FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[ X ] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from to
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Commission file no.: 0-12377
BT FINANCIAL CORPORATION
------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 25-1441348
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(State of Incorporation) (I.R.S. Employer Identification Number)
551 Main Street, Johnstown, Pennsylvania 15901
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(Address of Principal Executive Offices) (Zip Code)
(814) 532-3801
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Registrant's Telephone Number
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
16,683,294 shares of common stock
($5.00 par value)
as of May 3, 2000
BT FINANCIAL CORPORATION AND AFFILIATES
FORM 10-Q
March 31, 2000
Part I. Financial Information Page No.
------------------------------ --------
Item 1.
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Consolidated Balance Sheet - March 31, 2000
and December 31, 1999 3
Consolidated Statement of Income
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statement of Cash Flows
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statement of Comprehensive Income
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2.
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Management's Discussion and Analysis of
Financial Condition and Results
of Operations 11
Item 3.
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Quantitative and Qualitative Disclosures
about Market Risk 20
Part II. Other Information
---------------------------
Item 1.
-------
Legal Proceedings 20
Item 2.
-------
Changes in Securities and Use of Proceeds 20
Item 3.
-------
Defaults Under Senior Securities 20
Item 4.
-------
Submission of Matters to a Vote of Security Holders 20
Item 5.
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Other Information 20
Item 6.
-------
Exhibits and Reports on Form 8-K 21
Signatures 22
2
ITEM 1
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FINANCIAL STATEMENTS
--------------------
BT FINANCIAL CORPORATION AND AFFILIATES
---------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(In thousands, except share data)
March 31 December 31
2000 1999
(Unaudited)
-------------------------
ASSETS
Cash and cash equivalents $ 60,732 $ 65,812
Interest-bearing deposits with banks 740 136
Federal funds sold 5,000 49,000
Securities available-for-sale 374,283 359,883
Securities held-to-maturity (market values
of $1,972 at March 31, 2000 and
$1,983 at December 31, 1999) 2,000 1,999
-------------------------
Total securities 376,283 361,882
-------------------------
Loans 1,501,096 1,529,696
Less: Unearned interest 12,785 14,872
Reserve for loan losses 15,656 15,654
-------------------------
Net loans 1,472,655 1,499,170
Premises and equipment 28,618 29,265
Accrued interest receivable 13,011 12,660
Other assets 41,925 42,747
-------------------------
Total assets $ 1,998,964 $ 2,060,672
=========================
LIABILITIES
Deposits:
Non-interest-bearing $ 241,004 $ 241,293
Interest-bearing 1,343,856 1,353,826
-------------------------
Total deposits 1,584,860 1,595,119
Federal funds purchased and securities sold
under agreements to repurchase 35,797 37,607
Short-term borrowings 26,335 78,750
Accrued interest payable 8,879 7,840
Other liabilities 5,413 6,319
Long-term borrowings 150,004 150,010
--------------------------
Total liabilities 1,811,288 1,875,645
--------------------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value
2,000,000 shares authorized,
None outstanding --- ---
Common stock, par value $5 per share,
25,000,000 shares authorized,
shares issued: 16,683,294 at March 31, 2000
and December 31, 1999 83,416 83,416
Surplus 58,950 58,956
Retained earnings 56,449 53,666
Accumulated other
comprehensive (loss) income (11,139) (11,011)
---------------------------
Total shareholders' equity 187,676 185,027
---------------------------
Total liabilities and
shareholders' equity $1,998,964 $2,060,672
===========================
The accompanying notes are an integral part of the consolidated financial
statements.
