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, 1999.
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) 337-2265
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, 1999, there were 12,431,189 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.
-1-
NBT BANCORP INC.
FORM 10-Q--Quarter Ended September 30, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1999, December 31,
1998 (Audited), and September 30, 1998
Consolidated Statements of Income for the three month and nine
month periods ended September 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the nine month
periods ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1999 and 1998
Consolidated Statements of Comprehensive Income for the three month
and nine month periods ended September 30, 1999 and 1998
Notes to Interim Consolidated Financial Statements at September 30,
1999
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
-2-
NBT BANCORP INC. AND SUBSIDIARY SEPTEMBER 30, December 31, September 30,
CONSOLIDATED BALANCE SHEETS 1999 1998 1998
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(in thousands, except share and per share data) (UNAUDITED) (Unaudited)
ASSETS
Cash $ 44,801 $ 47,181 $ 47,703
Loans held for sale 3,511 2,887 2,854
Securities available for sale, at fair value 355,137 355,758 392,982
Securities held to maturity (fair value-$41,215,
$35,095 and $36,203) 41,216 35,095 36,203
Loans:
Commercial and agricultural 432,950 388,509 366,938
Real estate mortgage 174,204 160,025 153,905
Consumer 291,514 272,971 276,761
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Total loans 898,668 821,505 797,604
Less allowance for loan losses 13,555 12,962 12,611
- ----------------------------------------------------------------------------------------------------------------------
Net loans 885,113 808,543 784,993
Premises and equipment, net 20,853 20,241 20,417
Intangible assets, net 6,828 7,572 7,825
Other assets 20,800 12,732 9,966
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TOTAL ASSETS $1,378,259 $1,290,009 $1,302,943
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 157,618 $ 154,146 $ 142,383
Savings, NOW, and money market 386,245 391,614 385,872
Time 550,610 498,445 504,852
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 1,094,473 1,044,205 1,033,107
Short-term borrowings 113,163 96,589 120,215
Long-term debt 35,161 10,171 10,174
Other liabilities 7,583 8,412 6,941
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Total liabilities 1,250,380 1,159,377 1,170,437
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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; shares issued 13,015,789,
13,015,789 and 12,425,758 13,016 13,016 12,426
Capital surplus 111,221 111,749 97,165
Retained earnings 23,540 15,512 28,152
Accumulated other comprehensive income (loss) (7,117) 3,317 5,285
Common stock in treasury at cost, 590,489,
599,507 and 501,249 shares (12,781) (12,962) (10,522)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 127,879 130,632 132,506
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,378,259 $1,290,009 $1,302,943
- ----------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-3-
Three months ended Nine months ended
NBT BANCORP INC. AND SUBSIDIARY September 30, September 30,
CONSOLIDATED STATEMENTS OF INCOME 1999 1998 1999 1998
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(in thousands, except per share data) (Unaudited)
Interest and fee income:
Loans and loans held for sale $19,646 $18,100 $56,076 $52,701
Securities - taxable 6,425 6,966 18,301 22,233
Securities - tax exempt 282 281 760 836
Other 76 101 232 210
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Total interest and fee income 26,429 25,448 75,369 75,980
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 8,758 9,344 25,344 28,423
Short-term borrowings 1,600 1,405 3,882 4,525
Long-term debt 474 136 1,098 326
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Total interest expense 10,832 10,885 30,324 33,274
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Net interest income 15,597 14,563 45,045 42,706
Provision for loan losses 975 1,300 2,925 3,550
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Net interest income after provision for loan losses 14,622 13,263 42,120 39,156
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Noninterest income:
Trust 835 803 2,505 2,407
Service charges on deposit accounts 1,088 956 3,108 2,725
Net securities gains 837 168 1,507 613
Other 684 594 2,086 1,883
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Total noninterest income 3,444 2,521 9,206 7,628
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,025 4,920 14,166 14,214
Office supplies and postage 390 441 1,330 1,406
Occupancy 700 656 2,109 2,037
Equipment 666 668 1,974 1,728
Professional fees and outside services 857 724 2,010 1,987
Data processing and communications 965 872 2,843 2,635
Amortization of intangible assets 244 255 745 817
Other operating 1,239 1,171 2,763 3,824
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 10,086 9,707 27,940 28,648
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Income before income taxes 7,980 6,077 23,386 18,136
Income taxes 3,167 1,346 9,030 3,623
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NET INCOME $ 4,813 $ 4,731 $14,356 $14,513
- -------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Basic $ 0.39 $ 0.38 $ 1.16 $ 1.15
Diluted $ 0.38 $ 0.37 $ 1.14 $ 1.13
- -------------------------------------------------------------------------------------------------------------------
All per share data has been restated to give retroactive effect to stock
dividends and splits.
See notes to interim consolidated financial statements.
