SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(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, 1998.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ________.
COMMISSION FILE NUMBER 0-14703
NBT BANCORP INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1268674
(State of Incorporation) (I.R.S. Employer Identification No.)
52 SOUTH BROAD STREET NORWICH, NEW YORK 13815
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (607)-337-6000
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 shorter periods 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
As of July 31, 1998, there were 12,425,758 shares outstanding, including 410,567
shares held in the treasury, of the Registrant's common stock, No Par, Stated
Value $1.00. There were no shares of the Registrant's preferred stock, No Par,
Stated Value $1.00, outstanding at that date.
An index to exhibits follows the signature page of this FORM 10-Q.
<PAGE>
NBT BANCORP INC.
FORM 10-Q -- Quarter Ended June 30, 1998
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1998, December 31, 1997,
and June 30, 1997
Consolidated Statements of Income for the three month and six month
periods ended June 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the six month
periods ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the six month periods
ended June 30, 1998 and 1997
Consolidated Statements of Comprehensive Income for the three month
and six month periods ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements at June 30, 1998
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Information called for by Item 3 is contained on pages 19-20 of the
Management Discussion and Analysis.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on FORM 8-K
SIGNATURES
INDEX TO EXHIBITS
-2-
<PAGE>
<TABLE>
<CAPTION>
NBT BANCORP INC. AND SUBSIDIARY JUNE 30, December 31, June 30,
CONSOLIDATED BALANCE SHEETS 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------
(in thousands) (UNAUDITED) (See Notes) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 42,939 $ 37,446 $ 36,231
Loans available for sale 2,483 3,286 2,993
Securities available for sale, at fair value 409,184 440,632 437,277
Securities held to maturity (fair value-$37,137,
$36,139 and $31,241) 37,137 36,139 31,243
Loans:
Commercial and agricultural 355,945 326,491 309,176
Real estate mortgage 148,660 135,475 125,059
Consumer 274,482 273,516 263,978
- -------------------------------------------------------------------------------------------------------------
Total loans 779,087 735,482 698,213
Less allowance for loan losses 12,239 11,582 11,085
- -------------------------------------------------------------------------------------------------------------
Net loans 766,848 723,900 687,128
Premises and equipment, net 20,525 18,761 17,138
Intangible assets, net 8,080 8,642 9,256
Other assets 11,246 11,779 17,217
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,298,442 $1,280,585 $1,238,483
- -------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 139,321 $ 138,985 $ 130,931
Savings, NOW, and money market 382,546 358,366 365,114
Time 479,034 516,832 445,160
- -------------------------------------------------------------------------------------------------------------
Total deposits 1,000,901 1,014,183 941,205
Short-term borrowings 152,150 134,527 152,893
Other borrowings 10,178 183 20,189
Other liabilities 6,173 8,349 10,501
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,169,402 1,157,242 1,124,788
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par, stated value $1.00; shares
authorized -2,500,000 - - -
Common stock, no par, stated value $1.00; shares
authorized -15,000,000; issued 12,425,758,
12,573,281 and 12,603,450 12,426 9,430 9,002
Capital surplus 97,110 96,494 85,359
Retained earnings 25,448 22,249 29,126
Accumulated other comprehensive income 2,400 2,373 (1,598)
Common stock in treasury at cost, 415,225,
415,871, and 473,076 shares (8,344) (7,203) (8,194)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 129,040 123,343 113,695
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,298,442 $1,280,585 $1,238,483
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
NBT BANCORP INC. AND SUBSIDIARY June 30, June 30,
CONSOLIDATED STATEMENTS OF INCOME 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C>
Interest and fee income:
Loans and loans available for sale $17,563 $15,944 $34,601 $31,142
Securities - taxable 7,376 7,449 15,267 14,134
Securities - tax exempt 281 322 555 673
Other 56 44 109 93
- --------------------------------------------------------------------------------------------------------
Total interest and fee income 25,276 23,759 50,532 46,042
- --------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 9,588 8,752 19,079 17,145
Short-term borrowings 1,445 1,516 3,120 2,501
Other borrowings 135 291 190 572
- --------------------------------------------------------------------------------------------------------
Total interest expense 11,168 10,559 22,389 20,218
- --------------------------------------------------------------------------------------------------------
Net interest income 14,108 13,200 28,143 25,824
Provision for loan losses 1,150 1,000 2,250 1,715
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,958 12,200 25,893 24,109
- --------------------------------------------------------------------------------------------------------
Noninterest income:
Trust income 802 687 1,604 1,373
Service charges on deposit accounts 900 933 1,769 1,837
Securities gains 227 1 445 18
Other income 610 650 1,289 1,063
- --------------------------------------------------------------------------------------------------------
Total noninterest income 2,539 2,271 5,107 4,291
- --------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 4,607 4,247 9,294 8,598
Occupancy 695 654 1,381 1,308
Equipment 580 408 1,060 844
Amortization of intangible assets 271 359 562 737
Other operating 3,386 2,598 6,644 5,338
- --------------------------------------------------------------------------------------------------------
Total noninterest expense 9,539 8,266 18,941 16,825
- --------------------------------------------------------------------------------------------------------
Income before income taxes 5,958 6,205 12,059 11,575
Income taxes 1,248 2,168 2,277 4,093
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 4,710 $ 4,037 $ 9,782 $ 7,482
- --------------------------------------------------------------------------------------------------------
Earnings Per Share:
Basic $ 0.39 $ 0.34 $ 0.81 $ 0.63
Diluted $ 0.39 $ 0.33 $ 0.80 $ 0.62
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
NBT BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Capital Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 8,838 $82,731 $24,208 $(1,529) $(7,984) $106,264
Net income 7,482 7,482
Cash dividends - $0.214 per share (2,564) (2,564)
Issuance of 164,030 shares
to stock plan 164 2,476 2,640
Purchase of 131,900 treasury shares (2,568) (2,568)
Sale of 140,273 treasury shares to
employee benefit plans and other
stock plans 152 2,358 2,510
Unrealized loss on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $48 (69) (69)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $ 9,002 $85,359 $29,126 $(1,598) $(8,194) $113,695
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 9,430 $96,494 $22,249 $ 2,373 $(7,203) $123,343
Net income 9,782 9,782
Cash dividends - $0.298 per share (3,576) (3,576)
Effect of 4 for 3 split in the
form of a stock dividend 2,996 (2,996)
Payment in lieu of fractional shares (11) (11)
Purchase of 91,100 treasury shares (2,831) (2,831)
Sale of 91,746 treasury shares to
employee benefit plans and other
stock plans 616 1,690 2,306
Unrealized gain on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $10 27 27
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $12,426 $97,110 $25,448 $ 2,400 $(8,344) $129,040
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
NBT BANCORP INC. AND SUBSIDIARY Six months ended June 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1998 1997
- -------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,782 $ 7,482
Adjustments to reconcile net income to the cash provided by
operating activities:
Provision for loan losses 2,250 1,715
Depreciation and amortization of premises and equipment 986 709
Amortization of premiums and accretion of discounts on securities (878) 354
Amortization of intangible assets 562 737
Proceeds from sales of loans originated for sale 2,408 2,881
Loans originated for sale (1,605) (1,738)
Realized gains on sales of securities (445) (18)
(Increase) decrease in interest receivable 513 (274)
Increase (decrease) in interest payable (70) 755
Sale of branch, net - (219)
Other, net (1,651) 2,323
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,852 14,707
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 35,893 19,232
Proceeds from sales 93,120 45,969
Purchases (96,650) (133,746)
Securities held to maturity:
Proceeds from maturities 10,502 18,741
Purchases (11,500) (7,745)
