SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A Amendment #1
Annual Report Pursuant to Section 13 or Section 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
Commission File Number 2-80325
BATH NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-1185097
(State of Incorporation) (I.R.S. Employer
Identification No.)
44 Liberty Street
Bath, New York 14810
(Address of principal (zip code)
executive offices)
(607) 776-9661
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock Par Value $5 per Share
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 such shorter period 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 ______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to the Form 10-K.
Not Applicable
State the aggregate market value of the voting stock held by non-
affiliates of the registrant as of January 31, 1996.
Common stock, $5.00 par value - $40,987,020
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of January 31, 1996.
683,117 shares, common stock, $5.00 par value
Documents incorporated by reference
1) Proxy statement for 1996 Annual Meeting - Part III<PAGE>
<PAGE>
PART I
ITEM 1. Business
Bath National Corporation (BNC or the "Company") is a one bank
holding company which was incorporated in 1982, and registered under
the Bank Holding Company Act of 1956. BNC has no non-bank affiliates.
The Company functions primarily as the holder of stock of BNB
(described below) and assists in the management of BNB as appropriate.
The Company is a legal entity separate and distinct from BNB. The
right of the Company to participate in any distribution of the assets
or earnings of BNB is subject to the principal claims of creditors of
BNB, except to the extent that claims, if any, of the Company itself as
a creditor may be recognized. BNC derives all of its income from
dividends paid to it by the Bank.
Bath National Bank (BNB or "the Bank"), BNC's only subsidiary, has
approximately 134 employees. BNB is a full service commercial bank,
with trust powers. The Bank offers personal and business checking
accounts, savings accounts, money market checking accounts, various
types of certificates of deposit, commercial loans,
consumer/installments loans, real estate loans, safe deposit boxes and
provides such services as banking by mail, drive up teller service,
night depository, money orders, bond coupon redemptions, cashier and
travelers checks, credit cards, direct deposit of social security
funds, wire transfers and automatic teller services (ATM's). The Bank
also offers individual retirement accounts. The Bank is a member of
the Federal Deposit Insurance Corporation to the extent permitted by
law. BNB is included in the Company's consolidated financial
statements.
The following discussion of the business of the Company (primarily that
of BNB) contains certain statistical information concerning the
Company's operations.
Market Area and Competition:
The primary market areas of the Bank include Dundee, Hammondsport,
Wayland, Hornell, Atlanta, Naples and Bath, New York from which the
Bank draws principally all of its business.
The area has a well developed system of financial institutions,
including banks, savings and loan associations, and credit unions.
The Bank encounters aggressive competition for both deposit and loan
customers. The Bank is required to compete with financial institutions
which are subsidiaries of larger bank holding companies. The financial
institutions located in the Bank's market area offer all of the
services which the Bank offers. Neither the Company nor the Bank has
any foreign operations.<PAGE>
<PAGE>
Consolidated Average Balances
<TABLE>
The following is a presentation of average assets, liabilities and
equity of the Company for the years ended December 31, 1995 and 1994,
with respect to each major category of assets, liabilities and equity.
<CAPTION>
AVERAGE ASSETS
(dollars in thousands)
Year Ended Year Ended
December 31, 1995 December 31, 1994
<S> <C> <C>
Interest Earning
Deposits with Banks $ 3,800 $ 4,300
Taxable Investment Securities 36,000 29,100
Non-Taxable Investment Securities 22,600 20,000
Federal Funds Sold 3,500 2,000
Net Loans 142,900 137,700
Total Earning Assets 208,800 193,100
Other Assets 16,400 16,500
Total Assets $225,200 $209,600
AVERAGE LIABILITIES AND EQUITY
(dollars in thousands)
Non-Interest Bearing
Deposits $ 26,300 $ 25,600
Interest Bearing Deposits:
Savings 48,100 50,600
NOW Accounts 32,400 36,300
Money Market Accounts 13,000 17,400
Time Deposits 72,000 51,500
Federal Home Loan Bank Borrowings 1,400 0
Securities Sold Under Agreement to
Repurchase 3,100 0
Other Liabilities 1,400 1,200
Federal Funds Purchased 500 1,300
Total Liabilities 198,200 183,900
Common Stock 3,400 3,200
Additional Paid in Capital 4,400 3,500
Retained Earnings 19,200 19,000
Total Equity 27,000 25,700
Total Liabilities
and Equity $225,200 $209,600 <PAGE>
</TABLE>
<PAGE>
<TABLE>
The following is a presentation of an analysis of the net interest
earnings of the Company for years ended December 31, 1995 and 1994,
respectively, with respect to each major category of interest-earning
assets and interest-bearing liabilities:
<CAPTION>
Year Ended December 31, 1995
(dollars in thousands)
Interest
Average Earned Average
Assets Amount or Paid Yield or Rate
<S> <C> <C> <C>
Interest-Earning
Deposits with Banks $ 3,800 $ 224 5.89%
Taxable Investment Securities 36,000 2,391 6.64%
Non-Taxable Investment
Securities <F1> 22,600 1,748 7.73%
Federal Funds Sold 3,500 214 6.11%
Net Loans <F1><F2><F3> 142,900 13,652 9.55%
Total Earning Assets $208,800 $ 18,229 8.73%
Liabilities
Savings Deposits $ 48,100 $ 1,458 3.03%
Now Deposits 32,400 567 1.75%
Money Market Deposits 13,000 400 3.07%
Time Deposits 72,000 3,856 5.36%
Federal Home Loan Bank
Borrowings 1,400 70 5.00%
Repurchase Agreements 3,000 170 5.66%
Federal Funds Purchased 500 30 6.00%
Total Interest-Bearing
Liabilities 170,400 6,551 3.84%
Interest Income/Earning Assets 8.73%
Interest Expense/Earning Assets 3.14%
Net Yield 5.59%
<FN>
<F1> Non-Taxable interest is stated on a tax-equivalent basis, using a
marginal tax rate of 34%.
<F2>Net Loans includes non-accrual loans of $435,000.
<F3> Includes Loan Fees Totaling $65,000 and discount revenue of
345,000.