-4-
NBT BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Capital Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
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 - $0.446 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
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 $12,426 $ 97,165 $28,152 $ 5,285 $(10,522) $132,506
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $13,016 $111,749 $15,512 $ 3,317 $(12,962) $130,632
Net income 14,356 14,356
Cash dividends - $0.510 per share (6,312) (6,312)
Payment in lieu of fractional shares (16) (16)
Purchase of 213,500 treasury shares (4,643) (4,643)
Sale of 222,518 treasury shares to
employee benefit plans and other
stock plans (528) 4,824 4,296
Unrealized loss on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $7,206 (10,434) (10,434)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $13,016 $111,221 $23,540 $ (7,117) $(12,781) $127,879
- ------------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-5-
NBT BANCORP INC. AND SUBSIDIARY Nine Months Ended September 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1999 1998
- -----------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 14,356 $ 14,513
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 2,925 3,550
Depreciation of premises and equipment 1,649 1,514
Amortization of premiums and accretion of discounts on securities (1,181) (1,437)
Amortization of intangible assets 745 817
Proceeds from sales of loans originated for sale 1,734 3,219
Loans originated for sale (2,358) (2,787)
Net gain on sale of other real estate owned (543) (83)
Net realized gains on sales of securities (1,507) (613)
(Increase) decrease in interest receivable (883) 37
Increase in interest payable 567 62
Other, net (1,983) (1,615)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,521 17,177
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 49,922 53,806
Proceeds from sales 57,571 110,869
Purchases (121,824) (110,052)
Securities held to maturity:
Proceeds from maturities 16,808 16,886
Purchases (22,929) (16,950)
Net increase in loans (79,775) (65,546)
Purchase of premises and equipment, net (2,261) (3,170)
Proceeds from sales of other real estate owned 1,430 896
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (101,058) (13,261)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 50,268 18,924
Net increase (decrease) in short-term borrowings 16,574 (14,312)
Proceeds from issuance of long-term debt 25,000 10,000
Repayments of long-term debt (10) (9)
Proceeds from issuance of treasury shares to employee benefit
plans and other stock plans 4,296 3,143
Purchase of treasury stock (4,643) (5,791)
Cash dividends and payment for fractional shares (6,328) (5,614)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 85,157 6,341
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (2,380) 10,257
Cash and cash equivalents at beginning of year 47,181 37,446
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,801 $ 47,703
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period
for:
Interest $ 29,757 $ 33,212
Income taxes 9,156 5,211
- -----------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-6-
Three months ended Nine months ended
NBT BANCORP INC. AND SUBSIDIARY September 30, September 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Net Income $ 4,813 $4,731 $ 14,356 $14,513
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $(3,712),
$5,054, $(16,133) and $5,536] (2,196) 2,984 (9,543) 3,275
Less: Reclassification adjustment for net gains
included in net income [pre-tax amounts of
$(837), $(168), $(1,507) and $(613)] (495) (99) (891) (363)
- ------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (2,691) 2,885 (10,434) 2,912
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 2,122 $7,616 $ 3,922 $17,425
- ------------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-7-
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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.
The balance sheet at December 31, 1998 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, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. 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, 1998.
On October 25, 1999, 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, 1999 to shareholders of record as of
December 1, 1999. 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, 1999 stock dividend. The adjustment for purposes of comparability
will occur after the payment date.
On August 16, 1999, the Registrant announced the signing of a definitive
agreement of merger with Lake Ariel Bancorp, Inc. ("Lake Ariel"). The merger is
subject to the approval of each company's shareholders and of banking
regulators. The merger is expected to close in the first quarter of 2000 and is
intended to be accounted for as a pooling-of-interests and to qualify as a
tax-free exchange for Lake Ariel shareholders. Shareholders of Lake Ariel will
receive a minimum of 0.8315 shares and a maximum of 0.9487 shares of NBT common
stock for each share exchanged. Based on the August 13 closing price of $20.25
for NBT Bancorp Inc. common stock, NBT will issue approximately 4.6 million
shares and share equivalents in exchange for all of the Lake Ariel common stock
and share equivalents outstanding. The transaction is valued at $92.8 million or
$18.50 per share for the outstanding shares of Lake Ariel. Lake Ariel has
provided NBT an option to acquire up to 965,300 shares of Lake Ariel's common
stock exercisable in the event of certain circumstances involving transactions
with third parties, acts of third parties, or break-up of the merger agreement.
Concurrent with this announcement, NBT Bancorp Inc. reduced its stock repurchase
plan from 600,000 shares to 200,000 which leaves 76,500 shares remaining for
repurchase under the reduced plan.
-8-
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 following is a reconciliation of basic and diluted earnings per
share for the periods presented in the income statement.
- --------------------------------------------------------------------------------------------------
Three months ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 12,398 12,571
Net income available to common shareholders $ 4,813 $ 4,731
- --------------------------------------------------------------------------------------------------
Basic EPS $ 0.39 $ 0.38
- --------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 12,398 12,571
Dilutive common stock options 113 274
- --------------------------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 12,511 12,845
Net income available to common shareholders $ 4,813 $ 4,731
- --------------------------------------------------------------------------------------------------
Diluted EPS $ 0.38 $ 0.37
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 12,402 12,611
Net income available to common shareholders $14,356 $14,513
- --------------------------------------------------------------------------------------------------
Basic EPS $ 1.16 $ 1.15
- --------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 12,402 12,611
Dilutive common stock options 136 255
- --------------------------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 12,538 12,866
Net income available to common shareholders $14,356 $14,513
- --------------------------------------------------------------------------------------------------
Diluted EPS $ 1.14 $ 1.13
- --------------------------------------------------------------------------------------------------
-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 1998 FORM 10-K for an understanding of the following discussion and
analysis. In June of 1998, the Company distributed a four-for-three stock split
effected in the form of a 33 1/3% stock dividend. In December 1998, the Company
distributed a 5% stock dividend, the thirty-ninth consecutive year a stock
dividend has been declared. Throughout this discussion and analysis, amounts per
common share and common shares outstanding have been adjusted retroactively for
stock dividends and splits.
