SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or Section 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
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 0-20142
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:
Title of Each Class Name of Each Exchange Where Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $5 per Share
(Title of Class)
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 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 this Form 10-K.
The aggregate market value of the voting common stock of the
registrant held by non-affiliates of the registrant as of March 15,
1999 was $65,894,000.
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of March 15, 1999.
<PAGE>
1,365,801 shares, common stock, $5.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
1) Portions of Annual Report to Stockholders for the year ended
December 31,1998 - Part I & II
2) Portions of Proxy statement for 1999 Annual Meeting - Part III
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. Business 1-25
ITEM 2. Properties 25
ITEM 3. Legal Proceedings 25
ITEM 4. Submission of Matters to a
Vote of Security Holders 26
PART II
ITEM 5. Market for the Registrant's Securities
and Related Stockholder Matters 26-27
ITEM 6. Selected Financial Data 27-29
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 29-33
ITEM 8. Financial Statements and
Supplementary Data 33
ITEM 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure 33
PART III
ITEM 10. Directors and Executive Officers
of the Registrant 33
ITEM 11. Executive Compensation 33
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 34
ITEM 13. Certain Relationships and Related
Transactions 34
PART IV
ITEM 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 34-35
<PAGE>
PART I
ITEM 1. Business
The Company functions primarily as the holder of stock of Bath
National Corporation (BNC or the "Company"). BNC is a one bank holding
company which was incorporated in 1982 and is registered under the Bank
Holding company Act of 1956. Bath National Bank (BNB or "the Bank")
is a full service commercial bank with trust powers.
BNC Financial Services, a financial services subsidiary that sells
annuities, life insurance and mutual funds, was incorporated during
1997. This subsidiary employs three series seven investment
representatives. Investment services are available at all branch
locations. Investment products are sold through Caderet, Grant & Co.,
Inc. and is a member of NASD/SIPC. Insurance products are offered
through Finger Lakes Investments Corporation, which is based in
Rochester, New York. No proprietary funds are sold.
In addition to holding the stock of BNB and BNC Financial Services
(collectively, the "Subsidiaries"), both of which are wholly-owned by
the Company, the Company assists in the management of the subsidiaries
as appropriate. The Company is a legal entity separate and distinct
from the Subsidiaries. The right of the Company to participate in any
distribution of the assets or earnings of the Subsidiaries is subject
to the claims of creditors of the Subsidiaries, 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 Subsidiaries.
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.
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,
Erwin, Corning, Wayland, Hornell, Atlanta, Naples, Penn Yan, Watkins
Glen 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>
PART I, Continued
ITEM 1. Business, Continued
Consolidated Average Balances
The following is a presentation of average assets, liabilities and
equity of the Company for the years ended December 31, 1998, 1997 and
1996 with respect to each major category of assets, liabilities and
equity.
AVERAGE ASSETS
(dollars in thousands)
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
Interest Earning
Dep. with Banks $ 900 $ 2,200 $ 3,300
Taxable Invest. Sec. 50,000 58,200 51,400
Non-Tax. Inv. Sec. 37,300 33,700 27,400
Federal Funds Sold 6,400 2,900 1,500
Net Loans 169,200 159,300 152,000
Total Earning Assets 263,800 256,300 235,600
Other Assets 19,300 15,900 16,700
Total Assets $283,100 $272,200 $252,300
AVERAGE LIABILITIES AND EQUITY
(dollars in thousands)
Non-Int. Bearing
Deposits $ 32,800 $ 29,400 $ 27,900
Interest Bear. Dep.
Savings 42,500 43,700 45,700
NOW Accounts 35,200 34,500 33,200
Money Market Acct 10,700 10,900 12,100
Time Deposits 100,500 98,000 87,400
Federal Home Loan
Bank Borrowings 2,600 600 2,500
Securities Sold Under
Agree. to Repurch. 24,600 21,500 11,400
Other Liabilities 2,400 1,900 1,400
Federal Funds Purch. 100 300 1,200
Total Liabilities 251,400 240,800 222,800
Common Stock 6,800 6,800 6,800
Add. Paid in Capital 1,500 1,500 1,500
Retained Earnings 23,400 23,100 21,200
Total Equity 31,700 31,400 29,500
Total Liabilities
and Equity $283,100 $272,200 $252,300
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Analysis of Net Interest Earnings
The following is a presentation of an analysis of the net interest
earnings of the Company for years ended December 31, 1998, 1997 and
1996, respectively, with respect to each major category of interest-
earning assets and interest-bearing liabilities:
Year Ended December 31, 1998
(dollars in thousands)
Interest
Average Earned Average
Assets Amount or Paid Yield or Rate
Interest-Earning
Deposits with Banks $ 900 $ 51 5.67%
Taxable Investment Securities 50,000 3,469 6.94%
Non-Taxable Investment
Securities <F1> 37,300 2,700 7.24%
Federal Funds Sold 6,400 346 5.40%
Net Loans <F2><F3> 169,200 15,058 8.90%
Total Earning Assets $263,800 $21,624 8.20%
Liabilities
Savings Deposits $ 42,500 $ 1,163 2.73%
Now Deposits 35,200 605 1.71%
Money Market Deposits 10,700 303 2.83%
Time Deposits 100,500 5,430 5.40%
Federal Home Loan Bank
Borrowings 2,600 155 5.96%
Repurchase Agreements 24,600 1,522 6.19%
Federal Funds Purchased 100 4 4.00%
Total Interest-Bearing
Liabilities $216,200 $ 9,182 4.25%
Interest Income/Earning Assets 8.20%
Interest Expense/Earning Assets 3.48%
Net Yield 4.72%
[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 $512,000.
<F3> Includes Loan Fees Totaling $100,000.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Analysis of Net Interest Earnings, Continued
Year Ended December 31, 1997
(dollars in thousands)
Interest
Average Earned Average
Assets Amount or Paid Yield or Rate
Interest-Earning
Deposits with Banks 2,200 127 5.77%
Taxable Investment Securities 58,200 4,118 7.08%
Non-Taxable Investment
Securities <F1> 33,700 2,475 7.34%
Federal Funds Sold 2,900 156 5.38%
Net Loans <F2><F3> 159,300 14,736 9.25%
Total Earning Assets $256,300 $21,612 8.44%
Liabilities
Savings Deposits 43,700 1,207 2.76%
Now Deposits 34,500 606 1.76%
Money Market Deposits 10,900 316 2.90%
Time Deposits 98,000 5,331 5.44%
Federal Home Loan Bank
Borrowings 600 32 5.33%
Repurchase Agreements 21,500 1,372 6.38%
Federal Funds Purchased 300 19 6.33%
Total Interest-Bearing
Liabilities $209,500 $8,883 4.24%
Interest Income/Earning Assets 8.44%
Interest Expense/Earning Assets 3.47%
Net Yield 4.97%
[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 $661,000.
<F3> Includes Loan Fees Totaling $60,000.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Analysis of Net Interest Earnings, Continued
Year Ended December 31, 1996
(dollars in thousands)
Interest
Average Earned Average
Assets Amount or Paid Yield or Rate
Interest-Earning
Deposits with Banks $ 3,300 $ 192 5.82%
Taxable Investment Securities 51,400 3,517 6.84%
Non-Taxable Investment
Securities <F1> 27,400 2,043 7.46%
Federal Funds Sold 1,500 82 5.47%
Net Loans <F1><F2><F3> 152,000 13,955 9.18%
Total Earning Assets $235,600 $ 19,789 8.40%
Liabilities
Savings Deposits $ 45,700 $ 1,292 2.83%
Now Deposits 33,200 583 1.76%
Money Market Deposits 12,100 344 2.84%
Time Deposits 87,400 4,671 5.34%
Federal Home Loan Bank
Borrowings 2,500 158 6.32%
Repurchase Agreements 11,400 718 6.30%
Federal Funds Purchased 1,200 76 6.33%
Total Interest-Bearing
Liabilities 193,500 7,842 4.05%
Interest Income/Earning Assets 8.40%
Interest Expense/Earning Assets 3.32%
Net Yield 5.08%
[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 $820,000.
<F3> Includes Loan Fees Totaling $62,000.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Rate/Volume Analysis of Net Interest Income
The effect on interest income, interest expense, and net interest
income in the periods indicated from 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 the 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, 1998 and
1997, appear in their entirety on the following page.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
December 31, 1998 compared with December 31, 1997
(dollars in thousands)
Changes in net interest income as a result of:
Total
Volume Rate Change
Interest earned on:
Interest-earning
deposits with banks $ (75) $ (1) $ (76)
Taxable Investment
Securities (580) (69) (649)
Non-Taxable
Investment Securities 264 (39) 225
Federal Funds Sold 188 2 190
Net Loans 916 (594) 322
Total Interest Income 713 (701) 12
Interest paid on:
Interest-bearing
deposits 284 15 299
Change in net interest
income $ 429 $ (716) $ (287)
December 31, 1997 compared with December 1996
(dollars in thousands)
Changes in net interest income as a result of:
Total
Volume Rate Change
Interest earned on:
Interest-earning
deposits with banks $ (64) $ (1) $ (65)
Taxable Investment
Securities 465 136 601
Non-Taxable
Investment Securities 470 (38) 432
Federal Funds Sold 77 (3) 74
Net Loans 670 111 781
Total Interest Income 1,618 205 1,823
Interest paid on
Interest-bearing
deposits 648 393 1,041
Change in net interest
income $ 970 $ (188) $ 782
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Investments
Investment securities comprised approximately 29% of the Bank's
assets at December 31, 1998, with loans comprising approximately 63%
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, and tax
exempt municipal securities. 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>
PART I, Continued
ITEM 1. Business, Continued
Investments, Continued
The following tables present, at December 31, 1998, 1997, and 1996,
the book value and market values of both the available for sale (AFS)
and the held to maturity (HTM) categories of the Bank's investments.
The table also indicates the amount of investments due in (i) one
year or less, (ii) one to five years, (iii) five to ten years, and
(iv) over ten years.
1998 1997
Investment Book Market Avg. Book Market Avg.
Category Value Value Yield Value Value Yield
(dollars in thousands) (dollars in thousands)
Available-for-Sale Investments:
Obligations of U.S.
Treasury and other U.S.
Agencies and Corporations:
0 - 1 year $3,803 $3,827 7.02% $ 6,008 $ 5,990 4.75%
1 - 5 years 5,784 5,793 6.06% 4,333 4,323 7.63%
5 - 10 years - - - % 987 1,001 7.09%
Over 10 years - - - - - -
Obligations of States and
Political subdivisions
0 - 1 year $ 1,685 $ 1,694 4.92% $ 982 $ 986 5.99%
1 - 5 years 19,178 19,781 5.18% 14,756 15,067 5.10%
5 - 10 years 15,147 15,911 5.17% 18,932 19,666 5.28%
Over 10 years 1,285 1,372 5.92% 1,367 1,433 5.70%
Other Securities
0 - 1 year $ 737 $ 739 7.54% 444 446 8.76%
1 - 5 years 374 397 6.88% 7,445 7,436 6.83%
5 - 10 years 2,035 2,020 6.60% 2,017 2,126 7.58%
Over 10 years 15,133 15,039 6.56% 11,928 11,948 7.24%
Total AFS Securit. $65,161 $66,573 $69,199 $70,422
Held-to-Maturity Investments:
Agency
1 - 5 years $20,000 $20,269 7.67% $20,000 $20,539 7.67%
Total Securities $85,161 $86,842 $89,199 $90,961
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Investments, Continued
1996
Investment Book Market Avg.
Category Value Value Yield
(dollars in thousands)
Obligations of U.S.
Treasury and other U.S.
