EXHIBIT 99.1
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 subsidiaries, NBT Bank, N.A. (NBT)
and LA Bank, N.A. (LA) collectively referred to herein as the Company. This
discussion will focus on results of operations, financial position, capital
resources, and asset/liability management.
OVERVIEW
Net income of $22.2 million ($1.23 diluted earnings per share) for 1999 compares
to $22.9 million ($1.25 diluted earnings per share) for 1998. However, excluding
a $3.8 million net income tax benefit recognized in 1998 in connection with a
corporate realignment, net income increased 16.3% in 1999 over the prior year.
Income before taxes of $34.7 million improved $6.2 million (21.7%) over 1998.
Results for 1999 included merger related expenses of $0.8 million after taxes.
The increase in pretax income for 1999 can be primarily attributed to
improvements in net interest income and noninterest income. The increase in net
interest income was a result of continued loan growth. The higher noninterest
income was a result of increased fee income from the continued expansion of our
ATM network, increased service charges from demand deposit account growth and
increased securities gains on the sales of securities available for sale.
Additionally, the Company was able to achieve these improvements without a
significant increase in noninterest expense.
In December 1999, the Bancorp distributed a 5% stock dividend, the fortieth
consecutive year a stock dividend has been declared. Throughout this report,
amounts per common share and common shares outstanding have been retroactively
adjusted to reflect stock dividends and splits.
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; and (5) changes may incur
in business conditions and inflation.
MERGERS AND ACQUISITIONS
On February 17, 2000, the shareholders of Bancorp and Lake Ariel Bancorp, Inc.
(Lake Ariel) approved a merger whereby Lake Ariel was merged with and into
Bancorp with each issued and outstanding share of Lake Ariel exchanged for
0.9961 shares of Bancorp common stock. The transaction resulted in the issuance
of 5.0 million common shares, bringing the Bancorp's outstanding shares to
approximately 18.1 million after the merger. The merger results in Bancorp being
the surviving holding company for NBT and LA, a former subsidiary of Lake Ariel.
The merger is being accounted for as a pooling-of-interests and qualifies as a
tax-free exchange for Lake Ariel shareholders.
LA is a commercial bank headquartered in northeast Pennsylvania with
twenty-two branch offices in five counties and approximately $570 million in
assets at December 31, 1999. As a result, the Company, has combined assets of
approximately $2.0 billion and fifty-eight branch locations.
On December 8, 1999, Bancorp and Pioneer American Holding Company
Corp.(Pioneer American), the parent company of Pioneer American Bank, N.A.,
entered into a definitive agreement of merger, subject to the approval of each
company's shareholders and banking regulators. The merger is expected to close
in the second quarter of 2000 and is intended to be accounted for as a
pooling-of-interests and qualify as a tax-free exchange for Pioneer American
shareholders. Shareholders of Pioneer American will receive a fixed ratio of
1.805 shares of Bancorp common stock for each share exchanged. Bancorp will
issue approximately 5.2 million shares and share equivalents in exchange for all
of the Pioneer American common stock and share equivalents outstanding.
Pioneer American Bank, N.A. is a full service commercial bank with total
assets of approximately $420 million at December 31, 1999. The Bank has eighteen
branches in five counties in northeast Pennsylvania. Pioneer American Bank, N.A.
will ultimately be merged with LA to form the largest community bank
headquartered in northeast Pennsylvania.
YEAR 2000
The Company has not experienced any system failure or miscalculation of
financial data as a result of the Year 2000 issue. The Company will continue to
monitor all systems to ensure they are properly functioning as the year
progresses.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned on assets
and the interest paid on deposits and borrowings. Net interest income is one of
the major determining factors in a financial institution's performance as it is
the principal source of earnings. Table 1 presents average balance sheets and a
net interest income analysis on a taxable equivalent basis for each of the years
in the three-year period ended December 31, 1999.
As reflected in Table 1, federal taxable equivalent (FTE) net interest
income of $77.1 million in 1999 increased $5.6 million or 7.8% compared to 1998.
This increase can be attributed to an increase in average earning assets, which
mitigated the impact of a decline in yield during 1999, and a reduction in the
cost of interest bearing liabilities.
Average earning assets in 1999 increased $125.7 million or 7.8% compared to
1998. Average loans increased $131.7 million or 13.2% during 1999, while average
investment securities decreased $5.5 million or 0.9%. The benefits of the
increase offset a 26 basis point decline in the yield on earning assets,
primarily the result of a 40 basis point decline in the yield on loans. The
continuing decline in the yield earned on loans can be attributed to the
declining interest rate environment experienced during late 1998 and early 1999.
Average interest bearing liabilities during 1999 increased $97.3 million
compared to 1998, the result of an increase in interest bearing deposits and
borrowings of $43.6 million and $53.7 million, respectively. The effects of the
increase in interest bearing liabilities was offset by a 29 basis point
reduction in rate paid, resulting in a $0.2 million increase in interest expense
during 1999 compared to 1998. The reduced cost of interest bearing liabilities
during 1999 can also be attributed to the previously mentioned declining
interest rate environment.
In comparing 1998 to 1997, FTE net interest income increased $5.1 million
or 7.7% from $66.5 million in 1997 to $71.6 million in 1998. Yields on earning
assets and the cost of interest bearing liabilities were stable between 1997 and
1998. In 1998, average earning assets increased $132.0 million or 8.9% compared
to 1997, resulting in a $9.5 million increase in interest income. Average loans
increased $103.1 million or 11.5% during the 1998, while average investment
securities increased $29.8 million or 5.2%. During 1998, average interest
bearing liabilities increased $90.2 million, primarily a result of increases in
time deposits and other borrowings.
An important performance measurement of net interest income is the net
interest margin. Net interest margin, net 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. The net interest margin was stable
between 1998 and 1999. Net interest margin was 4.44% for 1999 compared to 4.44%
during 1998. The stability of the net interest margin is primarily a result of a
stable interest rate spread, as the reduction in the cost of interest bearing
liabilities was consistent with the decline in yield on earning assets.
TABLE 1
AVERAGE BALANCES AND NET INTEREST INCOME
The following table includes the condensed consolidated average balance sheet,
an analysis of interest income/expense and average yield/rate for each major
category of earning assets and interest bearing liabilities on a taxable
equivalent basis. Interest income for tax-exempt securities and loans has been
adjusted to a taxable-equivalent basis using the statutory Federal income tax
rate of 35%.
1999 1998 1997
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATES
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits $ 355 $ 18 5.07% $ 308 $ 14 4.55% $ 287 $ 14 4.88%
Federal funds sold and securities
purchased under agreements to resell 3,327 156 4.69 4,821 248 5.14 8,389 458 5.46
Other short-term investments 6,073 296 4.87 5,156 269 5.22 2,536 135 5.32
Securities available for sale 520,499 34,941 6.71 472,618 32,653 6.91 480,528 33,082 6.88
Securities held to maturity:
Taxable 35,387 2,255 6.37 87,279 5,784 6.63 47,660 3,338 7.00
Tax exempt 44,902 3,167 7.05 46,357 3,392 7.32 48,238 3,561 7.38
------ ----- ------ ----- ------ -----
Total securities held to maturity 80,289 5,422 6.75 133,636 9,176 6.87 95,898 6,899 7.19
Loans:
Commercial 520,269 46,035 8.85 427,416 40,005 9.36 368,264 35,614 9.67
Real estate mortgage 272,060 20,368 7.49 253,636 20,167 7.95 218,261 18,024 8.26
Consumer 335,731 30,462 9.07 315,297 29,443 9.34 306,711 28,275 9.22
------- ------ ------- ------ ------- ------
Total loans 1,128,060 96,865 8.59 996,349 89,615 8.99 893,236 81,913 9.17
--------- ------ ------- ------ ------- ------
Total earning assets 1,738,603 137,698 7.92 1,612,888 131,975 8.18 1,480,874 122,501 8.27
------- ------- -------
Other assets 106,032 104,655 91,835
------- ------- ------
Total assets $1,844,635 $1,717,543 $1,572,709
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Money market deposit accounts $ 109,108 3,228 2.96 $ 101,473 2,958 2.92 $ 103,391 3,013 2.91
NOW accounts 161,872 2,133 1.32 148,775 2,410 1.62 136,347 2,166 1.59
Savings deposits 224,842 6,082 2.71 197,366 6,007 3.04 195,148 5,987 3.07
Certificates of deposit 687,705 34,624 5.03 692,316 36,683 5.30 655,523 34,463 5.26
------- ------ ------- ------ ------- ------
Total interest bearing deposits 1,183,527 46,067 3.89 1,139,930 48,058 4.22 1,090,409 45,629 4.18
Short-term borrowings 121,268 5,999 4.95 116,419 6,153 5.29 121,361 6,693 5.51
Other borrowings 154,408 8,516 5.52 105,515 6,206 5.88 59,852 3,725 6.22
------- ----- ------- ----- ------ ---------
Total interest bearing liabilities 1,459,203 60,582 4.15 1,361,864 60,417 4.44% 1,271,622 56,047 4.41%
------ ------ --------- ------
Demand deposits 205,684 178,551 151,344
Other liabilities 15,125 12,467 13,537
Stockholders' equity 164,623 164,661 136,206
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,844,635 $1,717,543 $1,572,709
---------- --------- ----------
NET INTEREST INCOME $77,116 $71,558 $66,454
------- ------- -------
NET INTEREST MARGIN 4.44% 4.44% 4.49%
----- ----- -----
TAXABLE EQUIVALENT ADJUSTMENT $ 2,309 $ 1,675 $ 1,670
-------- -------- --------
(1) For purposes of these computations, nonaccrual loans are included in the
average loan balances outstanding.
(2) Securities are shown at average amortized cost.
TABLE 2
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
The following table presents changes in interest income and interest expense
attributable to changes in volume (change in average balance multiplied by prior
year rate) and changes in rate (change in rate multiplied by prior year volume).
The net change attributable to the combined impact of volume and rate has been
allocated to each type of asset and liability in proportion to the absolute
dollar amounts of change.
