FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[ X ] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from to
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Commission file no.: 0-12377
BT FINANCIAL CORPORATION
------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 25-1441348
------------ ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
551 Main Street, Johnstown, Pennsylvania 15901
-----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(814) 532-3801
--------------
Registrant's Telephone Number
Indicate by checkmark 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
12,500,872 shares common stock
($5.00 par value)
as of May 4, 1998
BT FINANCIAL CORPORATION AND AFFILIATES
FORM 10-Q
March 31, 1998
Part I. Financial Information Page No.
------------------------------ --------
Item 1.
-------
Consolidated Balance Sheet - March 31, 1998
and December 31, 1997 3
Consolidated Statement of Income and Comprehensive
Income-Three Months Ended March 31, 1998
and 1997 4
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2.
-------
Management's Discussion and Analysis of
Financial Condition and Results
of Operations 11
Part II. Other Information
---------------------------
Item 6.
-------
Exhibits and Reports 17
Signatures 18
2
ITEM 1
------
FINANCIAL STATEMENTS
--------------------
BT FINANCIAL CORPORATION AND AFFILIATES
---------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
March 31 December 31
1998 1997
(In thousands, except share data) (Unaudited)
- -----------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 49,986 $ 52,028
Money market investments:
Interest-bearing deposits with banks 143 424
Federal funds sold --- ---
-------------------------
Total money market investments 143 424
-------------------------
Securities available-for-sale 263,017 194,852
Securities held-to-maturity (market values
of $163,966 at March 31, 1998 and
$172,305 at December 31, 1997) 163,103 171,081
-------------------------
Total securities 426,120 365,933
-------------------------
Loans 1,157,222 1,125,387
Less: Unearned interest 49,715 58,326
Reserve for loan losses 9,916 9,766
-------------------------
Net loans 1,097,591 1,057,295
Premises and equipment 29,901 30,424
Accrued interest receivable 12,967 10,958
Other assets 36,790 35,859
-------------------------
Total assets $1,653,498 $1,552,921
=========================
LIABILITIES
Deposits:
Non-interest-bearing $ 181,892 $ 177,756
Interest-bearing 1,167,940 1,168,620
-------------------------
Total deposits 1,349,832 1,346,376
Federal funds purchased and securities sold
under agreements to repurchase 45,706 36,313
Short-term borrowings 62,349 1,871
Accrued interest payable 7,683 5,820
Other liabilities 2,732 2,497
Long-term debt 38,616 14,335
--------------------------
Total liabilities 1,506,918 1,407,212
--------------------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value
2,000,000 shares authorized,
None outstanding --- ---
Common stock, par value $5 per share,
25,000,000 shares authorized,
shares issued: 12,500,872 at
March 31, 1998 and December 31, 1997 62,504 31,252
Surplus 45,215 76,467
Retained earnings 38,775 37,283
Accumulated other comprehensive income 86 707
---------------------------
Total shareholders' equity 146,580 145,709
---------------------------
Total liabilities and
shareholders' equity $1,653,498 $1,552,921
===========================
The accompanying notes are an integral part of the consolidated financial
statements.
3
BT FINANCIAL CORPORATION AND AFFILIATES
---------------------------------------
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
---------------------------------------------------------
(Unaudited)
-------------
(In thousands, except shares and per share data)
Three months ended
March 31
1998 1997
-------------------------
INTEREST INCOME
Loans, including fees $ 23,034 $ 21,833
Investment securities:
Taxable 6,057 4,780
Tax-exempt 205 131
Deposits with banks 4 6
Federal funds sold 14 161
-------------------------
TOTAL INTEREST INCOME 29,314 26,911
-------------------------
INTEREST EXPENSE
Deposits 11,681 10,315
Federal funds purchased
and securities sold under
agreements to repurchase 517 267
Short-term borrowings 264 39
Long-term debt 365 285
-------------------------
TOTAL INTEREST EXPENSE 12,827 10,906
-------------------------
NET INTEREST INCOME 16,487 16,005
Provision for loan losses 1,230 1,045
-------------------------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 15,257 14,960
-------------------------
OTHER INCOME
Trust income 856 746
Fees for other services 1,886 1,806
Net security gains 21 95
Other income 175 268
-------------------------
TOTAL OTHER INCOME 2,938 2,915
-------------------------
OTHER EXPENSES
Salaries and wages 5,436 4,972
Pension and other
employee benefits 1,078 894
Net occupancy expense 1,136 1,063
Equipment expense 1,231 1,086
F.D.I.C. insurance 70 66
Amortization of intangible
assets 524 467
Other operating expense 3,418 3,048
-------------------------
TOTAL OTHER EXPENSES 12,893 11,596
-------------------------
INCOME BEFORE INCOME TAXES 5,302 6,279
Provision for income taxes 1,685 2,197
-------------------------
NET INCOME 3,617 4,082
-------------------------
Other comprehensive income, net of tax:
Unrealized holding losses on securities
arising during period (607) (1,171)
Less: Reclassification adjustment for
gains included in net income, net
of taxes of $7 in 1998 and $33
in 1997 14 62
------------------------
Other comprehensive income (loss) (621) (1,233)
------------------------
COMPREHENSIVE INCOME $ 2,996 $ 2,849
========================
Net income per common share - Basic $ .29 $ .33
Weighted average common shares
outstanding - Basic 12,500,872 12,500,872
Dividends paid per common share $ .17 $ .15
The accompanying notes are an integral part of the consolidated financial
statements.
