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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1268674
(State of Incorporation) (I.R.S. Employer Identification No.)
52 SOUTH BROAD STREET NORWICH, NEW YORK 13815
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (607) 337-6000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter periods that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
As of July 31, 1999, there were 12,418,983 shares outstanding of the
Registrant's common stock, No Par, Stated Value $1.00. There were no shares of
the Registrant's preferred stock, No Par, Stated Value $1.00, outstanding at
that date.
An index to exhibits follows the signature page of this FORM 10-Q.
-1-
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended June 30, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1999, December 31, 1998
(Audited), and June 30, 1998
Consolidated Statements of Income for the three month and six month
periods ended June 30, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the six month
periods ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the six month periods
ended June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income for the three month
and six month periods ended June 30, 1999 and 1998
Notes to Interim Consolidated Financial Statements at June 30, 1999
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Information called for by Item 3 is contained in the Liquidity and
Interest Rate Sensitivity Management section of the Management
Discussion and Analysis.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
-2-
NBT BANCORP INC. AND SUBSIDIARY JUNE 30, December 31, June 30,
CONSOLIDATED BALANCE SHEETS 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data) (UNAUDITED) (Unaudited)
ASSETS
Cash $ 51,849 $ 47,181 $ 42,939
Loans held for sale 3,023 2,887 2,483
Securities available for sale, at fair value 350,495 355,758 409,184
Securities held to maturity (fair value-$35,942,
$35,095 and $37,137) 35,942 35,095 37,137
Loans:
Commercial and agricultural 427,049 388,509 355,945
Real estate mortgage 170,810 160,025 148,660
Consumer 279,320 272,971 274,482
- -------------------------------------------------------------------------------------------------------------------
Total loans 877,179 821,505 779,087
Less allowance for loan losses 13,361 12,962 12,239
- -------------------------------------------------------------------------------------------------------------------
Net loans 863,818 808,543 766,848
Premises and equipment, net 20,424 20,241 20,525
Intangible assets, net 7,072 7,572 8,080
Other assets 18,147 12,732 11,246
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,350,770 $1,290,009 $1,298,442
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 146,106 $ 154,146 $ 139,321
Savings, NOW, and money market 384,220 391,614 382,546
Time 481,948 498,445 479,034
- -------------------------------------------------------------------------------------------------------------------
Total deposits 1,012,274 1,044,205 1,000,901
Short-term borrowings 169,301 96,589 152,150
Other borrowings 35,164 10,171 10,178
Other liabilities 6,878 8,412 6,173
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,223,617 1,159,377 1,169,402
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par, stated value $1.00; shares
authorized -2,500,000 - - -
Common stock, no par, stated value $1.00; shares
authorized -15,000,000; issued 13,015,789,
13,015,789 and 12,425,758 13,016 13,016 12,426
Capital surplus 111,526 111,749 97,110
Retained earnings 20,834 15,512 25,448
Accumulated other comprehensive income (loss) (4,426) 3,317 2,400
Common stock in treasury at cost, 635,642,
599,507, and 415,225 shares (13,797) (12,962) (8,344)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 127,153 130,632 129,040
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,350,770 $1,290,009 $1,298,442
- -------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-3-
Three months ended Six months ended
NBT BANCORP INC. AND SUBSIDIARY June 30, June 30,
CONSOLIDATED STATEMENTS OF INCOME 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
Interest and fee income:
Loans and loans held for sale $18,422 $17,563 $36,430 $34,601
Securities - taxable 6,194 7,376 11,876 15,267
Securities - tax exempt 240 281 478 555
Other 75 56 156 109
- -------------------------------------------------------------------------------------------------------------------
Total interest and fee income 24,931 25,276 48,940 50,532
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 8,302 9,588 16,586 19,079
Short-term borrowings 1,207 1,445 2,282 3,120
Other borrowings 469 135 624 190
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 9,978 11,168 19,492 22,389
- -------------------------------------------------------------------------------------------------------------------
Net interest income 14,953 14,108 29,448 28,143
Provision for loan losses 975 1,150 1,950 2,250
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 13,978 12,958 27,498 25,893
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Trust 835 802 1,670 1,604
Service charges on deposit accounts 1,059 900 2,020 1,769
Net securities gains 199 227 670 445
Other 610 610 1,402 1,289
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,703 2,539 5,762 5,107
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 4,525 4,607 9,141 9,294
Office supplies and postage 467 465 940 965
Occupancy 735 695 1,409 1,381
Equipment 687 580 1,308 1,060
Professional fees and outside services 586 615 1,153 1,263
Data processing and communications 968 862 1,878 1,763
Amortization of intangible assets 250 271 501 562
Other operating 856 1,444 1,524 2,653
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,074 9,539 17,854 18,941
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,607 5,958 15,406 12,059
Income taxes 2,875 1,248 5,863 2,277
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,732 $ 4,710 $ 9,543 $ 9,782
- -------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.38 $ 0.37 $ 0.77 $ 0.77
Diluted $ 0.38 $ 0.37 $ 0.76 $ 0.76
- -------------------------------------------------------------------------------------------------------------------
All per share data has been restated to give retroactive effect to stock
dividends and splits.
See notes to interim consolidated financial statements.
