<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
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: O-17177
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BSB Bancorp, Inc.
-----------------
(Exact name of registrant as specified in its charter)
Delaware 16-1327860
--------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer Number)
incorporation or organization)
58-68 Exchange Street, Binghamton, New York 13901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 779-2492
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n/a
------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes:[X] No:[_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of August 1, 2000:
10,277,227 shares of common stock, $0.01 par value.
<PAGE>
INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
------------------------------ ----
<S> <C>
Item 1: Financial Statements
------
Consolidated Statements of Condition
June 30, 2000 and December 31, 1999...................................... 1
Consolidated Statements of Income Three Months and Six Months
Ended June 30, 2000 and June 30, 1999.................................... 2
Consolidated Statements of Comprehensive Income Three Months and
Six Months Ended June 30, 2000 and June 30, 1999......................... 3
Consolidated Statements of Cash Flows Six Months
Ended June 30, 2000 and June 30, 1999.................................... 4
Consolidated Statements of Changes in Shareholders' Equity Six
Months Ended June 30, 1999 and June 30, 2000............................. 5
Notes to Consolidated Financial Statements............................... 6
Item 2: Management's Discussion and Analysis of
----- Financial Condition and Results of Operations............................ 7-17
Item 3: Quantitative and Qualitative Disclosures About Market Risk....................... 18
------
PART II. OTHER INFORMATION
----------------------------
Items 1-6................................................................ 19-23
Signature Page........................................................... 24
</TABLE>
<PAGE>
Item 1
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
BSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION (Dollars In Thousands - Except Share Data)
----------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 60,400 $ 70,065
Federal funds sold 7,000
----------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 67,400 70,065
Investment securities available for sale 370,861 387,251
Investment securities held to maturity (market value $11,394 and $14,588) 11,269 14,472
Mortgages held for sale 2,085
Loans:
Commercial 986,780 904,632
Consumer 448,434 467,986
Real estate 362,873 349,634
---------------------------------------------------------------------------------------------------------------------------
Total loans 1,798,087 1,722,252
Less: Net deferred costs (677) (636)
Allowance for possible credit losses 33,936 29,134
---------------------------------------------------------------------------------------------------------------------------
Net loans 1,764,828 1,693,754
Bank premises and equipment 15,243 15,988
Accrued interest receivable 14,871 14,612
Other real estate 508 910
Intangible assets 1,406 1,598
Other assets 42,154 40,213
---------------------------------------------------------------------------------------------------------------------------
$2,288,540 $2,240,948
===========================================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Due to depositors $1,932,966 $1,901,204
Borrowings 157,416 142,045
Other liabilities 6,414 13,206
Company obligated mandatorily redeemable preferred securities of
subsidiary, Capital Trust I, holding solely junior subordinated
debentures of the Company 30,000 30,000
Shareholders' Equity:
Preferred Stock, par value $0.01 per share;
authorized 2,500,000 shares; none issued
Common Stock, par value $0.01 per share;
authorized 30,000,000 shares; 11,445,720
and 11,398,991 shares issued 114 114
Additional paid-in capital 37,829 37,287
Undivided profits 147,234 140,295
Accumulated other comprehensive income (9,949) (9,757)
Treasury stock, at cost: 1,175,524 and 1,173,669 shares (13,484) (13,446)
---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 161,744 154,493
---------------------------------------------------------------------------------------------------------------------------
$2,288,540 $2,240,948
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
Item 1 - continued
<TABLE>
<CAPTION>
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BSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (Dollars In Thousands-Except Share Data)
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Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 41,571 $ 37,194 $ 81,139 $ 72,361
Interest on federal funds sold 9 215 22 420
Interest on investment securities 6,785 6,110 13,458 12,948
Interest on mortgages held for sale (8) 214 18 509
------------------------------------------------------------------------------------------------------------------------
Total interest income 48,357 43,733 94,637 86,238
Interest expense:
Interest on savings deposits 1,210 1,238 2,393 2,406
Interest on time accounts 15,699 13,951 31,133 27,319
Interest on money market deposit accounts 4,963 3,009 9,577 5,946
Interest on NOW accounts 84 484 171 938
Interest on borrowed funds 2,274 2,683 4,240 5,525
Interest on mandatorily redeemable
preferred securities of subsidiary 548 616 1,165 1,240
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Total interest expense 24,778 21,981 48,679 43,374
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Net interest income 23,579 21,752 45,958 42,864
Provision for credit losses 4,951 3,695 9,559 7,156
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Net interest income after provision for credit losses 18,628 18,057 36,399 35,708
Gains (losses) on sale of securities 185 (216)
Gains (losses) on sale of loans 21 (310) 28 (303)
Non-interest income:
Service charges on deposit accounts 1,384 1,116 2,596 2,116
Credit card fees 566 391 969 678
Mortgage servicing fees 309 344 629 706
Fees and commissions-brokerage services 312 176 486 324
Trust fees 306 293 637 544
Other charges, commissions, and fees 558 687 1,472 1,423
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Total non-interest income 3,435 3,007 6,789 5,791
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Operating expense:
Salaries, pensions, and other employee benefits 5,422 5,232 11,321 10,313
Building occupancy 1,173 1,192 2,342 2,392
Dealer commission expense 152 306 285 544
Computer service fees 447 634 862 1,124
Services 1,576 1,584 3,056 2,915
FDIC insurance 103 53 196 110
Goodwill 96 96 192 192
Interchange fees 433 311 748 523
Other real estate 12 (57) 58 (39)
Acquisition charges 1,040 1,359
Other expenses 2,300 2,267 4,367 4,389
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Total operating expense 11,714 12,658 23,427 23,822
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Income before income taxes 10,370 8,281 19,789 17,158
Provision for income taxes 4,051 3,496 7,722 6,837
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NET INCOME $ 6,319 $ 4,785 $ 12,067 $ 10,321
========================================================================================================================
Earnings per share:
Basic $ 0.62 $ 0.48 $ 1.18 $ 1.02
Diluted $ 0.61 $ 0.46 $ 1.17 $ 1.00
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
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BSB BANCORP, INC. (Dollars In Thousands)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income $6,319 $ 4,785 $12,067 $ 10,321
Other comprehensive income
Net unrealized gains (losses) on securities 1,309 (8,181) (328) (9,954)
Reclassification adjustment for net realized
(gains) losses included in net income 185 (216)
---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, before income tax 1,309 (7,996) (328) (10,170)
Income tax benefit (cost) on other comprehensive income (546) 3,264 136 4,406
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Other comprehensive income, net of tax 763 (4,732) (192) (5,764)
---------------------------------------------------------------------------------------------------------------------------
Net comprehensive income $7,082 $ 53 $11,875 $ 4,557
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Item 1 - continued
<TABLE>
<CAPTION>
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BSB BANCORP, INC. (Dollars In Thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended June 30,
2000 1999
