SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1268674
(State 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
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 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 October 31, 1998, there were 11,903,254 shares outstanding of the
Registrant's common stock, No Par, Stated Value $1.00. There were no shares of
the Registrant's preferred stock, No Par, Stated Value $1.00, outstanding at
that date.
An index to exhibits follows the signature page of this FORM 10-Q.
NBT BANCORP INC.
FORM 10-Q--Quarter Ended September 30, 1998
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1998, December 31,
1997 (Audited), and September 30, 1997
Consolidated Statements of Income for the three month and nine
month periods ended September 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the nine month
periods ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1998 and 1997
Consolidated Statements of Comprehensive Income for the three month
and nine month periods ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements at September 30, 1998
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Information called for by Item 3 is contained in the Liquidity and
Interest Rate Sensitivity Management section of the Management
Discussion and Analysis.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
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NBT BANCORP INC. AND SUBSIDIARY SEPTEMBER 30, December 31, September 30,
CONSOLIDATED BALANCE SHEETS 1998 1997 1997
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(in thousands, except share data) (UNAUDITED) (See Notes) (Unaudited)
ASSETS
Cash $ 47,703 $ 37,446 $ 41,112
Federal funds sold and securities
purchased under agreements to resell - - 15,488
Loans held for sale 2,854 3,286 3,335
Securities available for sale, at fair value 392,982 440,632 440,695
Securities held to maturity (fair value-$36,203,
$36,139 and $33,625) 36,203 36,139 33,626
Loans:
Commercial and agricultural 366,938 326,491 315,405
Real estate mortgage 153,905 135,475 128,863
Consumer 276,761 273,516 272,570
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Total loans 797,604 735,482 716,838
Less allowance for loan losses 12,611 11,582 11,438
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Net loans 784,993 723,900 705,400
Premises and equipment, net 20,417 18,761 17,603
Intangible assets, net 7,825 8,642 8,942
Other assets 9,966 11,779 16,130
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TOTAL ASSETS $1,302,943 $1,280,585 $1,282,331
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 142,383 $ 138,985 $ 127,054
Savings, NOW, and money market 385,872 358,366 371,931
Time 504,852 516,832 495,866
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Total deposits 1,033,107 1,014,183 994,851
Short-term borrowings 120,215 134,527 158,762
Other borrowings 10,174 183 186
Other liabilities 6,941 8,349 9,658
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Total liabilities 1,170,437 1,157,242 1,163,457
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-15,000,000; issued 12,425,758,
12,573,281 and 12,603,450 12,426 9,430 9,002
Capital surplus 97,165 96,494 85,531
Retained earnings 28,152 22,249 31,377
Accumulated other comprehensive income 5,285 2,373 754
Common stock in treasury at cost, 501,249,
415,871 and 449,744 shares (10,522) (7,203) (7,790)
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Total stockholders' equity 132,506 123,343 118,874
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,302,943 $1,280,585 $1,282,331
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See notes to consolidated financial statements.
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Three months ended Nine months ended
NBT BANCORP INC. AND SUBSIDIARY September 30, September 30,
CONSOLIDATED STATEMENTS OF INCOME 1998 1997 1998 1997
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(in thousands, except share and per share data) (Unaudited)
Interest and fee income:
Loans and loans held for sale $18,100 $16,599 $52,701 $47,741
Securities - taxable 6,966 7,798 22,233 21,932
Securities - tax exempt 281 244 836 917
Other 101 207 210 300
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Total interest and fee income 25,448 24,848 75,980 70,890
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Interest expense:
Deposits 9,344 8,735 28,423 25,880
Short-term borrowings 1,405 2,207 4,525 4,708
Other borrowings 136 133 326 705
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Total interest expense 10,885 11,075 33,274 31,293
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Net interest income 14,563 13,773 42,706 39,597
Provision for loan losses 1,300 965 3,550 2,680
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Net interest income after provision for loan losses 13,263 12,808 39,156 36,917
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Noninterest income:
Trust income 803 687 2,407 2,060
Service charges on deposit accounts 956 926 2,725 2,763
Securities gains (losses) 168 (90) 613 (72)
Other income 594 457 1,883 1,520
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Total noninterest income 2,521 1,980 7,628 6,271
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Noninterest expense:
Salaries and employee benefits 4,920 4,556 14,214 13,154
Occupancy 656 584 2,037 1,892
Equipment 668 435 1,728 1,279
Amortization of intangible assets 255 314 817 1,051
Other operating 3,208 3,015 9,852 8,353
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Total noninterest expense 9,707 8,904 28,648 25,729
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Income before income taxes 6,077 5,884 18,136 17,459
Income taxes 1,346 2,182 3,623 6,275
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NET INCOME $ 4,731 $ 3,702 $14,513 $11,184
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Earnings Per Share:
Basic $ 0.40 $ 0.31 $ 1.21 $ 0.94
Diluted $ 0.38 $ 0.31 $ 1.18 $ 0.93
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See notes to consolidated financial statements.
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NBT BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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Accumulated
Other
Common Capital Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
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(in thousands, except share and per share data) (Unaudited)
BALANCE AT DECEMBER 31, 1996 $ 8,838 $82,731 $24,208 $(1,529) $ (7,984) $106,264
Net income 11,184 11,184
Cash dividends - $0.366 per share (4,015) (4,015)
Issuance of 164,030 shares
to stock plan 164 2,476 2,640
Purchase of 131,900 treasury shares (2,569) (2,569)
Sale of 163,605 treasury shares to
employee benefit plans and other
stock plans 324 2,763 3,087
Unrealized gain on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $1,577 2,283 2,283
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BALANCE AT SEPTEMBER 30, 1997 $ 9,002 $85,531 $31,377 $ 754 $ (7,790) $118,874
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BALANCE AT DECEMBER 31, 1997 $ 9,430 $96,494 $22,249 $ 2,373 $ (7,203) $123,343
Net income 14,513 14,513
Cash dividends - $0.468 per share (5,603) (5,603)
Effect of 4 for 3 split in the
form of a stock dividend 2,996 (2,996)
Payment in lieu of fractional shares (11) (11)
Purchase of 214,700 treasury shares (5,791) (5,791)
Sale of 129,322 treasury shares to
employee benefit plans and other
stock plans 671 2,472 3,143
Unrealized gain on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $2,011 2,912 2,912
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BALANCE AT SEPTEMBER 30, 1998 $12,426 $97,165 $28,152 $ 5,285 $(10,522) $132,506
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See notes to consolidated financial statements.