On October 25, 1999, 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, 1999 to shareholders of record as of
December 1, 1999. 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, 1999 stock dividend. The adjustment for purposes of comparability
will occur after the payment date.
On August 16, 1999, the Registrant announced the signing of a definitive
agreement of merger with Lake Ariel Bancorp, Inc. ("Lake Ariel"). The merger is
subject to the approval of each company's shareholders and of banking
regulators. The merger is expected to close in the first quarter of 2000 and is
intended to be accounted for as a pooling-of-interests and to qualify as a
tax-free exchange for Lake Ariel shareholders. Shareholders of Lake Ariel will
receive a minimum of 0.8315 shares and a maximum of 0.9487 shares of NBT common
stock for each share exchanged. Based on the August 13 closing price of $20.25
for NBT Bancorp Inc. common stock, NBT will issue approximately 4.6 million
shares and share equivalents in exchange for all of the Lake Ariel common stock
and share equivalents outstanding. The transaction is valued at $92.8 million or
$18.50 per share for the outstanding shares of Lake Ariel. Lake Ariel has
provided NBT an option to acquire up to 965,300 shares of Lake Ariel's common
stock exercisable in the event of certain circumstances involving transactions
with third parties, acts of third parties, or break-up of the merger agreement.
Concurrent with this announcement, NBT Bancorp Inc. reduced its stock repurchase
plan from 600,000 shares to 200,000 which leaves 76,500 shares remaining for
repurchase under the reduced plan.
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.
-10-
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, 100% complete, includes code
enhancements, hardware and software updates, system replacements, vendor
certification, and other associated changes. The Validation Phase, 100%
complete, includes the testing of incremental changes to hardware and software
components. The Implementation Phase, 100% complete, certifies that systems are
Year 2000 compliant and have been accepted by the end users. 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 respect to its ability to influence business functions. The Company has
completed the testing and review of all applications without negative findings.
In some cases, the Company is relying on the service providers and software
vendors to facilitate proxy testing with a select group of users, including the
Company. The Company approved the test plans to ensure Year 2000 compliance of
those systems. The Company has also contracted with McGladrey and Pullen, LLP to
perform an independent third party review of all proxy test results. The
McGladrey and Pullen, LLP review did not identify any significant Year 2000
issues. 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 has tested its mission critical trust accounting system to
ensure Year 2000 compliance. The testing and validation of this system was
completed during the fourth quarter of 1998. Test results were reviewed by
internal staff and did not disclose any significant Year 2000 issues. In
addition, the system was also tested by the software vendor and two user groups
made up of other banks. Results of these tests did not identify any significant
Year 2000 issues. Non mission critical systems in use by the trust department
have been reviewed for Year 2000 compliance. 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. As of September 30, 1999, 95% of
discretionary securities identified as significant have received at least two
reviews. Updates on the status of these companies will continue throughout 1999.
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 150 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
low, medium or high 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. Continuous monitoring of significant new relationships is
performed to ensure Year 2000 preparedness. In addition, the Company has
modified its liquidity crisis plan to minimize funding risk due to the Year 2000
issue. The Company is monitoring customer behavior to determine the cash
availability requirements and the associated impact to its liquidity funding
position and will update the liquidity crisis plan as necessary.
As of September 30, 1999 the Company has incurred approximately $590,000 in
expenses directly related to the Year 2000 issue. Additionally, the Company
forecasts spending approximately $60,000 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 or will spend 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 it reasonable 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.
-11-
The Company has developed a business resumption contingency plan to help
ensure continued operations in the event of Year 2000 system failures. This
contingency plan is consistent with the Company's disaster recovery plan with
modifications for Year 2000 risks. The business resumption contingency plan has
been tested and independently validated in accordance with FFIEC guidelines.
OVERVIEW
Net income of $4.8 million ($0.38 diluted earnings per share) was recognized in
the third quarter of 1999, compared to third quarter 1998 net income of $4.7
million ($0.37 diluted earnings per share). The third quarter net income before
taxes of $8.0 million was $1.9 million higher than third quarter 1998. The
increase in pre-tax net income can be attributed to improvements in net interest
and noninterest income. Third quarter 1998 earnings included an approximate $1
million tax benefit available only through year-end 1998, arising from a
corporate realignment within the Company.
Net income of $14.4 million ($1.14 diluted earnings per share) was
recognized for the nine month period ended September 30, 1999, compared to the
first nine months in 1998 net income of $14.5 million ($1.13 diluted earnings
per share). The first nine months of 1998 included an approximate $3 million tax
benefit previously described. Net income before taxes of $23.4 million for the
first nine months of 1999 increased $5.3 million compared to the same period of
1998. The increase in pre tax income for the nine month period ended September
30, 1999 was driven by factors similar to those of third quarter 1999.
