SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number 0-12377
----------------- -------
BT FINANCIAL CORPORATION
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-1441348
------------------------ ----------------------------
(State of incorporation) (IRS Employer Identification No.)
551 Main Street, Johnstown, Pennsylvania 15901
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 814-532-3801
Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $5.00 per share Preferred Share Purchase Rights
- --------------------------------------- -------------------------------
(Title of class) (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 (229.405 of this chapter)
is not contained herein, and will not be contained, to the best
of Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The Registrant estimates that as of March 1, 1999, the aggregate
market value of the voting and non-voting common shares of the
Registrant's Common Stock held by non-affiliates of the
Registrant was approximately $354,782,154 computed on the basis
of $29.0625 per share, the closing sales price on the NASDAQ Stock
Market on March 1, 1999. The number of shares owned by "non-
affiliates" has been determined, solely for purposes of the
foregoing estimate, by subtracting all shares known by the
Registrant to be beneficially owned by its directors or executive
officers (777,714 shares in total) from the number of shares
outstanding (12,985,272).
As of March 1, 1999, the Registrant had outstanding 12,985,272
shares of its Common Stock.
Documents incorporated by reference: Incorporated into:
- ------------------------------------ ------------------
1998 Annual Report to Shareholders Part I and II
(the "1998 Annual Report")
Definitive Proxy Statement for the 1999 Annual Meeting of Part III
Shareholders (the "1999 Proxy Statement")
BT FINANCIAL CORPORATION
FORM 10-K
Fiscal year ended December 31, 1998
-----------------------------------
INDEX
PART I Page
- ------ ----
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of
Security Holders 7
Executive Officers of the Registrant 8
PART II
- -------
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation 11
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 11
Part III
- --------
Item 10. Directors and Executive Officers of the
Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial
Owners and Management 12
Item 13. Certain Relationships and Related
Transactions 12
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 17
2
Part I
Item 1 Business
- ------ --------
Description of Business
- -----------------------
BT Financial Corporation ("BT" or the "Registrant") is a
bank holding company located in Johnstown, Pennsylvania, which
was incorporated under the laws of the Commonwealth of
Pennsylvania on December 16, 1982.
BT is a reporting company under Section 12(g) of the
Securities and Exchange Act of 1934. BT files periodic and
annual reports with the Securities and Exchange Commission
("SEC") on Form 10-K, 10-Q and 8-K. The public may read BT
materials filed with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains BT's reports, BT's proxy and
information statements and other information regarding BT at
http://www.sec.gov. BT maintains its own website at
http://www.btfinancial.com.
At the close of business, October 10, 1997, BT adopted a
single bank charter for its three affiliate banks. Laurel Bank
and Fayette Bank ("Fayette") merged with and into Johnstown Bank
and Trust Company ("Bank and Trust"). At the same time, the
corporate title of Bank and Trust 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.
BT's single wholly-owned banking subsidiary, Laurel Bank
("Laurel"), is headquartered in Johnstown, Pennsylvania. BT has
four wholly-owned non-bank subsidiaries, Bedford Associates,
Inc., which holds and leases property, Laurel Trust Company, a
trust company which provides trust and investment services,
Laurel Community Development Corporation, a corporation which
conducts community development activities, and Bedford Associates
of Delaware, Inc., an investment holding company. At December
31, 1998 the Registrant had total assets of $1.70 billion.
On October 23, 1998, BT completed a merger with The Peoples
National Bank of Rural Valley ("Peoples"), Rural Valley,
Pennsylvania whereby Peoples merged into Laurel Bank. At the
time of the merger, Peoples operated one branch with unaudited
assets totaling approximately $37 million. In connection with
the merger, each share of Peoples common stock was converted into
12.11 shares of BT common stock, resulting in the issuance of
484,400 BT common shares. The value of the transaction was
approximately $12.6 million based on an average market price of
3
approximately $26 per BT common share. The merger has been
accounted for as a pooling-of-interests and accordingly BT's
accompanying consolidated financial statements have been restated
retroactively to include the accounts and operations of Peoples
for all periods presented prior to the merger.
BT's business consists primarily of the operations of
Laurel, its subsidiary bank. Laurel conducts business through a
network of 69 full-service offices located throughout
southwestern Pennsylvania. Laurel operates under the
management of its own officers and directors, although certain
financial and administrative functions, including auditing,
marketing, human resources, investment, accounting, data
processing and credit review, are coordinated through the
Registrant. In addition, Laurel operates 54 automated teller
machines located on both bank premises and off-premise sites.
Laurel Bank is engaged in the business of commercial and
retail banking. Laurel provides a full range of financial
services to individuals, businesses and governmental bodies,
including accepting demand, savings and time deposits, safe
deposit facilities, electronic banking services, debit cards,
money transfer services, and other banking services. Laurel also
offers lending services, including consumer, real estate,
commercial and industrial loans. Laurel has a fairly stable
deposit base with no major seasonal depositor or group of
depositors. Laurel's commercial customers are primarily small-
to mid-sized businesses located in southwestern Pennsylvania.
Laurel Bank's predecessor, Bank and Trust, was formed in
1934 through the consolidation of five banks. Laurel is a
Pennsylvania bank and trust company and member of the
Federal Reserve System with offices in Allegheny, Armstrong,
Bedford, Blair, Butler, Cambria, Fayette, Greene, Indiana,
Somerset, Washington, and Westmoreland Counties. At December 31,
1998, its assets totaled $1.69 billion, or approximately 99% of
BT's consolidated assets.
Bedford Associates, Inc. is a Pennsylvania corporation which
was formed in 1983. It holds and leases properties primarily
used by BT's subsidiaries. Most of its properties are leased to
Laurel Bank for use as community banking offices.
Laurel Trust Company, formerly known as BT Management Trust
Company, is located in Johnstown, Pennsylvania and offers a wide
range of corporate and personal trust services as well as pension
and fiduciary services. It is a Pennsylvania-chartered trust
company formed in 1990. Laurel Trust Company resulted from the
consolidation of the trust business of Bank and Trust, the former
Laurel Bank and Fayette. At year-end 1998, the market value of
trust assets under management at Laurel Trust Company totaled
$792 million compared to $601 million at year-end 1997.
4
Laurel Community Development Corporation, formerly known as
Moxham Community Development Corporation, was organized in 1992
to conduct community development activities. It is a for-profit
Pennsylvania corporation conducting activities consisting of
equity investments as a limited partner in various housing
developments for low income individuals.
Bedford Associates of Delaware, Inc., a Delaware
Corporation, was formed in 1998 for the purpose of holding and
managing certain investments of the Registrant.
Recent Developments
- -------------------
On December 10, 1998, BT and First Philson Financial
Corporation ("Philson") jointly announced they had reached an
agreement in principle to merge, with BT as the surviving
company. Philson's subsidiary, First Philson Bank, N.A., Berlin,
Pennsylvania, will be merged into BT's subsidiary, Laurel Bank.
On February 23, 1999, BT and Philson entered into a definitive
merger agreement. The agreement provides that each Philson
common share will receive 1.667 shares of BT common stock. Based
on BT's closing market price at February 23, 1999, the total
transaction value approximates $80 million. The merger agreement
is subject to completion of due diligence, regulatory approvals
and other conditions. At December 31, 1998, Philson had $214
million in assets. Post-merger BT's assets will total
approximately $1.9 billion. The merger will be accounted for as
a pooling-of-interests and is expected to be completed in the
second half of 1999.
Competition
- -----------
The business of commercial and retail banking and bank-
related services is highly competitive. The Registrant, Laurel
Bank, and Laurel Trust Company are subject to competition in all
aspects of their businesses from banks as well as other financial
institutions, including savings and loan associations, savings
banks, finance companies, credit unions, money market mutual
funds, brokerage firms, investment companies, credit companies
and insurance companies. They also compete with nonfinancial
institutions, including retail stores that maintain their own
credit programs, and with governmental agencies that make loans
available to certain borrowers. Some of the Registrant's
competitors are larger and have greater financial resources
and facilities than the Registrant. The management of BT and its
subsidiaries regularly reviews its product mix, services, fee
structure, and locations in the evaluation of its competitive
position. Additionally, acquisition prospects are considered
periodically to maintain and strengthen BT's competitive
position.
5
Employees
- ---------
As of December 31, 1998, the Registrant, Laurel, Laurel
Trust Company and the Registrant's other subsidiaries had a total
of 777 full time equivalent banking and administrative
employees. Management considers its relationship with its
employees to be satisfactory. The Registrant's executive offices
are located at 551 Main Street, P.O. Box 1146, Johnstown,
Pennsylvania 15907-1146. The telephone number is (814) 532-3801.
Supervision and Regulation
- --------------------------
BT is a bank holding company as defined in the Bank Holding
Company Act of 1956, as amended ("BHCA"). As such, BT is subject
to supervision and examination by the Board of Governors of the
Federal Reserve System ("FRB") and is required to file reports
with the FRB and provide such additional information as required
by the FRB. BT may not, without prior approval of the FRB,
acquire 5% or more of the voting shares of another bank. The
BHCA and the Federal Reserve Act place restrictions on
transactions between BT and its affiliates, including certain
restrictions relevant to intercompany loans, dividends, and
investments. BT, subject to approval of the FRB, may acquire (1)
banks throughout the United States, and (2) branches of
established banks throughout the United States, except in Texas
and Montana, which have opted out of interstate banking until
September 1999 and September 2000, respectively. Satisfactory
Community Reinvestment Act and capital ratios ratings are
generally required to obtain FRB approval of acquisitions.
Laurel, as a state chartered bank, is subject to
supervision, periodic examination and regulations of the
Pennsylvania Department of Banking. Laurel, as an insured bank,
is also subject to regulation by the Federal Deposit Insurance
Corporation ("FDIC"). Laurel's deposits are insured by the FDIC
to the maximum amount legally permitted, currently $100,000.
Laurel is also a member of the Federal Reserve System and is
subject to regulations of the Board of Governors of the Federal
Reserve System.
BT and its subsidiaries are subject to examination at the
discretion of supervisory authorities. BT is under the
jurisdiction of the Securities and Exchange Commission ("SEC")
with respect to engaging in the offering and public sale and
distribution of its securities. BT is also subject to SEC rules
regarding insider trading, proxy statements and periodic
reporting to shareholders.
Recent and Pending Acquisitions
- -------------------------------
Merger and acquisition activities of the Registrant are
detailed in "Note 3-Acquisitions" and "Note 22-Subsequent Event"
of the "Notes to the Consolidated Financial Statements" included
6
on pages 18, 19 and 32 of the 1998 Annual Report, which is
incorporated herein by reference.
Item 2 Properties
- ------ ----------
The executive offices of the Registrant are located at 551
Main Street, Johnstown, Pennsylvania, in an office building owned
by Bedford Associates, Inc. The building is occupied by the
Registrant, Laurel Trust Company, and other unrelated business
concerns.
Laurel operates 69 full-service banking offices located
throughout Southwestern Pennsylvania, 52 of which are owned by
Laurel free of liens and encumbrances. All properties and
buildings are in good condition and are continually maintained
against normal wear and tear. The remaining 17 offices are
operated under leases which, including renewal options, expire at
various times between 1999 and 2025. Bedford Associates,
Inc. owns 4 of the 17 leased properties, which are leased
to Laurel as community banking offices. Four of Laurel's banking
offices consolidated into nearby locations during the fourth
quarter of 1998.
Item 3 Legal Proceedings
- ------ -----------------
Information required to be furnished pursuant to this Item
is set forth in the 1998 Annual Report in Note 17 of the "Notes
to Consolidated Financial Statements" under the caption
"Litigation" which is incorporated herein by reference.
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
None.
7
Executive Officers of the Registrant
- ------------------------------------
Set forth below are the names of and certain information
with respect to the executive officers of the Registrant.
Pursuant to the Registrant's By-Laws, officers serve at the
discretion of the Board. There are no family relationships
between any such persons.
Name Age Positions and Offices Held
---- --- --------------------------
John H. Anderson 48 Chairman, Chief Executive Officer
and Director of the Registrant and
of Laurel.
Steven C. Ackmann 47 President and Chief Operating Officer
of the Registrant
Eric F. Rummel 46 Vice Chairman of the Registrant,
President and Director of Laurel.
J. William Smith 51 Vice Chairman and Treasurer of the
Registrant. Treasurer and Assistant
Secretary of Laurel and Laurel Trust
Company.
Kim Craig 43 Vice Chairman of the Registrant.
President and Director of Laurel
Trust Company.
Mark L. Sollenberger 45 Executive Vice President and Chief
Financial Officer of the Registrant.
8
John H. Anderson has served as Chairman and Chief Executive Officer of
----------------
the Registrant since 1995. He served as Chairman, President and
Chief Executive Officer of the Registrant from 1993 to 1995. He
served as President and Chief Operating Officer of the Registrant
from 1992 to 1993 and as Vice Chairman from 1991 to 1992. He
served as President of Bank and Trust from 1990 to 1991.
Steven C. Ackmann has served as President and Chief Operating Officer of
-----------------
the Registrant since 1995. He served as a Vice Chairman of the
Registrant from 1992 to 1995. He served as Executive Vice
President of the Registrant from 1990 to 1992.
Eric F. Rummel has served as Vice Chairman of the Registrant since 1996
--------------
and President of Laurel since 1997. He served as President of
Bank and Trust from 1995 to 1997. He served as President of the
former Laurel Bank from 1991 to 1995. He served as Executive
Vice President of the Registrant in 1991 and of Bank and Trust
from 1989 to 1991.
J. William Smith has served as Vice Chairman and Treasurer of the
----------------
Registrant and Treasurer and Assistant Secretary of Laurel and
Laurel Trust Company since 1998. He served as Vice Chairman of
the Registrant from 1996 to 1998. He served as President and
Chief Executive Officer of the former Moxham Bank Corporation
from 1986 to 1996.
Kim Craig has served as Vice Chairman of the Registrant since 1998 and
---------
President of Laurel Trust Company since 1990.
Mark L. Sollenberger has served as Executive Vice President and Chief
--------------------
Financial Officer of the Registrant since 1998. He
served as Executive Vice President, Treasurer and Assistant
Secretary of the Registrant from 1995 to 1998 and Executive Vice
President and Treasurer of Laurel from 1997 to 1998. He served as
Executive Vice President and Treasurer of the Registrant from
1992 to 1995 and of Bank and Trust from 1992 to 1997. He served
as Senior Vice President and Comptroller of the Registrant from
1991 to 1992. He served as Treasurer and Assistant Secretary of
Laurel Trust Company from 1992 to 1998.
9
Part II
Information required to be furnished pursuant to Part II of
this report is set forth in the 1998 Annual Report under the
captions and on the pages indicated below, and is incorporated
herein by reference.
Certain statements contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
constitute "forward-looking" statements with respect to the
Registrant 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 the Registrant and its subsidiaries to be materially different
from any future financial condition or results of operations
suggested or implied by such forward-looking statements. The
Registrant 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 an industries in which the
Registrant conducts its operations, pending litigation,
introduction and acceptance of new products and enhancements,
mergers and acquisitions and their integration into the
Registrant, and management's ability to manage these and other
risks.
Page in
Caption in 1998 Annual Report 1998 Annual
Report
----------------------------- ----------
Item 5 Market for the Registrant's Common
Equity and Related Stockholder Matters
--------------------------------------
Market Price and Cash Dividends 35
Dividend Restrictions 26
Item 6 Selected Financial Data
-----------------------
Selected Consolidated Financial Data 34
10
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations
-------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 35-47
Item 7A Quantitative and Qualitative Disclosures
About Market Risk
----------------------------------------
Liquidity and Market Risk Management 45-46
Item 8 Financial Statements and Supplementary Data
-------------------------------------------
Independent Accountants Report 11
Consolidated Balance Sheets 12
Consolidated Statements of Income 13
Consolidated Statements of Cash Flows 14
Consolidated Statements of Changes
in Shareholders' Equity 15
Consolidated Statement of Comprehensive
Income 15
Notes to Consolidated Financial Statements 16-32
Supplemental Financial Data 33
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
------------------------------------------------
None
11
Part III
Item 10 Directors and Executive Officers of the Registrant
--------------------------------------------------
Information required to be furnished pursuant to
this Item regarding directors of the Registrant is set
forth in the 1999 Proxy Statement under the caption
"Board of Directors," and is incorporated herein by
reference. Information required to be furnished
pursuant to this Item regarding delinquent filers is
set forth in the 1999 Proxy Statement under the caption
"Compliance with Section 16 (a) of the Securities
Exchange Act of 1934," and is incorporated herein by
reference. Information required to be furnished
pursuant to this Item regarding executive officers of
the Registrant is set forth in Part I of this Report
and is incorporated herein by reference.
Item 11 Executive Compensation
----------------------
Information required to be furnished pursuant to
this Item is set forth in the 1999 Proxy Statement
under the captions "Executive Compensation" and "Board
of Directors -- Directors' Compensation," and is
incorporated herein by reference. The "Executive
Committee Report on Compensation" set forth in the 1999
Proxy Statement is specifically not incorporated herein
by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information required to be furnished pursuant to
this Item is set forth in the 1999 Proxy Statement
under the captions "Board of Directors," "Executive
Compensation" and "Stock Ownership" and is incorporated
herein by reference.
Item 13 Certain Relationships and Related Transactions
----------------------------------------------
Information required to be furnished pursuant to
this Item is set forth in the 1999 Proxy Statement
under the caption "Transactions with Directors'
Companies" and is incorporated herein by reference.
12
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) (1) Financial Statements
--------------------
The consolidated financial statements of BT
Financial Corporation and affiliates together with the
report of PricewaterhouseCoopers LLP dated January 27, 1999,
except for Note 22 which is dated February 23, 1999,
are described herein in Part II, Item 8 - Financial
Statements and Supplementary Data and appear on pages
12 through 33 of the 1998 Annual Report and are
incorporated herein by reference.
(2) Financial Statement Schedules
-----------------------------
All financial statement schedules are omitted
because they are not required, are not applicable or
the required information is given in the consolidated
financial statements or notes thereto.
(3) Exhibits:
--------
The index to exhibits is on page 17.
(b) Reports on Form 8-K:
-------------------
A Form 8-K dated as of October 23, 1998 was filed
under Items 5 and 7 to report the finalization of the
merger with The Peoples National Bank of Rural Valley
and BT's press release regarding the completion of the
merger.
A Form 8-K dated as of November 30, 1998 was filed
under Item 5 to report BT's consolidated financial
results for the one month and eleven month periods
ended November 30, 1998.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BT FINANCIAL CORPORATION
-------------------------
(Registrant)
By: /s/ John H. Anderson Date: March 24, 1999
----------------------------- ----------------
Chairman, and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Principal Executive Officer:
/s/ John H. Anderson Date: March 24, 1999
----------------------------- ----------------
John H. Anderson
Chairman, and Chief Executive
Officer and Director
Principal Financial Officer:
/s/ Mark L. Sollenberger Date: March 24, 1999
----------------------------- ----------------
Mark L. Sollenberger
Executive Vice President
and Chief Financial Officer
Principal Accounting Officer:
/s/ Brian H. Lehman Date: March 24, 1999
---------------------------- ----------------
Brian H. Lehman
Vice President and Controller
14
Directors:
/s/ G. Scott Baton II Date: March 24, 1999
- ------------------------------ ----------------
G. Scott Baton II
/s/ Martin L. Bearer Date: March 24, 1999
- ------------------------------ ----------------
Martin L. Bearer
/s/ John C. Cwik, M.D. Date: March 24, 1999
- ------------------------------ ----------------
John C. Cwik, M.D.
