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As filed with the Securities and Exchange Commission on July 18, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
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HUDSON VALLEY HOLDING CORP.
(Exact Name of Registrant as Specified in Its Charter)
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New York 13-3148745
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
21 Scarsdale Road
Yonkers, New York 10707
(914) 961-6100
(Address, including Zip Code, and telephone number,
including area code, of Registrant's Principal Executive Offices)
Securities to be Registered Pursuant to Section 12(b) of the Act: None
Securities to be Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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Common Stock, None
par value $.20 per share
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Correspondence concerning this Registration Statement should be sent to:
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Stephen R. Brown Martin L. Budd
Hudson Valley Holding Corp. Day, Berry & Howard LLP
21 Scarsdale Road One Canterbury Green
Yonkers, New York 10707 Stamford, Connecticut 06901
(914) 961-6100 (203) 977-7300
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CROSS REFERENCE SHEET
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Form 10 Item Number Section of Registration Statement
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Item 1. Business Business
Item 2. Financial Information Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Property Business
Item 4. Security Ownership of Certain
Beneficial Owners and Security Ownership of Certain
Management Beneficial Owners and Management
Item 5. Directors and Executive Management
Officers
Item 6. Executive Compensation Executive Compensation
Item 7. Certain Relationships and Certain Relationships and Related
Related Transactions Transactions
Item 8. Legal Proceedings Business
Item 9. Market Price of and Dividends Market Price and Dividend Policy
on the Registrant's Common
Equity and Related
Stockholder Matters
Item 10. Recent Sales of Unregistered Recent Sales of Unregistered
Securities Securities
Item 11. Description of Registrant's Description of Securities
Securities to be Registered
Item 12. Indemnification of Directors Indemnification of Directors and
and Officers Officers
Item 13. Financial Statements and Consolidated Financial Statements
Supplementary Data
Item 14. Changes in and Disagreements Not Applicable
with Accountants on
Accounting and Financial
Disclosure
Item 15. Financial Statements and Index to Consolidated Financial
Exhibits Statements; Exhibits
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TABLE OF CONTENTS
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Page
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Hudson Valley Holding Corp............................................... 1
Risk Factors............................................................. 1
Forward-Looking Statements............................................... 5
Business................................................................. 5
Selected Financial Data.................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Market Price and Dividend Policy......................................... 53
Management............................................................... 54
Executive Compensation................................................... 57
Certain Relationships and Related Transactions........................... 61
Security Ownership of Certain Beneficial Owners and Management........... 63
Description of Securities................................................ 64
Indemnification of Directors and Officers................................ 65
Where to Find More Information........................................... 65
Recent Sales of Unregistered Securities.................................. 66
Index to Consolidated Financial Statements............................... F-1
Independent Auditors' Report............................................. F-2
Consolidated Financial Statements........................................ F-3
Index to Exhibits
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ii
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HUDSON VALLEY HOLDING CORP.
Hudson Valley Holding Corp. (the "Company") is a New York corporation
founded in 1982. The Company is registered as a bank holding company under the
Bank Holding Company Act of 1956.
The Company provides financial services through its wholly-owned subsidiary,
Hudson Valley Bank (the "Bank"), a New York chartered commercial bank
established in 1972. The Bank is the largest independent bank headquartered in
Westchester County, New York. The Bank has 13 branch offices in Westchester
County and 1 in Bronx County, New York. We anticipate opening an additional
facility in Bronx County in 2000. The Company and the Bank derive substantially
all of their revenue and income from providing banking and related services to
small and medium-sized businesses, professionals, municipalities, not-for-
profit organizations and individuals located in Westchester County and, to a
lesser extent, the Bronx.
Our principal executive offices are located at 21 Scarsdale Road, Yonkers,
New York 10707.
RISK FACTORS
An investment in our common stock involves a significant degree of risk,
including the risks described below.
Our markets are intensely competitive, and our principal competitors are larger
than us.
We face significant competition both in making loans and in attracting
deposits. This competition is based on, among other things, interest rates and
other credit and service charges, the quality of services rendered, the
convenience of the banking facilities, the range and type of products offered
and the relative lending limits in the case of loans to larger commercial
borrowers. The Westchester County and Bronx County area of New York has a very
high density of financial institutions, many of which are branches of
institutions which are significantly larger than us and have greater financial
resources and higher lending limits. Many of these institutions offer services
that we do not or cannot provide. Nearly all such institutions compete with us
to varying degrees.
Our competition for loans comes principally from commercial banks, savings
banks, savings and loan associations, credit unions, mortgage banking
companies, insurance companies and other financial service companies. Our most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations, and money market funds and other
securities funds offered by brokerage firms and other similar financial
institutions. We face additional competition for deposits from non-depository
competitors such as the mutual fund industry, securities and brokerage firms,
and insurance companies.
Competition may increase in the future as a result of regulatory change in
the financial services industry. We expect to face increased competitive
pressure from non-banking sources as a result of the passage by Congress of the
Financial Services Modernization Act of 1999 (the "Gramm-Leach-Bliley Act"),
which permits banks and bank holding companies to affiliate more easily with
other financial service institutions, such as insurance companies and brokerage
firms. Although the impact of this legislation on us cannot be predicted, it is
likely that financial institutions in our market will begin to offer a wider
range of services. Because of our smaller size, we may have less opportunity to
take advantage of the flexibility offered by the new legislation.
We operate in a highly regulated industry and could be adversely affected by
governmental monetary policy or regulatory change.
The Company, as a bank holding company, and the Bank are subject to
regulation by several government agencies, including the Federal Reserve Board,
the Federal Deposit Insurance Corporation, the New York Superintendent of
Banks, and the Banking Board of the State of New York. Changes in governmental
economic and monetary policy not only can affect the ability of the Bank to
attract deposits and make loans, but can also affect the demand for business
and personal lending and for real estate mortgages.
1
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Government regulations affect virtually all areas of our operations,
including our range of permissible activities, products and services, the
geographic locations in which our services can be offered, the amount of
capital required to be maintained to support operations, the right to pay
dividends and the amount which the Bank can pay to obtain deposits. The passage
of the Gramm-Leach-Bliley Act, which permits banks and bank holding companies
to affiliate more easily with other financial service firms, could
significantly change the nature of the financial services market over the next
few years. There can be no assurance that we will be able to adapt successfully
to changes initiated by this or other governmental or regulatory action.
Our income is sensitive to changes in interest rates.
The Bank's profitability, like that of most banking institutions, depends to
a large extent upon its net interest income. Net interest income is the
difference between interest income received on interest-earning accounts,
including loans and securities, and the interest paid on interest-bearing
liabilities, including deposits and borrowings. Accordingly, the Bank's results
of operations and financial condition depend largely on movements in market
interest rates and its ability to manage its assets and liabilities in response
to such movements.
The Bank tries to manage its interest rate risk exposure by closely
monitoring its assets and liabilities in an effort to reduce the effects of
changes in interest rates primarily by altering the mix and maturity of the
Bank's loans, investments and funding sources.
The Bank is currently positioned to benefit from a falling interest rate
environment. Significant rate increases could have an adverse effect on the
Bank's net interest income by decreasing the spread between the rates earned on
assets and paid on liabilities. Changes in interest rates also affect the
volume of loans originated by the Bank, as well as the value of its loans and
other interest-earning assets, including investment securities.
In addition, changes in interest rates may result in an increase in higher
cost deposit products within the Bank's existing portfolio, as well as a flow
of funds away from bank accounts into direct investments (such as U.S.
Government and corporate securities, and other investment instruments such as
mutual funds) to the extent that the Bank does not pay competitive rates of
interest. "See Management's Discussion and Analysis of Financial Condition--
Market Risk."
There is currently no active market for the common stock and there can be no
assurance that a market will develop.
Our common stock trades from time to time in the over-the-counter bulletin
board market under the symbol "HUVL." Trading in this market is sporadic. In
the absence of an active market for our common stock, there can be no assurance
that a shareholder will be able to find a buyer for his or her shares. Stock
prices as a whole may also be lower than they would be if an active market were
to develop, and may tend to fluctuate more dramatically.
We have not determined whether we will apply for the listing of the common
stock on the American Stock Exchange ("AMEX") or another securities exchange.
If we do apply for such listing, there can be no assurance that the common
stock will be listed on the AMEX or any securities exchange. Even if we
successfully list the common stock on the AMEX or another securities exchange,
there can be no assurance that any organized public market for the securities
will develop or that there will be any private demand for the common stock. We
could also fail to meet the requirements for continued inclusion on the AMEX or
such other exchange, such as the requirement relating to the minimum number of
public shareholders or the aggregate market value of publicly held shares.
The liquidity of the common stock depends upon the presence in the
marketplace of willing buyers and sellers. Liquidity also may be limited by
other factors, including restrictions imposed on the common stock by
shareholders.
2
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The Company has historically created a secondary market for its stock by
issuing offers to repurchase shares from any shareholder. However, the Company
is not obligated to issue such offers to repurchase shares in the future and
may discontinue or limit such offers at any time.
If the common stock is not listed on an exchange, it may not be accepted as
collateral for loans, or if accepted, its value may be substantially
discounted. As a result, investors should regard the common stock as a long-
term investment and should be prepared to bear the economic risk of an
investment in the common stock for an indefinite period. Investors who may need
or wish to dispose of all or a part of their investments in the common stock
may not be able to do so except by private, direct negotiations with third
parties.
The development of a market for the common stock could be limited by existing
agreements with respect to resale.
A significant number of our shareholders are current or former directors and
employees (or their family members) who purchased their shares subject to
various Stock Restriction Agreements. Pursuant to these Stock Restriction
Agreements, we enjoy a right of first refusal if the shareholder proposes to
sell his or her shares to a third party. Historically, we have exercised our
right of first refusal and have purchased a substantial portion of the shares
offered to us pursuant to the Stock Restriction Agreements. Our repurchase of
stock has effectively created a secondary market for the stock. We have no
obligation to repurchase the common stock under the Stock Restriction
Agreements or otherwise and there can be no assurance that we will purchase any
additional stock in the future. If we continue to exercise our right to
repurchase shares subject to the Stock Restriction Agreements, this will limit
the availability of shares in public markets.
Government regulation restricts our ability to pay cash dividends.
Dividends from the bank are the only significant source of cash for the
Company. However, there are various statutory and regulatory limitations
regarding the extent to which the Bank can pay dividends or otherwise transfer
funds to the Company. Federal and state bank regulatory agencies also have the
authority to limit further the Bank's payment of dividends based on such
factors as the maintenance of adequate capital for the Bank, which could reduce
the amount of dividends otherwise payable. The Company paid a cash dividend to
our shareholders of $1.02 per share in 1999, $0.82 per share in 1998 and $0.56
per share in 1997 (adjusted for subsequent stock dividends). Under applicable
banking statutes, at December 31, 1999, the Bank could have declared dividends
of approximately $27.2 million to the Company without prior regulatory
approval, which would have enabled the Company to pay an additional dividend of
approximately $6.40 per share without prior regulatory approval. No assurance
can be given that the Bank will have the profitability necessary to permit the
payment of dividends in the future; therefore, no assurance can be given that
the Company would have any funds available to pay dividends to shareholders.
Federal and state agencies require the Company and the Bank to maintain
adequate levels of capital. The failure to maintain adequate capital or to
comply with applicable laws, regulations and supervisory agreements could
subject the Company, the Bank or its subsidiaries to federal and state
enforcement provisions, such as the termination of deposit insurance, the
imposition of substantial fines and other civil penalties and, in the most
severe cases, the appointment of a conservator or receiver for a depositary
institution. Moreover, dividends can be restricted by any of the Bank's
regulatory authorities if the agency believes that the Bank's financial
condition warrants such a restriction.
In addition, the Company's ability to declare and pay dividends is
restricted under the New York Business Corporation Law, which provides that
dividends may only be paid by a corporation out of its surplus.
In the event of a liquidation or reorganization of the Bank, the ability of
holders of debt and equity securities of the Company to benefit from the
distribution of assets from the Bank upon any such liquidation or
reorganization would be subordinate to prior claims of creditors of the Bank
(including depositors), except to the extent that the Company's claim as a
creditor may be recognized. The Company is not currently a creditor of the
Bank.
3
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We may incur liabilities under federal and state environmental laws with
respect to foreclosed properties.
Approximately 66% of the loans held by the Bank as of December 31, 1999 were
secured by real estate. Approximately half of these loans were commercial real
estate loans, with most of the remainder being for single or multi-family
residences. The Bank currently does not own any property acquired on
foreclosure. However, the Bank has in the past and may in the future acquire
properties through foreclosure on loans in default. Under federal and state
environmental laws, the Bank could face liability for some or all of the costs
of removing hazardous substances, contaminants or pollutants from properties
acquired by the Bank on foreclosure. While other persons might be primarily
liable, such persons might not be financially solvent or able to bear the full
cost of the clean up. It is also possible that a lender that has not foreclosed
on property but has exercised unusual influence over the borrower's activities
may be required to bear a portion of the clean up costs under federal or state
environmental laws.
A downturn in the economy in our market area would adversely affect our loan
portfolio and our growth potential.
Our lending market area is concentrated in Westchester County, New York and,
to a lesser extent, Bronx County, New York with a primary focus on small to
medium-sized businesses located in this area. Accordingly, the asset quality of
our loan portfolio is largely dependent upon the area's economy and real estate
markets. A downturn in the economy in our primary lending area would adversely
affect our operations and limit our future growth potential.
Technological change may affect our ability to compete.
The banking industry is undergoing rapid technological changes, with
frequent introductions of new technology-driven products and services. In
addition to improving customer services, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. Our
future success will depend, in part, on our ability to address the needs of
customers by using technology to provide products and services that will
satisfy customer demands, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. There can be no assurance that we will be
able to effectively implement new technology-driven products and services or be
successful in marketing such products and services to the public.
In addition, because of the demand for technology-driven products, banks are
increasingly contracting with outside vendors to provide data processing and
core banking functions. The use of technology-related products, services,
delivery channels and processes expose a bank to various risks, particularly
transaction, strategic, reputation and compliance risk. There can be no
assurance that we will be able to successfully manage the risks associated with
our increased dependency on technology.
Our profitability depends on our customers' ability to repay their loans and
our ability to make sound judgments concerning credit risk.
There are risks inherent in making all loans, including risks with respect
to the period of time over which loans may be repaid, risks resulting from
changes in economic conditions, risks inherent in dealing with individual
borrowers, and, in the case of a collateralized loan, risks resulting from
uncertainties about the future value of the collateral. We maintain an
allowance for loan losses based on, among other things, historical experience,
an evaluation of economic conditions, and regular reviews of delinquencies and
loan portfolio quality. Our judgment as to the adequacy of the allowance is
based upon a number of assumptions which we believe to be reasonable but which
may or may not prove to be correct. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the allowance for loan losses will not be
required. Additions to the allowance for loan losses would result in a decrease
in net income and capital.
4
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FORWARD-LOOKING STATEMENTS
This Registration Statement on Form 10 contains forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements relate to future events or our
future financial performance. We have attempted to identify forward-looking
statements by terminology including "anticipates," "believes," "can,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should" or "will" or the negative of these terms or
other comparable terminology. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors", that may cause our or the banking industry's
actual results, levels of activity, or performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
BUSINESS
The Company is a New York corporation founded in 1982. The Company is
registered as a bank holding company under the Bank Holding Company Act of
1956.
The Company provides financial services through its wholly owned subsidiary,
the Bank, a New York chartered commercial bank established in 1972. The Bank is
the largest independent bank headquartered in Westchester County, New York. The
Bank has 13 branch offices in Westchester County, New York, and 1 branch office
in Bronx County, New York. We anticipate opening an additional facility in
Bronx County in 2000. The Company and the Bank derive substantially all of
their revenue and income from providing banking and related services to small
and medium sized businesses, professionals, municipalities, not-for-profit
organizations and individuals located in Westchester County and, to a lesser
extent, the Bronx.
The Bank's principal customers are small and medium-sized businesses,
professionals, individuals, municipalities and not-for-profit organizations
located in Westchester County and, to a lesser extent, Bronx County, New York.
The Bank's strategy is to operate as a community-oriented banking institution
dedicated to providing personalized service to customers and focusing products
and services on selected segments of the market. The Bank believes that its
ability to attract and retain customers is due primarily to its focused
approach to its market, its personalized and professional services, its product
offerings, its experienced staff, its knowledge of its local markets and its
ability to provide responsive solutions to customers needs. The Bank provides
these products and services to a diverse range of customers and does not rely
on a single large depositor for a significant percentage of deposits.
The Bank engages in a variety of lending activities which are primarily
categorized as real estate, commercial and industrial, individual and lease
financing. At December 31, 1999, gross loans totaled $418.4 million. Gross
loans were comprised of the following loan types:
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Real estate....................................................... 66.0%
Commercial and industrial......................................... 26.2
Individuals....................................................... 2.2
Lease financing................................................... 5.6
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Total............................................................. 100.0%
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At December 31, 1999, the Bank's unsecured lending limit to one borrower
under applicable regulations was approximately $12.5 million.
In managing its loan portfolio, the Bank focuses on:
(i) the application of its established underwriting criteria,
(ii) the establishment of individual lending authorities well below the
Bank's legal lending authority,
5
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(iii) the involvement by senior management and the Board of Directors in the
loan approval process for designated categories, types or amounts of loans,
(iv) an awareness of concentration by industry or collateral, and
(v) the monitoring of loans for timely payment and to seek to identify
potential problem loans.
The Bank utilizes its credit department to assess acceptable and
unacceptable credit risks based upon the Bank's established underwriting
criteria. The Bank utilizes its loan officers, branch managers and credit
department to identify changes in a borrower's financial condition that may
affect the borrower's ability to perform in accordance with loan terms. Lending
policies and procedures place an emphasis on assessing a borrower's income flow
a well as collateral values. Further, the Bank utilizes systems and analysis
which assist in monitoring loan delinquencies. The Bank utilizes its loan
officers, loan collection department and legal counsel in collection efforts on
past due loans. Additional collateral or guarantees may be requested where
delinquencies remain unresolved.
An independent loan review department reviews loans in the Bank's portfolio
and assigns a risk grading to each reviewed loan. Loans are reviewed based upon
the type of loan, the collateral for the loan, the amount of the loan and any
other pertinent information. The loan review department reports directly to the
Board of Directors.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Loan Portfolio" for further information related to the Company's
loan portfolio and lending activities.
The Bank offers deposit products ranging in maturity from demand-type
accounts to certificates of deposit with maturities of up to 5 years. The
Bank's deposits are generally derived from customers within its primary
marketplace. The Bank solicits only certain types of deposits from outside its
market area, primarily from certain professionals and government agencies. The
Bank does not pay fees to others to obtain deposits.
The Bank sets its deposit rates to remain generally competitive with other
financial institutions in its market, although the Bank does not generally seek
to match the highest rates paid by competing institutions. The Bank has
established a process to review interest rates on all deposit products and,
based upon this process, updates its deposit rates weekly. The Company's
Asset/Liability Management Policy and its Liquidity Policy set guidelines to
manage overall interest rate risk and liquidity. These guidelines can affect
the rates paid on deposits. Deposit rates are reviewed under these policies
periodically since deposits are the Bank's primary source of liquidity.
For more information regarding the Bank's deposits, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Deposits."
The Bank provides deposit pick up services for certain business customers.
The Bank has 9 automated teller machines, or ATMs, at various locations, which
generate activity fees based on use by other banks' customers.
The Company's strategy is to increase earnings through moderate growth
within its existing market. The Bank's primary market area, Westchester County
and Bronx County, has a high concentration of the types of customers that the
Bank desires to serve. The Bank expects to continue to expand by opening new
full service banking facilities, by expanding loan originations in its market
area, by enhancing and expanding computerized and telephonic products and
through strategic alliances and contractual relationships.
During the past five years, the Company has focused on maintaining existing
customer relationships and adding new relationships by providing products and
services that meet these customers' needs. The focus of the Bank's products and
services continues to be toward small and medium size businesses,
professionals, not-for-profit organizations and municipalities. The Bank has
expanded its market from Westchester County to include
6
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sections of Bronx County. The Bank has opened two new facilities during the
past five years, one in New Rochelle, Westchester County and one in Bronx
County, and anticipates opening an additional facility in Bronx County in 2000.
The Bank has also invested in technology based products and services to meet
customer needs. In addition, the Bank has expanded products and services,
particularly in its lending programs, and its offering of investment management
and trust services. As a result, the Bank has approximately doubled its total
assets during this five year period.
The Bank provides investment management services to its customers by
utilizing administrative support, investment products and methodologies
provided to the Bank through an alliance with an unaffiliated commercial bank
that is experienced in providing asset management services. The Bank has
periodically explored the possibility of developing relationships with others
that provide similar investment management services, and the Bank believes that
a number of alternative providers of these services exist. The Bank also
provides a software application designed to meet specific administrative needs
of bankruptcy trustees through a marketing and licensing agreement with the
application vendor. While the Bank is interested in developing new customer
relationships with bankruptcy trustees by offering them access to this
software, the Bank does not believe that its relationship with the application
vendor is material to its business. In addition, the Bank has participated in
loans originated by various other financial institutions within the normal
course of business and within standard industry practices.
Our Market Area
Westchester County is a suburban county located in the northern sector of
the New York metropolitan area. It has a large and varied economic base
containing many corporate headquarters, research facilities, manufacturing
firms as well as well-developed trade and service sectors. The median family
income, based on 1990 census data, and adjusted by the U.S. Department of
Housing and Urban Development in 1997 and 1998 was $71,600 and $74,200,
respectively. The County's 1995 per capita personal income of $40,696 placed
Westchester County sixth highest among the nation's 3,107 counties. In
November, 1997, the County's unemployment rate was 3.4 percent, as compared to
New York State at 5.9 percent and the United States at 4.3 percent. The County
has over 40,000 small and medium sized businesses, which form a large portion
of the Bank's current and potential customer base.
Bronx County is one of the five boroughs of New York City and borders on
Westchester County. While it also has a large and varied economic base, the
median family income in the Bronx is much lower than Westchester County. The
median family income, based on 1990 census data and adjusted by the U.S.
Department of Housing and Urban Development in 1999, was $49,800. Bronx County
has a well-developed and growing base of professionals and small and medium
size businesses. The Company believes that this potential customer base offers
growth opportunities similar to those the Bank has developed in Westchester
County.
Subsidiaries of the Bank
In 1987, the Bank formed a wholly-owned subsidiary, Hudson Valley Mortgage
Corp., for the purpose of providing mortgage banking services primarily in
Westchester County and surrounding areas. This subsidiary discontinued
operations in 1995, sold its assets and transferred its employees to the Bank.
It is an inactive subsidiary.
In 1991, the Bank formed a wholly-owned subsidiary, Hudson Valley Investment
Corp., a Delaware corporation, primarily for the purpose of acquiring and
managing a portfolio of investment securities, some of which were previously
owned by the Bank.
In 1993, the Bank formed a wholly-owned subsidiary, Sprain Brook Realty
Corp., primarily for the purpose of holding property obtained by the Bank
through foreclosure in its normal course of business.
In 1997, the Bank formed a subsidiary (of which the Bank owns more than 99
percent of the voting stock), Grassy Sprain Real Estate Holdings, Inc., a real
estate investment trust, primarily for the purpose of acquiring and managing a
portfolio of mortgage-backed securities, loans collateralized by real estate
and other investment securities previously owned by the Bank.
7
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The Company has no separate operations or revenues apart from the Bank and
its subsidiaries. The Bank and its subsidiaries are referred to collectively as
the "Bank".
Supervision and Regulation
Banks and bank holding companies are extensively regulated under both
federal and state law. We have set forth below brief summaries of various
aspects of supervision and regulation which do not purport to be complete and
which are qualified in their entirety by reference to applicable laws, rules
and regulations.
Regulations to which the Company is subject
As a bank holding company, the Company is regulated by and subject to the
supervision of the Board of Governors of the Federal Reserve System (the "FRB")
and is required to file with the FRB an annual report and such other
information as may be required. The FRB has the authority to conduct
examinations of the Company as well.
The Bank Holding Company Act of 1956 (the "BHC Act") limits the types of
companies which we may acquire or organize and the activities in which they may
engage. In general, a bank holding company and its subsidiaries are prohibited
from engaging in or acquiring control of any company engaged in non-banking
activities unless such activities are so closely related to banking or managing
and controlling banks as to be a proper incident thereto. Activities determined
by the FRB to be so closely related to banking within the meaning of the BHC
Act include operating a mortgage company, finance company, credit card company,
factoring company, trust company or savings association; performing certain
data processing operations; providing limited securities brokerage services;
acting as an investment or financial advisor; acting as an insurance agent for
certain types of credit-related insurance; leasing personal property on a full-
payout, non-operating basis; providing tax planning and preparation service;
operating a collection agency; and providing certain courier services. The FRB
also has determined that certain other activities, including real estate
brokerage and syndication, land development, property management and
underwriting of life insurance unrelated to credit transactions, are not
closely related to banking and therefore are not a proper activity for a bank
holding company.
The BHC Act requires every bank holding company to obtain the prior approval
of the FRB before acquiring substantially all the assets of, or direct or
indirect ownership or control of more than five percent of the voting shares
of, any bank. Subject to certain limits and restrictions, a bank holding
company, with the prior approval of the FRB, may acquire an out-of-state bank.
In November 1999, Congress amended certain provisions of the BHC Act through
passage of the Financial Services Modernization Act of 1999 (the "Gramm-Leach-
Bliley Act"). Under this new legislation, a bank holding company may elect to
become a "financial holding company" and thereby engage in a broader range of
activities than would be permissible for traditional bank holding companies. In
order to qualify for the election, all of the depository institution
subsidiaries of the bank holding company must be well capitalized and well
managed, as defined under FRB regulations, and all such subsidiaries must have
achieved a rating of "satisfactory" or better with respect to meeting community
credit needs. Pursuant to the Gramm-Leach-Bliley Act, financial holding
companies will be permitted to engage in activities that are "financial in
nature" or incidental or complementary thereto, as determined by the FRB. The
Gramm-Leach-Bliley Act identifies several activities as "financial in nature",
including, among others, insurance underwriting and agency activities,
investment advisory services, merchant banking and underwriting, and dealing in
or making a market in securities.
The Company believes it would meet the regulatory criteria that would enable
it to elect to become a financial holding company. The Company has not yet
determined whether to make such an election.
The Gramm-Leach-Bliley Act will also make it possible for entities engaged
in providing various other financial services to form financial holding
companies and form or acquire banks. Accordingly, the Gramm-Leach-Bliley Act
will make it possible for a variety of financial services firms to offer
products and services comparable to the products and services offered by the
Bank.
8
<PAGE>
There are various statutory and regulatory limitations regarding the extent
to which present and future banking subsidiaries of the Company can finance or
otherwise transfer funds to the Company or its non-banking subsidiaries,
whether in the form of loans, extensions of credit, investments or asset
purchases, including regulatory limitation on the payment of dividends directly
or indirectly to the Company from the Bank. Federal and state bank regulatory
agencies also have the authority to limit further the Bank's payment of
dividends based on such factors as the maintenance of adequate capital for such
subsidiary bank, which could reduce the amount of dividends otherwise payable.
Under applicable banking statutes, at December 31, 1999, the Bank could have
declared additional dividends of approximately $27.2 million to the Company
without prior regulatory approval.
As a matter of general corporate and commercial law, the ability of holders
of debt and equity securities of the Company to benefit from distribution of
assets from the Bank or any other subsidiary of the Company upon the
liquidation or reorganization of such subsidiary is subordinate to prior claims
of creditors of the subsidiary (including depositors in the case of banking
subsidiaries), except to the extent that a claim of the Company as a creditor
may be recognized.
Under the policy of the FRB, the Company is expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank in
circumstances where we might not do so absent such policy. In addition, any
subordinated loans by the Company to the Bank would also be subordinate in
right of payment to depositors and obligations to general creditors of such
subsidiary banks. The Company currently has no loans to the Bank.
The FRB has established capital adequacy guidelines for bank holding
companies that are similar to the Federal Deposit Insurance Corporation
("FDIC") capital requirements for the Bank described below. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Capital Resources" and Note 8 to the Consolidated Financial Statements. As of
December 31, 1999, our Tier 1 and Total risk-based capital ratios were 15.7
percent and 16.5 percent, respectively, and our leverage capital ratio was 7.2
percent. All ratios exceed the requirements under these regulations and
classify us as "well capitalized."
Regulations to which the Bank is subject
The Bank is organized under the Banking Law of the State of New York. Its
operations are subject to federal and state laws applicable to commercial banks
and to extensive regulation, supervision and examination by the New York
Superintendent of Banks and the Banking Board of the State of New York, as well
as by the FDIC, as its primary federal regulator and insurer of deposits. While
the Bank is not a member of the Federal Reserve System, it is subject to
certain regulations of the FRB. In addition to banking laws, regulations and
regulatory agencies, the Bank is subject to various other laws, regulations and
regulatory agencies, all of which directly or indirectly affect the Bank's
operations. The New York Superintendent of Banks and the FDIC examine the
affairs of the Bank for the purpose of determining its financial condition and
compliance with laws and regulations.
The New York Superintendent of Banks and the FDIC have significant
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies whether by the FDIC, Congress, the New
York Superintendent of Banks or the New York Legislature could have a material
adverse impact on the Bank.
Federal laws and regulations also limit, with certain exceptions, the
ability of state banks to engage in activities or make equity investments that
are not permissible for national banks. The Company does not expect such
provisions to have a material adverse effect on the Company or the Bank.
9
<PAGE>
Capital Standards
The FDIC has adopted risk-based capital guidelines to which FDIC-insured,
state-chartered banks that are not members of the Federal Reserve System, such
as the Bank, are subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to the
differences in risk profiles among banking organizations. Banks are required
to maintain minimum levels of capital based upon their total assets and total
"risk-weighted assets." For purposes of these requirements, capital is
comprised of both Tier 1 and Tier 2 capital. Tier 1 capital consists primarily
of common stock and retained earnings. Tier 2 capital consists primarily of
loan loss reserves, subordinated debt, and convertible securities. In
determining total capital, the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital. A bank's total "risk-based assets" are determined by
assigning the bank's assets and off-balance sheet items (e.g., letters of
credit) to one of four risk categories based upon their relative credit risks.