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<S> <C> <C>
Operating activities:
Net income $ 12,067 $ 10,321
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for credit losses 9,559 7,156
Realized losses on available for sale investment securities 216
Other gains (losses), net (29) 274
Depreciation and amortization 1,492 1,437
Net (accretion) of discounts on investment securities (155) (294)
Net (accretion) of discounts on loans (40) (52)
Sales of loans originated for sale 2,132 46,002
Net increase in loans originated for sale (35,684)
Writedowns of other real estate 282 543
Net change in other assets and liabilities (8,857) 12,257
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,451 42,176
---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from calls of held to maturity investment securities 3,550 3,743
Purchases of held to maturity investment securities (545) (2,442)
Principal collected on held to maturity investment securities 196 659
Proceeds from sales of available for sale investment securities 20,284 54,345
Purchases of available for sale investment securities (13,015) (64,815)
Principal collected on available for sale investment securities 8,950 15,237
Net increase in longer-term loans (88,001) (206,982)
Proceeds from sales of loans 7,095 46,223
Proceeds from sales of other real estate 405 1,348
Other (545) (1,638)
---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (61,626) (154,322)
---------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in demand deposits, NOW accounts, savings
accounts, and money market deposit accounts 47,973 29,865
Net increase (decrease) in time deposits (16,210) 58,998
Net increase in short-term borrowings 15,390 33,667
Proceeds from long-term borrowings 551
Repayment of long-term borrowings (19)
Proceeds from exercise of stock options 542 527
Purchases of treasury stock (38) (75)
Dividends paid (5,128) (4,540)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 42,510 118,993
---------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in cash and cash equivalents (2,665) 6,847
Cash and cash equivalents at beginning of year 70,065 70,287
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,400 $ 77,134
===========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest credited on deposits and paid on other borrowings $ 48,135 $ 42,615
---------------------------------------------------------------------------------------------------------------------------
Income taxes $ 9,121 $ 8,198
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Non-cash investing activity:
Securitization of mortgage loans and transfers to other real estate $ 294 $ 632
---------------------------------------------------------------------------------------------------------------------------
Unrealized (depreciation) in securities $ (328) $ (9,954)
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</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Item 1 - continued
<TABLE>
<CAPTION>
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BSB BANCORP, INC. (Dollars In Thousands-Except Share Data)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Six Months Ended Additional Other
June 30, Number Common Paid-In Undivided Treasury Comprehensive
1999 of Shares Stock Capital Profits Stock Income Total
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 11,237,470 $112 $35,202 $131,723 $(13,371) $ 425 $154,091
Comprehensive income:
Net income 10,321 10,321
Other comprehensive income:
Unrealized depreciation in
available for sale securities,
net of reclassification amount (5,764) (5,764)
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 10,321 (5,764) 4,557
Stock options exercised 53,924 1 526 527
Cash dividend paid on common
stock ($0.45 per share) (4,540) (4,540)
Treasury stock purchased (75) (75)
---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 11,291,394 $113 $35,728 $137,504 $(13,446) $(5,339) $154,560
=================================================================================================================================
2000
---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 11,398,991 $114 $37,287 $140,295 $(13,446) $(9,757) $154,493
Comprehensive income:
Net income 12,067 12,067
Other comprehensive income:
Unrealized depreciation in
available for sale securities,
net of reclassification amount (192) (192)
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 12,067 (192) 11,875
Stock options exercised 46,729 542 542
Cash dividend paid on common
stock ($0.50 per share) (5,128) (5,128)
Treasury stock purchased (38) (38)
---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 11,445,720 $114 $37,829 $147,234 $(13,484) $(9,949) $161,744
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Item 1 - continued
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(1) In the opinion of management, the interim financial statements reflect all
adjustments which are of a normal recurring nature necessary to a fair
statement of the results for the interim periods presented. The December
31, 1999 data in the Consolidated Statements of Condition is derived from
the audited consolidated financial statements included in the Company's
1999 Annual Report to Shareholders. The accompanying unaudited interim
consolidated financial statements and related notes should be read in
conjunction with the audited consolidated financial statements and related
notes included in the Company's 1999 Annual Report to Shareholders.
(2) Basic earnings per share are computed based on the weighted average shares
outstanding. Diluted earnings per share are computed based on the weighted
average shares outstanding adjusted for the dilutive effect of the assumed
exercise of stock options during the period.
The following is a reconciliation of basic earnings per share to
diluted earnings per share for the quarters ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Quarters ended June 30, Net Income Weighted Average Shares Earnings Per Share
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Basic earnings per share $ 6,319 10,263,287 $0.62
Effect of stock options 90,435
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Diluted earnings per share $ 6,319 10,353,722 $0.61
============================================================================================================================
1999
Basic earnings per share $ 4,785 10,088,482 $0.48
Effect of stock options 222,448
----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 4,785 10,310,930 $0.46
============================================================================================================================
Six Months Ended June 30,
----------------------------------------------------------------------------------------------------------------------------
2000
Basic earnings per share $12,067 10,253,180 $1.18
Effect of stock options 92,203
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Diluted earnings per share $12,067 10,345,383 $1.17
============================================================================================================================
1999
Basic earnings per share $10,321 10,079,664 $1.02
Effect of stock options 247,600
----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $10,321 10,327,264 $1.00
============================================================================================================================
</TABLE>
(3) In 1998, the Company formed a wholly owned subsidiary business trust, BSB
Capital Trust I, L.L.C. (the "Trust"), for the purpose of issuing preferred
securities. The Trust issued at par $30.0 million of 8.125% preferred
securities. The Preferred securities are non-voting, mandatorily redeemable
in 2028, and guaranteed by the Company. The Company's guarantee, together
with its other obligations under the relevant agreements, constitute a
full, irrevocable, and unconditional guarantee by the Company of the
securities issued by the Trust. The entire net proceeds to the Trust from
the offering were invested in junior subordinated obligations of the
Company, which are the sole assets of the Trust.
6
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
-------
BSB Bancorp, Inc., holding company for BSB Bank & Trust Company, earned net
income for the quarter ended June 30, 2000 of $6.3 million, or $0.61 per diluted
share, compared to $4.8 million or $0.46 per diluted share for the same period
of 1999. Net income for the first six months ended June 30, 2000 totalled $12.1
million, or $1.17 per diluted share, compared to $10.3 million or $1.00 per
diluted share for the first six months of 1999.