- ----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) Increase (Decrease)
1999 OVER 1998 1998 over 1997
- ----------------------------------------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------
Interest bearing deposits $ 2 $ 2 $ 4 $ 1 $ (1) $ 0
Federal funds sold and securities
purchased under agreements to resell (72) (20) (92) (185) (25) (210)
Other short-term investments 43 (16) 27 137 (3) 134
Securities available for sale 3,178 (890) 2,288 (548) 118 (429)
Securities held to maturity:
Taxable (3,315) (214) (3,529) 2,616 (170) 2,446
Tax exempt (104) (121) (225) (138) (31) (169)
Loans 10,994 (3,744) 7,250 9,080 (1,378) 7,702
- ----------------------------------------------------------------------------------------------------------------
Total interest income 10,726 (5,003) 5,723 10,963 (1,490) 9,474
- ----------------------------------------------------------------------------------------------------------------
Money market deposit accounts 225 45 270 (56) 1 (55)
NOW accounts 247 (524) (277) 200 44 244
Savings accounts 373 (298) 75 67 (47) 20
Certificates of deposit (243) (1,816) (2,059) 1,948 272 2,220
Short-term borrowings 284 (439) (155) (267) (304) (571)
Other borrowings 2,678 (367) 2,311 2,689 (177) 2,512
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 3,564 (3,399) 165 4,581 (211) 4,370
- ----------------------------------------------------------------------------------------------------------------
CHANGE IN FTE NET INTEREST INCOME $ 7,162 $(1,604) $5,558 $ (6,382) $(1,279) $5,104
- ----------------------------------------------------------------------------------------------------------------
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's judgement as to the
adequacy of the allowance to absorb losses inherent in the current loan
portfolio. In assessing the adequacy of the allowance for loan losses,
consideration is given to historical loan loss experience, value and adequacy of
collateral, level of nonperforming loans, loan concentrations, the growth and
composition of the portfolio, and the results of a comprehensive in-house loan
review program conducted throughout the year. Consideration is given to the
results of examinations and evaluations of the overall portfolio by senior
credit personnel, internal and external auditors, and regulatory examiners. The
provision for loan losses decreased to $5.1 million in 1999 from $5.7 million in
1998, the result of lower charge-offs and improved asset quality.
Accompanying tables reflect the five year history of net charge-offs and
the allocation of the allowance by loan category. Net charge-offs, both as
dollar amounts and as percentages of average loans outstanding, decreased
between 1999 and 1998. The allowance has been allocated based on identified
problem credits or categorical trends. Although the provision decreased, the
allowance increased to $16.7 million at December 31, 1999 from $15.3 million the
previous year-end. However, given the growth in the loan portfolio, at December
31, 1999, the allowance for loan losses to loans outstanding was 1.36%, compared
to 1.46% at year-end 1998. Management considers the allowance to be adequate at
December 31, 1999.
TABLE 3
ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Balance at January 1 $15,322 $13,691 $12,303 $10,777 $10,522
Loans charged off:
Commercial and agricultural 2,410 2,452 1,299 1,432 1,261
Real estate mortgages 246 356 158 347 312
Consumer 2,104 2,288 2,414 1,574 1,388
- -----------------------------------------------------------------------------------------------------------
Total loans charged off 4,760 5,096 3,871 3,353 2,961
- -----------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and agricultural 289 264 239 314 201
Real estate mortgages 71 35 16 20 --
Consumer 662 699 719 720 652
- -----------------------------------------------------------------------------------------------------------
Total recoveries 1,022 998 974 1,054 853
- -----------------------------------------------------------------------------------------------------------
Net loans charged off 3,738 4,098 2,897 2,299 2,108
Provision for loan losses 5,070 5,729 4,285 3,825 2,363
- -----------------------------------------------------------------------------------------------------------
Balance at December 31 $16,654 $15,322 $13,691 $12,303 $10,777
- -----------------------------------------------------------------------------------------------------------
Allowance for loan losses to loans
outstanding at end of year 1.36% 1.46% 1.45% 1.48% 1.46%
Allowance for loan losses to
nonaccrual loans 271% 256% 236% 313% 165%
Nonaccrual loans to total loans 0.50% 0.57% 0.61% 0.47% 0.88%
Nonperforming assets to total assets 0.36% 0.43% 0.42% 0.42% 0.63%
Net charge-offs to average loans outstanding 0.33% 0.41% 0.32% 0.29% 0.29%
- -----------------------------------------------------------------------------------------------------------
TABLE 4
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Category Category Category Category Category
Percent Percent Percent Percent Percent
(dollars in thousands) Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans
- -------------------------------------------------------------------------------------------------------------------------------
Commercial
and agricultural $ 8,702 47.2% $ 7,819 44.6% $ 6,316 41.8% $ 4,915 40.1% $ 4,950 38.7%
Real estate
mortgages 776 21.8% 681 24.0% 522 23.9% 608 23.7% 691 24.1%
Consumer 4,614 31.0% 4,452 31.4% 2,898 34.3% 2,825 36.2% 2,537 37.2%
Unallocated 2,562 -- 2,370 -- 3,955 -- 3,955 -- 2,599 --
- -------------------------------------------------------------------------------------------------------------------------------
Total $16,654 100.0% $15,322 100.0% $13,691 100.0% $12,303 100.0% $10,777 100.0%
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Noninterest income consists primarily of trust and custodian fees, service
charges on deposit accounts, gains and losses on the sales of investment
securities, and fees and service charges for other banking services. Total
noninterest income for 1999 of $16.4 million increased $1.5 million or 10.1%
compared to 1998. Excluding securities gains and losses, noninterest income
increased $0.8 million or 6.1% in 1999 compared to 1998. Excluding security
gains and losses, total noninterest income for 1998 increased $2.3 million over
1997.
Trust income rose during 1999 as managed assets have continued to increase.
At December 31, 1999, the Trust Department managed $891 million in assets
(market value), up from $865 million at year-end 1998, resulting in a $0.2
million increase in trust income.
Service charges on deposit accounts increased $1.0 million in 1999 compared
to 1998. This improvement can be attributed to an increase in service fee and
overdraft income resulting from growth in demand deposits. In addition, ATM fee
income increased $0.3 million in 1999 compared to 1998. This can be attributed
to an increase in the use of customer debit cards and the installation of
additional machines throughout our market areas. The Company had 47 ATM machines
in use at December 31, 1999, up from 35 at year-end 1998.
NONINTEREST EXPENSE AND OPERATING EFFICIENCY
Salaries and employee benefits increased $1.0 million between 1999 and 1998,
primarily the result of increased salaries and performance based incentives.
Salaries and employee benefits increased $2.1 million between 1998 and 1997, due
to additional staffing needs in both new and existing branch and administrative
offices at LA, increases in salaries and performance based incentives and
increases in health care insurance and other benefits.
Occupancy expense increased $0.2 million from 1998 to 1999 and $0.4 million
from 1997 to 1998. This is attributed to growth in the number of LA branch
offices throughout 1998, with a full year's effect of occupancy expense
reflected in 1999.
Equipment expense during 1999 increased $0.6 million compared to 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. Equipment
expense increased $1.0 million between 1998 and 1997. This increase can be
attributed primarily to growth in the number of LA branch offices and a rise in
computer depreciation expense related to the automation of the branch network
computer system at NBT completed in the fourth quarter of 1997.
Data processing and communications expense for 1998 experienced a $0.8
million increase compared to 1997. Contributing to this increase in third party
fees was the outsourcing of the Company's items processing function during 1997.
Other operating expense for 1999 experienced a $1.1 million decline
compared to 1998. In addition to a decline in recurring other operating expenses
during 1999, the Company recognized a nonrecurring gain of $0.8 million on the
sale of other real estate owned.
An important operating efficiency measure that the Company closely monitors
is the efficiency ratio. This ratio is computed as total noninterest expense
(excluding merger and acquisition expenses, gains and losses on the sales of
OREO and other nonrecurring expenses) divided by net interest income plus
noninterest income (excluding net security gains and losses and nonrecurring
income). The efficiency ratio improved to 56.06% in 1999 from 59.63% for 1998.
This improvement was a result of the increases in net interest and noninterest
income between the reporting periods, without any significant increase in
noninterest expense.
INCOME TAXES
The effective income tax rate was 36% in 1999, 19.7% in 1998, and 34.0% in 1997.
The increased income taxes in 1999 and decreased incomes taxes in 1998 resulted
from a tax benefit recognized during 1998 associated with a corporate
realignment. Additional information on income taxes is provided in the notes to
the supplemental consolidated financial statements.
SECURITIES
The securities portfolio constituted 34.6% and 37.5% of average earning assets
during 1999 and 1998, respectively. The decrease reflects a continuing shift in
asset mix to higher yielding loans. All purchases of U.S. Governmental agencies
guaranteed securities are classified as available for sale. Held to maturity
securities are obligations of the State of New York political subdivisions and
do not include any direct obligations of the State of New York.
TABLE 5
SECURITIES PORTFOLIO
As of December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR Amortized Fair Amortized Fair
(in thousands) COST VALUE Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
U.S. Treasury $ 10,400 $ 8,535 $ 10,406 $ 10,481 $ 2,395 $ 2,406
Federal Agency and mortgage-backed 439,429 417,493 392,613 397,602 477,593 481,363
State & Municipal and other securities 100,208 94,412 39,036 39,195 24,096 24,337
- -------------------------------------------------------------------------------------------------------------------
Total securities available for sale $550,037 $520,440 $442,055 $447,278 $504,084 $508,106
- -------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
Mortgage-backed securities 23,282 21,370 87,083 86,892 33,892 34,049
State & Municipal 53,414 52,268 45,459 46,164 48,045 48,651
Other securities 1,517 1,517 3,450 3,463 1,518 1,518
- -------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 78,213 $ 75,155 $ 135,992 $ 136,519 $ 83,455 $ 84,218
- -------------------------------------------------------------------------------------------------------------------
LOANS
The following Table 6 sets forth the loan portfolio by major categories as of
December 31 for the years indicated.
TABLE 6
COMPOSITION OF LOAN PORTFOLIO
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December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
Real estate mortgages $244,478 $238,321 $216,356 $184,774 $159,741
Commercial real estate mortgages 268,786 234,175 200,018 166,068 133,451
Real estate construction and development 22,154 13,863 9,909 12,722 17,981
Commercial and agricultural 308,472 235,244 195,952 167,408 152,546
Consumer 264,475 234,084 240,907 243,410 231,235
Home equity 114,289 95,819 82,064 57,716 43,989
- ---------------------------------------------------------------------------------------------------------------
Total loans $1,222,654 $1,051,506 $945,206 $832,098 $738,943
- ---------------------------------------------------------------------------------------------------------------
The loan portfolio is the largest component of earning assets and accounts for
the greatest portion of total interest income. At December 31, 1999, total loans
were $1,222.7 million, a 16.3% increase from December 31, 1998. In general,
loans are internally generated and lending activity is confined to principally
nine counties in New York State and five counties in Pennsylvania. The Company
does not engage in highly leveraged transactions or foreign lending activities.
