<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 JUNE 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.
15,856,815 shares of Common Stock outstanding, par value $.80 per share, at July
31, 2000.
<PAGE>
PREMIER NATIONAL BANCORP, INC. & SUBSIDIARIES
INDEX
Page Reference
--------------
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 12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 25
PART II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 29
Exhibit Index 30
<PAGE>
Part 1
Item 1: Financial information
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and due from banks $43,738 $46,889
Federal funds sold 15,582 31,782
------- -------
Total cash and cash equivalents 59,320 78,671
Securities
Available for sale, at fair value 432,673 452,025
Held to maturity, at cost, (fair value of $ 19,431 in 2000 19,311 17,014
and $17,168 in 1999)
Regulatory securities (at cost which approximates fair value) 9,726 9,726
Gross loans 1,012,855 993,821
Allowance for loan losses (21,786) (21,786)
-------- --------
Net loans 991,069 972,035
Premises and equipment, net 26,191 26,982
Accrued income 12,152 12,111
Deferred Taxes 15,647 16,024
Other real estate owned 828 1,369
Intangible assets, net 4,309 4,992
Other assets 2,577 4,717
---------------------------------------
TOTAL ASSETS $1,573,803 $1,595,666
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing $259,086 $252,166
Interest bearing 1,089,623 1,115,613
---------------------------------------
Total deposits 1,348,709 1,367,779
Notes payable 75,000 75,300
Other liabilities 11,081 10,549
---------------------------------------
TOTAL LIABILITIES 1,434,790 1,453,628
STOCKHOLDERS' EQUITY
Preferred stock
($.01 par value; 5,000,000 shares authorized; none issued - -
in 2000 and 1999)
Common stock ($.80 par value; 50,000,000 shares authorized) 13,155 13,142
16,443,894 shares issued in 2000 and 16,429,226 shares
issued in 1999
Additional paid-in capital 95,742 95,755
Retained earnings 45,061 39,789
Accumulated other comprehensive loss (6,346) (6,581)
Treasury stock, at cost, (644,359 shares in 2000 and 3,600 (8,599) (67)
shares in 1999)
---------------------------------------
TOTAL STOCKHOLDERS' EQUITY 139,013 142,038
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,573,803 $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 Six Six
Months Ended Months Ended Months Ended Months Ended
06/30/00 06/30/99 06/30/00 06/30/99
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $21,290 $20,191 $42,301 $40,674
Federal funds sold 279 238 577 1,140
Taxable securities 5,611 5,089 11,282 9,657
Tax-exempt securities 1,235 1,112 2,420 2,050
-----------------------------------------------------------------------------
Total interest income 28,414 26,630 56,580 53,521
Interest expense:
Interest expense on deposits 12,224 10,141 23,336 20,796
Interest expense, other 1,207 149 2,338 163
-----------------------------------------------------------------------------
Total interest expense 13,431 10,290 25,674 20,959
-----------------------------------------------------------------------------
Net interest income 14,983 16,340 30,906 32,562
Provision for loan losses 150 500 450 1,500
-----------------------------------------------------------------------------
Net interest income
after provision for loan losses 14,833 15,840 30,456 31,062
-----------------------------------------------------------------------------
Noninterest income:
Service charges and fees 2,139 2,070 4,233 4,032
Trust earnings 301 273 618 536
Gains on sales of securities, net 0 95 (1) 171
Gains on sales of loans, net 1 12 12 78
Other income 177 207 350 472
-----------------------------------------------------------------------------
Total noninterest income 2,618 2,657 5,212 5,289
-----------------------------------------------------------------------------
GROSS OPERATING INCOME 17,451 18,497 35,668 36,351
-----------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,297 5,533 10,585 11,242
Net occupancy and equipment expense 1,580 1,824 3,427 3,579
Other real estate owned 11 (15) 47 5
Other expenses 3,182 3,599 6,385 6,583
-----------------------------------------------------------------------------
Total noninterest expense 10,070 10,941 20,444 21,409
-----------------------------------------------------------------------------
Income before income taxes 7,381 7,556 15,224 14,942
Income taxes 2,346 2,563 4,911 5,217
-----------------------------------------------------------------------------
Net income $5,035 $4,993 $10,313 $9,725
=============================================================================
Weighted average common shares outstanding (1)
Basic 15,828,000 16,867,400 16,038,000 17,070,300
Diluted 15,927,500 17,109,500 16,146,400 17,312,700
Per common share data: (1)
Basic earnings $0.32 $0.30 $0.64 $0.57
Diluted earnings $0.32 $0.29 $0.64 $0.56
Cash dividends declared $0.15 $0.14 $0.30 $0.25
Book value at period end $8.80 $8.77
</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>
Six
Months Ended
OPERATING ACTIVITIES 06/30/00 06/30/99
--------- --------
<S> <C> <C>
Net income $10,313 $9,725