Net increase in loans (45,198) (44,723)
Purchase of premises and equipment, net (2,750) (1,540)
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities (16,583) (103,812)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (13,282) 24,886
Net increase in short-term borrowings 17,623 64,649
Proceeds from issuance of other borrowings 10,000 -
Repayments of other borrowings (5) (6)
Common stock issued, including treasury shares reissued 2,306 5,150
Purchase of treasury stock (2,831) (2,569)
Cash dividends and payment for fractional shares (3,587) (2,564)
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,224 89,546
- -------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 5,493 441
Cash and cash equivalents at beginning of year 37,446 35,790
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,939 $ 36,231
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the
period for:
Interest $ 22,459 $ 19,463
Income taxes 3,894 1,146
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
NBT BANCORP INC. AND SUBSIDIARY June 30, June 30,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
<S> <C> <C> <C> <C>
Net Income $4,710 $4,037 $9,782 $7,482
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period [pre-tax amounts of
$1,256, $6,385, $482 and ($99)] 748 3,777 290 (58)
Less: Reclassification adjustment for gains included
in net income [pre-tax amounts of
($227), ($1), ($445) and ($18)] (134) (1) (263) (11)
- -------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 614 3,776 27 (69)
- -------------------------------------------------------------------------------------------------------------
Comprehensive income $5,324 $7,813 $9,809 $7,413
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-7-
<PAGE>
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of NBT Bancorp Inc. (the Registrant) and its wholly-owned subsidiary,
NBT Bank, N.A. (Bank) collectively referred to herein as the Company. All
intercompany transactions have been eliminated in consolidation. Certain amounts
previously reported in the financial statements have been reclassified to
conform with the current presentation.
The determination of the allowance for loan losses is a material estimate
that is particularly susceptible to significant change in the near term. In
connection with the determination of the allowance for loan losses management
obtains independent appraisals for significant properties.
Net income per common share is computed based on the weighted average
number of common shares and common share equivalents outstanding during each
period after giving retroactive effect to stock dividends and splits. Cash
dividends per common share are computed based on declared rates adjusted
retroactively for stock dividends and splits.
The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to FORM 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month and six month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Registrant's annual report on FORM 10-K
for the year ended December 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
Effective January 1, 1998 the Company adopted the remaining provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which relate to the accounting for securities lending, repurchase agreements,
and other secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, did not have a material impact on the Company.
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for the
reporting and display of comprehensive income and its components. Comprehensive
income includes the reported net income adjusted for items that are currently
accounted for as direct entries to equity, such as the mark to market adjustment
on securities available for sale, foreign currency items and minimum pension
liability adjustments. At the Company, comprehensive income represents the net
income plus other comprehensive income, which consists of the net change in
unrealized gains or losses on securities available for sale for the period.
Accumulated other comprehensive income represents the net unrealized gains or
losses on securities available for sale as of the balance sheet dates.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 requires public business
enterprises to report financial and other information about key
revenue-producing segments of the entity for which such information is available
and is utilized by the chief operating decision makers. Specific information to
be reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
SFAS No. 131 was adopted January 1, 1998 and management will determine its
impact prior to the initial application of the statement's provisions on
December 31, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits". This statement revises
employers' disclosures about pension and other post retirement benefit plans. It
does not change the measurement or recognition of these plans. The Company
adopted SFAS No. 132 on January 1, 1998 and has determined its impact to be
revised year-end reporting requirements for pension and post retirement
benefits.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes comprehensive
accounting and reporting requirements for derivative instruments and hedging
-8-
<PAGE>
activities. SFAS No. 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. The accounting for gains
or losses resulting from changes in the values of those derivatives would be
dependent on the use of the derivative and the type of risk being hedged. The
statement is effective for all quarters of fiscal years beginning after June 15,
1999. At the present time, the Company has not fully analyzed the effect or
timing of the adoption of SFAS No. 133 on the Company's consolidated financial
statements.
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, various commitments and contingent liabilities
arise, including commitments to extend credit and standby letters of credit.
Also, off-balance sheet financial instruments such as interest rate swaps,
forward contracts, futures, options on financial futures, and interest rate
caps, collars and floors bear risk based on financial market conditions. The
following table summarizes the Registrant's exposure to these off-balance sheet
commitments and contingent liabilities as of June 30, 1998:
Contractual or
Notional Value
at June 30, 1998
Financial instruments with off-balance sheet credit risk:
Commitments to extend credit $136,642,000
Standby letters of credit 1,865,000
Financial instruments with off-balance sheet market risk None
-9-
<PAGE>
NBT BANCORP INC. AND SUBSIDIARY
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion and analysis is to provide the reader with a
concise description of the financial condition and results of operations of NBT
Bancorp Inc. (Bancorp) and its wholly owned subsidiary, NBT Bank, N.A. (Bank)
collectively referred to herein as the Company. This discussion will focus on
Results of Operations, Financial Position, Capital Resources and Asset/Liability
Management. Reference should be made to the Company's consolidated financial
statements and footnotes thereto included in this FORM 10-Q as well as to the
Company's 1997 FORM 10-K for an understanding of the following discussion and
analysis. The Company has a long history of distributing stock dividends; in
December 1997, a 5% stock dividend was distributed for the thirty-eighth
consecutive year. In addition, on June 15, 1998 the Company distributed a
four-for-three stock split effected in the form of a dividend. Throughout this
discussion and analysis, amounts per common share have been adjusted
retroactively for stock dividends and splits for purposes of comparability.
A committee continues to direct the Company's Year 2000 activities under
the framework of the FFIEC's Five Step Program. Testing of critical applications
began in August of 1998. Testing of core systems is expected to be complete by
year-end 1998, with testing of minor systems to continue into 1999. The Company
continues to work closely with Fiserv, its data services and items processing
provider, regarding Year 2000 compliance. The Company has recently begun
evaluating Year 2000 readiness of its major borrowers and fund providers to
assess their readiness and identify potential problems. The results of the
scheduled testing of software applications and evaluation of customer readiness
will determine the potential effect on the Company's financial position and
results of operations.
OVERVIEW
Net income of $4.7 million ($0.39 per diluted share) was realized in the second
quarter of 1998, representing a 16.7% increase from second quarter 1997 net
income of $4.0 million ($0.33 per diluted share). One of the major contributing
factors for this increase was increased net interest income. The increase in net
interest income was a result of an increase in average earning assets, as the
loan portfolio continues to expand. Also contributing to the increase in net
income for the second quarter of 1998 was an approximately $1 million tax
benefit arising from a corporate realignment within the Company.