On April 19, 2000, and amended as of May 17, 2000, BSB Bancorp, Inc. (BSB)
and NBT Bancorp Inc. (NBT) entered into a definitive agreement to merge. This
strategic alliance is expected to create a bank holding company with assets of
approximately $4.7 billion and proforma market capitalization of approximately
$539 million. As part of the merger, the combined holding company will adopt a
new name. Under the terms of the merger agreement, BSB stockholders will receive
two shares of the combined holding company common stock for each share of BSB
common stock held. The merger, was unanimously approved by the boards of
directors of NBT and BSB, is subject to regulatory and shareholder approvals. A
copy of the definitive documents related to the merger was filed under cover of
a current report on Form 8-K on April 28, 2000.
On July 31, 2000, the Board of Directors announced a quarterly cash dividend
of $0.25 per share payable on September 8, 2000 to shareholders of record at the
close of business on August 21, 2000.
Financial Condition
-------------------
Total assets of the Company increased from $2,240.9 million at December 31,
1999 to $2,288.5 million at June 30, 2000. During the first six months of 2000,
the Company originated $113.6 million of commercial loans, which contributed to
a net increase in the commercial loan portfolio of $82.2 million from $904.6
million at December 31, 1999 to $986.8 million at June 30, 2000. The interest
rates on these loans are generally tied to the Bank's Prime Rate. Consumer loans
decreased from $468.0 million at December 31, 1999 to $448.4 million at June 30,
2000, and during this period the Company originated $90.0 million in consumer
loans. Real estate loans increased from $349.6 million at December 31, 1999 to
$362.9 million at June 30, 2000. During the above mentioned period, the Company
originated $41.8 million of real estate loans, of which $5.9 million of
residential real estate loans were sold. Investment securities decreased from
$401.7 million at December 31, 1999 to $382.1 million at June 30, 2000.
The average commercial loan at June 30, 2000 was $182,000. Total loan
commitments to the Bank's 10 largest lending relationships ranged from $16.6
million to $21.6 million at June 30, 2000. Outstanding loan balances for these
10 relationships ranged from $20.3 million, made up of 4 individual loans, to
$5.7 million, made up of 7 individual loans. These loans generally have varied
sources of repayment and collateral. The Bank continually reviews all larger
group credits and often sells participations in these credits to other local
banks to limit exposure.
Non-performing loans are shown in a table within this report. See "Non-
Performing Loans and ORE". Total non-performing loans declined from 0.67% of
total loans at December 31, 1999 to 0.58% of total loans at June 30, 2000. Total
loans, in all types of loan portfolios, which were 30-89 days past due, rose
from $18.5 million at December 31, 1999 to $18.9 million at June 30, 2000.
Respectively, these dollar amounts represent 1.07% and 1.05% of total loans at
those dates, and historically have fluctuated from quarter to quarter.
The competition for consumer loans has increased significantly, mainly due
to the Bank being unable to remain competitive with the rates offered by
automobile captive finance companies. Because of this competition, the total
consumer loan portfolio has declined from $468.0 million at December 31, 1999 to
$448.4 million at June 30, 2000. Net charge-offs remained steady from the second
quarter of 1999 to the second quarter 2000 amount of $2.7 million. This,
combined with the continued decline in non-performing assets to $11.0 million at
June 30, 2000 from $12.5 million at December 31, 1999, and an
7
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Item 2 - continued
increase in the allowance for loan losses from $29.1 million at December 31,
1999 to $33.9 million at June 30, 2000, provides, what management feels, is
sufficient reserves to cover potential loan losses. Gross asset yields through
June 30, 2000, were 8.85%, up from 8.26% for the comparable period in 1999. Net
asset yields, after credit losses, in the first six months of 2000 increased to
8.41% from 7.77% for the first six months of 1999.
Total deposits increased, totaling $1,901.2 million at December 31, 1999 as
compared to $1,933.0 million at June 30, 2000. During the first six months of
2000, the Bank's money desk funds decreased to $157.6 million at June 30, 2000
from $221.6 million at December 31, 1999, with a decrease in retail certificates
of deposit of $13.9 million to $582.4 million. Offsetting these changes,
brokered certificates of deposits increased from $231.9 million at December 31,
1999 to $249.5 million at June 30, 2000, and municipal deposits increased $44.2
million to $105.6 million. Municipal deposits carry a lower cost, in general,
than money desk deposits and brokered deposits carry a similar cost to money
desk deposits while providing more control over inflows and maturity streams.
The Bank continues to determine the lowest cost of funding while still
maintaining available sources of funding. The slower growth, or in the case of
consumer lending, the decline, in loan balances has allowed the Bank to focus on
using lower cost funding products. Interest credited to depositors and interest
paid on borrowings totaled $48.7 million during that six-month period, as
compared to $43.4 million for the first six months of 1999. The Company's
borrowings increased from $142.0 million at December 31, 1999 to $157.4 million
at June 30, 2000. Borrowings at June 30, 2000 consisted of $50.0 million of
Federal Home Loan Bank advances and a $58.1 million Federal Home Loan Bank line
of credit. Of the remaining $49.3 million, $47.1 million were securities sold
under agreement to repurchase. These borrowings, along with deposits, are used
to fund the Company's lending and investment activities.
The following factors affected shareholders' equity in the first six months
of 2000: earnings and stock options exercised increased shareholders' equity by
$12.1 million and $542,000, respectively, and offset the $5.1 million of
shareholder cash dividends and the increase of $192,000 in unrealized losses of
available for sale securities for the first six months of 2000.
Results of Operations
---------------------
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, primarily loans and investments, and interest expense on interest-
bearing liabilities, primarily deposits and borrowings. The Company's operating
results also are affected by credit losses and provisions for such future
losses, operating expenses, the level of other income, including gains or losses
on sale of loans and securities, and other fees.
The following tables set forth, for the periods indicated, information
regarding (i) the Company's average balance sheet, (ii) the total dollar amount
of interest income from interest-earning assets and the resulting average
yields, (iii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average cost, (iv) net interest income, (v)
interest rate margin and interest rate spread, (vi) net interest-earning assets,
(vii) net yield on interest-earning assets, and (viii) ratio of interest-earning
assets to interest-bearing liabilities. Average balances are based on daily or
month-end balances. No tax equivalent adjustments were made.
