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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10
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.................................................. 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Market Price and Dividend Policy......................................... 41
Management............................................................... 42
Executive Compensation................................................... 45
Certain Relationships and Related Transactions........................... 49
Security Ownership of Certain Beneficial Owners and Management........... 51
Description of Securities................................................ 52
Indemnification of Directors and Officers................................ 53
Where to Find More Information........................................... 53
Recent Sales of Unregistered Securities.................................. 54
Index to Consolidated Financial Statements............................... F-1
Consolidated Financial Statements........................................ F-2
Index to Exhibits
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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.
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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.
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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.
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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.
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FORWARD-LOOKING STATEMENTS
This Registration Statement on Form 10 contains forward-looking statements.
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. We are not under any duty to update any
of the forward-looking statements after the date of this Registration Statement
on Form 10 to conform these statements to actual results, unless we are
required to by law.
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 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 Bank offers a wide range of commercial banking services, including
checking accounts, checking with interest accounts, money market accounts,
savings accounts (passbook and statement), certificates of deposit, retail
repurchase agreements, retirement accounts, investment management and trust
services, safe deposit facilities, lockbox services and other business and
consumer-oriented financial services. Loan products include business,
commercial real estate, construction, residential, home equity and second
mortgages, consumer loans, municipal financings, community development loans
and letters of credit. The Bank is an approved Small Business Administration
(SBA) lender and offers a variety of SBA products.
Of the $418.4 million of loans outstanding at December 31, 1999, 30 percent
were commercial real estate loans, 29 percent were residential real estate
loans, and 7 percent were construction and land development loans. The largest
percentage of loans other than real estate loans were loans to commercial and
industrial borrowers, while consumer loans (not secured by real estate)
constituted only 8 percent of the total loans outstanding at December 31, 1999.
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
5
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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 lending policies of the Bank are designed to correspond with its
strategy of being a community-oriented bank. The typical loan customer is a
small or medium-sized business, professional, developer, contractor or not-for-
profit organization who has a deposit relationship. The Bank's lending policies
set forth accountability for lending functions, underwriting, credit and
documentation procedures.
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. The Bank has
established relationships with other companies, including financial
institutions, that offer specific products, technology or services which
enhance the Bank's products and services. Such relationships include providing
the Bank and its customers specific technology, operating capabilities and loan
participations.
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 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.
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.
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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.
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.
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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 make it possible for entities engaged in
various 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.
The Company is a legal entity separate and distinct from its subsidiary. The
ability of holders of debt and equity securities of the Company to benefit from
distribution of assets from any subsidiary 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.
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.
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."
8
<PAGE>
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.
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
9
<PAGE>
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
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.
10
<PAGE>
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.
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.
11
<PAGE>
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.
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
12
<PAGE>
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 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.
13
<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 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>
Year ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(000's except share data)
<S> <C> <C> <C> <C> <C>
Operating Results:
Total interest income... $ 70,816 $ 62,445 $ 57,853 $ 47,434 $ 39,302
Total interest expense.. 29,658 27,622 24,330 18,111 12,629
---------- ---------- ---------- ---------- ----------
Net interest income..... 41,158 34,823 33,523 29,323 26,673
Provision (credit) for
loan losses............ 600 (300) 600 (1,258) 125
Income before income
taxes.................. 18,648 15,821 14,596 14,023 11,890
Net income.............. 14,004 12,254 11,080 9,946 8,671
Basic earnings per
common share........... 3.31 2.92 2.60 2.30 2.04
Diluted earning per
common share........... 3.24 2.84 2.55 2.26 1.96
Weighted average shares
outstanding............ 4,231,075 4,201,987 4,263,347 4,321,360 4,255,384
Adjusted weighted
average shares
outstanding............ 4,326,243 4,314,065 4,350,058 4,395,782 4,416,160
Cash dividends per
common share........... 1.02 .82 0.56 0.48 --
<CAPTION>
December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Financial Position:
Securities.............. $ 634,973 $ 565,616 $ 483,698 $ 407,627 $ 295,191
Loans, net.............. 412,914 308,131 264,254 235,641 212,507
Total assets............ 1,147,472 939,802 814,219 744,158 573,895
Deposits................ 754,846 627,297 595,382 539,304 410,629
Borrowings.............. 313,718 223,683 143,363 137,197 104,340
Stockholders' equity.... 68,310 75,696 64,821 56,946 52,140
</TABLE>
14
<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 consolidated results of
operations for each of the three years in the period ended December 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
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.
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.
15
<PAGE>
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.
16
<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.
17
<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
18
<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>
19
<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.
20
<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.
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.
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.
21
<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
======== ====== ======= ========
1998 (000's)
<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
======== ====== ======= ========
1997 (000's)
<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>
22
<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.
23
<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.
24
<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
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
. 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>
25
<PAGE>
Real estate collateralized loans comprised of interim and permanent
commercial mortgages, construction mortgages and residential mortgages
represent 66.0 percent and 76.1 percent of total gross loans at December 31,
1999 and 1998, respectively. 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.
During 1998, the Company began participating in lease financing of
automobiles which are originated by a third party. The Company had total
outstandings of $23.5 million and $2.8 million, at December 31, 1999 and 1998,
respectively. The Company believes that the 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.
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.
26
<PAGE>
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.
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.
27
<PAGE>
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, 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.
28
<PAGE>
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................ (11) (70) (55) (18) (322)
Commercial and industrial.. (85) (250) (208) (552) (433)
Other...................... (14) (18) (48) (95) (25)
Recoveries:
Real estate................ 381 71 499 45 350
Commercial and industrial.. 73 135 161 236 71
Other...................... -- 2 -- 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>
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
Amount of Loan Loans in each Amount of Loan Loans in 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>
One to four family...... $ 167 $ 99,268 23.73% $ 148 $ 97,145 31.11%
Multi-family............ -- 20,341 4.86 -- 16,875 5.41
Commercial real estate.. 57 125,588 30.02 257 111,397 35.68
Construction and
development............ -- 30,808 7.36 -- 12,311 3.94
Consumer................ 237 32,823 7.84 57 8,556 2.74
Commercial business..... 463 109,579 26.19 359 65,923 21.12
Unallocated............. 3,123 -- -- 2,282 -- --
------ -------- ------ ------ -------- ------
Total................... $4,047 $418,407 100.00% $3,103 $312,207 100.00%
====== ======== ====== ====== ======== ======
</TABLE>
(continued on next page)
29
<PAGE>
(continued)
<TABLE>
<CAPTION>
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>
One to four family...... $ 140 $ 78,136 29.07% $ 121 $ 70,546 29.71% $ 291 $ 68,128 31.37%
Multi-family............ -- 16,554 6.16 -- 11,952 5.03 -- 10,179 4.69
Commercial real estate.. 316 107,277 39.92 537 85,091 35.84 -- 65,717 30.26
Construction and
development............ -- 5,197 1.94 50 6,313 2.66 57 7,183 3.31
Consumer................ 78 5,620 2.09 108 6,814 2.87 80 4,978 2.29
Commercial business..... 302 55,962 20.82 365 56,736 23.89 954 60,981 28.08
Unallocated............. 2,697 -- -- 1,378 -- -- 2,800 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total................... $3,533 $268,746 100.00% $2,559 $237,452 100.00% $4,182 $217,166 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
</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 at December 31, 1999,
appropriately reflects the risk elements inherent in the total loan portfolio
at that time and is considered adequate to absorb potential losses. 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."
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.
30
<PAGE>
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.
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.
31
<PAGE>
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.
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>
32
<PAGE>
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.
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>
33
<PAGE>
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.
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.
34
<PAGE>
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
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
35
<PAGE>
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.
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
36
<PAGE>
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>
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.
37
<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% -- --
--------- ---------- --------- --------- -------- ---------- ----------
December 31, 1998
<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>
38
<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.
39
<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>
40
<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 regularly purchases 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.
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."
41
<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.
42
<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
43
<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.
44
<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 $1,349 in employer matching contributions to the
401(k) plan.
45
<PAGE>
Option/Stock Appreciation Rights Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
-------------------------------------------------- ----------------
Number of Percent of Total
Securities Options/SARs Exercise
Underlying granted to or Base
Options/SARs Employees in Price Expiration
Name Granted(#)/1/ Fiscal Year ($/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 46
<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.
47
<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>
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.
48
<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>
49
<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.
50
<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.
51
<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.
52
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation authorizes us to indemnify each of our
directors and officers who is made, or threatened to be made, a party to any
action or proceeding, whether civil or criminal, because he or she is our
director or officer, including any action in which our director or officer
served in any capacity at a different entity at our request. This
indemnification is available so long as the director or officer acted in good
faith for a purpose which he or she reasonably believed to be in our best
interests (or in the case in which the director or officer is serving at a
different entity, not opposed to our best interests). In addition, for criminal
actions or proceedings, the director or officer had to have had no reasonable
cause to believe his or her conduct was unlawful.
We must provide such indemnification if the director or officer is made, or
threatened to be made, a party to any proceeding by or in the right of the
Company if the director or officer acted in good faith for a purpose for which
he or she reasonably believed to be in the Company's best interests (or, in the
case in which the director or officer was acting on behalf of another entity,
not opposed to the Company's best interests). Indemnification is not available
unless a court determines that, in view of all of the circumstances, the person
is fairly and reasonably entitled to such indemnity.
Under our certificate of incorporation, no director may be held personally
liable to us or our shareholders for damages for any breach of duty while
acting as a director, unless such breach of duty is found by a court or other
final adjudication to have been committed in bad faith or involved intentional
misconduct or a knowing violation of law, or such director gained a financial
profit or other advantage to which such director was not legally entitled, or
such director's acts violated Section 719 of the New York Business Corporation
Law.
The indemnification rights described above are not exclusive of other rights
to which a person seeking indemnification may otherwise be entitled under
current or future laws or by agreement with us.
WHERE TO FIND MORE INFORMATION
We furnish to our shareholders our annual reports containing consolidated
financial statements audited by our independent auditors and our semi-annual
report containing unaudited consolidated financial statements.
Any forms we are required to file with the Securities and Exchange
Commission, (the "SEC") as well as our annual reports, including exhibits,
schedules and amendments thereto, may be inspected and copied at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's Regional
Offices located at Suite 1400, 500 West Madison Street, Chicago, Illinois
60661, and Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of these materials may be obtained from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
You may call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference room. The SEC also maintains a world wide Web site
(http:www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants such as us which file electronically
with the SEC. This Registration Statement on Form 10, including all exhibits
hereto and amendments hereof, is available on that Web site.
53
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Company during the
past three years involving sales of the Company's securities that were not
registered under the Securities Act of 1933:
The Company has issued stock option grants to directors, officers and
employees under various stock option plans. The Company has issued its
unregistered common stock as these stock options were exercised by the option
holders. The following table summarizes the unregistered common stock sold by
the Company during the past three years resulting from the exercise of stock
options:
<TABLE>
<CAPTION>
Number of Shares Aggregate Sale
Sold Proceeds
---------------- --------------
<S> <C> <C>
1999......................................... 96,216 $1,719,492
1998......................................... 39,133 691,430
1997......................................... 98,746 1,409,721
The Company has sold treasury shares at various times during the past three
years. These shares represent the Company's unregistered common stock which it
had previously reacquired. The following table summarizes the sale of treasury
stock during the past three years:
<CAPTION>
Number of Shares Aggregate Sale
Sold Proceeds
---------------- --------------
<S> <C> <C>
1999......................................... 18,574 $ 604,852
1998......................................... 6,896 216,585
1997......................................... 15,211 446,830
</TABLE>
Pursuant to its 1992 Stock Option Plan, the Company granted stock options
during the past three years as set forth below (each option entitled the holder
to acquire one share of common stock):
<TABLE>
<CAPTION>
Aggregate Options Weighted Average
Granted Exercise Price Exercise Price
----------------- ---------------- ----------------
<S> <C> <C> <C>
1999..................... 68,069 $30.50 -- $34.50 $30.68
1998..................... 39,730 $30.00 -- $32.50 $30.12
1997..................... 69,824 $24.00 -- $32.00 $25.74
</TABLE>
All sales were made in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933, relating to sales by an
issuer not involving any public offering, or Rule 701 under the Securities Act
of 1933, covering certain sales to employees. No underwriters were engaged in
connection with the foregoing issuances of securities, and no commissions or
discounts were paid.
