=============================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 20, 1997
HUBCO, INC.
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation)
1-10699 22-2405746
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
1000 MacArthur Boulevard
Mahwah, New Jersey 07430
(Address of principal executive offices)
(201) 236-2600
(Registrant's telephone number, including area code)
=============================================================
<PAGE>
This Form 8-K/A amends the Current Report on Form 8-K of HUBCO, Inc.
("HUBCO") dated October 22, 1997 (the "Original Form 8-K") and the Current
Report on Form 8-K/A of HUBCO dated May 15, 1998 (the "May 15, 1998 Form
8-K/A"), previously filed with the Securities and Exchange Commission (the
"Commission"). The Original Form 8-K was filed to report the announcement of the
(then proposed) acquisition by HUBCO of Poughkeepsie Financial Corp. ("PFC") and
the Bank of the Hudson ("BTH"), a federal savings bank wholly owned by PFC. The
May 15, 1998 Form 8-K/A was filed to amend the Original Form 8-K to identify it
as an Item 2 filing. This Form 8-K/A amends the Original Form 8-K and the May
15, 1998 Form 8-K/A by providing the required financial statements and
representing that the pro forma financial information will be filed by
amendment.
Information required by this form has been previously reported by the
registrant in its Registration Statement on Form S-4 filed with the Commission
on December 15, 1997, its Amendment No. 1 to the Registration Statement on Form
S-4/A filed with the Commission on January 30, 1998, and its Registration
Statement on Form S-4 filed with the Commission on May 15, 1998.
Item 2. Acquisition or Disposition of Assets.
On April 24, 1998, HUBCO completed its previously announced
acquisition of PFC and BTH by merging PFC into HUBCO pursuant to the Amended and
Restated Agreement and Plan of Merger dated as of October 22, 1997 among HUBCO,
PFC, and BTH. As a result, BTH became HUBCO's New York-based bank subsidiary. In
the merger, each share of PFC common stock was converted into .300 shares of
HUBCO Common Stock. As of December 31, 1997, PFC had total assets of $875
million, total deposits of $620 million and stockholders' equity of
approximately $72 million.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) The financial statements required by this item follow.
<PAGE>
<TABLE>
<CAPTION>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
March 31, December 31,
ASSETS: 1998 1997
-----------------------------------------
<S> <C> <C>
Cash and due from banks $ 9,952 $ 11,750
Securities available for sale:
Mortgage-backed securities 109,781 119,730
Other securities 5,185 7,207
Securities held to maturity:
Mortgage-backed securities 24,426 25,532
------------- -------------
Total securities 139,392 152,474
Loans, net
Residential real estate mortgage loans 386,423 388,284
Commercial real estate mortgage loans 236,702 237,944
Commercial business loans 2,964 8,417
Installment loans 40,552 39,901
-------------- --------------
666,641 674,545
Allowance for loan losses (12,123) (9,421)
Residential mortgage loans held for sale -- --
-------------- --------------
Total loans, net 654,518 665,125
Federal Home Loan Bank stock 10,071 10,071
Accrued interest and dividends receivable 5,375 5,325
Bank premises and equipment 8,304 8,411
Other real estate owned 3,737 4,564
Net deferred tax assets 15,639 14,991
Other assets 1,856 2,781
============== ==============
Total assets $ 848,844 $ 875,492
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Savings accounts $ 102,048 $ 96,979
Certificates of deposit 328,113 330,279
Money market deposits 136,581 140,387
Demand deposits 56,108 52,732
-------------- --------------
Total deposits 622,850 620,377
Advances from Federal Home Loan Bank 39,500 66,900
Securities sold under repurchase agreements 103,637 101,936
Accrued interest payable 848 1,343
Mortgagors' escrow deposits 3,530 4,563
Other liabilities 6,734 7,802
-------------- --------------
Total liabilities 777,099 802,921
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 128 127
Additional paid-in capital 67,541 66,823
Retained earnings 6,149 7,682
Accumulated other comprehensive income (136) (124)
Treasury stock, at cost (1,937) (1,937)
Total stockholders' equity 71,745 72,571
============== ==============
Total liabilities and
stockholders' equity $848,844 $ 875,492
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1998 1997
-------------------------------------------
<S> <C> <C>
Interest and dividend income:
Real estate mortgage loans $ 12,929 $ 12,571
Other loans 1,003 834
Mortgage-backed securities 2,215 2,333
Other securities 309 522
Federal funds and money market investments 7 36
----------------- ----------------
Total interest and dividend income 16,463 16,296
----------------- ----------------
Interest expense:
Deposits 7,080 6,635
Borrowings 2,324 2,864
----------------- ----------------
Total interest expense 9,404 9,499
----------------- ----------------
Net interest income 7,059 6,797
Provision for loan losses 2,850 300
----------------- ----------------
Net interest income after provision for loan losses 4,209 6,497
Non-interest income:
Mortgage banking income 46 57
Fees and other income, net 218 727
----------------- ----------------
Total other income 264 784
Non-interest expenses:
Salaries and wages 2,328 2,169
Employee benefits 688 716
Legal 121 136
Occupancy and equipment 827 709
Deposit insurance 143 136
Net cost of operating other real estate owned 140 223
Advertising and promotion 283 268
Data processing 168 170
Other 966 852
----------------- ----------------
Total other expenses 5,664 5,379
----------------- ----------------
Income (loss) before income taxes (1,191) 1,902
Income tax expense (benefit) (420) 776
----------------- ----------------
Net income (loss) $ (771) $ 1,126
Net income (loss) per common share - basic $(0.06) $ 0.09
Net income (loss) per common share - diluted $(0.06) $ 0.09
Dividends per share $ 0.06 $ 0.03
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Increase (decrease) in cash
(Unaudited)
Three Months Ended
March 31,
1998 1997
----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (771) $ 1,126
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,850 300
Writedowns on other real estate owned -- 250
Depreciation 280 227
Amortization of premiums and discounts on mortgage-backed
securities, other securities and loans 272 247
Net losses (gains) on sale of assets 659 (183)
Deferred tax expense (benefit) (420) 776
Increase in interest and dividend receivable (50) (582)
Decrease in other assets 705 1
Decrease in interest payable (495) (541)
Decrease in other liabilities (1,068) (1,310)
Increase in residential loans held for sale -- (903)
-------------- --------
Net cash provided by(used in) operating activities 1,962 (592)
-------------- --------
Cash flows from investing activities:
Purchase of other securities - available for sale (1,072) (2,000)
Principal repayments on mortgage-backed securities - available for sale 9,174 4,841
Principal repayments on mortgage-backed securities - held to maturity 1,080 842
Proceeds from sales of mortgage-backed securities - available for sale 1,000 --
Proceeds from maturities of other securities - available for sale 2,013 --
FHLB Stock purchases -- (310)
Loan originations, net of repayments 4,671 (14,246)
Proceeds from sales of loans in portfolio 3,253 7,666
Purchases of fixed assets (173) (318)
Proceeds from sale of other real estate owned 596 1,566
-------------- --------
Net cash provided by (used in) investing activities 20,542 (1,959)
-------------- --------
Cash flows from financing activities:
Net increase in demand, money market, and savings accounts 4,639 3,860
Net increase (decrease) in time deposits (2,166) 4,026
Net increase (decrease) in repurchase agreements 1,701 (4,532)
Repayment of long-term FHLB borrowings (10,000) --
Net (increase) decrease in short-term FHLB borrowings (17,400) 900
Decrease in escrow deposits (1,033) (759)
Stock issued 719 26
Dividends paid (762) (315)
-------------- --------
Net cash provided by (used in) financing activities (24,302) 3,206
-------------- --------
Net increase (decrease) in cash and cash equivalents (1,798) 655
Cash and cash equivalents, beginning of period 11,750 6,863
============== ========
Cash and cash equivalents, end of period $ 9,952 $ 7,518
============== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Formation of Holding Company
Poughkeepsie Financial Corp., a Delaware corporation, is a thrift holding
company whose sole subsidiary is Bank of the Hudson (the "Bank"). On May 30,
1997, the Bank completed a reorganization and formation of a thrift holding
company - Poughkeepsie Financial Corp. The holding company structure and
reorganization was approved by the shareholders of the Bank on April 30, 1997.
As a result of the holding company formation, each share of common stock of the
"Bank" became one share of common stock of Poughkeepsie Financial Corp.
Note 2 - Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of Poughkeepsie
Financial Corp. (together with its subsidiary, the "Company") include all
adjustments which management believes necessary for a fair presentation of the
Company's financial condition at March 31, 1998, the results of its operations
for the three month period ended March 31, 1998 and 1997, and the statements of
cash flows for the three months then ended. Adjustments are of a normal
recurring nature. The consolidated financial statements and related notes have
been prepared in accordance with Regulation S-X under the Securities Exchange
Act of 1934, as amended, and consequently, do not include all information and
notes necessary for a complete presentation of financial condition, results of
operations and cash flows in conformity with generally accepted accounting
principles. These interim financial statements should be read in conjunction
with the audited financial statements and note disclosures in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. As the Bank
represents the Company's sole investment, the interim periods presented herein
are comparable to prior year data.
Note 3 - Amended and Restated Agreement and Plan of Merger
Poughkeepsie Financial Corp., Bank of the Hudson and HUBCO,
Inc. entered into an Amended and Restated Agreement and Plan of Merger ("Merger
Agreement") dated as of October 22, 1997. Under the terms of this agreement each
share of Poughkeepsie Financial Corp. Common Stock will be exchanged for .30
shares of HUBCO Common Stock, as long as the median closing price for HUBCO
Common Stock during a pre-closing period is at or above $33.33. If the median
HUBCO price during the pre-closing period is below $33.33 but above $31.25, each
share of Poughkeepsie Financial Corp. Common Stock would be exchanged for shares
of HUBCO Common Stock with value of $10.00. If HUBCO's median pre-closing price
is $31.25 or below, a maximum exchange ratio of .32 would apply. In addition,
the agreement provided that Poughkeepsie Financial Corp. was able to increase
its quarterly cash dividends to amounts substantially equivalent to HUBCO's cash
dividend as adjusted for the exchange ratio. In connection with the execution of
the Merger Agreement, Poughkeepsie Financial Corp. issued an option to HUBCO
which, under certain defined circumstances, would enable HUBCO to purchase up to
2,000,000 shares of Poughkeepsie Financial Corp. Common Stock at $7.875 per
share. The transaction, which is expected to close in the second quarter of
1998, is expected to be treated as a tax-free exchange to holders of
Poughkeepsie Financial Corp. stock and to be accounted for as a pooling of
interests.
Note 4 - Earnings Per Share
Earnings per share
The Company adopted SFAS No. 128, "Earnings Per Share," which became
effective in the fourth quarter of 1997. As required, the Company has restated
all prior periods to the new definitions of Basic and Diluted Earnings per
share. The restatement did not have a material effect on previously reported
earnings per share amounts. Basic earnings per common share is computed by
dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per common share includes the additional dilutive effect of
stock options using the average market price of the Company's common stock for
the period.
<PAGE>
A summary of the basic and diluted earnings per share calculations for the three
months ended March 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
3/31/98 3/31/97
----------- ----------
<S> <C> <C>
Net income (loss) (in thousands) $(771) $1,126
========== ==========
Weighted average basic shares outstanding 12,712,257 12,592,829
Effect of dilutive stock options 761,721 454,758
---------- ----------
Weighted average diluted shares outstanding 13,473,978 13,047,587
========== ==========
Earnings per share:
Basic $(0.06) $0.09
Diluted $(0.06) $0.09
</TABLE>
Note 5 - Supplemental Disclosure of Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents includes cash,
amounts due from banks, federal funds sold and money market investments.
Supplemental cash flow disclosures are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
---------------------------------
($ in thousands)
<S> <C> <C>
Cash paid during period for:
Interest credited on deposits $7,125 $6,619
Interest paid on borrowings 2,774 3,421
Income/franchise taxes paid 277 22
Non-cash investing and financing activities:
Increase in net unrealized losses on available
for sale securities, net of deferred tax effect $ 12 $ 35
Loans transferred to OREO 46 317
Note 6 - Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and display of comprehensive income in
financial statements. The standard does not, however, specify when to recognize
or how to measure items that make up comprehensive income. Comprehenwsive income
represents net income and certain amounts reported directly in stockholders'
equity, such as the net unrealized gain or loss on securities available for
sale. While SFAS No. 130 does not reuqire a specific reporting format, it does
require that an enterprise display an amount representing total comprehensive
income for the period.
