SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 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 March 31, 1999.
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 April 30, 1999, there were 12,437,508 shares outstanding 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.
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<PAGE>
NBT BANCORP INC.
FORM 10-Q--Quarter Ended March 31, 1999
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 1999, December 31, 1998
(Audited), and March 31, 1998
Consolidated Statements of Income for the three month periods ended
March 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the three month
periods ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income for the three month
periods ended March 31, 1999 and 1998
Notes to Interim Consolidated Financial Statements at March 31,
1999
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 in the Liquidity and
Interest Rate Sensitivity Management section 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
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<PAGE>
<TABLE>
<CAPTION>
NBT BANCORP INC. AND SUBSIDIARY MARCH 31, December 31, March 31,
CONSOLIDATED BALANCE SHEETS 1999 1998 1998
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(in thousands, except share and per share data) (UNAUDITED) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ 48,271 $ 47,181 $ 39,708
Loans held for sale 3,506 2,887 3,652
Securities available for sale, at fair value 354,393 355,758 432,997
Securities held to maturity (fair value-$33,731,
$35,095 and $36,034) 33,731 35,095 36,035
Loans:
Commercial and agricultural 406,626 388,509 339,192
Real estate mortgage 165,980 160,025 140,229
Consumer 265,636 272,971 268,965
- -------------------------------------------------------------------------------------------------------------------
Total loans 838,242 821,505 748,386
Less allowance for loan losses 13,209 12,962 11,984
- -------------------------------------------------------------------------------------------------------------------
Net loans 825,033 808,543 736,402
Premises and equipment, net 20,222 20,241 19,462
Intangible assets, net 7,322 7,572 8,352
Other assets 14,612 12,732 12,691
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TOTAL ASSETS $1,307,090 $1,290,009 $1,289,299
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (noninterest bearing) $ 138,456 $ 154,146 $ 125,873
Savings, NOW, and money market 379,582 391,614 359,884
Time 507,050 498,445 553,293
- -------------------------------------------------------------------------------------------------------------------
Total deposits 1,025,088 1,044,205 1,039,050
Short-term borrowings 105,551 96,589 106,563
Other borrowings 35,168 10,171 10,180
Other liabilities 10,104 8,412 6,642
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Total liabilities 1,175,911 1,159,377 1,162,435
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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 13,015,789,
13,015,789 and 9,429,963 13,016 13,016 9,430
Capital surplus 111,726 111,749 96,915
Retained earnings 18,194 15,512 25,782
Accumulated other comprehensive income 1,287 3,317 1,786
Common stock in treasury at cost, 600,953,
599,507, and 390,534 shares (13,044) (12,962) (7,049)
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Total stockholders' equity 131,179 130,632 126,864
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,307,090 $1,290,009 $1,289,299
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
NBT BANCORP INC. AND SUBSIDIARY Three months ended March 31,
CONSOLIDATED STATEMENTS OF INCOME 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) (Unaudited)
<S> <C> <C>
Interest and fee income:
Loans and loans held for sale $18,008 $17,038
Securities - taxable 5,682 7,891
Securities - tax exempt 238 274
Other 81 53
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Total interest and fee income 24,009 25,256
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Interest expense:
Deposits 8,284 9,491
Short-term borrowings 1,075 1,675
Other borrowings 155 55
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Total interest expense 9,514 11,221
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Net interest income 14,495 14,035
Provision for loan losses 975 1,100
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Net interest income after provision for loan losses 13,520 12,935
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Noninterest income:
Trust 835 802
Service charges on deposit accounts 961 869
Securities gains 471 218
Other 792 679
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,059 2,568
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Noninterest expense:
Salaries and employee benefits 4,616 4,687
Office supplies and postage 473 500
Occupancy 674 686
Equipment 621 480
Professional fees and outside services 567 648
Data processing and communications 910 901
Amortization of intangible assets 251 291
Other operating 668 1,209
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Total noninterest expense 8,780 9,402
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Income before income taxes 7,799 6,101
Income taxes 2,988 1,029
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NET INCOME $ 4,811 $ 5,072
- ------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.39 $ 0.40
Diluted $ 0.38 $ 0.39
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
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<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 share and per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 9,430 $ 96,494 $22,249 $2,373 $ (7,203) $123,343
Net income 5,072 5,072
Cash dividends - $0.122 per share (1,539) (1,539)
Purchase of 31,100 treasury shares (835) (835)
Sale of 56,437 treasury shares to
employee benefit plans and other
stock plans 421 989 1,410
Unrealized loss on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $405 (587) (587)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $ 9,430 $ 96,915 $25,782 $1,786 $ (7,049) $126,864
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $13,016 $111,749 $15,512 $3,317 $(12,962) $130,632
Net income 4,811 4,811
Cash dividends - $0.170 per share (2,113) (2,113)
Payment in lieu of fractional shares (16) (16)
Purchase of 77,500 treasury shares (1,728) (1,728)
Sale of 76,054 treasury shares to
employee benefit plans and other
stock plans (23) 1,646 1,623
Unrealized loss on securities
available for sale, net of
reclassification adjustment,
and deferred taxes of $1,402 (2,030) (2,030)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 $13,016 $111,726 $18,194 $1,287 $(13,044) $131,179
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
NBT BANCORP INC. AND SUBSIDIARY Three Months Ended March 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS 1999 1998
- -----------------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,811 $ 5,072
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 975 1,100
Depreciation of premises and equipment 528 463
Amortization of premiums and accretion of discounts on
securities (333) (444)
Amortization of intangible assets 251 291
Proceeds from sale of loans originated for sale 442 1,009
Loans originated for sale (1,061) (1,375)
