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 consolidated financial condition and results of
operations of NBT Bancorp Inc. (Bancorp) and its wholly owned subsidiaries, NBT
Bank, N.A. (NBT), LA Bank, N.A. (LA) and Pioneer American Bank, N.A. (Pioneer
Bank) collectively referred to herein as the Company. This discussion will focus
on results of operations, financial position, capital resources, and
asset/liability management.
OVERVIEW
Net income of $26.3 million ($1.12 diluted earnings per share) for 1999 compares
to $26.9 million ($1.14 diluted earnings per share) for 1998. However, excluding
a $4.2 million net income tax benefit recognized in 1998 in connection with a
corporate realignment, net income increased 15.9 % in 1999 over the prior year.
Income before taxes of $40.2 million improved $6.2 million (18.2%) 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 primarily the 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 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 and was consummated
on February 17, 2000. Concurrent with the announcement of the merger with Lake
Ariel, Bancorp reduced its previously announced stock repurchase plan from
600,000 shares to 200,000 leaving 76,500 shares remaining for repurchase under
the reduced plan at December 31, 1999.
On June 20, 2000, the shareholders of Bancorp and Pioneer approved a merger,
whereby Pioneer Holding Company and its subsidiary were merged with and into
Bancorp with each issued and outstanding share of Pioneer Holding Company
exchanged for 1.805 shares of Bancorp common stock. The transaction resulted in
the issuance of approximately 5.2 million shares of Bancorp common stock. The
Pioneer Holding Company merger was consummated on July 1, 2000.
LA Bank and Pioneer Bank are commercial banks headquartered in northeast
Pennsylvania with approximately $570 million and $420 million, respectively, in
assets at December 31, 1999, and twenty-two and eighteen branch offices,
respectively, in five counties. Pioneer Bank will ultimately be merged with LA
Bank to form the largest community bank headquartered in northeast Pennsylvania.
The Lake Ariel and Pioneer Holding company mergers qualified as a tax-free
exchanges and are being accounted for as poolings-of-interests.
On March 28, 2000, NBT Bancorp Inc. and M. Griffith, Inc. jointly announced that
a definitive agreement had been signed for NBT Bancorp Inc. to acquire all of
the stock of M. Griffith, Inc., a Utica, New York based securities firm offering
investment, financial advisory and asset-management services, primarily in the
Mohawk Valley region. M. Griffith, Inc., a full-service broker/dealer and a
Registered Investment Advisor, will become a wholly-owned subsidiary of NBT
Financial Services, Inc. NBT Financial Services, Inc. was created in September
of 1999 to concentrate on expanding NBT Bancorp Inc.'s menu of financial
services beyond traditional bank product offerings.
On April 20, 2000, NBT Bancorp Inc. and BSB Bancorp, Inc., the parent company of
BSB Bank and Trust Company, announced the signing of a definitive agreement to
merge. The merger is subject to the approval of each company's shareholders and
of banking regulators. The merger is expected to close in the fourth quarter of
2000 and is intended to be accounted for as a pooling-of-interests and qualify
as a tax-free exchange for BSB Bancorp, Inc. shareholders. Shareholders of BSB
Bancorp, Inc. will receive a fixed ratio of 2.0 shares of NBT Bancorp Inc.
common stock for each share exchanged.
BSB Bank and Trust Company is a full service commercial bank with total assets
of approximately $2.2 billion at March 31, 2000 and twenty-two branches in six
counties in central New York and the Southern Tier. As a result of the merger,
NBT Bank, N.A. and BSB Bank and Trust Company will be combined to create one of
the largest independent community banks in upstate New York. This strategic
alliance will create a bank holding company with assets of $4.7 billion and
proforma market capitalization of approximately $539 million. The holding
company will adopt a new name before the merger occurs. The combined company
will have three direct operating subsidiaries including two community banks and
a financial services company.
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 consolidated 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
$92.2 million in 1999 increased $6.1 million or 7.1% compared to 1998. This
increase can be primarily attributed to an increase in average earning assets,
which mitigated the impact of a decline in yield during 1999.
Average earning assets in 1999 increased $154.1 million or 7.8% compared to
1998. Average loans increased $148.5 million or 12.2% during 1999, while average
investment securities increased $10.4 million or 1.4%. The benefits of these
increases 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 $121.9 million
compared to 1998, the result of an increase in interest bearing deposits and
borrowings of $49.5 million and $72.4 million, respectively. The effects of the
increase in interest bearing liabilities was offset by a 26 basis point
reduction in rate paid, resulting in a $0.7 million increase in interest expense
during 1999 compared to 1998. The reduced rates on 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 $5.4 million or
6.7% from $80.7 million in 1997 to $86.1 million in 1998. Yields on earning
assets declined by 12 basis points while the cost of interest bearing
liabilities was relatively stable between 1997 and 1998. In 1998, average
earning assets increased $166.8 million or 9.2% compared to 1997, resulting in a
$11.3 million increase in interest income. Average loans increased $118.9
million or 10.8% during 1998, while average investment securities increased
$45.6 million or 6.5%. During 1998, average interest bearing liabilities
increased $119.4 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 4.32% for 1999 compared to 4.34%
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 sheets,
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
ASSET
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 8,200 393 4.79 13,993 728 5.20 14,290 778 5.44
Other short-term investments 6,073 296 4.87 5,156 269 5.22 2,536 135 5.32
Securities (2) 756,170 50,426 6.67 745,739 51,058 6.85 700,119 48,544 6.93
Loans (1) 1,366,298 116,588 8.53 1,217,833 108,767 8.93 1,098,967 100,086 9.11
---------- ------- ---------- -------- ---------- -------
Total earning assets 2,137,096 167,721 7.85 1,983,029 160,836 8.11 1,816,199 149,557 8.23
------- -------- -------
Other assets 131,026 128,826 115,118
---------- ---------- ----------
TOTAL ASSETS $2,268,122 $2,111,855 $1,931,317
---------- ---------- ----------
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 219,078 4,031 1.84 200,262 4,080 2.04 185,874 3,784 2.04
Savings deposits 283,332 7,314 2.58 254,813 7,226 2.84 248,922 7,104 2.85
Time deposits 832,292 42,013 5.05 837,786 44,634 5.33 813,099 43,065 5.3
---------- ------- ---------- -------- ---------- -------
Total interest bearing deposits 1,443,810 56,586 3.92 1,394,334 58,898 4.22 1,351,286 56,966 4.22
Short-term borrowings 121,424 5,976 4.92 116,866 6,145 5.26 121,521 6,703 5.52
Other borrowings/LTD 232,366 12,918 5.56 164,479 9,693 5.89 83,450 5,223 6.26
---------- ------- ---------- -------- ---------- -------
Total interest bearing liabilities 1,797,600 75,480 4.20 1,675,679 74,736 4.46 1,556,257 68,892 4.43
------- -------- -------
Demand deposits 256,338 225,171 193,938
Other liabilities 15,125 12,467 13,537
Stockholders' equity 199,059 198,538 167,585
---------- ---------- ----------
Total liabilities and stockholders' equity $2,268,122 $2,111,855 $1,931,317
---------- ---------- ----------
Net interest income $ 92,241 $86,100 $80,665
======== ======= =======
Net interest margin 4.32% 4.34% 4.44%
Taxable equivalent adjustment $ 2,943 $2,234 $2,219
======== ======= =======
(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 (281) (54) (335) (16) (34) (50)
Other short-term investments 46 (19) 27 137 (3) 134
Securities 713 (1,345) (632) 3,087 (573) 2,514
Loans 12,844 (5,023) 7,821 10,685 (2,004) 8,681
-------- -------- -------- -------- -------- --------
Total Interest Income 13,324 (6,439) 6,885 13,894 (2,615) 11,279