Note: Share and per share data have been adjusted to reflect the 10%
stock dividend distributed on September 15, 1997 and the 2-for-1
stock split effected in the form of a stock dividend declared on
March 25, 1998 to shareholders of record at April 8, 1998 and
distributed on May 1, 1998. At December 31, 1997, BT Financial
Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share". The adoption of this statement did
not have any material impact on the earnings per share
computations. Prior period net income per common share has
been restated in accordance with SFAS No. 128.
4
BT FINANCIAL CORPORATION AND AFFILIATES
--------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Unaudited)
-----------
(In thousands)
--------------
Three months ended
March 31
1998 1997
-------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,617 $ 4,082
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,230 1,045
Provision for depreciation and
amortization 1,058 986
Amortization of intangible assets 524 467
Amortization of premium, net of
accretion of discount on loans and
securities 88 (37)
Deferred income taxes (239) (162)
Realized net securities gains (21) (95)
Increase in interest receivable (2,009) (1,175)
Increase in interest payable 1,863 1,551
Equity in loss of limited partnerships 42 38
Other assets and liabilities, net (770) 1,418
-------------------
Net cash provided by operating
activities 5,383 8,118
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities 10,165 5,612
Repayments and maturities of securities
available-for-sale 8,400 15,613
Repayments and maturities of securities
held-to-maturity 8,000 2,300
Purchases of securities available-for-
sale (87,665) ---
Purchase of securities held-to-maturity --- (41,005)
Net decrease in money market investments 281 10,307
Proceeds from sales of loans 1,843 2,225
Net increase in loans (43,398) (29,902)
Purchases of premises and equipment and other (535) (529)
Net increase in investment in limited partnerships --- (141)
--------------------
Net cash used in investing
activities (102,909) (35,520)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 3,456 1,689
Net increase in Federal Funds purchased and securities
sold under agreements to repurchase 9,393 12,997
Net increase in short-term borrowings 60,478 831
Common stock cash dividends paid (2,125) (1,875)
Proceeds from long-term debt 25,000 ---
Payment on long-term debt (718) (718)
--------------------
Net cash provided by financing activities 95,484 12,924
--------------------
Decrease in cash and cash equivalents (2,042) 14,478
Cash and cash equivalents at beginning
of the year 52,028 65,305
--------------------
Cash and cash equivalents at end of
period $49,986 $50,827
====================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest on deposits and other borrowings $10,964 $ 9,355
Federal income taxes --- 703
The accompanying notes are an integral part of the consolidated financial
statements.
5
BT FINANCIAL CORPORATION AND AFFILIATES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. At the close of business, October 10, 1997,
BT Financial Corporation adopted a single bank charter
for its three affiliate banks. Laurel Bank and Fayette
Bank merged with and into Johnstown Bank and Trust
Company. At the same time, the corporate title of
Johnstown Bank and Trust Company was changed to Laurel
Bank. Additionally, the corporate names of two other
non-bank affiliates were changed from BT Management
Trust Company to Laurel Trust Company and from Moxham
Community Development Corporation to Laurel Community
Development Corporation.