</TABLE>
<PAGE> <PAGE>
<TABLE>
Analysis of Net Interest Earnings, Continued
<CAPTION>
Year Ended December 31, 1994
(dollars in thousands)
Interest
Average Earned Average
Assets Amount or Paid Yield or Rate
<S> <C> <C> <C>
Interest-Earning
Deposits with Banks 4,300 259 6.02%
Taxable Investment Securities 29,100 1,906 6.55%
Non-Taxable Investment
Securities <F1> 20,000 1,723 8.61%
Federal Funds Sold 2,000 78 3.90%
Net Loans <F2><F3> 137,700 11,943 8.67%
Total Earning Assets $193,100 $15,909 8.24%
Liabilities
Savings Deposits 50,600 1,513 2.99%
Now Deposits 36,300 664 1.82%
Money Market Deposits 17,400 454 2.61%
Time Deposits 51,500 1,876 3.64%
Federal Funds Purchased 1,300 60 4.61%
Total Interest-Bearing
Liabilities $157,100 $4,567 2.91%
Interest Income/Earning Assets 8.24%
Interest Expense/Earning Assets 2.36%
Net Yield 5.88%
<FN>
<F1>Non-Taxable interest is stated on a tax-equivalent basis, using a
marginal tax rate of 34%.
<F2> Net Loans includes non-accrual loans of $454,000.
<F3> Includes Loan Fees Totaling $49,000. <PAGE>
</TABLE>
<PAGE>
Rate/Volume Analysis of Net Interest Income
The effect on interest income, interest expense, and net interest
income in the periods indicated, of changes in average balances
(volume) and changes in rate from the corresponding prior period is
shown in the tabulation on the following page. The effect of a
change in average balance has been determined by applying the average
rate in the earlier period to the change in average balances.
Changes resulting from rate variance from the prior period have been
determined by applying the average volume in their earlier period to
the change in average rate from the earlier to the later period.
Changes in interest due to both rate and volume have been allocated
to changes due to volume and changes due to rate based on the
percentage relationship of such variances to each other. The final
column entitled "Total Change" indicates the total change in the
gross interest income or expense over the prior year as indicated in
the later year's statement of income.
The Rate/Volume Analysis for the years ended December 31, 1995 and
1994, appear in their entirety on the following page. <PAGE>
<PAGE>
<TABLE>
December 31, 1995 compared with December 31, 1994
(dollars in thousands)
<CAPTION>
Changes in net interest income as a result of:
<S> <C> <C> <C>
Total
Volume Rate Change
Interest earned on:
Interest-earning
deposits with banks $ (30) $ (5) $ (35)
Taxable Investment
Securities 452 33 485
Non-Taxable
Investment Securities 224 (199) 25
Federal Funds Sold 58 78 136
Net Loans 451 1,258 1,709
Total Interest Income 1,155 1,165 2,320
Interest paid on:
Interest-bearing
deposits 375 1,609 1,984
Change in net interest
income $ 780 $ (444) $ 336
</TABLE>
<TABLE>
December 31, 1994 compared with December 1993
(dollars in thousands)
<CAPTION>
Changes in net interest income as a result of:
Total
Volume Rate Change
<S> <C> <C> <C>
Interest earned on:
Interest-earning
deposits with banks $ (33) $ (28) $ (61)
Taxable Investment
Securities (741) (129) (870)
Non-Taxable
Investment Securities 453 (291) 162
Federal Funds Sold (41) 19 (22)
Net Loans 1,338 123 1,461
Total Interest Income 976 (306) 670
Interest paid on
Interest-bearing
deposits 38 (144) (106)
Change in net interest
income $ 938 $ (162) $ 776 <PAGE>
</TABLE>
<PAGE>
Investments
Investment securities comprised approximately 27% of the Bank's
assets at December 31, 1995, with loans comprising approximately 64%
of total assets. The Bank invests primarily in obligations of the
United States or its agencies or obligations guaranteed as to
principal and interest by the United States or its agencies, tax
exempt municipal securities and certificates of deposit issued by
other financial institutions. The Bank's policy is to invest in
highly rated bonds. The Bank also enters into Federal Funds
transactions with its principal correspondent bank, and acts as a net
seller of such funds. The sale of Federal Funds amounts to a short-
term loan from the Bank to another bank.
A tabulation of the Bank's investments is included in its entirety on
the following page. <PAGE>
<PAGE>
<TABLE>
The following table presents, at December 31, 1995 and 1994, the book
value and market value of the Bank's investments. The table also
indicates the amount of investments due in (1) one year or less, (ii)
one to five years, (iii) five to ten years, and (iv) over ten years.
<CAPTION>
1995 1994
Investment Book Market Avg. Book Market Avg.
Category Value Value Yield Value Value Yield
(rounded in thousands) (rounded in thousands)
Obligations of U.S.
Treasury and other U.S.
Agencies and Corporations:
<S> <C> <C> <C> <C> <C> <C>
0 - 1 year $18,352 $18,233 6.83% $ 4,640 $ 4,406 6.79%
1 - 5 years 10,012 10,085 6.26% 8,726 8,158 6.01%
5 - 10 years 4,775 4,661 6.09% 5,004 4,383 6.16%
Over 10 years 21 19 7.19%
Obligations of States and
Political subdivisions
0 - 1 year $ 2,313 2,351 6.49% $ 2,349 $ 2,373 6.56%
1 - 5 years 5,803 5,897 4.92% 5,661 5,677 5.74%
5 - 10 years 15,558 15,768 4.73% 11,624 10,669 4.70%
Over 10 years 845 869 5.46% 1,287 1,184 5.34%
Other Securities
0 - 1 year 895 907 5.14% 135 135 7.41%
1 - 5 years 2,133 2,186 8.31% 3,150 3,127 7.90%
5 - 10 years 1,342 1,562 9.02% 1,343 1,399 9.01%
Over 10 years 2,430 2,418 7.94% 2,304 2,546 8.90%
Total Securities $64,458 $64,937 $46,244 $44,076
</TABLE>
Yields are computed on a tax equivalent basis using a marginal tax
rate of 34%.
A total of $45,320 of investments was pledged to secure public
deposits. <PAGE>
<PAGE>
Loan Portfolio:
The bank engages in a full complement of lending activities,
including commercial, consumer/instalment, real estate loans and
accounts receivable financing. At December 31, 1995, loans secured
by real estate comprised 52% of the total loan portfolio. At
December 31, 1995 none of the real estate loans were being held
specifically for resale in the secondary market.