Money market deposit accounts 228 42 270 (64) 9 (55)
NOW accounts 368 (417) (49) 296 0 296
Savings deposits 777 (689) 88 150 (28) 122
Certificates of deposit (291) (2,330) (2,621) 1,322 247 1,569
Short-term borrowings 235 (404) (169) (250) (308) (558)
Other borrowings/LTD 3,795 (570) 3,225 4,796 (326) 4,470
-------- -------- -------- -------- -------- --------
Total interest expense 5,112 (4,368) 744 6,250 (406) 5,844
-------- -------- -------- -------- -------- --------
Change in FTE net interest income $ 8,212 $ (2,071) $ 6,141 $ 7,644 $ (2,209) $ 5,435
======== ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
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 independent
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 $5.4 million in 1999 from $6.1 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. Although the provision decreased, the allowance increased
to $19.7 million at December 31, 1999 from $18.2 million at the previous
year-end. At December 31, 1999, the allowance for loan losses to loans
outstanding was 1.34%, down from 1.43% at December 31, 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 $18,231 16,450 15,053 13,519 13,221
Loans charged off:
Commercial and agricultural 2,427 2,528 1,524 1,635 1,360
Real estate mortgages 392 512 341 598 529
Consumer 2,205 2,364 2,605 1,638 1,512
--------------------------------------------------------------------
Total loans charged off 5,024 5,404 4,470 3,871 3,401
--------------------------------------------------------------------
Recoveries:
Commercial and agricultural 292 273 253 326 234
Real estate mortgages 72 47 18 20 16
Consumer 700 716 776 734 666
--------------------------------------------------------------------
Total recoveries 1,064 1,036 1,047 1,080 916
--------------------------------------------------------------------
Net loans charged off 3,960 4,368 3,423 2,791 2,485
Provision for loan losses 5,440 6,149 4,820 4,325 2,783
--------------------------------------------------------------------
Balance at December 31 $ 19,711 18,231 16,450 15,053 13,519
====================================================================
Allowance for loan losses to loans
outstanding at end of year 1.34% 1.43% 1.42% 1.45% 1.44%
Allowance for loan losses to
nonaccrual loans 259% 238% 196% 181% 156%
Nonaccrual loans to total loans 0.52% 0.60% 0.72% 0.80% 0.93%
Nonperforming assets to total assets 0.38% 0.49% 0.52% 0.73% 0.79%
Net charge-offs to average loans outstanding 0.29% 0.36% 0.31% 0.36% 0.34%
--------------------------------------------------------------------
TABLE 4
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Category Category Category Category Category
(dollars in thousands) Percent Percent Percent Percent Percent
Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial
and agricultural $ 9,091 46.3% $ 8,589 43.7% $ 6,755 41.5% $ 5,581 39.8% $ 5,111 38.5%
Real estate
mortgages 2,050 27.6% 1,219 30.2% 843 30.0% 1,053 30.2% 923 31.0%
Consumer 4,900 26.1% 4,813 26.1% 3,123 28.5% 3,007 30.0% 2,643 30.5%
Unallocated 3,670 -- 3,610 -- 5,729 -- 5,412 -- 4,842 --
Total $19,711 100.0% $18,231 100.0% $16,450 100.0% $15,053 100.0% $13,519 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
No portion of the allowance for loan losses is restricted to any loan or group
of loans, and the entire allowance is available to absorb realized losses. The
amount and timing of realized losses and future allowance allocations may vary
from current estimates.
- --------------------------------------------------------------------------------
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 $19.3 million increased $1.4 million or 7.7%
compared to 1998. Excluding securities gains and losses, noninterest income
increased $1.1 million or 7.0% in 1999 compared to 1998. Excluding security
gains and losses, total noninterest income for 1998 increased $2.4 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 $1.2 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 $0.4 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 85 ATM machines
in use at December 31, 1999, up from 72 at year-end 1998.
NONINTEREST EXPENSE AND OPERATING EFFICIENCY
Salaries and employee benefits increased $1.2 million, or 4.2%, 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 $0.8 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 along with
the addition of a new branch office at Pioneer Bank during the fourth quarter of
1998. Equipment expense increased $1.1 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.
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 $0.3 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.
It is anticipated that the Company will incur approximately $27.7 million of
merger and integration expenses in the future in connection with the Lake Ariel,
Pioneer Holding Company and BSB Bancorp, Inc. mergers.
Income Tax Expense
The effective income tax rate was 34.7% in 1999, 21.0% in 1998, and 33.0% in
1997. The increased income tax expense in 1999 and decreased incomes tax expense
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 35.4% and 37.6% of average earning assets
during 1999 and 1998, respectively. The decrease reflects a continuing shift in
asset mix to higher yielding loans. Approximately $485 million, or 67% of the
total securities portfolio, is invested in U.S. Agency Mortgage-Backed pools and
U.S. Agency issued Collateralized Mortgage Obligations (CMOs). Due to the nature
of the mortgage collateral behind these issues, the average lives of these
holdings will tend to lengthen when interest rates rise and shorten when
interest rates fall. To help mitigate this risk, management primarily focuses on
instruments that have some degree of extension and call protection, particularly
in the fixed rate holdings. In addition, management regularly reviews the
performance of all mortgage-backed holdings as well as the portfolio as a whole.
This includes the projections of principal cash flows under a current rate
environment as well as given a parallel move in the yield curve up or down 200
basis points.
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 $ 4,393 $ 4,405
Federal Agency and
mortgage-backed
securities 534,042 507,758 473,727 479,266 559,078 563,597
State & Municipal,
collateralized
mortgage obligations
and other
securities 97,122 90,434 32,876 33,507 17,516 18,112
-----------------------------------------------------------------------------------------------
Total securities
available for sale $ 641,564 $ 606,727 $ 517,009 $ 523,254 $ 580,987 $ 586,114
===============================================================================================
Securities Held to Maturity:
Federal Agency & MBS 51,578 48,568 122,921 122,871 58,975 59,320
State & Municipal 61,730 60,569 55,799 56,914 60,341 61,237
Other securities 10 10 1,943 1,956 1,518 1,518
-----------------------------------------------------------------------------------------------
Total securities held to
maturity $ 113,318 $109,147 $ 180,663 $ 181,741 $ 120,834 $ 122,075
===============================================================================================
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
December 31, 1999 1998 1997 1996 1995
(in thousands)
Real estate mortgages $ 381,961 371,133 335,991 299,590 271,143
Commercial real estate mortgages 347,191 305,564 269,523 227,322 191,513
Real estate construction and
Development 23,188 14,983 10,911 13,669 18,606
Commercial and agricultural 331,535 252,508 211,486 184,664 169,230
Consumer 268,703 237,234 247,573 253,185 241,759
Home equity 114,289 95,819 82,064 57,716 43,989
---------------------------------------------------------------------------------
Total loans $ 1,466,867 1,277,241 1,157,548 1,036,146 936,240
=================================================================================
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 $1,466.9 million, a 14.8% 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 northeastern Pennsylvania.
The Company does not generally 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 and
Pennsylvania, 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.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets and past due loans are reflected in Table 8 below as of
December 31, for the years indicated.