<PAGE>
Item 2 - continued
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Commercial loans $ 942,170 $23,426 9.95% $ 884,853 $19,565 8.84%
Consumer loans:
Passbook 97 3 12.37 129 3 9.30
Overdraft checking 515 26 20.19 1,115 29 10.40
Business line of credit 1,863 57 12.24 1,184 31 10.47
Credit cards 9,851 398 16.16 9,419 381 16.18
Personal-direct 79,831 1,951 9.78 84,708 1,963 9.27
Personal-indirect-new auto 55,541 1,132 8.15 55,636 1,133 8.15
Personal-indirect-used auto 170,103 4,041 9.50 176,117 4,097 9.31
Personal-indirect-mobile homes 67,859 1,687 9.94 58,767 1,515 10.31
Personal-indirect-other 25,427 543 8.54 24,157 470 7.78
Home equity line of credit 32,994 794 9.63 30,943 649 8.39
Checkcard reserve 2,519 356 56.53 1,742 196 45.01
Student 503 (16) (12.72) 3,611 23 2.55
--------------------------------------------------------------------------------------------------------------------------
Total consumer loans 447,103 10,972 9.82 447,528 10,490 9.38
--------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Residential-fixed 109,769 2,096 7.64 107,066 1,863 6.96
Commercial-fixed 11,036 231 8.37 5,754 106 7.37
Residential-adjustable 76,240 1,510 7.92 80,303 1,628 8.11
Commercial-adjustable 155,368 3,336 8.59 162,083 3,541 8.74
--------------------------------------------------------------------------------------------------------------------------
Total real estate loans 352,413 7,173 8.14 355,206 7,138 8.04
--------------------------------------------------------------------------------------------------------------------------
Investment securities 411,691 6,784 6.59 416,654 6,110 5.87
Mortgages held for sale 16 (7) (175.00) 7,141 214 11.99
Federal funds sold 687 9 5.24 17,667 216 4.89
--------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,154,080 $48,357 8.98% 2,129,049 $43,733 8.22%
---------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 99,800 120,101
---------------------------------------------------------------------------------------------------------------------------
Total assets $2,253,880 $2,249,150
===========================================================================================================================
Interest-bearing liabilities:
Deposits:
Savings $ 187,330 $ 1,210 2.58% $ 195,255 $ 1,237 2.53%
Money market 459,874 4,963 4.32 304,658 3,009 3.95
Certificates of deposit 1,081,038 15,699 5.81 1,088,590 13,951 5.13
NOW 26,585 83 1.25 113,315 484 1.71
Commercial checking 139,199 122,676
---------------------------------------------------------------------------------------------------------------------------
Total deposits 1,894,026 21,955 4.64 1,824,494 18,681 4.10
---------------------------------------------------------------------------------------------------------------------------
Borrowings 155,833 2,274 5.84 215,400 2,684 4.98
Manditorily reedeemable preferred securities 30,000 549 7.32 30,000 616 8.21
---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,079,859 $24,778 4.77% 2,069,894 $21,981 4.25%
---------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities 16,333 20,993
---------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,096,192 2,090,887
---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 157,688 158,263
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,253,880 $2,249,150
===========================================================================================================================
Net interest income/net interest rate spread $23,579 4.21% $21,752 3.97%
==========================================================================================================================
Net earnings assets/net interest rate margin $74,221 4.38% $59,155 4.09%
==========================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.04X 1.03X
==========================================================================================================================
</TABLE>
9
<PAGE>
Item 2 - continued
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Commercial loans $ 918,853 $44,850 9.76% $ 851,144 $37,450 8.80%
Consumer loans:
Passbook 103 6 11.65 138 8 11.59
Overdraft checking 526 54 20.53 1,151 58 10.08
Business line of credit 1,728 104 12.04 1,030 55 10.68
Credit cards 9,832 798 16.23 9,514 765 16.08
Personal-direct 80,380 3,917 9.75 83,410 3,915 9.39
Personal-indirect-new auto 56,751 2,315 8.16 53,253 2,221 8.34
Personal-indirect-used auto 174,209 8,242 9.46 166,844 7,886 9.45
Personal-indirect-mobile homes 67,140 3,325 9.90 56,675 2,828 9.98
Personal-indirect-other 25,826 1,095 8.48 21,283 904 8.50
Home equity line of credit 32,850 1,549 9.43 31,345 1,313 8.38
Checkcard reserve 2,507 668 53.29 1,764 371 42.06
Student 1,542 55 7.13 3,605 110 6.10
---------------------------------------------------------------------------------------------------------------------------
Total consumer loans 453,394 22,128 9.76 430,012 20,434 9.50
---------------------------------------------------------------------------------------------------------------------------
Real estate loans:
Residential-fixed 106,432 4,055 7.62 109,753 3,857 7.03
Commercial-fixed 11,302 479 8.48 5,759 227 7.88
Residential-adjustable 75,125 2,957 7.87 83,506 3,271 7.83
Commercial-adjustable 156,220 6,670 8.54 163,908 7,122 8.69
---------------------------------------------------------------------------------------------------------------------------
Total real estate loans 349,079 14,161 8.11 362,926 14,477 7.98
---------------------------------------------------------------------------------------------------------------------------
Investment securities 415,725 13,458 6.47 416,318 12,948 6.22
Mortgages held for sale 426 18 8.45 10,124 509 10.06
Federal funds sold 840 22 5.24 17,716 420 4.74
---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,138,317 $94,637 8.85% 2,088,240 $86,238 8.26%
---------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 103,875 115,288
---------------------------------------------------------------------------------------------------------------------------
Total assets $2,242,192 $2,203,528
===========================================================================================================================
Interest-bearing liabilities:
Deposits:
Savings $ 184,642 $ 2,393 2.59% $ 189,138 $ 2,406 2.54%
Money market 446,935 9,577 4.29 303,280 5,946 3.92
Certificates of deposit 1,097,317 31,133 5.67 1,052,409 27,319 5.19
NOW 25,916 171 1.32 112,407 937 1.67
Commercial checking 135,887 116,158
---------------------------------------------------------------------------------------------------------------------------
Total deposits 1,890,697 43,274 4.58 1,773,392 36,608 4.13
---------------------------------------------------------------------------------------------------------------------------
Borrowings 148,758 4,240 5.70 225,113 5,525 4.91
Manditorily reedeemable preferred securities 30,000 1,165 7.77 30,000 1,241 8.27
---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,069,455 $48,679 4.70% 2,028,505 $43,374 4.28%
---------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities 16,258 18,790
---------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,085,713 2,047,295
---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 156,479 156,233
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,242,192 $2,203,528
===========================================================================================================================
Net interest income/net interest rate spread $45,958 4.15% $42,864 3.98%
===========================================================================================================================
Net earnings assets/net interest rate margin $68,862 4.30% $59,735 4.11%
===========================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities 1.03X 1.03X
===========================================================================================================================
</TABLE>
10
<PAGE>
Item 2 - continued
The following table presents changes in interest income and interest expense
attributable to (i) changes in volume (change in volume multiplied by old rate),
and (ii) changes in rate (change in rate multiplied by old volume). The net
change attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 Compared to 1999 2000 Compared to 1999
Increase (Decrease) Increase (Decrease)
(Dollars In Thousands) Volume Rate Net Volume Rate Net
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income on interest-earning assets:
Commercial loans $ 1,314 $2,547 $3,861 $ 3,120 $4,280 $ 7,400
Consumer loans (69) 551 482 1,127 567 1,694
Real estate loans (262) 297 35 (883) 567 (316)
Investment securities (471) 1,145 674 (54) 564 510
Other interest-earning assets (230) (198) (428) (843) (46) (889)
---------------------------------------------------------------------------------------------------------------------------
Total $ 282 $4,342 $4,624 $ 2,467 $5,932 $ 8,399
===========================================================================================================================
Interest expense on interest-bearing liabilities:
Deposits $ 735 $2,539 $3,274 $ 2,518 $4,148 $ 6,666
Borrowings (2,547) 2,070 (477) (3,522) 2,161 (1,361)
---------------------------------------------------------------------------------------------------------------------------
Total (1,812) 4,609 2,797 (1,004) 6,309 5,305
---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 2,094 $ (267) $1,827 $ 3,471 $ (377) $ 3,094
===========================================================================================================================
</TABLE>
Interest Income
---------------
The Company's interest income on interest-earning assets increased from
$43.7 million for the three months ended June 30, 1999 to $48.4 million for the
three months ended June 30, 2000, and increased from $86.2 million for the six
months ended June 30, 1999 to $94.6 million for the six months ended June 30,
2000, respectively. These increases in interest income were the result of
increases in the average balance of interest-earning assets from $2,129.0
million to $2,154.1 million for the three months ended June 30, 1999 and June
30, 2000, and from $2,088.2 million to $2,138.3 million for the six months ended
June 30, 1999 and June 30, 2000, respectively. The increases in average balances
was accompanied by the increases in the average yield on interest-earning assets
from 8.22% to 8.98% for the three months ended June 30, 1999 and 2000, and from
8.26% to 8.85% for the six months ended June 30, 1999 and 2000, respectively.