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 decreased for the nine month period
ended September 30, 1999 compared to the same period a year previous. The
decline in these ratios can be attributed to the increased income tax expense
previously mentioned.
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
- ---------------------------------------------------------------------------------------------------
First Second THIRD NINE Fourth Twelve
Quarter Quarter QUARTER MONTHS Quarter Months
- ---------------------------------------------------------------------------------------------------
1999
Return on average assets 1.54% 1.44% 1.40% 1.46%
Return on average equity 14.87% 14.59% 15.17% 14.87%
Net interest margin 4.96% 4.87% 4.82% 4.88%
- ---------------------------------------------------------------------------------------------------
1998
Return on average assets 1.60% 1.47% 1.46% 1.51% 1.40% 1.48%
Return on average equity 16.49% 14.92% 14.54% 15.30% 13.87% 14.93%
Net interest margin 4.75% 4.68% 4.79% 4.74% 4.80% 4.76%
- ---------------------------------------------------------------------------------------------------
-12-
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 $1.1 million
for the third quarter of 1999 compared to the same period of 1998. This increase
was primarily a result of the $86.1 million increase in average earning assets,
less the $62.0 million increase in average interest bearing liabilities.
Total FTE interest income increased $1.1 million over third quarter 1998.
This increase is also a result of the increase in average earning assets, as the
loan portfolio growth has continued. The increase in average earning assets was
partially offset by a 22 basis point decrease in the yield on earning assets as
the loan portfolio yield declined. During the same time period, total interest
expense remained stable as the increase in average interest bearing liabilities
was offset by a 27 basis point reduction in cost.
For the first nine months of 1999, FTE net interest income increased $2.5
million over the comparable period of 1998. This can be attributed to lower
interest expense as the cost of interest bearing liabilities was reduced by 42
basis points, primarily time deposits and short-term borrowings. Interest income
remained stable during this period as the increase in average earning assets was
offset by a 27 basis point decline in yield.
Another important performance measurement of net interest income is the net
interest margin. The net interest margin increased to 4.88% for the first nine
months of 1999, up from 4.74% for the comparable period in 1998. The increase in
the net interest margin is primarily a result of the increased interest rate
spread, as the reduction in the cost of interest bearing liabilities exceeded
the decline in yield on earning assets. Also contributing to the improved net
interest margin is increased funding of earning assets from noninterest bearing
sources, as the Company has experienced an increase in demand deposit accounts.
-13-
TABLE 2
COMPARATIVE ANALYSIS OF FEDERAL TAXABLE EQUIVALENT NET INTEREST INCOME
- ----------------------------------------------------------------------------------------------------
Three months ended September 30,
Annualized
Yield/Rate Amounts Variance
- ----------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998 TOTAL VOLUME RATE
---- ---- ---- ---- ----- ------ ----
4.99% 5.84% Interest bearing deposits $ 2 $ 2 $ - $ - $ -
Federal funds sold and securities
- 3.90% purchased under agreements to resell - 25 (25) (12) (13)
4.93% 5.32% Other short-term investments 74 74 - 5 (5)
6.76% 6.85% Securities available for sale 6,228 6,768 (540) (448) (92)
6.75% 9.51% Loans held for sale 52 61 (9) 11 (20)
Securities held to maturity:
6.41% 6.84% Taxable 218 221 (3) 10 (13)
6.25% 6.81% Tax exempt 414 410 4 40 (36)
8.76% 9.15% Loans 19,745 18,087 1,658 2,471 (813)
-------------------------------------------------------------------------------------
8.10% 8.32% Total interest income 26,733 25,648 1,085 2,077 (992)
2.78% 2.90% Money Market Deposit Accounts 546 601 (55) (31) (24)
1.18% 1.55% NOW accounts 410 510 (100) 27 (127)
2.72% 2.72% Savings accounts 1,166 1,086 80 81 (1)
5.01% 5.42% Certificates of deposit 6,636 7,147 (511) 37 (548)
4.98% 5.17% Short-term borrowings 1,600 1,405 195 248 (53)
5.35% 5.31% Long-term debt 474 136 338 337 1
-------------------------------------------------------------------------------------
4.00% 4.27% Total interest expense 10,832 10,885 (53) 699 (752)
-------------------------------------------------------------------------------------
Net interest income $15,901 $14,763 $ 1,138 $ 1,378 $ (240)
=====================================================================================
4.10% 4.05% Interest rate spread
===== ===== ====================
4.82% 4.79% Net interest margin
===== ===== ===================
FTE adjustment $ 304 $ 200
============== ======= =======
Nine Months Ended September 30,
Annualized
Yield/Rate Amounts Variance
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998 TOTAL VOLUME RATE
---- ---- ---- ---- ----- ------ ----
4.49% 5.33% Interest bearing deposits $ 7 $ 5 $ 2 $ 3 $ (1)
Federal funds sold and securities
4.63% 3.91% purchased under agreements to resell 2 31 (29) (35) 6
4.78% 5.36% Other short-term investments 223 174 49 69 (20)
6.76% 6.98% Securities available for sale 17,736 21,626 (3,890) (3,230) (660)
6.93% 8.58% Loans held for sale 171 205 (34) 6 (40)
Securities held to maturity:
6.46% 6.86% Taxable 627 674 (47) (8) (39)
6.46% 7.01% Tax exempt 1,108 1,219 (111) (15) (96)
8.76% 9.23% Loans 56,269 52,654 3,615 6,428 (2,813)
-------------------------------------------------------------------------------------