3
BT FINANCIAL CORPORATION AND AFFILIATES
---------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
(Unaudited)
(In thousands, except shares and per share data)
Three months ended
March 31
2000 1999
-------------------------
INTEREST INCOME
Loans, including fees $ 30,066 $ 27,095
Investment securities:
Taxable 4,384 4,670
Tax-exempt 1,292 1,332
Deposits with banks 2 1
Federal funds sold 611 143
-------------------------
TOTAL INTEREST INCOME 36,355 33,241
-------------------------
INTEREST EXPENSE
Deposits 13,064 12,020
Federal funds purchased
and securities sold under
agreements to repurchase 363 316
Short-term borrowings 1,014 28
Long-term borrowings 2,014 1,290
-------------------------
TOTAL INTEREST EXPENSE 16,455 13,654
-------------------------
NET INTEREST INCOME 19,900 19,587
Provision for loan losses 1,203 1,477
-------------------------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 18,697 18,110
-------------------------
OTHER INCOME
Trust and investment management income 1,130 973
Fees for other services 2,363 2,254
Net security gains 30 77
Other income 337 166
-------------------------
TOTAL OTHER INCOME 3,860 3,470
-------------------------
OTHER EXPENSES
Salaries and wages 5,960 6,008
Pension and other
employee benefits 1,134 1,351
Net occupancy expense 1,243 1,267
Equipment expense 1,392 1,500
Amortization of intangible assets 492 524
Other taxes 481 479
Other operating expense 3,097 3,401
-------------------------
TOTAL OTHER EXPENSES 13,799 14,530
-------------------------
INCOME BEFORE INCOME TAXES 8,758 7,050
Provision for income taxes 2,639 1,989
-------------------------
NET INCOME $ 6,119 $ 5,061
=========================
Earnings per common share - Basic
and Diluted $ .37 $ .30
Weighted average common shares
outstanding - Basic 16,683,294 16,683,294
Weighted average common shares
outstanding - Diluted 16,683,294 16,686,051
DIVIDENDS PAID PER COMMON SHARE $ .20 $ .16
The accompanying notes are an integral part of the consolidated financial
statements.
4
BT Financial Corporation and Affiliates
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three months ended
March 31
2000 1999
-------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,119 $ 5,061
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,203 1,477
Provision for depreciation and
amortization 1,026 1,193
Amortization of intangible assets 492 524
Amortization of premium, net of
accretion of discount on loans and
securities 13 (65)
Deferred income taxes (93) (114)
Realized net securities gains (30) (77)
Proceeds from sale of loans 4,442 618
Decrease (increase) in interest receivable (351) 699
Increase in interest payable 1,039 967
Equity in loss of limited partnerships 32 62
Other assets and liabilities, net (433) 10
-------------------
Net cash provided by operating
activities 13,459 10,355
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities 3,627 ---
Repayments and maturities of securities
available-for-sale 2,537 21,285
Repayments and maturities of securities
held-to-maturity --- 55,768
Purchases of securities available-for-
sale (20,753) (12,918)
Purchase of securities held-to-maturity --- (3,728)
Net (increase) decrease in interest-bearing
deposits with banks (604) 11
Net decrease in federal funds sold 44,000 4,100
Net decrease (increase) in loans 20,865 (61,459)
Purchases of premises and equipment and other (379) (411)
--------------------
Net cash provided by investing activities 49,293 2,648
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits (10,259) (31,473)
Net (decrease) increase in Federal Funds purchased and
securities sold under agreements to repurchase (1,810) 3,413
Net (decrease) increase in short-term borrowings (52,415) 585
Common stock cash dividends paid (3,336) (2,702)
Payment on long-term borrowings (6) (5)
Other (6) ---
--------------------
Net cash used in financing activities (67,832) (30,182)
--------------------
Decrease in cash and cash equivalents (5,080) (17,179)
Cash and cash equivalents at beginning
of the year 65,812 67,823
--------------------
Cash and cash equivalents at end of period $60,732 $50,644
====================
The accompanying notes are an integral part of the consolidated financial
statements.
5
BT FINANCIAL CORPORATION AND AFFILIATES
---------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
----------------------------------------------
(Unaudited)
----------
(In thousands)
-------------
Three months ended
March 31
2000 1999
-------------------------
Net income $ 6,119 $ 5,061
-------------------------
Other comprehensive income (loss), net of tax:
Unrealized holding losses on
securities arising during period, net of tax
of $(58) in 2000 and $(1,000) in 1999 (109) (1,858)
Less: Reclassification adjustment for
gains included in net income, net of tax
of $11 in 2000 and $27 in 1999 19 50
--------------------------
Other comprehensive (loss), net of tax of
$(69) in 2000 and $(1,027) in 1999 (128) (1,908)
--------------------------
Comprehensive income $ 5,991 $ 3,153
==========================
The accompanying notes are an integral part of the consolidated
financial statements.
6
BT FINANCIAL CORPORATION AND AFFILIATES
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. In the opinion of the management of BT Financial Corporation (BT or
the Corporation), the accompanying consolidated financial
statements include all normal recurring adjustments necessary for a
fair presentation of the financial position and results of
operations of BT for the periods presented. All significant
intercompany transactions have been eliminated in consolidation.
The consolidated financial statements of BT include the accounts of
BT and its wholly owned affiliates, Laurel Bank (Laurel), Laurel
Trust Company (the Trust Company), Bedford Associates, Inc., Laurel
Community Development Corporation, Bedford Associates of Delaware,
Inc., Flex Financial Consumer Discount (Flex), and Laurel
Investment Advisors, Inc. On July 14, 1999, BT completed a merger
with First Philson Financial Corporation (Philson). At the time of
the merger, Philson's assets were approximately $221 million.