This reflected steady increases in the Company's Prime Rate totaling 175 basis
points from the first quarter of 1999 through the second quarter of 2000.
The increases in the average balance of the commercial loan portfolio
largely accounted for the increases in interest income. The average balance of
commercial loans increased $57.3 million from the second quarter of 1999 to
$942.2 million for the second quarter of 2000, and increased $67.7 million from
the six months ended June 30, 1999 to $918.9 million for the six months ended
June 30, 2000, respectively. The average yield on commercial loans increased
from 8.84% for the second quarter of 1999 to 9.95% for the second quarter of
2000, and increased from 8.80% for the six months ended June 30, 1999 to 9.76%
for the six months ended June 30, 2000. The Prime Rate was 7.75% through the
first and second quarter of 1999, rose to 8.00% in July, 8.25% in August, 8.50%
in November 1999; it continued to increase to 8.75% in February, to 9.00% in
March, and 9.50% in May 2000.
The average balance of consumer loans decreased $400,000 from $447.5
million for the quarter ended June 30, 1999 compared to $447.1 million for the
quarter ended June 30, 2000, with an increase in yield on these assets from
9.38% for the three months ended June 30, of 1999 to 9.82% for the three months
ended June 30, 2000. The average balance of consumer loans increased 5.4% from
$430.0 million for the six-month period ended June 30, 1999 to $453.4 million
for the six-month period ended June 30, 2000, with an increase in yield on these
assets from 9.50% for the six months ended June 30, 1999 to 9.76% for the six
months ended June 30, 2000. The Company continues to emphasize origination of
indirect and direct auto loans, which adds to the Company's market base for
potential business and provides some of the highest yielding assets for the
Company. These loans provided stable interest income of $5.2 million for both
the second quarter of 1999 and the second quarter of 2000, and provided an
increase in interest income from $10.1 million compared to the six months ended
June 30, 1999 to $10.6 million
11
<PAGE>
Item 2 - continued
in the six months ended June 30, 2000.
The average balance of real estate loans decreased $2.8 million to $352.4
million for the quarter ended June 30, 2000 compared to the quarter ended June
30, 1999, and decreased $13.8 million to $349.1 million for the six months ended
June 30, 2000 compared to the six months ended June 30, 1999. The quarter period
reflected an increase in yield from 8.04% to 8.14%, resulting in a net increase
of $35,000 in interest income from real estate loans to $7.2 million. The six-
month period reflected an increase in yield from 7.98% to 8.11%, and the reduced
average balance resulted in a net decline of $316,000 in interest income from
real estate loans to $14.2 million. The Bank continues to originate a
significant amount of fixed-rate residential mortgage loans and, after filling
the remainder of its loan sale commitments in the second quarter of 2000, will
retain the current production of the residential mortgages originated in its
portfolio.
The average balance of investment securities decreased from $416.7 million
for the second quarter of 1999 to $411.7 million for the second quarter of 2000,
and decreased from $416.3 million for the six months ended June 30, 1999 to
$415.7 million for the six months ended June 30, 2000. Yields on investment
securities increased for the second quarter periods from 5.87% to 6.59%, as the
interest income on investment securities increased $674,000 for the comparative
quarters. Yields on investment securities increased for the six-month periods
from 6.22% to 6.47%, as the interest income on investment securities increased
$510,000 for the comparative six-month periods.
Interest Expense
----------------
Total interest expense increased by $2.8 million for the quarter ended June
30, 2000 as compared to the same period in 1999. The average balance of all
interest-bearing liabilities increased from $2,069.9 million for the quarter
ended June 30, 1999 to $2,079.9 million for the quarter ended June 30, 2000,
accompanied by an increase in the average rate paid on all interest-bearing
liabilities from 4.25% to 4.77% during the respective period. The average
balance of deposits increased from $1,824.5 million during the three months
ended June 30, 1999 to $1,894.0 million during the same period in 2000. This
average balance increase and the increase in the yield of deposits were major
factors contributing to the increase in interest paid on deposits from $18.7
million for the second quarter of 1999 to $22.0 million for the second quarter
of 2000. Another component of the change in interest-bearing liabilities was the
decrease in average balance of borrowings from $215.4 million for the three
months ended June 30, 1999 to $155.8 million for the three months ended June 30,
2000. This decrease in average balance more than offset an increase in the rate
paid on borrowings from 4.98% to 5.84% during the three-month period as
borrowing costs decreased to $2.3 million for the three months ended June 30,
2000. As the average balance of deposit accounts tied to money-market indices
has increased from $304.7 million at June 30, 1999 to $459.9 million, these
deposits, which reprice in anticipation of the increase in rates, has caused
deposit costs to escalate more rapidly than in prior years. A similar increase
reflected average balances rising from $303.3 million for the six-month period
ended June 30, 1999 to $446.9 million for the six-month period ended June 30,
2000.
Provision for Credit Losses
---------------------------
The provision for credit losses increased from $3.7 million to $5.0 million
for the quarters ended June 30, 1999 and June 30, 2000, respectively, and
increased from $7.2 million to $9.6 million for the six months ended June 30,
1999 and June 30, 2000, respectively. The allowance for possible credit losses
increased to $33.9 million as of June 30, 2000, compared to $29.1 million as of
December 31, 1999. See "Non-performing Loans and ORE".