54
<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
</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, liabilities or
anticipated transactions. 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. At December 31, 1999 and 1998, the Company had outstanding interest
rate floors with a notional amount of $50 million for each of the years. The
fees paid in conjunction with the interest rate floors are amortized over the
term of the interest rate contracts. Amortization expense totaled $26 and $15
in 1999 and 1998, respectively.
F-8
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allowance for Loan Losses--Management believes that the allowance for loan
losses is adequate. Management uses past loan loss experience, its evaluation
of the loan portfolio under current economic conditions and other relevant
factors to recognize loan losses. Future additions to the allowance may be
necessary based on changes in 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 their
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 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.
F-9
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-10
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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."
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."
F-11
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
<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.
F-12
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-13
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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-14
<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-15
<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
F-16
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
<CAPTION>
Minimum For Capital
Actual Adequacy Purposes
------------- ---------------------
Amount Ratio Amount Ratio
Consolidated ------- ----- ----------- ---------
<S> <C> <C> <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-17
<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-18
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-19
<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
=========== ===========
Set forth below is a summary of the amounts reflected in the Bank's balance
sheets as of December 31:
<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-20
<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-21
<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-22
<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-23
<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> <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
======= =======
- ------------------------------------------------------------------------------
Condensed Statements of Income
For the years ended December 31, 1999, 1998 and
1997
Dollars in thousands
1999 1998 1997
------- ------- -------
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
======= ======= =======
- ------------------------------------------------------------------------------
Condensed Statements of Cash Flows
For the years ended December 31, 1999, 1998 and
1997
Dollars in thousands
<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-24
<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 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
May 1, 2000
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HUDSON VALLEY HOLDING CORP.
Under Section 807 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
1. The name of the Corporation is:
HUDSON VALLEY HOLDING CORP.
2. The Certificate of Incorporation was filed by Department of State on
November 15, 1982.
3. Paragraph 5 of the Certificate of Incorporation has been amended and
shall read as follows:
"5. The aggregate number of shares which the Corporation shall have
authority to issue is 10,000,000 shares, at $.20 par value."
4. The Amended and Restated Certificate of Incorporation incorporating the
above-mentioned amendment is attached as Exhibit A.
5. All of the foregoing terms have previously been authorized by votes
of the Board of Directors followed by votes of the holders of a majority of all
outstanding shares entitled to vote therein at meetings of shareholders of
the corporation.
<PAGE>
IN WITNESS WHEREOF, the undersigned has duly executed this certificate
this 27th day of April, 2000.
HUDSON VALLEY HOLDING CORP.
By:______________________________
Name:
Title:
<PAGE>
Exhibit A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HUDSON VALLEY HOLDING CORP.
Under Section 807 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
1. The name of the Corporation is:
HUDSON VALLEY HOLDING CORP.
2. The Certificate of Incorporation was filed by Department of State on
November 15, 1982.
3. The purpose or purposes for which the corporation is formed as follows,
to wit:
To acquire by subscription, purchase or otherwise, to hold for investment or for
resale, to sell, pledge, hypothecate and in all ways deal with: stocks, shares,
script, bonds, consols, debentures, mortgages, notes, trust receipts,
certificates of indebtedness, interim receipts and other obligations and
securities of corporations.
To do all things suitable and proper for the protection, conservation or
enhancement of the value of stocks, shares, securities, evidences of
indebtedness or other properties held by it, including the exercise of the right
to vote thereon. To bid upon and purchase at foreclosure or at other sales, real
property and rights of interests therein of all kinds.
<PAGE>
This corporation may purchase, acquire, hold and dispose of the stocks,
shares, bonds and other evidences of indebtedness of any corporation, and issue
in exchange therefor its shares, bonds or other obligations.
To own, operate, manage, acquire and deal in property, real and personal,
which may be necessary to the conduct of the business.
Without limiting any of the purposes or powers of the corporation it shall
have the power to do any one or more or all of the things set forth, and all
other things likely, directly or indirectly, to promote the interests of the
corporation. In the carrying on of its business it shall have the power to do
any and all things and powers which a co-partnership or a natural person could
do, either as a principal, agent, representative, lessor, lessee or otherwise,
either alone or in conjunction with others, and in any part of the world. In
addition, it shall have and exercise all rights, powers and privileges now
belonging to or conferred upon corporations organized under the Business
Corporation Law.
4. The office of the corporation is to be located in the City of Yonkers,
County of Westchester, State of New York.
5. The aggregate number of shares which the corporation shall have
authority to issue is 10,000,000 shares, at $.20 par value.
6. The Secretary of State is designated as agent of the corporation upon
whom process against it may be served. The post office address to which the
Secretary of State shall mail a copy of any process against the corporation
served upon him is:
Griffin, Coogan & Veneruso, P.C.
51 Pondfield Road
Bronxville, New York 10708
<PAGE>
7. The corporation shall indemnify any person made, or threatened to be
made, a party to an action or proceeding (other than one by or in the right of
the corporation to procure a judgment in its favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expense, including
attorney's fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
8. The corporation shall indemnify any person made, or threatened to be
made, a party to an action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he, his testator or intestate,
is or was a director or officer of the corporation, or its or was serving at the
request of the corporation as a director or officer of any of any other
corporation of any type or kind, domestic or foreign, of any partnership, joint
venture, trust, employee benefit plan or other enterprise, against amounts paid
in settlement and reasonable expenses, including attorney's fees, actually and
necessarily incurred by him in
<PAGE>
connection with the defense or settlement of such action, or in connection with
an appeal therein, if such director or officer acted, in good faith, for a
purpose which he reasonably believed to be in, or, in the case of service for
any other corporation or any partnership, joint venture, trust, employee benefit
plan or other enterprise, not opposed to, the best interests of the corporation,
except that no indemnification under this paragraph shall be made in respect of
(1) a threatened action, or a pending action which is settled or otherwise
disposed of, or (2) any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation, unless and only to the
extent that the court in which the action was brought, or, if no action was
brought, any court of competent jurisdiction, determines upon application that,
is view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
9. No director of the corporation shall be held personally liable to the
corporation or to its shareholders for damages for any breach of duty while
acting as director, unless said breach of duty, whether an act or an omission,
is found, by a judgment of a court of competent jurisdiction, or other final
adjudication to have been committed in bad faith or involved intentional
misconduct or a knowing violation of law, or that said director personally
gained, in fact, a financial profit or other advantage to which the director was
not legally entitled, or that the director's acts violated Section 719 of the
Business Corporation Law. Nothing contained herein shall eliminate the liability
of any director of the corporation for any act or omission committed before the
adoption of this provision on.
10. All of the foregoing terms have previously been authorized by votes of
the Board of Directors followed by votes of the holders of a majority of all
outstanding shares entitled to vote therein at meetings of shareholders of the
corporation.
<PAGE>
IN WITNESS WHEREOF, the undersigned has duly executed this certificate
this 27th day of April, 2000.
HUDSON VALLEY HOLDING CORP.
By:______________________________
Name:
Title:
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
HUDSON VALLEY HOLDING CORP.
ARTICLE I - OFFICES
-------------------
The principal office of the corporation shall be in the City of Yonkers,
County of Westchester, State of New York. The corporation may also have offices
at such other places within or without the State of New York as the board may
from time to time determine or the business of the corporation may require.
ARTICLE II - SHAREHOLDERS
-------------------------
1. PLACE OF MEETINGS.
Meetings of shareholders shall be held at the principal office of the
corporation or at such place within or without the State of New York as the
board shall authorize.
2. ANNUAL MEETING.
The annual meeting of the shareholders shall be held on the 15th day of May
at 4 p.m. in each year if not a legal holiday, and, if a legal holiday, then on
the next business day following at the same hour, when the shareholders shall
elect a board and transact such other business as may properly come before the
meeting.
3. SPECIAL MEETINGS.
Special meetings of the shareholders may be called by the board or by the
president and shall be called by the president or the secretary at the request
in writing of a majority of the board or at the request in writing by
shareholders owning a majority in amount of the shares issued and outstanding.
Such request shall state the purpose or purposes of the proposed meeting.
Business transacted at a special meeting shall be confined to the purposes
stated in the notice.
<PAGE>
4. FIXING RECORD DATE.
For the purpose of determining the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or to express
consent to or dissent from any proposal without a meeting, or for the purpose of
determining shareholders entitled to receive payment of any dividend or the
allotment of any rights, or for the purpose of any other action, the board
shall fix, in advance, a date as the record date for any such determination of
shareholders. Such date shall not be more than fifty nor less than ten days
before the date of such meeting, nor more than fifty days prior to any other
action. If not record date is fixed it shall be determined in accordance with
the provision of law.
5. NOTICE OF MEETINGS OF SHAREHOLDERS.
Written notice of each meeting of shareholders shall state the purpose or
purposes for which the meeting is called, the place, date and hour of the
meeting and unless it is the annual meeting, shall indicate that it is being
issued by or at the direction of the person or persons calling the meeting.
Notice shall be given either personally or by mail to each shareholder entitled
to vote at such meeting, not less than ten nor more than fifty days before the
date of the meeting. If action is proposed to be taken that might entitle
shareholders to payment for their shares, the notice shall include a statement
of that purpose and to that effect. If mailed, the notice is given when
deposited in the United States mail, with postage thereon prepaid, directed to
the shareholder at his address as it appears on the record of shareholders, or,
if he shall have filed with the secretary a written request that notices to him
be mailed to some other address, then directed to him at such other address.
6. WAIVERS.
Notice of meeting need not be given to any shareholder who signs a waiver
of notice, in person or by proxy, whether before or after the meeting. The
attendance of any shareholder at a meeting, in person or by proxy, without
protesting prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him.
7. QUORUM OF SHAREHOLDERS.
Unless the certificate of incorporation provides otherwise, the holders of
a majority of the shares entitled to vote thereat shall constitute a quorum at a
meeting of shareholders for the transaction of any business, provided that when
a specified item of business is required to be voted on by a class or classes,
the holders of a majority of the shares of such class or classes shall
constitute a quorum for the transaction of such specified time of business.
When a quorum is once present to organize a meeting, ti is not broken by
the subsequent withdrawal of any shareholders.
The shareholders present may adjourn the meeting despite the absence of a
quorum.
<PAGE>
8. PROXIES.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent without a meeting may authorize another person or
persons to act for him by proxy.
Every proxy must be signed by the shareholder or his attorney-in-fact. No
proxy shall be valid after expiration of eleven months from the date thereof
unless otherwise provided in the proxy. Every proxy shall be revocable at the
pleasure of the shareholder executing it, except as otherwise provided by law.
9. QUALIFICATION OF VOTERS.
Every shareholder of record shall be entitled at every meeting of
shareholders to one vote for every share standing in his name on the record of
shareholders, unless otherwise provided in the certificate of incorporation.
10. VOTE OF SHAREHOLDERS.
Except as otherwise required by statute or by the certificate of
incorporation:
(a) directors shall be elected by a plurality of the votes cast at a
meeting of shareholders by the holders of shares of entitled to vote in the
election;
(b) all other corporate action shall be authorized by a majority of the
votes cast.