Adjustment to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 450 1,500
Depreciation and amortization 1,388 1,537
Amortization of security premiums and
accretion of discounts 504 530
Amortization of goodwill/core deposit intangible/acquisition costs 730 744
Realized gains on sales of securities and loans (11) (249)
Gains on sale of premises and equipment 0 (216)
Gains on sale of other real estate (34) (24)
Deferred income tax expense (benefits) 111 (887)
Increase in accrued income (41) (2,765)
Other, net 2,819 5,085
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,229 14,980
-------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 14,018 35,981
Proceeds from maturities of securities available for sale 12,166 54,583
Proceeds from maturities of securities held to maturity 4,655 4,766
Purchases of securities available for sale (5,218) (213,639)
Purchases of securities held to maturity (8,570) (7,169)
Sale of loans 876 1,209
Net (increase) decrease in loans (20,348) 12,691
Purchase of premises and equipment (597) (753)
Proceeds from sales of premises and equipment 0 597
Proceeds from sale of OREO 477 563
-------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,541) (111,171)
-------------------------------
FINANCING ACTIVITIES
Net decrease in DDA/MM/NOW/Sav. Accounts (11,638) (41,711)
Net increase (decrease) in other time deposits (7,432) (2,996)
Proceeds from issuance of common stock from treasury 1,121 2,591
Repurchase of common stock (9,921) (12,974)
Borrowings 0 55,000
Repayment of borrowings (300) (1,725)
Cash dividends-common (4,869) (4,045)
-------------------------------
NET CASH USED IN FINANCING ACTIVITIES (33,039) (5,860)
-------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (19,351) (102,051)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 78,671 174,330
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $59,320 $72,279
===============================
CASH PAID FOR:
Interest $25,357 $20,779
Taxes 2,700 4,983
NON-CASH ITEMS
Transfer from loans to OREO 112 1,529
Net change in unrealized gains (losses) recorded
on securities available for sale 501 (8,423)
Change in deferred taxes on unrealized (gains)
losses recorded on securities available for sale (266) (3,505)
Loans originated to finance sales of OREO 148 0
</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 10,313 10,313
Cash dividends declared on common stock ($0.30 per share) (4,773) (4,773)
Adjustment on final issuance of 10% stock dividend 13 (13) 0
Dividend reinvestment and stock purchase plan - 53,463 shares 789 789
Options exercised - 41,479 shares 345 345
Cash in lieu issued for fractional shares (13) (13)
Effect of Treasury stock issued at less than cost (255) 255 0
Purchase of treasury stock - 725,881 shares (9,921) (9,921)
Net change in unrealized loss on securities, after tax 235 235
--------------------------------------------------------------------
Balance June 30, 2000 $13,155 $95,742 $45,061 ($6,346) ($8,599) $139,013
====================================================================
Balance January 1, 1999 $12,558 $84,492 $57,621 $1,521 ($38) $156,154
Net Income 9,725 9,725
Cash dividends declared on common stock ($0.25 per share) (4,281) (4,281)
Dividend reinvestment and stock purchase plan - 36,614 shares 14 285 299
Options exercised - 114,624 shares 48 750 1,505 2,303
Cash in lieu issued for fractional shares (11) (11)
Effect of Treasury stock issued at less than cost (631) 631 0
Purchase of treasury stock - 718,083 shares (12,974) (12,974)
Net change in unrealized gain on securities, after tax (4,918) (4,918)
--------------------------------------------------------------------
Balance June 30, 1999 $12,620 $85,516 $62,434 ($3,397) ($10,876) $146,297
====================================================================
</TABLE>
See notes to condensed consolidated financial statements
-4-
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Six months ended Three Months ended
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 10,313 $ 9,725 $ 5,035 $ 4,993
Other Comprehensive income (loss):
Net unrealized gains (losses) on securities:
Net unrealized holding gains (losses)
arising during year, net of taxes of
($82, $3,686, $494 and $2,760) 118 (5,305) 711 (3,971)
Less reclassification adjustment for losses included in net income:
net of taxes of ($81, $269, $0, $471) 117 387 0 278
----------- ---------- ---------- ----------
Other comprehensive income (loss) 235 (4,918) 711 (3,693)
----------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 10,548 $ 4,807 $ 5,746 $ 1,300
=========== ========== ========== ==========
</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 June 30, 2000 and December 31, 1999, its cash flows and
changes in stockholders' equity for the six months ended June 30, 2000 and 1999
and its consolidated results of operations and comprehensive income for the
three months and six months ended June 30, 2000.
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 six months ended June 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 Manufactures
and Traders Trust Company, a subsidiary of Olympia.