-4-
NBT BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Capital Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
BALANCE AT DECEMBER 31, 1997 $ 9,430 $ 96,494 $22,249 $ 2,373 $ (7,203) $123,343
Net income 9,782 9,782
Cash dividends - $0.284 per share (3,576) (3,576)
Effect of 4 for 3 split in the
form of a stock dividend 2,996 (2,996)
Payment in lieu of fractional shares (11) (11)
Purchase of 91,100 treasury shares (2,831) (2,831)
Sale of 91,746 treasury shares to
employee benefit plans and other
stock plans 616 1,690 2,306
Unrealized gain on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $10 27 27
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $12,426 $ 97,110 $25,448 $ 2,400 $ (8,344) $129,040
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $13,016 $111,749 $15,512 $ 3,317 $(12,962) $130,632
Net income 9,543 9,543
Cash dividends - $0.340 per share (4,205) (4,205)
Payment in lieu of fractional shares (16) (16)
Purchase of 179,500 treasury shares (3,943) (3,943)
Sale of 143,365 treasury shares to
employee benefit plans and other
stock plans (223) 3,108 2,885
Unrealized loss on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $5,348 (7,743) (7,743)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 $13,016 $111,526 $20,834 $ (4,426) $(13,797) $127,153
- ---------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-5-
NBT BANCORP INC. AND SUBSIDIARY Six months ended June 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
OPERATING ACTIVITIES:
Net income $ 9,543 $ 9,782
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,950 2,250
Depreciation of premises and equipment 1,084 986
Amortization of premiums and accretion of discounts on securities (712) (878)
Amortization of intangible assets 501 562
Proceeds from sale of loans originated for sale 1,199 2,408
Loans originated for sale (1,335) (1,605)
Net gain on sale of other real estate owned (533) (65)
Net realized gains on sales of securities (670) (445)
(Increase) decrease in interest receivable (393) 513
Decrease in interest payable (393) (70)
Other, net (1,597) (2,675)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,644 10,763
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 39,949 35,893
Proceeds from sales 54,957 93,565
Purchases (101,352) (96,650)
Securities held to maturity:
Proceeds from maturities 13,148 10,502
Purchases (13,995) (11,500)
Net increase in loans (57,448) (45,198)
Purchase of premises and equipment, net (1,267) (2,750)
Proceeds from sales of other real estate owned 1,537 644
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (64,471) (15,494)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in deposits (31,931) (13,282)
Net increase in short-term borrowings 72,712 17,623
Proceeds from issuance of other borrowings 25,000 10,000
Repayments of other borrowings (7) (5)
Proceeds from issuance of treasury shares to
employee benefit plans and other stock plans 2,885 2,306
Purchase of treasury stock (3,943) (2,831)
Cash dividends and payment for fractional shares (4,221) (3,587)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 60,495 10,224
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,668 5,493
Cash and cash equivalents at beginning of year 47,181 37,446
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 51,849 $ 42,939
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the
period for:
Interest $ 19,885 $ 22,459
Income taxes 6,658 3,894
- ---------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-6-
Three months ended Six months ended
NBT BANCORP INC. AND SUBSIDIARY June 30, June 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
Net Income $ 4,732 $ 4,710 $ 9,543 $ 9,782
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $(9,460),
$1,256, $(12,421) and $482] (5,596) 748 (7,347) 290
Less: Reclassification adjustment for net gains included
in net income [pre-tax amounts of
$(199), $(227), $(670) and $(445)] (117) (134) (396) (263)
- -----------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (5,713) 614 (7,743) 27
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (981) $ 5,324 $ 1,800 $ 9,809
- -----------------------------------------------------------------------------------------------------------------------
See notes to interim consolidated financial statements.
-7-
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of NBT Bancorp Inc. (the Registrant) and its wholly-owned subsidiary,
NBT Bank, N.A. (Bank) collectively referred to herein as the Company. All
intercompany transactions have been eliminated in consolidation. Certain amounts
previously reported in the financial statements have been reclassified to
conform with the current presentation.
The determination of the allowance for loan losses is a material estimate
that is particularly susceptible to significant change in the near term. In
connection with the determination of the allowance for loan losses management
obtains independent appraisals for significant properties.
The balance sheet at December 31, 1998 has been derived from audited
financial statements at that date. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to FORM 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month and six month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Registrant's annual report on FORM 10-K
for the year ended December 31, 1998.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. All
share and per share data has been adjusted retroactively for stock dividends and
splits. The following is a reconciliation of basic and diluted earnings per
share for the periods presented in the income statement.
- -------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 1998
- -------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 12,388 12,616
Net income available to common shareholders $ 4,732 $ 4,710
- -------------------------------------------------------------------------------------------------
Basic EPS $ 0.38 $ 0.37
- -------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 12,388 12,616
Dilutive common stock options 139 280
- -------------------------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 12,527 12,896
Net income available to common shareholders $ 4,732 $ 4,710
- -------------------------------------------------------------------------------------------------
Diluted EPS $ 0.38 $ 0.37
- -------------------------------------------------------------------------------------------------
-8-
- -------------------------------------------------------------------------------------------------
Six months ended June 30, 1999 1998
- -------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Basic EPS:
Weighted average common shares outstanding 12,404 12,631
Net income available to common shareholders $ 9,543 $ 9,782
- -------------------------------------------------------------------------------------------------
Basic EPS $ 0.77 $ 0.77
- -------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 12,404 12,631
Dilutive common stock options 148 245
- -------------------------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 12,552 12,876
Net income available to common shareholders $ 9,543 $ 9,782
- -------------------------------------------------------------------------------------------------
Diluted EPS $ 0.76 $ 0.76
- -------------------------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes comprehensive
accounting and reporting requirements for derivative instruments and hedging
activities. SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. The accounting for gains
or losses resulting from changes in the values of those derivatives would be
dependent on the use of the derivative and the type of risk being hedged. During
the second quarter of 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133". FASB No. 137 defers the effective date of FASB No. 133 by one
year from fiscal quarters of fiscal years beginning after June 15, 1999 to
fiscal quarters of fiscal years beginning after June 15, 2000. At the present
time, the Company has not fully analyzed the effect or timing of the adoption of
SFAS No. 133 on the Company's consolidated financial statements.
-9-
NBT BANCORP INC. AND SUBSIDIARY
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and results of operations of NBT
Bancorp Inc. (Bancorp) and its wholly owned subsidiary, NBT Bank, N.A. (Bank)
collectively referred to herein as the Company. This discussion will focus on
Results of Operations, Financial Position, Capital Resources and Asset/Liability
Management. Reference should be made to the Company's consolidated financial
statements and footnotes thereto included in this FORM 10-Q as well as to the
Company's 1998 FORM 10-K for an understanding of the following discussion and
analysis. In June of 1998, the Company distributed a four-for-three stock split
effected in the form of a 33 1/3% stock dividend. In December 1998, the Company
distributed a 5% stock dividend, the thirty-ninth consecutive year a stock
dividend has been declared. Throughout this discussion and analysis, amounts per
common share and common shares outstanding have been adjusted retroactively for
stock dividends and splits.
Certain statements in this release and other public releases by the Company
contain forward-looking information, as defined in the Private Securities
Litigation Reform Act. These statements may be identified by the use of phrases
such as "anticipate," "believe," "expect," "forecasts," "projects," or other
similar terms. Actual results may differ materially from these statements since
such statements involve significant known and unknown rules and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) an increase in competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3) changes in the
regulatory environment; (4) general economic environment conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality; (5) changes may incur in
business conditions and inflation; and (6) unforeseen risks associated with the
Year 2000 issue.
YEAR 2000
The Year 2000 issue presents a number of difficult challenges to the Company.
Information systems are often complex and have been developed over many years
through a variety of computer languages and hardware platforms. The Year 2000
issue refers to the programming of existing software applications using a two
digit year field. This coding presents a potential problem when the year begins
with "20", instead of "19". Computers may interpret the year as 1900 instead of
2000, creating possible system failure or miscalculation of financial data.