11. WRITTEN CONSENT OF SHAREHOLDERS.
Any action that may be taken by vote may be taken without a meeting on
written consent, setting forth the action so taken, signed by the holders of all
the outstanding shares entitled to vote thereon or signed by such lesser numbers
of holders as may be provided for in the certificate of incorporation.
ARTICLE III - DIRECTORS
1. BOARD OF DIRECTORS.
Subject to any provision in the certificate of incorporation the business
of the corporation shall be managed by its board of directors, each of whom
shall be at least 18 years of age and must be shareholders.
<PAGE>
2. NUMBER OF DIRECTORS.
The number of directors shall be not less than 5 nor more than 25. When
all of the shares are owned by less than three shareholders, the number of
directors may be less than three but not less than the number of shareholders.
3. ELECTION AND TERM OF DIRECTORS.
At each annual meeting of shareholders, the shareholders shall elect
directors to hold office until the next annual meeting. Each director shall
hold office until the expiration of the term for which he is elected and until
his successor has been elected and qualified, or until his prior registration or
removal.
4. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the board for any reason except the removal
of directors without cause maybe filled by a vote of a majority of the directors
then in office, although less than a quorum exists, unless otherwise provided in
the certificate of incorporation. Vacancies occurring by reason of the removal
of directors without cause shall be filled by vote of the shareholders unless
otherwise provided in the certificate of incorporation. A director elected to
fill a vacancy caused by resignation, death or removal shall be elected to hold
office for the unexpired term of his predecessor.
5. REMOVAL OF DIRECTORS.
Any or all of the directors may be removed for cause by vote of the
shareholders or by action of the board. Directors may be removed without cause
only by vote of the shareholders.
6. RESIGNATION.
A director may resign at any time by giving written notice to the board,
the president or the secretary of the corporation. Unless otherwise specified
in the notice, the resignation shall take effect upon receipt thereof by the
board or such officer, and the acceptance of the resignation shall not be
necessary to make it effective.
<PAGE>
7. QUORUM OF DIRECTORS.
Unless otherwise provided in the certificate of incorporation, a majority
of the entire board shall constitute a quorum for the transaction of business or
of any specified item of business.
8. ACTION OF THE BOARD.
Unless otherwise required by law, the vote of a majority of the directors
present at the time of the vote, if a quorum is present at such time, shall be
the act of the board. Each director present shall have one vote regardless of
the number of shares, if any, which he may hold.
9. PLACE AND TIME OF BOARD MEETING.
The board may hold its meetings at the office of the corporation or at such
other places, either within or without the State of New York, as it may from
time to time determine.
10. REGULAR ANNUAL MEETING.
A regular annual meeting of the board shall be held immediately following
the annual meeting of shareholders at the place of such annual meeting of
shareholders.
11. NOTICE OF MEETING OF THE BOARD, ADJOURNMENT.
(a) Regular meetings of the board may be held without notice at such time
and place as it shall from time to time determine. Special meetings of the
board shall be held upon notice to the directors and may be called by the
president upon three days notice to each director either personally or by mail
or by wire; special meetings shall be called by the president or by the
secretary in like manner on written request of two directors. Notice of a
meeting need not be given to any director who submits a waiver of notice whether
before or after the meeting or who attends the meeting without protesting prior
thereto or at its commencement, the lack of notice to him.
(b) A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. Notice of the
adjournment shall be given all directors who were absent at the time of the
adjournment and, unless such time and place are announced at the meeting, to the
other directors.
<PAGE>
12. CHAIRMAN.
At all meetings of the board the president, or in his absence, a chairman
chosen by the board shall preside.
13. EXECUTIVE AND OTHER COMMITTEES.
The board, by resolution adopted by a majority of the entire board, may
designate from among its members an executive committee and other committees,
each consisting of three or more directors. Each such committee shall serve at
the pleasure of the board.
14. COMPENSATION.
No compensation shall be paid to directors, as such, for their services,
but by resolution of the board a fixed sum and expenses for actual attendance,
at each regular or special meeting of the board may be authorized. Nothing
herein contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
15. CHAIRMAN EMERITUS/FOUNDER.
The honorary office of Chairman Emeritus/Founder is hereby created in
recognition of outstanding service to the corporation. The Board of Directors is
hereby authorized to select the person so honored.
ARTICLE IV - OFFICERS
1. OFFICES, ELECTION, TERM.
(a) Unless otherwise provided for in the certificate of incorporation, the
board may elect or appoint a president, one or more vice-presidents, a secretary
and a treasurer, and such other officers as it may determine, who shall have
such duties, powers and functions as hereinafter provided.
(b) All officers shall be elected or appointed to hold office until the
meeting of the board following the annual meeting of shareholders.
(c) Each officer shall hold office for the term for which he is elected or
appointed and until his successor has been elected or appointed and qualified.
2. REMOVAL, RESIGNATION, SALARY, ETC.
(a) Any officer elected or appointed by the board may be removed by the
board with or without cause.
(b) In the event of the death, resignation or removal of an officer, the
board in its discretion may elect or appoint a successor to fill the unexpired
term.
<PAGE>
(c) Any two or more offices may be held by the same person, except the
offices of president and secretary. When all of the issued and outstanding
stock of the corporation is owned by one person, such person may hold all or any
combination of offices.
(d) The salaries of all officers shall be fixed by the board.
(e) The directors may require any officer to give security for the faithful
performance of his duties.
3. PRESIDENT.
The president shall be the chief executive officer of the corporation; he
shall preside at all meetings of the shareholders and of the board; he shall
have the management of the business of the corporation and shall see that all
orders and resolutions of the board are carried into effect.
4. VICE-PRESIDENTS.
During the absence or disability of the president, the vice-president, or
if there are more than one, the executive vice-president, shall have all the
powers and functions of the president. Each vice-president shall perform such
other duties as the board shall prescribe.
5. SECRETARY.
The secretary shall:
(a) attend all meetings of the board and of the shareholders;
(b) record all votes and minutes of all proceedings in a book to be kept
for that purpose;
(c) give or cause to be given notice of all meetings of shareholders and of
special meetings of the board;
(d) keep in safe custody the seal of the corporation and affix it to any
instrument when authorized by the board;
(e) when required, prepare or cause to be prepared and available at each
meeting of shareholders a certified list in alphabetical order of the names of
shareholders entitled to vote thereat, indicating the number of shares of each
respective class held by each;
(f) keep all the documents and records of the corporation as required by
law or otherwise in a proper and safe manner.
<PAGE>
(g) perform such other duties as may be prescribed by the board.
6. ASSISTANT-SECRETARIES.
During the absence or disability of the secretary, the assistant-secretary,
or if there are more than one, the one so designated by the secretary or by the
board, shall have all the powers and functions of the secretary.
7. TREASURER.
The treasurer shall:
(a) have the custody of the corporate funds and securities;
(b) keep full and accurate accounts of receipts and disbursements in the
corporate books;
(c) deposit all money and other valuables in the name and to the credit of
the corporation in such depositories as may be designated by the board;
(d) disburse the funds of the corporation as may be ordered or authorized
by the board and preserve proper vouchers for such disbursements;
(e) render to the president and board at the regular meetings of the board,
or whenever they require it, an account of all his transactions as treasurer and
of the financial condition of the corporation;
(f) render a full financial report at the annual meeting of the
shareholders if so requested;
(g) be furnished by all corporate officers and agents at his request, with
such reports and statements as he may require as to all financial transactions
of the corporation;
(h) perform such other duties as are given to him by these by-laws or as
from time to time are assigned to him by the board or the president.
8. ASSISTANT-TREASURER.
During the absence or disability of the treasurer, the assistant-treasurer,
or if there are more than one, the one so designated by the secretary or by the
board, shall have all the powers and functions of the treasurer.
<PAGE>
9. SURETIES AND BONDS.
In case the board shall so require, any officer or agent of the corporation
shall execute to the corporation a bond in such sum and with such surety or
sureties as the board may direct, conditioned upon the faithful performance of
his duties to the corporation and including responsibility for negligence and
for the accounting for all property, funds or securities of the corporation
which may come into his hands.
ARTICLE V - CERTIFICATES FOR SHARES
1. CERTIFICATES.
The shares of the corporation shall be represented by certificates. They
shall be numbered and entered in the books of the corporation as they are
issued. They shall exhibit the holder's name and the number of shares and shall
be signed by the president or a vice president and the treasurer or the
secretary and shall bear the corporate seal.
2. LOST OR DESTROYED CERTIFICATES.
The board may direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by the corporation,
alleged to have been lost or destroyed, upon the making of an affidavit of the
fact by the person claiming the certificate to be lost or destroyed. When
authorizing such issue of a new certificate, the board may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or give the
corporation a bond in such sum and with such surety or sureties as it may direct
as indemnity against any claim that may by made against the corporation with
respect to the certificate alleged to have been lost or destroyed.
3. TRANSFERS OF SHARES.
(a) Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered on
the transfer book of the corporation which shall be kept at its principal
office.
No transfer shall be made within ten days next preceding the annual
meeting of shareholders.
(b) The corporation shall be entitled to treat the holder of record of any
share as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by the laws of New York.
<PAGE>
4. CLOSING TRANSFER BOOKS.
The board shall have the power to close the share transfer books of the
corporation for a period of not more than ten days during the thirty day period
immediately preceding (1) any shareholders' meeting, or (2) any date upon which
shareholders shall be called upon to or have a right to take action without a
meeting, or (3) any date fixed for the payment of a dividend or any other form
of distribution, and only those shareholders of record at the time the transfer
books are closed, shall be recognized as such for the purpose of (1) receiving
notice of or voting at such meeting, or (2) allowing them to take appropriate
action, or (3) entitling them to receive any dividend or other form of
distribution.
5. As a condition to transferring shares on the stock transfer books of the
corporation, the corporation shall have the right to demand form any shareholder
requesting a transfer evidence sufficient to the corporation to assure itself
that the shareholder requesting the transfer has complied with all prior notice
requirements, if any, imposed by regulatory agencies which supervise the
corporation. In particular, but without limitation, the corporation can, as a
condition of transfer, require sufficient evidence to indicate to its
satisfaction shareholder compliance, if applicable, with the prior notification
requirements of the Change in Bank Control Act of 1978 [12 U.S.C. Section
1817(j)], Title VI of FIRA (as set forth in Regulation Y at 12 Code of Federal
Regulations Section 225). (This Section added at a special meeting of
shareholders of the corporation dated February 26, 1987).
6. Before the corporation purchases or redeems any shares of its common stock,
the president of the corporation shall, if applicable, have the corporation
comply with the prior notice requirements upon certain purchases or the prior
notice requirements upon certian purchases of redemptions, as set forth in
Regualtaion Y at 12 Code of Federal Regulations Section 225, which requires the
corporation to provide a 45 day prior notice if, generally, any purchase or
redemption of its equity securities equals or exceeds ten percent (10%) of the
corporation's net worth. (This Section added at a special meeting of
shareholders of the corporation dated February 26, 1987).
ARTICLE VI - DIVIDENDS
Subject to the provisions of the certificate of incorporation and to
applicable law, dividends on the outstanding shares of the corporation may be
declared in such amounts and at such time or times as the board may determine.
Before payment of any dividend, there may be set aside out of the net profits of
the corporation available for dividends such sum or sums as the board from time
to time in its absolute discretion deems proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the board shall think
conducive to the interests of the corporation, and the board may modify or
abolish any such reserve.