For the Merger, each outstanding share, will, at the election of the holder
thereof, and with certain exceptions, be converted into either, (i) the right
6
<PAGE>
to receive $21 in cash, without interest, or (ii) an amount of common stock of
M&T,determined as provided in the merger agreement, par value $5.00, equal to
the quotient of (A) $21 divided by (B) the Market Value of a share of M&T common
stock. 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 Premier can cause the
total profit receivable thereunder to 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.
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 essential 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.
7
<PAGE>
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.
Recent Accounting Pronouncements
--------------------------------
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.
8
<PAGE>
Loans
-----
Major classifications of loans are summarized below (in thousands):
<TABLE>
<CAPTION>
At June 30, 2000 At December 31, 1999
---------------- --------------------
<S> <C> <C>
Commercial and industrial $133,471 $118,492
Consumer installment 141,932 138,256
Real estate - construction 59,667 62,596
Real estate - mortgage (Commercial) 267,458 260,998
Real estate - mortgage 407,838 408,240
(Residential & Home Equity)
Other loans 2,489 5,239
---------- --------
Total $1,012,855 $993,821
========== ========
</TABLE>
Deposits
--------
Major classifications of deposits are summarized below (in thousands):
<TABLE>
<CAPTION>
At June 30, 2000 At December 31, 1999
---------------- --------------------
<S> <C> <C>
Demand deposits $259,086 $252,166
NOW accounts 61,710 53,045
Money market deposit accounts 239,904 271,518
Savings accounts 253,137 248,746
Time deposits under $100,000 350,013 338,600
Time deposits over $100,000 184,859 203,704
---------- ----------
Total $1,348,709 $1,367,779
========== ==========
</TABLE>
9
<PAGE>
Securities
----------
Securities consist of the following (in thousands):
<TABLE>
<CAPTION>
At June 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 $19,925 $20,154 $19,925 $33,975 $34,255 $33,975
US Gov't Agencies:
Available for Sale 75,485 76,602 75,485 80,164 81,558 80,164
Obligations of States and
Political Subdivisions:
Available for Sale 142,352 146,244 142,352 136,443 140,786 136,443
Held to Maturity 18,436 18,436 18,556 16,139 16,139 16,293
Mortgage Backed Securities:
Available for Sale 35,604 36,181 35,604 41,539 42,019 41,539
Other Debt Securities:
Available for Sale 159,079 163,896 159,079 159,625 164,311 159,625
Held to maturity 75 75 75 75 75 75
Equity Securities:
Available for Sale 228 256 228 279 257 279
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 $461,710 $472,370 $461,830 $478,765 $489,926 $478,919
==============================================================================
Total Available for Sale $432,673 $443,333 $432,673 $452,025 $463,186 $452,025
Total Held to Maturity 19,311 19,311 19,431 17,014 17,014 17,168
Regulatory Securities 9,726 9,726 9,726 9,726 9,726 9,726
------------------------------------------------------------------------------
Total Securities $461,710 $472,370 $461,830 $478,765 $489,926 $478,919
==============================================================================
</TABLE>
At June 30, 2000 and December 31, 1999, the net unrealized loss on securities
available for sale (net of tax benefit of $4,314,000 and $4,580,000,
respectively) that was included in accumulated other comprehensive loss, a
separate component of stockholders' equity, was ($6,346,000) and ($6,581,000),
respectively. Gross realized gains (losses) were $2,000 and ($3,000),
respectively, for the six months ended June 30, 2000 and $241,000 and ($106,000)
respectively for the twelve months ended December 31, 1999.
10
<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 ended Six months ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 15,828 16,867 16,038 17,070
Total basic shares 15,828 16,867 16,038 17,070
====== ====== ====== ======
Net income $5,035 $4,993 $10,313 $9,725
====== ====== ======= ======
Basic earnings per common share $0.32 $0.30 $0.64 $0.57
===== ===== ===== =====
</TABLE>
Diluted earnings per common share is computed as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 15,828 16,867 16,038 17,070
Effect of dilutive stock options 100 242 108 243
------ ------ ------ ------
Total diluted shares 15,928 17,109 16,146 17,313
====== ====== ====== ======
Net income $5,035 $4,993 $10,313 $9,725
====== ====== ======= ======
Diluted earnings per common share $ 0.32 $ 0.29 $ 0.64 $ 0.56
====== ====== ======= ======
</TABLE>
Stockholders' Equity
--------------------
Issued and outstanding shares (net of treasury shares of 644,359 and 3,600) at
June 30, 2000 and December 31, 1999, were 15,799,535 and 16,425,626,
respectively. The Company purchased approximately 725,881 treasury shares during
the first six months of 2000 and reissued 94,942 shares through its dividend
reinvestment plan and stock option exercises. 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.)