Philson owned First Philson Bank, N.A. and Flex, a finance company
subsidiary. The merger was 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 Philson for all periods presented
prior to the merger. These statements should be read in
conjunction with the financial statements and the notes thereto
included in BT's annual report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1999. The
results of operations for the three-month period ended March 31,
2000 are not necessarily indicative of the results which may be
expected for the full year.
2. Tax provisions for interim financial statements are based on the
estimated effective tax rates for the full fiscal year. The
estimated effective tax rates may differ from the statutory tax
rate due primarily to tax-exempt interest income.
3. Reserve for loan losses -- The recorded investment in loans for
which impairment has been recognized in accordance with Statement
of Financial Accounting Standards (SFAS) No. 114 totaled $6.6
million at March 31, 2000, compared to $5.4 million at December 31,
1999 and $0 at March 31, 1999. The corresponding loan loss
valuation allowance was $1.1 million at March 31, 2000 and December
31, 1999 compared to $0 at March 31, 1999. BT recognized $39,000
and $0 of interest revenue on impaired loans during the three
months ended March 31, 2000 and 1999, respectively. The interest
revenue in the current year was recorded using the cash basis of
income recognition.
7
4. Earnings Per Share
------------------
The following table shows the calculation of basic and diluted
earnings per share. Share and per share data has been adjusted to
reflect the five percent stock dividend distributed on February 1,
2000.
Three months ended
March 31
2000 1999
-------------------
Basic Earnings Per Share:
Net income(in thousands) $ 6,119 $ 5,061
===== =====
Weighted average number
of common shares
outstanding-Basic 16,683,294 16,683,294
Basic Earnings Per
Share $ .37 $ .30
===== =====
Diluted Earnings Per Share:
Net income (in thousands) $ 6,119 $ 5,061
===== =====
Weighted average number
of common shares
outstanding-Basic 16,683,294 16,683,294
Effect of dilutive
stock options --- 2,757
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Weighted average number
of common shares
outstanding-Diluted 16,683,294 16,686,051
========== ==========
Diluted Earnings
Per Share $ .37 $ .30
===== =====
5. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board (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. In June of 1999, the FASB issued SFAS No. 137,
8
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133," which postponed
the adoption date of SFAS No. 133. As such, the Corporation is not
required to adopt SFAS No. 133 until fiscal year 2001. Since BT
does not currently use derivative financial instruments, the
standard would not have any material impact on BT's financial
position or results of operations upon adoption.
In March of 2000, the FASB issued Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of Accounting Principles Board
Opinion (APB) No. 25". The interpretation is intended to provide
accounting guidance involving stock compensation and to clarify
certain problems that have arisen in practice since the issuance
of APB No. 25 in October 1972. This interpretation is effective
on July 1, 2000. BT does have a stock-based compensation plan,
however, management believes the interpretation would not have any
material impact on BT's financial position or results of
operations upon adoption.
6. Litigation
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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 $13,000 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. All parties have come to an
agreement to settle the action. The Court entered an order
approving the settlement on April 20, 2000. The parties have
agreed to a settlement class of 432 accounts, the number of
residential mortgages which the bank converted from one method of
accounting to another. Notices were sent to all 432 accounts and
3 potential class members opted not to participate in the
settlement, meaning these borrowers could bring lawsuits for their
individual claims against the defendants if they choose. One
borrower stated its good relations with Bank and Trust as its
reason for opting out. The other 2 borrowers did not state their
reasons for opting out. Laurel Bank and Security will contribute
$200,000 and $25,000, respectively, to the settlement fund.
Interest on the settlement contributions will be calculated at
5.9% per annum until the time of payment. As of March 31, 2000,
Laurel Bank has accrued its portion of the settlement. Laurel
Bank expects to make its contribution to the settlement by the
end of May 2000.
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 area referred to as the "Pittsburgh
area." The suit seeks to enjoin Laurel from using its name and
9
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".
In April 1999, the Court granted plaintiff's partial motion for
summary judgment, concluding that plaintiff has the exclusive
right to use the word "Laurel" in its name within a geographic
area around its offices in the Pittsburgh area, but the court did
not define the area of exclusive use. While the plaintiff contends
that the zone of exclusive use encompasses the metropolitan
"Pittsburgh area", Laurel Bank contends that this zone is
substantially smaller. The issue of the scope of the "Pittsburgh
area" remains to be decided. On April 26, 2000, the Court held a
conference for the purpose of facilitating settlement discussions.