A committee continues to direct the Company's Year 2000 activities under
the framework of the FFIEC's Five-Step Program. The FFIEC's Five-Step Program
includes the following phases: Awareness, Assessment, Renovation, Validation and
Implementation. The Awareness Phase, 100% complete, defines the Year 2000
problem and gains executive level support for the necessary resources to prepare
the Company for Year 2000 compliance. The Assessment Phase, 100% complete,
assesses the size and complexity of the problem and details the magnitude of the
effort necessary to address the Year 2000 issues. Although the Awareness and
Assessment Phases are complete, the Company will continue to evaluate any new
issues as they arise. The Renovation Phase, 100% complete, includes code
enhancements, hardware and software updates, system replacements, vendor
certification, and other associated changes. The Validation Phase, 100%
complete, includes the testing of incremental changes to hardware and software
components. The Implementation Phase, 100% complete, certifies that systems are
Year 2000 compliant and have been accepted by the end users. The Company has
been addressing Informational Technology (IT) and non IT systems. The Company
has categorized all systems as mission critical, high, medium or low priority
with respect to its ability to influence business functions. The Company has
completed the testing of mission critical applications without negative
findings. In some cases, the Company is relying on the service providers and
software vendors to facilitate proxy testing with a select group of users,
including the Company. The Company approved the test plans to ensure Year 2000
compliance of those systems. The Company has also contracted with McGladrey and
Pullen, LLP to perform an independent third party review of all proxy test
results. The McGladrey and Pullen, LLP review did not identify any significant
Year 2000 issues. To ensure compliance of non IT systems where testing is not
possible, the Company has contacted the manufacturers and suppliers for Year
2000 certification. Based on responses from manufacturers and suppliers of non
IT systems, the Company does not anticipate incurring any material expenses due
to unpreparedness of the non IT systems.
-10-
The Company has identified material third party relationships to minimize
the potential loss from unpreparedness of these parties. The Company continues
to work closely with Fiserv, its data services and items processing provider,
regarding Year 2000 compliance.
The Company has tested its mission critical trust accounting system to
ensure Year 2000 compliance. The testing and validation of this system was
completed during the fourth quarter of 1998. Test results were reviewed by
internal staff and did not disclose any significant Year 2000 issues. In
addition, the system was also tested by the software vendor and two user groups
made up of other banks. Results of these tests did not identify any significant
Year 2000 issues. Non mission critical systems in use by the trust department
have been reviewed for Year 2000 compliance. In addition, the trust department
is following the FFIEC's Year 2000 Fiduciary Service Guidance. The fiduciary
review includes the following steps: account and asset administration, third
party risk, counter party risk, transfer agent risk, and client disclosure. A
Year 2000 compliance review is being conducted on those companies in which
significant trust assets are invested. As of June 30, 1999 the companies where
approximately 96% of significant assets are invested had been preliminarily
reviewed and 94% have received at least two reviews. Updates on the status of
these companies will continue throughout 1999. The trust account review process
has been modified to include specific Year 2000 issues. Third party and counter
party fiduciary risk is being addressed by communicating with various vendors
and service providers to ascertain their Year 2000 compliance. All customers and
beneficiaries of the trust department have been contacted regarding the
Company's efforts to identify and reduce Year 2000 risk.
The Company has evaluated the Year 2000 readiness of its major borrowers
and fund providers to assess their readiness and identify potential problems.
The Company has assessed the preparedness of its 75 largest commercial
borrowers, as well as 125 random commercial borrowers. These borrowers were
evaluated and rated as low, medium or high risk. For the medium and high risk
customers, an action plan for compliance has been developed, up to and including
credit risk downgrades and requests for additional collateral. The Company has
also assessed the preparedness of its 60 largest deposit account relationships,
as well as 45 random depositors. The providers were also evaluated and rated as
low, medium or high risk. The Company has scheduled follow up with the high risk
and material fund providers to ensure they are taking necessary steps to become
Year 2000 compliant. The Company also completed an assessment of its other
material funding sources and counter parties, with no high risk relationships
being identified. Continuous monitoring of significant new relationships is
performed to ensure Year 2000 preparedness. In addition, the Company has
modified its liquidity crisis plan to minimize funding risk due to the Year 2000
issue. The Company is monitoring customer behavior to determine the cash
availability requirements and the associated impact to its liquidity funding
position and will update the liquidity crisis plan as necessary.
As of June 30, 1999 the Company has incurred approximately $510,000 in
expenses directly related to the Year 2000 issue. Additionally, the Company
forecasts spending approximately $115,000 by December 31, 1999 to ensure Year
2000 readiness. These amounts include the cost of additional hardware and
software, as well as technology consultants contracted to assist in the
preparation for the Year 2000; however, they do not include a valuation for the
considerable time employees spent or will spend on Year 2000 preparedness. The
Company has included the cost of the Year 2000 issue in its 1999 annual budget.
Due to the uniqueness of the Year 2000 issue, it is difficult to quantify the
potential loss in revenue. Based on efforts to ensure systems will function
properly, the Company believes it reasonable that no material loss in revenue
will occur. The Company believes that its reasonably likely worst case Year 2000
scenario is a material increase in credit losses due to Year 2000 problems of
the Company's borrowers, as well as disruption in financial markets causing
liquidity stress. As previously mentioned, the Company has attempted to minimize
these risks by identifying the material borrowers and fund providers and
assessing their progress toward Year 2000 compliance.
The Company has developed a business resumption contingency plan to help
ensure continued operations in the event of Year 2000 system failures. This
contingency plan is consistent with the Company's disaster recovery plan with
modifications for Year 2000 risks. The business resumption contingency plan has
been tested and independently validated in accordance with FFIEC guidelines.
OVERVIEW
Net income of $4.7 million ($0.38 per diluted share) was recognized in the
second quarter of 1999, compared to second quarter 1998 net income of $4.7
million ($0.37 per diluted share). The second quarter net income before taxes of
$7.6 million was $1.6 million higher than second quarter 1998. The increase in
pre-tax income can be attributed to improvements in the net interest income,
noninterest income and noninterest expense categories. The increase in pretax
income is indicative of the strong core earnings capacity of the Company. Second
quarter 1998 earnings include an approximate $1 million tax benefit available
only through year-end 1998, arising from a corporate realignment within the
Company.
-11-
Net income of $9.5 million ($0.76 per diluted share) was recognized for the
six month period ended June 30, 1999, compared to net income of $9.8 million
($0.76 per diluted share) for the first six months of 1998. The first six months
of 1998 included an approximate $2 million tax benefit previously described. Net
income before taxes of $15.4 million for the first six months of 1999 increased
$3.3 million compared to the same period of 1998. The increased pre tax income
for the six month period ended June 30, 1999 was driven by factors similar to
those of second quarter 1999.
Table 1 depicts several measurements of performance on an annualized basis.