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
-------------------
Total assets of the Company decreased slightly to $1,574 million at June 30,
2000, from $1,596 million at December 31, 1999. Decreases in securities of $17.1
million to $461.7 million at June 30, 2000 and declines in cash and cash
equivalents of $19.4 million to $59.3 million were offset partially by increases
in net loans of $19.0 million to $991.1 million.
In the first six months of 2000 the Bank originated $129.6 million of new loans.
Amortization, prepayments and sales into the secondary market were $110.5
million resulting in a net increase from year end 1999 in gross loans
outstanding of $19.0 million at June 30, 2000. The net increase in the
outstanding balances of commercial mortgages of $6.5 million or 2.5%, commercial
and industrial loans of $15.0 million or 12.6%, and consumer installment loans
of $3.7 million or 2.7% was partially offset by declines in the outstanding
balances of residential mortgage loans (including home equity) of $.4 million or
.1%, real estate construction of $2.9 million or 4.7%, and other loans of $2.8
million or 52.5%. As of June 30, 2000, the Company held approximately $112.8
million in adjustable rate first lien mortgage loans that are scheduled to
reprice during the remainder of 2000. Although interest rates on fixed rate
mortgage loans have risen recently, customers may still choose to refinance to a
long-term fixed rate mortgage in lieu of maintaining an adjustable rate
mortgage. The Company continues its practice of not retaining significant
balances in long-term fixed rate mortgages in its portfolio. Therefore,
residential mortgage balances may continue to decline as prepayments,
refinancing and sales into the secondary market are expected to exceed new
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 $19.1 million in the first six months of
2000 to $1,349 million. Of this amount, total Public (Municipal) Funds decreased
$13.1 million or 8.9% to $133.8 million and total non-public funds decreased by
$6.0 million or .5% to $1,215 million.
12
<PAGE>
The following tables summarize the net changes in public (municipal) fund and
non-public fund deposits from December 31, 1999 to June 30, 2000 (in thousands):
PUBLIC FUNDS
<TABLE>
<CAPTION>
Percent
Balance Balance Net Change over
12/31/99 6/30/00 Change Y/E`99
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Demand accounts $3,434 $6,218 $2,784 81.1%
NOW accounts 11,841 13,467 1,626 13.7
Money market accounts 14,185 16,860 2,675 18.9
Savings accounts 3,541 2,729 (812) (22.9)
Time deposits 113,923 94,550 (19,373) (17.0)
------------------------------------------------------------------
Total public deposits $146,924 $133,824 $(13,100) (8.9)%
==================================================================
</TABLE>
Public funds balances decreased in the first six months of 2000 principally in
short term time deposits which reflected less aggressive bidding for such
deposits relative to many area banks.
NON PUBLIC FUNDS
<TABLE>
<CAPTION>
Percent
Balance Balance Net Change over
12/31/99 6/30/00 Change Y/E`99
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $248,732 $252,871 $4,139 1.7%
NOW accounts 41,204 48,243 7,039 17.1
Money market accounts 257,333 223,044 (34,289) (13.3)
Savings accounts 245,205 250,408 5,203 2.1
Time deposits 428,381 440,322 11,941 2.8
------------------------------------------------------------------
Total non public deposits $1,220,855 $1,214,888 $(5,967) (.5)%
==================================================================
</TABLE>
Non-public deposits declined $6.0 million compared to December 31, 1999. The
increase in demand accounts reflects both historical seasonality and growth in
the Company's commercial business base. NOW, Savings and time deposit categories
increased $24.2 million over year end 1999 totals due both to underlying growth
as well as some customers shifting deposits from Money Market accounts into
several promotional products offered by the Bank. Additionally the decline in
money market balances reflect the highly competitive pricing being offered by
many area financial institutions and competition for savings dollars with other
investment markets, especially the mutual fund markets.
13
<PAGE>
Consolidated stockholders' equity at June 30, 2000 was $139.0 million, down $3.0
million over year end 1999, primarily due to the purchase of approximately
725,881 shares of Treasury stock during the first six months of 2000 ($9.9
million). This change was partially offset by the Company's net retention of
earnings for the first six months of the year of $5.3 million and by $1.0
million of stock issuance proceeds from the Company's stock option and dividend
reinvestment plans and the decrease of $.2 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. The ratio of
stockholders' equity to total assets remained strong at June 30, 2000 standing
at 8.8%, compared to 8.9% at December 31, 1999. Tier I capital to average assets
was 9.0% and 9.3% at June 30, 2000 and December 31, 1999, respectively.