Loans Outstanding:
<TABLE>
The following table presents various categories of loans contained in
the Bank's loan portfolio on the dates indicated and the total amount
of all categories on these dates:
<CAPTION>
Year Ended December 31,
(dollars in thousands)
Loan Type 1995 1994
<S> <C> <C>
Commercial, Financial and
Agricultural $ 38,325 $ 31,520
Real Estate - Mortgage 78,666 82,217
Installment Loans to Individuals 29,765 24,097
All Other 3,247 3,945
Sub-Total 150,003 141,779
Allowance for Loan Losses 1,650 1,725
Loans - Net $148,353 $140,054
</TABLE>
<TABLE>
Maturity Distribution and Interest Sensitivity:
The following tabulation presents an analysis of maturities of loans
as of December 31, 1995, stated in thousands of dollars:
<CAPTION>
Years To Maturity
<S> <C> <C> <C> <C>
Loan Type 1 or less 1 - 5 Over 5 Total
Commercial, Financial,
and Agricultural $ 7,941 $15,330 $15,054 $38,325
</TABLE>
Demand loans, loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less. <PAGE>
<PAGE>
The following is a presentation of an analysis of sensitivities of
commercial, financial and agricultural loans to changes in interest
rates as of December 31, 1995, stated in thousands of dollars:
[S] [C]
Loans due after 1 year with predetermined $ 8,874
Interest Rates
Loans due after 1 year with floating
Interest Rates $ 21,510
<PAGE>
<PAGE>
Non-Performing Loans and Leases:
The following table presents, for the period indicated, the aggregate
amount of non-accrual, past due and restructured loans:
[CAPTION]
[S] [C] [C]
Year Ended Year Ended
Type of Loan 12/31/95 12/31/94
Loans accounted for on non-accrual
basis $435,000 $454,000
Number of loans 9 17
Accruing Loans Past due 90 Days
or more as to principal or
interest payments 209,000 324,000
Number of loans 17 17
Loans not included above which
are troubled debt restructuring <F1> ---- 290,000
Number of loans 0 2
[FN]
<F1>These are loans whose terms have been restructured to provide a
reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower.
Accrual of interest income is discontinued on loans when, in the
opinion of management, collection of such interest income becomes
doubtful. When a loan is reclassified to non-accrual status, all
accrued interest is immediately charged against current income.
Accrual of interest on such loans is resumed only when, in
management's judgment, the collection of said loan is probable. At
that time, any accrued interest previously written off is restored
through current income. Payments received on non-accrual loans are
applied to principal.
Interest income for the year ended December 31, 1995 would have
included approximately $60,100 interest income for the above non-
accrual loans if they had kept current in accordance with their
original terms. No interest income was included in income for 1995
for the non-accrual loans.
The Bank has not identified significant potential problem loans which
cause management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms.
The Bank has no foreign loans.
There are no concentrations of credit.<PAGE>
<PAGE>
Summary of Loan Loss Experience:
<TABLE>
An analysis of the loan loss experience is furnished in the following
table for the periods indicated, as well as the allocation of the
allowance for loan losses. Loans are presented net of unearned
income.
<CAPTION>
Year Ended December 31,
(dollars in thousands)
1995 1994
<S> <C> <C>
Allowance balance at beginning
of the year $ 1,725 $ 1,600
Loans Charged Off:
Real Estate 9
Commercial, Financial & Agricultural 212 59
Installment Loans to Individuals 146 180
Credit Cards 31 28
Total 389 276
Recoveries of Loans Previously Charged Off
Real Estate 17
Commercial, Financial & Agricultural 96 40
Installment Loans to Individuals 65 271
Credit Cards 4 13
Total 182 324
Additions charged to
Operations 132 77
Allowance Balance at end of the year 1,650 $ 1,725
Average loans $142,900 $137,700
Ratio of net charge-offs during the
period to Average loans during
the period .15% -.03% <PAGE>
</TABLE>
<PAGE>
<TABLE>
At December 31, 1995, the allowance balance was allocated as follows:
<CAPTION>
% of loans
Amount in each type
Loan Type (in thousands) to total loans
<S> <C> <C>
Commercial, Financial
and Agricultural $1,100 26.87%
Real Estate - Mortgage 50 52.61%
Installment loans to individuals 500 18.35%
All Other 2.17%
Total $1,650 100.00%
</TABLE>
<TABLE>
At December 31, 1994, the allowance balance was allocated as follows:
<CAPTION>
% of loans
Amount in each type
Loan Type (in thousands) to total loans
<S> <C> <C>
Commercial, Financial
and Agricultural $1,175 21.33%
Real Estate - Mortgage 50 57.99%
Installment loans to individuals 500 17.00%
All Other 3.68%
Total $1,725 100.00%
</TABLE>
<PAGE>
<PAGE>
Loan Loss Reserve:
In considering the adequacy of the Bank's allowance for possible loan
losses and, thus, the amount of additions of the allowance charged to
operating expense in 1995, management has focused on the fact that as
of December 31, 1995, 26% of outstanding loans are in the category of
commercial loans. Commercial loans are generally considered by
management as having greater risk than other categories of loans in
the Bank's loan portfolio.
Management considers loans to finance 1-4 family, owner occupied
property to have minimal risk due to the fact that these loans
represent conventional residential real estate mortgages where the
amount of the original loan does not exceed 80% of the appraised
value of the collateral.
The Bank's Board of Directors monitors the loan portfolio monthly to
enable it to evaluate the adequacy of the allowance for loan losses
quarterly and to implement its policy of identification and isolation
of potential problem loans. The loans are rated and the reserve
established based on an assigned rating. The provision for loan
losses charged to operating expenses is based on this established
reserve. Factors considered by the Board in rating the loans include
delinquent loans, underlying collateral value, payment history,
financial condition of the borrowers, and local and general economic
conditions affecting collectibility.
While no assurance can be given, management believes that losses
during 1996 will be no more than the losses during 1995. Although
management of the Company believes that the allowance (as
supplemented by projected provisions and recoveries) is adequate to
absorb anticipated losses, there can be no assurance that the Company
will not sustain losses in any given period which could be
substantial in relation to the size of the allowance or in relation
to the estimates set forth above.
