<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
------------------
/ / 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 1-13213
-------
PREMIER NATIONAL BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1668718
------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
PO Box 310, 1100 Route 55, Lagrangeville, NY 12540
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(845)471-1711
-------------
(Registrant's telephone number, including area code)
____________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ______
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
15,962,240 shares of Common Stock outstanding, par value $.80 per share, at
October 31, 2000.
<PAGE>
PREMIER NATIONAL BANCORP, INC. & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
PART I
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements
of Income and Expense 2
Condensed Consolidated Statements
of Cash Flows 3
Condensed Consolidated Statements
of Changes in Stockholders' Equity 4
Condensed Consolidated Statements of
Comprehensive Income 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 25
PART II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
</TABLE>
<PAGE>
Part 1
Item 1: Financial information
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and due from banks $ 40,723 $ 46,889
Federal funds sold 36,882 31,782
---------- ----------
Total cash and cash equivalents 77,605 78,671
Securities
Available for sale, at fair value 430,144 452,025
Held to maturity, at cost, (fair value of $20,532 in
2000 and $17,168 in 1999) 20,346 17,014
Regulatory securities (at cost which approximates fair value) 9,726 9,726
Gross loans 999,966 993,821
Allowance for loan losses (21,698) (21,786)
---------- ----------
Net loans 978,268 972,035
Premises and equipment, net 25,977 26,982
Accrued income 12,568 12,111
Deferred Taxes 14,166 16,024
Other real estate owned 1,098 1,369
Intangible assets, net 3,711 4,992
Other assets 3,032 4,717
-----------------------------
TOTAL ASSETS $1,576,641 $1,595,666
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing $ 255,330 $ 252,166
Interest bearing 1,106,004 1,115,613
-----------------------------
Total deposits 1,361,334 1,367,779
Notes payable 60,000 75,300
Other liabilities 10,035 10,549
-----------------------------
TOTAL LIABILITIES 1,431,369 1,453,628
STOCKHOLDERS' EQUITY
Preferred stock
($.01 par value; 5,000,000 shares authorized; none
issued in 2000 and 1999) - -
Common stock ($.80 par value; 50,000,000 shares
authorized) 16,443,894 shares issued in 2000 and
16,429,226 shares issued in 1999 13,155 13,142
Additional paid-in capital 95,742 95,755
Retained earnings 47,350 39,789
Accumulated other comprehensive loss (4,059) (6,581)
Treasury stock, at cost, (527,790 shares in 2000 and 3,600
shares in 1999) (6,916) (67)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 145,272 142,038
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,576,641 $1,595,666
=============================
</TABLE>
See notes to condensed consolidated financial statements.
-1-
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
09/30/00 09/30/99 09/30/00 09/30/99
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 21,545 $ 20,219 $ 63,846 $ 60,893
Federal funds sold 519 262 1,096 1,402
Taxable securities 5,758 5,782 17,040 15,438
Tax-exempt securities 1,259 1,323 3,679 3,373
-----------------------------------------------------------
Total interest income 29,081 27,586 85,661 81,106
Interest expense:
Interest expense on deposits 13,001 10,167 36,337 30,963
Interest expense, other 1,195 883 3,533 1,046
-----------------------------------------------------------
Total interest expense 14,196 11,050 39,870 32,009
-----------------------------------------------------------
Net interest income 14,885 16,536 45,791 49,097
Provision for loan losses 300 300 750 1,800
-----------------------------------------------------------
Net interest income
after provision for loan losses 14,585 16,236 45,041 47,297
-----------------------------------------------------------
Noninterest income:
Service charges and fees 2,065 2,035 6,298 6,067
Trust earnings 307 292 925 828
Gains (losses) on sales of 0 (16) (1) 155
securities, net
Gains on sales of loans, net 14 7 26 85
Other income 192 160 542 632
-----------------------------------------------------------
Total noninterest income 2,578 2,478 7,790 7,767
-----------------------------------------------------------
GROSS OPERATING INCOME 17,163 18,714 52,831 55,064
-----------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,833 5,311 16,418 16,553
Net occupancy and equipment expense 1,640 1,872 5,067 5,451
Other real estate owned 9 0 56 5
Other expenses 3,368 3,404 9,753 9,987
-----------------------------------------------------------
Total noninterest expense 10,850 10,587 31,294 31,996
-----------------------------------------------------------
Income before income taxes 6,313 8,127 21,537 23,068
Income taxes 1,656 2,800 6,567 8,017
-----------------------------------------------------------
Net income $ 4,657 $ 5,327 $ 14,970 $ 15,051
===========================================================
Weighted average common shares outstanding (1)
Basic 15,864,400 16,662,800 15,979,500 16,936,700
Diluted 16,124,700 16,888,300 16,138,500 17,147,900
Per common share data: (1)
Basic earnings $ 0.29 $ 0.32 $ 0.94 $ 0.89
Diluted earnings $ 0.29 $ 0.32 $ 0.93 $ 0.88
Cash dividends declared $ 0.15 $ 0.14 $ 0.45 $ 0.25
Book value at period end $ 9.13 $ 8.71
</TABLE>
(1) Adjusted for 10% Stock Dividend declared December 1999.
See notes to condensed consolidated financial statements.