The Company's only item of accumlated other comprehensive income included in
stockholders' equity is the net unrealized loss on securities available for
sale, net of taxes. Total comprehensive income (loss), representing net income
(loss) and the change in the after-tax net unrealized loss on securities
available for sale, amounted to $(783) thousand and $1,091 for the three month
periods ended March 31, 1998 and 1997, respectively.
</TABLE>
<PAGE>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(Dollars in
thousands)
<S> <C> <C>
ASSETS
Cash and due from banks................................................................... $ 11,750 $ 6,863
Securities available for sale: (Notes 4 and 9)
Mortgage-backed securities........................................................... 119,730 113,575
Other securities..................................................................... 7,207 22,215
Securities held to maturity: (Note 4)
Mortgage-backed securities, fair value of
$25,425 in 1997 and $25,597 in 1996................................................ 25,537 29,957
-------- --------
Total securities................................................................ 152,474 165,747
-------- --------
Loans, net:
Residential real estate mortgage loans............................................... 388,284 393,513
Commercial real estate and multi-family residential mortgage loans................... 237,944 210,982
Commercial loans..................................................................... 8,417 7,194
Installment loans.................................................................... 39,901 31,194
-------- --------
674,546 642,883
Less allowance for loan losses (Note 5)................................................... (9,421) (8,652)
Residential loans held for sale........................................................... -- 456
-------- --------
Total loans, net................................................................ 665,125 634,687
-------- --------
Federal Home Loan Bank stock.............................................................. 10,071 9,760
Accrued interest and dividends receivable................................................. 5,325 5,278
Premises and equipment, net (Note 7)...................................................... 8,411 6,793
Other real estate owned (Note 6).......................................................... 4,564 10,726
Net deferred tax assets (Note 10)......................................................... 14,991 16,812
Other assets.............................................................................. 2,781 2,024
-------- --------
Total assets.................................................................... $875,492 $858,690
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(Dollars in
thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts (Note 14)
Savings accounts..................................................................... $ 96,979 $ 93,371
Time deposits........................................................................ 330,279 314,059
Money market deposits................................................................ 140,387 126,233
Demand deposits...................................................................... 52,732 41,583
-------- --------
Total deposits.................................................................. 620,377 575,246
-------- --------
Borrowings from the FHLB (Note 8)......................................................... 66,900 84,800
Securities Sold Under Repurchase Agreements (Note 9)...................................... 101,936 113,894
Accrued interest payable.................................................................. 1,343 1,618
Mortgagors' escrow deposits............................................................... 4,563 4,134
Other liabilities......................................................................... 7,802 7,330
-------- --------
Total liabilities............................................................... 802,921 787,022
-------- --------
Commitments and contingencies (Notes 9 and 13)
STOCKHOLDERS' EQUITY
Common stock ($0.01 par value; 40,000,000 shares authorized; 12,715,315 and 12,696,825
shares issued and 12,610,315 and 12,591,825 shares outstanding in 1997 and 1996,
respectively)........................................................................... 127 127
Additional paid in capital................................................................ 66,823 66,736
Retained earnings (Note 15)............................................................... 7,682 6,827
Unrealized losses on securities, net...................................................... (124) (85)
Treasury stock, at cost, 105,000 shares................................................... (1,937) (1,937)
-------- --------
Total stockholders' equity (Notes 15 and 16).................................... 72,571 71,668
-------- --------
Total liabilities and stockholders' equity...................................... $875,492 $858,690
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Real estate mortgage loans.................................................. $51,260 $48,519 $42,071
Other loans................................................................. 3,790 3,388 3,425
Mortgage-backed securities.................................................. 9,438 9,593 11,454
Other securities............................................................ 2,164 1,973 1,824
Federal funds and money market investments.................................. 71 147 185
------- ------- -------
Total interest and dividend income..................................... 66,723 63,620 58,959
------- ------- -------
Interest expense:
Deposits.................................................................... 28,211 25,834 24,321
Borrowings.................................................................. 11,064 12,023 11,154
------- ------- -------
Total interest expense................................................. 39,275 37,857 35,475
------- ------- -------
Net interest income......................................................... 27,448 25,763 23,484
Provision for loan losses........................................................ 1,850 850 1,525
------- ------- -------
Net interest income after provision for loan losses......................... 25,598 24,913 21,959
------- ------- -------
Non-interest income:
Retail banking fees and other income........................................ 3,340 2,188 1,568
Residential mortgage banking income......................................... 234 168 64
Loss on bulk sale of commercial loans....................................... -- (894) (7,546)
------- ------- -------
Total non-interest income.............................................. 3,574 1,462 (5,914)
------- ------- -------
Non-interest expense:
Salaries and wages.......................................................... 8,968 8,284 7,074
Employee benefits (Note 11)................................................. 3,188 2,467 2,127
Legal....................................................................... 611 511 595
Occupancy................................................................... 1,737 1,447 1,139
Furniture and equipment..................................................... 1,218 1,001 1,006
Deposit insurance........................................................... 551 1,426 1,447
SAIF -- special assessment (Note 20)........................................ -- 2,624 --
Net cost of operating other real estate owned (Note 6)...................... 2,508 1,143 249
Third party loan servicing expenses......................................... 486 549 645
Other....................................................................... 5,217 4,524 3,987
------- ------- -------
Total non-interest expenses............................................ 24,484 23,976 18,269
------- ------- -------
Income (loss) before income taxes........................................... 4,688 2,399 (2,224)
Income tax expense (benefit) (Note 10)........................................... 2,259 963 (18,486)
------- ------- -------
Net income............................................................. $ 2,429 $ 1,436 $16,262
======= ======= =======
Net income per share -- basic (Note 3)........................................... $ 0.19 $ 0.11 $ 1.30
======= ======= =======
Net income per share -- diluted (Note 3)......................................... $ 0.18 $ 0.11 $ 1.27
======= ======= =======
Dividends per share.............................................................. $ 0.125 $ 0.10 $ 0.08
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
RETAINED UNREALIZED STOCK
ADDITIONAL EARNINGS GAINS HELD
COMMON PAID-IN (ACCUMULATED (LOSSES)
BY TREASURY
STOCK CAPITAL DEFICIT) ON SECURITIES
ESOP STOCK
------ ---------- ------------- -------------
- ------ --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
<C> <C>
Balance at January 1, 1995.................... $125 $ 66,521 $(8,615) $(5,425) $(191
) $ (1,937)
Net income.................................... 16,262
Cash dividends, $.08 per share................ (1,000)
Allocation of ESOP Shares..................... (120) 191
Stock options exercised....................... 1 114
Change in unrealized losses on available for
sale securities, net........................ 4,998
------ ---------- ------------- -------------
- ------ --------
Balance at December 31, 1995.................. 126 66,515 6,647 (427)
- -- (1,937)
Net income.................................... 1,436
Cash dividends, $.10 per share................ (1,256)
Stock options exercised....................... 1 221
Change in unrealized losses on available for
sale securities, net........................ 342
------ ---------- ------------- -------------
- ------ --------
Balance at December 31, 1996.................. 127 66,736 6,827 (85)
- -- (1,937)
Net income.................................... 2,429
Cash dividends, $.125 per share............... (1,574)
Stock options exercised....................... 87
Change in unrealized losses on available for
sale securities, net........................ (39)
------ ---------- ------------- -------------
- ------ --------
Balance at December 31, 1997.................. $127 $ 66,823 $ 7,682 $ (124)
- -- $ (1,937)
====== ========== ============= =============
====== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at January 1, 1995.................... $50,478
Net income.................................... 16,262
Cash dividends, $.08 per share................ (1,000)
Allocation of ESOP Shares..................... 71
Stock options exercised....................... 115
Change in unrealized losses on available for
sale securities, net........................ 4,998
-------------
Balance at December 31, 1995.................. 70,924
Net income.................................... 1,436
Cash dividends, $.10 per share................ (1,256)
Stock options exercised....................... 222
Change in unrealized losses on available for
sale securities, net........................ 342
-------------
Balance at December 31, 1996.................. 71,668
Net income.................................... 2,429
Cash dividends, $.125 per share............... (1,574)
Stock options exercised....................... 87
Change in unrealized losses on available for
sale securities, net........................ (39)
-------------
Balance at December 31, 1997.................. $72,571
=============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31,
- --------------------
1997 1996
--------
- --------
(Dollars in
thousands)
Increase
(decrease)
in
cash
<S> <C>
<C>
Cash flows from operating activities:
Net income..................................................................................... $ 2,429
$ 1,436
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.................................................................
1,850 850
Writedowns on other real estate owned.....................................................
1,718 372
Depreciation..............................................................................
935 743
Amortization of premiums and discounts on mortgage-backed securities, other securities and
loans...................................................................................
1,094 239
Net (gains) losses on sale of assets......................................................
(55) 687
Deferred tax expense (benefit)............................................................
1,946 883
(Increase) decrease in interest and dividend receivable...................................
(47) 621
(Increase) decrease in other assets.......................................................
(788) (666)
Increase (decrease) in interest payable...................................................
(275) (229)
Increase (decrease) in other liabilities..................................................
472 (129)
(Increase) decrease in residential loans held for sale....................................
456 (263)
--------
- --------
Net cash provided by operating activities.................................................
9,735 4,544
--------
- --------
Cash flows from investing activities:
Purchases of mortgage-backed securities -- available for sale..................................
(39,203) (19,841)
Purchases of other securities -- available for sale............................................
(7,001) (36,459)
Proceeds from sales of mortgage-backed securities -- available for sale........................
5,534 3,096
Proceeds from sales of other securities -- available for sale..................................
- -- 37,626
Principal repayments on mortgage-backed securities -- available for sale.......................
26,833 31,278
Principal repayments on mortgage-backed securities -- held to maturity.........................
4,227 3,623
Proceeds from maturities of other securities -- available for sale.............................
22,055 133
FHLB Stock purchases...........................................................................
(311) (843)
Loan originations, net of repayments........................................................... (67,668)
(112,267)
Proceeds from sales of commercial loans held for bulk-sale.....................................
- -- 33,178
Proceeds from sales of loans in portfolio......................................................
36,468 19,828
Purchases of fixed assets......................................................................
(2,553) (1,295)
Proceeds from sale of other real estate owned..................................................
2,556 2,480
--------
- --------
Net cash used in investing activities..............................................................
(19,063) (39,463)
--------
- --------
Cash flows from financing activities:
Net increase (decrease) in demand, money market, and savings accounts..........................
28,911 29,025
Net increase in time deposits..................................................................
16,220 12,180
Net increase (decrease) in repurchase agreements...............................................
(11,958) 80,408
Net increase (decrease) in FHLB borrowings.....................................................
(17,900) (88,699)
Increase (decrease) in escrow deposits.........................................................
429 (58)
Stock issued...................................................................................
87 222
Dividends paid.................................................................................
(1,574) (1,256)
--------
- --------
Net cash provided by financing activities..........................................................
14,215 31,822
--------
- --------
Net increase (decrease) in cash and cash equivalents...............................................
4,887 (3,097)
Cash and cash equivalents, beginning of year.......................................................
6,863 9,960
--------
- --------
Cash and cash equivalents, end of year............................................................. $ 11,750
$ 6,863
========
========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest credited on deposits............................................................. $ 28,165
$ 25,779
Interest paid on borrowings...............................................................
11,385 12,309
Income/franchise taxes paid...............................................................
500 240
Net non-cash investing and financing activities:
(Increase) decrease in net unrealized losses on available for sale securities, net of
deferred tax effect.....................................................................
(39) 342
Investment securities transferred from available-for-sale to held-to-maturity category....
- -- 35,300
Change in common stock held by ESOP.......................................................
- -- --
Loans transferred to other real estate....................................................
831 4,080
Loans to facilitate asset sales...........................................................