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NBT BANCORP INC. AND SUBSIDIARY Nine Months Ended September 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1998 1997
- -------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 14,513 $ 11,184
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,550 2,680
Depreciation and amortization of premises and equipment 1,514 1,064
Amortization of premiums and accretion of discounts on securities (1,437) 96
Amortization of intangible assets 817 1,051
Proceeds from sales of loans originated for sale 3,219 3,559
Loans originated for sale (2,787) (2,759)
Realized (gains) losses on sales of securities (613) 72
(Increase) decrease in interest receivable 37 (105)
Increase in interest payable 62 617
Gain on sale of branch, net - (219)
Other, net (919) 692
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Net cash provided by operating activities 17,956 17,932
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 53,806 28,787
Proceeds from sales 110,256 144,591
Purchases (110,052) (241,105)
Securities held to maturity:
Proceeds from maturities 16,886 22,037
Purchases (16,950) (13,425)
Net (increase) in loans (65,546) (64,920)
Purchase of premises and equipment, net (3,170) (2,360)
Proceeds from sales of other real estate owned 813 1,195
Gain on sale of other real estate owned, net (83) (106)
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Net cash used in investing activities (14,040) (125,306)
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FINANCING ACTIVITIES:
Net increase in deposits 18,924 78,532
Net increase (decrease) in short-term borrowings (14,312) 70,518
Proceeds from issuance of other borrowings 10,000 -
Repayments of other borrowings (9) (20,009)
Proceeds from issuance of treasury shares to employee benefit
plans and other stock plans 3,143 5,727
Purchase of treasury stock (5,791) (2,569)
Cash dividends and payment for fractional shares (5,614) (4,015)
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Net cash provided by financing activities 6,341 128,184
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Net increase in cash and cash equivalents 10,257 20,810
Cash and cash equivalents at beginning of year 37,446 35,790
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 47,703 $ 56,600
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 33,212 $ 30,676
Income taxes 5,211 3,661
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See notes to consolidated financial statements.
-6-
Three months ended Nine months ended
NBT BANCORP INC. AND SUBSIDIARY September 30, September 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Net Income $4,731 $3,702 $14,513 $11,184
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Other comprehensive income, net of tax:
Unrealized net holding gains arising during
period [pre-tax amounts of
$5,054, $3,887, $5,536 and $3,788] 2,984 2,299 3,275 2,241
Less: Reclassification adjustment for net (gains)
losses included in net income [pre-tax amounts
of ($168), $90, ($613) and $72] (99) 53 (363) 42
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Total other comprehensive income 2,885 2,352 2,912 2,283
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Comprehensive income $7,616 $6,054 $17,425 $13,467
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-7-
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of NBT Bancorp Inc. (the Registrant) and its wholly-owned
subsidiary, NBT Bank, N. A. (Bank). All intercompany transactions have been
eliminated in consolidation. Certain amounts previously reported in the
financial statements have been reclassified to conform with the current
presentation.
The determination of the allowance for loan losses is a material estimate
that is particularly susceptible to significant change in the near term. In
connection with the determination of the allowance for loan losses, management
obtains independent appraisals for significant properties.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. All
share and per share data has been adjusted retroactively for stock dividends and
splits.
The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date. The accompanying unaudited interim
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to FORM 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Registrant's annual report on
FORM 10-K for the year ended December 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Effective January 1, 1998 the Company adopted the remaining provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which relate to the accounting for securities lending, repurchase agreements,
and other secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, did not have a material impact on the Company.
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for the
reporting and display of comprehensive income and its components. Comprehensive
income includes the reported net income adjusted for items that are currently
accounted for as direct entries to equity, such as the mark to market adjustment
on securities available for sale, foreign currency items and minimum pension
liability adjustments. At the Company, comprehensive income represents net
income plus other comprehensive income, which consists of the net change in
unrealized gains or losses on securities available for sale for the period.
Accumulated other comprehensive income represents the net unrealized gains or
losses on securities available for sale as of the balance sheet dates.
In June 1997, SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" was issued requiring public business enterprises to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operating decision makers. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to amounts reported in
the financial statements would be provided. Management will determine the impact
of this statement prior to its initial application on December 31, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other post retirement benefit plans. It
does not change the measurement or recognition of these plans. The Company
adopted SFAS No. 132 on January 1, 1998 and has determined its impact to be
revised year-end reporting requirements for pension and post retirement
benefits.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes comprehensive
accounting and reporting requirements for derivative instruments and hedging
-8-
activities. SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. The accounting for gains
or losses resulting from changes in the values of those derivatives would be
dependent on the use of the derivative and the type of risk being hedged. The
statement is effective for all quarters of fiscal years beginning after June 15,
1999. At the present time, the Company has not fully analyzed the effect or
timing of the adoption of SFAS No. 133 on the Company's consolidated financial
statements.
-9-
NBT BANCORP INC. AND SUBSIDIARY
ITEM 2 -- 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. Reference should be made to the Company's consolidated financial
statements and footnotes thereto included in this FORM 10-Q as well as to the
Company's 1997 FORM 10-K for an understanding of the following discussion and
analysis. The Company has a long history of distributing stock dividends; in
December 1997, a 5% stock dividend was distributed for the thirty-eighth
consecutive year. In addition, on June 15, 1998 the Company distributed a
four-for-three stock split effected in the form of a dividend. Throughout this
discussion and analysis, amounts per common share have been adjusted
retroactively for stock dividends and splits for purposes of comparability.
On October 27, 1998, Bancorp announced the declaration of a 5% stock
dividend and a regular quarterly cash dividend of $0.17 per share. The stock and
cash dividends will be paid on December 15, 1998 to shareholders of record as of
December 1, 1998. The cash dividend will be paid on the increased number of
shares. Amounts per common share have not been adjusted for the prospective
December 15, 1998 stock dividend. The adjustment for purposes of comparability
will occur after the payment date.
In July of 1998, the Company announced the formation of a venture capital
subsidiary, NBT Capital Corp. The venture capital subsidiary, licensed as a
Small Business Investment Company by the U. S. Small Business Administration,
will seek opportunities to make capital investments in growing businesses in the
Company's market area.
Certain statements in this release and other public releases by the Company
contain forward-looking information, as defined in the Private Securities
Litigation Reform Act. These statements may be identified by the use of phrases
such as "anticipate," "believe," "expect," "forecasts," "projects," or other
similar terms. Actual results may differ materially from these statements since
such statements involve significant known and unknown rules and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) an increase in competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3) changes in the
regulatory environment; (4) general economic environment conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality; (5) changes may incur in
business conditions and inflation; and (6) unforeseen risks associated with the
Year 2000 issue.
YEAR 2000
The Year 2000 issue presents a number of difficult challenges to the Company.
Information systems are often complex and have been developed over many years
through a variety of computer languages and hardware platforms. The Year 2000
issue refers to the programming of existing software applications using a two
digit year field. This coding presents a potential problem when the year begins
with "20", instead of "19". Computers may interpret the year as 1900 instead of
2000, creating possible system failure or miscalculation of financial data.
A committee continues to direct the Company's Year 2000 activities under
the framework of the FFIEC's Five-Step Program. The FFIEC's Five-Step Program
includes the following phases: Awareness, Assessment, Renovation, Validation and
Implementation. The Awareness Phase, 100% complete, defines the Year 2000
problem and gains executive level support for the necessary resources to prepare
the Company for Year 2000 compliance. The Assessment Phase, 100% complete,
assesses the size and complexity of the problem and details the magnitude of the
effort necessary to address the Year 2000 issues. Although the Awareness and
Assessment Phases are complete, the Company will continue to evaluate any new
issues as they arise. The Renovation Phase, 75% complete, includes code
enhancements, hardware and software updates, system replacements, vendor
certification, and other associated changes. The Renovation Phase is scheduled
to be complete by December 31, 1998. The Validation Phase, 15% complete,
includes the testing of incremental changes to hardware and software components.