<PAGE>
<PAGE>
Deposits
The bank offers a wide range of commercial and consumer deposit
accounts, including non-interest bearing checking accounts, money
market checking accounts (consumer and commercial), individual
retirement accounts, time certificates of deposit and regular savings
accounts. The sources of deposits are residents, businesses and
employees of businesses within the Bank's market area.
The Bank pays competitive interest rates on time and savings
deposits. In addition, the Bank utilizes a service charge fee
schedule competitive with other financial institutions in the Bank's
market area, covering such matters as maintenance fees on checking
accounts, per item processing fees on checking accounts, returned
check charges and the like.
<TABLE>
The following table presents, for the periods indicated, the average
amount of and average rate paid on each of the major deposit
categories:
<CAPTION>
Year Ended Year Ended
12/31/95 12/31/94
<S> <C> <C> <C> <C>
Amount Rate Amount Rate
Deposit Category (dollars in thousands)
Non-Interest Bearing Demand
Deposits $27,400 $25,600
NOW Deposits 32,400 1.73% $36,300 1.82%
Money Market Deposits 13,300 3.07% $17,400 2.61%
Savings Deposits 46,500 3.04% $50,600 2.99%
Time Deposits 78,100 5.36% $51,500 3.64%
(including certificates of deposit)
</TABLE>
<TABLE>
The following presents time certificates of deposit (amounts in
thousands) of $100,000 or more and amounts of their maturities:
<CAPTION>
Maturity
3 Months Over
or 3-6 6-12 12
Less Months Months Months
<S> <C> <C> <C> <C>
Time Certificates of Deposit $9,713 $3,674 $2,552 $611 <PAGE>
</TABLE>
<PAGE>
<TABLE>
Return on Equity and Assets
Returns on average consolidated assets and average consolidated
equity for the periods indicated and certain other data are as
follows:
<CAPTION>
Year Ended
December 31,
1995 1994
<S> <C> <C>
Return on Average Assets <F1> 1.50% 1.64%
Return on Average Equity <F2> 12.51% 13.38%
Dividend Payout Ratio <F3> 48% 94%
Equity to Assets Ratio <F4>
(Average) 11.99% 12.26%
<FN>
<F1> Net income divided by average assets
<F2> Net income divided by average equity
<F3> Dividends declared per share divided by net income per share
<F4> Average equity divided by average assets
</TABLE>
Liquidity and Asset/Liability Management
Liquidity is the capacity of a banking enterprise to meet customer
loan demand, depositor withdrawals and other financial obligations.
The most immediate and efficient source of liquidity for the Bank is
a $11.5 million line of credit with the Federal Home Loan Bank of NY.
Based upon the current level of stock ownership, the Bank is
authorized to borrow up to $6.8 million. In addition, the Bank has a
borrowing line with a correspondent bank in the amount of $2 million.
Other sources of liquidity include repayment of loans, sale of loans
and securities maturing within one year, although the usefulness of
such securities for liquidity purposes is limited to the extent that
such securities are pledged. See Note 3 of Notes to Consolidated
Financial Statements. Day to day changes in cash needs caused by
flows of customer funds in and out of the Bank are generally
reflected in adjustments to the federal funds position.
Liquidity is managed on the liability side mainly by the Company's
ability to attract sources of funds (such as large denomination
certificates of deposit) to supplement maturing earning assets.
Closely related to the concept of liquidity is the management of the
Company's asset/liability mix and interest rate sensitivity. The
Board of Directors of the Company has the overall responsibility for
the implementation, communication, coordination and control of the
asset/liability and interest rate sensitivity policies for the
Company and the Bank. These policies are implemented by an
Asset/Liability Management Committee which is charged with the
responsibility of assuring balance sheet flexibility primarily with
respect to liquidity and interest rate sensitivity. Current,
prospective and unanticipated liquidity requirements are provided for
by attempting to preserve the high quality of marketable assets, by
managing the maturity structure of those assets and by maintaining
discretionary access to short-term funding sources. The Management
of interest rate sensitive asset and liability differentials,
referred to as "gaps", has become increasingly important as a result
of the more volatile interest rate environment. The continuing<PAGE>
<PAGE>
deregulation of the banking industry has greatly increased the
Liquidity and Asset/Liability Management, Continued
interest rate sensitivity of the Company's deposit base and has made
the monitoring of the "gap" between interest rate sensitive assets
and liabilities critical to continued profitability. It is
management's policy to seek to achieve a relatively balanced interest
rate sensitivity position, with a goal of achieving stability in
earnings performance, regardless of interest rate volatility.
The table on page 28 under the caption "Interest Rate Sensitivity
Analysis" provides information on interest sensitive assets and
liabilities.
Correspondent Banking
Correspondent banking involves the provision of services by one bank
to another bank which cannot provide that service for itself from an
economic or practical standpoint. The Bank is required to purchase
correspondent services offered by larger banks, including purchase
of federal funds, security safekeeping, investment services, and wire
transfer services.
Data Processing
The Bank's installation includes a full complement of hardware and
software to enable the Bank to provide total processing of its own
work on a daily basis with the exception of complete ATM processing.
The Bank utilizes a service center as its link to the ATM Networks.
Facilities
The Bank's main office is located in a freestanding building built on
property located in Bath, New York. The Bank has a drive through
teller facility adjacent to its main office. The Bank owns a branch
in Bath, which in addition to drive through teller facilities, houses
its Electronic Data Processing installation and Mortgage Department.
The Bank also operates branch offices in Dundee, Hammondsport,
Hornell, Atlanta, Naples and Wayland, New York. These branches are
equipped with both ATM's and teller stations. All of the offices
with the exception of our Atlanta Office, have drive-up teller
facilities.
The Company's offices are located in the Bank's main office.
The construction of our Naples Office was completed during 1995 and
was opened for business on January 2, 1996.
Employees
The Bank presently employs approximately 134 persons on a full-time
equivalent basis, including four senior officers. It is anticipated
that the Bank will hire additional persons as needed on a full-time
basis, including additional tellers and customer service
representatives.<PAGE>
<PAGE>
The Bank offers certain fringe benefits to its full time employees
including life insurance, health benefits and participation in a
profit sharing plan/401k plan.