There were no concentration of loans exceeding 10% of total loans other than the
concentration with borrowers in New York State, discussed in note 6 to the
supplemental consolidated financial statements, and those categories reflected
in Table 6.
Real estate mortgages consist primarily of loans secured by first or second
deeds of trust on primary residencies.
Loans in the commercial and agricultural category, as well as commercial
real estate mortgages, consist primarily of short-term and/or floating rate
commercial loans made to small to medium-sized companies. Agricultural loans
totaled $51.5 million at December 31, 1999, and there are no other substantial
loan concentrations to any one industry or to any one borrower.
Consumer loans consist primarily of installment credit to individuals
secured by automobiles and other personal property. Management believes consumer
loan underwriting guidelines to be conservative. The guidelines are based
primarily on satisfactory credit history, down payment, and sufficient income to
service monthly payments.
Shown in Table 7, Maturities and Sensitivities of Loans to Changes in
Interest Rates, are the maturities of the loan portfolio and the sensitivity of
loans to interest rate fluctuations at December 31, 1999. Scheduled repayments
are reported in the maturity category in which the contractual payment is due.
TABLE 7
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
- ---------------------------------------------------------------------------------------------------------------------
AFTER ONE
YEAR BUT
WITHIN AFTER
REMAINING MATURITY AT WITHIN FIVE FIVE
DECEMBER 31, 1999 ONE YEAR YEARS YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
Floating/adjustable rate:
Commercial and agricultural $151,253 $ 112,106 $ 32,421 $295,780
Real estate mortgages 24,369 17,453 27,544 69,366
Consumer 24,541 8,604 38,901 72,046
- ---------------------------------------------------------------------------------------------------------------------
Total floating rate loans 200,163 138,163 98,866 437,192
- ---------------------------------------------------------------------------------------------------------------------
Fixed Rate:
Commercial and agricultural 54,811 124,295 102,372 281,478
Real estate mortgages 15,783 36,462 145,021 197,266
Consumer 68,176 182,803 55,739 306,718
- ---------------------------------------------------------------------------------------------------------------------
Total fixed rate loans 138,770 343,560 303,132 785,462
- ---------------------------------------------------------------------------------------------------------------------
Total loans $338,933 $481,723 $401,998 $1,222,654
- ---------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets and past due loans are reflected in Table 8 below for the
years indicated.
TABLE 8
NONPERFORMING ASSETS AND RISK ELEMENTS
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Commercial and agricultural $4,697 $4,483 $3,856 $2,441 $3,945
Real estate mortgages 618 744 692 251 332
Consumer 837 762 1,242 1,243 2,243
- ----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 6,152 5,989 5,790 3,935 6,520
- ----------------------------------------------------------------------------------------------------------------------
Other real estate owned 862 1,522 1,053 2,083 2,052
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 7,014 7,511 6,843 6,018 8,572
- ----------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 125 527 176 418 559
Real estate mortgages 641 761 244 344 448
Consumer 184 629 1,778 1,882 2,041
- ----------------------------------------------------------------------------------------------------------------------
Total 950 1,917 2,198 2,644 3,048
- ----------------------------------------------------------------------------------------------------------------------
Total assets containing risk elements $7,964 $9,428 $9,041 $8,662 11,620
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets to loans 0.57% 0.71% 0.72% 0.72% 1.16%
Total assets containing risk element to loans 0.65% 0.90% 0.96% 1.04% 1.57%
Total nonperforming assets to assets 0.36% 0.43% 0.42% 0.42% 0.63%
Total assets containing risk elements to assets 0.41% 0.53% 0.55% 0.60% 0.86%
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets decreased $0.5 million or 6.6% at year-end 1999
compared to 1998, the result of the sales of other real estate owned during
1999. Total assets containing risk elements decreased $1.5 million or 15.5%
during the same period, the result of the sale of other real estate owned and a
reduction in loans ninety days or more past due. The effect of nonaccrual and
impaired loans on interest income is presented in the following Table 9.
TABLE 9
NONACCRUAL AND IMPAIRED LOANS INTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Income that would have been accrued at original
contract rates $704 $810 $610 $1,217 $952
Amount recognized as income 228 180 169 600 356
- --------------------------------------------------------------------------------------------------------------------
Interest income not accrued $476 $630 $441 $ 617 $596
- --------------------------------------------------------------------------------------------------------------------
DEPOSITS
Deposits are the largest component of the Company's liabilities and account for
the greatest portion of interest expense. At December 31, 1999, total deposits
were $1,477.6 million, an increase of 8.9% from December 31, 1998. Average
deposits during 1999 of $1,389.2 million were 5.4% higher than the 1998 average.
The increase can be attributed to growth in the demand and savings categories of
$40.2 million and $35.1 million, respectively, partially offset by a $4.6
million decline in average time deposits. The increase in demand and savings
deposits has contributed to the Company's improved net interest margin. The
preceding Table 1 presents average deposits with accompanying average rates
paid.
TABLE 10
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
- ------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Within three months $248,754 $236,226
After three but within six months 42,532 51,146
After six but within twelve months 33,001 21,041
After twelve months 18,006 16,557
- ------------------------------------------------------------------------------------------------------------------
Total $342,293 $324,970
- ------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS
Short-term borrowings include federal funds purchased, securities sold under
agreement to repurchase, and FHLB advances with original maturities of one day
up to one year. Long-term debt consists of fixed rate FHLB advances with an
original maturity greater than one year. At December 31, 1999, total borrowings
of $310.1 million were up 37.5% compared to the previous year-end total of
$225.5 million. Average borrowings during 1999 of $275.7 million represent a
$53.7 million increase over 1998. For additional information on borrowed funds
see notes 9 and 10 to the supplemental consolidated financial statements.
CAPITAL
Capital adequacy is an important indicator of financial stability and
performance. The principal source of capital to the Company is earnings
retention. The Company remains well capitalized as the capital ratios in the
notes to the supplemental consolidated financial statements indicate. Capital
measurements are significantly in excess of both regulatory minimum guidelines
and meet the requirements to be considered well capitalized.
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 policies must also provide the
flexibility to implement appropriate strategies and tactical actions.
Requirements change as loans grow, deposits and securities mature, and payments
on borrowings are made. Interest rate sensitivity management seeks to avoid
widely fluctuating net interest margins and to ensure consistent net interest
income through periods of changing economic conditions.
Given the above, liquidity to the Company is defined as the ability to
raise cash quickly at a reasonable cost without principal loss. The primary
liquidity measurement the Company utilizes is called the Basic Surplus which
captures the adequacy of its access to reliable sources of cash relative to the
stability of its funding mix of average liabilities. This approach recognizes
the importance of balancing levels of cash flow liquidity from short and
long-term securities with the availability of dependable borrowing sources which
can be accessed when necessary. Accordingly, the Company has established
borrowing facilities with other banks (federal funds), the Federal Home Loan
Bank of New York (short and long-term borrowings which are denoted as advances),
and repurchase agreements with investment companies.
This Basic Surplus approach enables the Company to adequately manage
liquidity from both tactical and contingency perspectives. By tempering the need
for cash flow liquidity with reliable borrowing facilities, the Company is able
to operate with a more fully invested and, therefore, higher interest income
generating, securities portfolio. The makeup and term structure of the
securities portfolio is, in part, impacted by the overall interest rate
sensitivity of the balance sheet. Investment decisions and deposit pricing
strategies are impacted by the liquidity position. At December 31, 1999, the
Company considered its Basic Surplus adequate to meet liquidity needs.
Interest rate risk is determined by the relative sensitivities of earning
asset yields and interest bearing liability costs to changes in interest rates.
Overnight federal funds on which rates change daily and loans which are tied to
the prime rate differ considerably from long-term investment securities and
fixed rate loans. Similarly, time deposits over $100,000 and money market
deposit accounts are much more interest sensitive than NOW and savings accounts.
The method by which banks evaluate interest rate risk is to look at the
interest sensitivity gap, the difference between interest sensitive assets and
interest sensitive liabilities repricing during the same period, measured at a
specific point in time. A funding matrix is utilized as a primary tool in
managing interest rate risk. The matrix arrays repricing opportunities along a
time line for both assets and liabilities. The asset/liabilities Management
Committee monitors the Company's gap position and implements appropriate
strategies to minimize potential interest rate risk.
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 the gap sensitivity, the next
step is to quantify the potential impact of the interest sensitivity on net
interest income. The Company measures interest rate risk based on the potential
change in net interest income under various rate environments. The Company
utilizes an interest rate risk model that simulates net interest income under
various interest rate environments. The model groups assets and liabilities into
components with similar interest rate repricing charataristics and applies
certain assumptions to these products. These assumptions include, but are not
limited to prepayment estimates under different rate environments, potential
call options of the investment portfolio and forecasted volumes of the various
balance sheet items.
TABLE 11
PERFORMANCE RATIOS
- -------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Return on Assets 1.20% 1.33% 1.16%
Return on Equity 13.47% 13.89% 13.35%
Average Equity to Average Assets 8.92% 9.59% 8.66%
Cash dividend per share payout 53.33% 46.96% 40.10%
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Responsibility for the integrity, objectivity, consistency, and fair
presentation of the financial information presented in this Annual Report rests
with NBT Bancorp Inc. management. The accompanying supplemental consolidated
financial statements and related information have been prepared in conformity
with generally accepted accounting principles consistently applied and include,
where required, amounts based on informed judgments and management's best
estimates.
Management maintains a system of internal controls and accounting policies
and procedures to provide reasonable assurance of the accountability and
safeguarding of Company assets and of the accuracy of financial information.
These procedures include management evaluations of asset quality and the impact
of economic events, organizational arrangements that provide an appropriate
segregation of responsibilities and a program of internal audits to evaluate
independently the adequacy and application of financial and operating controls
and compliance with Company policies and procedures.
The Board of Directors has appointed an Audit Committee composed entirely
of directors who are not employees of the Company. The Audit Committee is
responsible for recommending to the Board the independent auditors to be
retained for the coming year, subject to stockholder ratification. The Audit
Committee meets periodically, both jointly and privately, with the independent
auditors, with our internal auditors, as well as with representatives of
management, to review accounting, auditing, internal control structure and
financial reporting matters. The Committee reports to the Board on its
activities and findings.