2. In the opinion of the management of BT
Financial Corporation (BT or the Corporation), the
accompanying consolidated financial statements include
all normal recurring adjustments necessary for a fair
presentation of the financial position and results of
operations of BT for the periods presented. All
significant intercompany transactions have been
eliminated in consolidation. The consolidated
financial statements of BT include the accounts of BT
and its wholly owned affiliates, Laurel Bank (Laurel),
Laurel Trust Company (the Trust Company), Bedford
Associates, Inc., and Laurel Community Development
Corporation. Prior to BT's adoption of a single bank
charter (see Note 1 above), the consolidated financial
statements of BT included the banking affiliates'
accounts of Johnstown Bank and Trust Company (Bank and
Trust), the former Laurel Bank, and Fayette Bank
(Fayette). These statements should be read in
conjunction with the financial statements and the notes
thereto included in BT's annual report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1997. The results of
operations for the three month period ended March 31,
1998 are not necessarily indicative of the results
which may be expected for the full year.
3. Tax provisions for interim financial
statements are based on the estimated effective tax
rates for the full fiscal year. The estimated
effective tax rates may differ from the statutory tax
rate due primarily to tax-exempt interest income.
4. Reserve for loan losses -- The Corporation
follows Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment
of a Loan", and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and
Disclosures". Under these guidelines, a loan is
considered impaired, based on current information and
events, if it is probable that the Corporation will be
unable to collect the scheduled payments of principal
or interest when due according to the contractual terms
of the loan agreement. The recorded investment in
loans for which impairment has been recognized in
accordance with SFAS No. 114 totaled $1.4 million at
March 31, 1998, compared to $1.9 million at December
31, 1997 and $3.4 million at March 31, 1997. The
corresponding loan loss valuation allowance was
$401,000, $870,000, and $1.7 million for the same
periods, respectively. BT did not recognize any
6
interest revenue on impaired loans during the first
quarter of 1998. In the same period of 1997, BT
recognized approximately $5,000 of interest revenue on
impaired loans, all of which was recognized using the
cash basis method of income recognition.
5. Earnings Per Share
------------------
In February of 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 128 "Earnings Per
Share," which is effective for financial statements issued
for periods ending after December 15, 1997. Effective
December 31, 1997, BT adopted SFAS No. 128. The statement
requires a change in methods used to compute earnings per
share (EPS) and requires restatement of all prior periods.
SFAS No. 128 replaces the presentation of "primary" EPS with
"basic" EPS, with the principal difference being that common
stock equivalents are not considered in computing "basic"
EPS. The statement also requires the replacement of current
"fully diluted" EPS with "diluted" EPS. "Diluted" EPS will
be computed similarly to "fully diluted" EPS. The adoption
of this statement did not have any material impact on BT's
EPS computations.
6. Comprehensive Income
--------------------
In June of 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," which is
effective for fiscal years beginning after December 15,
1997. BT adopted SFAS No. 130 effective January 1,
1998. SFAS No. 130 establishes standards for the
reporting and the display of comprehensive income and
its components (revenues, expenses, gains, and losses)
in a full set of general purposes financial statements.
SFAS No. 130 requires that all items required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial
statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 requires that
an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive
income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of
financial position.
The following table sets forth the components
of accumulated other comprehensive income, net-of-tax:
Accumulated
Unrealized Other
Gains (Losses) Comprehensive
On Securities Income
------------- ------
(In thousands)
Beginning balance $ 707 $ 707
Current-period change (621) (621)
------ ------
Ending balance-March 31, 1998 $ 86 $ 86
====== ======
The following table sets forth the tax effect
allocated to components of other comprehensive income:
7
Pre-tax Tax Net-of-Tax
Amount Benefit Amount
------- ------- ------
(In thousands)
Unrealized holding losses on
securities arising during period $(934) $(327) $(607)
Less: Reclassification adjustment
for gains included in net
income 21 7 14
------- ------- ------
Other comprehensive income (loss) $(955) $(334) $(621)
======= ======= ======
BT's comprehensive income is reflected in the consolidated
statement of income and comprehensive income.
7. Recent Accounting Pronouncements
--------------------------------
In December of 1996, the FASB issued SFAS No.
127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." This statement
defers the effective date of SAFS No. 125 by one year
to January 1, 1998 for certain transfer transactions
including repurchase agreements, dollar rolls,
securities lending and similar arrangements. SFAS No.
127 also delays by one year the provisions of SFAS No.
125 for recognition of collateral by secured parties in
conjunction with secured borrowings. BT adopted SFAS
No. 127 on January 1, 1998, and the effect of the
adoption did not have a material impact on the
Corporation's financial position or results of
operations.