Agencies and Corporations:
0 - 1 year $10,511 $10,421 6.27%
1 - 5 years 5,336 5,354 6.54%
5 - 10 years 21 21 7.37%
Over 10 years - - -
Obligations of States and
Political subdivisions
0 - 1 year $ 1,036 1,051 6.85%
1 - 5 years 9,849 9,942 4.56%
5 - 10 years 18,806 19,125 4.90%
Over 10 years 1,355 1,360 5.17%
Other Securities
0 - 1 year 10,534 10,181 9.45%
1 - 5 years 6,749 6,694 8.25%
5 - 10 years 3,198 3,348 9.23%
Over 10 years 3,628 3,631 7.94%
Total Securities $71,023 $71,128
Yields are computed on a tax equivalent basis using a marginal tax
rate of 34%.
As of December 31, 1998, a total of $71,743,226 of investments were
pledged to secure public deposits.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
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, 1998, loans secured
by real estate comprised 48% of the total loan portfolio. At
December 31, 1998 none of the real estate loans were being held
specifically for resale in the secondary market.
Loans Outstanding:
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:
Year Ended December 31,
(dollars in thousands)
Loan Type 1998 1997 1996 1995 1994
Commercial, Financial
Agricultural $ 56,435 $ 45,466 $ 38,224 $ 38,325 $31,520
Real Estate Mortgage 89,404 83,872 84,131 78,666 82,217
Installment Loans 36,922 31,805 33,244 29,765 24,097
to Individuals
All Other 5,007 3,516 2,492 3,247 3,945
Sub-Total 187,768 164,659 158,091 150,003 141,779
Allowance for Loan
Losses 1,650 1,650 1,650 1,650 1,725
Loans - Net $186,118 $163,009 $156,441 $148,353 $140,054
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Loans Outstanding, Continued
Maturity Distribution and Interest Sensitivity:
The following tabulation presents an analysis of maturities of
Commercial, Financial, and Agricultural loans as of December 31, 1998
stated in thousands of dollars:
Years To Maturity
Loan Type 1 or less 1 - 5 Over 5 Total
Commercial, Financial,
and Agricultural $14,612 $11,347 $30,476 $56,435
Demand loans, loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less.
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, 1998, stated in thousands of dollars:
Loans due after 1 year with predetermined $14,865
Interest Rates
Loans due after 1 year with floating
Interest Rates $26,958
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Non-Performing Loans and Leases:
The following table presents, for the period indicated, the aggregate
amount of non-accrual, past due and restructured loans:
Type of Loan 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
Loans accounted
for on non-
accrual basis $512,000 $661,000 $820,000 $435,000 $454,000
Number of loans 13 9 13 9 17
Accruing Loans
Past due 90 Days
or more as to
principal or
interest payments 274,000 330,000 321,000 209,000 324,000
Number of loans 7 47 38 17 17
Loans not included
above which
are troubled debt
restructuring <F1> ---- ---- ---- ---- 290,000
Number of loans 0 0 0 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, 1998 would have
included approximately $40,000 of 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 1998
for the non-accrual loans.
The Bank maintains a problem loan report. As of December 31, 1998,
there were no individual loans identified which would materially
impact the Bank.
The Bank has no foreign loans.
There are no concentrations of credit.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Summary of Loan Loss Experience:
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.
Year Ended December 31,
(dollars in thousands)
1998 1997 1996 1995 1994
Allowance balance
at beginning
of the year $ 1,650 $ 1,650 $ 1,650 $ 1,725 $ 1,600
Loans Charged Off:
Real Estate 35 0 0 0 9
Commercial,
Financial &
Agricultural 101 134 191 212 59
Installment Loans
to Individuals 177 166 111 146 180
Credit Cards 90 81 47 31 28
Total 403 381 349 389 276
Recoveries of Loans
Previously Charged Off:
Real Estate 0 0 0 17 0
Commercial,
Financial &
Agricultural 19 34 14 96 40
Installment Loans
to Individuals 42 49 62 65 271
Credit Cards 8 3 4 4 13
Total 69 86 80 182 324
Additions charged to
Operations 334 295 269 132 77
Allowance Balance at
end of the year $ 1,650 $ 1,650 1,650 1,650 1,725
Average loans $169,200 $160,200 152,000 142,900 137,700
Ratio of net
charge-offs during
the period to
average loans during
the period .19% .18% .18% .15% -.03%
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Summary of Loan Loss Experience, Continued
At December 31, 1998, the allowance balance was allocated as follows:
% of loans
Amount in each type
Loan Type (in thousands) to total loans
Commercial, Financial
and Agricultural $1,200 30.05%
Real Estate - Mortgage 45 47.61%
Installment loans to individuals 400 19.66%
All Other 5 2.68%
Total $1,650 100.00%
At December 31, 1997, the allowance balance was allocated as follows:
% of loans
Amount in each type
Loan Type (in thousands) to total loans
Commercial, Financial
and Agricultural $1,200 27.63%
Real Estate - Mortgage 45 50.94%
Installment loans to individuals 400 19.32%
All Other 5 2.11%
Total $1,650 100.00%
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Summary of Loan Loss Experience, Continued
At December 31, 1996, the allowance balance was allocated as follows:
% of loans
Amount in each type
Loan Type (in thousands) to total loans
Commercial, Financial
and Agricultural $1,100 24.18%
Real Estate - Mortgage 50 53.22%
Installment loans to individuals 500 21.03%
All Other 0 1.57%
Total $1,650 100.00%
At December 31, 1995, the allowance balance was allocated as follows:
% of loans
Amount in each type
Loan Type (in thousands) to total loans
Commercial, Financial
and Agricultural $1,100 25.53%
Real Estate - Mortgage 50 52.45%
Installment loans to individuals 500 19.85%
All Other 0 2.17%
Total $1,650 100.00%
At December 31, 1994, the allowance balance was allocated as follows:
% of loans
Amount in each type
Loan Type (in thousands) to total loans
Commercial, Financial
and Agricultural $1,175 22.24%
Real Estate - Mortgage 50 57.99%
Installment loans to individuals 500 17.00%
All Other 0 2.77%
Total $1,725 100.00%
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Loan Loss Reserve, Continued
In considering the adequacy of the Bank's allowance for possible loan
losses and, thus, the amount of additions to the allowance charged to
operating expense in 1998, management has focused on the fact that as
of December 31, 1998, 30% 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 1999 will be no more than the losses during 1998. 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>
PART I, Continued
ITEM 1. Business, Continued
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,
employees of businesses and local municipalities 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.
The following table presents, for the periods indicated, the average
amount of and average rate paid on each of the major deposit
categories:
Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96
Amount Rate Amount Rate Amount Rate
Deposit Category (dollars in thousands)
Non-Interest Bearing
Demand Deposits $32,800 N/A $29,400 N/A $27,900 N/A
NOW Deposits 35,200 1.71% 34,500 1.76% 33,200 1.75%
Money Market Dep. 10,700 2.83% 10,900 2.90% 12,100 2.84%
Savings Deposits 42,500 2.73% 43,700 2.77% 45,700 2.82%
Time Deposits 100,500 5.40% 98,000 5.44% 87,400 5.34%
(including
Certificates of Dep.)
The following presents time certificates of deposit of $100,000 or
more and amounts of their maturities (amounts in thousands):
Maturity
3 Months Over
or 3-6 6-12 12
Less Months Months Months
Time Certificates of Deposit $10,365 $ 3,703 $ 2,958 $1,868
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
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:
Year Ended
December 31,
1998 1997 1996
Return on Average Assets <F1> 1.20% 1.30% 1.37%
Return on Average Equity <F2> 10.76% 11.26% 11.69%
Dividend Payout Ratio <F3> 99% 76% 42%
Equity to Assets Ratio
(Average) <F4> 11.20% 11.54% 11.69%
[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
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 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 $17.8 million. In addition, the Bank has a borrowing
line with a correspondent bank in the amount of $4 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. 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
<PAGE>
PART I
ITEM 1. Business, Continued
Liquidity and Asset/Liability Management, Continued
of the more volatile interest rate environment. The continuing
deregulation of the banking industry has greatly increased the
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 pages 32 and 33 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.
The Bank also operates branch offices in Dundee, Hammondsport,
Hornell, Atlanta, Naples, Wayland, Erwin, Watkins Glen and Penn Yan,
New York. These branches are equipped with both ATM's and teller
stations. All of the offices, with the exception of our Atlanta,
Hammondsport, Penn Yan and Watkins Glen Offices, have drive-through
teller facilities.
The Company's offices are located in the Bank's main office.
Employees
The Bank presently employs approximately 148 persons on a full-time
equivalent basis, including four senior officers. It is anticipated
that the Bank will hire additional persons as needed including
additional tellers and customer service representatives.
The bank offers certain fringe benefits to its qualified employees
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Employees, Continued
including life insurance, health benefits and participation in a
profit sharing plan/401(K) 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 (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 Board
possesses cease and desist powers over bank holding companies if
their actions represent unsafe or unsound practices or violations of
law.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Supervision and Regulation, Continued
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 Board
to be so closely related to banking as to be a 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.
The Federal Reserve Board and the Comptroller have each issued
minimum capital leverage ratios to be used in tandem with the risk-
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Supervision and Regulation, Continued
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.
Both the risk-based capital guidelines and the leverage ratios 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 OCC's CAMELS
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.
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:
TIER I TOTAL RISK
LEVERAGE RATIO BASED CAPITAL RATIO
Required Company Required Company
Minimum Ratio Minimum Ratio
For year ended
December 31, 1998 3.00% 10.34% 8.00% 18.09%
For year ended
December 31, 1997 3.00% 11.12% 8.00% 21.31%
For year ended
December 31, 1996 3.00% 11.56% 8.00% 22.27%
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.
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
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Supervision and Regulation, Continued
interpreted by regulation) for that year and the retained net profits
(as defined) for the preceding two years less any required transfers
to surplus. As of January 1, 1999, the Bank could have declared
aggregate dividends of approximately $2.8 million without the
approval of regulatory authorities.
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 required 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.
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
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Governmental Policies and Legislation, Continued
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
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
The significant accounting policies of the Bank are documented in
Note 1 of the financial statements.
ITEM 2. Properties
BNC occupies space at the main banking office of BNB. No real
properties are owned or leased by BNC.
The Bank's operations are conducted from eleven full service
facilities located in Bath, Hammondsport, Atlanta, Naples, Wayland,
Dundee, Penn Yan, Hornell, Watkins Glen and Erwin, New York. In
addition, the Bank also operates one seasonal office. The seasonal
office is located in the Wayland-Cohocton Central School. The main
office is located at 44 Liberty Street, Bath, New York. All
administrative functions of the Bank are conducted at the main
office. There is a drive-up facility adjacent to the main bank at 44
Liberty Street. There is another drive-up, walk-up facility at West
Washington Street, Bath. The Bank leases the building for its Penn
Yan and Erwin Offices and owns all of its other offices and branches.
The carrying value of property for BNC on a consolidated basis as of
December 31, 1998 and 1997 is included under the caption "Notes to
Consolidated Financial Statements", Note 5, of the financial
statements found in the Annual Report to Shareholders
and is incorporated herein by reference.
BNC Financial Services is located in Dundee, New York and maintains
offices in each of the Bank's branch locations.
ITEM 3. Legal Proceedings
There are no material legal proceedings pending, or to the knowledge
of management, threatened against the Company or the Subsidiaries.
<PAGE>
PART I, Continued
ITEM 4. Submission Matters to a Vote of Security Holders
None
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
A. Market Information
During the period covered by this report and as of the date hereof,
there is no established public trading market for the Company's
common stock.
The range of high and low bid information (in dollars) for each full
quarterly period for 1998 and 1997:
1998 1997
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
High 40 44 47 49 38 39 39 40
Low 39 44 47 47 37 38 38 39
The high and low bid information represents the price paid for shares
of stock of the Company by investors purchasing through the Company's
market makers, First Albany Corporation and Sandler O'Neill &
Partners, and trades between holders of Common Stock to the extent
the company is aware of such trades.