The Validation Phase is scheduled to be substantially complete by March 31,
1999. The Implementation Phase, 15% complete, certifies that systems are Year
2000 compliant and be accepted by the end users. The Implementation Phase is
scheduled to be substantially complete by March 31, 1999. The Company has been
addressing Informational Technology (IT) and non IT systems. The Company has
categorized all systems as mission critical, high, medium or low priority with
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respect to its ability to influence business functions. The Company has
completed the development of test and validation methodologies for its IT
systems. Testing of applications has begun and is scheduled to be substantially
complete during the first quarter of 1999. In some cases, the Company will rely
on the service providers and software vendors to facilitate proxy testing with a
selected group of users. The Company will review the test plans and validate the
results of the proxy testing to ensure the Year 2000 compliance of those
systems. To ensure compliance of non IT systems where testing is not possible,
the Company has contacted the manufacturers and suppliers for Year 2000
certification. Based on responses from manufacturers and suppliers of non IT
systems, the Company does not anticipate incurring any material expenses due to
unpreparedness of the non IT systems.
The Company has identified material third party relationships to minimize
the potential loss from unpreparedness of these parties. The Company continues
to work closely with Fiserv, its data services and items processing provider,
regarding Year 2000 compliance. The Company is in the process of testing its
trust accounting system to ensure Year 2000 compliance. The testing and
validation of this system is expected to be substantially complete by December
31, 1998. In addition, the trust department is following the FFIEC's Year 2000
Fiduciary Service Guidance. The fiduciary review includes the following steps:
account and asset administration, third party risk, counter party risk, transfer
agent risk, and client disclosure. A Year 2000 compliance review is being
conducted on those companies in which significant trust assets are invested. The
trust account review process has been modified to include specific Year 2000
issues. Third party and counter party fiduciary risk is being addressed by
communicating with various vendors and service providers to ascertain their Year
2000 compliance. All customers and beneficiaries of the trust department have
been contacted regarding the Company's efforts to identify and reduce Year 2000
risk. The Company has evaluated the Year 2000 readiness of its major borrowers
and fund providers to assess their readiness and identify potential problems.
The Company has assessed the preparedness of its 75 largest commercial
borrowers, as well as 25 random commercial borrowers. These borrowers were
evaluated and rated as low, medium or high risk. For the medium and high risk
customers, an action plan for compliance has been developed, up to and including
credit risk downgrades and requests for additional collateral. The Company has
also assessed the preparedness of its 60 largest deposit account relationships,
as well as 45 random depositors. The providers were also evaluated and rated as
high, medium or low risk. The Company has scheduled follow up with the high risk
and material fund providers to ensure they are taking necessary steps to become
Year 2000 compliant. The Company also completed an assessment of its other
material funding sources and counter parties, with no high risk relationships
being identified. In addition, the Company is in the process of modifying its
liquidity crisis plan to minimize funding risk due to the Year 2000 issue.
As of September 30, 1998 the Company has incurred approximately $85,000 in
expenses directly related to the Year 2000 issue. In addition, the Company
forecasts spending approximately $365,000 by December 31,1999 to ensure Year
2000 readiness. These amounts include the cost of additional hardware and
software, as well as technology consultants contracted to assist in the
preparation for the Year 2000; however, they do not include a valuation for the
considerable time employees spent on Year 2000 preparedness. The Company has
included the cost of the Year 2000 issue in its 1999 annual budget. Due to the
uniqueness of the Year 2000 issue, it is difficult to quantify the potential
loss in revenue. Based on efforts to ensure systems will function properly, the
Company believes is reasonably likely that no material loss in revenue will
occur. The Company believes that its reasonably likely worst case Year 2000
scenario is a material increase in credit losses due to Year 2000 problems of
the Company's borrowers, as well as disruption in financial markets causing
liquidity stress. As previously mentioned, the Company has attempted to minimize
these risks by identifying the material borrowers and fund providers and
assessing their progress toward Year 2000 compliance.
The Company is currently developing a business resumption contingency plan
to help ensure continued operations in the event of Year 2000 system failures.
This contingency plan will be consistent with the Company's disaster recovery
plan with modifications for Year 2000 risks. The business resumption contingency
plan is scheduled to be complete by December 31, 1998.
OVERVIEW
Net income of $4.7 million ($0.38 diluted earnings per share) was recognized in
the third quarter of 1998, representing a 27.8% increase from third quarter 1997
net income of $3.7 million ($0.31 diluted earnings per share). Contributing to
the increase in net income were increases in net interest and noninterest
income, partially offset by an increase in noninterest expense. The increase in
net interest income was a result of an increase in average earning assets, as
the loan portfolio continues to expand. Also contributing to the increase in net
income for the third quarter of 1998 was a reduction in income tax expense
arising from a corporate realignment within the Company.
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Net income of $14.5 million ($1.18 diluted earnings per share) was
recognized for the nine month period ended September 30, 1998, a 29.8% increase
from the first nine months in 1997 net income of $11.2 million ($0.93 diluted
earnings per share). The increased profitability for the nine months ended
September 30, 1998 was driven by factors similar to those of third quarter 1998.
Table 1 depicts several measurements of performance on an annualized basis.
Returns on average assets and equity measure how effectively an entity utilizes
its total resources and capital, respectively. Both the return on average assets
and the return on average equity ratios increased for the nine month period
ended September 30, 1998 compared to the same period a year previous.
Net interest margin, net federal taxable equivalent (FTE) interest income
divided by average interest-earning assets, is a measure of an entity's ability
to utilize its earning assets in relation to the interest cost of funding.
Taxable equivalency adjusts income by increasing tax exempt income to a level
that is comparable to taxable income before taxes are applied.
TABLE 1
PERFORMANCE MEASUREMENTS
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First Second THIRD NINE Fourth Twelve
Quarter Quarter QUARTER MONTHS Quarter Months
- --------------------------------------------------------------------------------------------------
1998
Return on average assets 1.60% 1.47% 1.46% 1.51%
Return on average equity 16.49% 14.92% 14.54% 15.30%
Net interest margin 4.75% 4.68% 4.79% 4.74%
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1997
Return on average assets 1.19% 1.33% 1.17% 1.23% 1.11% 1.20%
Return on average equity 12.82% 14.78% 12.74% 13.43% 11.71% 12.97%
Net interest margin 4.71% 4.65% 4.64% 4.66% 4.68% 4.67%
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NET INTEREST INCOME
Net interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest bearing
liabilities, primarily deposits and borrowings. Net interest income is effected
by the interest rate spread, the difference between the yield on earning assets
and cost of interest bearing liabilities, as well as the volumes of such assets
and liabilities. Table 2 represents an analysis of net interest income on a
federal taxable equivalent basis.