-2-
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine
Months Ended
OPERATING ACTIVITIES 09/30/00 09/30/99
-------- --------
<S> <C> <C>
Net income $ 14,970 $ 15,051
Adjustment to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 750 1,800
Depreciation and amortization 2,026 2,290
Amortization of security premiums and
accretion of discounts 799 1,017
Amortization of goodwill/core deposit 1,096 1,368
intangible/acquistion costs
Realized gains on sales of securities and loans (25) (240)
Gains on sale of premises and equipment 0 (216)
Gains on sale of other real estate (33) (24)
Deferred income tax benefits (5) (1,737)
Increase in accrued income (457) (3,921)
Other, net 1,040 4,461
-----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,161 19,839
-----------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 14,018 51,236
Proceeds from maturities of securities available for sale 18,558 70,209
Proceeds from maturities of securities held to maturity 8,070 6,244
Purchases of securities available for sale (6,985) (254,125)
Purchases of securities held to maturity (11,527) (8,599)
Sale of loans 2,881 3,760
Net (increase) decrease in loans (9,838) 7,055
Purchase of premises and equipment (1,021) (1,154)
Proceeds from sales of premises and equipment 0 597
Proceeds from sale of OREO 699 645
-----------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 14,855 (124,132)
-----------------------
FINANCING ACTIVITIES
Net decrease in DDA/MM/NOW/Sav. Accounts (35,085) (61,574)
Net increase in other time deposits 28,640 14,857
Proceeds from issuance of common stock from treasury 2,922 4,303
Repurchase of common stock (10,021) (18,950)
Borrowings 0 75,000
Repayment of borrowings (15,300) (1,725)
Cash dividends-common (7,238) (6,321)
-----------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (36,082) 5,590
-----------------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,066) (98,703)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 78,671 174,330
-----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,605 $ 75,627
=======================
CASH PAID FOR:
Interest $ 39,775 $ 31,681
Taxes 4,815 7,476
NON-CASH ITEMS
Transfer from loans to OREO 392 1,808
Net change in unrealized gains (losses) recorded
on securities available for sale 4,385 (10,083)
Change in deferred taxes on unrealized (gains)
losses recorded on securities available for sale (1,863) 4,196
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 2000 $13,142 $95,755 $39,789 ($6,581) ($67) $142,038
Net Income 14,970 14,970
Cash dividends declared on common stock ($0.45 per share) (7,159) (7,159)
Adjustment on final issuance of 10% stock dividend 13 (13) 0
Dividend reinvestment and stock purchase plan - 71,083 shares 1,276 1,276
Options exercised - 145,365 shares 1,659 1,659
Cash in lieu issued for fractional shares (13) (13)
Effect of Treasury stock issued at less than cost (237) 237 0
Purchase of treasury stock - 730,818 shares (10,021) (10,021)
Net change in unrealized loss on securities, after tax 2,522 2,522
------------------------------------------------------------------
Balance September 30, 2000 $13,155 $95,742 $47,350 ($4,059) ($6,916) $145,272
==================================================================
Balance January 1, 1999 $12,558 $84,492 $57,621 $ 1,521 ($38) $156,154
Net Income 15,051 15,051
Cash dividends declared on common stock($0.39 per share) (6,537) (6,537)
Dividend reinvestment and stock purchase plan - 58,223 shares 14 285 635 934
Options exercised - 319,694 shares 48 750 2,582 3,380
Cash in lieu issued for fractional shares (11) (11)
Effect of Treasury stock issued at less than cost (2,347) 2,347 0
Purchase of treasury stock - 1,123,642 shares (18,950) (18,950)
Net change in unrealized gain on securities, after tax (5,887) (5,887)
------------------------------------------------------------------
Balance September 30, 1999 $12,620 $85,516 $63,788 ($4,366) ($13,424) $144,134
==================================================================
</TABLE>
See notes to condensed consolidated financial statements
-4-
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Nine months ended Three Months ended
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 14,970 $ 15,051 $ 4,657 $ 5,327
Other Comprehensive income (loss):
Net unrealized gains (losses) on securities:
Net unrealized holding gains (losses)
arising during year, net of taxes of
($1,671, $4,512, $1,589 and $826) 2,405 (6,493) 2,287 (1,189)
Less reclassification adjustment for
losses included in net income:
net of taxes of ($81, $421,$0, $152) 117 607 0 220
-------- -------- -------- --------
Other comprehensive income (loss) 2,522 (5,886) 2,287 (969)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 17,492 $ 9,165 $ 6,944 $ 4,358
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
-5-
<PAGE>
FORM 10-Q
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements and related notes of
Premier National Bancorp, Inc. (the "Company") have been prepared in accordance
with Regulation S-X under the Securities Exchange Act of 1934, as amended, and
consequently do not contain all disclosures required by generally accepted
accounting principles. The condensed consolidated financial statements include
the Company's wholly owned subsidiary, Premier National Bank and its
subsidiaries (the "Bank"). These interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
note disclosures in the Annual Report on Form 10-K for the year ended December
31, 1999.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the Company's consolidated
financial position as of September 30, 2000 and December 31, 1999, its cash
flows and changes in stockholders' equity for the nine months ended September
30, 2000 and 1999 and its consolidated results of operations and comprehensive
income for the three months and nine months ended September 30, 2000 and 1999.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the dates of the consolidated statements of condition and the revenues and
expenses for the periods reported. Actual results could differ significantly
from those estimates.
Estimates that are particularly susceptible to significant change relate to the
determination of the adequacy of the allowance for loan losses and the valuation
of other real estate acquired in connection with foreclosures or in satisfaction
of loan receivables. In connection with the determination of the balances of
the allowance for loan losses and other real estate owned, management obtains
independent appraisals for significant properties, according to Bank policy or
regulation.
The results of operations for the three months and nine months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
full year.
Material intercompany items and transactions have been eliminated in
consolidation. Certain reclassifications have been made to conform to the
current presentation.
Pending Merger
--------------
On July 10, 2000, the Company, announced that it had entered into a definitive
agreement for the acquisition of the Company by M&T Bank Corporation ("M&T").
The agreement provides, among other things, that Premier will merge into Olympia
Financial Corporation ("Olympia"),a subsidiary of M&T, with Olympia being the
surviving corporation ("Merger")and that the Bank will merge into Manufacturers
and Traders Trust Company, a subsidiary of Olympia.
6
<PAGE>
In the Merger, each outstanding share, will, at the election of the holder
thereof, and with certain exceptions, be converted into either, (I) the right to
receive $21 in cash, without interest, or (ii) an amount of common stock of M&T,
equal to the quotient of (A) $21 divided by (B) the Market Value of a share of
M&T common stock determined as provided in the merger agreement. Subject to
possible adjustments set forth in the merger agreement, the total number of
shares of Premier common stock to be converted into common stock of M&T shall be
50% of the shares of the Premier common stock outstanding on July 9, 2000.
Premier shareholder elections to receive shares of M&T common stock or cash are
subject to the allocation and proration procedures set forth in the merger
agreement. The foregoing description of the merger agreement is qualified in
its entirety by reference to the terms of the merger agreement, which has been
filed as Exhibit 2.1. to the Company's current report on Form 8-K dated July 9,
2000 (the "Form 8-K"). The Company and M&T expect the transaction to close
during the first quarter of 2001.
In connection with the merger agreement, Premier granted to M&T an option that,
under certain circumstances, would enable M&T to purchase up to 3,144,107
shares, or approximately 19.9% of the issued and outstanding shares, of Premier
common stock. The Stock Option Agreement provides that the total profit
receivable by M & T thereunder shall not exceed $24 million. A copy of the Stock
Option Agreement has been filed as Exhibit 4.1. to the Form 8-K.
Consummation of the Merger is subject to the satisfaction of certain customary
conditions, approval of Premier's shareholders and federal and state bank
regulators. M & T has received the required approval of the Federal Reserve
Board.
