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, 1999
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) of The
Securities Exchange Act of 1934
For the transition period from .. to ..
Commission File Number 0-20142
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 the 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,
2000 was $66,392,400.
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of March 1, 2000.
1,365,801 shares, common stock, $5.00 par value.
<PAGE>
Documents Incorporated By Reference
1) Portions of Annual Report to Stockholders for the year ended
December 31,1999 - Part I & II
2) Portions of Proxy statement for 2000 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 33-57
ITEM 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure 58
PART III
ITEM 10. Directors and Executive Officers
of the Registrant 58
ITEM 11. Executive Compensation 58
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management 58
ITEM 13. Certain Relationships and Related
Transactions 58
PART IV
ITEM 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 58-59
<PAGE>
PART I
ITEM 1. Business
Bath National Corporation (BNC or the "Company") is a one bank
holding company which was incorporated in 1982 and is registered under
the Bank Holding Company Act of 1956. A wholly owned subsidiary, BNC
Financial Services, was incorporated during 1997 to sell annuities,
life insurance, mutual funds and other non-deposit investment products.
The Company functions primarily as the holder of stock of BNC Financial
Services, Inc. and BNB (described below) and assists in the management
of subsidiaries as appropriate. The Company is a legal entity separate
and distinct from BNB. The right of the Company to participate in any
distribution of the assets or earnings of BNB is subject to the claims
of creditors of BNB, except to the extent that claims, if any, of the
Company itself as a creditor may be recognized. BNC derives all of its
income from dividends paid to it by the Bank.
Bath National Bank (BNB or "the Bank"), has approximately 148
employees. BNB is a full service commercial bank with trust powers,
and one subsidiary, Bath United Home, Inc. (BUH). BUH is a Real Estate
Investment Trust (REIT) and purchases real estate mortgages originated
by the Bank.
The REIT was activated on October 1, 1999. The Bank owns 100% of
the common stock of the REIT and a majority of the preferred stock, any
potential voting will be controlled by the Bank.
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, 1999, 1998 and
1997 with respect to each major category of assets, liabilities and
equity.
AVERAGE ASSETS
(dollars in thousands)
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
Interest Earning
Dep. with Banks $ 1,400 $ 900 $ 2,200
Taxable Invest. Sec. 42,700 50,000 58,200
Non-Tax. Inv. Sec. 38,600 37,300 33,700
Federal Funds Sold 1,700 6,400 2,900
Net Loans 191,900 169,200 159,300
Total Earning Assets 276,300 263,800 256,300
Other Assets 20,500 19,300 15,900
Total Assets $296,800 $283,100 $272,200
AVERAGE LIABILITIES AND EQUITY
(dollars in thousands)
Non-Int. Bearing
Deposits $ 35,700 $ 32,800 $ 29,400
Interest Bear. Dep.
Savings 44,200 42,500 43,700
NOW Accounts 35,300 35,200 34,500
Money Market Acct 11,500 10,700 10,900
Time Deposits 100,500 100,500 98,000
Federal Home Loan
Bank Borrowings 15,200 2,600 600
Securities Sold Under
Agree. to Repurch. 20,100 24,600 21,500
Other Liabilities 2,100 2,400 1,900
Federal Funds Purch. 1,100 100 300
Total Liabilities 265,700 251,400 240,800
Common Stock 6,800 6,800 6,800
Add. Paid in Capital 1,500 1,500 1,500
Retained Earnings 22,800 23,400 23,100
Total Equity 31,100 31,700 31,400
Total Liabilities
and Equity $296,800 $283,100 $272,200
<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, 1999, 1998 and
1997, respectively, with respect to each major category of interest-
earning assets and interest-bearing liabilities:
Year Ended December 31, 1999
(dollars in thousands)
Interest
Average Earned Average
Assets Amount or Paid Yield or Rate
Interest-Earning
Deposits with Banks $ 1,400 $ 82 5.86%
Taxable Investment Securities 42,700 2,921 6.84%
Non-Taxable Investment
Securities <F1> 38,600 2,797 7.25%
Federal Funds Sold 1,700 85 5.00%
Net Loans <F2><F3> 191,900 16,431 8.56%
Total Earning Assets $276,300 $22,316 8.08%
Liabilities
Savings Deposits $ 44,200 $ 1,118 2.53%
Now Deposits 35,300 529 1.50%
Money Market Deposits 11,500 290 2.52%
Time Deposits 100,500 4,913 4.89%
Federal Home Loan Bank
Borrowings 15,200 842 5.54%
Repurchase Agreements 20,100 1,114 5.54%
Federal Funds Purchased 1,100 57 5.18%
Total Interest-Bearing
Liabilities $227,900 $ 8,863 3.89%
Interest Income/Earning Assets 8.08%
Interest Expense/Earning Assets 3.21%
Net Yield 4.87%
[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 $399,000.
<F3> Includes Loan Fees Totaling $118,400.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Analysis of Net Interest Earnings, Continued
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 <F1><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
Rate/Volume Analysis of Net Interest Income
The effect on interest income, interest expense, and net interest
income in the periods indicated, of changes in average balances
(volume) and changes in rate from the corresponding prior period is
shown in the tabulation on the following page. The effect of a
change in average balance has been determined by applying the average
rate in the earlier period to the change in average balances.
Changes resulting from rate variance from the prior period have been
determined by applying the average volume in their earlier period to
the change in average rate from the earlier to the later period.
Changes in interest due to both rate and volume have been allocated
to changes due to volume and changes due to rate based on the
percentage relationship of such variances to each other. The final
column entitled "Total Change" indicates the total change in the
gross interest income or expense over the prior year as indicated in
the later year's statement of income.
