<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 0-18533
--------
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-1168175
--------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
50 North Main Street Box 129 Castile NY 14427 (Address of
-----------------------------------------------------
principal executive offices) (Zip Code)
(716) 493-2576
--------------
Registrant's telephone number, including area code)
____________________________________________________________
(Former name, address, fiscal year, if changed)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) 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.
Y Yes No
- --------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of October 30, 1998
- -------------------------------------------------------------------
Common Stock, $1.00 per share 3,389,150 shares
Transitional Small Business Disclosure Format (Check One):
Yes__ No X
-
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
1
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
CONSOLIDATED STATEMENT OF CONDITION
-----------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------------- ------------------------
<S> <C> <C>
Assets
------
Cash and due from banks $ 11,612,245 $ 10,863,023
Federal funds sold 14,950,000 1,550,000
Securities available for sale, 65,614,621 34,356,500
Securities held to maturity, market value of -
$44,242,300 at December 31, 1997 43,109,322
Other securities 2,083,501 1,702,331
Loans, net of allowance for loan losses of
$2,293,312 and $2,028,600, respectively 178,430,421 157,943,432
Accrued interest receivable 2,010,276 1,740,101
Premises and equipment, net 6,458,655 6,419,871
Other assets 1,824,335 2,254,116
------------ ------------
Total Assets $282,984,054 $259,938,696
------------ ------------
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Noninterest-bearing $ 29,159,271 $ 32,083,730
Interest-bearing 208,994,989 185,121,594
------------ ------------
Total deposits $238,154,260 $217,205,324
Securities sold under agreements to repurchase 2,027,984 1,673,911
Accrued interest payable 1,019,557 810,382
Accrued taxes and other liabilities 981,451 677,005
Advances from Federal Home Loan Bank 7,538,819 7,812,302
------------ ------------
Total Liabilities $249,722,071 $228,178,924
------------ ------------
Shareholders' equity:
Common stock, par value $1.00 per share,
5,000,000 and 1,500,000 shares authorized,
respectively and 3,389,150 and 1,124,852 shares issued,
respectively $ 3,389,150 $ 1,124,852
Capital surplus 12,320,556 14,436,634
Retained earnings 18,065,621 16,428,534
Treasury stock at cost (74,731 and 0
shares,respectively) (1,379,351) 0
Unearned employee stock ownership plan shares (490,654) (539,320)
Accumulated other comprehensive income 1,356,661 309,072
------------ ------------
Total shareholders' equity $ 33,261,983 $ 31,759,772
------------ ------------
Total Liabilities and Shareholders' Equity $282,984,054 $259,938,696
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $4,232,393 $3,706,521 $12,152,986 $10,778,945
Interest on investment securities
Taxable 599,791 810,070 2,101,898 2,446,266
Tax-exempt 363,037 312,811 1,142,085 939,284
Interest on federal funds sold 105,158 92,647 205,636 217,480
------------- ------------- ------------- --------------
Total interest income $5,300,379 $4,922,049 $15,602,605 $14,381,975
Interest on deposits and advances 2,206,578 2,063,939 6,574,577 5,917,511
------------- ------------- ------------- --------------
Net interest income $3,093,801 $2,858,110 $ 9,028,028 $ 8,464,464
Provision for possible loan losses 121,831 87,151 378,251 249,441
------------- ------------- ------------- --------------
Net interest income after
provision for possible loan losses $2,971,970 $2,770,959 $ 8,649,777 $ 8,215,023
------------- ------------- ------------- --------------
Other operating income:
Service charges on deposit accounts $ 256,526 $ 254,653 $ 798,236 $ 720,264
Other charges and fees 44,940 24,309 101,890 65,996
Other operating income: 119,134 77,806 230,784 152,837
Net gains on sales of
loans and investment securities 44,734 - 65,639 37,657
------------- ------------- ------------- --------------
Total other operating income $ 465,334 $ 356,768 $ 1,196,549 $ 976,754
------------- ------------- ------------- --------------
Other operating expenses:
Salaries and employee benefits $1,209,074 $1,041,144 $ 3,406,964 $ 3,033,931
Occupancy expense 125,998 117,647 390,486 374,024
Printing and supplies 72,238 62,390 212,791 211,042
Equipment expense 213,197 187,980 680,786 568,426
FDIC assessment 9,693 6,054 29,445 25,099
Other operating expenses 532,667 495,930 1,619,858 1,536,162
------------- ------------- ------------- --------------
Total other operating expense $2,162,867 $1,911,145 $ 6,340,330 $ 5,748,684
Income before income taxes 1,274,437 1,216,582 3,505,996 3,443,093
Provision for income taxes 409,200 392,500 1,066,600 1,110,000
------------- ------------- ------------- --------------
Net Income $ 865,237 $ 824,082 $ 2,439,396 $ 2,333,093
============= ============= ============= ==============
Basic earnings per share $0.27 $0.29 $0.75 $0.83
Diluted earnings per share $0.26 $0.26 $0.73 $0.75
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $ 865,237 $824,082 $2,439,396 $2,333,093
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period 1,112,317 33,921 1,088,856 9,082
Less: reclassification adjustments
for gains included in net
income (30,611) (6,958) (41,267) (26,360)
----------- --------- ------------- -----------
Other comprehensive income, net of tax: 1,081,706 26,963 1,047,589 (17,278)
----------- --------- ------------- -----------
Comprehensive income $1,946,943 $851,045 $3,486,985 $2,315,815
=========== ========= ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statement
4
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,439,396 $ 2,333,093
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 644,087 632,634
Provision for possible loan losses 378,251 249,441
ESOP compensation expense 118,216 112,584
Gain on sale of investments (60,697) (37,657)
Gain on sale of loans (4,942) (213,771)
Increase in interest receivable (270,175)
Increase in other assets (228,695) (150,519)
Increase in interest payable 209,175 94,816
Increase(decrease) in accrued taxes
and other liabilities 304,446 (486,915)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,529,062 $ 2,533,706
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities-available
for sale $ 5,275,596 $ 4,028,594
Proceeds from calls and maturities of securities:
Available for sale 18,561,794 14,625,145
Proceeds from sale of loans 789,112 340,250
Purchases of securities:
Held to maturity - (5,470,057)
Available for sale (10,705,131) (11,650,995)
Net increase in loans (21,649,410) (7,871,030)
Expenditures for capital assets (578,337) (887,722)
-------------- --------------
NET CASH (USED IN)PROVIDED BY INVESTING ACTIVITIES $ (8,306,376) $ (6,885,775)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts and money market accounts $ 3,039,950 $ 4,952,637
Net increase in time deposits 17,908,986 9,456,489
Repayment FHLB borrowings (273,483) (291,725)
Exercise of options and warrants 78,670 326,650
Purchase of treasury stock (1,379,351) -
Net purchase agreements 354,073 378,949
Dividends paid (802,309) (573,340)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 18,926,536 $ 14,249,660
-------------- --------------
Net increase in cash and cash equivalents $ 14,149,222 $ 9,897,591
Cash and cash equivalents, beginning of year 12,413,023 11,565,746
-------------- --------------
Cash and cash equivalents, end of quarter $ 26,562,245 $ 21,463,337
============== ==============
Interest paid $ 2,415,753 $ 5,822,695
Income taxes paid $ 850,000 $ 740,003
</TABLE>
The accompanying notes are an integral part of these financial statement
5
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
September 30, 1998
------------------
Note 1 Basis of Presentation
- ----------------------------
The unaudited interim financial information includes the accounts of Letchworth
Independent Bancshares Corporation and its subsidiary, The Bank of Castile. The
financial information has been prepared in accordance with the Summary of
Significant Accounting Policies as outlined in the Company's Form 10-KSB for the
year ended December 31, 1997 and, in the opinion of management contains all
adjustments necessary to present fairly the Company's financial position as of
September 30, 1998 and December 31, 1997, the results of its operations for the
three and nine month periods ended September 30, 1998 and 1997, respectively,
and its cash flows for the nine month periods ended September 30, 1998 and 1997,
respectively.