<PAGE>
ARTICLE VII - CORPORATE SEAL
The seal of the corporation shall be circular in form and bear the name of
the corporation, the year of its organization and the words "Corporate Seal, New
York." The seal may be used by causing it to be impressed directly on the
instrument or writing to be sealed, or upon adhesive substance affixed thereto.
The seal on the certificates for shares or on any corporate obligation for the
payment of money may be a facsimile, engraved or printed.
ARTICLE VIII - EXECUTION OF INSTRUMENTS
All corporate instruments and documents shall be signed or countersigned,
executed, verified or acknowledged by such officer or officers or other person
or persons as the board may from time to time designate.
ARTICLE IX - FISCAL YEAR
This fiscal year shall begin the first day of January in each year.
(This Section amended at a special meeting of shareholders of the
corporation dated February 26, 1987).
ARTICLE X - REFERENCES TO CERTIFICATE OF INCORPORATION
Reference to the certificate of incorporation in these by-laws shall
include all amendments thereto or changes thereof unless specifically excepted.
ARTICLE XI - BY LAW CHANGES
AMENDMENT, REPEAL, ADOPTION, ELECTION OF DIRECTORS.
(a) Except as otherwise provided in the certificate of incorporation the
by-laws may be amended, repealed or adopted by vote of the holders of the shares
at the time entitled to vote in the election of any directors. By-laws may also
be amended, repealed or adopted by the board but any by-law adopted by the board
may be amended by the shareholders entitled to vote thereon as hereinabove
provided.
(b) If any By-law regulating an impending election of directors is adopted,
amended or repealed by the board, there shall be set forth in the notice of the
next meeting of shareholders for the election of directors the by-law so
adopted, amended or repealed, together with a concise statement of the changes
made.
<PAGE>
EXHIBIT 3.3
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 ("THE ACT"), OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY
THE OFFER, SALE, TRANSFER, OR OTHER DISPOSITION OF THE SHARES REPRESENTED BY
THIS CERTIFICATE IS RESTRICTED BY AND SUBJECT TO THE TERMS OF THAT CERTAIN
SHAREHOLDER AGREEMENT INCLUDING ANY AMENDMENTS THERETO, AND MAY NOT BE AFFECTED
IN CONTRAVENTION OF THE PROVISIONS OF SUCH AGREEMENT A COPY OF SUCH AGREEMENT
WILL BE FURNISHED TO THE HOLDER HEREOF BY THE SECRETARY OF THE COMPANY UPON
WRITTEN REQUEST
NUMBER [EAGLE] SHARES
HUDSON VALLEY HOLDING CORP.
21 SCARSDALE ROAD
YONKERS, NEW YORK 10707
(A NEW YORK CORPORATION)
THIS CERTIFIES THAT
is the owner of
of the Common Capital Stock of
HUDSON VALLEY HOLDING CORP.
hereinafter called the "Company" transferable only on the books of the Company
by the holder hereof in person or by duly authorized attorney upon the surrender
of this certificate properly endorsed.
The amount of the Common Capital Stock is set forth on the books of the
Company. The par value of the shares of said stock is set forth in the
Certificate of Incorporation of the Company and the amendments thereto, which
are hereby expressly incorporated herein by reference.
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by
its duly authorized officers, and the seal of the Company hereunto affixed.
Dated: , 19
------------------- --
- ---------------------------------- -----------------------------------
SECRETARY PRESIDENT
<PAGE>
EXHIBIT 4.1
STOCK RESTRICTION AGREEMENT
---------------------------
This Agreement (the "Agreement") is made and entered into this 10th day of
March, 1995, by and among Hudson Valley Holding Corp., a New York State
Corporation (the "Company"), and __________________ ("Stockholder")
RECITALS
A. WHEREAS, Stockholder may now own or may hereinafter own shares of
common stock of the Company ("the Shares") and
B. WHEREAS, the Company is granting stock option rights to the
Stockholder which will allow the Stockholder to acquire shares of the Company;
and the Company's grant of the stock options to the Stockholder is conditioned
upon Stockholder agreeing to the terms and conditions of this Stock Restriction
Agreement; and
C. WHEREAS, the parties acknowledge that the purpose of the Stock
Restriction Agreement is to protect and preserve the shareholders mutual
interests and the interests of the Company by promoting continuity of share
ownership and corporate control by imposing certain restrictions on the
transferability of the Company shares.
NOW, THEREFORE, in consideration of One Dollar ($1 .00) and other good
and valuable consideration, the receipt of which is hereby acknowledged, the
parties agree as follows:
1. Right of First Refusal. The Stockholder shall not sell, assign,
----------------------
transfer, or give, or in any manner, dispose of (gifts to family members
excepted, provided however, that the donee must become a signatory of the Stock
Restriction Agreement) all or any part of his or her Shares, now owned or
hereafter acquired, or any right or interest therein, whether voluntarily or by
operation of law, without first giving to the Company written notice by
Certified or registered Mail (the "Sale Notice") of his or her receipt of an
offer from a prospective purchaser. The Sale Notice must be in writing, giving
the name and address of the prospective purchaser, the number of Shares
involved, and the terms of such purchase.
Within ten (10) days after receipt of the Sale Notice by the Company,
the Company, by action of its Board of Directors or its designated committee,
may elect to purchase all, but not less than all, of such Shares offered for
disposition, or may elect to designate a person, including an officer, director
or employee of the Company, to purchase all but not less than all of such
Shares. The purchase price of any Shares purchased under terms of this Agreement
shall be on the same terms and conditions as that offered by the prospective
purchaser.
2. Termination of Restrictions. If all of the Shares of the Stockholder
---------------------------
or transferor desiring to make a disposition thereof are not purchased by the
Company or its designee in accordance with the provisions of Paragraph I hereof,
then all restrictions imposed by this
<PAGE>
Agreement upon the unsold Shares shall terminate and the Stockholder desiring to
make a disposition therefor shall be free to sell the unsold Shares to the
prospective purchaser at the price and terms set forth in the original offer, at
any time within twenty (20) days thereafter; provided, however, that at the end
of the twenty (20) day period, all restrictions shall again be applicable in the
same manner and under the same terms as set forth in this Agreement.
3. Terms of the Purchase.
---------------------
A. Closing. The consummation of the purchase and sale of the
Shares shall be referred to as the "Closing", and shall take place at a time and
place as to which the parties shall agree, but in no event shall it occur more
than twenty (20) days after the Company receives the Sale Notice pursuant to
Paragraph 1 of this Agreement.
B. Transfer of Shares. At such time as the agreed consideration
has been paid and delivered to the selling Stockholder or his or her estate, the
Shares shall be transferred to the purchaser.
C. Payment of Purchase Price. The purchase price for any shares
purchased pursuant to this Agreement shall be paid, either in cash or certified
funds.
4 Endorsement on Share Certificate. Each certificate representing shares
--------------------------------
of the Company shall have endorsed conspicuously on its face a legend in
substantially the following form:
(i) THE SECURITIES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 ("THE ACT"), OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO
BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY.
(ii) THE OFFER, SALE, TRANSFER OR OTHER
DISPOSITION OF THE SHARES REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED BY AND SUBJECT TO
THE TERMS OF THAT CERTAIN SHAREHOLDER
AGREEMENT INCLUDING ANY AMENDMENTS
THERETO, AND MAY NOT BE AFFECTED IN
CONTRAVENTION OF THE PROVISIONS OF SUCH
AGREEMENT. A COPY OF SUCH AGREEMENT WILL BE
FURNISHED TO THE HOLDER HEREOF BY THE
SECRETARY OF THE COMPANY UPON WRITTEN
REQUEST.
-2-
<PAGE>
5. Miscellaneous.
-------------
A. Binding Effect. This Agreement shall be binding upon the
parties to this Agreement and upon their respective heirs, legatees, personal
representatives, successors, assigns and donees.
B. No Waiver. No waiver of any breach or default under this
Agreement shall be considered valid unless in writing, and no such waiver shall
be deemed a waiver of any subsequent breach or default of the same or similar
nature.
C. Amendment. This Agreement may only be amended by written
instrument executed by both parties hereto.
D. Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties with respect to the transaction
contemplated pursuant to this Agreement, and supersedes all prior agreements,
arrangements, and understandings related to its subject matter among the
parties.
E. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, and all of which
shall constitute the same document.
F. Governing Law. The laws of the State of New York shall
govern this Agreement and the construction of its terms. If any provision is
unenforceable or invalid for any reason, the remainder of this Agreement shall
continue in effect.
G. Enforcement. If a Stockholder proposes to make a transfer of
any shares by assignment, sale, gift or any other transfer in violation of the
terms of this Agreement, the Company may apply to any court for injunctive order
prohibiting such proposed transfer except in compliance with the terms of this
Agreement. The Company may institute or maintain proceedings against the
violating Stockholder to compel specific performance of this Agreement. Any
attempt to transfer Shares in violation of this Agreement shall be void.
H. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if sent by Certified or
Registered Mail to:
As to the "Company" to:
Chairman of the Board
Hudson Valley Holding Corp.
21 Scarsdale Road
Yonkers, New York 10707
-3-
<PAGE>
As to the "Stockholder" to:
Any party, by notice given as provided above, may change the address to
which his, her, or its future notices shall be sent.
I. Termination. This Agreement shall terminate upon the unanimous
written agreement of the parties hereto.
IN WITNESS WHEREOF, the Company and the Stockholder have executed this
Agreement effective as of the date first above written.
HUDSON VALLEY HOLDING CORP.
By:__________________________________________
John A. Pratt Jr.
STOCKHOLDER
By:__________________________________________
STATE OF NEW YORK )
s.s.:
COUNTY OF WESTCHESTER)
-4-
<PAGE>
On the day of , 1995 before me personally came
John A. Pratt Jr. to me known, who, being by me duly sworn, did depose and say
that he resides at 50 Millard Road, Bronxville, New York 10708; that he is the
President & CEO of HUDSON VALLEY HOLDING CORP., the Corporation described in and
which executed the foregoing instrument; that he knows the seal of the
Corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said Corporation,
and that he signed his name thereto by like order.
STATE OF NEW YORK )
s.s.:
COUNTY OF WESTCHESTER)
On the day of , 1995 before me personally came
_______________, to me known to be the individual described in and who executed
the foregoing instrument, and acknowledged that she executed the same.
____________________________________
-5-
<PAGE>
EXHIBIT 4.2
STOCK RESTRICTION AGREEMENT
---------------------------
This Agreement (the "Agreement") is made and entered into this 27th day of
-----
March, 1997 by and among Hudson Valley Holding Corp., a New York Corporation
- -------
(the "Company"), and ________________ ("Stockholder").
RECITALS
A. WHEREAS, Stockholder may now own or may hereinafter own shares of common
stock of the Company ("the Shares") and
B. WHEREAS, Stockholder is acquiring shares from an individual or business
entity ("Transferor") whose shares are subject to certain stock restrictions
imposed by a Stock Restriction Agreement; and
C. WHEREAS, the parties acknowledge that the purpose of the Stock
Restriction Agreement is to protect and preserve the shareholders mutual
interests and the interests of the Company by promoting continuity of share
ownership and corporate control by imposing certain restrictions on the
transferability of the Company shares.
NOW, THEREFORE, in consideration of One Dollar ($1.00) and other good
and valuable consideration, the receipt of which is hereby acknowledged, the
parties agree as follows:
1. Right of First Refusal. The Stockholder shall not sell, assign,
----------------------
transfer, or give, or in any manner, dispose of all or any part of his or her
Shares, now owned or hereafter acquired, or any right or interest therein,
whether voluntarily or by operation of law, without first giving to the Company
written notice by Certified or Registered Mail (the "Sale Notice") of his or her
receipt of an offer from a prospective purchaser. The Sale Notice must be in
writing, giving the name and address of the prospective purchaser, the number of
Shares involved, and the terms of such purchase.
