment for "Good Reason" shall mean termination based on any of the following: (i) A change in your status or position(s) with the Company, which in your reasonable judgment, does not represent a promotion from your status or position(s) as in effect immediately prior to the change in 5 control, or a change in your duties or responsibilities which, in your reasonable judgment, is inconsistent with such status or position(s), or any removal of you from, or any failure to reappoint or reelect you to, such position(s), except in connection with the termination of your employment for Cause or Disability or as a result of your death or by you other than for Good Reason. (ii) A reduction by the Company in your base salary as in effect immediately prior to the change in control. (iii) The failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control. (iv) The failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy as in effect immediately prior to the change of control. (v) The Company's requiring you to be based anywhere other than where your office is located immediately prior to the change in control except for required travel on the Company's business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control. (vi) The failure by the Company to obtain from any successor the assent to this Agreement contemplated by Section 8 hereof. (vii) Any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of this Agreement; and for purposes of this Agreement, no such purported termination shall be effective. (viii)Any refusal by the Company to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company which, prior to the change in control, you were permitted by the Board to attend to or engage in. 6 For purposes of this subsection, "Plan" shall mean any compensation plan such as an incentive or stock option plan or any employee benefit such as a thrift, pension, profit sharing, medical disability, accident, life insurance plan, or a relocation plan or policy or any other plan, program, or policy of the Company intended to benefit employees. (f) NOTICE OF TERMINATION. A "Notice of Termination" of your employment given by the Company shall mean a written notice given to you of the termination of your employment which shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (g) PERSON. The term "Person" shall mean and include any individual, corporation, partnership, group, association, or other "person", as such term is used in Section 14(d) of the Exchange Act, other than the Company or any employee benefit plan(s) sponsored by the Company. 7. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chief Executive Officer of the Company with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall inure to the benefit of, and be binding upon, any corporate or other successor or assignee of the Company which shall acquire, directly or indirectly, by merger, consolidation or purchase, or otherwise, all or substantially all of the business or assets of the Company. The Company shall require any such successor, by an agreement in form and substance satisfactory to you, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, 7 all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee or, if there is no such designee, to your estate. 9. INCREASED SEVERANCE PAYMENTS UPON APPLICATION OF EXCISE TAX. (a) ADJUSTMENT OF PAYMENT. In the event any payments or benefits you become entitled to pursuant to the Agreement or any other payments or benefits received or to be received by you in connection with a change in control of the Company or your termination of employment (whether pursuant to the terms of any other agreement, plan, or arrangement, or other wise, with the Company, any person whose actions result in a change in control or any person affiliated with the Company or such person) (collectively the "Severance Payments") will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay you an additional amount (the "Gross-Up Payment") so that the net amount retained by you, after deduction of the Excise Tax (but before deduction for any federal, state or local income tax) on the Severance Payments and after deduction for the aggregate of any federal, state, or local income tax and Excise Tax upon the Gross-Up Payment, shall be equal to the Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the entire amount of the Severance Payments shall be treated as "parachute payments" within the meaning of Section 280G(b) (2) of the Code and as subject to the Excise Tax, unless and to the extent, in the written opinion of outside tax counsel selected by the Company's independent accountants and reasonably acceptable to you, such payments (in whole or in part) are not subject to the deferred payment or benefit (constituting a part of the Severance Payments) shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d) (3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of the federal income taxation applicable to individuals (without taking into account surtaxes or loss or reduction of deductions) for the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation in the state and locality of your residence on the date of Termination. In the event that the amount of Excise Tax you are required to pay is subsequently determined to be less than the amount taken into account hereunder, you shall repay to the Company promptly after the time that the amount of such reduction in Excise Tax is finally determined the amount of the reduction, together with the interest on the amount of such reduction at the rate of 6 percent per annum from the date of the Gross-Up Payment, plus, if