The greater the risk associated with an asset, the greater the amount of such
asset that will be subject to capital requirements. Banks must satisfy the
following three minimum capital standards:
(1) Tier 1 capital in an amount equal to between 4 percent and 5 percent
of total assets (the "leverage ratio");
(2) Tier 1 capital in an amount equal to 4 percent of risk-weighted
assets; and
(3) total Tier 1 and Tier 2 capital in an amount equal to 8 percent of
risk- weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), defines specific capital categories based upon an institution's
capital ratios. The capital categories, in declining order, are: (i) well
capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv)
significantly undercapitalized; and (v) critically undercapitalized. Under
FDICIA and the FDIC's prompt corrective action rules, the FDIC may take any
one or more of the following actions against an undercapitalized bank:
restrict dividends and management fees, restrict asset growth and prohibit new
acquisitions, new branches or new lines of business without prior FDIC
approval. If a bank is significantly undercapitalized, the FDIC may also
require the bank to raise capital, restrict interest rates a bank may pay on
deposits, require a reduction in assets, restrict any activities that might
cause risk to the bank, require improved management, prohibit the acceptance
of deposits from correspondent banks and restrict compensation to any senior
executive officer. When a bank becomes critically undercapitalized, (i.e., the
ratio of tangible equity to total assets is equal to or less than 2 percent),
the FDIC must, within 90 days thereafter, appoint a receiver for the bank or
take such action as the FDIC determines would better achieve the purposes of
the law. Even where such other action is taken, the FDIC generally must
appoint a receiver for a bank if the bank remains critically undercapitalized
during the calendar quarter beginning 270 days after the date on which the
bank became critically undercapitalized.
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4 percent, a Tier 1 capital to risk-weighted
assets ratio of at least 4 percent and total Tier 1 and Tier 2 capital to
risk-weighted assets ratio of at least 8 percent. As of December 31, 1999, the
most recent notification from the FDIC categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized," the Bank must maintain a minimum total
risk-based capital ratio of 10 percent, a Tier 1 risk-based capital ratio of
at least 6 percent and a Tier 1 leverage ratio of at least 5 percent. There
are no conditions that we believe have changed the Bank's category.
See Note 8 to the Consolidated Financial Statements.
Safety and Soundness Standards
Federal law requires each federal banking agency to prescribe for
depository institutions under its jurisdiction standards relating to, among
other things: internal controls; information systems and audit systems; loan
documentation; credit underwriting; interest rate risk exposure; asset growth;
compensation; fees and benefits; and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies
adopted final regulations and Interagency Guidelines Establishing Standards
for Safety and
10
<PAGE>
Soundness (the "Guidelines") to implement these safety and soundness standards.
The Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The Guidelines address internal
controls and information systems; internal audit system; credit underwriting;
loan documentation; interest rate risk exposure; asset quality; earnings and
compensation; fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard set by the Federal
Deposit Insurance Act. The final regulations establish deadlines for submission
and review of such safety and soundness compliance plans.
The federal banking agencies also have adopted final regulations for real
estate lending prescribing uniform guidelines for real estate lending. The
regulations require insured depository institutions to adopt written policies
establishing standards, consistent with such guidelines, for extensions of
credit secured by real estate. The policies must address loan portfolio
management, underwriting standards and loan to value limits that do not exceed
the supervisory limits prescribed by the regulations.
Premiums for Deposit Insurance
The FDIC has implemented a risk-based assessment system, under which an
institution's deposit insurance premium assessment is based on the probability
that the deposit insurance fund will incur a loss with respect to the
institution, the likely amount of any such loss, and the revenue needs of the
deposit insurance fund.
Under this risk-based assessment system, banks are categorized into one of
three capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three categories based on supervisory evaluations
by its primary federal regulator (in the Bank's case, the FDIC). The three
supervisory categories are: financially sound with only a few minor weaknesses
(Group A), demonstrates weaknesses that could result in significant
deterioration (Group B), and poses a substantial probability of loss (Group C).
The capital ratios used by the FDIC to define well-capitalized, adequately
capitalized and undercapitalized are the same in the FDIC's prompt corrective
action regulations. The Bank is currently considered a "Well Capitalized Group
A" institution and, therefore, is not subject to any quarterly FDIC Bank
Insurance Fund ("BIF") assessments. This could change in the future based on
the capitalization of the BIF.
FDIC insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the insured institution has engaged in
unsafe or unsound practices, or is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule or
order of, or conditions imposed by, the FDIC. Neither the Company nor the Bank
is aware of any practice, condition or violation that might lead to termination
of deposit insurance.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal") was enacted to ease restrictions on interstate banking. Riegle-
Neal allows the FRB to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all
or substantially all of the assets of, a bank located in a state other that
such holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The FRB may not approve the acquisition of
a bank that has not been in existence for a minimum time period (not exceeding
five years) specified by the statutory law of the host state. Riegle-Neal also
prohibits the FRB from approving an application if the applicant (and its
depository institution affiliates) controls or would control more than 10
percent of the insured deposits in the United States or 30 percent or more of
the deposits in the target bank's home state or in any state in which the
target bank maintains a branch. Riegle-Neal does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30 percent state-wide
concentration limit contained in Riegle-Neal.
11
<PAGE>
Community Reinvestment Act and Fair Lending Developments
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, the Bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
prescribe specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA) amended the CRA to
require public disclosure of an institution's CRA rating and require the FDIC
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. Institutions are evaluated and rated by
the FDIC as "Outstanding", "Satisfactory", "Needs to Improve" or "Substantial
Non Compliance." Failure to receive at least a "Satisfactory" rating may
inhibit an institution from undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA Compliance considerations. As of its last CRA
examination in June, 1999, the Bank received a rating of "Satisfactory."
Gramm-Leach-Bliley Act
The present bank regulatory scheme is undergoing significant change, both as
it affects the banking industry itself and as it affects competition between
banks and non-banking financial institutions. There has been a significant
regulatory change in the bank merger and acquisition area, in the products and
services banks can offer, and in the non-banking activities in which bank
holding companies may engage. Under the Gramm-Leach-Bliley Act enacted by
Congress on November 12, 1999, banks and bank holding companies may now
affiliate with insurance and securities companies. In part as a result of these
changes, banks are now actively competing with other types of non-depository
institutions, such as money market funds, brokerage firms, insurance companies
and other financial services enterprises. It is not possible at this time to
assess what impact these changes in the regulatory scheme will ultimately have
on the Bank.
Governmental Monetary Policy
The Company's and Bank's business and earnings depend in large part on
differences in interest rates. One of the most significant factors affecting
the Company's and the Bank's earnings is the difference between (1) the
interest rates paid by the Bank on its deposits and its other borrowings
(liabilities) and (2) the interest rates received by the Bank on loans made to
its customers and securities held in its investment portfolio (assets). The
value of and yield on its assets and the rates paid on its liabilities are
sensitive to changes in prevailing market rates of interest. Therefore, the
earnings and growth of the Company and the Bank will be influenced by general
economic conditions, the monetary and fiscal policies of the federal
government, including the Federal Reserve System, whose function is to regulate
the national supply of bank credit in order to influence inflation and overall
economic growth. Its policies are used in varying combinations to influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans, earned on investments or paid for deposits.
In view of changing conditions in the national and local economies, no
prediction can be made by the Company as to possible future changes in interest
rates, deposit levels, loan demand, or availability of investment securities
and the resulting effect on the business or earnings of the Company and the
Bank.
Employees
At December 31, 1999, we employed 206 full-time employees and 44 part-time
employees. We provide a variety of benefit plans, including group life, health,
dental, disability, retirement and stock option plans. We consider our employee
relations to be satisfactory.
12
<PAGE>
Competition
The banking and financial services business in New York generally, and in
Westchester and Bronx Counties specifically, is highly competitive. There are
approximately 19 commercial banks with branch banking offices in our market
area. In addition, a number of other depository institutions compete in our
market area including savings banks, savings and loan associations, credit
unions and brokerage houses. The Bank competes with local offices of large New
York City commercial banks due to its proximity to New York City. Other
financial institutions, such as mutual funds, finance companies, factoring
companies, mortgage bankers and insurance companies also compete with the Bank
for both loans and deposits. The Bank is smaller in size than most of its
competitors. In addition, many non-bank competitors are not subject to the same
extensive federal regulations that govern bank holding companies and federally
insured banks.
According to statistics gathered by the FDIC, there were in 1997 and 1998,
respectively, 320 and 384 separate banks, credit unions, mortgage
brokerages/companies and finance companies operating within our market area
that originated at least one home purchase, home refinance, home improvement or
multi-family loan. In 1997 and 1998, the Bank ranked 64th (0.41 percent market
share) and 59th (0.35 percent market share), respectively, in terms of market
share among these lending institutions . While there are only 9 other lenders
headquartered in Westchester County, we consider 14 financial institutions as
the Bank's primary local competition for small business and mortgage loans.
Competition for depositors' funds and for credit-worthy loan customers is
intense. A number of larger banks are increasing their efforts to serve smaller
commercial borrowers. Competition among financial institutions is based upon
interest rates and other credit and service charges, the quality of service
provided, the convenience of banking facilities, the products offered and, in
the case of larger commercial borrowers, relative lending limits.
Federal legislation permits adequately capitalized bank holding companies to
expand across state lines to offer banking services. In light of this, it is
possible for large organizations to enter many new markets, including our
market area. Many of these competitors, by virtue of their size and resources,
may enjoy efficiencies and competitive advantages over the Bank in pricing,
delivery and marketing of their products and services. The passage of the
Gramm-Leach-Bliley Act in 1999 may also increase the number of powerful
competitors in our market by allowing other financial institutions to form or
acquire banking subsidiaries.
In response to competition, we have focused our attention on customer
service and on addressing the needs of small businesses, professionals and not-
for-profits located in the communities in which we operate. We emphasize
community relations and relationship banking. We believe that despite the
continued growth of large institutions and the potential for large out-of-area
banking and financial institutions to enter our market area there will continue
to be opportunities for efficiently-operated, service-oriented, well-
capitalized, community-based banking organizations to grow by serving customers
that are not served well by larger institutions or do not wish to bank with
such large institutions.
Properties
The principal executive offices of the Company and the Bank, including
administrative and operating departments, are located at 21 Scarsdale Road,
Yonkers, New York, in premises that are owned by the Bank. The Bank's main
branch is located at 35 East Grassy Sprain Road, Yonkers, New York, in premises
that are leased by the Bank.
In addition to the main branch, the Bank operates 12 branches in Westchester
County, New York. The following six branches are owned by the Bank: 37 East
Main Street, Elmsford, New York; 61 South Broadway, Yonkers, New York; 150 Lake
Avenue, Yonkers, New York; 865 McLean Avenue, Yonkers, New York; 512 South
Broadway, Yonkers, New York; and 664 Main Street, Mount Kisco, New York. The
following six branches are leased by the Bank: 403 East Sandford Boulevard,
Mount Vernon, New York; 1835 East Main
13
<PAGE>
Street, Peekskill, New York; 500 Westchester Avenue, Port Chester, New York;
233 Marble Avenue, Thornwood, New York; 328 Central Avenue, White Plains, New
York; and Five Huguenot Street, New Rochelle, New York.
In addition to the branches in Westchester County, the Bank operates a
branch at 3130 East Tremont Avenue, Bronx, New York, in a premise leased by the
Bank.
Of the leased properties, 3 properties, located in Peekskill, White Plains
and New Rochelle, New York, have lease terms that expire within the next 2
years, with each lease subject to the Bank's renewal option. The Bank expects
to exercise its renewal option on the leases of each of these properties.
The Bank also operates 9 ATM machines, 5 of which are located in the Bank's
facilities. Four ATMs are located at different off-site locations--Westchester
County Airport, Harrison, New York; Rye Playland, Rye, New York; Yonkers
General Hospital in Yonkers, New York; and St. Joseph's Hospital in Yonkers,
New York.
In the opinion of management, the premises, fixtures and equipment used by
the Company and the Bank are adequate and suitable for the conduct of their
businesses. All facilities are well maintained and provide adequate parking.
Legal Proceedings
Various claims and lawsuits are pending against the Company and its
subsidiaries in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, resolution of each matter is not
expected to have a material effect on the financial condition or results of
operations of the Company and its subsidiaries.
14
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the years ended and as of the dates indicated. The selected historical
consolidated financial data as of December 31, 1999 and 1998, and for the years
ended December 31, 1999, 1998 and 1997, are derived from our consolidated
financial statements included elsewhere in this Registration Statement on Form
10. The selected historical consolidated financial data as of December 31,
1997, 1996 and 1995 and for the years ended December 31, 1996 and 1995 are
derived from our consolidated financial statements that are not included in
this Registration Statement on Form 10. The selected historical consolidated
data as of March 31, 2000 and for the three months ended March 31, 2000 and
March 31, 1999, are derived from the unaudited financial statements included
elsewhere in this Registration Statement on Form 10. The unaudited consolidated
financial statements include all adjustments necessary to present fairly the
financial position as of March 31, 2000 and the results of operations for the
three month periods ended March 31, 2000 and March 31, 1999. The information
set forth below should be read in conjunction with the consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Registration Statement on
Form 10.
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
--------------------- ---------- ---------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(000's except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Total interest income... $ 20,455 $ 15,657 $ 70,816 $ 62,445 $ 57,853 $ 47,434 $ 39,302
Total interest expense.. 9,233 6,443 29,658 27,622 24,330 18,111 12,629
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income..... 11,222 9,214 41,158 34,823 33,523 29,323 26,673
Provision (credit) for
loan losses............ 350 225 600 (300) 600 (1,258) 125
Income before income
taxes.................. 5,162 3,931 18,648 15,821 14,596 14,023 11,890
Net income.............. 3,794 2,968 14,004 12,254 11,080 9,946 8,671
Basic earnings per
common share........... 0.89 0.71 3.31 2.92 2.60 2.30 2.04
Diluted earning per
common share........... 0.88 0.69 3.24 2.84 2.55 2.26 1.96
Weighted average shares
outstanding............ 4,242,953 4,182,301 4,231,075 4,201,987 4,263,347 4,321,360 4,255,384
Adjusted weighted
average shares
outstanding............ 4,332,785 4,280,980 4,326,243 4,314,065 4,350,058 4,395,782 4,416,160
Cash dividends per
common share........... 0.29 0.25 1.02 .82 0.56 0.48 --
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
---------- ----------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Financial Position:
Securities........... $ 648,887 $ 634,973 $565,616 $483,698 $407,627 $295,191
Loans, net........... 423,642 412,914 308,131 264,254 235,641 212,507
Total assets......... 1,157,381 1,147,472 939,802 814,219 744,158 573,895
Deposits............. 790,512 754,846 627,297 595,382 539,304 410,629
Borrowings........... 282,333 313,718 223,683 143,363 137,197 104,340
Stockholders'
equity.............. 71,934 68,310 75,696 64,821 56,946 52,140
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section presents discussion and analysis of the Company's consolidated
financial condition at December 31, 1999 and 1998, and March 31, 2000 and
consolidated results of operations for each of the three years in the period
ended December 31, 1999 and the three month periods ended March 31, 2000 and
March 31, 1999. The Company is consolidated with its wholly-owned subsidiary,
Hudson Valley Bank, and the Bank's subsidiaries, Hudson Valley Investment
Corp., Grassy Sprain Real Estate Holdings, Inc., Sprain Brook Realty Corp. and
Hudson Valley Mortgage Corp. (collectively the "Bank"). This discussion and
analysis should be read in conjunction with the financial statements and
supplementary financial information contained elsewhere in this Registration
Statement on Form 10.
Results of Operations for the Three Months Ended March 31, 2000 and March 31,
1999
Summary of Results
The Company reported net income of $3.8 million for the three month period
ended March 31, 2000, a 27.8 percent increase over net income of $3.0 million
for the three months ended March 31, 1999. The increase in net income in the
current year period was primarily due to higher net interest income and higher
non interest income partially offset by higher non interest expense, a higher
provision for loan losses and a higher effective tax rate.
Diluted earnings per share were $0.88 and $0.69 for the three months ended
March 31, 2000 and March 31, 1999, respectively. Return on average equity was
18.45 percent for the current year period compared to 16.52 percent in the
prior year period. Return on average assets was 1.30 percent and 1.22 percent
for the three month period ended March 31, 2000 and March 31, 1999,
respectively.
16
<PAGE>
Average Balances and Interest Rates
The following table sets forth the average balances of interest earning
assets and interest bearing liabilities for the three month periods ended March
31, 2000 and March 31, 1999, as well as total interest and corresponding yields
and rates. The data contained in the table has been adjusted to a tax
equivalent basis, based on the federal statutory rate of 34 percent.
<TABLE>
<CAPTION>
(000's except percentages)
Three Months Ended March 31,
------------------------------------------------------
2000 1999
----------------------------- ------------------------
Average Yield/ Average Yield/
Balance Interest Rate(/3/) Balance Interest Rate(/3/)
---------- -------- --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold...... $ 10,727 $ 152 5.67% $ 12,746 $ 151 4.74%
Securities:(/1/)
Taxable............... 540,249 9,127 6.76 466,468 7,053 6.05
Exempt from federal
income taxes......... 135,548 2,512 7.41 121,638 2,292 7.54
Loans, net (/2/)........ 418,378 9,518 9.10 314,100 6,940 8.84
---------- ------- -------- ------
Total interest earning
assets................. 1,104,902 21,309 7.71 914,952 16,436 7.19
---------- ------- -------- ------
Non interest earning
assets:
Cash and due from
banks................ 27,092 25,900
Other assets.......... 34,909 33,008
---------- --------
Total non interest
earning assets......... 62,001 58,908
---------- --------
Total assets............ $1,166,903 $973,860
========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Money market.......... $ 142,268 $ 1,006 2.83% $108,363 $ 653 2.41%
Savings............... 51,471 199 1.55 52,563 224 1.70
Time.................. 292,277 3,857 5.28 231,213 2,653 4.59
Checking with
interest............. 58,356 182 1.25 56,414 200 1.42
Securities sold under
Repurchase agreements
and other short-term
borrowings 209,791 2,873 5.48 143,477 1,651 4.60
Other borrowings........ 79,057 1,116 5.65 76,646 1,062 5.54
---------- ------- -------- ------
Total interest bearing
liabilities............ 833,220 9,233 4.43 668,676 6,443 3.85
---------- ------- -------- ------
Non interest bearing
liabilities:
Demand deposits....... 239,522 219,105
Other liabilities..... 11,896 14,208
---------- --------
Total non interest
bearing liabilities.... 251,418 233,313
---------- --------
Stockholder' equity
(/1/).................. 82,265 71,871
---------- --------
Total liabilities and
stockholders'
equity(/1/)............ $1,166,903 $973,860
========== ========
Net interest earnings... $12,076 $9,993
======= ======
Net yield on interest
earning assets......... 4.37% 4.37%
</TABLE>
--------
(/1/) Excludes unrealized gains (losses) on securities available for sale
(/2/) Includes loans classified as non-accrual
(/3/) Effect of adjustment to a tax equivalent basis was $854 and $779 for the
three months ended March 31, 2000 and March 31, 1999, respectively.
17
<PAGE>
Interest Differential
The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income between the three month
periods ended March 31, 2000 and March 31, 1999, on a tax equivalent basis.
<TABLE>
<CAPTION>
(000's)
-----------------------
Increase (Decrease)
Due to Change in
-----------------------
Volume Rate Total(1)
------ ----- --------
<S> <C> <C> <C>
Interest income:
Federal funds sold...................................... ($ 24) $ 25 $ 1
Securities:
Taxable............................................... 1,116 958 2,074
Exempt from federal income taxes...................... 262 (42) 220
Loans, net.............................................. 2,304 274 2,578
------ ----- ------
Total interest income................................... 3,658 1,215 4,873
------ ----- ------
Interest expense:
Deposits:
Money market.......................................... $ 204 $ 149 $ 353
Savings............................................... (5) (20) (25)
Time.................................................. 702 502 1,204
Checking with interest................................ 7 (25) (18)
Securities sold under repurchase agreements
and other short-term borrowings........................ 763 459 1,222
Other borrowings........................................ 33 21 54
------ ----- ------
Total interest expense.................................. 1,704 1,086 2,790
------ ----- ------
Increase in interest differential....................... $1,954 $ 129 $2,083
====== ===== ======
</TABLE>
--------
(1) Changes attributable to both rate and volume are allocated between the rate
and volume variances based upon their absolute relative weights to the
total change.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is the most significant component of the Company's consolidated
earnings. For the three months ended March 31, 2000, net interest income, on a
tax equivalent basis, increased 20.8 percent to $12.1 million from $10.0
million for the three months ended March 31, 1999. Net interest income rose
because of the increase in the excess of interest earning assets over interest
bearing liabilities to $271.7 million for the current year period from $246.3
million in the prior year period. The interest rate margin remained unchanged
from period to period.
Interest income is determined by the volume of, and related rates earned on,
interest earning assets. Volume increases in securities and loans plus rate
increases in all asset categories (except securities exempt from federal income
taxes), partially offset by lower volume in Federal funds sold, contributed to
the higher interest income in the current year period as compared to the same
period in the prior year. Average interest earning assets increased $189.9
million to $1,104.9 million in the current year period as compared to $915.0
million in the same period in the prior year, reflecting a 20.8 percent
increase. Interest income on a tax equivalent basis, increased $4.9 million to
$21.3 million for the current year period compared to $16.4 million in the same
period in the prior year, or 29.6 percent.
Average total securities increased $87.7 million to $675.8 million for the
period ended March 31, 2000 as compared to $588.1 million for the period ended
March 31, 1999, representing a 14.9 percent increase. The
18
<PAGE>
increase in average total securities in the current year period, as compared to
the same period in the prior year, was principally due to management's efforts
to effectively leverage capital. Interest income on securities increased in the
current year period due to higher volume and higher aggregate rates.
Average net loans increased $104.3 million to $418.4 million for the three
months ended March 31, 2000 from $314.1 million for the three months ended
March 31, 1999, representing a 33.2 percent increase. This increase in average
net loans reflects management's greater emphasis on making new loans, more
effective market penetration and continuing strong economic conditions in the
Company's primary market. Interest income on net loans increased in the current
year period due to higher volume and slightly higher rates.
Interest expense is a function of the volume of, and rates paid for,
interest bearing liabilities, comprised of deposits and borrowings. Interest
expense for the three months ended March 31, 2000 increased $2.8 million to
$9.2 million from $6.4 million for the three months ended March 31, 1999, or
43.3 percent. Average balances in all deposit categories, except for savings
accounts, increased period to period. Deposits increased from existing
customers, new customers and the opening of a new branch in June, 1999 in the
Bronx, New York. In addition, time deposits increased, principally from
municipalities, which are obtained on a bid basis, and borrowings increased in
a continuing effort to effectively leverage capital. These funds were invested
in loans and securities. The amount of non interest bearing average demand
deposits, which increased in the current year period $20.4 million to $239.5
million from $219.1 million in the same period in the prior year, or 9.3
percent, is an important component of the Company's liability management and
has a direct impact on the determination of net interest income. Interest rates
paid on average money market accounts, time deposits and borrowings, increased
period over period due to a higher interest rate environment. Savings accounts
and checking with interest accounts were not as sensitive to general interest
rate changes and, therefore, the rates on these deposits remained virtually
unchanged.
The interest rate spread on a tax equivalent basis for the periods ended
March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
March 31,
----------
2000 1999
---- ----
<S> <C> <C>
Average interest rate on:
Total average interest earning assets......................... 7.71% 7.19%
Total average interest bearing liabilities.................... 4.43 3.85
Total interest rate spread.................................... 3.28 3.34
</TABLE>
Higher overall yields on interest earning assets offset by higher rates on
interest bearing liabilities, resulted from: a higher interest rate
environment; a shifting of funding to higher rate deposits and borrowings; and
loans, the highest yielding asset category, growing as a component of total
interest earning assets, reduced the interest rate spread period to period.
Management cannot predict what impact market conditions will have on its
interest rate spread and compression in net interest rate spread may occur. The
leveraging of capital generally tends to decrease the interest rate spread,
however, it adds net interest income without adding significant operating
costs.
Provision for Loan Losses
The Bank recorded a provision for loan losses of $350,000 during the three
months ended March 31, 2000 compared to $225,000 during the three months ended
March 31, 1999. The provision for loan losses is charged to income to bring the
Bank's allowance for loan losses to a level deemed appropriate by management.
See "Financial Condition at March 31, 2000" for further discussion.
Non Interest Income
Non interest income for the three months ended March 31, 2000 was $626,000
compared to $373,000 for the same period in the prior year, or an increase of
67.8 percent.
19
<PAGE>
Service charges increased to $277,000 from $236,000 for the three month
periods ended March 31, 2000 and 1999, respectively. This increase reflects a
higher level of fees charged and increased activity.
Other income increased to $349,000 from $137,000 for the three month periods
ended March 31, 2000 and 1999, respectively. This increase resulted from a gain
of $233,000 in the current year period on the sale of a branch facility which
was relocated during 1999, partially offset by an insurance dividend received
in the period ended March 31, 1999 and not received in the period ended March
31, 2000.
Non Interest Expense
Non interest expense rose to $6.3 million, or 16.7 percent during the three
months ended March 31, 2000 as compared to $5.4 million during the three month
period ended March 31, 1999. This increase reflects the overall growth of the
Company and resulted from increases in salaries and employee benefits,
occupancy costs, professional services, equipment expense, business development
costs, FDIC assessments and other operating expenses.
Salaries and employee benefits, the largest component of non interest
expense, rose 19.1 percent to $3.5 million compared to $2.9 million in the
prior year period. This increase resulted from increased staff to accommodate
the increases in loans and deposits, the opening of a new branch facility, as
well as merit increases. In addition, salaries and employee benefits increased
as a result of higher costs of employee benefit programs such as medical
coverage, retirement, costs associated with related payroll taxes, and training
expenses. Further, recruitment related costs increased due to increased
recruiting activity.
Occupancy expense increased 12.5 percent to $549,000 for the three month
period ended March 31, 2000, compared to $488,000 for the same period in the
prior year. This increase reflects the opening of a new branch facility in
June, 1999, as well as the rising costs on leased facilities, real estate
taxes, utility costs, maintenance costs and other costs to operate the
Company's facilities.
Professional services increased to $618,000 in the current year period from
$468,000 in the prior year period, or 32.1 percent. The increase resulted from
professionals engaged to assist with first-time filings with the Securities and
Exchange Commission, to perform a customer satisfaction survey and to review
certain operating functions.
Equipment expense increased 3.0 percent to $443,000 in the current year
period from $430,000 in the same period in the prior year. The increase
reflects higher depreciation and maintenance costs associated with the
Company's in-house computer systems, as well as capital expenditures made since
the prior year period.
Business development expense rose 16.7 percent to $238,000 for the period
ended March 31, 2000 as compared to $204,000 for the period ended March 31,
1999. The increase reflects costs associated with increased promotion of
products and services as well as expanded business development efforts.
The assessment of the Federal Deposit Insurance Corporation (FDIC) increased
100 percent to $42,000 from $21,000 for the three months ended March 31, 2000
and 1999, respectively. This increase resulted from increases in the Bank's
deposits subject to FDIC assessment as well as a general increase in the
overall assessment rate.
Significant changes, more than 5 percent, in other components of non
interest expense for the three months ended March 31, 2000, compared to the
three months ended March 31, 1999, were due to the following:
. Increase of $27,000 (23.7%) in stationery and printing costs relate
primarily to increases in supplies, forms and stationery due to
increased business activity and a new branch facility.
. Increase of $26,000 (16.6%) in communications expense due to added voice
and data lines associated with expansion of technology usage and growth
in customers and business activity.
. Increase of $14,000 (19.4%) in courier expense due to increased customer
utilization of the service and an increase in costs of such service.
20
<PAGE>
. Increase of $28,000 (53.2%) in dues, meetings and seminars due to
increased participation in such events.
. Decrease of $19,000 (25.8%) in other insurance resulting from changes in
estimates of the net cost of certain life insurance programs.
. Decrease of $61,000 (58.0%) in other loan expense due principally to
reduced costs associated with OREO.
Income Taxes
Income taxes increased 42.1 percent to $1.4 million for the three month
period ended March 31, 2000 compared to $1.0 million for the three month period
ended March 31, 1999. The effective tax rate was 26.5 percent and 24.5 percent
for the three months ended March 31, 2000 and 1999, respectively. The increase
in the tax rate reflects an increase in income subject to tax largely due to
the decrease in tax exempt income as a percentage of total interest income and
the Company becoming subject to New York City tax during the last half of 1999.
Results of Operations for Each of Three Years in the Period Ended December 31,
1999
Summary of Results
The Company reported net income of $14.0 million for the year ended December
31, 1999, a 14.3 percent increase over 1998. Net income was $12.3 million for
the year ended December 31, 1998, a 10.6 percent increase over 1997 net income
of $11.1 million. The increase in 1999 net income, compared to 1998 primarily
reflects higher net interest income, partially offset by a higher provision for
loan losses, lower securities gains, higher operating expenses and a higher
effective tax rate. The increased net income in 1998, compared to 1997,
reflects higher net interest income and securities gains, a lower provision for
loan losses and effective tax rate, partially offset by higher operating
expenses.
Diluted earnings per share of $3.24 in 1999 increased 14.1 percent over the
$2.84 recorded in 1998, while diluted earnings per share increased 11.4 percent
in 1998 compared to the $2.55 recorded in 1997, reflecting the higher net
income. Prior period per share amounts have been adjusted to reflect the 10
percent stock dividend distributed on December 15, 1999. Return on average
equity was 18.60 percent in 1999, compared to 18.44 percent in 1998, and 18.60
percent in 1997. Return on average assets (excluding the available for sale
securities' unrealized loss in 1999 and the unrealized gain in 1998 and 1997)
was 1.31 percent in 1999, compared to 1.32 percent in 1998, and 1.35 percent in
1997.
Net interest income for 1999 rose to $41.2 million, an 18.2 percent increase
over the $34.8 million recorded in 1998, while 1998 net interest income
increased 3.9 percent compared to the $33.5 million recorded in 1997. These
increases resulted principally from continuing growth in interest earning
assets, primarily loans and securities, partially offset by the growth in
interest bearing liabilities and, in 1998, by a narrowing interest rate margin,
compared to 1997. The interest rate margin, on a tax equivalent basis,
increased in 1999 to 4.41 percent, compared to 1998, and decreased to 4.33
percent in 1998, compared to 4.79 percent in 1997. The increase in 1999 was
primarily the result of growth in loans and securities, partially offset by the
effects of additional leveraging of the balance sheet and a relatively flat
yield curve. The decrease in 1998 was primarily the result of additional
leveraging of the balance sheet, principally by growth in securities, and a
relatively flat yield curve. Non interest income for 1999 decreased $383,000
compared to 1998, as a result of lower securities gains, partially offset by
higher service charges. Non interest income in 1998 increased $533,000 compared
to 1997, primarily as a result of higher securities gains. The overall
increases in revenues were partially offset by increases in non interest
expense of $2.2 million and $1.5 million in 1999 and 1998, respectively,
reflecting increases in such expenses as employee salaries and benefits,
occupancy and equipment expense and other expenses, as a result of the
Company's continuing growth, investment in people, technology, products and
branch facilities. The higher effective tax rate in 1999 decreased net income
compared to 1998, while the lower effective tax rate in 1998 increased net
income compared to 1997. The effective tax rate changed primarily due to a
change in mix of taxable versus tax exempt income for Federal and for New York
State income tax purposes.