Within ten (10) days after receipt of the Sale Notice by the Company,
the Company, by action of its Board of Directors or its designated committee,
may elect to purchase all, but not less than all, of such Shares offered for
disposition, or may elect to designate a person, including an officer, director
or employee of the Company, to purchase all but not less than all of such
Shares. The purchase price of any Shares purchased under the terms of this
Agreement shall be on the same terms and conditions as that offered by the
prospective purchaser.
2. Termination of Restrictions. If all of the Shares of the Stockholder
---------------------------
or transferor desiring to make a disposition thereof are not purchased by the
Company or its designee in accordance with the provisions of Paragraph 1 hereof,
then all restrictions imposed by this Agreement upon the unsold Shares shall
terminate and the Stockholder desiring to make a disposition therefor shall be
free to sell the unsold Shares to the prospective purchaser at the price and
terms set forth in the original offer, at any time within twenty (20) days
thereafter;
Page 1 of 5
<PAGE>
provided, however, that at the end of the twenty (20) day period, all
restrictions shall again be applicable in the same manner and under the same
terms as set forth in this Agreement.
3. Terms of the Purchase.
---------------------
A. Closing. The consummation of the purchase and sale of the Shares
shall be referred to as the "Closing", and shall take place at a time and place
as to which the parties shall agree, but in no event shall it occur more than
(20) days after the Company receives the Sale Notice pursuant to Paragraph 1 of
this Agreement.
B. Transfer of Shares. At such time as the agreed consideration has
been paid and delivered to the selling Stockholder or his estate, the Shares
shall be transferred to the purchaser.
C. Payment of Purchase Price. The purchase price for any shares
purchased pursuant to this Agreement shall be paid, either in cash or certified
funds.
4. Endorsement on Share Certificate. Each certificate representing shares
--------------------------------
of the Company shall have endorsed conspicuously on its face a legend in
substantially the following form:
(i) THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED
FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
("THE ACT"), OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY .
(ii) THE OFFER, SALE, TRANSFER, OR OTHER DISPOSITION OF THE SHARES
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY AND SUBJECT TO
THE TERMS OF THAT CERTAIN SHAREHOLDER AGREEMENT INCLUDING ANY
AMENDMENTS THERETO, AND MAY NOT BE AFFECTED IN CONTRAVENTION OF
THE PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH AGREEMENT WILL BE
FURNISHED TO THE HOLDER HEREOF BY THE SECRETARY OF THE COMPANY
UPON WRITTEN REQUEST.
5. Miscellaneous.
-------------
A. Binding Effect. This Agreement shall be binding upon the parties to
this Agreement and upon their respective heirs, legatees, personal
representatives, successors, assigns and donees.
Page 2 of 5
<PAGE>
B. No Waiver. No waiver of any breach or default under this Agreement
shall be considered valid unless in writing, and no such waiver shall be deemed
a waiver of any subsequent breach or default of the same or similar nature.
C. Amendment. This Agreement may only be amended by written instrument
executed by both parties hereto.
D. Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties with respect to the transaction contemplated
pursuant to this Agreement, and supersedes all prior agreements, arrangements
and understandings related to its subject matter among the parties.
E. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which shall
constituted the same document.
F. Governing Law. The laws of the State of New York shall govern this
Agreement and the construction of its terms. If any provision is unenforceable
or invalid for any reason, the remainder of this Agreement shall continue in
effect.
G. Enforcement. If a stockholder proposes to make a transfer of any
shares by assignment, sale, gift or other transfer in violation of the terms of
this Agreement, the Company may apply to any court for injunctive order
prohibiting such proposed transfer except in compliance with the terms of this
Agreement. The Company may institute or maintain proceedings against the
violating stockholder to compel specific performance of this Agreement. My
attempt to transfer the Shares in violation of this Agreement shall be void.
H. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by Certified or
Registered Mail to:
As to the "Company" to:
Chairman of the Board
Hudson Valley Holding Corp.
21 Scarsdale Road
Yonkers, New York 10707
As to the "Stockholder"to:
Any party, by notice given as provided above, may change the address to
which his, her, or its future notices shall be sent.
Page 3 of 5
<PAGE>
I. Termination. This Agreement shall terminate upon the unanimous
written agreement of the parties hereto.
IN WITNESS WHEREOF, the Company and the Stockholder have executed this
Agreement effective as of the date first above written.
HUDSON VALLEY HOLDING CORP.
BY:________________________________
William M. Mooney, President & CEO
STOCKHOLDER:
BY:________________________________
Page 4 of 5
<PAGE>
STATE OF NEW YORK )
ss:
COUNTY OF WESTCHESTER )
On the 21st of March, 1997 before me personally came William M. Mooney, to
me known, who, being by me duly sworn, did depose and say that he resides at 87
Cliffield Road, Bedford, N.Y. 10506; that he is the President and CEO of HUDSON
VALLEY HOLDING CORP., the Corporation described in and which executed the
foregoing instrument; that he knows the seal of said Corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
order of the Board of Directors of said Corporation, and that he signed his name
thereto by like order.
____________________________
STATE OF NEW YORK )
ss:
COUNTY OF WESTCHESTER )
On the 27th day of March, 1997 before me personally came
_____________________, to me known to be the individual described in and who
executed the foregoing instrument, and acknowledged that __he executed the same.
____________________________
PALMA BACCARI
Notary Public
State of New York No OlBA4988730
Qualified in Westchester County
Commission Expires 11/18/97
Page 5 of 5
<PAGE>
HUDSON VALLEY NATIONAL BANK
AMENDED AND RESTATED
DIRECTORS RETIREMENT PLAN
EFFECTIVE DECEMBER 1, 1993
The plan is adopted by the HUDSON VALLEY NATIONAL BANK ("HVNB") and is for
the benefit of the Directors of Hudson Valley National Bank, Hudson Valley
Mortgage Corp., Hudson Valley Investment Corp., and all subsidiaries and
affiliates thereof, (hereinafter referred to as "Directors"). It is in
recognition of the long and distinguished service they have rendered to these
entities and with the hope of encouraging future outside Directors similarly to
provide lengthy and distinguished service as well.
ARTICLE ONE
TYPE OF PLAN
------------
This plan is intended to be an unfunded retirement plan for the benefit of
the outside Directors of the above named entities. This plan replaces and
supersedes the Hudson Valley National Bank Directors Retirement Plan dated
November 24, 1987.
ARTICLE TWO
EFFECTIVE DATE
--------------
The effective date of the original plan was November 24, 1987. This
restatement is effective as of December 1, 1993. The original November 24, 1987
plan is of no further force and effect.
<PAGE>
ARTICLE THREE
ELIGIBILITY
-----------
A. Eligibility is restricted to outside Directors ("Directors"). An
"outside director" shall mean a Director of who is not a full-time employee of
any entity referred to in this plan.
B. A Director, in order to be eligible, must accrue five full years of
service as a Director, including years of service prior to the original
effective date. A "year of service" is determined on a July 1, fiscal year.
C. The Director must retire, resign, or otherwise relinquish his service
as Director to receive a retirement benefit under the plan.
ARTICLE FOUR
VESTING
-------
A. Every Director who satisfies all of the requirements of Section 3
(whether prior to, coincident with, or subsequent to November 24, 1987) and who
is a Director on November 24, 1987 shall be eligible to receive either a pro
rata retirement benefit or full retirement benefit on his or her benefit
commencement date. Every Director who satisfies the requirements of Section 3
and who was not a Director on November 23, 1987 but becomes a Director
thereafter shall also be eligible to receive either a pro rata or full
retirement benefit on his or her benefit commencement date.
2
<PAGE>
B. Pro rata retirement benefits are based on the following vesting
schedule:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
NO. OF YEARS AS DIRECTOR AMOUNT PAYABLE AT
(AS OF JULY 1/st/) RETIREMENT AGE
----------------- --------------
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Less than 5 years 0%
- ---------------------------------------------------------------------------------------------------------
5 years but less than 6 years 5%
- ---------------------------------------------------------------------------------------------------------
6 years but less than 7 years 10%
- ---------------------------------------------------------------------------------------------------------
7 years but less than 8 years 20%
- ---------------------------------------------------------------------------------------------------------
8 years but less than 9 years 30%
- ---------------------------------------------------------------------------------------------------------
9 years but less than 10 years 40%
- ---------------------------------------------------------------------------------------------------------
10 years but less than 11 years 50%
- ---------------------------------------------------------------------------------------------------------
11 years but less than 12 years 60%
- ---------------------------------------------------------------------------------------------------------
12 years but less than 13 years 70%
- ---------------------------------------------------------------------------------------------------------
13 years but less than 14 years 80%
- ---------------------------------------------------------------------------------------------------------
14 years but less than 15 years 90%
- ---------------------------------------------------------------------------------------------------------
15 or more years 100%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
ARTICLE FIVE
FORFEITURE
----------
Section 4 of this plan notwithstanding, a Director who has become vested
under Section 4 shall forfeit all benefits hereunder if he or she has engaged in
any gross misconduct or criminal activity as a Director.
3
<PAGE>
ARTICLE SIX
RETIREMENT BENEFITS
-------------------
Each director shall receive an annual retirement benefit payable in
substantially equal monthly installments equal to the amount of the basic fees
that such Director received during the 12 month period immediately prior to the
benefit commencement date. The term basic fees, as used herein, shall mean fees
paid for attendance at all board meetings, fees paid for all committee meetings
or sub-committee meetings and fees paid as a committee chairman of the various
committees of the entities or their ultimate parent corporation, the Hudson
Valley Holding Corp. ("Holding Corp."). It shall exclude all other fees,
including Directors stipends, special stipends for selected committee chairman,
all reimbursed expenses and all fees paid for acting as Vice Chairman or
Chairman of the Board of the Bank, the Holding Corp., and all other entities as
may be covered by this agreement from time to time.
ARTICLE SEVEN
BENEFIT COMMENCEMENT DATE
-------------------------
A Director shall begin to receive benefits under the plan on the first day
of the month after he or she retires, resigns, or otherwise relinquishes his or
her place as a Director.
4
<PAGE>
ARTICLE EIGHT
FORM OF BENEFIT
---------------
Each Director shall receive a monthly benefit, payable as follows:
Directors receive credit towards pension benefits equal to four months for each
year of service (subject to vesting and minimum age criteria) up to a maximum of
96 months (8 years), payable to the Director during his life, and on his or her
death prior to receiving payments for such period, to the spouse of such
Director, if such Director is married, and to his or her estate, if such
Director is unmarried, for the remainder of such period.
ARTICLE NINE
DEATH PRIOR TO BENEFIT COMMENCEMENT DATE
----------------------------------------
If a Director who is vested in his or her retirement benefit dies prior to
his or her benefit commencement date, he or she will be deemed to have retired
on the day before his or her death, and his or her spouse or estate will receive
benefits in accordance with Articles "Four" through "Eight" hereof.
5
<PAGE>
ARTICLE TEN
ASSIGNMENT
----------
No retirement benefit under the plan shall be subject in any manner to
alienation, anticipation, encumbrance, sale, assignment, transfer, pledge,
charge or hypothecation, whether voluntary or involuntary, and any attempt to
alienate, anticipate, encumber, sell, assign. transfer, pledge, charge or
hypothecate shall be null and void and shall be disregarded by the Bank, which
shall continue to discharge its obligations hereunder as though no such
assignment had been made.
ARTICLE ELEVEN
FUNDING
-------
The plan is intended to be an unfunded arrangement. Nothing contained in
the plan and no action taken pursuant to the provision of this plan shall create
or be construed to create a trust of any kind, or a fiduciary relationship
between the Bank and any Director, his or her spouse, or his or her estate.