Federal taxable equivalent (FTE) net interest income increased $0.8 million
for the third quarter of 1998 compared to the same period of 1997. This increase
was primarily a result of the $30.6 million increase in average earning assets,
less the $4.3 million increase in average interest bearing liabilities.
Total FTE interest income increased $0.6 million over third quarter 1997.
This increase is also a result of the increase in average earning assets. The
yield on average earning assets was comparable between the reporting periods.
During the same time period, total interest expense decreased $0.2 million. This
decrease is a result of a reduction in the cost of interest bearing liabilities
by 9 basis points (0.09%), primarily the result of lower short-term borrowing
costs.
For the first nine months of 1998, FTE net interest income increased $3.1
million over the comparable period of 1997. This increase was primarily the
result of the $67.9 million increase in average earning assets, less a $41.9
million increase in interest bearing liabilities.
Another important performance measurement of net interest income is the net
interest margin. The net interest margin increased to 4.74% for the first nine
months of 1998, up from 4.66% for the comparable period in 1997. The increase in
net interest margin is a function of the increased funding of earning assets
from noninterest bearing sources.
-12-
TABLE 2
COMPARATIVE ANALYSIS OF FEDERAL TAXABLE EQUIVALENT NET INTEREST INCOME
- ----------------------------------------------------------------------------------------------------
Three months ended September 30,
Annualized
Yield/Rate Amounts Variance
- ----------------------------------------------------------------------------------------------------
1998 1997 (dollars in thousands) 1998 1997 TOTAL VOLUME RATE
- ---- ---- ---- ---- ----- ------ ----
5.73% 4.69% Interest bearing deposits $ 2 $ 1 $ 1 $ - $ 1
Federal funds sold and securities
3.90% 5.16% purchased under agreements to resell 25 186 (161) (124) (37)
5.32% 5.50% Other short-term investments 74 20 54 55 (1)
6.82% 6.93% Securities available for sale 6,737 7,581 (844) (723) (121)
9.51% 7.89% Loans held for sale 61 57 4 (7) 11
Securities held to maturity:
7.76% 7.03% Taxable 251 242 9 (15) 24
6.81% 7.36% Tax exempt 410 347 63 90 (27)
9.15% 9.31% LOANS 18,088 16,598 1,490 1,763 (273)
-------------------------------------------------------------------------------------
8.32% 8.33% Total interest income 25,648 25,032 616 1,039 (423)
2.90% 2.91% Money Market Deposit Accounts 601 647 (46) (44) (2)
1.55% 1.61% NOW accounts 510 483 27 44 (17)
2.72% 2.81% Savings accounts 1,086 1,115 (29) 9 (38)
5.42% 5.37% Certificates of deposit 7,147 6,490 657 590 67
5.17% 5.65% Short-term borrowings 1,405 2,207 (802) (627) (175)
5.31% 6.25% OTHER BORROWINGS 136 133 3 25 (22)
-------------------------------------------------------------------------------------
4.27% 4.36% TOTAL INTEREST EXPENSE 10,885 11,075 (190) (3) (187)
-------------------------------------------------------------------------------------
Net interest income $14,763 $13,957 $ 806 $1,042 $ (236)
====================================================================================
4.05% 3.97% Interest rate spread
===== ===== ====================
4.79% 4.64% Net interest margin
===== ===== ===================
FTE adjustment $ 200 $ 184
============== ======= =======
Nine Months Ended September 30,
Annualized
Yield/Rate Amounts Variance
- ----------------------------------------------------------------------------------------------------
1998 1997 (dollars in thousands) 1998 1997 TOTAL VOLUME RATE
- ---- ---- ---- ---- ----- ------ ----
5.33% 4.52% Interest bearing deposits $ 5 $ 4 $ 1 $ (1) $ 2
Federal funds sold and securities
3.91% 5.17% purchased under agreements to resell 31 192 (161) (123) (38)
5.36% 5.28% Other short-term investments 174 104 70 69 1
6.95% 6.81% Securities available for sale 21,542 21,330 212 (230) 442
8.58% 8.30% Loans held for sale 205 231 (26) (34) 8
Securities held to maturity:
7.72% 6.92% Taxable 758 670 88 10 78
7.01% 6.79% Tax exempt 1,219 1,339 (120) (162) 42
9.23% 9.32% LOANS 52,654 47,678 4,976 5,396 (420)
-------------------------------------------------------------------------------------
8.38% 8.29% Total interest income 76,588 71,548 5,040 4,925 115
2.90% 2.92% Money Market Deposit Accounts 1,846 2,020 (174) (161) (13)
1.63% 1.62% NOW accounts 1,544 1,424 120 112 8
2.79% 2.83% Savings accounts 3,239 3,294 (55) (14) (41)
5.44% 5.29% Certificates of deposit 21,794 19,142 2,652 2,100 552
5.43% 5.50% Short-term borrowings 4,525 4,708 (183) (125) (58)
5.32% 5.80% OTHER BORROWINGS 326 705 (379) (324) (55)
-------------------------------------------------------------------------------------
4.35% 4.27% TOTAL INTEREST EXPENSE 33,274 31,293 1,981 1,588 393
------------------------------------------------------------------------------------
Net interest income $43,314 $40,255 $3,059 $3,337 $(278)
=====================================================================================
4.03% 4.02% Interest rate spread
===== ===== ====================
4.74% 4.66% Net interest margin
===== ===== ===================
FTE adjustment $ 608 $ 658
============== ======= =======
-13-
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance established to provide
for the estimated losses related to the collection of the Company's loan
portfolio. The allowance is maintained at a level considered adequate to provide
for loan loss exposure based on management's estimate of potential losses in the
portfolio considering an evaluation of risk, prevailing and anticipated economic
factors, and past loss experience. Management determines the provision and
allowance for loan losses based on a number of factors including a comprehensive
in-house loan review program conducted throughout the year. The loan portfolio
is continually evaluated in order to identify potential problem loans, credit
concentration, and other risk factors such as current and projected economic
conditions. The allowance for loan losses to outstanding loans at September 30,
1998 is 1.58%, compared to 1.60% at September 30, 1997. Management considers the
allowance for loan losses to be adequate based on evaluation and analysis of the
loan portfolio.
Table 3 reflects changes to the allowance for loan losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net charge-offs. Charge-offs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan losses. Net charge-offs for the third quarter of 1998 were
$0.9 million, or 0.47% of average loans, compared to $0.6 million, or 0.34% of
average loans for the same period of 1997. The rise in net charge-offs can be
attributed to the commercial portfolio, primarily the result of two customers.
Net charge-offs for the nine months ended September 30, 1998 were $2.5 million,
or 0.44% of average loans, compared to $1.7 million, or 0.34% of average loans
for the same period during the previous year. The increase in year-to-date
charge-offs can also be attributed to the commercial portfolio, primarily the
result of three customers.