21
<PAGE>
The Company's total capital ratio under the risk-based capital guidelines
exceeds regulatory guidelines of 8 percent, as the total ratio equaled 16.5
percent and 20.2 percent at December 31, 1999 and 1998, respectively. The
leverage capital ratio was 7.2 percent and 7.4 percent at December 31, 1999 and
1998, respectively.
Average Balances and Interest Rates
The following table sets forth the average balances of interest earning
assets and interest bearing liabilities for each of the last three years as
well as total interest and corresponding yields and rates. The data contained
in the table has been adjusted to a tax equivalent basis, based on the federal
statutory rate of 34 percent.
<TABLE>
<CAPTION>
(000's except percentages)
Year ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- --------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(/3/) Balance Interest Rate(/3/) Balance Interest Rate(/3/)
---------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Deposits in banks....... -- -- -- $ 123 $ 8 6.50% $ 13,599 $ 802 5.90%
Federal funds sold...... $ 18,164 $ 908 5.00% 41,824 2,303 5.51 45,513 2,542 5.59
Securities:(/1/)
Taxable................ 505,260 32,002 6.33 439,085 27,716 6.31 345,279 23,719 6.87
Exempt from federal
income taxes.......... 125,798 9,366 7.45 112,832 8,748 7.75 107,251 8,533 7.96
Loans, net(/2/)......... 355,628 31,724 8.92 279,378 26,644 9.54 249,259 25,158 10.09
---------- ------- -------- ------- -------- -------
Total interest earning
assets................. 1,004,850 74,000 7.36 873,242 65,419 7.49 760,901 60,754 7.98
---------- ------- -------- ------- -------- -------
Non interest earning
assets:
Cash and due
from banks............ 26,730 23,514 29,305
Other assets........... 34,316 30,799 28,809
---------- -------- --------
Total non interest
earning assets......... 61,046 54,313 58,114
---------- -------- --------
Total assets............ $1,065,896 $927,555 $819,015
========== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Money market........... $ 129,690 $ 3,292 2.54% $110,471 $ 2,987 2.70% $102,739 $ 2,836 2.76%
Savings................ 52,847 820 1.55 53,376 1,073 2.01 55,784 1,114 2.00
Time................... 265,665 12,524 4.71 244,933 12,695 5.18 215,736 11,540 5.35
Checking with
interest.............. 58,379 810 1.39 54,606 968 1.77 51,725 849 1.64
Securities sold under
repurchase agreements
and other short-term
borrowings............. 147,502 7,221 4.90 129,405 6,933 5.36 142,438 7,668 5.38
Other borrowings........ 93,254 4,991 5.35 55,307 2,966 5.36 1,669 81 4.85
Note payable............ -- -- -- -- -- -- 2,820 242 8.58
---------- ------- -------- ------- -------- -------
Total interest bearing
liabilities............ 747,337 29,658 3.97 648,098 27,622 4.26 572,911 24,330 4.25
---------- ------- -------- ------- -------- -------
Non interest bearing
liabilities:
Demand deposits........ 228,905 201,249 174,702
Other liabilities...... 14,368 11,760 11,835
---------- -------- --------
Total non interest
bearing liabilities.... 243,273 213,009 186,537
---------- -------- --------
Stockholders'
equity(/1/)............ 75,286 66,448 59,567
---------- -------- --------
Total liabilities and
stockholders'
equity(/1/)............ $1,065,896 $927,555 $819,015
========== ======== ========
Net interest earnings... $44,342 $37,797 $36,424
======= ======= =======
Net yield on interest
earning assets......... 4.41% 4.33% 4.79%
</TABLE>
--------
(1) Excludes unrealized gains (losses) on securities available for sale.
(2) Includes loans classified as non-accrual
(3) Effect of adjustment to a tax equivalent basis was $3,184, $2,974 and
$2,901 for the years ended December 31, 1999, 1998 and 1997, respectively.
22
<PAGE>
Interest Differential
The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income between the years ended
December 31, 1999 and 1998, and the years ended December 31, 1998 and 1997, on
a tax equivalent basis.
<TABLE>
<CAPTION>
(000's)
--------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due to Increase (Decrease) Due
Change in to Change in
---------------------------- ---------------------------
Volume Rate Total(/1/) Volume Rate Total(/1/)
------- ------- ---------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Deposits in banks....... $ (8) -- $ (8) $ (795) $ 1 $ (794)
Federal funds sold...... (1,303) $ (92) (1,395) (206) (33) (239)
Securities:
Taxable............... 4,177 109 4,286 6,444 (2,447) 3,997
Exempt from federal
income taxes......... 1,005 (387) 618 444 (229) 215
Loans, net.............. 7,272 (2,192) 5,080 3,040 (1,554) 1,486
------- ------- ------- ------ ------- ------
Total interest income... 11,143 (2,562) 8,581 8,927 (4,262) 4,665
------- ------- ------- ------ ------- ------
Interest expense:
Deposits:
Money market.......... 520 (215) 305 213 (62) 151
Savings............... (11) (242) (253) (47) 6 (41)
Time.................. 1,075 (1,246) (171) 1,562 (407) 1,155
Checking with
interest............. 66 (224) (158) 47 72 119
Securities sold under
repurchase agreements
and other short-term
borrowings............. 970 (682) 288 (702) (33) (735)
Other borrowings........ 2,035 (10) 2,025 2,603 282 2,885
Note payable............ -- -- -- (242) -- (242)
------- ------- ------- ------ ------- ------
Total interest expense.. 4,655 (2,619) 2,036 3,434 (142) 3,292
------- ------- ------- ------ ------- ------
Increase (decrease) in
interest differential.. $ 6,488 $ 57 $ 6,545 $5,493 $(4,120) $1,373
======= ======= ======= ====== ======= ======
</TABLE>
--------
(1) Changes attributable to both rate and volume are allocated between the rate
and volume variances based upon their absolute relative weights to the
total change.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is the most significant component of the Company's consolidated
earnings. Net interest income of $44.3 million, on a tax equivalent basis, for
1999 reflects a 17.3 percent increase over the $37.8 million for 1998. Net
interest income, on a tax equivalent basis, for 1998 reflects an increase of
3.8 percent over the $36.4 million for 1997. Net interest income rose because
of the increase in the excess of average interest earning assets over average
interest bearing liabilities to $257.5 million in 1999, from $225.1 million in
1998 and $188.0 million in 1997, partially offset, for 1998, by a narrowing
interest rate margin compared to 1997.
Interest income is determined by the volume of, and related rates earned on,
interest earning assets. Volume increases in securities and loans, partially
offset by lower volume in Federal funds sold and overall lower rates (lower in
all categories except taxable securities), contributed to the higher interest
income in 1999, compared to 1998. Volume increases, particularly in loans and
securities, also contributed to higher interest income in 1998, and were
partially offset by overall lower rates in all categories, compared to 1997.
Average interest earning assets increased in 1999 to $1,004.9 million from
$873.2 million in 1998 and from $760.9 million in 1997, reflecting a 15.1
percent and 14.8 percent increase in 1999 and 1998, respectively.
23
<PAGE>
The Company's ability to make changes in its asset mix allows management to
capitalize on more desirable yields, as available, on various interest earning
assets.
Securities are the largest component of interest earning assets. In 1999,
average total securities increased $79.1 million to $631.1 million compared to
1998, while average total securities increased $99.4 million in 1998 compared
to 1997. Total securities increased $69.4 million to $635.0 million at December
31, 1999 from $565.6 million at December 31, 1998, or a 12.3 percent increase,
compared to an increase of $81.9 million, or 16.9 percent in 1998 over 1997.
The increase in average total securities in 1999 and 1998 was principally due
to management's efforts to effectively leverage capital and to balance the risk
and liquidity of the total securities portfolio. Interest income on total
securities increased in both 1999 and 1998 due to higher volume, partially
offset by lower interest rates.
In 1999, average net loans increased $76.3 million to $355.6 million
compared to 1998, while average net loans increased $30.1 million in 1998
compared to 1997. Net loans increased $104.8 million to $412.9 at December 31,
1999 from $308.1 million at December 31, 1998, or a 34.0 percent increase,
compared to an increase of $43.8 million, or 16.6 percent in 1998 compared to
$264.3 million at year end 1997. The increase in average net loans in 1999 and
1998 was principally due to management's greater emphasis on making new loans,
more effective market penetration and continuing strong economic conditions in
the Company's primary market. Interest income on net loans increased in both
1999 and 1998 due to higher volume, partially offset by lower interest rates.
Interest expense is a function of the volume of and rates paid, for interest
bearing liabilities, comprised of deposits and borrowings. Interest expense in
1999 increased $2.0 million, or 7.4 percent to $29.7 million, while interest
expense increased $3.3 million, or 13.5 percent in 1998 compared to 1997.
Average balances in substantially all deposit categories, except for savings
accounts, increased in both 1999 and 1998. Deposits increased principally from
existing customer relationships and branches as well as new relationships and
the opening of new branches, in New Rochelle, New York in 1998 and in Bronx,
New York in 1999. In addition, in a continuing effort to effectively leverage
capital, management increased, in the aggregate, time and other deposits of
municipalities, FHLB advances and borrowings under securities sold under
repurchase agreements and other short-term borrowings. These funds were
invested in loans and securities. The amount of non interest bearing average
demand deposits which increased in 1999 to $228.9 million from $201.2 million
in 1998, compared to $174.7 million in 1997, is an important component of the
Company's liability management and has a direct impact on the determination of
net interest income. Interest rates paid on average interest bearing deposits
generally decreased in both 1999 and 1998 due to a lower interest rate
environment.
The interest rate spread on a tax equivalent basis for each of the three
years in the period ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average interest rate on:
Total average interest earning assets...................... 7.36% 7.49% 7.98%
Total average interest bearing liabilities................. 3.97 4.26 4.25
Total interest rate spread................................. 3.39 3.23 3.73
</TABLE>
In 1998, the interest rate spread decreased primarily due to lower overall
yields on interest earning assets and due to securities increasing as a
component of total interest earning assets, which generally have lower yields
than loans. In 1999, the interest rate spread increased primarily due to loans,
which generally have higher yields than securities, growing as a component of
total interest earning assets and from generally lower rates paid on interest
bearing liabilities. The leveraging of capital generally tends to decrease the
interest rate
24
<PAGE>
spread, however, it adds net interest income without adding significant
operating costs. Management cannot predict what impact market conditions will
have on its interest rate spread and future compression in net interest rate
spread may occur.
Non Interest Income
Non interest income for 1999 was $1,599,000 compared to $1,982,000 for 1998.
Non interest income for 1998 increased $533,000 compared to 1997. The decrease
in non interest income in 1999 compared to 1998 as well as the increase in 1998
compared to 1997 was primarily a result of higher security gains in 1998 than
in 1999 and 1997.
Net gains (losses) on securities transactions of $19,000, $439,000 and
($104,000) for the years ended December 31, 1999, 1998 and 1997, respectively,
principally resulted from the sale of securities to restructure the portfolio,
manage cash flow and enhance portfolio yield, and efforts to manage the
Company's overall interest rate risk in response to changes in interest rates
or changes in composition of the balance sheet.
Service charges increased by 3.7 percent in 1999 and decreased by 0.7
percent in 1998. The increase in 1999 reflects a higher level of accounts and
fees charged. The decrease in 1998 reflects lower account activity.
Other income was virtually unchanged during the years 1999, 1998 and 1997.
Non Interest Expense
Non interest expense rose to $23.5 million for 1999, or a 10.5 percent
increase over the $21.3 million for 1998, compared to a 7.6 percent increase in
1998 over the $19.8 million in 1997. These increases reflect the overall growth
of the Company. The Company's efficiency ratio (a lower ratio indicates greater
efficiency) which compares non interest expense to total adjusted revenue
(taxable equivalent net interest income, plus non interest income, excluding
gain or loss on security transactions) was 51.2 percent in 1999, compared to
54.1 percent in 1998 and 52.1 percent in 1997.
Salaries and employee benefits, the largest component of non interest
expense, rose 13.0 percent in 1999 to $12.8 million, compared to a 5.3 percent
increase in 1998 to $11.4 million from the $10.8 million for 1997. The Company
opened one new branch in each of 1999 and 1998, resulting in increased staff.
The increases in both years also reflected the cost of additional personnel
necessary for the Bank to accommodate the increases in both deposits and loans
resulting from the expansion of services and products available to customers,
from increases in the number of customer relationships, as well as annual merit
increases. Increases in salaries and employee benefits in both 1999 and 1998
were also attributable to incentive compensation programs and other benefit
plans necessary to be competitive in attracting and retaining high quality and
experienced personnel, as well as higher health care costs and costs associated
with related payroll taxes.
<TABLE>
<CAPTION>
1999 1998 1997
Employees at December 31, -------- -------- --------
<S> <C> <C> <C>
Full Time Employees............................ 206 191 183
Part Time Employees............................ 44 44 37
Salaries and Employee Benefits (000's except percentages)
Salaries....................................... $ 8,816 $ 7,965 $ 7,537
Payroll Taxes.................................. 718 644 634
Medical Plans.................................. 680 629 596
Incentive Compensation Plans................... 949 680 807
Deferred Compensation Plans.................... 56 54 50
Employee Retirement Plans...................... 1,040 879 743
Other.......................................... 584 512 424
-------- -------- --------
Total.......................................... $ 12,843 $ 11,363 $ 10,791
======== ======== ========
Percentage of total non interest expense....... 54.6% 53.4% 54.6%
======== ======== ========
</TABLE>
25
<PAGE>
Occupancy expense rose to $2.0 million for 1999, a 12.1 percent increase
over 1998, compared to $1.8 million in 1998, a 4.9 percent increase over 1997.
The increases are due to a full year of expenses for the branches opened in the
prior year and current year branch openings. All years also reflect the rising
costs of such items as rent on leased facilities, utility costs, real estate
taxes, maintenance costs and other costs of operating the Company's facilities.
Professional services increased 7.1 percent to $2,011,000 in 1999 from
$1,877,000 in 1998, which was a 2.3 percent decrease from $1,921,000 for 1997.
The increase in 1999 was principally the result of increased utilization of
business development consultants and information systems consultants, partially
offset by reduced legal and compensation consultant expense. The decrease in
1998 primarily resulted from reduced professional fees, partially offset by
increases in technology consulting expense.
Equipment expense rose to $1,875,000 for 1999, a 22.6 percent increase over
1998, compared to $1,529,000 in 1998, a 25.9 percent increase over $1,214,000
in 1997. The continued increase in equipment expense was a result of higher
depreciation and maintenance costs associated with the Bank's in-house computer
systems as well as the capital investments made over the last several years
designed to enhance and expand Bank-wide technology, operating and processing
capabilities.
Business development expense increased 31.1 percent in 1999 to $1,012,000
from $772,000 in 1998, which was a 6.0 percent increase from $728,000 in 1997.
The increases are primarily due to increased promotion of services and
products, expanded business development efforts, and promotion of one new
branch opened in each of 1999 and 1998.
FDIC assessment increased to $81,000 for 1999 compared to $76,000 for 1998
and $74,000 for 1997. The increases primarily resulted from increases in the
Bank's deposits subject to FDIC assessment.
Other operating expenses, as reflected in the following table, decreased 5.2
percent in 1999 and increased 16.1 percent in 1998 compared to 1997.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Other Operating Expenses (000's except percentages)
Other insurance................................ $ 59 $ 197 $ 222
Stationery and printing........................ 528 465 430
Communications expense......................... 672 558 529
Courier expense................................ 319 265 185
Other loan expense............................. 485 890 513
Outside services............................... 691 565 539
Dues, meetings and seminars.................... 194 293 292
Other.......................................... 701 616 605
-------- -------- --------
Total.......................................... $ 3,649 $ 3,849 $ 3,315
======== ======== ========
Percentages of total non interest expense...... 15.5% 18.1% 16.8%
======== ======== ========
</TABLE>
The increases reflect higher outside service fees, including computer
program licensing fees and higher customer service related costs, including
communications and courier expenses. The decreases reflect reduced net cost of
certain insurance expense, a reduction in meetings and seminar expense and
reduced other loan expense primarily associated with other real estate owned
("OREO").
To monitor and control the amount of non interest expenses, as well as non
interest income, the Company continually monitors the system of internal
budgeting, including analysis and follow up of budget variances.
26
<PAGE>
Income Taxes
Income taxes of $4,644,000, $3,567,000 and $3,516,000 were recorded in 1999,
1998 and 1997, respectively. The Company is currently subject to a statutory
incremental Federal tax rate of 35 percent (34 percent for the first $10
million of taxable income), a New York State tax rate of 9 percent, plus a 17
percent surcharge and, in 1999, a New York City tax rate of 9 percent. The
Company's overall effective tax rate was 24.9 percent, 22.5 percent and 24.1
percent in 1999, 1998 and 1997, respectively. The increase in the overall
effective tax rate for 1999 primarily reflects higher state taxes and a
decrease in tax exempt interest income as a percentage of total interest
income. The decrease in 1998 compared to 1997 resulted primarily from lower
state taxes. Other pertinent tax information is set forth in the Notes to
Consolidated Financial Statements included elsewhere herein.
Financial Condition at March 31, 2000
At March 31, 2000, the Company had total assets of $1,157.4 million, an
increase of $9.9 million, or 0.9 percent, from the $1,147.5 million at December
31, 1999.
The securities portfolio consists of securities available for sale of $648.9
million and $635.0 million and Federal Home Loan Bank of New York (FHLB) stock
totaling $9.5 million and $9.4 million at March 31, 2000 and December 31, 1999,
respectively.
The following table sets forth the amortized cost, gross unrealized gains
and losses and the estimated fair value of securities classified as available
for sale at March 31, 2000 (the Company had no securities classified as held to
maturity at March 31, 2000):
<TABLE>
<CAPTION>
(000's)
----------------------------------
Gross
Unrealized Estimated
Amortized -------------- Fair
Cost Gains Losses Value
--------- ------ ------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies...... $210,280 $ 8 $11,913 $198,375
Mortgage-backed securities................. 316,813 358 9,673 307,498
Obligations of state and political
subdivisions.............................. 137,146 1,208 1,600 136,754
Other debt securities...................... 4,460 -- 183 4,277
-------- ------ ------- --------
Total debt securities...................... 668,699 1,574 23,369 646,904
Equity securities.......................... 1,584 418 19 1,983
-------- ------ ------- --------
Total...................................... $670,283 $1,992 $23,388 $648,887
======== ====== ======= ========
</TABLE>
During the three months ended March 31, 2000, U.S. Treasury and government
agency obligations increased $10.6 million to $198.4 million due to purchases
of $14.7 million offset by maturities of $4.0 million and other decreases of
$0.1 million. The purchases were made based upon the attractive yield available
in the market.
Mortgage-backed securities, including CMO's, decreased $2.4 million during
the period to $307.5 at March 31, 2000. The decrease was due to purchases of
$5.9 million offset by principal paydowns and redemptions of $8.3 million.
These purchases were fixed rate mortgage-backed securities with average lives
of less than ten years at the time of purchase.
Obligations of state and political subdivisions increased $3.9 million
during the period to $136.8 million due to purchases of $5.4 million,
maturities of $1.7 million and other increases of $0.2 million. The purchases
were made for the attractive yields in the market and for their favorable
income tax treatment.
The Company invests in FHLB stock and other securities which are rated with
an investment grade by nationally recognized credit rating organizations and,
on a limited basis, in non-rated securities. Non-rated
27
<PAGE>
securities totaled $5.7 million at March 31, 2000 comprised primarily of
obligations of municipalities located within the Company's market area.
Except for securities of the U.S. Treasury and government agencies, FHLB
stock having a book value and estimated fair value of $9.5 million and
mortgage-backed securities issued by Residential Funding Mortgage Corp. having
a book value of $10.0 million and an estimated fair value of $9.2 million,
there were no obligations of any single issuer which exceeded ten percent of
stockholders' equity at March 31, 2000.
Total loans were $429.5 at March 31, 2000 compared to $418.4 million at
December 31, 1999, reflecting an $11.1 million increase. This increase resulted
principally from an $11.0 million increase in commercial and industrial loans,
which continues to be a product that the Company emphasizes. All other loan
types showed little change during the three month period ended March 31, 2000.
Major classifications of loans at March 31, 2000 and December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
(000's)
----------------------
March
31, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Real Estate:
Commercial............................................. $124,538 $125,588
Construction........................................... 31,518 30,808
Residential............................................ 120,697 119,609
Commercial and industrial................................ 120,612 109,579
Individuals.............................................. 9,189 9,280
Lease financing.......................................... 22,992 23,543
-------- --------
Total.................................................... 429,546 418,407
Deferred loan fees....................................... (1,507) (1,446)
Allowance for loan losses................................ (4,397) (4,047)
-------- --------
Loans, net............................................... $423,642 $412,914
======== ========
</TABLE>
In March 2000, the Company ended its participation in an automobile leasing
program due to the sale of the company that originated and serviced the leases
and resulting changes to various aspects of the program. The balance of $23.0
million of such leases at March 31, 2000 will continue to decline as repayments
of existing leases continue. The Company has not determined if it will seek to
participate in a similar program in the future.
The following table summarizes the Company's non-accrual loans, loans past
due 90 days or more and still accruing, restructured loans, OREO and related
interest income not recorded on non-accrual loans as of and for the three
months ended March 31, 2000 and year ended December 31, 1999.
<TABLE>
<CAPTION>
(000's except
percentage)
----------------------
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Non-accrual loans at period end......................... $4,827 $3,855
OREO at period end...................................... 2,172 2,193
Restructured loans at period end........................ 27 323
------ ------
Total nonperforming assets.............................. 7,026 6,371
Loans past due 90 days or more and still accruing....... 1,439 264
Additional interest income that would have been recorded
if these borrowers had complied with contractual loan
terms.................................................. 282 698
Nonperforming assets to total assets at period end...... 0.61% 0.56%
</TABLE>
The Bank maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio based on ongoing quarterly assessments of estimated losses.
The Bank's methodology for assessing the appropriateness of the allowance
consists of several key components, which include a specific allowance for
identified problem loans, a formula allowance and an unallocated allowance.
28
<PAGE>
A summary of the components of the allowance for loan losses at March 31,
2000 and December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(000's)
----------------------
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Specific allowance................................. $ 57 $ 57
Formula allowance.................................. 441 867
Unallocated allowance.............................. 3,899 3,123
------ ------
$4,397 $4,047
====== ======
</TABLE>
The decline in the formula allowance resulted from management's periodic
adjustment to loss factors applied to outstanding loans by type. The loss
factors are based on historical loss experience.
During the three months ended March 31, 2000, changes in assumptions
regarding the effects of economic and business conditions on borrowers and
other factors, which are described below, affected the determination of the
unallocated allowance.
During the three months ended March 31, 2000, commercial and industrial
loans increased $11.0 million, or 10.1 percent, to $120.6 million. These loans
to businesses and not-for-profit organizations can be adversely impacted by
changes in economic conditions, such as increases in interest rates experienced
during this period. This factor, along with the increase in these types of
loans during the period, contributed to the determination of the unallocated
allowance.
At March 31, 2000, total nonperforming assets and loans past due 90 days or
more and still accruing, increased $1.9 million to $8.5 million, or 27.6
percent, compared to $6.6 million at December 31, 1999. This increase
contributed to the determination of the unallocated allowance.
Construction loans totaling approximately $1.9 million at March 31, 2000,
which are not on non-accrual status, were potential problems loans that may
result in their being placed on non-accrual status in the future. The Bank has
generally no historical loss experience for this type of loan.
Management believes the allowance for loan losses is the best estimate of
possible losses which have been incurred as of March 31, 2000.
Total deposits increased $35.7 million for the three month period ended
March 31, 2000 to $790.5 million, or 4.7 percent from $754.8 million at
December 31, 1999.
The following table presents a summary of deposits at March 31, 2000 and
December 31, 1999.
<TABLE>
<CAPTION>
(000's)
--------------------------------
March 31, December 31, Increase
2000 1999 (Decrease)
--------- ------------ ---------
<S> <C> <C> <C>
Demand deposits............................ $236,961 $226,345 $10,616
Money market accounts...................... 148,602 140,462 8,140
Savings accounts........................... 52,224 52,548 (324)
Time deposits of $100,000 or more.......... 245,118 226,997 18,121
Time deposits of less than $100,000........ 51,508 50,146 1,362
Checking with interest..................... 56,099 58,348 (2,249)
-------- -------- -------
$790,512 $754,846 $35,666
======== ======== =======
</TABLE>
29
<PAGE>
The increase in non interest bearing demand deposits reflects the Company's
continuing emphasis on developing this funding source. The increase in time
deposits of $100,000 or more primary resulted from an increase in CD's from
municipal customers which are acquired on a bid basis. Changes in the totals of
each of the other deposit types reflect normal fluctuations and account
activity.
Total borrowings decreased $31.4 million to $282.3 million at March 31, 2000
from $313.7 million at December 31, 1999. This overall decrease in borrowings
resulted from a reduction of $14.4 million in the Bank's Federal funds sold and
deposit growth in excess of growth in loans and securities.
Stockholders' equity increased $3.6 million to $71.9 million at March 31,
2000 from $68.3 million at December 31, 1999. Increases in stockholders' equity
resulted from:
. Net income of $3.8 million for the three months ended March 31, 2000
. $0.6 million of stock options exercised
. $32,000 of treasury stock sales
. $0.8 million unrealized gain on securities available for sale
Decreases in stockholders' equity resulted from:
. $0.4 million treasury stock purchases
. $1.2 million cash dividend paid on common stock
The Company's and the Bank's capital ratios at March 31, 2000 and December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Minimum
for
Capital
March 31, December 31, Adequacy
2000 1999 Purposes
--------- ------------ --------
<S> <C> <C> <C>
Leverage ratio:
Company................................... 7.1% 7.2% 4.0%
Bank...................................... 7.0 7.1 4.0
Tier 1 capital:
Company................................... 15.6 15.7 4.0
Bank...................................... 15.6 15.5 4.0
Total capital:
Company................................... 16.4 16.5 8.0
Bank...................................... 16.4 16.3 8.0
</TABLE>
The Company and the Bank exceed all current regulatory capital requirements.
In addition, the Bank was in the "well capitalized" category at March 31, 2000
and December 31, 1999.
The Bank's liquid assets, at March 31, 2000, include cash and due from banks
of $23.8 million and Federal funds sold of $6.5 million. Other sources of
liquidity at March 31, 2000 include maturities and principal and interest
payments on loans and securities, comprised of approximately $85.2 million of
loans maturing in one year or less, and approximately $49.0 million of
securities having contractual maturities or expected call dates or average
lives of one year or less. In addition, at March 31, 2000, the Bank had an
available borrowing capacity of approximately $60 million from the FHLB, $12.5
million under two Federal funds purchased facilities, $60 million available
under Retail CD Brokerage Agreements and had securities totaling $37 million
that could be sold under agreements to repurchase.
30
<PAGE>
Financial Condition at December 31, 1999 and 1998
Securities Portfolio
Securities are selected to provide safety of principal, liquidity, pledging
capabilities (to collateralize certain deposits and borrowings), income and to
leverage capital. The Company's investment strategy focuses on maximizing
income while providing for safety of principal, maintaining appropriate
utilization of capital, providing adequate liquidity to meet loan demand or
deposit outflows and to manage overall interest rate risk. The Company selects
individual securities whose credit, cash flow, maturity and interest rate
characteristics, in the aggregate, effect the stated strategies.
The securities portfolio consists of securities available for sale totaling
$635.0 million, $565.6 million and $341.5 million and FHLB stock totaling $9.4
million, $5.3 million and $3.1 million at December 31, 1999, 1998 and 1997,
respectively.
In accordance with SFAS No. 115, the Bank's investment policies include a
determination of the appropriate classification of securities at the time of
purchase. If management has the intent and ability to hold securities until
maturity, they are classified as held-to-maturity and carried at amortized
cost. Securities held for indefinite periods of time and not intended to be
held-to-maturity include the securities management intends to use as part of
its asset/liability strategy and liquidity management and the securities that
may be sold in response to changes in interest rates, resultant prepayment
risks, liquidity demands and other factors. Such securities are classified as
available for sale and are carried at fair value. All securities have been
classified as available for sale at December 31, 1999 and 1998. At December 31,
1997, the securities portfolio consisted of $341.5 million classified as
available for sale and $142.2 million classified as held to maturity.
During 1998, the Company held U.S. Treasury securities primarily as
collateral for municipal deposits. The securities were purchased with the
intent to hold them to maturity, as the Company did not foresee any changes in
the collateral requirements. When the collateral requirements changed and
higher yields were available from alternative investments that met the changed
collateral requirements the Company elected to sell the U.S. Treasury
securities and reinvested the proceeds in higher yielding securities. The
Company reviewed SFAS No. 115 and concluded that the change in circumstance
that led to the sale of the held-to-maturity securities did not meet the
requirements of SFAS No. 115 that would allow the Company to continue to
designate securities as held-to-maturity. Accordingly, in December 1998, the
Company transferred all securities classified as held-to-maturity which had an
amortized cost of $140.8 million to securities available for sale. At the date
of this transfer, these securities had an unrealized gain of $5.5 million. This
unrealized gain, net of tax, was recorded in "Stockholders' Equity-Other
Comprehensive Income," in accordance with SFAS No. 115.
Securities represent 62.8 percent, 63.2 percent and 59.5 percent of average
interest earning assets in 1999, 1998 and 1997, respectively. Emphasis on the
securities portfolio will continue to be an important part of the Company's
investment strategy. The size of the securities portfolio will depend on loan
and deposit growth, the level of capital and the Company's ability to take
advantage of leveraging opportunities.