In the meantime, the court has suspended the schedule for expert
reports and briefing on the issue of the scope of the "Pittsburgh
area" in an effort to facilitate a settlement. 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.
7. Stock Dividend
--------------
On December 22, 1999, BT's Board of Directors declared a five
percent stock dividend. The dividend was distributed on February
1, 2000, to shareholders of record as of January 4, 2000. All
share and per share data in this report has been adjusted to
reflect the stock dividend.
8. Stock Based Compensation Plan
-----------------------------
On January 5, 2000, under the 1998 Equity Incentive Plan, BT
granted non-qualified stock options to certain employees and
directors to purchase 111,500 shares of BT Common Stock. The
exercise price of the options was $20 per share which equaled the
market price of BT's Common Stock on the date of grant. The stock
options became exercisable on January 6, 2000 and have a maximum
term of 10 years.
10
ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following is Management's Discussion and Analysis of the material
changes in financial position between March 31, 2000 and December 31,
1999, and the material changes in results of operations comparing the
three month period ending March 31, 2000 with the results for the
comparable period of 1999 for BT. The following should be read in
conjunction with BT's Annual Report on Form 10-K for the year ended
December 31, 1999.
On July 14, 1999, BT completed a merger with First Philson Financial
Corporation (Philson). Philson owned First Philson Bank, N.A. and
Flex Financial Consumer Discount Company, a finance company
subsidiary. At the time of the merger, Philson's assets were
approximately $221 million. 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 Philson for all periods presented prior to the
merger. This acquisition strengthened BT's leading market position in
Somerset County, Pennsylvania, where BT currently represents over one-
third of total bank and thrift deposits.
Forward-Looking Statements
--------------------------
Except for historical information contained herein, the matters
discussed in this report or incorporated by reference in this report
may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents
incorporated by reference in this report, the words "anticipate,"
"believe," "estimate," "may," "intend," "expect" and similar
expressions identify certain of such forward-looking statements.
Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking
statements contained herein. Factors that could cause future results
to vary from current expectations include, but are not limited to the
following: changes in economic conditions (both generally and more
specifically in the markets in which BT operates); changes in interest
rates, deposit flows, loan demand, real estate values and competition;
changes in accounting principles, policies or guidelines and in
government legislation and regulation (which change from time to time
and over which BT has no control); other factors affecting BT's
operations, markets, products and services; and other risks detailed
in this report and in BT's other Securities and Exchange commission
filings. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only
as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
11
FINANCIAL REVIEW
----------------
Overview
--------
BT's primary financial objectives are to expand the growth and
profitability of the Corporation through: (1) expansion and
diversification of revenue streams in fee income, trust, and
investment management areas, (2) increases in market share growth by
way of expanded sales-focused initiatives, (3) implementation of
various efficiency strategies including the continuous refinement of
BT's product delivery systems and (4) strategic mergers and
acquisitions. Maintaining high asset quality while managing internal
and merger-related growth remains an essential element in BT's
expansion strategies. BT's strategic business plan targets retail
consumers and small to mid-sized businesses by offering a full menu of
banking and financial services.
BT's recent merger with Philson in July of 1999 increased total assets
to approximately $2.0 billion. Philson's banking subsidiary, First
Philson Bank, N.A., operated nine branches in Somerset and Fayette
counties and was merged into Laurel Bank upon consummation of the
merger. Philson also owned Flex Financial Consumer Discount Company,
which continues to operate as a non-bank subsidiary of BT. Targeted
synergies and efficiencies resulting from the merger have been
realized as evidenced by an improved efficiency ratio of 56% in the
first quarter of 2000 compared to 60% in the same period of 1999.
Cost-saving measures included the elimination of redundant overhead
expenses and some branch closures due to overlapping market areas.
During the fourth quarter of 1999, two branches of the former Philson
Bank, N.A., along with one branch of Laurel, were closed and
consolidated into nearby locations as a result of duplicate service
areas created by the merger. BT plans to generate additional revenues
in the future through the expansion of Flex's market by opening
additional Flex offices and by targeting trust and investment services
to the former Philson customer base.
BT's consolidated net income increased 20.9%, to $6.1 million, or $.37
per diluted share, in the first quarter of 2000 compared to $5.1
million, or $.30 per diluted share, in the same period of 1999. The
strong earnings improvement was driven primarily by increases in net
interest income and non-interest income along with a reduction in
other expenses. Gains in non-interest income reflect BT's continued
emphasis on growth in fee-related revenues and less reliance on net
interest income. As a percent of total revenue (net interest income
and total other income), BT's total other income increased to 16.2 percent
in the first quarter of 2000 when compared to 15.0 percent for the
same period of 1999. Trust and investment management income was a
prime contributor as it increased 16.1% to $1.1 million.