In February of 1998, the FASB issued SFAS No.
132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 revises
employers' disclosures about pension and other
postretirement benefit plans. It does not change the
measurement or recognition of those plans. SFAS No.
132 standardizes the disclosure requirements and
requires additional information on changes in the
benefit obligations and fair value of plan assets that
will facilitate financial analysis, and eliminates
certain disclosures from SFAS No. 87 "Employers
Accounting for Pensions", SFAS No. 88 "Employers
Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106 "Employers Accounting for
Postretirement Benefits Other Than Pensions." BT will
adopt SFAS No. 132 for fiscal year 1998 reporting, and
it is anticipated the adoption of this statement will
not have a material impact on the Corporation's
financial position or results of operations.
8. Recent Branch Acquisitions
--------------------------
On June 6, 1997, the former Johnstown Bank
and Trust Company acquired and accounted for as a
purchase, three branch offices of National City Bank of
Pennsylvania, a subsidiary of National City Corporation
of Cleveland, Ohio. The locations of the three
branches are Meyersdale and Salisbury in Somerset
County, Pennsylvania and Everett in Bedford County,
Pennsylvania. The purchase included the deposits,
loans and fixed assets of the three branches. The
purchase price of approximately $4.6 million was
allocated to a deposit intangible and is being
amortized over a 15 year period. The combined deposit
8
and loan totals for the three offices was approximately
$69.7 million and $5.8 million, respectively, at June
6, 1997.
9. Litigation
----------
A purported class action was instituted in the Court of
Common Pleas of Cambria County, Pennsylvania against Bank &
Trust and Security of America Life Insurance Company (Security)
in November, 1996 alleging various calculation irregularities
in connection with a residential mortgage loan to the plaintiff
in the principal amount of approximately thirteen thousand
dollars resulting in, among other things, overcharges on credit
life and disability insurance coverage and other items. The
plaintiff purports to represent a class of persons who made a
mortgage payment to Bank and Trust or any of its subsidiaries
within six years before November 21, 1996 and/or had credit
life or disability insurance coverage with Security within six
years before November 21, 1996. The complaint seeks
unspecified damages. The Corporation has filed an answer
denying that its actions breached its agreements with
plaintiffs. The class potentially includes the borrowers on
approximately 2,800 accounts, the number of residential
mortgages held by Bank and Trust during the relevant period.
Management intends to oppose certification of the case as a
class action, pursue its affirmative defenses and vigorously
defend the lawsuit. The impact of this litigation on BT cannot
be fully assessed at this early stage of the proceedings.
On November 19, 1997, Laurel Capital Group, Inc, and its
wholly-owned subsidiary, Laurel Savings Bank, filed a suit in
the United States District Court in the Western District of
Pennsylvania claiming that Laurel Bank infringed on its common
law trademark and servicemark rights by using the name "Laurel"
and a related logo in an undefined market segment referred to
as the "Pittsburgh area." The suit seeks to enjoin Laurel from
using its name and related logo in the "Pittsburgh area" and
seeks unspecified damages. Laurel Savings Bank is a thrift
institution with five branch locations in the North Hills of
Pittsburgh and one branch in Butler County. Pending a hearing
on plaintiffs' motion for preliminary injunction, Laurel agreed
to refrain from using the "Laurel" name or any related logo on
any bank documents, advertisements, or promotional materials in
the Pittsburgh vicinity. While BT denies the use of the name
"Laurel" and related logo infringes on plaintiff's trademark
and servicemark rights and believes that its rights to the name
"Laurel" and related logo are senior to that of the plaintiffs,
there is a risk that Laurel might be prevented from using the
"Laurel" name and related logo in the Pittsburgh vicinity. The
impact of this litigation on BT cannot be fully assessed at
this early stage of the proceedings.
Due to the nature of their activities, BT and its
subsidiaries are at all times engaged in other various legal
proceedings which arise in the normal course of their
businesses. While it is difficult to predict the outcome of
these proceedings, management believes the ultimate liability,
if any, will not materially affect BT's consolidated financial
position or results of operations.
10. Stock Dividends
---------------
On March 25, 1998, BT's Board of Directors
declared a 2-for-1 stock split effected in the form of a
stock dividend. The dividend was distributed on May 1,
1998, to shareholders of record as of April 8, 1998.