TABLE 7
NONPERFORMING ASSETS AND RISK ELEMENTS
----------------------------------------------------------------------------
DECEMBER 31, 1999 1998 1997 1996 1995
----------------------------------------------------------------------------
(dollars in thousands)
Non accrual loans:
Commercial and agricultural $6,141 6,167 $6,452 $6,845 $6,106
Real estate mortgages $618 $744 692 $251 $332
Consumer $837 $762 1,242 $1,243 $2,243
---------------------------------------------------------------------------
Total nonaccrual loans $7,596 7,673 $8,386 $8,339 8,681
---------------------------------------------------------------------------
Other real estate owned $1,438 $2,971 2,098 2,083 2,052
---------------------------------------------------------------------------
Total nonperforming assets $9,034 10,644 10,484 10,422 10,733
---------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural $1,201 1,365 2,202 418 559
Real estate mortgages $641 $761 244 344 448
Consumer $184 $629 1,778 1882 2041
---------------------------------------------------------------------------
Total $2,026 $2,755 4,224 2,644 3,048
---------------------------------------------------------------------------
Restructured loans 2,495 4,402 2,877 643 837
---------------------------------------------------------------------------
Total assets containing risk elements $13,555 $17,801 $17,585 $13,709 $14,618
---------------------------------------------------------------------------
Total nonperforming assets to loans 0.62% 0.83% 0.91% 1.00% 1.15%
Total assets containing risk element to loans .92% 1.39% 1.52% 1.32% 1.56%
Total nonperforming assets to assets 0.38% 0.49% 0.52% 0.58% 0.64%
Total assets containing risk elements to assets 0.57% .82% .87% .78% .87%
---------------------------------------------------------------------------
Total nonperforming assets decreased $1.6 million or 15.1% 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 $3.6 million or 20.7%
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 8.
TABLE 8
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 $802 $921 $771 $1,377 $1,063
Amount recognized as income 249 193 181 600 356
------------------------------------------------------------
Interest income not accrued $553 $728 $590 $777 $707
============================================================
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 $1,777.1 million, an increase of 6.8% from December 31, 1998. Average
deposits during 1999 of $1,700.1 million were 5.0% higher than the 1998 average.
The increase can be attributed to growth in the demand and savings categories of
$31.1 million and $28.5 million, respectively, partially offset by a $5.5
million decline in average time deposits. The preceding Table 1 presents average
deposits with accompanying average rates paid.
TABLE 9
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
December 31, 1999 1998
---- ----
(in thousands)
Within three months $260,976 $246,193
After three but within six months 51,587 63,151
After six but within twelve months 46,126 34,097
After twelve months 24,668 23,162
---------------------------------
Total $383,357 $366,603
=================================
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 primarily of fixed rate FHLB advances
with an original maturity greater than one year. At December 31, 1999, total
borrowings of $394.2 million were up 38.9% compared to the previous year-end
total of $283.8 million. Average borrowings during 1999 of $353.8 million
represent a $72.4 million increase over 1998. For additional information on
borrowed funds see notes 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 and
Pennsylvania (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 characteristics 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 10
PERFORMANCE RATIOS
December 31, 1999 1998 1997
Return on Assets 1.16% 1.27% 1.15%
Return on Equity 13.19% 13.55% 13.24%
Average Equity to Average Assets 8.78% 9.40% 8.68%
Cash dividend per share payout 58.57% 51.49% 42.96%
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Responsibility for the integrity, objectivity, consistency, and fair
presentation of the financial information presented in this document 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 and independent
loan reviews 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.
Daryl R. Forsythe
President and Chief Executive Officer
Michael J. Chewens
Executive Vice President
Chief Financial Officer and Treasu
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, changes in 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 Pioneer American Holding Company Corp. on
July 1, 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.
Syracuse, New York
July 28, 2000
/s/ KPMG LLP
NBT BANCORP INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
ASSETS 1999 1998
------------------------- -------------------------
Cash and cash equivalents $ 79,629 87,762
Securities available for sale, at fair value 606,727 523,254
Securities held to maturity (fair value - $109,147 and $181,741) 113,318 180,663
Loans 1,466,867 1,277,241
Less allowance for loan losses 19,711 18,231
------------------------- -------------------------
Net loans 1,447,156 1,259,010
Premises and equipment, net 47,097 44,672
Other assets 86,280 74,494
------------------------- -------------------------
Total assets $ 2,380,207 2,169,855
========================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 267,895 249,487
Savings, NOW, and money market 605,334 589,607
Time 903,862 825,213
------------------------- -------------------------
Total deposits 1,777,091 1,664,307
Short-term borrowings 142,267 99,872
Long-term debt 251,970 183,968
Other liabilities 17,407 17,670
------------------------- -------------------------
Total liabilities 2,188,735 1,965,817
------------------------- -------------------------
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 23,915,329 and 23,188,135 23,915 23,188
Additional paid-in-capital 155,983 146,823
Retained earnings 44,949 43,253
Accumulated other comprehensive (loss) income (21,710) 3,736
Common stock in treasury at cost, 538,936 and 599,507 shares (11,665) (12,962)
------------------------- -------------------------
Total stockholders' equity 191,472 204,038
------------------------- -------------------------
Total liabilities and stockholders' equity $ 2,380,207 2,169,855
========================= =========================
See accompanying notes to supplemental consolidated financial statements.
NBT BANCORP INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
1999 1998 1997
------------------ ----------------- -----------------
Interest and dividend income:
Interest and fees on loans $ 115,896 108,492 99,789
Securities - taxable 43,697 45,205 42,842
Securities - tax exempt 4,478 3,894 3,780
Other 707 1,011 927
------------------ ----------------- -----------------
Total interest and dividend income 164,778 158,602 147,338
------------------ ----------------- -----------------
Interest expense:
Deposits 56,586 58,898 56,966
Short-term borrowings 5,976 6,145 6,703
Other borrowings 12,918 9,693 5,223
------------------ ----------------- -----------------
Total interest expense 75,480 74,736 68,892
------------------ ----------------- -----------------
Net interest income 89,298 83,866 78,446
Provision for loan losses 5,440 6,149 4,820
------------------ ----------------- -----------------
Net interest income after provision for loan losses 83,858 77,717 73,626
------------------ ----------------- -----------------
Noninterest income:
Trust 3,305 3,115 2,675
Service charges on deposit accounts 7,938 6,729 6,339
Net securities gains 1,804 1,567 34
Other 6,205 6,463 4,880
------------------ ----------------- -----------------
Total noninterest income 19,252 17,874 13,928
------------------ ----------------- -----------------
Noninterest expense:
Salaries and employee benefits 30,504 29,286 27,151
Occupancy 5,379 5,159 4,780
Equipment 5,220 4,372 3,317
Data processing and communications 4,528 4,279 3,422
Professional fees and outside services 4,330 4,402 3,385
Office supplies and postage 2,970 3,029 2,757
Amortization of intangible assets 1,317 1,314 1,544
Other operating 8,634 9,706 8,104
------------------ ----------------- -----------------
Total noninterest expense 62,882 61,547 54,460
------------------ ----------------- -----------------
Income before income tax expense 40,228 34,044 33,094
Income tax expense 13,971 7,149 10,906
------------------ ----------------- -----------------
Net income $ 26,257 26,895 22,188
================== ================= =================
Earnings per share:
Basic $ 1.14 1.16 1.00
================== ================= =================
Diluted $ 1.12 1.14 0.98
================== ================= =================
See accompanying 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
ACCUMULATED
ADDITIONAL OTHER COMPRE- COMMON
COMMON PAID-IN- RETAINED HENSIVE STOCK IN
STOCK CAPITAL EARNINGS (LOSS)/INCOME TREASURY TOTAL
Balance at December 31, 1996 $ 17,583 99,887 50,161 (1,948) (7,984) 157,699
Net income 22,188 22,188
Stock dividends 600 13,030 (13,630) --
Cash dividends - $0.421 per share (8,968) (8,968)
Payment in lieu of fractional shares for stock (33) (33)
Issuance of shares to employee benefit plans
and other stock plans 272 3,111 3,383
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
Other comprehensive income 5,057 5,057
--------------------------------------------------------------------------------
Balance at December 31, 1997 19,257 127,675 49,718 3,109 (7,203) 192,556
Net income 26,895 26,895
Stock dividends and splits 3,814 17,670 (21,484) --
Cash dividends - $0.587 per share (11,848) (11,848)
Payment in lieu of fractional shares for stock (16) (16)
Purchase of 355,708 treasury shares (9,127) (9,127)
Sale of 169,364 treasury shares to employee
benefit plans and other stock plans 724 3,368 4,092
Issuance of shares to employee benefit plans
and other stock plans 117 754 871
Costs on sale of common stock through
secondary offering (12) (12)
Other comprehensive income 627 627
--------------------------------------------------------------------------------
Balance at December 31, 1998 23,188 146,823 43,253 3,736 (12,962) 204,038
Net income 26,257 26,257
Stock dividends 621 10,994 (11,615) --
Cash dividends - $0.656 per share (12,930) (12,930)
Payment in lieu of fractional shares for stock (16) (16)
Purchase of 388,711 treasury shares (6,948) (6,948)
Sale of 321,019 treasury shares to employee
benefit plans and other stock plans (830) 6,489 5,659
Issuance of shares to employee benefit plans
and other stock plans 153 705 858
Other comprehensive loss (25,446) (25,446)
Retirement of treasury shares of pooled Company (47) (1,709) 1,756 --
---------- ----------- ---------- ----------- ----------- ---------
Balance at December 31, 1999 $ 23,915 155,983 44,949 (21,710) (11,665) 191,472
========== =========== ========== =========== =========== =========
See accompanying notes to supplemental consolidated financial statements.
