<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
( ) 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 April 30, 1999
- --------------------------------------------------------------------------------
Common Stock, $1.00 per share 3,459,924 shares
Transitional Small Business Disclosure Format (Check One):
Yes No X
--- ---
1
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LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
Page
INDEX
PART I Financial Information
Item 1. Financial Statements
Consolidated Statement of Condition (Unaudited)
March 31, 1999 and December 31, 1998 3
Consolidated Statement of Income (Unaudited)
Three Months Ended March 31, 1999
and 1998, respectively 4
Consolidated Statement of Comprehensive Income
(Unaudited)Three Months Ended
March 31, 1999 and 1998, respectively 5
Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended March 31, 1999 and 1998 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 6 Exhibits and Reports on Form 8-K 19
Signatures 21
Exhibit 11 22
2
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LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
CONSOLIDATED STATEMENT OF CONDITION
-----------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 9,352,726 $ 10,647,917
Federal funds sold 12,700,000 9,250,000
Investment securities:
Available for sale 62,810,167 65,255,014
Other securities 2,083,501 2,083,501
Loans, net of allowance for loan losses of
$2,451,269 and $2,377,250, respectively 183,312,038 184,459,034
Accrued interest receivable 1,914,181 1,731,499
Premises and equipment, net 6,291,294 6,344,049
Other Assets 2,091,853 1,891,872
------------- -------------
Total Assets $ 280,555,760 $ 281,662,886
------------- -------------
LIABILITIES AND SHAREHOLDERS EQUITY:
Deposits:
Noninterest bearing $ 33,205,663 $ 36,432,791
Interest bearing 206,343,595 204,419,241
------------- -------------
Total Deposits 239,549,258 240,852,032
Securities sold under agreement to repurchase 1,203,888 1,198,294
Accrued interest payable 932,411 1,158,630
Accrued taxes and other liabilities 1,127,317 856,636
Advances from Federal Home Loan Bank 3,826,048 3,968,283
------------- -------------
Total Liabilities 246,638,922 248,033,875
------------- -------------
Shareholders' equity
Common stock, $1.00 par value, 5,000,000
shares authorized, 3,391,650 and 3,390,650
shares issued, respectively 3,391,650 3,390,650
Capital surplus 12,351,915 12,347,915
Retained earnings 19,341,640 18,673,888
Unearned employee stock ownership plan shares (441,988) (490,654)
Accumulated
other comprehensive income 1,043,770 1,261,145
Treasury stock at cost, 100,847 and 86,847
shares, respectively (1,770,149) (1,553,933)
------------- -------------
Total Shareholders'
Equity 33,916,838 33,629,011
------------- -------------
Total Liabilities and Shareholders Equity $ 280,555,760 $ 281,662,886
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
LETCHWORTH INDEPENDENT CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Interest Income:
Interest and fees on loans $4,200,315 $3,850,122
Interest on investment securities
Taxable 477,412 798,525
Tax-exempt 400,538 395,258
Interest on federal funds sold 159,716 56,257
---------- ----------
Total interest income $5,237,981 $5,100,162
Interest expense on deposits and advances 1,974,355 2,163,249
---------- ----------
Net interest income $3,263,626 $2,936,913
Provision for loan losses 116,419 131,422
---------- ----------
Net interest income after
provision for loan losses $3,147,207 $2,805,491
---------- ----------
Other operating income:
Service charges on deposit accounts $ 252,468 $ 272,930
Other charges and fees 42,306 16,718
Net gains on sales of loans
and investment securities 1,492 21,427
Other operating income 95,319 48,747
---------- ----------
Total other operating income $ 391,585 $ 359,822
---------- ----------
Other operating expenses:
Salaries and employee benefits $1,217,444 $1,098,463
Equipment expense 223,508 232,851
Occupancy expense 138,453 134,950
Printing and supplies 66,714 66,189
FDIC assessment 10,417 9,994
Other operating expenses 551,586 484,590
---------- ----------
Total other operating expense $2,208,122 $2,027,037
Income before income taxes 1,330,670 1,138,276
Provision for income taxes 365,003 338,000
---------- ----------
Net Income $ 965,667 $ 800,276
========== ==========
Basic earnings per share $ 0.30 $ 0.24
Diluted earnings per share $ 0.29 $ 0.23
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
March 31,
1999 1998
Net Income $ 965,667 $ 800,276
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period 217,375 11,194
Less: reclassification adjustments
for gains included in net
income -- (19,297)
---------- ----------
Other comprehensive income, net of tax: 217,375 (8,103)