The stock dividend, representing 6,250,436 shares,
9
increased common shares issued and outstanding to
12,500,872. Accordingly, a transfer of $31,252,180,
representing the par value of additional shares issued,
was made from surplus to common stock. On September 15,
1997, a 10% stock dividend was distributed to
shareholders of record as of August 27, 1997. All share
and per share data in this report has been adjusted to
reflect the stock dividends.
10
ITEM 2
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following is Management's Discussion and Analysis of the material
changes in financial position between December 31, 1997 and March 31, 1998,
and the material changes in results of operations comparing the three month
periods ending March 31, 1998 with the results for the comparable period of
1997 for BT Financial Corporation. The following should be read in
conjunction with BT's Annual Report on Form 10-K for the year ended
December 31, 1997.
Certain statements contained in this report constitute "forward-looking"
statements with respect to BT Financial Corporation and its subsidiaries.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the financial condition and
results of operations of BT Financial Corporation and its subsidiaries to
be materially different from any future financial condition or results of
operations suggested or implied by such forward-looking statements. BT
undertakes no obligation to update any forward-looking statements made
herein. The factors that may cause actual results to differ materially
from the forward-looking statements include: interest rates, market and
monetary fluctuations, monetary and fiscal policies, changes in laws and
regulations, inflation, general economic conditions, competition and
economic conditions in the geographic region and industries in which the
Corporation conducts its operations, introduction and acceptance of new
products and enhancements, mergers and acquisitions and their integration
into BT, and management's ability to manage these and other risks.
FINANCIAL REVIEW
- ----------------
Highlights - First Quarter 1998
- -------------------------------
On March 25, 1998, BT's Board of Directors declared a 2-for-1 stock split
in the form of a stock dividend that was distributed on May 1, 1998 to
shareholders of record as of April 8, 1998. BT's common stock price
increased 43.0%, adjusted for the stock split, at March 31, 1998 compared
to March 31, 1997. BT's historical stock price performance is not
necessarily indicative of future price performance.
During the first quarter of 1998, several senior officers of BT elected to
retire early. Certain severance and legal costs associated with these
retirements were approximately $337,000 and were recorded in the first
quarter. The retiring officers will not be replaced, and the costs
associated with the early retirements are expected to be recovered by
reduced salary and benefits expense throughout the remainder of 1998. BT
also expensed approximately $348,000 in the first quarter of 1998 in
connection with two legal settlements, their associated costs, and other
legal fees related to various lawsuits. The settlements and their costs
represented the majority of the expensed amount in the first quarter. As a
result of the special charges incurred with early retirements and
litigation costs, BT's first quarter 1998 earnings per share were reduced
by approximately $.04, adjusted for the 2-for-1 stock split.
Consolidated net income decreased 11.4%, to $3.6 million in the first
quarter of 1998 compared to $4.1 million in the same period of 1997 due to
the special charges discussed earlier. Excluding the special charges, net
income for the first quarter of 1998 would have been $4.1 million, or $.33
per share. Increases in net interest income and non-interest income were
offset by increases in the provision for loan losses and a higher level of
other expenses.
11
Total assets grew to a record $1.65 billion at March 31, 1998 compared to
$1.55 billion at year-end 1997 and $1.48 billion at March 31, 1997. The
growth in the current period resulted from targeted balance sheet
leveraging in 1998 along with loan growth.
BT's organizational realignment in 1997 to a single bank charter, supported
by five marketing regions, has enhanced product delivery channels which
allow BT to focus on its customer needs more effectively. In addition,
resources have been targeted to support the organizational changes through
expanded sales training and incentive programs. As a result of these
measures, BT experienced internal growth in both loans and deposits in the
first quarter of 1998.
CHANGES IN FINANCIAL POSITION
Total assets at March 31, 1998 increased $100.6 million, or 6.5%, and
$168.8 million, or 11.4%, compared to year-end 1997 and March 31, 1997,
respectively. The higher balance sheet levels over both periods resulted
primarily from strong loan growth and increases in securities levels funded
mainly by short- and long-term borrowings. The availability of favorably
priced wholesale funding sources has allowed BT to prudently leverage its
balance sheet by increasing earning asset levels in order to enhance income
while contributing to the management of interest rate risk. Funding
strategies are managed by BT's Asset/Liability Committee to ensure adequate
liquidity and to control interest rate risk exposure. The year-over-year
asset increase was impacted by the branches acquired from National City
which accounted for asset growth of approximately $70 million.