Non-interest Income
-------------------
Non-interest income increased 13.3% from $3.0 million to $3.4 million for
the quarter ended June 30, 1999 to June 30, 2000, respectively, and increased
17.2% from $5.8 million to $6.8 million for the six months ended June 30, 1999
to June 30, 2000, respectively. The factors contributing to the increase from
the second quarter of 1999 to the same quarter of 2000 were increases of
$268,000 in service charges on deposit accounts, $175,000 in credit card fees,
$136,000 in fees and commissions on brokerage
12
<PAGE>
Item 2 - continued
services, and $13,000 in trust fees. Similar percentage increases for core
banking activities are noted for the six-month period ended June 30, 2000
compared to June 30, 1999.
Gains (Losses) On Sale of Securities
------------------------------------
There were no gains on the sale of securities for the second quarter of 2000 and
the six months ended June 30, 1999. This compares to gains of $185,000 for the
same quarter of 1999 and losses of $216,000 for the six months ended June 30,
1999. The Company's investment portfolio is used to maintain its liquidity
position; from time to time, securities are sold when deemed prudent by
management, to adjust the interest rate sensitivity of the Company's balance
sheet.
Gains (Losses) On Sale of Loans
-------------------------------
In prior years, the practice of the Company had been to sell or securitize
long-term, fixed-rate residential mortgage loans. This provided liquidity to
fund shorter-term, or more rate-sensitive assets, and collateral to provide
borrowing for lending activities. In 2000, the Company started to retain
originated mortgages for its own portfolio. As a result of this practice, the
Company sold or securitized $1.3 million and $35.2 million for the second
quarter of 2000 and 1999, respectively. This resulted in gains of $21,000 and
losses of $310,000 for the same two periods, respectively. For the six-month
period ended June 30, 2000 and 1999, the Bank securitized or sold $5.9 million
and $82.1 million, respectively, of residential mortgage loans. These sales
generated gains of $28,000 and losses of $303,000 for the same six-month
periods.
Operating Expense
-----------------
Operating expense decreased from $12.7 million for the quarter ended June
30, 1999 to $11.7 million for the quarter ended June 30, 2000, and also
decreased from $23.8 million for the six months ended June 30, 1999 to $23.4
million for the six months ended June 30, 2000. The main factor contributing to
the decrease was the recognition of $1.4 million acquisition charges in the
first six months of 1999. Permanent cost savings from the Skaneateles Bancorp,
Inc. acquisition and continued emphasis on expense controls has kept operating
expense levels down in 2000.
Income Taxes
------------
The income tax expense was $4.1 million and $3.5 million for the quarters
ended June 30, 2000 and June 30, 1999, respectively, and $7.7 million and $6.8
million for the six months ended June 30, 2000 and June 30, 1999, respectively.
These increases were mainly due to increased levels of taxable income.
Non-Performing Loans and ORE
----------------------------
When a borrower fails to make a scheduled payment on a loan, the Company
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made within five business days after the expiration of
the payment grace period, set forth in the loan contract. In most cases,
deficiencies are cured promptly. If a delinquency extends beyond 60 days, the
loan and payment histories are reviewed and legal proceedings may be instituted
to remedy the default. While the Company generally prefers to work with
borrowers to resolve such problems, the Company does initiate foreclosure
proceedings or pursues other legal collection procedures, as necessary, to
minimize any potential loss. Once the Company takes legal title to the property,
it is classified as ORE on the Statement of Condition.
13
<PAGE>
Item 2 - continued
Loans are placed on a non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. Such loans include potential problem
loans where known information about possible credit problems of borrowers has
caused management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
Other than with respect to consumer loans, the Company does not accrue interest
on loans greater than 90 days or more past due for the payment of interest
unless the value of the collateral and active collection efforts ensure full
recovery. Consumer loans are charged-off before they become non-accrual.
The following table sets forth information regarding non-performing loans
which are 90 days or more overdue and ORE held by the Company at the dates
indicated.
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars In Thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial loans:
Non-accrual loans $ 6,646 $ 8,448
Consumer loans:
Accruing loans 90 days overdue 505 945
Residential real estate loans:
Non-accrual loans 1,960 2,161
Commercial real estate loans:
Non-accrual loans 1,375 53
---------------------------------------------------------------------------------------------------------------------------
Total non-performing loans and accruing loans 90 days overdue $10,486 $ 11,607
===========================================================================================================================
Total non-performing loans to total gross loans 0.58% 0.67%
Total real estate acquired in settlement of
loans at net realizable value $ 508 $ 910
Total non-performing loans and real estate acquired in settlement
of loans at net realizable value to total assets 0.48% 0.56%
</TABLE>
Total non-performing loans and ORE, which is defined to include property
acquired by foreclosure or by deed in lieu of foreclosure, decreased to $11.0
million, or 0.48% of total assets at June 30, 2000, compared to $12.5 million,
or 0.56% of total assets at December 31, 1999.
At December 31, 1999, non-performing residential real estate loans totalled
$2.2 million and included 40 loans. At June 30, 2000, non-performing residential
real estate loans totalled $2.0 million and included 35 loans.
At December 31, 1999, there was 1 non-performing commercial real estate loan
of $53,000. At June 30, 2000, there were 2 non-performing commercial real estate
loans totalling $1.4 million. Both of these loans are with one borrower who is
experiencing cash flow problems in these and other lines of business. Unused
space has recently been leased and some payments have been made but workout is
expected throughout the year 2000.
Non-performing commercial loans at December 31, 1999 totalled $8.4 million
and included 34 individual loans ranging in size from $6,000 to $1.2 million. At
June 30, 2000, non-performing commercial loans decreased to $6.6 million and
consisted of 36 individual loans ranging in size from $7,000 to $1.0 million.
At December 31, 1999, the Company had $0.9 million of consumer loans 90 days
or more past due which were accruing interest, as compared to $0.5 million at
June 30, 2000.
At June 30, 2000, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totalled $4.4 million with a
corresponding valuation allowance of $1.9 million. At December 31, 1999, these
figures totalled $5.5 million and $1.8 million, respectively.
At December 31, 1999, ORE totalled $910,000, which consisted of 10 single-
family residential properties with a book value totalling $526,000 and 4
commercial real estate properties with a book value totalling $384,000. At June
30, 2000, ORE totalled $508,000, which consisted of 10 single-family residential
properties totalling $318,000 million and 1 commercial real estate property with
a book value of $190,000.