---------- ----------
Comprehensive income $1,183,042 $ 792,173
========== ==========
The accompanying notes are an integral part of these financial statement
5
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended
March 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 965,667 $ 800,276
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 215,590 214,875
Provision for possible loan losses 116,419 131,422
ESOP compensation expense 48,666 48,666
Gain on sale of investments -- (19,297)
Gain on sale of loans (1,492) (2,130)
Increase in interest receivable (182,682) (323,147)
Increase in other assets (235,126) (222,667)
(Decrease) increase in interest payable (226,219) 29,970
Increase in accrued taxes
and other liabilities 270,681 369,557
------------ ------------
Net cash provided by operating activities $ 971,504 $ 1,027,525
------------ ------------
Cash flows from investing activities:
Proceeds from sales of securities-available
for sale $ -- $ 37,352
Proceeds from calls and maturities of securities:
Held to Maturity -- 1,585,336
Available for sale 6,537,404 3,484,375
Proceeds from sale of loans 422,966 370,892
Purchases of securities:
Held to maturity -- (522,780)
Available for sale (4,309,932) (6,834,290)
Net increase in loans 609,103 (4,876,478)
Expenditures for capital assets (127,690) (336,437)
------------ ------------
Net cash provided by (used in) investing activities $ 3,131,851 $ (7,092,030)
------------ ------------
Cash flows from financing activities:
Net decrease in demand deposits, NOW
accounts and money market accounts $ (9,236,308) $ (2,083,383)
Net increase(decrease) in time deposits 7,933,534 5,187,598
Net increase in securities sold under
agreements to repurchase 5,594 94,998
Repayment FHLB borrowings (142,235) (136,766)
Exercise of options and warrants 5,000 17,300
Purchase of treasury stock (216,216) (486,250)
Dividends paid (297,915) (269,964)
------------ ------------
Net cash (used in) provided by financing activities $ (1,948,546) $ 2,323,533
------------ ------------
Net increase (decrease) in cash and cash equivalents $ 2,154,809 $ (3,740,972)
Cash and cash equivalents, beginning of year 19,897,917 12,413,023
------------ ------------
Cash and cash equivalents, end of quarter $ 22,052,726 $ 8,672,051
------------ ------------
Interest paid $ 2,200,574 $ 2,193,219
Income taxes paid $ 250,000 $ 38,806
</TABLE>
The accompanying notes are an integral part of these financial statement
6
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
March 31, 1999
--------------
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
(collectively the "Company"). The financial information has been prepared in
accordance with the Summary of Significant Accounting Policies as outlined in
the Company's Form 10-K for the year ended December 31, 1998 and, in the opinion
of management contains all adjustments necessary to present fairly the Company's
financial position as of March 31, 1999 and December 31, 1998, the results of
its operations for the three month periods ended March 31, 1999 and 1998,
respectively, and its cash flows for the three month periods ended March 31,
1999 and 1998, 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 1998 Annual Report on Form 10-K.
Note 2 Investment Securities
- ----------------------------
The amortized cost and approximate market value if investment securities are as
follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
Available for Sale
- ------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $12,458,946 $12,691,277 $13,742,386 $14,087,865
State and political subdivision
obligations 34,059,202 35,314,296 32,486,465 33,876,508
Mortgage-Backed Securities 14,711,663 14,804,594 17,173,404 17,290,641
----------- ----------- ----------- -----------
$61,229,811 $62,810,167 $63,402,255 $65,255,014
----------- ----------- ----------- -----------
</TABLE>
7
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Note 3 Loans
- ------------
Loans consist of the following:
March-31 December-31
1999 1998
------------- ------------
Residential real estate $ 55,129,712 $ 53,638,439
Commercial real estate 40,923,623 39,948,496
Commercial and industrial loans 38,534,501 38,201,766
Agricultural loans 30,596,050 35,707,279
Consumer loans 20,579,421 19,340,354
------------ ------------
$185,763,307 $186,836,334
------------ ------------
An analysis of changes in the allowance for loan losses is as follows:
March 31, March 31,
1999 1998
---- ----
Balance, beginning of year $2,377,250 $2,028,600
Provision expense 116,418 131,422
Chargeoffs 47,280 885,911
Recoveries 5,081 3,900
---------- ----------
Balance, end of period $2,451,269 $2,078,011
========== ==========
The following table summarized the Company's non-performing loans at the dates
indicated.