Gain on sale of other real estate owned, net (188) (38)
Realized gains on sales of securities (471) (218)
Increase in interest receivable (332) (360)
Increase (decrease) in interest payable (25) 724
Other, net 1,248 (2,555)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,845 3,669
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from maturities 24,148 15,080
Proceeds from sales 54,234 52,271
Purchases (79,645) (60,046)
Securities held to maturity:
Proceeds from maturities 4,027 4,124
Purchases (2,663) (4,019)
Net increase in loans (17,495) (13,906)
Purchase of premises and equipment, net (509) (1,164)
Proceeds from sales of other real estate owned 540 317
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,363) (7,343)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (19,117) 24,867
Net increase (decrease) in short-term borrowings 8,962 (27,964)
Proceeds from issuance of other borrowings 25,000 10,000
Repayments of other borrowings (3) (3)
Proceeds from issuance of treasury shares to
employee benefit plans and other stock plans 1,623 1,410
Purchase of treasury stock (1,728) (835)
Cash dividends and payment for fractional shares (2,129) (1,539)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,608 5,936
- -----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,090 2,262
Cash and cash equivalents at beginning of year 47,181 37,446
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,271 $ 39,708
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,539 $ 10,497
Income taxes 288 1,836
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to interim consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
NBT BANCORP INC. AND SUBSIDIARY Three Months Ended March 31,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 1999 1998
- --------------------------------------------------------------------------------------------------
(in thousands) (Unaudited)
<S> <C> <C>
Net Income $4,811 $5,072
- --------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
Unrealized holding gains (losses) arising during
period [pre-tax amounts of $(2,961) and $(774)] (1,751) (458)
Less: Reclassification adjustment for net gains included
in net income [pre-tax amounts of $(471) and $(218)] (279) (129)
- --------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (2,030) (587)
- --------------------------------------------------------------------------------------------------
Comprehensive income $2,781 $4,485
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</TABLE>
See notes to interim consolidated financial statements.
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<PAGE>
NBT BANCORP INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
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). 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.
The balance sheet at December 31, 1998 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 period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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, 1998.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. All
share and per share data has been adjusted retroactively for stock dividends and
splits. The following is a reconciliation of basic and diluted earnings per
share for the periods presented in the income statement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Three months ended March 31, 1999 1998
- -------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C>
Basic EPS:
Weighted average common shares outstanding 12,420 12,646
Net income available to common shareholders $ 4,811 $ 5,072
- -------------------------------------------------------------------------------------------------
Basic EPS $ 0.39 $ 0.40
- -------------------------------------------------------------------------------------------------
Diluted EPS:
Weighted average common shares outstanding 12,420 12,646
Dilutive common stock options 157 211
- -------------------------------------------------------------------------------------------------
Weighted average common shares and common
share equivalents 12,577 12,857
Net income available to common shareholders $ 4,811 $ 5,072
- -------------------------------------------------------------------------------------------------
Diluted EPS $ 0.38 $ 0.39
- -------------------------------------------------------------------------------------------------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
comprehensive accounting and reporting requirements for derivative instruments
and hedging 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.
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<PAGE>
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities". This statement conforms
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the accounting for such
securities by a non-mortgage banking enterprise. This statement is effective for
the first quarter beginning after December 15, 1998, and did not have any impact
on our financial position or results of operations as we do not currently
securitize mortgage loans.
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<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 1998 FORM 10-K for an understanding of the following discussion and
analysis. In June of 1998, the Company distributed a four-for-three stock split
effected in the form of a 33 1/3% stock dividend. In December 1998, the Company
distributed a 5% stock dividend, the thirty-ninth consecutive year a stock
dividend has been declared. Throughout this discussion and analysis, amounts per
common share and common shares outstanding have been adjusted retroactively for
stock dividends and splits.
On April 26, 1999, NBT Bancorp Inc. announced the declaration of a regular
quarterly cash dividend of $0.17 per share. The cash dividend will be paid on
June 15, 1999 to stockholders of record as of June 1, 1999.
Certain statements in this release and other public releases by the Company
contain forward-looking information, as defined in the Private Securities
Litigation Reform Act. These statements may be identified by the use of phrases
such as "anticipate," "believe," "expect," "forecasts," "projects," or other
similar terms. Actual results may differ materially from these statements since
such statements involve significant known and unknown rules and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) an increase in competitive pressures in the banking
industry; (2) changes in the interest rate environment; (3) changes in the
regulatory environment; (4) general economic environment conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in credit quality; (5) changes may incur in
business conditions and inflation; and (6) unforeseen risks associated with the
Year 2000 issue.
YEAR 2000
The Year 2000 issue presents a number of difficult challenges to the Company.
Information systems are often complex and have been developed over many years
through a variety of computer languages and hardware platforms. The Year 2000
issue refers to the programming of existing software applications using a two
digit year field. This coding presents a potential problem when the year begins
with "20", instead of "19". Computers may interpret the year as 1900 instead of
2000, creating possible system failure or miscalculation of financial data.