31
<PAGE>
The following table sets forth the amortized cost, gross unrealized gains
and losses and the estimated fair value of securities classified as available
for sale at December 31:
1999 (000's)
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Amortized -------------- Fair
Classified as Available for Sale Cost Gains Losses Value
-------------------------------- --------- ------ ------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies...... $199,679 -- $11,843 $187,836
Mortgage-backed securities................. 319,221 $ 173 9,526 309,868
Obligations of states and political
subdivisions.............................. 133,733 1,133 2,001 132,865
Other debt securities...................... 3,079 3 190 2,892
-------- ------ ------- --------
Total debt securities...................... 655,712 1,309 23,560 633,461
Equity securities.......................... 1,079 433 -- 1,512
-------- ------ ------- --------
Total...................................... $656,791 $1,742 $23,560 $634,973
======== ====== ======= ========
</TABLE>
1998 (000's)
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Amortized ------------- Fair
Classified as Available for Sale Cost Gains Losses Value
-------------------------------- --------- ------ ------ ---------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies....... $136,505 $ 428 $325 $136,608
Mortgage-backed securities.................. 302,438 2,293 474 304,257
Obligations of states and political
subdivisions............................... 118,537 4,993 69 123,461
Other debt securities....................... 400 3 -- 403
-------- ------ ---- --------
Total debt securities....................... 557,880 7,717 868 564,729
Equity securities........................... 495 392 -- 887
-------- ------ ---- --------
Total....................................... $558,375 $8,109 $868 $565,616
======== ====== ==== ========
</TABLE>
1997 (000's)
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Amortized ------------- Fair
Classified as Available for Sale Cost Gains Losses Value
-------------------------------- --------- ------ ------ ---------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies........ $131,489 $ 688 $104 $132,073
Mortgage-backed securities................... 206,569 2,075 5 208,639
Other debt securities........................ 50 3 -- 53
-------- ------ ---- --------
Total debt securities........................ 338,108 2,766 109 340,765
Equity securities............................ 495 196 -- 691
-------- ------ ---- --------
Total........................................ $338,603 $2,962 $109 $341,456
======== ====== ==== ========
</TABLE>
32
<PAGE>
The following table sets forth the amortized cost, gross unrealized gains
and losses and the estimated fair value of securities classified as held to
maturity at December 31, 1997 (the Company had no securities classified as held
to maturity at December 31, 1999 and 1998):
1997 (000's)
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Amortized ------------- Fair
Classified as Held to Maturity Cost Gains Losses Value
------------------------------ --------- ------ ------ ---------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies....... $ 32,064 $ 232 $16 $ 32,280
Obligations of states and political
subdivisions............................... 110,178 4,223 43 114,358
-------- ------ --- --------
Total....................................... $142,242 $4,455 $59 $146,638
======== ====== === ========
</TABLE>
The following table presents the amortized cost of securities available for
sale at December 31, 1999, distributed based on contractual maturity or earlier
call date for securities expected to be called, and weighted average yields
computed on a tax equivalent basis. Mortgage-backed securities which may have
principal prepayments are distributed to a maturity category based on estimated
average lives. Actual maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
(000's except percentages)
----------------------------------------------------------------------------
After 1 but After 5 but
within within After 10
Within 1 Year 5 Years 10 Years Years Total
------------- -------------- -------------- ------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- -------- ----- -------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
government agencies.... $ 5,500 4.89% $ 8,997 5.93% $166,360 6.61% $18,822 6.95% $199,679 6.65%
Mortgage-backed
securities............. 43,393 7.03 165,670 7.04 100,721 7.05 9,437 7.28 319,221 7.05
Obligations of states
and political
subdivisions........... 11,403 6.91 31,126 7.27 54,623 7.49 36,491 7.39 133,733 7.42
Other debt securities... -- -- 540 6.31 500 7.21 2,039 7.73 3,079 7.60
------- -------- -------- ------- --------
Total................... $60,296 6.92% $206,423 7.00% $322,204 6.82% $66,789 7.25% $655,712 6.95%
------- -------- -------- ------- --------
Estimated fair value.... $59,236 $202,168 $309,113 $62,944 $633,461
======= ======== ======== ======= ========
</TABLE>
Obligations of U.S. Treasury and government agencies principally include
U.S. Treasury securities and debentures and notes issued by the FHLB, the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). The total balances held of such securities was
$187.8 million, $136.6 million and $164.1 million at December 31, 1999, 1998
and 1997, respectively. The December 31, 1999 balance increased $51.2 million,
resulting from $109.6 million in purchases offset by $46.1 million of
maturities and calls and other decreases of $12.3 million. The purchases
consisted primarily of callable U.S. Government agency bonds that offered
attractive yields. The December 31, 1998 balance decreased $27.5 million from
the prior year end, resulting from purchases of $230.1 million and gain on
sales of $0.4 million offset by maturities and calls of $121.1 million, sales
of $136.0 million and other decreases of $0.9 million. The maturities and calls
consisted of approximately $29.5 million in maturities of U. S. Treasury bonds
and $91.6 million in calls on U.S. government agency bonds. The calls resulted
from generally lower interest rates. Sales of approximately $12.1 million of
U.S. Treasury bonds and $123.9 million of U.S.
33
<PAGE>
government agency bonds were conducted as part of the Company's ongoing asset
liability management activities and as part of the Company's management of its
securities portfolio.
The Company invests in mortgage-backed securities, including collateralized
mortgage obligations ("CMOs"), that are primarily issued by the Government
National Mortgage Association ("GNMA"), FNMA, FHLMC and, to a lesser extent,
such securities issued by others. GNMA securities are backed by the full faith
and credit of the U.S. Treasury, assuring investors of receiving all of the
principal and interest due from the mortgages backing the securities. FNMA and
FHLMC guarantee the payment of interest at the applicable certificate rate and
the full collection of the mortgages backing the securities; however, such
securities are not backed by the full faith and credit of the U.S. Treasury. At
December 31, 1999, the Company held $10.0 million of mortgage-backed securities
issued by Residential Funding Mortgage Corp. and $2.7 million of mortgage-
backed securities issued by Countrywide Mortgage Corp. Both of these private
issues have a "AAA" rating issued by Standard and Poors, a nationally
recognized credit rating organization.
Mortgage-backed securities, including CMO's, increased $5.6 million to
$309.9 million and $95.6 million to $304.3 million at December 31, 1999 and
1998, respectively, as compared to the $208.6 million at December 31, 1997. The
increases for 1999 and 1998 were due to purchases of $95.2 million and $192.0
million that were offset by principal paydowns and redemptions of $77.2 million
and $83.2 million, respectively, sales of $11.1 million in 1998 and other
decreases of $12.4 million and $2.0 million, respectively.
For 1999, purchases of fixed rate mortgage-backed securities, including
CMO's totaling $95.2 million, were offset by principal paydowns and redemptions
of $50.4 million of similar fixed rate securities. In addition, principal
paydowns and redemptions of adjustable rate mortgage-backed securities totaled
$26.8 million. In the aggregate, purchases during 1999 replaced principal
paydowns and redemptions. The Company purchased only fixed rate securities of
this type in 1999 considering the yield available and other asset liability
considerations.
During 1998, purchases of mortgage-backed securities, including CMO's, with
fixed rates of interest and with adjustable rates of interest totaling $145.9
million and $46.1 million, respectively, were offset by principal paydowns and
redemptions of $57.6 million and $25.6 million, respectively, and sales of
$11.1 million of such securities with fixed rates of interest. The increase in
the portfolio reflects the Company's continuing leveraging of capital. The
sales were transacted to take advantage of market opportunities to restructure
the portfolio by selling securities having characteristics such as yield,
average life or prepayment assumptions less favorable to the Company
considering the portfolio in the aggregate and opportunities for similar
securities available in the market.
The outstanding balances in obligations of states and political subdivisions
at December 31, 1999, 1998 and 1997 were $132.9 million, $123.5 million and
$110.2 million, respectively, with purchases of $28.3 million and $29.0 million
and maturities of $12.9 million and $14.0 million during 1999 and 1998,
respectively, and other decreases of $6.0 million in 1999 and other increases
of $4.8 million in 1998. In addition, the Company had sales of such securities
during 1998 totaling $6.5 million. These sales were conducted as part of the
Company's ongoing portfolio management. The obligations at year end 1999 were
comprised of approximately 65 percent for New York State political subdivisions
and 35 percent for a variety of other states and their subdivisions all with
diversified final maturities. The Company considers such securities to have
favorable tax equivalent yields and further utilizes such securities for their
favorable income tax treatment.
The Company invests in FHLB stock and other securities which are rated with
an investment grade by nationally recognized credit rating organizations. As a
matter of policy, the Company invests in non-rated securities, on a limited
basis, when the Company is able to satisfy itself as to the credit. These non-
rated securities outstanding at December 31, 1999 totaled approximately $6.4
million comprised primarily of obligations of municipalities located within the
Company's market area. The Bank, as a member of the FHLB, invests in stock of
the FHLB as a prerequisite to obtaining funding under various advance programs
offered by the FHLB. The Bank must purchase additional shares of FHLB stock to
obtain increases in such borrowings.
34
<PAGE>
The Company continues to exercise a conservative approach to investing by
purchasing high credit quality investments with various maturities and cash
flows to provide for liquidity needs and prudent asset liability management.
The Company's security portfolio provides for a significant source of income,
liquidity and is utilized in managing Company-wide interest rate risk. These
securities are used to collateralize borrowings and deposits to the extent
required or permitted by law. Therefore, the securities portfolio is an
integral part of the Company's funding strategy.
Except for securities of the U.S. Treasury and government agencies, FHLB
stock having a book value and estimated market value of $9.4 million and
mortgage-backed securities issued by Residential Funding Mortgage Corp. having
a book value of $10.0 million and an estimated market value of $9.0 million,
there were no obligations of any single issuer which exceeded ten percent of
stockholders' equity at December 31, 1999.
Loan Portfolio
Real Estate Loans: Real estate loans are comprised primarily of loans
collateralized by interim and permanent commercial mortgages, construction
mortgages and residential mortgages including home equity loans. The Bank
originates these loans primarily for its portfolio, although a significant
portion of its residential real estate loans, in addition to meeting the Bank's
underwriting criteria, comply with nationally recognized underwriting criteria
("conforming loans") and can be sold in the secondary market.
Commercial real estate loans are offered by the Bank generally on a fixed or
variable rate basis with 5 year terms and, exceptionally, up to 10 year terms.
Amortizations generally range up to 25 years.
In underwriting commercial real estate loans, the Bank evaluates both the
prospective borrower's ability to make timely payments on the loan and the
value of the property securing the loan. The Bank generally utilizes licensed
or certified appraisers, previously approved by the Bank, to determine the
estimated value of the property. Commercial mortgages are generally
underwritten for up to 75% of the value of the property depending on the type
of the property.
Where the owner occupies the property, the Bank also evaluates the
business's ability to repay the loan on a timely basis. In addition, the Bank
may require personal guarantees, lease assignments or the guarantee of the
operating company when the property is owner occupied. These types of loans are
often for larger amounts than other types of loans made by the Bank and may
involve greater risks than other types of lending. Because payments on such
loans are often dependent upon the successful operation of the business
involved, repayment of such loans may be negatively impacted by adverse changes
in economic conditions.
Construction loans are short-term loans (generally up to 24 months) secured
by land for both residential and commercial development. The loans are
generally made for acquisition and improvements. Funds are disbursed as phases
of construction are completed. The majority of these loans are made with
variable rates of interest, although some fixed rate financing is provided on
residential property. The loan amount is generally limited to 75% of value.
Most non-residential construction loans require pre-approved permanent
financing or pre-leasing with the Bank providing the permanent financing. The
Bank does not generally fund construction loans for single family homes or
commercial real estate built by investors until the builder has a firm sales
contract for the building to be constructed, although in certain projects,
model homes may be financed within the overall site improvement financing.
Residential real estate loans are offered by the Bank with terms of up to 30
years and loan to value ratios of up to 95%. However, for loan to value ratios
in excess of 80%, the Bank generally requires private mortgage insurance. The
Bank offers fixed and adjustable rate loans. Adjustable rate loans generally
have a fixed rate for the first 3, 5 or 7 years and then convert to an annual
adjustable rate, generally based upon the applicable constant maturity U.S.
Treasury securities index plus 2.5% to 3.0%. These adjustable rate loans
generally provide for a maximum annual change in the rate of 2% with an
interest rate ceiling over the life of the loan. Fixed rate loans are generally
underwritten to Federal Home Loan Mortgage Corp. guidelines that allow for the
sale of such loans in the secondary market.
35
<PAGE>
The Bank offers three types of home equity loans. The first is a no cost
home equity line of credit subject to a limit of $500,000 with a maximum
combined loan to value ratio of 80%. The interest rate for the first year of
the loan is the Bank's prime rate. For the remaining term of the loan, the
interest rate is prime plus 1%. The loan has a term of 25 years, with the first
10 years structured as a line of credit with payments of interest only, with
the loan converting to a fully amortizing term loan for the remaining 15 years.
The Bank pays the costs associated with originating this loan. The loan
contains a prepayment penalty during the first two years. Second, the Bank
offers a home equity line of credit subject to a limit of $200,000 with a
maximum combined loan to value ratio of 80%. The interest rate for the first
year is the Bank's prime rate, with the rate changing to prime plus 1% for the
remaining term of the loan. The loan has a term of 25 years with the first 10
years structured as a line of credit with payments of interest only, with the
loan converting to a fully amortizing term loan for the remaining 15 years. The
borrower pays all costs associated with originating this loan. There are no
prepayment penalties. Third, the Bank offers a home secured loan subject to a
limit of $100,000 with a maximum combined loan to value ratio of 80%. The loan
has a 15 year term with a fixed rate of interest. The Bank pays the costs
associated with originating this loan and requires a prepayment penalty during
the first three years of the loan.
Commercial and Industrial Loans: The Bank's commercial and industrial loan
portfolio consists primarily of commercial business loans and lines of credit
to small and medium sized businesses and professionals. These loans are usually
made to finance the purchase of inventory, new or used equipment or other short
or long-term working capital purposes. These loans are generally secured but
are also offered on an unsecured basis. These loans generally have variable
rates of interest. Commercial loans, for the purpose of purchasing equipment
and/or inventory, are usually written for the terms of 1 to 5 years with,
exceptionally, a 7 year term. In granting this type of loan, the Bank primarily
looks to the borrower's cash flow as the source of repayment with collateral
and personal guarantees, where obtained, as a secondary source. The Bank
generally requires a debt service coverage ratio of at least 125%. The Bank is
an approved Small Business Administration (SBA) lender and offers a variety of
SBA products. Commercial loans are often larger and may involve greater risks
than other types of loans offered by the Bank. Payments on such loans are often
dependent upon the successful operation of the underlying business involved
and, therefore, repayment of such loans may be negatively impacted by adverse
changes in economic conditions.
Loans to Individuals and Leasing: The Bank offers installment loans and
reserve lines of credit to individuals. Installment loans are limited to
$50,000 and lines of credit are limited to $5,000. These loans have 5 year
terms with fixed or variable rates of interest. The rate of interest is
dependent on the term of the loan and the type of collateral. The Bank does not
place an emphasis on originating these types of loans.
During 1998, the Bank began participating in lease financing of automobiles
which are originated by a third party. The lease terms are generally up to 48
months with full recourse to the third party originator. The borrowers
generally have superior credit backgrounds. The Bank only provides leasing for
new vehicles or lease renewals. The Company believes this program provides for
portfolio diversification without the addition of significant operating
expenses. The Company periodically reviews the performance and strategic
appropriateness of these lease financings.
During 1999, average net loans increased $76.3 million to $355.6 million,
and increased $30.1 million in 1998 to $279.4 million, as compared to $249.3
million in 1997. At December 31, 1999, gross loans increased $106.2 million to
$418.4 million, or 34.0 percent compared to the $312.2 million at December 31,
1998. Gross loans at December 31, 1998 increased $43.5 million, or 16.2 percent
compared to December 31, 1997 gross loans of $268.7 million. This growth in
gross loans resulted primarily from:
. Increases during 1999 and 1998 of $14.2 million and $4.1 million,
respectively, in commercial real estate mortgages, due primarily to
increased activity and greater market penetration
. Increases in construction loans of $18.5 million and $7.1 million,
respectively, resulting from a greater emphasis on this product
including an expanded offering and focused marketing
36
<PAGE>
. Increases in residential real estate mortgages of $5.6 million and $19.3
million, respectively, primarily as a result of increased activity,
particularly during 1998
. Increases in commercial and industrial loans of $43.7 million and $10.0
million, respectively, primarily due to a continuing strong economic
environment, increased activity and a greater emphasis on this product
with resulting increased market penetration, particularly during 1999
. Increases of $20.8 million and $2.8 million, respectively, in lease
financings resulting from the participation in an automobile leasing
program beginning in late 1998 and
. Increases in loans to individuals of $3.5 million and $0.2 million,
respectively.
Major classifications of loans, including loans held for sale, at December
31 are as follows:
<TABLE>
<CAPTION>
(000's)
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real Estate:
Commercial................. $125,588 $111,397 $107,277 $ 85,091 $ 65,717
Construction............... 30,808 12,311 5,197 6,313 7,183
Residential................ 119,609 114,020 94,690 83,991 78,393
Commercial and industrial.... 109,579 65,923 55,962 56,736 60,981
Individuals.................. 9,280 5,801 5,620 6,814 4,978
Lease financing.............. 23,543 2,755 -- -- --
-------- -------- -------- -------- --------
Total........................ 418,407 312,207 268,746 238,945 217,252
Deferred loan fees........... (1,446) (973) (959) (745) (563)
Allowance for loan losses.... (4,047) (3,103) (3,533) (2,559) (4,182)
-------- -------- -------- -------- --------
Loans, net................... $412,914 $308,131 $264,254 $235,641 $212,507
======== ======== ======== ======== ========
</TABLE>
The Company's primary lending emphasis is for loans to businesses and
developers, primarily in the form of commercial real estate mortgages,
construction loans, and commercial and industrial loans, including lines of
credit. The Company will continue to emphasize these types of loans, which have
increased significantly during both 1999 and 1998, and which enable the Company
to meet the borrowing needs of businesses in the communities it serves. These
loans are made at both fixed rates of interest and variable or floating rates
of interest, generally based upon the prime rate as published in the Wall
Street Journal. At December 31, 1999, the Company had total gross loans with
fixed rates of interest of $257.7 million, or 61.6 percent, and total gross
loans with variable or floating rates of interest of $160.7 million, or 38.4
percent, as compared to $183.6 million or 58.8 percent of fixed rate loans and
$128.6 million or 41.2 percent of variable or floating rate loans at December
31, 1998.
At December 31, 1999 and 1998, the Company had approximately $103.2 million
and $93.4 million, respectively, of committed but unissued lines of credit,
commercial mortgages, construction loans and commercial and industrial loans.
37
<PAGE>
The following table presents the maturities of loans outstanding at December
31, 1999 excluding loans to individuals, real estate mortgages (other than
construction loans) and lease financings, and the amount of such loans by
maturity date that have pre-determined interest rates and the amounts that have
floating or adjustable rates.
<TABLE>
<CAPTION>
(000's except percentages)
-----------------------------------------------
After 1
Within 1 But within After 5
Year 5 years Years Total Percent
-------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Loans:
Real estate--construction..... $18,919 $ 1,542 $10,347 $ 30,808 21.9%
Commercial and industrial..... 43,586 38,905 27,088 109,579 78.1%
------- ------- ------- -------- -----
Total......................... $62,505 $40,447 $37,435 $140,387 100.0%
------- ------- ------- -------- -----
Rate Sensitivity:
Fixed or predetermined inter-
est rates.................... $ 1,600 $16,444 $26,184 $ 44,228 31.5%
Floating or adjustable inter-
est rates.................... 60,905 24,003 11,251 96,159 68.5%
------- ------- ------- -------- -----
Total......................... $62,505 $40,447 $37,435 $140,387 100.0%
------- ------- ------- -------- -----
Percent....................... 44.5% 28.8% 26.7% 100.0%
</TABLE>
It is the Company's policy to discontinue the accrual of interest on loans
when, in the opinion of management, a reasonable doubt exists as to the timely
collectibility of the amounts due. Regulatory requirements generally prohibit
the accrual of interest on certain loans when principal or interest is due and
remains unpaid for 90 days or more, unless the loan is both well secured and in
the process of collection.
The following table summarizes the Company's non-accrual loans, loans past
due 90 days or more and still accruing, restructured loans, OREO and related
interest income not recorded on non-accrual loans as of and for the year ended
December 31:
<TABLE>
<CAPTION>
(000's except percentages)
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans at year end......... $3,855 $ 633 $1,580 $1,795 $4,535
OREO at year end...................... 2,193 2,102 2,641 2,694 264
Restructured loans at year end........ 323 428 568 2,934 3,706
------ ------ ------ ------ ------
Total nonperforming assets............ 6,371 3,163 4,789 7,423 8,505
Loans past due 90 days or more and
still accruing....................... 264 1,442 1,638 883 816
Additional interest income that would
have been recorded if these borrowers
had complied with contractual loan
terms................................ 698 362 809 1,347 1,102
Nonperforming assets to total assets
at year end.......................... 0.56% 0.34% 0.59% 1.00% 1.48%
</TABLE>
Substantially all non-accruing loans are collateralized by real estate. At
December 31, 1999, the Company had no commitments to lend additional funds to
customers with non-accrual or restructured loan balances. Non-accrual loans
increased in 1999 to $3.9 million and decreased in 1998 to $0.6 million, from
$1.6 million in 1997. Net income is adversely impacted by the level of non-
performing assets caused by the deterioration of the borrowers' ability to meet
scheduled interest and principal payments. In addition to forgone revenue, the
Company must increase the level of provision for loan losses, incur higher
collection costs and other costs associated with the management and disposition
of foreclosed properties.
At December 31, 1999, loans that aggregated approximately $2.5 million,
which are not on non-accrual status, were potential problem loans that may
result in their being placed on non-accrual status in the future.
Restructured loans in the amounts of $323,000, $428,000 and $568,000, at
December 31, 1999, 1998 and 1997, respectively, that are considered to be
impaired due to a reduction in the contractual interest rate, are on accrual
status since the collateral securing these loans is sufficient to protect the
contractual principal and interest of the restructured loans. These loans have
been performing for a reasonable period of time. Interest accrued on these
loans not yet collected as of December 31, 1999 was immaterial.
38
<PAGE>
In accordance with SFAS No. 114, which establishes the accounting treatment
of impaired loans, loans that are within the scope of SFAS No. 114 totaling
$3.0 million, $364,000 and $278,000 at December 31, 1999, 1998 and 1997,
respectively, have been measured based on the estimated fair value of the
collateral since these loans are all collateral dependent. The total allowance
for loan losses specifically allocated to impaired loans was $57,000, $78,000
and $143,000 at December 31, 1999, 1998 and 1997, respectively. The average
recorded investment in impaired loans for the years ended December 31, 1999,
1998 and 1997 was approximately $1.7 million, $0.3 million and $0.7 million,
respectively. No income was recorded on impaired loans during the portion of
the year that they were impaired.
Allowance for Loan Losses and Provision for Loan Losses
Allowance for Loan Losses
The Bank maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio based on ongoing quarterly assessments of the estimated
losses. The Bank's methodology for assessing the appropriateness of the
allowance consists of several key components, which include a specific
allowance for identified problem loans, a formula allowance, and an unallocated
allowance. The specific allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures." These accounting
standards prescribe the measurement methods, income recognition and disclosures
related to impaired loans.
The formula allowance is calculated by applying loss factors to outstanding
loans by type, excluding loans for which a specific allowance has been
determined. Loss factors are based on historical loss experience. New loan
types, for which there has been no historical loss experience, as explained
further below, is one of the considerations in determining the appropriateness
of the unallocated allowance.
The appropriateness of the unallocated allowance is reviewed by management
based upon its evaluation of then-existing economic and business conditions
affecting the key lending areas of the Bank and other conditions, such as new
loan products, credit quality trends (including trends in nonperforming loans
expected to result from existing conditions), collateral values, loan volumes
and concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions were
believed to have had on the collectibility of the loan portfolio. Senior
management reviews these conditions quarterly. Management's evaluation of the
loss related to these conditions is reflected in the unallocated allowance. The
evaluation of the inherent loss with respect to these conditions is subject to
a higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments.
A summary of the components of the allowance for loan losses at December 31,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(000's)
--------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Specific allowance................................... $ 57 $ 78 $ 143
Formula allowance.................................... 867 743 693
Unallocated allowance................................ 3,123 2,282 2,697
------ ------ ------
Total allowance...................................... $4,047 $3,103 $3,533
====== ====== ======
</TABLE>
During 1999, changes in assumptions regarding the effects of economic and
business conditions on borrowers and other factors, which are described below,
affected the determination of the unallocated allowance.
During 1999, the Bank's construction loans increased $18.5 million, or 150%
over 1998, as a result of expanded product offerings and a focused marketing
effort. This rapid increase in construction loans, which have a greater
inherent credit risk than other types of real estate lending in which the Bank
is engaged,
39
<PAGE>
contributed to the determination of the unallocated allowance because there has
been generally no historical loss experience for this loan type.
The Bank began participating in automobile lease financing during 1998. The
Bank had total outstandings of $23.5 million of lease financings at December
31, 1999 compared to $2.8 million at December 31, 1998. These leases are
originated by a third party and represent loans to consumers, which is not a
primary lending activity of the Bank. The Bank believes these consumer oriented
loans have a greater inherent credit risk than loans secured by real estate. As
the Bank has generally no historical experience related to such loans, the
increase in automobile lease financing contributed to the determination of the
unallocated allowance.
During 1999, the Bank's commercial and industrial loans, including lines of
credit, increased $43.7 million, or 66% over 1998, primarily due to increased
activity and a greater emphasis on this product by the Bank. These loans to
businesses and not-for-profit organizations can be adversely impacted by
changes in economic conditions, such as increases in interest rates,
experienced during 1999. The increase in commercial and industrial loans also
contributed to the determination of the unallocated allowance.
Further, loans aggregating approximately $2.5 million, which are not on non-
accrual status at December 31, 1999, were potential problem loans that may
result in their being placed on non-accrual status in the future. Such loans
were also considered in the determination of the unallocated portion of the
allowance.
A summary of the allowance for loan losses for the years ended December 31,
is as follows:
<TABLE>
<CAPTION>
(000's except percentages)
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loans outstanding at end
of year..................... $412,914 $308,131 $264,254 $235,641 $212,507
-------- -------- -------- -------- --------
Average net loans outstanding
during the year............. 355,628 279,378 249,259 220,604 207,724
-------- -------- -------- -------- --------
Allowance for loan losses:...
Balance, beginning of year... $ 3,103 $ 3,533 $ 2,559 $ 4,182 $ 4,352
Provision (credit) charged to
expense..................... 600 (300) 600 (1,258) 125
-------- -------- -------- -------- --------
3,703 3,233 3,159 2,924 4,477
Charge-offs and recoveries
during the year:
Charge offs:
Real estate:
Commercial................. -- -- -- -- (322)
Construction............... -- -- -- -- --
Residential................ (11) (70) (1) (347) --
Commercial and industrial... (85) (250) (275) (209) (433)
Lease financing and
individuals................ (14) (18) (35) (109) (25)
Recoveries:
Real estate:
Commercial................. 381 36 -- 45 350
Construction............... -- -- -- -- --
Residential................ -- 35 499 -- --
Commercial and industrial... 73 135 161 236 71
Lease financing and
individuals................ -- 2 25 19 64
-------- -------- -------- -------- --------
Net (charge-offs) recoveries
during the year............. 344 (130) 374 (365) (295)
-------- -------- -------- -------- --------
Balance, end of year......... $ 4,047 $ 3,103 $ 3,533 $ 2,559 $ 4,182
======== ======== ======== ======== ========
Ratio of net charge-offs to
average net loans
outstanding during the
year........................ -- 0.05% -- 0.17% 0.14%
Ratio of allowance for loan
losses to gross loans
outstanding at end of the
year........................ 0.97% 1.00% 1.32% 1.07% 1.93%
</TABLE>
40
<PAGE>
The distribution of our allowance for loan losses at the dates indicated is
summarized as follows:
<TABLE>
<CAPTION>
(000's except percentages)
-----------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Percent of Percent of
Loans in Loans in
Amount of Loan each Amount of Loan each
Loan Loss Amounts by Category by Loan Loss Amounts by Category by
Allowance Category Total Loans Allowance Category Total Loans
--------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Commercial............. -- $125,588 30.02% $ 180 $111,397 35.68%
Construction........... -- 30,808 7.36 -- 12,311 3.94
Residential............ $ 167 119,609 28.59 148 114,020 36.52
Commercial and
industrial............. 520 109,579 26.19 437 65,923 21.12
Lease financing and
individuals............ 237 32,823 7.84 56 8,556 2.74
Unallocated............. 3,123 -- -- 2,282 -- --
------ -------- ------ ------ -------- ------
Total................... $4,047 $418,407 100.00% $3,103 $312,207 100.00%
====== ======== ====== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
(000's except percentages)
-----------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in each Loan in each Loan in each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by by Total Loan Loss by by Total Loan Loss by by Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Commercial............. $ 173 $107,277 39.92% $ 537 $ 85,091 35.61% $ 451 $ 65,717 30.25%
Construction........... -- 5,197 1.94 50 6,313 2.64 57 7,183 3.31
Residential............ 140 94,690 35.23 121 83,991 35.15 291 78,393 36.08
Commercial and
industrial............. 445 55,962 20.82 365 56,736 23.75 503 60,981 28.07
Lease financing and
individuals............ 78 5,620 2.09 108 6,814 2.85 80 4,978 2.29
Unallocated............. 2,697 -- -- 1,378 -- -- 2,800 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total................... $3,533 $268,746 100.00% $2,559 $238,945 100.00% $4,182 $217,252 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
</TABLE>
Actual losses can vary significantly from the estimated amounts. The Bank's
methodology permits adjustments to the allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the loan portfolio as of the evaluation date have changed. By assessing the
estimated losses inherent in the loan portfolio on a quarterly basis, the Bank
is able to adjust specific and inherent loss estimates based upon any more
recent information that has become available.
Management believes the allowance for loan losses is the best estimate of
probable losses which have been incurred as of December 31, 1999. There is no
assurance that the Company will not be required to make future adjustments to
the allowance in response to changing economic conditions or regulatory
examinations. During 1999, the FDIC, and during 1998, the New York State
Banking Department, completed examinations of the Bank. In 1999, the Federal
Reserve completed an off-site examination of the Company. The regulatory
agencies concluded that the process of internal asset review and the allowance
for loan losses were adequate.
Provision for Loan Losses
The Bank recorded a provision for loan losses of $600,000 during 1999,
compared to a credit of $300,000 during 1998 and a provision of $600,000 during
1997. The provision (credit) for loan losses is charged to income to bring the
Bank's allowance for loan losses to a level deemed appropriate by management
based on the factors previously discussed under "Allowance for Loan Losses."
41
<PAGE>
Deposits
The Company's fundamental source of funds supporting interest earning assets
is deposits, consisting of non interest bearing demand deposits, checking with
interest, money market, savings and various forms of time deposits. The
maintenance of a strong deposit base is key to the development of lending
opportunities and creates long term customer relationships, which enhance the
ability to cross sell services. Depositors include various sized businesses,
professionals, not-for-profits, municipalities and individuals. To meet the
requirements of a diverse customer base, a full range of deposit instruments
are offered, which has allowed the Company to maintain and expand its deposit
base despite intense competition from other banking institutions and non-bank
financial service providers.