in the written opinion of outside tax counsel selected by the Company's independent accountants and reasonably acceptable to you, such payment (or a portion thereof) was not taxable income to you when reported or is deductible by you for federal income tax purposes, the net federal income tax benefit you actually realize as a result of making such payment pursuant to this 8 sentence. In the event that the amount of Excise Tax you are required to pay is subsequently determined to exceed the amount taken into account hereunder, the Company shall make an additional Gross-Up Payment in the manner set forth above in respect of such excess (plus any interest, additions to tax, or penalties payable by you with respect to such excess) promptly after the time that the amount can be reasonably determined. (b) TIME OF PAYMENT: ESTIMATED PAYMENTS. The payments provided for in subsection (a) above, shall be made not later than the fifth business day following the Date of Termination; provided, however, that if the amount of such payments cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments, and shall pay the remainder of such payments (together with interest at the rate of 6 percent per annum) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth day after demand by the Company (together with interest at the rate of 6 percent per annum). 10. MISCELLANEOUS. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing signed by you and the Chief Executive Officer or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same, or at any prior or subsequent, time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction, and performance of this Agreement shall be governed by laws of the State of New York without giving effect to the principles of conflict of laws thereof. 11. LEGAL FEES AND EXPENSES. The Company shall pay or reimburse any reasonable legal fees and expenses you may incur in connection with any legal action to enforce your rights under, or to defend the validity of, this Agreement. The Company will pay or reimburse such legal fees and expenses on a regular, periodic basis upon presentation by you of a statement or statements prepared by your counsel in accordance with its usual practices. 12. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9 13. PAYMENTS DURING CONTROVERSY. Notwithstanding the dependency of any dispute or controversy, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary and installments of incentive compensation) and continue you as a participant in all compensation, benefit, and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with Section 7(c). Amounts paid under this Section are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. You shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject. Very truly yours, NBT BANCORP INC. By: /s/ _________________________ AGREED TO: /s/ ______________________________ idpc/rr 10 EXHIBIT 10.45 Restricted Stock Agreement Between NBT Bancorp Inc. and (Director) RESTRICTED STOCK AGREEMENT BETWEEN NBT BANCORP INC. AND (Director) AGREEMENT made as of January 1, 1997 by and between NBT Bancorp Inc. ("Company") and DIRECTOR ("Participant"): WHEREAS, the Participant is a Director of the Company and, as such, receives an annual retainer fee in addition to fees for meeting attendance. The Company and Participant agree that the Participant is entitled to receive the retainer fee in Company Stock subject to the conditions specified below. THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed as follows: 1. AWARD OF SHARES. Under the terms of this Agreement, the Company has awarded the Participant a Restricted stock award on January 1, 1997 ("Award Date"), covering 165 shares of NBT Bancorp Inc. Common Stock, with a fair market value equal to $3,011.25 (annual director's retainer), subject to the terms, conditions and restrictions set forth in this agreement. 2. AWARD RESTRICTIONS. The shares covered by restricted stock award shall vest in accordance with the schedule set forth below: Full Years Elapsed from Award Date Percent Vested 1 33% 2 66% 3 100% Upon the vesting of any part of the restricted stock award by virtue of the lapse of the restriction period set forth above or under Section 4 of this Agreement, the Company shall cause a stock certificate covering the requisite number of shares in the name of the Participant or beneficiary(ies) to be distributed within 30 days after vesting. Upon receipt of such stock certificate(s), the Participant or beneficiary(ies) are free to hold or dispose of such certificate at will. 1 During the restriction period, the shares covered by the restricted stock award not already vested are not transferable by the Participant by means of sale, assignment, exchange, pledge, or otherwise. However, the restriction period will lapse upon a change of ownership control within the meaning of Internal Revenue Code Section 368(c) of Company or NBT Bancorp Inc. The lapse ofthe restriction period will cause the restricted stock award to be fully vested. 3. STOCK CERTIFICATES. The stock certificate(s) evidencing the restricted stock award shall be registered in the name of the Participant as of the Award Date. Physical possession or custody of such stock certificate(s) shall be retained by the Company until such time as the shares are vested (i.e. the restriction period lapses). The Company reserves the right to place a legend on the stock certificate(s) restricting the transferability of such certificate(s). During the restriction period, except as otherwise provided in Section 2 of this Agreement, the Participant shall be entitled to all rights of a stockholder of the Company, including the right to vote the shares and receive cash dividends. Stock dividends declared by the Company will be characterized as restricted stock, and distributed with the principle restricted stock. 