Note: Cash dividends per share represent the cash historical dividends per
share of NBT Bancorp Inc.
NBT BANCORP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
1999 1998 1997
----------------- ----------------- -----------------
Operating activities:
Net income $ 26,257 26,895 22,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,440 6,149 4,820
Depreciation of premises and equipment 4,815 4,151 3,244
Net accretion on securities (1,211) (1,330) (192)
Amortization of intangible assets 1,317 1,314 1,544
Deferred income tax benefit (380) (1,015) (499)
Proceeds from sale of loans held for sale 41,899 46,462 36,743
Originations and purchases of loans held for sale (40,471) (47,494) (35,542)
Net gains on sales of loans (342) (1,013) (462)
Net gains on sales of securities (1,804) (1,567) (34)
Net (gain) loss on sales of other real estate (291) 145 (102)
Writedowns on other real estate owned 220 25 213
Loss (gain) on sales of premises and equipment 66 (23) (5)
Net decrease (increase) in other assets 2,727 (4,151) 1,553
Net decrease in other liabilities (866) (1,185) (4,300)
----------------- ----------------- -----------------
Net cash provided by operating activities 37,376 27,363 29,169
----------------- ----------------- -----------------
Investing activities:
Securities available for sale:
Proceeds from maturities and principal paydowns 92,771 116,948 99,327
Proceeds from sales and calls 110,073 184,669 230,802
Purchases Securities held to maturity: (253,113) (234,275) (385,392)
Proceeds from maturities, calls, and principal paydowns 35,535 71,250 34,599
Purchases (39,461) (133,053) (95,306)
Net increase in loans (196,595) (121,898) (127,337)
Purchase of FHLB stock (744) (6,415) (5,772)
Purchases of premises and equipment, net (7,335) (11,027) (9,725)
Proceeds from sales of premises and equipment 29 66 35
Proceeds from sales of other real estate owned 3,527 2,747 2,965
----------------- ----------------- -----------------
Net cash used in investing activities (255,313) (130,988) (255,804)
----------------- ----------------- -----------------
Financing activities:
Net increase in deposits 112,784 76,031 122,815
Net increase (decrease) in short-term borrowings 42,395 (37,205) 48,533
Proceeds from issuance of long-term debt 75,000 120,658 69,969
Repayments of long-term debt (6,998) (21,542) (25,610)
Proceeds from sale of treasury shares to employee
benefit plans and other stock plans 5,659 4,092 3,919
Purchase of treasury stock (6,948) (9,127) (2,568)
Net proceeds from issuance of common stock
Cash dividends and payment for fractional shares (12,946) (11,864) (9,001)
----------------- ----------------- -----------------
Net cash provided by financing activities 209,804 121,914 223,319
----------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents (8,133) 18,289 (3,316)
Cash and cash equivalents at beginning of year 87,762 69,473 72,789
----------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 79,629 87,762 69,473
================= ================= =================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 73,641 74,968 67,622
Income taxes 14,486 9,381 8,549
================= ================= =================
Noncash investing activities:
Transfer of held to maturity securities to securities
available for sale $ 71,137 - -
Transfer of loans to other real estate owned $ 1,923 3,790 2,315
================= ================= =================
See accompanying notes to supplemental consolidated financial statements.
NBT BANCORP INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
1999 1998 1997
----------------- ------------------ ------------------
Net income $ 26,257 26,895 22,188
----------------- ------------------ ------------------
Other comprehensive (loss) income, net of tax:
Unrealized net holding (losses) gains arising
during the year (pre-tax amounts of ($39,278);
$2,174 and $8,225) (24,359) 1,571 5,077
Less: Reclassification adjustment for net (gains)
losses included in net income (pre-tax amounts
of $1,804; $1,567; $34) (1,087) (944) (20)
----------------- ------------------ ------------------
Total other comprehensive (loss) income (25,446) 627 5,057
----------------- ------------------ ------------------
Comprehensive income $ 811 27,522 27,245
================= ================== ==================
See accompanying notes to supplemental consolidated financial statements
NBT BANCORP INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NBT Bancorp Inc. ("Bancorp") and its subsidiaries, NBT Bank, N.A. (NBT
Bank), LA Bank, N.A. (LA Bank), and Pioneer American Bank, N.A. (Pioneer
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:
MERGERS
On July 1, 2000, Pioneer American Holding Company Corp. (Pioneer Holding
Company) and its wholly-owned subsidiary were merged with and into
Bancorp. On February 17, 2000, Lake Ariel Bancorp, Inc. (Lake Ariel) and
its wholly-owned subsidiaries were merged with and into Bancorp. The
mergers were accounted for as pooling-of-interests and, accordingly,
these supplemental consolidated financial statements have been restated
to present the combined consolidated financial condition and results of
operations of all companies as if the mergers had been in effect for all
years presented. Further details pertaining to the mergers are described
below.
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. amounts previously reported in the consolidated
financial statements are reclassified when ever necessary to conform with
the current year's 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 other comprehensive income or loss, 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.
Loans are placed on nonaccrual status when timely collection of principal
and interest in accordance with contractual terms 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 sooner when management concludes
circumstances indicate that borrowers may be unable to meet contractual
principal or interest payments. Accrual of interest is discontinued if
the loan is placed on nonaccrual status. When a loan is transferred to a
nonaccrual status, any unpaid accrued interest is reversed and charged
against income. When in the opinion of management the collection of
principal appears unlikely, the loan balance is charged-off in total or
in part.
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 and the
collectibility of both principal and interest appears assured.
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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount which, in the opinion of
management, is necessary to absorb probable losses inherent 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 Independent 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 loan 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 fair value of the asset acquired less
estimated costs to sell or "cost" (defined as the fair value at initial
foreclosure). At the time of foreclosure, or when foreclosure occurs
in-substance, the excess, if any of the loan over the fair market value
of the assets received, less estimated selling costs, is charged to the
allowance for loan losses and any subsequent valuation write-downs are
charged to other expense. Operating costs associated with the properties
are charged to expense as incurred. Gains on the sale of OREO are
included in income when title has passed and the sale has met the minimum
down payment requirements prescribed by GAAP.