Results of Operations
---------------------
Interest income as reported, for the six months ended June 30, 2000, compared to
the same period in 1999, increased $3.1 million or 5.7% while interest expense
increased by $4.7 million or 22.5%. This resulted in a decrease in net interest
income of $1.7 million or 5.1%. The provision for loan losses decreased by $1.1
million or 70%. Total non-interest income decreased $77,000 or 1.5%. Total
noninterest expenses decreased by $965,000 or 4.5% from the first six months of
1999. Net income after tax increased by $.6 million or 6.1% to $10.3 million.
Diluted earnings per common share increased to $.64 for the six months of 2000
compared to $.56 for 1999, or by 14.3%.
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 Six months ended
------------------------ ------------------------
6/30/00 6/30/99 6/30/00 6/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (in thousands) $5,035 $4,993 $10,313 $9,725
Per common share:*
Basic earnings 0.32 0.30 0.64 0.57
Diluted earnings 0.32 0.29 0.64 0.56
Return on average assets 1.28% 1.31% 1.31% 1.27%
Return on average stockholders' equity 14.27% 13.20% 14.61% 12.73%
</TABLE>
* Adjusted for the 10% stock dividend declared December 1999.
14
<PAGE>
Interest income
---------------
On a tax equivalent basis, gross interest income increased by $3.3 million or
6.0% for the six months ended June 30, 2000 compared to the same period in 1999,
due principally to the increase in average interest earning assets of $48.7
million. Average loans increased by $45.8 million, average securities increased
$29.8 million and average federal funds sold decreased by $26.8 million.
Total interest expense increased by $4.7 million or 22.5% for the six month
period ended June 30, 2000 as compared to the six months ended June 30, 1999 due
both to higher interest paid on deposits and an increase in average borrowed
funds of $68.8 million.
The Federal Reserve has raised short-term interest rates six times since June
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 led to a modest reduction in overall loan
yields despite 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 (19 basis points) to 7.76% for the six months ended June 30,2000 vs.
7.57% as of the same period in 1999 reflecting increases in yields on taxable
securities, fed funds sold and tax-exempt securities. These increases were
partially offset by a small decline in average yield on loans. However, average
interest bearing liability rates paid increased (70 basis points) to 4.39% for
the six months ended June 30, 2000 vs. 3.68% for the six months ended June 2000
due primarily to the upward pressure on interest rates, and the effect of $68.8
million increase in average borrowed funds at an average cost of 6.23%. These
borrowed funds were employed primarily in the increase in investment securities
since June 30, 1999. Accordingly, net interest margin on a tax equivalent basis
decreased to 4.32% for the six months ended June 30, 2000 compared to 4.67% in
1999. Variances due to changes in rates (primarily higher deposit costs)
produced a $1.9 million overall net decrease in net interest income in the six
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($237,000) net volume related increase in net interest
income over the same period. The net effect was that net interest income before
provision for loan losses was $32.2 million for the six months ended June 30,
2000 compared to $33.7 million for the comparable period in 1999, a decrease of
$1.5 million or (4.3%). Excluding the effects of tax equivalent adjustments, net
interest income was down $1.7 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.
15
<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>
Six Months Ended June 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) $1,006,234 $42,301 8.41% $960,483 $40,674 8.47%
Taxable Securities 360,722 11,282 6.26 345,834 9,657 5.59
Tax-exempt Securities (2) 105,005 3,723 7.09 90,107 3,154 7.00
Fed Funds Sold 19,970 577 5.78 46,785 1,140 4.87
---------- ------- ---------- -------
Total Interest Earning Assets 1,491,931 57,883 7.76 1,443,209 54,625 7.57
NonInterest Earning Assets:
Cash & Due from Banks 36,146 49,873
Premises & Equipment 26,607 27,942
Other Assets 37,236 27,406
Allowance for Loan Losses (21,859) (21,408)
---------- ------- ---------- -------
Total Assets $1,570,061 57,883 7.37 $1,527,022 54,625 7.15
========== ======= ==== ========== ======= ====
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing
Savings Deposits $244,114 3,476 2.85% $285,707 3,706 2.59%
NOW Accounts 57,406 370 1.29 58,446 290 .99
Money Market Accounts 262,241 5,257 4.01 321,413 5,566 3.46
Other Time Deposits 531,912 14,233 5.35 468,174 11,234 4.80
Borrowed Funds 75,005 2,338 6.23 6,238 163 5.23
---------- ------- ---------- -------
Total Interest-Bearing 1,170,678 25,674 4.39 1,139,978 20,959 3.68
Noninterest-Bearing Liabilities:
Demand Deposits 246,534 222,990
Other 11,672 3.59 11,218 3.05
---------- ----------
Total Noninterest-Bearing
Liabilities 258,206 234,208
Stockholders' Equity 141,177 152,836
---------- ----------
Total Liabilities and
Stockholders' Equity $1,570,061 25,674 $1,527,022 20,959
========== ------- ========== -------
Net Interest Margin 32,209 4.32 33,666 4.67
Less Tax Equivalent Adjustments (1,303) (1,104)
------- -------
Net Interest Income $30,906 4.14% $32,562 4.51%
======= ===== ======= =====
Excess of interest earning assets
over interest bearing liabilities $ 319,448 $ 303,231
========== ==========
Ratio of Average Interest-Earning
Assets to Average
Interest-Bearing Liabilities 127.25% 126.60%
======= =======
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average Balances include non-accrual loans.