/s/ Daryl R. Forsythe
- ---------------------
Daryl R. Forsythe
President and Chief Executive Officer
/s/ Michael J. Chewens
- ----------------------
Michael J. Chewens
Executive Vice President
Chief Financial Officer and Treasurer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NBT Bancorp Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of NBT Bancorp Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related supplemental consolidated statements of income, stockholders' equity,
cash flows and comprehensive income for each of the years in the three year
period ended December 31, 1999. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of NBT Bancorp Inc. and Lake Ariel Bancorp, Inc. on February 17,
2000, which has been accounted for as a pooling of interests as described in
Note 2 to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of NBT Bancorp Inc. and
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of NBT
Bancorp Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1999, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination.
/s/ KPMG LLP
Syracuse, New York
March 10, 2000
NBT BANCORP INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
ASSETS
Cash and cash equivalents $ 64,431 $ 66,185
Securities available for sale, at fair value 520,440 447,278
Securities held to maturity (fair value-$75,155 and $136,519) 78,213 135,992
Loans 1,222,654 1,051,506
Less allowance for loan losses 16,654 15,322
- ------------------------------------------------------------------------------------------------------------------
Net loans 1,206,000 1,036,184
Premises and equipment, net 40,830 37,605
Other assets 51,518 41,454
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,961,432 $1,764,698
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 223,143 $ 206,556
Savings, NOW, and money market 487,746 471,950
Time 766,729 678,441
- ------------------------------------------------------------------------------------------------------------------
Total deposits 1,477,618 1,356,947
Short-term borrowings 137,567 99,872
Long-term debt 172,575 125,611
Other liabilities 13,798 13,696
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 1,801,558 1,596,126
- ------------------------------------------------------------------------------------------------------------------
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-30,000,000; shares issued 18,488,347 and 17,817,182 18,489 17,817
Additional paid-in-capital 148,242 137,523
Retained earnings 23,060 23,132
Accumulated other comprehensive (loss) income (18,252) 3,062
Common stock in treasury at cost, 538,936 and 599,507 shares (11,665) (12,962)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 159,874 168,572
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,961,432 $1,764,698
- ------------------------------------------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements
NBT BANCORP INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Interest and fee income:
Loans $ 96,235 $ 89,399 $81,688
Securities - taxable 34,956 37,590 35,779
Securities - tax exempt 3,210 2,780 2,757
Other 988 531 607
- ---------------------------------------------------------------------------------------------------------------------
Total interest and fee income 135,389 130,300 120,831
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 46,067 48,058 45,629
Short-term borrowings 5,999 6,153 6,693
Other borrowings 8,516 6,206 3,725
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 60,582 60,417 56,047
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 74,807 69,883 64,784
Provision for loan losses 5,070 5,729 4,285
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 69,737 64,154 60,499
- ---------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust 3,305 3,115 2,675
Service charges on deposit accounts 6,303 5,325 4,942
Securities gains (losses) 1,716 1,056 (123)
Other 5,097 5,417 3,973
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income 16,421 14,913 11,467
- ---------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 25,213 24,215 22,111
Occupancy 4,317 4,132 3,754
Equipment 4,230 3,599 2,632
Data processing and communications 4,091 3,796 2,966
Professional fees and outside services 3,325 3,375 2,485
Office supplies and postage 2,436 2,523 2,250
Amortization of intangible assets 1,278 1,275 1,505
Other operating 6,610 7,665 6,677
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 51,500 50,580 44,380
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 34,658 28,487 27,586
Income taxes 12,483 5,614 9,406
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 22,175 $22,873 $18,180
- ---------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.24 $ 1.27 $ 1.06
Diluted $ 1.23 $ 1.25 $ 1.05
- ---------------------------------------------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements
All per share data has been restated to give retroactive effect to stock
dividends and splits.
NBT BANCORP INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Additional Accumulated Other
Common Paid-In Retained Comprehensive Treasury
(in thousands, except per share data) Stock Capital Earnings (Loss)/Income Stock Total
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 12,348 91,060 33,780 (1,768) (7,984) 127,436
Net income 18,180 18,180
5% stock dividends 600 13,030 (13,630) --
Cash dividends - $0.421 per share (6,913) (6,913)
Payment in lieu of fractional shares (33) (33)
Issuance of shares to employee benefit plans
and other stock plans 211 2,899 3,110
Purchase of 131,900 treasury shares (2,568) (2,568)
Sale of 197,478 treasury shares to
employee benefit plans and other
stock plans 570 3,349 3,919
Issuance of shares of common stock through
secondary offering 802 11,077 11,879
Unrealized net gain on securities
available for sale, net of deferred taxes 4,148 4,148
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 13,961 118,636 31,384 2,380 (7,203) 159,158
Net income 22,873 22,873
Stock dividends and splits 3,814 17,670 (21,484) --
Cash dividends - $0.587 per share (9,613) (9,613)
Payment in lieu of fractional shares (16) (16)
Purchase of 353,000 treasury shares (9,094) (9,094)
Sale of 169,364 treasury shares to
employee benefit plans and other
stock plans 724 3,335 4,059
Issuance of shares to employee benefit plans
and other stock plans 42 493 535
Costs on sale of common stock through
secondary offering (12) (12)
Unrealized net gain on securities
available for sale, net of deferred taxes. 682 682
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 17,817 137,523 23,132 3,062 (12,962) 168,572
Net income 22,175 22,175
5% stock dividend 621 10,994 (11,615) --
Cash dividends - $0.656 per share (10,616) (10,616)
Payment in lieu of fractional shares (16) (16)
Purchase of 213,500 treasury shares (4,643) (4,643)
Sale of 274,071 treasury shares to
employee benefit plans and other
stock plans (830) 5,940 5,110
Issuance of shares to employee benefit plans
and other stock plans 51 555 606
Unrealized net loss on securities
available for sale, net of deferred taxes (21,314) (21,314)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $18,489 $148,242 $23,060 $(18,252) $(11,665) $159,874
- --------------------------------------------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements
Note: Cash dividends per share represent the historical dividends of NBT Bancorp
Inc.
NBT BANCORP INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH
FLOWS
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income $ 22,175 $ 22,873 $ 18,180
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,070 5,729 4,285
Depreciation of premises and equipment 3,773 3,292 2,400
Net accretion on securities (1,449) (1,676) (220)
Amortization of intangible assets 1,278 1,275 1,505
Deferred income tax benefit (271) (1,069) (497)
Proceeds from sale of loans held for sale 40,195 41,043 33,329
Originations and purchases of loans held for sale (37,923) (41,782) (32,382)
Net gains on sales of loans (325) (951) (404)
Net realized (gains) losses on sales of securities (1,716) (1,056) 123
Net gain on sales of other real estate owned (699) (75) (115)
Writedowns on other real estate owned 220 25 213
Net decrease (increase) in other assets 2,388 (4,300) 2,010
Net (decrease) increase in other liabilities (513) (1,460) (4,170)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,203 21,868 24,257
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities and principal paydowns 73,537 85,160 60,868
Proceeds from sales and calls 105,447 164,452 213,003
Purchases (212,710) (184,523) (337,172)
Securities held to maturity:
Proceeds from maturities, calls, and principal paydowns 26,151 54,384 27,961
Purchases (39,461) (107,249) (50,713)
Net increase in loans (178,354) (107,508) (117,567)
Purchases of premises and equipment, net (6,998) (8,392) (8,593)
Proceeds from sales of other real estate owned 2,660 2,288 2,494
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (229,728) (101,388) (209,719)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 120,671 62,314 125,118
Net increase (decrease) in short-term borrowings 37,695 (34,855) 46,183
Proceeds from issuance of long-term debt 50,000 95,658 29,969
Repayments of long-term debt (3,036) (17,826) (22,408)
Proceeds from issuance of treasury shares to employee
benefit plans and other stock plans 5,110 4,059 3,919
Purchase of treasury stock (4,643) (9,094) (2,568)
Net proceeds from issuance of common stock 606 523 14,989
Cash dividends and payment for fractional shares (10,632) (9,629) (6,946)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 195,771 91,150 188,256
- ------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,754) 11,630 2,794
Cash and cash equivalents at beginning of year 66,185 54,555 51,761
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 64,431 $ 66,185 $ 54,555
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 58,677 $ 60,641 $ 54,679
Income taxes 12,823 7,628 7,058
Noncash investing activities:
Transfer of held to maturity securities to securities
available for sale 71,137 -- --
Transfers of loans to other real estate owned 1,521 2,707 1,562
See notes to supplemental consolidated financial statements
NBT BANCORP INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Net income $22,175 $22,873 $18,180
- ------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax:
Unrealized net holding (losses) gains arising during
period [pre-tax amounts of $(33,102); $2,257
and $6,847] (20,285) 1,336 4,089
Less: Reclassification adjustment for net (gains)
losses included in net income [pre-tax amounts
of $(1,716); $(1,056) and $123] (1,029) (654) 59
- ------------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income (21,314) 682 4,148
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income $861 $23,555 $22,328
- ------------------------------------------------------------------------------------------------------------------
See notes to supplemental consolidated financial statements
NBT BANCORP INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NBT Bancorp Inc. ("Bancorp") and its subsidiaries, NBT Bank, N.A. (NBT Bank) and
LA Bank, N.A. (LA Bank), follow generally accepted accounting principles
("GAAP") and reporting practices applicable to the banking industry. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
The following is a description of significant policies and practices:
NBT-Lake Ariel Merger
On February 17, 2000, Lake Ariel Bancorp, Inc. (Lake Ariel) and its wholly owned
subsidiaries were merged with and into Bancorp. The merger was accounted for as
a pooling of interests and, accordingly, these supplemental consolidated
financial statements have been restated to present the combined financial
condition and results of operations of both companies as if the merger had been
in effect for all years presented. Further details pertaining to the merger are
prescribed in note 2.
Consolidation
The consolidated financial statements include the accounts of Bancorp and its
wholly owned subsidiaries, collectively referred to herein as the Company. All
significant intercompany transactions have been eliminated in consolidation.
Certain amounts previously reported in the financial statements have been
reclassified to conform with the current presentation. In the "Parent Company
Financial Information," the investment in subsidiary bank is carried under the
equity method of accounting.
Business
The Company provides loan and deposit services to its customers throughout
upstate New York and northeastern Pennsylvania. The Company is subject to
competition from other financial institutions. The Company is also subject to
the regulations of certain federal agencies and undergoes periodic examinations
by those regulatory agencies.
Segment Reporting
The Company's operations are solely in the financial services industry and
include the provision of traditional banking services. The Company operates
solely in the geographical region of upstate New York and northeastern
Pennsylvania. Management makes operating decisions and assesses performance
based on an ongoing review of its traditional banking operations, which
constitute the Company's only reportable segment.