The Rate/Volume Analysis for the years ended December 31, 1999 and
1998, appear in their entirety on the following page.
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
December 31, 1999 compared with December 31, 1998
(dollars in thousands)
Changes in net interest income as a result of:
Total
Volume Rate Change
Interest earned on:
Interest-earning
deposits with banks $ 28 $ 3 $ 31
Taxable Investment
Securities (507) (41) (548)
Non-Taxable
Investment Securities 7 90 97
Federal Funds Sold (254) (7) (261)
Net Loans 2020 (647) 1373
Total Interest Income 1294 (602) 692
Interest paid on:
Interest-bearing
deposits 103 (754) (651)
Change in net interest
income $1,191 $ 152 $1,343
December 31, 1998 compared with December 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)
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Investments
Investment securities comprised approximately 26% of the Bank's
assets at December 31, 1999, 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, 1999, 1998, and 1997,
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.
1999 1998
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 $ 2,754 $ 2,744 5.32% $ 3,803 $ 3,827 7.02%
1 - 5 years 502 497 6.56% 5,784 5,793 6.06%
5 - 10 years 2,720 2,572 6.51% - - - %
Over 10 years 500 451 6.41% - - -
Obligations of States and
Political subdivisions
0 - 1 year $ 2,401 $ 2,404 5.40% $ 1,685 $ 1,694 4.92%
1 - 5 years 4,769 4,793 4.96% 19,178 19,781 5.18%
5 - 10 years 26,805 26,768 4.91% 15,147 15,911 5.17%
Over 10 years 6,650 6,482 5.23% 1,285 1,372 5.92%
Other Securities
0 - 1 year $ - $ - - % 737 739 7.54%
1 - 5 years 1,056 1,034 6.44% 374 397 6.88%
5 - 10 years 2,061 2,004 7.29% 2,035 2,020 6.60%
Over 10 years 28,499 27,685 7.10% 15,133 15,039 6.56%
Total AFS Securit. $ 78,717 $ 77,434 $65,161 $66,573
Held-to-Maturity Investments:
Agency
1 - 5 years N/A N/A N/A% $20,000 $20,269 7.67%
Total Securities $78,717 $77,434 $85,161 $86,842
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Investments, Continued
1997
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 $ 6,008 $ 5,990 4.75%
1 - 5 years 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 $ 982 986 5.99%
1 - 5 years 14,756 15,067 5.10%
5 - 10 years 18,932 19,666 5.29%
Over 10 years 1,367 1,433 5.70%
Other Securities
0 - 1 year 444 446 8.76%
1 - 5 years 7,445 7,436 6.83%
5 - 10 years 2,017 2,126 7.58%
Over 10 years 11,928 11,948 7.24%
Total Securities $69,199 $70,422
Yields are computed on a tax equivalent basis using a marginal tax
rate of 34%.
As of December 31, 1999, a total of $61,679,000 of investments were
pledged to secure public deposits and repurchase agreements.
Yield information does not give effect to changes in fair market
value that are effected as a component of stockholders equity.
<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, 1999, loans secured
by real estate comprised 44% of the total loan portfolio. At
December 31, 1999 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 1999 1998 1997 1996 1995
Commercial, Financial
Agricultural $ 67,709 $ 56,435 $ 45,466 $ 38,224 $38,325
Real Estate Mortgage 82,806 89,404 83,872 84,131 78,666
Installment Loans
to Individuals 31,859 36,922 31,805 33,244 29,765
All Other 7,657 5,007 3,516 2,492 3,247
Sub-Total 190,031 187,768 164,659 158,091 150,003
Allowance for Loan
Losses 1,748 1,650 1,650 1,650 1,650
Loans - Net $188,283 $186,118 $163,009 $156,441 $148,353
<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, 1999
stated in thousands of dollars:
Years To Maturity
Loan Type 1 or less 1 - 5 Over 5 Total
Commercial, Financial,
and Agricultural $37,872 $23,498 $6,339 $67,709
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, 1999, stated in thousands of dollars:
Loans due after 1 year with predetermined $16,105
Interest Rates
Loans due after 1 year with floating
Interest Rates $13,732
<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 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Loans accounted
for on non-
accrual basis $399,000 $512,000 $661,000 $820,000 $435,000
Number of loans 10 13 9 13 9
Accruing Loans
Past due 90 Days
or more as to
principal or
interest payments 640,000 274,000 330,000 321,000 209,000
Number of loans 35 7 47 38 17
Loans not included
above which
are troubled debt
restructuring (1) ---- ---- ---- ---- ----
Number of loans 0 0 0 0 0
(1) 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, 1999 would have
included approximately $34,000 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 1999
for the non-accrual loans.
One loan was identified which would materially impact the Bank if
collection is unsuccessful. The loan is currently in the
restructuring phase in an amount of $2.3 million.