Net income of $9.8 million ($0.80 per diluted share) was realized for the
six month period ended June 30, 1998, a 30.7% increase from the first six months
in 1997 net income of $7.5 million ($0.62 per diluted share). The increased
profitability for the six months ended June 30, 1998 was driven by factors
similar to those of second quarter 1998.
Table 1 depicts several measurements of performance on an annualized basis.
Returns on average assets and equity measure how effectively an entity utilizes
its total resources and capital, respectively. Both the return on average assets
and the return on average equity ratios increased for the three and six month
periods ended June 30, 1998 compared to the same periods a year previous.
Net interest margin, net federal taxable equivalent (FTE) interest income
divided by average interest-earning assets, is a measure of an entity's ability
to utilize its earning assets in relation to the interest cost of funding.
Taxable equivalency adjusts income by increasing tax exempt income to a level
that is comparable to taxable income before taxes are applied.
-10-
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
PERFORMANCE MEASUREMENTS
- ------------------------------------------------------------------------------------------------------
First SECOND SIX Third Fourth Twelve
Quarter QUARTER MONTHS Quarter Quarter Months
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Return on average assets 1.60% 1.47% 1.54%
Return on average common equity 16.49% 14.92% 15.70%
Net interest margin 4.75% 4.68% 4.72%
- ------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997
Return on average assets 1.19% 1.33% 1.26% 1.17% 1.11% 1.20%
Return on average common equity 12.82% 14.78% 13.81% 12.74% 11.71% 12.97%
Net interest margin 4.71% 4.65% 4.68% 4.64% 4.68% 4.67%
- ------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on interest bearing
liabilities, primarily deposits and borrowings. Net interest income is affected
by the interest rate spread, the difference between the yield on earning assets
and cost of interest bearing liabilities, as well as the volumes of such assets
and liabilities. Table 2 represents an analysis of net interest income on a
federal taxable equivalent basis.
Net federal taxable equivalent (FTE) interest income increased $0.9 million
for the second quarter of 1998 compared to the same period of 1997. This
increase was primarily a result of the $65.9 million increase in average earning
assets, less the $41.2 million increase in average interest bearing liabilities.
Total FTE interest income increased $1.5 million over second quarter 1997.
This increase is also a result of the increase in average earning assets. During
the same time period, total interest expense increased $0.6 million. The
increase in average interest bearing liabilities was the primary reason for the
increase in overall interest expense.
For the first six months of 1998, net FTE interest income increased $2.3
million over the comparable period of 1997. This increase can be attributed to
an $86.9 million increase in average earning assets. During the same period, the
yield on earning assets increased 14 basis points (0.14%), primarily driven by
the 27 basis point increase in the yield earned on the securities available for
sale portfolio. The cost of interest bearing liabilities increased 18 basis
points for the six months ended June 30, 1998 compared to the same period of
1997. This increase can be attributed to a rise in the cost of certificate of
deposits and short-term borrowings between the reporting periods.
Another important performance measurement of net interest income is the net
interest margin. The net interest margin increased to 4.72% for first six months
of 1998, up from 4.68% for the comparable period in 1997. The increase in net
interest margin is a function of the increased funding of earning assets from
noninterest bearing sources.
-11-
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
COMPARATIVE ANALYSIS OF FEDERAL TAXABLE EQUIVALENT NET INTEREST INCOME
- ---------------------------------------------------------------------------------------------------
Three months ended June 30,
ANNUALIZED
YIELD/RATE AMOUNTS VARIANCE
- ----------------------------------------------------------------------------------------------------
1998 1997 (dollars in thousands) 1998 1997 TOTAL VOLUME RATE
- ---- ---- ---- ---- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
5.18% 4.91% Interest bearing deposits $ 2 $ 1 $ 1 $ - $ 1
3.78% -% Federal funds sold 5 - 5 5 -
5.36% 5.31% Other short-term investments 49 43 6 7 (1)
6.87% 6.78% Securities available for sale 7,146 7,249 (103) (203) 100
8.71% 9.25% Loans available for sale 72 92 (20) (14) (6)
Securities held to maturity:
7.85% 7.00% Taxable 253 222 31 3 28
7.03% 6.58% Tax exempt 409 474 (65) (95) 30
9.20% 9.36% LOANS 17,543 15,909 1,634 1,903 (269)
-------------------------------------------------------------------------------------
8.34% 8.30% Total interest income 25,479 23,990 1,489 1,606 (117)
2.90% 2.96% Money Market Deposit Accounts 607 695 (88) (74) (14)
1.66% 1.60% NOW accounts 530 469 61 42 19
2.82% 2.82% Savings accounts 1,084 1,093 (9) (8) (1)
5.41% 5.28% Certificates of deposit 7,367 6,495 872 706 166
5.42% 5.66% Short-term borrowings 1,445 1,516 (71) (6) (65)
5.31% 5.77% OTHER BORROWINGS 135 291 (156) (134) (22)
-------------------------------------------------------------------------------------
4.35% 4.28% TOTAL INTEREST EXPENSE 11,168 10,559 609 526 83
------------------------------------------------------------------------------------
Net interest income $14,311 $13,431 $ 880 $1,080 $(200)
=====================================================================================
3.99% 4.02% Interest rate spread
===== ===== ====================
4.68% 4.65% Net interest margin
===== ===== ===================
FTE adjustment $ 203 $ 231
============== ======= =======
<PAGE>
<CAPTION>
Six months ended June 30,
ANNUALIZED
YIELD/RATE AMOUNTS VARIANCE
- ----------------------------------------------------------------------------------------------------
1998 1997 (dollars in thousands) 1998 1997 TOTAL VOLUME RATE
- ---- ---- ---- ---- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
5.14% 4.45% Interest bearing deposits $ 3 $ 3 $ - $ (1) $ 1
3.96% 5.27% Federal funds sold 6 6 - 2 (2)
5.40% 5.23% Other short-term investments 100 84 16 13 3
7.01% 6.74% Securities available for sale 14,804 13,749 1,055 496 559
8.24% 8.44% Loans available for sale 144 174 (30) (26) (4)
Securities held to maturity:
7.70% 6.86% Taxable 507 428 79 24 55
7.11% 6.61% Tax exempt 809 992 (183) (254) 71
9.28% 9.32% LOANS 34,567 31,080 3,487 3,635 (148)
-------------------------------------------------------------------------------------
8.41% 8.27% Total interest income 50,940 46,516 4,424 3,889 535
2.90% 2.93% Money Market Deposit Accounts 1,245 1,373 (128) (118) (10)
1.67% 1.62% NOW accounts 1,034 941 93 68 25
2.83% 2.84% Savings accounts 2,153 2,179 (26) (24) (2)
5.45% 5.26% Certificates of deposit 14,647 12,652 1,995 1,509 486
5.55% 5.37% Short-term borrowings 3,120 2,501 619 530 89
5.32% 5.71% OTHER BORROWINGS 190 572 (382) (345) (37)
-------------------------------------------------------------------------------------
4.40% 4.22% TOTAL INTEREST EXPENSE 22,389 20,218 2,171 1,620 551
-------------------------------------------------------------------------------------
Net interest income $28,551 $26,298 $2,253 $2,269 $ (16)
=====================================================================================
4.01% 4.05% Interest rate spread
===== ===== ====================
4.72% 4.68% Net interest margin
===== ===== ===================
FTE adjustment $ 408 $ 474
============== ======= =======
</TABLE>
-12-
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance established to provide
for the estimated possible losses related to the collection of the Bank's loan
portfolio. The allowance is maintained at a level considered adequate to provide
for loan loss exposure based on management's estimate of potential future losses
considering an evaluation of portfolio risk, prevailing and anticipated economic
factors, and past loss experience. Management determines the provision and
allowance for loan losses based on a number of factors including a comprehensive
loan review program conducted throughout the year. The loan portfolio is
continually evaluated in order to identify potential problem loans, credit
concentration, and other risk factors such as current and projected economic
conditions. The allowance for loan losses to outstanding loans at June 30, 1998
is 1.57%, compared to 1.59% for the same period in 1997. Management considers
the allowance for loan losses to be adequate based on evaluation and analysis of
the loan portfolio.