Period end total loans outstanding, net of unearned interest, increased
$40.4 million, or 3.8%, and $55.1 million, or 5.2%, compared to year-end
1997 and March 31, 1997, respectively. The loan increases were due
primarily to internal growth in both commercial and consumer loans. Loan
expansion was attributable to increased market demand and aggressive sales
efforts focusing on loan production. While recent loan growth has been
substantial, BT adheres to strict underwriting and credit guidelines in its
loan review processes to preserve a quality loan portfolio. Various loans
acquired in the branch acquisitions of National City totaled approximately
$5.8 million at the acquisition date.
BT's nonperforming assets increased $365,000, or 3.3%, compared to year-end
1997 while decreasing $1.5 million, or 11.3%, compared to March 31, 1997.
The increase over year-end 1997 was principally due to a higher level of
nonaccrual commercial loans in the current period partially offset by a
decline in consumer and commercial loans 90 days or more past-due. The
year-over-year decrease was mainly due to a decline of $1.8 million, or
15.9% in the level of nonperforming loans. The higher level at March 31,
1997 resulted from increased nonperforming loans initially experienced in
1996 due to the addition of various merger-related loans and an industry-
wide deterioration in consumer credit quality. The reduction was
accomplished by the utilization of an automated, centralized collection
function along with other strategies including enhanced collection efforts
and credit counseling activities. BT recently created a Special Assets
department to concentrate on nonperforming commercial loans.
Management's policy is to maintain an adequate loan loss reserve to cover
inherent losses in the loan portfolio. The evaluation process to determine
potential losses includes loan reviews, collateral adequacy assessments, an
analysis of specific conditions of the borrower and an assessment of
general economic conditions. The BT Credit and Collection functions
continuously monitor and assess credit quality to minimize exposure to
potential future credit losses. The ratio of the reserve for loan losses
to loans, net of unearned interest, declined to .90% at March 31, 1998,
compared to .92% at year-end 1997 and March 31, 1997, commensurate with
growth in the loan portfolio. The following table provides information
12
with respect to the components of BT's nonperforming assets and related
ratios for the periods indicated.
March 31 December 31 March 31
(In thousands) 1998 1997 1997
----------------------------------------
Loans 90 days or more past-due $ 480 $ 1,208 $ 561
Restructured loans 265 266 317
Nonaccrual loans 8,736 7,678 10,395
----------------------------------------
Total nonperforming loans 9,481 9,152 11,273
Other real estate owned 721 710 553
Repossessed assets 1,337 1,312 1,176
----------------------------------------
Total nonperforming assets $ 11,539 $ 11,174 $ 13,002
========================================
Nonperforming loans as a % of
loans, net of unearned interest .86% .86% 1.07%
Reserve for loan losses to
nonperforming loans 1.0x 1.1x .9x
Reserve for loan losses as a % of
loans, net of unearned interest .90% .92% .92%
BT is anticipating a portion of the securities portfolio will be called in
1998. Therefore, based on the market outlook, a strategy was developed to
invest in additional securities prior to the actual call dates of existing
securities. As a result, total securities increased $60.2 million, or
16.4%, compared to year-end 1997 and $108.0 million, or 34.0%, compared to
March 31, 1997. The higher levels were primarily due to purchases of
various municipal and U.S. Government agency securities. Additionally, a
portion of the increase over the prior year reflects additional securities
purchased in connection with funding provided by deposits acquired from the
National City branches.
Period end deposits increased $3.5 million, or .3%, and $84.4 million, or
6.7%, compared to year-end 1997 and March 31, 1997, respectively. The
growth over year-end 1997 was mainly due to a $4.1 million, or 2.3%,
increase in non-interest-bearing deposits. The year-over-year increase was
primarily due to approximately $69.7 million in deposits acquired from the
National City branches.
Short-term borrowings increased $60.5 million compared to year-end 1997 and
$57.5 million compared to March 31, 1997 while long-term debt increased
$24.3 million and $22.1 million over the same periods, respectively. The
higher levels reflect increases in wholesale funding levels used by BT to
support recent loan growth and securities purchases. The wholesale funding
has been provided by the Federal Home Loan Bank (FHLB). In the first
quarter of 1998, the FHLB advanced a $25 million long-term borrowing to BT.