The accounting policies of the Company conform with generally accepted
accounting principles and prevailing practices within the banking industry. The
preparation of financial information in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial information and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
These notes should be read in conjunction with the notes to the consolidated
financial statements incorporated in the Letchworth Independent Bancshares
Corporation 1997 Annual Report and Form 10-KSB.
NEW ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards (SFAS) No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," was issued in
December 1996 and deferred until January 1, 1998, the effective date for certain
provisions of SFAS No. 125 relating to repurchase agreements, dollar roll,
securities lending and similar transactions and pledged collateral. SFAS No. 127
has been adopted by the Company in the first quarter of 1998, as required, and
has not had a material impact on the Company's results of operations.
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" is required to be adopted for fiscal
years beginning after December 15,1997. As a result, this standard will be
initially adopted effective with issuance of the Company's Annual Report filings
for December 31, 1998. This Statement requires that financial and descriptive
information be disclosed about the Company's operating segments based on how
the chief operating decision maker internally evaluates the performance of
these business units and decides how to allocate corporate resources.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is required to be adopted for all
fiscal quarters beginning after June 15, 1999. Earlier adoption is permitted at
the beginning of any quarter, commencing on July 1, 1998. Accordingly,
Letchworth Independent Bancshares Corporation chose early adoption for SFAS No.
133, as of July 1, 1998. There were no derivative instruments held by the
Company that had to be marked to market value as a result of this early
adoption. In connection with the adoption of SFAS No. 133, companies are
allowed a one-time opportunity to shift any or all of the held-to-maturity
portfolio into the available-for-sale portfolio. In adopting SFAS No. 133,
Letchworth Independent Bancshares Corporation chose to move its entire held-to-
maturity portfolio into its available-for-sale portfolio as of July 1, 1998.
SFAS No. 133 prohibits selling securities for ninety days that have been moved
into the available-for-sale portfolio
6
<PAGE>
Note 3 Comprehensive Income
- ---------------------------
In the first quarter, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company has chosen to disclose comprehensive income in a separate statement,
in which the components of comprehensive income are displayed net of income
taxes. The following table sets forth the related tax effects allocated to each
element of comprehensive income for the three months ended September 30, 1998
and 1997:
<TABLE>
<CAPTION>
Three Months Ended Sept 30, 1998 Nine Months Ended Sept 30, 1998
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses)on
securities:
Unrealized holding gains
arising during period 1,639,694 (527,377) 1,112,317 1,601,531 (512,675) 1,088,856
Less: reclassification
adjustment for gains
realized in net income (43,363) 12,752 (30,611) (60,697) 19,430 (41,267)
--------------- ------------- ------------- --------------- ------------ -------------
Net unrealized (loss) gain 1,596,331 (514,625) 1,081,706 1,540,834 (493,245) 1,047,589
--------------- ------------- ------------- --------------- ------------ -------------
Other comprehensive (loss) income 1,596,331 (514,625) 1,081,706 1,540,834 (493,245) 1,047,589
--------------- ------------- ------------- --------------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Sept 30, 1997 Nine Months Ended Sept 30, 1997
Tax Tax
Before-tax (Expense) Net-of-Tax Before-tax (Expense) Net-of-Tax
Amount or Benefit Amount Amount or Benefit Amount
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses)on
securities:
Unrealized holding gains
arising during period 60,152 (26,231) 33,921 12,975 (3,893) 9,082
Less: reclassification
adjustment for gains
realized in net income (807) (6,151) (6,958) (37,657) 11,297 (26,360)
------------- ---------- ---------- --------- ---------- ----------
Net unrealized gain (loss) 59,345 (32,382) 26,963 (24,682) 7,404 (17,278)
------------- ---------- ---------- --------- ---------- ----------
Other comprehensive income (loss) 59,345 (32,382) 26,963 (24,682) 7,404 (17,278)
------------- ---------- ---------- --------- ---------- ----------
</TABLE>
7
<PAGE>
The following table sets forth the components of accumulated other comprehensive
income for the three months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended
Sept 30,
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 309,072 $162,869
Unrealized gains on securities, net 1,047,589 (17,278)
---------- --------
Ending balance $1,356,661 $145,591
---------- --------
</TABLE>
Note 4 Investment Securities
- ----------------------------
The book and approximate market
value of investment securities
at:
<TABLE>
<CAPTION>
Sept 30, 1998 Decemebr 31, 1997
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Available for Sale
- ------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $16,744,067 $17,109,667 $14,920,070 $15,186,700
State and political subdivision
obligations 29,741,982 31,173,435 4,812,298 4,923,200
Mortgage-Backed Securities 17,066,088 17,331,519 14,163,181 14,246,600
----------- ----------- ----------- -----------
$63,552,137 $65,614,621 $33,895,549 $34,356,500
----------- ----------- ----------- -----------
Held to Maturity
- ----------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies 0 0 $11,958,264 $12,168,400
State and political subdivision
obligations 0 0 24,961,440 25,853,700
Mortgage-Backed Securities 0 0 6,189,618 6,220,200
- - ----------- -----------
0 0 $43,109,322 $44,242,300
- - ----------- -----------
</TABLE>
8
<PAGE>
Note 5 Loans
- ------------
LOANS CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
September-30 December-31
1998 1997
--------------------- ----------------------
<S> <C> <C>
Residential real estate $ 53,851,646 $ 49,158,726
Commercial real estate 39,390,467 35,046,889
Commercial and industrial loans 37,126,118 33,616,025
Agricultural loans 32,608,835 31,563,146
Consumer loans 17,746,667 10,587,246
------------ ------------
$180,723,733 $159,972,032
------------ ------------
</TABLE>
An analysis of changes in the
allowance for possible loan losses
is as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
--------------------- ----------------------
<S> <C> <C>
Balance, beginning of year $2,028,600 $1,841,200
Chargeoffs: 142,004 165,898
Recoveries: 28,465 16,554
Net charge-offs 113,539 149,344
---------- ----------
Additional charges to operations 378,251 249,441