A committee continues to direct the Company's Year 2000 activities under
the framework of the FFIEC's Five-Step Program. The FFIEC's Five-Step Program
includes the following phases: Awareness, Assessment, Renovation, Validation and
Implementation. The Awareness Phase, 100% complete, defines the Year 2000
problem and gains executive level support for the necessary resources to prepare
the Company for Year 2000 compliance. The Assessment Phase, 100% complete,
assesses the size and complexity of the problem and details the magnitude of the
effort necessary to address the Year 2000 issues. Although the Awareness and
Assessment Phases are complete, the Company will continue to evaluate any new
issues as they arise. The Renovation Phase, 100% complete, includes code
enhancements, hardware and software updates, system replacements, vendor
certification, and other associated changes. The Validation Phase, 95% complete,
includes the testing of incremental changes to hardware and software components.
The Validation Phase is scheduled to be substantially complete by May 30, 1999.
The Implementation Phase, 97% complete, certifies that systems are Year 2000
compliant and have been accepted by the end users. The Implementation Phase is
scheduled to be substantially complete by May 30, 1999. The Company has been
addressing Informational Technology (IT) and non IT systems. The Company has
categorized all systems as mission critical, high, medium or low priority with
respect to its ability to influence business functions. The Company has
completed the development of test and validation methodologies for its IT
systems. Testing of applications is well underway and is scheduled to be
complete by June 30, 1999. In some cases, the Company is relying on the service
providers and software vendors to facilitate proxy testing with a selected group
of users, including the Company. The Company is reviewing the test plans and
validating the results of the proxy testing to ensure the Year 2000 compliance
of those systems. The Company has contracted with McGladrey and Pullen to
perform an independent third party review of all proxy test results. To date,
these proxy tests and reviews have identified no significant Year 2000 issues.
To ensure compliance of non IT systems where testing is not possible, the
Company has contacted the manufacturers and suppliers for Year 2000
certification. Based on responses from manufacturers and suppliers of non IT
systems, the Company does not anticipate incurring any material expenses due to
unpreparedness of the non IT systems.
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<PAGE>
The Company has identified material third party relationships to minimize
the potential loss from unpreparedness of these parties. The Company continues
to work closely with Fiserv, its data services and items processing provider,
regarding Year 2000 compliance.
The Company has tested its mission critical trust accounting system to
ensure Year 2000 compliance. The testing and validation of this system was
completed during the fourth quarter of 1998. Test results were reviewed by
internal staff and did not disclose any significant Year 2000 issues. In
addition, the system was also tested by the software vendor and two user groups
made up of other banks. Results of these tests did not identify any significant
Year 2000 issues. Other non mission critical systems in use by the trust
department are in the process of review for Year 2000 compliance and are
expected to be complete by June 30, 1999. In addition, the trust department is
following the FFIEC's Year 2000 Fiduciary Service Guidance. The fiduciary review
includes the following steps: account and asset administration, third party
risk, counter party risk, transfer agent risk, and client disclosure. A Year
2000 compliance review is being conducted on those companies in which
significant trust assets are invested. As of March 31, 1999 approximately 90% of
significant assets had been preliminarily reviewed. Updates on the status of
these companies will continue throughout 1999. The trust account review process
has been modified to include specific Year 2000 issues. Third party and counter
party fiduciary risk is being addressed by communicating with various vendors
and service providers to ascertain their Year 2000 compliance. All customers and
beneficiaries of the trust department have been contacted regarding the
Company's efforts to identify and reduce Year 2000 risk.
The Company has evaluated the Year 2000 readiness of its major borrowers
and fund providers to assess their readiness and identify potential problems.
The Company has assessed the preparedness of its 75 largest commercial
borrowers, as well as 25 random commercial borrowers. These borrowers were
evaluated and rated as low, medium or high risk. For the medium and high risk
customers, an action plan for compliance has been developed, up to and including
credit risk downgrades and requests for additional collateral. The Company has
also assessed the preparedness of its 60 largest deposit account relationships,
as well as 45 random depositors. The providers were also evaluated and rated as
high, medium or low risk. The Company has scheduled follow up with the high risk
and material fund providers to ensure they are taking necessary steps to become
Year 2000 compliant. The Company also completed an assessment of its other
material funding sources and counter parties, with no high risk relationships
being identified. Continuous monitoring of significant new relationships is
performed to ensure Year 2000 preparedness. In addition, the Company has
modified its liquidity crisis plan to minimize funding risk due to the Year 2000
issue. The Company is monitoring customer behavior to determine the cash
availability requirements and the associated impact to its liquidity funding
position and will update the liquidity crisis plan as necessary.
As of March 31, 1999 the Company has incurred approximately $400,000 in
expenses directly related to the Year 2000 issue. Additionally, the Company
forecasts spending approximately $175,000 by December 31,1999 to ensure Year
2000 readiness. These amounts include the cost of additional hardware and
software, as well as technology consultants contracted to assist in the
preparation for the Year 2000; however, they do not include a valuation for the
considerable time employees spent or will spend on Year 2000 preparedness. The
Company has included the cost of the Year 2000 issue in its 1999 annual budget.