Returns on average assets and equity measure how effectively an entity utilizes
its total resources and capital, respectively. Both the return on average assets
and the return on average equity ratios declined for the three and six month
periods ended June 30, 1999 compared to the same periods a year previous. The
decline in these ratios can be attributed to the increased income tax expense
previously mentioned.
Net interest margin, net federal taxable equivalent (FTE) interest income
divided by average interest-earning assets, is a measure of an entity's ability
to utilize its earning assets in relation to the interest cost of funding.
Taxable equivalency adjusts income by increasing tax exempt income to a level
that is comparable to taxable income before taxes are applied. The positive
trend in net interest margin is critical to the improved profitability of the
Company.
TABLE 1
PERFORMANCE MEASUREMENTS
- -------------------------------------------------------------------------------------------------
First SECOND SIX Third Fourth Twelve
Quarter QUARTER MONTHS Quarter Quarter Months
- -------------------------------------------------------------------------------------------------
1999
Return on average assets 1.54% 1.44% 1.49%
Return on average equity 14.87% 14.59% 14.73%
Net interest margin 4.96% 4.87% 4.91%
- -------------------------------------------------------------------------------------------------
1998
Return on average assets 1.60% 1.47% 1.54% 1.46% 1.40% 1.48%
Return on average equity 16.49% 14.92% 15.70% 14.54% 13.87% 14.93%
Net interest margin 4.75% 4.68% 4.72% 4.79% 4.80% 4.76%
- -------------------------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest bearing
liabilities, primarily deposits and borrowings. Net interest income is affected
by the interest rate spread, the difference between the yield on earning assets
and cost of interest bearing liabilities, as well as the volumes of such assets
and liabilities. Table 2 represents an analysis of net interest income on a
federal taxable equivalent basis.
Net federal taxable equivalent (FTE) interest income increased $0.9 million
for the second quarter of 1999 compared to the same period of 1998. This
increase was primarily a result of the $27.9 million increase in average earning
assets, while at the same time maintaining stable interest bearing liabilities.
Total FTE interest income decreased $0.3 million compared to the second
quarter 1998. This decrease is a result of a decline in the yield on earning
assets of 28 basis points, driven primarily by a decline in the loan portfolio
yield. During the same time period, total interest expense decreased $1.2
million. This decrease is a result of a 47 basis point decline in the cost of
interest bearing liabilities, driven primarily by a decline in the cost of
certificates of deposit.
For the first six months of 1999, net FTE interest income increased $1.4
million over the comparable period of 1998. This increase can be attributed to a
$7.1 million increase in average earning assets, while at the same time reducing
interest bearing liabilities by $17.6 million. During the same period, the yield
on earning assets decreased 30 basis points, primarily driven by the 52 basis
point decline in the loan portfolio yield. The cost of interest bearing
liabilities decreased 51 basis points for the six months ended June 30, 1999
compared to the same period of 1998. This decrease can be attributed primarily
to a decline in the cost of certificate of deposits and short term borrowings
between the reporting periods.
Another important performance measurement of net interest income is the net
interest margin. The net interest margin increased to 4.87% for the second
quarter of 1999, up from 4.68% during the same period in 1998. The net interest
margin increased to 4.91% for first six months of 1999, up from 4.72% for the
comparable period in 1998. The increase in the net interest margin during these
periods is primarily a result of the increased interest rate spread. Also
contributing to the improved net interest margin is increased funding of earning
assets from noninterest bearing sources.
-12-
TABLE 2
COMPARATIVE ANALYSIS OF FEDERAL TAXABLE EQUIVALENT NET INTEREST INCOME
- ----------------------------------------------------------------------------------------------------
Three months ended June 30,
ANNUALIZED
YIELD/RATE AMOUNTS VARIANCE
- ----------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998 TOTAL VOLUME RATE
---- ---- ---- ---- ----- ------ ----
5.77% 5.18% Interest bearing deposits $ 2 $ 2 $ - $ 1 $ (1)
Federal funds sold and securities
-% 3.78% purchased under agreements to resell - 5 (5) (2) (3)
4.69% 5.36% Other short-term investments 73 49 24 30 (6)
6.75% 6.90% Securities available for sale 6,008 7,171 (1,163) (1,012) (151)
7.31% 8.71% Loans held for sale 62 72 (10) 2 (12)
Securities held to maturity:
6.50% 7.09% Taxable 206 228 (22) (3) (19)
6.73% 7.03% Tax exempt 349 409 (60) (43) (17)
8.69% 9.20% Loans 18,481 17,543 938 1,952 (1,014)
-------------------------------------------------------------------------------------
8.06% 8.34% Total interest income 25,181 25,479 (298) 925 (1,223)
2.73% 2.90% Money Market Deposit Accounts 552 607 (55) (21) (34)
1.23% 1.66% NOW accounts 417 530 (113) 30 (143)
2.72% 2.82% Savings accounts 1,116 1,084 32 68 (36)
4.89% 5.41% Certificates of deposit 6,217 7,367 (1,150) (466) (684)
4.67% 5.42% Short-term borrowings 1,207 1,445 (238) (44) (194)
5.35% 5.31% Other Borrowings 469 135 334 333 1
-------------------------------------------------------------------------------------
3.88% 4.35% Total Interest Expense 9,978 11,168 (1,190) (100) (1,090)
-------------------------------------------------------------------------------------
Net interest income $15,203 $14,311 $ 892 $ 1,025 $ (133)
=====================================================================================
4.18% 3.99% Interest rate spread
===== ===== ====================
4.87% 4.68% Net interest margin
===== ===== ===================
FTE adjustment $ 250 $ 203
============== ======= =======
Six months ended June 30,
ANNUALIZED
YIELD/RATE AMOUNTS VARIANCE
- ----------------------------------------------------------------------------------------------------
1999 1998 (dollars in thousands) 1999 1998 TOTAL VOLUME RATE
---- ---- ---- ---- ----- ------ ----
4.34% 5.14% Interest bearing deposits $ 5 $ 3 $ 2 $ 3 $ (1)
4.63% 3.96% Federal funds sold 2 6 (4) (4) -
4.71% 5.40% Other short-term investments 149 100 49 64 (15)
6.76% 7.04% Securities available for sale 11,508 14,858 (3,350) (2,785) (565)
7.01% 8.24% Loans held for sale 119 144 (25) (4) (21)
Securities held to maturity:
6.48% 6.88% Taxable 409 453 (44) (18) (26)
6.59% 7.11% Tax exempt 694 809 (115) (57) (58)
8.76% 9.28% Loans 36,524 34,567 1,957 3,956 (1,999)
-------------------------------------------------------------------------------------
8.11% 8.41% Total interest income 49,410 50,940 (1,530) 1,155 (2,685)
2.74% 2.90% Money Market Deposit Accounts 1,170 1,245 (75) (6) (69)
1.37% 1.67% NOW accounts 934 1,034 (100) 99 (199)
2.74% 2.83% Savings accounts 2,198 2,153 45 118 (73)
4.93% 5.45% Certificates of deposit 12,284 14,647 (2,363) (1,012) (1,351)
4.73% 5.55% Short-term borrowings 2,282 3,120 (838) (407) (431)
5.34% 5.32% Other Borrowings 624 190 434 433 1
------------------------------------------------------------------------------------
3.89% 4.40% Total Interest Expense 19,492 22,389 (2,897) (775) (2,122)
-------------------------------------------------------------------------------------
Net interest income $29,918 $28,551 $ 1,367 $1,930 $ (563)
=====================================================================================
4.22% 4.01% Interest rate spread
===== ===== ====================
4.91% 4.72% Net interest margin
===== ===== ===================
FTE adjustment $ 470 $ 408
============== ======= =======
-13-
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance established to provide
for the estimated losses related to the collection of the Company's loan
portfolio. The allowance is maintained at a level considered adequate to provide
for loan loss exposure based on management's estimate of probable losses in the
portfolio considering an evaluation of risk, economic factors, and past loss
experience. Management determines the provision and allowance for loan losses
based on a number of factors including a comprehensive loan review program
conducted throughout the year. The loan portfolio is continually evaluated in
order to identify problem loans, credit concentration, and other risk factors
such as economic conditions. The allowance for loan losses to outstanding loans
at June 30, 1999 is 1.52%, compared to 1.57% for the same period in 1998.