14
<PAGE>
Item 2 - continued
The following table summarizes activity in the Company's allowance for
possible credit losses during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars In Thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average gross loans outstanding $1,774,460 $1,714,022 $1,753,025 $1,669,747
========================================================================================================================
Allowance at beginning of period $ 31,705 $ 26,149 $ 29,134 $ 25,030
------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Commercial loans 1,987 1,913 3,903 3,321
Consumer loans 919 1,446 1,949 2,314
Residential real estate loans 90 48 92 215
Commercial real estate loans 108 2 107 341
------------------------------------------------------------------------------------------------------------------------
Total loan charge-offs 3,104 3,409 6,051 6,191
Recoveries:
Commercial loans 119 359 687 645
Consumer loans 265 267 607 421
Residential real estate loans 49 49
------------------------------------------------------------------------------------------------------------------------
Total recoveries 384 675 1,294 1,115
------------------------------------------------------------------------------------------------------------------------
Net charge-offs 2,720 2,734 4,757 5,076
Provision for credit losses
charged to expense 4,951 3,695 9,559 7,156
------------------------------------------------------------------------------------------------------------------------
Allowance at end of period $ 33,936 $ 27,110 $ 33,936 $ 27,110
========================================================================================================================
Ratio of net charge-offs to:
Average gross loans outstanding (annualized) 0.61% 0.64% 0.54% 0.61%
Ratio of allowance to:
Non-performing loans 323.63% 141.54% 323.63% 141.54%
Period-end loans outstanding 1.89% 1.57% 1.89% 1.57%
</TABLE>
Net charge-offs remained at $2.7 million for the second quarter of 1999 and
2000. Management continues to take an aggressive approach to the charge-off of
problem loans and continues to review the level of reserves to maintain a level
of loan loss reserves that is considered adequate to cover potential credit
losses.
Sources of Funds
----------------
Funding for the Company's assets is derived primarily from demand and time
deposits and long and short-term borrowings. The competition for deposits
continues to be very strong in the market area and remains a focus of the Bank's
effort. The average balance of all interest-bearing liabilities increased from
$2,069.9 million for the three-month period ended June 30, 1999 to $2,079.9
million for the same period ended June 30, 2000. The most significant increase
in interest-bearing liabilities for the quarter ended June 30, 2000 compared to
June 30, 1999, was an increase in the average balance of moneymarket accounts.
The average balance of moneymarket accounts increased to $459.9 million for the
second quarter of 2000 from $304.7 million for the second quarter of 1999. A
shift in balances from checking products to money market accounts is reflected
because of a retail sweep account program maintained by the Bank. The balance at
June 30, 2000 that represented checking accounts that were swept into
moneymarket accounts approximated $87.9 million. To fund loan growth, the Bank
looked to other areas to augment retail deposits as a source of funds.
Certificates of deposits from a money desk decreased to an average balance of
$165.0 million in the second quarter of 2000 from a $255.9 million average
balance in the same quarter in 1999. Brokered certificates of deposit
additionally remain a source of funding for asset growth. The average balance of
these deposits grew from $164.9 million for the second quarter of 1999 to $213.0
million for the second quarter of 2000. With the rise in interest rates over the
past year, the
15
<PAGE>
Item 2 - continued
overall cost of funds for all certificates of deposits increased from 5.13% to
5.81% from the second quarter of 1999 to the same period in 2000. Total
borrowings decreased from an average balance of $215.4 million to $155.8 million
from the quarter ended June 30, 1999 to the same quarter ended June 30, 2000.
With an increase in the average rate paid on borrowings from 4.98% for the
quarter ended June 30, 1999 to 5.84% for the same quarter in 2000 offset by the
decrease in average balance, interest expense on these borrowings decreased from
$2.7 million for the second quarter of 1999 to $2.3 million for the second
quarter of 2000.
Liquidity and Capital Resources
-------------------------------
A fundamental objective of the Company is to manage its liquidity
effectively. Prudent liquidity management insures that the Company can meet all
of its contractual obligations, meet its customers' loan demands, fund all of
its operations and minimize the effects of interest rate fluctuation on
earnings. There were no material changes in the Company's liquidity or interest
rate sensitivity since December 31, 1999.
The Company's primary sources of funds consist of deposits, amortization and
prepayments of outstanding loans and mortgage-backed securities, bond
maturities, and such other sources as long- and short-term borrowings, and sales
of investment securities, loans, and mortgage-backed securities. At June 30,
2000, the total of approved loan commitments amounted to $70.2 million. Long-
term borrowings of $23.0 million are scheduled to mature in the years 2002
through 2019. Savings certificates, which are scheduled to mature during the
next 12 months, totalled $861.6 million. Management expects that a substantial
portion of these maturing certificates will remain on deposit with the Company.
At June 30, 2000, the Company's Tier I leverage ratio, as defined in
regulatory guidelines, was 8.21%, which exceeds the current requirements for the
Company. At June 30, 2000, the Company's total capital-to-risk-weighted assets
ratio, calculated under the Federal Reserve Board's risk-based capital
requirements, was 11.19%.
The Company's book value per common share increased from $15.11 at December
31, 1999 to $15.75 at June 30, 2000.
Impact of Inflation and Changing Prices
---------------------------------------
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
price of goods and services.
16
<PAGE>
Item 2 - continued
Other Matters
-------------
On April 19, 2000, and amended as of May 17, 2000, BSB Bancorp, Inc. (BSB)
and NBT Bancorp Inc. (NBT) entered into a definitive agreement to merge. This
strategic alliance is expected to create a bank holding company with assets of
approximately $4.7 billion and proforma market capitalization of approximately
$539 million. As part of the merger, the combined holding company will adopt a
new name. Under the terms of the merger agreement, BSB stockholders will receive
two shares of the combined holding company common stock for each share of BSB
common stock held. The merger, was unanimously approved by the boards of
directors of NBT and BSB, is subject to regulatory and shareholder approvals. A
copy of the definitive documents related to the merger was filed under cover of
a current report on Form 8-K on April 28, 2000. (see exhibit in Part II, Other
Information).
Subsequent to the end of the second quarter, Glenn Small, the Bank's former
senior commercial lending officer, along with three other commercial loan
officers, resigned from the Bank, and began employment with another commercial
bank in the Binghamton area. Although the Bank expects as an initial matter that
some commercial customers may transfer their business, the Bank's commercial
lending function continues to operate in the ordinary course under a new senior
officer. The Bank is unable to determine at this time if the departure of Mr.
Small will have a material impact on its commercial lending business.
Forward-Looking Statements
--------------------------
Certain statements in Management's Discussion and Analysis are forward-
looking statements within the meaning of the Securities Act of 1933, as amended
and the Securities Exchange Act of 1934, as amended. Actual results,
performance, or developments may differ materially from those expressed or
implied by such forward-looking statements as a result of market uncertainties
and other factors. The financial services market generally, and the market for
the Company's products and services specifically, is characterized by a high
degree of competition and rapidly changing local, national, and global market,
financial and economic conditions. Such developments, as well as unforeseen
developments in the financial services industry, could have an adverse impact on
the Company's financial position and results of operations.