Recent Accounting Pronouncements
--------------------------------
1) Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No.101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB No. 101A and in June 2000 issued
SAB No. 101B, to defer the effective date of implementation of SAB No. 101 with
earlier application encouraged. The Company is required to adopt SAB 101 in the
fourth quarter of fiscal 2000. The Company does not expect the adoption of SAB
101 to have a material effect on its financial position or results of operation.
2) Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
140") replacing FASB Statement No. 125. SFAS No. 140 revises the standard for
accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. The new standard is based on consistent
application of a financial-components approach that recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. SFAS No. 140 provides consistent guidelines for
distinguishing transfers of financial assets that are sales
7
<PAGE>
from transfers that are secured borrowings. The Company is required to adopt
SFAS No. 140 by March 31, 2001. SFAS No. 140 is not expected to have a material
impact on the Company's consolidated financial statements.
Loans
-----
Major classifications of loans are summarized below (in thousands):
<TABLE>
<CAPTION>
At September 30, 2000 At December 31, 1999
--------------------- --------------------
<S> <C> <C>
Commercial and industrial $129,116 $118,492
Consumer installment 141,340 138,256
Real estate - construction 53,377 62,596
Real estate - mortgage 269,444 260,998
(Commercial)
Real estate - mortgage 404,317 408,240
(Residential & Home Equity)
Other loans 2,372 5,239
-------- --------
Total $999,966 $993,821
======== ========
</TABLE>
Deposits
--------
Major classifications of deposits are summarized below (in thousands):
<TABLE>
<CAPTION>
At September 30, 2000 At December 31, 1999
--------------------- --------------------
<S> <C> <C>
Demand deposits $ 255,330 $ 252,166
NOW accounts 64,244 53,045
Money market deposit 226,300 271,518
accounts
Savings accounts 244,516 248,746
Time deposits under $100,000 369,719 338,600
Time deposits over $100,000 201,225 203,704
---------- ----------
Total $1,361,334 $1,367,779
========== ==========
</TABLE>
8
<PAGE>
Securities
----------
Securities consist of the following (in thousands):
<TABLE>
<CAPTION>
At September 30, 2000 At December 31, 1999
--------------------------------------- ----------------------------------------
Carrying Amortized Fair Carrying Amortized Fair
Amount Cost Value Amount Cost Value
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Treasury:
Available for Sale $ 19,970 $ 20,112 $ 19,970 $ 33,975 $ 34,255 $ 33,975
US Gov't Agencies:
Available for Sale 73,789 74,716 73,789 80,164 81,558 80,164
Obligations of States and
Political Subdivisions:
Available for Sale 143,548 145,709 143,548 136,443 140,786 136,443
Held to Maturity 19,471 19,471 19,656 16,139 16,139 16,293
Mortgage Backed Securities:
Available for Sale 33,259 33,434 33,259 41,539 42,019 41,539
Other Debt Securities:
Available for Sale 159,345 162,692 159,345 159,625 164,311 159,625
Held to maturity 75 75 76 75 75 75
Equity Securities:
Available for Sale 233 257 233 279 257 279
Held to Maturity 800 800 800 800 800 800
Regulatory Securities 9,726 9,726 9,726 9,726 9,726 9,726
----------------------------------------------------------------------------------------
Total Securities $460,216 $466,992 $460,402 $478,765 $489,926 $478,919
========================================================================================
Total Available for Sale $430,144 $436,920 $430,144 $452,025 $463,186 $452,025
Total Held to Maturity 20,346 20,346 20,532 17,014 17,014 17,168
Regulatory Securities 9,726 9,726 9,726 9,726 9,726 9,726
----------------------------------------------------------------------------------------
Total Securities $460,216 $466,992 $460,402 $478,765 $489,926 $478,919
========================================================================================
</TABLE>
At September 30, 2000 and December 31, 1999, the net unrealized loss on
securities available for sale (net of tax benefit of $2,718,000 and $4,580,000,
respectively) that was included in accumulated other comprehensive loss, a
separate component of stockholders' equity, was ($4,059,000) and ($6,581,000),
respectively. Gross realized gains (losses) were $2,000 and ($3,000),
respectively, for the nine months ended September 30, 2000 and $241,000 and
($106,000) respectively for the twelve months ended December 31, 1999 .
9
<PAGE>
Earnings per common share 1999 data has been adjusted for the 10% stock dividend
-------------------------
which the Company declared in December 1999.
Basic earnings per common share is computed as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C>
Weighted average common shares <C>
outstanding 15,864 16,663 15,980 16,937
Total basic shares 15,864 16,663 15,980 16,937
======= ======= ======= =======
Net income $ 4,657 $ 5,327 $14,970 $15,051
======= ======= ======= =======
Basic earnings per common share $ 0.29 $ 0.32 $ 0.94 $ 0.89
======= ======= ======= =======
</TABLE>
Diluted earnings per common share is computed as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 15,864 16,663 15,980 16,937
Effect of dilutive stock options 261 225 159 211
------- ------- ------- -------
Total diluted shares 16,125 16,888 16,139 17,148
======= ======= ======= =======
Net income $ 4,657 $ 5,327 $14,970 $15,051
======= ======= ======= =======
Diluted earnings per common share $ 0.29 $ 0.32 $ 0.93 $ 0.88
======= ======= ======= =======
</TABLE>
Stockholders' Equity
--------------------
Issued and outstanding shares (net of treasury shares of 527,790 and 3,600) at
September 30, 2000 and December 31, 1999, were 15,916,104 and 16,425,626,
respectively. The Company purchased approximately 730,818 treasury shares during
the first nine months of 2000 and reissued 216,448 shares through its dividend
reinvestment plan and stock option exercises. As of the third quarter the
Company suspended its dividend reinvestment plan. The Company did not repurchase
any shares of its common stock in the third quarter. The Company may repurchase
shares in the future to offset its increase in outstanding shares from stock
option exercises and dividend reinvestment plan issuances, and may continue its
long standing policy of repurchasing common stock from employees or directors.
The Company paid a 10% stock dividend in January 2000 which increased common
shares outstanding by 1.5 million. (All 1999 share data has been accordingly
restated in the condensed consolidated balance sheets, statements of income and
expense and Stockholders' Equity.)
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
--------------------------
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for the remainder of 2000 and, in certain instances, subsequent
periods. The Company cautions that these forward-looking statements are subject
to numerous assumptions, risks and uncertainties, and that statements for
subsequent periods are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: risks
associated with the proposed merger such as legal or regulatory impediments, the
emergence of contesting interests, loss of business due to targeted competitive
pressure during the period to closing, loss of management and other staff,
changes in customer general acceptance of the Company's products and services,
pricing pressures on loan and deposit products; level of prepayments of loans;
general actions of competitors; changes in local or national economic
conditions; the extent and timing of actions of the Federal Reserve Board;
continued customer deposit disintermediation; other normal business risks such
as credit losses, litigation, etc.; increases in the levels of nonperforming
assets; and the extent and timing of any legislative and regulatory actions and
reform.