Table 3 reflects changes to the allowance for loan losses for the periods
presented. The allowance is increased by provisions for losses charged to
operations and is reduced by net charge-offs. Charge-offs are made when the
collectability of loan principal within a reasonable time is unlikely. Any
recoveries of previously charged-off loans are credited directly to the
allowance for loan losses. Net charge-offs for the quarter ended June 30, 1998
increased 51.2% from the prior years second quarter. Net charge-offs for the six
months ended June 30, 1998 increased 44.4% over the comparable period of 1997.
Annualized net charge-offs to average loans increased to 0.47% for the second
quarter of 1998, up from 0.35% for the comparable period of 1997. The rise in
net charge-offs during 1998 can be attributed to the commercial portfolio,
primarily the result of three customers.
<PAGE>
<TABLE>
<CAPTION>
TABLE 3
ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $11,984 $10,677 $11,582 $10,473
Recoveries 222 205 410 395
Charge-offs (1,117) (797) (2,003) (1,498)
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs (895) (592) (1,593) (1,103)
Provision for loan losses 1,150 1,000 2,250 1,715
- -------------------------------------------------------------------------------------------------------------------
Balance, end of period $12,239 $11,085 $12,239 $11,085
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMPOSITION OF NET CHARGE-OFFS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $ (532) 59% $ (110) 19% $ (848) 53% $ (362) 33%
Real estate mortgage (34) 4% (14) 2% (55) 4% (7) 1%
Consumer (329) 37% (468) 79% (690) 43% (734) 66%
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs $ (895) 100% $ (592) 100% $(1,593) 100% $(1,103) 100%
- -------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs
to average loans 0.47% 0.35% 0.43% 0.33%
- -------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans for the year ended
December 31, 1997 0.34%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
Table 4 below presents quarterly and period to date noninterest income.
Noninterest income for the second quarter of 1998, excluding security gains and
nonrecurring income, increased $0.3 million or 12.7% when compared to second
quarter of 1997. Trust income was a major contributor to this increase. Market
value of trust assets were $823 million at June 30, 1998, up $132 million over
the same period in 1997. The continued growth of trust assets has generated
increased income for the Company. Also contributing to the increase in
noninterest income was a rise in ATM transaction income. For the six month
period ended June 30, 1998, excluding security gains and nonrecurring income,
noninterest income increased $0.6 million or 15.0% compared to the same period
during 1997.
Security gains increased $0.2 million for the second quarter 1998 as
compared to second quarter 1997. This increase can be attributed to the change
in market conditions between the two periods. Other income for the second
-13-
<PAGE>
quarter 1997 includes a one-time gain of $0.2 million for the sale of the Hamden
branch to The National Bank of Delaware County.
<TABLE>
<CAPTION>
TABLE 4
NONINTEREST INCOME
- ----------------------------------------------------------------------------------------------------------
First SECOND SIX Third Fourth Twelve
(dollars in thousands) Quarter QUARTER MONTHS Quarter Quarter Months
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Trust income $ 802 $ 802 $1,604
Service charges on deposit accounts 869 900 1,769
Securities gains 218 227 445
Other income 679 610 1,289
- ----------------------------------------------------------------------------------------------------------
Total noninterest income $2,568 $2,539 $5,107
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997
Trust income $ 686 $ 687 $1,373 $ 687 $ 615 $2,675
Service charges on deposit accounts 904 933 1,837 926 932 3,695
Securities gains 17 1 18 (90) (265) (337)
Other income 413 650 1,063 457 513 2,033
- ----------------------------------------------------------------------------------------------------------
Total noninterest income $2,020 $2,271 $4,291 $1,980 $1,795 $8,066
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE AND OPERATING EFFICIENCY
Table 5 presents components of noninterest expense as well as selected operating
efficiency ratios. Noninterest expense for the quarter ended June 30, 1998
experienced a $1.3 million increase compared to the same time period of 1997.
Noninterest expense for the six month period ended June 30, 1998 experienced a
$2.1 million increase compared to the same time period of 1997.
Employee benefits for the quarter ended June 30, 1998 experienced a $0.3
million increase compared to the same period in 1997. The increase can be
attributed to a rise in the accrual for executive incentive compensation based
on current year's performance.
Legal, audit, and outside services expense increased $0.3 million for the
quarter ended June 30, 1998 compared to the same period in 1997. The increase
can be attributed to the outsourcing of the Company's item processing function
during 1997, as well as increased audit and outside service fees associated with
the corporate realignment.
Loan collection and other loan related expenses increased by $0.3 million
for the quarter ended June 30, 1998 compared to the same period in 1997. The
increase can be attributed to a rise in loan initiation expense, primarily due
to the increased loan activity.
The increase in noninterest expense for the six months ended June 30, 1998
can be attributed to factors similar to those for the second quarter of 1998.
Two important operating efficiency measures that the Company closely
monitors are the efficiency and expense ratios. The efficiency ratio is computed
as total noninterest expense (excluding nonrecurring charges) divided by net
interest income plus noninterest income (excluding net security gains and losses
and nonrecurring income). The efficiency ratio increased to 57.4% in the second
quarter of 1998 from 53.4% for the same period of 1997. This increase was a
result of the increase in noninterest expense. The expense ratio is computed as
total noninterest expense (excluding nonrecurring charges) less noninterest
income (excluding net security gains and losses and nonrecurring income) divided
by average assets. The expense ratio increased to 2.3% for the second quarter
1998 from 2.1% for the same period of 1997. This increase can also be attributed
to the rise in noninterest expense between the reporting periods, partially
offset by the increase in noninterest income.