---------- ----------
Balance, end of period $2,293,312 $1,941,297
========== ==========
</TABLE>
The following table summarized the Company's non-performing loans at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
1998 1997
------- -------
<S> <C> <C>
Non-accruing loans 642,551 264,399
Accruing loans past due 90 days or more 327,243 174,566
Renegotiated loans 0 0
</TABLE>
The average balance of impaired loans during the first nine months of 1998 was
approximately $613,438. At September 30, 1998, the balance of impaired loans
and related reserve against that balance was $593,011 and $170,256,
respectively. The average balance of impaired loans during the first nine months
of 1997 was approximately $390,523. At September 30, 1997, the balance of
impaired loans and related reserve against the balance was $445,669 and $76,870,
respectively. Interest income recognized on impaired loans and interest income
recognized on a cash basis was not significant
9
<PAGE>
Note 6 Earnings Per Share
- -------------------------
The calculations of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
Quarter ended Nine Month Ended
Sept 30, Sept 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Income available to common shareholders $ 865,237 $ 824,082 $2,439,396 $2,333,093
BASIC EARNINGS PER SHARE
Weighted average shares outstanding 3,250,168 2,823,603 3,269,064 2,806,453
Basic earnings per share $ 0.27 $ 0.29 $ 0.75 $ 0.83
---------- ---------- ---------- ----------
DILUTED EARNINGS PER SHARE
Weighted average shares outstanding 3,250,168 2,823,603 3,269,064 2,806,453
Dilitive effect of:
Stock options 84,146 313,857 94,367 288,849
Adjusted weighted average shares
outstanding 3,334,314 3,137,460 3,363,431 3,095,302
Diluted earnings per share $ 0.26 $ 0.26 $ 0.73 $ 0.75
---------- ---------- ---------- ----------
</TABLE>
10
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1998
FINANCIAL CONDITION
Total assets of Letchworth Independent Bancshares Corporation (the "Company")
were $282.9 million as of September 30, 1998, an increase of $23.0 million, or
8.87%, above total assets at December 31, 1997. Deposits, the Company's primary
source of funds, increased $20.9 million from December 31, 1997, or 9.64%, to
$238.1 million at September 30, 1998. September's deposit surge has temporarily
increased the Company's liquidity, but has provided the flexibility to take
advantage of current market opportunities. The increase in deposits occurred
primarily in the certificate of deposit category.
Total loans outstanding as of September 30, 1998 were $178.4 million, which
represented an increase of $20.5 million, or 12.97%, over total loans at
December 31, 1997. The total loans outstanding is net of loans sold and the
allowance for possible loan losses. The increase of total loans as of September
30, 1998, was the result of the following: Residential real estate loans
increased by $4.7 million or 9.55%; commercial real estate loans increased $4.3
million or 12.39%; agricultural loans decreased $1.0 million or 3.31%;
commercial and industrial loans increased $3.5 million or 10.44%; and consumer
loans increased $7.2 million or 67.62%. The increase in consumer loans during
the first nine month period of 1998, is primarily attributable to the Company's
new indirect lending program. This program generates auto loans through
relationships with local dealers.
11
<PAGE>
Nonaccrual loans totaled $642,551 as of September 30, 1998, compared to $264,339
as of September 30, 1997. The increase in nonaccrual loans results from several
commercial credits being placed in this category during the past twelve months.
While this represents a significant increase, the Company is aggressive at
identifying and dealing with problem loan situations. Further, management
believes that the loan loss allowance is adequate to cover any expected losses.
"Potential problem loans" consist of loans which are generally secured and not
currently considered nonperforming, but where information about possible credit
problems has caused management to have doubts as to the ability of such
borrowers to comply with present payment terms. As of September 30, 1998, the
Company considers $1,997,206 to be "potentially problem loans", as described
above. Historically, however, only a very small portion of those loans have
resulted in actual losses for the Company.
Total deposits as of September 30, 1998 were $238.2 million, which represented
an increase of $20.9 million over total deposits as of December 31, 1997. The
increase in deposits over this period occurred in the interest-bearing category.
Specifically, certificates of deposit increased by $15.7 million during this
period. Historically, the end of September is a time of increased deposits for
our school district customers, with the collection of school taxes. This is the
most significant reason for the increase in certificates of deposit. Money
market deposit accounts also increased by $3.7 million during this period.
September's deposit surge has temporarily increased the Company's liquidity, but
has provided the flexibility to take advantage of current market opportunities
The Company's shareholders' equity increased to $33.3 million, an increase of
4.73% or $1.5 million from December 31, 1997. The increase in shareholders
equity was due to net income but was moderated by the repurchase of 74,731
shares of the Company's common stock, in the form of treasury stock. These
shares were purchased at a total cost of $1,379,351, for an average price of
$18.46 per share.
The Risk-based capital ratios are a very good indicator of the Company's
financial soundness. As of September 30, 1998, the Company had a Tier 1 capital
ratio of 17.96%, a total capital ratio of 19.21%, and a Tier 1 leverage ratio of
11.65%. Each of these ratios compares favorably with the regulatory minimum
requirements of 4.00%, 8.00%, and 4.00%, respectively.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1997
12
<PAGE>
Net income of $865,237 for the three months ended September 30, 1998 represents
an increase of 41,155 or 4.99%, over the $824,082 earned during the same period
ended September 30, 1997. Net income (diluted) per common share and common share
equivalent was $.26 for the three months ended September 30, 1998. (See Exhibit
11 of this Quarterly Report on Form 10-QSB) This total remained unchanged from
the same period in 1997. The increase in income for the third quarter of 1998
was offset by the increase in outstanding shares attributed to the exercise of
warrants through December 31, 1997.
Net interest income was $3.1 million for the three months ended September 30,
1998, up 8.25% from the $2.9 million earned during the three months ended
September 30, 1997. Increased volume in the loan portfolio was the primary
reason for the increase in interest income during the second quarter of 1998.
Interest expense on deposits increased by $142,639.