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
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 additional paid-in-capital. Losses on
the sale of treasury stock are charged to additional paid-in-capital to
the extent of previous gains, otherwise charged to retained earnings.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. The
Company files a consolidated tax return on the accrual basis. Deferred
income taxes are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
(2) MERGER AND ACQUISITION ACTIVITY
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 and was consummated on February 17, 2000. Concurrent with
the announcement of the merger with Lake Ariel, Bancorp reduced its
previously announced stock repurchase plan from 600,000 shares to 200,000
leaving 76,500 shares remaining for repurchase under the reduced plan at
December 31, 1999.
On June 20, 2000, the shareholders of Bancorp and Pioneer Holding Company
approved a merger, whereby Pioneer Holding Company and its subsidiary
were merged with and into Bancorp with each issued and outstanding share
of Pioneer Holding Company exchanged for 1.805 shares of Bancorp common
stock. The transaction resulted in the issuance of approximately 5.2
million shares of Bancorp common stock. The Pioneer Holding Company
merger was consummated on July 1, 2000.
LA Bank and Pioneer Bank are commercial banks headquartered in northeast
Pennsylvania with approximately $570 million and $420 million,
respectively, in assets at December 31, 1999, and twenty-two and eighteen
branch offices, respectively, in five counties. Pioneer Bank will
ultimately be merged with LA Bank to form the largest community bank
headquartered in northeast Pennsylvania.
The Lake Ariel and Pioneer Holding Company mergers qualified as tax-free
exchanges and are being accounted for as poolings-of-interests.
The following table presents net interest income, net income, and
earnings per share reported by Lake Ariel, Pioneer Holding Company,
Bancorp without Lake Ariel or Pioneer Holding Company (NBT) and Bancorp
on a combined basis.
DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net interest income:
NBT $ 60,582 57,403 53,659
Lake Ariel 14,225 12,480 11,125
Pioneer Holding Company 14,491 13,983 13,662
-------------------- --------------------- -----------------
Combined $ 89,298 83,866 78,446
==================== ===================== =================
Net income:
NBT $ 18,370 19,102 14,749
Lake Ariel 3,805 3,771 3,431
Pioneer Holding Company 4,082 4,022 4,008
-------------------- --------------------- -----------------
Combined $ 26,257 26,895 22,188
==================== ===================== =================
Basic earnings per share:
NBT $ 1.41 1.45 1.12
Lake Ariel 0.79 0.79 0.88
Pioneer Holding Company 1.41 1.39 1.41
Combined 1.14 1.16 1.00
Diluted earnings per share:
NBT 1.40 1.42 1.11
Lake Ariel 0.77 0.77 0.84
Pioneer Holding Company 1.39 1.36 1.36
Combined 1.12 1.14 0.98
On March 28, 2000, NBT Bancorp Inc. and M. Griffith, Inc. jointly
announced that a definitive agreement had been signed for NBT Bancorp
Inc. to acquire all of the stock of M. Griffith, Inc., a Utica, New York
based securities firm offering investment, financial advisory and
asset-management services, primarily in the Mohawk Valley region. M.
Griffith, Inc., a full-service broker/dealer and a Registered Investment
Advisor, will become a wholly-owned subsidiary of NBT Financial Services,
Inc. NBT Financial Services, Inc. was created in September of 1999 to
concentrate on expanding NBT Bancorp Inc.'s menu of financial services.
On April 20, 2000, NBT Bancorp Inc. and BSB Bancorp, Inc., the parent
company of BSB Bank and Trust Company, announced the signing of a
definitive agreement to merge. The merger is subject to the approval of
each company's shareholders and of banking regulators. The merger is
expected to close in the fourth quarter of 2000 and is intended to be
accounted for as a pooling-of-interests and qualify as a tax-free
exchange for BSB Bancorp, Inc. shareholders. Shareholders of BSB Bancorp,
Inc. will receive a fixed ratio of 2.0 shares of NBT Bancorp Inc. common
stock for each share exchanged.
BSB Bank and Trust Company is a full service commercial bank with total
assets of approximately $2.2 billion at March 31, 2000 and twenty-two
branches in six counties in central New York and the Southern Tier. As a
result of the merger, NBT Bank, N.A. and BSB Bank and Trust Company will
be combined to create one of the largest independent community banks in
upstate New York. This strategic alliance will create a bank holding
company with assets of $4.7 billion and proforma market capitalization of
approximately $539 million. The holding company will adopt a new name
before the merger occurs. The combined company will have three direct
operating subsidiaries including two community banks and a financial
services company.
(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 consolidated statements of income:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic EPS:
Weighted average
common shares
outstanding 23,089 23,199 22,239
Net income available to
common shareholders $ 26,257 26,895 22,188
-------------------- --------------------- -----------------
Basic EPS $ 1.14 1.16 1.00
==================== ===================== =================
Diluted EPS:
Weighted average
common shares
outstanding 23,089 23,199 22,239
Dilutive common
stock options 293 492 459
-------------------- --------------------- -----------------
Weighted average
common shares
and potential
common stock 23,382 23,691 22,698
==================== ===================== =================
Net income available
to common
stockholder $ 26,257 26,895 22,188
==================== ===================== =================
Diluted EPS $ 1.12 1.14 0.98
==================== ===================== =================
(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 $24.4 million.
(5) SECURITIES
The amortized cost, estimated fair value and unrealized gains and losses
of securities available for sale are as follows:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ----------------- ----------------- ---------------
(IN THOUSANDS)
December 31, 1999:
U.S. Treasury $ 10,400 -- 1,865 8,535
Federal Agency 125,959 -- 9,693 116,266
State & municipal 41,623 20 3,141 38,502
Mortgage-backed 408,083 9 16,600 391,492
Collateralized mortgage
obligations 45,392 10 3,568 41,834
Other securities 10,107 362 371 10,098
----------------- ----------------- ----------------- ---------------
Total $ 641,564 401 35,238 606,727
================= ================= ================= ===============
December 31, 1998:
U.S. Treasury $ 10,406 75 -- 10,481
Federal agency 139,108 1,173 163 140,118
State & municipal 23,610 590 64 24,136
Mortgage-backed 334,619 4,919 390 339,148
Collateralized mortgage
obligations 6,908 -- 186 6,722
Other securities 2,358 303 12 2,649
----------------- ----------------- ----------------- ---------------
Total $ 517,009 7,060 815 523,254
================= ================= ================= ===============
Gross realized gains and gross realized losses on the sale of securities
available for sale were $1.64 million and $0.02 million, respectively, in
1999. Gross realized gains and gross realized losses on the sale of
securities available for sale were $1.61 million and $0.04 million,
respectively, in 1998. Gross realized gains and gross realized losses on
the sale of securities available for sale were $1.08 million and $0.74
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 $71.1 million of securities from its held to
maturity portfolio to its available for sale portfolio. These securities
were subsequently sold during 1999 at a realized gain of $0.18 million.