Monetary Policies
The results of operations of the Bank are affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board
include open market operations in US Government securities, changes
in the discount rate on member bank borrowings and changes in reserve
requirements against member bank deposits. In view of changing
conditions in the national economy and in the money markets, as well
as the effect of action by monetary and fiscal authorities, including
the Federal Reserve Board, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
Supervision and Regulation
The Company and the Bank operate in a highly regulated environment,
with their business activities governed by statutes, regulations and
administrative policies. The business activities of the Company and
the Bank are closely supervised by a number of regulatory agencies,
including the Board of Governors of the Federal Reserve System
("Federal Reserve Board") in the case of the Company, and in the case
of the Bank, the Office of the Comptroller of the Currency
("Comptroller") and the Federal Deposit Insurance Corporation
("FDIC").
The Company is regulated by the Federal Reserve Board under the
Federal Bank Holding Company Act of 1956, as amended.
A bank holding company must obtain Board approval before acquiring,
directly or indirectly, ownership or control of any voting shares of
a bank or bank holding company if, after such acquisition, it would
own or control 5% or more of such shares (unless it already owns or
controls a majority of such shares). Board approval must also be
obtained before any bank or bank holding company merges or
consolidates with another bank holding company. Furthermore, any
acquisition by a bank holding company of 5 percent or more of the
voting shares, or of all or substantially all of the assets, of a
bank located in another state is subject to approval provided in the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
A bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the
extension of credit or the lease or the sale of any property or the
furnishing of services. The subsidiary bank of a bank holding
company is also subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank holding
company or any of its subsidiaries, thereof, and on the taking of
such stocks or securities as collateral for loans, The Federal<PAGE>
<PAGE>
Reserve Board possesses cease and desist powers over bank holding
companies if their actions represent unsafe or unsound practices or
violations of law.
A bank holding company is generally prohibited from acquiring more
than five percent of any class of voting securities of any company
which is not a bank and from engaging in any business other than the
business of banking or managing and controlling banks. However,
there are certain activities which have been identified by the
Federal Reserve Board to be so closely related to banking as to be a
Supervision and Regulations, Continued
proper incident thereto and thus permissible for bank holding
companies provided that the Federal Reserve Board has notice of or
has consented to the acquisition.
In addition to the traditional activities of banks such as lending
and accepting deposit functions, the Bank is permitted to engage in,
by way of example, the following types of activities: acting as
investment or financial advisor to subsidiaries and certain outside
companies; leasing personal and real property or acting as a broker
with respect thereto; providing management consulting advice to non-
affiliated banks and non-bank depository institutions; providing
consumer financial counseling services; operating collection agencies
and credit bureaus; providing data processing and data transmission
services; acting as an insurance agent or underwriter with respect to
limited types of insurance; performing real estate appraisals;
arranging commercial real estate equity financing; providing
securities brokerage services; providing certain types of courier
services; and underwriting and dealing in obligations of the United
States, the states and their political subdivisions.
The Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the
Comptroller, respectively, which generally parallel each other. In
1989, the Federal Reserve Board issued new risk-based capital
guidelines for bank holding companies which make regulatory capital
requirements more sensitive to differences in risk profiles of
various banking organizations. These capital adequacy guidelines
issued by the Federal Reserve Board are applied to bank holding
companies on a consolidated basis with the banks owned by the holding
company. These new requirements were phased in over a three year
period. The new guidelines provided that by the end of 1990, banking
organizations must have had capital (as defined in the new rules)
equivalent to 7.25% of weighted risk assets. By the end of 1992,
when the guidelines became fully effective, banking organizations
were required to have capital equivalent to 8% of risk assets. The
risk weights assigned to assets are based primarily on credit risk.
Depending upon the riskiness of a particular asset, it is assigned to
a risk category. For example, securities with an unconditional
guarantee by the United States Government are assigned to the lowest
risk category, whereas a risk weight of 50% is assigned to loans
secured by owner-occupied, one to four family residential mortgages.
The aggregate amount of assets assigned to each risk category is
multiplied by the risk weight assigned to that category to determine
the weight values, which are added together to determine total risk-
weighted assets.
<PAGE>
The Federal Reserve Board and the Comptroller have each issued
minimum capital leverage ratios to be used in tandem with the risk-
based guidelines in assessing the overall capital rules. Bank
holding companies and national banks are required to maintain a ratio
of 3% "Tier 1" capital to total assets (net of goodwill). "Tier 1"
capital includes common stockholder's equity, non-cumulative
perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries.
Supervision and Regulation Continued
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements, applicable only to top-rated banking
institutions. Institutions operating at or near these levels are
expected to have well-diversified risk, excellent asset quality, high
liquidity, good earnings and in general, have to be considered strong
banking organizations, rating composite 1 under the CAMEL rating
system for banks or the BOPEC rating system for bank holding
companies. Institutions with a lower rating and institutions with
high levels of risk or experiencing or anticipating significant
growth would be expected to maintain ratios 100 to 200 basis points
above the stated minimums.
<TABLE>
The Company's ratio of capital to assets, as defined by the
regulations, as of the end of each of its last three fiscal years has
been as follows:
<CAPTION>
TIER I TOTAL RISK
LEVERAGE RATIO BASED CAPITAL RATIO
Required Company Required Company
Minimum Ratio Minimum Ratio
<S> <C> <C> <C> <C>
For year ended
December 31, 1995 3.00% 11.96% 8.00% 20.33%
For year ended
December 31, 1994 3.00% 12.26% 8.00% 20.26%
For year ended
December 31, 1993 3.00% 11.78% 8.00% 18.54%
</TABLE>
The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state
legislation.
The Bank is subject to supervision by the Comptroller and the Federal
Deposit Insurance Corporation. Various federal and state laws and
regulations apply to many aspects of the operations of the Bank,
including capital adequacy, reserves on deposits, loans, investments,
mergers and acquisitions, and the establishment of branch offices and
facilities. Restrictions on rates of interest payable by banks on
deposits have been essentially eliminated. The capital adequacy
guidelines of the Comptroller are substantially the same as those of
the Federal Reserve Board.<PAGE>
<PAGE>
All of the revenue of the Company available for the payment of
dividends on the Common Stock results from amounts paid to the
Company by the Bank. The Bank is required by Federal law to obtain
governmental approval for the payment of dividends to the Company if
the total of all dividends declared by the Bank in any year will
exceed the total of the Bank's net profits (as defined and
interpreted by regulation) for that year and the retained net profits
(as defined) for the proceeding two years less any required transfers
to surplus. As of January 1, 1996 the Bank could have declared
aggregate dividends of approximately $3.9 million without the
approval of regulatory authorities.