Date: March 24, 1999
- ------------------------------ ----------------
Louis G. Galliker
/s/ William B. Kania Date: March 24, 1999
- ------------------------------ ----------------
William B. Kania
/s/ Edward L. Mears Date: March 24, 1999
- ------------------------------ ----------------
Edward L. Mears
/s/ Roger S. Nave Date: March 24, 1999
- ------------------------------ ----------------
Roger S. Nave
/s/ Ethel J. Otrosina Date: March 24, 1999
- ------------------------------ ----------------
Ethel J. Otrosina
Date: March 24, 1999
- ------------------------------ ----------------
Robert G. Salathe, Jr.
Date: March 24, 1999
- ------------------------------ ----------------
William R. Snoddy
/s/ Gerald W. Swatsworth Date: March 24, 1999
- ------------------------------ ----------------
Gerald W. Swatsworth
/s/ W. A. Thomas Date: March 24, 1999
- ------------------------------ ----------------
W. A. Thomas
15
/s/ Rowland H. Tibbott, Jr. Date: March 24, 1999
- ------------------------------ ----------------
Rowland H. Tibbott, Jr.
/s/ Thomas A. Young Date: March 24, 1999
- ------------------------------ ----------------
Thomas A. Young
16
EXHIBIT
INDEX
-----
The following Exhibits are filed as a part of this Report.
Documents other than those designated as being filed herewith are
incorporated herein by reference. Documents incorporated by
reference to an Annual Report on Form 10-K or a Quarterly Report
on Form 10-Q are at Securities and Exchange Commission File
No. 0-12377.
Prior Filing or
Exhibit Sequential Page
Number Description No. Herein
- ------- ----------- ---------------
2.1 Agreement and Plan of Incorporated by reference
Reorganization dated to Exhibit 2.1 to BT
October 24, 1995 by and Financial Corporation
among BT Financial Corporation, Registration Statement on
Johnstown Bank and Trust Form S-4 (No. 333-01797).
Company and The Armstrong
County Trust Company.
2.2 Agreement and Plan of Incorporated by reference
Reorganization by and to Exhibit 2 to Current
between BT Financial Report on Form 8-K dated
Corporation and Moxham January 12, 1996.
Bank Corporation.
2.3 Amended Agreement and Plan of Incorporated by reference
Reorganization dated August 26, to Annex A of Amendment No. 1
1998 by and among BT Financial to BT Financial Corporation
Corporation, Laurel Bank and Registration Statement on Form
The Peoples National Bank of S-4 (No. 333-61683).
Rural Valley.
2.4 Agreement and Plan of Incorporated by reference to
Reorganization by and between Exhibit 2 to Current Report
BT Financial Corporation and on Form 8-K dated February 23,
First Philson Financial 1999.
Corporation.
3.1 Amended and Restated Articles Incorporated by reference
of Incorporation of to BT Financial Corporation
BT Financial Corporation. Registration Statement on
Form S-4 (No. 33-69112).
3.2 By-Laws of BT Financial Incorporated by reference
Corporation. to BT Financial Corporation
Registration Statement on
Form S-4 (No. 33-69112).
17
10.1 BT Financial Corporation Incorporated by reference to
Supplemental Executive Benefit Exhibit 10.1 to BT Financial
Plan dated July 23, 1997.* Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1997.
10.2 Key Employee Incentive Incorporated by reference to
Compensation Plan of BT Exhibit 10.2 to BT Financial
Financial Corporation Corporation's Annual Report
dated July 24, 1996.* on Form 10-K for the year
ended December 31, 1996.
10.3 Moxham Bank Corporation Incorporated by reference to
Executive Retirement Plan Exhibit 10.3 to BT Financial
dated January 1, 1987, as Corporation's Annual Report
amended and restated.* on Form 10-K for the year
ended December 31, 1996.
10.4 BT Financial Corporation Incorporated by reference to
1998 Equity Incentive Plan Exhibit 10.4 to BT Financial
dated May 12, 1998.* Corporation's Quarterly Report
on Form 10-Q for the quarter
ended June 30, 1998.
10.5 Stock Option Agreement Incorporated by reference to
between BT Financial Exhibit 99 to Current Report on
Corporation and First Form 8-K dated February 23,
Philson Financial 1999.
Corporation.
13.1 All portions of the BT Filed herewith.
Financial Corporation
1998 Annual Report to
Shareholders that are
incorporated herein by
reference.
21.1 Subsidiaries of the Registrant Filed herewith.
23.1 Consent of Filed herewith.
PricewaterhouseCoopers LLP,
independent accountants
for the Registrant.
27.1 Financial Data Schedule Filed herewith.
27.2 Restated Financial Data Filed herewith.
Schedule
* Indicates exhibit is a management contract or compensation
plan or arrangement.
18
27.3 Restated Financial Data Filed herewith.
Schedule
27.4 Restated Financial Data Filed herewith.
Schedule
The Registrant will furnish to requesting shareholders a
copy of any exhibit(s) listed above upon payment of $5.00 plus
$0.10 per page to cover Registrant's expenses in furnishing such
exhibit(s). Requests should be directed in writing to Laura L.
Roth, Corporate Secretary, BT Financial Corporation, 551 Main
Street, P. O. Box 1146, Johnstown, Pennsylvania 15907-1146.
19
Financial Report to Shareholders
PRICEWATERHOUSECOOPERS [LOGO]
To The Board of Directors and Shareholders
of BT Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows, changes in
shareholders' equity, and comprehensive income present fairly, in all
material respects, the financial position of BT Financial Corporation and
affiliates ("Corporation") at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Corporation's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 27, 1999 except for Note 22,
as to which the date is February 23, 1999
Eleven
<PAGE>
BT Financial Corporation and Affiliates
CONSOLIDATED BALANCE SHEET
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 57,522 $ 53,215
Interest-bearing deposits with banks 57 424
Federal funds sold 17,000 1,800
Securities available-for-sale, at market value 274,291 200,008
Securities held-to-maturity (market values of $72,691 at
December 31, 1998 and $187,097 at December 31, 1997) 72,307 185,764
- -----------------------------------------------------------------------------------------------------------
Total securities 346,598 385,772
Loans 1,247,867 1,139,293
Less:
Unearned interest 29,681 58,326
Reserve for loan losses 10,971 9,882
- -----------------------------------------------------------------------------------------------------------
Net loans 1,207,215 1,071,085
Premises and equipment 28,665 30,538
Accrued interest receivable 11,288 11,262
Other assets 33,983 35,915
===========================================================================================================
TOTAL ASSETS $1,702,328 $1,590,011
LIABILITIES
Deposits:
Non-interest-bearing $ 210,127 $ 182,640
Interest-bearing 1,182,893 1,192,637
- -----------------------------------------------------------------------------------------------------------
Total deposits 1,393,020 1,375,277
Federal funds purchased and securities sold under agreements to repurchase 35,073 36,313
Short-term borrowings 2,185 1,871
Accrued interest payable 5,747 5,942
Other liabilities 2,689 2,511
Long-term borrowings 100,031 14,335
- -----------------------------------------------------------------------------------------------------------
Total liabilities 1,538,745 1,436,249
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY
Preferred stock:
No par value; Authorized shares, 2,000,000 -- --
Common stock:
Par value, $5.00; Authorized shares, 25,000,000;
Shares issued; 12,985,272 at December 31, 1998
and December 31, 1997 64,926 32,463
Capital surplus 43,993 76,456
Retained earnings 53,057 44,120
Accumulated other comprehensive income 1,607 723
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 163,583 153,762
===========================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,702,328 $1,590,011
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Twelve
<PAGE>
Financial Report to Shareholders
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 97,041 $ 92,112 $ 88,969
Securities:
Taxable 23,835 22,491 19,647
Tax-exempt 2,694 670 823
Deposits with banks 8 16 34
Federal funds sold 353 683 1,246
- -------------------------------------------------------------------------------------------------------
Total interest income 123,931 115,972 110,719
INTEREST EXPENSE
Deposits 47,171 46,131 43,140
Federal funds purchased and securities
sold under agreements to repurchase 1,910 1,731 1,098
Short-term borrowings 966 174 158
Long-term borrowings 4,510 1,112 1,268
- -------------------------------------------------------------------------------------------------------
Total interest expense 54,557 49,148 45,664
NET INTEREST INCOME 69,374 66,824 65,055
Provision for loan losses 5,940 4,230 2,441
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 63,434 62,594 62,614
OTHER INCOME
Trust income 3,651 3,187 2,919
Fees for other services 8,620 7,699 6,656
Net securities gains 454 195 406
Other income 1,011 1,476 1,362
- -------------------------------------------------------------------------------------------------------
Total other income 13,736 12,557 11,343
OTHER EXPENSES
Salaries and wages 20,921 20,342 20,764
Pension and other employee benefits 4,142 3,441 3,910
Net occupancy expense 4,306 4,429 4,684
Equipment expense 5,223 4,899 4,329
F.D.I.C. insurance 271 268 1,786
Amortization of intangible assets 2,095 2,020 1,991
Reorganization expense 290 -- 1,309
Other operating expense 13,708 12,810 13,561
- -------------------------------------------------------------------------------------------------------
Total other expenses 50,956 48,209 52,334
INCOME BEFORE INCOME TAXES 26,214 26,942 21,623
Provision for income taxes 7,936 9,195 7,213
=======================================================================================================
NET INCOME $ 18,278 $ 17,747 $ 14,410
EARNINGS PER SHARE
Basic:
Earnings per share $ 1.41 $ 1.37 $ 1.13
Weighted average shares outstanding 12,985,272 12,985,272 12,650,352
Diluted:
Earnings per share $ 1.41 $ 1.37 $ 1.13
Weighted average shares outstanding 12,985,272 12,985,272 12,753,984
Dividends paid per common share $ .72 $ .63 $ .51
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Thirteen
<PAGE>
BT Financial Corporation and Affiliates
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,278 $ 17,747 $ 14,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 5,940 4,230 2,441
Provision for depreciation and amortization 4,465 4,179 3,976
Amortization of intangible assets 2,095 2,020 1,991
Amortization of premium, net of accretion
of discount on loans and investments 459 37 (438)
Deferred income taxes (656) 34 (1,073)
Realized net securities gains (454) (195) (406)
(Increase) decrease in interest receivable (26) (2,235) 1,417
(Decrease) increase in interest payable (195) 444 (2,026)
Equity in loss of limited partnerships 115 117 182
Other assets and liabilities, net 1,506 (1,139) 3,352
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,527 25,239 23,826
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities 45,249 10,926 5,378
Repayments and maturities of securities available-for-sale 99,318 78,788 107,150
Repayments and maturities of securities held-to-maturity 100,629 46,964 14,837
Purchase of securities available-for-sale (202,030) (79,927) (20,652)
Purchase of securities held-to-maturity (2,709) (121,059) (75,266)
Net decrease (increase) in interest-bearing deposits with banks 367 (90) 1,249
Net (increase) decrease in federal funds sold (15,200) 9,500 565
Proceeds from sales of loans 8,096 11,845 7,965
Net increase in loans (150,094) (51,808) (13,526)
Purchases of premises and equipment and other (2,592) (2,637) (3,662)
Net increase in investment in limited partnership (1,434) (181) (131)
Purchase of Banks and branches, net of cash acquired -- 58,819 (3,407)
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (120,400) (38,860) 20,500
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase(decrease) in deposits 17,743 13,999 (31,486)
Net (decrease) increase in federal funds purchased
and securities sold under agreements to repurchase (1,240) (365) 1,365
Net increase (decrease) in short-term borrowings 314 (2,139) 1,644
Preferred dividends paid -- -- (54)
Common dividends paid (9,333) (8,184) (6,452)
Proceeds from long-term borrowings 100,000 -- --
Payments on long-term borrowings (14,304) (2,875) (2,873)
Other -- (3) 3
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 93,180 433 (37,853)
Increase(decrease) in cash and cash equivalents 4,307 (13,188) 6,473
Cash and cash equivalents at beginning of year 53,215 66,403 59,930
============================================================================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 57,522 $ 53,215 $ 66,403
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings $ 54,752 $ 48,704 $ 47,363
Federal income taxes, net of refunds 7,721 10,325 6,947
Non-cash financing activities:
Issuance of common stock; Armstrong acquisition $ -- $ -- $ 7,712
Conversion of preferred stock to common stock -- -- 1,378
Details of the acquisition of Armstrong County Trust
Company during 1996, follow:
Fair value of assets acquired $ -- $ -- $ 54,285
Fair value of liabilities assumed -- -- 42,307
- ------------------------------------------------------------------------------------------------------------
Net assets acquired $ -- $ -- $ 11,978
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Fourteen
<PAGE>
Financial Report to Shareholders
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1998, 1997, and 1996
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------ Comprehensive
Number of Preferred Common Capital Retained Income
Shares Stock Stock Surplus Earnings (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 5,065,265 $ 1,378 $25,327 $ 33,874 $ 67,287 $1,621 $129,487
Net income, 1996 14,410 14,410
Common dividends paid
($.51 per share) (6,452) (6,452)
Preferred dividends paid-Moxham,
($8.00 per share) (54) (54)
Acquisition of Armstrong County
Trust Company 212,000 1,060 6,652 7,712
Conversion of Moxham preferred
stock into common stock 88,550 (1,378) 442 936 --
Stock dividend 536,582 2,683 14,364 (17,047) --
Other 2 (13) (11)
Change in accumulated other
comprehensive income (loss),
net of tax (859) (859)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 5,902,397 -- 29,512 55,828 58,131 762 144,233
Net income, 1997 17,747 17,747
Common dividends paid
($.63 per share) (8,184) (8,184)
Stock dividend 590,239 2,951 20,630 (23,581) --
Other (2) 7 5
Change in accumulated other
comprehensive income (loss),
net of tax (39) (39)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 6,492,636 -- 32,463 76,456 44,120 723 153,762
Net income, 1998 18,278 18,278
Common dividends paid
($.72 per share) (9,333) (9,333)
2-for-1 stock split in the form
of a stock dividend 6,492,636 32,463 (32,463) --
Other (8) (8)
Change in accumulated other
comprehensive income,
net of tax 884 884
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 12,985,272 $ -- $64,926 $ 43,993 $ 53,057 $ 1,607 $163,583
</TABLE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $18,278 $17,747 $14,410
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities arising during period 1,179 88 (595)
Less: Reclassification adjustment for
gains included in net income 295 127 264
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 884 (39) (859)
==========================================================================================================================
Comprehensive income $19,162 $17,708 $13,551
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Fifteen
<PAGE>
BT Financial Corporation and Affiliates
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. BANK CHARTER CONSOLIDATION AND NAME CHANGES
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
(Bank and Trust). 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. ACCOUNTING AND FINANCIAL REPORTING POLICIES
The following is a summary of the significant accounting and financial
reporting policies of BT Financial Corporation (BT or the Corporation) and
its affiliates.
BASIS OF PRESENTATION
The consolidated financial statements of BT, a bank holding company
incorporated under the laws of the Commonwealth of Pennsylvania, include
the accounts of BT and its wholly owned affiliates, Laurel Bank (Laurel),
Laurel Trust Company (the Trust Company), Bedford Associates, Inc., Laurel
Community Development Corporation, and Bedford Associates of Delaware,
Inc. All significant intercompany transactions have been eliminated in
consolidation.
Bedford Associates, Inc., was organized by BT primarily to hold and
operate real property and equipment used by banking affiliates in their
operations. Laurel Community Development Corporation was organized to
conduct community development activities. Bedford Associates of Delaware,
Inc., a Delaware Corporation, was formed in 1998 to hold and manage
certain investments of BT.
The preparation of 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 the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
Prior period financial statements have been restated to include the
accounts and operations of companies that were acquired and accounted for
as poolings-of-interests. Results of operations from business combinations
accounted for as purchases are included in the consolidated financial
statements from their respective acquisition dates.
CASH EQUIVALENTS
BT considers all non-interest-bearing amounts due from banks to be cash
equivalents. At December 31, 1998 and 1997, the Corporation maintained
cash balances of approximately $31 million and $24 million respectively,
with one large financial institution located in southwestern Pennsylvania.
SECURITIES
The securities portfolio consists of securities and short-term
investments, which are purchased by the Corporation to enhance the overall
yield on earning assets and to contribute to the management of interest
rate risk and liquidity. BT follows Statement of Financial Accounting
Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and
Equity Securities". This statement requires classification of securities
into three categories; held-to-maturity, trading securities, and
available-for-sale. The Corporation may classify securities as
held-to-maturity when it has both the ability and positive intent to hold
the securities to maturity. Securities designated as available for sale
may be sold in response to changes in market interest rates and in
prepayment risk, income tax considerations, and liquidity needs. Pursuant
to SFAS No. 115, securities available-for-sale are recorded at market
value, with aggregate unrealized holding gains and losses reported net of
income tax as a separate component of shareholders' equity. Securities
held-to-maturity are stated at cost adjusted for amortization of premium
and accretion of discount, computed primarily under the interest method.
The Corporation's investment policy specifically prohibits the existence
of a trading account portfolio.
Gains and losses are computed principally under the specific
identification method. On a periodic basis, management evaluates each
security where amortized cost exceeds market value. If the decline is
judged to be other than temporary, the cost basis of the security is
written down to its estimated net realizable value with the write down
included in net securities gains (losses).
INTEREST INCOME
Interest income is recognized in a manner that results in a level yield
on principal amounts outstanding. The accrual of interest is discontinued
when, in management's judgment, it is determined that the collectibility
of interest, but not necessarily principal, is doubtful. Payments on
nonaccrual loans are generally applied to either principal or interest or
both, depending upon management's evaluation of collectibility. Loan
origination fees, net of certain direct origination costs, are deferred
and recognized over the life of the related loan as a yield adjustment.