B. Holders of Common Stock
As of March 15, 1999, the approximate number of holders of record of
the Company's common stock was 656.
C. Dividends
For 1998 and 1997 the Company paid quarterly cash dividends,
amounting to a total for the year of $2.55 and $2.00 per share
respectively.
The Bank is restricted in its ability to pay dividends to the Company
<PAGE>
PART II, Continued
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters, Continued
C. Dividends, Continued
by banking regulations. Generally, dividends may be declared and paid
in cash or property only out of the retained earnings of the Bank.
Dividends may not be declared or paid at any time that a bank does
not have the paid in capital and appropriate retained earnings as
required by law. Dividends may not be paid without prior approval of
the regulator in excess of specified amounts as may be fixed by
banking regulations to ensure that banks maintain an adequate capital
structure.
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, 1998, 1997, 1996, 1995 and 1994 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.
<PAGE>
PART II, Continued
ITEM 6. Selected Financial Data, Continued
1998 1997 1996 1995 1994
Condensed Statements
of Income (in
thousands, except per
share data)
Interest Income <F1> $ 21,637 $ 21,478 $ 19,793 $ 18,226 $ 16,192
Interest Expense
Deposits 7,485 7,447 6,891 6,280 4,506
Interest Expense
Borrowings 1,681 1,436 952 271 61
Net Interest Income 12,471 12,595 11,950 11,675 11,625
Loan Loss Provision 334 295 269 132 77
Net Interest Income
After Loan Loss
Provision 12,137 12,300 11,681 11,543 11,548
Other Operating
Income <F3> 1,503 1,108 993 898 856
Other Operating
Expenses 8,047 7,560 6,951 6,768 6,579
Income Before
Income Tax 5,593 5,848 5,723 5,673 5,825
Tax Equivalent
Adjustment 1,029 930 779 668 590
Income Taxes 1,153 1,384 1,496 1,627 1,815
Net Income $ 3,411 $ 3,534 $ 3,448 $ 3,378 $ 3,420
Per Share Data <F2>
Book Value 22.99 23.12 22.23 20.90 18.69
Cash Dividends 2.55 2.00 1.05 1.20 2.51
Net Income 2.56 2.61 2.52 2.49 2.66
Weighted Average
Common Shares 1,331,567 1,354,869 1,365,832 1,354,492 1,285,762
Balance Sheet Data
(in thousands, except
number of outstanding
shares) at
December 31
Assets $295,477 $271,734 $269,238 $235,165 $209,158
Securities (Book Val.) 84,799 89,198 91,022 64,937 43,878
Loans, Net 186,118 163,009 156,441 148,353 140,054
Deposits 224,604 212,042 208,473 197,760 180,866
Equity $ 30,523 $ 31,137 $ 30,363 $ 28,554 $ 25,181
Common Shares
Outstanding 1,365,801 1,365,801 1,365,801 1,366,234 1,346,780
Treasury Stock 37,953 19,203 - - -
<PAGE>
PART II, Continued
ITEM 6. Selected Financial Date, Continued
[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 on April 24, 1996.
<F3> Discount Revenue was reclassified from Other Operating Income to
Interest for the years 1996 through 1994.
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The purpose of this section is to focus on relevant business events
and information provided in this Annual Report. For a full
understanding of this discussion, reference should be made to the
Consolidated Financial Statements and Notes thereto, and the
Consolidated Financial Highlights herein and statistical data
included under Item 1 of this form 10K.
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. 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, 1998 loans with an aggregate balance
of $45.7 million and securities of $10.5 million were due to mature
in one year or less. Additional funds flow from payments on
installment 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
December 31, 1998, the loan to deposit ratio was 84% and the ratio of
loans to core deposits (excluding certificates of deposit of $100,000
or more) was 91%.
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 1998, the Bank had an
average daily net federal funds sold of $6.2 million. The Bank is
also a member of, and has a line of credit with, 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 $17.8 million under
this line. The Bank borrowed an average of $2.6 million during 1998
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Liquidity and Capital Resources, Continued
against this line of credit.
At December 31, 1998, banking regulations required conformity with a
minimum risk based capital standard of 8%. The Bank's risk based
capital level as of December 31, 1998 is approximately 18%. Neither
the Company nor the Bank had any material commitments for capital
expenditures as of December 31, 1998. 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.
The Company has repurchased 37,953 shares of stock at a price equal
to the then current market value at the time of acquisition. The
shares are being recorded on the cost basis and have not yet been
retired. The Board of Directors believes the repurchase of this
stock was an excellent investment opportunity for the company and its
shareholders in light of the Company's strong capital position.
Year 2000
During 1998, management advised its Board of Directors of the issues
surrounding the approach of January 1, 2000. Nearly all computer
hardware and software developed during the current century have been
programmed with two digit reference to each year. Such hardware and
software, if not upgraded by January 1, 2000, may become useless.
Management is undergoing a five phase project to respond to this
issue, with major emphasis upon identifying all applications and data
bases supporting the Bank's mission critical applications. The five
phases are awareness, assessment, renovation, validation and
implementation, and will seek to neutralize not only the Bank's
vulnerability, but to determine the financial capacity of its
vendors, determine alternate vendors, and evaluate the capacity of
its customers to respond to this challenge. A committee continues to
direct the Company's Year 2000 activities under the framework of the
FFIEC's Five Step Program. Testing of critical applications has been
substantially completed with testing of other non-critical
applications expected to be completed by March 31, 1999. The Company
has begun evaluating Year 2000 readiness of its commercial loan
applicants as part of the loan underwriting process and is calling
upon major existing borrowers to assess their readiness and identify
potential problems.
In addition, the Company is currently formulating a contingency plan
for business continuation in the event of Year 2000 systems failure.
This contingency plan will be based upon the Company's existing
disaster recovery plan with modifications for Year 2000 risks. The
Company expects to complete its systems contingency plan by June
1999.
Significant Year 2000 failures in the Company's systems or in the
systems of third parties (or third parties upon whom they depend)
could have a material adverse effect on the Company's financial
condition and results of operation. The Company believes that its
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Year 2000, Continued
reasonably likely worse case Year 2000 scenario is (i) a material
increase in the Company's credit losses due to Year 2000 problems for
the Company's borrowers and obligors, and (ii) disruption in
financial markets causing liquidity stress to the Company. The
magnitude of these potential credit losses and disruption cannot be
determined at this time.
It is expected that costs associated with Year 2000 readiness
including hardware and software upgrades as well as costs of testing
will be approximately $75,000.
Results of Operations
Fiscal 1998 Compared with Fiscal 1997
Total bank assets grew from $271.7 million at year end 1997 to $295.5
at year end 1998 or 8.8%. Loan demand increased sharply from $163.0
million at year end 1997 to $186.1 million at year end 1998, an
increase of 14%. Deposits increased from $212.0 million to $224.6
million. Securities sold under agreements to repurchase increased
from $23.8 million to $28.1 million.
Although net income declined from $3.5 million to $3.4 million for
the year ended December 31, 1998, net income per share declined
modestly from $2.61 to $2.56. New office openings and the staffing
required account for the decline. As growth and the resulting income
derived from additional deposits and loans is realized we expect
earnings to improve.
Net loan losses increased from $295,000 to $334,000. Loan losses as
a percent of average loans outstanding however, remained steady at
.18%.
Other operating income increased from $292,000 to $613,000 due
primarily to the increase in the bank's mortgage broker fee income
and the additional fee income generated by BNC Financial Services.
Fiscal 1997 Compared with Fiscal 1996
Total Bank assets continued to grow from $269.2 million at year end
1996 to $271.7 million at year end 1997. Loan demand increased from
$156.4 million to $163.1 million or 4.3%. Deposits increased from
$208.5 million to $212.0 million.
Net income increased from $2.52 per share in 1996 to $2.61 per share
in 1997. Although the net yield on earnings assets continues to
decline (from 5.05% in 1996 to 4.96% in 1997), increased loan
activity is expected to provide a basis for improvement in 1998.
Net loan losses were higher than anticipated for 1997. Bankruptcy
losses continue to plague the banking industry in general.
Salaries and employee benefits expense increased significantly in
1997 compared to 1996. This increase is primarily due to the
duplication of positions resulting from the impending retirement of
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Fiscal 1997 Compared with Fiscal 1996, Continued
four officers of the bank. While management expects salaries to
remain approximately the same in 1998, additional employees have been
hired to staff the Erwin and Watkins Glen offices.
For detailed information concerning changes in operating income and
operating assets refer to Item 1, which includes statistical data.
Interest Sensitivity Analysis
The following table sets forth the maturity distribution of the
Company's interest-earning assets and interest bearing liabilities as
of December 31, 1998, 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 advanced 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.
Interest Rate Sensitivity Analysis
(dollars in thousands)
0-30 31-90 91-180 181-365 1 - 5 Over 5
As of
December 31, 1998:
Earning Assets:
Federal Funds Sold
Loans 46,700 5,700 8,300 19,800 69,700 35,900
Securities 20,000 1,300 4,000 21,100 21,600 16,800
Total Earning Assets 66,700 7,000 12,300 40,900 91,300 52,700
Interest Bearing Liab.
Money Market Demand 11,400
Interest Bearing
Deposits 36,100
Certificates of Deposit
Under $100,000 8,500 14,200 17,700 36,000 3,700
$100,000 and over 6,300 3,900 3,700 4,500 500
Savings Accounts 43,000
Securities Sold
Agreement to Repurch. 7,400 1,800 18,900
FHLB Borrowings 5,000
Federal Funds Purch. 2,100
119,800 18,100 23,200 59,400 4,200
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Interest Sensitivity Analysis, Continued
Total Int. Bear. Liab.
Incremental Gap <F1> (53,100)(11,100)(10,900)(18,500) 87,100
Cumulative Gap <F2> (53,100)(64,200)(75,100)(93,600) (6,500)
Sensitivity Gap <F3> .56 .39 .53 .69 21.73
Cumulative Sensit. <F4> .56 .53 .53 .55 .97
[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.
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, 1998 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 statement of financial condition 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>
Part II, Continued
ITEM 8. Financial Statements and Supplementary Data
The information required under Item 8 is incorporated by reference to
the Registrant's Annual Report, for the fiscal year ended December
31, 1998, pages 6 through 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
None
Part III
ITEM 10. Directors and Executive Officers of the Registrant
Information required by this Item 10 has been included in the
Registrant's Proxy Statement, included on pages 6 through 11, for its
1999 Annual Meeting filed with the Securities and Exchange Commission
in March 1999 and which is incorporated herein by reference.
ITEM 11. Executive Compensation
Information under this Item 11 has been included in the Registrant's
Proxy Statement, pages 8 through 11, for its 1999 Annual Meeting
filed with the Securities and Exchange Commission in March 1999 and
which is incorporated herein by reference.
ITEM 12. Security Ownership of certain Beneficial Owners and
Management
Information under this Item 12 has been included in Registrant's
Proxy Statement, pages 7 and 8, for its 1999 Annual Meeting filed
with the Securities and Exchange Commission in March 1999 and which
is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information under this Item 13 has been included in the Registrant's
Proxy Statement, page 12, for its 1999 Annual Meeting filed with the
Securities and Exchange Commission in March 1999 and which is
incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
A. Financial Statements, Financial Statement Schedules and Exhibits
The following consolidated financial statements and independent
auditor's report, included in pages 9 through 27 of the Registrant's
Annual Report for the fiscal year ended December 31, 1998, are
incorporated herein by reference:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years ended December 31,
1998, 1997 and 1996
<PAGE>
PART IV, Continued
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K, Continued
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
B. Reports on Form 8-K
No reports on form 8-K were required to be filed for the fourth
quarter of 1998.