Supervision and Regulation Continued
The Comptroller has authority to prohibit a national bank from
engaging in conduct which, in his opinion, constitutes an unsafe or
unsound practice in conducting its business. Thus, depending upon
the financial condition of the bank in question and other factors,
the Comptroller may assert that the payment of dividends or other
funds from a subsidiary bank to a bank holding company could
constitute, under certain circumstances, an unsafe or unsound banking
practice. In addition, the capital guidelines of the Federal Reserve
Board, the Comptroller and FDIC could limit the amount of dividends
which the Company may pay in the future. Furthermore, regulatory
pressures to reclassify and charge off loans and to establish
additional loan loss reserves can have the effect of reducing current
operating earnings and thus impairing an institution's ability to pay
dividends.
If at any time, the Federal Reserve Board believes that an activity
of the Company constitutes a serious risk to the financial safety,
soundness, or stability of the Bank or the Company, and is
inconsistent with sound banking principles or the purposes of the
Bank Holding Company Act, the Federal Reserve Board may require the
Company to terminate the activity or to terminate control over the
Bank.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) was enacted. Among other things,
FDICIA requires FDIC to establish a risk-based assessment system for
FDIC deposit insurance. FDICIA also contains provisions limiting
certain activities and business methods of depository institutions,
including limiting the acceptance of brokered deposits by certain
depository institutions; placing restrictions on the terms of "bank
investment contracts that may be offered by depository institutions.
Finally, FDICIA provides for expanded regulation of depository
institutions and their affiliates, including parent holding
companies, by such institutions' appropriate Federal banking
regulator, and requires the appropriate Federal banking regulator to
take "prompt corrective action" with respect to a depository
institution if such institution does not meet certain capital
adequacy standards.
<PAGE>
Governmental Policies and Legislation
The policies of regulatory authorities, including the Federal Reserve
Board and the FDIC, have had a significant effect on the operating
results of commercial banks in the past and are expected to do so in
the future. An important function of the Federal Reserve System is
to regulate aggregate bank credit and money through such means as
open market dealing in securities, establishment of the discount rate
on member bank borrowings, and changes in reserve requirements
against member bank deposits. Policies at these agencies may be
influenced by many factors, including inflation, unemployment, short-
term changes in the international trade balance, and fiscal policies
of the United States Government.
The United States Congress has periodically considered and adopted
legislation which has resulted in, and could result in, further
deregulation of both banks and financial institutions. Such
legislation could modify or eliminate geographic restrictions on
banks and bank holding companies and could modify or eliminate
current prohibitions against the Company's engaging in one or more
Supervision and Regulation, Continued
non-banking activities. Such legislative changes could place the
Company in more direct competition with other financial institutions,
including mutual funds, securities brokerage firms, insurance
companies and investment banking firms. No assurance can be given as
to whether any additional legislation will be adopted and as to the
effect of such legislation on the business of the Company.
Significant Accounting Policies
In January 1993, the Bank adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes. The
adoption of FAS 109, which did not have a material effect on the
Bank's financial statements, changed the Bank's method of accounting
for income taxes from the deferred method to an asset and liability
approach.
The Bank provides certain health care benefits for all retired
employees that meet eligibility requirements. Effective January 1,
1993, the Bank adopted financial accounting Standards Board Statement
No. 106 Employer Accounting for Postretirement Benefits other than
pensions to account for its share of the cost of those benefits.
Under that Statement, the Bank's share of the estimated costs that
will be paid after retirement is generally being accrued by charges
to expense over the employees' active service periods to the dates
they are fully eligible for benefits, except that the Bank's unfunded
cost that existed at January 1, 1993 is being accrued primarily in a
straight-line manner that will result in its full accrual by 2013.
Prior to 1993, the Bank expensed its share of costs as they were
paid.
The adoption of SFAS 106 in 1993 resulted in a pre-tax charge to 1993
earnings of $88,210 ($.14 per share) to reflect the annual expense
for postretirement benefits on an accrual basis, and a pre-tax charge
to 1994 earnings of $132,888. The charge for 1995 is $127,000.
The accumulated postretirement benefit obligation was determined
using a discount rate of 8.0 percent, and a health care cost trend
rate of approximately 6.0 percent.<PAGE>
<PAGE>
Increasing the assumed health care cost trend rates by one percentage
point in each year and holding all other assumptions constant, would
increase the accumulated postretirement benefit obligation as of
December 31, 1995 by approximately $146,530 and increase the
aggregate of the service and interest cost components of the net
periodic post retirement benefit cost for 1995 by approximately
$26,000.
On May 31, 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for impairment of a loan" (SFAS 114). SFAS 114 was amended
by SFAS 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure." These Statements prescribe
recognition criteria for loan impairment, generally related to
commercial type loans, and measurement methods for certain impaired
loans and all loans whose terms are modified in troubled debt
restructurings subsequent to the adoption of these statements. A
loan is considered impaired when it is probable that the borrower
will not repay the loan according to the original contractual terms
of the loan agreement.
On January 1, 1995, the Bank adopted the provisions of SFAS 114 and
SFAS 118 and has provided the required disclosures. The effect of
adoption of these Statements was not material to the financial
statements.
As a matter of policy, the Bank generally places impaired loans on
nonaccrual status and recognizes interest income on such loans only
on a cash basis upon receipt of interest payments from the borrower.
Accrual of interest is discontinued on a loan when management
believes, after considering economics, business conditions and
collection efforts, that the borrower's financial condition is such
that collection of interest is doubtful, or after three months of
nonpayment, whichever is earlier. Uncollectible interest previously
accrued is charged off. Income is subsequently recognized only to
the extent cash payments are received until, in management's
judgement, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is
returned to accrual status.