UNEARNED INTEREST
Unearned interest represents interest deducted from the proceeds of
consumer loans and direct finance leases. Income is recognized over the
life of the loan or lease as payments become due.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is based on management's evaluation of
probable losses in the current loan portfolio, which includes an
assessment of current economic conditions, changes in the nature of the
loan portfolio, loan loss experience, and other relevant factors. When
conducting loan evaluations, management considers various factors such as
historical loan performance, the financial condition of the debtor and
collateral adequacy to determine when a loan is
Sixteen
<PAGE>
Financial Report to Shareholders
impaired. Recurring shortfalls or delays in payments and/or extended
delinquency periods may provide evidence that a delay or shortfall is
significant enough to warrant a review of the loan for impairment. Loans
are considered for impairment if payments are delinquent for 90 days or
earlier based on management's judgment. The measurement of impaired loans
is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that
collateral-dependent loans are generally measured for impairment based on
the fair value of the collateral. All of the loans identified as impaired
loans for BT at December 31, 1998, are collateral-dependent loans. When
the measured amount of an impaired loan is less than the recorded
investment in the loan, the impairment is recorded in a specific valuation
reserve through a charge to provision for loan losses. The specific
valuation reserve is periodically adjusted for significant changes in the
amount or timing of expected future cash flows, observable market price or
fair value of the collateral. The valuation reserve, or reserve for
impaired loan losses, is part of the total reserve for loan losses. Upon
disposition of an impaired loan, any related reserve is reversed and any
excess or deficiency of such reserve is netted against the general
reserve. Individual smaller balance loans are collectively evaluated for
impairment. In addition, the Corporation collectively reviews for
impairment commercial real estate and commercial loans under $250. The
aggregation of these loans is based upon common risk characteristics such
as, among other factors: loan type; geographic or industry risk
concentrations; whether the loans have similar terms, such as interest and
principal repayment terms; levels and types of collateral; and external
credit ratings or internal risk ratings for the particular loans.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation and amortization. Depreciation is
computed by both straight-line and accelerated methods over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
terms of leases or estimated useful lives of improvements, whichever is
shorter. Estimated useful lives are generally 10 to 50 years for premises,
3 to 10 years for equipment and 5 to 15 years for leasehold improvements.
Maintenance, repairs, and minor renewals are charged to expense as
incurred. Expenditures for improvements and major renovations are
capitalized and depreciated over their estimated useful lives.
When premises and equipment are removed or otherwise disposed of, the
cost and related accumulated depreciation or amortization are removed from
the accounts and any resulting gain or loss is credited or charged to
income.
INTANGIBLE ASSETS
The purchase method of accounting for business combinations results in
the adjustment of net assets to their estimated fair value at the
acquisition date. The excess of purchase price over such fair value is
recorded in other assets and amortized on a straight-line basis over
periods ranging from 5 to 15 years. Premiums paid by bank affiliates for
branch offices are allocated to core deposit intangibles and are recorded
in other assets and amortized on a straight-line basis over their
estimated lives, generally ranging from 5 to 15 years. Core deposit
premiums amounted to $4,145 and $4,452 and goodwill and other intangibles
amounted to $16,897 and $18,685 at December 31, 1998 and 1997,
respectively. Management periodically evaluates the carrying value and
remaining amortization periods of intangible assets for possible
impairment. Adjustments are recorded when the benefit of the intangible
asset decreases due to asset dispositions or reduced earnings from
acquisitions with anticipated earning levels projected below the cost to
recover such intangibles.
OTHER REAL ESTATE
Other real estate is carried at the lower of estimated market value,
less selling costs, or the value of the outstanding loan balance. Costs to
maintain the assets and subsequent gains and losses attributable to their
disposal are included in other expense.
INCOME TAXES
The Corporation follows the liability approach for measuring deferred
taxes based on temporary differences between the financial statement and
tax basis of assets and liabilities existing at each balance sheet date
using enacted tax rates.
PER SHARE DATA
Cash dividends per share are based on the number of shares outstanding
at the respective declaration dates, after giving retroactive effect to
the stock dividends.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."The statement, effective for fiscal years beginning after
December 15, 1997, establishes standards for the way public enterprises
report information about operating segments in annual financial statements
and interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. BT adopted SFAS No. 131 for fiscal year 1998
reporting and concluded that no additional disclosures were required in
its financial statements. Since SFAS No. 131 is a disclosure based
statement, the adoption did not have any impact on BT's financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires, among other things, that an entity recognizes all
derivatives as either assets or liabilities in the statement of financial
condition and measures those instruments at fair value. The statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Since BT does not currently use derivative financial instruments,
the standard will not have any material impact on BT's financial position
or results of operations upon adoption.
Seventeen
<PAGE>
BT Financial Corporation and Affiliates
3. ACQUISITIONS
On June 13, 1996, BT acquired The Armstrong County Trust Company
(Armstrong) of Kittanning, Pennsylvania by merging Armstrong into Bank and
Trust. The acquisition was accounted for as a purchase. Armstrong had
assets of approximately $50 million and operated one office in Armstrong
County. Each Armstrong common share was exchanged for 26.5 shares of BT
Common Stock and $533.21 in cash. A total of 212,000 BT common shares were
issued in the merger. The total consideration for the Armstrong
acquisition was approximately $12 million in the aggregate for all 8,000
Armstrong shares outstanding. The cash portion of approximately $4.3
million was financed through short-term borrowing from a commercial bank.
In connection with the acquisition, goodwill and other intangibles of
approximately $5.2 million were recorded. Goodwill is being amortized over
15 years. Armstrong's results of operations after June 13, 1996 are
included in BT's 1996 Consolidated Statement of Income. Unaudited pro
forma results of operations for the year ended December 31, 1996 are
presented below. The pro forma results are not necessarily indicative of
what actually would have occurred if the acquisition had been in effect
for the entire period presented. In addition, they are not intended to be
a projection of future results and do not reflect any synergies that might
be achieved from the combined operations of the companies.
PRO FORMA RESULTS
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------------
<S> <C>
Net interest income before
the provision for loan loss $66,060
Net income 14,221
Earnings per share:*
Basic and Diluted 1.10
------------------------------------------------------------
</TABLE>
*Data reflects the issuance of 26.5 shares of BT Common
Stock (212,000 shares in total) for each share of
Armstrong Common Stock and has been adjusted to reflect
the May 1, 1998 2-for-1 stock split effected in the form
of a stock dividend.
On June 25, 1996, BT completed a merger with Moxham Bank Corporation
(Moxham) whereby Moxham was merged directly into BT. In connection with
the merger, each share of Moxham Common Stock (other than shares held by
the Corporation) was converted into 1.15 shares of BT Common Stock,
resulting in the issuance of 1,038,519 BT common shares. In addition,
88,550 shares of BT Common Stock were exchanged for all 14,000 outstanding
shares of Moxham Series A $8.00 cumulative convertible non-voting
preferred stock. The merger has been accounted for as a
pooling-of-interests, and accordingly BT's accompanying consolidated
financial statements have been restated retroactively to include the
accounts and operations of Moxham for all periods presented prior to the
merger. Moxham's banking subsidiaries included the Moxham National Bank
and The First National Bank of Garrett. Moxham also held a non-bank
subsidiary known as the Moxham Community Development Corporation. Upon
consummation of the merger, Moxham's banking subsidiaries were merged into
Bank and Trust on June 25, 1996. At the time of the merger, Moxham had
assets of approximately $235 million and operated 12 branches in Cambria,
Somerset, and Westmoreland counties. In conjunction with the merger, four
of these branches closed during the third quarter of 1996 along with two
branches of the former Bank and Trust and one branch of the former Laurel
Bank as a result of duplicate service areas.
Separate results of the combining entities are presented below for June
30, 1996. All significant intercompany transactions have been eliminated.
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
BT Moxham Combined
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income before
the provision for loan loss $27,158 $4,692 $31,850
Net income 6,245 783 7,028
Earnings per share:
Basic -- -- .57
Diluted -- -- .56
-----------------------------------------------------------------------
</TABLE>
Certain reclassifications have been made to Moxham's financial
information to conform to BT's classification.
In connection with the Moxham merger, $1.3 million of reorganization
costs ($959 after-tax or $.08 per diluted share) were incurred and charged
to expense in 1996. The reorganization costs consisted primarily of
severance pay to furloughed employees and various legal, accounting and
investment banking fees associated with the transaction.
On June 6, 1997, Bank and Trust purchased three branch offices of
National City Bank of Pennsylvania (National City), a subsidiary of
National City Corporation of Cleveland, Ohio. The acquisition of the three
branches was accounted for as a purchase. 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
Eighteen
<PAGE>
Financial Report to Shareholders
of all three branches which were merged into Bank and Trust. The purchase
price of approximately $4.6 million was allocated to a deposit intangible
and is being amortized over a fifteen-year period. The combined deposit
and loan totals for the three offices were approximately $69.7 million and
$5.8 million, respectively, at June 6, 1997. Due to the nature of the
branch acquisitions, pro forma information is not presented.
On October 23, 1998, BT completed a merger with The Peoples National
Bank of Rural Valley (Peoples), Rural Valley, Pennsylvania whereby Peoples
merged into Laurel Bank. At the time of the merger, Peoples operated one
branch with unaudited assets totaling approximately $37 million. In
connection with the merger, each share of Peoples Common Stock was
converted into 12.11 shares of BT Common Stock, resulting in the issuance
of 484,400 BT common shares. The value of the transaction was
approximately $12.6 million based on an average market price of
approximately $26 per BT common share. The merger has been accounted for
as a pooling-of-interests, and accordingly BT's accompanying consolidated
financial statements have been restated retroactively to include the
accounts and operations of Peoples for all periods presented prior to the
merger.
Separate results of the combining entities are presented for the
periods shown below.
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
BT Peoples Combined
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income before the
provision for loan loss $50,868 $1,111 $51,979
Net income 12,991 465 13,456
Earnings per share:
Basic and Diluted -- -- 1.04
-----------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BT Peoples Combined
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income before the
provision for loan loss $65,381 $1,443 $66,824
Net income 17,152 595 17,747
Earnings per share:
Basic and Diluted 1.37 -- 1.37
-----------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BT Peoples Combined
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income before the
provision for loan loss $63,624 $1,431 $65,055
Net income 13,774 636 14,410
Earnings per share:
Basic 1.13 -- 1.13
Diluted 1.12 -- 1.13
-----------------------------------------------------------------------
</TABLE>
Certain reclassifications have been made to Peoples' financial
information to conform to BT's classification.
In connection with the Peoples merger, $290 of reorganization costs
($260 after-tax or $.02 per diluted share) were recognized in 1998. These
costs consisted principally of legal, accounting, and other fees related
to the merger.
Nineteen
<PAGE>
BT Financial Corporation and Affiliates
4. SECURITIES
The amortized cost and estimated market values of securities at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Amortized Holding Holding Market Amortized Holding Holding Market
Cost Gains Losses Value Cost Gains Losses Value
--------------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
US Treasury and
obligations of US
Government agencies
and corporations $159,004 $1,416 $ (3) $160,417 $184,577 $1,121 $(271) $185,427
Obligations of states and
political subdivisions 92,960 1,070 (78) 93,952 6,868 204 (3) 7,069
Debt securities issued
by foreign governments 982 38 -- 1,020 924 27 (1) 950
Corporate securities 18,872 30 -- 18,902 6,526 37 (1) 6,562
=========================================================================== ================================================
TOTAL $271,818 $2,554 $(81) $274,291 $198,895 $1,389 $(276) $200,008
SECURITIES HELD-TO-MATURITY
US Treasury and
obligations of US
Government agencies
and corporations $ 72,307 $ 384 $ -- $ 72,691 $180,870 $1,369 $ (74) $182,165
Obligations of states and
political subdivisions -- -- -- -- 4,894 39 (1) 4,932
=========================================================================== ================================================
TOTAL $ 72,307 $ 384 $ -- $ 72,691 $185,764 $1,408 $ (75) $187,097
</TABLE>
The market value of securities was based on quoted market prices or bid
quotations received from securities dealers. BT owned capital stock of the
Federal Home Loan Bank and the Federal Reserve Bank of Philadelphia in the
aggregate amounts of $18,505 and $6,022 at December 31, 1998 and 1997,
respectively. These stock investments are carried at cost and are included
in BT's corporate securities total.
The amortized cost and estimated market value of securities at December
31, 1998 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-For-Sale Held-To-Maturity
1998 1998
---------------------------- --------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 23,419 $ 23,575 $ -- $ --
Due after one year through five years 16,697 17,083 72,307 72,691
Due after five years through ten years 145,309 146,299 -- --
Due after ten years 86,393 87,334 -- --
=============================================================================== ============================
Total $271,818 $274,291 $72,307 $72,691
</TABLE>
Proceeds from sales of securities during 1998 were $45,249. Gross gains
of $361 were realized on those sales. In addition, various securities were
called during 1998, which resulted in gross gains of $163 and gross losses
of $20. BT realized gross losses of $50 in 1998, 1997, and 1996 in
connection with a valuation adjustment on an equity security. During 1997,
proceeds from sales of securities were $10,926, with gross gains of $270
and gross losses of $62 realized on those sales. In addition, various
securities were called during 1997, which resulted in gross gains of $37.
In 1996, proceeds from sales of securities were $5,378, with gross gains
of $445 and gross losses of $8 realized on those sales. Also, various
securities were called in 1996 resulting in gross gains of $19. At
December 31, 1998, securities carried at $134,228 were pledged as
collateral for public and trust deposits and securities sold under
agreements to repurchase. At December 31, 1997, BT held available-for-sale
investments in government agency step-up securities of approximately $8.5
million with call options that allow the issuer to redeem the investment
prior to maturity.
Twenty
<PAGE>
Financial Report to Shareholders
5. LOANS
The composition of the loan portfolio at December 31, 1998 and 1997 was
as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 189,592 $ 166,803
Real estate:
Residential 375,416 345,036
Commercial 267,665 252,040
Consumer 415,194 375,414
=======================================================================
TOTAL $1,247,867 $1,139,293
</TABLE>
Commercial real estate, residential real estate and other loans held by
the Corporation are primarily located in western and central Pennsylvania.
The Corporation evaluates each customer's credit worthiness on a
case-by-case basis. Collateral held includes mortgages on residential and
income-producing properties. Included in consumer loans are education
loans held-for-sale which totaled $12,122 and $12,300 at December 31,
1998, and 1997, respectively. Such loans are carried at cost and
historically have been sold at carrying amount.
A summary of loans to executive officers and directors, including
associates of such persons, is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------
<S> <C> <C>
Loans at beginning of year $24,367 $23,578
New loans 24,400 16,582
Loan payments (22,672) (14,840)
Other (3,850) (953)
===============================================================
LOANS AT END OF YEAR $22,245 $24,367
</TABLE>
Other represents the net change in loan balances resulting from changes
in related parties during the year.
See Note 20 "Financial Instruments with Off-Balance Sheet Risk" for
credit risk disclosures.
6. RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ -------------------------------
Total Total Total
Reserve for Reserve Reserve for Reserve Reserve for Reserve
General Impaired for Loan General Impaired for Loan General Impaired for Loan
Reserve Loan Losses Losses Reserve Loan Losses Losses Reserve Loan Losses Losses
------------------------------ ------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year $ 9,012 $ 870 $ 9,882 $ 8,294 $1,511 $ 9,805 $ 9,227 $ 931 $10,158
Reserve of acquisition -- -- -- -- -- -- 159 -- 159
Additions:
Provisions for loan
losses 4,399 1,541 5,940 3,524 706 4,230 1,111 1,330 2,441
Recoveries of loans
charged off 381 -- 381 408 -- 408 571 -- 571
Deductions:
Loans charged off (2,969) (2,263) (5,232) (3,214) (1,347) (4,561) (2,774) (750) (3,524)
============================================================ =============================== ===============================
BALANCE AT END OF YEAR $10,823 $ 148 $10,971 $ 9,012 $ 870 $ 9,882 $ 8,294 $1,511 $ 9,805
</TABLE>
The recorded investment in loans for which impairment has been
recognized totaled $674 and $1,895 at December 31, 1998 and 1997,
respectively. A corresponding valuation allowance of $148 and $870 was
established at December 31, 1998 and 1997, respectively. The
year-over-year decreases were principally due to charge-offs in 1998 of
various impaired commercial loans associated with two borrowers. The
average recorded investment in impaired loans during 1998 and 1997 was
approximately $1,479 and $2,653, respectively. During 1998 and 1997, BT
recognized approximately $5 of interest revenue on impaired loans, all of
which was recorded using the cash basis of income recognition.
Twenty-One
<PAGE>
BT Financial Corporation and Affiliates
7. PREMISES AND EQUIPMENT
Major classes of premises and equipment at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------
<S> <C> <C>
Land $ 4,410 $ 4,446
Buildings 28,714 28,942
Leasehold improvements 1,789 1,798
Equipment 27,389 25,436
-----------------------------------------------------------------
Total 62,302 60,622
Less accumulated depreciation
and amortization 33,637 30,084
=================================================================
PREMISES AND EQUIPMENT, NET $28,665 $30,538
</TABLE>
8. DEPOSITS
The composition of deposits at December 31, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------
<S> <C> <C>
Non-interest-bearing demand $ 210,127 $ 182,640
Interest-bearing demand 226,485 195,378
Savings 223,028 240,800
Time deposits 733,380 756,459
==============================================================
TOTAL $1,393,020 $1,375,277
</TABLE>
The aggregate amount of all time deposits over $100 amounted to
$126,501 and $135,917 at December 31, 1998 and 1997, respectively.
The following table presents the maturity schedule of BT's total time
deposits at December 31, 1998.
<TABLE>
<CAPTION>
--------------------------------------------------------------
<S> <C>
Time Deposits:
1 year or less $574,078
Over 1 year through 2 years 111,165
Over 2 years through 3 years 27,383
Over 3 years through 4 years 6,702
Over 4 years through 5 years 9,602
Over 5 years 4,450
==============================================================
TOTAL $733,380
</TABLE>
9. FEDERAL INCOME TAXES
The components of the provision (benefit) for income taxes from
operations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Current $8,592 $9,161 $ 8,286
Deferred (656) 34 (1,073)
====================================================
TOTAL $7,936 $9,195 $ 7,213
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax
rate applicable to income before income taxes follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 35.0% 35.0% 35.0%
Add (deduct) the tax effect of:
Tax-exempt interest (6.3) (3.6) (4.9)
Interest expense limitation .2 .5 .8
Other, net 1.4 2.2 2.5
========================================================================
Effective tax rate 30.3% 34.1% 33.4%
</TABLE>
Twenty-Two
<PAGE>
Financial Report to Shareholders
The deferred tax assets and deferred tax liabilities recorded on the
balance sheet are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------- ------------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Reserve for possible loan losses $3,736 $ -- $3,296 $ --
Net unrealized holding gains
on securities -- 865 -- 389
Depreciation 773 -- 722 --
Deferred loan fees, net 119 -- 131 --
Adjustment due to acquisition 47 430 202 623
Deferred compensation 498 -- 491 --
Other 1,527 548 1,441 594
============================================================================ ==============================
TOTAL $6,700 $1,843 $6,283 $1,606
</TABLE>
No valuation allowance was established at December 31, 1998 and 1997 in
view of the Corporation's ability to carry back net deferred tax assets to
taxes paid in previous years.
10. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
In February of 1998, the FASB issued SFAS No. 132 "Employers'
Disclosures about Pensions and Other Post-retirement Benefits." BT adopted
SFAS No. 132 effective December 31, 1998 and prior year disclosures have
been restated to conform with SFAS No. 132. SFAS No. 132 revises
employers' disclosures about pension and other post-retirement 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 Post-retirement
Benefits Other Than Pensions."
BT maintains noncontributory defined benefit pension plans covering
substantially all employees meeting minimum age and service requirements.