Management considers the allowance for loan losses to be adequate based on
evaluation and analysis of the loan portfolio.
Table 3 reflects changes to the allowance for loan losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net charge-offs. Charge-offs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan losses. Net charge-offs for the quarter and six months ended
June 30, 1999 declined minimally compared to the same period of 1998. Annualized
net charge-offs to average loans declined to 0.39% for the second quarter of
1999, down from 0.47% for the comparable period of 1998. Annualized net
charge-offs to average loans declined to 0.37% for the first six months of 1999,
compared to 0.43% for the comparable period of 1998. The decline in charge-offs
as a percentage of average loans during 1999 indicates an improvement in the
Company's loan quality.
TABLE 3
ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
Balance, beginning of period $13,209 $11,984 $12,962 $11,582
Recoveries 195 222 389 410
Charge-offs (1,018) (1,117) (1,940) (2,003)
- -----------------------------------------------------------------------------------------------------------
Net charge-offs (823) (895) (1,551) (1,593)
Provision for loan losses 975 1,150 1,950 2,250
- -----------------------------------------------------------------------------------------------------------
Balance, end of period $13,361 $12,239 $13,361 $12,239
- -----------------------------------------------------------------------------------------------------------
COMPOSITION OF NET CHARGE-OFFS
- -----------------------------------------------------------------------------------------------------------
Commercial and agricultural $ (458) 56% $ (532) 59% $ (783) 50% $ (848) 53%
Real estate mortgage (37) 4% (34) 4% (65) 4% (55) 4%
Consumer (328) 40% (329) 37% (703) 46% (690) 43%
- -----------------------------------------------------------------------------------------------------------
Net charge-offs $ (823) 100% $ (895) 100% $(1,551) 100% $(1,593) 100%
- -----------------------------------------------------------------------------------------------------------
Annualized net charge-offs
to average loans 0.39% 0.47% 0.37% 0.43%
- -----------------------------------------------------------------------------------------------------------
Net charge-offs to average loans for the year ended
December 31, 1998 0.42%
- -----------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Table 4 below presents quarterly and period to date noninterest income.
Noninterest income for the second quarter of 1999, excluding security gains and
nonrecurring income, increased $0.2 million or 8.3% when compared to second
quarter of 1998. Trust income continued its growth trend as managed assets have
steadily increased. Deposit service charges have increased as the Company has
experienced an increase in demand deposit accounts. Also contributing to the
increase in noninterest income was a rise in ATM transaction income. For the six
month period ended June 30, 1999, excluding security gains and nonrecurring
income, noninterest income increased $0.4 million or 9.2% compared to the same
period during 1998.
-14-
TABLE 4
NONINTEREST INCOME
- -----------------------------------------------------------------------------------------------------------
First SECOND SIX Third Fourth Twelve
(dollars in thousands) Quarter QUARTER MONTHS Quarter Quarter Months
- -----------------------------------------------------------------------------------------------------------
1999
Trust income $ 835 $ 835 $1,670
Service charges on deposit accounts 961 1,059 2,020
Net securities gains 471 199 670
Other income 792 610 1,402
- -----------------------------------------------------------------------------------------------------------
Total noninterest income $3,059 $2,703 $5,762
- -----------------------------------------------------------------------------------------------------------
1998
Trust income $ 802 $ 802 $1,604 $ 803 $ 708 $3,115
Service charges on deposit accounts 869 900 1,769 956 1,024 3,749
Net securities gains 218 227 445 168 11 624
Other income 679 610 1,289 594 608 2,491
- -----------------------------------------------------------------------------------------------------------
Total noninterest income $2,568 $2,539 $5,107 $2,521 $2,351 $9,979
- -----------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE AND OPERATING EFFICIENCY
Table 5 presents components of noninterest expense as well as selected operating
efficiency ratios. Noninterest expense for the quarter ended June 30, 1999
decreased $0.5 million compared to the same time period of 1998. Noninterest
expense for the six month period ended June 30, 1999 decreased $1.1 million
compared to the same time period of 1998.
Other operating expense for the second quarter of 1999 experienced a $0.6
million decline compared to the second quarter of 1998. In addition to a decline
in recurring other operating expenses, the Company recognized a nonrecurring
gain of $0.3 million on the sale of other real estate owned in the second
quarter of 1999.
Equipment expense for the quarter ended June 30, 1999 experienced a $0.1
million increase compared to the same period in 1998, primarily attributable to
increased equipment depreciation and maintenance.
The decrease in noninterest expense for the six months ended June 30, 1999
can be attributed to factors similar to those for the second quarter of 1999.
Two important operating efficiency measures that the Company closely
monitors are the efficiency and expense ratios. The efficiency ratio is computed
as total noninterest expense (excluding nonrecurring charges) divided by net
interest income plus noninterest income (excluding net security gains and losses
and nonrecurring income). The efficiency ratio declined to 53.2% in the second
quarter of 1999 from 57.4% for the same period of 1998. This decline was a
result of the increases in net interest and noninterest income as well as a
reduction in noninterest expense. The expense ratio is computed as total
noninterest expense (excluding nonrecurring charges) less noninterest income
(excluding net security gains and losses and nonrecurring income) divided by
average assets. The expense ratio declined to 2.1% for the second quarter 1999
from 2.3% for the same period of 1998. This improvement can also be attributed
to the reduction in noninterest expense and increased noninterest income between
the reporting periods.