2,585 4,000
<PAGE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
---------
<S> <C>
Cash flows from operating activities:
Net income..................................................................................... $ 16,262
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses................................................................. 1,525
Writedowns on other real estate owned..................................................... 94
Depreciation.............................................................................. 809
Amortization of premiums and discounts on mortgage-backed securities, other securities and
loans................................................................................... 436
Net (gains) losses on sale of assets...................................................... 6,715
Deferred tax expense (benefit)............................................................ (18,760)
(Increase) decrease in interest and dividend receivable................................... (1,083)
(Increase) decrease in other assets....................................................... 480
Increase (decrease) in interest payable................................................... 1,351
Increase (decrease) in other liabilities.................................................. 681
(Increase) decrease in residential loans held for sale.................................... 86
---------
Net cash provided by operating activities................................................. 8,596
---------
Cash flows from investing activities:
Purchases of mortgage-backed securities -- available for sale.................................. (44,624)
Purchases of other securities -- available for sale............................................ (15,132)
Proceeds from sales of mortgage-backed securities -- available for sale........................ 49,781
Proceeds from sales of other securities -- available for sale.................................. 3,000
Principal repayments on mortgage-backed securities -- available for sale....................... 27,629
Principal repayments on mortgage-backed securities -- held to maturity......................... --
Proceeds from maturities of other securities -- available for sale............................. 5,129
FHLB Stock purchases........................................................................... (1,587)
Loan originations, net of repayments........................................................... (119,681)
Proceeds from sales of commercial loans held for bulk-sale..................................... --
Proceeds from sales of loans in portfolio...................................................... 9,457
Purchases of fixed assets...................................................................... (1,348)
Proceeds from sale of other real estate owned.................................................. 3,598
---------
Net cash used in investing activities.............................................................. (83,778)
---------
Cash flows from financing activities:
Net increase (decrease) in demand, money market, and savings accounts.......................... (19,644)
Net increase in time deposits.................................................................. 64,541
Net increase (decrease) in repurchase agreements............................................... 1,451
Net increase (decrease) in FHLB borrowings..................................................... 26,899
Increase (decrease) in escrow deposits......................................................... 983
Stock issued................................................................................... 186
Dividends paid................................................................................. (1,000)
---------
Net cash provided by financing activities.......................................................... 73,416
---------
Net increase (decrease) in cash and cash equivalents............................................... (1,766)
Cash and cash equivalents, beginning of year....................................................... 11,726
---------
Cash and cash equivalents, end of year............................................................. $ 9,960
=========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest credited on deposits............................................................. $ 24,334
Interest paid on borrowings............................................................... 9,887
Income/franchise taxes paid............................................................... 129
Net non-cash investing and financing activities:
(Increase) decrease in net unrealized losses on available for sale securities, net of
deferred tax effect..................................................................... 4,998
Investment securities transferred from available-for-sale to held-to-maturity category.... --
Change in common stock held by ESOP....................................................... 191
Loans transferred to other real estate.................................................... 4,788
Loans to facilitate asset sales........................................................... 1,080
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
POUGHKEEPSIE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
On May 30, 1997, Poughkeepsie Financial Corp. (the 'Holding Company' or
together with its wholly-owned subsidiary, the 'Company') became the holding
company for Poughkeepsie Savings Bank, FSB after a stockholder approved
reorganization. On October 14, 1997, Poughkeepsie Savings Bank, FSB changed its
name to Bank of the Hudson (the 'Bank').
Bank of the Hudson is a federally chartered community savings bank
serving the Mid-Hudson Valley region of New York through sixteen branches in
Dutchess, Orange and Rockland counties and six residential loan origination
offices. In recent years, the business of the Bank has consisted primarily of
obtaining funds in the form of deposits from the general public and borrowings,
and using such funds to make residential mortgage loans and commercial mortgage
loans as well as commercial business loans, consumer loans, student loans and
other investments. The Bank's deposits are insured up to applicable limits by
the Savings Association Insurance Fund ('SAIF'), which is administered by the
Federal Deposit Insurance Corporation ('FDIC'). The Bank is subject to
comprehensive regulation, examination and supervision by the Office of Thrift
Supervision ('OTS'), its primary regulator, and the FDIC. The Bank also is a
member of the Federal Home Loan Bank ('FHLB') system.
2. AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
Poughkeepsie Financial Corp., Bank of the Hudson and HUBCO, Inc.
entered into an Amended and Restated Agreement and Plan of Merger ('Merger
Agreement') dated as of October 22, 1997. Under the terms of this agreement each
share of Poughkeepsie Financial Corp. Common Stock will be exchanged for .30
shares of HUBCO Common Stock, as long as the median closing price for HUBCO
Common Stock during a pre-closing period is at or above $33.33. If the median
HUBCO price during the pre-closing period is below $33.33 but above $31.25, each
share of Poughkeepsie Financial Corp. Common Stock would be exchanged for shares
of HUBCO Common Stock with value of $10.00. If HUBCO's median pre-closing price
is $31.25 or below, a maximum exchange ratio of .32 would apply. In addition,
the agreement provided that Poughkeepsie Financial Corp. was able to increase
its quarterly cash dividends to amounts substantially equivalent to HUBCO's cash
dividend as adjusted for the exchange ratio. In connection with the execution of
the Merger Agreement, Poughkeepsie Financial Corp. issued an option to HUBCO
which, under certain defined circumstances, would enable HUBCO to purchase up to
2,000,000 shares of Poughkeepsie Financial Corp. Common Stock at $7.875 per
share. The transaction, which is expected to close in the second quarter of
1998, is expected to be treated as a tax-free exchange to holders of
Poughkeepsie Financial Corp. stock and to be accounted for as a pooling of
interests.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of
Poughkeepsie Financial Corp. and Bank of the Hudson and its wholly-owned
subsidiaries: PSB Associates, Inc., a life insurance agency; PSB Building Corp.,
a holding company for the Bank's headquarters building; and several other
subsidiaries primarily engaged in holding real estate acquired through
foreclosure or otherwise intended for disposition, including: PoSaBk, Inc. and
Plural Realty, Inc. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Certain 1996 and 1995 amounts in the consolidated financial statements
have been reclassified to conform with the 1997 presentation.
<PAGE>
USE OF ESTIMATES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and prevalent practices used
within the banking industry. In preparing such financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated statement of
financial condition and the revenues and expenses for the period. Actual results
could differ significantly from those estimates. Estimates that are particularly
susceptible to significant change relate to the determination of the adequacy of
the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of other real
estate owned ('OREO'), management obtains independent appraisals for significant
properties.
Management believes that the allowance for loan losses is adequate and
the valuation of OREO is appropriate. While management uses available
information to recognize possible loan losses, future additions to the allowance
may be necessary based on changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and the valuation of
OREO. Such agencies may require the Bank to recognize additions to the allowance
or reduce the valuation of OREO based on their judgments of information
available to them at the time of their examination.
SECURITIES
The Company classifies its securities at acquisition and each reporting
date thereafter as either held-to-maturity, available-for-sale or trading.
Securities classified as held-to-maturity are limited to debt securities for
which the Company has the positive intent and ability to hold to maturity.
Trading securities are debt and equity securities that are bought for the
purpose of selling them in the near term. All other securities are classified as
available-for-sale.
Held-to-maturity securities are carried at amortized cost;
available-for-sale securities are carried at fair value, with unrealized gains
and losses excluded from earnings and reported on a net-of-tax basis as a
separate component of stockholders' equity. Fair values for these securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for similar securities.
The Company has no trading securities. Federal Home Loan Bank stock is a
restricted security held in accordance with certain regulatory requirements and
is carried at cost.
Purchases and sales are recorded on the trade date and realized gains
and losses on sales of securities are determined using the specific
identification method. Premiums and discounts are amortized to interest income
using the level yield method over the term of the securities, adjusted, in the
case of mortgage-based securities, for actual prepayments.
LOANS
Loans generally are stated at their outstanding unpaid principal
balance net of any deferred fees or costs. Interest income on loans is
recognized as earned based on principal amounts outstanding. Non-refundable loan
origination fees and costs directly associated with the loan origination process
are deferred and recognized as a yield adjustment over the life of the related
loan.
Non-Accrual Loans: Generally, a loan (including a loan defined as
impaired under SFAS No. 114) is classified as non-accrual when the loan becomes
90 days past due, or earlier if the probability of collection is deemed to be
insufficient to warrant continued accrual, even though the loan currently is
performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. All previously accrued
interest for loans placed on non-accrual is deducted from interest income and
any cash receipts from these assets are generally credited directly to the
outstanding principal balances. Generally, loans are returned to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility is no longer in doubt. Consumer loans that are more than 120 days
delinquent are generally charged off against the allowance for loan losses.
Allowance for Loan Losses: The allowance for loan losses is maintained
at a level which management considers adequate based on its regular review of
the Bank's loan portfolios taking into consideration the likelihood of
repayment, the diversity of the borrowers, the type of loan, the quality of the
collateral, current market conditions and associated risks.
SFAS No. 114, 'Accounting by Creditors for Impairment of a Loan,' as
amended by SFAS No. 118, 'Accounting for Impairment of a Loan -- Income
Recognition and Disclosures,' was adopted by the Bank as of January 1, 1995.
Adoption of SFAS No. 114, as amended, did not result in any adjustment to the
allowance for loan losses. The Bank uses the loan-by-loan measurement method,
however, one-to-four family residential loans and consumer installment loans are
collectively evaluated for impairment and are not subject to SFAS No. 114
measurement criteria.
Under SFAS No. 114, a loan is recognized as impaired when it is
probable that principal and/or interest will not be collected in accordance with
its contractual terms. A loan in not considered impaired if there is a
insignificant delay in receipt of payment. The Bank measures impairment based on
the fair value of the collateral for all collateral dependent loans. Impaired
loans which are not collateral dependent are measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate;
this evaluation is inherently subjective, as it requires material estimates that
may be susceptible to significant change. If the fair value of an impaired loan
is less than the related recorded amount, a valuation allowance is established
or the write-down is charged against the allowance for loan losses if the
impairment is considered to be permanent.
Mortgage Banking Activities: The Bank originates certain one-to-four
family residential mortgage loans in its local market area for sale to unrelated
investors. Residential mortgage loans held for sale are carried at the lower of
aggregate cost or market. Interest rate exposure with respect to mortgage
production is hedged primarily through mortgage sale commitments. Gains (losses)
on the sale of loans are recorded when the loans are sold to unrelated
investors.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation on premises, leasehold improvements,
and furniture and equipment is computed by the straight-line method over the
estimated useful lives of the related assets or, if shorter, the related lease
terms, which range from 3 to 40 years.
OTHER REAL ESTATE OWNED ('OREO')
Real estate acquired by foreclosure or deed in lieu of foreclosure is
stated at the lower of the recorded investment or estimated fair value less
costs of disposition. Upon classification as OREO, the excess of the recorded
investment over the estimated fair value of the collateral, if any, is charged
to the allowance for loan losses. Net income derived from these properties
reduces the carrying value of the property. Net expenses incurred in maintaining
properties, subsequent write-downs due to reductions in estimated fair values,
and gains or losses upon disposition are included in operating expenses.
Expenditures to complete or improve properties are capitalized only if
reasonably expected to be recovered; otherwise they are expensed as incurred.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights (MSRs) on loans serviced for others are
recognized based on their fair value (relative to the fair value of the loan
without the servicing rights) at the time the loan is sold. Mortgage servicing
rights are amortized as a reduction of loan servicing income over the estimated
servicing period. MSRs are assessed for impairment based upon their estimated
fair value. To evaluate impairment MSRs are stratified based principally on the
loan type and interest rate. MSR impairment, if any, is recognized through a
valuation allowance.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Company enters into sales of securities under agreements to
repurchase the same securities. These agreements are treated as financings, and
the obligations to repurchase securities sold are reflected as a liability in
the consolidated statement of financial condition. The securities underlying the
agreements are included in the asset accounts.
SFAS No. 125, 'Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,' adopted by the Company, specifies
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities and for distinguishing whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except for
certain provisions (relating to the accounting for secured borrowings and
collateral and the accounting for transfers and servicing of repurchase
agreements, dollar rolls, securities lending and similar transactions) which
have been deferred until January 1, 1998 in accordance with SFAS No. 127,
'Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125.' The adoption of these standards has not had a material impact on the
Company's consolidated financial statements.
INTEREST ON DEPOSITS
Interest on deposits is compounded annually, monthly or continuously
using a daily percentage rate (except for certain money market deposits and time
deposits over one hundred thousand dollars, which do not receive compound
interest) and is credited to depositors' accounts monthly, quarterly, annually
or at maturity.
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123, 'Accounting for
Stock-Based Compensation,' encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has opted to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
'Accounting for Stock Issued to Employees,' and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock. See Note 12 for a further
discussion of the Company's stock option plans.