4. TERM OF DIRECTORSHIP. If the Participant terminates board membership with the Company due to death, disability, retirement, or failure to be re-elected or re-appointed, the restricted stock award, to the extent not already vested, shall vest in full as of the date of such termination. Voluntary resignation or removal for cause will result in forfeiture of the non-vested grants. The Participant may designate a beneficiary(ies) to receive the stock certificate representing that portion of the restricted stock award automatically vested upon death. The participant has the right to change such beneficiary designation at will. 5. DUTY TO NOTIFY. It is the Participant's duty to notify the Company in the event an Internal Revenue Code Section 83(b) election is made in the year of the award. 6. WITHHOLDING TAXES. The Company shall have the right to retain and withhold from any payment under the restricted stock awarded the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such payment. At its discretion, the Company may require a Participant receiving shares of Common Stock under a restricted stock award to reimburse the Company for any such taxes required to be withheld by the Company and withhold any distribution in whole or in part until the Company is so 2 reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due or to become due from the Company to the Participant an amount equal to such taxes required to be withheld by the Company to reimburse the Company for any such taxes or retain and withhold a number of shares having a market value not less than the amount of such taxes and cancel (in whole or in part) any such shares so withheld in order to reimburse the Company for any such taxes. 7. IMPACT ON OTHER BENEFITS. The value of the restricted stock award (either on the Award Date or at the time the shares are vested) shall not be includable as compensation or earnings for purposes of any other benefit plan offered by the Company. 8. ADMINISTRATION. The Compensation Committee shall have full authority and discretion to decide all matters relating to the administration and interpretation of this Agreement. The Compensation Committee shall have full power and authority to pass and decide upon cases in conformity with the objectives of this Agreement under such rules as the Board of Directors of the Company may establish. Any decision made or action taken by the Company, the Board of Directors, or the Compensation Committee arising out of, or in connection with, the administration, interpretation, and effect of this Agreement shall be at their absolute discretion and will be conclusive and binding on all parties. No member of the Board of Directors, Compensation Committee, or employee of the Company shall be liable for any act or action hereunder, whether of omission or commission, by the Participant or by any agent to whom duties in connection with the administration of this Agreement have been delegated in accordance with the provision of this Agreement. 9. COMPANY RELATION WITH PARTICIPANTS. Nothing in this Agreement shall confer on the Participant any right to continue as a director of the Company. 10. FORCE AND EFFECT. The various provisions of this Agreement are severable in their entirety. Any determination of invalidity or unenforceability of any one provision shall have no effect on the continuing force and effect of the remaining provisions. 11. GOVERNING LAWS. Except to the extent pre-empted under federal law, the provisions of this Agreement shall be construed, administered and enforced in accordance with the domestic internal law of the State of New York. 3 12. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties and shall not be modified or amended except in writing and duly signed by the parties. No waiver by either party of any default under this Agreement shall be deemed a waiver of any later default. IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ________, ________ NBT BANCORP INC. By_______________________________ President And by_______________________________ Vice President _______________________________ Signature of Participant _______________________________ Name of Participant (please print) 4 I direct that all amounts payable at my death under the terms of a certain NBT Bank, N.A. Agreement for Deferral of Receipt of Compensation be paid as provided below. As used below "survive me" means "survive me by more than 30 days." (Fill in the blank(s) of only one of the following) 1. To ______________________, if such person survives me, otherwise in equal shares to my children who survive me; but if any child of mine does not survive me and leaves a child or children, then such child's share equally to his or her children, who survive me. At this time, my children are ____________________________________________________________. 2. To my children who survive me in equal shares but if any child of mine does not survive me and leaves a child or children, then such child's share equally to his or her children who survive me. At this time my children are_________________________________________________________ _______________________________________. 3. To ______________________, trustee (or any successor trustee) of a trust agreement of which I am the grantor dated ______________________________. 