-15-
TABLE 5
NONINTEREST EXPENSE AND PRODUCTIVITY MEASUREMENTS
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) First SECOND SIX Third Fourth Twelve
1999 Quarter QUARTER MONTHS Quarter Quarter Months
- ----------------------------------------------------------------------------------------------------
Salaries and employee benefits $4,616 $4,525 $ 9,141
Office supplies and postage 473 467 940
Occupancy 674 735 1,409
Equipment 621 687 1,308
Professional fees and outside services 567 586 1,153
Data processing and communications 910 968 1,878
Amortization of intangible assets 251 250 501
Other operating 668 856 1,524
- ----------------------------------------------------------------------------------------------------
Total noninterest expense $8,780 $9,074 $17,854
- ----------------------------------------------------------------------------------------------------
Efficiency ratio 51.83% 53.16% 52.50%
Expense ratio 2.04% 2.10% 2.07%
Average full-time equivalent
employees 486 486 486
Average assets per average full-time
equivalent employee (millions) $ 2.6 $ 2.7 $ 2.7
- ----------------------------------------------------------------------------------------------------
1998
Salaries and employee benefits $4,687 $4,607 $ 9,294 $4,920 $4,988 $19,202
Office supplies and postage 500 465 965 441 506 1,912
Occupancy 686 695 1,381 656 806 2,843
Equipment 480 580 1,060 668 647 2,375
Professional fees and outside services 648 615 1,263 724 849 2,836
Data processing and communications 901 862 1,763 872 942 3,577
Amortization of intangible assets 291 271 562 255 253 1,070
Other operating 1,209 1,444 2,653 1,171 1,489 5,313
- ----------------------------------------------------------------------------------------------------
Total noninterest expense $9,402 $9,539 $18,941 $9,707 $10,480 $39,128
- ----------------------------------------------------------------------------------------------------
Efficiency ratio 56.67% 57.39% 57.03% 56.71% 60.84% 57.92%
Expense ratio 2.23% 2.25% 2.24% 2.27% 2.49% 2.31%
Average full-time equivalent
employees 488 488 488 495 487 489
Average assets per average full-time
equivalent employee (millions) $ 2.6 $ 2.6 $ 2.6 $ 2.6 $ 2.7 $ 2.6
- ----------------------------------------------------------------------------------------------------
INCOME TAXES
Income tax expense was $2.9 million for the second quarter of 1999 compared with
$1.2 million for the second quarter of 1998. For the first six months of 1999,
income tax expense amounted to $5.9 million compared with $2.3 million in the
first half of 1998. The increase in income taxes during 1999 can be attributed
to an approximate $2.0 million tax benefit for the first six months of 1998
resulting from a corporate realignment. The increased income before income taxes
between reporting periods also contributed to the increased tax expense.
BALANCE SHEET
The following table highlights the changes in the balance sheet. Since period
end balances can be distorted by one day fluctuations, the discussion and
analysis concentrates on average balances when appropriate to give a better
indication of balance sheet trends.
-16-
TABLE 6
AVERAGE BALANCES
- ----------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 40,593 $ 36,394 $ 40,205 $ 36,798
Securities available for
sale, at fair value 357,689 420,538 345,757 429,594
Securities held to maturity 33,579 36,254 33,983 36,209
Loans held for sale 3,403 3,316 3,416 3,528
Loans 852,964 764,547 840,731 751,352
Deposits 1,036,996 1,039,724 1,030,494 1,031,956
Short-term borrowings 103,687 106,998 97,383 113,337
Other borrowings 35,166 10,179 23,566 7,197
Stockholders' equity 130,128 126,605 130,665 125,658
Assets 1,317,013 1,288,574 1,292,307 1,285,067
Earning assets 1,253,412 1,225,520 1,228,008 1,220,912
Interest bearing liabilities $1,030,460 $1,030,140 $1,009,364 $1,026,985
- ----------------------------------------------------------------------------------------------------
SECURITIES
Average total securities were $65.5 million less for the second quarter of 1999
than for the same period of 1998. During the second quarter of 1999, the
securities portfolio represented 31.2% of average earning assets compared to
37.0% for the second quarter of 1998. Average total securities for the six month
period ended June 30, 1999 were $86.1 million less than the same period of 1998.
Available for sale securities are primarily U.S. Governmental agencies
guaranteed securities. Held to maturity securities are obligations of the State
of New York political subdivisions and do not include any direct obligations of
the State of New York. At June 30, 1999, the composition of the securities
portfolio was 91% available for sale and 9% held to maturity.
LOANS
Average loan volume for the three months ended June 30, 1999 increased $88.4
million, or 11.6% over second quarter 1998. Average loan growth has been present
in the commercial and mortgage portfolios with increases of $66.0 million and
$23.9 million, respectively. Average consumer loans experienced a minimal
decline between the reporting periods. The Company has continued to experience
an increase in the demand for commercial loans, primarily in the business and
real estate categories. Emphasis on marketing and improving product delivery has
resulted in an increase in the mortgage portfolio during the recent period of
high refinance activity. The Company does not engage in highly leveraged
transactions or foreign lending activities.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of nonaccrual loans and other real estate owned
(OREO). Loans are generally placed on nonaccrual when principal or interest
payments become ninety days past due, unless the loan is well secured and in the
process of collection. Loans may also be placed on nonaccrual when circumstances
indicate that the borrower may be unable to meet the contractual principal or
interest payments. OREO represents property acquired through foreclosure and is
valued at the lower of the carrying amount or fair market value, less any
estimated disposal costs.
Total nonperforming assets at June 30, 1999 decreased $2.3 million compared
to June 30, 1998. The primary reason for the decrease in nonperforming assets
was a $2.0 million decline in impaired commercial and agricultural loans,
attributable to the sale of real estate property pledged as collateral for these
loans. The changes in nonperforming assets are presented in Table 7 below.
-17-
At June 30, 1999, the recorded investment in impaired loans was $2.2
million. Included in this amount is $0.5 million of impaired loans for which the
specifically allocated allowance for loan loss is $0.2 million. In addition,
included in impaired loans is $1.7 million of impaired loans that, as a result
of the adequacy of collateral values and cash flow analysis do not have a
specific reserve. At December 31, 1998, the recorded investment in impaired
loans was $2.4 million, of which $1.1 million had a specific allowance
allocation of $0.2 million and $1.3 million for which there was no specific
reserve. At June 30, 1998, the recorded investment in impaired loans was $4.2
million, of which $1.5 million had a specific allowance allocation of $0.3
million and $2.7 million of which there was no specific reserve. The Company
classifies all nonaccrual loans as impaired loans, except smaller-balance
homogeneous loans that are collectively evaluated for impairment.