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)
1999 1998 1997 1996 1995
Allowance balance
at beginning
of the year $ 1,650 $ 1,650 $ 1,650 $ 1,650 $ 1,725
Loans Charged Off:
Real Estate 0 35 0 0 0
Commercial,
Financial &
Agricultural 503 101 134 191 212
Installment Loans
to Individuals 183 177 166 111 145
Credit Cards 42 90 81 47 31
Total 728 403 381 349 389
Recoveries of Loans
Previously Charged Off:
Real Estate 0 0 0 0 17
Commercial,
Financial &
Agricultural 13 19 34 14 96
Installment Loans
to Individuals 55 42 49 62 65
Credit Cards 13 8 3 4 4
Total 81 69 86 80 182
Additions charged to
Operations 745 334 295 269 132
Allowance Balance at
end of the year $ 1,748 $ 1,650 1,650 1,650 1,650
Average loans $191,900 $169,200 160,200 152,000 142,900
Ratio of net
charge-offs during
the period to
average loans during
the period .34% .19% .18% .18% .15%
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Summary of Loan Loss Experience, Continued
At December 31, 1999, the allowance balance was allocated as follows:
% of loans
Amount in each type
Loan Type (in thousands) to total loans
Commercial, Financial
and Agricultural $1,260 35.61%
Real Estate - Mortgage 83 43.58%
Installment loans to individuals 360 16.77%
All Other 45 4.04%
Total $1,748 100.00%
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%
<PAGE>
PART I, Continued
ITEM 1. Business, Continued
Summary of Loan Loss Experience, Continued
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%
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%
<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 1999, management has focused on the fact that as
of December 31, 1999, 35% 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 2000 will be no more than the losses during 1999. 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
12/31/99 12/31/98 12/31/97
Amount Rate Amount Rate Amount Rate
Deposit Category (dollars in thousands)
Non-Interest Bearing
Demand Deposits $35,700 N/A $32,800 N/A $29,400 N/A
NOW Deposits 35,300 1.50% 35,200 1.71% 34,500 1.76%
Money Market Dep. 11,500 2.52% 10,700 2.83% 10,900 2.90%
Savings Deposits 44,200 2.53% 42,500 2.73% 43,700 2.77%
Time Deposits 100,500 4.89% 100,500 5.40% 98,000 5.44%
(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 $11,500 $3,501 $9,500 $ 646
<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,
1999 1998 1997
Return on Average Assets <F1> 1.24% 1.20% 1.30%
Return on Average Equity <F2> 11.88% 10.76% 11.26%
Dividend Payout Ratio <F3> 93% 99% 76%
Equity to Assets Ratio
(Average)<F4> 10.48% 11.20% 11.54%
[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 with two correspondent banks totaling $9.0 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 29 and 30 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-up teller
facilities.
The Company's offices are located in the Bank's main office.
Employees
The Bank presently employs approximately 147 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/401k plan.
Monetary Policies
The results of operations of the Bank are affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board
include open market operations in US Government securities, changes
in the discount rate on member bank borrowings and changes in reserve
requirements against member bank deposits. In view of changing
conditions in the national economy and in the money markets, as well
as the effect of action by monetary and fiscal authorities, including
the Federal Reserve Board, no prediction can be made as to possible
future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
Supervision and Regulation
The Company and the Bank operate in a highly regulated environment,
with their business activities governed by statutes, regulations and
administrative policies. The business activities of the Company and
the Bank are closely supervised by a number of regulatory agencies,
including the Board of Governors of the Federal Reserve System
("Federal Reserve Board") in the case of the Company, and in the case
of the Bank, the Office of the Comptroller of the Currency
("Comptroller") and the Federal Deposit Insurance Corporation
("FDIC").
The Company is regulated by the Federal Reserve Board (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, 1999 3.00% 10.08% 8.00% 16.80%
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%
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, 2000, the Bank could not declare
additional dividends 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 buildings for our Penn
Yan and Erwin Offices.
The carrying value of property for BNC on a consolidated basis as of
December 31, 1999 and 1998 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.
ITEM 3. Legal Proceedings
There are no material legal proceedings pending threatened against
the Company or the Bank.
<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 1999 and 1998:
1999 1998
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
High 50 50 51 52 40 44 47 49
Low 45 50 50 49 39 44 47 47
The high and low bid information represent 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 9, 2000, the approximate number of holders of record of
the Company's common stock was 667.
C. Dividends
For 1999 and 1998 the Company paid quarterly cash dividends,
amounting to a total for the year of $2.60 and $2.75 per share
respectively. Following is a listing of the quarterly dividends for
1999:
First Quarter - $ .30/share
Second Quarter - .30/share
Third Quarter - .30/share
Fourth Quarter - 1.70/share
Total - $2.60/share
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, 1999, 1998, 1997, 1996 and 1995 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
1999 1998 1997 1996 1995
Condensed Statements
of Income (in
thousands, except per
share data)
Interest Income <F1> $ 22,381 $ 21,637 $ 21,478 $ 19,793 $ 18,226
Interest Expense
Deposits 6,850 7,485 7,447 6,891 6,280
Interest Expense
Borrowings 2,013 1,681 1,436 952 271
Net Interest Income 13,518 12,471 12,595 11,950 11,675
Loan Loss Provision 745 334 295 269 132
Net Interest Income
After Loan Loss
Provision 12,773 12,137 12,300 11,681 11,543
Other Operating
Income <F3> 1,971 1,503 1,108 993 898
Other Operating
Expenses 8,438 8,047 7,560 6,951 6,768
Income Before
Income Tax 6,306 5,593 5,848 5,723 5,673
Tax Equivalent
Adjustment 1,186 1,029 930 779 668
Income Taxes 1,426 1,153 1,384 1,496 1,627
Net Income $ 3,694 $ 3,411 $ 3,534 $ 3,448 $ 3,378
Per Share Data <F2>
Book Value 21.95 22.98 23.12 22.23 20.90
Cash Dividends 2.60 2.55 2.00 1.05 1.20
Net Income 2.78 2.56 2.61 2.52 2.49
Weighted Average
Common Shares 1,327,848 1,331,567 1,354,869 1,365,832 1,354,492
Balance Sheet Data
(in thousands, except
number of outstanding
shares) at
December 31
Assets $295,295 $295,477 $271,734 $269,238 $235,165
Securities (Book Val.) 78,717 84,799 89,198 91,022 64,937
Loans, Net 188,283 186,118 163,009 156,441 148,353
Deposits 219,072 224,604 212,042 208,473 197,760
Borrowed Funds 30,000 5,000 - - -
Equity 29,147 $ 30,523 $ 31,137 $ 30,363 $ 28,554
Common Shares
issued 1,365,801 1,365,801 1,365,801 1,365,801 1,366,234
Treasury Stock 37,953 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 and other borrowings.