Significant Accounting Policies Continued
In January 1994, the Bank approved the Financial Accounting Standards
Board has also issued Statement No. 115, Accounting for Investments
in Debt and Equity Securities. The statement established accounting
and reporting standards for investments in debt securities and
investments in equity securities that have readily determinable fair
values. The Statement requires that those investments are to be
classified in three categories as follow:
"Held to Maturity" when the investor has the positive intent and
ability to hold debt securities to maturity.<PAGE>
<PAGE>
"Trading" when the investor acquires debt and equity securities
principally for the purpose of selling them in the near term.
"Available for Sale" when the investor has not classified debt and
equity securities as either held to maturity or trading.
The Bank has classified all its securities as "Available for Sale".
ITEM 6. Selected Financial Data
The data appearing on the following page represent selected
consolidated financial data of the Company for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991 and are derived from the
Company's consolidated financial statements. These data should be
read in conjunction with the Company's consolidated financial
statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included
elsewhere herein and are qualified in their entirety thereby and by
other detailed information elsewhere in this Form 10K.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Condensed Statements
of Income (in
thousands, except per
share data)
Interest Income <F1> $ 17,881 $ 15,911 $ 15,155 $ 15,398 $ 16,726
Interest Expense
Deposits 6,280 4,506 4,669 5,943 8,454
Interest Expense
Borrowings 271 61 4 3 3
Net Interest Income 11,330 11,344 10,482 9,452 8,269
Loan Loss Provision 132 77 35 413 586
Net Interest Income
After Loan Loss
Provision 11,198 11,267 10,447 9,039 7,683
Other Operating
Income 1,448 1,296 1,270 972 777
Other Operating
Expenses 6,973 6,738 6,248 6,101 5,813
Income Before
Income Tax 5,673 5,825 5,469 3,910 2,647
Tax Equivalent
Adjustment 668 590 505 422 547
Income Taxes (benefit) 1,627 1,815 1,658 1,119 515
Net Income $ 3,378 $ 3,420 $ 3,306 $ 2,369 $ 1,585<PAGE>
Per Share Data <F2>
Book Value 41.80 37.39 37.78 34.46 32.24
Cash Dividends 2.40 5.00 2.00 1.65 1.50
Net Income 4.99 5.32 5.28 3.88 2.65
Weighted Average
Common Shares 677,246 642,881 625,831 610,453 596,444
Balance Sheet Data
(in thousands, except
share amount) at
December 31
Assets 235,165 209,158 199,202 191,201 182,129
Investment Securities 64,937 43,878 51,840 51,105 54,352
Loans, Net 148,353 140,054 125,887 118,588 105,460
Deposits 197,760 180,866 170,235 168,388 161,515
Shareholders' Equity 28,554 25,181 24,125 21,424 19,567
Common Shares
Outstanding 683,117 673,390 638,480 621,528 606,766
<FN>
<F1>Presented on a tax equivalent basis utilizing a marginal tax rate
of 34%.
<F2> All per share data has been restated to reflect a two-for-one
stock split April 15, 1992.
</TABLE>
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Liquidity and Capital Resources:
Management has not identified any trends, demands, commitments,
events or uncertainties that will result in or are reasonably likely
to result in any material decreases or increases in the Company's
liquidity.
Liquidity is an important factor in the financial condition of the
Company and affects its ability to meet the borrowing needs and
deposit withdrawal requirements of its customers. Assets, consisting
principally of loans and investment securities, are funded by
customer deposits.
The investment portfolio is one of the Company's primary sources of
liquidity. The Company's primary sources of liquidity are federal
funds sold and purchased. Other resources of liquidity include
repayment of loans and sale of loans. Maturities of securities and
principal payments on mortgage backed securities provide a constant
flow of funds which are available for cash needs. Interest bearing
deposits in other financial institutions maturing within one year
total $1.0 million. Also, high quality securities are readily
marketable and provide another level of liquidity. Maturities in the
loan portfolio also provide a steady flow of funds. At December 31,
1995 loans with an aggregate balance of $13.2 million were due to
mature in one year or less. Additional funds flow from payments on
instalment and revolving credit loans and from a historically high
level of net operating earnings. The Company's liquidity also
continues to be enhanced by a relatively stable deposit base. At<PAGE>
<PAGE>
December 31, 1995, the loan to deposit ratio was 76% and the ratio of
loans to core deposits (excluding certificates of deposit of $100,000
or more) was 83%.
In addition to the sources of liquidity above, the Bank may borrow
from the Federal Reserve Bank in the event of a short term liquidity
deficiency. The Bank also has an agreement with its correspondent
bank to borrow overnight federal funds. During 1995, the Bank had an
average daily federal funds sold of $3.5 million. The Bank is also a
member of the Federal Home Loan Bank of New York, and based upon the
current level of stock ownership, the Bank is authorized to borrow up
to $6.8 million. The Bank borrowed an average of $2.0 million during
1995.
At December 31, 1995, banking regulations required conformity with a
minimum risk based capital standard of 8%. The Bank's risk based
capital level was approximately 20%. Neither the Company nor the
Bank had any material commitments for capital expenditures as of
December 31, 1995. The adequacy of the Bank's capital is reviewed on
an ongoing basis with reference to the size, composition and quality
of the Bank's resources. An adequate capital base is important for
continued growth, expansion and added protection against unexpected
losses.
Fiscal 1995 compared with Fiscal 1994
Total Bank assets grew from $209 million at year end 1994 to $235
million at year end 1995, or an increase of 12.4%, while equity
capital grew from $25.2 million to $28.6 million or an increase of
13.5% for this period. Growth in the Bank's assets can be attributed
to new deposits in the Naples Branch as well as a significant
increase in the Hammondsport balances. An advance from the Federal
Home Loan Bank of $3.0 million also increased total assets.
Loan demand continued strong during 1995 with an increase from $140
million at December 31, 1994 to $148.3 million at December 31, 1995,
or an increase of 6%.
Total deposits increased from $180.9 million to $197.7 million. This
increase was primarily in the form of time deposits, which increased
by 31.4%.
An advance from Federal Home Loan Bank of $3 million was outstanding
as of December 31, 1995. This advance was matched specifically with<PAGE>
<PAGE>
investments to better leverage the Bank's capital.
Net income decreased modestly from $3.42 million in 1994 to $3.38
million for 1995. Net interest income declined slightly due to
falling yields earned on prime rate loans and a decline in yields
earned on investments. Interest on deposits increased due to growth
in time deposits.