(2) Tax Equivalent Yields on tax-exempt securities based on a Federal tax rate
of 35%.
16
<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>
Six Months Ended June 30,
2000 vs. 1999
-----------------------------------------------------------------
Increase (Decrease) due to
-----------------------------------------------------------------
Volume Rate Net(1)
------ ---- ------
<S> <C> <C> <C>
Interest Income:
Loans $1,937 ($310) $1,627
Taxable investment securities 416 1,209 1,625
Tax-exempt investment(2)
securities 521 48 569
Federal funds sold (653) 90 (563)
-------------- --------------- --------------
Total interest income 2,221 1,037 3,258
Interest expense:
Savings deposits (540) 310 (230)
NOW/accounts (5) 85 80
Money market accounts (1,025) 716 (309)
Other Time Deposits 1,529 1,470 2,999
Borrowed funds 1,844 331 2,175
-------------- --------------- --------------
Total interest expense 1,803 2,912 4,715
-------------- --------------- --------------
Net interest margin(3) 418 ($1,875) (1,457)
Less tax equivalent effect 181 18 199
-------------- --------------- --------------
Net interest income $237 ($1,857) ($1,656)
============== =============== ==============
</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 $16.5 million in available
funds. At the average year to date 2000 overall investment and fed funds
yield of 6.41%, the imputed loss of income due to the Company's stock
repurchase program represented approximately $530,000 of the $1.5 million
decline in net interest income on a tax-equivalent basis.
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,
17
<PAGE>
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 $1,500,000 in 1999 to $450,000 in
2000.
Net charge-offs for the first six months of 2000 were $450,000 compared to
$1,476,000 for the same period in 1999. The ratio of net chargeoffs to average
loans, on an annualized basis, decreased to .09% in the first six months of 2000
vs. .31% for the same period of 1999.
Total non-performing assets were approximately $9.0 million at the end of June
2000, down $3.9 million from $12.9 million at June 1999, while basically
unchanged from the $8.9 million at year end 1999. Period end non-performing
loans of $8.0 million at June 2000 were down $3.1 million from June 1999 but
were up $.5 million over the December 31, 1999 level of $7.5 million. OREO
balances were down $.9 million from June 30, 1999 and down $.6 million from
December 31, 1999 levels.
Nonperforming assets represent 124 loans or OREO properties of which on1y
6 have balances in excess of $300,000 of which one loan has a balance of $1.5
million and is secured by real estate, another is a relationship of $860,000
primarily secured by commercial real estate and another is an OREO property with
a balance of $519,000. Of the total nonperforming loans, 26% are collateralized
by residential property, 61% by commercial property, and 13% 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.
18
<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 six months For the year
ended June 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 161 125 368 406 1,448
Consumer installment & other 665 662 1,461 1,620 1,146
Real estate mortgage 278 990 1,308 3,344 2,164
------------------------- ------------------------------------
Total charge-offs 1,104 1,777 3,137 5,370 4,758
Recoveries:
Commercial & industrial 180 31 322 462 164
Consumer installment & other 415 270 533 481 160
Real estate mortgage 59 - 798 437 757
------------------------- ------------------------------------
Total recoveries 654 301 1,653 1,380 1,081
------------------------- ------------------------------------
Net charge-offs (450) (1,476) (1,484) (3,990) (3,677)
Provision for loan losses 450 1,500 2,000 5,929 4,475
------------------------- ------------------------------------
Balance at end of period $21,786 $21,294 $21,786 $21,270 $19,331
========================= ====================================
Ratio of net charge-offs to average
loans outstanding during the period
(annualized) .09% .31% .15% .40% .35%
Allowance for loan losses as a
percent of period-end loans 2.15% 2.22% 2.19% 2.18% 1.85%
Allowance as a percent of 271% 192% 290% 226% 214%
non-performing loans
Nonperforming loans and OREO
to total loans and OREO .87% 1.34% .89% 1.03% 1.00%
</TABLE>
19
<PAGE>
The table below summarizes the Company's nonperforming assets and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
At June 30, At December 31,
----------- ---------------
2000 1999 1999 1998 1997
---------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate mortgage $7,173 $9,205 $6,289 $8,282 $7,602
Commercial & Industrial 496 1,428 921 558 164
Consumer & other 213 208 106 83 123
---------------------------- -----------------------------------------
Total nonaccrual loans 7,882 10,841 7,316 8,923 7,889
Loans 90 days or more past due and
still accruing:
Real estate mortgage - 146 - 224 129
Commercial & industrial 129 75 129 205 188
Consumer & other - 24 35 68 126
---------------------------- -----------------------------------------
Total 90 days past due accruing 129 245 164 497 443
Restructured - real estate 24 27 25 28 682
---------------------------- -----------------------------------------
Total non-performing and restructured
loans 8,035 11,113 7,505 9,448 9,014
Other real estate owned (2) 828 1,743 1,369 628 1,366
---------------------------- -----------------------------------------
Total non-performing assets $8,863 $12,856 $8,874 $10,076 $10,380
============================ =========================================
Non-performing and re-
structured loans as a
percent of total loans .79% 1.16% .76% .96% .87%
============================ =========================================
Nonperforming assets as a percent of
total assets .56% .82% .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 $828,000 at June 30, 2000 and includes 7
properties acquired through foreclosure: 4 residences and 3 non-farm
nonresidential properties.