4. To:__________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _______________________ DATED this ________ day of ___________________________. _______________________________ Signature of Participant ___________________________ Name of Participant (please print) 5 EXHIBIT 10.50 Restricted Stock Agreement between NBT Bank, National Association and (Director) RESTRICTED STOCK AGREEMENT BETWEEN NBT BANK, N.A. AND (DIRECTOR) AGREEMENT made as of January 1, 1997 by and between NBT Bank, N.A. ("Company") and DIRECTOR ("Participant"): WHEREAS, the Participant is a Director of the Company and, as such, receives an annual retainer fee in addition to fees formeeting attendance. The Company and Participant agree that the Participant is entitled to receive the retainer fee in Company Stock subject to the conditions specified below. THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed as follows: 1. AWARD OF SHARES. Under the terms of this Agreement, the Company has awarded the Participant a Restricted stock award on January 1, 1997 ("Award Date"), covering 165 shares of NBT Bancorp Inc. Common Stock, with a fair market value equal to $3,011.25 (annual director's retainer), subject to the terms, conditions and restrictions set forth in this agreement. 2. AWARD RESTRICTIONS. The shares covered by restricted stock award shall vest in accordance with the schedule set forth below: Full Years Elapsed from Award Date Percent Vested 1 33% 2 66% 3 100% Upon the vesting of any part of the restricted stock award by virtue of the lapse of the restriction period set forth above or under Section 4 of this Agreement, the Company shall cause a stock certificate covering the requisite number of shares in the name of the Participant or beneficiary(ies) to be distributed within 30 days after vesting. Upon receipt of such stock certificate(s), the Participant or beneficiary(ies) are free to hold or dispose of such certificate at will. 1 During the restriction period, the shares covered by the restricted stock award not already vested are not transferable by the Participant by means of sale, assignment, exchange, pledge, or otherwise. However, the restriction period will lapse upon a change of ownership control within the meaning of Internal Revenue Code Section 368(c) of Company or NBT Bancorp Inc. The lapse of the restriction period will cause the restricted stock award to be fully vested. 3. STOCK CERTIFICATES. The stock certificate(s) evidencing the restricted stock award shall be registered in the name of the Participant as of the Award Date. Physical possession or custody of such stock certificate(s) shall be retained by the Company until such time as the shares are vested (i.e. the restriction period lapses). The Company reserves the right to place a legend on the stock certificate(s) restricting the transferability of such certificate(s). During the restriction period, except as otherwise provided in Section 2 of this Agreement, the Participant shall be entitled to all rights of a stockholder of the Company, including the right to vote the shares and receive cash dividends. Stock dividends declared by the Company will be characterized as restricted stock, and distributed with the principle restricted stock. 4. TERM OF DIRECTORSHIP. If the Participant terminates board membership with the Company due to death, disability, retirement, or failure to be re-elected or re-appointed, the restricted stock award, to the extent not already vested, shall vest in full as of the date of such termination. Voluntary resignation or removal for cause will result in forfeiture of the non-vested grants. The Participant may designate a beneficiary(ies) to receive the stock certificate representing that portion of the restricted stock award automatically vested upon death. The participant has the right to change such beneficiary designation at will. 5. DUTY TO NOTIFY. It is the Participant's duty to notify the Company in the event an Internal Revenue Code Section 83(b) election is made in the year of the award. 6. WITHHOLDING TAXES. The Company shall have the right to retain and withhold from any payment under the restricted stock awarded the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such payment. At its discretion, the Company may require a Participant receiving shares of Common Stock under a restricted stock award to reimburse the Company for any such taxes required to be withheld by the Company and withhold any distribution in whole or in part until the Company is so 2 reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due or to become due from the Company to the Participant an amount equal to such taxes required to be withheld by the Company to reimburse the Company for any such taxes or retain and withhold a number of shares having a market value not less than the amount of such taxes and cancel (in whole or in part) any such shares so withheld in order to reimburse the Company for any such taxes. 7. IMPACT ON OTHER BENEFITS. The value of the restricted stock award (either on the Award Date or at the time the shares are vested) shall not be includable as compensation or earnings for purposes of any other benefit plan offered by the Company. 