Other expenses increased from $6,738,100 to $6,972,600 during 1995
due primarily to the opening of our Naples Branch and necessary
staffing requirements.
FDIC insurance decreased from $410,000 in 1994 to $210,000 in 1995,
due primarily to the decrease in the assessment rate for banks with a
1A classification.
As discussed in more detail in Supervision and Regulation under Item
I above, the capital ratio continues strong at 11.96% for 1995, as
compared to 12.22% at December 31, 1994.
Fiscal 1994 compared with Fiscal 1993
The Bank's assets grew from $199.2 million at year end 1993 to $209.1
million at year end 1994. Loan demand has remained strong throughout
1994 with total outstanding loans growing from $125.8 million at year
end 1993 to $140 million at year end 1994.
Bank customers have changed their investment strategies in order to
maximize their interest earnings, thus the change from lower yielding
NOW and money market accounts into time deposits, increasing the
average cost of funds to the Bank.
Earnings of $3.4 million for 1994 reflect a modest increase from
1993's $3.3 million. Investment losses during 1994 amount to
$44,000. These losses were taken in order to increase future income
and to recognize current tax benefits.
Net Interest Income on a fully tax equivalent basis (which adjusts
for the tax exempt status of income earned on municipal investments
to express such income as if it were taxable) for the year ended 1994
was $11,343, representing an increase of $897 or 8.5% over 1993.
This increase was largely attributable to increased loan volume and
the resulting higher yield on earning assets.
Fiscal 1994 compared with Fiscal 1993 Continued
Other expenses increased from $6.2 million to $6.7 million. Included
in this other expense increase is an increase in salaries and
benefits of 5.52% from $3.3 million to $3.5 million. In addition,
expenses on Other Real Estate Owned increased from $30,000 in 1993 to
$141,000 in 1994. Property foreclosures and subsequent sales of this
property increased in 1994.
<PAGE>
Interest Sensitivity Analysis
<TABLE>
The following table sets forth the maturity distribution of the
Company's interest-earning assets and interest bearing liabilities as
of December 31, 1995, the Company's interest rate sensitivity gap
(i.e. interest rate sensitive assets less interest rate sensitive
liabilities), the Company's cumulative interest rate sensitivity gap,
the Company's interest rate sensitivity ratio (i.e. interest rate
sensitive assets divided by interest rate sensitive liabilities) and
the Company's cumulative interest rate sensitivity ratio. The
following assumptions were used in preparation of this table:
variable rate loans are included in the period in which their next
scheduled rate adjustment is expected to take place; fixed rate loans
are assumed to be repaid in accordance with their contractual terms;
no prepayments are assumed on any loans; and securities are included
in the period in which they mature, or in the case of variable rate
securities, the period in which the next rate change is anticipated.
<CAPTION>
Interest Rate Sensitivity Analysis
(dollars in thousands)
0-30 31-90 91-180 181-365 1 - 5 Over 5
As of December 31, 1995:
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans 54,707 2,542 4,544 6,535 40,894 40,781
Securities 8,298 2,289 6,984 5,961 20,498 20,907
Total Earning Assets 63,005 4,831 11,528 12,496 61,392 61,688
Interest Bearing Liab.
Money Market Demand 13,302
Interest Bearing
Deposits 32,372
Certificates of Deposit
Under $100,000 5,530 8,612 13,480 21,213 12,789
$100,000 and over 7,165 2,548 3,674 2,552 611
Savings Accounts 46,510
Securities Sold
Agreement to Repurch. 546 525
FHLB Borrowings
Federal Funds Purch. 2,150 1,000 2,000
Total Int. Bear. Liab.107,575 11,160 17,679 24,765 15,400 61,688
Incremental Gap <F1> (44,570) (6,329) (6,151)(12,269)(45,992) 38,361
Cumulative Gap <F2> (44,570)(50,899)(57,050)(69,319)(23,327)
Sensitivity Gap <F3> .58 .43 .65 .50 3.98
Cumulative Sensit.<F4> .58 .57 .63 .61 .87
Interest Sensitivity Analysis Continued
<FN>
<F1> Total earning assets less total interest bearing liabilities for
each period.
<F2> Total earning assets less total interest bearing liabilities,
cumulative for periods.
<F3> Total earning assets divided by total interest bearing
liabilities.
<F4> Total earning assets divided by total interest bearing
liabilities cumulative for periods.
</TABLE>
<PAGE>
Typically, a banking institution which is "liability sensitive" will
be expected to benefit from a decrease in interest rates and be
adversely impacted by an increase in interest rates. However,
because (as noted above) the repricing of assets and liabilities is
frequently subject to management discretion, the correlation between
an institution's interest sensitivity position and a change in the
interest rate environment is rarely precise. Although the Company
currently is "liability sensitive", within one year after December
31, 1995 a decline in interest rates would adversely impact the
Company to the extent that the Company determines not to make a
corresponding adjustment to the rates paid on NOW and money market
deposit accounts.
Inflation:
Inflation may effect financial institutions through impaired asset
growth, reduced earnings and substandard capital adequacy ratios.
Since the majority of assets and liabilities are monetary in nature,
variations in economic policies issued by the Federal Reserve Board
to control interest rates have a greater impact on the profitability
of a financial institution. The investment committee continually
monitors the rate sensitivity of its earning assets and interest
bearing liabilities to minimize any adverse effects on future
earnings.
Future Outlook:
The profitability of the Company, like all financial institutions, is
subject to the volatility of interest rates throughout the year. The
composition of the Company's balance sheet and the repricing
frequency of its interest bearing assets and liabilities have a
direct impact on the interest margin, a key indicator of
profitability. Since there will always be economic events and trends
that will influence the decision making of management, a main goal of
the Bank is controlling interest rate risk through managing the
interest sensitivity gap and by controlling the quality of assets
through credit policies and diversification. At this time,
management believes that the Company's balance sheet does not include
significant concentrations of assets or liabilities that would have a
material adverse affect on earnings.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the
undersigned thereunto duly authorized.
BATH NATIONAL CORPORATION
_______________________________
DATE ______________________ Robert H. Cole
President
_______________________________
DATE ________________________ Edward C. Galpin
Vice President and Treasurer <PAGE>