March 31,
1999 1998
--------- -------
Non-accruing loans 419,860 712,649
Accruing loans past due 90 days or more 655,675 63,613
Renegotiated loans 0 0
The average balance of impaired loans during the first three months of 1999 was
approximately $158,213, compared to $541,509 for the first three months of 1998.
At March 31, 1999 and 1998, the balance of impaired loans and related reserve
against that balance was $155,293 and $656,300, respectively. Interest income
recognized on impaired loans and interest income recognized on a cash basis was
not significant
8
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Note 4 Earnings Per Share
- -------------------------
The calculations of basic and diluted earnings per share are as follows:
Quarter ended
March 31,
1999 1998
Income available to common shareholders $ 965,667 $ 800,276
Basic earnings per share
Weighted average shares outstanding 3,238,052 3,306,549
Basic earnings per share $ 0.30 $ 0.24
---------- ----------
Diluted earnings per share
Weighted average shares outstanding 3,238,052 3,306,549
Dilitive effect of:
Stock options 54,992 104,352
Adjusted weighted average shares
outstanding 3,292,872 3,410,901
Diluted earnings per share $ 0.29 $ 0.23
---------- ----------
Note 5 Comprehensive Income
- ---------------------------
The Company to discloses quarterly 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 March 31, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 Three Months Ended March 31,
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 on securities:
Unrealized holding gains
arising during period 272,403 (55,028) 217,375 20,842 (9,649) 11,194
Less: reclassification
adjustment for gains
realized in net income - - - (19,297) - (19,297)
---------- ----------- ------------ ---------- ----------- -----------
Net unrealized gain 272,403 (55,028) 217,375 1,545 (9,649) (8,103)
---------- ----------- ------------ ---------- ----------- -----------
Other comprehensive income 272,403 (55,028) 217,375 1,545 (9,649) (8,103)
---------- ----------- ------------ ---------- ----------- -----------
</TABLE>
The following table sets forth the components of accumulated other comprehensive
income for the three months ended March 31, 1999 and 1998:
Three Months Ended
March 31,
1999 1998
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Beginning balance $1,261,145 $309,072
Unrealized gains on securities, net of tax 217,375 (8,103)
--------------------
Ending balance $1,043,770 $309,969
--------------------
</TABLE>
9
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1999
Financial Condition
Total assets of Letchworth Independent Bancshares Corporation (the "Company")
were $280.6 million as of March 31, 1999, a decrease of $1.1 million, or .39%,
from total assets at December 31, 1998. Deposits, the Company's primary source
of funds, decreased $1.3 million from December 31, 1998, or .54%, to $239.5
million at March 31, 1999. The decrease in deposits occurred primarily in the
non-interest commercial accounts.
Total loans outstanding as of March 31, 1999 were $183.3 million, which
represented a decrease of $1.1 million, or .62%, from total loans at December
31, 1998. The total loans outstanding is net of loans sold and the allowance for
possible loan losses. Consumer loans increased $1.2 million or 6.41% during the
first quarter, and loans secured by residential mortgages increased $1.8 million
or 2.64%. These gains were offset by a $4.7 million or 6.91% net decrease of
agricultural and commercial loans. The increase in consumer loans during the
three month period of 1999, is primarily attributable to the Company's new
indirect lending program. This program generates auto loans through
relationships with local dealers.
Nonaccrual loans totaled $419,860 as of March 31, 1999, compared to $712,649 as
of March 31, 1998. This decrease resulted from aggressive management in
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 March 31, 1999, the
Company considers $2,684,465 to be potential problem loans, which compares to
$2,405,065 on March 31, 1998. Historically, however, only a very small portion
of those loans have resulted in actual losses for the Company.
Total deposits as of March 31, 1999 were $239.5 million, which represented a
decrease of $1.3 million, or .54%, from total deposits as of December 31, 1998.
Although interest-bearing deposits increased by $1.9 million since the end of
1998, and certificate of deposit accounts and savings accounts increased by $7.0
million and
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$1.0 million, respectively, during this period, these increases were offset
partially by a $2.8 million decline in NOW accounts and a $3.2 million decrease
in the money market accounts. Noninterest bearing deposits decreased by $3.2
million during the first quarter primarily for the commercial accounts.
The Company's shareholders' equity increased to $33.9 million, an increase of
$.3 million, or .09%, from December 31, 1998. The increase in shareholders
equity was due to net income of the Company but was moderated by shareholder
dividends and the repurchase of 14,000 shares of the Company's common stock.
These shares of common stock were purchased at a total cost of $216,216, for an
average price of $15.44 per share.