The plans generally provide benefits based on years of credited service
and final average earnings. BT's current funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Pension plan assets are primarily US Government obligations,
corporate obligations, and equity securities whose values are subject to
fluctuations of the securities market. Plan assets include common stock of
BT with values of $2,148 and $2,001 at December 31, 1998 and 1997,
respectively. Changes in plan asset values attributable to differences
between actual and expected returns on plan assets are deferred as
unrecognized gains or losses and included in the determination of net
pension cost over time.
Prior to 1998, BT maintained separate pension plans for its banking and
non-banking employees. During 1998, BT's non-banking employees were
terminated and subsequently rehired by an outside contractor. Accordingly,
the non-banking plan assets and liabilities were assumed by the
contractor.
The following table sets forth the change in the projected benefit
obligation for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- -------------------
1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $21,216 $19,179 $763 $569
Service cost 836 740 82 141
Interest cost 1,493 1,314 57 53
Actuarial gain (loss) 1,488 751 (55) --
Termination of plan (234) -- -- --
Benefits paid (706) (768) (35) --
=====================================================================================================================
PROJECTED BENEFIT OBLIGATION AT END OF YEAR $24,093 $21,216 $812 $763
</TABLE>
The following table sets forth the change in the fair value of the plan
assets for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- -------------------
1998 1997 1998 1997
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $26,158 $23,268 $-- $--
Employer contributions 398 216 35 --
Actual return on plan assets 2,363 3,442 -- --
Termination of plan (267) -- -- --
Benefits paid (706) (768) (35) --
=====================================================================================================================
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $27,946 $26,158 $-- $--
</TABLE>
Twenty-Three
<PAGE>
BT Financial Corporation and Affiliates
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet at December 31, 1998 and
1997.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- -------------------
1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status:
Funded status $ 3,853 $ 4,942 $(812) $(763)
Unrecognized actuarial loss (1,082) (2,311) -- --
Unrecognized prior service costs (282) (309) 98 162
Unrecognized transition credit (1,398) (1,487) -- --
====================================================================================================================
PREPAID (ACCRUED) PENSION COSTS $ 1,091 $ 835 $(714) $(601)
</TABLE>
Pension expense is determined at the beginning of the year using the
funded status assumptions for the previous year-end. The funded status is
determined using assumptions as of the end of the year are as follows.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 7.00% 7.50% 7.50% 7.50%
Long-term rate of return 8.25% 8.00% 8.00% -- -- --
Compensation rate 3.00% 3.00% 3.00% 4.50% 4.50% 4.50%
------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the pension expense for the years ended
December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Pension Benefits
------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service costs benefits earned during
the year $ 836 $ 740 $ 654
Interest accrued on projected
benefit obligation 1,493 1,314 1,236
Actual return on plan assets (2,363) (3,441) (3,010)
Net amortization and deferral 142 1,492 1,238
==========================================================================================
NET PENSION EXPENSE $ 108 $ 105 $ 118
</TABLE>
<TABLE>
<CAPTION>
Other Benefits
------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service costs benefits earned during
the year $ 82 $141 $109
Interest accrued on projected
benefit obligation 57 53 40
==========================================================================================
NET PENSION EXPENSE $139 $194 $149
</TABLE>
The Corporation follows SFAS No. 106 "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions". This statement requires
that the expected cost of providing post-retirement benefits be recognized
in the financial statements during the employees active period of
employment. Expense under the provisions of SFAS No. 106 for 1996
consisted of the following:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
<S> <C>
Interest cost $104
Amortization of transition
obligation and other 94
=======================================================
NET POST-RETIREMENT EXPENSE $198
</TABLE>
During 1997, retirees maintaining health care coverage were transferred
to the Corporation's medical plan in which retirees are responsible for
payment of premiums. As a result, the Corporation did not have a SFAS No.
106 liability at year-end 1998 or 1997.
The Corporation adopted a defined contribution plan with 401(k)
features during 1995. The plan permits each employee to contribute a
portion of their salary to the plan on a pre-tax basis with employer
matching up to stipulated amounts as determined by the Corporation. Total
expense was $162 for 1998, $157 for 1997, and $143 for 1996.
Twenty-Four
<PAGE>
Financial Report to Shareholders
Moxham Bank Corporation maintained a noncontributory target benefit
pension plan (target plan) covering all employees who met the eligibility
requirements. Prior to BT's acquisition of Moxham, a resolution was passed
to terminate the target plan subject to IRS approval. These employees were
admitted to the BT 401(k) plan upon acquisition and will vest 100% in the
plan upon completion of six years of service with either BT or previously
with Moxham. To be eligible for the target benefit pension plan prior to
the merger, an employee must have been 21 years of age and have completed
one year of continuous service. Contributions to the target plan were
determined by a formula based on the participant's annual compensation and
years of service. Contributions to the target plan included in the
consolidated statement of income were $107 for 1996.
Moxham also maintained a non-qualified deferred compensation plan
(plan) for certain employees. This plan was frozen upon the acquisition of
Moxham by BT. To participate in this plan, selected employees must have
completed at least twelve consecutive months of service with Moxham. The
plan provides payments from a participant's "account" payable at age
sixty-two, or upon the participant's retirement from the Corporation,
whichever is later, or upon the participant's death or disablement.
Payments are made from the participant's account in equal quarterly
installments over a period of ten years, or the participant may elect to
receive the payment in a lump sum. Contributions to this plan included in
the consolidated statement of income were $445 in 1996.
11. SHORT-TERM AND LONG-TERM BORROWINGS
BT's short-term borrowings consist of federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings. Outstanding short-term borrowings were $37,258 and $38,184 at
December 31, 1998 and 1997, respectively. The weighted average interest
rates on these borrowings at year-end 1998 and 1997 were 3.07% and 5.15%,
respectively. Laurel is a member of the Federal Home Loan Bank (FHLB).
Accordingly, Laurel has availability of short- and long-term borrowings in
the form of collateralized advances from the FHLB. The advances are
secured primarily by Laurel's residential mortgage loans. The available
line of credit for short-and long-term borrowings from the FHLB at
December 31, 1998 was approximately $261 million. At December 31, 1998 and
1997, Laurel did not have any short-term borrowings consisting of FHLB
advances.
Long-term borrowings outstanding amounted to $100,031 and $14,335 at
December 31, 1998 and 1997, respectively. During 1998, the Corporation
incurred $100,000 in long-term borrowings provided by the FHLB. The FHLB
borrowings are scheduled to mature in the year 2008. After an initial
lockout period ranging from one to three years and then quarterly
thereafter, the FHLB has the option to convert the fixed-rate advances to
adjustable rates which reset quarterly. Payments on the advances consist
of interest due only until maturity in the year 2008 when, at that time,
principal payments are also due. The interest rates on the FHLB advances
range from 5.08% to 5.24% at December 31, 1998. During 1998, the
Corporation paid off $14,285 in a long-term borrowing related to a note
incurred on December 14, 1995. The interest rate paid on this note was
6.75% during 1998.
A mortgage note is included in long-term borrowings and amounted to $31
and $50 at December 31, 1998 and 1997, respectively. The mortgage note has
a fixed rate of 9.5% and matures in the year 2000.
12. CAPITAL STOCK
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 6,492,636 shares, increased common shares
issued and outstanding to 12,985,272. Accordingly, a transfer of $32.5
million, representing the par value of additional shares issued, was made
from surplus to common stock. On July 23, 1997 BT's Board of Directors
declared a 10% stock dividend. The dividend was distributed on September
15, 1997 to shareholders of record as of August 27, 1997. The dividend was
charged to retained earnings in the aggregate amount of $23.6 million
which was based on a market price of $39.95 per share. The stock dividend,
representing 590,239 common shares, increased common shares issued and
outstanding to 6,492,636. On August 28, 1996, BT's Board of Directors
declared a 10% stock dividend. The dividend was distributed on October 22,
1996 to shareholders of record as of September 20, 1996. The dividend was
charged to retained earnings in the aggregate amount of $17.0 million
which was based on a market price of $31.77 per share. Weighted average
shares outstanding and all per share amounts included in the accompanying
consolidated financial statements and notes are based on the increased
number of shares giving retroactive effect to the aforementioned stock
dividends.
In July 1992, the former Moxham Bank Corporation issued 15,000 shares
of Series A $8.00 cumulative convertible non-voting Preferred Stock
(Series A Preferred Stock). An annual dividend of $8.00 per share, payable
quarterly on the last day of March, June, September and December,
commenced September 30, 1992. Cash dividends on the Series A preferred
stock were cumulative from date of issue. At December 31, 1995, 14,000
preferred shares were outstanding. These shares were exchanged for 88,550
shares of BT Common Stock in connection with the merger on June 25, 1996.
Approximately $54 in preferred stock dividends were paid in 1996.
BT has authorized, at no par value, 2,000,000 shares of nonredeemable
cumulative Series A Preferred Stock. At December 31, 1998, no shares have
been issued. Upon issuance, the Series A Preferred Stock would have
certain voting and liquidation rights. In 1991, the Board of Directors of
BT declared and paid a dividend distribution of one right for each
outstanding share of BT Common Stock. Each right entitles the holder to
purchase from the Corporation, units of Series A Preferred Stock at a set
price, exercisable on the distribution date as defined in the agreement.
All currently outstanding shares of BT Common Stock have these rights. At
December 31, 1998 no rights have been exercised.
BT is subject to various regulatory capital requirements administered
by the Federal Reserve Bank. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material
effect on BT's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, BT and Laurel must
meet specific
Twenty-Five
<PAGE>
BT Financial Corporation and Affiliates
capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Capital amounts and classification 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 BT and Laurel to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets, and of Tier I capital to average
assets. As of December 31, 1998, the Corporation meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized BT and Laurel as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized", each entity 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 which management
believes have changed each institution's categorization.
BT's consolidated and subsidiary bank's actual capital amounts and
ratios are presented in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
BT (Consolidated) $151,910 12.13% =>$100,205 =>8.00% N/A
Laurel 141,155 11.32 => 99,797 =>8.00 =>$124,746 =>10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
BT (Consolidated) $140,939 11.25% =>$ 50,103 =>4.00% N/A
Laurel 130,184 10.44 => 49,899 =>4.00 =>$ 74,848 => 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS)
BT (Consolidated) $140,939 8.41% =>$ 67,054 =>4.00% N/A
Laurel 130,184 7.80 => 66,721 =>4.00 =>$ 83,401 => 5.00%
As of December 31, 1997:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
BT (Consolidated) $139,797 12.28% =>$ 91,063 =>8.00% N/A
Laurel 146,303 12.92 => 90,607 =>8.00 =>$113,259 =>10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
BT (Consolidated) $129,915 11.41% =>$ 45,532 =>4.00% N/A
Laurel 136,421 12.05 => 45,304 =>4.00 =>$ 67,955 => 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS)
BT (Consolidated) $129,915 8.27% =>$ 62,848 =>4.00% N/A
Laurel 136,421 8.71 => 62,636 =>4.00 =>$ 78,294 => 5.00%
</TABLE>
13. REGULATORY REQUIREMENTS
Reserve balances of $12,357 were required to be maintained at the
Federal Reserve Bank of Philadelphia by Laurel at December 31, 1998.
Dividends and loans to BT from Laurel are subject to regulatory
limitations. During 1998, Laurel received regulatory approval to pay a
special dividend to BT in the amount of $12,143 in connection with the
payoff of a long-term borrowing at BT. In 1999, under regulatory
guidelines and without prior approval of bank regulators, Laurel can
declare dividends to BT generally equal to the net earnings of Laurel for
the period January 1, 1999 through the date of declaration less dividends
previously paid in 1999. Loans must be collateralized and loans to a
single non-bank affiliate cannot exceed 10% of Laurel's capital and
surplus, and the aggregate to all non-bank affiliates cannot exceed 20%.
The maximum amount available to BT at December 31, 1998 from Laurel in the
form of loans was $5,681.
14. STOCK BASED COMPENSATION PLAN
On May 12, 1998, BT's shareholders approved the 1998 Equity Incentive
Plan (the "1998 Plan"). Under the 1998 Plan, BT may grant stock options to
its employees and directors for up to 1,200,000 shares of BT Common Stock.
Incentive stock options, non-qualified stock options and other
performance-based incentive awards may be granted pursuant to the 1998
Plan. Effective May 12, 1998, BT's Board of Directors granted
non-qualified stock options to purchase 382,000 shares of common stock at
an exercise price of $27.75 per share, which equaled the market price of
the stock on the date of grant. The stock options became exercisable on
May 13, 1998 and have a maximum term of 10 years.
Twenty-Six
<PAGE>
Financial Report to Shareholders
Stock option transactions for the 1998 Plan are summarized below:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
Weighted
Shares Average
Under Exercise
Option Price
----------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year -- --
Granted 382,000 $27.75
Exercised -- --
Forfeited -- --
----------------------------------------------------------------------------
Outstanding at December 31, 1998 382,000 $27.75
Options exercisable at December 31, 1998 382,000
Weighted average estimated fair value
of options granted $ 7.21
</TABLE>
The following table summarizes information about BT's stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life (Years) Price Exercisable Price
-------------- ---------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$27.75 382,000 9.4 $27.75 382,000 $27.75
</TABLE>
BT applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" in accounting for the 1998 Plan. Accordingly,
no compensation expense has been recognized for the 1998 Plan. Had
compensation cost for the 1998 Plan been determined based on the fair
value at the grant date consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation", BT's net income and earnings per share would
have been reduced to the pro forma amounts indicated in the table below.
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------------------------------------------------------
<S> <C> <C>
Net income (in thousands) As reported $18,278
Pro forma 16,488
Basic and Diluted earnings per share As reported $ 1.41
Pro forma 1.27
----------------------------------------------------------------------------
</TABLE>
Since all of the outstanding stock options became vested on May 13,
1998, the pro forma amounts above reflect the recognition of the entire
associated compensation cost in the year ended December 31, 1998.
The fair value for the options described above was estimated at the
date of grant using a Black-Scholes option pricing model. The model was
developed for use in estimating the fair value of traded options which
have different characteristics from BT's stock options. Additionally, the
model requires the input of subjective assumptions which can materially
affect the fair value estimate. In management's opinion, the model may not
necessarily provide a reliable single measure of the fair value of BT's
stock options. The fair value of stock options granted during 1998 was
estimated on the date of grant using the following weighted average
assumptions: risk free interest rate of 5.62%, an average life of the
options of 6 years, a stock price volatility factor of 23.9%, and a
dividend yield of 2.6%.
15. 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.
Twenty-Seven
<PAGE>
BT Financial Corporation and Affiliates
The following table sets forth the components of accumulated other
comprehensive income, net-of-tax:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
------------------------------------------------------- ------------------------------ -------------------------------
Accumulated Accumulated Accumulated
Unrealized Other Unrealized Other Unrealized Other
Gains Comprehensive Gains (Losses) Comprehensive Gains (Losses) Comprehensive
on Securities Income on Securities Income (Loss) on Securities Income (Loss)
------------------------------------------------------- ------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 723 $ 723 $762 $762 $1,621 $1,621
Current-period change 884 884 (39) (39) (859) (859)
======================================================= ============================== ===============================
ENDING BALANCE $1,607 $1,607 $723 $723 $ 762 $ 762
</TABLE>
The following table sets forth the tax effect allocated to components
of other comprehensive income:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------- ----------------------------- -------------------------------
Tax Tax
Pre-tax Tax Net-of-Tax Pre-tax Expense Net-of-Tax Pre-tax Expense Net-of-Tax
Amount Expense Amount Amount (Benefit) Amount Amount (Benefit) Amount
- ------------------------------------------------------------- ----------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized holding gains
(losses) on securities
arising during period $1,814 $635 $1,179 $135 $ 47 $ 88 $ (915) $(320) $(595)
Less: Reclassification
adjustment for gains
included in net income 454 159 295 195 68 127 406 142 264
============================================================= ============================= ===============================
OTHER COMPREHENSIVE
INCOME (LOSS) $1,360 $476 $ 884 $(60) $(21) $(39) $(1,321) $(462) $(859)
</TABLE>
BT's comprehensive income is disclosed in BT's consolidated statement
of comprehensive income.
16. EARNINGS PER SHARE
BT computes "basic" EPS by dividing net income, after deducting
preferred stock dividends, if any, by the weighted average number of
shares of common stock outstanding during each year, after giving
retroactive effect to the 2-for-1 stock split effected in the form of a
stock dividend distributed on May 1, 1998 and the 10% stock dividends
distributed on September 15, 1997 and October 22, 1996. "Diluted" EPS
amounts are calculated assuming that all potentially dilutive equivalents
outstanding were converted into common stock at the beginning of each year
and that no preferred dividends were paid. BT's outstanding stock options
issued in 1998 had an antidilutive effect, therefore they are not included
in the 1998 EPS calculation. The calculation of earnings per share
follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income $ 18,278 $ 17,747 $ 14,410
Preferred dividends -- -- (54)
---------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 18,278 $ 17,747 $ 14,356
Weighted average shares outstanding-Basic 12,985,272 12,985,272 12,650,352
===============================================================================================================
BASIC EARNINGS PER SHARE $ 1.41 $ 1.37 $ 1.13
Diluted earnings per share:
Net income $ 18,278 $ 17,747 $ 14,410
Weighted average shares outstanding-Basic 12,985,272 12,985,272 12,650,352
Additional common shares assuming:
Conversion of preferred stock Series A -- -- 103,632
---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding-Diluted 12,985,272 12,985,272 12,753,984
===============================================================================================================
DILUTED EARNINGS PER SHARE $ 1.41 $ 1.37 $ 1.13
</TABLE>
Twenty-Eight
<PAGE>
17. LITIGATION
A purported class action was instituted in the Court of Common Pleas of
Cambria County, Pennsylvania against the former Johnstown Bank & Trust
Company (Bank and Trust), now Laurel Bank, 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
the former 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 the former Bank and Trust
during the relevant period. The litigation is currently in the class
discovery phase. A hearing is scheduled for May 1999 at which time the
court will determine whether or not to certify the class. 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 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 area". 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 area". Motions for summary judgement filed by both parties
are pending. The impact of this litigation on BT cannot be fully assessed
at this 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.
18. SAIF ASSESSMENT
On September 30, 1996, President Clinton signed legislation which
required financial institutions with Savings Association Insurance Fund
(SAIF) deposits to pay a one time special assessment to facilitate the
recapitalization of the SAIF. The assessment was based on 65.7 cents per
one hundred dollars of deposits at March 31, 1995. This assessment
resulted in a charge of approximately $1.4 million ($899 net of tax or
$.07 per diluted share) to other expense during the year ended 1996. The
legislation also included provisions whereby at such time as the SAIF is
adequately recapitalized, future SAIF deposit premiums will decrease from
the $.23 per one hundred dollars of deposits paid in 1996 to approximately
$.065 through the year 2000 and approximately $.025 through the year 2017.
BT paid $.061 and $.064 per one hundred dollars of SAIF deposits during
1998 and 1997, respectively.