Trust
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the accompanying consolidated balance sheets, since such
assets are not assets of the Company. Trust income is recognized on the accrual
method based on contractual rates applied to the balances of trust accounts.
Cash Equivalents
The Company considers amounts due from correspondent banks, cash items in
process of collection and institutional money market mutual funds to be cash
equivalents.
Securities
The Company classifies its debt securities at date of purchase as either
available for sale or held to maturity. The Company does not hold any securities
considered to be trading. Held to maturity securities are those that the Company
has the ability and intent to hold until maturity. All other securities not
included as held to maturity are classified as available for sale.
Available for sale securities are recorded at fair value. Held to maturity
securities are recorded at amortized cost. Unrealized holding gains and losses,
net of the related tax effect, on available for sale securities are excluded
from earnings and are reported in stockholders' equity as accumulated
comprehensive income, net of income taxes. Transfers of securities between
categories are recorded at fair value at the date of transfer. A decline in the
fair value of any
available for sale or held to maturity security below cost that is deemed other
than temporary is charged to earnings resulting in the establishment of a new
cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the interest method. Dividends
and interest income are recognized when earned. Realized gains and losses on
securities sold are derived using the specific identification method for
determining the cost of securities sold.
Loans
Loans are recorded at their current unpaid principal balance, net of unearned
income. Interest income on loans is primarily accrued based on the principal
amount outstanding.
The Company's classification of a loan as a nonaccrual loan is based in
part on bank regulatory guidelines. Loans are placed on nonaccrual status when
timely collection of interest is doubtful. Loans are transferred to a nonaccrual
basis generally when principal or interest payments become ninety days
delinquent, unless the loan is well secured and in the process of collection, or
when management concludes circumstances indicate that borrowers may be unable to
meet contractual principal or interest payments. When in the opinion of
management the collection of principal appears unlikely, the loan balance is
charged-off in total or in part. Accrual of interest is discontinued if the loan
is placed on nonaccrual status. When a loan is transferred to a nonaccrual
status, any unpaid accrued interest is reversed and charged against income.
Management, considering current information and events regarding the
borrowers' ability to repay the obligations, considers a loan to be impaired
when it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of collateral if the loan is collateral dependent.
If ultimate repayment of a non-accrual loan is expected, any payments
received are applied in accordance with contractual terms. If ultimate repayment
of principal is not expected or management judges it to be prudent, any payment
received on a non-accrual loan is applied to principal until ultimate repayment
becomes expected. Nonaccrual loans are returned to accrual status when
management determines that the financial condition of the borrower has improved
significantly to the extent that there has been a sustained period of repayment
performance so that the loan is brought current and the collectibility of both
principal and interest appears assured.
Allowance for loan losses
The allowance for loan losses is the amount which, in the opinion of management,
is necessary to absorb probable losses in the loan portfolio. The allowance is
determined by reference to the market area the Company serves, local economic
conditions, the growth and composition of the loan portfolio with respect to the
mix between the various types of loans and their related risk characteristics, a
review of the value of collateral supporting the loans, and comprehensive
reviews of the loan portfolio by the Loan Review staff and management. As a
result of the test of adequacy, required additions to the allowance for loan
losses are made periodically by charges to the provision for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in
economic conditions or changes in the values of properties securing loans in the
process of foreclosure. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to recognize additions to
the allowance for loan losses based on their judgements about information
available to them at the time of their examination which may not be currently
available to management.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation of premises and equipment is determined using the straight line
method over the estimated useful lives of the respective assets. Expenditures
for maintenance, repairs, and minor replacements are charged to expense as
incurred.
Other real estate owned
Other real estate owned ("OREO") consists of properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure. These assets are
recorded at the lower of carrying amount or fair market value, less any
estimated costs of disposal. Loan losses arising from the acquisition of such
assets are charged to the allowance for loan losses and any subsequent valuation
write-downs are charged to other expense. Operating costs associated with the
properties are charged to expense as incurred. Gains on the sale of OREO are
included in income when title has passed and the sale has met the minimum down
payment requirements prescribed by generally accepted accounting principles.
Intangible assets
Intangible assets consist of core deposit intangibles and goodwill. The core
deposit intangibles are the excess of the purchase price over the fair value of
the tangible net assets acquired in bank acquisitions accounted for using the
purchase method of accounting and allocated to deposits. The core deposit
intangibles are being amortized on a straight-line basis in amounts sufficient
to write-off those intangibles over their estimated useful lives. On a periodic
basis, management assesses the recoverability of the core deposit intangibles.
Such assessments encompass a projection of future earnings from the deposit base
as compared to the original expectations, based upon a discounted cash flow
analysis. If an assessment of the core deposit intangibles indicates that they
are impaired, a charge to income for the most recent period is recorded for the
amount of the impairment. Goodwill is the excess of cost over the fair value of
tangible net assets acquired in bank acquisitions accounted for using the
purchase method of accounting and not allocated to any specific asset or
liability category. Goodwill is being amortized on a straight-line basis over
periods up to 25 years from the acquisition date. The corporation also reviews
goodwill on a periodic basis for events or changes in circumstances that may
indicate that the carrying amount of goodwill may not be recoverable.
Treasury stock
Treasury stock acquisitions are recorded at cost. Subsequent sales of treasury
stock are recorded on an average cost basis. Gains on the sale of treasury stock
are credited to capital surplus. Losses on the sale of treasury stock are
charged to capital surplus to the extent of previous gains, otherwise charged to
retained earnings.
Income taxes
Income taxes are accounted for under the asset and liability method. The Company
files a consolidated tax return on the accrual basis. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
NOTE 2 MERGER AND ACQUISITION ACTIVITY
Lake Ariel Bancorp, Inc.
On February 17, 2000, the shareholders of Bancorp and Lake Ariel approved a
merger, whereby Lake Ariel and its subsidiaries were merged with and into
Bancorp with each issued and outstanding share of Lake Ariel exchanged for
0.9961 shares of Bancorp common stock. The transaction resulted in the issuance
of approximately 5.0 million shares of Bancorp common stock, bringing Bancorp's
outstanding shares to approximately 18.1 million after the merger.
LA Bank is a commercial bank headquartered in northeast Pennsylvania with
approximately $570 million in assets at December 31, 1999, and twenty-two branch
offices in five counties.
The merger qualified as a tax-free exchange for Lake Ariel shareholders and
is being accounted for as a pooling-of-interests combination. Concurrent with
the announcement of the merger, NBT Bancorp Inc. reduced its stock repurchase
plan from 600,000 shares to 200,000 leaving 76,500 shares remaining for
repurchase under the reduced plan.
The following table presents net interest income, net income, and
earnings per share reported by Lake Ariel, Bancorp without Lake Ariel (NBT), and
on a combined basis:
YEARS ENDED DECEMBER 31,
1999 1998 1997
Net Interest Income
NBT 60,582 57,403 53,659
Lake Ariel 14,225 12,480 11,125
Combined 74,807 69,883 64,784
Net Income
NBT 18,370 19,102 14,749
Lake Ariel 3,805 3,771 3,431
Combined 22,175 22,873 18,180
Basic Earnings per share
NBT 1.41 1.45 1.12
Lake Ariel 0.79 0.79 0.88
Combined 1.24 1.27 1.06
Diluted Earnings per share
NBT 1.40 1.42 1.11
Lake Ariel 0.77 0.77 0.84
Combined 1.23 1.25 1.05
Pioneer American Holding Company Corp.
On December 8, 1999, Bancorp and Pioneer American Holding Company Corp., the
parent company of Pioneer American Bank, N.A. entered into a definitive
agreement of merger. The transaction is subject to the approval of each
company's shareholders and of banking regulators, but is expected to close in
the second quarter of 2000. The merger is intended to be accounted for as a
pooling-of-interests and qualify as a tax-free exchange for Pioneer American
shareholders. Shareholders of Pioneer American will receive a fixed ratio of
1.805 shares of Bancorp common stock for each share exchanged. Bancorp will
issue approximately 5.2 million shares and share equivalents in exchange for all
of the Pioneer American common stock and share equivalents outstanding.
Pioneer American Bank, N.A. is a full service commercial bank with total
assets of approximately $420 million at December 31, 1999 and eighteen branches
in five counties in northeast Pennsylvania. Pioneer American Bank, N.A. will
ultimately be merged with LA Bank to form the largest community bank
headquartered in northeast Pennsylvania.
NOTE 3 EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted 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 years presented in the income statement:
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
Basic EPS:
Weighted average common shares outstanding 17,851 17,976 17,095
Net income available to common shareholders $22,175 $22,873 $18,180
- --------------------------------------------------------------------------------------------------------------------
Basic EPS $ 1.24 $ 1.27 $ 1.06
- --------------------------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 17,851 17,976 17,095
Dilutive common stock options 244 385 298
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares and potential
common stock 18,095 18,361 17,393
Net income available to common stockholders $22,175 $22,873 $18,180
- --------------------------------------------------------------------------------------------------------------------
Diluted EPS $ 1.23 $ 1.25 $ 1.05
- --------------------------------------------------------------------------------------------------------------------
NOTE 4 FEDERAL RESERVE BOARD REQUIREMENT
The Company is required to maintain a reserve balance with the Federal Reserve
Bank. The required average total reserve for the 14 day maintenance period
ending December 29, 1999, was $20.5 million.
NOTE 5 SECURITIES
The amortized cost, estimated fair value and unrealized gains and losses of
securities available for sale are as follows:
- ---------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 10,400 $ -- $ 1,865 $ 8,535
Federal Agency 79,979 -- 7,950 72,029
State & Municipal 25,138 5 2,234 22,909
Mortgage-backed 359,450 2 13,988 345,464
CMO's 45,392 10 3,568 41,834
Other securities 9,373 362 371 9,364
Nonmarketable securities 20,305 -- -- 20,305
- ---------------------------------------------------------------------------------------------------------------------
Total $550,037 $ 379 $29,976 $520,440
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 10,406 $ 75 $ -- $ 10,481
Federal Agency 91,901 782 102 92,581
State & Municipal 10,793 88 34 10,847
Mortgage-backed 300,712 4,638 329 305,021
CMO's 6,908 -- 186 6,722
Other securities 21,335 303 12 21,626
- ---------------------------------------------------------------------------------------------------------------------
Total $442,055 $5,886 $ 663 $447,278
- ---------------------------------------------------------------------------------------------------------------------
Gross realized gains and gross realized losses on the sale of
securities available for sale were $1.71 million and $0.02 million,
respectively, in 1999. Gross realized gains and gross realized losses on the
sale of securities available for sale were $1.05 million and $0.04 million,
respectively, in 1998. Gross realized gains and gross realized losses on the
sale of securities available for sale were $0.64 million and $0.72 million,
respectively, in 1997. During 1999, Lake Ariel adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". In connection with its
adoption of SFAS No. 133, Lake Ariel transferred approximately $71 million of
securities from its held to maturity portfolio to its available for sale
portfolio. These securities were subsequently sold during 1999 at a gain of $.18
million.