C. Exhibits
The following exhibits are filed with this report.
S-K
Exhibit No. Description of Exhibit
3.1 Certificate of Incorporation*
3.2 By-Laws of Registrant*
4.1 Specimen Common Stock Certificate*
10.1 Deferred Compensation Agreement*
10.2 Early Retirement Plan - Officers*
10.3 Trustee Fee Plan*
10.4 Severance Agreement of Douglas L. McCabe
10.5 Severance Agreement of Edward C. Galpin
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
27 Financial Data Schedules
*Filed with Registrant's Form 10-K for the year ended December 31,
1991 and incorporated herein by reference thereto.
D. Financial Statements Schedules
Financial Statements Schedules are omitted in this particular section
since the required information is inapplicable or the required
information is presented in the Consolidated Financial Statements and
related Notes to Consolidated Financial Statements presented as Item
8 in Part II.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, hereunto duly authorized
as of the day of , 1999.
BATH NATIONAL CORPORATION
By:
Douglas McCabe, President
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated all as of
the 30th day of March 1999.
Principal Executive Officer:
_____________________________
Douglas McCabe, President
Chief Executive Officer and
Director
Principal Financial and Accounting Officer:
______________________________________
Edward C. Galpin, Vice President,
Chief Financial Officer, and Director
Directors:
____________________________
Laverne H. Billings, Director
____________________________
Theodore P. Capron, Director
____________________________
Herbert Fort, Director
____________________________
Lisle E. Hopkins, Director
___________________________
Lawrence Howell, Director
<PAGE>
____________________________
Constance Manikas, Director
____________________________
Robert H. Cole, Director
____________________________
Joseph F. Meade, Jr., Director
____________________________
Freeman H. Smith, III, Director
____________________________
Patrick Sullivan, Director
____________________________
Alan J. Wilcox, Director
BATH NATIONAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
December 31, 1998
Bath National Corporation and Subsidiaries
Contents
Independent Auditor's Report 1
Financial Statements
Consolidated statements of financial condition 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6-23
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
Bath National Corporation
We have audited the accompanying consolidated statements of
financial condition of Bath National Corporation and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Bath National Corporation and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted
accounting principles.
Albany, New York
February 20, 1999
<PAGE>
Bath National Corporation
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
1998 1997
Assets
Cash and due from banks $12,009,241 $ 7,453,597
intterest bearing deposits in other banks 396,377 1,477,829
Securities 84,799,120 89,030,914
Loans, net 186,117,798 163,009,225
Premises and equipment, net 5,462,078 5,625,903
Accrued interest receivable 2,351,959 2,310,129
Other 4,340,714 2,826,444
$295,477,287 $271,734,041
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand 35,30,118 $ 31,218,815
Savings 43,039,599 41,781,937
NOW accounts 36,145,813 33,030,029
Money market accounts 11,384,049 10,572,735
Time deposits ($100,000 or more) 18,894,039 19,620,007
Other time accounts 80,110,976 75,818,040
224,604,584 212,041,563
Federal funds purchased 2,150,000 -
Securities sold under agreements to 28,090,773 23,840,977
repurchase
Borrowed funds 5,000,000 -
Other 5,108,937 4,714,097
264,954,294 240,596,637
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $10 par value,
300,000 shares - -
authorized; none issued
Common stock, $5 par value, 1,500,000
shares authorized,1,365,801authorized,
1,365,801 issued and
outstanding 6,829,005 6,829,005
Additional paid in capital 1,494,678 1,494,678
Undivided profits 22,839,159 22,816,135
Accumulated other comprehensive income 851,210 736,902
Treasury stock (18,750 shares in 1998,
19,203 (1,491,059) (739,316)
, shares in 1997)
30,522,993 31,137,404
$295,477,287 $271,734,041
See Notes to Consolidated Financial Statements.
<PAGE>
Bath National Corporation
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Interest income:
Loans $14,968,012 $14,518,778 $13,878,041
Securities
Held-to-maturity
U.S. Government and agency 1,538,000 1,538,000 730,550
obligations
Available-for-sale
U.S. Government and agency 1,754,087 2,355,672 2,725,582
obligations
State and municipal obligations 1,876,492 1,784,057 1,343,952
Federal funds sold 346,195 156,219 81,539
Deposits in other banks 126,658 195,583 254,709
Total interest income 20,609,444 20,548,309 19,014,373
Interest expense:
Deposits 7,485,833 7,447,411 6,891,164
Borrowings 1,681,381 1,436,903 952,038
Total interest expense 9,167,214 8,884,314 7,843,202
Net interest income 11,442,230 11,663,995 11,171,171
Provision for loan losses 333,689 295,468 268,793
Net interest income after
provision for loan losses 11,108,54 1 11,368,527 10,902,378
Noninterest income:
Service charges 831,068 784,299 762,002
Net realized gains (losses) on sale of
available-for-sale securities 58,095 33,218 (21,653)
Other 613,393 292,161 252,930
Total other income 1,502,556 1,109,678 993,279
Noninterest expenses:
Salaries and employee benefits 4,499,521 4,400,690 3,806,366
Occupancy 1,306,538 1,092,288 1,058,539
Other 2,240,966 2,067,879 2,086,289
Total other expenses 8,047,025 7,560,857 6,951,194
Income before income taxes 4,564,072 4,917,348 4,944,463
Income taxes 1,152,696 1,383,784 1,496,384
Net Income $ 3,411,376 3,533,564 3,448,079
Net Income per Common Share $2.56 $2.61 $2.52
See Notes to Consolidated Financial Statements.
<PAGE>
Bath National Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
Years Ended December 31, 1998, 1997 and 1996
[---------
- COMMON
STOCK ----
<CAPTION>
------]
Accumulate
d Total
Number of AdditionalUndivided Other Treasury Stockholde
Shares Amount Paid in Profits Comprehens Stock rs' Equity
Capital ive Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 683,117 $3,415,585 $4,923,490$19,966,387 $248,300 $28,553,762
2-for-1 stock split 683,117 3,415,585 (3,415,585) - - - -
fractional shares repurc. (433) (2,165) (13,227) - - - (15,392)
Comprehensive income ,
Net income - - - 3,448,079 - - 3,448,079
Other comprehensive
income:
Net change in
unrealized gains (losses)
on securities available
for-sale net of taxes
of $181,310 - - - - (211,393) - (211,393)
Less: reclass. adjust. - - - - 21,653 - 21,653
Total other
comprehensive income (189,740)
Total
comprehensive income 3,258,339
Cash dividends declared
($1.05 per common share) - - - (1,434,116) - - (1,434,116)
Balance, December 31, 1996 1,365,801 6,829,005 1,494,678 21,980,350 58,560 - 30,362,593
Purchase of treasury stock
(19,203 shares) - - - - - (739,316) (739,316)
Comprehensive income
Net income - - - 3,533,564 - - . 3,533,564
Other comprehensive
income:
Net change in
unrealized gains (losses)
on
securities available-
for-sale net of taxes
of $437,286 - - - - 711,560 - 711,560
Less: reclassification
adjustment - - - - (33,218) - (33,218)
Total other
comprehensive income 678,342
Total
comprehensive income 4,211,906
Cash dividends declared
($2.00 per common share) - - - (2,697,779) - - (2,697,779)
Balance, December 31, 1997 1,365,801 6,829,005 1,494,678 22,816,135 736,902 (739,316) 31,137,404
Purchase of treasury stock
(18,750 shares) - - - - - (751,743) (751,743)
Comprehensive income
Net income - - - 3,411,376 - - 3,411,376
Other comprehensive
income:
Net change in
unrealized gains (losses)
on
securities available-
for-sale net of taxes
of $76,205 - - - - 172,403 - 172,403
Less: reclass. adjust. - - - - (58,095) - (58,095)
Total other
comprehensive income 114,308
Total
comprehensive income 3,525,684
Cash dividends declared
($2.55 per common share) - - - (3,388,352) - - (3,388,352)
Balance, December 31, 1998 1,365,801 6,829,005 1,494,678 22,839,159 851,210 (1,491,059)30,522,993
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Bath National Corporation
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income 3,411,376 3,533,564 3,448,079
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 520,691 437,578 409,581
Provision for loan losses 333,689 295,468 268,793
Deferred taxes - (50,538) 17,472
Loan origination costs deferred (189,348) (69,465) (72,635)
Bond premium amortized and discount 160,355 140,080 175,703
accreted
Losses (gains) on sale of (58,095) (33,218) 21,653
investments
Loss on disposed assets 11,629 - -
Changes in:
Interest receivable (41,830) 78,964 (613,958)
Other assets (1,538,450 19,050 (459,293)
Other liabilities (253,161) 408,984 232,718
Net cash provided by operating
activities 2,356,856 4,760,467 3,428,113
Cash Flows From Investing Activities
Proceeds from sales and maturities of
available-for-sale securities 16,562,804 9,949,448 13,926,729
Purchases of held-to-maturity
securities - - (20,000,000)
Purchases of available-for-sale
securities (12,242,757)(7,911,437) (20,424,362)
Federal funds purchased/sold 2,150,000 (4,225,000) 1,675,000
Net decrease in interest bearing
deposits in other banks 1,081,452 1,478,712 578,797
Increase in loans, net (23,252,914)(6,794,600) (8,283,737)
Capital expenditures (374,743) (976,873) (329,947)
Proceeds from sales of equipment 30,428 - -
Net cash used in investing
activities (16,045,730)(8,479,750) (32,857,520)
Cash Flows From Financing Activities
Proceeds from Federal Home Loan Bank
borrowings 5,000,000 - -
Repayments of Federal Home Loan Bank
borrowings - (2,000,000) (1,000,000)
Net increase in securities sold under
repurchase agreements 4,249,796 1,912,040 20,858,081
Purchase of treasury stock (751,743) (739,316) -
Increase in deposits 12,563,021 3,568,593 10,711,651
Dividends paid (2,816,556) (1,427,667) (1,499,743)
Net cash provided by financing
activities 18,244,518 1,313,650 29,069,989
Net increase (decrease) in cash and due
from banks 4,555,644 (2,405,633) (359,418)
Cash and due from banks:
Beginning of year 7,453,597 9,859,230 10,218,648
End of Year $12,009,241 $ 7,453,59 $ 9,859,23
Supplemental Disclosures of Cash Flow
Information
Interest paid 9,206,412 9,023,686 7,415,700
Income taxes paid 902,984 1,531,283 1,698,800
Dividends payable (included in other
liabilities) 2,456,519 1,884,723 614,611
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Note 1. Summary of Significant Accounting Policies
General
Bath National Corporation (the "Company"), a bank
holding company, its wholly owned subsidiary, Bath
National Bank (the "Bank"), a federal-chartered
financial institution, and BNC Financial Services, a
wholly owned subsidiary providing securities and
insurance products and services, are incorporated under
the laws of New York State. The accounting and financial
reporting policies of the entities are in accordance
with generally accepted accounting principles and
general practices within the industry.
Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly owned
subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Securities
The Bank has investments in debt and other securities.
Debt securities consist primarily of obligations of the
U.S. government, its agencies and corporations, and
state and municipal governments. Management determines
the appropriate classification of securities at the time
of purchase.
Trading
Trading account assets are held for resale in
anticipation of short-term market movements. Trading
account assets, consisting of debt and money market
instruments, are stated at fair value. Gains and
losses, both realized and unrealized, are included in
other income. The Bank did not hold any trading
account assets at December 31, 1998 and 1997.
Held-to-Maturity
Securities for which the Bank has the positive intent
and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are
recognized in interest income over the period to
maturity.
Available-for-Sale
Available-for-sale securities consist of bonds, notes,
debentures, and certain equity securities not
classified as trading or as held-to-maturity
securities.