Due to the uniqueness of the Year 2000 issue, it is difficult to quantify the
potential loss in revenue. Based on efforts to ensure systems will function
properly, the Company believes it reasonable that no material loss in revenue
will occur. The Company believes that its reasonably likely worst case Year 2000
scenario is a material increase in credit losses due to Year 2000 problems of
the Company's borrowers, as well as disruption in financial markets causing
liquidity stress. As previously mentioned, the Company has attempted to minimize
these risks by identifying the material borrowers and fund providers and
assessing their progress toward Year 2000 compliance.
The Company is currently developing a business resumption contingency plan
to help ensure continued operations in the event of Year 2000 system failures.
This contingency plan will be consistent with the Company's disaster recovery
plan with modifications for Year 2000 risks. The business resumption contingency
plan is scheduled to be complete by June 30, 1999.
OVERVIEW
Net income of $4.8 million ($0.38 per diluted share) was recognized in the first
quarter of 1999, down from first quarter 1998 net income of $5.1 million ($0.39
per diluted share). The decline in net income can be attributed to increased
income tax expense between the reporting periods, resulting from a $1 million
tax benefit in the first quarter of 1998 that was available only through
year-end 1998. The first quarter net income before taxes of $7.8 million was
$1.7 million higher than the first quarter of 1998. The increase in pre-tax
income can be attributed to improvements in the net interest income, noninterest
income and noninterest expense categories.
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 declined for the quarter compared to the
same period a year previous. The decline in these ratios can be attributed to
the increased income tax expense previously mentioned.
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<PAGE>
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. The positive
trend in net interest margin is critical to the improved profitability of the
Company.
<TABLE>
<CAPTION>
TABLE 1
PERFORMANCE MEASUREMENTS
- -------------------------------------------------------------------------------------------------
First Second Third Fourth Twelve FIRST
Quarter Quarter Quarter Quarter Months QUARTER
1998 1998 1998 1998 1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Return on average assets 1.60% 1.47% 1.46% 1.40% 1.48% 1.54%
Return on average equity 16.49% 14.92% 14.54% 13.87% 14.93% 14.87%
Net interest margin 4.75% 4.68% 4.79% 4.80% 4.76% 4.96%
- -------------------------------------------------------------------------------------------------
</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.
Federal taxable equivalent (FTE) net interest income increased $0.5 million
for the first quarter of 1999 compared to the same period of 1998. This increase
was accomplished despite a minimal decline in average earning assets.
Total FTE interest income declined $1.2 million compared to first quarter
1998, primarily the result of a 32 basis point decline in the yield on average
earning assets. During the same time period, total interest expense declined
$1.7 million. The cost of interest bearing liabilities decreased 54 basis
points, as certificates of deposits and short-term borrowing costs declined. A
$35.8 million reduction in average interest bearing liabilities between
reporting periods also contributed to the decline in overall interest expense,
as certificates of deposit and short-term borrowing volumes declined.
Another important performance measurement of net interest income is the net
interest margin. This is computed by dividing annualized FTE net interest income
by average earning assets for the period. Net interest margin increased to 4.96%
for first quarter 1999, up from 4.75% for the comparable period in 1998. The
increase in the net interest margin is primarily a result of the 22 basis point
increase in the interest rate spread between the reporting periods. Also
contributing to the improved net interest margin is increased funding of earning
assets from noninterest bearing sources.
-12-
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
COMPARATIVE ANALYSIS OF FEDERAL TAXABLE EQUIVALENT NET INTEREST INCOME
Three months ended March 31,
ANNUALIZED
YIELD/RATE AMOUNTS VARIANCE
1999 1998 (dollars in thousands) 1999 1998 TOTAL VOLUME RATE
- ---- ---- ---- ---- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
3.63% 5.09% Interest bearing deposits $ 3 $ 1 $ 2 $ 2 $ -
Federal funds sold and securities
4.63% 5.51% purchased under agreements to resell 2 1 1 1 -
4.74% 5.44% Other short-term investments 76 51 25 33 (8)
6.78% 7.18% Securities available for sale 5,500 7,688 (2,188) (1,779) (409)
6.71% 7.82% Loans held for sale 57 72 (15) (6) (9)
Securities held to maturity:
6.46% 6.67% Taxable 203 225 (22) (15) (7)
6.45% 7.19% Tax exempt 345 399 (54) (15) (39)
8.83% 9.36% LOANS 18,043 17,024 1,019 2,004 (985)
-------------------------------------------------------------------------------------
8.17% 8.49% Total interest income 24,229 25,461 (1,232) 225 (1,457)
2.75% 2.91% Money market deposit accounts 618 638 (20) 15 (35)
1.50% 1.68% NOW accounts 517 504 13 70 (57)
2.76% 2.85% Savings accounts 1,082 1,069 13 51 (38)
4.97% 5.50% Certificates of deposit 6,067 7,280 (1,213) (546) (667)
4.79% 5.67% Short-term borrowings 1,075 1,675 (600) (364) (236)
5.32% 5.33% OTHER BORROWINGS 155 55 100 100 -
-------------------------------------------------------------------------------------
3.91% 4.45% TOTAL INTEREST EXPENSE 9,514 11,221 (1,707) (674) (1,033)
-------------------------------------------------------------------------------------
Net interest income $14,715 $14,240 $ 475 $ 899 $ (424)
=====================================================================================
4.26% 4.04% Interest rate spread
==== ==== ====================
4.96% 4.75% Net interest margin
==== ==== ====================
FTE adjustment $ 220 $ 205
============== ======= =======
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance established to provide
for the estimated losses related to the collection of the Company's loan
portfolio. The allowance is maintained at a level considered adequate to provide
for loan loss exposure based on management's estimate of probable losses in the
portfolio considering an evaluation of 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
in-house 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 March 31, 1999
was 1.58%, compared to 1.60% at March 31, 1998. 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 first quarter of 1999 were
$0.7 million, or 0.36% of average loans, compared to $0.7 million, or 0.38% of
average loans for the same period of 1998. The decline in charge-offs as a
percent of average loans indicates an improvement in the Company's loan quality.