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, 1999 loans with an aggregate balance
of $36.5 million and securities of $11.5 million were due to mature
in one year or less. Additional funds flow from payments on
instalment and revolving credit loans and from a historically high
level of net operating earnings. The Company's liquidity also
continues to be enhanced by a relatively stable deposit base. At
December 31, 1999, the loan to deposit ratio was 86% and the ratio of
loans to core deposits (excluding certificates of deposit of $100,000
or more) was 94%.
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
banks to borrow overnight federal funds. During 1999, the Bank had
an average daily net federal funds sold of $.6 million.
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Liquidity and Capital Resources, Continued
At December 31, 1999, banking regulations required conformity with a
minimum risk based capital standard of 8.0%. The Bank's risk based
capital level as of December 31, 1999 is approximately 16.80%.
Neither the Company nor the Bank had any material commitments for
capital expenditures as of December 31, 1999. 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.
Year 2000
Management of the company noted no problems associated with the
millennium change or the leap year. Systems remain in place to
identify related problems, and contingency plans have been developed
in the even of unforeseen computer problems
Results of Operations
Fiscal 1999 Compared with Fiscal 1998
Total assets remained at $295 million at year end 1999. Utilizing
structured borrowings from FHLB, the Bank was able to purchase both
taxable and tax-exempt investments that provided a favorable spread
between the interest rate on borrowings versus the yield on invested
funds.
Net income grew from $3.3 million for 1998 to $3.7 million for 1999.
Increased loan activity coupled with a decrease in interest expense,
accounts for a significant portion of the increase.
The Provision for Loan Losses increased from $333,000 in 1998 to
$745,000 in 1999. The reserve increased from $1.6 million at year
end 1998 to $1.7 million at December 31, 1999, reflecting the larger
loan loss exposure.
Other operating income increased from $1.4 million to $1.7 million.
Increased service fee income amounted to $147,000 while CSV of bank
owned life insurance increased by $102,000.
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
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 imporve.
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.
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, 1999, 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.
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Interest Sensitivity Analysis, Continued
Interest Rate Sensitivity Analysis
(dollars in thousands)
0-30 31-90 91-180 181-365 1-5 Over 5
As of
December 31, 1999:
Earning Assets:
Federal Funds Sold 4,075
Short term investments 5,099
Securities 13,026 1,423 3,484 1,350 32,601 22,903
Variable rate loans 38,202 3,877 4,587 12,674 32,175
Fixed rate loans 9,397 5,256 9,011 14,894 43,018 16,940
Total Earning Assets 64,700 15,655 17,082 28,918 107,794 39,843
Interest Bearing Liab.
Money Market Demand 3,535
Interest Bearing
Deposits
Certificates of Deposit
Under $100,000 6,574 10,798 12,528 25,884 9,510 13
$100,000 and over 2,912 5,812 6,721 4,123 651
Individual Retirement 632 1,573 1,900 3,122 2,851 24
Savings Accounts
Securities Sold
Agreement to Repurch. 10,422 1,750 401
FHLB Borrowings 5,000 ______ ______ 25,000
Total Int. Bear. Liab. 20,540 26,718 22,899 33,530 13,012 25,037
Incremental Gap <F1> 44,160 (11,063) (5,817) (4,612) 94,782
Cumulative Gap <F2> 44,160 33,097 27,280 22,668 117,450
Sensitivity Gap <F3> 3.15 0.59 0.75 0.86 8.28
Cumulative Sensit. <F4> 3.15 1.70 1.39 1.22 2.01
[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.
(4) Total earning assets divided by total interest bearing
liabilities cumulative for periods.
Assumptions:
Variable rate loans are included in their earliest repricing
date.
Fixed rate loans are included by scheduled amortization.
Money Market Demand Accounts are considered to be price sensitive
only if balances exceed $100,000 and therefore, reprice
quarterly.
Savings accounts are not considered interest rate sensitive.
All other interest bearing liabilities are included in the time
period in which they mature.
<PAGE>
PART II, Continued
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Typically, a banking institution which is "asset sensitive" will be
expected to benefit from an increase in interest rates and be
adversely impacted by a decrease 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 "asset sensitive", within one year after December 31,
1999 an incline in interest rates would benefit 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.
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, 1999, pages 6 through 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
None
<PAGE>
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, 1999, are
incorporated herein by reference:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 1998 and 1997
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 1999.
<PAGE>
PART IV, Continued
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K, Continued
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 Trustee Fee Plan**
10.3 Severance Agreement of Douglas L. McCabe*
10.4 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,
1998 and incorporated herein by reference thereto.
**Filed with Registrant's Form SE for the year ended December 31,
1999.
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 16th day of March, 2000.
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 16th day of March, 2000.