At December 31, 1999 and 1998, securities with amortized costs
totalling $405.6 million and $350.5 million, respectively, were pledged to
secure public deposits and for other purposes required or permitted by law.
The amortized cost, estimated fair value, and unrealized gains and losses of
securities held to maturity are as follows:
- ----------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
Mortgage-backed $23,282 $ -- $1,912 $21,370
State & Municipal 53,414 127 1,273 52,268
Other securities 1,517 -- -- 1,517
- ----------------------------------------------------------------------------------------------------------------------
Total $78,213 $127 $3,185 $75,155
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
Mortgage-backed $87,083 $139 $330 $86,892
CMO's 1,933 13 -- 1,946
State & Municipal 45,459 706 1 46,164
Other securities 1,517 -- -- 1,517
- ----------------------------------------------------------------------------------------------------------------------
Total $135,992 $858 $331 $136,519
- ----------------------------------------------------------------------------------------------------------------------
At December 31, 1999 and 1998 substantially all of the mortgage-backed
securities held by the Company were issued or backed by Federal agencies.
REMAINING MATURITIES OF DEBT SECURITIES AT DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
After One Year After Five Years
Within But Within But Within After Ten Total
One Year Five Years Ten Years Years Portfolio
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury $ -- --% $ -- --% $ -- --% $ 10,400 5.23% $ 10,400 5.23%
Federal Agency -- -- -- -- 25,569 6.71 54,410 7.22 79,979 7.05
State & Municipal -- -- 1,197 6.30 821 6.39 23,120 6.87 25,138 6.76
Mortgage-backed 11,955 6.85 51,394 6.92 85,456 6.86 256,037 6.92 404,842 6.90
Other securities -- -- -- -- -- -- 9,373 4.40 9,373 4.40
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized cost $11,955 6.85% $52,591 6.91% $111,846 6.22% $353,340 6.82% $529,732 6.80%
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value $11,408 $50,701 $107,380 $330,646 $500,135
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
Mortgage-backed $ 1,368 6.08% $ 5,471 6.08% $6,838 6.08% $ 9,605 6.08% $23,282 6.08%
State & Municipal 24,073 6.05 5,117 7.30 7,072 7.48 17,152 7.20 53,414 6.73
Other securities -- -- -- -- 1,517 6.66 -- -- 1,517 6.65
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized cost 25,441 6.05% $10,588 6.66% $15,427 6.78% $26,757 6.80% $78,213 6.53%
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value $25,328 $10,141 $14,899 $ 24,787 $75,155
- -----------------------------------------------------------------------------------------------------------------------------------
In the above tables, the maturity distribution and weighted average taxable
equivalent yield of securities at December 31, 1999, yields on amortized cost
have been calculated based on effective yields weighted for the scheduled
maturity of each security using the marginal federal tax rate of 35%. Maturities
of mortgage-backed securities are stated based on their estimated average life.
NOTE 6 LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans by category is as follows:
- ----------------------------------------------------------------------------------------------
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------
(in thousands)
Real estate mortgages $244,478 $238,321
Commercial real estate mortgages 268,786 234,175
Real estate construction and
development 22,154 13,863
Commercial and agricultural 308,472 235,244
Consumer 264,475 234,084
Home equity 114,289 95,819
- ----------------------------------------------------------------------------------------------
Total loans $1,222,654 $1,051,506
- ----------------------------------------------------------------------------------------------
The Company's concentrations of credit risk are reflected in the balance sheet.
The concentrations of credit risk with standby letters of credit, committed
lines of credit and commitments to originate new loans generally follow the loan
classifications. A substantial portion of the Company's loans is secured by real
estate located in central and northern New York and eastern Pennsylvania.
Accordingly, the ultimate collectiblity of a substantial portion of the
Company's portfolio is susceptible to changes in market conditions of those
areas. Management is not aware of any material concentrations of credit to any
industry or individual borrowers.
Changes in the allowance for loan losses for the three years ended December 31,
1999, are summarized as follows:
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Balance at January 1, $15,322 $13,691 $12,303
Provision 5,070 5,729 4,285
Recoveries 1,022 998 974
- ---------------------------------------------------------------------------------------------------------------------
21,414 20,418 17,562
Loans charged off (4,760) (5,096) (3,871)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, $16,654 $15,322 $13,691
- ---------------------------------------------------------------------------------------------------------------------
Nonperforming Assets
The effect of nonaccrual loans on interest income for the years ended December
31, 1999, 1998, and 1997 was not material. The Company is not committed to
advance additional funds to these borrowers. Nonaccrual loans were $6.2 million
and $6.0 million at December 31, 1999 and 1998, respectively.
At December 31, 1999, the recorded investment in impaired loans was $4.7
million. Included in this amount is $0.9 million of impaired loans for which the
specifically allocated allowance for loan loss is $0.5 million. In addition,
included in impaired loans is $3.8 million of impaired loans that, as a result
of the adequacy of collateral values and cash flow analysis do not have a
specific allocation. At December 31, 1998, the recorded investment in impaired
loans was $4.5 million, of which $2.4 million had a specific allowance
allocation of $0.7 million and $2.1 million for which there was no specific
allocation. The average recorded investment in impaired loans was $4.2 million,
$6.1 million and $3.5 million in 1999, 1998 and 1997, respectively. During 1999,
1998 and 1997 the Company recognized 0.2 million, $0.2 million and $0.1million,
respectively, of interest income on impaired loans on the cash basis.
Related Party Transactions
In the ordinary course of business, the Company has made loans at prevailing
rates and terms to directors, officers, and other related parties. Such loans,
in management's opinion, did not present more than the normal risk of
collectiblity or incorporate other unfavorable features. The aggregate amount of
loans outstanding to qualifying related parties and changes during the years are
summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at January 1, $ 4,771 $ 3,933
New loans 4,130 3,505
Repayments (833) (2,667)
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, $ 8,068 $ 4,771
- ------------------------------------------------------------------------------------------------------------------------
NOTE 7
PREMISES AND EQUIPMENT, NET
A summary of premises and equipment follows:
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Buildings and Improvements $39,631 $37,158
Equipment 31,134 28,141
Construction in progress 1,399 306
- ------------------------------------------------------------------------------------------------------------------------
72,164 65,605
Accumulated depreciation 31,334 28,000
- ------------------------------------------------------------------------------------------------------------------------
Total premises and equipment $40,830 $37,605
- ------------------------------------------------------------------------------------------------------------------------
Rental expense included in occupancy expense amounted to $1.0 million in 1999,
$1.0 million in 1998, and $0.7 million in 1997. The future minimum rental
commitments as of December 31, 1999, for noncancellable operating leases were as
follows: 2000--$1.1 million; 2001--$1.0 million; 2002--$0.9 million; 2003--$0.4
million; and 2004--and beyond--$1.1 million.
NOTE 8 DEPOSITS
The following table sets forth the maturity distribution of time certificates of
deposit at December 31, 1999:
(in thousands)
Within one year $632,253
After one but within two years 95,353
After two but within three years 23,558
After three but within four years 10,396
After four but within five years 5,084
After five years 85
- --------------------------------------------------------------------------------------------------
TOTAL $766,729
- --------------------------------------------------------------------------------------------------
Time deposits of $100,000 or more aggregated $342.3 million and $325.0 million
at year end 1999, and 1998 respectively.
NOTE 9 SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and securities sold
under repurchase agreements, which generally represent overnight borrowing
transactions, and other short-term borrowings, primarily Federal Home Loan Bank
(FHLB) advances, with original maturities of one year or less. The Company has
unused lines of credit available for short-term financing of $316 million at
December 31, 1999. Securities collateralizing repurchase agreements are held in
safekeeping by a non-affiliated financial institutions and are under the
Company's control.
Information related to short-term borrowings is summarized as follows:
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
FEDERAL FUNDS PURCHASED
Balance at year-end $58,130 $28,000 $25,000
Average during the year 45,472 36,326 31,344
Maximum month end balance 88,140 69,300 58,100
Weighted average rate during the year 5.23% 5.58% 5.68%
Weighted average rate at December 31 5.46% 4.75% 6.13%
- ------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Balance at year-end $39,187 $41,671 $59,921
Average during the year 38,267 35,185 51,686
Maximum month end balance 52,736 45,368 95,803
Weighted average rate during the year 4.09% 4.04% 5.04%
Weighted average rate at December 31 4.43% 3.66% 5.03%
- ------------------------------------------------------------------------------------------------------------------
OTHER SHORT-TERM BORROWINGS
Balance at year-end $40,250 $30,201 $49,806
Average during the year 37,529 44,908 38,331
Maximum month end balance 70,250 50,165 49,806
Weighted average rate during the year 5.40% 5.96% 6.02%
Weighted average rate at December 31 5.54% 5.62% 5.82%
- ------------------------------------------------------------------------------------------------------------------
NOTE 10 LONG-TERM DEBT
Long-term debt consists of obligations having an original maturity at issuance
of more than one year. A summary as of December 31, 1999 is as follows:
(dollars in thousands)
Maturity Date Interest Rate Amount
- ----------------------------------------------------------------------------
FHLB advance 2000 prime 5,000
FHLB advance 2001 6.45-6.49 7,110
FHLB advance 2002 6.27-6.44 9,728
FHLB advance 2003 5.74-5.86 50,000
FHLB advance 2005 4.40-6.41 40,000
FHLB advance 2008 5.06-7.20 10,157
Note Payable 2008 6.70 580
FHLB advance 2009 5.10-5.50 50,000
- ----------------------------------------------------------------------------
Total $172,575
- ----------------------------------------------------------------------------
FHLB advances are collateralized by the FHLB stock owned by the Company, certain
of its mortgage-backed securities and a blanket lien on its residential real
estate mortgage loans.