Total assets were $2.00 billion at March 31, 2000 compared to $2.06
billion at December 31, 1999 and $1.89 billion at March 31, 1999. The
decline during the first quarter of 2000 was primarily due to the
retirement of $50 million in short-term borrowings at the Federal Home
Loan Bank. The year-over-year increase was primarily due to strong
loan growth.
On April 26, 2000, the Board of Directors declared an increased cash
dividend of $.21 per share to shareholders of record on May 8, 2000,
payable June 1, 2000. This increase is in keeping with BT's practice
of reflecting the Company's success in its dividend policy.
12
CHANGES IN FINANCIAL POSITION
Total assets at March 31, 2000 were $2.00 billion compared to $2.06
billion at December 31, 1999 and $1.89 billion at March 31, 1999. The
3.0% decrease from year-end 1999 was primarily due to the retirement
of $50 million in a short-term borrowing at the Federal Home Loan
Bank, which was recently held in short-term investments. The 5.8%
increase over March 31, 1999 was mainly due to higher loan levels
funded by short- and long-term borrowings and increased deposit
levels. Average total assets for the quarter ended March 31, 2000
were $2.04 billion, representing an increase of $137.6 million or 7.2%
over the quarter ended March 31, 1999. The increase was substantially
due to higher loan levels in the current quarter. Average total
assets declined slightly by $13.1 million or 0.6% in the current
quarter compared to the fourth quarter of 1999.
Total shareholders' equity was $187.7 million at March 31, 2000
compared to $185.0 million at year-end 1999 and $189.6 million at
March 31, 2000. The increase of $2.7 million over year-end 1999 was
due to BT's net income. The decline of $1.9 million compared to
March 31, 1999 was due mainly to a reduction in accumulated other
comprehensive income (loss) due to decreases in unrealized market
values on securities available-for-sale. The decline was mitigated by
BT's net income. The generally upward interest rate movement
experienced over the last twelve months has resulted in a net-of-tax
fair value securities valuation decline of $11.3 million, comparing
the current period versus March 31, 1999.
Total loans outstanding at March 31, 2000, net of unearned interest,
declined $26.5 million, or 1.8%, compared to year-end 1999 versus an
increase of $102.5 million, or 7.4% compared to March 31, 1999. The
decline from year-end 1999 resulted primarily from decreases in
consumer automobile and residential mortgage loans. Automotive
lending was lower in the first quarter due to normal seasonality
factors, while mortgage lending has been impacted by a higher interest
rate environment. The increase over March 31, 1999 was due to higher
balances in consumer home equity and commercial loans. BT operates
six local sales-focused banking regions throughout its market area,
designed to incorporate local market knowledge with the backing of a
corporate business plan tailored to offer customers a complete array
of lending and other financial products. In 2000, BT has focused on
consumer loan growth by centralizing its direct consumer lending
function. The key benefits of this centralization include consistent
credit scoring, quicker approval and turnaround time, enhanced
documentation, and improved control over the entire loan process.
Customers will benefit by the time-savings features inherent in the
centralized structure and the resulting improvement in customer
service. Commercial lending to small- and mid-sized businesses is
also being targeted for growth in 2000 as BT continues to aggressively
pursue existing and potential commercial relationship opportunities
within its market area. In order to profitably expand customer
relationships and meet customer needs, BT has expanded its offering
of loan terms and maturities to its customer base. BT then
executes funding strategies and other balance sheet management
techniques to optimize the related impact on BT's operating results.
As an example, BT has established secondary market relationships which
allow the sale of certain longer-term loans. This enhances BT's
capability to manage its balance sheet more effectively both from a
liquidity and risk perspective while providing the potential for fee
13
gains related to the asset sales. In 2000, BT plans to become more
active in pursuing longer term commercial and mortgage lending with
the intent to sell the loans when deemed appropriate by management.
BT's nonperforming assets increased $2.4 million, or 21.9%, and $4.6
million, or 52.5%, compared to year-end 1999 and March 31, 1999,
respectively. The increase over year-end is principally due to the
addition of one nonperforming commercial mortgage loan totaling
approximately $2.0 million at March 31, 2000. The increase over March
31, 1999 is mainly due to the aforementioned loan and the addition of
one nonperforming commercial relationship totaling approximately $3.0
million at March 31, 2000. Management is currently anticipating only
a nominal loss in connection with these credits.