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, 1999
<PAGE>
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, 1999 and 1998, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. 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, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
Albany, New York
February 19, 2000
<PAGE>
Bath National Corporation
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
1999 1998
Assets
Cash and due from banks $10,281,522 $12,009,241
Interest bearing deposits in other banks 5,099,048 396,377
Federal funds sold 4,075,000 -
Securities 74,787,243 84,799,120
Loans, net 188,283,344 186,117,798
Premises and equipment, net 5,006,069 5,462,078
Accrued interest receivable 2,010,967 2,351,959
Other 5,752,002 4,340,714
$295,295,195 $295,477,287
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand $33,968,948 $35,030,108
Savings 41,923,246 43,039,599
NOW accounts 36,712,143 36,145,813
Money market accounts 10,672,029 11,384,049
Time deposits ($100,000 or more) 20,219,230 18,894,039
Other time accounts 75,576,595 80,110,976
219,072,191 224,604,584
Federal funds purchased - 2,150,000
Securities sold under agreements to repurchase 12,572,930 28,090,773
Borrowed funds 30,000,000 5,000,000
Accrued interest and other liabilities 4,502,979 5,108,937
266,148,100 264,954,294
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, 1,365,801 issued 6,829,005 6,829,005
Additional paid in capital 1,494,678 1,494,678
Undivided profits 23,080,497 22,839,159
Accumulated other comprehensive income (loss) (766,026) 851,210
Treasury stock (37,953 shares in 1999 and 1998) (1,491,059) (1,491,059)
29,147,095 30,522,993
$295,295,195 $295,477,287
See Notes to Consolidated Financial Statements.
<PAGE>
Bath National Corporation
<TABLE>
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income:
Loans $ 16,440,122 $ 14,968,012 $ 14,518,778
Securities
Held-to-maturity
U.S. Government and agency obligations 769,000 1,538,000 1,538,000
Available-for-sale
U.S. Government and agency obligations 1,845,795 1,754,087 2,355,672
State and municipal obligations 1,971,868 1,876,492 1,784,057
Federal funds sold 85,348 346,195 156,219
Deposits in other banks 173,173 126,658 195,583
Total interest income 21,285,306 20,609,444 20,548,309
Interest expense:
Deposits 6,850,176 7,485,833 7,447,411
Borrowings 2,013,011 1,681,381 1,436,903
Total interest expense 8,863,187 9,167,214 8,884,314
Net interest income 12,422,119 11,442,230 11,663,995
Provision for loan losses 745,000 333,689 295,468
Net interest income after provision for
loan losses 11,677,119 11,108,541 11,368,527
Noninterest income:
Service charges 978,199 831,068 784,299
Net realized gains on sale of available-for-sale
securities - 58,095 33,218
Other 937,539 613,393 292,161
Total other income 1,915,738 1,502,556 1,109,678
Noninterest expenses:
Salaries and employee benefits 4,827,776 4,499,521 4,400,690
Occupancy 1,448,131 1,306,538 1,092,288
Other 2,197,452 2,240,966 2,067,879
Total other expenses 8,473,359 8,047,025 7,560,857
Income before income taxes 5,119,498 4,564,072 4,917,348
Income taxes 1,426,412 1,152,696 1,383,784
Net Income $3,693,086 $3,411,376 $3,533,564
Net Income per Common Share $2.78 $2.56 $2.61
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Bath National Corporation
<TABLE>
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
<CAPTION> Number of Add. Undivided Compre. Trea. Total
Shares Amount Pd. Profits Income Stock Stock-
capt. holder's
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,365,801 6,829,005 1,494,678 21,980,350 58,560 - $ 30,362,593
Purchase of treas. stock (19,203 shares) - - - (739,316) (739,316)
Comprehensive income
Net income - 3,533,564 3,533,564
Other comprehensive income:
Net change in unreal. 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: reclassification adjustment - - (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
Comprehensive income
Net income - 3,693,086 - 3,693,086
Other comprehensive income:
Net change in unrealized gains (losses) on securities
available-for-sale, net of taxes of $1,078,158 - - (1,617,236) (1,617,236)
Less: reclassification adjustment
Total other comprehensive income (loss) (1,617,236)
Total comprehensive income 2,075,850
Cash dividends declared ($2.60 per common share) - (3,451,748) - (3,451,748)
Balance, December 31, 1999 1,365,801 6,829,005 1,494,678 23,080,497 (766,026)(1,491,059)29,147,095
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Bath National Corporation
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 3,693,086 $ 3,411,376 $ 3,533,564
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 563,612 520,691 437,578
Provision for loan losses 745,000 333,689 295,468
Deferred taxes - - (50,538)
Loan origination costs deferred 22,946 (189,348) (69,465)
Bond premium amortized and discount accreted 138,274 160,355 140,080
Gain on sale of investments - (58,095) (33,218)
Loss (gain) on disposed assets (10,000) 11,629 -
Changes in:
Interest receivable 340,992 (41,830) 78,964
Other assets (76,962) 6,550 19,050
Other liabilities 109,196 (253,161) 408,984
Net cash provided by operating activities 5,526,144 3,901,856 4,760,467
Cash Flows From Investing Activities
Proceeds from sales and maturities of available-for-sale securities 7,991,863 16,562,804 9,949,448
Proceeds from maturities of hold to maturities 20,000,000 - -
Purchases of available-for-sale securities (20,813,654) (12,242,757) (7,911,437)
Federal funds purchased/sold (6,225,000) 2,150,000 (4,225,000)
Net (increase) decrease in interest bearing deposits in other banks (4,702,671) 1,081,452 1,478,712
Proceeds from sales of loans 7,998,376 - -
Net increase in loans (10,931,868) (23,252,914) (6,794,600)
Capital expenditures (83,423) (374,743) (976,873)
Proceeds from sale of equipment 10,000 30,428 -
Other (795,700) (1,545,000) -
Net cash used in investing activities (7,552,077) (17,590,730) (8,479,750)
Cash Flows From Financing Activities
Proceeds from Federal Home Loan Bank borrowings 25,000,000 5,000,000 -
Repayments of Federal Home Loan Bank borrowings - - (2,000,000)
Net increase (decrease) in securities sold under repurchase
agreements (15,517,843) 4,249,796 1,912,040
Purchase of treasury stock - (751,743) (739,316)
Net increase (decrease) in deposits (5,532,393) 12,563,021 3,568,593
Dividends paid (3,651,550) (2,816,556) (1,427,667)
Net cash provided by financing activities 298,214 18,244,518 1,313,650
Net increase (decrease) in cash and due from banks (1,727,719) 4,555,644 (2,405,633)
Cash and due from banks:
Beginning of year 12,009,241 7,453,597 9,859,230
End of year $ 10,281,522 $ 12,009,241 $ 7,453,597
Supplemental Disclosures of Cash Flow Information
Interest paid $ 9,016,132 $ 9,206,412 $ 9,023,686
Income taxes paid $ 1,488,455 $ 902,984 $ 1,531,283
Dividends payable (included in other liabilities) $ 2,256,717 $ 2,456,519 $ 1,884,723
</TABLE>
See Notes to Consolidated Financial Statements.