6
<PAGE>
ARTICLE TWELVE
RIGHTS OF DIRECTORS
-------------------
Any retirement benefits payable hereunder shall represent only an unsecured
contractual obligation on the part of the Bank to pay the amounts described
herein. No person, including the Director, his or her spouse, or his or her
estate, shall have, by virtue of the terms of this plan, any interest in such
amounts. The extent that any person acquires a right to secure payments from
the Bank under this plan, such right shall be not greater than the right of any
unsecured general creditor of the Bank. If the Bank elects to satisfy its
obligations hereunder through the purchase of an annuity certificate, neither
the Director, his or her spouse, nor his or her estate, shall have any rights
whatsoever in the annuity certificate. The Bank shall be the sole owner and
beneficiary thereof and may exercise all incidents of ownership therein.
ARTICLE THIRTEEN
AMENDMENT
---------
The Bank, through its Board of Directors, reserves the right to amend this
plan, or to terminate the plan, at any time, except that all benefits in pay
status shall be continued.
7
<PAGE>
ARTICLE FOURTEEN
ADMINISTRATION
--------------
The Executive Committee, or the Board of Directors itself of HNVB or, if
there is no such committee, the Board of Directors, shall administer the plan.
No member of such committee, while serving as a committee member, shall be
eligible to receive any retirement benefit under the plan, but such Director
will accrue years of service. Decisions and determinations by the committee
shall be final and binding upon all parties. The committee shall have the
authority to interpret the plan, to adopt and revise rules and regulations
relating to the plan, and to make any other determinations which it believes
necessary or advisable for the administration of the plan.
ARTICLE FIFTEEN
MANDATORY RETIREMENT DATE
-------------------------
Mandatory retirement age for persons who were Directors of the entities on
March 10, 1993 is not later than December 31 of the year in which they reach
their 75th birthday. All persons who become Directors thereafter have a
mandatory retirement age of seventy-two (72) years of age. However, upon
request, the Board may grant year to year extensions until the Director reaches
age 75, at which time, they must retire on their 75/th/ birthday.
8
<PAGE>
ARTICLE SIXTEEN
LEGAL INCAPACITY
----------------
Whenever, in the committee's opinion, a person entitled to receive any
retirement benefit hereunder is under a legal disability or is incapacitated in
any way as to be unable to manage the person's financial affairs, the committee
may direct that payment be made to such person's legal representative or
guardian or to a friend of relative of such person for such person's benefit, or
the committee may direct that application of the payment for the benefit of such
person in any manner as the committee considers advisable. Any payment of a
retirement benefit in accordance with the provision of this Article 16 shall be
a complete discharge of any liability for the making of such payment under the
provisions of the plan.
ARTICLE SEVENTEEN
GOVERNING LAW
-------------
This plan shall be construed in accordance with the laws of the State of
New York, except to the extent (if any) pre-empted by federal law.
9
<PAGE>
The foregoing constitutes the entire Agreement known the HUDSON VALLEY
NATIONAL BANK DIRECTORS RETIREMENT PLAN.
DIRECTORS OF HUDSON VALLEY NATIONAL
BANK AS OF DECEMBER 1, 1993
__________________________________________
WILLIAM E. GRIFFIN, Chairman of the Board
__________________________________________
IRVING ROSNER, Vice Chairman of the Board
__________________________________________
JOHN A. PRATT, JR.
__________________________________________
JOHN N. FINNERTY
__________________________________________
ROYDEN A. LETSEN
__________________________________________
ANGELO R. MARTINELLI
__________________________________________
JAMES F. X. O'ROURKE
__________________________________________
CRAIG S. THOMPSON
10
<PAGE>
HUDSON VALLEY BANK
RESTATED AND AMENDED SUPPLEMENTAL RETIREMENT PLAN
EFFECTIVE AS OF
1 DECEMBER 1995
ARTICLE ONE
-----------
I. PURPOSE OF THE PLAN
-------------------
The purpose of the Supplemental Retirement plan (hereinafter call the
"Plan") is to provide the participating executives with an added incentive in
order to retain their services until retirement.
The plan is intended to be a non-qualified, unfounded Plan which is designed to
supplement Qualified and Social Security Benefits. The Plan may, at its option
purchase insurance on the Participant's life, payable to the Corporation to
reimburse the Corporation in whole or in part for its cost of such benefits.
This plan replaces and supersedes any and all similar plans and/or
contracts that may be in existence with the Participants.
ARTICLE TWO
-----------
The following words and phrases shall have the respective meaning set forth
below:
A. "Plan" shall mean the provisions of the Hudson Valley Bank
------
Supplemental Retirement Plan Restated as of December 1, 1995.
B. "Bank" shall mean the Hudson Valley Bank, its successors and assigns.
------
C. "Participants" shall be the following Senior Executives:
--------------
1. John A. Pratt
2. William L. Weil
3. John N. Finnerty
4. Vincent Grippo
5. Vincent Palaia
6. James J. Landy
7. John DeGiorgio
Page 1
<PAGE>
D. "Beneficiary" shall mean the person(s) entitled to the benefits as a
-------------
beneficiary of a deceased participant.
E. "Effective Date" shall mean as the 1st Day of November 1983.
----------------
F. "Base Annual Compensation" shall mean the regular base salary of the
--------------------------
Participant (before any deductions for a 401(k) Plan) actually paid to the
Participant for the services rendered during any applicable calendar year.
However, it shall exclude any overtime, fringe or supplemental compensation or
any payments from prior periods of any amounts that have been deferred at the
request of the Participant.
However if the Participant shall be considered "disabled" under the Plan the
- ----------------------------------------------------------------------------
Base Annual Compensation shall be the regular basic salary at the time of
- -------------------------------------------------------------------------
disability increased by the annual percentage in the Cost of Living (for the New
- --------------------------------------------------------------------------------
York Metropolitan Area as determined by the Bureau of Labor Statistics) limited
- -------------------------------------------------------------------------------
to a maximum of 5% annually until the Normal Retirement Date.
- ------------------------------------------------------------
G. "Normal Retirement Date" shall mean the first day of the month
------------------------
coinciding with or next following the date which a Participant has attained age
65 "Normal Retirement" and has completed at least 10 years of service.
H. "Interest Rate Offset" - The yield on a 15 Year U.S. Treasury Bond on
----------------------
the 1st Day of the Month three months prior to the Participant's Retirement.
I - Lump Sum Equivalent- The Value of the Participant's Qualified Plan
-------------------
Account as of December 1995 increased annually by:
a) Any Bank Contribution into the Qualified Plan Account
b) multiplied by the Interest Rate Offset.
J. "Bank Pension Plan Benefit" - The annual amount payable over a 15 year
-------------------------
period from the Lump Sum Equivalent of any Qualified Retirement Plan of the Bank
at the Participant's Retirement assuming the Interest Rate Offset If the Bank
should Terminate its Qualified Plan prior to the Participant's Retirement the
definition of Lump Sum shall be the Lump Sum Equivalent at Termination Increased
Annually by the Interest Rate Offset on January 1st of each year.
(An Example of this definition is - $100,000 Lump Sum Equivalent at Retirement -
7% Interest
Rate Offset - annual 15 year payment of $l0,261)
ARTICLE THREE
-------------
3. ADMINISTRATION OF THE PLAN
--------------------------
The Compensation Committee of the Bank (hereinafter called the "Committee") or
other committee so designated by the Bank's Board of Directors shall administer
the Plan. All questions of interpretation and application of the Plan shall be
determined by a majority of the Committee and the determination of such majority
shall be final and binding on all persons.
Page 2
<PAGE>
February 6, 1996
4. POSTPONED RETIREMENT
--------------------
Each Participant shall be required to retire at such time as he or she
attains the Normal Retirement Age, provided said Mandatory Retirement is in
conformity with the State and/or Federal Laws applicable at that time.
A Participant may remain in the employ of the Bank after he or she attains
the Normal Retirement Age with the permission of the Board of Directors. Such
permission shall be on a year to year basis.
No additional benefits shall accrue for any employment subsequent to age
sixty five (65), but upon retirement or separation from employment the
Participant shall receive the Normal Supplemental Retirement Benefit he or she
would have received had the Participant retired at Age 65.
ARTICLE FIVE
------------
5. BENEFITS FORMULA
----------------
A. Supp1emental Retirement Benefit - Term - A Participant who retires from
--------------------------------------
the Bank under Normal Retirement, or under Postponed Retirement, shall receive
Supplemental Retirement Benefits for a period of fifteen (15) years, payable
upon a monthly basis (180 months) beginning on the first day of the month
following his Normal or Postponed Retirement Date.
B. Supplemental Retirement Benefit - Amount - The Normal Supplemental
----------------------------------------
Retirement Benefit shall be equal to 75% of the Participant's highest Base
Annual Compensation in any of the last three years he or she was employed less
any Bank Retirement Plan Benefits which would be payable to the Participant.
C. Transfer of Duties/Authorized Leave - Notwithstanding any provision to
-----------------------------------
the contrary, so long as the Participant shall continue to be in the employ of
the Bank or the Hudson Valley Holding Corp. ("Holding Corp.") or one or more of
its subsidiaries, his or her eligibility and vesting shall not be affected by
any change of duties or position. In addition, an authorized leave of absence
shall not affect the Participant's rights. However, nothing in this Plan or in
any other agreement shall confer upon any Participant any right to continue in
the employment of the Bank, Holding Corp. or any such subsidiary, which retains
the right to terminate a Participant's employment at any time.
Page 3
<PAGE>
February 6, 1996
ARTICLE SIX
-----------
6. VOLUNTARY RESIGNATION, TERMINATION WITH AND WITHOUT CAUSE. PRIOR TO
RETIREMENT.
A. Voluntary Resignation. In the event the Participant voluntarily resigns
---------------------
before the participant reaches age 65, the Bank's obligations to make any
payments under this Agreement shall immediately terminate.
B. Termination Without Cause - In the event the Participant's employment is
-------------------------
terminated without cause before the Participant shall have reached the age of
65, the Bank's obligation to make any payments under this Agreement shall
immediately terminate, except the Participant shall be entitled to receive a
percentage of the Supplemental Retirement Benefit based upon the following
formula:
Age at Termination No. of Years of Service Non-Forfeiture Benefit
------------------ ----------------------- -----------------------
60 but less than 61 10 or more 50%
61 but less than 62 11 or more 60%
62 but less than 63 12 or more 70%
63 but less than 64 13 or more 80%
64 but less than 65 14 or more 90%
Such Supplemental Retirement Benefit shall be payable in accordance with Article
5b and shall commence upon the Participant's reaching age 65.
C. Termination for Cause - In the event that a Participant's employment is
---------------------
terminated by the Bank, Holding Corp. or any of its subsidiaries for cause
including to but not limited to wrongful application of funds, commission of a
crime, disregard of Board or Management policy or directives, all rights
hereunder may be terminated as of the date of the misconduct.
If after receive payments under this plan it shall come to the attention of the
- -------------------------------------------------------------------------------
Bank that while employed the Participant end in an act that would have caused
- -----------------------------------------------------------------------------
Termination for Cause the Participant will no longer be entitled to any benefits
- --------------------------------------------------------------------------------
under this Plan
- ---------------
The Compensation Committee's determination as to what constitutes "for
cause" shall be binding and final upon all parties.
Page 4
<PAGE>
February 6, 1996
ARTICLE SEVEN
-------------
7 TOTAL DISABILITY
----------------
A. If while employed by the Bank prior to the Participant's 65th Birthday,
Participant should become disabled by "Total Disability" as defined herein the
Participants rights and Bank's Payment Obligations as described in Article Five
hereof shall remain unaffected due to such disability. If such Total Disability
shall continue through the Participant's Normal Retirement Date, then the
Supplemental Retirement Benefit shall be payable as if the Participant had
fulfilled all of the conditions of Paragraph 5 of this Agreement.