The Risk-based capital ratios are an indicator of the Company's financial
soundness. As of March 31, 1999, the Company had a Tier 1 capital ratio of
16.25%, a total capital ratio of 17.50%, and a Tier 1 leverage ratio of 11.01%.
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 March 31, 1999 Compared to Three
Months Ended March 31, 1998
Net income of $965,667 for the three months ended March 31, 1999 represents an
increase of $165,391, or 20.67%, over the $800,276 earned during the same period
ended March 31, 1998. Diluted earnings per common share was $.29 for the three
months ended March 31, 1999. The diluted earnings per share increased $.06 per
share from the same period in 1998. The increase in income for the first quarter
of 1999 along with a decrease in the number of outstanding shares of common
stock attributed, in part, to the increase.
Net interest income was $3.3 million for the three months ended March 31, 1999,
up 11.12% from the $2.9 million earned during the three months ended March 31,
1998. Increased volume in the loan portfolio was the primary reason for the
increase in interest income during the first quarter of 1999. Interest expense
on deposits decreased by $188,894 or 8.73%.
The provision for loan losses, the charge to earnings for potential credit
losses associated with lending activities, was $116,419 for the three months
ended March 31, 1999, down 11.42% from the $131,422 provision recorded during
the three months ended March 31, 1998. Gross charge-offs were $47,280 in the
first quarter of 1999, compared to $85,911 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
11
<PAGE>
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 March 31, 1999. The allowance for loan losses
of the Company at March 31, 1999, was $2,451,269, or 1.32%, of total loans and
is up $74,019, or 3.11%, from the allowance at December 31, 1998.
Other operating income for the three month period ended March 31, 1999 was
$391,585 compared to $359,822 for the same period in 1998. This increase is
partially attributed to growth in trust fee income and ATM charges.
Other operating expense for the three month period ended March 31, 1999 was
$2,208,122, an increase of 8.93% over the $2,027,037 recorded for the same
period in the prior year. The majority of this increase occurred in salaries and
employee benefits expense which increased by $118,981 or 10.83%. Several new
staff positions, as well as, increased benefit expenses, account for the
increase in this area.
The provision for income taxes was $365,003 for the three months ended March 31,
1999, up 7.99% from the $338,000 for the three months ended March 31, 1998. This
increase is primarily attributed to the growth in earnings for the period.
The Company's Interest Rate Sensitivity for a 100+/- basis point simulated shift
in interest rates resulted in lower variances than those disclosed in the Annual
Report Form 10-K statement issued for December 31, 1998.
After tax earnings change:
March 31, 1999 December 31, 1998
+100 basis points -100 basis points + 100 basis points -100 basis points
+ $284,000 $(384,000) + $466,000 $(523,000)
Other Events of Significance:
On January 20, 1999, the Company announced that it had reached an agreement to
acquire a majority interest in The Mahopac National Bank ( the "Mahopac Bank").
The Mahopac Bank is headquartered in Putnam County, New York, and operates three
offices. The transaction is subject to regulatory approval, and it is
anticipated that the transaction will be consummated during the second quarter.
The purchase is the culmination of several years of exploring options and
opportunities for growth.
The Mahopac National Bank is owned primarily by the members of two families; the
Costello/Ryder and the Spain family, and the Company
12
<PAGE>
has agreed to purchase the shares of the Costello/Ryder family, which represents
58% of the ownership. In addition, the Company has agreed to purchase shares
held by other shareholders of the Mahopac Bank, which brings our total position
within the Bank to approximately 70%. The purchase price for each share to be
purchased was $9,700 per share, for a total investment of approximately 14.5
million.
In addition, the Company entered into a written agreement (the "Shareholder
Agreement") with the members of the Spain family to unify the ownership
structure of the Mahopac Bank within two years. To unify the ownership
structure, the Shareholder Agreement allows for either the Spain family to
purchase all the shares of the Mahopac Bank owned by the Company, or for the
Company to purchase all of the shares of the Mahopac Bank owned by the Spain
family. The exercise price for each share of common stock is equal percent of
the "fair market value" of each share of common stock of the Mahopac Bank, as
determined in accordance with the Shareholder Agreement. The intent of the
Company, and also the stated intent of the Spain family, is for the Company to
acquire all of the shares of common stock owned by the Spain Family. If, for
whatever reason, neither party is able or willing to buy out the other, the
terms of the Shareholder Agreement require that the Mahopac Bank be sold in its
entirety to a third party.
Management believes that the Mahopac Bank transaction gives the Company greater
opportunity for future growth than if we remained exclusively in Western New
York. Putnam County is the fastest growing county in New York and has the
highest median income in the state. The Mahopac Bank itself has grown rapidly.