HEDGING ACTIVITIES
In accordance with policies approved by the Board of Directors, the
Company uses certain derivative financial instruments and forward contracts to
assist in managing its interest rate risk exposure, but does not utilize such
instruments for speculative purposes. The Company uses three principle types of
derivative financial instruments: interest rate caps and collars (which reduce
the Company's cash flow exposures to changing interest rates), interest rate
swaps (which effectively convert a portion of the Company's variable rate
borrowings to a fixed rate), and forward contracts (which effectively reduce the
Company's exposure to interest rate changes on residential mortgage applications
which have been rate locked by the borrower and, if funded, the Company plans to
sell into the secondary market). The change in fair value of forward contracts
which hedge mortgage applications in the pipeline are deferred and recognized as
adjustments to gain or loss on sale of the underlying loans. Interest rate swaps
are accounted for on a settlement basis, with the net amounts paid or received
under such contracts included in interest income or expense. Interest rate caps
and collars are also accounted for on a settlement basis. See Notes 17 and 19
for more information regarding the Company's derivative financial instruments.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable
for the current year (after exclusion of non-taxable items) plus deferred taxes.
Deferred taxes are provided when income or expense is recognized in different
periods for tax purposes than for financial reporting purposes using an asset
and liability approach for recognizing the tax effects of temporary differences.
Significant temporary differences include additions to the allowance for loan
losses and write-downs of OREO, which generally are not deductible for tax
purposes until the loans are charged off or the properties are sold. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. The effect on deferred tax assets and
liabilities of a change in tax laws or rates is recognized in income in the
period the change is enacted.
The Company and its subsidiary file a consolidated Federal income tax
return.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, 'Reporting Comprehensive Income.' SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 requires
that financial statements report and display comprehensive income in the same
prominence as net income, but permits the statement of comprehensive income to
be presented either together with or apart from the income statement.
Comprehensive income, as defined by SFAS No. 130, includes revenues, expenses,
gains and losses, which under current generally accepted accounting principles,
bypass net income and are typically reported as a component of stockholders'
equity. SFAS No. 130 is effective for the Company's 1998 financial statements.
The adoption of this standard is not expected to have a material impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, 'Disclosure About Segments
of an Enterprise and Related Information.' SFAS No. 131 introduces a new model
for segment reporting entitled the 'management approach,' which focuses upon the
manner in which the chief operating decision makers organize segments within a
company for making operating decisions and assessing performance. Under the
management approach, reportable segments can be based upon, but not limited to,
products and services, geography and legal or management structure. SFAS No. 131
requires full financial disclosure for each segment, but only requires limited
quarterly segment disclosure. SFAS No. 131 is effective for the Company's 1998
financial statements. The adoption of this standard is not expected to have a
material impact on the Company's financial statements.
<PAGE>
EARNINGS PER SHARE
The Company adopted SFAS No. 128, 'Earnings Per Share,' which became
effective in the fourth quarter of 1997. As required, the Company has restated
all prior periods to the new definitions of Basic and Diluted Earnings per
share. The restatement did not have a material effect on previously reported
earnings per share amounts. Basic earnings per common share is computed by
dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per common share includes the additional dilutive effect of
stock options using the average market price of the Company's common stock for
the period.
A summary of the basic and diluted earnings per share calculations for
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income (in thousands)............................... $ 2,429 $ 1,436 $ 16,262
=========== =========== ===========
Weighted average basic shares outstanding............... 12,595,307 12,546,881 12,483,085
Effect of dilutive stock options........................ 643,404 363,577 372,166
----------- ----------- -----------
Weighted average diluted shares outstanding............. 13,238,711 12,910,458 12,855,251
=========== =========== ===========
Earnings per share:
Basic.............................................. $ 0.19 $ 0.11 $ 1.30
=========== =========== ===========
Diluted............................................ $ 0.18 $ 0.11 $ 1.27
=========== =========== ===========
</TABLE>
<PAGE>
4. SECURITIES
A summary of securities at December 31 follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
1997
Available-for-Sale Securities:
Securities of U.S. Government agencies and
corporations.................................. $ 7,059 $ 32 $ 7,091
Securities of financial institutions and
corporations.................................. 115 1 116
Mortgage-backed securities...................... 119,763 652 $685 119,730
--------- ----------- ---------- --------
$126,937 $ 685 $685 $126,937
========= =========== ========== ========
Held-to-Maturity Securities:
Mortgage-backed securities...................... $ 25,537 $ -- $112 $ 25,425
========= =========== ========== ========
1996
Available-for-Sale Securities:
Securities of U.S. Government agencies and
corporations.................................. $ 17,071 $ 2 $ 38 $ 17,035
Securities of financial institutions and
corporations.................................. 5,157 23 -- 5,180
Mortgage-backed securities...................... 113,456 718 599 113,575
--------- ----------- ---------- --------
$135,684 $ 743 $637 $135,790
========= =========== ========== ========
Held-to-Maturity Securities:
Mortgage-backed securities...................... $ 29,957 $ -- $360 $ 29,597
========= =========== ========== ========
</TABLE>
In February 1996, the Bank reclassified $35.3 million of fixed rate
mortgage-backed securities from the available-for-sale category to the
held-to-maturity category. At the date of transfer, these securities had a net
unrealized loss of $0.3 million which is being amortized over the remaining life
of the underlying securities, 14 years. The net unrealized loss on securities
classified as available for sale is reported, net of income taxes, as a separate
component of stockholders' equity. Proceeds from sales of investment securities
during 1997, 1996 and 1995 totaled approximately $5.5 million, $40.7 million and
$52.8 million, respectively, and resulted in gross gains of $0, $0.1 million,
and $0.4 million, respectively, and gross losses of $0, $0.1 million and $0.5
million, respectively.
The amortized cost and fair value of securities at December 31, 1997,
by maturity date, are summarized below. Mortgage-backed securities are included
in the table based upon remaining contractual term. Due to prepayment features,
certain of these securities may repay prior to contractual maturity.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less................................. $ 2,466 $ 2,466 -- --
Due after one year through five years................... 7,146 7,177 -- --
Due after five years through ten years.................. 28 30 -- --
Due after ten years..................................... 117,297 117,264 $25,537 $25,425
--------- -------- --------- -------
Total.............................................. $126,937 $126,937 $25,537 $25,425
========= ======== ========= =======
</TABLE>
<PAGE>
The composition of the mortgage-backed securities portfolio at December
31, 1997 is as follows:
<TABLE>
<CAPTION>
AVAILABLE- HELD-TO-
FOR-SALE MATURITY
--------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C>
FHLMC participation certificates........................ $ 43,857 $ 43,870 $12,243 $12,176
GNMA certificates....................................... 46,412 46,202 -- --
FNMA mortgage-backed securities......................... 29,494 29,658 7,860 7,815
Private mortgage-backed securities...................... -- -- 5,434 5,434
--------- -------- --------- -------
Total.............................................. $119,763 $119,730 $25,537 $25,425
========= ======== ========= =======
</TABLE>
At December 31, 1997, mortgage-backed securities with a book value of
$114.4 million were pledged as collateral for FHLB borrowings, repurchase
agreements, certain interest rate hedge agreements and for other purposes.
5. ALLOWANCE FOR LOAN LOSSES
The following is a summary of changes in the allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year...................................... $8,652 $8,259 $18,195
------ ------ -------
Provision for loan losses....................................... 1,850 850 1,525
------ ------ -------
Charge-offs:
1-4 family residential real estate......................... 1,656 457 562
Commercial real estate..................................... 101 208 1,395
Commercial business........................................ 36 6 --
Consumer................................................... 85 62 108
------ ------ -------
Total charge-offs.......................................... 1,878 733 2,065
------ ------ -------
Recoveries:
Commercial real estate..................................... 647 110 308
Commercial business........................................ 128 93 43
Consumer................................................... 22 73 254
------ ------ -------
Total recoveries........................................... 797 276 605
------ ------ -------
Net charge-offs................................................. 1,081 457 1,460
------ ------ -------
Writedowns of loans transferred to Commercial Loans Held for
Bulk Sale..................................................... -- -- 10,001
------ ------ -------
Balance, end of year............................................ $9,421 $8,652 $ 8,259
====== ====== =======
</TABLE>
The Bank currently originates loans primarily in the Mid-Hudson Valley
region of New York and adjacent counties in New Jersey and Connecticut. The
ability of borrowers to perform in accordance with the terms of their loan
agreements is affected by, among other things, the real estate market conditions
prevailing within the Bank's market area.
During the fourth quarter of 1995, the Bank charged-off $10.1 million
related to its efforts to sell, in bulk, certain non-performing, sub-performing,
and performing commercial loans. In addition to this $10.1 million charge-off
against the allowance for loan losses, a loss of $7.5 million was recorded to
write these loans down to their then fair value of $61.5 million. During 1996,
an additional $0.9 million write-down was recorded to recognize a decline in
fair value on certain loans held for bulk sale which became non-performing in
1996. During 1996, the Bank closed on the sale of $33.1 million of these loans,
was paid off on an additional $4.6 million, and the balance of $22.6 million was
returned to portfolio.
Loans delinquent 90 days or more as to interest (including non-accrual
loans) amounted to $10.2 million and $15.4 million at December 31, 1997 and
1996, respectively. Loans which are 90 days or more past their contractual
maturity, predominantly commercial real estate mortgages, were approximately
$6.2 million and $7.0 million at December 31, 1997 and 1996, respectively. These
loans have not 'performed' in accordance with their principal repayment terms
but continue to perform in accordance with their interest terms. Interest income
is recognized on these loans. The loan portfolio also includes certain
restructured loans that are performing in accordance with their modified terms.
Restructured loans totaled $14.4 million and $9.5 million at December 31, 1997
and 1996, respectively.
Interest income recorded in 1997, 1996 and 1995 would have increased by
approximately $1.2 million, $1.9 million and $2.6 million had non-accrual loans
and restructured loans performed in accordance with their original terms and
conditions. Interest income recorded on these loans totaled approximately $1.0
million in 1997 and $1.4 million in 1996.
At December 31, 1997, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $21.3 million. Generally, the
fair value of impaired loans was determined using the fair value of the
underlying collateral. Included in this amount is $4.2 million of impaired loans
for which the related valuation allowance for loan losses is $0.9 million and
$9.7 million of impaired loans that as a result of write-downs do not have an
allowance for credit losses. During 1997 and 1996, the average recorded
investment in impaired loans was approximately $19.2 million and $9.4 million,
respectively, and the Bank recognized interest income on these impaired loans of
approximately $1.5 million and $1.4 million. No interest income was recognized
on the cash basis method of interest recognition.
At December 31, 1996, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $19.4 million. Generally, the
fair value of impaired loans was determined using the fair value of the
underlying collateral. Included in this amount was $0.9 million of impaired
loans for which the related valuation allowance for loan losses is $0.3 million,
and $13.3 million of impaired loans that as a result of write-downs do not have
an allowance for credit losses.
6. OTHER REAL ESTATE OWNED
The following is a summary of the activity in the other real estate
owned accounts (including investment in real estate):
<TABLE>
<CAPTION>
NON-PERFORMING
PERFORMING -------------------------
INVESTMENT COMMERCIAL RESIDENTIAL
IN REAL ESTATE OREO OREO TOTAL
-------------- ---------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1996......................... $ 1,192 $ 11,424 $ 1,357 $13,973
Real estate acquired in settlement of loans........ 3,000 1,080 4,080
Capital improvements............................... 907 907
Dispositions....................................... (1,180) (1,300) (2,480)
Transfer to performing loans....................... (1,192) (4,044) (5,236)
Net excess cash flow............................... (39) (108) (147)
Write-downs........................................ (335) (36) (371)
-------------- ---------- ----------- -------
Balance at December 31, 1996....................... -- 9,733 993 10,726
==============
Real estate acquired in settlement of loans........ 831 831
Capital improvements............................... 305 305
Dispositions....................................... (1,234) (1,322) (2,556)
Transfer to performing loans....................... (2,585) (2,585)
Net excess cash flow............................... (439) (439)
Write-downs........................................ (1,664) (54) (1,718)
---------- ----------- -------
Balance at December 31, 1997....................... $ 4,116 $ 448 $ 4,564
========== =========== =======
</TABLE>
<PAGE>
The investment in real estate represents advances on a loan to
facilitate the sale of OREO. In 1996 this loan met all the criteria for
classification as a performing loan and was transferred to the commercial real
estate loan category.