TABLE 3
ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
Balance, beginning of period $12,239 $11,085 $11,582 $10,473
Recoveries 200 271 610 666
Charge-offs (1,128) (883) (3,131) (2,381)
- -----------------------------------------------------------------------------------------------------------
Net (charge-offs) (928) (612) (2,521) (1,715)
Provision for loan losses 1,300 965 3,550 2,680
- -----------------------------------------------------------------------------------------------------------
Balance, end of period $12,611 $11,438 $12,611 $11,438
- -----------------------------------------------------------------------------------------------------------
COMPOSITION OF NET (CHARGE-OFFS)
- -----------------------------------------------------------------------------------------------------------
Commercial and agricultural $ (553) 60% $ (321) 52% $(1,401) 56% $ (683) 40%
Real estate mortgage (46) 5% (30) 5% (101) 4% (37) 2%
Consumer (329) 35% (261) 43% (1,019) 40% (995) 58%
- -----------------------------------------------------------------------------------------------------------
Net (charge-offs) $ (928) 100% $ (612) 100% $(2,521) 100% $(1,715) 100%
- -----------------------------------------------------------------------------------------------------------
Annualized net charge-offs
to average loans 0.47% 0.34% 0.44% 0.34%
- -----------------------------------------------------------------------------------------------------------
Net charge-offs to average loans for the year ended
December 31, 1997 0.34%
- -----------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Table 4 below presents quarterly and year-to-date noninterest income.
Noninterest income for the third quarter of 1998, excluding security gains and
nonrecurring income, increased $0.3 million or 13.7% when compared to third
quarter of 1997. Trust income has continued its growth trend as managed assets
have steadily increased. For the nine month period ended September 30, 1998,
excluding security gains and nonrecurring income, noninterest income increased
$0.9 million or 14.5% compared to the same period during 1997. The increase in
securities gains for the quarter and year-to-date periods can be attributed to
the change in market conditions between reporting periods. The increase in other
income for the quarter and year-to-date periods can be primarily attributed to
an increase in ATM transaction income. Other income for the nine month period
ended September 30, 1997 includes a one-time gain of $0.2 million on the sale of
the Hamden branch to The National Bank of Delaware County.
-14-
TABLE 4
NONINTEREST INCOME
- ----------------------------------------------------------------------------------------------------
First Second THIRD NINE Fourth Twelve
(dollars in thousands) Quarter Quarter QUARTER MONTHS Quarter Months
- ----------------------------------------------------------------------------------------------------
1998
Trust income $ 802 $ 802 $ 803 $2,407
Service charges on deposit accounts 869 900 956 2,725
Securities gains 218 227 168 613
Other income 679 610 594 1,883
- ----------------------------------------------------------------------------------------------------
Total noninterest income $2,568 $2,539 $2,521 $7,628
- ----------------------------------------------------------------------------------------------------
1997
Trust income $ 686 $ 687 $ 687 $2,060 $ 615 $2,675
Service charges on deposit accounts 904 933 926 2,763 932 3,695
Securities gains (losses) 17 1 (90) (72) (265) (337)
Other income 413 650 457 1,520 513 2,033
- ----------------------------------------------------------------------------------------------------
Total noninterest income $2,020 $2,271 $1,980 $6,271 $1,795 $8,066
- ----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE AND OPERATING EFFICIENCY
Table 5 presents components of noninterest expense as well as selected operating
efficiency ratios. Noninterest expense for the quarter ended September 30, 1998
experienced a $0.8 million increase compared to the same period of 1997.
Noninterest expense for the nine months ended September 30, 1998 experienced a
$2.9 million increase compared to the same period of 1997.
Employee benefits for the third quarter and nine months ended September 30,
1998 increased $0.2 million and $0.7 million, respectively, compared to the same
time periods of 1997. This increase can be attributed to an increase in the
accrual for executive incentive compensation based on the current year's
performance.
Equipment expense for the third quarter and nine months ended September 30,
1998 increased $0.2 million and $0.4 million, respectively, compared to the same
time periods of 1997. This increase can be attributed to a rise in computer
depreciation expense related to the automation of the branch network computer
system.
Legal, audit, and outside services increased $1.0 million for the nine
months ended September 30, 1998 compared to the same period in 1997. The
increase can be attributed to the outsourcing of the Company's item processing
function during 1997, as well as increased professional fees associated with the
corporate realignment.
Two important operating efficiency measures that the Company closely
monitors are the efficiency and expense ratios. The efficiency ratio is computed
as total noninterest expense (excluding nonrecurring charges) divided by net
interest income plus noninterest income (excluding net security gains and losses
and nonrecurring income). The efficiency ratio increased to 56.7% in the third
quarter of 1998 from 55.6% for the same period of 1997. This increase was a
result of the increase in noninterest expense between the reporting periods. The
expense ratio is computed as total noninterest expense (excluding nonrecurring
charges) less noninterest income (excluding net security gains and losses and
nonrecurring income) divided by average assets. The expense ratio increased to
2.3% for the third quarter 1998 from 2.2% for the same period of 1997. The
increase in the expense ratio can also be attributed to the increase in
noninterest expense.
-15-
TABLE 5
NONINTEREST EXPENSE AND PRODUCTIVITY MEASUREMENTS
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) First Second THIRD NINE Fourth Twelve
1998 Quarter Quarter QUARTER MONTHS Quarter Months
- ----------------------------------------------------------------------------------------------------
Salaries and wages $3,170 $3,250 $3,359 $ 9,779
Employee benefits 1,517 1,357 1,561 4,435
Occupancy expense 686 695 656 2,037
Equipment expense 480 580 668 1,728
FDIC assessments 41 20 31 92
Legal, audit, and outside services 1,305 1,231 1,344 3,880
Loan collection and other loan
related expenses 480 628 480 1,588
Amortization of intangible assets 291 271 255 817
Other operating expense 1,432 1,507 1,353 4,292
- ----------------------------------------------------------------------------------------------------
Total noninterest expense $9,402 $9,539 $9,707 $28,648
- ----------------------------------------------------------------------------------------------------
Efficiency ratio 56.67% 57.39% 56.71% 56.92%
Expense ratio 2.23% 2.25% 2.27% 2.25%
Average full-time equivalent
employees 488 488 495 490
Average assets per average
full-time equivalent employee
(millions) $ 2.6 $ 2.6 $ 2.6 $ 2.6
- ----------------------------------------------------------------------------------------------------
1997
Salaries and wages $3,042 $3,150 $3,196 $ 9,388 $3,248 $12,636
Employee benefits 1,309 1,097 1,360 3,766 1,503 5,269
Occupancy expense 654 654 584 1,892 706 2,598
Equipment expense 436 408 435 1,279 421 1,700
FDIC assessments 28 29 30 87 29 116
Legal, audit, and outside services 930 891 1,013 2,834 1,217 4,051
Loan collection and other loan
related expenses 423 375 552 1,350 474 1,824
Amortization of intangible assets 378 359 314 1,051 300 1,351
Other operating expense 1,359 1,303 1,420 4,082 1,543 5,625
- ----------------------------------------------------------------------------------------------------
Total noninterest expense $8,559 $8,266 $8,904 $25,729 $9,441 $35,170
- ----------------------------------------------------------------------------------------------------
Efficiency ratio 57.56% 53.38% 55.56% 55.47% 57.86% 56.09%
Expense ratio 2.27% 2.05% 2.16% 2.16% 2.30% 2.20%
Average full-time equivalent
employees 498 496 495 496 488 494
Average assets per average
full-time equivalent employee
(millions) $ 2.3 $ 2.5 $ 2.5 $ 2.4 $ 2.6 $ 2.5
- ----------------------------------------------------------------------------------------------------
INCOME TAXES
Income tax expense for the third quarter of 1998 was $1.3 million, compared with
$2.2 million for the third quarter of 1997. For the first nine months of 1998,
income tax expense amounted to $3.6 million, compared with $6.3 million during
the same period of 1997. The reduction in income taxes during 1998 can be
attributed to the tax benefit resulting from a corporate realignment within the
Company.