20
<PAGE>
In addition to the nonperforming loans and other nonperforming assets noted
above, at June 30, 2000, the Company had approximately $25.9 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>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Impaired loans with allowance established $2,733,000 $12,607 $11,515
and $3,793,000, respectively)
Impaired loans which have been written down 469 431
$865,000 and $219,000, respectively) --- ---
Total $13,076 $11,946
======= =======
Average amount of impaired loans $12,417 $10,407
for the period ======= =======
</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>
June 30, December 31,
2000 1999 1999 1998 1997
---------------------------------------- -----------------------------------------------------------------
Balance at end of % of % of % of % of % of
period applicable to: Amount total Amount total Amount total Amount total Amount total
loans loans loans loans loans
---------------------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & industrial $ 3,616 13.2% $4,802 11.9% $ 4,426 11.9% $ 2,472 11.7% $ 2,131 9.0%
Consumer & other 3,702 14.2 2,797 14.2 3,399 14.4 3,530 14.4 3,699 15.2
Real estate - mortgage 10,659 72.6 12,543 73.9 11,871 73.7 11,679 73.9 12,124 75.8
Unallocated 3,809 - 1,152 - 2,090 - 3,589 - 1,377 -
---------------------------------------- -----------------------------------------------------------------
Total $21,786 100% $21,294 100% $21,786 100% $21,270 100% $19,331 100%
======================================== =================================================================
</TABLE>
21
<PAGE>
Noninterest Income
------------------
Total noninterest income decreased by $77,000 or 1.5% to $5.2 million during the
first six 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 $172,000 and lower income from other sources of $122,000
(principally one time property sales) offset these improvements.
Other Expenses
--------------
In total, noninterest expense decreased by $965,000 or 4.5% to $20.4 million for
the first six months of 2000 compared to the same period of 1999. Salaries and
employee benefits expense decreased $657,000 to $10.6 million at June 30, 2000
vs. $11.2 million in the first six 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
$152,000 due also to further realization of economies related to the 1998
merger. Other real estate owned expenses were $42,000 higher due to more
properties under management and credits received in 1999. Other expenses
decreased by $198,000 reflecting continued emphasis on controlling costs.
Net Income
----------
Pretax income increased by $.3 million. The Company's effective tax rate
decreased to 32.3% from 34.9% as a result of higher levels of investments in tax
preferenced securities and the higher levels of utilization of a state tax
advantaged investment subsidiaries. Thus, net income was $10.3 million for the
six months ended June 30, 2000 vs. $9.7 million for the same period in 1999, an
increase of $.6 million or 6.1%.
Three Months Ended June 30, 2000 vs. June 30, 1999
--------------------------------------------------
Net interest income decreased $1,357,000 or 8.3% for the three months ended June
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.
Provisions for loan losses decreased by $350,000 for the three month period
ended June 30, 2000 vs. June 30, 1999.
Total non-interest income decreased $39,000 to $2.6 million for the three months
ended June 30, 2000 compared to 1999, primarily due to lower levels of gains on
sales of securities ($95,000), gain on sales of loans ($11,000) and other income
($30,000). These decreases more than offset increases in service charges and
fees ($69,000) and trust earnings ($28,000).
Total noninterest expense decreased $.9 million for the three months ended June
30, 2000 compared to 1999 due to decreases in salaries and benefits ($236,000),
occupancy and equipment ($244,000) and other expense of $417,000 (primarily
computer service bureau, consulting, telephone and postage expenses).