The following table presents a summary of deposits at December 31:
<TABLE>
<CAPTION>
(000's)
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Demand deposits.................................. $226,345 $209,824 $191,233
Money market accounts............................ 140,462 109,780 106,214
Savings accounts................................. 52,548 53,034 53,264
Time deposits of $100,000 or more................ 226,997 146,335 143,212
Time deposits of less than $100,000.............. 50,146 49,717 42,153
Checking with interest........................... 58,348 58,607 59,306
-------- -------- --------
Total............................................ $754,846 $627,297 $595,382
======== ======== ========
</TABLE>
At December 31,1999 and 1998, certificates of deposits and other time
deposits of $100,000 or more totaled $227.0 million and $146.3 million,
respectively. At December 31, 1999, such deposits classified by time remaining
to maturity were as follows:
<TABLE>
<CAPTION>
(000's)
<S> <C>
3 months or less................................................ $199,773
Over 3 through 6 months......................................... 17,280
Over 6 through 12 months........................................ 8,389
Over 12 months.................................................. 1,555
--------
Total........................................................... $226,997
========
</TABLE>
Total deposits at the end of 1999 increased 20.3 percent to $754.8 million,
from $627.3 million at December 31, 1998, an increase of 5.4 percent from
$595.4 million at the end of 1997. Average deposits outstanding increased 10.7
percent in 1999 and 10.6 percent in 1998. Excluding municipal CD's, which are
acquired on a bid basis, total deposits increased 12.0 percent and 7.1 percent,
and average deposits increased 10.0 percent and 11.5 percent, respectively.
Average non interest bearing deposits increased 13.7 percent or $27.7
million for 1999 compared to 1998, and 15.2 percent in 1998 compared to 1997,
due to the Company's continuing emphasis on developing this funding source.
Average interest bearing deposits in 1999 increased $43.2 million and, in 1998,
increased $37.4 million, reflecting increases in all deposit categories except
savings.
Average balances in money market deposits increased $19.2 million in 1999
and $7.7 million in 1998, due principally to increased account activity by
customers and, particularly in 1999, due to increased deposits from municipal
customers.
Checking with interest average deposits increased $3.8 million in 1999 and
$2.9 million in 1998 due to increased activity by customers and the addition of
new customer relationships through business development efforts.
42
<PAGE>
The increase of $20.7 million in 1999 and $29.2 million in 1998 of average
time deposits principally reflects increases in municipal CD's and other jumbo
CD's. These increases resulted from the Company's continuing business
development effort of municipal customers as well as other customers placing
deposits into higher rate CD's.
Average savings deposits decreased $0.5 million in 1999 and $2.4 million in
1998, as the rate on savings accounts was maintained at a lower competitive
rate and customers switched to other higher rate accounts.
In general, deposit rates in 1999 declined from 1998 due to a lower interest
rate environment. Deposit rates showed little change in 1998 from 1997, despite
a slightly lower interest rate environment, as the Company left deposit rates
at levels competitive with the market for such deposits.
Time deposits of over $100,000, including municipal deposits, increased
$80.7 million and $3.1 million in 1999 and 1998, respectively. The increases
result from increases in municipal CD's which are used to expand or maintain
lower cost municipal deposits, fund securities purchases and for capital
leveraging. These CD's are acquired on a bid basis. Time deposits over $100,000
from other customers increased in 1999 $18.5 million over 1998 and $7.2 million
in 1998 compared to 1997 principally due to the more attractive rates as
compared to other deposit products. Time deposits of over $100,000 are
generally for maturities of 7 to 180 days and are acquired to fund loans and
securities, and to leverage capital under the Company's asset liability policy
by matching such funds with investments and loan production in excess of other
deposit growth.
The Company also utilizes wholesale borrowings and other sources of funds
interchangeably with time deposits in excess of $100,000 depending upon
availability and rates paid for such funds at any point in time. Due to the
generally short maturity of these fundings, the Company can experience higher
volatility of interest margins during periods of both rising and declining
interest rates. The Company does not generally acquire brokered deposits.
The following table summarizes the average amounts and rates of various
classifications of deposits for the periods indicated:
<TABLE>
<CAPTION>
(000's except percentages)
----------------------------------------------
Year ended December 31,
----------------------------------------------
1999 1998 1997
Average Average Average
-------------- -------------- --------------
Amount Rate Amount Rate Amount Rate
--------- ---- --------- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits--Non interest
bearing...................... $ 228,905 -- $ 201,249 -- $ 174,702 --
Money market accounts......... 129,690 2.54% 110,471 2.70% 102,739 2.76%
Savings accounts.............. 52,847 1.55 53,376 2.01 55,784 2.00
Time deposits................. 265,665 4.71 244,933 5.18 215,736 5.35
Checking with interest........ 58,379 1.39 54,606 1.77 51,725 1.64
--------- --------- ---------
Total......................... $ 735,486 2.37% $ 664,635 2.67% $ 600,686 2.72%
========= ========= =========
</TABLE>
Borrowings with original maturities of one year or less totaled $219.5
million and $148.1 million at December 31, 1999 and 1998, respectively. Such
short-term borrowings consisted of securities sold under agreements to
repurchase and borrowings from the FHLB. Other borrowings totaled $94.2 million
and $75.5 million at December 31, 1999 and 1998, respectively, consisting of
borrowings from the FHLB with stated maturities of ten years and 1 to 3 year
call options.
43
<PAGE>
Interest expense on all borrowings totaled $12.2 million, $9.9 million and
$7.7 million in 1999, 1998 and 1997, respectively. The following table
summarizes the average balances, weighted average interest rates and the
maximum month-end outstanding amounts of securities sold under agreements to
repurchase and FHLB borrowings for each of the years:
<TABLE>
<CAPTION>
(000's except percentages)
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Average balance: Short-term $147,502 $129,405 $142,438
Other borrowings 93,254 55,307 1,669
Weighted average interest rate
(for the year): Short-term 4.9% 5.4% 5.4%
Other borrowings 5.4% 5.4% 4.9%
Weighted average interest rate
(at year end): Short-term 4.7% 4.8% 5.4%
Other borrowings 5.4% 5.3% 6.5%
Maximum month-end outstanding
amount: Short-term $219,484 $148,147 $164,548
Other borrowings 94,234 75,536 1,635
</TABLE>
In addition, at December 31, 1999, the Bank had available unused lines of
credit of $17 million from FHLB, $15 million from Manufacturers & Traders Trust
Company, $2 million from BankBoston and $60 million from Merrill Lynch, all of
which are subject to various terms and conditions.
Capital Resources
Stockholders' equity decreased to $68.3 million at December 31, 1999, or 9.8
percent from $75.7 million at December 31, 1998. Stockholders' equity at
December 31, 1998 increased 16.8 percent from 1997. In each year, stockholders'
equity was increased by record net income and the exercise of stock options,
offset by cash dividends of $4.3 million and $3.5 million in 1999 and 1998,
respectively, and repurchases of outstanding shares of stock. Stockholders'
equity also decreased by $17.2 million at December 31, 1999 and increased by
$2.6 million at December 31, 1998 as a result of the effect of the net
unrealized loss in 1999 and net unrealized gain in 1998 on securities available
for sale, net of tax.
The Company paid its first cash dividend in 1996, and the Board of Directors
authorized a quarterly cash dividend policy in the first quarter of 1998. The
Bank's payment of dividends to the Company, the Company's primary source of
funds, is subject to limitation by federal and state regulators based on such
factors as the maintenance of adequate capital, which could reduce the amount
of dividends otherwise payable. See "Business--Supervision and Regulation."
The various components and changes in stockholders' equity are reflected in
the Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 included elsewhere herein.
Management believes that future retained earnings will provide the necessary
capital for current operations and the planned growth in total assets.
All banks and bank holding companies are subject to risk-based capital
guidelines. These guidelines define capital as Tier 1 and Total capital. Tier 1
capital consists of common stockholders' equity and qualifying preferred stock,
less intangibles; and Total capital consists of Tier 1 capital plus the
allowance for loan losses up to certain limits, preferred stock and certain
subordinated and term-debt securities. The guidelines require a minimum total
risk-based capital ratio of 8.0 percent, and a minimum Tier 1 risk-based
capital ratio of 4.0 percent.
44
<PAGE>
The risk-based capital ratios at December 31, follow:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tier 1 capital:
Company............................................... 15.7% 19.4% 18.6%
Bank.................................................. 15.5 19.3 18.6
Total capital:
Company............................................... 16.5 20.2 19.6
Bank.................................................. 16.3 20.1 19.6
</TABLE>
Banks and bank holding companies must also maintain a minimum leverage ratio
of 4 percent, which consists of Tier 1 capital based on risk-based capital
guidelines, divided by average tangible assets (excluding intangible assets
that were deducted to arrive at Tier 1 capital).
The leverage ratios were as follows at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Company................................................... 7.2% 7.4% 7.4%
Bank...................................................... 7.1 7.4 7.4
</TABLE>
To be considered "well-capitalized" under FDICIA, an institution must
generally have a leverage ratio of at least 5 percent, Tier 1 ratio of 6
percent and a Total capital ratio of 10 percent. The Bank exceeds all current
regulatory capital requirements and was in the "well capitalized" category at
December 31, 1999. Management plans to conduct the affairs of the Bank so as to
maintain a strong capital position in the future.
Liquidity
The Asset/Liability Strategic Committee ("ALSC") of the Board of Directors
of the Bank establishes specific policies and operating procedures governing
the Company's liquidity levels and develops plans to address future liquidity
needs, including contingent sources of liquidity. The primary functions of
asset liability management are to provide safety of depositor and investor
funds, assure adequate liquidity and maintain an appropriate balance between
interest earning assets and interest bearing liabilities. Liquidity management
involves the ability to meet the cash flow requirement of depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity management
seeks to manage fluctuating net interest margins and to enhance consistent
growth of net interest income through periods of changing interest rates.
The Bank's liquid assets, at December 31, 1999, include cash and due from
banks of $26.2 million and Federal funds sold of $20.9 million. Federal funds
sold represents the Bank's excess liquid funds that are invested with other
financial institutions in need of funds and which mature daily.
Other sources of liquidity include maturities and principal and interest
payments on loans and securities. The loan and securities portfolios are of
high credit quality and of mixed maturity, providing a constant stream of
maturing and re-investable assets, which can be converted into cash should the
need arise. The ability to redeploy these funds is an important source of
medium to long term liquidity. The amortized cost of securities available for
sale having contractual maturities or expected call dates or average lives of
one year or less amounted to $60.3 million at December 31, 1999. This
represented 9.2 percent of the amortized cost of the securities portfolio.
Excluding installment loans to individuals, real estate loans other than
construction loans and lease financing, $62.5 million, or 44.5 percent of loans
at December 31, 1999, mature in one year or less. The Bank may increase
liquidity by selling certain residential mortgages, or exchanging them for
mortgage-backed securities that may be sold, in the secondary market.
45
<PAGE>
The Bank is a member of the FHLB. The Bank has a borrowing capacity of up to
$110 million at December 31, 1999, at various terms secured by FHLB stock owned
and to be purchased and certain other assets of the Bank. The Bank had advances
from the FHLB totaling $93 million at December 31, 1999. The Bank borrowed
$126.5 million under securities sold under agreements to repurchase at December
31, 1999, and had securities totaling $26 million at December 31, 1999 that
could be sold under agreements to repurchase, thereby increasing liquidity. In
addition, the Bank has an agreement with a primary investment firm to borrow up
to $60 million under Retail CD Brokerage Agreements and has agreements with two
correspondent banks for Federal funds purchased totaling $17 million. The Bank
had no amounts outstanding under these agreements at December 31, 1999.
Additional liquidity is provided by the ability to borrow from the Federal
Reserve Bank's discount window, which borrowings must be collateralized by U.S.
Treasury and government agency securities.
The Bank pledges certain of its assets as collateral for deposits of
municipalities and other deposits allowed or required by law, FHLB borrowings
and repurchase agreements. By utilizing collateralized funding sources, the
Bank is able to access a variety of cost effective sources of funds. The assets
pledged consist of U.S. Treasury and government agency securities, mortgage-
backed securities and other securities. Management monitors its liquidity
requirements by assessing assets pledged, the level of assets available for
sale, additional borrowing capacity and other factors. Management does not
anticipate any negative impact to its liquidity from its pledging activities.
Non interest bearing demand deposits and interest bearing deposits from
businesses, professionals, not-for-profit organizations and individuals are a
relatively stable, low-cost source of funds. The deposits of the Bank generally
have shown a steady growth trend as well as a generally consistent deposit mix.
However, there can be no assurance that deposit growth will continue or that
the deposit mix will not shift to higher rate products.
Another source of funding for the Company is capital market funds, which
includes common stock, preferred stock, convertible debentures, retained
earnings and long-term debt qualifying as regulatory capital.
Each of the Company's sources of liquidity is vulnerable to various
uncertainties beyond the control of the Company. Scheduled loan and security
payments are a relatively stable source of funds, while loan and security
prepayments and calls, and deposit flows vary widely in reaction to market
conditions, primarily prevailing interest rates. Asset sales are influenced by
general market interest rates and other unforeseen market conditions. The
Company's ability to borrow at attractive rates is affected by its financial
condition and other market conditions.
Management considers the Company's sources of liquidity to be adequate to
meet any expected funding needs and also to be responsive to changing interest
rate markets.
Market Risk at March 31, 2000
The Company's primary market risk exposure is interest rate risk since all
transactions are denominated in U.S. dollars with no direct foreign exchange or
changes in commodity price exposure.
All market risk sensitive instruments continue to be classified as available
for sale with no financial instruments entered into for trading purposes. The
Company does not use derivative financial instruments extensively. However, an
interest rate floor with a notional amount of $50 million was in place as of
March 31, 2000 to manage the Company's interest rate exposure. The Company did
not enter into any new derivative financial instruments during the three months
ended March 31, 2000.
The Company uses two methods to evaluate market risk to changes in interest
rates, a "Static Gap" analysis and a simulation analysis of the impact of
changes in interest rates on the Company's net interest income. Both methods
show the Company's net interest income declining if interest rates gradually
rise.
46
<PAGE>
The Company's "Static Gap" at March 31, 2000 was negative $340.0 million in
the one year time frame.
The Company's policy limit on interest rate risk has remained unchanged
since December 31, 1999. The following table illustrates the estimated
exposure under a rising rate scenario and a declining rate scenario calculated
as a percentage change in estimated net interest income assuming a gradual
shift in interest rates for the next 12 month measurement period, beginning
March 31, 2000.
<TABLE>
<CAPTION>
Percentage Change
in Estimated
Gradual Change in Net Interest Income
Interest Rates from March 31, 2000 Policy Limit
----------------- ------------------- ------------
<S> <C> <C>
+200 basis points (5.5)% (5.0)%
-200 basis points 5.5 % (5.0)%
</TABLE>
The percentage change in estimated net interest income in the +200 basis
points scenario continues to exceed the Company's policy limit. As a result,
management and the Board of Directors have reviewed the contributing factors
and determined that no immediate corrective action was necessary.
Market Risk at December 31, 1999 and 1998
Market risk is the potential for economic losses to be incurred on market
risk sensitive instruments arising from adverse changes in market indices such
as interest rates, foreign currency exchange rates and commodity prices. Since
all Company transactions are denominated in U.S. dollars with no direct
foreign exchange or changes in commodity price exposures, the Company's
primary market risk exposure is interest rate risk.
Interest rate risk is the exposure of net interest income to changes in
interest rates. Interest rate sensitivity is the relationship between market
interest rates and net interest income due to the repricing characteristics of
assets and liabilities. If more liabilities than assets reprice in a given
period (a liability-sensitive position or "negative gap"), market interest
rate changes will be reflected more quickly in liability rates. If interest
rates decline, such positions will generally benefit net interest income.
Alternatively, where assets reprice more quickly than liabilities in a given
period (an asset-sensitive position or "positive gap"), a decline in market
rates could have an adverse effect on net interest income. Excessive levels of
interest rate risk can result in a material adverse effect on the Company's
future financial condition and results of operations. Accordingly, effective
risk management techniques that maintain interest rate risk at prudent levels
is essential to the Company's safety and soundness.
The Company has no financial instruments entered into for trading purposes.
Federal funds, both purchases and sales, on which rates change daily, and
loans and deposits tied to certain indices, such as the prime rate and federal
discount rate, are the most market sensitive and have the most stable fair
values. The least sensitive instruments include long-term fixed rate loans and
securities and fixed rate savings deposits, which have the least stable fair
value. On those types falling between these extremes, the management of
maturity distributions is as important as the balances maintained. Management
of maturity distributions involve the matching of interest rate maturities, as
well as principal maturities, and is a key determinant of net interest income.
In periods of rapidly changing interest rates, an imbalance ("gap") between
the rate sensitive assets and liabilities can cause major fluctuations in net
interest income and in earnings. The Company's management of liquidity and
interest rate sensitivity has been successful in the past, as evidenced by the
continued net interest income growth. Continuing to establish patterns of
sensitivity which will enhance future growth regardless of frequent shifts in
the market conditions is one of the objectives of the Company's
asset/liability management strategy.
Evaluating the Company's exposure to changes in interest rates is the
responsibility of ALSC and includes assessing both the adequacy of the
management process used to control interest rate risk and the quantitative
level of exposure. When assessing the interest rate risk management process,
the Company seeks to ensure that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest
rate risk at appropriate levels. Evaluating the quantitative level of interest
rate risk exposure, requires the Company to assess the existing and potential
future effects of changes in interest rates on its consolidated financial
condition, including capital adequacy, earnings, liquidity and asset quality.
47
<PAGE>
The Company uses two methods to evaluate market risk to changes in interest
rates. A "Static Gap" analysis shows the Company as liability-sensitive in the
one-year time frame as of December 31, 1999. The simulation analysis also
indicates a liability-sensitive position at that same date. The Company
believes the simulation analysis is a more accurate analysis of interest rate
risk.
The "Static Gap" as of December 31, 1999 and 1998 is presented in the tables
below. Balance sheet items are appropriately categorized by contractual
maturity, expected average lives for mortgage-backed securities, or repricing
dates, with prime rate indexed loans and certificates of deposit. Checking with
interest accounts, savings accounts, money market deposits and other borrowings
constitute the bulk of the floating rate category. The determination of the
interest rate sensitivity of non contractual items is arrived at in a
subjective fashion. Savings accounts are viewed as a relatively stable source
of funds and are therefore classified as intermediate funds.
At December 31, 1999, the "Static Gap" showed a negative cumulative gap of
$289.2 million in the one day to one year repricing period, as compared to a
positive cumulative gap of $14.4 million at December 31, 1998. The cumulative
gap at December 31, 1999 is due principally to fixed rate securities and loans
in the over one year to five years and over five years categories to maximize
yield on assets and the treatment of deposit accounts, and other borrowings, as
previously discussed above. A significant portion of the loans in the over one
year to five year category represents five year fixed rate commercial mortgages
and commercial loans. Origination of such loans has allowed the Company to
generate an asset repriceable within five years to reduce long-term interest
rate risk. The change in the cumulative static gap between December 31, 1999
and December 31, 1998 reflects the increase in such fixed rate loans, the
reduced expectation of prepayment of securities with such provisions and the
reduced expectation of calls on securities with such provisions, thereby
extending the estimated repricing dates. In addition, borrowing in total
increased, as did the expectation of calls on such borrowings. These shifts in
estimated repricing dates resulted from increases in interest rates at year end
1999 as compared to year end 1998.
The Company uses the simulation analysis to estimate the effect that
specific movements in interest rates would have on net interest income. This
analysis incorporates management assumptions about the levels of future balance
sheet trends, different patterns of interest rate movements, and changing
relationships between interest rates (i.e. basis risk). These assumptions have
been developed through a combination of historical analysis and future expected
pricing behavior. For a given level of market interest rate changes, the
simulation can consider the impact of the varying behavior of cash flows from
principal prepayments on the loan portfolio and mortgage-backed securities,
call activities on investment securities, balance charges on non contractual
maturity deposit products (demand deposits, checking with interest, money
market and savings accounts), and embedded option risk by taking into account
the effects of interest rate caps and floors. The impact of planned growth and
anticipated new business activities is not integrated into the simulation
analysis. The Company can assess the results of the simulation and, if
necessary, implement suitable strategies to adjust the structure of its assets
and liabilities to reduce potential unacceptable risks to net interest income.
The Company's policy limit on interest rate risk is that if interest rates
were to gradually increase or decrease 200 basis points from current rates, the
percentage change in estimated net interest income for the subsequent 12 month
measurement period should not decline by more than 5.0 percent. Net interest
income is forecasted using various interest rate scenarios that management
believes are reasonably likely to impact the Company's financial condition. A
base case scenario, in which current interest rates remain stable, is used for
comparison to other scenario simulations. The table below illustrates the
estimated exposures under a rising rate scenario and a declining rate scenario
calculated as a percentage change in estimated net interest income from the
base case scenario, assuming a gradual shift in interest rates for the next 12
month measurement period, beginning December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Percentage Change in Percentage Change in
Estimated Net Interest Estimated Net Interest
Gradual Change in Interest Income from Income from December
Rates December 31, 1999 31, 1998
-------------------------- ---------------------- ----------------------
<S> <C> <C>
+ 200 basis points.......... (5.3)% (3.0)%
- 200 basis points.......... 9.7 % 2.0 %
</TABLE>
48
<PAGE>
The percentage change in estimated net interest income in the +200 basis
points scenario of (5.3%) exceeds the Company's policy limit of (5.0%). As a
result, the ALSC reviewed the contributing factors and determined that no
immediate corrective action was necessary.
As with any method of measuring interest rate risk, there are certain
limitations inherent in the method of analysis presented. Actual results may
differ significantly from simulated results should market conditions and
management strategies, among other factors, vary from the assumptions used in
the analysis. The model assumes that certain assets and liabilities of similar
maturity or period to repricing will react the same to changes in interest
rates, but, in reality, they may react in different degrees to changes in
market interest rates. Specific types of financial instruments may fluctuate in
advance of changes in market interest rates, while other types of financial
instruments may lag behind changes in market interest rates. Additionally,
other assets, such as adjustable-rate loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Furthermore, in the event of a change in interest rates, expected rates of
prepayments on loans and securities and early withdrawals from time deposits
could deviate significantly from those assumed in the simulation.
One way to minimize interest rate risk is to maintain a balanced or matched
interest rate sensitivity position. However, profits are not always maximized
by matched funding. To increase net interest earnings, the Company selectively
mis-matches asset and liability repricing to take advantage of short-term
interest rate movements and the shape of the U.S. Treasury yield curve. The
magnitude of the mismatch depends on a careful assessment of the risks
presented by forecasted interest rate movements. The risk inherent in such a
mismatch, or gap, is that interest rates may not move as anticipated.
Interest rate risk exposure is reviewed in quarterly meetings in which
guidelines are established for the following quarter and the longer term
exposure. The structural interest rate mismatch is reviewed periodically by
ALSC and management.
Risk is mitigated by matching maturities or repricing more closely, and by
reducing interest rate risk by the use of interest rate contracts. The Company
does not use derivative financial instruments extensively. However, as
circumstances warrant, the Company purchases derivatives such as interest rate
contracts to manage its interest rate exposure. Any derivative financial
instruments are carefully evaluated to determine the impact on the Company's
interest rate risk in rising and declining interest rate environments as well
as the fair value of the derivative instruments. Use of derivative financial
instruments is included in the Bank's Asset/Liability policy, which has been
approved by the Board of Directors. Additional information on derivative
financial instruments is presented in Note 1 to the Consolidated Financial
Statements.
49
<PAGE>
The tables below set forth the interest rate sensitivity analysis by
repricing date at year end 1999 and 1998.
Interest Rate Sensitivity Analysis By Repricing Date
December 31, 1999
<TABLE>
<CAPTION>
(000's except percentages)
-------------------------------------------------------------------------------
One Day Over One Over Over One
and Day to Three Year to Over Non-
Floating Three Months to Five Five Interest
Rate Months One Year Years Years Bearing Total
--------- --------- --------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans, net.............. -- $ 167,220 $ 32,382 $ 124,586 $ 88,726 -- $ 412,914
Mortgage-backed
securities............. -- 55,523 44,980 83,813 125,552 -- 309,868
Other securities........ -- 4,158 18,795 65,629 236,523 -- 325,105
Other earning assets.... $ 20,900 -- -- -- -- -- 20,900
Other assets............ -- 9,361 -- -- -- $ 69,324 78,685
--------- --------- --------- --------- -------- --------- ----------
Total assets............ 20,900 236,262 96,157 274,028 450,801 69,324 1,147,472
--------- --------- --------- --------- -------- --------- ----------
Liabilities and
stockholders' equity:
Interest bearing
deposits............... -- 364,018 45,466 8,028 110,989 -- 528,501
Other borrowed funds.... 126,269 103,720 3,018 80,358 353 -- 313,718
Demand deposits......... -- -- -- -- -- 226,345 226,345
Other liabilities....... -- -- -- -- -- 10,598 10,598
Stockholders' equity.... -- -- -- -- -- 68,310 68,310
--------- --------- --------- --------- -------- --------- ----------
Total liabilities and
stockholders' equity... 126,629 467,738 48,484 88,386 111,342 305,253 1,147,472
--------- --------- --------- --------- -------- --------- ----------
Net interest rate
sensitivity gap........ $(105,369) $(231,476) $ 47,673 $ 185,642 $339,459 $(235,929) --
--------- --------- --------- --------- -------- --------- ----------
Cumulative gap.......... $(105,369) $(336,845) $(289,172) $(103,530) $235,929 -- --
--------- --------- --------- --------- -------- --------- ----------
Cumulative gap to
interest-earning
assets................. (9.77)% (31.24)% (26.82)% (9.60)% 21.88% -- --
--------- --------- --------- --------- -------- --------- ----------
</TABLE>
December 31, 1998
<TABLE>
<CAPTION>
(000's except percentages)
-----------------------------------------------------------------------------
One Day Over One Over Over One
and Day to Three Year to Over Non-
Floating Three Months to Five Five Interest
Rate Months One Year Years Years Bearing Total
--------- ---------- --------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans, net.............. -- $ 134,104 $ 28,420 $ 96,501 $ 48,106 -- $308,131
Mortgage-backed
securities............. -- 69,352 79,162 96,939 58,804 -- 304,257
Other securities........ $ 351 57,701 80,398 54,085 88,824 -- 261,359
Other earning assets.... 3,500 -- -- -- -- -- 3,500
Other assets............ -- 5,277 -- -- -- $ 57,278 62,556
--------- ---------- --------- --------- -------- ---------- --------
Total assets............ 3,851 266,434 188,980 247,525 175,734 57,278 939,802
--------- ---------- --------- --------- -------- ---------- --------
Liabilities and
stockholders' equity:
Interest bearing
deposits............... -- 281,784 34,963 8,500 112,246 -- 417,473
Other borrowed funds.... 61,418 86,735 19 194 75,317 -- 223,683
Demand deposits......... -- -- -- -- -- 209,824 209,824
Other liabilities....... -- -- -- -- -- 13,128 13,128
Stockholders' equity.... -- -- -- -- -- 75,696 75,695
--------- ---------- --------- --------- -------- ---------- --------
Total liabilities and
stockholders' equity... 61,418 348,499 34,982 8,694 187,663 298,545 939,802
--------- ---------- --------- --------- -------- ---------- --------
Net interest rate
sensitivity gap........ $ (57,587) $ (82,065) $ 153,998 $ 238,831 $(11,829) $ (241,368) --
--------- ---------- --------- --------- -------- ---------- --------
Cumulative gap.......... $ (57,567) $ (139,632) $ 14,366 $ 253,197 $241,368 -- --
--------- ---------- --------- --------- -------- ---------- --------
Cumulative gap to
interest-earning
assets................. (6.52)% (16.82)% 1.63% 28.69% 27.33% -- --
--------- ---------- --------- --------- -------- ---------- --------
</TABLE>
50
<PAGE>
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to December 31, 1999. The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements relating to
subsequent periods increasingly are subject to greater uncertainty because of
the increased likelihood of changes in underlying factors and assumptions.
Actual results could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements:
. competitive pressure on loan and deposit product pricing;
. other actions of competitors;
. changes in economic conditions;
. the extent and timing of actions of the Federal Reserve Board;
. a loss of customer deposits;
. changes in customer's acceptance of the Banks' products and services;
. increases in federal and state income taxes and/or the Company's
effective income tax rate; and
. the extent and timing of legislative and regulatory actions and reform.
The Company's forward-looking statements are only as of the date on which
such statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts or estimated fair value without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
51
<PAGE>
Financial Ratios
Significant ratios of the Company for the periods indicated are as follows:
<TABLE>
<CAPTION>
Year ended December
31,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Earnings Ratios
Net income as a percentage of:
Average earning assets.............................. 1.39% 1.40% 1.46%
Average total assets................................ 1.31 1.32 1.35
Average total stockholders' equity (/1/)............ 18.60 18.44 18.60
Capital Ratios
Average total stockholders' equity to average total
assets(/1/)........................................ 7.06% 7.16% 7.27%
Average net loans as a multiple of average total
stockholders' equity(/1/).......................... 4.72 4.20 4.18
Leverage capital.................................... 7.20 7.40 7.40
Tier I capital (to risk weighted assets)............ 15.70 19.40 18.60
Total risk-based capital (to risk weighted assets).. 16.50 20.20 19.60
Other
Allowance for loan losses as a percentage of year-end
loans................................................ 0.97% 1.00% 1.32%
Loans (net) as a percentage of year-end total assets.. 35.98 32.79 32.45
Loans (net) as a percentage of year-end total
deposits............................................. 54.70 49.12 44.38
Securities as a percentage of year-end total assets... 55.34 60.18 59.41
Average interest earning assets as a percentage of
average interest bearing liabilities................. 134.46 134.74 132.81
Dividends per share as a percentage of diluted
earnings per share................................... 31.48 28.87 21.96
</TABLE>
--------
(1) Excludes unrealized losses in 1999 and unrealized gains in 1998 and 1997,
net of tax, on securities available for sale
Quarterly Results of Operations
Set forth below are certain quarterly results of operations for 1999 and
1998.
<TABLE>
<CAPTION>
(000's except per share data)
------------------------------------------------------------------
1999 Quarters 1998 Quarters
-------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $19,615 $18,580 $16,964 $15,657 $15,765 $16,106 $16,022 $14,552
Net interest income..... 11,097 10,897 9,949 9,215 8,940 8,711 8,682 8,490
Provision (credit) for
loan losses............ (75) 225 225 225 (250) (350) 150 150
Income before income
taxes.................. 5,044 5,649 4,023 3,932 4,780 3,936 3,565 3,540
Net income.............. 3,734 4,265 3,037 2,968 4,007 2,991 2,565 2,691
Basic earnings per
common share........... 0.88 1.00 0.72 0.71 0.95 0.71 0.62 0.64
Diluted earnings per
common share........... 0.86 0.98 0.71 0.69 0.92 0.70 0.60 0.62
</TABLE>
52
<PAGE>
MARKET PRICE AND DIVIDEND POLICY
The Company's common stock was held of record as of April 3, 2000 by
approximately 560 shareholders. The Company's common stock trades on a limited
and sporadic basis in the over-the-counter market under the symbol "HUVL", but
no public trading market has developed. The Company has historically purchased
shares of common stock from shareholders at a price that the Company believes
to be the fair market value at the time. Some of these purchases are made
pursuant to Stock Restriction Agreements which give the Company a right of
first refusal if the shareholder wishes to sell his or her shares. The majority
of transactions in the Company's common stock are sales to the Company or
private transactions. There can be no assurance that the Company will purchase
any additional stock in the future.