8.11% 8.38% Total interest income 76,143 76,588 (445) 3,218 (3,663)
2.75% 2.90% Money Market Deposit Accounts 1,716 1,846 (130) (37) (93)
1.30% 1.63% NOW accounts 1,344 1,544 (200) 125 (325)
2.73% 2.79% Savings accounts 3,364 3,239 125 199 (74)
4.96% 5.44% Certificates of deposit 18,920 21,794 (2,874) (985) (1,889)
4.83% 5.43% Short-term borrowings 3,882 4,525 (643) (157) (486)
5.34% 5.32% Long-term debt 1,098 326 772 770 2
------------------------------------------------------------------------------------
3.93% 4.35% Total interest expense 30,324 33,274 (2,950) (85) (2,865)
-------------------------------------------------------------------------------------
Net interest income $45,819 $43,314 $ 2,505 $ 3,303 $ (798)
=====================================================================================
4.18% 4.03% Interest rate spread
===== ===== ====================
4.88% 4.74% Net interest margin
===== ===== ===================
FTE adjustment $ 774 $ 608
============== ======= =======
-14-
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 probable losses in the
portfolio considering an evaluation of risk, economic factors, and past loss
experience. Management determines the provision and allowance for loan losses
based on a number of factors including a comprehensive loan review program
conducted throughout the year. The loan portfolio is continually evaluated in
order to identify problem loans, credit concentration, and other risk factors
such as economic conditions. The allowance for loan losses to outstanding loans
at September 30, 1999 is 1.51%, compared to 1.58% for the same period in 1998.
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 quarter ended September 30,
1999 declined $0.1 million or 15.8% compared to the same period of 1998. Net
charge-offs for the nine months ended September 30, 1999 declined $0.2 million
or 7.5% compared to the same period of 1998. Annualized net charge-offs to
average loans declined to 0.35% for the third quarter of 1999, down from 0.47%
for the comparable period of 1998. Annualized net charge-offs to average loans
declined to 0.36% for the first nine months of 1999, compared to 0.44% for the
comparable period of 1998. The decline in charge-offs and charge-offs as a
percentage of average loans during 1999 indicates an improvement in the
Company's loan quality.
TABLE 3
ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
Balance, beginning of period $13,361 $12,239 $12,962 $11,582
Recoveries 231 200 620 610
Charge-offs (1,012) (1,128) (2,952) (3,131)
- ------------------------------------------------------------------------------------------------------------
Net charge-offs (781) (928) (2,332) (2,521)
Provision for loan losses 975 1,300 2,925 3,550
- ------------------------------------------------------------------------------------------------------------
Balance, end of period $13,555 $12,611 $13,555 $12,611
- ------------------------------------------------------------------------------------------------------------
COMPOSITION OF NET (CHARGE-OFFS) RECOVERIES
- ------------------------------------------------------------------------------------------------------------
Commercial and agricultural (503) 64% $ (553) 60% $(1,286) 55% $(1,401) 56%
Real estate mortgage 9 (1)% (46) 5% (56) 2% (101) 4%
Consumer (287) 37% (329) 35% (990) 43% (1,019) 40%
- ------------------------------------------------------------------------------------------------------------
Net charge-offs $ (781) 100% $ (928) 100% $(2,332) 100% $(2,521) 100%
- ------------------------------------------------------------------------------------------------------------
Annualized net charge-offs
to average loans 0.35% 0.47% 0.36% 0.44%
- ------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans for the year ended
December 31, 1998 0.42%
- ------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Table 4 below presents quarterly and year-to-date noninterest income.
Noninterest income for the third quarter of 1999, excluding security gains and
nonrecurring income, increased $0.3 million or 10.8% when compared to third
quarter of 1998. For the nine month period ended September 30, 1999, excluding
security gains and nonrecurring income, noninterest income increased $0.7
million or 9.8% compared to the same period during 1998. Deposit service charges
has increased during 1999 as a result of growth in demand deposit accounts. The
increase in other income for the quarter and year-to-date periods can be
primarily attributed to an increase in ATM transaction income.
-15-
TABLE 4
NONINTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------------
First Second THIRD NINE Fourth Twelve
(dollars in thousands) Quarter Quarter QUARTER MONTHS Quarter Months
- ------------------------------------------------------------------------------------------------------------------------
1999
Trust income $ 835 $ 835 $ 835 $2,505
Service charges on deposit accounts 961 1,059 1,088 3,108
Net securities gains 471 199 837 1,507
Other income 792 610 684 2,086
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income $3,059 $2,703 $3,444 $9,206
- ------------------------------------------------------------------------------------------------------------------------
1998
Trust income $ 802 $ 802 $ 803 $2,407 $ 708 $3,115
Service charges on deposit accounts 869 900 956 2,725 1,024 3,749
Net securities gains 218 227 168 613 11 624
Other income 679 610 594 1,883 608 2,491
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income $2,568 $2,539 $2,521 $7,628 $2,351 $9,979
- ------------------------------------------------------------------------------------------------------------------------
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, 1999
experienced a $0.4 million increase compared to the same period of 1998.