-13-
<PAGE>
<TABLE>
<CAPTION>
TABLE 3
ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------
Three months ended March 31,
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $12,962 $11,582
Recoveries 194 188
Charge-offs (922) (886)
- ------------------------------------------------------------------------------------------------------------
Net (charge-offs) (728) (698)
Provision for loan losses 975 1,100
- ------------------------------------------------------------------------------------------------------------
Balance, end of period $13,209 $11,984
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
COMPOSITION OF NET CHARGE-OFFS
<S> <C> <C> <C> <C>
Commercial and agricultural $ (325) 45% $ (316) 45%
Real estate mortgage (28) 4% (21) 3%
Consumer (375) 51% (361) 52%
- ------------------------------------------------------------------------------------------------------------
Net charge-offs $ (728) 100% $ (698) 100%
- ------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans 0.36% 0.38%
- ------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans for the year ended
December 31, 1998 0.42%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
Table 4 below presents quarterly and period to date noninterest income.
Noninterest income for the first quarter of 1999, excluding security gains,
increased $0.2 million or 10.1% when compared to first quarter 1998. Trust
income continued its growth trend as managed assets have steadily increased.
Deposit service charges have increased as the Company has experienced an
increase in overdraft fees resulting from an increase in demand deposit
accounts. Other income increased as a result of an increase in ATM fee income
due to increased use and the installation of additional machines throughout our
market areas.
Security gains increased $0.3 million for the first quarter 1999 as
compared to first quarter 1998. This increase can be attributed to the change in
market conditions between the two periods.
<TABLE>
<CAPTION>
TABLE 4
NONINTEREST INCOME
- ------------------------------------------------------------------------------------------------------
First Second Third Fourth Twelve FIRST
Quarter Quarter Quarter Quarter Months QUARTER
(dollars in thousands) 1998 1998 1998 1998 1998 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust income $ 802 $ 802 $ 803 $ 708 $3,115 $ 835
Service charges on deposit accounts 869 900 956 1,024 3,749 961
Securities gains 218 227 168 11 624 471
Other income 679 610 594 608 2,491 792
- ------------------------------------------------------------------------------------------------------
Total noninterest income $2,568 $2,539 $2,521 $2,351 $9,979 $3,059
- ------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE AND OPERATING EFFICIENCY
Table 5 presents components of noninterest expense as well as selected operating
efficiency ratios. Total noninterest expense declined $0.6 million between the
quarter ended March 31, 1999 and the same period for 1998. The decline in
noninterest expense is a reflection of the Company's expense control efforts.
Other operating expense for the first quarter of 1999 experienced a $0.5
million decline compared to the first quarter of 1998. In addition to a decline
in recurring other operating expenses, the Company recognized a nonrecurring
gain of $0.2 million on the sale of other real estate owned in the first quarter
of 1999.
Equipment expense for the quarter ended March 31, 1999 experienced a $0.1
million increase compared to the same period in 1998, primarily attributable to
increased equipment depreciation and maintenance.
-14-
<PAGE>
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 declined to 51.8% in the first
quarter of 1999 from 56.7% in the same period of 1998. This favorable decline
was a result of the increase in net interest income as well as the reduction 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 declined to 2.0% for the first quarter 1999, from 2.2% for the same period
of 1998. This favorable decline is a result of the reduction in noninterest
expense.
<TABLE>
<CAPTION>
TABLE 5
NONINTEREST EXPENSE AND PRODUCTIVITY MEASUREMENTS
- --------------------------------------------------------------------------------------------------
First Second Third Fourth Twelve FIRST
Quarter Quarter Quarter Quarter Months QUARTER
(dollars in thousands) 1998 1998 1998 1998 1998 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits 4,687 4,607 4,920 4,988 19,202 4,616
Office supplies and postage 500 465 441 506 1,912 473
Occupancy expense 686 695 656 806 2,843 674
Equipment expense 480 580 668 647 2,375 621
Professional fees and outside services 648 615 724 849 2,836 567
Data processing and communications 901 862 872 942 3,577 910
Amortization of intangible assets 291 271 255 253 1,070 251
Other operating expense 1,209 1,444 1,171 1,489 5,313 668
- --------------------------------------------------------------------------------------------------
Total noninterest expense $ 9,402 $9,539 $9,707 $10,480 $39,128 $8,780
- --------------------------------------------------------------------------------------------------
Efficiency ratio 56.67% 57.39% 56.71% 60.84% 57.92% 51.83%
Expense ratio 2.23% 2.25% 2.27% 2.49% 2.31% 2.04%
Average full-time equivalent
employees 488 488 495 487 489 486
Average assets per average
full-time equivalent employee
(millions) $ 2.6 $ 2.6 $ 2.6 $ 2.7 $ 2.6 $ 2.6
- --------------------------------------------------------------------------------------------------
</TABLE>
INCOME TAXES
Income tax expense was $3.0 million for the first quarter of 1999 compared to
$1.0 million for the first quarter of 1998. The increase in income taxes during
the first quarter of 1999 can be attributed to a $1.0 million tax benefit for
the first quarter of 1998 resulting from a corporate realignment. The increased
income before income taxes between reporting periods also contributed to the
increased tax expense.