7. PREMISES AND EQUIPMENT
Below is a summary of premises and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Banking offices....................................................... $ 7,747 $ 7,600
Furniture and equipment............................................... 8,698 7,517
Leasehold improvements................................................ 3,760 2,521
-------- --------
20,205 17,638
Accumulated depreciation.............................................. (11,794) (10,845)
-------- --------
Total, net............................................................ $ 8,411 $ 6,793
======== ========
</TABLE>
8. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF NEW YORK
The following table provides certain information regarding term
advances and short-term borrowings as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Term advances............................................ $35,000 5.69% $35,000 5.64%
Short-term advances and overnight borrowings under the
FHLB line of credit.................................... 31,900 5.75 49,800 5.45%
------- -------
$66,900 $84,800
======= =======
</TABLE>
The term advances outstanding as of December 31, 1997 are scheduled to
mature in 1998 with interest rates of 5.7%.
In connection with term advances, the Bank has granted to the FHLB, as
collateral, a security interest in specific assets including mortgage loans with
an aggregate value of 110% of the outstanding advance. As of December 31, 1997,
the Bank had sufficient available collateral to borrow an additional $258
million in the form of FHLB advances or reverse repurchase agreements.
In addition, at December 31, 1997, the Bank had available an unused
line of credit of $52.8 million, from a total line of $84.7 million granted by
the FHLB, which is subject to various terms and conditions, including
collateralization.
<PAGE>
9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Repurchase agreements........................................................... $ 97,102 $109,005
Unit investment trust........................................................... 4,834 4,889
-------- --------
$101,936 $113,894
======== ========
</TABLE>
The securities underlying the agreements to repurchase were delivered
to the various counterparties, who may have sold, loaned or otherwise disposed
of such securities to other parties in the normal course of their operations and
have agreed to resell to the Bank the same (or substantially the same)
securities upon maturity of the agreements. The amount of risk under these
borrowings with any one counterparty, defined as the excess of carrying value of
the asset sold under agreements to repurchase, including accrued interest, over
the amount borrowed, adjusted for accrued interest was approximately $0.4
million at December 31, 1997. The weighted average rate for the borrowings under
repurchase agreements was 5.8% and 5.46% at December 31, 1997 and 1996,
respectively.
The repurchase agreements outstanding at December 31, 1997 matured
during January 1998. The maximum amounts outstanding at any month-end during
1997, 1996 and 1995 were $129.3 million, $112.4 million and $142.4 million,
respectively.
In 1984, the Bank sold tax-exempt municipal investment securities
subject to a 14 day put option, under certain circumstances, to a unit
investment trust. The transaction was accounted for as a borrowing due to the
recourse nature of the put option and the municipal securities are included in
the securities portfolio. The underlying collateral to the municipal security is
a first mortgage secured by a commercial property which may prepay without
penalty. Such prepayment would cause the dissolution of the put option as well
as the elimination of the Bank's investment and borrowing. Such prepayment could
result in a loss to the Bank. The Bank accrued $0.2 million for this potential
loss in 1997. The weighted average interest rate on borrowings under the unit
investment trust was 8.0% at both December 31, 1997 and 1996.
The following were pledged as additional collateral for the unit
investment trust as of December 31 for the periods indicated:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------ --------- ------
(In thousands)
<S> <C> <C> <C> <C>
FHLMC participation certificates............................ $ 2,707 $2,717 $ 697 $ 690
Private mortgage-backed securities.......................... 182 137 234 152
FNMA mortgage-backed securities............................. 4,326 4,299 6,548 6,451
--------- ------ --------- ------
$ 7,215 $7,153 $ 7,479 $7,293
========= ====== ========= ======
</TABLE>
<PAGE>
10. INCOME TAXES
A reconciliation of the income tax provision to the amount computed
using the federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ---- --------
(In thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate (34%)..... $1,593 $816 $ (756)
State income tax, net of federal benefit......................... 408 177 181
Tax-exempt interest income....................................... 20 21 21
Bad debt deduction............................................... -- -- 1,768
Decrease in valuation allowance.................................. -- -- (19,808)
Effect of non-deductible merger related costs.................... 147 -- --
Other............................................................ 91 (51) 108
------ ---- --------
Income tax expense (benefit)..................................... $2,259 $963 $(18,486)
====== ==== ========
</TABLE>
<PAGE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ---- --------
(In thousands)
<S> <C> <C> <C>
Federal:
Deferred.................................................... $1,851 $696 $(16,849)
State:
Current..................................................... 313 80 274
Deferred.................................................... 95 187 (1,911)
------ ---- --------
Income tax expense (benefit)..................................... $2,259 $963 $(18,486)
====== ==== ========
</TABLE>
In accordance with SFAS No. 109, deferred income tax assets and
liabilities reflect the impact of temporary differences between values recorded
as assets and liabilities for financial reporting purposes and values utilized
for remeasurement in accordance with tax laws. The tax effects of temporary
differences giving rise to the Company's deferred tax assets at December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Net operating loss (NOL) carryforward................................... $ 7,265 $ 8,495
Allowance for loan losses and OREO...................................... 3,640 3,230
Loans with different tax and book basis................................. 2,848 3,763
Deferred loan fees...................................................... 444 384
AMT credit.............................................................. 694 694
Net unrealized losses on available for sale securities.................. 83 (42)
Other, net.............................................................. 17 288
------- -------
14,991 16,812
Valuation allowance..................................................... -- --
------- -------
Net deferred tax asset.................................................. $14,991 $16,812
======= =======
</TABLE>
<PAGE>
Under SFAS No. 109, deferred tax assets must be reduced by a valuation
allowance to an amount that is 'more likely than not' to be realized. Based on
recent historical and anticipated future pre-tax earnings, management believes
that it is more likely than not that the Company will realize its net deferred
tax assets. Accordingly, the Company eliminated the valuation allowance in
December 1995. At December 31, 1997, the Company had a net operating loss
carryforward and alternative minimum tax credit carryforward of $21.3 million
and $0.7 million, respectively. The net operating loss carryforward begins to
expire in 2005.
Until December 31, 1995, savings banks that met certain definitions,
tests and other conditions prescribed by the Internal Revenue Code were allowed
a bad debt deduction, subject to certain limitations. This deduction was
computed either as a percentage of taxable income before such deductions or
based on actual loss experience. SFAS No. 109 provides that the cumulative tax
bad debt reserves as of December 31, 1987 (the 'base year reserves') are
permanent differences which do not require the establishment of a deferred tax
liability. The tax 'base year reserves' for the Bank is approximately $5.7
million. This 'base year reserve' could be recognized as taxable income and
create a current tax liability at the income tax rates then in effect if one of
the following occur: 1) the Bank's retained earnings represented by the reserve
is used for purposes other than to absorb losses from bad debts; or 2) the Bank
fails to qualify as a Bank as defined by the Internal Revenue Code or; 3) there
is a change in the federal tax law. None of these events occurred as of December
31, 1997. Furthermore, no additions to the 'base year reserves' were made in the
years 1988 through 1995 for financial statement purposes. However, in September
1996 when the Bank filed its 1995 tax return, the deduction taken for bad debts
increased the Bank's tax bad debt reserves to an amount which exceeded the 'base
year reserves' by approximately $2.0 million.
On August 20, 1996, legislation was signed into law which repealed the
percentage of taxable income method of tax bad debt deduction available for
thrift institutions. This repeal is effective for the Bank's taxable year
beginning January 1, 1996. In addition, the legislation requires that tax bad
debt reserves in excess of 'base year reserves' be recaptured into taxable
income over a 6 to 8 year period dependent on whether certain residential loan
origination levels are maintained. As previously mentioned, after the filing of
its 1995 tax return, the Bank's tax bad debt reserves exceed its base year
reserves by approximately $2.0 million. However, the change in tax law had no
effect on the Bank's income tax expense recorded in 1996. The additional
deferred tax liability related to excess reserves were offset by an increase in
deferred tax assets related to additional NOL carryforwards created as a result
of the bad debt deductions taken on the 1995 tax return. The effect of this
change in tax law on the Bank is that some available net operating loss
carryforwards will be utilized earlier than anticipated to offset the required
recapture of these excess bad debt reserves into taxable income in future years.
While New York State tax law is generally based on federal law, on July
30, 1996, New York State enacted legislation, effective January 1, 1996, which
generally retains the percentage of taxable income method for calculating the
tax bad debt deduction and does not require the Bank to recapture into income
its excess tax bad debt reserves over its base year reserves for New York State
tax purposes. The New York State percentage of taxable income tax bad debt
deduction is equal to 32% of New York State taxable income, with certain
adjustments.
11. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has a non-contributory defined benefit pension plan (the
'Plan') with the Retirement Systems Group, Inc., (formerly The Savings Bank
Retirement System), covering employees meeting certain eligibility requirements.
The Company's policy is to fund pension costs to the extent they can be deducted
for federal income tax purposes.
<PAGE>
The following table sets forth the funded status of the pension plan
covering employees as of the plan's year ended September 30:
<TABLE>
<CAPTION>
1997 1996
----- -----
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested benefits........................................................ $ 833 $ 773
Nonvested benefits..................................................... -- 27
----- -----
Accumulated benefit obligation.............................................. 833 800
Effect of projected future compensation levels.............................. -- --
----- -----
Projected benefit obligation................................................ 833 800
Plan assets at fair value................................................... 1,385 1,307
----- -----
Plan assets in excess of projected benefit obligation....................... 552 507
Unrecognized loss........................................................... 176 221
Unrecognized past service liability......................................... 1 1
----- -----
Prepaid pension asset....................................................... $ 729 $ 729
===== =====
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Components of pension expense are:
Interest cost.................................................. $ 62 $ 63 $ 61
Return on assets............................................... (240) (141) (185)
Amortization of deferred investment loss....................... 135 42 95
Amortization of unrecognized investment loss................... 10 18 18
Benefit settlement charges..................................... 33 -- --
----- ----- -----
Pension credit...................................................... $ -- $ (18) $ (11)
===== ===== =====
</TABLE>
Due to the financial condition of the Bank in 1991, the Plan was
amended, effective October 1, 1991, to provide that there would be no new
enrollments in the Plan and that there would be no further benefit accruals
under the Plan. This benefit 'suspension' was initially intended to be
temporary. However, it is now expected to remain in effect indefinitely.
Deferred investment losses in the above table have been fully reserved.
The discount rate used in determining the actuarial present value of
the projected benefit obligations was 7.75% for 1997 and 7.50% for 1996, and the
expected long-term rate of return on plan assets was 8.0% for each period. Plan
assets consist primarily of equity and debt securities.
In 1996 the Company reactivated the Non-Employee Directors' Retirement
Plan which covers non-employee directors. This Plan is a defined benefit,
non-qualified and unfunded Plan. In December 1997, and in connection with the
Definitive Merger Agreement, the Plan was curtailed in anticipation of a
February 1998 termination and settlement. The following table sets forth
information on this Plan as of December 31, 1997 and 1996. Although this Plan
was not directly funded, the Company made contributions into a Grantor Trust
which was established to meet the benefit obligations of this Plan as they
become due. All of the funds held by the Grantor Trust are expected to be
distributed to the beneficiaries in lump sums in February 1998.
<PAGE>
<TABLE>
<CAPTION>
1997 1996
----- -----
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested benefits......................................................... $ 949 $ 564
Nonvested benefits...................................................... -- --
----- -----
Accumulated benefit obligation............................................... 949 564
Effect of projected future compensation levels............................... -- --
----- -----
Projected benefit obligation................................................. 949 564
Plan assets at fair value.................................................... -- --
----- -----
Projected benefit obligation in excess of Plan assets........................ (949) (564)
Unrecognized loss............................................................ 42 46
Unrecognized past service liability.......................................... -- 491
----- -----
Accrued pension expense...................................................... $(907) $ (27)
===== =====
Components of pension expense are:
Service cost............................................................ $ 24 $ 24
Interest cost........................................................... 43 44
Amortization of unrecognized past service liability..................... 47 47
Curtailment expense..................................................... 777 --
----- -----
Pension expense.............................................................. $ 891 $ 115
===== =====
</TABLE>
The discount rate used in determining the actuarial present value of
the projected benefit obligations was 7.25% for 1997 and 7.75% for 1996.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
The Company provides medical and life insurance benefits to all
currently eligible pension recipients. However, during 1992 the post-retirement
medical benefit plan was amended to eliminate substantially all current
employees from becoming eligible for these benefits. Post-retirement benefits
are recognized on an accrual basis over the employee's service period. Expenses
for these post retirement benefits are substantially lower than they may have
been had all current employees been expected to become eligible for these
benefits.