Twenty-Nine
<PAGE>
BT Financial Corporation and Affiliates
19. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The condensed balance sheets and statements of income and cash flows of
BT as of December 31, 1998, 1997, and 1996 and for the years then ended
are presented below.
BT FINANCIAL CORPORATION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET
Assets:
Cash $ 61 $ 1,299 $ 1,208
Investment in bank affiliates 152,998 160,361 154,266
Investment in non-bank affiliates 10,888 2,486 1,907
Other 678 6,069 6,137
========================================================================================================================
TOTAL ASSETS $ 164,625 $ 170,215 $ 163,518
Liabilities and Shareholders' Equity:
Long-term borrowings $ -- $ 14,285 $ 17,143
Other liabilities 1,042 2,168 2,141
Shareholders' equity 163,583 153,762 144,234
========================================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 164,625 $ 170,215 $ 163,518
STATEMENT OF INCOME
Cash dividends from bank affiliates $ 25,590 $ 11,464 $ 16,037
Cash dividends from non-bank affiliates 400 200 100
Management fees from affiliates 17,007 15,467 14,030
Other (loss) income (40) 127 418
Interest expense (718) (1,107) (1,257)
Operating expense (18,039) (16,762) (15,077)
------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed income of affiliates 24,200 9,389 14,251
Income tax benefit 262 447 394
Income before equity in undistributed income of affiliates 24,462 9,836 14,645
Equity in undistributed income of affiliates:
Banks (7,196) 7,266 (611)
Non-banks 1,012 645 376
========================================================================================================================
NET INCOME $ 18,278 $ 17,747 $ 14,410
STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income $ 18,278 $ 17,747 $ 14,410
Equity in undistributed income of affiliates 6,184 (7,911) 235
Amortization 462 1,163 1,184
Other assets and liabilities, net 4,846 (477) (1,640)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,770 10,522 14,189
Cash flows from investing activities:
Investment in affiliate (7,389) -- (4,266)
Sale of investment securities -- 293 726
Other -- -- 22
------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (7,389) 293 (3,518)
Cash flows from financing activities:
Preferred dividends paid -- -- (54)
Common dividends paid (9,333) (7,864) (6,212)
Payment on long-term borrowings (14,286) (2,857) (3,572)
Other -- (3) 3
------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (23,619) (10,724) (9,835)
------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash (1,238) 91 836
Cash at beginning of year 1,299 1,208 372
========================================================================================================================
CASH AT END OF YEAR $ 61 $ 1,299 $ 1,208
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on long-term borrowings $ 718 $ 1,150 $ 1,122
Federal income taxes, net of refunds 7,500 10,105 6,761
Non-cash financing activities:
Issuance of common stock; Armstrong acquisition $ -- $ -- $ 7,712
Conversion of preferred stock to common stock $ -- $ -- $ 1,378
</TABLE>
Thirty
<PAGE>
Financial Report to Shareholders
20. 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 December 31, 1998 were as follows:
<TABLE>
<S> <C>
Loan commitments................. $240,768
Standby letters of credit........ 11,492
</TABLE>
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
credit worthiness 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.
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
CASH AND SHORT-TERM INVESTMENTS
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
For securities, estimated fair values are based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS
Fair values were estimated for loan portfolios with similar financial
characteristics by discounting estimated future contractual cash flows
using the current rates at which similar loans would be made to borrowers
with 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.
SHORT-TERM LIABILITIES
The carrying value of short-term borrowings and securities sold under
agreements to repurchase approximates fair value.
LONG-TERM BORROWINGS
The estimated fair value of fixed rate debt was established based on
rates currently available to the Corporation for debt with similar terms
and remaining maturities. The carrying value of variable rate debt
approximates fair value.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
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 guarantees and 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.
The fair value of commitments, guarantees and letters of credit are
insignificant after considering the aforementioned factors.
Thirty-One
<PAGE>
BT Financial Corporation and Affiliates
The estimated fair values of BT's financial instruments at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 57,579 $ 57,579 $ 53,639 $ 53,639
Securities 346,598 346,982 385,772 387,105
Loans 1,218,186 1,232,947 1,080,967 1,087,728
Less: Reserve for loan losses (10,971) -- (9,882) --
======================================================================= ============================
TOTAL FINANCIAL ASSETS $ 1,611,392 $ 1,637,508 $ 1,510,496 $ 1,528,472
Financial liabilities:
Deposits $ 1,393,020 $ 1,401,765 $ 1,375,277 $ 1,380,309
Federal funds purchased and securities
sold under agreements to repurchase 35,073 35,073 36,313 36,313
Short-term borrowings 2,185 2,185 1,871 1,871
Long-term borrowings 100,031 100,545 14,335 14,335
======================================================================= ============================
TOTAL FINANCIAL LIABILITIES $ 1,530,309 $ 1,539,568 $ 1,427,796 $ 1,432,828
</TABLE>
22. SUBSEQUENT EVENT
On December 10, 1998, BT and First Philson Financial Corporation
(Philson) jointly announced they had reached an agreement in principle to
merge, with BT as the surviving company. Philson's subsidiary, First
Philson Bank, N.A., Berlin, Pennsylvania, will be merged into BT's
subsidiary, Laurel Bank. On February 23, 1999, BT and Philson entered into
a definitive merger agreement. The agreement provides that each Philson
common share will receive 1.667 shares of BT Common Stock. Based on BT's
closing market price at February 23, 1999, the total transaction value
approximates $80 million. The merger agreement is subject to completion of
due diligence, regulatory approvals and other conditions.
At December 31, 1998, BT had approximately $1.7 billion in assets and
Philson had $214 million in assets. Post-merger BT's assets will total
approximately $1.9 billion. The transaction is expected to be completed in
the second half of 1999.
The merger will be accounted for as a pooling-of-interests. The
following unaudited pro forma financial data summarizes the combined
operating results of BT and Philson as if the merger occurred at the
beginning of the periods presented.
PRO FORMA RESULTS
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income before the
provision for loan loss $78,505 $75,526 $73,125
Net Income $21,059 $20,478 $16,800
Earnings per share:*
Basic $ 1.33 $ 1.29 $ 1.08
Diluted 1.33 1.29 1.07
-------------------------------------------------------------------------------
</TABLE>
*The pro forma earnings per share amounts are based on the
sum of the weighted average shares outstanding, as
reported by BT, and the weighted average shares
outstanding for Philson converted to BT shares at the
exchange ratio of 1.667.
Thirty-Two
<PAGE>
Financial Report to Shareholders
SUPPLEMENTAL FINANCIAL DATA
QUARTERLY FINANCIAL DATA*
(UNAUDITED)
A summary of financial data for the four quarters for the years 1998
and 1997 is presented below.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- ---------------------------------------------
Quarter Ended Quarter Ended
Mar. 31 Jun. 30 Sept. 30 Dec. 31 Mar. 31 Jun. 30 Sept. 30 Dec. 31
-------------------------------------------- ---------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 16,855 $ 17,715 $ 17,409 $ 17,395 $ 16,362 $ 16,619 $ 16,930 $ 16,913
Provision for
loan losses (1,245) (1,650) (1,615) (1,430) (1,045) (1,045) (1,065) (1,075)
Other income 2,954 3,257 3,828 3,697 2,936 2,815 3,388 3,418
Other expenses (13,098) (12,597) (12,415) (12,846) (11,815) (11,841) (12,347) (12,206)
Provision for
income taxes (1,738) (2,019) (2,185) (1,994) (2,222) (2,219) (2,361) (2,393)
======================================================================= =============================================
NET INCOME $ 3,728 $ 4,706 $ 5,022 $ 4,822 $ 4,216 $ 4,329 $ 4,545 $ 4,657
Common dividends $ 2,185 $ 2,350 $ 2,330 $ 2,467 $ 1,935 $ 1,992 $ 1,992 $ 2,265
Earnings per share:(1)
Basic and Diluted .29 .36 .39 .37 .32 .33 .35 .36
</TABLE>
*Financial data for prior periods has been restated to give effect to
the Peoples acquisition which was accounted for as a pooling-of-
interests. Quarterly figures may not total to the full-year amount
due to rounding.
(1)Per share data has been adjusted to reflect the 2-for-1 stock split
effected in the form of a stock dividend distributed on May 1, 1998
and the 10% stock dividend distributed on September 15, 1997. Earnings
per share data for periods prior to December 31, 1997 has been
restated to reflect the adoption of SFAS No. 128 on December 31, 1997.
Thirty-Three
<PAGE>
BT Financial Corporation and Affiliates
SELECTED CONSOLIDATED FINANCIAL DATA*
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997(7) 1996(6) 1995(5) 1994
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Interest income $ 123,931 $ 115,972 $ 110,719 $ 102,136 $ 91,240
Interest expense 54,557 49,148 45,664 43,614 33,967
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 69,374 66,824 65,055 58,522 57,273
Provision for loan losses 5,940 4,230 2,441 1,566 1,168
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 63,434 62,594 62,614 56,956 56,105
Other income 13,736 12,557 11,343 8,796 8,468
Other expense 50,956 48,209 52,334 46,252 46,268
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 26,214 26,942 21,623 19,500 18,305
Provision for income taxes 7,936 9,195 7,213 5,869 5,056
===============================================================================================================================
NET INCOME $ 18,278 $ 17,747 $ 14,410 $ 13,631 $ 13,249
BALANCE SHEET DATA (PERIOD END)
Total assets $ 1,702,328 $ 1,590,011 $ 1,502,083 $ 1,477,815 $ 1,372,539
Loans, net of unearned interest 1,218,186 1,080,967 1,039,937 1,025,238 904,944
Total securities 346,598 385,772 321,384 322,431 352,659
Total deposits 1,393,020 1,375,277 1,291,621 1,281,240 1,175,807
Total long-term borrowings 100,031 14,335 17,210 20,083 10,021
Total shareholders' equity 163,583 153,762 144,233 129,487 110,826
PER SHARE DATA(1)
Basic earnings per share $ 1.41 $ 1.37 $ 1.13 $ 1.10 $ 1.08
Diluted earnings per share 1.41 1.37 1.13 1.09 1.07
Common dividends declared per share .72 .63 .51 .44 .40
Period end book value 12.60 11.84 11.11 10.43 8.95
Average shares outstanding-Basic 12,985,272 12,985,272 12,650,352 12,237,738 12,206,754
Average shares outstanding-Diluted 12,985,272 12,985,272 12,753,984 12,459,682 12,436,352
FINANCIAL RATIOS
Return on average assets 1.08% 1.14% .96% .99% .99%
Return on average shareholders' equity 11.56 11.92 10.53 11.26 11.74
Net yield on earning assets(2) 4.55 4.73 4.81 4.66 4.74
Common stock dividend payout 51.06 46.11 44.77 39.92 36.89
Average shareholders' equity to average assets 9.31 9.54 9.15 8.78 8.47
Primary capital ratio at period end(3) 10.19 10.23 10.19 9.37 8.69
Net charge-offs to average loans,
net of unearned interest .42 .39 .28 .15 .11
Nonperforming loans to total loans,
net of unearned interest(4) .61 .86 1.22 .73 .72
Reserve for loan losses to period end
loans, net of unearned interest .90 .91 .94 .99 1.01
</TABLE>
* Financial data for prior periods has been restated to give effect to
acquisitions accounted for as pooling-of-interests.
(1) Per share data has been adjusted to reflect the 5% stock dividend
distributed by BT on October 14, 1994, the 10% stock dividends distributed
on October 22, 1996 and September 15, 1997 and the two-for-one stock split
effected in the form of a stock dividend distributed on May 1, 1998.
Additionally, per share data has been adjusted to reflect the 10% stock
dividend paid on December 30, 1994 by the former Moxham Bank Corporation.
Earnings per share data for periods prior to 1997 has been restated to
reflect the adoption of SFAS No. 128 on December 31, 1997.
(2) Net interest income stated on a fully taxable equivalent basis divided by
average earning assets.
(3) The sum of shareholders' equity and the reserve for loan losses divided by
the sum of total assets and the reserve for loan losses.
(4) Nonperforming loans include nonaccrual, restructured and loans 90 days or
more past-due.
(5) Reflects the purchase acquisition of Huntington National Bank of
Pennsylvania on December 14, 1995.
(6) Reflects the purchase acquisition of Armstrong on June 13, 1996.
(7) Reflects the purchase acquisition of three branch offices of National City
on June 6, 1997.
Thirty-Four
<PAGE>
Financial Report to Shareholders
MARKET PRICE AND CASH DIVIDENDS
BT's Common Stock is traded in the NASDAQ Stock Market under the NASDAQ
symbol "BTFC".
The following table sets forth cash dividends declared and the range of
high and low sale prices, as reported on the NASDAQ Stock Market for BT's
Common Stock for the quarters indicated.
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Quarter High Low Dividend High Low Dividend
--------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $28.31 $24.70 $.168 $19.89 $18.07 $.149
2nd 30.75 25.00 .181 19.89 17.73 .153
3rd 28.25 22.00 .179 23.13 19.32 .153
4th 28.75 24.25 .190 25.75 21.66 .174
--------------------------------------------------------------------- -----------------------------------
TOTAL $.718 $.629
</TABLE>
Note: Data has been adjusted to reflect the 2-for-1 stock split effected
in the form of a stock dividend distributed on May 1, 1998 and the 10%
stock dividend distributed on September 15, 1997.
On February 1, 1999, there were 4,739 record holders of BT Common
Stock.
BT offers an Automatic Dividend Reinvestment Plan to provide a prompt,
simple and expense-free way for shareholders to invest cash dividends into
additional shares of BT Common Stock. Laurel Trust Company performs
certain bookkeeping and administrative functions in connection with the
Plan. As participants, the shareholders may add to their investment in BT
Common Stock through voluntary additional cash deposits with the
Administrator.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. OVERVIEW
Fiscal year 1998 was another year of record financial performance for
BT Financial Corporation. Total assets exceeded $1.7 billion while net
income, after nonrecurring expenses, was $18.3 million, an increase of
3.0% over 1997. Earnings per share equaled $1.41, which was $.04, or 2.9%
greater than 1997. BT's growth strategy was underscored in 1998 by the
completion of the merger with The Peoples National Bank of Rural Valley
and the announcement of a merger agreement with First Philson Financial
Corporation. BT's bank subsidiary, Laurel Bank, operated under five
market-driven regions in 1998 which led to impressive loan, deposit and
fee-based revenue growth resulting from sales initiatives. Efficiency
measures taken to enhance the branch delivery system included the
consolidation of four branch offices and the utilization of a branch
staffing model designed to optimize BT's part-time workforce. A focus on
strong credit quality in 1998 led to a significant decline in BT's
nonperforming assets which were at their lowest level since 1994. On March
25, 1998, BT's Board of Directors declared a 2-for-1 stock split effected
in the form of a stock dividend which was distributed on May 1, 1998. On a
total return basis, BT's Common Stock yielded 10.2% in 1998.
In the first quarter of 1998, several senior officers of BT elected to
retire early. Certain severance and other costs associated with these
retirements were approximately $337,000 and were recorded in the first
quarter. The retiring officers were not replaced. 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.
On October 23, 1998, BT completed a merger with the Peoples National
Bank of Rural Valley, Rural Valley, Pennsylvania, whereby Peoples merged
into Laurel Bank. Nonrecurring reorganization expenses associated with
this merger totaled $290,000. At the time of the merger, Peoples operated
one branch with unaudited assets totaling approximately $37 million. In
connection with the merger, each share of Peoples Common Stock was
converted into 12.11 shares of BT Common Stock, resulting in the issuance
of 484,400 shares of BT Common Stock. The value of the transaction was
approximately $12.6 million based on an average market price of
approximately $26 per BT common share. The merger has been accounted for
as a pooling-of-interests, and accordingly BT's consolidated financial
statements have been restated retroactively to include the accounts and
operations of Peoples for all periods presented prior to the merger. This
acquisition increased BT's market share in Armstrong County, located north
of Pittsburgh, Pennsylvania.
Consolidated net income increased 3.0% to a record $18.3 million, or
$1.41 per share, in 1998 compared to $17.7 million, or $1.37 per share in
1997. As a result of the special charges incurred with early retirements,
litigation costs and nonrecurring reorganization expenses, BT's 1998
earnings per share were reduced by approximately $.05. Excluding the
special charges, core net income for 1998 would have increased 7.0% to
$19.0 million, or $1.46 per share. Increases in net interest income and
non-interest income along with a lower income tax provision offset
increases in the provision for loan losses and a higher level of other
expenses. Net income for 1997 represented a $3.3 million, or 23.2%
increase over the $14.4 million earned in 1996. In 1997, earnings per
share increased $.24, or 21.2% compared to the $1.13 earned per share in
1996.
Total assets grew to $1.70 billion at year-end 1998 compared to $1.59
billion at year-end 1997. The increase in 1998 resulted from strong loan
growth along with targeted balance sheet leveraging. BT's organizational
Thirty-Five
<PAGE>
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 non-interest-bearing
deposits during 1998.
During October 1998, BT completed the previously announced
consolidations of its banking offices located in Duquesne, West Lebanon,
Duncansville and Somerset (Route 31), Pennsylvania. The branches
consolidated into nearby Laurel Bank offices. The branch closures were
undertaken to increase efficiencies within the corporation by eliminating
redundant, underperforming offices. The costs associated with the branch
closings did not have a material impact on BT's financial position or
results of operations. On December 14, 1998, in another action to achieve
an enhanced delivery system, BT announced the sale of its two Indiana,
Pennsylvania, branch offices to First Summit Bank of Johnstown,
Pennsylvania.
BT continued its strategy of growth through opportunistic acquisition
during the fourth quarter of 1998. On December 10, 1998, BT announced an
agreement in principle had been reached to merge BT with First Philson
Financial Corporation (Philson) with BT as the surviving company.
Headquartered in Berlin, Somerset County, Pennsylvania, Philson has total
assets of approximately $214 million and represents the fourth largest
bank in Somerset County. Combined with our largest market share, BT will
represent, on a pro-forma basis, over one-third of the total bank and
thrift deposits in Somerset County. BT will also represent the largest
bank in the Johnstown MSA, with over one-fourth of total bank and thrift
deposits, based on deposits at June 30, 1998. On February 23, 1999, BT and
Philson entered into a definitive merger agreement. The merger will be
accounted for as a pooling-of-interests and is expected to be completed in
the second half of 1999. The merger supports BT's fundamental strategy of
enhancing shareholder value through a disciplined focus on community
banking. By adding to our share of a traditional market, BT will leverage
growing sales and marketing expertise over a broader base of customers.
This should facilitate revenue generation and assist in expense reduction
by permitting a more efficient delivery system.
Return on average assets was 1.08% in 1998, 1.14% in 1997, and .96% in
1996. Return on average shareholders' equity was 11.56%, 11.92%, and
10.53% in 1998, 1997, and 1996, respectively. Return on average tangible
shareholders' equity, which excludes intangible amortization expense from
net income and intangibles from average shareholders' equity, was 14.98%
in 1998, 15.61% in 1997, and 13.94% in 1996.