BALANCE SHEET
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.
<PAGE>
<TABLE>
<CAPTION>
TABLE 6
AVERAGE BALANCES
- --------------------------------------------------------------------------------------------------
Three months ended
March 31,
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 39,813 $ 37,207
Securities available for sale, at fair value 333,693 438,750
Securities held to maturity 34,391 36,162
Loans held for sale 3,428 3,743
Loans 828,363 738,012
Deposits 1,023,920 1,024,102
Short-term borrowings 91,010 119,746
Other borrowings 11,836 4,182
Stockholders' equity 131,209 124,700
Assets 1,267,325 1,281,520
Earning assets 1,202,323 1,216,253
Interest bearing liabilities $ 988,035 $1,023,795
- --------------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
SECURITIES
Average total securities were $106.8 million less for the first quarter of 1999
than for the same period of 1998. The majority of this decline was in the
available for sale portfolio. During the first quarter of 1999, the securities
portfolio represented 30.2% of average earning assets compared to 38.7% for the
first quarter of 1998. Investments are primarily U.S. Governmental agencies
guaranteed securities classified as available for sale. 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 March 31,
1999, the securities portfolio was comprised of 91% available for sale and 9%
held to maturity securities.
LOANS
Average loan volume for the first quarter of 1999 was $90.4 million, or 12.2%
greater than the first quarter 1998 average. Average loan growth has been
present in the commercial and mortgage portfolios with increases of $66.7
million and $25.1 million, respectively. Average consumer loans experienced a
minimal decline between the reporting periods.
The Company has continued to experience an increase in the demand for
commercial loans, primarily in the business and real estate categories.
Aggressive marketing and improved product delivery has resulted in an increase
in the mortgage portfolio during the recent period of high refinance activity.
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 decreased $1.9 million at March 31, 1999
compared to March 31, 1998. The decrease in nonperforming assets can be
attributed to a $2.2 million decline in impaired commercial and agricultural
loans, partially offset by an increase in other real estate owned of $0.3
million. The primary reason for the reduction in nonperforming commercial and
agricultural loans can be attributed to the sale of real estate property pledged
as collateral for these loans. The changes in nonperforming assets are presented
in Table 7 below.
At March 31, 1999, the recorded investment in impaired loans was $2.3
million. Included in this amount is $0.6 million of impaired loans for which the
specifically allocated allowance for loan loss is $0.1 million. In addition,
included in impaired loans is $1.7 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, 1998, the recorded investment in impaired
loans was $2.4 million, of which $1.1 million had a specific allowance
allocation of $0.2 million and $1.3 million for which there was no specific
reserve. At March 31, 1998, the recorded investment in impaired loans was $4.5
million, of which $2.7 million had a specific allowance allocation of $0.4
million and $1.8 million of which there was no specific reserve. The Company
classifies all commercial and small business nonaccrual loans as impaired loans.
-16-
<PAGE>
<TABLE>
<CAPTION>
TABLE 7
NONPERFORMING ASSETS AND RISK ELEMENTS
- ------------------------------------------------------------------------------------------------------------
MARCH 31, December 31, March 31,
(in thousands) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural loans $2,301 64% $2,394 67% $4,546 78%
Real estate mortgage 505 14% 437 12% 425 7%
Consumer 811 22% 762 21% 852 15%
- ------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 3,617 100% 3,593 100% 5,823 100%
- ------------------------------------------------------------------------------------------------------------
Other real estate owned 869 1,164 564
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets 4,486 4,757 6,387
- ------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing:
Commercial and agricultural - -% 291 25% 515 57%
Real estate mortgage 160 35% 341 30% 122 14%
Consumer 299 65% 526 45% 263 29%
- ------------------------------------------------------------------------------------------------------------
Total 459 100% 1,158 100% 900 100%
- ------------------------------------------------------------------------------------------------------------
Total assets containing risk elements $4,945 $5,915 $7,287
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets to loans 0.54% 0.58% 0.85%
Total assets containing risk elements to loans 0.59% 0.72% 0.97%
Total nonperforming assets to assets 0.34% 0.37% 0.50%
Total assets containing risk elements to assets 0.38% 0.46% 0.57%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
Customer deposits represent the greatest source of funding assets. Average total
deposits for the quarter ended March 31, 1999 and 1998 were $1.0 billion. While
average total deposits remained stable between the reporting periods, the mix
changed with demand and savings deposits experiencing increases of $14.5 million
and $27.4 million, respectively, while time deposits declined $42.1 million.
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 three months ended March 31, 1999 declined $21.1 million, or 17.0% compared
to the same period of 1998.