-----------
B. "Total Disability", for the purposes of this Agreement, shall mean if
the Participant is deemed totally disabled under the Bank's Long Term Disability
Policy in effect at the time of the Participant's disability.
C. Under no circumstances shall this Article be construed to give the
Participant any additional disability benefits other than those which may be
provided by the Bank under separate disability plans or policies.
ARTICLE EIGHT
-------------
A. Death Prior to Retirement. In the event of a Participant's death while
-------------------------
employed by the Bank and prior to his or her Retirement Date, the Bank agrees to
pay to such Beneficiary as Participant may have designated pursuant to Article
Nine or in the absence of any such designation, to the Participants surviving
spouse, or if no surviving spouse then to Participant's estate, 75% of the
Participant's Base Annual Salary for a period of 15 years (the benefit years)
commencing upon the first day of the month immediately following the
Participant's death, in equal monthly installments subject to the provisions of
Paragraph B below.
B. Eligibility for Death Benefits Prior to Retirement - In order to be
--------------------------------------------------
eligible for the Pre-Retirement Death Benefit under the Plan prior to retirement
the Participant must qualify for life insurance at standard rates from the
insurer designated by the Bank. If the Participant does not quality for standard
insurance he or she can qualify for the Pre-Retirement Death Benefit if the
Participant agrees to reduce their compensation from the Bank for that portion
of the life insurance premium greater than the standard premium.
An example of this paragraph is:
Standard Premium from designated insurer $10,000
Premium Offered by Insurer 12,500
Participant's Annual Salary Reduction 2,500
If the Participant was previously insured at standard rates and subsequently
cannot qualify for standard rates and does not elect salary reduction as stated
above the Participant will still be
Page 5
<PAGE>
February 6, 1996
entitled to death benefits based upon the participant's Base Annual Compensation
in the Year the last policy was issued at standard rates.
C. Death Benefit While Receiving Retirement Benefits - In the event of the
-------------------------------------------------
Participant's death while receiving retirement payments under Articles Five and
Six, Death Benefits shall be payable to such beneficiary as Participant may have
designated pursuant to Article Nine or in the absence of any such designation's
to the participant's surviving spouse, or if no surviving spouse then to
Participant's estate, in the same manner as if payable to the Participant. Any
amounts not fully paid by reason of Participant's death while receiving
payments, if any, shall also be payable in the same manner and under the same
conditions as if payable to the Participant under Paragraph 8A above.
ARTICLE NINE
------------
9. DESIGNATION OF BENEFICIARY.
---------------------------
A. To designate a Beneficiary or Beneficiaries to receive Death Benefits
or Unpaid Retirement Benefits under this Agreement , the Corporation shall
provide the Participant Beneficiary forms to designate the name, address and
relationship and percentage benefit payable to the Beneficiary. If the
Corporation does not have an executed Beneficiary Designation of the
Participant, the benefits shall be payable to the Participant's surviving spouse
or if the Participant has no surviving spouse, the estate of the Participant. If
the Beneficiary of any benefits is the surviving spouse of the Participant, said
surviving spouse shall have the right to designate a Beneficiary to receive any
unpaid benefits due at the surviving spouse's death. If the Beneficiary is not
the surviving spouse, the Participant shall have the right to name Successor
Beneficiaries.
ARTICLE TEN
-----------
10. Restrictive Covenant
--------------------
The Participant agrees that during employment or while receiving benefits,
he or she shall not accept employment or consultancy with any bank mortgage or
--------------------------------------------------------------------
brokerage company or financial institution, nor solicit, directly or indirectly,
- ------------------------------------------
on behalf of any bank, mortgage or brokerage company or financial institution
any person or entity that is or was a customer of the Bank, the Holding Corp. or
any of its subsidiaries. In order to clarify the term "was a customer of", it
shall be construed to mean a customer at any time within five (5) years prior to
the Participant's termination of employment.
Page 6
<PAGE>
February 6, 1996
ARTICLE ELEVEN
--------------
11. Insurance
---------
It is the intention of the Corporation to purchase a life insurance
contract or contracts on the Participant's life payable to the Corporation as a
means of reimbursing itself, in whole or in part, for the cost of the benefits
provided in this Agreement. The Participant agrees to cooperate with the
Corporation in obtaining such insurance by giving necessary consents or by
submitted to any necessary physical examinations. Nothing in this Agreement,
however, shall create an obligation on the Corporation's part to obtain life
insurance or to set aside any assets or funds to meet the obligations under this
Agreement and the Corporation hereby reserves the absolute right in its sole
discretion to terminate any insurance contract it may obtain on the
Participant's life, or to terminate in whole or in part, any other funding
program it may elect to undertake in connection with this Agreement,
ARTICLE TWELVE
--------------
12. REORGANIZATION
--------------
If the Bank is merged, consolidated into or with any other corporation or
substantially all the assets are transferred to another corporation, the
provisions of this Agreement are binding upon and inure to the benefit of the
corporation resulting from such merger, consolidation, or transfer.
Notwithstanding any other provisions of this Agreement, in the event of a
merger, consolidation or sale of substantially all of the Corporation's assets,
the Participant would at the time of said reorganization have ten (10) or more
years of service and be under age 60, the Participant for purposes of this
Agreement shall be deemed to be Age 60. Even though the Participant may be
entitled to receive payments prior to Age 65 if terminated under this paragraph
the provisions in regard to Postponed Retirement under Article Four above shall
only be effective after the Participant's chronological age of 65.
An example of this paragraph is:
Participant Age 55 - 12 Years of Service - Bank is sold .Participant is
terminated without cause
2 years after sale - Base Compensation at that time is $100,000
Participant would be entitled to $52,500 less any Qualified Plan Offset three
years hence payable for 15 Years.
Page 7
<PAGE>
February 6, 1996
ARTICLE THIRTEEN
----------------
13. INCAPACITY OF RECIPIENT
-----------------------
In the event a Participant or Beneficiary is declared incompetent or the
provisions of the Participant or Beneficiary's Durable Power of Attorney has
been satisfied, any benefits payable under the Plan to which such Participant or
Beneficiary shall be entitled may be paid to such Guardian or Attorney-in-Fact
or any other person legally charged with the care of this person or estate.
Except as provided above in this paragraph, when. the Compensation Committee in
its sole discretion determines that a Participant or Beneficiary is unable to
manage its financial affairs, the Compensation Committee may direct the payments
to any persons for the benefit of the Participant or Beneficiary.
ARTICLE FOURTEEN
----------------
14 CLAIMS BY OTHERS
----------------
At no time shall the Participant's estate, Participant's spouse, or any
other Beneficiary the Participant may have designated under this Agreement be
deemed to have any claims, rights, title or any other interest in or to any life
insurance contact(s) the Corporation may have obtained or any specific fund or
asset belonging to the Corporation. As to any claim for unpaid benefits under
this Agreement, the Participant, Participant's spouse, or any other designated
Beneficiary shall be an unsecured creditor of the Corporation with no greater
rights than any other creditor having a general claim for unpaid compensation.
ARTICLE FIFTEEN
---------------
15. ENCUMBRANCES
------------
It is expressly agreed that neither the Participant, the Participant's
spouse, nor any other Beneficiary shall have the right to commute, sell, pledge,
assign, transfer or otherwise convey the right to receive any payments under
this Agreement, which payments and rights hereto being hereby expressly made
nonassignable and nontransferable. Such payments shall not be subject to legal
process or levy of any kind.
Page 8
<PAGE>
February 6, 1996
ARTICLE SIXTEEN
---------------
16. RELATION TO OTHER BENEFITS
--------------------------
The benefits under this Agreement shall be independent of, and in addition
to, benefits payable under any other employment agreement that may exist from
time to time between the parties hereto, or any other compensation payable by
the Corporation to the Participant whether as salary, or otherwise. This
Agreement shall not be deemed to constitute a contract of employment between the
parties, nor shall any provision hereof restrict the absolute right of the
Corporation to discharge the Participant at will or restrict the absolute right
of the Participant to terminate his/her employment at will. However, it is
intended that this Agreement shall remain in effect until all benefits have been
paid, except in the event of earlier termination of the Agreement as provided
under any other termination provision of this Agreement.
ARTICLE SEVENTEEN
-----------------
17. LUMP SUM PAYMENT OF BENEFITS
----------------------------
The Corporation shall have the right to commute any benefits after they
become payable under the program but shall be limited to utilizing the Interest
Rate Offset.
An example of this article is:
1. Annual Payment -$75,000.
2. Years Remaining -5.
3. Interest Rate Offset - 7%
4. Commuted Amount -$329,040
ARTICLE EIGHTEEN
----------------
During the Participant's lifetime this Agreement may be terminated or
amended in any particular by the mutual written agreement of the Participant and
the Corporation.
Page 9
<PAGE>
February 6, 1996
ARTICLE NINETEEN
----------------
19. BINDING EFFECT
--------------
This Agreement shall be binding upon the parties hereto, their heirs,
executors and administrators, conservators, attorney-in-fact and successors in
interest.
ARTICLE TWENTY
--------------
20. GOVERNING LAW
-------------
This Agreement shall be construed in accordance with the laws of the State
of New York. except to the extent (if any) preempted by Federal law.
ARTICLE TWENTY-ONE
------------------
21. ARBITRATION
-----------
Unless otherwise provided in this Agreement, any controversy or claim
arising out of or relating to this contract, or the breach thereof, shall be
settled by the American Arbitration Association2 and the judgment upon the award
rendered by the Arbitrators may be entered in any Court having jurisdiction
thereof.
ARTICLE TWENTY-TWO
------------------
22. SEVERABILITY
------------
It is agreed that the invalidity or unenforceability of any article,
section, provision of this Agreement shall not effect the validity or
enforceability of any one or more of the other articles, sections, paragraphs or
provisions.
HUDSON VALLEY BANK
by_________________________
Chairman of the Board
ATTEST:
_________________________
Secretary.
Page 10
<PAGE>
EXHIBIT 10.3
HUDSON VALLEY BANK
SUPPLEMENTAL RETIREMENT PLAN OF 1997
------------------------------------
EFFECTIVE AS OF JULY 1, 1997
ARTICLE ONE
-----------
1. PURPOSE OF THE PLAN
-------------------
The purpose of the Hudson Valley Bank Supplemental Retirement Plan
(hereinafter called the "Plan") is to provide the participating executives with
an added incentive in order to retain their services until retirement.
The Plan is intended to be a non-qualified, unfunded Plan which is designed
to supplement all other benefits received, now or in the future, by the
participant. The Plan may, at its option, purchase insurance on the
participant's life with the Bank being the beneficiary of these policies in
order to reimburse itself, in whole or in part, for its cost of such benefits.
ARTICLE TWO
-----------
2. DEFINITIONS
-----------
The following words and phrases shall have the respective meaning set forth
below:
A. "Plan" shall mean the provisions of the Hudson Valley Bank Supplemental
Retirement Plan of 1997.
B. "Bank" shall mean the Hudson Valley Bank, its successors and assigns.
C. "Participants" shall be those present and future Senior Executives
selected by the Compensation Committee to participate in the Plan.
<PAGE>
D. "Beneficiary" shall mean the person(s) entitled to the benefits as a
beneficiary of a deceased participant.