<PAAGE>
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.
In May 1999, the Bank formed a subsidiary corporation, Bath United Home,
Inc. (the "REIT"), which was organized to qualify as a real estate investment
trust. The REIT became an active subsidiary of the Bank on October 1,
1999. The REIT was organized principally to hold certain qualifying loans.
The Bank and the REIT are collectively referred to as the Bank.
Consolidation
The consolidated financial statements include the accounts of the Company
and its 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, 1999 and 1998.
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 1999 and 1998.
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.
Net Income Per Common Share
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 1,327,848, 1,331,567 and 1,354,869
in 1999, 1998 and 1997, 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 1998 and 1997 financial
statements to conform with the 1999 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
$2,627,000 and $5,645,000 at December 31, 1999 and 1998, respectively.
<PAGE>
Note 3. Securities
The amortized cost and fair values of available-for-sale securities as
of December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Government and agency
securities $ 6,474,873 $ 142 $ 211,920 $ 6,263,095
State and municipal securities 40,624,564 232,432 410,327 40,446,669
Mortgage-backed and related
securities 25,354,462 17,423 662,156 24,709,729
Other 3,615,650 2,022 249,922 3,367,750
$ 76,069,549 $ 252,019 $ 1,534,325 $ 74,787,243
</TABLE>
The amortized cost and fair value of available-for-sale securities as of
December 31, 1999 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 $ 5,154,611 $ 5,148,906
Due after one year through five years 6,326,482 6,323,370
Due after five years through ten years 31,586,178 31,344,238
Due after ten years 33,002,278 31,970,729
$ 76,069,549 $ 74,787,243
The Bank did not hold any held-to-maturity investments at
December 31, 1999.
The amortized cost and fair values of available-for-sale securities as
of December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
Note 3. Securities, Continued
The amortized cost and fair values of held-to-maturity securities as of
December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Government and agency
securities $ 20,000,000 $ 268,750 $ - $ 20,268,750
</TABLE>
Proceeds from sales and calls of securities during 1999, 1998 and 1997, which
were principally attributable to those available-for-sale, were $3,000,000,
$8,557,804 and $5,599,231, respectively. Gross gains of $92,692 and $58,983
and gross losses of $34,597 and $25,765 were realized on those sales and
calls in 1998 and 1997, respectively. No gains or losses on sales and calls
were realized in 1999.
Securities with a carrying value of $62,683,676 and $71,743,226 and market
values of $61,678,747 and $72,772,816 at December 31, 1999 and 1998,
respectively, were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required or permitted by
law.
Note 4. Loans, Net
The components of loans at December 31, 1999 and 1998 were as follows:
1999 1998
Commercial $ 100,237,822 $ 91,073,309
Installment 19,819,990 18,872,768
Real estate mortgage 34,775,892 42,872,595
Home equity loans 22,615,053 23,351,490
Student 10,024,872 8,938,556
Credit card loans 1,621,317 1,700,208
Net deferred loan origination costs and
unearned discounts 935,926 958,872
190,030,872 187,767,798
Less allowance for loan losses 1,747,528 1,650,000
Loans, net $ 188,283,344 $ 186,117,798
Real estate mortgage and home equity loans consist of:
Mortgages with fixed rates $ 23,050,963
Mortgages with variable rates 11,724,929
Home equity loans with fixed rates 18,372,044
Home equity loans with variable rates 4,243,009
Total real estate loans $ 57,390,945
<PAGE>
Note 4. Loans, Net, Continued
Changes in the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of year $ 1,650,000 $ 1,650,000 $ 1,650,000
Provision for loan losses 745,000 333,689 295,469
Recoveries credited to the allowance 80,952 69,167 86,306
Losses charged to the allowance (728,424) (402,856) (381,775)
"Balance, end of year $ 1,747,528 $ 1,650,000 $ 1,650,000
</TABLE>
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 $600,000 and $550,000 at December 31, 1999 and 1998,
respectively.