8. ADMINISTRATION. The Compensation Committee shall have full authority and discretion to decide all matters relating to the administration and interpretation of this Agreement. The Compensation Committee shall have full power and authority to pass and decide upon cases in conformity with the objectives of this Agreement under such rules as the Board of Directors of the Company may establish. Any decision made or action taken by the Company, the Board of Directors, or the Compensation Committee arising out of, or in connection with, the administration, interpretation, and effect of this Agreement shall be at their absolute discretion and will be conclusive and binding on all parties. No member of the Board of Directors, Compensation Committee, or employee of the Company shall be liable for any act or action hereunder, whether of omission or commission, by the Participant or by any agent to whom duties in connection with the administration of this Agreement have been delegated in accordance with the provision of this Agreement. 9. COMPANY RELATION WITH PARTICIPANTS. Nothing in this Agreement shall confer on the Participant any right to continue as a director of the Company. 10. FORCE AND EFFECT. The various provisions of this Agreement are severable in their entirety. Any determination of invalidity or unenforceability of any one provision shall have no effect on the continuing force and effect of the remaining provisions. 11. GOVERNING LAWS. Except to the extent pre-empted under federal law, the provisions of this Agreement shall be construed, administered and enforced in accordance with the domestic internal law of the State of New York. 3 12. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties and shall not be modified or amended except in writing and duly signed by the parties. No waiver by either party of any default under this Agreement shall be deemed a waiver of any later default. IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ________, ________ NBT BANK, N.A. By_______________________________ President And by_______________________________ Vice President _______________________________ Signature of Participant ______________________________ Name of Participant (please print) 4 INTERNAL REVENUE CODE SECTION 83(b) ELECTION Taxpayer's Name: Address: _________________________________________________________________ _________________________________________________________________ Taxpayer's Social Security Number _____-___-_______ Description of property transferred: _________ Shares of restricted common stock of NBT Bancorp Inc. Date(s) of property transfer ______________________________________________ Calendar year for which the election is being made: _______________________ Nature of the restriction to which the property is subject: THE COMMON STOCK WILL BECOME FULLY VESTED AFTER THREE YEARS, WITH ONE-THIRD OF THE SHARES VESTING AT THE END OF YEARS ONE, TWO AND THREE. TERMINATION OF EMPLOYMENT WITH NBT BANK, N.A. PRIOR TO THE COMPLETION OF THE THREE-YEAR TERM WILL RESULT IN FORFEITURE OF THE RESTRICTED STOCK. Amount paid for the property: NONE Fair market value of the property at the time of transfer as determined without regard to any lapse restrictions $___________ per share of NBT Bancorp Inc. stock I hereby certify that a copy of this election has been furnished to NBT Bank, N.A. and NBT Bancorp Inc. ______________________________ Signature of Taxpayer ______________________________ Date 5 BENEFICIARY DESIGNATION I direct that all amounts payable at my death under the terms of a certain NBT Bank, N.A. Agreement for Deferral of Receipt of Compensation be paid as provided below. As used below "survive me" means "survive me by more than 30 days." (Fill in the blank(s) of only one of the following) 1. To ______________________, if such person survives me, otherwise in equal shares to my children who survive me; but if any child of mine does not survive me and leaves a child or children, then such child's share equally to his or her children, who survive me. At this time, my children are ____________________________________________________________. 2. To my children who survive me in equal shares but if any child of mine does not survive me and leaves a child or children, then such child's share equally to his or her children who survive me. At this time my children are__________________________________________________________ _______________________________________. 3. To ______________________, trustee (or any successor trustee) of a trust agreement of which I am the grantor dated ______________________________. 4. To:____________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ ________________________ DATED this ________ day of ___________________________. _______________________________ Signature of Participant ___________________________ Name of Participant (please print) 6 EXHIBIT 10.55 Restricted Stock Agreement Between NBT Bank, National Association and Daryl R. Forsythe RESTRICTED STOCK AGREEMENT BETWEEN NBT BANK, N.A. AND DARYL R. FORSYTHE AGREEMENT made as of January 1, 1997 by and between NBT Bank, N.A. ("Company") and DARYL R. FORSYTHE ("Participant"): WHEREAS, the Company maintains the 1996 Executive Incentive Compensation Plan (EICP), and the NBT Bank, N.A. Agreement for Deferral of Receipt of Compensation ("Deferral Agreement") under which the Participant is entitled to receive Company stock subject to the conditions specified in the Deferral Agreement; THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed as follows: 1. AWARD OF SHARES. Under the terms of the Deferral Agreement, the Company has awarded the Participant a restricted stock award on ____________, 19___ ("Award Date"), covering ________ shares of NBT Bancorp Inc. Common Stock, with a fair market value on such date equal to 25% of the deferred amount under the Deferral Agreement, subject to the terms, conditions and restrictions set forth in this Agreement. 