Pretax income decreased $175,000 to $7.4 million for the three months ended June
30, 2000 compared to the same period of 1999, while income taxes decreased by
$217,000, due to fuller utilization of tax advantaged subsidiaries and continued
purchases of tax-exempt securities. Comparative
22
<PAGE>
income after taxes therefore increased $42,000 to $5.0 million for the quarter
ended June 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 June 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 June 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
($893.2 million) that would reprice relative to similarly categorized assets
($662.7 million) in that time frame.
23
<PAGE>
This exposure would be mitigated over the longer term as the Company has
$558.7 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.
24
<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>
Total Greater
Maturity Repricing 3 months or 4 months to within One yr. than
Date (1)(2) less one yr. one yr. to 5 yrs. five yrs. Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities (3) $128,709 $45,340 $174,049 $200,747 $97,575 $472,371
Fed Funds 15,582 15,582 15,582
Fixed rate loans 79,508 78,610 158,118 239,712 57,375 455,205
Floating rate loans (3) 158,197 156,891 315,088 233,041 1,639 549,768
-------------- -------------- --------------- -------------- ------------ -------------
Total interest
earning assets (1) 381,996 280,841 662,837 673,500 156,589 1,492,926
-------------- -------------- --------------- -------------- ------------ -------------
Other interest bearing
deposits (4) 286,523 77,625 364,148 116,636 73,967 554,751
Time/Other (5) 256,555 197,502 454,057 79,584 1,231 534,872
Borrowings 75,000 75,000 75,000
-------------- -------------- --------------- -------------- ------------ -------------
Total interest-bearing
liabilities 618,078 275,127 893,205 196,220 75,198 1,164,623
-------------- -------------- --------------- -------------- ------------ -------------
Interest Sensitivity
gap (6) $(236,082) $5,714 $(230,368) $477,280 $81,391 $328,303
=======================================================================================
Gap as a percent of earnings
assets (15.81)% 0.38% (15.43)% 31.97% 5.45% 21.99%
=======================================================================================
</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
June 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 $534.9 million and other interest-bearing
liabilities ($75 million) are classified by contractual maturity or
repricing frequency.
(6) Non-interest bearing deposit liabilities were approximately $259.1
million at June 2000.
25
<PAGE>
Capital Resources and Liquidity
-------------------------------
The following summarizes the minimum capital requirements and capital position
at June 30, 2000:
<TABLE>
<CAPTION>
To be Well Capitalized Under
Capital Position at "Prompt Corrective Action"
June 30, 2000 Provision of FDICIA
------------------- -----------------------------
Bank Only Consolidated
<S> <C> <C> <C>
Total Capital
to Risk-Weighted Assets 12.48% 13.36% 10%
Tier 1 Capital
to Risk-Weighted Assets 11.22% 12.11% 6%
Tier 1 Capital to Average
Assets (Leverage Ratio) 8.35% 9.00% 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 June 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 $59.3 million in
addition to its securities available for sale of $432.7 million at June 30, 2000
are sufficient to meet both the funding needs of its borrowers and the liquidity
requirements of its depositors.
The Company's total capital to assets level is 8.8% at June 30, 2000. As such,
management believes that the Company has ample capital available for future
expansion and diversification and regularly evaluates appropriate business
opportunities to efficiently deploy its capital resources. 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 June 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.
26
<PAGE>
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 (15.4%) and 32% at June 30, 2000, respectively. As
previously discussed, the Company changed the maturity and rate sensitivity
reporting for the savings and NOW categories 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 June 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".
27
<PAGE>
Part II
Item 4. Submission of matters to a vote of security holders
------------------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 11, 2000. The
following matters were approved by the Company's shareholders at the meeting:
(1) Election of six directors for three year term expiring in 2003.
The total shares outstanding on the record date of March 31, 2000 were
16,016,033.
Individual votes cast were as follows:
Votes FOR Votes WITHHELD
--------- --------------
Elizabeth P. Allen 13,436,500 246,582
Thomas C. Aposporos 13,450,089 232,993
Tyler Dann 13,198,980 484,102
Thomas C. DeBenedictus 13,453,020 230,062
Lewis J. Ruge 13,446,095 236,987
Peter Van Kleeck 13,206,211 476,871
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a. Exhibits
10.1 Employment Agreement of Robert Apple dated June 1, 2000
10.2 Employment Agreement of George H. Elferink dated June 22, 2000
10.3 Amendment to Employment Agreement of Paul A. Maisch dated
April 1, 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.
28
<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: August 9, 2000 /s/ Paul A. Maisch
------------------
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
29
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
-------- -----------
10.1 Employment Agreement of Robert Apple dated June 1, 2000
10.2 Employment Agreement of George H. Elferink dated June 22, 2000
10.3 Amendment to Employment Agreement of Paul A. Maisch dated
April 1, 2000
27 Financial Data Schedule (with EDGAR filings included)
30