Noninterest expense for the nine months ended September 30, 1999 experienced a
$0.7 million decrease compared to the same period of 1998.
Equipment expense for the nine months ended September 30, 1999 increased
$0.2 million compared to the same period of 1998. This increase can be
attributed to computer maintenance and depreciation resulting from replacement
of computers for Year 2000 compliance, as well as the installation of additional
computers throughout the branch network.
Other operating expense for the nine months ended September 30, 1999
experienced a $1.1 million decline compared to the same period in 1998. In
addition to a decline in recurring other operating expenses during 1999, the
Company recognized a nonrecurring gain of $0.5 million on the sale of other real
estate owned.
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 improved to 54.6% in the third
quarter of 1999 from 56.7% for the same period of 1998. This improvement was a
result of the increases in net interest and noninterest income 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 improved to 2.2% for the third quarter 1999 from 2.3% for the same period
of 1998. The improvement in the expense ratio can be attributed to the increases
in noninterest income and average assets, while at the same time experiencing a
minimal increase in noninterest expense.
-16-
TABLE 5
NONINTEREST EXPENSE AND PRODUCTIVITY MEASUREMENTS
- ---------------------------------------------------------------------------------------------------
(dollars in thousands) First Second THIRD NINE Fourth Twelve
1999 Quarter Quarter QUARTER MONTHS Quarter Months
- ---------------------------------------------------------------------------------------------------
Salaries and employee benefits $4,616 $4,525 $ 5,025 $14,166
Office supplies and postage 473 467 390 1,330
Occupancy 674 735 700 2,109
Equipment 621 687 666 1,974
Professional fees and outside services 567 586 857 2,010
Data processing and communications 910 968 965 2,843
Amortization of intangible assets 251 250 244 745
Other operating 668 856 1,239 2,763
- ---------------------------------------------------------------------------------------------------
Total noninterest expense $8,780 $9,074 $10,086 $27,940
- ---------------------------------------------------------------------------------------------------
Efficiency ratio 51.83% 53.16% 54.58% 53.22%
Expense ratio 2.04% 2.10% 2.17% 2.11%
Average full-time equivalent
employees 486 486 489 487
Average assets per average
full-time equivalent employee
(millions) $ 2.6 $ 2.7 $ 2.8 $ 2.7
- ---------------------------------------------------------------------------------------------------
1998
Salaries and employee benefits $4,687 $4,607 $ 4,920 $14,214 $ 4,988 $19,202
Office supplies and postage 500 465 441 1,406 506 1,912
Occupancy 686 695 656 2,037 806 2,843
Equipment 480 580 668 1,728 647 2,375
Professional fees and outside services 648 615 724 1,987 849 2,836
Data processing and communications 901 862 872 2,635 942 3,577
Amortization of intangible assets 291 271 255 817 253 1,070
Other operating 1,209 1,444 1,171 3,824 1,489 5,313
- ---------------------------------------------------------------------------------------------------
Total noninterest expense $9,402 $9,539 $ 9,707 $28,648 $10,480 $39,128
- ---------------------------------------------------------------------------------------------------
Efficiency ratio 56.67% 57.39% 56.71% 56.92% 60.84% 57.92%
Expense ratio 2.23% 2.25% 2.27% 2.25% 2.49% 2.31%
Average full-time equivalent
employees 488 488 495 490 487 489
Average assets per average
full-time equivalent employee
(millions) $ 2.6 $ 2.6 $ 2.6 $ 2.6 $ 2.7 $ 2.6
- ---------------------------------------------------------------------------------------------------
INCOME TAXES
Income tax expense for the third quarter of 1999 was $3.2 million, compared with
$1.3 million for the third quarter of 1998. For the first nine months of 1999,
income tax expense amounted to $9.0 million, compared with $3.6 million during
the same period of 1998. The increase in income taxes during 1999 can be
attributed to an approximate $3.0 million tax benefit for the first nine months
of 1998 resulting from a corporate realignment. The increased income before
income taxes between reporting periods also contributed to the increased tax
expense.
-17-
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) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 41,633 $ 39,888 $ 40,686 $ 37,840
Securities available for
sale, at fair value 353,622 396,617 348,408 418,481
Securities held to maturity 39,795 36,738 35,941 36,387
Loans held for sale 3,057 2,524 3,294 3,190
Loans 894,754 783,951 858,937 762,338
Deposits 1,068,906 1,031,618 1,043,439 1,031,842
Short-term borrowings 127,426 107,817 107,507 111,476
Long-term debt 35,163 10,176 27,474 8,201
Stockholders' equity 125,857 129,063 129,045 126,805
Assets 1,366,912 1,286,579 1,317,448 1,285,576
Earning assets 1,309,424 1,223,361 1,255,445 1,221,737
Interest bearing liabilities $1,073,948 $1,011,954 $1,031,129 $1,021,920
- ---------------------------------------------------------------------------------------------------------------------
SECURITIES
Average total securities were $39.9 million less for the third quarter of 1999
than for the same period of 1998. During the third quarter of 1999, the
securities portfolio represented 31.0% of average earning assets compared to
35.0% for the third quarter of 1998. Average total securities for the nine month
period ended September 30, 1999 were $70.5 million less than the same period of
1998. 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, 1999, the composition of the securities
portfolio was 90% available for sale and 10% held to maturity.