The Company's forward-looking statements speak only as of the date on which such
statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
Financial Condition
-------------------
Total assets of the Company decreased to $1,577 million at September 30, 2000,
from $1,596 million at December 31, 1999. Decreases in securities of $18.5
million to $460 million at September 30, 2000 and declines in cash and cash
equivalents of $1.1 million to $77.6 million were offset partially by increases
in net loans of $6.2 million to $978.3 million.
In the first nine months of 2000 the Bank originated $181.9 million of new
loans. Amortization, prepayments and sales into the secondary market were $175.8
million resulting in a net increase from year end 1999 in gross loans
outstanding of $6.1 million at September 30, 2000. The net increase in the
outstanding balances of commercial mortgages of $8.4 million or 3.2%, commercial
and industrial loans of $10.6 million or 9%, and consumer installment loans of
$3.1 million or 2.2% was partially offset by declines in the outstanding
balances of residential mortgage loans (including home equity) of $3.9 million
or 1%, real estate construction of $9.2 million or 14.7%, and other loans of
$2.9 million or 54.7%. As of September 30, 2000, the Company held approximately
$194 million in adjustable rate first lien mortgage loans that are scheduled to
reprice during the remainder of 2000. Residential mortgage balances may continue
to decline as prepayments, refinancing and sales into the secondary market are
expected to exceed new
11
<PAGE>
originations. While the Company continues to emphasize its competitive
advantages in business banking, it also seeks to increase its mortgage and home
equity loan originations and to mitigate the runoff of residential mortgages
through active solicitation of residential mortgage borrowers identified as more
likely to refinance their balances. The interest earned on refinanced loans may
be lower than that currently earned on the existing loans.
Period end total deposits decreased $6.4 million in the first nine months of
2000 to $1,361 million. Of this amount, total Public (Municipal) Funds decreased
$11.9 million or 8.1% to $135.1 million and total non-public funds increased by
$5.4 million or .4% to $1,226 million.
The following tables summarize the net changes in public (municipal) fund and
non-public fund deposits from December 31, 1999 to September 30, 2000 (in
thousands):
PUBLIC FUNDS
<TABLE>
<CAPTION>
Percent
Change
Balance Balance Net over
12/31/99 9/30/00 Change Y/E'99
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $ 3,434 $ 8,885 $ 5,451 158.7%
NOW accounts 11,841 14,664 2,823 23.8
Money market accounts 14,185 15,633 1,448 10.2
Savings accounts 3,541 2,755 (786) (22.2)
Time deposits 113,923 93,137 (20,786) (18.2)
--------------------------------------------------------------------
Total public deposits $146,924 $135,074 $(11,850) (8.1)
====================================================================
</TABLE>
Public funds balances decreased in the first nine months of 2000 principally in
short term time deposits which reflected less aggressive bidding for such
deposits relative to many area banks. Increases in the demand deposit, NOW
account and money market categories principally reflect seasonal tax deposits.
NON PUBLIC FUNDS
<TABLE>
<CAPTION>
Percent
Change
Balance Balance Net over
12/31/99 9/30/00 Change Y/E'99
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $ 248,732 $ 246,445 $ (2,287) (.9)%
NOW accounts 41,204 49,580 8,376 20.3
Money market accounts 257,333 210,667 (46,666) (18.1)
Savings accounts 245,205 241,761 (3,444) (1.4)
Time deposits 428,381 477,806 49,425 11.5
--------------------------------------------------------------------
Total non public deposits $1,220,855 $1,226,259 $ 5,404 .4%
====================================================================
</TABLE>
Non-public deposits increased $5.4 million compared to December 31, 1999. NOW
and time deposit categories increased $57.8 million over year end 1999 totals
due to several promotional products offered by the Bank. The decline in money
market balances reflects both the highly competitive pricing being
12
<PAGE>
offered by many area financial institutions and competition for savings dollars
with other investment markets, especially the mutual fund markets as well as a
shifting into promotional products offered by the Bank.
Consolidated stockholders' equity at September 30, 2000 was $145.3 million, up
$3.2 million over year end 1999, primarily due to the Company's net retention of
earnings for the first nine months of the year of $7.8 million and by $2.9
million of stock issuance proceeds from the Company's stock option and dividend
reinvestment plans and the decrease of $2.5 million in accumulated other
comprehensive loss due to changes in the net unrealized gains and losses, after
tax, in the market value of available for sale securities. These increases were
mostly offset by the purchase of approximately 731,000 shares of Treasury stock
during the first nine months of 2000 ($10.0 million). The ratio of stockholders'
equity to total assets remained strong at September 30, 2000 standing at 9.2%,
compared to 8.9% at December 31, 1999. Tier I capital to average assets was 9.3%
and 9.3% at both September 30, 2000 and December 31, 1999.
Results of Operations
---------------------
Interest income as reported, for the nine months ended September 30, 2000,
compared to the same period in 1999, increased $4.6 million or 5.6% while
interest expense increased by $7.9 million or 24.6%. This resulted in a decrease
in net interest income of $3.3 million or 6.7%. The provision for loan losses
decreased by $1.1 million or 58.3%. Total non-interest income increased $23,000
or .3%. Total noninterest expenses, which includes a $520,000 charge for
directors and officers' stock appreciation rights' expenses, decreased by
$702,000 or 2.2% from the first nine months of 1999. Net income after tax
decreased by $81,000 or .5% to $14.97 million. Diluted earnings per common share
increased to $.93 for the nine months of 2000 compared to $.88 for 1999, or by
5.7%. The impact of the directors and officers stock appreciation rights
expenses recorded reduced diluted earnings per share by $.02 for both the three
and nine months ended September 30, 2000.
The net income and earnings per common share data and annualized returns on
average assets and equity is summarized below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (in thousands) $4,657 $5,327 $14,970 $15,051
Per common share:*
Basic earnings 0.29 0.32 0.94 0.89
Diluted earnings 0.29 0.32 0.93 0.88
Return on average assets 1.19% 1.36% 1.27% 1.30%
Return on average
stockholders' equity 13.18% 14.67% 14.13% 13.41%
</TABLE>
* Adjusted for the 10% stock dividend declared December 1999.
13
<PAGE>
Interest income
---------------
On a tax equivalent basis, gross interest income increased by $4.7 million or
5.7% for the nine months ended September 30, 2000 compared to the same period in
1999, due principally to the increase in average interest earning assets of
$34.2 million. Average loans increased by $46.3 million, average securities
increased $2.0 million and average federal funds sold decreased by $14.2
million.