NOTE 11 INCOME TAXES
Total income taxes were allocated as follows:
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
Income before income taxes $12,483 $5,614 $ 9,406
Stockholders' equity, capital surplus,
for stock options exercised (296) (117) (329)
Stockholders' equity, for accumulated
Comprehensive (loss) income (13,504) 519 2,822
- ---------------------------------------------------------------------------------------------------------------------
Total $ (1,317) $6,016 $11,899
- ---------------------------------------------------------------------------------------------------------------------
The significant components of income taxes attributable to operations are:
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
Current:
Federal $ 10,163 $ 5,338 $8,464
State 2,591 1,345 1,439
- ---------------------------------------------------------------------------------------------------------------------
12,754 6,683 9,903
Deferred:
Federal (412) (840) (392)
State 141 (229) (105)
- ---------------------------------------------------------------------------------------------------------------------
(271) (1,069) (497)
- ---------------------------------------------------------------------------------------------------------------------
Total $ 12,483 $ 5,614 $9,406
- ---------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
- -------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Allowance for loan losses $6,092 $5,683
Unrealized loss on securities available for sale 11,345 -
Deferred compensation 659 556
Postretirement benefit obligation 1,068 993
Other 654 677
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 19,818 7,909
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid pension obligation 389 396
Premises and equipment, primarily due to accelerated
depreciation 1,034 949
Unrealized gain on securities available for sale -- 2,161
Securities discount accretion 406 352
Equipment leasing 567 399
Other 18 25
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 2,414 4,282
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $17,404 $3,627
- -------------------------------------------------------------------------------------------------------------------
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be realized. Based on
available evidence, gross deferred tax assets will ultimately be realized and a
valuation allowance was not deemed necessary at December 31, 1999 and 1998.
The following is a reconciliation of the provision for income taxes to the
amount computed by applying the applicable Federal statutory rate of 35% to
income before taxes:
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(in thousands)
Federal income tax at statutory rate $12,130 $9,970 $9,655
Tax exempt income (1,390) (1,167) (1,166)
Non-deductible expenses 443 354 220
State taxes, net of federal tax benefit 1,776 725 867
Federal income tax benefit
from corporate realignment -- (4,186) --
Other, net (476) (82) (170)
- -------------------------------------------------------------------------------------------------------------------
Income taxes $12,483 $5,614 $9,406
- -------------------------------------------------------------------------------------------------------------------
NOTE 12 NONINTEREST EXPENSE
Included in the data processing and communications expense category are data
processing fees of $2.7 million, $2.6 million, and $1.9 million in years 1999,
1998, and 1997, respectively. The future minimum annual commitments for data
processing services as of December 31, 1999 were as follows: 2000--$3.9 million;
2001--$3.6 million; 2002--$3.0 million; and 2003--$1.4 million.
NOTE 13 COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit standards in making commitments
and conditional obligations as it does for on balance sheet instruments. At
December 31, 1999, off balance sheet commitments to extend credit for primarily
variable rate loans amounted to $197.8 million. The amount of standby letters of
credit at December 31, 1999, amounted to $2.4 million. At December 31, 1998, off
balance sheet commitments to extend credit for primarily variable rate loans
amounted to $181.7 million. The amount of standby letters of credit at December
31, 1998, amounted to $2.3 million.
At December 31, 1999 and 1998, the Company held no off balance sheet
derivative financial instruments such as interest rate swaps, forward contracts,
futures, options on financial futures, or interest rate floors, and was not
subject to the market risk associated with such derivative financial
instruments.
In the normal course of business there are various outstanding legal
proceedings. In the opinion of management, the aggregate amount involved in such
proceedings is not material to the financial condition or results of operations
of the Company.
NOTE 14 STOCKHOLDERS' EQUITY
The Company currently is authorized to issue 2.5 million shares of preferred
stock, no par value, $1.00 stated value. The Board of Directors is authorized to
fix the particular designations, preferences, rights, qualifications, and
restrictions for each series of preferred stock issued. In November 1994, the
Company adopted a Stockholder Rights Plan (Plan) designed to ensure that any
potential acquiror of the Company negotiate with the Board of Directors and that
all Company stockholders are treated equitably in the event of a takeover
attempt. At that time, the Company paid a dividend of one Preferred Share
Purchase Right (Right) for each outstanding share of common stock of the
Company. Similar Rights are attached to each share of the Company's common stock
issued after November 15, 1994, subject to adjustment. Under the Plan, the
Rights will not be exercisable until a person or group acquires beneficial
ownership of 20 percent or more of the Company's outstanding common stock,
begins a tender or exchange offer for 25 percent or more of the Company's
outstanding common stock, or an adverse person, as declared by the Board of
Directors, acquires 10 percent or more of the Company's outstanding common
stock. Additionally, until the occurrence of such an event, the Rights are not
severable from the Company's common stock and, therefore, the Rights will be
transferred upon the transfer of shares of the Company's common stock. Upon the
occurrence of such events, each Right entitles the holder to purchase one
one-hundredth of a share of Series R Preferred Stock, no par value, and $1.00
stated value per share of the Company at a price of $100.
The Plan also provides that upon the occurrence of certain specified
events, the holders of Rights will be entitled to acquire additional equity
interests, in the Company or in the acquiring entity, such interests having a
market value of two times the Right's exercise price of $100. The Rights, which
expire November 14, 2004, are redeemable in whole, but not in part, at the
Company's option prior to the time they are exercisable, for a price of $0.01
per Right.
The Company has a Dividend Reinvestment Plan for stockholders. There were
772,869 shares of common stock reserved for future issuance under the plan at
December 31, 1999 (the number of shares available has been adjusted for stock
dividends and splits).
Certain restrictions exist regarding the ability of the subsidiary banks to
transfer funds to the Company in the form of cash dividends. The approval of the
Comptroller of the Currency is required to pay dividends in excess of the
subsidiary banks' earnings retained in the current year plus retained net
profits for the preceding two years or when the Bank fails to meet certain
minimum regulatory capital standards. At December 31, 1999, the subsidiary banks
have the ability to pay $25.5 million in dividends to Bancorp without obtaining
prior regulatory approval. Under the State of Delaware Business Corporation Law,
the Company may declare and pay dividends either out of accumulated net retained
earnings or capital surplus.
NOTE 15 REGULATORY CAPITAL REQUIREMENTS
Bancorp and the subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the subsidiary banks must meet specific capital guidelines that involve
quantitative measures of the banks' assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 Capital to
risk-weighted assets, and of Tier 1 capital to average assets. As of December
31, 1999 the Company and the subsidiary banks meet all capital adequacy
requirements to which it is subject.
As of December 31, 1999 the most recent notification from The Office of the
Comptroller of the Currency categorized the subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the banks must maintain minimum total risk-based, Tier 1
risk-based, Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the subsidiary banks' categories.
The Company and the subsidiary banks actual capital amounts and ratios are
presented in the following table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
ACTUAL Adequacy Purposes: Action Provisions:
- -----------------------------------------------------------------------------------------------------------------------
(in thousands) AMOUNT RATIO Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
As of December 31, 1999:
Total Capital (to Risk Weighted Assets):
Company Combined $183,501 14.78% $99,329 8.00% $ 124,162 10.00%
NBT Bank $132,427 14.59% $72,637 8.00% $ 90,796 10.00%
LA Bank $ 40,896 13.03% $25,115 8.00% $ 31,394 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company Combined $169,219 13.63% $ 49,665 4.00% $ 74,497 6.00%
NBT Bank $121,047 13.33% $ 36,319 4.00% $ 54,478 6.00%
LA Bank $ 38,215 12.17% $ 12,558 4.00% $ 18,837 6.00%
Tier 1 Capital (to Average Assets):
Company Combined $169,219 8.74% $ 58,097 3.00% $ 96,828 5.00%
NBT Bank $121,047 8.84% $ 41,098 3.00% $ 68,497 5.00%
LA Bank $ 38,215 6.85% $ 16,725 3.00% $ 27,874 5.00%
- -----------------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Company Combined $167,822 15.71% $85,451 8.00% $106,814 10.00%
NBT Bank $124,646 15.36% $64,912 8.00% $ 81,140 10.00%
LA Bank $ 37,855 14.96% $20,237 8.00% $ 25,297 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Company Combined $155,330 14.54% $42,726 4.00% $ 64,089 6.00%
NBT Bank $114,469 14.11% $32,456 4.00% $ 48,684 6.00%
LA Bank $ 35,587 14.07% $10,119 4.00% $ 15,178 6.00%
Tier 1 Capital (to Average Assets):
Company Combined $155,330 8.90% $52,341 3.00% $ 87,235 5.00%
NBT Bank $114,469 8.96% $38,341 3.00% $ E3,901 5.00%
LA Bank $ 35,587 7.72% $13,827 3.00% $ 23,044 5.00%
- -----------------------------------------------------------------------------------------------------------------------
NOTE 16 EMPLOYEE BENEFIT PLANS
Postretirement Benefits Other Than Pensions
Nonpension benefits are accrued over the employees' active service period,
defined as the date of employment up to the date of the employees' eligibility
for such benefits. The Company provides certain health care benefits for retired
employees. Lake Ariel did not provide health care benefits for retired
employees. As such, Lake Ariel employees are not included in this Plan as of
December 31, 1999. The health care plans are contributory for participating
retirees and also requires them to absorb deductibles and coinsurance with
contributions adjusted annually to reflect cost sharing provisions and benefit
limitations. Substantially all of the employees may become eligible for these
benefits if they reach normal retirement age while working for the Company or
its subsidiaries. The benefits are provided by the participants choice of health
maintenance organizations with community rated premiums or self-insured plans
administered by insurance companies, whose premiums are based on the claims paid
during the year. The Company funds the cost of post retirement health care as
benefits are paid. The Company elected to recognize the transition obligation in
the balance sheets and statements of income on a delayed basis over the plan
participant's future service periods, estimated to be twenty years.
The Company used a health care trend rate in calculating its postretirement
benefit obligation of 7.0% to 8.0% for 1999, grading down uniformly to 5.5% for
2005 and thereafter.