LOANS
Average loan volume for the three months ended September 30, 1999 was $110.8
million, or 14.1% greater than the third quarter 1998. This growth has been
present in all loan categories, with increases in the average commercial,
consumer and mortgage portfolios of $79.2 million, $10.4 million and $21.2
million, respectively.
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.
Emphasis on marketing and improved product delivery has resulted in an increase
in the mortgage portfolio. 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 $2.1 million, or 38.8% at September
30, 1999 compared to September 30, 1998. The reduction in nonperforming assets
can be attributed to a decline in nonaccrual loans, with reductions in all loan
type categories. This is an indication of improvement in the Company's overall
loan quality. The changes in nonperforming assets are presented in Table 7
below.
At September 30, 1999, the recorded investment in impaired loans was $2.0
million. Included in this amount is $0.2 million of impaired loans for which the
specifically allocated allowance for loan loss is $0.1 million. In addition,
included in impaired loans is $1.8 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, 1998, the recorded investment in impaired
loans was $2.4 million, of which $1.1 million had a specific allowance
allocation of $0.2 million and $1.3 million for which there was no specific
reserve. At September 30, 1998, the recorded investment in impaired loans was
$3.7 million, of which $1.1 million had a specific allowance allocation of $0.2
million and $2.6 million of which there was no specific reserve. The Company
classifies all commercial and small business nonaccrual loans as impaired loans.
-18-
TABLE 7
NONPERFORMING ASSETS AND RISK ELEMENTS
- ------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in thousands) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------
Commercial and agricultural $2,002 72% $2,394 67% $3,684 75%
Real estate mortgage 309 11% 437 12% 523 11%
Consumer 481 17% 762 21% 695 14%
- ------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 2,792 100% 3,593 100% 4,902 100%
- ------------------------------------------------------------------------------------------------------------
Other real estate owned 585 1,164 612
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets 3,377 4,757 5,514
- ------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 55 15% 291 25% 261 27%
Real estate mortgage 125 33% 341 30% 303 32%
Consumer 197 52% 526 45% 390 41%
- ------------------------------------------------------------------------------------------------------------
Total 377 100% 1,158 100% 954 100%
- ------------------------------------------------------------------------------------------------------------
Total assets containing risk elements $3,754 $5,915 $6,468
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets to loans 0.38% 0.58% 0.69%
Total assets containing risk elements to loans 0.42% 0.72% 0.81%
Total nonperforming assets to assets 0.25% 0.37% 0.42%
Total assets containing risk elements to assets 0.27% 0.46% 0.50%
- ------------------------------------------------------------------------------------------------------------
DEPOSITS
Customer deposits represent the greatest source of funding assets. Average total
deposits for the quarter ended September 30, 1999, increased $37.3 million, or
3.6% from the same period in 1998. This growth has been present in the demand
and savings categories with increases of $19.9 million and $14.7 million,
respectively, while average time deposits remained stable between reporting
periods.
BORROWED FUNDS
The Company's borrowed funds consist of short-term borrowings and long-term
debt. 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. Long-term debt consists of fixed rate FHLB advances with
an original maturity greater than one year. Average borrowings for the quarter
ended September 30, 1999 increased $44.6 million, or 37.8% as compared to the
same period of 1998.
CAPITAL AND DIVIDENDS
Stockholders' equity of $127.9 million represents 9.3% of total assets at
September 30, 1999, compared with $130.6 million, or 10.1% at December 31, 1998
and $132.5 million, or 10.2% a year previous. The decrease in equity is due to
depreciation in the market value of the securities available for sale portfolio
resulting from the recent rise in market interest rates.
In December of 1998, the Company distributed a 5% stock dividend, the
thirty-ninth consecutive year a stock dividend has been declared. In September
of 1999, 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 1998 and 1997, 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 8 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 3%, 4% and 8% respectively, with requirements to be
considered well capitalized of 5%, 6% and 10%, respectively.
-19-
TABLE 8
CAPITAL MEASUREMENTS
- ------------------------------------------------------------------------------------------------------
First Second THIRD Fourth
Quarter Quarter QUARTER Quarter
- ------------------------------------------------------------------------------------------------------
1999
Tier 1 leverage ratio 9.75% 9.51% 9.37%
Tier 1 capital ratio 14.87% 14.42% 14.39%
Total risk-based capital ratio 16.12% 15.67% 15.64%
Cash dividends as a percentage of net income 43.93% 44.06% 43.97%
Per common share:
Book value $10.57 $10.27 $10.29
Tangible book value $ 9.98 $ 9.70 $ 9.74
- ------------------------------------------------------------------------------------------------------
1998
Tier 1 leverage ratio 9.19% 9.27% 9.36% 9.33%
Tier 1 capital ratio 15.30% 15.13% 14.95% 14.69%
Total risk-based capital ratio 16.56% 16.38% 16.21% 15.94%
Cash dividends as a percentage of net income 30.33% 36.55% 38.61% 40.37%
Per common share:
Book value $10.02 $10.23 $10.58 $10.52
Tangible book value $ 9.36 $ 9.59 $ 9.96 $ 9.91
- ------------------------------------------------------------------------------------------------------
The accompanying Table 9 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, 1999, total
market capitalization of the Company's common stock was approximately $215
million compared to $290 million at December 31, 1998 and $274 million at
September 30, 1998. The Company's price to book value ratio was 1.68 at
September 30, 1999 and 2.07 a year previous. The per share market price was 11
times annualized earnings at September 30, 1999 and 15 times annualized earnings
at September 30, 1998.