-16-
BALANCE SHEET
The following table highlights the changes in the balance sheet. Since period
end balances can be distorted by one day fluctuations, the discussion and
analysis concentrates on average balances when appropriate to give a better
indication of balance sheet trends.
TABLE 6
AVERAGE BALANCES
- -------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 39,888 $ 47,570 $ 37,840 $ 38,631
Securities available for
sale, at fair value 396,647 432,893 418,491 415,306
Securities held to maturity 36,708 32,367 36,377 39,313
Loans held for sale 2,524 2,861 3,190 3,720
Loans 783,951 707,709 762,338 684,266
Deposits 1,031,618 965,188 1,031,842 962,543
Short-term borrowings 107,817 154,997 111,476 114,539
Other borrowings 10,176 8,449 8,201 16,235
Stockholders' equity 129,063 115,313 126,805 111,303
Assets 1,286,579 1,254,842 1,285,576 1,214,229
Earning assets 1,223,361 1,192,781 1,221,737 1,153,839
Interest bearing liabilities $1,011,954 $1,007,660 $1,021,920 $ 979,992
- -------------------------------------------------------------------------------------------------
SECURITIES
Average total securities were $31.9 million less for the third quarter of 1998
than for the same period of 1997. During the third quarter of 1998, the
securities portfolio represented 35.0% of average earning assets. Available for
sale securities are primarily U.S. Governmental agencies guaranteed securities.
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.
At September 30, 1998, the composition of the securities portfolio was 91%
available for sale and 9% held to maturity.
LOANS
Average loan volume for the three months ended September 30, 1998 was $76.2
million, or 10.8% greater than the third quarter 1997. This growth has been
present in all loan categories, with average increases in the commercial,
consumer and mortgage portfolios of $45.9 million, $5.5 million and $24.8
million, respectively, between the reporting periods.
The Company has continued to experience an increase in the demand for
commercial loans, primarily in the business and real estate categories. The
increase in consumer loans can be attributed to a rise in home equity loans,
primarily revolving lines of credit secured by the borrowers primary residence.
The Company does not engage in highly leveraged transactions or foreign lending
activities.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of nonaccrual loans and other real estate owned
(OREO). Loans are generally placed on nonaccrual when principal or interest
payments become ninety days past due, unless the loan is well secured and in the
process of collection. Loans may also be placed on nonaccrual when circumstances
indicate that the borrower may be unable to meet the contractual principal or
interest payments. OREO represents property acquired through foreclosure and is
valued at the lower of the carrying amount or fair market value, less any
estimated disposal costs.
Total nonperforming assets decreased $0.2 million, or 4.3% at September 30,
1998 compared to September 30, 1997. This reduction in nonperforming assets can
be attributed to a decline in other real estate owned. The changes in
nonperforming assets are presented in Table 7 below.
-17-
At September 30, 1998, the recorded investment in impaired loans was $3.7
million. Included in this amount is $1.1 million of impaired loans for which the
specifically allocated allowance for loan loss is $0.2 million. In addition,
included in impaired loans is $2.6 million of impaired loans that, as a result
of the adequacy of collateral values and cash flow analysis do not have a
specific reserve. At December 31, 1997, the recorded investment in impaired
loans was $4.3 million, of which $1.9 million had a specific allowance
allocation of $0.6 million and $2.4 million for which there was no specific
reserve. At September 30, 1997, the recorded investment in impaired loans was
$3.5 million, of which $0.2 million had a specific allowance allocation of $0.1
million and $3.3 million of which there was no specific reserve. The Company
classifies all commercial and small business nonaccrual loans as impaired loans.
TABLE 7
NONPERFORMING ASSETS AND RISK ELEMENTS
- -----------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in thousands) 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------
Impaired commercial and agricultural loans $3,684 75% $3,856 73% $3,531 76%
Other nonaccrual loans:
Real estate mortgage 523 11% 692 13% 444 10%
Consumer 695 14% 708 14% 649 14%
- -----------------------------------------------------------------------------------------------------------
Total nonaccrual loans 4,902 100% 5,256 100% 4,624 100%
- -----------------------------------------------------------------------------------------------------------
Other real estate owned 612 530 1,136
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets 5,514 5,786 5,760
- -----------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 261 27% 176 24% 178 18%
Real estate mortgage 303 32% 244 33% 434 44%
Consumer 390 41% 325 43% 378 38%
- -----------------------------------------------------------------------------------------------------------
Total 954 100% 745 100% 990 100%
- -----------------------------------------------------------------------------------------------------------
Total assets containing risk elements $6,468 $6,531 $6,750
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets to loans 0.69% 0.79% 0.80%
Total assets containing risk elements to loans 0.81% 0.89% 0.94%
Total nonperforming assets to assets 0.42% 0.45% 0.45%
Total assets containing risk elements to assets 0.50% 0.51% 0.53%
- -----------------------------------------------------------------------------------------------------------
TABLE 8
CHANGES IN NONACCRUAL AND IMPAIRED LOANS
- -----------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(in thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
Balance at beginning of period $5,470 $3,619 $ 5,256 $ 3,320
Loans placed on nonaccrual 1,505 2,337 5,615 5,025
Charge-offs (932) (621) (2,412) (1,503)
Payments (730) (644) (2,555) (1,689)
Transfers to OREO (397) (25) (977) (332)
Loans returned to accrual (14) (42) (25) (197)
- -----------------------------------------------------------------------------------------
Balance at end of period $4,902 $4,624 $ 4,902 $ 4,624
- -----------------------------------------------------------------------------------------
CHANGES IN OREO
- -----------------------------------------------------------------------------------------
Balance at beginning of period $ 540 $ 887 $ 530 $ 1,242
Additions 321 608 902 960
Sales (234) (306) (799) (910)
Write-downs (15) (53) (21) (156)
- -----------------------------------------------------------------------------------------
Balance at end of period $ 612 $1,136 $ 612 $ 1,136
- -----------------------------------------------------------------------------------------
-18-
DEPOSITS
Customer deposits represent the greatest source of funding assets. Average total
deposits for the quarter ended September 30, 1998, increased $66.4 million, or
6.9% from the same period in 1997. This growth has been present in all
categories, with increases in the demand, savings and time deposits of $16.7
million, $6.5 million and $43.2 million, respectively.