The table below sets forth the high and the low prices per share at which
the Company purchased shares of its common stock from shareholders in 1998,
1999, and the first quarter of 2000. The price per share has been adjusted to
reflect the 10 percent stock dividend to shareholders in December 1999 and
1998.
<TABLE>
<CAPTION>
1999 1998
------------- -------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter...................................... $28.64 $27.73 $25.62 $24.79
Second Quarter..................................... 30.91 28.64 26.45 25.62
Third Quarter...................................... 31.36 30.91 26.86 26.45
Fourth Quarter..................................... 32.00 31.36 27.73 26.86
First Quarter 2000 through April 3, 2000........... 32.00 32.00
</TABLE>
The foregoing prices were not subject to retail markup, markdown or
commission.
In 1998, the Board of Directors of the Company adopted a policy of paying
quarterly cash dividends to holders of its common stock. Quarterly cash
dividends were paid as follows: In 1999, $0.24 per share to holders of record
on February 8; $0.26 per share to holders of record on May 6, August 5 and
November 8. In 1998, $0.20 per share to holders of record on February 10 and
May 12; $0.21 per share to holders of record on August 11 and November 9.
Stock dividends of 10 percent each (one share for every 10 outstanding
shares) were declared by the Company for shareholders of record on December 2,
1999 and November 30, 1998.
Effective April 28, 2000, the Board of Directors of the Company raised the
price at which the Company would purchase shares to $35.00 per share and raised
the quarterly dividend to $.31 per share to holders of record on May 8, 2000.
Any funds which the Company may require in the future to pay cash dividends,
as well as various Company expenses, are expected to be obtained by the Company
chiefly in the form of cash dividends from the Bank and secondarily from sales
of common stock pursuant to the Company's stock option plan. The ability of the
Company to declare and pay dividends in the future will depend not only upon
its future earnings and financial condition, but also upon the future earnings
and financial condition of the Bank and its ability to transfer funds to the
Company in the form of cash dividends and otherwise. The Company is a separate
and distinct legal entity from the Bank. The Company's right to participate in
any distribution of the assets or earnings of the Bank is subject to prior
claims of creditors.
Under the New York Banking Law, a New York bank may declare and pay
dividends not more often than quarterly and no dividends may be declared,
credited, or paid so long as there is any impairment of capital stock. In
addition, except with the approval of the New York State Superintendent of
Banks, the total of all dividends declared in any year may not exceed the sum
of a bank's net profits for that year and its undistributed net profits for the
preceding two years, less any required transfers to surplus. A bank may be
required to transfer to surplus up to 10 percent of its net profits in any
accounting period if its combined capital stock, surplus and undivided profit
accounts do not equal 10 percent of its net deposit liabilities.
The payment of dividends by the Company may also be limited by the Federal
Reserve Board's capital adequacy and dividend payment guidelines applicable to
bank holding companies. See "Business--Supervision and Regulation."
53
<PAGE>
MANAGEMENT
Directors and Executive Officers
Certain information with respect to directors and executive officers of the
Company and of the Bank is set forth below. All directors serve a term of one
year. All executive officers are elected by the Board of Directors and serve
until their successors are duly elected by the Board of Directors. Unless
otherwise noted, all of the individuals set forth below are directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John N. Finnerty........ 61 President, Chief Executive Officer and Director
Stephen R. Brown........ 44 Executive Vice President, Chief Operating Officer and Chief
Financial Officer
Vincent T. Palaia....... 53 Executive Vice President and Chief Lending Officer of the Bank
Joseph L. Bellini, III.. 59 Executive Vice President of the Bank
James J. Landy.......... 45 Executive Vice President of the Bank
George E. Dunkel........ 59 Executive Vice President of the Bank
William E. Griffin...... 67 Director and Chairman of the Board
James M. Coogan......... 57 Director and Secretary
Gregory F. Holcombe..... 38 Director
Angelo R. Martinelli.... 72 Director
Ronald F. Poe........... 61 Director
John A Pratt, Jr........ 69 Director
Cecile D. Singer........ 70 Director
Craig S. Thompson....... 46 Director
</TABLE>
John N. Finnerty joined the Company in 1978 and has served as an executive
officer in various capacities, becoming Executive Vice President and Chief
Operating Officer in 1995 and President and Chief Executive Officer in 1997. He
has been a member of the Board of Directors since 1990. Mr. Finnerty has
announced that he will retire at the end of the current calendar year.
Stephen R. Brown has served as the Executive Vice President, Chief Operating
Officer and Chief Financial Officer of the Company since 1997. Mr. Brown served
as Senior Vice President and Chief Financial Officer of the Company from 1996
to 1997 and as Vice President and Controller from 1993 until 1996.
Vincent T. Palaia has served as Executive Vice President and Chief Lending
Officer of the Bank since 1997. From 1995 until 1997, Mr. Palaia served as
Senior Vice President and Chief Lending Officer of the Bank, responsible for
real estate and general business lending.
Joseph L. Bellini, III has served as Executive Vice President of the Bank
since 1997. He became responsible for Top 100 VIP Relationships in 2000. From
1997 until 1999, Mr. Bellini was responsible for the Bank's Sales Group and
Segment Leader for General Business. From 1996 until 1997, Mr. Bellini served
as Senior Vice President of the Bank and Team Leader for Small Businesses.
Prior to joining the Bank, Mr. Bellini was Vice President of Chase Manhattan
Bank, serving the small business market in Westchester and Bronx counties in
New York until 1996.
James J. Landy has served as Executive Vice President of the Bank since
December 1998 and as Manager of Strategic Relationships and Sales since
September 1999, having been employed by the Bank since 1977. He has served as
Manager of Special Relationships from 1997 until 1999, as Senior Vice President
and Manager of Municipal and Community Relationships from 1996 to 1997, and as
Regional Vice President for Southern Westchester from 1988 to 1996.
George E. Dunkel joined the Bank in August 1999 as an Executive Vice
President responsible for certain lending programs and product development.
Prior to that time, he was President, Chief Executive Officer and a member of
the Board of Directors of Community Bank of Sullivan County, a bank he helped
to found in 1993.
54
<PAGE>
William E. Griffin is an attorney and is a shareholder and President of
Griffin, Coogan & Veneruso, P.C., a law firm located in Bronxville, New York.
He has been a member of the Board of Directors since 1981 and Chairman of the
Board since 1990.
James M. Coogan is an attorney and is a shareholder and Vice President of
Griffin, Coogan & Veneruso P.C., a law firm located in Bronxville, New York. He
has been a member of the Board of Directors of the Company since 1994 and
Secretary since 1997.
Gregory F. Holcombe is Vice President of Supply Chain Management of
Precision Valve Corporation, a maker of aerosol spray valves based in Yonkers,
New York. Mr. Holcombe was previously Vice President of Component and Machinery
Sales from 1997 to 1999 and Financial Analyst Manager from 1995 to 1997 of
Precision Valve Corporation. He has been a member of the Board of Directors of
the Company since 1999.
Angelo R. Martinelli has been President of Gazette Press, Inc., a printing
company located in Yonkers, New York since 1948. He has been a Director of the
Company since 1990.
Ronald F. Poe has been President of Ronald F. Poe & Associates, a private
real estate investment firm in White Plains, New York, since February 1999;
prior thereto, he was Senior Advisor of Legg Mason Dorman & Wilson, Inc., a
real estate investment banking firm in White Plains from which he retired as
Chairman and Chief Executive Officer in August 1998. Mr. Poe has been a
Director of the Company since 1997. He also serves as a member of the Board of
Directors of Freddie Mac and Charter One Financial, Inc.
John A. Pratt, Jr. has served as a consultant to the Bank since 1996,
advising the Bank on new business development and business retention. Mr. Pratt
was previously the President and Chief Executive Officer of the Company,
retiring in 1995. He has served as a director of the Company since 1983.
Cecile D. Singer has been a principal in Cecile D. Singer Consulting, a
consulting firm located in Yonkers, New York, specializing in government
relations since 1995. Ms. Singer has been a member of the Board of Directors
since 1994.
Craig S. Thompson has been the President and principal of Thompson Pension
Employee Plans, Inc. a company located in New York City and specializing in
pension administration and investment and insurance sales for over 5 years. Mr.
Thompson has been a member of the Company's Board of Directors since 1988.
Committees of the Board of Directors of the Bank
The Company's Board of Directors convened 14 times in 1999. The Company's
Board does not have any separate committees. Policy decisions for the Bank and
its subsidiaries are often made by standing committees of the Board of
Directors of the Bank. Each of the members of the Board of Directors of the
Company is also a member of the Board of Directors of the Bank. The Executive
Committee is chaired by Craig S. Thompson. The other members of the Executive
Committee are James M. Coogan, John A. Pratt, Jr., Ronald F. Poe, Cecile D.
Singer, William E. Griffin, Angelo R. Martinelli and John N. Finnerty. The
Compensation and Organization Committee consists of Cecile D. Singer, who
serves as chair of the committee, and William E. Griffin, Craig S. Thompson,
Angelo R. Martinelli, Ronald F. Poe and John N. Finnerty. The members of the
Audit and Ethics Committee consists of Gregory F. Holcombe, who serves as chair
of the committee, Craig S. Thompson, Cecile D. Singer and James M. Coogan.
The Executive Committee is charged with responsibility for and authority
regarding all financial matters of the Bank and its subsidiaries, including an
annual review and approval of all policies related to the financial management
of the Bank and the approval of the annual budget for the Bank and the Bank's
subsidiaries. The Committee is comprised of at least five outside directors and
convened 12 times in 1999.
The Compensation and Organization Committee is charged with: conducting
performance reviews of all executive officers and certain other officers of the
Bank and its subsidiaries; reviewing and approving all officer
55
<PAGE>
promotions; reviewing salary ranges by grade, staffing levels, vacancies,
recruiting programs, benefit plans, pension plans and related investment
performance; approving stock option plans and all grants of stock options; and
reviewing the life insurance policies for executive officers. The Compensation
Committee also reviews and approves personnel policies and engages consultants
as required. The Committee is comprised of 5 outside directors and convened 6
times in 1999.
The Audit and Ethics Committee is charged with the responsibility for
overseeing the Company's internal control structure, and for the overall
accuracy of the financial statements. The Committee also has the responsibility
for and authority regarding the annual audit of the financial statements of the
Company, the Bank, and its subsidiaries, for recommending to the Board of
Directors the selection and termination of the independent Certified Public
Accountant, for the ongoing examination of the operations of the Company, the
Bank, and its subsidiaries, and for the issuance of ethics policies and
monitoring compliance therewith. The Committee is comprised of at least three
outside directors, and may include others that may not be officers or employees
of the Bank, and convened on a quarterly basis in 1999.
56
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information as to the compensation of the
Company's Chief Executive Officer and the persons who, at the end of 1999, were
the other four most highly compensated executive officers of the Company or the
Bank (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
-----------------
Annual Compensation
--------------------
Awards/Securities
Name and Principal Underlying All Other
Position Year Salary($) Bonus($) Options(#)/1/ Compensation($)
------------------ ---- ---------- --------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
John N. Finnerty........ 1999 287,500 165,000 3,764 20,030/2/
President and Chief
Executive 1998 275,000 135,000 0 17,450
Officer 1997 229,807 156,200 38,200 14,672
Stephen R. Brown........ 1999 162,000 70,000 2,530 11,812/2/
Executive Vice
President, 1998 149,423 53,000 0 10,770
Chief Operating Officer 1997 122,596 65,000 0 10,610
and Chief Financial
Officer
Vincent T. Palaia....... 1999 157,500 27,000 1,175 11,866/2/
Executive Vice
President, 1998 151,538 30,000 0 12,850
Chief Lending Officer of
the Bank 1997 138,846 45,000 0 12,209
Joseph L. Bellini, III.. 1999 141,500 30,000 2,033 11,378/2/
Executive Vice President
of the 1998 134,615 30,000 0 11,195
Bank 1997 116,462 35,000 3,328 9,405
James J. Landy.......... 1999 119,404 40,000 880 10,023/2/
Executive Vice President
of the 1998 108,404 15,491 0 8,936
Bank 1997 98,231 18,500 0 8,586
</TABLE>
--------
/1 /The number of shares underlying options was adjusted to reflect a 10
percent stock dividend in December 1999, November 1998 and December 1997.
/2 /Includes, for 1999: for Mr. Finnerty, $10,156 in group term life insurance
premiums, $8,000 in employer contributions to the Company's Profit-sharing
Plan and $1,874 in employer matching contributions to the Company's Section
401(k) plan; for Mr. Brown, $1,796 in group term life insurance premiums,
$8,000 in employer contributions to the Company's Profit-sharing Plan and
$2,016 in employer matching contributions to the 401(k) plan; for Mr.
Palaia, $2,418 in group term life insurance premiums, $8,000 in employer
contributions to the Company's Profit-sharing Plan and $1,448 in employer
matching contributions to the 401(k) plan; for Mr. Bellini, $3,378 in group
term life insurance premiums and $8,000 in employer contributions to the
Company's Profit-sharing Plan; and for Mr. Landy, $1,175 in group term life
insurance premiums, $7,499 in employer contributions to the Company's
Profit-sharing Plan and $1,349 in employer matching contributions to the
401(k) plan.
57
<PAGE>
Option/Stock Appreciation Rights Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
-------------------------------------------------- ----------------
Number of Percent of Total
Securities Options/SARs Exercise
Underlying granted to or Base
Options/SARs Employees in Price Expiration
Name Granted(#)/1/ Fiscal Year ($/sh) Date 5% ($) 10% ($)
---- ------------- ---------------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
John N. Finnerty........ 3,764 8.7% $30.50 1/1/09 $65,633 $166,343
Stephen R. Brown........ 2,530 5.9% $30.50 1/1/09 $44,114 $111,803
Vincent J. Palaia....... 1,175 2.7% $30.50 1/1/09 $20,484 $ 51,915
Joseph L. Bellini, III.. 2,033 4.7% $30.50 1/1/09 $35,445 $ 89,831
James J. Landy.......... 880 2.0% $30.50 1/1/09 $15,344 $ 38,888
</TABLE>
The following table provides information as to options granted to the Named
Executive Officers during 1999.
--------
/1/All options were granted on January 1, 1999 and were fully vested on grant.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
The following table provides information as to options exercised by the
Named Executive Officers during 1999. In addition, this table includes the
number of shares covered by both exercisable and unexercisable stock options as
of December 31, 1999. Also reported are the values of "in the money" options,
which represent the positive spread between the exercise price of outstanding
stock options and the year-end price.
<TABLE>
<CAPTION>
Value of
Unexercised
Number of In-the-Money
Unexercised Options/SARSs
Options/SARs at at
Shares Acquired on Fiscal Year- Fiscal Year-
Name Exercise (#) Value Realized ($) End(#) End($)1
---- ------------------ ------------------ --------------- ---------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
--------------- ---------------
<S> <C> <C> <C> <C>
John N. Finnerty........ 0 0 7,986/19,736 101,152/218,381
Stephen R. Brown........ 0 0 9,722/8,386 162,600/108,202
Vincent T. Palaia....... 0 0 17,088/1,174 329,816/4,994
Joseph L. Bellini, III.. 0 0 1,698/5,998 19,536/54,372
James J. Landy.......... 0 0 12,390/880 245,980/3,760
</TABLE>
--------
/1 /Based on a value per share of common stock of $32.00 at December 31, 1999,
based on the then most recent sale price of the common stock.
Retirement Plans
Executive officers participate in the Company's Employee Savings Plan and
the Company's Profit-sharing Plan. These defined contribution plans are
available to employees generally and are qualified, respectively, under Section
401(k) and 401(a) of the Internal Revenue Code of 1986.
Messrs. Finnerty, Palaia and Landy participate in the Company's 1995
Supplemental Retirement Plan, while Mr. Brown participates in the Company's
1997 Supplemental Retirement Plan. These plans are not qualified for tax
purposes and are available only to executive officers. Benefits under these
plans are unfunded. Pursuant to the 1995 Supplemental Retirement Plan,
participating executive officers are entitled to receive supplemental
retirement benefits for a period of 15 years payable on a monthly basis.
Supplemental benefits equal 75% of the executive officer's highest base salary
in any of the last 3 years of employment, less any retirement plan benefits
provided to him by the Bank. Pursuant to the 1997 Supplemental Retirement Plan,
a participating executive officer who retires is entitled to receive
supplemental retirement benefits for a period of
58
<PAGE>
15 years payable on a monthly basis. Supplemental benefits equal 60% of the
average of the highest five years' annual base compensation paid to the
executive during his last 10 years of employment, reduced by (1) the value of
his qualified plan account as of the date of retirement; (2) the value of his
401(k) matching benefit as of the date of retirement; (3) 50% of his primary
social security benefit; and (4) the value of any other retirement type
benefits provided to him by the Company and its subsidiaries.
The estimated annual benefits payable upon retirement at normal retirement
age to each of the participating Named Executive Officers under the
supplemental retirement plans are: $221,650 for Mr. Finnerty; $213,900 for Mr.
Brown, $156,950 for Mr. Palaia and $117,300 for Mr. Landy. The Company has
purchased life insurance to support its obligations under the supplemental
retirement plans.
Director Compensation
Each member of the Board of Directors who is not employed by the Company or
its subsidiaries is entitled to a director's fee based on the number of years
of service with the Board, the number of meetings attended and other factors.
The directors' fees paid in 1999 for service on the Board of Directors of the
Company and its subsidiaries were as follows: $52,500 for Mr. Griffin, $36,000
for Mr. Coogan, $3,000 for Mr. Holcombe, $42,000 for Mr. Martinelli, $36,000
for Mr. Poe, $36,000 for Mr. Pratt, $38,000 for Ms. Singer and $48,000 for Mr.
Thompson.
The Company permits directors to defer all or any portion of the directors'
fees owed to them.
Directors who are not full-time employees of the Company or its subsidiaries
participate in the Directors' Retirement Plan. This plan is designed to benefit
all outside directors who serve 5 or more years as a director. Benefits are
paid upon a director's retirement or resignation and are equal to a percentage
of the aggregate annual fees paid to the director during the 12 months prior to
the commencement of the benefit as determined by a vesting schedule based on
the number of years served as a director. Benefits are payable for a period of
up to 8 years after resignation or retirement, depending on the number of years
of service as a director. Benefits under the plan are not funded. The following
vesting schedule determines the annual benefit to directors:
<TABLE>
<CAPTION>
Number of Years Percentage of Director's Fees
as a Director Payable at Retirement Age
--------------- -----------------------------
<S> <C>
Less than 5
years 0%
5 years but less
than 6 5%
6 years but less
than 7 10%
7 years but less
than 8 20%
8 years but less
than 9 30%
9 years but less
than 10 40%
10 years but
less than 11 50%
11 years but
less than 12 60%
12 years but
less than 13 70%
13 years but
less than 14 80%
14 years but
less than 15 90%
15 years or more 100%
</TABLE>
Estimated annual benefits to each of the non-employee directors at normal
retirement age under the Directors' Retirement Plan are: $69,100 to Mr.
Griffin, $61,200 to Mr. Coogan, $136,600 to Mr. Holcombe, $31,500 to Mr.
Martinelli, $49,900 to Mr. Poe, $4,050 to Mr. Pratt, $8,200 to Ms. Singer and
$143,500 to Mr. Thompson.
Mr. Pratt serves as a consultant to the Bank on matters relating to new
business and business retention. The consulting contract called for Mr. Pratt
to make between 30 and 40 calls per month to the Bank's high income producing
customers or to customers who have the potential to attain this status. For
consulting services rendered in 1999, Mr. Pratt received a consulting fee of
$46,000.
59
<PAGE>
Directors of the Company are eligible to receive options under the Company's
1992 Stock Option Plan. In 1999, the following directors were granted non-
statutory options to purchase the following number of shares of the Company's
common stock under this plan:
<TABLE>
<S> <C> <C> <C>
Griffin 4,950 Pratt 2,750
Coogan 2,750 Singer 3,520
Martinelli 3,850 Thompson 4,400
Poe 2,750
</TABLE>
Each option was fully vested upon receipt and will expire on January 1,
2009, the tenth anniversary of the date of grant.
1992 Stock Option Plan
The Company's 1992 Stock Option Plan provides for the granting of (1) non-
statutory stock options (also referred to as non-qualified stock options) for
directors, consultants or advisors who are not employees of the Company and its
subsidiaries, and (2) incentive stock options to employees of the Company and
its subsidiaries.
As a general rule, optionees recognize ordinary income on the exercise of a
non-statutory stock option to the extent of the difference between the fair
market value on the date of exercise and the exercise price. Upon the sale of
stock acquired on exercise of the option, the optionee will recognize income
taxable as capital gains on any appreciation over the fair market value on the
date of exercise. By contrast, the exercise of an incentive stock option is not
a taxable event if certain statutory conditions are met, although the optionee
may incur alternative minimum tax liability. Upon the sale of stock acquired on
the exercise of an incentive stock option, the appreciated value over the
exercise price is taxable as capital gains. The Company does not recognize tax
deductible compensation expense on the exercise of an incentive stock option or
on the exercise of a non-statutory stock option granted to a person who is not
an employee or director of the Company or any of its subsidiaries.
The 1992 Stock Option Plan is administered by the Compensation Committee of
the Bank. The Compensation Committee has the sole discretion, subject to the
provisions of the plan, to select those to whom options under the plan will be
granted from among those eligible, the purchase price of the underlying stock,
the term and vesting provisions of each option, and the number of options to be
granted. The Compensation Committee has the authority to interpret and construe
the plan, and any such interpretation or construction of the provisions of the
plan or of any options granted under the plan is final and conclusive.
The plan authorizes the issuance of an aggregate of 950,000 shares of common
stock, of which approximately 505,000 shares are currently available for new
grants. If an option granted under the plan expires, terminates, or is
cancelled for any reason, the shares of stock underlying that option become
available again under the plan. No options may be exercised under the plan
after the tenth anniversary of the date of the grant of the option.
Payment of the exercise price of options granted under the plan must be made
in cash. Optionees have no rights as shareholders with respect to shares of
stock subject to options prior to the date of issuance of a certificate for
such shares. Prior to receiving any shares of stock, the optionee must enter
into a Stock Restriction Agreement with the Company.
In the event of a declaration of a stock dividend, or a reorganization,
merger, consolidation, acquisition, disposition, separation, recapitalization,
stock split, spin-off, combination or exchange of any shares of our common
stock or like event, the number or character of the shares subject to
outstanding options or the exercise price of any such option may be
appropriately adjusted as deemed appropriate by the Compensation Committee. The
number of shares authorized under the plan and issuable under each outstanding
stock option was increased proportionately upon the declaration of stock
dividends in 1999, 1998 and 1997.
60
<PAGE>
The Compensation Committee may at any time amend, suspend or discontinue the
plan. The Compensation Committee may not alter, amend, discontinue or revoke or
otherwise impair any outstanding options granted under the plan without written
consent of the optionee. The Compensation Committee may not increase the number
of shares reserved for options under the plan without shareholder approval.
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Loans to Officers and Directors
The Bank makes loans to the Company's executive officers and directors, and
businesses with which they are associated, in the ordinary course of business.
Such loans are made on the same terms and conditions, including interest rate
and collateral, as those prevailing at the same time for comparable
transactions with unrelated persons. None of the loans involve more than the
normal risk of collectibility or present other unfavorable features. The
aggregate amount outstanding for all such loans was $2,886,468 in 1999,
$2,446,652 in 1998 and $1,231,968 in 1997.
Stock Restriction Agreements
The Company has required all employees and directors who acquire shares of
common stock from the Company to enter into Stock Restriction Agreements that
give the Company a right of first refusal on any shares of common stock that
the shareholder wishes to transfer. Gifts to family members are not subject to
the Company's right of first refusal, but the donee must enter into a Stock
Restriction Agreement with the Company. Pursuant to the Stock Restriction
Agreements, the Company may, but is not required to, purchase all of the shares
offered upon the same terms and conditions as that offered by the prospective
purchaser. The table below sets forth the aggregate number of shares and
aggregate purchase price for shares purchased by the Company from executive
officers, directors and beneficial owners of 5 percent or more of the common
stock (considered together with members of their immediate family) pursuant to
Stock Purchase Agreements in 1999, 1998 and 1997. The table excludes sales to
the Company aggregating less than $60,000 per annum per executive officer,
director or beneficial owner.
<TABLE>
<CAPTION>
Stock Purchases by the Company
--------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
(shares/dollar amount) (shares/dollar amount) (shares/dollar amount)
<S> <C> <C> <C>
Finnerty................ 0 0 27,000/$810,000
Landy................... 2,200/$69,300 0 0
Griffin................. 4,076/$127,818 3,329/$105,660 4,656/$130,511
G. Holcombe............. 0 0 7,950/$230,550
Pratt................... 6,811/$185,918 5,185/$156,579 0
Thompson................ 14,546/$467,496 12,521/$396,140 7,485/$203,000
J. Abplanalp............ 0 0 7,250/$210,250
</TABLE>
61
<PAGE>
Loans to Five-Percent Beneficial Owners
The Bank makes loans to the beneficial owners of 5 percent or more of the
Company's common stock and the immediate family members of such persons in the
ordinary course of business. Such loans are made on the same terms and
conditions, including interest rate and collateral, as those prevailing at the
same time for comparable transactions with unrelated persons. None of the loans
involve more than the normal risk of collectibility or present other
unfavorable features. The dollar amount per individual borrower for 1999, 1998,
and 1997 is listed below:
<TABLE>
<CAPTION>
Borrower 1999 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C>
BMW Machinery Co., Inc........................ $4,096,733 $4,709,400 $2,416,537
J. Abplanalp.................................. 208,765 155,874 0
M. Holcombe................................... 222,824 193,148 0
W. Griffin.................................... 372,045 320,153 320,950
</TABLE>
Certain Other Related Party Transactions
Messrs. Griffin and Coogan are shareholders of the law firm of Griffin,
Coogan & Veneruso, P.C., which serves as the Company's general counsel.
Griffin, Coogan & Veneruso, P.C. received fees approximating $615,000 in 1999,
$307,500 in 1998 and $524,900 in 1997 for legal services performed on behalf of
the Company and its subsidiaries.
Mr. Thompson is the President and principal shareholder of Thompson Pension
Employee Plans, Inc., which has written life insurance policies supporting the
Company's obligations under the supplemental retirement plans for executive
officers. The total annual premium was $507,620 in 1999 and in 1998 and
$540,836 in 1997. Thompson Pension Employee Plans, Inc. also provides
consulting services in exchange for a $5,000 fee.
Mr. Martinelli is the President and principal shareholder of the Gazette
Press, Inc., which received fees approximating $119,800 in 1999, $84,500 in
1998 and $109,700 in 1997 in exchange for printing services provided to the
Company and its subsidiaries.
62
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the "beneficial ownership" (as that term is
defined in the rules of the Securities and Exchange Commission) of the common
stock as of March 1, 2000, by (a) each Named Executive Officer and member of
the Board of Directors, and (b) each other person known to be a beneficial
owner of more than five percent of the common stock and (c) all executive
officers and members of the Board of Directors as a group. Persons who hold
options that are exercisable within 60 days of March 1, 2000 are deemed to own,
beneficially, the shares of common stock that may be acquired on the exercise
of such options. Such shares are deemed outstanding for purposes of computing
the number of shares owned by the person holding the option, but not for any
other purpose.
<TABLE>
<CAPTION>
Number of Shares Percent of Outstanding
Name of Common Stock Shares of Common Stock
---- ---------------- ----------------------
<S> <C> <C>
BMW Machinery Co., Inc./1/ ..... 267,897 6.3%
John P. Abplanalp/2/ ........... 726,140 (/2/) 17.2
Marie A. Holcombe/3/ ........... 731,072 (/3/) 17.3
John N. Finnerty................ 75,419 (/4/) 1.8
Stephen R. Brown................ 22,090 (/5/) *
Vincent T. Palaia............... 42,360 (/6/) 1.0
Joseph L. Bellini, III.......... 7,729 (/7/) *
James J. Landy.................. 50,633 (/8/) 1.2
William E. Griffin/9/ .......... 589,224 (/9/) 13.9
James M. Coogan................. 80,073(/10/) 1.9
Gregory F. Holcombe/11/ ........ 731,072(/11/) 17.3
Angelo R. Martinelli ........... 76,378(/12/) 1.8
Ronald F. Poe................... 14,700(/13/) *
John A. Pratt, Jr............... 78,982(/14/) 1.9
Cecile D. Singer................ 25,224(/15/) *
Craig S. Thompson............... 199,166(/16/) 4.7
All directors and executive
officers as a group
(14 persons)................... 1,605,071(/17/) 37.9%
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
/1/The address for BMW Machinery Co., Inc. is P.O. Box 309, Yonkers, New York
10702.
/2/The address for John A. Abplanalp is 700 Nepperhan Avenue, Yonkers, New
York 10702. Includes 267,897 shares owned by BMW Machinery Co., Inc. (of
which Mr. Abplanalp is a principal shareholder); 404,568 shares held by the
R.H. Abplanalp Grantor Retained Annuity Trust of which John P. Abplanalp,
Marie A. Holcombe and William E. Griffin are co-trustees, and 25,156 shares
held in trusts for the benefit of the children of John P. Abplanalp or the
children of Gregory and Marie Holcombe (for which John P. Abplanalp serves
as trustee).
/3/The address for Marie A. Holcombe is 700 Nepperhan Avenue, Yonkers, New
York 10702. Mrs. Holcombe is the wife of Gregory F. Holcombe. Includes
267,897 shares owned by BMW Machinery Co., Inc.; 404,568 shares held by the
R.H. Abplanalp Grantor Retained Annuity Trust of which John P. Abplanalp,
Marie A. Holcombe and William E. Griffin are co-trustees, and 25,156 shares
held in trusts for the benefit of the children of Marie Holcombe or the
children of John Abplanalp (for which Marie A. Holcombe serves as trustee),
plus 532 shares held in a trust for the benefit of her children. Also
includes 2,500 shares which may be acquired by Mrs. Holcombe's husband,
Gregory F. Holcombe, upon the exercise of options.
/4/Includes 25,959 shares which may be acquired upon the exercise of options.
/5/Includes 21,930 shares which may be acquired upon the exercise of options
/6/Includes 24,023 shares which may be acquired upon the exercise of options.
/7/Includes 7,729 shares which may be acquired upon the exercise of options.
/8/Includes 19,181 shares which may be acquired upon the exercise of options.
63
<PAGE>
/9/The address for William E. Griffin is Griffin, Coogan & Veneruso, P.C., 51
Pondfield Road, Bronxville, NY 10708. Includes 404,568 shares held by R.H.