TABLE 7
NONPERFORMING ASSETS AND RISK ELEMENTS
- -----------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(dollars in thousands) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------
Commercial and agricultural $2,221 67% $2,394 67% $4,189 77%
Real estate mortgage 472 14% 437 12% 457 8%
Consumer 646 19% 762 21% 824 15%
- -----------------------------------------------------------------------------------------------------------
Total nonaccrual loans 3,339 100% 3,593 100% 5,470 100%
- -----------------------------------------------------------------------------------------------------------
Other real estate owned 410 1,164 540
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets 3,749 4,757 6,010
- -----------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 187 43% 291 25% 393 40%
Real estate mortgage 107 24% 341 30% 265 27%
Consumer 147 33% 526 45% 325 33%
- -----------------------------------------------------------------------------------------------------------
Total 441 100% 1,158 100% 983 100%
- -----------------------------------------------------------------------------------------------------------
Total assets containing risk elements $4,190 $5,915 $6,993
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets to loans 0.43% 0.58% 0.77%
Total assets containing risk elements to loans 0.48% 0.72% 0.90%
Total nonperforming assets to assets 0.28% 0.37% 0.46%
Total assets containing risk elements to assets 0.31% 0.46% 0.54%
- -----------------------------------------------------------------------------------------------------------
DEPOSITS
Customer deposits represent the greatest source of funding assets. Average total
deposits for the quarter ended June 30, 1999 and 1998 were $1.0 billion. While
average total deposits remained stable between the reporting periods, the mix
changed with demand and savings deposits experiencing increases of $18.6 million
and $14.6 million, respectively, while time deposits declined $36.0 million.
BORROWED FUNDS
The Company's borrowed funds consist of short-term borrowings and other
borrowings. Short-term borrowings include federal funds purchased, securities
sold under agreement to repurchase, and other short-term borrowings which
consist primarily of Federal Home Loan Bank (FHLB) advances with an original
maturity of one day up to one year. Other borrowings consist of fixed rate FHLB
advances with an original maturity greater than one year. Average borrowings for
the quarter ended June 30, 1999 increased $21.7 million, or 18.5% as compared to
the same period of 1998.
CAPITAL AND DIVIDENDS
Stockholders' equity of $127.2 million represents 9.4% of total assets at June
30, 1999, compared with $130.6 million, or 10.1% at December 31, 1998 and $129.0
million, or 9.9% a year previous. The equity decrease is due to the depreciation
in the value of the securities available for sale portfolio.
In December of 1998, the Company distributed a 5% stock dividend, the
thirty-ninth consecutive year a stock dividend has been declared. In July of
1999, the Company declared a regular quarterly cash dividend of $0.17 per share,
equivalent to an annual dividend of $0.68 per share. The Company does not have a
target dividend payout ratio, rather the Board of Directors considers the
Company's earnings position and earnings potential when making dividend
decisions.
Capital is an important factor in ensuring the safety of depositors'
accounts. For both 1998 and 1997, the Company earned the highest possible
national safety and soundness rating from two national bank rating services,
Bauer Financial Services and Veribanc, Inc. Their ratings are based on capital
levels, loan portfolio quality and security portfolio strength.
As the capital ratios in Table 8 indicate, the Company remains well
capitalized. Capital measurements are significantly in excess of regulatory
minimum guidelines and meet the requirements to be considered well capitalized
for all periods presented. Tier 1 and Risk-based Capital ratios have regulatory
minimum guidelines of 3%, 4% and 8% respectively, with requirements to be
considered well capitalized of 5%, 6% and 10%, respectively.
-18-
TABLE 8
CAPITAL MEASUREMENTS
- ----------------------------------------------------------------------------------------------------
First SECOND Third Fourth
1999 Quarter QUARTER Quarter Quarter
- ----------------------------------------------------------------------------------------------------
Tier 1 leverage ratio 9.75% 9.51%
Tier 1 capital ratio 14.87% 14.42%
Total risk-based capital ratio 16.12% 15.67%
Cash dividends as a percentage of net income 43.93% 44.06%
Per common share:
Book value $10.57 $10.27
Tangible book value $ 9.98 $ 9.70
- ----------------------------------------------------------------------------------------------------
1998
Tier 1 leverage ratio 9.19% 9.27% 9.36% 9.33%
Tier 1 capital ratio 15.30% 15.13% 14.95% 14.69%
Total risk-based capital ratio 16.56% 16.38% 16.21% 15.94%
Cash dividends as a percentage of net income 30.33% 36.55% 38.61% 40.37%
Per common share:
Book value $10.02 $10.23 $10.58 $10.52
Tangible book value $ 9.36 $ 9.59 $ 9.96 $ 9.91
- ----------------------------------------------------------------------------------------------------
The accompanying Table 9 presents the high, low and closing sales price for the
common stock as reported on the NASDAQ National Market System, and cash
dividends declared per share of common stock. At June 30, 1999, total market
capitalization of the Company's common stock was approximately $254 million
compared to $290 million at December 31, 1998 and $305 million at June 30, 1998.
The Company's price to book value ratio was 2.00 at June 30, 1999 and 2.36 a
year ago. The per share market price was 13 times annualized earnings at June
30, 1999 and 16 times annualized earnings at June 30, 1998.
TABLE 9
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- ---------------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- ---------------------------------------------------------------------------------------
1998
March 31 $20.00 $16.79 $20.00 $0.122
June 30 24.65 19.29 24.17 0.162
September 30 25.00 18.46 21.90 0.162
December 31 25.50 20.71 23.38 0.170
- ---------------------------------------------------------------------------------------
1999
MARCH 31 $24.50 $20.88 $20.88 $0.170
JUNE 30 22.25 20.00 20.50 0.170
- ---------------------------------------------------------------------------------------
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objectives of asset and liability management are to provide for the
safety of depositor and investor funds, assure adequate liquidity, and maintain
an appropriate balance between interest sensitive earning assets and interest
bearing liabilities. Liquidity management involves the ability to meet the cash
flow requirements of customers who may be depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. The Asset/Liability Management Committee (ALCO) is
responsible for liquidity management and has developed guidelines which cover
all assets and liabilities, as well as off balance sheet items that are
potential sources or uses of liquidity. Liquidity must also provide the
flexibility to implement appropriate strategies and tactical actions.
Requirements change as loans grow, deposits and securities mature, and payments
on borrowings are made. Interest rate sensitivity management seeks to avoid
widely fluctuating net interest margins and to ensure consistent net interest
income through periods of changing economic conditions.