CAPITAL AND DIVIDENDS
Stockholders' equity of $131.2 million represents 10.0% of total assets at March
31, 1999, compared with $126.9 million, or 9.8% a year previous, and $130.6
million, or 10.1% at December 31, 1998.
In December 1998, the Company distributed a 5% stock dividend, the
thirty-ninth consecutive year a stock dividend has been declared. 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. During both 1998 and 1997, 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 8 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 leverage, Tier 1 capital and Risk-based
capital ratios have regulatory minimum guidelines of 3%, 4% and 8% respectively,
with requirements to be considered well capitalized of 5%, 6% and 10%,
respectively.
-17-
<PAGE>
<TABLE>
<CAPTION>
TABLE 8
CAPITAL MEASUREMENTS
- --------------------------------------------------------------------------------------------------
First Second Third Fourth FIRST
Quarter Quarter Quarter Quarter QUARTER
1998 1998 1998 1998 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 leverage ratio 9.19% 9.27% 9.36% 9.33% 9.75%
Tier 1 capital ratio 15.30% 15.13% 14.95% 14.69% 14.87%
Total risk-based capital ratio 16.56% 16.38% 16.21% 15.94% 16.12%
Cash dividends as a percentage
of net income 30.33% 36.55% 38.61% 40.37% 43.93%
Per common share:
Book value $10.02 $10.23 $10.58 $10.52 $10.57
Tangible book value $ 9.36 $ 9.59 $ 9.96 $ 9.91 $ 9.98
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Table 9 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 March 31, 1999, total market
capitalization of the Company's common stock was approximately $259 million
compared with $253 million at March 31, 1998. The change in market
capitalization is due to an increase in the market price. The Company's price to
book value ratio was 1.98 at March 31, 1999 and 2.00 a year ago. The Company's
price was 14 times annualized earnings at March 31, 1999, compared to 13 times a
year previous.
<TABLE>
<CAPTION>
TABLE 9
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
- ---------------------------------------------------------------------------------------
Cash
Dividends
Quarter Ending High Low Close Declared
- ---------------------------------------------------------------------------------------
1998
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31 $20.00 $16.79 $20.00 $0.122
June 30 24.65 19.29 24.17 0.162
September 30 25.00 18.46 21.90 0.162
December 31 25.50 20.71 23.38 0.170
- ---------------------------------------------------------------------------------------
1999
- ---------------------------------------------------------------------------------------
MARCH 31 $24.50 $20.88 $20.88 $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.
<PAGE>
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 March 31, 1999 and 1998, the Company's basic surplus ratios (net access
to cash and secured borrowings as a percentage of total assets) were
approximately 5% and 7%, 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.
-18-
<PAGE>
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 March 31, 1999, the interest
sensitivity gap indicates that the Company's assets and liabilities are closely
matched and as a result, has minimal interest rate risk in the short-term.
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
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 March 31, 1999 balance sheet
position.
<TABLE>
<CAPTION>
TABLE 10
INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------
Change in interest rates Percent change in
(in basis points) net interest income
- --------------------------------------------------------------
<S> <C>
+200 (2.74%)
+100 (1.41%)
- -100 (0.06%)
- -200 (0.13%)
- --------------------------------------------------------------
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SELECTED FIVE YEAR DATA 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net income $ 19,102 $ 14,749 $ 12,179 $ 9,329 $ 6,508
Return on average assets 1.48% 1.20% 1.10% 0.90% 0.64%
Return on average equity 14.93% 12.97% 11.80% 9.18% 6.53%
Net interest margin 4.76% 4.67% 4.69% 4.43% 4.81%
Efficiency ratio 57.92% 56.09% 60.74% 65.92% 70.22%
Expense ratio 2.31% 2.20% 2.41% 2.51% 2.96%
Tier 1 leverage ratio 9.33% 8.91% 8.70% 8.80% 9.05%
Tier 1 risk-based capital ratio 14.69% 14.88% 14.06% 15.21% 16.09%
Total risk-based capital ratio 15.94% 16.13% 15.31% 16.46% 17.35%
Cash dividend per share payout 41.34% 37.91% 36.50% 42.61% 56.13%
Earnings per share:
Basic $ 1.52 $ 1.18 $ 0.98 $ 0.72 $ 0.50
Diluted $ 1.49 $ 1.16 $ 0.97 $ 0.72 $ 0.50
Cash dividends paid $ 0.616 $ 0.442 $ 0.355 $ 0.307 $ 0.277
Book value $ 10.52 $ 9.77 $ 8.65 $ 8.47 $ 7.56
Tangible book value $ 9.91 $ 9.09 $ 7.84 $ 7.56 $ 6.81
Stock dividends distributed 5.00% 5.00% 5.00% 5.00% 5.00%
Market price:
High $ 25.50 $ 19.78 $ 12.93 $ 11.66 $ 10.88
Low $ 16.79 $ 11.99 $ 10.21 $ 9.72 $ 8.82
End of year $ 23.38 $ 19.29 $ 12.25 $ 11.34 $ 10.18
Price/earnings ratio (assumes dilution) 15.69X 16.56x 12.59x 15.73x 20.49x
Price/book value ratio 2.22X 1.97x 1.42x 1.34x 1.35x
Total assets $1,290,009 $1,280,585 $1,138,986 $1,106,266 $1,044,557
Total stockholders' equity $ 130,632 $ 123,343 $ 106,264 $ 108,044 $ 98,307
Average diluted common shares
outstanding (thousands) 12,832 12,700 12,514 12,936 13,140
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the aggregate amount involved in such
proceedings is not material to the financial condition or results of operations
of the Company.