Note 5. Premises and Equipment
At December 31, 1999 and 1998, premises and equipment consist of:
1999 1998
Land $ 502,389 $ 502,389
Buildings and improvements 6,258,972 6,229,904
Furniture 3,600,262 3,545,907
Total 10,361,623 10,278,200
Less accumulated depreciation 5,355,554 4,816,122
Premises and equipment, ne $ 5,006,069 $ 5,462,078
Depreciation expense was $539,432, $496,511 and $411,672 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Note 6. Deposits
A summary of deposit accounts at December 31, by maturity, is as follows:
1999 1998
No contractual maturity $ 123,277,971 $ 125,599,569
Maturity within one year 82,772,040 81,109,227
Maturity after one year through five years 12,996,635 17,895,788
Maturity over five years 25,545 -
$ 219,072,191 $ 224,604,584
<PAGE>
Note 7. Securities Sold Under Agreements to Repurchase
Information concerning securities sold under agreements to repurchase is
summarized as follows. The agreements mature in less than one year.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Average balance during the year $ 20,084,000 $ 24,577,300
Average interest rate during the year 6.6% 6.2%
Maximum month-end balance during
the year $ 28,205,400 $ 28,887,900
</TABLE>
Carrying value $ 17,001,000 $ 32,539,000
Estimated fair value $ 16,507,000 $ 32,884,000
Securities underlying the agreements at year-end:
Carrying value $ 17,001,000 $ 32,539,000
Estimated fair value $ 16,507,000 $ 32,884,000
In 1998, approximately $18,500,000 of 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.
Note 8. Borrowed Funds
Borrowed funds represent advances from the Federal Home Loan Bank
("FHLB") as follows at December 31:
Maturity Date Rate 1999 1998
March 31, 2000 5.81% $ 5,000,000 $ -
June 25, 2008 6.08% 5,000,000 5,000,000
July 22, 2009 5.52% 20,000,000 -
$ 30,000,000 $ 5,000,000
All borrowings outstanding with the FHLB at December 31, 1999 were fixed
rate borrowings and the $20,000,000 advance is convertible. The conversion
feature allows the FHLB to convert the debt on the third anniversary (July
2002) and quarterly thereafter into replacement funding at then current market
rates. The advances at December 31, 1999 were partially collateralized by
certain real estate loans.
<PAGE>
Note 9. Income Taxes
A summary of the components of income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Current Tax
Federal $ 1,096,228 $ 828,322 $ 1,091,641
State 330,184 324,374 342,681
Total current tax expense 1,426,412 1,152,696 1,434,322
Deferred tax
Federal and State - - (50,538)
Total provision for income
taxes $ 1,426,412 $ 1,152,696 $ 1,383,784
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Statutory provision $ 1,740,629 $ 1,551,784 $ 1,671,898
Tax exempt interest (697,461) (672,113) (608,027)
State income tax, net of federal
benefit 217,921 225,967 226,169
Non deductible interest 87,040 90,004 80,956
Other 78,282 (42,946) 12,788
Total $ 1,426,411 $ 1,152,696 $ 1,383,78
</TABLE>
Net deferred tax liabilities (classified as other liabilities) consist of the
following at December 31, 1999 and 1998:
1999 1998
Deferred tax assets:
Provision for loan losses $ 502,464 $ 502,464
Employee benefits 322,724 322,724
825,188 825,188
Less valuation allowance - -
825,188 825,188
Deferred tax liabilities:
Depreciation 467,495 467,495
Deferred loan fees 307,810 307,810
775,305 775,305
Net deferred tax asset (liability) $ 49,883 $ 49,883
<PAGE>
Note 9. Income Taxes, Continued
The above analysis does not include the recorded deferred tax asset of
$512,923 related to unrealized losses and deferred tax liabilities of
$565,235 related to the unrealized gains in the available-for-sale securities
portfolio as of December 31, 1999 and 1998, respectively. These amounts
are included in other assets and other liabilities, respectively, and the
changes in the deferred taxes related to the available-for-sale securities
portfolio are reported in other comprehensive income (loss) in the
statement of stockholders? equity.
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,
$265,600 and $268,000 for 1999, 1998 and 1997, 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 $215,000,
$177,300 and $208,700 for 1999, 1998 and 1997, 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.
<PAGE>
Note 10. Employee Benefit Plans and Postretirement Benefits, Continued
Postretirement Benefits, Continued:
A summary of this plan's funded status is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 1,378,752 $ 924,328
Service cost 52,868 37,489
Interest cost 90,699 83,253
Plan participants' contributions 13,453 13,700
Actuarial loss 14,819 399,387
Benefits paid (77,972) (79,405)
Benefit obligation at end of year 1,472,619 1,378,752
Change in plan assets
Fair value of plan assets at beginning of year - -
Actual return on plan assets - -
Employer contribution 64,519 65,705
Plan participants' contributions 13,453 13,700
Benefits paid (77,972) (79,405)
Fair value of plan assets at end of year - -
Funded status (1,472,619) (1,378,752)
Unrecognized transition obligation 344,697 371,211
Unrecognized net actuarial loss 498,000 511,957
Accrued benefit cost (classified as other liabilities) $ (629,922) $ (495,584)
</TABLE>
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Weighted-average assumptions as of December 31
Discount rate 7.75% 6.75%
Expected return on plan assets n/a n/a
Rate of compensation increase n/a n/a
</TABLE>
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.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 52,868 $ 37,489 $ 26,798
Interest cost 90,699 83,253 68,154
Amortization of transition obligation 26,514 26,514 26,514
Amortization of net loss 28,776 12,867 2,714
Net periodic benefit cost $ 198,857 $ 160,123 $ 124,180
</TABLE>
<PAGE>
Note 10. Employee Benefit Plans and Postretirement Benefits, Continued
Postretirement Benefits, Continued:
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, 1999:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
<S> <C> <C>
Effect on total service and interest cost
components $ 24,249 $ (19,637)
Effect on postretirement benefit obligation $ 195,479 $ (161,663)
</TABLE>
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
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, 1999, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1999, 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.