<PAGE>
The following tables set forth the status of the post-retirement
benefit plan:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
FINANCIAL POSITIONS 1997 1996
------------------- ------- -------
(Dollars in
thousands)
<S> <C> <C>
Accumulated post-retirement benefit obligation ('APBO')......................... $(1,279) $(1,231)
Unrecognized net gain........................................................... (345) (441)
Unrecognized net transition obligation.......................................... 1,247 1,330
------- -------
Accrued post-retirement benefit cost............................................ $ (377) $ (342)
======= =======
<CAPTION>
NET PERIODIC POST-RETIREMENT EXPENSE 1997 1996 1995
------------------------------------ ---- ---- ----
<S> <C> <C> <C>
Service cost.................................................................... $ 6 $ 6 $ 10
Interest cost................................................................... 89 85 94
Amortization of unrecognized net transition obligation.......................... 83 83 83
Amortization of unrecognized net gain........................................... (64) (71) (70)
---- ---- ----
Net periodic post-retirement expense charged to operations...................... $114 $103 $117
==== ==== ====
<CAPTION>
ASSUMPTIONS 1997 1996 1995
----------- ---- ---- ----
<S> <C> <C> <C>
Discount rate................................................................... 7.50% 7.50% 7.25%
<CAPTION>
SERVICE PLUS
SERVICE INTEREST INTEREST
EFFECT OF A 1% INCREASE IN HEALTH TREND RATES APBO COST COST COST
--------------------------------------------- ------ ------- -------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Current basis................................................. $1,278 $ 6 $ 89 $ 95
1% trend increase............................................. 1,363 7 95 101
--
------ --- ------
Change due to 1% increase..................................... $ 85 $ 1 $ 6 $ 6
====== === ==== ======
</TABLE>
OTHER BENEFIT PLANS
The Company has a defined contribution 401(k) plan, covering
substantially all full time employees meeting certain eligibility requirements.
The Company's 401(k) contributions in 1997, 1996 and 1995 were $350,000,
$339,000, and $304,000, respectively.
In 1987, the Bank established a non-contributing leveraged Employee
Stock Ownership Plan (ESOP), which acquired shares of the Bank's stock for the
benefit of all eligible employees. The ESOP borrowed funds from an unrelated
financial institution and acquired 318,200 shares in 1987 and 37,673 shares in
1988 of the Bank's stock in the open market at an average price of $14.05 per
share. No borrowings or unallocated shares remained as of December 31, 1997.
The Company has employment contracts with certain executive officers
which provide these individuals with post-termination benefits under certain
specified conditions, including a change in control of the Company. In
connection with the Amended and Restated Agreement and Plan of Merger with
HUBCO, Inc., payments of $1.0 million are anticipated under the change in
control provisions of these contracts.
<PAGE>
12. STOCK OPTION PLANS
A description of each of the Company's three stock option plans
follows:
1985 STOCK OPTION PLAN
The Bank received shareholder approval in 1985 for a stock option plan
for directors, officers and employees of the Bank and its subsidiaries under
which options granted may be either qualifying incentive stock options or
nonqualified options. A total of 391,867 shares were authorized under this plan.
The options are exercisable at the market price at the date of grant and vest
over periods ranging up to four years. The options may permit the holder to
purchase any combination of market value or book value shares or to exercise
stock appreciation rights. Book value options are exercisable at the book value
per share of common stock at the end of the most recent fiscal quarter prior to
the date of grant and require the Bank to repurchase shares issued upon exercise
of the options at the book value per share of common stock at the end of the
most recent fiscal quarter prior to the repurchase. All options currently
outstanding to non-directors do not contain book value share exercise features
or stock appreciation rights.
1993 STOCK INCENTIVE PLAN
The Bank received shareholder approval for a 1993 Stock Incentive Plan
('1993 Plan') which provides for the granting of incentive stock options
intended to comply with the requirements of Section 422 of the Internal Revenue
Code, non-incentive or compensatory stock options and stock appreciation rights.
The 1993 Plan is administered and interpreted by a committee of not less than
two members of the Board of Directors, none of whom is an officer or employee of
the Bank and each of whom is a 'disinterested person' within the meaning of the
applicable regulations under the federal securities law. The committee
determines who will be granted options, whether such options will be incentive
or compensatory options, the number of shares subject to each option and the
exercise price of each compensatory option when such options become exercisable.
The per share exercise price of an incentive stock option at least equals the
fair market value of a share of Common Stock on the date the option is granted.
Each stock option or portion thereof is exercisable at any time on or after it
vests. A total of 595,315 shares were authorized under this plan in 1993, and in
1996, stockholders approved an amendment to this plan which increased the number
of shares authorized by 525,288 shares for a total authorization of 1,120,603
shares.
1993 DIRECTORS' STOCK OPTION PLAN
The Bank also received shareholder approval for a 1993 Directors' Stock
Option Plan (the 'Directors' Plan'), which provides for the grant of
non-qualified stock options to non-employee directors of the Bank. The
Directors' Plan is administered and interpreted by the entire Board of Directors
of the Bank. A total of 255,135 shares were authorized under this plan.
Each non-employee director of the Bank in June 1993, upon the
completion date of the Bank's Offering, received compensatory options to
purchase 25,000 shares of common stock, 7,000 of which vest and are exercisable
twelve months after the date of grant, and 18,000 of which vest and are
exercisable thereafter at the rate of 4,500 shares at the end of each succeeding
twelve-month period. All of these initial grants were at $2.50 per share, the
subscription price for a share of common stock in the Offering.
Any person who becomes a member of the Board of Directors of the Bank
subsequent to the Offering and who is not an employee of the Bank will receive
an option to purchase 25,000 shares of stock (or such lesser number as may then
be available for grant under the Directors' Plan), 7,000 of which vest and are
exercisable twelve months after the date of grant, and 18,000 of which vest and
are exercisable thereafter at the rate of 4,500 shares at the end of each
succeeding twelve-month period. The exercise price of such shares will be the
fair market value at the date of grant.
<PAGE>
A summary of the transactions within each of the Company's Stock Option
Plans follows:
<TABLE>
<CAPTION>
1993 DIRECTORS'
1985 OPTION PLAN 1993 INCENTIVE PLAN PLAN
------------------- -------------------
- -------------------
WEIGHTED WEIGHTED
WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE
EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------
- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 1/1/95.......................... 229,244 $ 4.12 556,250 $ 3.10 193,000 $ 2.89
Granted................................... -- 20,000 5.38 --
Exercised................................. (13,950) 2.24 (36,150) 2.50 --
Canceled.................................. (45,000) 9.61 (1,500) 2.50 --
------- ------- -------
Outstanding at 12/31/95........................ 170,294 2.83 538,600 3.22 193,000 2.89
Granted................................... -- 438,000 5.12 --
Exercised................................. (500) 1.50 (60,500) 3.98 --
Canceled.................................. -- -- --
------- ------- -------
Outstanding at 12/31/96........................ 169,794 2.84 916,100 4.08 193,000 2.89
Granted................................... -- -- --
Exercised................................. (8,540) 2.78 (9,950) 4.41 --
Canceled.................................. -- -- --
------- ------- -------
Outstanding at 12/31/97........................ 161,254 2.84 906,150 4.08 193,000 2.89
======= ======= =======
Exercisable as of 12/31/97..................... 161,254 $ 2.84 591,350 $ 3.76 148,000 $ 2.82
======= ======== ======= ======== =======
========
Available for future grant, as of 12/31/97..... 65,212 92,353 55,135
======= ======= =======
</TABLE>
GENERAL
At December 31, 1997, the Company had three stock option plans as
described above. The Company applies APB Opinion 25 and related Interpretations
in accounting for these plans. Accordingly, no compensation cost has been
recognized for these plans. Had compensation cost for these stock option plans
been determined based on the fair value at the grant dates for awards under
these plans consistent with the fair value method of SFAS No. 123, 'Accounting
for Stock Based Compensation', net income and earnings per share would have been
reduced to the pro forma amounts indicated below (amounts in thousands, except
per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C> <C>
Net income As reported $2,429 $1,436 $16,262
Pro forma 2,227 1,375 16,258
Earnings per share -- Basic As reported $ 0.19 $ 0.11 $ 1.30
Pro forma 0.18 0.11 1.30
Earnings per share -- Diluted As reported $ 0.18 $ 0.11 $ 1.27
Pro forma 0.17 0.11 1.27
</TABLE>
The fair value of each option grant was estimated as of the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants awarded in 1996 and 1995, respectively: dividend
yield of 2.0% and 1.5%; expected volatility of 31% and 36%; risk-free interest
rate of 5.5% in both years; and expected lives of 4.5 years and 4.0 years. There
were no options awarded in 1997.
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------
- -------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED
AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE
PRICE
- - ------------------------------- ----------- ---------------- ---------------- -----------
- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 to $3.00................. 603,474 5.3 years $ 2.34 523,974 $
2.32
3.01 to 5.00................. 205,000 6.5 years 4.55 184,500
4.60
5.01 and greater.............. 451,930 8.7 years 5.31 192,130
5.57
----------- -----------
1,260,404 6.7 years 3.77 900,604
3.48
=========== ===========
</TABLE>
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
The Company leases various branch and loan origination offices and
certain equipment under noncancelable agreements. These leases have expiration
dates through 2021. Certain of the lease agreements contain escalation clauses
which have been aggregated into the annual rent expense and minimum annual
rentals. At December 31, 1997, aggregate minimum annual rentals were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- - ------------ (In thousands)
<S> <C>
1998................................................... $1,257
1999................................................... 773
2000................................................... 665
2001................................................... 457
2002................................................... 260
Thereafter............................................. 2,267
-------
Total........................................... $5,679
=======
</TABLE>
Rental expense aggregated $0.9 million, $0.7 million, and $0.5 million
in 1997, 1996 and 1995, respectively. Rent expense relates primarily to the cost
of leasing retail branch locations and loan production offices.
In the course of its business, the Company is involved in various legal
proceedings. No predictions can be made presently as to the outcome or nature of
any relief that may be ultimately granted with respect to any of these
proceedings. In the opinion of management, pending or threatened legal
proceedings are not expected to result in a material adverse effect on the
Company's consolidated financial statements.
During 1989 the Bank securitized approximately $100 million of seasoned
one-year adjustable rate mortgages, originated primarily in the Mid-Hudson
Valley, with the Federal Home Loan Mortgage Corporation (FHLMC). An agreement
was entered into requiring the Bank to repay FHLMC for any foreclosure losses
incurred on that portfolio through 1999. During 1997, payments of $64,000 were
made on this agreement. Since 1989, payments on this agreement have aggregated
$670,000. The outstanding balance on these mortgage-backed securities was
approximately $24.2 million at December 31, 1997 and $27.8 million at December
31, 1996. At December 31, 1997, there were reserves of $300,000 for estimated
future payments related to this agreement.
Loans sold with recourse are identified when a loan is sold and the
buyer retains the right to enforce a repurchase by the seller under certain
conditions. The Bank does not sell loans with recourse as part of normal
operations. However, it did so to facilitate the sale of its Farmers Federal
division in 1988. Repurchases under this agreement have not been material.
14. DEPOSIT ACCOUNTS
Below is a summary of the deposit accounts at December 31 for the
periods indicated:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
AMOUNT RATE AMOUNT RATE
-------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Checking accounts........................................ $ 37,282 -- $ 25,787 --
NOW accounts............................................. 15,450 2.16% 15,796 2.16%
Passbook accounts........................................ 96,581 3.26 93,061 3.27
Money market deposit accounts............................ 140,387 4.81 126,233 4.56
Club accounts............................................ 398 3.00 310 3.00
Certificate accounts..................................... 330,279 5.72 314,059 5.56
-------- --------
$620,377 4.70% $575,246 4.63%
======== ========
</TABLE>
<PAGE>
The following is a summary of certificate accounts by remaining term to
contractual maturity at December 31:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
AMOUNT RATE AMOUNT RATE
-------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
3 months or less......................................... $ 44,535 5.19% $ 69,976 5.27%
3 to 6 months............................................ 46,607 5.50 78,253 5.35
6 to 12 months........................................... 99,811 5.58 69,416 5.32
1 to 2 years............................................. 69,345 5.89 19,813 5.67
2 to 3 years............................................. 60,450 6.20 53,390 5.98
3 to 4 years............................................. 5,043 5.89 16,989 6.87
More than 4 years........................................ 4,488 7.07 6,222 6.67
-------- --------
Total certificates.................................. $330,279 5.72% $314,059 5.56%
======== ========
</TABLE>
Interest expense on deposits, summarized by major categories, were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Savings accounts....................................................... $ 3,093 $ 3,036 $ 3,288
Time deposits.......................................................... 18,131 17,195 15,949
Money market deposits.................................................. 6,287 4,988 4,543
Demand deposits........................................................ 643 564 501
Mortgagors' escrow deposits............................................ 57 51 40
------- ------- -------
$28,211 $25,834 $24,321
======= ======= =======
</TABLE>
At December 31, 1997 and 1996 there were no brokered deposits. Deposits
in excess of $100,000 at December 31, 1997 and 1996 were $88.3 million and $69.0
million, respectively.