Abplanalp Grantor Retained Annuity Trust of which John P. Abplanalp, Marie
A. Holcombe and William E. Griffin are co-trustees. Also includes 11,475
shares which may be acquired upon the exercise of options.
/10/Includes 3,725 shares which may be acquired upon the exercise of options.
/11/The address for Gregory F. Holcombe is 700 Nepperhan Avenue, Yonkers, New
York 10702. Mr. Holcombe is the husband of Marie A. Holcombe. Includes
267,897 shares owned by BMW Machinery Co., Inc. (of which Mrs. Holcombe is a
principal shareholder); 404,568 shares held by the R.H. Abplanalp Grantor
Retained Annuity Trust of which John P. Abplanalp, Marie A. Holcombe and
William E. Griffin are co-trustees, and 25,156 shares held in trusts for the
benefit of the children of Marie A. Holcombe or the children of John
Abplanalp (for which Marie A. Holcombe serves as trustee), plus 532 shares
held in a trust for the benefit of her children. Beneficial ownership of all
these shares is attributed to Mr. Holcombe through his wife. The table also
includes 2,500 shares that may be acquired by Mr. Holcombe upon the exercise
of options.
/12/Includes 5,075 shares which may be acquired upon the exercise of options.
/13/Includes 3,725 shares which may be acquired upon the exercise of options.
/14/Includes 16,188 shares which may be acquired upon the exercise of options.
/15/Includes 4,610 shares which may be acquired upon the exercise of options.
/16/Includes 19,771 shares which may be acquired upon the exercise of options.
/17/Includes 165,921 shares which may be acquired on the exercise of options.
DESCRIPTION OF SECURITIES
The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of our capital stock contained in
our certificate of incorporation and bylaws.
Our authorized capital stock consists of 10,000,000 shares of common stock,
par value $.20 per share. As of March 1, 2000, there were 4,235,681 shares of
common stock issued and outstanding and there were outstanding options to
purchase an additional 403,642 shares of common stock. All outstanding shares
of stock are fully paid and nonassessable. An additional 505,000 shares of
common stock are available for issuance to employees, directors, consultants or
advisors pursuant to the Company's 1992 Stock Option Plan.
Voting
Each holder of common stock is entitled to one vote per share with respect
to all matters that are to be voted on by stockholders generally, including the
election of directors. A majority of the shares entitled to vote, present in
person or by proxy, constitutes a quorum at a meeting of shareholders, and if a
quorum exists, action on a matter is taken if authorized by a majority of the
votes cast, except as otherwise provided under New York law. Directors are
elected by a plurality of the votes cast.
Preemptive Rights and Redemption
The holders of common stock have no preemptive rights to purchase or
subscribe for any stock or other securities, and there are no conversion or
liquidation rights or redemption or sinking fund provisions with respect to the
stock.
Stock Restriction Agreements
Nearly all of the common stock that we have issued to employees or directors
has been issued pursuant to Stock Restriction Agreements. The Stock Restriction
Agreements provide, among other things, that we have a right of first refusal
in the event the shareholder wishes to sell or otherwise transfer his or her
shares, and that each certificate representing shares of our stock must bear a
legend that restricts the transfer of the stock under the rules of the
Securities Act of 1933 and the Stock Restriction Agreement.
64
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT............................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 and 1998
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999:
Consolidated Statements of Income...................................... F-3
Consolidated Statements of Comprehensive Income........................ F-4
Consolidated Balance Sheets............................................ F-5
Consolidated Statements of Changes in Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows.................................. F-7
Notes to Consolidated Financial Statements............................. F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2000 AND
DECEMBER 31, 1999 AND FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000
AND MARCH 31, 1999
Consolidated Statements of Income...................................... F-26
Consolidated Statements of Comprehensive Income........................ F-27
Consolidated Balance Sheets............................................ F-28
Consolidated Statements of Changes in Stockholders' Equity............. F-29
Consolidated Statements of Cash Flows.................................. F-30
Notes to Consolidated Financial Statements............................. F-31
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders
Hudson Valley Holding Corp.
We have audited the consolidated balance sheets of Hudson Valley Holding
Corp. and its subsidiary, Hudson Valley Bank, (collectively the "Company"), as
of December 31, 1999 and 1998 and the related consolidated statements of
income, comprehensive income, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Hudson Valley Holding Corp.
and its subsidiary at December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Stamford, Connecticut
January 24, 2000
F-2
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998 and 1997
Dollars in thousands, except per share amounts
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest Income:
Loans, including fees............................... $31,724 $26,644 $25,158
Securities:
Taxable........................................... 32,002 27,716 23,719
Exempt from Federal income taxes.................. 6,182 5,774 5,632
Federal funds sold.................................. 908 2,303 2,542
Deposits in banks................................... -- 8 802
------- ------- -------
Total interest income............................... 70,816 62,445 57,853
------- ------- -------
Interest Expense:
Deposits............................................ 17,446 17,723 16,339
Securities sold under repurchase agreements and
other short term borrowings........................ 7,221 6,933 7,668
Other borrowings.................................... 4,991 2,966 81
Note payable........................................ -- -- 242
------- ------- -------
Total interest expense.............................. 29,658 27,622 24,330
------- ------- -------
Net Interest Income................................. 41,158 34,823 33,523
Provision (credit) for loan losses.................. 600 (300) 600
------- ------- -------
Net interest income after provision (credit) for
loan losses........................................ 40,558 35,123 32,923
------- ------- -------
Non Interest Income:
Service charges..................................... 1,046 1,009 1,016
Realized gain (loss) on sales of securities, net.... 19 439 (104)
Other income........................................ 534 534 537
------- ------- -------
Total non interest income........................... 1,599 1,982 1,449
------- ------- -------
Non Interest Expense:
Salaries and employee benefits...................... 12,843 11,363 10,791
Occupancy........................................... 2,038 1,818 1,733
Professional services............................... 2,011 1,877 1,921
Equipment........................................... 1,875 1,529 1,214
Business development................................ 1,012 772 728
FDIC assessment..................................... 81 76 74
Other operating expenses............................ 3,649 3,849 3,315
------- ------- -------
Total non interest expense.......................... 23,509 21,284 19,776
------- ------- -------
Income Before Income Taxes.......................... 18,648 15,821 14,596
Income Taxes........................................ 4,644 3,567 3,516
------- ------- -------
Net Income.......................................... $14,004 $12,254 $11,080
======= ======= =======
Basic Earnings Per Common Share..................... $ 3.31 $ 2.92 $ 2.60
Diluted Earnings Per Common Share................... $ 3.24 $ 2.84 $ 2.55
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 1999, 1998 and 1997
Dollars in thousands
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net Income......................................... $ 14,004 $12,254 $11,080
-------- ------- -------
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities
available for sale arising during the year........ (29,036) (574) 2,845
Income tax effect.................................. 11,890 235 (1,165)
-------- ------- -------
(17,146) (339) 1,680
Unrealized holding gain as a result of
reclassification of securities from held for
investment to available for sale.................. -- 5,539 --
Income tax effect.................................. -- (2,268) --
-------- ------- -------
-- 3,271 --
Reclassification adjustment for net (gain) loss
realized on securities available for sale......... (19) (439) 104
Income tax effect.................................. 5 99 (25)
-------- ------- -------
(14) (340) 79
-------- ------- -------
Unrealized holding gain (loss) on securities, net.. (17,160) 2,592 1,759
Minimum pension liability adjustment............... 127 (14) (344)
Income tax effect.................................. (52) 6 141
-------- ------- -------
75 (8) (203)
-------- ------- -------
Other comprehensive income (loss).................. (17,085) 2,584 1,556
-------- ------- -------
Comprehensive Income (Loss)........................ $( 3,081) $14,838 $12,636
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
Dollars in thousands, except per share and share amounts
<TABLE>
<CAPTION>
1999 1998
ASSETS ---------- --------
<S> <C> <C>
Cash and due from banks................................. $ 26,185 $ 29,359
Federal funds sold...................................... 20,900 3,500
Securities available for sale, at estimated fair value
(amortized cost of $656,791 in 1999 and $558,375 in
1998).................................................. 634,973 565,616
Federal Home Loan Bank of New York (FHLB) stock......... 9,361 5,277
Loans (net of allowance for loan losses of $4,047 in
1999 and $3,103 in 1998)............................... 412,914 308,131
Accrued interest and other receivables.................. 9,556 8,029
Premises and equipment, net............................. 13,732 12,021
Other real estate owned................................. 2,193 2,102
Deferred income taxes................................... 12,175 677
Other assets............................................ 5,483 5,090
---------- --------
TOTAL ASSETS............................................ $1,147,472 $939,802
========== ========
LIABILITIES
Deposits:
Non interest-bearing.................................. $ 226,345 $209,824
Interest-bearing...................................... 528,501 417,473
---------- --------
Total deposits........................................ 754,846 627,297
Securities sold under repurchase agreements and other
short-term borrowings.................................. 219,484 148,147
Other borrowings........................................ 94,234 75,536
Accrued interest and other liabilities.................. 10,598 13,126
---------- --------
TOTAL LIABILITIES....................................... 1,079,162 864,106
---------- --------
Commitments and contingencies (Note 10)
STOCKHOLDERS' EQUITY
Common Stock, $0.20 par value; authorized 5,000,000
shares; outstanding 4,223,599 and 3,802,510 shares in
1999 and 1998, respectively............................ 1,011 915
Additional paid-in capital.............................. 87,011 72,898
Retained earnings....................................... 13,955 16,469
Accumulated other comprehensive income (loss)........... (13,584) 3,501
Treasury stock, at cost................................. (20,083) (18,087)
---------- --------
Total stockholders' equity.............................. 68,310 75,696
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $1,147,472 $939,802
========== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
Dollars in thousands, except share amounts
<TABLE>
<CAPTION>
Accumulated
Number of Additional Other
Shares Common Treasury Paid-In Retained Comprehensive
Outstanding Stock Stock Capital Earnings Income (Loss) Total
----------- ------ -------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 3,219,326 $ 755 $(11,853) $49,574 $19,109 $ (639) $56,946
Net income.............. 11,080 11,080
Exercise of stock
options................ 98,746 20 1,390 1,410
Purchase of treasury
stock.................. (194,174) (5,291) (5,291)
Sale of treasury stock.. 15,211 353 94 447
Stock dividend.......... 319,017 64 9,507 (9,571) --
Cash dividends.......... (2,399) (2,399)
Minimum pension
liability adjustment... (203) (203)
Tax benefit from
exercise of stock
options................ 1,072 1,072
Net unrealized gain on
securities available
for sale............... 1,759 1,759
--------- ------ -------- ------- ------- -------- -------
Balance at December 31,
1997................... 3,458,126 839 (16,791) 61,637 18,219 917 64,821
Net income.............. 12,254 12,254
Exercise of stock
options................ 39,133 7 684 691
Purchase of treasury
stock.................. (46,964) (1,456) (1,456)
Sale of treasury stock.. 6,896 160 57 217
Stock dividend.......... 345,319 69 10,462 (10,531) --
Cash dividends.......... (3,473) (3,473)
Minimum pension
liability adjustment... (8) (8)
Tax benefit from
exercise of stock
options................ 58 58
Net unrealized gain on
securities available
for sale............... 2,592 2,592
--------- ------ -------- ------- ------- -------- -------
Balance at December 31,
1998................... 3,802,510 915 (18,087) 72,898 16,469 3,501 75,696
Net income.............. 14,004 14,004
Exercise of stock
options................ 96,216 19 1,700 1,719
Purchase of treasury
stock.................. (76,239) (2,443) (2,443)
Sale of treasury stock.. 18,574 447 158 605
Stock dividend.......... 382,538 77 12,165 (12,242) --
Cash dividends.......... (4,276) (4,276)
Minimum pension
liability adjustment... 75 75
Tax benefit from
exercise of stock
options................ 90 90
Net unrealized loss on
securities available
for sale............... (17,160) (17,160)
--------- ------ -------- ------- ------- -------- -------
Balance at December 31,
1999................... 4,223,599 $1,011 $(20,083) $87,011 $13,955 $(13,584) $68,310
========= ====== ======== ======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
Dollars in thousands
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income....................................... $ 14,004 $ 12,254 $ 11,080
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (credit) for loan losses.............. 600 (300) 600
Valuation adjustment of other real estate
owned.......................................... -- 516 --
Depreciation and amortization................... 1,727 1,488 1,184
Realized (gain) loss on security transactions,
net............................................ (19) (439) 104
Amortization of premiums on securities, net..... 1,662 2,322 890
Realized gains on sale of loans held for sale,
net............................................ (46) -- (18)
Originations of loans held for sale............. (4,904) -- --
Proceeds from sale of loans held for sale....... 4,950 -- 1,511
Deferred taxes (benefit)........................ 351 (364) (796)
Increase in deferred loan fees.................. 473 14 214
Increase in accrued interest and other
receivables.................................... (1,527) (9) (631)
Increase in other assets........................ (393) (665) (423)
Increase (decrease) in accrued interest and
other liabilities.............................. (2,528) 2,473 (58)
Other changes, net.............................. (108) 68 757
-------- -------- --------
Net cash provided by operating activities........ 14,242 17,358 14,414
-------- -------- --------
Investing Activities:
Net (increase) decrease in short term
investments..................................... (17,400) 9,700 23,400
Increase in FHLB stock........................... (4,084) (2,227) (707)
Proceeds from maturities of securities available
for sale........................................ 136,186 176,564 189,714
Proceeds from maturities of securities held for
investment...................................... -- 41,726 33,264
Proceeds from sales of securities available for
sale............................................ -- 153,668 114,574
Purchases of securities available for sale....... (236,283) (410,979) (375,434)
Purchases of securities held for investment...... -- (40,392) (36,217)
Net increase in loans............................ (105,688) (44,021) (30,956)
Net purchases of premises and equipment.......... (3,438) (1,494) (1,938)
Proceeds from sales of other real estate owned... 102 430 53
-------- -------- --------
Net cash used in investing activities............ (230,605) (117,025) (84,247)
-------- -------- --------
Financing Activities:
Proceeds from issuance of common stock........... 1,719 691 1,410
Proceeds from sale of treasury stock............. 605 217 447
Net increase in deposits......................... 127,549 31,915 56,078
Cash dividends paid.............................. (4,276) (3,473) (2,399)
Payment on notes payable......................... -- -- (3,040)
Repayment of other borrowings.................... (13,500) -- --
Proceeds from other borrowings................... 32,198 74,948 --
Net increase in securities sold under repurchase
agreements and short term borrowings............ 71,337 5,372 9,206
Acquisition of treasury stock.................... (2,443) (1,456) (5,291)
-------- -------- --------
Net cash provided by financing activities........ 213,189 108,214 56,411
-------- -------- --------
Increase (decrease) in Cash and Due from Banks... (3,174) 8,547 (13,422)
Cash and due from banks, beginning of year....... 29,359 20,812 34,234
-------- -------- --------
Cash and due from banks, end of year............. $ 26,185 $ 29,359 $ 20,812
======== ======== ========
Supplemental Disclosures:
Interest paid.................................... $ 29,808 $ 27,103 $ 24,119
Income tax payments.............................. 6,903 1,800 3,909
Increase in other real estate owned due to
transfer of loans............................... -- 407 --
Change in unrealized gain (loss) on securities
available for sale--net of tax.................. (17,160) 2,592 1,759
Transfer of securities from held for investment
to available for sale........................... -- 140,762 --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share and share amounts
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations and Basis of Presentation--The consolidated
financial statements include the accounts of Hudson Valley Holding Corp. and
its wholly-owned subsidiary, Hudson Valley Bank (the "Bank"), (collectively the
"Company"). The Bank offers a broad range of lending and depository products to
businesses, individuals and government units through 12 branches and a business
center in Westchester County, New York, and one branch in Bronx County, New
York. All inter-company accounts are eliminated. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles. In preparing the consolidated 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 balance sheet and
income and expenses for the period. Actual results could differ significantly
from those estimates. An estimate that is particularly susceptible to
significant change in the near term relates to the determination of the
allowance for loan losses. In connection with the determination of the
allowance for loan losses, management utilizes the work of professional
appraisers for significant properties.
Securities--Securities are classified as either available for sale,
representing securities the Bank may sell in the ordinary course of business,
or as held for investment, representing securities the Bank has the ability and
positive intent to hold until maturity. Securities available for sale are
reported at fair value with unrealized gains and losses (net of tax) excluded
from operations and reported in other comprehensive income. Securities held for
investment are stated at amortized cost (specific identification). There were
no securities held for investment at December 31, 1999 and 1998. The
amortization of premiums and accretion of discounts is determined by using the
level yield method to the earlier of the call or maturity date. Securities are
not acquired for purposes of engaging in trading activities. Realized gains and
losses from sales of securities are determined using the specific
identification method.
Loans--Loans are reported at their outstanding principal balance, net of
charge-offs, and deferred loan origination fees and costs. Loan origination
fees and certain direct loan origination costs are deferred and recognized over
the life of the related loan or commitment as an adjustment to yield, or taken
directly into income when the related loan is sold or commitment expires.
Loans Held for Sale--Loans held for sale are valued at the lower of cost or
market, decreases in the carrying value, if any, are reported in earnings.
Realized gains or losses on sales of loans are reported in earnings in the
period the sale occurs. There were no loans held for sale at December 31, 1999
and 1998.
Interest Rate Contracts--The Company, from time to time, uses various
interest rate contracts such as forward rate agreements, interest rate swaps,
caps and floors, primarily as hedges against specific assets and liabilities.
Contracts accounted for as hedges must meet certain criteria, including the
following: the hedged item must expose the Company to interest rate risk; the
interest rate contract must reduce that exposure; and must have a high
correlation of change in fair value of the interest rate contract and change in
fair value of the item hedged. For contracts designated as hedges, gains or
losses are deferred and recognized as adjustments to interest income or expense
of the underlying assets or liabilities over the life of the contract. Net
payments on interest rate swaps designated as hedges are accounted for on the
accrual basis. Gains or losses resulting from early terminations of contracts
are deferred and amortized over the remaining term of the underlying assets or
liabilities. If the contracts do not meet the criteria for hedge accounting,
the contract is valued at its estimated fair value and any gain or loss is
recorded in the Statements of Consolidated Income. Any fees received or
disbursed which represent adjustments to the yield on interest rate contracts
are capitalized and amortized over the term of the interest rate contracts.
During 1999 and 1998 the Company had no forward rate agreements, no interest
rate swaps and no interest rate caps. At December 31, 1999 and 1998, the
Company had outstanding
F-8
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest rate floors with a notional amount of $50 million for each of the
years. The estimated fair value of the interest rate floors, determined based
on a market bid indication, was $21 and $425 at December 31, 1999 and 1998,
respectively. The fees paid in conjunction with the interest rate floors
aggregated $131 and are amortized over the term of the interest rate contracts.
Amortization expense totaled $26 and $15 in 1999 and 1998, respectively.
Allowance for Loan Losses--The Bank maintains an allowance for loan losses
to absorb losses inherent in the loan portfolio based on ongoing quarterly
assessments of the estimated losses. The Bank's methodology for assessing the
appropriateness of the allowance consists of several key components, which
include a specific allowance for identified problem loans, a formula allowance,
and an unallocated allowance. The specific allowance incorporates the results
of measuring impaired loans as provided in SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures." These accounting
standards prescribe the measurement methods, income recognition and disclosures
related to impaired loans.
The formula allowance is calculated by applying loss factors to outstanding
loans by type. Loss factors are based on historical loss experience. New loan
types, for which there has been no historical loss experience, as explained
further below, is one of the considerations in determining the appropriateness
of the unallocated allowance.
The appropriateness of the unallocated allowance is reviewed by management
based upon its evaluation of then-existing economic and business conditions
affecting the key lending areas of the Bank and other conditions, such as new
loan products, credit quality trends (including trends in nonperforming loans
expected to result from existing conditions), collateral values, loan volumes
and concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions were
believed to have had on the collectibility of the loan portfolio. Senior
management reviews these conditions quarterly. Management's evaluation of the
loss related to these conditions is reflected in the unallocated allowance. The
evaluation of the inherent loss with respect to these conditions is subject to
a higher degree of uncertainty because they are not identified with specific
credits or portfolio segments.
Actual losses can vary significantly from the estimated amounts. The Bank's
methodology permits adjustments to the allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the loan portfolio as of the evaluation date have changed.
Management believes the allowance for loan losses is the best estimate of
probable losses which have been incurred as of December 31, 1999. There is no
assurance that the Company will not be required to make future adjustments to
the allowance in response to changing economic conditions, particularly in the
Bank's service area, since the majority of the Bank's loans are collateralized
by real estate. In addition, various regulatory agencies, as an integral part
of the examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments at the time of their examination.
Impaired Loans--A loan is recognized as impaired when it is probable that
principal and/or interest are not collectible in accordance with the loan's
contractual terms. A loan is not deemed to be impaired if there is a short
delay in receipt of payment or if, during a longer period of delay, the Company
expects to collect all amounts due including interest accrued at the
contractual rate during the period of delay. Measurement of impairment can be
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent. This evaluation
is inherently subjective as it requires material estimates that may be
susceptible to
F-9
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
significant change. If the fair value of the impaired loan is less than the
related recorded amount, a specific valuation allowance is established within
the allowance for loan losses or a writedown is charged against the allowance
for loan losses if the impairment is considered to be permanent. Measurement of
impairment does not apply to large groups of smaller balance homogenous loans
that are collectively evaluated for impairment such as the Company's portfolios
of home equity loans, real estate mortgages, installment and other loans.
Loan Restructurings--Loan restructurings are renegotiated loans for which
concessions have been granted to the borrower that the Company would not have
otherwise granted. Restructured loans are returned to accrual status when said
loans have demonstrated performance, generally evidenced by six months of
payment performance in accordance with the restructured terms, or by the
presence of other significant factors.
Income Recognition on Loans--Interest on loans is accrued monthly. Net loan
origination and commitment fees are deferred and recognized as an adjustment of
yield over the lives of the related loans. Loans, including impaired loans, are
placed on a non-accrual status when management believes that interest or
principal on such loans may not be collected in the normal course of business.
When a loan is placed on non-accrual status, all interest previously accrued,
but not collected, is reversed against interest income. Interest received on
non-accrual loans generally is either applied against principal or reported as
interest income, in accordance with management's judgment as to the
collectability of principal. Loans can be returned to accruing status when they
become current as to principal and interest, demonstrate a period of
performance under the contractual terms, and when, in management's opinion,
they are estimated to be fully collectible.
Premises and Equipment--Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
generally 3 to 31.5 years. Leasehold improvements are amortized over the lesser
of the term of the lease or the estimated useful life of the asset.
Other Real Estate Owned--Real estate properties acquired through loan
foreclosure are recorded at the lower of cost or estimated fair value, net of
estimated selling costs, at time of foreclosure. Credit losses arising at the
time of foreclosure are charged against the allowance for loan losses.
Subsequent valuations are periodically performed by management and the carrying
value is adjusted by a charge to expense to reflect any subsequent declines in
the estimated fair value. Routine holding costs are charged to expense as
incurred. Any gains on dispositions of such properties reduce OREO expense.
Income Taxes--Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. 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 recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period the change is enacted.
Transfers and Servicing of Financial Assets--The Company follows the
provision of Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," in determining the 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.
Stock-Based Compensation--SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at
F-10
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) 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 the grant over the amount an employee must
pay to acquire the stock.
Earnings per Common Share--SFAS No. 128, "Earnings per Share," establishes
standards for computing and presenting earnings per share. The statement
requires disclosure of basic earnings per share (i.e. common stock equivalents
are not considered) and diluted earnings per share (i.e. common stock
equivalents are considered using the treasury stock method) on the face of the
statement of operations, along with a reconciliation of the numerator and
denominator of basic and diluted earnings per share. Basic earnings per share
are computed by dividing net income by the weighted average number of common
shares outstanding during the period. The computation of diluted earnings per
share is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares, consisting
solely of stock options, had been issued.
Weighted average common shares outstanding used to calculate basic and
diluted earnings per share were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares:
Basic....................................... 4,231,075 4,201,987 4,263,347
Effect of stock options..................... 95,168 112,078 86,711
Diluted..................................... 4,326,243 4,314,065 4,350,058
</TABLE>
In December 1999, 1998 and 1997, the Board of Directors of the Company
declared 10 percent stock dividends. Share amounts have been retroactively
restated to reflect the issuance of the additional shares.
Comprehensive Income--SFAS No. 130 "Reporting Comprehensive Income," became
effective January 1, 1998, and requires that all items that are components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income is
defined as the change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
Disclosures About Segments of an Enterprise and Related Information--SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
establishes standards for the way business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in subsequent
interim financial reports issued to shareholders. It also establishes standards
for related disclosure about products and services, geographic areas, and major
customers. The statement requires that a business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and assess performance.
The statement also requires that business enterprises report a measure of
segment profit or loss, certain specific revenue and expense items and segment
assets. It also requires that information be reported about revenues derived
from the enterprises' products or services, or about the countries in which the
enterprises earn revenues and holds assets, and about major customers,
regardless of whether that information is used in making operating decisions.
The Company has one operating segment, "Community Banking."
F-11
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pending Accounting Pronouncement--In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was amended in June 1999 by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133." SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivative instruments are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company does not believe that adoption of this
statement in January 2001 will have a material impact on its financial position
or results of operations.
Other--Certain 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
2 SECURITIES
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------
1999 1998
--------------------------------- -------------------------------------
Gross
Unrealized Gross Unrealized
Amortized -------------- Fair Amortized ------------------ Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ------ ------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Classified as Available
for Sale
U.S. Treasury and
government agencies.... $199,679 -- $11,843 $187,836 $136,505 $ 428 $ 325 $136,608
Mortgage-backed
securities............. 319,221 $ 173 9,526 309,868 302,438 2,293 474 304,257
Obligations of states
and political
subdivisions........... 133,733 1,133 2,001 132,865 118,537 4,993 69 123,461
Other debt securities... 3,079 3 190 2,892 400 3 -- 403
-------- ------ ------- -------- -------- --------- ------- --------
Total debt securities... 655,712 1,309 23,560 633,461 557,880 7,717 868 564,729
Equity securities....... 1,079 433 -- 1,512 495 392 -- 887
-------- ------ ------- -------- -------- --------- ------- --------
Total................... $656,791 $1,742 $23,560 $634,973 $558,375 $ 8,109 $ 868 $565,616
======== ====== ======= ======== ======== ========= ======= ========
</TABLE>
In December 1998, the Company transferred all securities classified as held
to maturity which had an amortized cost of $140,762 to securities classified as
available for sale. At the date of this transfer, these securities had an
unrealized gain of $5,539. This unrealized gain, net of tax, was recorded in
"Stockholders' Equity--Other Comprehensive Income," in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt or Equity Securities."
At December 31, 1999, securities having a stated value of approximately
$495,936 were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required or permitted by
law.
Gross gains of $19 were recorded in 1999 as a result of securities called.
There were no security sales during 1999. Gross gains of $619, and $687 and
gross losses of $180, and $791 were incurred on sales and/or redemption of
securities available for sale in 1998 and 1997, respectively. Applicable income
taxes (benefit) relating to such transactions were $5, $99 and ($25) in 1999,
1998 and 1997, respectively.
The contractual maturity of all debt securities held at December 31, 1999 is
shown below. Actual maturities may differ from contractual maturities because
some issuers have the right to call or prepay obligations with or without call
or prepayment penalties. Mortgage-backed securities which may have principal
prepayments are distributed to a maturity category based on estimated average
lives.
F-12
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Available for Sale
------------------
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Contractual Maturity
Within 1 year......................................... $ 60,296 $ 59,236
After 1 but within 5 years............................ 206,423 202,168
After 5 but within 10 years........................... 322,204 309,113
After 10 years........................................ 66,789 62,944
-------- --------
Total................................................. $655,712 $633,461
======== ========
</TABLE>
3 CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Bank has outstanding, at any time, a significant number of commitments
to extend credit and also provide financial guarantees to third parties. Those
arrangements are subject to strict credit control assessments. Guarantees
specify limits to the Bank's obligations. The amounts of those loan commitments
and guarantees are set out in the following table. Because many commitments and
almost all guarantees expire without being funded in whole or in part, the
contract amounts are not estimates of future cash flows.
<TABLE>
<CAPTION>
1999 1998
Contract Contract
Amount Amount
-------- --------
<S> <C> <C>
Credit commitments...................................... $103,163 $93,368
Guarantees written...................................... $ 4,433 $ 4,822
</TABLE>
The majority of loan commitments have terms up to one year, with either a
floating interest rate or contracted fixed interest rates of 7.5 percent to 9.5
percent. Guarantees written generally have terms up to one year.
Loan commitments and guarantees written have off-balance-sheet credit risk
because only origination fees and accruals for probable losses are recognized
in the balance sheet until the commitments are fulfilled or the guarantees
expire. Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of SFAS No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," collateral or other security would have no
value.
The Bank's policy is to require customers to provide collateral prior to the
disbursement of approved loans. For loans and financial guarantees, the Bank
usually retains a security interest in the property or products financed or
other collateral which provides repossession rights in the event of default by
the customer.
Concentrations of credit risk (whether on or off-balance-sheet) arising from
financial instruments exist in relation to certain groups of customers. A group
concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Bank
does not have a significant exposure to any individual customer or
counterparty. A geographic concentration arises because the Bank operates
principally in
F-13
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Westchester County and Bronx County, New York. Loans and credit commitments
collateralized by real estate are as follows:
<TABLE>
<CAPTION>
Residential Commercial
Property Property Total
----------- ---------- --------
<S> <C> <C> <C>
1999
Loans..................................... $119,609 $156,396 $276,005
Credit commitments........................ 19,556 26,021 45,577
-------- -------- --------
$139,165 $182,417 $321,582
======== ======== ========
1998
Loans..................................... $114,020 $123,708 $237,728
Credit commitments........................ 16,250 33,677 49,927
-------- -------- --------
$130,270 $157,385 $287,655
======== ======== ========
</TABLE>
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to have no value. The Bank
has experienced little difficulty in accessing collateral when required. The
amounts of credit risk shown, therefore, greatly exceed expected losses.
4 LOANS
The loan portfolio is comprised of the following:
<TABLE>
<CAPTION>
December 31
------------------
1999 1998
-------- --------
<S> <C> <C>
Real Estate:
Commercial................................................ $125,588 $111,397
Construction.............................................. 30,808 12,311
Residential............................................... 119,609 114,020
Commercial and industrial................................... 109,579 65,923
Individuals................................................. 9,280 5,801
Lease financing............................................. 23,543 2,755
-------- --------
Total....................................................... 418,407 312,207
Deferred loan fees.......................................... (1,446) (973)
Allowance for loan losses................................... (4,047) (3,103)
-------- --------
Loans, net.................................................. $412,914 $308,131
======== ========
</TABLE>
The Bank has established credit policies applicable to each type of lending
activity in which it engages. The Bank evaluates the credit worthiness of each
customer and extends credit based on credit history, ability to repay and
market value of collateral. The customers' credit worthiness is monitored on an
ongoing basis. Additional collateral is obtained when warranted. Real estate is
the primary form of collateral. Other important forms of collateral are bank
deposits and marketable securities. While collateral provides assurance as a
secondary source of repayment, the Bank ordinarily requires the primary source
of payment to be based on the borrower's ability to generate continuing cash
flows.