-19-
The Company's primary measure of liquidity is called the basic surplus,
which compares the adequacy of cash sources to the amounts of volatile funding
sources. This approach recognizes the importance of balancing levels of cash
flow liquidity from short and long-term securities with the availability of
dependable borrowing sources. Accordingly, the Company has established borrowing
agreements with other banks (Federal Funds), the Federal Home Loan Bank of New
York (short and long-term borrowings which are denoted as advances), and
repurchase agreements with investment companies.
At June 30, 1999 and 1998, the Company's basic surplus ratios (net access
to cash and secured borrowings as a percentage of total assets) were
approximately 2% and 6%, respectively. The Asset/Liability Management Committee
has determined that liquidity is adequate to meet the cash flow requirements of
the Company.
Interest rate risk is determined by the relative sensitivities of earning
asset yields and interest bearing liability costs to changes in interest rates.
The method by which banks evaluate interest rate risk is to look at the interest
sensitivity gap, the difference between interest sensitive assets and interest
sensitive liabilities repricing during the same period, measured at a specific
point in time. Through analysis of the interest sensitivity gap, the Company
attempts to position its assets and liabilities to maximize net interest income
in several different interest rate scenarios. As of June 30, 1999, the interest
sensitivity gap indicates that the Company is liability sensitive in the short
term and supports management's contention that the Company is positioned to
benefit from a declining interest rate environment over the next twelve months.
The nature and timing of the benefit will be initially impacted by the extent to
which core deposit and borrowing rates are lowered as rates decline.
While the static gap evaluation of interest rate sensitivity is useful, it
is not indicative of the impact of fluctuating interest rates on net interest
income. Once the Company determines the extent of gap sensitivity, the next step
is to quantify the potential impact of the interest sensitivity on net interest
income. The Company utilizes a simulation model which measures the effect
certain assumptions will have on net interest income over a short period of
time, usually one or two years. These assumptions include, but are not limited
to prepayments, potential call options of the investment portfolio and various
interest rate environments. The following table presents the impact on net
interest income of a gradual twelve-month increase or decrease in interest rates
compared to a stable interest rate environment. The simulation projects net
interest income over the next year using the June 30, 1999 balance sheet
position.
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
- --------------------------------------------------------------
+200 (5.22%)
+100 (2.95%)
- -100 1.44%
- -200 2.23%
- --------------------------------------------------------------
-20-
SELECTED FIVE YEAR DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Net income $ 19,102 $ 14,749 $ 12,179 $ 9,329 $ 6,508
Return on average assets 1.48% 1.20% 1.10% 0.90% 0.64%
Return on average equity 14.93% 12.97% 11.80% 9.18% 6.53%
Net interest margin 4.76% 4.67% 4.69% 4.43% 4.81%
Efficiency ratio 57.92% 56.09% 60.74% 65.92% 70.22%
Expense ratio 2.31% 2.20% 2.41% 2.51% 2.96%
Tier 1 leverage ratio 9.33% 8.91% 8.70% 8.80% 9.05%
Tier 1 risk-based capital ratio 14.69% 14.88% 14.06% 15.21% 16.09%
Total risk-based capital ratio 15.94% 16.13% 15.31% 16.46% 17.35%
Cash dividend per share payout 41.34% 37.91% 36.50% 42.61% 56.13%
Earnings per share:
Basic $ 1.52 $ 1.18 $ 0.98 $ 0.72 $ 0.50
Diluted $ 1.49 $ 1.16 $ 0.97 $ 0.72 $ 0.50
Cash dividends paid $ 0.616 $ 0.442 $ 0.355 $ 0.307 $ 0.277
Book value $ 10.52 $ 9.77 $ 8.65 $ 8.47 $ 7.56
Tangible book value $ 9.91 $ 9.09 $ 7.84 $ 7.56 $ 6.81
Stock dividends distributed 5.00% 5.00% 5.00% 5.00% 5.00%
Market price:
High $ 25.50 $ 19.78 $ 12.93 $ 11.66 $ 10.88
Low $ 16.79 $ 11.99 $ 10.21 $ 9.72 $ 8.82
End of year $ 23.38 $ 19.29 $ 12.25 $ 11.34 $ 10.18
Price/earnings ratio (assumes dilution) 15.69X 16.56x 12.59x 15.73x 20.49x
Price/book value ratio 2.22X 1.97x 1.42x 1.34x 1.35x
Total assets $1,290,009 $1,280,585 $1,138,986 $1,106,266 $1,044,557
Total stockholders' equity $ 130,632 $ 123,343 $ 106,264 $ 108,044 $ 98,307
Average diluted common shares
outstanding (thousands) 12,832 12,700 12,514 12,936 13,140
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All share and per share data has been restated to give retroactive effect to
stock dividends and splits.
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PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 -- Legal Proceedings
This item is omitted, as there have been no material legal proceedings initiated
or settled during the quarter ended June 30, 1999.
Item 2 -- Changes in Securities
Not Applicable
Item 3 -- Defaults upon Senior Securities
This item is omitted because there were no defaults upon the Registrant's senior
securities during the quarter ended June 30, 1999.
Item 4 -- Submission of Matters to a Vote of Security Holders
This item is omitted, as there is no disclosure required for the quarter ended
June 30, 1999. The results of the election of directors and ratification of
auditors at the Annual Meeting of Stockholders held April 17, 1999 was
previously reported in Form 10-Q, March 31, 1999.
Item 5 -- Other Information
Not Applicable
Item 6 -- Exhibits and Reports on FORM 8-K
An index to exhibits follows the signature page of this FORM 10-Q.
No reports on FORM 8-K were filed by the Registrant during the quarter ended
June 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on FORM 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized, this 13th day of August, 1999.
NBT BANCORP INC.
By: /S/ JOE C. MINOR
Joe C. Minor
Executive Vice President
Chief Financial Officer and Treasurer
INDEX TO EXHIBITS
The following documents are attached as Exhibits to this FORM 10-Q or, if
annotated by the symbol *, are incorporated by reference as Exhibits as
indicated by the page number or exhibit cross-reference to the prior filings of
the Registrant with the Commission.
FORM 10-Q
Exhibit Exhibit
NUMBER CROSS-REFERENCE
- ------ ---------------
27.1 Financial Data Schedule for the six months ended June 30, 1999 Herein
-24-
EXHIBIT 27.1
Financial Data Schedule for the six months ended
June 30, 1999
9 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-1-1999 JUN-30-1999 1 45,041 6,808 0 0 350,495 35,942 35,942 877,179 13,361 1,350,770 1,012,274 169,301 6,878 35,164 0 0 13,016 114,137 1,350,770 36,430 12,354 156 48,940 16,586 19,492 29,448 1,950 670 17,854 15,406 9,543 0 0 9,543 .77 .76 4.91 3,339 441 0 29,295 12,962 1,940 389 13,361 11,674 0 1,687