The provision for possible loan losses, the charge to earnings for potential
credit losses associated with lending activities, was $121,831 for the three
months ended September 30, 1998, up 39.79% from the $87,151 provision recorded
during the three months ended September 30, 1997. Gross charge-offs were
$142,004 in the third quarter of 1998, compared to $165,898 for the same period
last year. Management conducts a periodic evaluation which assigns risk weights
for individual loans and different classes of loan groups in determining the
adequacy of the reserve. Regulatory examination, historical gross loans, an
assessment of economic conditions and other relevant factors are used in this
analysis. Management of the Company believes this analysis indicates that the
level of the loan loss reserve is adequate to absorb any potential losses
inherent in the loan portfolio at September 30, 1998. The allowance for possible
loan losses of the Company at September 30, 1998 was $2,293,312 or 1.27% of
total loans and is up 13.05% or $264,712 from the allowance at December 31,
1997. Other operating income for the three month period ended September 30, 1998
was 465,334, compared to 356,768 for the same period in 1997. This increase is
partially attributed to revisions made in deposit fees and service charges.
Other operating expense for the three month period ended September 30, 1998 was
$2,162,867, an increase of 13.17% over the $1,911,145 recorded for the same
period in the prior year. The majority of these increases occurred in equipment
expense which increased by $25,217 or 13.41%; and salaries and employee benefits
expense which increased by $167,930 or 16.13%. The increase in equipment expense
was due largely to the increase in maintenance contracts and the addition of the
branch office in the Village of Geneseo (See Other Events of Significance in
this From 10-QSB). Several new staff positions, as well as an increase in ESOP
expense attributed to the rise in the market value of the Company's common
stock, account for the increase in salaries and benefits.
13
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Net income of $2,439,396 for the nine months ended September 30, 1998 represents
an increase of $106,303 or 4.56%, over the $2,333,093 earned during the same
period ended September 30, 1997. Net income (diluted) per share was $.73 for the
nine months ended September 30, 1998. (See Exhibit 11 of this Quarterly Report
on Form 10-QSB) Although this represents a decrease when compared to the $.75
per share figure for the same period in 1997, the earnings per share figure for
this quarter was affected by an increase in the number of outstanding shares of
common stock due to the exercise of the remainder of outstanding warrants
through December 31, 1997, which had previously been issued by the Company.
Net interest income was $9.0 million for the nine months ended September 30,
1998, up 6.66% from the $8.5 million earned during the nine months ended
September 30, 1997. Increased volume in the loan portfolio was the primary
reason for the increase in interest income during the first quarter of 1998.
Interest expense on deposits increased by $657,066.
The provision for possible loan losses, the charge to earnings for potential
credit losses associated with lending activities, was $378,251 for the nine
months ended September 30, 1998, up 51.64% from the $249,441 provision recorded
during the nine months ended September 30, 1997. Gross charge-offs were $142,004
in the first nine month period of 1998, as compared to $165,528 for the same
period last year. Management conducts a periodic evaluation which assigns risk
weights for individual loans and different classes of loan groups in determining
the adequacy of the reserve. Regulatory examination, historical gross loans, an
assessment economic conditions and other relevant factors are used in this
analysis. Management of the Company believes this analysis indicates that the
level of the loan loss reserve is adequate to absorb any potential losses within
the loan portfolio. The allowance for possible loan losses of the Company at
September 30, 1998 was $2,293,312 or 1.27% of total loans and is up 13.05% or
$264,712 from the allowance at December 31, 1997. The allowance for possible
loan losses of the Company at September 30, 1997 was $1,941,297 or 1.26% of
total loans.
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Other operating expense for the nine month period ended September 30, 1998 was
$6,340,330, an increase of 10.29% over the $5,748,684 recorded for the same
period in the prior year. The majority of these increases occurred in equipment
expense which increased by $112,360 or 19.77%; and salaries and employee
benefits expense which increased by $373,033 or 12.30%. The increase in
equipment expense was due largely to the increase in maintenance contracts and
the addition of the branch office in the Village of Geneseo (See Other Events of
Significance in this From 10-QSB). Several new staff positions, in addition to
annual compensation increase , account for the increase in salaries and
benefits. Other operating expenses were $1,619,858 for the nine months ended
September 30, 1998, an increase of $83,696 over the same period in 1997. Several
items caused this increase. Auto finder fees, related to the new indirect
lending program, increased by $33,345. Subscriptions increased by $19,422.
Telephone expense increased by $25,286. The increase in telephone expense is
primarily the result of the bank's new branch in Geneseo, as well as the new
Trust Department operation.
OTHER EVENTS OF SIGNIFICANCE:
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On January 5, 1998, The Bank of Castile opened its 11th office in the village of
Geneseo. The office is presently meeting management's expectations with over $5
million in deposits and $4 million in loans.
The Geneseo office also houses the Bank's new "Trust and Investment Department"
which was developed in cooperation with the Tompkins County Trust Company of
Ithaca, New York. We received approval from the appropriate regulators in the
third quarter of 1997 and began offering the services shortly thereafter. The
results at this point continue to exceed expectations.
During the fourth quarter of 1997, the Board of Directors approved a program to
allow for the repurchase of up to $2 Million in Company common stock and
warrants. As of September 30, 1998 the Company had repurchased 74,731 shares at
an average price of $18.46. Together with the purchase of warrants during the
fourth quarter of 1997, the Company has spent $1,808,851 out of the total that
was authorized. There are no plans at this point for further expansion of this
repurchase program. Management of the Company believes that the Company is well
positioned to take advantage of growth opportunities that allow the Company to
utilize its capital.
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YEAR 2000 PROJECT
The Year 2000 issue concerns the potential impact of historic computer software
code that only utilizes two digits to represent the calendar year (e.g. "98" for
"1998"). Software so developed, and not corrected, could produce inaccurate or
unpredictable results commencing upon January 1, 2000, when current and future
dates present a lower two digit year number than dates in the prior century. The
Company, similar to most financial services providers, is significantly subject
to the potential impact of the Year 2000 issue due to the nature of financial
information. Potential impacts to the Company may arise from software, computer
hardware, and other equipment both within the Company's direct control and
outside of the Company's ownership, yet with which the Company electronically or
operationally interfaces. Financial institution regulators have intensively
focused upon Year 2000 exposures, issuing guidance concerning the
responsibilities of senior management and directors. Year 2000 testing and
certification is being addressed as a key safety and soundness issue in
conjunction with regulatory exams.