-14-
<PAGE>
<TABLE>
<CAPTION>
TABLE 5
NONINTEREST EXPENSE AND PRODUCTIVITY MEASUREMENTS
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands) First SECOND SIX Third Fourth Twelve
1998 Quarter QUARTER MONTHS Quarter Quarter Months
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and wages $3,170 $3,250 $ 6,420
Employee benefits 1,517 1,357 2,874
Net occupancy expense 686 695 1,381
Equipment expense 480 580 1,060
FDIC assessments 41 20 61
Legal, audit, and outside services 1,305 1,231 2,536
Loan collection and other loan
related expenses 480 628 1,108
Amortization of intangible assets 291 271 562
Other operating expense 1,432 1,507 2,939
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense $9,402 $9,539 $18,941
- ----------------------------------------------------------------------------------------------------------
Efficiency ratio 56.67% 57.39% 57.03%
Expense ratio 2.23% 2.25% 2.24%
Average full-time equivalent
employees 488 488 488
Average assets per average full-time
equivalent employee (millions) $ 2.6 $ 2.6 $ 2.6
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997
Salaries and wages $3,042 $3,150 $ 6,192 $3,196 $3,248 $12,636
Employee benefits 1,309 1,097 2,406 1,360 1,503 5,269
Occupancy expense 654 654 1,308 584 706 2,598
Equipment expense 436 408 844 435 421 1,700
FDIC assessments 28 29 57 30 29 116
Legal, audit, and outside services 930 891 1,821 1,013 1,217 4,051
Loan collection and other loan
related expenses 423 375 798 552 474 1,824
Amortization of intangible assets 378 359 737 314 300 1,351
Other operating expense 1,359 1,303 2,662 1,420 1,543 5,625
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense $8,559 $8,266 $16,825 $8,904 $9,441 $35,170
- ----------------------------------------------------------------------------------------------------------
Efficiency ratio 57.56% 53.38% 55.43% 55.56% 57.86% 56.09%
Expense ratio 2.27% 2.05% 2.16% 2.16% 2.30% 2.20%
Average full-time equivalent
employees 498 496 497 495 488 494
Average assets per average full-time
equivalent employee (millions) $ 2.3 $ 2.5 $ 2.4 $ 2.5 $ 2.6 $ 2.5
- ----------------------------------------------------------------------------------------------------------
</TABLE>
INCOME TAXES
Income tax expense for the second quarter of 1998 was $1.2 million, compared
with $2.2 million for the second quarter of 1997. For the first six months of
1998, income tax expense amounted to $2.3 million, compared with $4.1 million in
the first half of 1997. The reduction in income taxes during 1998 can be
attributed to the approximate $2 million tax benefit resulting from a corporate
realignment within the Company.
The following table highlights the changes in the balance sheet. Since
period end balances can be distorted by one day fluctuations, the discussion and
analysis concentrates on average balances when appropriate to give a better
indication of balance sheet trends.
-15-
<PAGE>
<TABLE>
<CAPTION>
TABLE 6
AVERAGE BALANCES
- -------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
- --------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 36,394 $ 33,123 $ 36,798 $ 34,088
Securities available for
sale, at fair value 420,538 422,550 429,594 406,366
Securities held to maturity 36,254 41,618 36,209 42,843
Loans available for sale 3,316 3,972 3,528 4,158
Loans 764,547 681,777 751,352 672,350
Deposits 1,039,724 970,344 1,031,956 961,198
Short-term borrowings 106,998 107,449 113,337 93,975
Other borrowings 10,179 20,191 7,197 20,192
Stockholders' equity 126,605 109,546 125,658 109,264
Assets 1,288,574 1,217,078 1,285,067 1,193,585
Earning assets 1,225,520 1,159,612 1,220,912 1,134,045
Interest bearing liabilities $1,030,140 $ 988,987 $1,026,985 $ 965,929
- --------------------------------------------------------------------------------------------
</TABLE>
SECURITIES
Average total securities decreased $7.4 million for the second quarter of 1998
over the same period of 1997. During the second quarter of 1998, the securities
portfolio represented 37.0% of average earning assets. Average total securities
for the six month period ended June 30, 1998 increased $16.6 million compared to
the same period of 1997. Available for sale securities are primarily U.S.
Governmental agencies guaranteed securities. Held to maturity securities are
obligations of the State of New York political subdivisions and do not include
any direct obligations of the State of New York. At June 30, 1998, the
composition of the securities portfolio was 92% available for sale and 8% held
to maturity.
LOANS
Average loan volume for the three months ended June 30, 1998 increased $82.8
million, or 12.1% over second quarter 1997. This growth has been present in all
loan categories, with increases in the commercial, consumer and mortgage
portfolios of $45.3 million, $16.2 million and $21.3 million, respectively.
The Company has continued to experience an increase in the demand for
commercial loans, with growth of $29.5 million since year-end 1997, primarily in
the business and real estate categories. The increase in consumer loans can be
attributed to a rise in homequity loans, primarily revolving lines of credit
secured by the borrowers primary residence. The company does not engage in
highly leveraged transactions or foreign lending activities.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets consist of nonaccrual loans and other real estate owned
(OREO). Loans are generally placed on nonaccrual when principal or interest
payments become ninety days past due, unless the loan is well secured and in the
process of collection. Loans may also be placed on nonaccrual when circumstances
indicate that the borrower may be unable to meet the contractual principal or
interest payments. OREO represents property acquired through foreclosure and is
valued at the lower of the carrying amount or fair market value, less any
estimated disposal costs.
Total nonperforming assets at June 30, 1998 increased $1.5 million compared
to June 30, 1997. An increase of $1.8 million in impaired commercial and
agricultural loans was partially offset by a decrease in other real estate owned
of $0.3 million. A significant portion of the increase in impaired commercial
loans can be attributed to two customers. The changes in nonperforming assets
are presented in Table 7 below.
At June 30, 1998, the recorded investment in impaired loans was $4.2
million. Included in this amount is $1.5 million of impaired loans for which the
specifically allocated allowance for loan loss is $0.3 million. In addition,
included in impaired loans is $2.7 million of impaired loans that, as a result
of the adequacy of collateral values and cash flow analysis do not have a
specific reserve. At December 31, 1997, the recorded investment in impaired
loans was $4.3 million, of which $1.9 million had a specific allowance
allocation of $0.6 million and $2.4 million for which there was no specific
reserve. At June 30, 1997, the recorded investment in impaired loans was $2.8
million, of which $0.7 million had a specific allowance allocation of $0.2
-16-
<PAGE>
million and $2.1 million of which there was no specific reserve. The Company
classifies all nonaccrual loans as impaired loans, except smaller-balance
homogeneous loans that are collectively evaluated for impairment.