The net postretirement health benefits expense and funded status are as
follows:
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
Components of net periodic benefit cost:
Service cost $ 235 $ 205 $ 182
Interest cost 278 261 255
Amortization of transition obligation 85 85 85
Amortization of gains and losses 24 25 28
- ---------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 622 $ 576 $ 550
- ---------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of the year $ 4,350 $ 4,158
Service cost 235 205
Interest cost 278 261
Plan participant's contributions 106 95
Actuarial (gain) loss (932) (172)
Benefits paid (222) (197)
- ----------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 3,815 $ 4,350
- ----------------------------------------------------------------------------------------------------
Components of accrued benefit cost:
Funded status $(3,815) $(4,350)
Unrecognized transition obligation 1,103 1,188
Unrecognized actuarial net loss 152 1,108
- ----------------------------------------------------------------------------------------------------
Accrued benefit cost $(2,560) $(2,054)
- ----------------------------------------------------------------------------------------------------
Weighted average discount rate 7.75% 6.75%
- ----------------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on amounts
reported for the health care plans. A one-percentage point change in the health
care trend rates would have the following effects:
1-PERCENTAGE 1-PERCENTAGE
POINT POINT
INCREASE DECREASE
- ----------------------------------------------------------------------------------------------------------
(in thousands)
Effect on total of service and interest cost components $ 140 $ (109)
Effect on postretirement benefit obligation 843 (681)
Retirement Savings and Employee Stock Ownership Plan
The Company maintains a 401(k) and Employee Stock Ownership Plan. The Company
contributes an amount based on employees' 401(k) contributions out of their
annual salary. In addition, the Company may also make discretionary ESOP
contributions based on the Company's profitability. Participation in the plan is
contingent upon certain age and service requirements. Provisions for
contributions to the plan amounted to $1.1 million in 1999 and $1.0 million in
1998, and 0.7 million in 1997. Additionally, Lake Ariel maintained a
profit-sharing plan and a 401(k) savings plan. Contributions to these plans were
$0.2 million in 1999, $0.3 million in 1998, and $0.3 million in 1997.
Pension Plan
The Company has a qualified, noncontributory pension plan covering substantially
all employees of old NBT Bancorp Inc. As of December 31, 1999, Lake Ariel
employees are not included in this plan. Benefits paid from the plan are based
on age, years of service, compensation prior to retirement, social security
benefits, and are determined in accordance with defined formulas. The Company's
policy is to fund the pension plan in accordance with ERISA standards.
The net pension expense and the funded status of the plan are as
follows:
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Components of net periodic benefit cost:
Service cost $ 892 $ 701 $ 508
Interest cost 1,457 1,354 1,181
Expected return on plan assets (1,935) (1,705) (1,406)
Amortization of initial unrecognized asset (109) (109) (109)
Amortization of prior service cost 257 257 257
Amortization of unrecognized net gain -- -- (36)
- ------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 562 $ 498 $ 395
- ------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $(21,434) $(19,490) $(15,910)
Service cost (892) (701) (508)
Interest cost (1,457) (1,354) (1,181)
Prior service cost -- -- --
Actuarial gain 2,402 (1,119) (3,098)
Benefits paid 1,236 1,230 1,207
- ------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $(20,145) $(21,434) $(19,490)
- ------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 21,931 $ 19,431 $ 15,589
Actual return on plan assets 745 3,672 3,266
Employer contributions 550 58 1,784
Benefits paid (1,236) (1,230) (1,207)
- ------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 21,990 $ 21,931 $ 19,432
- ------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation $ 1,845 $ 497 $ (58)
Unrecognized portion of net asset at transition (1,085) (1,194) (1,304)
Unrecognized net actuarial loss (3,459) (2,247) (1,399)
Unrecognized prior service cost 3,677 3,934 4,191
- ------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 978 $ 990 $ 1,430
- ------------------------------------------------------------------------------------------------------------------
Weighted average assumptions as of December 31,
Discount rate 7.75% 6.75% 7.00%
Expected long-term return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.00% 4.00%
- ------------------------------------------------------------------------------------------------------------------
Stock Option Plans
The Company has two stock option plans (Plans). Under the terms of the
Plans, options were granted to key employees to purchase shares of the Company's
common stock at a price equal to the fair market value of the common stock on
the date of the grant. Options granted terminate eight or ten years from the
date of the grant.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $5.47, $6.70 and $5.14, respectively on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1999 - expected dividend yield of 3.72%, expected
volatility of 29.05%, risk-free interest rates between 4.63% and 6.16%, and
expected life 7 years; 1998 - expected dividend yield of 2.75%, expected
volatility of 21.86%, risk-free interest rates of 5.49% and 5.62%, and expected
life 7 years; 1997 - expected dividend yield of 2.60%, expected volatility of
22.56%, risk-free interest rates of 6.52% and 6.58%, and an expected life of 7
years.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Net income As reported $22,175 $22,873 $18,180
Pro forma 21,437 22,345 17,835
Basic earnings per share As reported $ 1.24 $ 1.27 $ 1.06
Pro forma 1.20 1.24 1.04
Diluted earnings per share As reported $ 1.23 $ 1.25 $ 1.05
Pro forma 1.18 1.22 1.03
- ------------------------------------------------------------------------------------------------------------------
Pro forma net income reflects only options granted after January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of 4 years and compensation cost for options granted prior to January 1,
1995 is not considered.
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the Black-Scholes
model was developed, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of the fair value
of its employee stock options.
The following is a summary of changes in options outstanding:
Number Weighted Average of
of Exercise Price of
Options Options Under Plan
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 911,328 $ 8.57
- -------------------------------------------------------------------------------------------------------------------
Granted 175,033 11.67
Exercised (307,823) 9.19
Lapsed (30,759) 10.34
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 747,779 $8.96
- -------------------------------------------------------------------------------------------------------------------
Granted 191,255 18.06
Exercised (23,691) 8.07
Lapsed (3,336) 11.37
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 912,007 $9.24
- -------------------------------------------------------------------------------------------------------------------
Granted 238,817 20.47
Exercised (64,303) 8.91
Lapsed (17,735) 16.23
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,068,786 $14.81
- -------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------
Weighted
Average
Remaining
Range of Contractual Average Weighted Average Weighted
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
- --------------------------------------------------------------------------------------------------------------------
$5.01 - $10.50 493,823 5.55 $ 8.13 465,526 $ 8.00
$10.51 - $16.00 164,484 7.18 11.69 102,151 11.72
$16.01 - $21.50 410,479 8.64 19.37 81,534 17.91
- --------------------------------------------------------------------------------------------------------------------
$5.01 - $21.50 1,068,786 6.99 $14.81 649,211 $9.83
- --------------------------------------------------------------------------------------------------------------------
NOTE 17 PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 1998
- ---------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash $ 1,750 $ 1,875
Due from subsidiary bank 288 24
Securities available for sale 7,724 3,572
Loans 18 18
Investment in subsidiary banks 149,627 162,839
Other assets 541 339
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETs $159,948 $168,667
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 74 $ 95
- ---------------------------------------------------------------------------------------------------
Total liabilities 74 95
Stockholders' equity 159,874 168,572
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $159,948 $168,667
- ---------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
Dividends from subsidiary banks $14,583 $13,718 $ 7,383
Interest and dividend income 353 345 322
Gain on sale of securities available for sale 1,036 16 -
- -------------------------------------------------------------------------------------------------------------------
15,972 14,079 7,705
Operating expense 894 257 299
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiary banks 15,078 13,822 7,406
Income tax expense 223 61 26
Equity in undistributed income of subsidiary banks 7,320 9,112 10,800
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $22,175 $22,873 $18,180
- -------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
OPERATING ACTIVITIES:
Net income $ 22,175 $22,873 $ 18,180
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized gains on sale of securities available for sale (1,036) (16) --
Undistributed net income of subsidiary banks (7,320) (9,112) (10,800)
Other, net (99) (385) (108)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,720 13,360 7,272
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales of securities 2,301 3,416 -
Purchases (5,717) (2,965) (3,384)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (3,416) 451 (3,384)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Treasury shares reissued 5,110 4,059 6,559
Purchase of treasury stock (4,643) (9,094) (2,568)
Cash dividends and payment for fractional shares (10,632) (9,629) (6,946)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (10,165) (14,664) (2,955)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 139 (853) 933
Cash and cash equivalents at beginning of year 1,899 2,752 1,819
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,038 $ 1,899 2,752
- --------------------------------------------------------------------------------------------------------------------
NOTE 18 FAIR VALUES OF FINANCIAL INSTRUMENTS
A financial instrument is defined as cash, evidence of an ownership interest in
an entity, or a contract that imposes the obligation to deliver, receive, or
exchange cash or other financial instruments between willing entities on
potentially favorable or unfavorable terms. There are no off balance sheet
derivative financial instruments at December 31, 1999 and 1998. The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments.
Cash and cash equivalents
For these short-term instruments, carrying value approximates fair value.
Securities
Fair values for securities are based on quoted market prices or dealer quotes,
where available. Where quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans
For variable rate loans that reprice frequently and have no significant credit
risk, fair values are based on carrying values. The fair values for fixed rate
loans are estimated through discounted cash flow analyses using interest rates
currently being offered for loans with similar terms and credit quality. The
fair value of loans held for sale on an aggregate basis, are based on quoted
market prices. Nonperforming loans are valued based upon recent loss history for
similar loans.
Accrued interest receivable and payable
For these short-term instruments, carrying value approximates fair value.
Deposits
The fair values disclosed for savings, money market, and noninterest bearing
accounts are, by definition, equal to their carrying values at the reporting
date. The fair value of fixed maturity certificates of deposit is estimated
using a discounted cash flow analysis that applies interest rates currently
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Short-term borrowings
For short-term borrowings, carrying value approximates fair value.
Other borrowings
The fair value of other borrowings has been estimated using discounted cash flow
analyses that apply interest rates currently being offered for notes with
similar terms.
Commitments to extend credit and standby letters of credit
The fair value of commitments to extend credit and standby letters of credit are
estimated using fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present credit
worthiness of the counterparts. Carrying amounts which are comprised of the
unamortized fee income are immaterial.
Estimated fair values of financial instruments
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
(in thousands) AMOUNT VALUE Amount Value
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash $ 64,431 $ 64,431 $ 66,185 $ 66,185
Securities available for sale 520,440 520,440 447,278 447,278
Securities held to maturity 78,213 75,155 135,992 136,519
Loans 1,222,654 1,219,928 1,051,506 1,091,639
Less allowance for loan losses 16,654 -- 15,322 --
- ---------------------------------------------------------------------------------------------------------------------
Net loans 1,206,000 1,219,928 1,036,184 1,091,639
Accrued interest receivable 10,755 10,755 9,641 9,641
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Deposits:
Interest bearing:
Savings, NOW and money market 487,746 487,746 471,950 471,950
Time deposits 766,729 762,663 678,441 678,966
Noninterest bearing 223,143 223,143 206,556 206,556
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 1,477,618 1,473,552 1,356,947 1,357,472
Short-term borrowings 137,567 137,567 99,872 99,872
Long-term debt 172,575 169,153 125,611 125,846
Accrued interest payable $ 7,896 $ 7,896 $ 5,991 $ 5,991
- ---------------------------------------------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.