Unrealized gains and losses, net of tax, on available-
for-sale securities are reported in other
comprehensive income.
<PAGE>
Note 1. Summary of Significant Accounting Policies, Continued
Securities, Continued
Available-for-Sale, Continued
Gains and losses on the sale of available-for-sale
securities are determined using the specific
identification method.
Premiums and discounts are recognized in interest
income over the period to maturity.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal,
adjusted for net deferred loan origination costs,
unearned fees and discounts, and an allowance for loan
losses. Certain direct loan origination costs are
deferred and recognized as an adjustment to interest
income over the estimated life of the loans. Interest on
loans is recognized over the term of the loan and is
calculated using the simple interest method on principal
amounts outstanding.
The allowance for loan losses is maintained at a level
which, in management's judgment, is adequate to absorb
potential losses inherent in the loan portfolio. The
amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit
concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined
based on collateral values or the present value of
estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense
and reduced by charge-offs, net of recoveries. Changes
in the allowance relating to impaired loans are charged
or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the
loan portfolio and the related allowance may change in
the near term. However, the amount of the change that is
reasonably possible cannot be estimated. In addition,
various regulatory agencies, as an integral part of
their examination process, periodically review the
Company's allowance for losses on loans. Such agencies
may require the Company to recognize additions to the
allowances based on their judgments of information
available to them at the time of their examination.
Accounting for loan impairments is governed by Statement
of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" (SFAS 114) and
SFAS 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure," which amended
SFAS 114. 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.
<PAGE>
Note 1. Summary of Significant Accounting Policies, Continued
Loans and Allowance for Loan Losses, Continued
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 judgment, 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.
Premises and Equipment, Net
Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is provided over
the estimated useful lives using straight line and
accelerated methods.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially
recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and
the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation
allowances are included in noninterest expense.
Real estate properties formally acquired in settlement
of loans were not material in 1998 and 1997.
Income Taxes
Income taxes are provided for the tax effects of the
transactions reported in the financial statements and
consist of taxes currently due and deferred taxes, which
relate primarily to differences between the basis of
available-for-sale securities; allowance for loan
losses; accumulated depreciation; and employee benefits
for financial and income tax reporting. Deferred tax
assets and liabilities represent the future tax return
consequences of those differences, which will either be
taxable or deductible when the assets and liabilities
are recovered or settled. Deferred tax assets and
liabilities are reflected at income tax rates applicable
to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the
provision for income taxes.
<PAGE>
Note 1. Summary of Significant Accounting Policies, Continued
Employee Benefit Plans
Retirement Benefits: The Bank has a defined
contribution pension plan and a profit sharing plan,
with a salary deferral feature, for those employees who
meet the eligibility requirements set forth in the
plans. Contributions to the defined contribution plan
are based on a formula while contributions to the profit
sharing plan are at the discretion of the board of
directors.
Postretirement Benefits: The Bank provides certain
health care benefits for all retired employees that meet
certain eligibility requirements. 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 prior to the adoption of the
plan is being accrued primarily in a straight line
manner.
Stock Split and Net Income Per Common Share
On March 21, 1996, the Board of Directors approved a two-
for-one common stock split, distributable on April 24,
1996 to stockholders of record at the close of business
on that date. All per share amounts and numbers of
shares in the consolidated financial statements have
been restated to reflect this split. In addition, an
amount equal to the $5 par value of the split shares has
been transferred from additional paid in capital to
common stock.
Net income per common share is computed on the weighted
average number of shares outstanding during each year.
The weighted average number of shares outstanding were
1,331,567, 1,354,869 and 1,365,832 in 1998, 1997 and
1996, respectively.
Use of Estimates
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain items have been reclassified in the 1997 and
1996 financial statements to conform with the 1998
presentation.
Note 2. Cash and Due From Banks
The Bank is required to maintain reserve cash balances
with the Federal Reserve Bank. The total of those reserve
cash balances was approximately $5,645,000 and $2,938,000
at December 31, 1998 and 1997, respectively.
<PAGE>
Note 3. Securities
The amortized cost and fair values of available-for-sale
securities as of December 31, 1998 are summarized as
follows:
[-----Gross Unrealized -----]
Amortized
Cost Gains Losses Fair
Value
U.S. Government and
agency
securities 9,587,648 63,977 30,938 9,620,687
State and municipal
securities 37,295,393 1,470,182 3,917 38,761,658
Mortgage-backed and
related
securities 15,957,808 45,417 152,329 15,850,896
Other 545,184 22,829 2,134 565,879
$63,386,033 $1,602,405 $189,318 $64,799,120
The amortized cost and fair value of available-for-sale
securities as of December 31, 1998 by contractual maturity
are shown below. For purposes of the maturity table,
mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of
underlying collateral. The mortgage-backed securities may
mature earlier than their weighted-average contractual
maturities because of principal prepayments.
Amortized Fair
Cost Value
Due in one year or less $ 6,224,171 $ 6,260,246
Due after one year
through five years 25,337,213 25,971,923
Due after five years
through ten years 17,182,269 17,930,619
Due after ten years 14,642,380 14,636,332
$63,386,033 $64,799,120
The amortized cost and fair values of held-to-maturity
securities as of December 31, 1998 are summarized as
follows:
[-----Gross Unrealized -----]
Amortized
Cost Gains Losses Fair
Value
U.S. Government and
agency
securities $20,000,000 $268,750 - $20,268,750
The amortized cost and fair value of securities being held-
to-maturity as of December 31, 1998 by contractual
maturity are shown below.
Amortized Fair
Cost Value
Due in one year or less $20,000,000 $20,268,750
<PAGE>
Note 3. Securities, Continued
The amortized cost and fair values of available-for-sale
securities as of December 31, 1997 are summarized as
follows:
[-----Gross Unrealized -----]
Amortized
Cost Gains Losses Fair
Value
U.S. Government and
agency
securities $11,327,853 66,558 80,270 $11,314,141
State and municipal
securities 36,036,771 1,115,839 1,290 37,151,320
Mortgage-backed and
related
securities 19,059,605 139,891 123,490 19,076,006
Other 1,384,109 105,338 - 1,489,447
$67,808,338 $1,427,626 $205,050 $69,030,914
The amortized cost and fair values of held-to-maturity
securities as of December 31, 1997 are summarized as
follows:
[-----Gross Unrealized -----]
Amortized
Cost Gains Losses Fair
Value
U.S. Government and
agency
securities $20,000,000 $539,200 - $20,539,200
Proceeds from sales and calls of securities during 1998,
1997 and 1996, which were principally attributable to
those available-for-sale, were $8,557,804, $5,599,231 and
$6,867,918, respectively, with gross gains of $92,692,
$58,983 and $23,080 and gross losses of $34,597, $25,765
and $44,733 realized on those sales.
Securities with a carrying value of $71,743,226 and
$68,621,401 and market values of $72,772,816 and
$69,556,886 at December 31, 1998 and 1997, respectively,
were pledged to secure public deposits, securities sold
under agreements to repurchase, and for other purposes as
required or permitted by law.
<PAGE>
Note 4. Loans, Net
The components of loans at December 31, 1998 and 1997 were
as follows:
1998 1997
Commercial 91,073,309 71,582,995
Installment 18,872,768 19,002,523
Real estate mortgage 42,872,595 41,788,215
Home equity loans 23,351,490 21,697,621
Student 8,938,556 7,932,328
Credit card loans 1,700,208 1,886,019
Net deferred loan
origination costs and
unearned discounts 958,872 769,524
187,767,798 164,659,225
Less allowance for loan
losses 1,650,000 1,650,000
Loans, net $186,117,798 $163,009,225
Real estate mortgage and home equity loans consist of:
Mortgages with fixed rates $23,685,162
Mortgages with variable
rates 19,187,433
Home equity loans with
fixed rates 18,873,518
Home equity loans with
variable rates 4,477,972
Total real estate loans $66,224,085
Changes in the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
Balance, beginning of
year $1,650,000 $1,650,000 $1,650,000
Provision for loan losses 333,689 295,469 268,793
Recoveries credited to
the allowance 69,167 86,306 80,752
Losses charged to the
allowance (402,856) (381,775) (349,545)
Balance, end of year $1,650,000 $1,650,000 $1,650,000
The Bank has, and may be expected to have in the future,
banking transactions with directors, principal officers,
their immediate families and affiliated companies in which
they are principal stockholders (commonly referred to as
related parties). The aggregate amount of loans to related
parties was $550,000 and $675,000 at December 31, 1998 and
1997, respectively.
<PAGE>
Note 4. Loans, Net, Continued
The activity with respect to loans to related parties for
the year ended December 31, 1998 follows:
Aggregate amount beginning of period $675,000
New loans 135,000
Repayments (260,000)
Aggregate amount end of period $550,000
Note 5. Premises and Equipment
At December 31, 1998 and 1997, premises and equipment
consist of:
1998 1997
Land 502,389 502,389
Buildings and improvements 6,229,904 6,161,265
Furniture 3,545,907 3,315,991
Total 10,278,200 9,979,645
Less accumulated
depreciation 4,816,122 4,353,742
Premises and equipment, net
$ 5,462,078 $5,625,903
Depreciation expense was $496,511, $411,672 and $379,401
for the years ended December 31, 1998, 1997 and 1996,
respectively.
Note 6. Deposits
A summary of deposit accounts at December 31, by maturity,
is as follows:
1998 1997
No contractual maturity $125,599,569 $116,625,042
Maturity within one year 81,109,227 80,899,368
Maturity after one year
through five years 17,895,788 14,517,153
$224,604,584 $212,041,563
Note 7. Securities Sold Under Agreements to Repurchase
Substantially all securities sold under repurchase
agreements were delivered to the broker-dealers who
arranged the transactions. These broker-dealers may have
sold, loaned, or otherwise disposed of such securities to
other parties in the normal course of their operations,
and have agreed to resell to the Bank substantially
identical securities at the maturities of the agreements.
The agreements mature in less than one year.
<PAGE>
Note 7. Securities Sold Under Agreements to Repurchase, Continued
Information concerning securities sold under agreements to
repurchase is summarized as follows:
1998 1997
Average balance during the
year $24,577,300 $21,533,500
Average interest rate 6.2% 6.2%
during the year
Maximum month-end balance
during
the year $28,887,900 $23,841,000
Securities underlying the agreements at year-end:
Carrying value $32,539,000 $28,086,000
Estimated fair value $32,884,000 $28,136,500
Note 8. Borrowed Funds
Borrowed funds represent advances from the Federal Home
Loan Bank. There were no advances at December 31, 1997.
Advances at December 31, 1998 are summarized as follows:
1998
Advance Interest Maturity
Amount Rate Date
$5,000,000 6.08% June 2008
Note 9. Income Taxes
A summary of the components of income taxes is as follows:
[----------Years Ended December 31, -------]
1998 1997 1996
Current Tax
Federal $828,322 $1,091,641 $1,099,494
State 324,374 342,681 379,418
Total current tax
expense 1,152,696 1,434,322 1,478,912
Deferred tax
Federal and State - (50,538) 17,472
Total provision
for income
taxes $1,152,696 $1,383,784 $1,496,384
<PAGE>
Note 9. Income Taxes, Continued
A reconciliation of the expected income tax expense,
computed at the federal statutory rate of 34%, to the
income tax expense included in the consolidated statements
of income is as follows:
[----------Years Ended December 31, -------]
1998 1997 1996
Statutory provision $1,551,784 $1,671,898 $1,681,117
Tax exempt interest (672,113) (608,027) (508,980)
State income tax, net
of federal
benefit 225,967 226,169 250,416
Non deductible
interest 90,004 80,956 57,800
Other (42,946) 12,788 16,031
Total $1,152,696 $1,383,784 $1,496,384
Net deferred tax liabilities (classified as other
liabilities) consist of the following at December 31, 1998
and 1997:
1998 1997
Deferred tax assets:
Provision for loan losses $502,464 $502,464
Employee benefits 361,500 322,724
863,964 825,188
Less valuation allowance - -
863,964 825,188
Deferred tax liabilities:
Depreciation 486,295 467,495
Deferred loan fees 383,549 307,810
869,844 775,305
Net deferred tax asset
(liability) (5,880) 49,883
This analysis does not include the recorded deferred tax
liabilities of $565,235 and $489,030 related to the
unrealized gains in the available-for-sale securities
portfolio as of December 31, 1998 and 1997, respectively.