Management's policy is to maintain an adequate loan loss reserve to
cover inherent losses in the loan portfolio. The evaluation process
to determine potential losses includes loan reviews, collateral
adequacy assessments, an analysis of specific conditions of the
borrower and an assessment of general economic conditions. The BT
Credit and Collection functions continuously monitor and assess credit
quality to minimize exposure to potential future credit losses. The
reserve for loan losses as a percent of loans, net of unearned
interest, increased to 1.05% at March 31, 2000, compared to 1.03% at
year-end 1999 and 1.04% at March 31, 1999. The following table
provides information with respect to the components of BT's
nonperforming assets and related ratios for the periods indicated.
MARCH 31 December 31 March 31
(In thousands) 2000 1999 1999
----------------------------------
Loans 90 days or more past-due $ 617 $ 582 $ 566
Restructured loans 212 212 264
Nonaccrual loans 11,449 8,936 6,596
----------------------------------
Total nonperforming loans 12,278 9,730 7,426
Other real estate owned 401 502 631
Repossessed assets 747 784 748
----------------------------------
Total nonperforming assets $ 13,426 $ 11,016 $ 8,805
==================================
Nonperforming loans as a % of
loans, net of unearned interest .82% .64% .54%
Reserve for loan losses to
nonperforming loans 1.3x 1.6x 1.9x
Reserve for loan losses as a % of
loans, net of unearned interest 1.05% 1.03% 1.04%
14
Total investment securities have increased $14.4 million, or 4.0%, and
$3.8 million, or 1.0%, compared to year-end 1999 and March 31, 1999,
respectively. Most of the increase over year-end 1999 was due to a
higher level of U.S. Treasury securities while the year-over-year
growth was due to increased government agency securities, which was
partially offset by a decline in the unrealized market value of the
portfolio. BT's securities are purchased to enhance the overall yield
on earning assets and to contribute to the management of interest rate
risk and liquidity. Loans generally provide higher yields than
securities, and sound loan expansion remains one of BT's key growth
strategies.
Period-end total deposits decreased slightly by $10.3 million or 0.6%,
compared to year-end 1999 while increasing $38.2 million or 2.5%,
compared to March 31, 1999. The decline from year-end was primarily
due to lower levels of interest-checking and money market accounts.
The year-over-year increase was driven by higher certificate of
deposit balances. BT has recently targeted growth in this product
line by offering more aggressive rates for selected maturities. This
strategy allows BT to meet its funding needs at rates lower than
current wholesale credit sources. On a year-over-year basis, non-
interest-bearing demand deposits grew by $11.4 million, or 5.0%,
reflecting BT's strategic focus on growth in this area. BT's total
average deposits for the first quarter of 2000 were $1.58 billion,
representing an increase of $22.8 million, or 1.5%, compared to the
first quarter of 1999. The increase was due to certificate of deposit
and demand deposit growth, which offset declines in savings, interest-
checking, and money market accounts.
BT's short-term borrowings (consisting of federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings) declined $54.2 million compared to year-end 1999 due
mainly to the retirement of $50 million in short-term debt at the
Federal Home Loan Bank (FHLB). Short- and long-term borrowings
increased $18.9 million and $51.9 million respectively, compared to
March 31, 1999 due to funding requirements in connection with higher
earning assets levels. BT's long-term borrowings of $150.0 million at
March 31, 2000 were provided by the FHLB during 1998 and 1999. The
borrowings, scheduled to mature in years 2008 and 2009, had interest
rates ranging from 4.99% to 5.56% at March 31, 2000. BT's funding
strategy utilizes alternative nondeposit funding sources when deemed
appropriate as a means to supplement internal deposit growth. Loans,
net of unearned interest, as a percentage of deposits, were 93.9%,
95.0% and 89.6% at March 31, 2000, December 31, 1999, and March 31,
1999, respectively. BT strives to maintain the loan to deposit ratio
under 100% in order not to become dependent on higher cost funding
sources. Funding strategies are actively managed by BT's
Asset/Liability Committee to ensure adequate liquidity and to control
interest rate risk exposure while maximizing profitability.
RESULTS OF OPERATIONS
A five percent stock dividend was declared on December 22, 1999 to shareholders
of record at January 4, 2000. The stock dividend was distributed on
February 1, 2000. All per share data in the following discussion
reflects the stock dividend.
For the first quarter of 2000, BT produced net income of $6.1 million,
or $.37 per diluted share, compared to $5.1 million, or $.30 per
diluted share, over the same period of 1999. The improved profit
performance in net income of 20.9% and earnings per share growth of
23.3% was largely a result of targeted cost savings from the July 1999
15
Philson merger, continued fee income increases, and higher net
interest income. BT's first quarter efficiency ratio of 56% in 2000
compared favorably to the 60% ratio of a year earlier, reflecting the
successful integration of Philson into BT and management's ongoing
efforts to control overhead costs.