In May 1997, the Federal Financial Institutions Examination Council ("FFIEC")
Issued an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. The FFIEC has highly prioritized Year 2000 compliance in order to
avoid major disruptions to the operations of financial institutions and the
country's financial systems when the new century results in two digit dates for
the year being below the prior year's value. The FFIEC statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the Year 2000
issue. The federal banking agencies have been conducting Year 2000 compliance
examinations, and the failure to implement an adequate Year 2000 program can be
identified as an unsafe and unsound banking practice.
The Board of Directors assigned responsibility for the Year 2000 project to the
standing Risk Committee with the Vice President, Manager of Information Services
as coordinator. Furthermore, the five step approach recommended by the FFIEC was
adopted as the project guideline:
1. Awareness
2. Assessment
3. Renovation
4. Validation
5. Implementation
The first two stages were substantially completed during the third quarter of
1997. The second phase included the identification of all processes, hardware
and software, as well as, interdependencies impacting operations. An inventory
of these items was assembled, priorities established and resources allocated to
complete the necessary modifications to minimize the Company's exposure.
Because the Company does not have any "in house" programming, but instead
utilizes the services of outside software packages, the renovation stage became
more of a monitoring project to insure our systems utilized were compliant.
During the past year the following major systems were upgraded to Year 2000
compliant versions:
Core Processing System May 21, 1998
Direct Deposit/Automated Clearing House August 27, 1997
Item Processing System October 9, 1998
Currently, all other identified mission critical processes are on schedule to be
ready by December 31, 1998.
During the validation stage, each system is being tested to determine it
correctly processes data for thirteen dates which have been identified by the
regulators as crucial. The core processing system has thus far been successfully
tested through the December 31, 1999, test date. The remainder of the test dates
for this and the other mission critical items will be completed by March 31,
1999. Validation for the non-critical processes are scheduled to be completed by
June 30, 1999.
The Company has initiated formal communications with all of its significant
suppliers, utility providers, and customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company is requesting that third party vendors represent
their products and services to be Year 2000 compliant and that they have a
program to test for that compliance. However, the response of certain third
parties is beyond the control of the Company. The Company has developed
contingency plans, to address anticipated worst case scenarios. Contingency
plans may include increasing liquidity levels, adjusting facility shut-down and
start-up schedules, and other appropriate measures. Once developed, contingency
plans and related cost estimates will be continually refined as additional
information becomes available. At this time the Company cannot, however,
estimate the additional cost, if any, that might develop from such contingency
plans. The Company is prepared to curtail credit availability to customers
identified as having material exposure to the Year 2000 issue. However, the
Company's ability to exercise such curtailment may be limited by various
factors, including existing legal agreements and potential concerns regarding
lender liability.
The Company's total Year 2000 estimated project cost, which is based upon
currently available information, includes expenses for the review and testing of
third parties, including government entities. However, there can be no guarantee
that the hardware, software, and systems of such third parties will be without
unfavorable Year 2000 issues and therefore not present a material adverse impact
upon the Company.
Year 2000 compliance costs incurred during fiscal 1998 totaled approximately
$17,000, the majority of which was related to external consulting. This figure
does not include the implicit costs associated with the reallocation of internal
staff hours to Year 2000 project related efforts. At this time, management
currently estimates additional Year 2000 compliance costs, which are expenses on
a current period basis, at approximately $140,000. This estimate does not
include normal ongoing costs for computer hardware (including ATM's) and
software that would be replaced in the next year even without the presence of
the Year 2000 issue in conjunction with the Company's ongoing programs for
updating its delivery infrastructure. The aforementioned Year 2000 project cost
estimate may change as the Company progresses in its Year 2000 program and
obtains additional information associated with and conducts further testing
concerning third parties. At this time, no significant projects have been
delayed as a result of the Company's Year 2000 effort.
Despite the Company's activities in regards to the Year 2000 issue, there can be
no assurance that partial or total systems interruptions or the costs necessary
to update hardware and software would not have a material adverse effect upon
the Company's business, financial condition, results of operations, and business
prospects.
Recovery under existing insurance policies would be available depending upon the
circumstances of a Year 2000 related event and the type of facility involved.
Generally, no recovery would be available in the event of an orderly shutdown
which does not result in damage to the facility. Potential recoveries in the
event of facility damage, including business interruption, However, would be
subject to deductibles.
The Company presently believes that the Year 2000 problem will not pose
significant operational problems or have significant impact on its financial
condition, results of operations or cash flows. However, if the third party
modification plans are not completed and tested on a timely basis, the Year 2000
issue may have a material impact on the operations of the Company.
The Company has taken a proactive approach to increase Year 2000 compliance of
its commercial customers. At a recent seminar held for the Banks commercial
customers a representative from the Federal Reserve Bank specifically addressed
the Year 2000 compliance issue. Additionally a series of letters regarding Year
2000 compliance were mailed to all commercial customers.
17
<PAGE>
OTHER INFORMATION
ITEM 4(c)Letchworth Independent Bancshares Corporation Stock Option Plan of 1998
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
STOCK OPTION PLAN OF 1998
1. Purpose. THE LETCHWORTH INDEPENDENT BANCSHARES CORPORATION STOCK
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OPTION PLAN OF 1998 (hereinafter referred to as the "Plan") is designed to
attract the best available personnel for positions of substantial responsibility
and to furnish additional incentive to officers and key employees of LETCHWORTH
INDEPENDENT BANCSHARES CORPORATION (hereinafter referred to as the "Company"),
or THE BANK OF CASTILE, the Company's wholly-owned subsidiary, upon whose
efforts the successful conduct of the business of the Company largely depends,
by encouraging such officers and key employees to acquire a proprietary interest
in the Company or to increase the same. This purpose will be effected through
18
<PAGE>
the granting of options to purchase the common stock of the Company which will
be either "Incentive Stock Options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended to date (hereinafter referred to as
the "Code") or Non-Statutory Stock Options (which shall not qualify under
Section 422 of the Code) on the terms provided herein. Hereinafter the term
"option" shall be deemed to refer to either Incentive Stock Options or Non-
Statutory Stock Options as the context requires, unless specific reference is
made to Incentive Stock Options.
2. Eligibility. The persons eligible to receive options under this Plan
-----------
shall be such officers and key employees of the Company as the Board of
Directors of the Company shall select from time to time; provided, however, that
all options must be approved by the Option Committee. The Option Committee
shall be composed solely of two (2) or more "Non-Employee Directors," as that
term is defined in Rule 16b-3(b)(3)(i) promulgated under Section 16 of the
Securities Exchange Act of 1934, as amended. Directors who are not otherwise
officers or employees of the Company shall not be eligible to receive options
under the Plan. All references in this Plan to employees of the Company shall
include the officers and key employees of any parent or subsidiary of the
Company, as those terms are defined in Section 424 of the Internal Revenue Code.