<PAGE>
Note 11. Regulatory Matters, Continued
The Company's actual and required capital amounts and ratios are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Actual Adequacy Purposes: To Be Well Capitalized:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Risk- Based Capital
(to Risk-Weighted Assets) $ 31,467 16.8% $ 14,986 >=8.0% $ 18,732 >=10.0%
Tier I Capital
(to Risk-Weighted Assets) 29,719 15.9% 7,493 >=4.0% 11,239 >=6.0%
Tier I Capital
(to Adjusted Total Assets) 29,719 10.1% 11,784 >=4.0% 14,731 >=5.0%
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%
</TABLE>
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, no
dividends 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.
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.
<PAGE>
Note 12. Commitments and Contingencies, Continued
Financial instruments with off balance sheet risk, continued:
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,
1999 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Revolving open-end lines secured by 1-4 family residential
properties $ 3,515
Credit card lines 5,373
Commercial real estate, construction and land development 3,969
Commercial and similar letters of credit, net 594
Other unused commitments 18,074
$ 31,525
</TABLE>
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.
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.
<PAGE>
Note 12. Commitments and Contingencies, Continued
Concentrations of credit risk, continued:
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 a commercial bank in the amount of
$4,000,000 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.
<TABLE>
<CAPTION>
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and short term investments $ 15,381 $ 15,381 $ 12,406 $ 12,406
Federal funds sold 4,075 4,075 - -
Securities 74,787 74,787 84,799 85,068
Loans, net 188,283 188,791 186,118 188,401
$ 282,526 $ 283,034 $ 283,323 $ 285,875
Financial liabilities:
Deposits $ 219,072 $ 218,917 $ 224,605 $ 225,007
Federal funds purchased - - 2,150 2,150
Securities sold under agreements
to repurchase 12,573 12,573 28,091 28,091
Borrowed funds 30,000 29,673 5,000 5,000
$ 261,645 $ 261,163 $ 259,846 $ 260,248
Unrecognized financial instruments
Commitments to extend credit $ 31,525 $ 31,525 $ 33,297 $ 33,297
</TABLE>
<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:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
December 31, 1999 and 1998
1999 1998
<S> <C> <C>
Assets
Cash $ 6,517 $ 2,144
Dividend receivable 2,258,000 2,460,000
Investment in subsidiaries 29,165,745 30,545,229
Total assets $ 31,430,262 $ 33,007,373
Liabilities and Stockholders' Equity
Liabilities
Dividend payable $ 2,256,717 $ 2,456,519
Other liabilities 26,450 27,861
2,283,167 2,484,380
Stockholders' Equity
Common stock 6,829,005 6,829,005
Additional paid in capital 1,494,678 1,494,678
Undivided profits 23,080,497 22,839,159
Accumulated other comprehensive income (766,026) 851,210
Treasury stock 1,491,059) (1,491,059)
29,147,095 30,522,993
Total liabilities and stockholders' equity $ 31,430,262 $ 33,007,373
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Operations
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
<S> <C> <C> <C>
Revenue $ 980 $ - $ -
Expenses
Other operating expenses - 1,295 2,165
Loss before equity in earnings of
subsidiaries 980 (1,295) (2,165)
Equity in earnings of subsidiaries 3,692,106 3,412,671 3,535,729
Net income $ 3,693,086 $ 3,411,376 $ 3,533,564
</TABLE>
<PAGE>
Note 14. Parent Company Only Financial Information, Continued
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 3,693,086 $ 3,411,376 $ 3,533,564
Adjustments to reconcile net income to net
cash used in operating activities:
Net earnings of subsidiaries (3,692,106) (3,412,671) (3,535,729)
Change in other liabilities (1,411) (1,302) (2,788)
Net cash used in operating activities (431) (2,597) (4,953)
Cash Flows From Investing Activities
Cash dividend received 3,656,355 3,571,743 2,170,313
Cash Flows From Financing Activities
Payments for purchase of treasury stock - (751,743) (739,316)
Cash dividends paid (3,651,551) (2,816,556) (1,427,667)
Net cash used in financing activities (3,651,551) (3,568,299) (2,166,983)
Net increase (decrease) in cash 4,373 847 (1,623)
Cash, January 1 2,144 1,297 2,920
Cash, December 31 $ 6,517 $ 2,144 $ 1,297
</TABLE>
Subsidiaries of the Registrant
The following compose, as of December 31, 1999, the subsidiaries of Bath
National Corporation:
Bath National Bank, a New York corporation
Bath United Home, Inc., a New York corporation
BNC Financial Services, Inc., a New York corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,281,522
<SECURITIES> 74,787,243
<RECEIVABLES> 2,010,967
<ALLOWANCES> (1,747,528)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,006,069
<DEPRECIATION> 539,432
<TOTAL-ASSETS> 295,295,195
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 6,829,005
<OTHER-SE> 22,338,090
<TOTAL-LIABILITY-AND-EQUITY> 295,295,195
<SALES> 0
<TOTAL-REVENUES> 21,285,306
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,473,359
<LOSS-PROVISION> 745,000
<INTEREST-EXPENSE> 8,863,187
<INCOME-PRETAX> 5,119,498
<INCOME-TAX> 1,426,412
<INCOME-CONTINUING> 3,693,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,693,086
<EPS-BASIC> 2.78
<EPS-DILUTED> 2.78
</TABLE>