BORROWED FUNDS
The Company's borrowed funds consist of short-term borrowings and other
borrowings. Short-term borrowings include federal funds purchased, securities
sold under agreement to repurchase, and other short-term borrowings which
consist primarily of Federal Home Loan Bank (FHLB) advances with an original
maturity of one day up to one year. Other borrowings consist of fixed rate FHLB
advances with an original maturity greater than one year. Average borrowings for
the quarter ended September 30, 1998 decreased $45.5 million, or 27.8% as
compared to the same period of 1997.
CAPITAL AND DIVIDENDS
Stockholders' equity of $133 million represents 10.2% of total assets at
September 30, 1998, compared with $123 million, or 9.6% at December 31, 1997 and
$119 million, or 9.3% a year previous. The equity increase is primarily due to
earnings retention. Also contributing to the increase in equity is the
appreciation in the value reflected in the securities available for sale
portfolio.
In December of 1997, the Company distributed a 5% stock dividend for the
thirty-eighth consecutive year. On June 15, 1998 the Company distributed a
four-for-three stock split effected in the form of a dividend. In September of
1998, the Company paid a regular quarterly cash dividend of $0.17 per share,
equivalent to an annual dividend of $0.68 per share. 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.
Capital is an important factor in ensuring the safety of depositors'
accounts. For both 1997 and 1996, 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.
As the capital ratios in Table 9 indicate, the Company remains well
capitalized. Capital measurements are significantly in excess of regulatory
minimum guidelines and meet the requirements to be considered well capitalized
for all periods presented. Tier 1 and 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.
TABLE 9
CAPITAL MEASUREMENTS
- ----------------------------------------------------------------------------------------------------
First Second THIRD Fourth
Quarter Quarter QUARTER Quarter
- ----------------------------------------------------------------------------------------------------
1998
Tier 1 leverage ratio 9.19% 9.27% 9.36%
Tier 1 capital ratio 15.30% 15.13% 14.95%
Total risk-based capital ratio 16.56% 16.38% 16.21%
Cash dividends as a percentage of net income 30.33% 36.55% 38.61%
Per common share:
Book value $10.52 $10.74 $11.11
Tangible book value $ 9.83 $10.07 $10.46
- ----------------------------------------------------------------------------------------------------
1997
Tier 1 leverage ratio 8.91% 8.75% 8.76% 8.91%
Tier 1 capital ratio 14.53% 14.46% 14.47% 14.88%
Total risk-based capital ratio 15.78% 15.71% 15.73% 16.13%
Cash dividends as a percentage of net income 36.46% 34.27% 35.90% 37.72%
Per common share:
Book value $ 9.00 $ 9.53 $ 9.93 $10.26
Tangible book value $ 8.19 $ 8.75 $ 9.18 $ 9.54
- ----------------------------------------------------------------------------------------------------
-19-
The accompanying Table 10 presents 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 September 30, 1998, total
market capitalization of the Company's common stock was approximately $274
million compared to $243 million at December 31, 1997 and $226 million at
September 30, 1997. The change in market capitalization is due to an increase in
the stock's market price. The Company's price to book value ratio was 2.07 at
September 30, 1998 and 1.90 a year previous. The per share market price was 15
times annualized earnings at September 30, 1998 and 1997.
TABLE 10
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- --------------------------------------------------------------------------------------
1997
March 31 $14.29 $12.59 $13.93 $0.107
June 30 19.20 13.93 19.20 0.107
September 30 19.11 15.89 18.84 0.122
December 31 20.77 17.15 20.25 0.128
- --------------------------------------------------------------------------------------
1998
March 31 $21.00 $17.63 $21.00 $0.128
June 30 25.88 20.25 25.38 0.170
SEPTEMBER 30 26.25 19.38 23.00 0.170
- --------------------------------------------------------------------------------------
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.
The Company's primary measure of liquidity is called the basic surplus,
which compares the adequacy of cash sources to the amounts of volatile funding
sources. 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. Accordingly, the Company has established borrowing
agreements with other banks (Federal Funds), the Federal Home Loan Bank of New
York (short and long-term borrowings which are denoted as advances), repurchase
agreements and broker deposit agreements with major brokerage firms.
At September 30, 1998 and 1997, the Company's basic surplus ratios (net
access to cash and secured borrowings as a percentage of total assets) were
approximately 7.1% and 7.3%, respectively. The Company has set a present
internal minimum guideline range of 5% to 7%. As these ratios indicate, the
Company's liquidity is well within management standards.
Interest rate risk is determined by the relative sensitivities of earning
asset yields and interest bearing liability costs to changes in interest rates.
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. Through analysis of the interest sensitivity gap, the Company
attempts to position its assets and liabilities to maximize net interest income
in several different interest rate scenarios. As of September 30, 1998, the
interest sensitivity gap indicates that the Company is liability sensitive in
the short term and supports management's contention that the Company is
positioned to benefit from a declining interest rate environment over the next
twelve months. The nature and timing of the benefit will be initially impacted
by the extent to which core deposit and borrowing rates are lowered as rates
decline. The Company becomes asset sensitive after the one-year time frame and,
-20-
therefore, would benefit in the long-term from rising interest rates.
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 utilizes a simulation model which measures the effect
certain assumptions will have on net interest income over a short period of
time, usually one or two years. These assumptions include, but are not limited
to prepayments, potential call options of the investment portfolio and various
interest rate environments. The following table presents the impact on net
interest income of a gradual twelve-month increase or decrease in interest rates
compared to a stable interest rate environment. The simulation projects net
interest income over the next year using the September 30, 1998 balance sheet
position.
TABLE 11
INTEREST RATE SENSITIVITY ANALYSIS
- -------------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
- -------------------------------------------------------------
+200 (3.46%)
+100 (1.62%)
- -100 0.61%
- -200 0.27%
- -------------------------------------------------------------
-21-
- -------------------------------------------------------------------------------------------------------------------
SELECTED FIVE YEAR DATA 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Net income $ 14,749 $ 12,179 $ 9,329 $ 6,508 $ 8,505
Return on average assets 1.20% 1.10% 0.90% 0.64% 0.93%
Return on average equity 12.97% 11.80% 9.18% 6.53% 8.79%
Net interest margin 4.67% 4.69% 4.43% 4.81% 5.26%
Efficiency ratio 56.09% 60.74% 65.92% 70.22% 71.05%
Expense ratio 2.20% 2.41% 2.51% 2.96% 3.21%
Tier 1 leverage ratio 8.91% 8.70% 8.80% 9.05% 9.24%
Tier 1 risk-based capital ratio 14.88% 14.06% 15.21% 16.09% 15.40%
Total risk-based capital ratio 16.13% 15.31% 16.46% 17.35% 16.66%
Cash dividend per share payout 37.91% 36.50% 42.61% 56.13% 39.19%
Per share:
Basic earnings $ 1.24 $ 1.03 $ 0.76 $ 0.53 $ 0.69
Diluted earnings $ 1.22 $ 1.02 $ 0.76 $ 0.52 $ 0.68
Cash dividends paid $ 0.464 $ 0.373 $ 0.322 $ 0.291 $ 0.268
Book value $ 10.26 $ 9.08 $ 8.89 $ 7.94 $ 8.15
Tangible book value $ 9.54 $ 8.23 $ 7.94 $ 7.15 $ 7.10
Stock dividends distributed 5.00% 5.00% 5.00% 5.00% 5.00%
Market price:
High $ 20.77 $ 13.58 $ 12.24 $ 11.42 $ 11.42
Low $ 12.59 $ 10.72 $ 10.21 $ 9.26 $ 7.79
End of year $ 20.25 $ 12.86 $ 11.91 $ 10.69 $ 11.26
Price/earnings ratio (assumes dilution) 16.56X 12.59x 15.73x 20.49x 16.59x
Price/book value ratio 1.97X 1.42x 1.34x 1.35x 1.38x
Total assets $1,280,585 $1,138,986 $1,106,266 $1,044,557 $ 953,907
Total stockholders' equity $ 123,343 $ 106,264 $ 108,044 $ 98,307 101,108
Average diluted common shares
outstanding (thousands) 12,096 11,918 12,320 12,515 12,455
- -----------------------------------------------------------------------------------------------------------------
<FN>
* All share and per share data has been restated to give retroactive effect to
stock dividends and splits.