The interest rate on the borrowing at March 31, 1998 was 5.22%. The
borrowing, scheduled to mature in the year 2008, will be used for selected
loan and investment funding and to enhance liquidity while mitigating BT's
interest rate risk exposure. After an initial lockout period of three
years and then quarterly thereafter, the FHLB has the option to convert the
fixed-rate advance to an adjustable rate which resets quarterly. If the
FHLB elects to convert the advance, BT has the option to accept the
adjustable-rate or return the advance with no penalty. At March 31, 1998,
BT's short-term borrowings with the FHLB amounted to $60 million and were
scheduled to mature in April and May 1998. The interest rates on these
borrowings at March 31, 1998 ranged from 5.67% to 5.70%. The short- and
long-term borrowings are collateralized by BT's residential mortgage loan
portfolio.
13
RESULTS OF OPERATIONS
A 2-for-1 stock split effected in the form of a stock dividend was declared
on March 25, 1998 to shareholders of record at April 8, 1998. The stock
dividend was distributed on May 1, 1998. A ten percent stock dividend was
distributed on September 15, 1997, to shareholders of record at August 27,
1997. All per share data in the following discussion has been adjusted to
reflect the stock dividends.
For the first quarter of 1998, BT produced net income of $3.6 million, or
$.29 per share, compared to $4.1 million, or $.33 per share, over the same
period of 1997. 1998 earnings were impacted by special charges associated
with the retirement of several senior officers of BT and certain costs in
connection with two legal settlements along with other legal fees related
to various lawsuits. The total charges approximated $685,000 and reduced
earnings per share by approximately $.04 in the first quarter of 1998.
The annualized return on average assets for the first quarters of 1998 and
1997 was .92% and 1.12%, respectively. The annualized return on average
shareholders' equity was 10.01% in 1998 and 11.90% in 1997. The return on
average tangible shareholders' equity, which excludes intangible
amortization expense from net income and intangibles from average
shareholders' equity was 13.58% and 15.55% for the first quarters of 1998
and 1997, respectively.
Fully taxable equivalent net interest income increased $493,000, or 3.0%,
to $16.8 million in the first quarter of 1998 compared to 1997. The
increase was primarily due to a $123.6 million, or 9.1%, rise in average
earning assets in 1998. The earning asset increase was due to a higher
levels of securities and loans in 1998. The net interest margin declined
28 basis points in 1998 to 4.63% due primarily to higher rates paid on
interest-bearing liabilities. A portion of the compression resulted from
balance sheet leveraging through the utilization of short-and long-term
wholesale funding used to support higher earning asset levels in the first
quarter of 1998. The leveraging position enables BT to enhance net
interest income while sacrificing some net interest spread differential.
The provision for loan losses increased $185,000 in 1998, compared to the
same period of 1997 due to management's assessment of the provision
necessary to maintain an adequate reserve against potential future losses
based upon the current size and quality of the loan portfolio. Net charge-
offs were approximately $1.1 million in 1998 compared to $1.0 million in 1997.
Total other income increased $23,000, or .8%, in the first quarter of 1998
compared to 1997. Trust income increased $110,000, or 14.7%, commensurate
with a greater volume of assets under management. Service fees grew
$80,000 or 4.4%, primarily resulting from higher levels of deposit account
fees. Securities transactions income and other income declined $74,000 and
$93,000, respectively, in the first quarter of 1998 compared to 1997. The
decline in other income was due to a gain of $121,000 in 1997 related to
the sale of an other real estate owned property.
Total other expenses increased $1.3 million, or 11.2%, in 1998 compared to
1997. The majority of the increase was due to the special charges
mentioned earlier in this discussion. Salaries and wages increased 9.3%
reflecting the impact of merit increases and special charges of
approximately $322,000 associated with the retirement of several senior
officers of BT. These special charges will be recovered by reduced salary
and benefits expenses throughout 1998 due to the nonreplacement of the
retired senior officers. Full time equivalent employees rose to 774 in
1998 from 759 in 1997 reflecting additional employees hired in connection
with the National City branch acquisitions. Employee benefit costs
14
increased 20.6% mainly due to higher hospitalization expense. Occupancy
expense increased 6.9% due to the three branches acquired from National
City. Equipment expense increased 13.4% reflecting higher levels of
ongoing technology-based expenditures. Amortization of intangible assets
increased 12.2% due to the branches acquired from National City. Other
operating expense increased 12.1% largely due to $363,000 in special
charges related to litigation and legal settlement costs.