These amounts are included in other liabilities and the
changes in the deferred taxes related to the available-for-
sale securities portfolio are reported in other
comprehensive income in the statement of stockholders'
equity.
<PAGE>
Note 10. Employee Benefit Plans and Postretirement Benefits
Employee Benefit Plans:
The Bank has a defined contribution pension plan for
those employees who meet the eligibility requirements
set forth in the plan. Substantially all of the Bank's
full time employees are covered by the plan.
Contributions to the plan are based on a percentage
computation. The Bank's defined contribution pension
plan expense was $265,600, $268,000 and $214,300 for
1998, 1997 and 1996, respectively.
The Bank also has a profit sharing plan, with a salary
deferral feature, for those employees who meet the
eligibility requirements set forth in the plan.
Contributions to the plan are at the discretion of the
Board of Directors. Substantially all of the Bank's full
time employees are covered by the plan. The Bank's
profit sharing plan expense was $177,300, $208,700 and
$198,800 for 1998, 1997 and 1996, respectively.
The Bank has severance compensation agreements with two
of its officers which do not become effective unless
there has been a change in control of the Bank as
defined and the Bank terminates the officers'
employment. Under those conditions the Bank will pay, as
severance, a lump sum payment equal to three times the
aggregate annual compensation paid to the executive
officers during the calendar year immediately preceding
the change in control.
Postretirement Benefits:
The Bank provides health and dental care benefits to
retired employees who meet specified age and service
requirements through a postretirement health and dental
care plan in which both the Bank and retiree share the
cost. The plan provides for substantially the same
medical insurance coverage as for active employees until
their death and is integrated with Medicare for those
retirees aged 65 or older.
A summary of the plan's funded status is as follows:
1998 1997
Change in benefit obligation
Benefit obligation at
beginning of year 924,328 874,469
Service cost 37,489 26,798
Interest cost 83,253 68,154
Plan participants'
contributions 13,70 9,402
Actuarial loss 399,387 -
Benefits paid (79,405) (54,495)
Benefit obligation at end
of year 1,378,752 924,328
Change in plan assets
Fair value of plan assets
at beginning of year - -
Actual return on plan
assets - -
Employer contribution 65,705 45,093
Plan participants'
contributions 13,700 9,402
Benefits paid (79,405) (54,495)
Fair value of plan assets
at end of year - -
Funded status (1,378,752) (924,328)
Unrecognized transition
obligation 371,211 397,725
Unrecognized net actuarial loss 511,957 125,437
Accrued benefit cost (classified
as other liabilities) (495,584) (401,166)
<PAGE>
Note 10. Employee Benefit Plans and Postretirement Benefits,
Continued
Postretirement Benefits, Continued:
1998 1997
Weighted-average assumptions as of
December 31
Discount rate 6.75% 8.00%
Expected return on plan
assets n/a n/a
Rate of compensation
increase n/a n/a
For measurement purposes, a 7.5 percent annual rate of
increase in the per capita cost of covered health care
benefits was assumed for 1999. The rate was assumed to
decrease gradually to 4.5 percent for 2004 and remain at
that level thereafter. The dental trend rate assumed was
3 percent.
1998 1997 1996
Components of net periodic
benefit cost
Service cost 37,489 26,798 26,690
Interest cost 83,253 68,154 70,005
Amortization of
transition obligation 26,514 26,514 26,514
Amortization of net
loss 12,867 2,714 8,078
Net periodic benefit
cost $160,123 $124,180 $131,287
Assumed health and dental care cost trend rates have a
significant effect on the amounts reported for the plan.
A one-percentage-point change in assumed health and
dental care cost trend rates would have the following
effects at December 31, 1998:
1-Percentage-1-Percentage-
Point Point
Increase Decrease
Effect on total service and
interest cost
components 16,978 (13,958)
Effect on postretirement
benefit obligation 121,915 (102,342)
Note 11. Regulatory Matters
The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum regulatory capital requirements
can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken,
could have a direct material effect on the Bank's
financial statements. Under the regulatory capital
adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative
<PAGE>
Note 11. Regulatory Matters, Continued
measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments
by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total
risk-based capital and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of
Tier I capital to adjusted total assets (as defined).
Management believes, as of December 31, 1998, that the
Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1998, the most recent notification from
the Office of Controller of the Currency categorized the
Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as
set forth in the table. There are no conditions or events
since that notification that management believes have
changed the Bank's category.
The Bank's actual and required capital amounts and ratios
are as follows (dollars in thousands):
For Capital
Adequacy To Be Well
Actual Purposes: Capitalized:
Amount Ratio Amount Ratio Amount Ratio
As of December
31, 1998
Total Risk- Based
Capital
(to Risk-
Weighted Assets) $31,053 18.1% $13,734 >=8.0% $17,167 >=10.0%
Tier I Capital
(to Risk-
Weighted Assets) 29,403 17.1% 6,867 >=4.0% 10,300 >=6.0%
Tier I Capital
(to Adjusted
Total Assets) 29,403 10.3% 11,374 >=4.0% 14,217 >=5.0%
As of December
31, 1997
Total Risk-Based
Capital
(to Risk-
Weighted Assets) 31,757 21.3% 11,923 >=8.0% 14,904 >=10.0%
Tier I Capital
(to Risk-
Weighted Assets) 30,107 20.2% 5,962 >=4.0% 8,943 >=6.0%
Tier I Capital
(to Adjusted
Total Assets) 30,107 11.1% 10,832 >=4.0% 13,540 >=5.0%
The Bank is restricted as to the amount of dividends which
can be paid. Dividends declared by national banks that
exceed net income (as defined) for the current year plus
retained net income for the preceding two years must be
approved by the Comptroller of the Currency. Under the
formula, dividends of approximately $2,800,000 may be paid
without prior regulatory approval. Regardless of formal
regulatory restrictions, the Bank may not pay dividends
that would result in capital levels being reduced below
the minimum requirements shown above.
<PAGE>
Note 12. Commitments and Contingencies
Financial instruments with off balance sheet risk:
The Bank is party to financial instruments with off
balance sheet risk in the normal course of business to
meet the financing needs of its customers. These
financial instruments include commitments to extend
credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the statements of
financial condition.
The Bank's exposure to credit loss in the event of non
performance by the other party to the financial
instrument for commitments to extend credit and standby
letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional
obligations as they do for on balance sheet instruments.
A summary of the Bank's commitments at December 31, 1998
is as follows (dollars in thousands):
Revolving open-end lines secured by 1-4
family residential
properties $ 3,807
Credit card lines 5,277
Commercial real estate, construction and
land development 3,432
Commercial and similar letters of credit,
net 363
Other unused commitments 20,418
$33,297
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any
condition established in the contract. Since many of the
commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates
each customer's creditworthiness on a case by case
basis. The amount of collateral obtained if deemed
necessary by the Bank upon extension of credit is based
on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts
receivable, inventory, property, equipment and income
producing commercial properties.
Letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to
customers. Collateral held varies as specified above and
is required in instances where the Bank deems necessary.
<PAGE>
Note 12. Commitments and Contingencies, Continued
Concentrations of credit risk:
The Company and the Bank are located in the Southern
Tier of the Finger Lakes region of New York State. The
Bank grants commercial, consumer and residential loans
primarily to customers in Allegheny, Livingston,
Ontario, Schuyler, Steuben and Yates counties. The
Bank's loan portfolio consists primarily of commercial,
installment and real estate secured loans. A substantial
portion of its debtors' ability to honor their contracts
is dependent upon the economic conditions of the region.
All of the Bank's loans, commitments to extend credit
and letters of credit have been granted to customers in
the Bank's market area. Investments in securities issued
by state and political subdivisions also involve
governmental entities within the Bank's market area. The
concentrations of credit by type of loan are set forth
in Note 4. The distribution of commitments to extend
credit approximates the distribution of loans
outstanding. Standby letters of credit were granted
primarily to commercial borrowers.
Line of credit:
The Bank has credit available from the Federal Home Loan
Bank and Manufacturers and Traders Bank in the amount of
$12,812,000 and $4,000,000, respectively, at the
overnight federal funds rate.
Note 13. Disclosures About Fair Value of Financial Instruments
The fair values shown below (in thousands) represent
management's estimates of values at which the various
types of the Bank's financial instruments could be
exchanged in transactions between willing, unrelated
parties. They do not necessarily represent amounts that
would be received or paid in actual trades of specific
financial instruments.
...1998... ...1997...
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and short term
investments 12,406 12,406 8,931 8,931
Securities 84,799 85,068 89,031 89,570
Loans, net 186,118 188,401 163,009 170,048
$283,323 $285,875 $260,971 $268,549
Financial liabilities:
Deposits 224,605 $225,007 $212,042 $212,171
Federal funds
purchased 2,150 2,150 - -
Securities sold under
agreements to
repurchase 28,091 28,091 23,841 23,841
Borrowed funds 5,000 5,000 - -
$259,846 $260,248 $235,883 $236,012
Unrecognized financial
instruments
Commitments to extend
credit $ 33,297 33,297 24,225 24,225
<PAGE>
Note 13. Disclosures About Fair Value of Financial Instruments,
Continued
The specific estimation methods and assumptions used can
have a substantial impact on the resulting fair values of
financial instruments. Following is a brief summary of the
significant methods and assumptions used in the above
table:
Cash and short term investments:
For those short term instruments, the carrying amount is
a reasonable estimate of fair value.
Securities:
For securities held as investments, fair value equals
quoted market price, if available. If a quoted market
price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans, net:
For certain homogeneous categories of loans, such as
residential mortgages, credit card receivables, and
other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar
loans, adjusted for differences in loan characteristics.
The fair value of other types of loans is estimated by
discounting the future cash flows using the current
rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining
maturities.
Deposits:
The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase and
borrowed funds:
The carrying amounts of securities sold under agreements
to repurchase and borrowed funds approximate their fair
values.
Commitments to extend credit and standby letters of
credit:
The fair value of commitments is estimated using the
fees currently charged to enter into similar agreements,
taking into account the remaining terms of the
agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair
value also considers the difference between current
levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees
currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting
date.