At December 31, 1999 and 1998, securities available for sale with
amortized costs totaling $479.3 million and $390.9 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 UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------- ----------------- ----------------- ---------------
(IN THOUSANDS)
December 31, 1999:
Mortgage-backed $ 51,578 -- 3,010 48,568
State & municipal 61,730 170 1,331 60,569
Other securities 10 -- -- 10
----------------- ----------------- ----------------- ---------------
Total $ 113,318 170 4,341 109,147
================= ================= ================= ===============
December 31, 1998:
Mortgage-backed $ 122,921 323 373 122,871
CMO's 1,933 13 -- 1,946
State & municipal 55,799 1,119 4 56,914
Other securities 10 -- -- 10
----------------- ----------------- ----------------- ---------------
Total $ 180,663 1,455 377 181,741
================= ================= ================= ===============
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:
WITHIN AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR BUT WITHIN FIVE YEARS BUT WITHIN TEN YEARS AFTER TEN YEARS TOTAL PORTFOLIO
------------------- ---------------------- ----------------------- ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- -------- -------- -------- --------- -------
(IN THOUSANDS)
Securities available
for sale:
U.S. Treasury $ - - % $ - - % $ - - % $ 10,400 5.23% $ 10,400 5.23%
Federal agency and
collateralized
mortgage
obligations 2,000 5.10 28,085 5.61 41,465 6.56 99,801 7.03 171,351 6.66
State &
municipal - - 4,543 7.68 13,163 7.88 23,917 6.90 41,623 7.29
Mortgage-
backed 11,955 6.85 51,394 6.92 85,456 6.86 259,278 6.92 408,083 6.91
-------- -------- -------- -------- -------- -------- -------- ------- --------- -------
Amortized
cost $ 13,955 6.60% $ 84,022 6.53% $140,084 6.86% $393,396 6.86% $631,457 6.81%
======== ======== ======== ======== ======== ======== ======== ======= ========= =======
Fair value $ 13,387 $ 81,077 $134,108 $368,048 $596,620
======== ======== ======== ======== =========
Securities held to
maturity:
Mortgage-
backed $ 1,368 6.08% $ 5,471 6.08% $ 6,838 6.08% $ 37,901 6.76% $ 51,578 6.08%
State &
municipal 24,461 6.07 8,422 7.73 10,388 7.71 18,459 7.28 61,730 6.94
-------- -------- -------- -------- -------- -------- -------- ------- --------- -------
Amortized
cost $ 25,829 6.07% $ 13,893 7.08% $ 17,226 6.49% $ 56,360 6.93% $113,308 6.46%
======== ======== ======== ======== ======== ======== ======== ======= ========= =======
Fair value $ 25,715 13,444 16,694 53,284 109,137
======== ======== ======== ======== =========
In the above tables, the maturity distribution and weighted average
taxable equivalent yield of securities at December 31, 1999, yield 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 and collateralized
mortgage obligations securities are stated based on their estimated
average life.
Actual maturities may differ from contractual maturities because, in
certain cases, borrowers have the right to call or prepay obligations
with or without call or prepayment penalties.
(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 $ 381,961 371,133
Commercial real estate mortgages 347,191 305,564
Real estate construction and development 23,188 14,983
Commercial and agricultural 331,535 252,508
Consumer 268,703 237,234
Home equity 114,289 95,819
----------------- ----------------
Total loans $ 1,466,867 1,277,241
================= ================
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. Approximately 33% and 26% of
the Company's loans are secured by real estate located in central and
northern New York and northeastern Pennsylvania, respectively.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's portfolio is susceptible to changes in market conditions of
those areas. Management is not aware of any material concentrations of
credit to any industry or individual borrowers.
FHLB advances are collateralized by a blanket lien on the Company's
residential real estate mortgages.
Changes in the allowance for loan losses for the three years ended
December 31, 1999, are summarized as follows:
1999 1998 1997
-------------------- --------------------- ------------------
(IN THOUSANDS)
Balance at January 1, $ 18,231 16,450 15,053
Provision 5,440 6,149 4,820
Recoveries 1,064 1,036 1,047
Loans charged off (5,024) (5,404) (4,470)
-------------------- --------------------- ------------------
Balance at December 31, $ 19,711 18,231 16,450
==================== ===================== ==================
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 $7.6 million and $7.7 million at December 31, 1999 and 1998,
respectively. Restructured loans were $2.5 million and $4.4 million at
December 31, 1999 and 1998, respectively.
At December 31, 1999, the recorded investment in impaired loans was $6.3
million. Included in this amount is $1.7 million of impaired loans for
which the specifically allocated allowance for loan loss is $0.7 million.
In addition, included in impaired loans is $4.6 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 $6.0 million, of which $2.8
million had a specific allowance allocation of $0.8 million and $3.2
million for which there was no specific allocation. The average recorded
investment in impaired loans was $5.8 million, $7.9 million and $5.4
million in 1999, 1998 and 1997, respectively. During 1999, 1998 and 1997
the Company recognized $0.2 million, $0.2 million and $0.1 million,
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 collectibility or incorporate other unfavorable
features. The aggregate amount of loans outstanding to qualifying related
parties and changes during the years are summarized as follows:
1999 1998
----------------- ----------------
(IN THOUSANDS)
Balance at January 1, $ 7,351 6,648
New loans 6,950 4,430
Repayments (1,654) (3,727)
----------------- -----------------
Balance at December 31, $ 12,647 7,351
================= ==================
(7) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment follows:
DECEMBER 31,
-------------------------------------
1999 1998
----------------- ----------------
(IN THOUSANDS)
Buildings and improvements $ 46,655 44,293
Equipment 40,135 36,841
Construction in progress 1,399 306
----------------- ----------------
88,189 81,440
Accumulated depreciation 41,092 36,768
----------------- ----------------
Total premises and equipment $ 47,097 44,672
================= ================
Rental expense included in occupancy expense amounted to $1.3 million in
1999, $1.3 million in 1998, and $1.0 million in 1997. The future minimum
rental commitments as of December 31, 1999, for noncancellable operating
leases were as follows: 2000, $1.3 million; 2001, $1.2 million; 2002,
$1.0 million; 2003, $0.5 million; and 2004 and beyond $1.2 million.
(8) DEPOSITS
The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 1999:
(IN THOUSANDS)
Within one year $ 739,199
After one but within two years 109,993
After two but within three years 30,482
After three but within four years 14,088
After four but within five years 9,994
After five years 106
------------
Total $ 903,862
============
Time deposits of $100,000 or more aggregated $383.4 million and $366.6
million at year end 1999 and 1998, respectively.
(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 $326 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
-------------------- --------------------- -------------------
(DOLLARS IN THOUSANDS)
FEDERAL FUNDS PURCHASED:
Balance at year-end $ 58,130 28,000 27,350
Average during the year 45,628 36,773 31,504
Maximum month end
balance 88,140 72,300 60,450
Weighted average rate
during the year 5.23% 5.57% 5.68%
Weighted average rate at
December 31 5.46% 4.55% 6.20%
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 $ 44,950 30,201 49,806
Average during the
year 37,591 44,908 38,331
Maximum month end
balance 74,950 50,165 49,806
Weighted average rate
during the year 5.40% 5.96% 6.02%
Weighted average rate
at December 31 5.45% 5.62% 5.82%
(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:
MATURITY DATE INTEREST RATE AMOUNT
------------- ------------- ------
(DOLLARS IN THOUSANDS)
FHLB advance 2000 6.45-prime $ 9,225
FHLB advance 2001 6.45-6.49 11,616
FHLB advance 2002 5.99-6.44 30,117
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 35,157
Note payable 2008 6.50-6.70 855
FHLB advance 2009 4.97-5.50 75,000
------
Total $251,970
========
FHLB advances are collateralized by the FHLB stock owned by the Company,
certain of its mortgage-backed securities and a blanket lien on its
residential real estate mortgage loans.