2. AWARD RESTRICTIONS. The shares covered by restricted stock award shall vest in accordance with the schedule set forth below: Full Years Elapsed from Award Date Percent Vested 3 33% 4 66% 5 100% Upon the vesting of any part of the restricted stock award by virtue of the lapse of the restriction period set forth above or under Section 4 of this Agreement, the Company shall cause a stock certificate covering the requisite number of shares in the name of the Participant or beneficiary(ies) to be distributed within 30 days after vesting. Upon receipt of such stock certificate(s), the Participant or beneficiary(ies) are free to hold or dispose of such certificate at will. During the restriction period, the shares covered by the restricted stock award not already vested are not transferable by the Participant by means of sale, assignment, exchange, pledge, or otherwise. However, the restriction period will lapse upon a change of ownership control within the meaning of Internal Revenue Code Section 368(c) of Company or NBT Bancorp Inc. The 1 lapse of the restriction period will cause the restricted stock award to be fully vested. To the extent that such vesting, combined with any other payment, will cause taxation under Internal Revenue Code Section 280G (a parachute payment), the total amount of payment will be reduced to avoid such tax. 3. STOCK CERTIFICATES. The stock certificate(s) evidencing the restricted stock award shall be registered in the name of the Participant as of the Award Date. Physical possession or custody of such stock certificate(s) shall be retained by the Company until such time as the shares are vested (i.e. the restriction period lapses). The Company reserves the right to place a legend on the stock certificate(s) restricting the transferability of such certificate(s). During the restriction period, except as otherwise provided in Section 2 of this Agreement, the Participant shall be entitled to all rights of a stockholder of the Company, including the right to vote the shares and receive cash dividends. Pursuant to the Deferral Agreement, at the election of the Participant, cash dividends are payable to the Participant at declaration or may be deferred. Stock dividends declared by the Company will be characterized as restricted stock, and distributed with the principle restricted stock. 4. EMPLOYMENT. If the Participant terminates employment with the Company due to death or total permanent disability during the restriction period, the restricted stock award, to the extent not already vested, shall vest in full as of the date of such termination. Disability eligibility will be determined at the discretion of the Board of Directors. Termination of the Participant's employment with the Company for any other reason shall result in forfeiture of the restricted stock award on the date of termination to the extent not already vested. The Participant may designate a beneficiary(ies) to receive the stock certificate representing that portion of the restricted stock award automatically vested upon death. The Participant has the right to change such beneficiary designation at will. 5. DUTY TO NOTIFY. It is the Participant's duty to notify the Company in the event an Internal Revenue Code Section 83(b) election is made in the year of the award. 6. WITHHOLDING TAXES. The Company shall have the right to retain and withhold from any payment under the restricted stock awarded the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such payment. At its discretion, the Company may require a Participant receiving shares of Common Stock under a restricted stock award to reimburse the Company for any such taxes required to be withheld by the Company and withhold any distribution in whole or in part until the Company is so reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due or to become due from the Company to the Participant an amount equal to such taxes required to be withheld by the Company to reimburse the Company for any such taxes or retain and withhold a number of shares having a market value not less than the amount of such taxes 2 and cancel (in whole or in part) any such shares so withheld in order to reimburse the Company for any such taxes. 7. IMPACT ON OTHER BENEFITS. The value of the restricted stock award (either on the Award Date or at the time the shares are vested) shall not be includable as compensation or earnings for purposes of any other benefit plan offered by the Company. 8. ADMINISTRATION. The Compensation Committee shall have full authority and discretion (subject only to the express provisions of the Deferral Agreement), to decide all matters relating to the administration and interpretation of the Deferral Agreement and this Agreement. The Compensation Committee shall have full power and authority to pass and decide upon cases in conformity with the objectives of this Agreement under such rules as the Board of Directors of the Company may establish. Any decision made or action taken by the Company, the Board of Directors, or the Compensation Committee arising out of, or in connection with, the administration, interpretation, and effect of this Agreement shall be at their absolute discretion and will be conclusive and binding on all parties. No member of the Board of Directors, Compensation Committee, or employee of the Company shall be liable for any act or action hereunder, whether of omission or commission, by the Participant or by any agent to whom duties in connection with the administration of this Agreement have been delegated in accordance with the provision of this Agreement. 