<PAGE>
Note 14. Parent Company Only Financial Information
Parent company (Bath National Corporation) only condensed
financial information is as follows:
Condensed Statements of Financial Condition
December 31, 1998 and 1997
1998 1997
Assets
Cash 2,144 1,297
Dividend receivable 2,460,000 1,886,000
Investment in subsidiaries 30,545,229 31,163,993
Total assets $33,007,373 $33,051,290
Liabilities and Stockholders'
Equity
Liabilities
Dividend payable 2,456,519 1,884,723
Other liabilities 27,861 29,163
2,484,380 1,913,886
Stockholders' Equity
Common stock 6,829,005 6,829,005
Additional paid in capital 1,494,678 1,494,678
Undivided profits 22,839,159 22,816,135
Accumulated other comprehensive
income 851,210 736,902
Treasury stock (1,491,059) (739,316)
30,522,993 31,137,404
Total liabilities and
stockholders' equity $33,007,373 $33,051,290
Condensed Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Revenue $ - $ - $ -
Expenses
Other operating
expenses 1,295 2,165 1,835
Loss before equity in
earnings of
subsidiaries (1,295) (2,165) (1,835)
Equity in earnings of
subsidiaries 3,412,671 3,535,729 3,449,914
Net income $3,411,376 $3,533,564 $3,448,079
<PAGE>
Note 14. Parent Company Only Financial Information, Continued
Condensed Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash Flows from Operating
Activities
Net income $3,411,376 $3,533,564 $3,448,079
Adjustments to
reconcile net income to net
cash used in
operating activities:
Net earnings of
subsidiaries (3,412,671) (3,535,729) (3,449,914)
Change in other
liabilities (1,302) (2,788) (1,392)
Net cash used in
operating activities (2,597) (4,953) (3,227)
Cash Flows from Investing
Activities
Cash dividend received 3,571,743 2,170,313 1,505,608
Cash Flows from Financing
Activities
Payments for purchase
of treasury stock (751,743 ) (739,316) -
Cash dividends paid (2,816,556) (1,427,667) (1,499,743)
Net cash used in
financing activities (3,568,299) (2,166,983) (1,499,743)
Net increase (decrease) in
cash 847 (1,623) 2,638
Cash, January 1 1,297 2,920 282
Cash, December 31 2,144 1,297 2,920
Subsidiaries of the Registrant
Bath National Bank, a New York corporation
BNC Financial Services, a New York corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,009,241
<SECURITIES> 84,799,120
<RECEIVABLES> 0
<ALLOWANCES> (1,650,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,351,959
<PP&E> 5,462,078
<DEPRECIATION> 496,511
<TOTAL-ASSETS> 295,477,287
<CURRENT-LIABILITIES> 11,740,773
<BONDS> 0
0
0
<COMMON> 6,829,005
<OTHER-SE> 24,333,837
<TOTAL-LIABILITY-AND-EQUITY> 295,477,287
<SALES> 0
<TOTAL-REVENUES> 20,609,444
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,047,025
<LOSS-PROVISION> 333,689
<INTEREST-EXPENSE> 9,167,214
<INCOME-PRETAX> 4,564,072
<INCOME-TAX> 1,152,696
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,411,376
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.56
</TABLE>
SEVERANCE COMPENSATION AGREEMENT
dated as of February 18, 1999, between BATH NATIONAL
BANK, a New York Corporation (the "Company") and DOUGLAS L. MCCABE
The Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the
Executive, to their assigned duties without distraction in
potentially disturbing circumstances arising from the possibility of
a change in control of the Company.
This Agreement sets forth the severance compensation which the
Company agrees it will pay to the Executive if the Executive's
employment with the Company terminates under one of the circumstances
described herein following a Change in Control of the Company (as
defined herein).
1. Term. This Agreement shall terminate, except to the extent
that any obligation of the Company hereinunder remains unpaid as of
such time, upon the earliest of (i) five years from the date hereof
if a Change in Control of the Company has not occurred within such
five year period; (ii) the termination of the Executive's employment
with the Company based on death, Disability (as defined in Section
3(b)), Retirement (as defined in Section 3(c)) or Cause (as defined
in Section 3(d) or by the Executive other than for Good Reason (as
defined in Section 3(e)); and (iii) five years from the date of a
Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under
this Agreement unless and until (a) there shall have been a Change in
Control of the Company, while the Executive is still an employee of
the Company and (b) the Executive's employment by the Company
thereafter shall have been terminated in accordance with Section 3.
For purposes of this Agreement, a Change in Control of the Company
shall be deemed to have occurred if (i) there shall be consummated
(x) any consolidation or merger of the Company in which the Company
shares of the Company's Common Stock would be converted into cash,
securities or other property, other than a merger of the Company in
which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of
the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the
assets of the Company, or (ii) the stockholders of the Company
approved any plan or proposal for the liquidation or dissolution of
the Company, or (iii) any person (as such term is used in Sections
13(d) and 14 (d) (2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 30% or
more of the Company's outstanding Common Stock, or (iv) during any
period of five consecutive years, individuals who at the beginning of
such period constitute the entire Board of Directors shall cease for
any reason to constitute a majority thereof unless the election, or
<PAGE>
the nomination for election by the Company's stockholders, of each
new director was approved by a vote of at least two-thirds of the
directors then still in office who where directors at the beginning
of the period.
3. Termination Following Change in Control. (a) If a Change
in Control of the Company shall have occurred while the Executive is
still an employee of the Company, the Executive shall be entitled to
the compensation provided in Section 4 upon the subsequent
termination of the Executive's Employment with the Company by the
Executive or by the Company unless such termination is as a result of
(i) the Executive's death; (ii) the Executive's Disability (as
defined in Section 3(c) below; (iv) the Executive's termination by
the Company for Cause (as defined in Section 3(d) below; or (v) the
Executive's decision to terminate employment other than for Good
Reason (as defined in Section 3(e) below).
(b) For purposes of Section 1 of this Agreement, the Executive
shall incur a disability if the Executive is absent from his duties
with the Company for a period of more than six consecutive months due
to a physical or mental illness and the Executive does not return to
the full time performance of his duties within 30 days after the
receipt of written notice from the Company of its intention to
terminate his employment.
(c) Retirement. The term "Retirement" as used in this
Agreement shall mean termination by the Company or the Executive of
the Executive's employment based on the Executive's having reached
age 65 or such other age as shall have been stated in any written
agreement between the Executive and the Company.
(d) Cause. The Company may terminate the Executive's
employment for Cause. For purposes of this Agreement only, the
Company shall have "Cause" to terminate the Executive's employment
hereunder only on the basis of fraud, misappropriation or
embezzlement on the part of the Executive, that is , in the opinion
of the Board of Directors of the Company, detrimental to the
business, assets, or reputation of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated
for Cause unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters of the entire membership of the
Company's Board of Directors at a meeting of the Board called and
held for the purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel,
to be heard before the Board), finding that in the good faith opinion
of the Board the Executive was guilty of conduct set forth in the
second sentence of this Section 3(d) and specifying the particulars
thereof in detail.
(e) Good Reason. The Executive may terminate the Executive's
employment for Good Reason at any time during the term of this
Agreement. For purposes of this Agreement "Good Reason" shall mean
any of the following (without the Executive's express written
consent):
<PAGE>
( i) The assignment to the Executive by the Company of
duties inconsistent with the Executive's position, duties,
responsibilities and status with the Company immediately prior
to a Change in Control of the Company, or a change in the
Executive's titles or offices as in effect immediately prior to
a Change in Control of the Company, or any removal of the
Executive from or any failure to reelect the Executive to any
of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a
result of the Executive's death or by the Executive other than
for Good Reason;
( ii) a reduction by the Company in the Executive's base
salary as in effect on the date hereof or as the same may be
increased from time to time during the term of this Agreement
or the Company's failure to increase (within 12 months of the
Executive's last increase in base salary) the Executive's base
salary after a Change in Control of the Company in an amount
which at least equals, on a percentage basis, the average
percentage increase in base salary for all officers of the
Company effected in the preceding 12 months;
(iii) any failure by the Company to continue in effect any
benefit plan or arrangement (including, without limitation, the
Company's Profit Sharing Plan, Group Annuity Contract, group
life insurance plan, senior executive survivor life insurance
supplement, and medical, dental, accident and disability plans)
in which the Executive is participating at the time of a Change
in Control of the Company (or any other plans providing the
Executive with substantially similar benefits) (hereinafter
referred to as "Benefit Plans"), or the taking of any action by
the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits
under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of
a Change in Control of the Company;
( iv) any failure by the Company to continue in effect any
incentive plan or arrangement (including, without limitation,
the Company's Annual Incentive Compensation Plan, Long-Term
Performance Incentive Plan, Long-Term Incentive Bonus Plan, as
amended, bonus and contingent bonus arrangements and credits and
the right to receive performance awards and similar incentive
compensation benefits) in which the Executive is participating
at the time of a Change in Control of the Company (or any other
plans or arrangements providing him with substantially similar
benefits) hereinafter referred to as "Incentive Plans") or the
taking of any action by the Company which would adversely affect
the Executive's Participation in any such Incentive Plan or
reduce the Executive's benefits under any such Incentive Plan,
expressed as a percentage of his base salary, by more than 10
percentage points in any fiscal years as compared to the
immediately preceding fiscal year;
<PAGE>
( v) a relocation of the Company's principal executive
offices to a location outside of Steuben County, or the
Executive's relocation to any place other than the location at
which the Executive performed the Executive's duties prior to a
Change in Control of the Company, except for required travel by
the Executive on the Company's business to an extent
substantially consistent with the Executive's business travel
obligations at the time of a Change in Control of the Company;
( vi) any failure by the Company to provide the Executive
with the number of paid vacation days to which the Executive is
entitled at the time of a Change in Control of the Company;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
( ix) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 3(f), and for purposes of
this Agreement, no such purported termination shall be
effective.
(f) Notice of Termination. Any termination by the Company
pursuant to Section 3(b), 3(c) or 3(d) shall be communicated by a
Notice of Termination. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate those
specific termination provisions in the Agreement relied upon and
which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provisions so indicated. For
purposes of this Agreement, no such purported termination by the
Company shall be effective without such Notice of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a)
if this Agreement is terminated by the Company for Disability, 30
days after Notice of Termination is given to the Executive (provided
that the Executive shall not have returned to the performance of the
Executive's duties on a full-time basis during such 30-day period) or
(b) if the Executive's employment is terminated by the Company for
any other reason, the date on which a Notice of Termination is given;
provided that if within 30 days after any Notice of Termination is
given to the Executive by the Company the Executive notifies the
Company that a dispute exists concerning the termination, the Date of
Termination shall be the date the dispute is finally determined,
whether by mutual agreement by the parties or upon final judgment,
order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected).
<PAGE>
4. Severance Compensation upon Termination of Employment. If
the Company shall terminate the Executive's employment other than
pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall
terminate his employment for Good Reason, then the Company shall pay
to the Executive as severance pay in a lump sum, in cash, on the
thirtieth day following the Date of Termination, an amount equal to
three times the average of the aggregate annual compensation paid to
the Executive during the 3 calendar years preceding the change in
control of the Company by the Company and any of its subsidiaries
subject to United States or Canadian income taxes. Average annual
compensation shall include base salary, annual bonus, and profit
sharing plan contributions. If the company does not agree with the
Executive's calculation of the lump sum payment, the matter will be
resolved by Urbach, Kahn & Werlin, PC, Certified Public Accountants,
and both the Executive and the Company will accept Urbach, Kahn &
Werlin's calculation as final.
5. No Obligation To Mitigate Damages; No Effect on Other
Contractual Rights. (a) The Executive shall not be required to
mitigate damages or the amount of any payment provided for under this
Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for under this Agreement be reduced by
any compensation earned by the Executive as the result of employment
by another employer after the Date of Termination, or otherwise.
(b) The provisions of this Agreement, and any payment provided
for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which
would accrue solely as a result of the passage of time, under any
Benefit Plan, Incentive Plan or Securities Plan, employment agreement
or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required
to perform it if no such succession or assignment had taken place.
The company will deliver to the Executive within ten days of the
effectiveness of any such succession or assignment, the written
Agreement of the succession to perform all of the obligations of the
Company under this Agreement and that the failure to deliver such
Agreement will entitle the Executive to terminate his employment for
Good Reason at any time thereafter. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any
successor or assign to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 6 or
which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law. If at any time during the term of
this Agreement the Executive is employed by any corporation a
majority of the voting securities of which is then owned by the
Company, "Company" as used in Sections 3, 4, 11 and 12 hereof shall
<PAGE>
in addition include such employer. In such event, the Company agrees
that it shall pay or shall cause such employer to pay any amounts
owed to the Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees. If the Executive should die while any amounts are
still payable to him hereunder, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee or,
if there is no such designee, to the Executive's estate.