TABLE 9
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- ---------------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- ---------------------------------------------------------------------------------------
1998
March 31 $20.00 $16.79 $20.00 $0.122
June 30 24.65 19.29 24.17 0.162
September 30 25.00 18.46 21.90 0.162
December 31 25.50 20.71 23.38 0.170
- ---------------------------------------------------------------------------------------
1999
MARCH 31 $24.50 $20.88 $20.88 $0.170
JUNE 30 22.25 20.00 20.50 0.170
SEPTEMBER 30 21.94 17.25 17.31 0.170
- ---------------------------------------------------------------------------------------
-20-
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, 1999 and 1998, the Company's basic surplus ratios (net
access to cash and secured borrowings as a percentage of total assets) were
approximately 4% and 7%, respectively. The Asset/Liability Management Committee
has determined that liquidity is adequate to meet the cash flow requirements of
the Company.
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, 1999, the
interest sensitivity gap indicates that the Company is liability sensitive in
the short term.
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, 1999 balance sheet
position.
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
- ---------------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
- ---------------------------------------------------------------
+200 (5.15%)
+100 (2.72%)
-100 1.68%
-200 2.71%
- ---------------------------------------------------------------
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SELECTED FIVE YEAR DATA 1998 1997 1996 1995 1994
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(dollars in thousands, except per share data)
Net income $ 19,102 $ 14,749 $ 12,179 $ 9,329 $ 6,508
Return on average assets 1.48% 1.20% 1.10% 0.90% 0.64%
Return on average equity 14.93% 12.97% 11.80% 9.18% 6.53%
Net interest margin 4.76% 4.67% 4.69% 4.43% 4.81%
Efficiency ratio 57.92% 56.09% 60.74% 65.92% 70.22%
Expense ratio 2.31% 2.20% 2.41% 2.51% 2.96%
Tier 1 leverage ratio 9.33% 8.91% 8.70% 8.80% 9.05%
Tier 1 risk-based capital ratio 14.69% 14.88% 14.06% 15.21% 16.09%
Total risk-based capital ratio 15.94% 16.13% 15.31% 16.46% 17.35%
Cash dividend per share payout 41.34% 37.91% 36.50% 42.61% 56.13%
Earnings per share:
Basic $ 1.52 $ 1.18 $ 0.98 $ 0.72 $ 0.50
Diluted $ 1.49 $ 1.16 $ 0.97 $ 0.72 $ 0.50
Cash dividends paid $ 0.616 $ 0.442 $ 0.355 $ 0.307 $ 0.277
Book value $ 10.52 $ 9.77 $ 8.65 $ 8.47 $ 7.56
Tangible book value $ 9.91 $ 9.09 $ 7.84 $ 7.56 $ 6.81
Stock dividends distributed 5.00% 5.00% 5.00% 5.00% 5.00%
Market price:
High $ 25.50 $ 19.78 $ 12.93 $ 11.66 $ 10.88
Low $ 16.79 $ 11.99 $ 10.21 $ 9.72 $ 8.82
End of year $ 23.38 $ 19.29 $ 12.25 $ 11.34 $ 10.18
Price/earnings ratio (assumes dilution) 15.69X 16.56x 12.59x 15.73x 20.49x
Price/book value ratio 2.22X 1.97x 1.42x 1.34x 1.35x
Total assets $1,290,009 $1,280,585 $1,138,986 $1,106,266 $1,044,557
Total stockholders' equity $ 130,632 $ 123,343 $ 106,264 $ 108,044 $ 98,307
Average diluted common shares
outstanding (thousands) 12,832 12,700 12,514 12,936 13,140
- ------------------------------------------------------------------------------------------------------------------------------------
All share and per share data has been restated to give retroactive effect to
stock dividends and splits.
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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, 1999.
Item 2 -- Changes in Securities
Not Applicable
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, 1999.
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, 1999.
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.
During the third quarter ended September 30, 1999, the Company filed the
following Current Reports on Form 8-K:
(1) A report dated August 19, 1999 stating that NBT Bancorp Inc. and Lake
Ariel Bancorp, Inc. announced that they had entered into an Agreement
and Plan of Merger, dated as of August 16, 1999.
(2) A report dated September 13, 1999 describing organizational changes
within the Company.
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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, 1999.
NBT BANCORP INC.
By: /S/ DARYL R. FORSYTHE
Daryl R. Forsythe
President and
Chief Executive Officer
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
- ------ ---------------
27.1 Financial Data Schedule for the nine months ended September 30, 1999 Herein
-25-
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999