The following is a more detailed discussion of certain significant
factors that affected the Corporation's consolidated operating results,
financial position, capital resources, liquidity, and interest rate
sensitivity for the years ended December 31, 1998, 1997, and 1996.
Reference should be made to the consolidated financial statements and
notes thereto as well as the selected financial data presented herein for
a complete understanding of the following discussion and analysis.
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 BT conducts its operations, pending litigation,
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.
2. RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is BT's primary source of revenue. Net interest
income represents the amount by which interest income on interest-earning
assets exceeds interest paid on interest-bearing liabilities. In 1998,
fully taxable equivalent net interest income was a record $71.9 million,
representing a 5.2%, or $3.6 million increase over 1997. The increase was
primarily due to a $136.8 million, or 9.5% increase in average earning
assets in 1998. Total average interest-earning assets were $1.58 billion
in 1998 versus $1.44 billion in 1997. The higher level resulted from
strong ongoing loan growth and increases in securities levels. Average
loans increased $83.2 million, or 7.7%, and average securities rose $59.4
million, or 16.8%, in 1998 compared to 1997. Funding for the loan and
security growth was mainly provided by increased long-term borrowings in
the form of FHLB advances. Additional information regarding long-term
borrowings is contained in Note 11 to the consolidated financial
statements. In 1998, the availability of favorably priced wholesale
funding allowed BT to prudently leverage its balance sheet by increased
earning asset levels in order to enhance net interest income while
contributing to the management of interest rate risk. Funding strategies
are actively managed by BT's Asset/Liability Committee to ensure adequate
liquidity and to control interest rate risk exposure.
Net interest margin is calculated by dividing fully taxable equivalent
net interest income by average interest-earning assets. The net interest
margin, on a fully taxable equivalent basis, declined to 4.55% in 1998
from 4.73% in 1997 due to lower yields on loans, slightly higher rates
paid on interest-bearing deposit accounts, and the effect of BT's 1998
balance sheet leveraging strategy which impacted funding costs. The
declining interest rate environment experienced in 1998 played a role in
the net interest margin compression. During 1999, BT will strive to
maintain the current level of the net interest margin by emphasizing
growth in non-interest bearing demand deposits which contribute additional
funds available for investment by the Corporation at no interest cost.
Fully taxable equivalent net interest income rose $1.6 million, or
2.5%, while average interest-earning assets increased $57.5 million, or
4.1%, in 1997 compared to 1996. The higher level of net interest income in
1997 was principally due to a greater volume of average interest-earning
assets resulting from increased loan levels which were
Thirty-Six
<PAGE>
Financial Report to Shareholders
funded mainly by deposits acquired from National City when Laurel Bank
purchased three branch locations in 1997. The net interest margin, on a
fully taxable equivalent basis, declined 8 basis points to 4.73% in 1997
compared to 4.81% in 1996. The decrease resulted from higher rates paid on
deposits due to marketplace competition and some shifting of funds into
higher priced products. Rates paid on the deposits acquired from National
City also contributed to the higher cost of funds in 1997.
BT's fundamental strategy of generating quality loan growth through
acquisitions and internal loan growth continued throughout 1998. The loan
portfolio represents BT's largest component of average interest-earning
assets. Average loans were 73.4% of average interest-earning assets in
1998 compared to 74.6% in 1997 and 75.1% in 1996.
The following table presents the major categories of assets,
liabilities and shareholders' equity with their corresponding average
balances, related interest income earned on interest-earning assets or
interest expense paid on interest-bearing liabilities, and resulting
yields and rates on a fully taxable equivalent basis for the years
indicated.
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ----------------------------------------
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
- ------------------------------------------------------------------------------------ ----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of unearned interest(2) $1,160,045 $ 98,134 8.46% $1,076,804 $ 93,255 8.66%
Taxable securities 357,458 23,835 6.67 341,705 22,492 6.58
Nontaxable securities 56,298 4,131 7.34 12,631 1,028 8.14
Federal funds sold 6,751 353 5.23 12,429 683 5.50
Time deposits in other banks 97 8 8.25 291 16 5.50
- ------------------------------------------------------------------------------------ ----------------------------------------
Total interest-earning assets 1,580,649 126,461 8.00 1,443,860 117,474 8.14
Non-interest-earning assets:
Cash and cash equivalents 47,216 48,527
Premises and equipment, net 29,941 31,294
Other assets 51,093 45,542
Less: Reserve for loan losses (10,264) (9,773)
==================================================================================== ========================================
TOTAL ASSETS $1,698,635 $1,559,450
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand and savings deposits $ 441,163 7,048 1.60 $ 443,309 6,356 1.43
Other time deposits 751,459 40,123 5.34 730,209 39,775 5.45
Federal funds purchased
and securities sold under
agreements to repurchase 43,984 1,909 4.34 35,805 1,731 4.83
Short-term borrowings 16,784 966 5.76 2,540 174 6.85
Long-term borrowings 83,062 4,510 5.43 16,028 1,112 6.94
- ------------------------------------------------------------------------------------ ----------------------------------------
Total interest-bearing liabilities 1,336,452 54,556 4.08 1,227,891 49,148 4.00
Non-interest-bearing liabilities:
Demand deposits 193,168 173,015
Other liabilities 10,889 9,717
- ------------------------------------------------------------------------------------ ----------------------------------------
Total liabilities 1,540,509 1,410,623
Shareholders' equity 158,126 148,827
==================================================================================== ========================================
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,698,635 $1,559,450
Net interest income $71,905 $68,326
Net interest spread(3) 3.92% 4.14%
==================================================================================== ========================================
NET YIELD ON EARNING ASSETS(4) 4.55% 4.73%
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
Interest Rate
Average Income/ Earned/
Balance Expense(1) Paid(1)
- --------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of unearned interest(2) $1,040,589 $ 90,160 8.66%
Taxable securities 306,529 19,646 6.41
Nontaxable securities 15,317 1,264 8.25
Federal funds sold 23,251 1,246 5.36
Time deposits in other banks 692 34 4.91
- --------------------------------------------------------------------------------------
Total interest-earning assets 1,386,378 112,350 8.10
Non-interest-earning assets:
Cash and cash equivalents 47,249
Premises and equipment, net 32,650
Other assets 39,206
Less: Reserve for loan losses (9,789)
======================================================================================
TOTAL ASSETS $1,495,694
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand and savings deposits $ 460,872 6,897 1.50
Other time deposits 673,632 36,243 5.38
Federal funds purchased
and securities sold under
agreements to repurchase 28,638 1,098 3.83
Short-term borrowings 2,845 158 5.55
Long-term borrowings 19,020 1,268 6.67
- --------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,185,007 45,664 3.85
Non-interest-bearing liabilities:
Demand deposits 163,307
Other liabilities 10,562
- --------------------------------------------------------------------------------------
Total liabilities 1,358,876
Shareholders' equity 136,818
======================================================================================
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,495,694
Net interest income $66,686
Net interest spread(3) 4.25%
======================================================================================
NET YIELD ON EARNING ASSETS(4) 4.81%
</TABLE>
(1) Tax-exempt income on loans and investments and related yields are shown on
a fully taxable equivalent basis computed using the federal statutory tax
rate of 35%.
(2) For purposes of calculating loan yields, average loan balances include
nonaccrual loans.
(3) The difference between rate earned on total interest-earning assets and
rate paid on total interest bearing liabilities.
(4) Net interest income stated on a fully taxable equivalent basis divided by
average interest-earning assets.
Thirty-Seven
<PAGE>
BT Financial Corporation and Affiliates
The following table provides an analysis of the changes in interest
income and expense attributable to changes in volume and rate.
<TABLE>
<CAPTION>
1998 vs 1997 1997 vs 1996
--------------------------------- -------------------------------------
Net Net
Increase Due to changes in Increase Due to changes in
(Decrease) Volume Rate (Decrease) Volume Rate
----------------------------------------------------------------------------- -------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, net of unearned
interest(1) (2) $ 4,879 $ 7,209 $ (2,330) $ 3,095 $ 3,138 $ (43)
Taxable securities 1,343 1,037 306 2,846 2,254 592
Non-taxable securities(1) 3,103 3,554 (451) (236) (222) (14)
Federal funds sold (330) (312) (18) (563) (580) 17
Time deposits in other banks (8) (11) 3 (18) (20) 2
----------------------------------------------------------------------------- -------------------------------------
Total interest income 8,987 11,477 (2,490) 5,124 4,570 554
INTEREST EXPENSE
Interest-bearing demand
and savings deposits 692 (31) 723 (541) (263) (278)
Other time deposits 348 1,158 (810) 3,532 3,044 488
Federal funds purchased and securities
sold under agreements to repurchase 178 395 (217) 633 275 358
Short-term borrowings 792 976 (184) 16 (17) 33
Long-term borrowings 3,398 4,651 (1,253) (156) (199) 43
----------------------------------------------------------------------------- -------------------------------------
Total interest expense 5,408 7,149 (1,741) 3,484 2,840 644
============================================================================= =====================================
CHANGE IN NET INTEREST INCOME(1) $ 3,579 $ 4,328 $ (749) $ 1,640 $ 1,730 $ (90)
</TABLE>
(1) Tax-exempt income on loans and investments and related yield are shown
on a fully taxable equivalent basis computed using the federal
statutory tax rate of 35%.
(2) Nonaccrual loans are included in the average outstanding balances.
OTHER INCOME
BT's other income growth has substantially contributed to the higher
profitability of the Corporation in recent years. Total other income,
excluding security gains, increased $920,000, or 7.4%, in 1998 compared to
1997. Trust income experienced the largest percentage growth of BT's other
income components, up 14.6%, or $464,000 in 1998 over 1997. Traditional
trust fees, along with investment management service income and employee
benefit administration fees, all increased in the current year benefiting
from sales-driven initiatives implemented in 1998. At year-end 1998, the
market value of trust assets under management totaled $792 million
compared to $601 million at year-end 1997. Service fees are the most
significant component of BT's other income, generating 64.9% of total
other income, excluding security gains, in 1998. Service fees increased
$921,000, or 12.0%, during 1998 compared to 1997 due principally to higher
ATM/debit card service income and a rise in loan insurance commissions. In
1997, BT sold its credit card portfolio to a large servicer and realized a
gain of $304,000 on the sale of the associated loans. In connection with
the sale, BT also sold its merchant credit card relationships, realizing a
profit of $250,000. These measures were undertaken to take advantage of
favorable selling opportunities in the marketplace for credit card
portfolios while simultaneously eliminating the risks and expenses related
to the maintenance of credit card loans. Due to the credit card portfolio
sale in 1997, other income in 1998 declined $465,000, or 31.5%, compared
to the prior year. In the fourth quarter of 1998, other income reflected a
gain of $157,000 related to the sale of the Laurel Place property in
Indiana, PA.
Total other income, exclusive of security gains, increased $1.4
million, or 13.0% in 1997 over 1996. Trust income increased $268,000, or
9.2%, due to increased assets under management. In 1997, higher levels of
deposit account fees led service fees to a $1.0 million, or 15.7%,
increase over the prior year level. The sale of the credit card portfolio
and BT's merchant credit card relationships added $554,000 to other income
in 1997.
Securities transactions income rose $259,000 in 1998 over 1997 as BT
realized gains related to called securities and sales of U.S. federal
agency securities as part of a strategy involving the selling of
securities likely to be called and reinvesting the proceeds into
tax-exempt municipal issues. Securities transaction income decreased
$211,000 in 1997 compared to 1996 due to the sale of various stocks in
1996 of other financial institutions acquired by BT through merger and
acquisition activity. Generally, securities are acquired to provide
interest income and to contribute to the management of interest rate risk
and liquidity and are not bought and sold for profit taking. Sales may
occur periodically when funding is required for loan or deposit outflows.
OTHER EXPENSES
During the first quarter of 1998, several senior officers of BT elected
to retire early. Certain severance and other costs associated with these
retirements were approximately $337,000 and were recorded in the first
quarter. The retiring officers were not replaced. 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
Thirty-Eight
<PAGE>
Financial Report to Shareholders
settlements and their costs represented the majority of the expensed
amount in the first quarter. During the fourth quarter of 1998, BT
expensed $290,000 in reorganization costs related to the Peoples merger.
As a result of these special charges incurred during the year, BT's 1998
earnings per share were reduced by approximately $.05.
Total other expenses rose $2.7 million, or 5.7%, in 1998 compared to
1997. Approximately $975,000 of the increase was due to the one-time
transactions mentioned earlier in this discussion. BT's efficiency ratio,
exclusive of nonrecurring costs, improved to 59% in 1998 compared to 60%
in 1997 and 64% in 1996. The efficiency ratio measures the ability to
generate revenue in relation to expenditures. The lower ratios indicate
improvement in BT's strategic goal of improving efficiency by utilizing
its resources more effectively to produce revenue. Salaries and employee
benefits comprised 49.2% and 49.3% of total other expenses in 1998 and
1997, respectively. Salaries and benefits increased 5.4% in 1998 due to
the impact of normal merit increases, sales incentives, special charges
associated with the retirement of several senior officers, and increases
in hospitalization premiums. Full-time equivalent employees declined to
777 in 1998 from 799 in 1997. The reduction has resulted from a focus
toward more efficient staffing levels. A branch staffing model was
developed in 1998 and should benefit future periods by increasing
utilization of part-time employees at the branch level. The model was
designed as an efficiency measure to develop a more cost-effective
delivery system by lowering costs while enhancing customer service
throughout the branch network. Average assets per employee has risen to
$2.2 million in 1998 compared to $2.0 million in 1997 and $1.9 million in
1996. Net occupancy and equipment expenses rose 2.2% in 1998 largely due
to higher depreciation levels associated with BT's ongoing technology
investments. BT consolidated four branch offices into nearby locations
during the fourth quarter of 1998 as part of the Corporation's continuous
efforts to review branches to determine their fit with BT's strategy of
providing more efficient delivery channels. The costs associated with the
branch closings did not have a material impact on BT's financial position
or results of operations. During the fourth quarter of 1998, BT also
announced the sale of two additional branch offices. Other operating costs
increased 7.0% due in part to $348,000 in special charges mentioned
earlier in this discussion related to litigation and legal settlement
costs. Additionally, BT's ongoing legal expenses have increased in 1998
due to various litigation cases.
In 1997, total other expenses declined 7.9% over 1996. Most of the
decline was due to nonrecurring reorganization costs of $1.3 million paid
in 1996 related to the Moxham merger and the one-time SAIF deposit
insurance assessment of $1.4 million paid in 1996. Excluding one-time
charges, total other expenses declined 2.9%, or $1.4 million. Cost savings
and improved efficiencies from the Moxham acquisition associated with
branch closings, reduced staffing levels and consolidation of various
support activities were realized in 1997. Salaries and employee benefits
declined due to the implementation of managed health care in 1997
offsetting salary merit increases. Full-time equivalent employees
increased to 799 at year-end 1997 compared to 777 at year-end 1996
principally due to employees hired in connection with the National City
branch acquisitions. Occupancy expense declined due to the closure of
seven branch offices in 1996 associated with the Moxham merger. Equipment
expense rose due to equipment upgrades. FDIC insurance declined due to the
one-time SAIF deposit assessment in 1996. Other operating costs declined
despite additional expenses related to BT's bank charter consolidation in
1997.
PROVISION FOR INCOME TAXES
Income before taxes decreased $728,000, or 2.7%, in 1998, to $26.2
million after a $5.3 million, or 24.6%, increase in 1997 over 1996. The
effective tax rate was 30.3% in 1998 compared to 34.1% in 1997 and 33.4%
in 1996.
A substantial increase in tax-exempt securities income was primarily
responsible for the decline in the effective tax rate in 1998 compared to
1997. A decrease in tax-exempt interest income contributed to the slight
increase in the effective tax rate in 1997 over 1996.
3. FINANCIAL CONDITION
LOAN PORTFOLIO
BT's loan portfolio is comprised of a balanced composition of
commercial loans to small- to mid-sized businesses, consumer loans and
residential mortgage loans. In 1998, average total loans, net of unearned
interest, grew $83.2 million, or 7.7%, over 1997 to an average of $1.16
billion. At year-end 1998, total loans outstanding, net of unearned
interest, were $1.22 billion, an increase of $137.2 million, or 12.7%,
over year-end 1997. BT's loan growth in 1998 was primarily a result of the
increased focus on sales and customer service inherent in the formation of
Laurel's five local regions late in 1997. This strategy placed the
decision-makers closer to their customers. The subsequent loan growth
occurred across BT's portfolio in consumer, mortgage and commercial loans.
Along with this growth, the corporation maintained its traditional
conservative underwriting posture. Accordingly, the bank's credit quality
measurements improved over the course of the year. Direct consumer lending
through retail branch offices showed increases as a result of maintaining
competitive pricing and highlighting Laurel's home equity product.
Indirect consumer lending through Laurel's centralized dealer center
showed significant increases as a result of maintaining competitive
pricing and refining the service delivery through enhanced automation
processes. BT will focus on generating additional consumer loan growth in
1999 by employing competitive pricing strategies and by utilizing the
branch network to deliver products to customers. The mortgage origination
area was able to take advantage of the strong refinance market that
existed in 1998 to supplement its volume of new home finance purchases.
This resulted in a record volume of mortgage loan originations. In 1999,
BT is anticipating a continuation of mortgage refinancing activity due to
the current low interest rate environment. In 1998, BT remained active in
selling selected mortgage loans in the secondary loan market. BT will
continue to sell certain mortgage loans in the future when deemed
appropriate by management. Early in 1998, management determined that, with
the formation of Laurel's five regions, BT's existing commercial lending
personnel structure needed to be reorganized. Consequently, BT recruited
several highly experienced and successful commercial lenders from large
institutions to manage the commercial lending teams in each region. This
was the primary factor contributing to the improvement in loan volume
within the commercial loan portfolio in 1998. BT plans to target
additional commercial loan growth in 1999 through focused sales and
marketing efforts.
At year-end 1997, total loans outstanding, net of unearned interest,
increased $41.0 million, or 3.9%, compared to year-end 1996. Loans
acquired in the National City branch acquisitions totaled approximately
$5.8 million.
Thirty-Nine
<PAGE>
BT Financial Corporation and Affiliates
BT's loan growth in 1997 was aided by a strong local economy, which
translated into increased demand for both commercial and consumer loans.
BT's higher commercial loan levels were primarily due to increased lending
activity to existing commercial accounts. Consumer loan growth reflected
strong automobile loan demand particularly in the first half of 1997.
At December 31, 1998, BT's entire loan portfolio consisted of loans
made to individuals and businesses located within BT's marketing region
with the vast majority of these loans located in the Commonwealth of
Pennsylvania. BT does not have any foreign loans. At December 31, 1998, BT
did not have any loan concentrations in any category exceeding 10% of
total loans.
The following table summarizes the composition of BT's loan portfolio
by types of loans at December 31 for each of the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 189,592 $ 166,803 $ 171,014 $ 168,014 $ 142,631
Real estate 643,081 597,076 545,581 527,617 479,396
Consumer 415,194 375,414 380,251 379,238 323,865
=============================================================================================
TOTAL $1,247,867 $1,139,293 $1,096,846 $1,074,869 $ 945,892
</TABLE>
The following table shows BT's loan maturities by types of loans
indicated, exclusive of residential and commercial real estate, consumer
and lease financing loans, as of December 31, 1998.