Total interest expense increased by $7.9 million or 24.6% for the nine month
period ended September 30, 2000 as compared to the nine months ended September
30, 1999 due both to higher interest paid on deposits and an increase in average
borrowed funds of $48.3 million.
The Federal Reserve has raised short-term interest rates five times since the
beginning of the quarter ended September 30, 1999. In addition, intense
competition exists for deposits from both other financial institutions and
non-financial institutions. This has resulted in higher levels of interest
expense relative to the overall changes in balances. While such increases in
market rates have benefited the yield on the Company's cash and investments,
competitive pressures for retention of existing loans and on the generation of
new loans has not allowed the Company to pass on to borrowers the full effect of
the increases in the prime rate that have taken place over the past year. The
result is that average yields on interest earning assets increased (25 basis
points) to 7.83% for the nine months ended September 30,2000 vs. 7.58% as of the
same period in 1999 reflecting increases in yields on taxable securities, fed
funds sold and tax-exempt securities while the average yield on loans remained
flat over the same time period at 8.46%. However, average interest bearing
liability rates paid increased (79 basis points) to 4.53% for the nine months
ended September 30, 2000 vs. 3.74% for the nine months ended September 1999 due
primarily to the effect of $48.3 million increase in average borrowed funds at
an average cost of 6.34% vs. 5.36% in the prior year and to the migrations of
customer deposit balances from lower cost accounts to higher cost time deposits.
Accordingly, net interest margin on a tax equivalent basis decreased to 4.27%
for the nine months ended September 30, 2000 compared to 4.65% for the same
period in 1999. Variances due to changes in rates (primarily higher deposit
costs) produced a $3.5 million overall net decrease in net interest income in
the nine months of 2000 compared to the same period in 1999. At the same time
the increase in average earning assets and liabilities substantially offset each
other resulting in a small($.2 million) net volume related increase in net
interest income over the same period. The net effect was that tax equivalent net
interest income before provision for loan losses was $47.8 million for the nine
months ended September 30, 2000 compared to $50.9 million for the comparable
period in 1999, a decrease of $3.1 million or (6.1%). Excluding the effects of
tax equivalent adjustments, net interest income was down $3.3 million. This
difference is more than offset by savings in tax expense. The Bank continues to
utilize tax saving strategies to enhance its overall net income.
14
<PAGE>
The table below sets forth the consolidated average balance sheets for the
Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
---- ----
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $1,005,804 $63,846 8.46% $ 959,501 $60,893 8.46%
Taxable Securities 360,914 17,040 6.30 363,280 15,438 5.67
Tax-exempt Securities (2) 102,608 5,660 7.35 98,201 5,189 7.05
Fed Funds Sold 23,879 1,096 6.12 38,034 1,402 4.91
---------- ------- ---------- -------
Total Interest Earning
Assets 1,493,205 87,642 7.83 1,459,016 82,922 7.58
Noninterest Earning Assets:
Cash & Due from Banks 36,635 45,714
Premises & Equipment 26,449 27,759
Other Assets 36,199 29,236
Allowance for Loan Losses (21,834) (21,572)
---------- ------- ---------- -------
Total Assets $1,570,654 87,642 7.44 $1,540,153 82,922 7.18
========== ------- ========== -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing
Savings Deposits $ 246,139 5,538 3.00% $ 271,750 5,248 2.58%
NOW Accounts 58,184 612 1.40 56,777 427 1.00
Money Market Accounts 252,341 7,842 4.14 313,408 8,298 3.53
Other Time Deposits 539,105 22,345 5.53 474,045 16,990 4.78
Borrowed Funds 74,359 3,533 6.34 26,011 1,046 5.36
---------- ------- ---------- -------
Total Interest-Bearing 1,170,128 39,870 4.53 1,141,991 32,009 3.74
Noninterest-Bearing
Demand Deposits 248,598 236,867
Other 10,709 3.71 11,615 3.07
---------- ----------
Total Noninterest-Bearing
Liabilities 259,307 248,482
Stockholders' Equity 141,219 149,680
---------- ----------
Total Liabilities and
Stockholders' Equity $1,570,654 39,870 $1,540,153 32,009
========== ------- ========== -------
Net Interest Margin 47,772 4.27 50,913 4.65
Less Tax Equivalent
Adjustments (1,981) (1,816)
------- -------
Net Interest Income $45,791 4.09% $49,097 4.49%
======= ===== ======= =====
Excess of interest earning
assets over interest
bearing liabilities $ 323,077 $ 317,024
========== ==========
Ratio of Average Interest-
Earning Assets to Average
Interest-Bearing
Liabilities 127.61% 127.76%
========= ==========
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average Balances include non-accrual loans.
(2) Tax Equivalent Yields on tax-exempt securities based on a Federal tax rate
of 35%.
15
<PAGE>
The table below details the changes in interest income and interest expense for
the period indicated due to both changes in average outstanding balances and
changes in average interest rates:
Rate/Volume Analysis (in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 vs. 1999
------------------------------------------------------
Increase (Decrease) due to
------------------------------------------------------
Volume Rate Net(1)
------ ---- ----
<S> <C> <C> <C>
Interest Income:
Loans $ 2,939 $ 14 $ 2,953
Taxable investment securities (112) 1,714 1,602
Tax-exempt investment(2)
securities 243 228 471
Federal funds sold (650) 344 (306)
------- ------- --------
Total interest income 2,420 2,300 4,720
Interest expense:
Savings deposits (495) 785 290
NOW/accounts 11 174 185
Money market accounts (1,619) 1,163 (456)
Other Time Deposits 2,332 3,023 5,355
Borrowed funds 1,944 543 2,487
------- ------- --------
Total interest expense 2,173 5,688 7,861
------- ------- --------
Net interest margin(3) 247 ($3,388) (3,141)
Less tax equivalent effect (92) (73) (165)
------- -------- --------
Net interest income $ 155 ($3,461) ($3,306)
======= ======== ========
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each to the total change.
(2) Equivalent yields on tax exempt securities based on a Federal tax rate
of 35%.
(3)The Company's stock repurchase program utilized $15.0 million in average
available funds over the prior year. At the average year to date 2000 overall
investment and fed funds yield of 6.51%, the imputed loss of income due to the
Company's stock repurchase program represented approximately $730,000 of the
$3.1 million decline in net interest income on a tax-equivalent basis.