3. Stock Subject to Options. Subject to the provisions of Section 11
------------------------
hereof, options may be granted under this Plan for up to 500,000 shares of the
common stock, par value $1.00 per share, of the Company (hereinafter referred to
as "Shares"), which Shares may, in the discretion of the Board of Directors of
the Company, consist either in whole or in part of authorized but unissued
shares of common stock or shares of common stock held in the treasury of the
Company. Any Shares subject to an option that expires or terminates unexercised
as to such Shares for any reason whatsoever, shall continue to be available for
options under this Plan.
4. Effective Date. The effective date of this Plan shall be January 15,
--------------
1998, the date that the Plan was adopted by the Board of Directors of the
Company; provided, however, that the effectiveness of the Plan shall be subject
to and contingent upon the approval by the stockholders of the Company within
twelve (12) months of the date that this Plan is so adopted by the Board of
Directors.
5. Terms and Conditions of Options. Each option granted by the Option
-------------------------------
Committee on behalf of the Board of Directors pursuant to this Plan shall be
evidenced by a certain stock option agreement (the "Agreement") containing
provisions consistent with this Plan. The Agreement shall specify whether the
options granted are Incentive Stock Options, designed to qualify under the
provisions of Section 422 of the Code, or Non-Statutory Stock Options, which are
not designed to qualify under Section 422 of the Code. The Agreement, whether
for Incentive Stock Options, Non-Statutory Stock Options, or both, shall
incorporate in substance the following terms and conditions:
(a) Price. Each option shall state the number of Shares subject to
-----
the option as well as the option price of each such Share, which shall be
an amount not less than the "Fair Market Value" of a share of common stock
of the Company as of the date
19
<PAGE>
the option is granted. For the purposes of the Plan, the "Fair Market
Value" of each share of common stock of the Company shall be an amount
equal to the average "Bid" and "Ask" price of the common stock of the
Company as set forth in the NASDAQ Bid and Ask Quotations supplied by the
National Association of Securities Dealers, Inc. on the date immediately
preceding the date of such grant. If for any reason the common stock of the
Company is no longer being traded at the time of the grant of the option,
the "Fair Market Value" of each share of common stock of the Company shall
be determined by the Option Committee; provided, however, that the "Fair
Market Value" shall in no event be less than the book value of the common
stock of the Company as of the date said option is granted, excluding
goodwill. In the event an option, which is designed to qualify as an
Incentive Stock Option, is granted to any person who would after the grant
of such option be deemed to beneficially own stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company within the meaning of Section 422(b)(6) of the Code
(hereinafter referred to as a "Ten Percent Shareholder"), the option price
per share shall be an amount not less than one hundred ten percent (110%)
of the "Fair Market Value" of a share of common stock of the Company.
(b) Term. The term of each option shall be determined by the Option
----
Committee, but in no event shall an option be exercisable either in whole
or in part after the expiration of ten (10) years from the date on which it
is granted, or in the case of a Ten Percent Shareholder where the option is
designed to qualify as an Incentive Stock Option, in no event shall such an
option be exercisable either in whole or in part after the expiration of
five (5) years from the date on which it is granted. The Board of
Directors and an optionee may at any time by mutual agreement terminate any
option granted to such optionee under this Plan.
(c) Vesting Schedule. Each Agreement may include, in the discretion
----------------
of the Option Committee, a vesting period following the grant of any option
during which all or any part of such option remains forfeitable and cannot
be exercised. All Agreements shall provide for full and immediate vesting
in the event that (i) the Company shall dispose of all or substantially all
of its assets as an entity and thereafter dissolve, or (ii) consolidate
with or merge into another corporation or permit one or more corporations
to consolidate with or merge into it and pursuant to any such merger or
consolidation the Company shall not be the resulting or surviving
corporation. In the event of any merger or consolidation involving the
Company and pursuant to which the Company shall be the resulting or
surviving corporation, then any options granted under this Plan shall not
be subject to full and immediate vesting. Additional specific provisions
regarding vesting in the event of an optionee's death or disability are set
forth at Sections 9 and 10 of this Plan, respectively.
(d) Exercise. Each option, or any installment thereof, shall be
--------
exercised whether in whole or in part, by giving written
20
<PAGE>
notice to the Company at its principal office, specifying the number of
Shares to be purchased and the purchase price to be paid, and accompanied
by the payment of the purchase price. Any optionee may pay for the Shares
subject to the option with cash, a certified check or a bank check payable
to the order of the Company. Alternatively, the optionee may pay for the
Shares, in whole or in part, by the delivery of shares of common stock of
the Company already owned by him or her which will be accepted in exchange
for the Shares at their value on the date of exercise. Certificates
representing the Shares purchased by the optionee shall be issued as soon
as practicable after the optionee has complied with the provisions hereof.
6. Annual Limitation for Incentive Stock Options. The aggregate Fair
---------------------------------------------
Market Value of the Shares (determined under Section 5 as of the time the option
is granted) with respect to which Incentive Stock Options are first exercisable
by an optionee during any calendar year (under all stock option plans of the
Company or any of its subsidiaries) shall not exceed One Hundred Thousand
Dollars ($100,000).
7. Non-Assignment. During the lifetime of the optionee, options issued
--------------
hereunder shall be exercisable only by the optionee and shall not be assignable
or transferable by the optionee, whether voluntarily or by operation of law or
otherwise, and no other person shall acquire any rights therein.
8. Termination of Employment.
-------------------------
(a) Optionees shall have the right to exercise the vested portion of
any options granted under this Plan only while the optionee maintains a
relationship as an employee of the Company or any of its subsidiaries and has
been an employee of one or more such corporations continuously since the grant
of the option, except as otherwise expressly provided herein. For purposes of
this Section, a relationship qualifying an optionee to participate under this
Plan will be treated as continuing during the period when the optionee is on
military duty, sick leave or other bona fide leave of absence if the period of
such leave does not exceed ninety (90) days, or, if longer, so long as a statute
or contract guarantees the optionee's right to re-employment with the Company.
When the period of leave exceeds ninety (90) days and the optionee's right to
re-employment is not guaranteed either by statute or by contract, the
relationship will be deemed to have terminated on the ninety-first (91st) day of
such leave.
(b) In the event of an optionee's termination of employment without
cause, other than by reason of death or permanent and total disability, all
rights to purchase Shares shall vest immediately and any such unexercised option
or portion thereof may be exercised in whole or in part by the optionee at any
time within ninety (90) days of said termination date; provided, however, that
in any event, the option cannot be exercised after the expiration of the term of
the option. Options not exercised within the applicable period specified above
shall terminate. In the event of an optionee's termination of employment for
cause, any option or options held by him or her under
21
<PAGE>
this Plan, to the extent not exercised before the effective date of such
termination, shall forthwith terminate.