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
----------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $127,281 $ 46,194 $ 16,117 $189,592
Real estate construction 9,897 -- -- 9,897
===================================================================================================
TOTAL $137,178 $ 46,194 $ 16,117 $199,489
</TABLE>
Commercial, financial, and agricultural loans due after one year and
having floating or adjustable rates approximated $27 million.
BT's highly leveraged financings were not significant at December 31,
1998. Highly leveraged financings are defined as those credits that are
extended for the acquisition or restructuring of an organization and are
characterized by unusually high debt to total asset ratios. While it is
recognized that these transactions carry a higher level of risk in some
cases, Laurel may originate or participate in this type of financing from
time to time.
NONPERFORMING ASSETS AND RISK ELEMENTS
BT's nonperforming assets constitute nonperforming loans (loans 90 days
or more past due, restructured loans and nonaccrual loans), other real
estate owned, and repossessed assets (primarily automobiles). BT's asset
quality improved substantially in 1998. Total nonperforming assets
declined $2.6 million, or 23.2%, to $8.7 million at year-end 1998 compared
to $11.3 million at year-end 1997. This decline followed a $3.3 million,
or 22.5% decrease at year-end 1997 compared to year-end 1996. During 1998,
the programs established in 1997, such as the automated, centralized
collection function with enhanced collection efforts and the creation of
the Special Assets department, contributed to the decline in nonperforming
loans from $9.3 million at year-end 1997 to $7.5 million at year-end 1998,
a decrease of $1.8 million or 19.5%. The Special Assets department was
created to concentrate on nonperforming commercial loans. Loans 90 days
past due or more decreased $588,000 or 47.7%, and nonaccrual loans
decreased $1.2 million or 15.7%. The decline in loans 90 days or more past
due was due to a lower level of past due commercial loans in 1998 versus
1997. Nonaccrual loans decreased in 1998 due to a decline in nonaccrual
commercial mortgage loans.
Other real estate owned decreased $96,000 in 1998 compared to 1997 due
to the sale of several residential and small commercial properties.
Repossessed assets decreased $711,000 to $601,000 at year-end 1998
compared to $1.3 million at year-end 1997. The decrease was attributed to
a reduced level of repossessions, a result of BT's effort to assist
customers with their financial needs before problems arise, and successful
sales of the year-end 1997 repossessed assets inventory.
Forty
<PAGE>
Financial Report to Shareholders
The following table provides information with respect to BT's past-due
loans and the components of its nonperforming assets at December 31 of
each of the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans 90-days or more past due $ 644 $ 1,232 $ 991 $ 2,186 $ 1,358
Restructured loans 264 266 317 318 675
Nonaccrual loans 6,544 7,762 11,376 5,024 4,461
--------------------------------------------------------------------------------------------------------
Total nonperforming loans 7,452 9,260 12,684 7,528 6,494
Other real estate owned 614 710 1,023 912 116
Repossessed assets 601 1,312 851 318 177
========================================================================================================
TOTAL NONPERFORMING ASSETS $ 8,667 $11,282 $14,558 $ 8,758 $ 6,787
Nonperforming loans as a percent of total
loans, net of unearned interest 0.61% 0.86% 1.22% 0.73% 0.72%
</TABLE>
Reviews of the commercial loan and commercial mortgage portfolios are
conducted by Credit Department personnel to systematically evaluate the
quality of the portfolio, to detect problems, and to provide an early
warning system for loan deterioration. The accrual of interest on loans is
discontinued when, in management's judgement, it is determined that the
collectibility of interest, but not necessarily principal, is doubtful.
Generally, commercial loans and residential mortgages are placed on a
nonaccrual status when they become 90-days past due as to principal or
interest. In previous years, no specific period of delinquency triggered
nonaccrual status for consumer loans, however, in 1996 management
instituted a policy of generally placing consumer loans on nonaccrual
status when they become 120-days past due. Consumer loans normally are
charged-off within 150 days of delinquency, when they are determined to be
uncollectible and all collateral securing the loans has been liquidated.
Interest income of $899,000, $895,000 and $1,475,000 would have been
recorded in 1998, 1997 and 1996, respectively, if nonaccrual and
restructured loans were on a current basis in accordance with their
original terms. Interest income of $303,000, $323,000 and $562,000 on
nonaccrual and restructured loans was recorded in each of the years of
1998, 1997 and 1996, respectively. A loan generally remains on nonaccrual
status until it becomes current as to principal and interest, except for
consumer loans, which are returned to accrual status when they become less
than 120 days past due. Loans determined to be uncollectible are charged
off against the reserve for loan losses. A loan is classified as
restructured when the terms have been modified because of deterioration in
the financial position of the borrowers to provide for a reduction of
either interest or principal.
The Corporation's Credit Department analyzes the financial stability of
all large borrowers and pays particular attention to resolving certain
problem or classified loans. A loan is generally considered classified due
to a deterioration in the financial performance of the borrower. The
Corporation had internally classified loans (other than non-performing
loans) totaling $19.8 million at December 31, 1998 compared to $11.8
million at December 31, 1997. However, these loans are currently
performing, and based on a loan-by-loan review, historical performance,
and current economic conditions, management does not expect any
significant amount of classified loans to deteriorate to nonaccrual
status. Classified loans are reviewed monthly by BT's and Laurel's Board
of Directors.
RESERVE FOR LOAN LOSSES
The reserve for loan losses totaled $11.0 million at December 31, 1998
compared to $9.9 million at December 31, 1997 and $9.8 million at December
31, 1996. The reserve for loan losses is increased by provisions charged
to earnings and is reduced by charge-offs, net of recoveries. The reserve
for loan losses, as a percent of loans, net of unearned interest was .90%
at year-end 1998 compared to .91% and .94% at year-end 1997 and 1996,
respectively. Net charge-offs increased $698,000 in 1998 to $4.9 million,
mainly due to a higher level of commercial mortgage charge-offs. BT does
not believe the increase in net charge-offs in 1998 is indicative of a
deteriorating trend in the remainder of the loan portfolio. Consumer and
commercial loan charge-offs in 1998 were consistent with 1997 levels. In
1997, net charge-offs increased $1.2 million over 1996 to $4.2 million.
The higher level was related to increased credit losses associated with
various commercial loans. The ratio of net charge-offs to average loans,
net of unearned discount, was .42% in 1998 compared to .39% in 1997 and
.28% in 1996. The provision for loan losses increased to $5.9 million in
1998 compared to $4.2 million in 1997 and $2.4 million in 1996 due to
increased charge-offs. The coverage ratio (reserve to nonperforming loans)
improved to 1.5x in 1998 from 1.1x in 1997 due to a lower level of
nonperforming loans in 1998. Management believes the reserve is adequate
to cover losses inherent in the current loan portfolio. However, there can
be no assurance that the Corporation will not incur losses in future
periods which could be substantial in relation to the size of the reserve
or in relation to the estimates set forth herein.
Based on management's loan-by-loan review, the past performance of the
borrowers and current economic conditions, management does not anticipate
any current losses related to nonaccrual, nonperforming or classified
loans above what has already been considered in its overall judgment of
the adequacy of the reserve. In determining the amount to be provided in
the reserve for loan losses, management considers the volume of loans by
type and prevailing economic conditions. As previously mentioned, BT's
Credit Department employs a loan-by-loan review of a substantial portion
of the banks' business loan portfolios. In addition, BT's historical
experience with respect to charge-offs, delinquencies, and the level of
the reserve are considered. BT's Credit Department utilizes a quantitative
model to formally ascertain reserve levels at quarterly intervals. The
model employs a disciplined methodology approach factoring in the various
loan types and credit ratings within the commercial portfolio.
Forty-One
<PAGE>
BT Financial Corporation and Affiliates
Management's final assessment of the adequacy of the reserve involves
considerations which are essentially judgmental and are not subject to
mathematical formulation.
The following table summarizes the activity in BT's reserve for loan
losses for each of the years indicated.
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL LOANS OUTSTANDING
AT PERIOD END
(net of unearned interest) $ 1,218,186 $ 1,080,967 $ 1,039,937 $ 1,025,238 $ 904,944
Reserve for loan losses
at beginning of year $ 9,882 $ 9,805 $ 10,158 $ 9,179 $ 8,942
Reserve of acquired banks -- -- 159 849 --
Loans charged off:
Commercial, financial and agricultural (1,669) (1,639) (664) (525) (285)
Real estate (1,059) (333) (261) (170) (248)
Consumer (2,504) (2,589) (2,599) (1,096) (813)
------------------------------------------------------------------------------------------------------------------------------
Total loans charged off (5,232) (4,561) (3,524) (1,791) (1,346)
Recoveries of loans previously charged off:
Commercial, financial and agricultural 49 71 146 29 171
Real estate 6 7 57 80 36
Consumer 326 330 368 246 208
------------------------------------------------------------------------------------------------------------------------------
Total recoveries 381 408 571 355 415
Net loans charged off (4,851) (4,153) (2,953) (1,436) (931)
------------------------------------------------------------------------------------------------------------------------------
Additions to reserve charged to operations 5,940 4,230 2,441 1,566 1,168
==============================================================================================================================
RESERVE FOR LOAN LOSSES
AT YEAR END $ 10,971 $ 9,882 $ 9,805 $ 10,158 $ 9,179
Ratio of net charge-offs during year
to average loans, net of
unearned interest 0.42% 0.39% 0.28% 0.15% 0.11%
Reserve for loan losses as a percent
of loans, net of unearned interest 0.90% 0.91% 0.94% 0.99% 1.01%
Reserve for loan losses
to nonperforming loans 1.5x 1.1x 0.8x 1.3x 1.4x
</TABLE>
The following table summarizes the allocation of the reserve for loan
losses at December 31 for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------------- ---------------- --------------- --------------- ----------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
----------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 2,429 15.2% $2,102 14.6% $2,449 15.6% $ 2,936 15.6% $3,492 15.1%
Real estate 3,447 51.5 3,236 52.4 3,176 49.7 2,705 49.1 2,298 50.7
Consumer 2,609 33.3 2,480 33.0 1,831 34.7 1,687 35.3 2,147 34.2
Unallocated 2,486 -- 2,064 -- 2,349 -- 2,830 -- 1,242 --
========================================== ================= ================= ================= ================
Total reserve $10,971 100.0% $9,882 100.0% $9,805 100.0% $10,158 100.0% $9,179 100.0%
</TABLE>
Not withstanding the foregoing allocations, the entire reserve for loan
losses is available to absorb charge-offs in any category of loans.
Forty-Two
<PAGE>
Financial Report to Shareholders
SECURITIES PORTFOLIO
BT's securities portfolio consists primarily of debt securities used to
provide interest income and liquidity to the Corporation and to contribute
to the management of interest rate risk. The portfolio does not contain
any derivative investments or any investments in hedge funds. Throughout
1998, BT's investment portfolio was impacted by calls of various
securities. Based on the market outlook, a strategy was utilized in 1998
to invest in additional securities prior to the actual call dates of
existing securities. This strategy allowed BT to capture higher yields on
securities purchased before interest rates declined later in the year.
More securities were purchased in 1998 as part of a balance sheet
leveraging plan that enabled BT to enhance net interest income by
utilizing favorably priced wholesale funding. As a result, average
securities increased $59.4 million, or 16.8%, in 1998 compared to 1997.
The higher level in 1998 was principally due to purchases of municipal
securities and U.S. federal agency securities. At December 31, 1998,
securities totaled $346.6 million compared to $385.8 million at December
31, 1997, a 10.2% decrease. The year-over-year decline reflects the use of
proceeds from maturing securities in the fourth quarter of 1998 funding
robust loan demand. Gross unrealized holding gains on securities
available-for-sale, net of gross unrealized holding losses, totaled $2.5
million at year-end 1998 compared to $1.1 million at year-end 1997. Total
securities were $385.8 million at year-end 1997, a $64.4 million, or
20.0%, increase over year-end 1996. The higher level in 1997 was primarily
due to the purchase of various securities in connection with funding
provided by $69.7 million in deposits acquired from the National City
branches. The yield on the securities portfolio, on a fully taxable
equivalent basis, was 6.76% in 1998 compared to 6.64% in 1997 and 6.50% in
1996.
The following table summarizes the carrying value of BT's securities
portfolio at December 31 for each of the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury and other U.S. Government agencies
Available-for-sale $160,417 $185,427 $192,074
Held-to-maturity 72,307 180,870 106,774
States and political subdivisions
Available-for-sale 93,952 7,069 9,863
Held-to-maturity -- 4,894 4,779
Other securities available-for-sale 19,922 7,512 7,894
==========================================================================================================
TOTAL $346,598 $385,772 $321,384
</TABLE>
The following table summarizes the amortized cost and weighted average
yields of BT's securities portfolio at December 31, 1998 by maturities of
investments.
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
-------------------- -------------------- ------------------- --------------------
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------------------------------------------------------------- -------------------- ------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
U.S. Treasury and other
U.S. Government agencies $ -- --% $ 72,307 6.94% $ -- --% $ -- --%
Securities available-for-sale:
U.S. Treasury and other
U.S. Government agencies 21,610 6.26 13,347 6.44 124,047 6.57 -- --
States and political subdivisions(2) 1,685 6.84 3,045 7.05 20,581 6.21 67,649 7.33
Other securities 124 9.24 305 6.82 681 7.24 18,744 6.27
============================================================= ==================== =================== ====================
TOTAL $ 23,419 6.31% $ 89,004 6.87% $145,309 6.52% $ 86,393 7.10%
</TABLE>
(1) Weighted average yield is based on yield to maturity, which is the
discount or premium rate that makes the present value of a bond's cash
flow to maturity equal to the bond's market price.
(2) Yields on tax-exempt securities were computed on a fully taxable
equivalent basis using the federal statutory tax rate of 35%.
DEPOSITS
BT's primary funding source is its deposits. Average total deposits
were $1.39 billion in 1998 compared to $1.35 billion in 1997 and $1.30
billion in 1996. At December 31, 1998, total deposits were $1.39 billion
compared to $1.38 billion at December 31, 1997, a $17.7 million, or 1.3%
increase. The higher level was due to a $27.5 million, or 15.0%, increase
in non-interest-bearing deposits. A decline of $9.7 million, or .8%,
occurred in the level of interest-bearing deposits. The changes within the
mix of total deposits reflect BT's strategy of emphasizing growth in
non-interest-bearing demand deposits and other low cost deposits.
Additionally, BT has chosen a non-aggressive pricing approach
Forty-Three
<PAGE>
BT Financial Corporation and Affiliates
relative to certain certificates of deposit. BT has experienced some
shifting of existing lower cost funds to higher rate time deposits,
reflecting customer bias to capture increased interest income. BT
anticipates similar trends will occur in 1999. BT will focus efforts to
increase non-interest-bearing checking accounts in 1999 through various
marketing approaches. BT will also strive to increase deposits by
leveraging its commercial banking relationships to capture more business
accounts. At December 31, 1997, total deposits increased $83.7 million, or
6.5%, compared to December 31, 1996. The increase was principally due to
$69.7 million in deposits acquired from three branches of National City on
June 6, 1997. BT faces competition from banks, savings and loans, credit
unions and other financial companies for deposits.
The daily average amount of BT's deposits and the average rate paid on
such deposits are summarized in the following table.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
-------------------------------------------------------------------- --------------------- ---------------------
Amount Rate Amount Rate Amount Rate
--------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 193,168 --% $ 173,015 --% $ 163,307 --%
Interest-bearing demand deposits 206,986 1.9 189,555 1.5 188,458 1.5
Savings deposits 234,177 1.3 253,754 1.3 272,414 1.5
Time deposits 751,459 5.3 730,209 5.5 673,632 5.4
==================================================================== ===================== =====================
TOTAL $1,385,790 $1,346,533 $1,297,811
</TABLE>
The maturity schedule of BT's time certificates of deposit of $100,000
or more at December 31, 1998 is summarized below.
TIME CERTIFICATES OF DEPOSIT
(IN THOUSANDS)
<TABLE>
<S> <C>
3 months or less ............................$ 52,262
Over 3 through 6 months...................... 23,948
Over 6 through 12 months..................... 32,125
Over 12 months .............................. 11,322
=====================================================
Total $119,657
</TABLE>
SHORT-TERM BORROWINGS
The following table summarizes the distribution of BT's short-term
borrowings, which are comprised of federal funds purchased, securities
sold under agreements to repurchase, and other short-term borrowings.
Repurchase agreements consist of retail repurchase agreements with terms
of overnight to 29 days and repurchase agreements with the Federal Home
Loan Bank (FHLB). Also shown are the maximum amount of borrowings, the
average amount of borrowings, and the weighted average interest rates paid
on such borrowings for the last three years. During 1998, the average
balance of short-term borrowings increased $22.4 million, or 58.5%, due
principally to an increased level of FHLB borrowings which supported loan
growth and securities purchases during the year.
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount outstanding at year end $ 37,258 $38,184 $40,688
Weighted average interest rate at year end 3.07% 5.15% 3.27%
Maximum amount outstanding at any month end 118,468 82,720 42,526
Average amount outstanding during the year 60,768 38,345 31,483
Weighted average interest rate during the year 4.73% 4.97% 3.99%
-----------------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
BT's primary source of capital has historically been retained earnings.
Other sources may include the sale of common stock, long-term borrowings,
and issuances of stock in connection with acquisitions. BT has developed a
capital planning policy to ensure current capital adequacy and to plan for
future needs. The general objective of the policy is to manage the capital
position, not only to ensure compliance with regulations, but also to
ensure capital adequacy for future expansion.
The Corporation and its predecessor, Bank and Trust, have increased
dividends for 31 consecutive years. Common dividends paid per share were
$.72 in 1998 and $.63 in 1997. A common dividend of $.19 was declared for
the first quarter of 1999.
BT Common Stock attained a 165% total cumulative return during the
five-year period from December 31, 1993 to December 31, 1998, assuming
reinvestment of all dividends. BT's historical stock price performance is
not necessarily indicative of future price performance. The market price
of BT Common Stock at December 31, 1998 was $27.38, compared to $25.50
(adjusted for the 1998 2-for-1 stock split effected in the form of a stock
dividend) at December 31, 1997.
Forty-Four
<PAGE>
Financial Report to Shareholders
LIQUIDITY AND MARKET RISK MANAGEMENT
Liquidity
Liquidity focuses on the availability and price of funds in the market.
Liquidity can be provided by either assets or liabilities. For BT, the
primary sources of asset liquidity are cash, cash equivalents and maturing
investments. Liability sources of liquidity include short- and long-term
borrowings and the acquisition and growth of deposits. At December 31,
1998, cash and due from banks totaled $57.5 million compared to $53.2
million in 1997. Securities due to mature within one year were $23.4
million at December 31, 1998 compared to $39.3 million in 1997. Short-term
borrowings at year-end 1998 totaled $37.3 million compared to $38.2
million in 1997. Long-term borrowings at year-end 1998 were $100.0 million
versus $14.3 million at year-end 1997.