16
<PAGE>
Provision for loan losses and credit quality
--------------------------------------------
Provisions for loan losses are based on management's assessment of risk of loss
inherent in the loan portfolio and as such reflect, among other things, both
trends in local economic conditions and the categorization of the credit quality
of individual loans. Such assessment is ongoing, and may not directly reflect
the charge-offs taken in any accounting period, although the trend in charge-
offs is an important element in the evaluation of the adequacy of the allowance
for loan losses.
The provision for loan losses decreased from $1,800,000 in 1999 to $750,000 in
2000.
Net charge-offs for the first nine months of 2000 were $838,000 compared to
$1,159,000 for the same period in 1999. The ratio of net chargeoffs to average
loans, on an annualized basis, remained unchanged at .16% for the time period
September 1999 vs. September 2000.
Total non-performing assets were approximately $9.0 million at the end of
September 2000, down $3.3 million from $12.3 million at September 1999, while
slightly up from the $8.9 million at year end 1999. Period end non-performing
loans of $7.9 million at September 2000 were down $2.8 million from September
1999 but were up $.3 million over the December 31, 1999 level of $7.5 million.
OREO balances were up $.5 million from September 30, 1999 and down $.3 million
from December 31, 1999 levels.
Nonperforming assets represent 130 loans or OREO properties of which on1y 7 have
balances in excess of $300,000 of which four of these loans totaling $2.4
million, consisting of two relationships, are secured by commercial real estate.
Another is an OREO property with a balance of $513,000. Of the total
nonperforming loans, 30% are collateralized by residential property, 67% by
commercial property, and 3% by other assets or unsecured.
Management believes that the allowance for loan losses is adequate to cover the
probable losses in the loan portfolio. However, no assurance can be given that
the very favorable current economic conditions of the Company's overall market
area will not be unsettled by future events. Any such developments would be
expected to adversely affect the financial performance of the Company.
17
<PAGE>
The table below summarizes the Company's allowance for loan losses and its loan
loss experience for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
For the nine months For the year
ended September 30, ended December 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
---------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $21,786 $21,270 $21,270 $19,331 $18,533
Chargeoffs:
Commercial & industrial 214 196 368 406 1,448
Consumer installment & other 1,044 1,379 1,461 1,620 1,146
Real estate mortgage 365 831 1,308 3,344 2,164
---------------------------- ---------------------------------------
Total charge-offs 1,623 2,406 3,137 5,370 4,758
Recoveries:
Commercial & industrial 190 64 322 462 164
Consumer installment & other 528 418 533 481 160
Real estate mortgage 67 765 798 437 757
---------------------------- ---------------------------------------
Total recoveries 785 1,247 1,653 1,380 1,081
---------------------------- ---------------------------------------
Net charge-offs (838) (1,159) (1,484) (3,990) (3,677)
Provision for loan losses 750 1,800 2,000 5,929 4,475
---------------------------- ---------------------------------------
Balance at end of period $21,698 $21,911 $21,786 $21,270 $19,331
============================ =======================================
Ratio of net charge-offs to
average loans outstanding
during the period
(annualized) .16% .16% .15% .40% .35%
Allowance for loan losses
as a percent of period-end loans 2.17% 2.28% 2.19% 2.18% 1.85%
Allowance as a percent of 284% 205% 290% 226% 214%
non-performing loans
Nonperforming loans and OREO .87% 1.27% .89% 1.03% 1.00%
to total loans and OREO
</TABLE>
18
<PAGE>
The table below summarizes the Company's nonperforming assets and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- ---------------
2000 1999 1999 1998 1997
----------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate mortgage $6,751 $8,483 $6,289 $8,282 $7,602
Commercial & Industrial 754 1,564 921 558 164
Consumer & other 196 362 106 83 123
------------------------ -------------------------------------
Total nonaccrual loans 7,701 10,409 7,316 8,923 7,889
Loans 90 days or more past
due and still accruing:
Real estate mortgage - - - 224 129
Commercial & industrial 129 253 129 205 188
Consumer & other - 5 35 68 126
------------------------ -------------------------------------
Total 90 days past due and
still accruing 129 258 164 497 443
Restructured - real estate 22 - 25 28 682
------------------------ -------------------------------------
Total non-performing and
restructured loans 7,852 10,667 7,505 9,448 9,014
Other real estate owned (2) 1,100 1,605 1,369 628 1,366
------------------------ -------------------------------------
Total non-performing assets $8,952 $12,272 $8,874 $10,076 $10,380
======================== =====================================
Non-performing and re-
structured loans as a
percent of total loans .79% 1.11% .76% .96% .87%
========================== =====================================
Nonperforming assets as a
percent of total assets .57% .77% .56% .64% .64%
========================== =====================================
</TABLE>
(1) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of interest is unlikely, or loans that meet other nonaccrual criteria
as established by regulatory authorities. Payments received on loans classified
as nonaccrual are either applied to the outstanding principal balance or
recorded as interest income, depending upon management's assessment of the
collectibility of the loan.
(2) Other real estate owned totals $1,100,000 at September 30, 2000 and includes
9 properties acquired through foreclosure: 5 residences and 4 non-farm
nonresidential properties.
19
<PAGE>
In addition to the nonperforming loans and other nonperforming assets noted
above, at September 30, 2000, the Company had approximately $26.3 million in
loans requiring special attention (substandard) compared to $22.9 million of
similar loans at December 31, 1999. Such loans are being monitored so that if
present concerns about the borrowers' ability to comply with repayment terms
becomes evident, management will be able to quickly assess impairment. Further
deterioration in such borrowers' financial position may result in reclassifying
them as nonperforming assets.
The following table summarizes impaired loans for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Impaired loans with allowance established $2,619,000
and $3,793,000, respectively) $11,769 $11,515
Impaired loans which have been written down
$255,000 and $219,000, respectively) 341 431
------- -------
Total $12,110 $11,946
======= =======
Average amount of impaired loans
for the period $12,028 $10,407
======= =======
</TABLE>
The following table shows, at the dates indicated, the allocation of the
allowance for loan losses, by category, and the percentage of loans in each
category to total gross loans (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 1999 1998 1997
----------------------------------------- --------------------------------------------------------------
Balance at end of % of % of % of % of % of
period applicable to: total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
----------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial &
industrial $ 3,011 12.9% $4,902 11.8% $ 4,426 11.9% $ 2,472 11.7% $ 2,131 9.0%
Consumer & other 3,621 14.4 3,184 14.6 3,399 14.4 3,530 14.4 3,699 15.1
Real estate -
mortgage 11,099 72.7 12,069 73.6 11,871 73.7 11,679 73.9 9,451 75.9
Unallocated 3,967 - 1,756 - 2,090 - 3,589 - 4,050 -
----------------------------------------- --------------------------------------------------------------
Total $21,698 100% $21,911 100% $21,786 100% $21,270 100% $19,331 100%
========================================= ==============================================================
</TABLE>
20
<PAGE>
Noninterest Income
------------------
Total noninterest income increased by $23,000 or .3% to $7.8 million during the
first nine months of 2000 compared to the same period of 1999. Specifically,
service charges and fees increased $201,000 and trust income increased by
$82,000. Lower levels of sales of loans into the secondary market resulted in a
decrease in gains on sales of loans of $66,000, while lower levels of gains on
sales of securities of $156,000 and lower income from other sources of $122,000
(principally one time property sales consummated in 1999) also offset these
improvements.