F-14
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
December 31
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year......................... $3,103 $3,533 $2,559
Add (deduct):
Provision (credit) for loan losses............... 600 (300) 600
Recoveries on loans previously charged-off....... 454 208 685
Charge-offs...................................... (110) (338) (311)
------ ------ ------
Balance, end of year............................... $4,047 $3,103 $3,533
====== ====== ======
</TABLE>
The recorded investment in impaired loans at December 31, 1999 was $2,999,
for which an allowance of $57 has been established. At December 31, 1998, the
recorded investment in impaired loans was $364, for which an allowance of $78
had been established. Generally, the fair value of these loans was determined
using the fair value of the underlying collateral of the loan.
The average investment in impaired loans during 1999, 1998 and 1997 was
$1,682, $322 and $733, respectively. During the years reported, no income was
recorded on impaired loans during the portion of the year that they were
impaired.
Loans which were restructured prior to adoption of SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," and non-accrual loans at December 31,
1999, 1998 and 1997 and related interest income are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
Non-Accrual Restructured Non-Accrual Restructured Non-Accrual Restructured
Loans Loans Loans Loans Loans Loans
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Amount.................. $3,855 $323 $633 $428 $1,580 $568
Interest income
recorded............... -- 34 -- 42 -- 66
Interest income that
would have been
recorded under the
original contract
terms.................. 507 17 84 20 280 123
</TABLE>
Non-accrual loans at December 31, 1999 and 1998 include $2,999 and $364 of
loans considered to be impaired under SFAS No. 114, respectively.
Loans made directly or indirectly to employees, directors or principal
shareholders were approximately $13,599 and $11,660 at December 31, 1999 and
1998, respectively. During 1999, new loans granted to these individuals and the
effects of changes in board member composition totaled $3,625 and payments
totaled $1,686.
F-15
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5 PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
December 31
---------------
1999 1998
------- -------
<S> <C> <C>
Land..................................................... $ 1,139 $ 1,139
Buildings................................................ 10,109 8,658
Leasehold improvements................................... 2,060 1,718
Furniture, fixtures and equipment........................ 10,479 8,915
Automobiles.............................................. 233 184
------- -------
Total.................................................... 24,020 20,614
Less accumulated depreciation and amortization........... 10,288 8,593
------- -------
Premises and equipment, net.............................. $13,732 $12,021
======= =======
</TABLE>
6 OTHER BORROWINGS
Borrowings with original maturities of one year or less totaled $219,484 and
$148,147 at December 31, 1999 and 1998, respectively. Such short-term
borrowings consisted of securities sold under agreements to repurchase and
borrowings from the Federal Home Loan Bank of New York (FHLB). Other borrowings
totaled $94,234 and $75,536 at December 31, 1999 and 1998, respectively,
consisting of borrowings from FHLB with stated maturities of ten years and 1 to
3 year call options.
Interest expense on all borrowings totaled $12,212, $9,899 and $7,749 in
1999, 1998 and 1997, respectively. The following table summarizes the average
balances, weighted average interest rates and the maximum month-end outstanding
amounts of securities sold under agreements to repurchase and FHLB borrowings
for each of the years:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Average balance:
Short-term................................. $147,502 $129,405 $142,438
Other Borrowings........................... 93,254 55,307 1,669
Weighted average interest rate:
Short-term................................. 4.9% 5.4% 5.4%
Other Borrowings........................... 5.4% 5.4% 4.9%
Maximum month-end outstanding amount:
Short-term................................. $219,484 $148,147 $164,548
Other Borrowings........................... 94,234 75,536 1,635
</TABLE>
In addition, at December 31, 1999, the Bank had available unused lines of
credit of $17 million from FHLB, $15 million from Manufacturers & Traders Trust
Company, $2 million from BankBoston and $60 million from Merrill Lynch, all of
which are subject to various terms and conditions.
F-16
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7 INCOME TAXES
A reconciliation of the income tax provision and the amount computed using
the federal statutory rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rate.. $ 6,340 34.0% $ 5,379 34.0% $ 4,963 34.0%
State income tax, net of
Federal benefit.............. 432 2.3 273 1.7 368 2.5
Tax-exempt interest income.... (1,865) (10.0) (1,675) (10.6) (1,914) (13.1)
Other......................... (263) (1.4) (410) (2.6) 99 0.7
------- ----- ------- ----- ------- -----
Provision for income taxes.... $ 4,644 24.9% $ 3,567 22.5% $ 3,516 24.1%
======= ===== ======= ===== ======= =====
</TABLE>
The components of the provision for income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended December
31
---------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal:
Current $3,734 $3,464 $3,905
Deferred.......................................... 255 (333) (757)
State:
Current........................................... 559 467 407
Deferred.......................................... 96 (31) (39)
------ ------ ------
Total............................................... $4,644 $3,567 $3,516
====== ====== ======
</TABLE>
The tax effect of temporary differences giving rise to the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
December 31, 1999 1998
----------------- ----------------
Asset Liability Asset Liability
------- --------- ------ ---------
<S> <C> <C> <C> <C>
Allowance for loan losses.................... $ 1,602 $1,215
Treasury securities.......................... $477 $ 242
Supplemental pension benefit................. 921 775
Minimum pension liability.................... 477 529
Deferred compensation........................ 633 624
Securities available for sale................ 8,934 2,965
Interest on non-accrual loans................ 294 524
Other real estate owned...................... -- -- 425
Depreciation................................. 204 204
Other........................................ 5 4
------- ---- ------ ------
$12,861 $686 $4,092 $3,415
======= ==== ====== ======
</TABLE>
8 STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Company and the Bank are 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 their financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
F-17
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
Management believes, as of December 31, 1999, that both the Company and the
Bank meet all capital adequacy requirements to which they are subject.
The following summarizes the capital requirements and capital position at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
Bank Only ------- ----- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (To Risk
Weighted Assets)....... $73,200 20.1% $29,087 8.0% $ 36,359 10.0%
Tier 1 Capital (To Risk
Weighted Assets)....... 70,097 19.3 14,544 4.0 21,815 6.0
Tier 1 Capital (To
Average Assets)........ 70,097 7.4 38,128 4.0 47,660 5.0
As of December 31, 1999:
Total Capital (To Risk
Weighted Assets)....... $83,477 16.3% $40,948 8.0% $ 51,185 10.0%
Tier 1 Capital (To Risk
Weighted Assets)....... 79,430 15.5 20,474 4.0 30,711 6.0
Tier 1 Capital (To
Average Assets)........ 79,430 7.1 44,668 4.0 55,834 5.0
</TABLE>
<TABLE>
<CAPTION>
Minimum For Capital
Actual Adequacy Purposes
------------- ---------------------
Amount Ratio Amount Ratio
Consolidated ------- ----- ----------- ---------
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (To Risk
Weighted Assets)....... $73,774 20.2% $ 29,158 8.0%
Tier 1 Capital (To Risk
Weighted Assets)....... 70,671 19.4 14,579 4.0
Tier 1 Capital (To
Average Assets)........ 70,671 7.4 38,159 4.0
As of December 31, 1999:
Total Capital (To Risk
Weighted Assets)....... $84,528 16.5% $ 41,002 8.0%
Tier 1 Capital (To Risk
Weighted Assets)....... 80,481 15.7 20,501 4.0
Tier 1 Capital (To
Average Assets)........ 80,481 7.2 44,701 4.0
</TABLE>
As of December 31, 1999, the most recent notification from the FDIC
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 total risk based, Tier 1 risk based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
Stock Dividend
In December 1999, 1998 and 1997, the Board of Directors of the Company
declared 10 percent stock dividends. Share and per share amounts have been
retroactively restated to reflect the issuance of the additional shares.
F-18
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
The Company has stock option plans that provide for the granting of options
to directors, certain officers, and to all eligible employees. Options to
purchase 262,779 shares of common stock were outstanding at December 31, 1999
under all plans. The stock options are exercisable at prices that approximate
the market value of the Company's stock at dates of grant. Certain options
become exercisable in up to five annual installments, commencing one year from
date of grant. Other options become exercisable in their entirety, upon
completion of 5 years of service. Options have a maximum duration of 10 years.
Stock option transactions under the Plans were as follows:
<TABLE>
<CAPTION>
Shares Weighted
Underlying Average Exercise
Options Price Per Share
Outstanding Options ---------- ----------------
<S> <C> <C>
As of January 1, 1997......................... 387,831 $12.09
Granted....................................... 69,824 25.74
Cancelled or expired.......................... (5,218) 21.59
Exercised..................................... (98,746) 14.30
------- ------
As of December 31, 1997....................... 353,691 14.28
Granted....................................... 39,730 30.12
Cancelled or expired.......................... (4,130) 23.20
Exercised..................................... (39,133) 18.19
------- ------
As of December 31, 1998....................... 350,158 15.71
Granted....................................... 68,069 30.68
Cancelled or expired.......................... (59,232) 19.29
Exercised..................................... (96,216) 17.71
------- ------
As of December 31, 1999....................... 262,779 $18.43
Exercisable as of December 31, 1999........... 203,031 $16.99
Available for future grant.................... 245,599
</TABLE>
The following table summarizes the range of exercise prices of the Company's
stock options outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
------------------
Remaining
Number of Life Exercise
Exercise Price Options (yrs) Price
---------------- --------- --------- --------
<S> <C> <C> <C> <C>
$8.66 to $12.15 78,147 3.7 $11.13
15.37 to 21.79 94,030 6.3 16.36
25.78 to 31.36 90,602 8.7 26.88
-------
$8.66 to $31.36 262,779 6.3 $18.43
Exercisable.................. $8.66 to $27.76 203,031 5.8 $16.99
Not Exercisable.............. $13.64 to $31.36 59,748 8.0 $23.33
</TABLE>
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to account for stock-based compensation plans
in accordance with APB No. 25, rather than adopt the accounting requirements of
SFAS No. 123. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the
F-19
<PAGE>
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net income
As reported..................................... $14,004 $12,254 $11,080
Pro forma....................................... 13,710 12,162 10,695
Basic earnings per share
As reported..................................... $ 3.31 $ 2.92 $ 2.60
Pro forma....................................... 3.24 2.89 2.51
Diluted earnings per share
As reported..................................... $ 3.24 $ 2.84 $ 2.55
Pro forma....................................... 3.17 2.82 2.46
</TABLE>
The fair value (present value of the estimated future benefit to the option
holder) of each option grant in 1999, 1998 and 1997 is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants in 1999, 1998 and 1997, respectively:
dividend yield of 3.4%, 3.3% and 0%; expected volatility of 12%, 9% and 18%;
risk-free interest rates of 6.42%, 4.65% and 5.75% and expected life of 6 years
for 1999 and 7 years for both 1998 and 1997. All option grants expire within 10
years of the date of grant. The weighted average fair value of options granted
during 1999, 1998 and 1997 was $6.54, $3.78 and $10.59, respectively.
9 BENEFIT PLANS
The Hudson Valley Bank Employees' Defined Contribution Pension Plan covers
substantially all employees. Pension costs accrued and charged to current
operations include 5 percent of each participant's earnings during the year.
Pension costs charged to other operating expenses (including pension costs for
directors) totaled approximately $522, $422 and $404 in 1999, 1998 and 1997,
respectively.
The Hudson Valley Bank Employees' Savings Plan covers substantially all
employees. The Bank matches 25 percent of employee contributions annually, up
to 4 percent of base salary. Savings Plan costs charged to expense totaled
approximately $56, $54 and $50 in 1999, 1998 and 1997, respectively.
Additional retirement benefits are provided to certain officers pursuant to
supplemental plans. Costs for the officers' supplemental pension plan totaled
approximately $640, $579 and $460 in 1999, 1998 and 1997, respectively. The
Bank records an additional minimum pension liability to the extent that its
accumulated pension benefit obligation exceeds the fair value of pension plan
assets and accrued pension liabilities. This additional minimum pension
liability is offset by an intangible asset, not to exceed prior service costs
of the pension plan. Amounts in excess of prior service costs are reflected as
a reduction in other comprehensive income net of related tax benefits.
F-20
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth the status of the Bank's plans as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year....... $ 4,371,694 $ 4,065,536
Service cost................................ 232,011 203,500
Interest cost............................... 297,939 276,475
Amendments.................................. 370,563 --
Actuarial (gain) loss....................... (183,596) 186,175
Benefits paid............................... (359,503) (359,992)
----------- -----------
Benefit obligation at end of year............. 4,729,108 4,371,694
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of
year......................................... -- --
Actual return on assets..................... -- --
Employer contributions...................... 359,503 359,992
Benefits paid............................... (359,503) (359,992)
----------- -----------
Fair value of plan assets at end of year...... -- --
----------- -----------
Funded status................................. (4,729,108) (4,371,694)
Unrecognized transition obligation............ 250,276 291,154
Unrecognized prior service cost............... 655,091 321,547
Unrecognized net loss......................... 1,376,808 1,714,157
----------- -----------
Accrued benefit cost.......................... $(2,446,933) $(2,044,836)
=========== ===========
Weighted average assumptions:
Discount rate................................. 7% 7%
Expected return on plan assets................ -- --
Rate of compensation increase................. 4% 4%
Components of net periodic benefit cost:
Service cost.................................. $ 232,011 $ 203,500
Interest cost................................. 297,939 276,475
Expected return on plan assets................ -- --
Amortization of transition obligation......... 40,878 40,878
Amortization of prior service cost............ 37,019 37,019
Amortization of net loss...................... 153,753 142,428
----------- -----------
Net periodic benefit cost..................... $ 761,600 $ 700,300
=========== ===========
</TABLE>
Set forth below is a summary of the amounts reflected in the Bank's balance
sheets as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Accrued benefit liability..................... $(4,271,230) $(4,030,559)
Intangible asset.............................. 657,738 694,757
Accumulated other comprehensive income (pre-
tax net reduction in equity)................. 1,166,559 1,290,966
----------- -----------
Accrued benefit cost.......................... $(2,446,933) $(2,044,836)
=========== ===========
</TABLE>
F-21
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10 COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
The Company is obligated under leases for certain of its branches and
equipment. Minimum rental commitments for bank premises and equipment under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000........................................................... $ 701
2001........................................................... 536
2002........................................................... 490
2003........................................................... 248
Thereafter..................................................... --
------
Total minimum future rentals .................................. $1,975
======
</TABLE>
Rent expense for premises and equipment was approximately $828, $737 and
$695 in 1999, 1998 and 1997, respectively. In the normal course of business,
there are various outstanding commitments and contingent liabilities which are
not reflected in the consolidated balance sheets. No losses are anticipated as
a result of these transactions.
In the ordinary course of business, the Company is party to various legal
proceedings, none of which, in the opinion of management, will have a material
effect on the Company's consolidated financial position or results of
operations.
At December 31,1999, the Company was a party to two interest rate floor
agreements, as more fully discussed in Note 1 to these consolidated financial
statements. These agreements are subject to the counterparties' ability to
perform in accordance with the terms of the agreements. The Company's risk of
loss is equal to the unamortized premium paid to enter into these agreements.
The unamortized premium related to these agreements at December 31, 1999 was
$90.
Cash Reserve Requirements
The Bank is required to maintain average reserve balances under the Federal
Reserve Act and Regulation D issued thereunder. Such reserves totaled
approximately $603 at December 31, 1999 and $583 at December 31, 1998.
Restrictions on Funds Transfers
There are various restrictions which limit the ability of a bank subsidiary
to transfer funds in the form of cash dividends, loans or advances to the
parent company. Under federal law, the approval of the primary regulator is
required if dividends declared by the Bank in any year exceed the net profits
of that year, as defined, combined with the retained net profits for the two
preceding years.
11 SEGMENT INFORMATION
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others. For example, commercial lending is dependent upon the ability of the
Bank to fund itself with retail deposits and other borrowings and to manage
interest rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.
F-22
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
General information required by SFAS No. 131 is disclosed in the
Consolidated Financial Statements and accompanying notes. The Company operates
only in the U.S. domestic market, primarily the counties of Westchester and
Bronx, New York. For the years ended December 31, 1999, 1998 and 1997, there is
no customer that accounted for more than 10% of the Company's revenue.
12 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107,"Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of the estimated fair value of certain financial
instruments. These estimated fair values as of December 31, 1999 and 1998 have
been determined using available market information and appropriate valuation
methodologies. Considerable judgment is required to interpret market data 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 had a material effect on these estimates of fair value.
<TABLE>
<CAPTION>
December 31
---------------------------------------
1999 1998
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In millions)
<S> <C> <C> <C> <C>
Assets:
Financial assets for which carrying
value approximates fair value......... $ 47.1 $ 47.1 $ 32.9 $ 32.9
Securities, FHLB stock and accrued
interest.............................. 672.6 650.8 568.8 576.0
Loans and accrued interest............. 415.2 417.2 309.9 314.8
Liabilities:
Deposits with no stated maturity and
accrued interest...................... $478.1 $478.1 $431.9 $431.9
Time deposits and accrued interest..... 278.5 277.8 197.4 197.6
Securities sold under repurchase
agreements and other short-term
borrowings and accrued interest....... 219.7 219.7 148.5 148.5
Other borrowings and accrued interest.. 94.9 94.3 76.1 74.9
</TABLE>
The estimated fair value of the indicated items was determined as follows:
Financial assets for which carrying value approximates fair value--The
estimated fair value approximates carrying amount because of the immediate
availability of these funds or based on the short maturities and current rates
for similar deposits. Cash and due from banks as well as Federal funds sold are
reported in this line item.
Securities, FHLB stock and accrued interest--The fair value was estimated
based on quoted market prices or dealer quotations. FHLB stock and accrued
interest are stated at their carrying amounts.
Loans and accrued interest--The fair value of loans was estimated by
discounting projected cash flows at the reporting date using current rates for
similar loans, reduced by specific and general loan loss allowances.
Additionally, under SFAS No. 114, all loans considered impaired are reported at
either the fair value of collateral or present value of expected future cash
flows. Accrued interest is stated at its carrying amount.
Deposits with no stated maturity and accrued interest--The estimated fair
value of deposits with no stated maturity and accrued interest, as applicable,
are considered to be equal to their carrying amounts.
Time deposits and accrued interest--The fair value of time deposits has been
estimated using current rates for similar deposits. Accrued interest is stated
at its carrying amount.
F-23
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Securities sold under repurchase agreements and other short-term borrowings
and accrued interest--The fair value of these instruments has been estimated
based on their short maturities, variable rates and current rates for similar
borrowings. Accrued interest is stated at its carrying amount.
Other borrowings and accrued interest--The fair value of callable FHLB
advances was estimated by discounting projected cash flows at the reporting
date using the rate applicable to the first call date option. Accrued interest
is stated at its carrying amount.
Off-Balance-Sheet Financial Instruments--Estimated fair value for the
Company's off-balance-sheet financial instruments are not material.
F-24
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13 CONDENSED FINANCIAL INFORMATION OF HUDSON VALLEY HOLDING CORP. (Parent
Company Only)
Condensed Balance Sheets
December 31, 1999 and 1998
Dollars in thousands
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Assets
Cash........................................................... $ 520 $ 236
Investment in subsidiary....................................... 67,001 74,891
Equity securities.............................................. 1,112 888
Other assets................................................... 26 5
------- -------
Total Assets................................................... $68,659 $76,020
======= =======
Liabilities and Stockholders' Equity
Other liabilities.............................................. $ 349 $ 324
Stockholders' equity........................................... 68,310 75,696
------- -------
Total Liabilities and Stockholders' Equity..................... $68,659 $76,020
======= =======
</TABLE>
--------------------------------------------------------------------------------
Condensed Statements of Income
For the years ended December 31, 1999, 1998 and 1997
Dollars in thousands
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Dividends from the Bank............................... $ 4,900 $ 4,600 $ 7,540
Dividends from equity securities...................... 26 18 12
Interest expense...................................... -- -- 242
Other income.......................................... 7 -- 604
Operating expenses.................................... 67 83 239
------- ------- -------
Income before equity in undistributed earnings in the
Bank................................................. 4,866 4,535 7,675
Equity in undistributed earnings of the Bank.......... 9,138 7,719 3,405
------- ------- -------
Net Income............................................ $14,004 $12,254 $11,080
======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
Condensed Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
Dollars in thousands
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net income......................................... $14,004 $12,254 $11,080
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of the Bank..... (9,138) (7,719) (3,405)
Increase (decrease) in other liabilities......... 12 (303) 356
(Increase) decrease in other assets.............. (21) 2 (7)
Other changes, net............................... -- -- 173
------- ------- -------
Net cash provided by operating activities.......... 4,857 4,234 8,197
------- ------- -------
Investing Activities:
Purchase of equity securities...................... (184) -- --
------- ------- -------
Financing Activities:
Payment on notes payable........................... -- -- (3,040)
Proceeds from issuance of common stock and sale of
treasury stock.................................... 2,324 908 1,857
Acquisition of treasury stock...................... (2,443) (1,456) (5,291)
Cash dividends paid................................ (4,270) (3,461) (2,399)
------- ------- -------
Net cash used in financing activities.............. (4,389) (4,009) (8,873)
------- ------- -------
Increase (decrease) in Cash and Due from Banks..... 284 225 (676)
Cash and due from banks, beginning of year......... 236 11 687
------- ------- -------
Cash and due from banks, end of year............... $ 520 $ 236 $ 11
======= ======= =======
</TABLE>
F-25
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Dollars in thousands, except per share amounts
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-------------
2000 1999
------ ------
<S> <C> <C>
Interest Income:
Loans, including fees........................................... $9,518 $6,940
Securities:
Taxable....................................................... 9,127 7,053
Exempt from Federal income taxes.............................. 1,658 1,513
Federal funds sold.............................................. 152 151
------ ------
Total interest income........................................... 20,455 15,657
------ ------
Interest Expense:
Deposits........................................................ 5,244 3,730
Securities sold under repurchase agreements and other short term
borrowings..................................................... 2,873 1,651
Other borrowings................................................ 1,116 1,062
------ ------
Total interest expense.......................................... 9,233 6,443
------ ------
Net Interest Income............................................. 11,222 9,214
Provision for loan losses....................................... 350 225
------ ------
Net interest income after provision for loan losses............. 10,872 8,989
------ ------
Non Interest Income:
Service charges................................................. 277 236
Other income.................................................... 349 137
------ ------
Total non interest income....................................... 626 373
------ ------
Non Interest Expense:
Salaries and employees benefits................................. 3,499 2,937
Occupancy....................................................... 549 488
Professional services........................................... 618 468
Equipment....................................................... 443 430
Business development............................................ 238 204
FDIC assessment................................................. 42 21
Other operating expenses........................................ 947 883
------ ------
Total non interest expense...................................... 6,336 5,431
------ ------
Income Before Income Taxes...................................... 5,162 3,931
Income Taxes.................................................... 1,368 963
------ ------
Net Income...................................................... $3,794 $2,968
====== ======
Basic Earnings Per Common Share................................. $ 0.89 $ 0.71
Diluted Earnings Per Common Share............................... $ 0.88 $ 0.69
</TABLE>
See notes to consolidated financial statements
F-26
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Dollars in thousands
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
--------- ---------
<S> <C> <C>
Net Income................................................ $ 3,794 $ 2,968
-------- ---------
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available
for sale arising during the period..................... 1,346 (2,916)
Income tax effect....................................... (551) 1,194
-------- ---------
Other comprehensive income (loss)......................... 795 (1,722)
-------- ---------
Comprehensive Income...................................... $ 4,589 $ 1,246
======== =========
</TABLE>
See notes to consolidated financial statements
F-27
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except per share and share amounts
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 23,750 $ 26,185
Federal funds sold.................................... 6,500 20,900
Securities available for sale, at estimated fair value
(amortized cost of $670,283 in 2000 and $656,791 in
1999)................................................ 648,887 634,973
Federal Home Loan Bank of New York (FHLB) Stock....... 9,461 9,361
Loans (net of allowance for loan losses of $4,397 in
2000 and $4,047 in 1999)............................. 423,642 412,914
Accrued interest and other receivables................ 10,939 9,556
Premises and equipment, net........................... 13,466 13,732
Other real estate owned............................... 2,172 2,193
Deferred income taxes................................. 12,547 12,175
Other assets.......................................... 6,017 5,483
---------- ----------
TOTAL ASSETS.......................................... $1,157,381 $1,147,472
========== ==========
LIABILITIES
Deposits:
Non interest-bearing................................ $ 236,961 $ 226,345
Interest-bearing.................................... 553,551 528,501
---------- ----------
Total deposits...................................... 790,512 754,846
Securities sold under repurchase agreements and other
short-term borrowings................................ 204,877 219,484
Other borrowings...................................... 77,456 94,234
Accrued interest and other liabilities................ 12,602 10,598
---------- ----------
TOTAL LIABILITIES..................................... 1,085,447 1,079,162
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $0.20 par value; authorized 5,000,000
shares; outstanding 4,241,969 and 4,223,599 shares in
2000 and 1999, respectively.......................... 1,017 1,011
Additional paid-in-capital............................ 87,598 87,011
Retained earnings..................................... 16,521 13,955
Accumulated other comprehensive loss.................. (12,789) (13,584)
Treasury stock, at cost............................... (20,413) (20,083)
---------- ----------
Total stockholders' equity............................ 71,934 68,310
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $1,157,381 $1,147,472
========== ==========
</TABLE>
See notes to consolidated financial statements
F-28
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Three Months Ended March 31, 2000 and 1999
Dollars in thousands, except share amounts
<TABLE>
<CAPTION>
Accumulated
Number of Additional Other
Shares Common Treasury Paid-in Retained Comprehensive
Outstanding Stock Stock Capital Earnings Income (Loss) Total
----------- ------ -------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
2000................... 4,223,599 $1,011 $(20,083) $87,011 $13,955 $(13,584) $68,310
Net income.............. 3,794 3,794
Exercise of stock
options................ 28,435 6 580 586
Purchase of treasury
stock.................. (11,088) (355) (355)
Sale of treasury stock.. 1,023 25 7 32
Cash dividend........... (1,228) (1,228)
Net unrealized gain on
securities available
for sale............... 795 795
--------- ------ -------- ------- ------- -------- -------
Balance at March 31,
2000................... 4,241,969 $1,017 $(20,413) $87,598 $16,521 $(12,789) $71,934
========= ====== ======== ======= ======= ======== =======
<CAPTION>
Accumulated
Number of Additional Other
Shares Common Treasury Paid-in Retained Comprehensive
Outstanding Stock Stock Capital Earnings Income (Loss) Total
----------- ------ -------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1999................... 3,802,510 $ 915 $(18,087) $72,898 $16,469 $ 3,501 $75,696
Net income.............. 2,968 2,968
Exercise of stock
options................ 26,901 6 453 459
Purchase of treasury
stock.................. (33,798) (1,036) (1,036)
Sale of treasury stock.. 514 12 4 16
Cash dividend........... (949) (949)
Net unrealized gain on
securities available
for sale............... (1,722) (1,722)
--------- ------ -------- ------- ------- -------- -------
Balance at March 31,
1999................... 3,796,127 $ 921 $(19,111) $73,355 $18,488 $ 1,779 $75,432
========= ====== ======== ======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements
F-29
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Dollars in thousands
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
2000 1999
------- --------
<S> <C> <C>
Operating Activities:
Net income $ 3,794 $ 2,968
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................ 350 225
Depreciation and amortization............................ 431 397
Amortization of premiums on securities, net.............. 74 667
Increase (decrease) in deferred loan fees................ 62 (74)
Increase in accrued interest and other receivables....... (1,383) (1,047)
(Increase) decrease in other assets...................... (534) 45
Increase (decrease) in accrued interest and other
liabilities............................................. 2,004 (2,035)
Other changes, net....................................... (28) (160)
------- --------
Net cash provided by operating activities.................. 4,770 986
------- --------
Investing Activities:
Net (increase) decrease in short term investments.......... 14,400 (6,000)
Increase in FHLB stock..................................... (100) (1,249)
Proceeds from maturities of securities available for sale.. 14,030 52,945
Purchases of securities available for sale................. (27,596) (108,245)
Net increase in loans...................................... (11,090) (15,670)
Net purchases of premises and equipment.................... (165) (1,492)
------- --------
Net cash used in investing activities...................... (10,521) (79,711)
------- --------
Financing Activities:
Proceeds from issuance of common stock..................... 586 459
Proceeds from sale of treasury stock....................... 32 16
Net increase in deposits................................... 35,666 67,887
Cash dividend paid......................................... (1,228) (949)
Repayment of other borrowings.............................. (10,500) --
Proceeds from other borrowings............................. -- 18,750
Net decrease in securities sold under repurchase agreements
and short term borrowings................................. (20,885) (12,088)
Acquisition of treasury stock.............................. (355) (1,036)
------- --------
Net cash provided by financing activities.................. 3,316 73,039
------- --------
Decrease in cash and due from banks........................ (2,435) (5,686)
Cash and due from banks, beginning of period............... 26,185 29,359
------- --------
Cash and due from banks, end of period..................... $23,750 $ 23,673
======= ========
Supplemental Disclosures:
Interest paid.............................................. $ 8,809 $ 6,381
Income tax payments........................................ -- 2,238
Change in unrealized gain (loss) on securities available
for sale-net of tax....................................... 795 (1,722)
</TABLE>
See notes to consolidated financial statements
F-30
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <S>
Amended and Restated Certificate of Incorporation of Hudson Valley
3.1 Holding Corp.
3.2 By-Laws of Hudson Valley Holding Corp.
3.3 Specimen of Common Stock Certificate
4.1 Specimen Stock Restriction Agreement Between the Company and a
Shareholder Granted Stock Options
4.2 Specimen Stock Restriction Agreement Between the Company and a
Shareholder who Acquired Such Shares from a Shareholder Subject to the
Agreement
10.1 Hudson Valley Bank Directors' Retirement Plan*
10.2 Hudson Valley Bank Restated and Amended Supplemental Retirement Plan,
effective December 1, 1995*
10.3 Hudson Valley Bank Supplemental Retirement Plan of 1997*
10.4 1992 Stock Option Plan*
10.5 Specimen Non-Statutory Stock Option Agreement*
10.6 Specimen Incentive Stock Option Agreement*
Consulting Agreement Between the Company and Director John A. Pratt
10.7 Jr.*
11 Statements re: Computation of Earnings Per Share
21 Subsidiaries of the Company
27 Financial Data Schedule
</TABLE>
--------
* Management compensation plan
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused Amendment No. 2 to this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
HUDSON VALLEY HOLDING CORP.
(Registrant)
/s/ Stephen R. Brown
By: _________________________________
Name: Stephen R. Brown
Title: Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
July 18, 2000