The annualized return on average assets for the first quarters of 2000
and 1999 was 1.20% and 1.08%, respectively. The annualized return on
average shareholders' equity was 13.29% in 2000 and 10.83% in 1999.
The return on average tangible shareholders' equity, which excludes
intangible amortization expense from net income and intangibles from
average shareholders' equity, was 15.98% and 13.42% for the first
quarters of 2000 and 1999, respectively. The higher ratios in 2000
are reflective of BT's strong year-over-year net income increase.
Fully taxable equivalent net interest income increased $265,000, or
1.3%, to $20.9 million in the first quarter of 2000 compared to 1999,
despite a decline in the net interest margin. The increase was
primarily due to a $157.5 million, or 8.8%, rise in average earning
assets to $1.94 billion in 2000 as average loans grew $143.5 million,
or 10.5%, to $1.50 billion. The increase in average earning assets
outpaced the rise in average interest-bearing liabilities of $129.8
million, or 8.8%, to $1.60 billion in 2000. The net interest margin
declined by 37 basis points to 4.33%, which is indicative of the
recent margin pressure being experienced at most financial
institutions. Average earning assets yielded 7.73% in 2000 compared
to 7.81% in 1999. The decline was due mainly to competitive loan
pricing. Rates paid on average interest-bearing liabilities were
4.12% and 3.76% for the same periods, respectively. The increased
cost of funds is reflective of a continued migration of funds from
lower cost savings, interest-checking, and money market accounts to
higher cost certificates of deposit. BT is anticipating some
additional margin pressure in its near-term outlook as competitive
loan pricing and higher cost funding continues in the current rising
interest rate environment. BT pursues growth in non-interest bearing
demand deposits as a means to mitigate margin compression.
Accordingly, average demand deposits were $233.2 million in the
current quarter, representing growth of $7.4 million, or 3.3%,
compared to the quarter ended March 31, 1999. This increase, along
with the overall higher interest rate trend, improved the effective
yield on non-interest paying funds 7 basis points to .72% in 2000 from
.65% in 1999.
The provision for loan losses decreased $274,000 in the first quarter
of 2000, compared to the same period in 1999 due to management's
assessment of the provision necessary to maintain an adequate reserve
against potential future losses based upon the current size and
quality of the loan portfolio. Net charge-offs were approximately
$1.2 million in 2000 compared to $806,000 in 1999. The increase was
due to generally higher levels of credit losses in most major loan
categories. Net charge-offs represented .32% of average loans, net of
unearned interest, on an annualized basis for the first quarter of
2000 compared to .24% for the same quarter last year. Management
believes the increase is not indicative of any trend representing
deteriorating loan quality in BT's loan portfolio.
Total other income, excluding security gains, increased $437,000, or
12.9%, in the first quarter of 2000 compared to 1999. Gains in other
income reflect BT's continuing strategy of emphasis on growth in fee-
related revenues and less reliance on net interest income. As a
percent of total revenue, BT's other income increased to 16.2% in the
current quarter compared to 15.0% for the quarter ended March 31,
16
1999. Trust and investment management income increased $157,000, or
16.1%, to $1.1 million, primarily reflecting an expansion in
traditional trust business, including custodian and escrow
administration. Service fees are the most significant component of
BT's other income, generating 61.7% of total other income, excluding
security gains, in the current quarter. Service fees increased
$109,000, or 4.8%, mainly due to higher levels of deposit account fees
earned in the first quarter of 2000 over the same period last year.
In the current quarter, the other income component of total other
income grew to $337,000, representing an increase of $171,000, or
103.0%, over the first quarter of 1999. The higher level was
primarily due to a $78,000 increase in gains realized in connection
with the sale of certain loans. Gains from loan sales totaled $91,000
in the current quarter compared to $13,000 in the first quarter of
1999. Security gains declined $47,000 due to a higher level of gains
related to called securities during the first quarter of last year.
Other expenses declined by 5.0% or $731,000, primarily due to the
successful implementation of targeted cost savings associated with the
Philson acquisition and management's ongoing cost-containment efforts.