7. Notice. For purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt requested,
postage prepaid, as follows:
If to the Company:
Bath National Bank
44 Liberty Street
Bath, New York 14810
If to the Executive:
Douglas L. McCabe
48 Lake Street
Hammondsport, NY 14840
or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach
by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect
to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of
New York.
9. Validity. The invalidity or unenforceability of any
provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
<PAGE>
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all
of which together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal
fees and expenses which the Executive may incur as a result of the
Company's contesting the validity, interpretation, and enforceability
of the Agreement.
12. Confidentiality. The Executive shall retain in confidence
any and all confidential information known to the Executive
concerning the Company and its business so long as such information
is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
BATH NATIONAL BANK
Date: February 18, 1999 _______________________________
Name: Robert H. Cole
Title: Chairman of the Board
______________________________
Date: February 18, 1999 Name: Douglas L. McCabe
Title: Senior Vice President
SEVERANCE COMPENSATION AGREEMENT
dated as of February 18, 1999, between BATH NATIONAL
BANK, a New York Corporation (the "Company") and EDWARD C. GALPIN
The Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the
Executive, to their assigned duties without distraction in
potentially disturbing circumstances arising from the possibility of
a change in control of the Company.
This Agreement sets forth the severance compensation which the
Company agrees it will pay to the Executive if the Executive's
employment with the Company terminates under one of the circumstances
described herein following a Change in Control of the Company (as
defined herein).
1. Term. This Agreement shall terminate, except to the extent
that any obligation of the Company hereinunder remains unpaid as of
such time, upon the earliest of (i) five years from the date hereof
if a Change in Control of the Company has not occurred within such
five year period; (ii) the termination of the Executive's employment
with the Company based on death, Disability (as defined in Section
3(b)), Retirement (as defined in Section 3(c)) or Cause (as defined
in Section 3(d) or by the Executive other than for Good Reason (as
defined in Section 3(e)); and (iii) five years from the date of a
Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under
this Agreement unless and until (a) there shall have been a Change in
Control of the Company, while the Executive is still an employee of
the Company and (b) the Executive's employment by the Company
thereafter shall have been terminated in accordance with Section 3.
For purposes of this Agreement, a Change in Control of the Company
shall be deemed to have occurred if (i) there shall be consummated
(x) any consolidation or merger of the Company in which the Company
shares of the Company's Common Stock would be converted into cash,
securities or other property, other than a merger of the Company in
which the holders of the Company's Common Stock immediately prior to
the merger have the same proportionate ownership of common stock of
the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the
assets of the Company, or (ii) the stockholders of the Company
approved any plan or proposal for the liquidation or dissolution of
the Company, or (iii) any person (as such term is used in Sections
13(d) and 14 (d) (2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 30% or
more of the Company's outstanding Common Stock, or (iv) during any
period of five consecutive years, individuals who at the beginning of
such period constitute the entire Board of Directors shall cease for
any reason to constitute a majority thereof unless the election, or
<PAGE>
the nomination for election by the Company's stockholders, of each
new director was approved by a vote of at least two-thirds of the
directors then still in office who where directors at the beginning
of the period.
3. Termination Following Change in Control. (a) If a Change
in Control of the Company shall have occurred while the Executive is
still an employee of the Company, the Executive shall be entitled to
the compensation provided in Section 4 upon the subsequent
termination of the Executive's Employment with the Company by the
Executive or by the Company unless such termination is as a result of
(i) the Executive's death; (ii) the Executive's Disability (as
defined in Section 3(c) below; (iv) the Executive's termination by
the Company for Cause (as defined in Section 3(d) below; or (v) the
Executive's decision to terminate employment other than for Good
Reason (as defined in Section 3(e) below).
(b) For purposes of Section 1 of this Agreement, the Executive
shall incur a disability if the Executive is absent from his duties
with the Company for a period of more than six consecutive months due
to a physical or mental illness and the Executive does not return to
the full time performance of his duties within 30 days after the
receipt of written notice from the Company of its intention to
terminate his employment.
(c) Retirement. The term "Retirement" as used in this
Agreement shall mean termination by the Company or the Executive of
the Executive's employment based on the Executive's having reached
age 65 or such other age as shall have been stated in any written
agreement between the Executive and the Company.
(d) Cause. The Company may terminate the Executive's
employment for Cause. For purposes of this Agreement only, the
Company shall have "Cause" to terminate the Executive's employment
hereunder only on the basis of fraud, misappropriation or
embezzlement on the part of the Executive, that is , in the opinion
of the Board of Directors of the Company, detrimental to the
business, assets, or reputation of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated
for Cause unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters of the entire membership of the
Company's Board of Directors at a meeting of the Board called and
held for the purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel,
to be heard before the Board), finding that in the good faith opinion
of the Board the Executive was guilty of conduct set forth in the
second sentence of this Section 3(d) and specifying the particulars
thereof in detail.
(e) Good Reason. The Executive may terminate the Executive's
employment for Good Reason at any time during the term of this
Agreement. For purposes of this Agreement "Good Reason" shall mean
any of the following (without the Executive's express written
consent):
<PAGE>
( i) The assignment to the Executive by the Company of
duties inconsistent with the Executive's position, duties,
responsibilities and status with the Company immediately prior
to a Change in Control of the Company, or a change in the
Executive's titles or offices as in effect immediately prior to
a Change in Control of the Company, or any removal of the
Executive from or any failure to reelect the Executive to any
of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a
result of the Executive's death or by the Executive other than
for Good Reason;
( ii) a reduction by the Company in the Executive's base
salary as in effect on the date hereof or as the same may be
increased from time to time during the term of this Agreement
or the Company's failure to increase (within 12 months of the
Executive's last increase in base salary) the Executive's base
salary after a Change in Control of the Company in an amount
which at least equals, on a percentage basis, the average
percentage increase in base salary for all officers of the
Company effected in the preceding 12 months;
(iii) any failure by the Company to continue in effect any
benefit plan or arrangement (including, without limitation, the
Company's Profit Sharing Plan, Group Annuity Contract, group
life insurance plan, senior executive survivor life insurance
supplement, and medical, dental, accident and disability plans)
in which the Executive is participating at the time of a Change
in Control of the Company (or any other plans providing the
Executive with substantially similar benefits) (hereinafter
referred to as "Benefit Plans"), or the taking of any action by
the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits
under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of
a Change in Control of the Company;
( iv) any failure by the Company to continue in effect any
incentive plan or arrangement (including, without limitation,
the Company's Annual Incentive Compensation Plan, Long-Term
Performance Incentive Plan, Long-Term Incentive Bonus Plan, as
amended, bonus and contingent bonus arrangements and credits and
the right to receive performance awards and similar incentive
compensation benefits) in which the Executive is participating
at the time of a Change in Control of the Company (or any other
plans or arrangements providing him with substantially similar
benefits) hereinafter referred to as "Incentive Plans") or the
taking of any action by the Company which would adversely affect
the Executive's Participation in any such Incentive Plan or
reduce the Executive's benefits under any such Incentive Plan,
expressed as a percentage of his base salary, by more than 10
percentage points in any fiscal years as compared to the
immediately preceding fiscal year;
<PAGE>
( v) a relocation of the Company's principal executive
offices to a location outside of Steuben County, or the
Executive's relocation to any place other than the location at
which the Executive performed the Executive's duties prior to a
Change in Control of the Company, except for required travel by
the Executive on the Company's business to an extent
substantially consistent with the Executive's business travel
obligations at the time of a Change in Control of the Company;
( vi) any failure by the Company to provide the Executive
with the number of paid vacation days to which the Executive is
entitled at the time of a Change in Control of the Company;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
( ix) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 3(f), and for purposes of
this Agreement, no such purported termination shall be
effective.
(f) Notice of Termination. Any termination by the Company
pursuant to Section 3(b), 3(c) or 3(d) shall be communicated by a
Notice of Termination. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate those
specific termination provisions in the Agreement relied upon and
which sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provisions so indicated. For
purposes of this Agreement, no such purported termination by the
Company shall be effective without such Notice of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a)
if this Agreement is terminated by the Company for Disability, 30
days after Notice of Termination is given to the Executive (provided
that the Executive shall not have returned to the performance of the
Executive's duties on a full-time basis during such 30-day period) or
(b) if the Executive's employment is terminated by the Company for
any other reason, the date on which a Notice of Termination is given;
provided that if within 30 days after any Notice of Termination is
given to the Executive by the Company the Executive notifies the
Company that a dispute exists concerning the termination, the Date of
Termination shall be the date the dispute is finally determined,
whether by mutual agreement by the parties or upon final judgment,
order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected).
<PAGE>
4. Severance Compensation upon Termination of Employment. If
the Company shall terminate the Executive's employment other than
pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall
terminate his employment for Good Reason, then the Company shall pay
to the Executive as severance pay in a lump sum, in cash, on the
thirtieth day following the Date of Termination, an amount equal to
three times the average of the aggregate annual compensation paid to
the Executive during the 3 calendar years preceding the change in
control of the Company by the Company and any of its subsidiaries
subject to United States or Canadian income taxes. Average annual
compensation shall include base salary, annual bonus, and profit
sharing plan contributions. If the company does not agree with the
Executive's calculation of the lump sum payment, the matter will be
resolved by Urbach, Kahn & Werlin, PC, Certified Public Accountants,
and both the Executive and the Company will accept Urbach, Kahn &
Werlin's calculation as final.
5. No Obligation To Mitigate Damages; No Effect on Other
Contractual Rights. (a) The Executive shall not be required to
mitigate damages or the amount of any payment provided for under this
Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for under this Agreement be reduced by
any compensation earned by the Executive as the result of employment
by another employer after the Date of Termination, or otherwise.
(b) The provisions of this Agreement, and any payment provided
for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which
would accrue solely as a result of the passage of time, under any
Benefit Plan, Incentive Plan or Securities Plan, employment agreement
or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required
to perform it if no such succession or assignment had taken place.
The company will deliver to the Executive within ten days of the
effectiveness of any such succession or assignment, the written
Agreement of the succession to perform all of the obligations of the
Company under this Agreement and that the failure to deliver such
Agreement will entitle the Executive to terminate his employment for
Good Reason at any time thereafter. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any
successor or assign to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 6 or
which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law. If at any time during the term of
this Agreement the Executive is employed by any corporation a
majority of the voting securities of which is then owned by the
Company, "Company" as used in Sections 3, 4, 11 and 12 hereof shall
<PAGE>
in addition include such employer. In such event, the Company agrees
that it shall pay or shall cause such employer to pay any amounts
owed to the Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees. If the Executive should die while any amounts are
still payable to him hereunder, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee or,
if there is no such designee, to the Executive's estate.
7. Notice. For purpose of this Agreement, notices and all
other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or
mailed by United States registered mail, return receipt requested,
postage prepaid, as follows:
If to the Company:
Bath National Bank
44 Liberty Street
Bath, New York 14810
If to the Executive:
Edward C. Galpin
7227 Apple Street
Bath, New York 14810
or such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach
by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect
to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of
New York.
9. Validity. The invalidity or unenforceability of any
provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
<PAGE>
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all
of which together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal
fees and expenses which the Executive may incur as a result of the
Company's contesting the validity, interpretation, and enforceability
of the Agreement.
12. Confidentiality. The Executive shall retain in confidence
any and all confidential information known to the Executive
concerning the Company and its business so long as such information
is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
BATH NATIONAL BANK
Date: February 18, 1999 _______________________________
Name: Robert H. Cole
Title: Chairman of the Board
______________________________
Date: February 18, 1999 Name: Edward C. Galpin
Title: Executive Vice President