<TABLE>
<CAPTION>
TABLE 7
NONPERFORMING ASSETS AND RISK ELEMENTS
- ------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
(dollars in thousands) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Impaired commercial and agricultural loans $4,189 77% $3,856 73% $2,379 66%
Other nonaccrual loans:
Real estate mortgage 457 8% 692 13% 513 14%
Consumer 824 15% 708 14% 727 20%
- ------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 5,470 100% 5,256 100% 3,619 100%
- ------------------------------------------------------------------------------------------------------------
Other real estate owned 540 530 887
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets 6,010 5,786 4,506
- ------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural 393 40% 176 24% 172 24%
Real estate mortgage 265 27% 244 33% 343 49%
Consumer 325 33% 325 43% 191 27%
- ------------------------------------------------------------------------------------------------------------
Total 983 100% 745 100% 706 100%
- ------------------------------------------------------------------------------------------------------------
Restructured loans, in compliance with modified terms:
Commercial and agricultural - - -
- ------------------------------------------------------------------------------------------------------------
Total assets containing risk elements $6,993 $6,531 $5,212
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets to loans 0.77% 0.79% 0.65%
Total assets containing risk elements to loans 0.90% 0.89% 0.75%
Total nonperforming assets to assets 0.46% 0.45% 0.36%
Total assets containing risk elements to assets 0.54% 0.51% 0.42%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 8
CHANGES IN NONACCRUAL AND IMPAIRED LOANS
- ----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
- ----------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $5,823 $3,258 $5,256 $3,320
Loans placed on nonaccrual 1,722 1,563 4,110 2,688
Charge-offs (869) (494) (1,480) (882)
Payments (925) (306) (1,825) (1,045)
Transfers to OREO (276) (247) (580) (307)
Loans returned to accrual (5) (155) (11) (155)
- ----------------------------------------------------------------------------
Balance at end of period $5,470 $3,619 $5,470 $3,619
- ----------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
CHANGES IN OREO
Balance at beginning of period $ 564 $ 732 $ 530 $1,242
Additions 277 286 581 352
Sales (300) (117) (565) (604)
Write-downs (1) (14) (6) (103)
- ----------------------------------------------------------------------------
Balance at end of period $ 540 $ 887 $ 540 $ 887
- ----------------------------------------------------------------------------
</TABLE>
DEPOSITS
Customer deposits represent the greatest source of funding assets. Average total
deposits for the quarter ended June 30, 1998, increased $69.4 million, or 7.2%
from the same period in 1997. The majority of this increase was time deposits,
-17-
<PAGE>
which increased $52.6 million between the reporting periods. This increase can
be attributed to municipal time deposits. The Company also experienced a $17.8
million increase in average demand deposits, while average savings deposits
experienced a minimal decline between quarters.
BORROWED FUNDS
The Company's borrowed funds consist of short-term borrowings and other
borrowings. Short-term borrowings include federal funds purchased, securities
sold under agreement to repurchase, and other short-term borrowings which
consist primarily of Federal Home Loan Bank (FHLB) advances with an original
maturity of one day up to one year. Other borrowings consist of fixed rate FHLB
advances with an original maturity greater than one year. Average borrowings for
the quarter ended June 30, 1998 decreased $10.5 million, or 8.2% as compared to
the same period of 1997.
CAPITAL AND DIVIDENDS
Stockholders' equity of $129 million represents 9.9% of total assets at June 30,
1998, compared with $123 million, or 9.6% at December 31, 1997 and $114 million,
or 9.2% a year previous. The equity increase is primarily due to earnings
retention.
In December of 1997, the Company distributed a 5% stock dividend for the
thirty-eighth consecutive year. On June 15, 1998 the Company distributed a
four-for-three stock split effected in the form of a dividend. In July of 1998,
the Company declared a regular quarterly cash dividend of $0.17 per share,
equivalent to an annual dividend of $0.68 per share. The Company does not have a
target dividend payout ratio, rather the Board of Directors considers the
Company's earnings position and earnings potential when making dividend
decisions.
Capital is an important factor in ensuring the safety of depositors'
accounts. For both 1997 and 1996, the Company earned the highest possible
national safety and soundness rating from two national bank rating services,
Bauer Financial Services and Veribanc, Inc. Their ratings are based on capital
levels, loan portfolio quality and security portfolio strength.
As the capital ratios in Table 9 indicate, the Company remains well
capitalized. Capital measurements are significantly in excess of regulatory
minimum guidelines and meet the requirements to be considered well capitalized
for all periods presented. Tier 1 and Risk-based Capital ratios have regulatory
minimum guidelines of 4% and 8% respectively, with requirements to be considered
well capitalized of 6% and 10%, respectively.
<TABLE>
<CAPTION>
TABLE 9
CAPITAL MEASUREMENTS
- ------------------------------------------------------------------------------------------------
First SECOND Third Fourth
1998 Quarter QUARTER Quarter Quarter
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 leverage ratio 9.19% 9.27%
Tier 1 capital ratio 15.30% 15.13%
Total risk-based capital ratio 16.56% 16.38%
Cash dividends as a percentage of net income 30.33% 36.55%
Per common share:
Book value $10.52 $10.74
Tangible book value $ 9.83 $10.07
- ------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
1997
Tier 1 leverage ratio 8.91% 8.75% 8.76% 8.91%
Tier 1 capital ratio 14.53% 14.46% 14.47% 14.88%
Total risk-based capital ratio 15.78% 15.71% 15.73% 16.13%
Cash dividends as a percentage of net income 36.46% 34.27% 35.90% 37.72%
Per common share:
Book value $ 9.00 $ 9.53 $ 9.93 $10.26
Tangible book value $ 8.19 $ 8.75 $ 9.18 $ 9.54
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Table 10 presents the high, low and closing sales price for the
common stock as reported on the NASDAQ National Market System, and cash
dividends declared per share of common stock. At June 30, 1998, total market
capitalization of the Company's common stock was approximately $305 million
compared to $243 million at December 31, 1997 and $229 million at June 30, 1997.
The change in market capitalization is due to an increase in the stock's market
-18-
<PAGE>
price. The Company's price to book value ratio was 2.36 at June 30, 1998 and
2.02 a year ago. The per share market price was 16 times annualized earnings at
June 30, 1998 and 15 times annualized earnings at June 30, 1997.
<TABLE>
<CAPTION>
TABLE 10
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
March 31 $14.29 $12.59 $13.93 $0.107
June 30 19.20 13.93 19.20 0.107
September 30 19.11 15.89 18.84 0.122
December 31 20.77 17.15 20.25 0.128
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
MARCH 31 $21.00 $17.63 $21.00 $0.128
JUNE 30 25.88 20.25 25.38 0.170
- --------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objectives of asset and liability management are to provide for the
safety of depositor and investor funds, assure adequate liquidity, and maintain
an appropriate balance between interest sensitive earning assets and interest
bearing liabilities. Liquidity management involves the ability to meet the cash
flow requirements of customers who may be depositors wanting to withdraw funds
or borrowers needing assurance that sufficient funds will be available to meet
their credit needs. The Asset/Liability Management Committee (ALCO) is
responsible for liquidity management and has developed guidelines which cover
all assets and liabilities, as well as off balance sheet items that are
potential sources or uses of liquidity. Liquidity must also provide the
flexibility to implement appropriate strategies and tactical actions.