Other Expenses
--------------
In total, noninterest expense decreased by $702,000 or 2.2% to $31.3 million for
the first nine months of 2000 compared to the same period of 1999. This includes
$520,000 in charges for directors' and officers' stock appreciation rights'
expenses due to increases in the market price of the Company's common stock. Of
this, $520,000 charge, the employee component of $282,000 was charged to salary
and benefits expense, and the directors' component of $238,000 was charged to
other expenses. Despite this, salaries and employee benefits expense decreased
$135,000 to $16.4 million at September 30, 2000 vs. $16.6 million in the first
nine months of 1999 due to lower levels of personnel as economies of the 1998
merger were more fully realized. Occupancy and equipment expense decreased over
the same period in 1999 by $384,000 due also to further realization of economies
related to the 1998 merger. Other real estate owned expenses were $51,000 higher
due to more properties under management and credits received in 1999. Other
expenses decreased by $234,000 reflecting continued emphasis on controlling
costs and reductions in levels of consulting fees paid from 1999 levels.
Net Income
----------
Pretax income decreased by $1.5 million to $23.5 million for the nine months
ended September 30, 2000 compared to the same period in 1999. The Company's
effective tax rate decreased to 30.5% from 34.8% as a result of higher levels of
investments in tax preferenced securities and the higher levels of utilization
of a state tax advantaged subsidiaries. This resulted in net tax savings of $1.4
million. Net income was $15.0 million for the nine months ended September 30,
2000 vs. $15.1 million for the same period in 1999, an decrease of $81,000 or
.5%.
Three Months Ended September 30, 2000 vs. September 30, 1999
------------------------------------------------------------
Net interest income decreased $1.7 million or 10.0% for the three months ended
September 30, 2000 compared to 1999, primarily due to the much higher levels of
interest expense which were only partially offset by volume driven increases in
loan income as discussed earlier.
Provisions for loan losses remained unchanged at $300,000 for the three month
period ended September 30, 2000 vs. September 30, 1999.
Total non-interest income increased $100,000 to $2.6 million for the three
months ended September 30, 2000 compared to 1999, primarily due to higher
service charges and fees on deposit accounts ($30,000) and trust income
($15,000) and increased levels of other income.
Total noninterest expense increased $.3 million for the three months ended
September 30, 2000 compared to 1999 due to increases in salaries and benefits
($522,000), (of which $282,000 was stock appreciation rights expense) being
21
<PAGE>
offset partially by decreases in occupancy and equipment ($232,000) and other
expense of $36,000 (net of $238,000 in stock appreciation rights expenses).
Pretax income decreased $1.8 million to $6.3 million for the three months ended
September 30, 2000 compared to the same period of 1999, while income taxes
decreased more than proportionately by $1.1 million, due to fuller utilization
of tax advantaged subsidiaries and continued higher levels of tax-exempt
securities. Comparative income after taxes decreased $670,000 to $4.7 million
for the quarter ended September 30, 2000 vs. 1999.
Asset/Liability Management
--------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities and capital resources. The Company's
Investment Committee of the Board monitors, and the Bank, through its treasury
division, controls the rate sensitivity of the balance sheet while seeking to
maintain an appropriate level of net interest income contribution to the
operations of the Company.
The Company's net interest income is affected by fluctuations in market interest
rates as a result of timing differences in the repricing of its assets and
liabilities. These repricing differences are quantified in specific time
intervals and are referred to as interest rate sensitivity gaps. The Company
manages the interest rate risk of current and future earnings to a level that it
considers consistent with its mix of businesses and seeks to limit such risk
exposure to appropriate percentages of both earnings and the imputed value of
stockholders' equity. The objective in managing interest rate risk is to support
the achievement of business strategies, while controlling earnings variability
and seeking to provide appropriate liquidity. Further, the historical level of
demand deposits (greater than 15% of total assets) serves to mitigate the
effects of increases in interest rates and reduce the average cost of total
liabilities. By the end of the third quarter in 1999, the Company implemented a
leverage strategy, whereby it purchased investment assets of $100 million and
funded such increased assets with a portion of its available line of credit with
the Federal Home Loan Bank, borrowings under repurchase agreements and municipal
deposits. Although the related funding costs have risen through the last nine
months, the high levels of floating rate assets used in the strategy allowed the
Company to benefit from pretax net interest income during the quarter of
approximately 50 basis points per annum on the assets acquired. The component
securities and funding sources utilized in the transaction (a combination of
fixed and floating rate securities funded primarily with variable rate
liabilities) is not expected to raise significantly the Company's overall
exposure to fluctuations in market interest rates.
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of September 30, 2000, based upon the known
repricing dates of certain assets, at amortized cost, and liabilities and the
assumed repricing dates of others. As shown in the following chart, at September
30, 2000, assuming no management action, the Company's principal interest rate
risk is to a rising rate environment and particularly within one year time
frame. That is, net interest revenue would be expected to be adversely affected
by an increase in interest rates (on a one-for-one basis) above the rates
embedded in the current yield curve, principally due to the higher level of
liabilities ($905.6 million) that would reprice relative to similarly
categorized assets ($682.0 million) in that time frame.
22
<PAGE>
This exposure would be mitigated over the longer term as the Company has $553.8
million more in repriceable interest earning assets than interest bearing
liabilities beyond one year.
The Company modified its maturity report classifications for the savings and NOW
categories effective with the reporting period June 30, 2000. The majority of
the balances in these two categories were recategorized out beyond one year
(prior to this savings and NOW categories were reported in the four months to
one year category). The new methodology more closely mirrors industry practice
and is based on a historical review of the Company's actual rate and volume
changes during the interest rate cycles for the past twenty-four months. The
revised model, in managements opinion, better reflects the true pricing
sensitivity nature of the Bank's core deposits.
23
<PAGE>
This chart displays only a static view of the Company's interest rate
sensitivity gap and does not capture the dynamics of balance sheet, rate and
spread movements or management actions that may be taken to manage this risk (in
thousands).