15. STOCKHOLDERS' EQUITY
The Holding Company relies on dividends received from the Bank to
declare and pay dividends to stockholders. The Bank may not declare or pay
dividends on shares of its common stock if the effect thereof would cause
stockholders equity to be reduced below applicable regulatory capital
maintenance requirements.
The Company's retained earnings at December 31, 1997 include certain
amounts which have been designated as a reserve for bad debts under federal
income tax regulations and has been deducted for federal income tax purposes.
See Income Taxes at Note 10.
Upon the Bank's conversion from mutual to stock form in 1985, a
liquidation account was established within stockholders' equity for the benefit
of all eligible account holders in an amount equal to $38.0 million,
representing total retained earnings at June 30, 1985. In the event of complete
liquidation of the Bank, such account holders would be entitled to their
interest in the liquidation account prior to any payments to shareholders. In
addition, no dividend declaration or payment would be permitted which would
reduce stockholders' equity below the aggregate amount required in the
liquidation account. The aggregate liquidation account is determined at the end
of each fiscal year and is reduced proportionately as eligible account holders
reduce their balances. In no event may the liquidation account be increased. The
liquidation account amounted to $6.5 million and $7.3 million at December 31,
1997 and 1996, respectively.
On May 1, 1988, the Bank's Board of Directors adopted a shareholder
rights plan which expires on May 1, 1998. The plan provides for a dividend of
one share purchase right for each of the Bank's common shares held of record as
of the close of business on May 18, 1988. Initially, the rights are not
exercisable; right certificates are not distributed, and the rights
automatically trade with the Bank's common shares. However, 20 days following
the acquisition of 20% or more of the Bank's common shares or 20 days following
the commencement of a tender offer for 30% or more of the Bank's common shares,
the rights will become exercisable and separate right certificates will be
distributed. The rights will entitle the holders of the Bank's common shares to
purchase additional shares at an exercise price of $75 per share. In addition,
in the event of certain triggering events described in the rights plan, holders
of the rights (other than the acquiring person) will be entitled to acquire the
Bank's common shares having a market value of twice the then-current exercise
price of the rights. In addition, in the event the Bank enters into certain
business combination transactions, holders of the rights will be provided a
right to acquire equity securities of the acquiring entity having a market value
of twice the then-current exercise price of the rights. The Bank will be
entitled to redeem the rights upon the occurrence of certain events. In
connection with the October 22, 1997 definitive merger agreement with HUBCO,
Inc., the Company and the Bank agreed to terminate this shareholder rights plan
upon stockholder approval of the merger.
16. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators, that if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its subsidiary bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of Tangible and Core capital (as defined) to adjusted total
assets (as defined), and of Tier 1 and Total capital (as defined in the
regulations) to risk-weighted assets (as defined). Core capital to adjusted
total assets is also known as the 'Leverage' ratio. Management believes, as of
December 31, 1997, that the Bank exceeds all capital adequacy requirements to
which it is subject.
<PAGE>
As of December 31, 1997, the most recent information from the Bank's
primary regulator, the Office of Thrift Supervision ('the OTS'), categorized the
Bank as 'well capitalized' under the regulatory framework for prompt corrective
action. To be categorized as 'well capitalized' the Bank must maintain minimum
core, Tier 1 and risk-based capital ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the Bank's category. The Bank's actual capital amounts and
ratios are also presented in the table.
<TABLE>
<CAPTION>
OTS REQUIREMENTS
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------- -----------------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----
<S> <C> <C> <C> <C>
As of December 31, 1997:
Tangible Capital/Adjusted Total Assets........... $59,960 6.95% $12,943 1.5%
Core Capital/Adjusted Total Assets............... $59,960 6.95% $25,887 3.0%
Tier 1 Capital/Risk Weighted Assets.............. $59,960 10.38% -- --
Total Capital/Risk Weighted Assets............... $67,180 11.62% $46,232 8.0%
As of December 31, 1996:
Tangible Capital/Adjusted Total Assets........... $56,457 6.69% $12,652 1.5%
Core Capital/Adjusted Total Assets............... $56,457 6.69% $25,304 3.0%
Tier 1 Capital/Risk Weighted Assets.............. $56,457 10.22% -- --
Total Capital/Risk Weighted Assets............... $63,354 11.47% $44,199 8.0%
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTION PROVISIONS
-----------------------
AMOUNT RATIO
------ -----
<S> <C> <C>
As of December 31, 1997:
Tangible Capital/Adjusted Total Assets........... -- --
Core Capital/Adjusted Total Assets............... $43,145 5.0%
Tier 1 Capital/Risk Weighted Assets.............. $34,674 6.0%
Total Capital/Risk Weighted Assets............... $57,790 10.0%
As of December 31, 1996:
Tangible Capital/Adjusted Total Assets........... -- --
Core Capital/Adjusted Total Assets............... $42,175 5.0%
Tier 1 Capital/Risk Weighted Assets.............. $33,150 6.0%
Total Capital/Risk Weighted Assets............... $55,250 10.0%
</TABLE>
<PAGE>
A reconciliation of the Company's stockholders' equity under generally
accepted accounting principles to the Bank's Regulatory Capital is summarized as
follows:
<TABLE>
<CAPTION>
TANGIBLE CORE
RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- -------
- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity under GAAP - Holding Company.............................. $ 72,571 $72,571 $ 72,571
Adjustments: primarily loss at Holding Company................................. 489 489 489
-------- -------
- ----------
Stockholders' equity under GAAP - Bank......................................... 73,060 73,060 73,060
Unrealized losses on available for sale securities, net of tax................. 124 124 124
Limitation on deferred tax assets.............................................. (13,224) (13,224)
(13,224)
General allowance for loan losses (to extent allowable)........................ n/a n/a 7,220
-------- -------
- ----------
Regulatory capital............................................................. $ 59,960 $59,960 $ 67,180
======== =======
==========
</TABLE>
Adjusted total assets for Bank were $862.9 million and $843.5 million
as of December 31, 1997 and 1996, respectively. Risk-weighted assets for the
Bank were $577.9 million and $552.5 million as of December 31, 1997 and 1996,
respectively.
The Federal Reserve System requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW, SuperNOW
and checking accounts). As of December 31, 1997, a 3% reserve was required on
total transaction balances in excess of $4.3 million but less than $47.7
million. Reserves of 10% were required on total transaction balances in excess
of $47.7 million. Because required reserves must be maintained in the form of
vault cash or a non-interest bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce the Bank's earning assets.
Required reserves aggregated $2.0 million at December 31, 1997.
17. OFF-BALANCE SHEET RISK
In the normal course of business, the Company utilizes various
financial instruments with off-balance sheet risk to meet the financing needs of
its customers, and to reduce its own exposure to fluctuations in interest rates.
These off-balance sheet activities may include commitments to extend credit,
commercial letters of credit, standby letters of credit, commitments to purchase
and sell loans, and interest rate hedge agreements. The credit and market risks
associated with these financial instruments are generally managed in conjunction
with the Company's balance sheet activities and are subject to normal credit
policies, financial controls and risk limiting and monitoring procedures. The
maximum dollar effect of the risks may be in excess of the amounts recognized in
the consolidated statements of condition because these amounts vary depending on
the nature of the underlying instrument and the related accounting policy.
Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Company's exposure to credit loss
is represented by the contractual amount of the commitments to extend credit,
commitments to purchase and sell loans, commercial letters of credit and standby
letters of credit. This is the maximum potential loss of principal in the event
the commitment is drawn upon and the counterparty defaults. With respect to
other financial instruments, the contractual or notional amounts of interest
rate caps do not necessarily represent the actual credit exposure, but the
extent of involvement in a particular class of instrument. In addition, the
measurement of the risks associated with these financial instruments is
meaningful only when all related and offsetting transactions are identified.
<PAGE>
A summary of the contractual or notional amounts for off-balance sheet
activities at December 31, 1997 and 1996 and further discussion of these
activities follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
(In thousands)
<S> <C> <C>
Credit activities:
Commitments to extend credit:
1-4 family residential mortgage loans.................................. $ 14,262 $29,026
Commercial loans....................................................... 6,359 8,040
Unfunded commitments on:
One-to-four family construction loans.................................. 2,057 2,567
Other construction loans, primarily residential sub-divisions.......... 26,443 24,181
Consumer lines......................................................... 14,565 12,312
Commercial lines....................................................... 323 192
Standby letters of credit.............................................. 2,312 2,790
Securitized 1-4 family mortgage loans sold with recourse............... 11,696 13,440
Loans sold with recourse............................................... 6,157 5,900
Commitments to sell loans:
1-4 family residential mortgage loans.................................. 9,386 12,985
Other financial instrument activities:
Interest rate swap agreements (notional amount)............................. 20,000 20,000
Interest rate collar agreements (notional amount)........................... 115,000 95,000
Forward contracts........................................................... 1,000 8,000
</TABLE>
CREDIT ACTIVITIES
Commitments to extend credit are legally binding agreements to lend
money at predetermined interest rates for a specific period of time. The
exposure to loss is minimized by maintaining specific credit standards and by
requiring the borrower to comply with certain terms and conditions prior to the
disbursement of funds. Collateral is obtained when deemed necessary and may
include but is not limited to accounts receivable, inventory, equipment, real
estate, or income producing assets. Since commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent the total
amount of future outlays.
Commercial letters of credit, which are included in commitments to
extend credit in the preceding table, are issued to facilitate certain trade
transactions. The risks associated with these transactions would be a result of
the customer's failure to perform in accordance with the terms and conditions of
the agreement which is limited by applying adequate monitoring procedures.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The Bank issues
standby letters of credit to ensure contract performance or assure payment by
its customers. The risk involved in issuing standby letters of credit is the
same as the credit risk involved in extending loan facilities to customers;
therefore, standby letters of credit are subject to the same credit approvals
and monitoring procedures.
Commitments to sell loans are primarily utilized by the Bank to hedge
origination activity. These commitments obligate the Bank to deliver a fixed
amount of loans by a specified date. Risk originates from the inability of
counterparties to meet the terms of their contracts (credit risk).
OTHER FINANCIAL INSTRUMENT ACTIVITIES
An interest rate swap is an agreement where one party (a broker) agrees
to pay a floating rate of interest (based on the 3-month LIBOR) on a notional
principal amount to another party (the Bank) in exchange for receiving a fixed
rate of interest on the same notional amount. As of December 31, 1997, the Bank
had one outstanding swap on which it receives a floating rate of 5.72% and pays
a fixed rate of 7.335%. The swap expires in March 2000. The Bank's risk of loss
on this swap is equal to the fair value of the swap, which as of December 31,
1997 was an unrealized loss of $0.6 million.
An interest rate collar involves the simultaneous purchase of an
interest rate cap and sale of an interest rate floor, both tied to specific
indices and based on notional principal amounts. The premium paid on interest
rate collars is amortized on a straight-line basis over the life of the
individual agreements. As of December 31, 1997, the weighted average cap rate,
floor rate and maturity of the Bank's $115 million notional amount of interest
rate collar agreements were, 6.76%, 5.42%, and 18 months, respectively. The rate
caps and floor are based on 3-month LIBOR which was 5.72% at December 31, 1997.
During 1995, 1996, and 1997 the Bank neither paid nor received any amounts on
these interest rate collars.
Forward contracts are agreements where the Bank has agreed to deliver
to a counterparty a specific type of security at a agreed upon rate. These
contracts are generally settled within 60 to 90 days. At December 31, 1997, the
Bank had committed to sell, under forward agreements, an aggregate principal
amount of $1.0 million of mortgage-backed securities with a weighted average
rate of 7.0%. These agreements were entered into in connection with mortgage
banking activities.