Requirements change as loans grow, deposits and securities mature, and payments
on borrowings are made. Interest rate sensitivity management seeks to avoid
widely fluctuating net interest margins and to ensure consistent net interest
income through periods of changing economic conditions.
The Company's primary measure of liquidity is called the basic surplus,
which compares the adequacy of cash sources to the amounts of volatile funding
sources. This approach recognizes the importance of balancing levels of cash
flow liquidity from short and long-term securities with the availability of
dependable borrowing sources. Accordingly, the Company has established borrowing
agreements with other banks (Federal Funds), the Federal Home Loan Bank of New
York (short and long-term borrowings which are denoted as advances), and
repurchase agreements with investment companies.
At June 30, 1998 and 1997, the Company's basic surplus ratios (net access
to cash and secured borrowings as a percentage of total assets) were
approximately 6% and 8%, respectively. The Company has set a present internal
minimum guideline range of 5% to 7%. As these ratios indicate, the Company's
liquidity is within management standards. In addition, the Asset/Liability
Management Committee has determined that liquidity is adequate to meet the cash
flow requirements of the Company.
Interest rate risk is determined by the relative sensitivities of earning
asset yields and interest bearing liability costs to changes in interest rates.
The method by which banks evaluate interest rate risk is to look at the interest
sensitivity gap, the difference between interest sensitive assets and interest
sensitive liabilities repricing during the same period, measured at a specific
point in time. Through analysis of the interest sensitivity gap, the Company
attempts to position its assets and liabilities to maximize net interest income
in several different interest rate scenarios. As of June 30, 1998, the interest
sensitivity gap indicates that the Company is liability sensitive in the short
term and supports management's contention that the Company is positioned to
benefit from a declining interest rate environment over the next twelve months.
The nature and timing of the benefit will be initially impacted by the extent to
which core deposit and borrowing rates are lowered as rates decline. The Company
becomes asset sensitive after the one-year time frame and, therefore, would
benefit in the long-term from rising interest rates.
While the static gap evaluation of interest rate sensitivity is useful, it
is not indicative of the impact of fluctuating interest rates on net interest
income. Once the Company determines the extent of gap sensitivity, the next step
is to quantify the potential impact of the interest sensitivity on net interest
income. The Company utilizes a simulation model which measures the effect
-19-
<PAGE>
certain assumptions will have on net interest income over a short period of
time, usually one or two years. These assumptions include, but are not limited
to prepayments, potential call options of the investment portfolio and various
interest rate environments. The following table presents the impact on net
interest income of a gradual twelve-month increase or decrease in interest rates
compared to a stable interest rate environment. The simulation projects net
interest income over the next year using the June 30, 1998 balance sheet
position.
<TABLE>
<CAPTION>
TABLE 11
INTEREST RATE SENSITIVITY ANALYSIS
- ---------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
- ---------------------------------------------------
<S> <C>
+200 (4.54%)
+100 (2.46%)
- -100 0.95%
- -200 0.84%
- ---------------------------------------------------
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SELECTED FIVE YEAR DATA 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net income $ 14,749 $ 12,179 $ 9,329 $ 6,508 $ 8,505
Return on average assets 1.20% 1.10% 0.90% 0.64% 0.93%
Return on average equity 12.97% 11.80% 9.18% 6.53% 8.79%
Net interest margin 4.67% 4.69% 4.43% 4.81% 5.26%
Efficiency ratio 56.09% 60.74% 65.92% 70.22% 71.05%
Expense ratio 2.20% 2.41% 2.51% 2.96% 3.21%
Tier 1 leverage ratio 8.91% 8.70% 8.80% 9.05% 9.24%
Tier 1 risk-based capital ratio 14.88% 14.06% 15.21% 16.09% 15.40%
Total risk-based capital ratio 16.13% 15.31% 16.46% 17.35% 16.66%
Cash dividend per share payout 37.91% 36.50% 42.61% 56.13% 39.19%
Earnings per share:
Basic $ 1.24 $ 1.03 $ 0.76 $ 0.53 $ 0.69
Diluted $ 1.22 $ 1.02 $ 0.76 $ 0.52 $ 0.68
Cash dividends paid $ 0.464 $ 0.373 $ 0.322 $ 0.291 $ 0.268
Book value $ 10.26 $ 9.08 $ 8.89 $ 7.94 $ 8.15
Tangible book value $ 9.54 $ 8.23 $ 7.94 $ 7.15 $ 7.10
Stock dividends distributed 5.00% 5.00% 5.00% 5.00% 5.00%
Market price:
High $ 20.77 $ 13.58 $ 12.24 $ 11.42 $ 11.42
Low $ 12.59 $ 10.72 $ 10.21 $ 9.26 $ 7.79
End of year $ 20.25 $ 12.86 $ 11.91 $ 10.69 $ 11.26
Price/earnings ratio (assumes dilution) 16.56X 12.59x 15.73x 20.49x 16.59x
Price/book value ratio 1.97X 1.42x 1.34x 1.35x 1.38x
Total assets $1,280,585 $1,138,986 $1,106,266 $1,044,557 $953,907
Total stockholders' equity $ 123,343 $ 106,264 $ 108,044 $ 98,307 $101,108
Average diluted common shares
outstanding (thousands) 12,096 11,918 12,320 12,515 12,455
- ---------------------------------------------------------------------------------------------------------
<FN>
* All per share data has been restated to give retroactive effect to stock
dividends and splits.
</FN>
</TABLE>
-21-
<PAGE>
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
This item is omitted, as there have been no material legal proceedings initiated
or settled during the quarter ended June 30, 1998.
Item 2 -- Changes in Securities
Following are listed changes in the Company's Common Stock outstanding during
the quarter ended June 30, 1998 as well as certain actions which have been taken
which may affect the number of shares of Common Stock (shares) outstanding in
the future. There was no Preferred Stock outstanding during the quarter ended
June 30, 1998.
The Company has Stock Option Plans covering key employees. In January 1998,
non-qualified stock options were granted for 160,933 shares of common stock at
an option price of $20.03 per share. In April 1998, non-qualified stock options
were granted for 2,000 shares of common stock at an option price of $20.74 per
share. These options vest over a four-year period with the first vesting date
one-year from the date of grant. Outstanding at June 30, 1998 are non-qualified
stock options covering 614,535 shares at exercise prices ranging between $6.44
and $20.74 with expiration dates between February 12, 1999, and April 6, 2008.
There are 1,585,818 shares of authorized common stock designated for possible
issuance under the Plans, including the aforementioned shares. The number of
shares designated for the Plans, the number of shares under existing options and
the option price per share may be adjusted upon certain changes in
capitalization, such as stock dividends, stock splits and other occurrences as
enumerated in the Plans. (FORMs S-8, Registration Statement Nos. 33-18976 and
33-77410, filed with the Commission on December 9, 1987 and April 6, 1994,
respectively).