(11) INCOME TAXES
Total income taxes were allocated as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- -------------------
(IN THOUSANDS)
Income tax expense on
operations $ 13,971 7,149 10,906
Stockholders' equity,
capital surplus, for
stock option exercised (296) (117) (329)
Stockholders' equity, for
accumulated
comprehensive (loss)
income (15,636) 490 3,290
-------------------- --------------------- --------------------
Total tax expense
(benefit) $ (1,961) 7,522 13,867
==================== ===================== ====================
The significant components of income tax expense attributable to
operations are:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- --------------------
(IN THOUSANDS)
Current:
Federal $ 11,760 6,819 9,966
State 2,591 1,345 1,439
-------------------- --------------------- --------------------
14,351 8,164 11,405
Deferred:
Federal (521) (786) (394)
State 141 (229) (105)
-------------------- --------------------- --------------------
(380) (1,015) (499)
-------------------- --------------------- --------------------
Total income tax
expense $ 13,971 7,149 10,906
==================== ===================== ====================
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 $ 6,849 6,396
Net unrealized loss on securities available
for sale 13,128 --
Deferred compensation 1,040 923
Postretirement benefit obligation 1,068 993
Other 861 946
----------------- ----------------
Total gross deferred tax assets 22,946 9,258
----------------- ----------------
Deferred tax liabilities:
Prepaid pension obligation 389 396
Premises and equipment, primarily due
to accelerated depreciation 1,290 1,274
Net unrealized gain on securities available
for sale -- 2,508
Securities discount accretion 480 470
Equipment leasing 567 399
Other 18 25
----------------- ----------------
Total gross deferred tax liabilities 2,744 5,072
----------------- ----------------
Net deferred tax assets $ 20,202 4,186
================= ================
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income
within the available carryback period. A valuation allowance is provided
when it is more likely than not that some portion of the deferred tax
asset will not be realized. Based on available evidence, gross deferred
tax assets will ultimately be realized and a valuation allowance was not
deemed necessary at December 31, 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 $ 14,080 11,915 11,583
Tax exempt income (1,816) (1,546) (1,538)
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 (512) (113) (226)
-------------------- --------------------- --------------------
Income taxes $ 13,971 7,149 10,906
==================== ===================== ====================
(12) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to certain financial instruments with off balance
sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to
extend credit 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 $214.3 million. The amount of standby letters of credit at
December 31, 1999, amounted to $.9 million. At December 31, 1998, off
balance sheet commitments to extend credit for primarily variable rate
loans amounted to $196.5 million. The amount of standby letters of credit
at December 31, 1998, amounted to $4.4 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 consolidated financial
condition or results of operation of the Company.
(13) 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 a subsidiary bank's earnings retained in the current year
plus retained net profits for the preceding two years (as defined in the
regulations) or when a Bank fails to meet certain minimum regulatory
capital standards. At December 31, 1999, the subsidiary banks have the
ability to pay $29.7 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.
(14) REGULATORY CAPITAL REQUIREMENTS
Bancorp and the subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the subsidiary
banks must meet specific capital guidelines that involve quantitative
measures of the banks' assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital
amounts and classifications are also subject to qualitative judgements by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the subsidiary banks to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1
Capital to risk-weighted assets, and of Tier 1 capital to average assets.
As of December 31, 1999, the Company and the subsidiary banks meet all
capital adequacy requirements to which they were subject.
Under their prompt corrective action regulations, regulatory authorities
are required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution.
Such actions could have a direct material effect on an institution's
financial statements. The regulations establish a framework for the
classification of banks into five categories: well capitalized,
adequately capitalized, under capitalized, significantly under
capitalized, and critically under capitalized. As of December 31, 1999
and 1998, the most recent notification from the respective banks'
regulators 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 capital to average asset ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changes the subsidiary banks' categories.
The Company and the subsidiary banks' actual capital amounts and ratios
are presented as follows:
REGULATORY
RATIO REQUIREMENTS
------------------------------
FOR
ACTUAL MINIMUM CLASSIFICATION
--------------------- CAPITAL AS WELL
(DOLLARS IN THOUSANDS) AMOUNT RATIO ADEQUACY CAPITALIZED
------ ----- -------- -----------
As of December 31, 1999:
Total capital (to risk weighted assets):
Company combined $ 220,967 14.95% 8.00%
NBT Bank 132,427 14.59% 8.00% 10.00%
LA Bank 40,896 13.03% 8.00% 10.00%
Pioneer Bank 37,279 15.76% 8.00% 10.00%
Tier I Capital (to risk weighted assets):
Company combined 203,722 13.78% 4.00%
NBT Bank 121,047 13.33% 4.00% 6.00%
LA Bank 38,215 12.17% 4.00% 6.00%
Pioneer Bank 34,321 14.51% 4.00% 6.00%
Tier I Capital (to average assets):
Company combined 203,722 8.63% 3.00%
NBT Bank 121,047 8.84% 3.00% 5.00%
LA Bank 38,215 6.85% 3.00% 5.00%
Pioneer Bank 34,321 8.07% 4.00% 5.00%
As of December 31, 1998:
Total capital (to risk weighted assets):
Company combined $ 204,810 15.87% 8.00%
NBT Bank 124,646 15.36% 8.00% 10.00%
LA Bank 37,855 14.96% 8.00% 10.00%
Pioneer Bank 36,359 16.22% 8.00% 10.00%
Tier I Capital (to risk weighted assets):
Company combined 189,531 14.68% 4.00%
NBT Bank 114,469 14.11% 4.00% 6.00%
LA Bank 35,587 14.07% 4.00% 6.00%
Pioneer Bank 33,555 14.97% 4.00% 6.00%
Tier I Capital (to average assets):
Company combined 189,531 8.81% 3.00%
NBT Bank 114,469 8.96% 3.00% 5.00%
LA Bank 35,587 7.72% 3.00% 5.00%
Pioneer Bank 33,555 8.25% 4.00% 5.00%
(15) EMPLOYEE BENEFIT PLANS
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Benefits are accrued over the employees' active service period. The
Company provides certain health care benefits for retired employees. Lake
Ariel and Pioneer Holding Company did not provide health care benefits
for retired employees. Lake Ariel and Pioneer Holding Company employees
begin to participate in this plan and to accrue benefits under this plan
as of February 17, 2000 and July 1, 2000, respectively. As such, Lake
Ariel and Pioneer Holding Company employees are not included in this plan
as of December 31, 1999. The health care plan is 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. employees become eligible for these
benefits if they reach normal retirement age while working for the
Company or its subsidiaries. The Company funds the cost of postretirement
health care as benefits are paid. The Company elected to recognize the
transition obligation on a delayed basis over twenty years.
The net postretirement health benefits expense and funded status are as
follows:
YEARS 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 participants'
contribution 106 95
Actuarial gain (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%
==================== =====================
The Company used a health care trend rate in calculating it
postretirement benefit obligation of 7.0% to 8.0% for 1999, grading down
uniformly to 5.5% for 2005 and thereafter.
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)
================= ===================
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLANS
The Company maintains 401(k) and employee stock ownership plans (ESOP).
The Company contributes an amount based on employees'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 plans is contingent upon certain age and service requirements.
NBT Bank recorded expenses associated with the plan of $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. Pioneer Bank maintained an ESOP and a
savings and investment plan. Contributions to this plan were $0.1 million
in 1999, $0.1 million in 1998 and $0.2 million in 1997.