9. EMPLOYER RELATION WITH PARTICIPANTS. Nothing in the Deferral Agreement or this Agreement shall confer on the Participant any right to continue in the employ of the Company or in any way affect the Company's right to terminate the Participant's employment without prior notice at any time for any or no reason. 10. AMENDMENT. This Agreement shall be subject to the terms of the Deferral Agreement as amended except that the restricted stock award that is the subject to this agreement may not in any way be restricted or limited by any Deferral Agreement amendment or termination approved after the date of the award without the Participant's written consent. 11. FORCE AND EFFECT. The various provisions of this Agreement are severable in their entirety. Any determination of invalidity or unenforceability of any one provision shall have no effect on the continuing force and effect of the remaining provisions. 3 12. GOVERNING LAWS. Except to the extent pre-empted under federal law, the provisions of this Agreement shall be construed, administered and enforced in accordance with the domestic internal law of the State of New York. 13. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties and shall not be modified or amended except in writing and duly signed by the parties. No waiver by either party of any default under this Agreement shall be deemed a waiver of any later default. IN WITNESS WHEREOF, the parties have executed this Agreement on this 28th day of January, 1997. NBT BANK, N.A. By /s/ Joe C. Minor _______________________________ S. Vice President, CFO And by_______________________________ Vice President /s/ Daryl R. Forsythe ------------------------------- Signature of Participant DARYL R. FORSYTHE ------------------------------- Name of Participant (please print) 4 INTERNAL REVENUE CODE SECTION 83(B) ELECTION Taxpayer's Name: Daryl R. Forsythe Address: _________________________________________________________________ _________________________________________________________________ Taxpayer's Social Security Number _____-___-_______ Description of property transferred: _________ Shares of restricted common stock of NBT Bancorp Inc. Date(s) of property transfer ________________________________________________ Calendar year for which the election is being made: _________________________ NATURE OF THE RESTRICTION TO WHICH THE PROPERTY IS SUBJECT: THE COMMON STOCK WILL BECOME FULLY VESTED AFTER FIVE YEARS, WITH ONE-THIRD OF THE SHARES VESTING AT THE END OF YEARS THREE, FOUR AND FIVE. TERMINATION OF EMPLOYMENT WITH NBT BANK, N.A. PRIOR TO THE COMPLETION OF THE FIVE-YEAR TERM WILL RESULT IN FORFEITURE OF THE RESTRICTED STOCK. Amount paid for the property: NONE Fair market value of the property at the time of transfer as determined without regard to any lapse restrictions $___________ per share of NBT Bancorp Inc. stock I hereby certify that a copy of this election has been furnished to NBT Bank, N.A. and NBT Bancorp Inc. ______________________________ Signature of Taxpayer ______________________________ Date 5 BENEFICIARY DESIGNATION I direct that all amounts payable at my death under the terms of a certain NBT Bank, N.A. Agreement for Deferral of Receipt of Compensation be paid as provided below. As used below "survive me" means "survive me by more than 30 days." (Fill in the blank(s) of only one of the following) 1. To ______________________, if such person survives me, otherwise in equal shares to my children who survive me; but if any child of mine does not survive me and leaves a child or children, then such child's share equally to his or her children, who survive me. At this time, my children are ____________________________________________________________. 2. To my children who survive me in equal shares but if any child of mine does not survive me and leaves a child or children, then such child's share equally to his or her children who survive me. At this time my children are__________________________________________________________ _______________________________________. 3. To ______________________, trustee (or any successor trustee) of a trust agreement of which I am the grantor dated ______________________________. 4. To:__________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________________ DATED this ________ day of ___________________________. _______________________________ Signature of Participant ___________________________ Name of Participant (please print) EXHIBIT 21 List of Subsidiaries of the Registrant SUBSIDIARIES OF THE REGISTRANT NBT BANCORP INC. has one subsidiary, which is wholly owned: NBT Bank, National Association 52 South Broad Street Norwich, New York 13815 Telephone: (607) 337-6000 E.I.N. 15-0395735 EXHIBIT 23 Consent of KPMG Peat Marwick LLP INDEPENDENT AUDITORS' CONSENT The Board of Directors NBT Bancorp Inc.: We consent to incorporation by reference in the registration statements on Form S-3 (File No. 33-12247) and Form S-8 (File Nos. 33-18976, 33-77410 and 333-02925) of NBT Bancorp Inc. of our report dated January 17, 1997, relating to the consolidated balance sheets of NBT Bancorp Inc. and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report has been included herein. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Syracuse, New York March 6, 1997 EXHIBIT 27 Financial Data Schedule
 

9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NBT BANCORP INC'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS DEC-31-1996 DEC-31-1996 33,678 2,112 0 0 369,202 42,239 42,238 654,593 10,473 1,138,986 916,319 88,244 7,964 20,195 0 0 8,838 97,426 1,138,986 57,660 26,636 91 84,387 31,942 36,365 48,022 3,175 1,179 34,422 19,287 12,179 0 0 12,179 1.43 1.43 4.69 3,320 1,051 0 30,748 9,120 2,778 956 10,473 7,036 0 3,437