Laurel is a member of the FHLB. The FHLB provides an additional source
of both short- and long-term funding, special funding for low-income
housing lending, and various other correspondent bank services. The
Corporation believes it has sufficient funding sources available from
financial institutions and the financial markets should the need for
additional funding develop.
Liquidity can be further analyzed by utilizing the Consolidated
Statement of Cash Flows. During 1998, net cash provided by financing
activities was $93.2 million. This was primarily due to net increases in
long-term borrowings of $85.7 million and deposits of $17.7 million
partially offset by a decrease in short-term borrowings of $1.2 million
and payments for dividends of $9.3 million. Net cash used in investing
activities was $120.4 million, consisting primarily of a $150.1 million
increase in loans and a $15.2 million increase in federal funds sold
offset by a $40.5 million decrease resulting from securities transactions.
Net cash provided by operating activities was $31.5 million. Overall, cash
and cash equivalents increased $4.3 million at year-end 1998 compared to
year-end 1997.
Market Risk Management
Market risk is the risk of losses resulting from adverse changes in
market pricing and rates. BT's market risk is primarily its interest rate
risk associated with its lending, deposit and borrowing functions as well
as its investments in securities. Interest rate risk arises when interest
rates on assets change in a different time period or in a different
proportion from that of liabilities. Management actively monitors its
interest rate sensitivity position with the primary objective to prudently
structure the balance sheet so that movements of interest rates on assets
and liabilities are highly correlated and produce a relatively constant
net interest margin even in periods of volatile interest rates. Interest
rate risk is considered by management to be BT's most significant market
risk that could materially impact the Corporation's financial position or
results of operations. In its normal course of business, BT is not exposed
to other types of market risks such as risk associated with commodity
prices or foreign currencies.
The following table sets forth, in summary form, BT's repricing
analysis at December 31, 1998.
<TABLE>
<CAPTION>
Non-rate
sensitive
0-90 91-365 Over 1-5 and over
(IN THOUSANDS) days days years 5 years Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $ 278,678 $ 224,293 $ 462,840 $ 252,375 $1,218,186
Securities 17,460 6,272 85,473 237,393 346,598
Other interest-earning assets 17,057 -- -- -- 17,057
--------------------------------------------------------------------------------------------------------
Total interest-earning assets 313,195 230,565 548,313 489,768 1,581,841
Other assets -- -- -- 120,487 120,487
========================================================================================================
TOTAL ASSETS $ 313,195 $ 230,565 $ 548,313 $ 610,255 $1,702,328
Demand deposits $ 77,019 $ -- $ -- $ 359,593 $ 436,612
Savings deposits 12,656 1,091 -- 209,281 223,028
Interest-bearing time deposits 210,241 363,836 145,250 14,053 733,380
Short-term borrowings 37,258 -- -- -- 37,258
Long-term borrowings 5 50,016 50,010 -- 100,031
Other liabilities -- -- -- 8,436 8,436
Shareholders' equity -- -- -- 163,583 163,583
========================================================================================================
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 337,179 $ 414,943 $ 195,260 $ 754,946 $1,702,328
Net interest sensitivity gap $ (23,984) $ (184,378) $ 353,053 $ (144,691) $ --
Net cumulative interest gap $ (23,984) $ (208,362) $ 144,691 $ -- $ --
</TABLE>
The information on the above table indicates the potential for interest
rate adjustment on only a one-day position at year-end 1998. Loans and
securities are based upon contractual repayments and maturities. Included
in demand deposits are non-interest-bearing checking accounts,
interest-bearing checking accounts, and money market investment accounts.
Based on historical experience, it is assumed that demand deposits and
savings deposits are stable core deposits.
While this static evaluation of interest rate sensitivity is useful,
the repricing of various categories of assets and liabilities is subject
to competitive and other pressures in each category of asset or liability.
Accordingly, both the timing and magnitude of repricing may vary
significantly, depending on the asset or liability as interest rates
change.
Forty-Five
<PAGE>
BT Financial Corporation and Affiliates
Therefore, static gap is not necessarily indicative of changes in net
interest income that would actually occur due to changing market interest
rates. As a result of these gap limitations, BT complements this analysis
and puts considerable emphasis on computer simulations that incorporate a
range of possible changes in the balance sheet, product pricing, and
yield-curve movements to project the impact of changing interest rates on
earnings.
One way to analyze interest-rate risk is to calculate the volume
difference between interest rate sensitive assets and interest rate
sensitive liabilities and then measure the effect a one-time, parallel
yield curve shift of 200 basis points would have on net interest income.
Except for accounts that are contractually variable rate products at
specified intervals, demand deposits and savings deposits are considered
non-rate sensitive given a 200 basis point yield curve shift. At December
31, 1998, BT's simulation analysis indicated that a 200 basis point
decrease in interest rates would virtually have no impact on projected net
interest income. Conversely, the simulation analysis indicated that a 200
basis point increase in rates would reduce projected net interest income
by approximately $1.2 million over the same period. This low variance is
within BT's policy guidelines. If these scenarios actually would occur, BT
would likely take some actions to mitigate its exposure to the interest
rate changes.
INFLATION
Assets and liabilities of a financial institution are monetary in
nature. Accordingly, interest rates, which generally move with the rate of
inflation, have potentially the most significant effect on BT's net
interest income. BT attempts to limit inflation's impact on net interest
spread through effective asset/liability management.
RECENT DEVELOPMENTS
Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."The statement, effective for
fiscal years beginning after December 15, 1997, establishes standards for
the way public enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. BT adopted
SFAS No. 131 for fiscal year 1998 reporting and concluded that no
additional disclosures were required in its financial statements. Since
SFAS No. 131 is a disclosure based statement, the adoption did not have
any impact on BT's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires, among other things, that an entity recognizes all
derivatives as either assets or liabilities in the statement of financial
condition and measures those instruments at fair value. The statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Since BT does not currently use derivative financial instruments,
the standard will not have any material impact on BT's financial position
or results of operations upon adoption.
YEAR 2000 READINESS DISCLOSURE
In 1996, BT created a special task force to analyze 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
utilizes and is dependent upon data processing systems and software in its
normal course of business. BT is in the process of: (1) ongoing analysis
of its information systems and vendor supplied application systems to
address any Year 2000 issues, (2) correcting or replacing all
non-compliant critical applications, (3) testing or certifying its mission
critical systems, (4) evaluating the potential effects of Year 2000 issues
on both the customers and vendors of Laurel and the Trust Company, and (5)
developing Year 2000 contingency and business resumption plans.
The ongoing process of analyzing BT's information systems involves
internal testing of computer hardware and software and the modification
and/or replacement of such systems if necessary. BT is also assessing its
noncomputer (non-IT) systems for year 2000 compliance. These non-IT
systems such as ATM machines and security systems typically utilize
embedded technology, such as microcontrollers, which could contain a date
element. BT met its goal of completing renovations of all mission critical
systems and applications by the end of 1998. While BT is taking all
appropriate steps to assure Year 2000 compliance, it is dependent on its
information systems vendor's 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. Currently, 81% of the mission critical systems that BT and its
affiliates utilize have been certified by the respective vendor or service
provider as being Year 2000 compliant, and additionally, 19% that are not
yet certified have a renovation plan in place to become compliant.
Successful internal unit testing or other internal certification has been
performed on 82% of these systems and is expected to be substantially
completed by June 30, 1999. BT's mainframe system, as well as BT's core
business application software packages, have been certified by the
respective vendors for Year 2000 compliance. Contingency planning efforts,
specific to critical systems and applications, are underway in the event
that primary systems, although certified, are deemed inadequate for
processing after the beginning of the Year 2000. BT is developing a
liquidity plan to address any funding needs related to Year 2000 issues.
BT has also contacted its utility service suppliers and requested written
assurance of their Year 2000 compliancy. BT's task force will assess these
vendor relationships upon determination of each vendor's Year 2000
readiness. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely
affect the Corporation's results of operations, liquidity and capital
resources. Although BT believes that it will be adequately prepared for
potential Year 2000 risks, the Corporation is unable to determine at this
time whether the consequences of Year 2000 failures will have a material
Forty-Six
<PAGE>
Financial Report to Shareholders
impact on the Corporation's results of operations, liquidity or capital
resources, due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness
of third-party suppliers and customers.
BT estimates that the total cumulative cost of this process will
approximate $756,000, 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. Currently, approximately
$521,000 of the estimated total cumulative cost has been expended. The
total 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.
BT's process of evaluating potential effects of Year 2000 issues on
customers of Laurel is 100% complete, and at this time BT has not
identified any potentially adverse effects of Year 2000 problems on
Laurel's loan customers. Reassessments on medium and high risk loan
customers are currently being performed and should be completed by April
30, 1999. 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 to Laurel.
Information will continue to be accumulated from customers of Laurel to
enable BT to assess the degree to which customers' operations are
susceptible to potential problems.
MANAGEMENT'S REPORT ON INTERNAL CONTROL
Management has assessed its internal control structure over financial
reporting as of December 31, 1998. The assessment was based on criteria
for effective internal control over financial reporting described in
"Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Management believes
that the Corporation maintained an effective internal control structure
over financial reporting as of December 31, 1998.
/s/ JOHN H. ANDERSON
------------------------------------
John H. Anderson
Chairman and Chief Executive Officer
/s/ MARK L. SOLLENBERGER
------------------------------
Mark L. Sollenberger
Executive Vice President
and Chief Financial Officer
Forty-Seven
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF BT FINANCIAL CORPORATION
PERCENTAGE STATE
NAME OWNERSHIP OF INCORPORATION
---- ---------- ----------------
Laurel Bank 100% Pennsylvania
Bedford Associates, Inc. 100% Pennsylvania
Laurel Trust Company 100% Pennsylvania
Laurel Community
Development Corporation 100% Pennsylvania
Bedford Associates of
Delaware, Inc. 100% Delaware
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 33-93454), dated June 14, 1995, with
regard to BT Financial Corporation 401(K) Plan for Banking Employees, of
our report dated January 27, 1999, except for Note 22, which is dated
February 23, 1999, on our audits of the consolidated
financial statements of BT Financial Corporation and affiliates
as of December 31, 1998 and 1997, and for the years ended
December 31, 1998, 1997, and 1996, which report is incorporated
by reference in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, PA
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 57,522
<INT-BEARING-DEPOSITS> 57
<FED-FUNDS-SOLD> 17,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 274,291
<INVESTMENTS-CARRYING> 72,307
<INVESTMENTS-MARKET> 72,691
<LOANS> 1,247,867
<ALLOWANCE> 10,971
<TOTAL-ASSETS> 1,702,328
<DEPOSITS> 1,393,020
<SHORT-TERM> 37,258
<LIABILITIES-OTHER> 8,436
<LONG-TERM> 100,031
0
0
<COMMON> 64,926
<OTHER-SE> 98,657
<TOTAL-LIABILITIES-AND-EQUITY> 1,702,328
<INTEREST-LOAN> 97,041
<INTEREST-INVEST> 26,529
<INTEREST-OTHER> 361
<INTEREST-TOTAL> 123,931
<INTEREST-DEPOSIT> 47,171
<INTEREST-EXPENSE> 54,557
<INTEREST-INCOME-NET> 69,374
<LOAN-LOSSES> 5,940
<SECURITIES-GAINS> 454
<EXPENSE-OTHER> 50,956
<INCOME-PRETAX> 26,214
<INCOME-PRE-EXTRAORDINARY> 26,214
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,278
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 4.55
<LOANS-NON> 6,544
<LOANS-PAST> 644
<LOANS-TROUBLED> 264
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,882
<CHARGE-OFFS> 5,232
<RECOVERIES> 381
<ALLOWANCE-CLOSE> 10,971
<ALLOWANCE-DOMESTIC> 10,971
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule restates previously filed financial information to give
effect to the merger between BT Financial Corporation and The Peoples
National Bank of Rural Valley. The merger was completed on October
23, 1998 and was accounted for as a pooling-of-interests.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 JUN-30-1998 MAR-31-1998
<CASH> 48,507 48,815 51,001
<INT-BEARING-DEPOSITS> 32 27 143
<FED-FUNDS-SOLD> 1,700 7,100 1,300
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 286,342 304,660 268,173
<INVESTMENTS-CARRYING> 111,397 145,291 178,340
<INVESTMENTS-MARKET> 112,416 146,161 179,300
<LOANS> 1,238,374 1,200,856 1,171,277
<ALLOWANCE> 10,774 10,376 10,042
<TOTAL-ASSETS> 1,721,155 1,738,009 1,690,671
<DEPOSITS> 1,381,277 1,386,245 1,378,634
<SHORT-TERM> 54,248 72,697 108,055
<LIABILITIES-OTHER> 10,583 8,719 10,695
<LONG-TERM> 112,179 112,898 38,616
0 0 0
0 0 0
<COMMON> 64,926 64,926 64,926
<OTHER-SE> 97,942 92,524 89,745
<TOTAL-LIABILITIES-AND-EQUITY> 1,721,155 1,738,009 1,690,671
<INTEREST-LOAN> 72,280 47,449 23,321
<INTEREST-INVEST> 20,864 14,277 6,547
<INTEREST-OTHER> 199 151 43
<INTEREST-TOTAL> 93,343 61,877 29,911
<INTEREST-DEPOSIT> 35,735 23,851 11,910
<INTEREST-EXPENSE> 41,364 27,307 13,056
<INTEREST-INCOME-NET> 51,979 34,570 16,855
<LOAN-LOSSES> 4,510 2,895 1,245
<SECURITIES-GAINS> 366 64 21
<EXPENSE-OTHER> 38,110 25,695 13,098
<INCOME-PRETAX> 19,398 12,191 5,466
<INCOME-PRE-EXTRAORDINARY> 19,398 12,191 5,466
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 13,456 8,434 3,728
<EPS-PRIMARY> 1.04 .65 .29
<EPS-DILUTED> 1.04 .65 .29
<YIELD-ACTUAL> 4.55 4.58 4.63
<LOANS-NON> 7,364 8,235 8,820
<LOANS-PAST> 739 504 495
<LOANS-TROUBLED> 265 265 265
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 9,882 9,882 9,882
<CHARGE-OFFS> 3,910 2,621 1,186
<RECOVERIES> 292 205 101
<ALLOWANCE-CLOSE> 10,774 10,376 10,042
<ALLOWANCE-DOMESTIC> 10,774 10,376 10,042
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule restates previously filed financial information to give
effect to the merger between BT Financial Corporation and The Peoples
National Bank of Rural Valley. The merger was completed on October
23, 1998 and was accounted for as a pooling-of-interests.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 53,215 53,165 57,321 51,755
<INT-BEARING-DEPOSITS> 424 349 277 127
<FED-FUNDS-SOLD> 1,800 12,950 11,300 1,700
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 200,008 156,228 155,843 186,798
<INVESTMENTS-CARRYING> 185,764 210,552 204,497 151,273
<INVESTMENTS-MARKET> 187,097 212,073 204,986 150,007
<LOANS> 1,139,293 1,151,756 1,154,931 1,125,592
<ALLOWANCE> 9,882 9,864 9,807 9,822
<TOTAL-ASSETS> 1,590,011 1,588,304 1,589,354 1,521,354
<DEPOSITS> 1,375,277 1,376,979 1,377,422 1,294,065
<SHORT-TERM> 38,184 33,641 38,932 54,516
<LIABILITIES-OTHER> 8,453 11,264 8,872 11,022
<LONG-TERM> 14,335 15,054 15,773 16,492
0 0 0 0
0 0 0 0
<COMMON> 32,463 32,463 29,512 29,512
<OTHER-SE> 121,299 118,903 118,843 115,747
<TOTAL-LIABILITIES-AND-EQUITY> 1,590,011 1,588,304 1,589,354 1,521,354
<INTEREST-LOAN> 92,112 68,563 44,986 22,123
<INTEREST-INVEST> 23,161 16,953 10,931 5,191
<INTEREST-OTHER> 699 502 312 188
<INTEREST-TOTAL> 115,972 86,018 56,229 27,502
<INTEREST-DEPOSIT> 46,131 33,723 21,611 10,549
<INTEREST-EXPENSE> 49,148 36,107 23,248 11,140
<INTEREST-INCOME-NET> 66,824 49,911 32,981 16,362
<LOAN-LOSSES> 4,230 3,155 2,090 1,045
<SECURITIES-GAINS> 195 24 21 95
<EXPENSE-OTHER> 48,209 36,003 23,656 11,815
<INCOME-PRETAX> 26,942 19,892 12,986 6,438
<INCOME-PRE-EXTRAORDINARY> 26,942 19,892 12,986 6,438
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 17,747 13,089 8,545 4,216
<EPS-PRIMARY> 1.37 1.01 .66 .32
<EPS-DILUTED> 1.37 1.01 .66 .32
<YIELD-ACTUAL> 4.73 4.77 4.81 4.89
<LOANS-NON> 7,762 8,732 8,952 10,494
<LOANS-PAST> 1,232 800 501 622
<LOANS-TROUBLED> 266 266 316 317
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 9,805 9,805 9,805 9,805
<CHARGE-OFFS> 4,561 3,425 2,280 1,136
<RECOVERIES> 408 329 192 108
<ALLOWANCE-CLOSE> 9,882 9,864 9,807 9,822
<ALLOWANCE-DOMESTIC> 9,882 9,864 9,807 9,822
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule restates previously filed financial information to give
effect to the merger between BT Financial Corporation and The Peoples
National Bank of Rural Valley. The merger was completed on October
23, 1998 and was accounted for as a pooling-of-interests.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 66,403
<INT-BEARING-DEPOSITS> 334
<FED-FUNDS-SOLD> 11,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 209,831
<INVESTMENTS-CARRYING> 111,553
<INVESTMENTS-MARKET> 112,169
<LOANS> 1,096,846
<ALLOWANCE> 9,805
<TOTAL-ASSETS> 1,502,083
<DEPOSITS> 1,291,621
<SHORT-TERM> 40,688
<LIABILITIES-OTHER> 8,330
<LONG-TERM> 17,210
0
0
<COMMON> 29,512
<OTHER-SE> 114,721
<TOTAL-LIABILITIES-AND-EQUITY> 1,502,083
<INTEREST-LOAN> 88,969
<INTEREST-INVEST> 20,470
<INTEREST-OTHER> 1,280
<INTEREST-TOTAL> 110,719
<INTEREST-DEPOSIT> 43,140
<INTEREST-EXPENSE> 45,664
<INTEREST-INCOME-NET> 65,055
<LOAN-LOSSES> 2,441
<SECURITIES-GAINS> 406
<EXPENSE-OTHER> 52,334
<INCOME-PRETAX> 21,623
<INCOME-PRE-EXTRAORDINARY> 21,623
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,410
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 4.81
<LOANS-NON> 11,376
<LOANS-PAST> 991
<LOANS-TROUBLED> 317
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,158
<CHARGE-OFFS> 3,524
<RECOVERIES> 571
<ALLOWANCE-CLOSE> 9,805
<ALLOWANCE-DOMESTIC> 9,805
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