Its income has increased 182% over the last five years, and grew 16.7% in the
last year.
Plans were recently announced to open a new branch office in the Town of Chili,
New York. Regulatory approval has been requested from the New York State Banking
Department. It is anticipated that approval will be obtained during the second
quarter. The site at 3262 Chili Avenue will be the Company's 12th branch and is
contiguous to our LeRoy and Avon branch market areas.
During the fourth quarter of 1997, the Board of Directors approved a program to
allow the repurchase of up to $2 Million in Company common stock and warrants.
The program was amended in December of 1998 and to allow an additional
repurchase of $1 million if required. As of March 31, 1999 the Company had
repurchased 100,847 shares at an average price of $17.55. Together with the
purchase of warrants during the fourth quarter of 1997, the Company has spent
$2,199,649 out of the total that was authorized and no additional purchases are
presently anticipated. 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.
13
<PAGE>
Impact Of The Year 2000
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. 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; and 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 uses
the services of outside software packages, the renovation stage became more of a
monitoring project to ensure that
14
<PAGE>
the systems used are compliant. The following major systems were upgraded to
Year 2000 compliant versions: Core Processing System (May 21, 1998); Direct
Deposit/Automated Clearing House (ACH) (August 27, 1997); Item Processing System
(October 9, 1998), additional ACH upgrade (February 3, 1999).
All identified mission critical processes were ready by March 31, 1998.
During the validation stage, each system is being tested to determine if it
correctly processes data for the thirteen dates that have been identified by the
regulators as crucial. The core processing system and item processing systems
have been successfully tested for all test dates. The test dates for all mission
critical items was completed by March 31, 1999. Validations for the non-critical
processes are scheduled to be completed by June 30, 1999.
The validation stage and the implementation stage overlap for the Company, since
it uses the services of outside software packages. All of the mission critical
software has been installed and is operating in the Bank's systems, and
continues to be tested as part of the implementation process.
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 a business continuation contingency plan to address
anticipated worst case scenarios which are beyond our control that may disrupt
normal operations. A walk through test of various scenarios on March 15, 1999,
did not indicate any changes were necessary. The contingency plan 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 refinements. 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
15
<PAGE>
Company.
Year 2000 compliance costs incurred during the first quarter of 1999 totaled
approximately $73,900, the majority of which was related to equipment and
software. 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 estimates additional Year 2000 compliance costs, which are
expenses on a current period basis, at approximately $136,800. This estimate
does not include normal ongoing costs for computer hardware (including ATM's)
and software that would be replaced in the next year in conjunction with the
Company's ongoing programs for updating its delivery infrastructure. The Year
2000 project cost estimate may change as the Company progresses in its Year 2000
program 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 regard 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
that 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 issue 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 assumed a proactive approach to increase Year 2000 awareness and
compliance. In addition to mailing statement stuffers to all customers we also
have trained our commercial loan officers to discuss Year 2000 issues with our
borrowers. The information is used in loan review process to evaluate risk
ratings and loan loss reserves. Major depositors are also being contacted
directly to determine their readiness. On going customer awareness programs are
planned throughout the balance of 1999.
16
<PAGE>
OTHER INFORMATION
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 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,
and form of Stock option Agreement, incorporated by reference to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30,
1998 and filed with the Commission on November 11, 1998, and wherein such
Exhibit is designated Exhibit 4(c).
11 Computation of Basic and Diluted Earnings Per Share for the quarter ended
March 31, 1999 is presented on Exhibit 11 of this Report on Form 10-Q.
(b). The Registrant did not file any current reports on Form 8-K during the
quarter ended March 31, 1999.
17
<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 5/13/99 /s/ James W. Fulmer
-------- -----------------------------------------
James W. Fulmer
President & Chief Executive Officer
Date 5/13/99 /s/ Thomas J. Sykes
-------- ----------------------------------------
Thomas J. Sykes
Treasurer & Chief Financial Officer
18
<PAGE>
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
March 31, 1999
--------------
Exhibit 11:
Three Months Ended
March 31,
1999
Income available to common shareholders $ 965,667
Basic earnings per share
Weighted average shares outstanding 3,238,052
Basic earnings per share $ 0.30
-------------
Diluted earnings per share
Weighted average shares outstanding 3,238,052
Dilitive effect of :
Stock options 54,992
Adjusted weighted average shares
outstanding 3,292,872
Diluted earnings per share $ 0.29
-------------
21
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