PENSION PLAN
The Company has a qualified, noncontributory pension plan covering
substantially all employees of NBT Bancorp Inc. As of December 31, 1999,
Lake Ariel and Pioneer employees are not included in this plan. Lake
Ariel and Pioneer Holding Company did not provide pension benefits and,
accordingly, their respective employees are not included in this plan at
December 31, 1999. Lake Ariel and Pioneer Holding Company employees began
to participate in this plan and to accrue benefits under this Plan as of
February 17, 2000 and July 1, 2000, respectively. 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 periodic pension expense and the funded status of the plan are as
follows:
YEARS 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)
Actuarial gain (loss) 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 19,432 15,589
Actual return on plan assets 745 3,671 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 (less than) 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 are 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, "Accounting for Stock Issued to
Employees," in accounting for its Plans and, accordingly, no compensation
cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997
-------------------- --------------------- -------------------
Net income:
As reported $ 26,257 26,895 22,188
Pro forma 25,519 26,367 21,843
Basic earnings per share:
As reported 1.14 1.16 1.00
Pro forma 1.11 1.14 0.98
Diluted earnings per share:
As reported 1.12 1.14 0.98
Pro forma 1.09 1.11 0.96
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 (40% in the first year and 20% each in
the second, third, and fourth years) and compensation of 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:
WEIGHTED
AVERAGE OF
EXERCISE PRICE
NUMBER OF OF OPTIONS
OPTIONS UNDER PLAN
----------------- -------------------
Balance at December 31, 1996 1,241,147 $7.81
----------------- -------------------
Granted 175,033 11.67
Exercised (375,686) 8.50
Lapsed (30,759) 10.34
----------------- -------------------
Balance at December 31, 1997 1,009,735 $8.14
----------------- -------------------
Granted 191,255 18.06
Exercised (101,189) 5.56
Lapsed (3,336) 11.37
----------------- -------------------
Balance at December 31, 1998 1,096,465 $8.74
----------------- -------------------
Granted 238,817 20.47
Exercised (167,310) 7.24
Lapsed (17,735) 16.23
----------------- -------------------
Balance at December 31, 1999 1,150,237 $14.21
================= ===================
The following table summarizes information concerning currently
outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
------------------- ------------------ --------------- --------------- --------------- ---------------
$4.43-$5.00 30,911 2.68 $ 4.79 30,911 $ 4.79
$5.01-$10.50 544,363 5.42 8.04 516,066 7.92
$10.51-$16.00 164,484 7.81 11.69 102,151 11.72
$16.01-$21.50 410,479 8.64 19.37 81,534 17.91
------------------- ------------------ --------------- --------------- --------------- ---------------
$4.43-$21.50 1,150,237 6.71 $14.21 730,662 $ 9.44
=================== ================== =============== =============== =============== ===============
(16) PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
DECEMBER 31,
--------------------------------------
ASSETS 1999 1998
----------------- ---------------
(IN THOUSANDS)
Cash and cash equivalents $ 1,880 2,469
Securities available for sale 7,724 3,572
Investment in subsidiary banks 181,043 197,659
Other assets 1,472 1,014
----------------- ----------------
Total assets $ 192,119 204,714
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities 647 676
----------------- ----------------
Stockholders' equity 191,472 204,038
----------------- ----------------
Total liabilities and stockholders'
equity $ 192,119 204,714
================= ================
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- -----------------
(IN THOUSANDS)
Dividends from subsidiary
banks $ 18,515 15,953 9,438
Interest and other dividend income 353 345 322
Net gain on sale of securities
available for sale 1,036 16 -
-------------------- --------------------- -----------------
Operating expense 1,009 395 349
-------------------- --------------------- -----------------
Income before income tax expense
and equity in
undistributed income of
subsidiary banks 18,895 15,919 9,411
Income tax expense 223 61 26
Equity in undistributed
income of subsidiary
banks 7,585 11,037 12,803
-------------------- --------------------- -----------------
Net income $ 26,257 26,895 22,188
==================== ===================== ====================
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- ------------------
(IN THOUSANDS)
Operating activities:
Net income $ 26,257 26,895 22,188
Adjustments to reconcile net
income to net cash provided
by operating activities:
Net gains on sale of
securities available
for sale (1,036) (16) -
Undistributed net income
of subsidiary banks (7,585) (11,037) (12,803)
Other, net (1,432) (548) (12,680)
-------------------- --------------------- ------------------
Net cash provided by (used
in) operating activities 16,204 15,294 (3,295)
-------------------- --------------------- ------------------
Investing activities:
Securities available for sale:
Proceeds 2,301 3,416 -
Purchases (5,717) (2,965) (3,384)
-------------------- --------------------- ------------------
Net cash(used in) provided by
Investing activities (3,416) 451 (3,384)
-------------------- --------------------- ------------------
Financing activities:
Sale and issuance of treasury shares
to employee benefit plans
and other stock plans 6,517 4,963 19,181
Purchase of treasury shares (6,948) (9,127) (2,568)
Cash dividends and payment
for fractional shares (12,946) (11,864) (9,001)
-------------------- --------------------- ------------------
Net cash (used in) provided by
financing activities (13,377) (16,028) 7,612
-------------------- --------------------- ------------------
Net (decrease) increase in
cash and cash
equivalents (589) (283) 933
Cash and cash equivalents at
beginning of year 2,469 2,752 1,819
-------------------- --------------------- ------------------
Cash and cash equivalents at end of year $ 1,880 2,469 2,752
==================== ===================== ==================
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
SHORT TERM INSTRUMENTS
For short-term instruments, such as cash and cash equivalents, accrued
interest receivable, accrued interest payable and short term borrowings,
carrying value approximates fair value.
SECURITIES
Fair values for securities are based on quoted market prices or dealer
quotes, where available. Where quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
LOANS
For variable rate loans that reprice frequently and have no significant
credit risk, fair values are based on carrying values. The fair values
for fixed rate loans are estimated through discounted cash flow analysis
using interest rates currently being offered for loans with similar terms
and credit quality. 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.
DEPOSITS
The fair values disclosed for savings, money market, and noninterest
bearing accounts are, by definition, equal to their carrying values at
the reporting date. The fair value of fixed maturity time deposits is
estimated using a discounted cash flow analysis that applies interest
rates currently offered to a schedule of aggregated expected monthly
maturities on time deposits.
OTHER BORROWINGS
The fair value of other borrowings has been estimated using discounted
cash flow analysis that applies interest rates currently offered for
notes with similar terms.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of
credit are estimated using fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present credit worthiness of the counterparts. Carrying amounts,
which are comprised of the unamortized fee income, are not significant.
Estimated fair values of financial instruments at December 31 are as
follows:
1999 1998
-------------------------------------- ---------------------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
----------------- ----------------- ----------------- ---------------
(IN THOUSANDS)
FINANCIAL ASSETS
Cash and cash equivalents $ 79,629 79,629 87,762 87,762
Securities available for sale 606,727 606,727 523,254 523,254
Securities held to maturity 113,318 109,147 180,663 181,741
Loans 1,466,867 1,461,915 1,277,241 1,320,837
Less allowance for loan losses 19,711 -- 18,231 --
----------------- ----------------- ----------------- ---------------
Net loans 1,447,156 1,461,915 1,259,010 1,320,837
Accrued interest receivable 13,422 13,422 13,392 13,392
FINANCIAL LIABILITIES
Deposits:
Interest bearing:
Savings, NOW and money
market $ 605,334 605,334 589,607 589,607
Time deposits 903,862 903,862 825,213 826,110
Noninterest bearing 267,895 267,895 249,487 249,487
Short-term borrowings 142,267 142,267 99,872 99,872
Long-term debt 251,970 246,354 183,968 185,137
Accrued interest payable 9,925 9,925 8,086 8,086
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has a
substantial trust and investment management operation that contributes
net fee income annually. The trust and investment management operation is
not considered a financial instrument, and its value has not been
incorporated into the fair value estimates. Other significant assets and
liabilities include the benefits resulting from the low-cost funding of
deposit liabilities as compared to the cost of borrowing funds in the
market, and premises and equipment and software. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in the estimate of fair value.