In 1995, the Company granted its then Chairman stock options in connection
with the discharge of severance obligations of the Company and the Bank under
his employment agreement. The agreement issued options covering 191,081 and
40,032 shares with exercise prices of $10.49 and $10.95, respectively, and an
expiration date of January 31, 1997 (the number of shares under option and the
option price per share have been adjusted for stock dividends and splits). The
Company filed a registration statement relating to these option shares. These
stock options did not reduce the number available under the previously mentioned
Plans.
The Company has a Dividend Reinvestment Plan for stockholders under which
no new shares of common stock were issued for the quarter ended June 30, 1998.
There are 701,015 shares of authorized but unissued common stock designated for
possible issuance under the Plan (the number of shares available has been
adjusted for stock dividends and splits). (FORM S-3, Registration Statement No.
33-12247, filed with the Commission on February 26, 1987).
The Company's Board of Directors has reserved 35,000 of authorized but
unissued shares for future payment of an annual Board retainer. In January 1998,
each Director was granted 149 shares which are restricted from one to three
years for payment of their 1998 Board retainer (the number of shares available
and granted has been adjusted for stock dividends and splits). Shares were
purchased from treasury therefore the number of authorized and unissued shares
was not effected.
The Company's Board of Directors has authorized the purchase on the open
market by the Company of additional shares of treasury stock. These treasury
shares are to be used for a variety of corporate purposes, primarily to meet the
needs of the Company's Employee Stock Ownership Plan, Automatic Dividend
Reinvestment and Stock Purchase Plan, Stock Option Plans, Retirement Savings
Plan, Restricted Stock Agreements and Bank Trust Department directed IRA and
HR-10 accounts. Purchases and sales during 1998 totalled 91,100 and 91,746,
respectively, with 415,225 shares in treasury at June 30, 1998. Purchases were
made at the prevailing market price in effect at the dates of the transactions.
Subsequent sales to both the Company's Employee Stock Ownership Plan and
Dividend Reinvestment and Stock Purchase Plan, if any, were made at the five day
average of the highest and lowest quoted selling price of the Company's common
stock on the National Market System of NASDAQ.
The Company currently is authorized to issue 2.5 million shares of
preferred stock, no par value, $1.00 stated value. The Board of Directors is
authorized to fix the particular designations, preferences, rights,
qualifications, and restrictions for each series of preferred stock issued. The
Company has a Stockholder Rights Plan (Plan) designed to ensure that any
potential acquiror of the Company negotiate with the Board of Directors and that
all Company stockholders are treated equitably in the event of a takeover
attempt. When the Plan was adopted, the Company paid a dividend of one Preferred
Share Purchase Right (Right) for each outstanding share of common stock of the
Company. Similar Rights are attached to each share of the Company's common stock
issued after November 15, 1994, the date of adoption subject to adjustment.
-22-
<PAGE>
Under the Plan, the Rights will not be exercisable until a person or group
acquires beneficial ownership of 20 percent or more of the Company's outstanding
common stock, begins a tender or exchange offer for 25 percent or more of the
Company's outstanding common stock, or an adverse person, as declared by the
Board of Directors, acquires 10 percent or more of the Company's outstanding
common stock. Additionally, until the occurrence of such an event, the Rights
are not severable from the Company's common stock and therefore, the Rights will
be transferred upon the transfer of shares of the Company's common stock. Upon
the occurrence of such events, each Right entitles the holder to purchase one
one-hundredth of a share of Series R Preferred Stock, no par value, and $1.00
stated value per share of the Company at a price of $100.
The Plan also provides that upon the occurrence of certain specified
events, the holders of Rights will be entitled to acquire additional equity
interests in the Company or in the acquiring entity, such interests having a
market value of two times the Right's exercise price of $100. The Rights, which
expire November 14, 2004, are redeemable in whole, but not in part, at the
Company's option prior to the time they are exercisable, for a price of $0.01
per Right.
Item 3 -- Defaults Upon Senior Securities
This item is omitted because there were no defaults upon the Registrant's senior
securities during the quarter ended June 30, 1998.
Item 4 -- Submission of Matters to a Vote of Security Holders
This item is omitted, as there is no disclosure required for the quarter ended
June 30, 1998. The results of the election of directors and ratification of
auditors at the Annual Meeting of Stockholders held April 18, 1998 was
previously reported in Form 10-Q, March 31, 1998.
Item 5 -- Other Information
Not Applicable
Item 6 -- Exhibits and Reports on FORM 8-K
An index to exhibits follows the signature page of this FORM 10-Q.
No reports on FORM 8-K were filed by the Registrant during the quarter ended
June 30, 1998.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on FORM 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized, this 14th day of August, 1998.
NBT BANCORP INC.
By: /S/ JOE C. MINOR
Joe C. Minor
Executive Vice President
Chief Financial Officer and Treasurer
<PAGE>
INDEX TO EXHIBITS
The following documents are attached as Exhibits to this FORM 10-Q or,
if annotated by the symbol *, are incorporated by reference as Exhibits as
indicated by the page number or exhibit cross-reference to the prior filings of
the Registrant with the Commission.
<TABLE>
<CAPTION>
FORM 10-Q
Exhibit Exhibit
NUMBER CROSS-REFERENCE
- ------ ---------------
<S> <C> <C>
27.1 Financial Data Schedule for the six months ended June 30, 1998 Herein
</TABLE>
-25-
<PAGE>
EXHIBIT 27.1
Financial Data Schedule for the six months ended
June 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NBT BANCORP
INC'S FORM 10-Q FOR THE PERIOD ENDED JUNE, 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 38,963
<INT-BEARING-DEPOSITS> 3,976
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 409,184
<INVESTMENTS-CARRYING> 37,137
<INVESTMENTS-MARKET> 37,137
<LOANS> 779,087
<ALLOWANCE> 12,239
<TOTAL-ASSETS> 1,298,442
<DEPOSITS> 1,000,901
<SHORT-TERM> 152,150
<LIABILITIES-OTHER> 6,173
<LONG-TERM> 10,178
0
0
<COMMON> 12,426
<OTHER-SE> 116,614
<TOTAL-LIABILITIES-AND-EQUITY> 1,298,442
<INTEREST-LOAN> 34,601
<INTEREST-INVEST> 15,822
<INTEREST-OTHER> 109
<INTEREST-TOTAL> 50,532
<INTEREST-DEPOSIT> 19,079
<INTEREST-EXPENSE> 22,389
<INTEREST-INCOME-NET> 28,143
<LOAN-LOSSES> 2,250
<SECURITIES-GAINS> 445
<EXPENSE-OTHER> 18,941
<INCOME-PRETAX> 12,059
<INCOME-PRE-EXTRAORDINARY> 9,782
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,782
<EPS-PRIMARY> .81
<EPS-DILUTED> .80
<YIELD-ACTUAL> 4.72
<LOANS-NON> 5,470
<LOANS-PAST> 983
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 27,105
<ALLOWANCE-OPEN> 11,582
<CHARGE-OFFS> 2,003
<RECOVERIES> 410
<ALLOWANCE-CLOSE> 12,239
<ALLOWANCE-DOMESTIC> 8,578
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,661
</TABLE>