BT's effective tax rate was 31.8% for the first quarter of 1998 compared to
35.0% for the same period of 1997. The lower rate in 1998 reflects an
increased application of low income housing tax credits and a higher level
of tax-exempt interest income.
CAPITAL ADEQUACY
At March 31, 1998, BT continued to maintain capital levels well above the
minimum regulatory levels. BT's capital ratios as of March 31, 1998 and
December 31, 1997 are presented in the table below. The required
regulatory ratios, representing the level needed to meet "Adequately
Capitalized" status are also presented.
Regulatory
3-31-98 12-31-97 Requirement
------- -------- -----------
Tier I Risk Based Ratio 10.55% 10.83% 4.00%
Total Capital Risk Based Ratio 11.40% 11.70% 8.00%
Tier I Leverage Ratio 7.90% 7.94% 4.00%
COMMITMENTS AND CONTINGENCIES:
YEAR 2000 ISSUES
In 1996, BT began analyzing any Year 2000 issues pertaining to BT's
business and operations. Year 2000 issues refer to uncertainties regarding
the ability of various software systems to interpret dates correctly after
the beginning of the Year 2000. BT is in the process of (1) analyzing its
information systems and vendor supplied application systems to address any
Year 2000 issues, and (2) evaluating the potential effects of Year 2000
issues on customers of Laurel and the Trust Company.
The ongoing process of analyzing its information systems involves internal
testing of computer hardware and software and the modification and/or
replacement of such systems if necessary. While BT is taking all
appropriate steps to assure Year 2000 compliance, it is dependent on vendor
compliance to a large extent. BT is requiring systems and software vendors
to represent that the services and products provided are, or will be Year
2000 compliant and are tested for such compliance. Management expects to
have all or substantially all systems and applications compliant or near
completion of any necessary remedial actions by the end of 1998.
BT estimates that the total cumulative cost of this process will
approximate $520,000, which includes costs associated with modifying the
systems as well as the cost of purchasing or leasing certain hardware and
software. Purchased hardware and software will be capitalized in
accordance with normal policy. Personnel and all other costs related to
this process are being expensed as incurred. The cost of this process and
the expected completion dates are based on management's best estimates and
are believed to be reasonably accurate. The expenditure is not expected to
be material to the Corporation's business, operations or financial
condition and should have no material impact on the Corporation's results
of operations, liquidity or capital resources.
15
BT's process of evaluating potential effect of Year 2000 issues on
customers of Laurel and the Trust Company is in its early stages, and it is
therefore impossible to quantify the potential adverse effects of Year 2000
problems on Laurel's loan customers. The failure of a commercial bank
customer to prepare adequately for Year 2000 compatibility could have a
significant adverse effect on such customer's operations and profitability,
in turn inhibiting its ability to repay loans in accordance with their
terms. Until sufficient information is accumulated from customers of
Laurel to enable BT to assess the degree to which customers' operations are
susceptible to potential problems, BT will be unable to quantify the
potential losses, if any, from loans to commercial customers.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a 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 consist of loan commitments and
standby letters of credit.
The Corporation's exposure to loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of these
instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The face amounts of financial instruments with off-balance-sheet risk at
March 31, 1998 were as follows:
(In thousands)
Loan commitments $206,036
Standby letters of credit 12,736
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements or loss exposures. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of credit,
is based on management's credit evaluation of the customer. Standby
letters of credit are unconditional commitments issued by the Corporation
to support the financial obligations of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans. The collateral
varies but may include accounts receivable, inventory and property, plant
and equipment for those commitments for which collateral is deemed
necessary.
16
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6
------
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
--------------------
During the first quarter of 1998, the Registrant filed the following
Current Report on Form 8-K:
(1) A report dated as of March 25, 1998, was filed on March 31,
1998, pursuant to Item 5, to report the Registrant's press release
regarding BT's Board of Directors announcement of a 2-for-1 stock split
in the form of a common stock dividend payable to shareholders of record
at April 8, 1998 to be distributed on May 1, 1998.
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date May 14, 1998 /s/ John H. Anderson
------------------ ----------------------------
John H. Anderson, Chairman
and Chief Executive Officer
Date May 14, 1998 /s/ Mark L. Sollenberger
------------------ -------------------------------
Mark L. Sollenberger,
Executive Vice
President, Treasurer
and Assistant
Secretary
(Principal Financial Officer)
18
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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