</FN>
-22-
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
This item is omitted, as there have been no material legal proceedings initiated
or settled during the quarter ended September 30, 1998.
Item 2 -- Changes in Securities
Following are listed changes in the Company's Common Stock outstanding during
the quarter ended September 30, 1998 as well as certain actions which have been
taken which may affect the number of shares of Common Stock (shares) outstanding
in the future. There was no Preferred Stock outstanding during the quarter ended
September 30, 1998.
The Company has Stock Option Plans covering key employees. In January 1998,
non-qualified stock options were granted for 160,933 shares of common stock at
an option price of $20.03 per share. In April 1998, non-qualified stock options
were granted for 2,000 shares of common stock at an option price of $20.74 per
share. These options vest over a four-year period with the first vesting date
one-year from the date of grant. Outstanding at September 30, 1998 are
non-qualified stock options covering 614,535 shares at exercise prices ranging
between $6.44 and $20.74 with expiration dates between February 12, 1999, and
April 6, 2008. There are 1,585,818 shares of authorized common stock designated
for possible issuance under the Plans, including the aforementioned shares. The
number of shares designated for the Plans, the number of shares under existing
options and the option price per share may be adjusted upon certain changes in
capitalization, such as stock dividends, stock splits and other occurrences as
enumerated in the Plans. (FORMs S-8, Registration Statement Nos. 33-18976 and
33-77410, filed with the Commission on December 9, 1987 and April 6, 1994,
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 191,081 and
40,032 shares with exercise prices of $10.49 and $10.95, 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 and splits). The
Company filed a registration statement relating to these option shares. These
stock options did not serve to reduce the number available under the previously
mentioned Plans.
The Company has a Dividend Reinvestment Plan for stockholders under which
no new shares of common stock were issued for the quarter ended September 30,
1998. There are 701,015 shares of authorized but unissued common stock
designated for possible issuance under the Plan (the number of shares available
has been adjusted for stock dividends and splits). (FORM S-3, Registration
Statement No. 33-12247, filed with the Commission on February 26, 1987).
The Company's Board of Directors has reserved 35,000 of authorized but
unissued shares for future payment of an annual Board retainer. In January 1998,
each Director was granted 149 shares which are restricted from one to three
years for payment of their 1998 Board retainer. Shares were purchased from
treasury therefore the number of authorized and unissued shares was not
effected.
The Company's Board of Directors has authorized the purchase on the open
market by the Company of additional shares of treasury stock. These treasury
shares are to be used for a variety of corporate purposes, primarily to meet the
needs of the Company's Employee Stock Ownership Plan, Automatic Dividend
Reinvestment and Stock Purchase Plan, Stock Option Plans, Retirement Savings
Plan, Restricted Stock Agreements and Bank Trust Department directed IRA and
HR-10 accounts. Purchases and sales during 1998 totalled 214,700 and 129,322,
respectively, with 501,249 shares in treasury at September 30, 1998. Purchases
are made at the prevailing market price in effect at the dates of the
transactions. Subsequent sales to both the Company's Employee Stock Ownership
Plan and Dividend Reinvestment and Stock Purchase Plan, if any, were made at the
five day average of the highest and lowest quoted selling price of the Company's
common stock on the National Market System of NASDAQ.
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. The
Company has 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. When the Plan was adopted, the Company paid a dividend of one Preferred
Share Purchase Right (Right) for each outstanding share of common stock of the
-23-
Company. Similar Rights are attached to each share of the Company's common stock
issued after November 15, 1994, the date of adoption 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.
Item 3 -- Defaults Upon Senior Securities
This item is omitted because there were no defaults upon the Registrant's senior
securities during the quarter ended September 30, 1998.
Item 4 -- Submission of Matters to a Vote of Security Holders
This item is omitted as there is no disclosure required for the quarter ended
September 30, 1998.
Item 5 -- Other Information
Not Applicable
Item 6 -- Exhibits and Reports on FORM 8-K
An index to exhibits follows the signature page of this FORM 10-Q.
No reports on FORM 8-K were filed by the Registrant during the quarter ended
September 30, 1998.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on FORM 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized, this 12th day of November, 1998.
NBT BANCORP INC.
By: /S/ JOE C. MINOR
Joe C. Minor
Executive Vice President
Chief Financial Officer and Treasurer
INDEX TO EXHIBITS
The following documents are attached as Exhibits to this FORM 10-Q 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-Q
Exhibit Exhibit
NUMBER CROSS-REFERENCE
- ------ ---------------
10.1 Lease Extension of Vail Mills Office. Herein
27.1 Financial Data Schedule for the nine months ended September 30, 1998. Herein
-26-
EXHIBIT 10.1
LEASE EXTENSION OF VAIL MILLS OFFICE
-27-
NBT BANK
February 6, 1998
Mr. Fred Showers
Mrs. Reta L. Showers
3786 State Highway 30 #1
Amsterdam, New York 12010
Re: Lease Renewal/Route 30, Mayfield, New York
Dear Mr. & Mrs. Showers:
According to the terms of the lease between NBT Bank, N.A. and yourselves we are
hereby electing to renew the 2nd term effective 1 July 1998 through 30 June
1999. In accordance to the term of the lease, the rental fee would increase to
6,945.75 per year, payable in monthly installments of $578.82.
Should you have any questions, please do not hesitate in giving me a call at
607-337-6115. Thank you for your continued assistance and cooperation.
Sincerely,
/s/Donna L. Deuel
Donna L. Deuel
Vice President
Administrative Services
:blf
cc: J. Minor
M. Dietrich
NBT Bank, N.A., 52 South Broad Street, P.O. Box 351, Norwich, New York 13815
*Telephone 607-337-6000
-28-
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998