9. Death of Optionee. In the event that an optionee shall die while an
-----------------
employee of the Company and prior to the complete exercise of options granted to
the optionee under this Plan, any such unexercised option or portion thereof may
be exercised in whole or in part within one (1) year after the date of the
optionee's death and then only: (i) by the optionee's estate or by or on behalf
of such person or persons to whom the optionee's rights pass under the
optionee's Will or the laws of descent and distribution; and (ii) prior to the
expiration of the term of the option.
10. Disability. In the event that an optionee shall become permanently
----------
and totally disabled (within the meaning of Section 22(e)(3) of the Code) while
an employee of the Company and prior to the complete exercise of options granted
to the optionee under this Plan, any such remaining options may be exercised in
whole or in part within one (1) year following the determination date of said
permanent and total disability; provided, however, that in no event shall any
such options be exercisable after the expiration of the term of the option.
11. Adjustments to Number of Shares. The aggregate number and kind of
-------------------------------
Shares available for options under this Plan, the number and kind of Shares
subject to any outstanding option and the option price of each outstanding
option, shall be proportionately adjusted by the Board of Directors for any
increase, decrease or change in the total outstanding common shares of the
Company resulting from a stock dividend, recapitalization, merger,
consolidation, split-up, combination, exchange of stock or similar transaction
(but not by reason of the issuance or purchase of common voting stock by the
Company in consideration for money, services or property).
12. Rights as a Shareholder. The optionee shall have no rights as a
-----------------------
Shareholder with respect to the Shares purchased by him or her pursuant to the
exercise of an option until the date of the issuance to him or her of a
certificate of stock representing such Shares. No adjustment shall be made for
dividends or for distributions of any other kind with respect to Shares for
which the record date is prior to the date of the issuance to the optionee of a
certificate for the Shares.
13. Investment Purpose. Each written notice by which an optionee
------------------
exercises an option shall contain representations on behalf of the optionee that
he or she acknowledges that the Company is selling or distributing Shares to him
or her under a claim of exemption from registration under the Securities Act of
1933, as amended (hereinafter referred to as the "Act"), as a transaction not
involving any public offering; that he or she represents and warrants that he or
she is acquiring such Shares with a view to investment and not with a view to
distribution or resale; and that he or she agrees not to make any sale or other
distribution or disposition of such Shares unless (i) a registration statement
with respect to such Shares shall be effective under the Act, together with
proof satisfactory to the Company that there has been compliance with applicable
state law,
22
<PAGE>
or (ii) the Company shall have received an opinion of counsel satisfactory to it
that no violation of the Act or applicable state law will be involved in such
transfer. The Company shall include on any certificate for Shares issued under
this Plan such legend restricting the transfer thereof as it may deem
appropriate to comply with any requirement established by law or by the rules of
any stock exchange.
14. Term of Plan. This Plan originally was adopted by the Board of
------------
Directors on January 15, 1998, and approved by the stockholders of the Company
at the Annual Meeting of Stockholders on May 7, 1998, and shall remain in effect
until all Shares subject to issuance hereunder have been purchased pursuant to
the exercise of the options granted under this Plan or until all such options
have lapsed or terminated unexercised; provided, however, that all options and
rights under this Plan must be granted on or before January 14, 2008, which date
is ten (10) years from the date that this Plan was adopted by the Board of
Directors of the Company.
15. Amendment and Termination of Plan. The Board of Directors of the
---------------------------------
Company, without further approval of the stockholders of the Company, may at any
time suspend or terminate this Plan or may amend it from time to time in any
manner; provided, however, that no amendment shall be effective without prior
approval of the stockholders of the Company which would (i) except as provided
in Section 11 hereof, increase the maximum number of Shares which may be issued
under this Plan, (ii) change the eligibility requirements for individuals
entitled to receive options under this Plan, (iii) extend the period for
granting options, (iv) change the manner of determining the option price, or (v)
materially increase the benefits accruing to employees under this Plan. No
amendment, modification or termination of this Plan shall in any manner
adversely affect any outstanding option under this Plan without the consent of
the optionee holding such affected options.
16. Termination of Prior Stock Option Plans. Upon adoption of this Plan
---------------------------------------
by the Board of Directors of the Company, all other stock option plans in effect
on behalf of the Company or any of its subsidiaries shall terminate; provided,
however, such plans shall remain in effect to the extent there remain
unexercised options issued in accordance with the terms and conditions of such
plan or plans.
17. Administration. This Plan shall be administered by the Option
--------------
Committee of the Board of Directors and decisions of the Option Committee
concerning the interpretation and construction of any provisions hereof or any
option granted pursuant hereto shall be final. The Company shall effect the
grant of options under this Plan in accordance with the decisions of the Option
Committee, which may, from time to time, adopt rules and regulations for
carrying out this Plan. For purposes of this Plan, an option shall be deemed to
be granted when the written Agreement for the same is signed on behalf of the
Company by its duly authorized officer or representative. Subject to the
express provisions of this Plan, the Option Committee shall have the authority,
in its discretion and without limitation, to determine: the optionees to
receive options, the times when such individuals shall receive such options, the
number of Shares to be subject to each option, the term of each option, the date
when each
23
<PAGE>
option or portion thereof shall become exercisable, the term of each
installment, the option price of each Share subject to option, and such other
terms or conditions of any option that are not inconsistent with the terms and
conditions of this Plan or, in the case of an Incentive Stock Option, not
inconsistent with the qualification of such option under Section 422 of the
Code; to accelerate the date of exercise of any option or installment thereof;
and to make all other recommendations advisable for administering this Plan.
18. Reservation of Shares. The Company shall be under no obligation to
---------------------
reserve Shares to fill options. The grant of options to employees hereunder
shall not be construed to constitute the establishment of a trust of such Shares
and no particular Shares shall be identified as optioned and reserved for
employees hereunder. The Company shall be deemed to have complied with the
terms of this Plan if, at the time of issuance and delivery pursuant to the
exercise of an option, it has a sufficient number of Shares authorized and
unissued or in its treasury which may then be appropriated and issued for the
purposes contemplated herein, irrespective of the date when such Shares were
authorized.
19. Application of Proceeds. The proceeds of a sale of Shares by the
-----------------------
Company under this Plan will constitute general funds of the Company and may be
used by the Company for any purpose.
20. No Rights Conferred. The adoption and maintenance of this Plan shall
-------------------
not be deemed to constitute a contract between the Company and any officer or
employee or to be a consideration for, or an inducement to or condition of, the
employment of any person. Nothing herein contained shall be deemed to: (i)
give to any officer or employee the right to be retained in the employ of the
Company, (ii) interfere with the right of the Company to discharge any officer
or employee at any time, (iii) give to the Company the right to require any
officer or employee to remain in its employ, or (iv) interfere with any
officer's or employee's right to terminate his or her employment with the
Company at any time.