Salaries and benefits declined 3.6%, while full-time equivalent
employees declined to 831 at March 31, 2000, compared to 863 at March
31, 1999. Occupancy expense declined 1.9% as 3 branch offices were
consolidated as a result of the Philson acquisition and 2 branch
offices were sold in May of 1999. BT will continue efforts to
rationalize its branch banking offices in 2000 to seek greater
efficiencies in its product delivery structure. While BT continues to
devote expenditures necessary to improve its technological
capabilities, equipment expense declined 7.2% or $108,000, primarily
due to the consolidation of data processing operations at BT and
Philson. All other operating expenses declined 8.2% or $312,000,
mainly due to the elimination of duplicative expense structures at BT
and Philson. In particular, total professional services expense
declined $110,000 or 15.4% to $606,000 in the current quarter. BT
continuously evaluates the efficiency of its operations to seek
improved processes and delivery channels which will best serve its
customers while reducing operating costs. BT's Internet banking
product is currently in its final testing phase and should be fully
operational in the near future. BT will employ the newest
technologies to offer its customers a superior and highly secure on-
line banking product.
BT's effective tax rate was 30.1% for the first quarter of 2000
compared to 28.2% for the same period of 1999. The higher rate in
2000 reflects a lower level of tax-exempt interest income compared to
the prior year.
17
CAPITAL ADEQUACY
At March 31, 2000, BT continued to maintain capital levels designating
the Corporation as "Well Capitalized". BT's capital ratios as of
March 31, 2000 and December 31, 1999 are presented in the table below.
The required regulatory ratios, representing the level needed to meet
"Adequately Capitalized" status are also presented.
Regulatory
3-31-00 12-31-99 Requirement
------- -------- -----------
Tier I Risk Based Ratio 12.21% 11.79% 4.00%
Total Capital Risk Based Ratio 13.27% 12.83% 8.00%
Tier I Leverage Ratio 8.85% 8.56% 4.00%
COMMITMENTS AND CONTINGENCIES:
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments consist of loan
commitments and standby letters of credit. The Corporation's exposure
to loss in the event of nonperformance by the other party to the
financial instrument for loan commitments and standby letters of
credit is represented by the contractual amount of these instruments.
The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet
instruments.
The face amounts of financial instruments with off-balance-sheet risk
at March 31, 2000 were as follows:
(In thousands)
Loan commitments $195,958
Standby letters of credit 11,123
Since many of the loan commitments may expire without being drawn
upon, the total commitment amount does not necessarily represent
future cash requirements or loss exposures. The Corporation evaluates
each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
customer. Standby letters of credit are unconditional commitments
issued by the Corporation to support the financial obligations of a
customer to a third party. These guarantees are primarily issued to
support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans. The collateral varies but may include
accounts receivable, inventory and property, plant and equipment for
those commitments for which collateral is deemed necessary.
18
RECENT DEVELOPMENTS:
YEAR 2000 COMPLIANCE
BT instituted procedures and underwent extensive systems testing to
prepare for potential Year 2000 problems, as disclosed in earlier
reports. To date BT has not had any Year 2000 related problems, and
all internal systems have functioned properly since the beginning of
the Year 2000. All key vendors have not had any problems that BT is
aware of. Additionally, BT is not aware of any adverse Year 2000
effects on Laurel Bank's loan customers. At this time, management
does not foresee significant Year 2000 risks resulting from its
dealings with vendors or customers. BT will continue to monitor its
systems on an ongoing basis to ensure all processes continue to
function properly. In prior years, BT expended a total of approximately
$726,000 in connection with Year 2000 compliance.
19
ITEM 3
------
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
There have been no material changes in the Corporation's market risk
during the three months ended March 31, 2000. For additional
information, refer to pages 50 and 51 in the Annual Report of BT on
Form 10-K as filed on March 29, 2000 for the fiscal year ended
December 31, 1999 which is incorporated by reference.
PART II
--------
OTHER INFORMATION
------------------
ITEM 1
-------
Legal Proceedings
-----------------
The information regarding legal proceedings can be found in this
current filing of Form 10-Q under BT and Affiliates Notes to
Consolidated Financial Statements in Footnote 6, Litigation.
ITEM 2
-------
Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
ITEM 3
------
Defaults Under Senior Securities
--------------------------------
Not applicable.
ITEM 4
-------
Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
ITEM 5
-------
Other Information
-----------------
Not applicable.
20
ITEM 6
------
Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Exhibit No. Description Prior Filing or Sequential
- ----------- ----------- Page Number
-----------
27.1 Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K
-------------------
The Registrant did not file any Current Reports on Form 8-K during the
first quarter of 2000.
21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BT FINANCIAL CORPORATION
(Registrant)
Date May 15, 2000 /s/ John H. Anderson
------------------ ----------------------------
John H. Anderson, Chairman
and Chief Executive Officer
Date May 15, 2000 /s/ Brian H. Lehman
------------------ -------------------------------
Brian H. Lehman,
Senior Vice
President and Chief
Financial Officer
22
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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