Item 2 -- Changes in Securities
Following are listed changes in the Company's Common Stock outstanding during
the quarter ended March 31, 1999 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
March 31, 1999.
The Company has Stock Option Plans covering key employees. In January 1999,
non-qualified stock options were granted for 199,500 shares of common stock at
an option price of $21.63 per share. These options vest over a four year period
with the first vesting date one year from the date of grant. Outstanding at
March 31, 1999 are non-qualified stock options covering 829,392 shares at
exercise prices ranging between $6.13 and $21.63 with expiration dates between
February 11, 2000, and January 26, 2009. There are 1,650,356 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, 33-77410 and 333-67615 filed with the
Commission on December 9, 1987; April 6, 1994 and November 20, 1998,
respectively).
The Company has a Dividend Reinvestment Plan for stockholders under which
no new shares of common stock were issued for the quarter ended March 31, 1999.
There are 736,065 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 36,750 of authorized but
unissued shares for future payment of an annual Board retainer. In January 1999,
each Director was granted 125 shares which are restricted from one to three
years for payment of their 1999 Board retainer. 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 401(K) and 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 the first quarter of 1999
totalled 77,500 and 76,054, respectively, with 600,953 shares in treasury at
March 31, 1999. 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.
<PAGE>
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.
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.
-21-
<PAGE>
Item 3 -- Defaults Upon Senior Securities
This item is omitted because there were no defaults upon the Company's senior
securities during the quarter ended March 31, 1999.
Item 4 -- Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on April 17, 1999.
Stockholders approved a proposal to increase the number of directors to nine and
voted on one other proposal, as described below. A copy of the Notice of Annual
Stockholders' Meeting and Proxy Statement is incorporated by Reference to this
FORM 10-Q as Exhibit No. 99.1. A complete description of each proposal is
included in the Proxy Statement.
a. A proposal to fix the number of directors at nine was approved. Peter B.
Gregory, Paul O. Stillman and J. Peter Chaplin were elected as directors with
terms of office to expire at the 2002 Annual Meeting of Stockholders. William L.
Owens was elected as director with a term of office to expire at the 2001 Annual
Meeting of Stockholders. Dan B. Marshman was elected as director with a term of
office to expire at the 2000 Annual Meeting of Stockholders.
Peter B. Gregory was elected, with 10,388,980 votes FOR, and 103,062 votes
WITHHELD. Paul O. Stillman was elected, with 10,365,725 votes FOR, and
126,317 votes WITHHELD. J. Peter Chaplin was elected, with 10,373,904 votes
FOR, and 118,138 votes WITHHELD. William L. Owens was elected, with
10,407,341 votes FOR, and 84,700 votes WITHHELD. Dan B. Marshman was
elected, with 10,408,611 votes FOR, and 83,431 votes WITHHELD.
b. Proposal to ratify the Board of Directors action in selection of KPMG LLP as
Independent Public Accountants for the Company for 1999.
The proposal was approved, with 10,466,187 votes FOR, 179,232 votes
AGAINST, and 29,223 votes ABSTAINING.
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 Company during the quarter ended March
31, 1999.
-22-
<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 12th day of May, 1999.
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. Financial Data Schedule Herein
99.1 NBT BANCORP INC. Notice of Annual Stockholders Meeting *
and Proxy dated March 17, 1999.
Filed on March 16, 1999 pursuant to Section 14 of the
Exchange Act, File No. 0-14703.
</TABLE>
-24-
<PAGE>
EXHIBIT 27
Financial Data Schedule
<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 MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 41,387
<INT-BEARING-DEPOSITS> 6,884
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 354,393
<INVESTMENTS-CARRYING> 33,731
<INVESTMENTS-MARKET> 33,731
<LOANS> 838,242
<ALLOWANCE> 13,209
<TOTAL-ASSETS> 1,307,090
<DEPOSITS> 1,025,088
<SHORT-TERM> 105,551
<LIABILITIES-OTHER> 10,104
<LONG-TERM> 35,168
0
0
<COMMON> 13,016
<OTHER-SE> 118,163
<TOTAL-LIABILITIES-AND-EQUITY> 1,307,090
<INTEREST-LOAN> 18,008
<INTEREST-INVEST> 5,920
<INTEREST-OTHER> 81
<INTEREST-TOTAL> 24,009
<INTEREST-DEPOSIT> 8,284
<INTEREST-EXPENSE> 9,514
<INTEREST-INCOME-NET> 14,495
<LOAN-LOSSES> 975
<SECURITIES-GAINS> 471
<EXPENSE-OTHER> 8,780
<INCOME-PRETAX> 7,799
<INCOME-PRE-EXTRAORDINARY> 4,811
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,811
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
<YIELD-ACTUAL> 4.96
<LOANS-NON> 3,617
<LOANS-PAST> 459
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 33,361
<ALLOWANCE-OPEN> 12,962
<CHARGE-OFFS> 922
<RECOVERIES> 194
<ALLOWANCE-CLOSE> 13,209
<ALLOWANCE-DOMESTIC> 11,472
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,737
</TABLE>