21. Tax Withholding. The Company, which employs an officer or employee
---------------
granted an option under this Plan, shall have the right to deduct or otherwise
effect a withholding of any amount required by federal or state laws to be
withheld with respect to the grant, exercise, or surrender of any option, or the
sale of Shares acquired upon the exercise of an option, in order for the Company
(or one of its subsidiaries, as the case may be) to obtain a tax deduction
otherwise available as a consequence of such grant, exercise, surrender or sale,
as the case may be. Under appropriate circumstances, such right shall include
the right to receive payment from the optionee of the required withholding
amount. In addition, if, following the exercise of an option granted hereunder,
an optionee sells Shares purchased on exercise of an Incentive Stock Option
within two (2) years from the date of the granting of such Incentive Stock
Option or within one (1) year after the transfer of such Shares to the optionee,
the optionee shall notify the Company at the time of such sale.
22. Indemnification. To the extent permitted by law, each
---------------
24
<PAGE>
person who is or shall have been a member of the Board of Directors of the
Company or the Option Committee shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under this Plan and against and from any and all amounts paid by
him or her in settlement thereof, with the Company's approval, or paid by him or
her in satisfaction of judgment in any such action, suit, or proceeding against
him or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and
defend on his or her own behalf. The foregoing right of indemnification shall
not be exclusive of any other rights of indemnification to which such persons
may be entitled under the Company's Certificate of Incorporation or Bylaws, as a
matter of law, or otherwise, or any power that the Company or any subsidiary
thereof may have to indemnify them or hold them harmless.
23. Governing Law. This Plan shall be governed by and construed in
-------------
accordance with the laws of the State of New York.
The undersigned, being the President and Chief Executive Officer of
Letchworth Independent Bancshares Corporation, hereby certifies that the
foregoing Stock Option Plan was duly adopted by the Board of Directors of the
Company on January 15, 1998, and was approved by the stockholders of the Company
on May 7, 1998.
LETCHWORTH INDEPENDENT
BANCSHARES CORPORATION
By: /s/ James W. Fulmer
------------------------------------------
James W. Fulmer
President and Chief Executive Officer
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
3(a) Certificate of Incorporation of Registrant filed by the New York
Department of State on July 17, 1981, incorporated by reference to the
Registrant's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed
with the commission on September 2, 1989 and wherein such Exhibit is designed
Exhibit 3(a).
3(b) Certificate of Amendment of Certificate of Incorporation of Registrant
filed by the New York Department of State on July 26, 1989, incorporated by
reference to the Registrant's Registration Statement on Form S-18 (Reg. No. 33-
31149-NY), filed with the Commission on
25
<PAGE>
September 2, 1989, and wherein such Exhibit is designated Exhibit 3(b).
3(c) Certificate of Amendment of Certificate of Incorporation of Registrant
filed by the New York Department of State on May 2, 1990, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1990 and filed with the Commission on August 9, 1990, and wherein
such Exhibit is designed Exhibit (4)b.
3(d) Certificate of Amendment of Certificate of Incorporation of Registrant
filed by the New York Department of State on May 15,1998, incorporated by
reference to the Registrant's Quarterly Report on Form 10QSB for the quarter
ended June 30, 1998, and filed with the commission on August 13, 1998, and
wherein such exhibit is designated Exhibit 3(d).
3(e) Bylaws of Registrant, as amended by the stockholders of the Registrant at
a special meeting of stockholders on July 11, 1989, incorporated by reference to
the Registrant's Registration Statement on From S-18 (Reg. No. 33-31149-NY),
filed with the Commission on September 2, 1989 and wherein such Exhibit is
designated Exhibit 3(c).
4(a) Form of Common Stock Certificate of Registrant, incorporated by reference
to the Registrant's Amendment No. 1 to Form s-18 Registration Statement (Reg.
No. 33-31149-NY), filed with the Commission on October 31, 1989, and wherein
such Exhibit is designated Exhibit 4.
4(b) Letchworth Independent Bancshares Corporation Stock Option Plan of 1990
and form of Stock Option Agreement, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990
and filed with the Commission on August 9, 1990, and wherein such Exhibit is
designated Exhibit 4.
4(c) Letchworth Independent Bancshares Corporation Stock Option Plan of 1998.
11 Computation of Basic and Diluted Earnings Per Share for the quarter ended
September 30, 1998 is presented on Exhibit 11 of this Report on Form 10-QSB.
(b). The Registrant did not file any current reports on Form 8-K during the
quarter ended September 30, 1998.
26
<PAGE>
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.
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
Date 11/11/98 /s/ James W. Fulmer
-------- -----------------------------------------------
James W. Fulmer
President & Chief Executive Officer
Date 11/11/98 /s/ Steven C. Lockwood
--------- ----------------------------------------------
Steven C. Lockwood
Treasurer & Chief Financial Officer
27
<PAGE>
INDEX
<TABLE>
Page
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Condition (Unaudited)
September 30, 1998 and December 31, 1997 3
Consolidated Statement of Income (Unaudited)
Three and Nine Months Ended September 30, 1998
and 1997 4
Consolidated Statement of Comprehensive Income
(Unaudited)Three and Nine Months Ended
September 30, 1998 and 1997 5
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Information 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II Other Information
Item 4 Corporation Stock Option Plan 21
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 31
Exhibit 11 32
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,612
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,615
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 180,724
<ALLOWANCE> 2,293
<TOTAL-ASSETS> 282,984
<DEPOSITS> 238,154
<SHORT-TERM> 2,028
<LIABILITIES-OTHER> 2,001
<LONG-TERM> 7,539
0
0
<COMMON> 3,389
<OTHER-SE> 29,873
<TOTAL-LIABILITIES-AND-EQUITY> 282,984
<INTEREST-LOAN> 12,153
<INTEREST-INVEST> 3,244
<INTEREST-OTHER> 206
<INTEREST-TOTAL> 15,603
<INTEREST-DEPOSIT> 6,575
<INTEREST-EXPENSE> 6,575
<INTEREST-INCOME-NET> 9,028
<LOAN-LOSSES> 122
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 2,163
<INCOME-PRETAX> 3,506
<INCOME-PRE-EXTRAORDINARY> 3,506
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,439
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 0
<LOANS-NON> 643
<LOANS-PAST> 965
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,997
<ALLOWANCE-OPEN> 2,029
<CHARGE-OFFS> 142
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 2,293
<ALLOWANCE-DOMESTIC> 2,293
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
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