<TABLE>
<CAPTION>
Greater
Total than
Maturity Repricing 3 months 4 months within One yr. five
Date (1)(2) or less to one yr. one yr. to 5 yrs. yrs. Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities (3) $ 119,233 $ 55,776 $175,009 $199,331 $ 92,653 $ 466,993
Fed Funds 36,882 36,882 36,882
Fixed rate loans 80,363 79,223 159,586 227,114 54,998 441,698
Floating rate loans (3) 153,751 156,740 310,491 238,055 2,021 550,567
--------- -------- --------- -------- -------- ----------
Total interest
earning assets (1) 390,229 291,739 681,968 664,500 149,672 1,496,140
--------- -------- --------- -------- -------- ----------
Other interest bearing
deposits (4) 277,816 75,463 353,279 111,605 70,176 535,060
Time/Other (5) 305,447 186,910 492,357 77,618 969 570,944
Borrowings 60,000 60,000 60,000
--------- -------- --------- -------- -------- ----------
Total interest-bearing
liabilities 643,263 262,373 905,636 189,223 71,145 1,166,004
--------- -------- --------- -------- -------- ----------
Interest Sensitivity
gap (6) $(253,034) $ 29,366 $(223,668) $475,277 $ 78,527 $ 330,136
==========================================================================================
Gap as a percent of
earnings assets (16.91)% 1.96% (14.95)% 31.77% 5.25% 22.07%
==========================================================================================
</TABLE>
(1) Interest rate sensitivity gaps are defined as the fixed rate positions
(assets less liabilities) for a given time period. The gaps measure the
time weighted dollar equivalent volume of positions fixed for a particular
period. The gap positions reflect a repricing date at which date funds are
assumed to "mature" and reprice to a current market rate for the asset or
liability. The table does not include loans on nonaccrual status or net
unrealized losses recorded on available-for-sale securities as of September
30, 2000.
(2) Variable rate balances are reported based on their repricing formulas.
Fixed rate balances are reported based on their scheduled contractual
maturity dates, except for certain investment securities and loans secured
by 1-4 family residential properties that are based on anticipated cash
flows.
(3) Prime-priced loans and investments are considered as 1 to 3 month assets.
(4) Other interest-bearing deposits include Money Market accounts (three months
or less) and Savings and NOW accounts (are categorized based upon
management's evaluation of the changes in those products over the last
twenty four months) The remainder of other interest-bearing deposits are
"Merit" accounts (savings accounts whose yield is repriced directly with
the Federal Reserve Discount Rate). This discount rate changes less
frequently than other market rates. As a result, management places these
balances at one-half in the three month to six month category and the
balance beyond one year repricing category. The interest rate sensitivity
assumptions presented for these deposits are based on historical and
current experiences regarding balance retention and interest rate repricing
behavior.
(5) Time/Other: Time deposits $570.9 million and other interest-bearing
liabilities ($60 million) are classified by contractual maturity or
repricing frequency.
(6) Noninterest bearing deposit liabilities were approximately $10.0 million at
September 2000.
24
<PAGE>
Capital Resources and Liquidity
-------------------------------
The following summarizes the minimum capital requirements and capital position
at September 30, 2000:
<TABLE>
<CAPTION>
To be Well Capitalized Under
Capital Position at "Prompt Corrective Action"
September 30, 2000 Provision of FDICIA
------------------------------ --------------------
Bank Only Consolidated
--------- ------------
<S> <C> <C> <C>
Total Capital
to Risk-Weighted Assets 13.01% 14.11% 10%
Tier 1 Capital
to Risk-Weighted Assets 11.75% 12.85% 6%
Tier 1 Capital to Average
Assets (Leverage Ratio) 8.51% 9.27% 5%(1)
</TABLE>
(1) Regulatory authorities require all but the most highly rated banks and bank
holding companies to have a leverage ratio of at least between 4.0% - 5.0%.
At September 30, 2000, the Bank met the requirements for a "well capitalized"
institution based on its capital ratios as of such date.
The Company believes that its cash and cash equivalents of $77.6 million in
addition to its securities available for sale of $430.2 million at September
30,2000 are sufficient to meet both the funding needs of its borrowers and the
liquidity requirements of its depositors.
The Company's equity to assets level is 9.2% at September 30, 2000. As such,
management believes that the Company has ample capital available for future
growth. The Company also has available lines of credit with the Federal Home
Loan Bank, Federal Reserve and other commercial banks.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Quantitative and qualitative disclosure about market risk is presented at
December 31, 1999 in Item 7A in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 28, 2000. The following is
an update of the discussion provided therein:
General. The Company's largest component of market risk continues to be interest
rate risk. The Company is not subject to foreign currency exchange or commodity
price risk. At September 30, 2000, neither the Company nor the Bank owned any
trading assets, nor did they utilize hedging transactions such as interest rate
swaps and caps.
GAP Analysis. The one-year and five-year cumulative interest sensitivity gap as
a percentage of total assets have changed from (24.5%) and 45.5% at December 31,
1999, respectively. , to (14.95%) and 37.02% at September 30, 2000,
respectively. As previously discussed, the Company changed the maturity and rate
sensitivity reporting for the savings and NOW categories
25
<PAGE>
effective with reporting period June 30, 2000, which recategorized a substantial
portion of these balances out beyond one year due to a reanalysis of the decay
of deposits during the twenty-four month period since the 1998 merger. At
December 31, 1999, reporting of these balances was categorized in the four
months to one year category.
Interest Rate Risk Compliance. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at December 31, 1999. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value change at September 30, 2000 compared to December 31, 1999, and the impact
of possible changes within the Company's models continue to fall within all
board approved limits for potential interest rate volatility. The adjustment of
the GAP analysis noted above had no significant impact on the overall model
results as the NOW and savings categories of deposits have the lowest average
cost of funds.
See also Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations "Asset/Liability Management".
26
<PAGE>
Part II
Item 4. NONE
-------------
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a. Exhibits
2 Amendment to Merger Agreement, filed on Form 8-K, July 12, 2000
27 Financial Data Schedule (with EDGAR filings included)
b. Reports on Form 8-K
-------------------
On July 12, 2000, the Company filed a Current Report on Form 8-K dated
July 9,2000 to disclose the pending Merger with M&T Bank Corporation.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed in its behalf by the undersigned
thereunto duly authorized.
Premier National Bancorp, Inc.
(Registrant)
Date: November 8, 2000 /s/ Paul A. Maisch
------------------
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
28
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
2 Amendment to Merger Agreement
27 Financial Data Schedule (with EDGAR filings included)
29