Market Prices and Related Shareholder Matters
---------------------------------------------
The stock of the Company is listed on The Nasdaq Stock Market National
Market Tier under the symbol BSBN. As of June 30, 2000, the Company had 2,314
shareholders of record and 10,270,196 shares of common stock outstanding. The
number of shareholders does not reflect persons or entities who hold their stock
in nominee or "street" name through various brokerage firms.
The following table sets forth the market price information as reported by
The Nasdaq Stock Market for the common stock.
<TABLE>
<CAPTION>
Cash
Price Range Dividends
-------------------------------------------------------------------------------------------------
1999 High Low
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $32.68 $24.25 $0.22
Second Quarter 28.00 24.25 0.23
Third Quarter 27.63 24.00 0.25
Fourth Quarter 24.88 18.50 0.25
2000
First Quarter $22.97 $16.75 $0.25
Second Quarter 21.75 17.50 0.25
</TABLE>
17
<PAGE>
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's consolidated results of operations depend to a large extent
on the level of its net interest income, which is the difference between
interest income from interest-earnings assets (such as loans and investments)
and interest expense on interest-bearing liabilities (such as deposits and
borrowings). If interest-rate fluctuations cause the Company's cost of funds to
increase faster than the yield on its interest-bearing assets, net interest
income will decrease. In addition, the market values of most of its financial
assets are sensitive to fluctuations in market interest rates. The Company
measures and manages its interest-rate risk by focusing on the Company's "gap",
which is the measure of the mismatch between the dollar amount of the Company's
interest-earning assets and interest-bearing liabilities which mature or reprice
within certain time frames.
Based on the Company's latest analysis of asset/liability mix (December 31,
1999), management's simulation analysis of the effects of changing interest
rates on a static balance sheet project that an immediate 200 basis point
increase in interest rates over the 12 months ended December 31, 2000 would
decrease net interest income for that period by 0.33% or less and that a similar
decrease in interest rates would increase net interest income by 0.23% or less.
The test is based on a number of assumptions and there can be no assurance that
if interest rates did move by two percent that the Company's results of
operations would be impacted as estimated. Although the Company uses various
monitors of interest-rate risk, the Company is unable to predict future
fluctuations in interest rates or the specific impact thereof.
Changes in interest rates can also affect the amount of loans the Company
originates, as well as the value of its loans and other interest-earning assets
and its ability to realize gains on the sale of such assets and liabilities.
Prevailing interest rates also affect the extent to which borrowers prepay loans
owned by the Company. When interest rates increase, borrowers are less likely to
prepay their loans, and when interest rate decrease, borrowers are more likely
to prepay loans. Funds generated by prepayment might be invested at less
favorable interest rates. Prepayments may adversely affect the value of mortgage
loans, the levels of such assets that are retained in the Company's portfolio,
net interest income and loan servicing income. Similarly, prepayments on
mortgage-backed securities can adversely affect the value of such securities and
the interest income generated by them.
Increases in interest rates might cause depositors to shift funds from
accounts that have a comparatively lower cost (such as regular savings accounts)
to accounts with a higher cost (such as certificates of deposits). If the cost
of deposits increases at a rate greater than yields on interest-earning assets
increase, the interest-rate spread will be negatively affected. Changes in the
asset and liability mix also affect the Company's interest-rate risk.
The Company faces substantial competition for deposits and loans throughout
its market area both from local financial institutions and from out-of-state
financial institutions that either solicit deposits or maintain loan production
offices in the Company's market area. The Company competes for deposits and
loans primarily with other financial service providers such as savings
institutions, commercial banks, credit unions, money market funds, and other
investment alternatives. The Company believes that its ability to compete
effectively depends largely on its ability to compete with regard to interest
rates, as well as service fees, personalized services, quality and range of
financial products and services offered, convenience of office hours and
locations, and automated services.
<PAGE>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
Not applicable
Item 2 - Changes in Securities
---------------------
Not applicable
Item 3 - Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) On April 24, 2000, the Company held an Annual Meeting of
Shareholders (the "Annual Meeting") to elect four
directors for a term of three years and to ratify the
appointment of the Company's independent auditors for
the fiscal year ended December 31, 2000.
(b) At the Annual Meeting, Messrs. David A. Niermeyer, Mark
T. O'Neil, Jr., Thomas L. Thorn, and Mrs. Diana J. Bendz
were elected as directors. Each of the following
directors' term of office continued after the Annual
Meeting:
Ferris G. Akel Ann G. Higbee
Robert W. Allen Thomas F. Kelly
William C. Craine William H. Rincker
John P. Driscoll
(c) Set forth below is a description of each matter voted
upon at the Annual Meeting and the number of votes cast
for, against or withheld, as well as the number of
abstentions and broker non-votes as to each such matter.
1. Four directors were elected for a term of three
years, or until their successors have been elected
and qualified. A list of such directors, including
the votes for, withheld and abstentions, and
broker non-votes, is set forth below:
<TABLE>
<CAPTION>
Votes For Withheld Abstentions Broker Non-votes
<S> <C> <C> <C> <C>
Diana J. Bendz 8,091,178 215,741 0 0
David A. Niermeyer 8,090,675 216,244 0 0
Mark T. O'Neil, Jr. 8,088,369 218,550 0 0
Thomas L. Thorn 7,898,501 408,418 0 0
</TABLE>
2. The appointment of PricewaterhouseCoopers LLP as
the Company's independent auditors for the fiscal
year ended December 31, 2000 was ratified. There
were 8,262,254 votes cast for the proposal, 20,248
votes against the proposal, and 24,392 votes
abstained. There were 25 broker non-votes.
Item 5 - Other Information
-----------------
Not applicable
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger, dated as of April 19, 2000,
by and between NBT Bancorp Inc. and BSB Bancorp, Inc.
(incorporated by reference to BSB Bancorp's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on April 28, 2000).
19
<PAGE>
PART II. OTHER INFORMATION
2.2 BSB Option Agreement, dated as of April 19, 2000, by and
between BSB Bancorp, Inc. and NBT Bancorp Inc.
(incorporated by reference to BSB Bancorp's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on April 28, 2000).
2.3 NBT Option Agreement, dated as of April 19, 2000, by and
between NBT Bancorp Inc. and BSB Bancorp, Inc.
(incorporated by reference to BSB Bancorp's Current Report
on Form 8-K filed with the Securities and Exchange
Commission on April 28, 2000).
2.4 Amendment to the Agreement and Plan of Merger, dated May
17, 2000, by and between NBT Bancorp Inc. and BSB Bancorp,
Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 28, 2000 (Agreement and Plan of Merger by and between NBT
Bancorp Inc. and BSB Bancorp, Inc.)
20