Interest rate caps are an agreement between two parties to limit the
effects of rising interest rates. The issuer of an interest rate cap assumes a
liability to the purchaser for the excess interest of a stated market rate over
a contracted cap rate on a notional amount of principal. The Bank uses interest
rate caps to protect itself from rising interest rates on certain liabilities.
The risks associated with these caps are the abilities of the counterparties to
meet the terms of the contract (credit risk) and exposure to movements in
interest rates (market risk). These risks are subject to the review and approval
process of the asset/liability committee. The premium paid on interest rate caps
is amortized on a straight-line basis over the life of the individual
agreements. The Bank's risk of loss is limited to the remaining unamortized
premiums on these agreements.
18. RELATED PARTY TRANSACTIONS
Loans and lines of credit are made available to directors and senior
officers on the same terms, including interest rates and collateral
requirements, as loans to other employees and to the public.
At December 31, 1997, the full amount of credit extended to directors,
senior officers and their affiliates was $1.2 million which includes the
unfunded portion of lines of credit. The table below indicates the activity in
these loan accounts during 1997 (amounts in whole dollars):
<TABLE>
<S> <C>
Outstanding balance at December 31, 1996........................................ $ 592,000
Additions.................................................................. 655,000
Deductions................................................................. (138,000)
----------
Outstanding balance at December 31, 1997........................................ $1,109,000
==========
</TABLE>
<PAGE>
19. FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of certain
financial instruments. The following estimated fair values have been determined
using available market information and appropriate valuation methodologies.
Considerable judgment is required to interpret market data and to develop
estimates of fair value. The estimates presented are not necessarily indicative
of amounts the Company could realize in a current market exchange. The use of
alternative market assumptions and estimation methodologies could have a
material effect on these estimates of fair value.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks.............................. $ 11.8 $ 11.8 $ 6.9 $ 6.9
Mortgage-backed securities and accrued interest...... 146.4 146.3 144.7 144.3
Other securities and accrued interest................ 17.4 17.4 32.1 32.1
Loans and accrued interest, net...................... 669.2 673.4 638.7 636.6
Liabilities:
Deposits with no stated maturity..................... 290.4 290.4 261.5 261.5
Time deposits and accrued interest................... 330.6 329.7 314.4 313.4
Borrowings........................................... 168.8 168.8 198.7 198.7
Mortgagors' escrow deposits.......................... 4.6 4.6 4.1 4.1
Other Financial Instruments:
Interest rate hedge agreements....................... 0.4 (0.5) -- (1.0)
</TABLE>
Cash and Due From Banks: The estimated fair value approximates the
carrying amount because of the immediate availability of these funds or based on
the short maturities and current rates for similar deposits with other banks.
Mortgage-backed and Other Securities: The fair value was estimated
based on quoted market prices or dealer quotes, where available. If quoted
market prices are not available, fair values are based on quoted market prices
for similar securities.
Loans: The fair value of fixed rate loans has been estimated by
discounting projected cash flows using current rates for similar loans reduced
by specific and general loan loss allowances. For loans which reprice frequently
to market rates, the carrying amount, net of the applicable credit factor, is a
reasonable estimate of fair value. Impaired loans, which include non-accrual
loans, are included in the above table based generally on the fair value of the
underlying collateral.
Deposits: The estimated fair value of demand deposits, savings
accounts, and certain money market deposits, as required by SFAS No. 107, is the
amount payable at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
Borrowings: Rates currently available to the Company for borrowings
with similar terms and remaining maturities are used to estimate fair value.
Mortgagors' Escrow Deposits: The estimated fair value of mortgagors'
escrow deposits is the amount payable at the reporting date.
Other Financial Instruments: The fair value of interest rate hedge
instruments is the amount at which they could be settled, based on estimates
obtained from dealers.
At December 31, 1997, the Bank had an interest rate swap agreement
which expires in March 2000, covering an aggregate notional amount of $20.0
million, where the Bank receives 3-month LIBOR and pays 7.335% fixed.
At December 31, 1997, the Bank had interest rate collar agreements
covering an aggregate notional amount of $115.0 million which expire as follows:
$50.0 million in 1998, $20.0 million in 1999, and $45.0 million in 2000. The
interest rate floors and caps are based on the 3-month LIBOR. At December 31,
1997, the weighted average floor rate was 5.42% and the weighted cap rate was
6.76%. Under these interest rate collar agreements, the Bank receives payments
if 3-month LIBOR is greater than cap rate and pays if 3-month LIBOR is less than
floor rate.
At December 31, 1997, the Bank had committed to sell, under forward
agreements, an aggregate principal amount of $1.0 million of mortgage-backed
securities with a weighted average rate of 7.00%. These agreements were entered
into in connection with mortgage banking activities and generally must be
settled within 90 days.
Commitments include commitments to extend permanent financing and
letters of credit. The fair value of commitments is estimated based upon fees
currently charged to enter into similar agreements taking into account the
remaining terms of the agreement and the present creditworthiness of the
counterparties. The fair value of letters of credit is based on fees currently
charged for similar agreements. The fair value of commitments at December 31,
1997 and 1996, respectively, approximate the recorded amounts of related fees,
which are not material.
20. SAVINGS ASSOCIATION INSURANCE FUND ('SAIF') SPECIAL ASSESSMENT
On September 30, 1996, legislation was signed into law which included
provisions designed to replenish the Savings Association Insurance Fund. Under
this legislation, all SAIF insured institutions (including the Bank) were
assessed a one-time fee of 65.7 cents on every $100 of insured deposits held on
March 31, 1995, as adjusted. This one-time special assessment charged to the
Bank totaled $2.6 million and was paid on November 27, 1996. This assessment was
recorded as a charge to earnings on September 30, 1996 and is included in the
accompanying Statement of Income with non-interest expenses. The
recapitalization of the SAIF fund is expected to provide for lower deposit
insurance premiums through at least 1999.
<PAGE>
21. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Earnings of the Bank are recognized by Poughkeepsie Financial Corp.
(the 'Holding Company') using the equity method of accounting. Accordingly,
earnings of the Bank are recorded as increases in the Holding Company's
investment and any dividend received from the Bank reduces the Holding Company's
investment in the Bank. The condensed financial statements for the Holding
Company at December 31, 1997 and for the period May 30, 1997 (date Holding
Company commenced operations) to December 31, 1997 are presented below (dollar
amounts are in thousands):
<TABLE>
<S> <C>
CONDENSED STATEMENT OF FINANCIAL CONDITION
Assets:
Cash and due from banks........................................................................... $ 102
Investment in the Bank............................................................................ 73,060
Other assets...................................................................................... 96
-------
Total assets...................................................................................... $73,258
=======
Liabilities and Stockholders' Equity:
Due to the Bank................................................................................... $ 607
Other liabilities................................................................................. 80
-------
Total liabilities................................................................................. 687
Stockholders' equity.............................................................................. 72,571
-------
Total liabilities and stockholders' equity........................................................ $73,258
=======
CONDENSED STATEMENT OF INCOME
Dividend income from the Bank..................................................................... $ 1,260
Interest income................................................................................... 2
Other operating expenses.......................................................................... 686
-------
Income before income taxes and equity in undistributed earnings of the Bank....................... 576
Income tax benefit................................................................................ (95)
-------
Income before equity in undistributed earnings of the Bank........................................ 671
Undistributed earnings of the Bank................................................................ 1,758
-------
Net income........................................................................................ $ 2,429
=======
CONDENSED STATEMENT OF CASH FLOW
Operating activities:
Net Income................................................................................... $ 2,429
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of the Bank............................................ (1,758)
Net change in other assets and liabilities.............................................. 504
-------
Net cash provided by operating activities............................................... 1,175
-------
Financing activities:
Issuance of common stock..................................................................... 87
Cash dividends paid.......................................................................... (1,260)
-------
Net cash used in financing activities................................................... (1,173)
-------
Net increase in cash and cash equivalents......................................................... 2
Cash and cash equivalents at May 30, 1997......................................................... 100
-------
Cash and cash equivalents at December 31, 1997.................................................... $ 102
=======
</TABLE>
<PAGE>
22. QUARTERLY DATA (UNAUDITED)
Quarterly financial information for 1997 and 1996 follows. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
such periods are reflected.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
12/31/97 9/30/97 6/30/97 3/31/97
------- ------- ------- -------
(Dollars in thousands, except per share
data)
<S> <C> <C> <C> <C>
Interest and dividend income................................ $16,978 $16,968 $16,481 $16,296
Interest expense............................................ 10,122 9,969 9,685 9,499
------- ------- ------- -------
Net interest and dividend income............................ 6,856 6,999 6,796 6,797
Provision for loan losses................................... 900 350 300 300
------- ------- ------- -------
Net interest income after provision for loan losses......... 5,956 6,649 6,496 6,497
Other income................................................ 820 1,173 797 784
Other expenses.............................................. 7,795 6,043 5,267 5,379
------- ------- ------- -------
Income (loss) before taxes.................................. (1,019) 1,779 2,026 1,902
Income tax expense (benefit)................................ (66) 725 824 776
------- ------- ------- -------
Net income (loss)........................................... $ (953) $ 1,054 $ 1,202 $ 1,126
======= ======= ======= =======
Net income (loss) per share -- basic........................ $ (0.08) $ 0.08 $ 0.10 $ 0.09
======= ======= ======= =======
Net income (loss) per share -- diluted...................... $ (0.08) $ 0.08 $ 0.09 $ 0.09
======= ======= ======= =======
Dividends per share......................................... $ 0.050 $ 0.025 $ 0.025 $ 0.025
======= ======= ======= =======
Weighted average shares outstanding:
Basic.................................................. 12,598,758 12,594,855 12,594,725 12,592,829
========== ========== ========== ==========
Diluted................................................ 13,398,272 13,263,963 13,110,509 13,047,587
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96
------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income............................. $16,586 $15,938 $15,172 $15,924
Interest expense......................................... 9,751 9,594 9,100 9,412
------- ------- ------- -------
Net interest and dividend income......................... 6,835 6,344 6,072 6,512
Provision for loan losses................................ 300 250 150 150
------- ------- ------- -------
Net interest income after provision for loan losses...... 6,535 6,094 5,922 6,362
Other income............................................. 708 597 (331) 488
Other expenses........................................... 5,204 7,673 5,568 5,531
------- ------- ------- -------
Income (loss) before taxes............................... 2,039 (982) 23 1,319
Income tax expense (benefit)............................. 817 (394) 7 533
------- ------- ------- -------
Net income (loss)........................................ $ 1,222 $ (588) $ 16 $ 786
======= ======= ======= =======
Net income (loss) per share -- basic..................... $ 0.10 $ (0.05) $ 0.00 $ 0.06
======= ======= ======= =======
Net income (loss) per share -- diluted................... $ 0.09 $ (0.05) $ 0.00 $ 0.06
======= ======= ======= =======
Dividends per share...................................... $ 0.025 $ 0.025 $ 0.025 $ 0.025
======= ======= ======= =======
Weighted average shares outstanding:
Basic............................................... 12,561,010 12,550,765 12,543,885 12,531,666
========== ========== ========== ==========
Diluted............................................. 12,920,090 12,890,832 12,907,787 12,922,124
========== ========== ========== ==========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
POUGHKEEPSIE FINANCIAL CORP.
Poughkeepsie, New York
We have audited the accompanying consolidated statements of financial
condition of Poughkeepsie Financial Corp. and subsidiary (the 'Company') as of
December 31, 1997 and 1996 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Poughkeepsie
Financial Corp. and subsidiary at December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
- - ------------------------------
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 23, 1998
<PAGE>
(b) The pro forma financial information statements required by this
item will be filed by amendment prior to July 8, 1998
(c) Exhibits:
(1) Amended and Restated Agreement and Plan of Merger dated as
of October 22, 1997 among HUBCO, Inc., Poughkeepsie
Financial Corp. and Bank of the Hudson (Exhibit 99.2 to
HUBCO's December 12, 1997 Form 8-K)*
* This exhibit was previously filed as an exhibit to the Registrant's Form
8-K filed with the Commission on December 12, 1997 and thus is not included in
this filing.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registration has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
HUBCO, INC.
D. LYNN VAN BORKULO-NUZZO
Dated: June 29, 1998 By: _________________________________
D. Lynn Van Borkulo-Nuzzo
Executive Vice President and
Corporate Secretary