E. "Effective Date" shall mean the 1st day of July, 1997.
F. "Base Annual Compensation" shall mean the regular basic salary of the
Participant (before any deductions for a 401(k) Plan or any other deferred
income) actually paid for the services rendered during any applicable calendar
year. However, it shall exclude any bonuses, overtime, fringe or supplemental
compensation or any payments from prior periods of any amounts that have been
deferred at the request of the employee.
However, if the Participant shall be considered "disabled" under the Plan,
the Base Annual Compensation shall be the regular basic salary at the time of
disability, increased by the annual percentage in the Cost of Living (for the
New York Metropolitan Area as determined by the Bureau of Labor Statistics)
limited to a maximum of 5% annually until the Normal Retirement Date.
G. "Normal Retirement Date" shall mean the first day of the month
coinciding with or next following the date which a Participant has attained Age
65 "Normal Retirement" and has completed at least ten (10) years of service.
H. "Interest Rate Offset" shall mean the yield on a 15 Year United States
Treasury Bond on the first day of the month, three (3) months prior to the
Participant's retirement.
I. "Lump Sum Equivalent" shall mean the value of the Participant's
Qualified Plan Account as of the date of retirement.
J. "Bank Pension Plan Benefit" shall mean the annual amount payable over a
fifteen (15) year period from the lump sum equivalent of any Qualified
Retirement Plan of the Bank at
2
<PAGE>
the Participant's retirement assuming the interest rate offset. If the Bank
should terminate its Qualified Plan prior to the Participant's retirement, the
definition of lump sum shall be the lump sum equivalent at termination increased
annually by the interest rate offset on January 1st of each year.
(An example of this definition is: $100,000 lump sum equivalent at
retirement - 7% interest rate offset - annual 15 year payment of $10,261).
K. "401(k) Matching Offset" shall mean the annual amount payable over a 15
year period from the maximum annual amount the Bank would have matched to the
executive's 401(k) contribution (irrespective of whether the executive
contributed the maximum amount) increased annually by the interest rate offset.
(An example of this definition is: $50,000 lump sum equivalent at
retirement - 7% interest rate offset - annual 15 year payment of $5,130).
ARTICLE THREE
-------------
3. ADMINISTRATION OF THE PLAN
--------------------------
The Compensation Committee of the Bank (hereinafter called the "Committee")
or other committee so designated by the Bank's Board of Directors shall
administer the Plan. All questions of interpretation and application of the
Plan shall be determined by a majority of the committee and the determination of
such majority shall be final and binding on all persons.
3
<PAGE>
ARTICLE FOUR
------------
4. POSTPONED RETIREMENT
--------------------
Each Participant shall be required to retire at such time as he or she
attains the Normal Retirement Age, provided said Normal Retirement is in
conformity with the State and/or Federal Laws applicable at that time.
A. Participant may remain in the employ of the Bank after he or she
attains the Normal Retirement Age for such periods or "at will" as may be agreed
to by the Board of Directors.
No additional benefits shall accrue for any employment subsequent to Age
65, but upon retirement or separation from employment, the Participant shall
receive the Normal Supplemental Retirement Benefits he or she would have
received had the Participant retired at Age 65.
ARTICLE FIVE
------------
5. BENEFITS FORMULA
----------------
A. Supplemental Pension Benefit - Term - A Participant who retires from
the Bank under Normal Retirement, or under Postponed Retirement, shall
receive supplemental retirement benefits for a period of fifteen (15)
years, payable on a monthly basis (180 months) beginning on the first
day of the month following his Normal or Postponed Retirement Date .
B. Supplemental Pension Benefit - Amount - The Normal Supplemental Pension
Benefit shall be equal to 60% of the average of the highest five years
Base Annual Compensation during the last ten years of the Participant's
employment reduced by the following :
1. The Lump Sum Equivalent of Qualified Plan Benefit;
4
<PAGE>
2. The Lump Sum Equivalent of the 401(k) Matching benefit;
3. 50% of the Executive's Primary Social Security Benefit; and
4. The Lump Sum Equivalent of any other retirement type benefits which
have been provided and paid for by the Bank during the course of the
Participant's employment.
An example of this provision is as follows:
Age Salary
63 $150,000
------------------------------------------------
64 $135,000
------------------------------------------------
62 $125,000
------------------------------------------------
61 $110,000
------------------------------------------------
60 $100,000
------------------------------------------------
Average $124,000
------------------------------------------------
60% of Average Salary $ 74,400
------------------------------------------------
Minus Pension Plan $24,4000
Lump Sum Equivalent
------------------------------------------------
Minus 401(k) Match $ 5,100
Lump Sum Equivalent
------------------------------------------------
Minus 50% Primary $ 7,500
Social Security
------------------------------------------------
Equals 15 Yr. $ 37,400
Supplemental Pension
------------------------------------------------
C. Transfer of Duties/Authorized Leave - Notwithstanding any provision to
the contrary, so long as the Participant shall continue to be in the employ of
the Bank or the Hudson Valley Holding Corp. or one or more of its subsidiaries,
his or her eligibility and vesting shall not be affected by any change of duties
or position. In addition, an authorized leave of absence shall not affect the
Participant's rights. However, nothing in this Plan or in any other agreement
5
<PAGE>
shall confer upon any Participant any right to continue' in the employment of
the Bank, Holding Corp., or any such subsidiary.
ARTICLE SIX
-----------
6. VOLUNTARY RESIGNATION, TERMINATION WITH AND WITHOUT CAUSE, PRIOR TO
--------
RETIREMENT.
-----------
A. Voluntary Resignation. In the event the Participant voluntarily
---------------------
resigns, before the Participant reaches Age 65, the Bank's obligations to make
any payments under this Agreement shall immediately terminate.
B. Termination with Cause. In the event that a Participant is terminated
----------------------
for cause including but not limited to wrongful application of funds, commission
of a crime or disregard of Board or Management policy or directives at any time
either before the Participant reaches Age 65 or after the Participant reaches
Age 65 if the Participant has postponed retirement in accordance with Article 4
herein, the Bank's obligations to make any payments under this Agreement shall
immediately terminate. Additionally, if after receiving payments under this
plan, it comes to the attention of the Bank that while employed, the Participant
engaged in an act that would have caused Termination for Cause, the participant
will no longer be entitled to benefits under this Plan.
The Compensations Committee's determination as to what constitutes "for
cause" shall be binding and final on all parties.
C. Termination without Cause. In the event the Participant's employment
-------------------------
is terminated without cause before the Participant shall have reached the Age of
65, the Bank's obligation to make any payments under this Agreement shall
immediately terminate, except the
6
<PAGE>
Participant shall be entitled to receive a percentage of the annual benefits
based upon the following formula:
# of Years Non-Forfeiture
Age at Termination Of Service Benefit
------------------------------------------------------------------
60 but less than 61 10 or more 50%
------------------------------------------------------------------
61 but less than 62 11 or more 60%
------------------------------------------------------------------
62 but less than 63 12 or more 70%
------------------------------------------------------------------
63 but less than 65 13 or more 80%
------------------------------------------------------------------
64 but less than 65 14 or more 90%
------------------------------------------------------------------
ARTICLE SEVEN
-------------
7. TOTAL DISABILITY
----------------
A. If, prior to the Participant's 65th birthday, Participant should become
disabled by "Total Disability" as defined herein, while employed by the Bank,
the Participant's rights and Bank's payment obligations as described in Article
Five hereof, shall remain unaffected due to such disability. If such Total
Disability shall continue through the Participant's "Normal Retirement Date",
then the annual benefits shall be payable as if the Participant had fulfilled
all of the conditions in Paragraph 5 of this Agreement.
B. "Total Disability", for the purposes of this Agreement, shall be if the
Participant is deemed totally disabled under the Bank's Long Term Disability
Policy in effect at the time of the Participant's disability.
7
<PAGE>
C. Under no circumstances shall this Article be construed to give the
Participant any additional disability benefits other than those which may be
provided by the Bank under separate disability plans or policies.
ARTICLE EIGHT
-------------
8. DEATH BENEFITS
--------------
A. Death Prior to Age 60 - In the event of a Participant's death while
---------------------
employed by the Bank prior to Age 60 and prior to his or her Retirement Date,
the Bank agrees to pay to such beneficiary as Participant may have designated
pursuant to Article Nine or in the absence of any such designation, to the
Participant's surviving spouse, or if no surviving spouse, then to Participant's
estate, 60% of the Participant's Base Annual Compensation (see definitions) for
a period of fifteen (15) years (the benefit years) commencing upon the first day
of the month immediately following the Participant's death, with death benefits
in equal monthly installments subject to the provisions of Paragraph B below.
B. Death After Age 60 but Prior to Retirement - In the event of a
------------------------------------------
Participant's death after Age 60, but before receiving retirement benefits, the
amount paid to the designated beneficiary shall be the amount as if the
Participant had retired on the normal retirement date.
C. Eligibility for Death Benefits Prior to Retirement - In order to be
--------------------------------------------------
eligible for the pre-retirement death benefit under the Plan1 prior to
retirement, the Participant must qualify for life insurance at standard rates
from the insurer designated by the Bank. If the Participant does not qualify for
standard insurance, he or she can qualify for the Pre-Retirement Death Benefit
if the Participant agrees to reduce their compensation from the Bank for that
portion of the life insurance premium greater than the standard premium.
8
<PAGE>
An example of this paragraph is:
If Standard Premium could be issued = $10,000
Premium Offered by Insurer = 12,500
Executive's Annual Salary Reduction = 2,500
If the Participant was previously insured at standard rates and receives an
increase in Base Annual Compensation which necessitates additional insurance for
which Participant is uninsurable or cannot qualify for standard rates and the
Participant does not elect salary reduction as stated above, the Participant
will still be entitled to death benefits based upon the Participant's Base
Annual Compensation in effect at the time immediately prior to the increase in
Base Annual Compensation that triggered the need for increased insurance.
D. Death Benefit While Receiving Retirement Benefits - In the event of the
-------------------------------------------------
Participant's death while receiving retirement payments under Articles Five and
Six, Death Benefits shall be payable to such beneficiary as Participant may have
designated pursuant to Article Nine or in the absence of any such designation,
to the Participant's surviving spouse, or if no surviving spouse, then to
Participant's estate, in the same manner as if payable to the Participant. Any
amounts not fully paid by reason of any such payee's death while receiving
payments, if any, shall also be payable in the same manner and under the same
conditions as if payable to the Participant under Paragraph 8A above.
ARTICLE NINE
------------
9. DESIGNATION OF BENEFICIARY
--------------------------
To designate a beneficiary or beneficiaries to receive death benefits or
unpaid retirement benefits under this Agreement, the Bank shall provide each
Participant with beneficiary forms to
9
<PAGE>
designate the name, address, relationship, and percentage benefit payable to the
beneficiary. If the Bank does not have an executed beneficiary designation of
Participant, the benefits shall be payable to the Participant's surviving spouse
or if the Participant has no surviving spouse, the estate of the Participant. If
the beneficiary of any benefits is the Surviving spouse of the Participant, said
surviving spouse shall have the right to designate a beneficiary to receive any
unpaid benefits due to the surviving spouse at their death. If the beneficiary
is not the surviving spouse, the Participant shall have the right to name
successor beneficiaries.
ARTICLE TEN
-----------
10. RESTRICTIVE COVENANTS
---------------------
A. Employment and Solicitation. The Participant agrees that during
---------------------------
employment or while receiving benefits hereunder, the Participant shall not
accept employment or consultancy with any bank, mortgage or brokerage company,
or financial institution, nor solicit as a customer, either directly or
indirectly, on behalf of any other bank, mortgage or brokerage company, or
financial institution, any person or entity that is domiciled or operating
within the Bank's primary market area as defined in its public C.R.A. statement
or anyone who is a current or prospective customer of the Bank, wherever
located.
B. Confidential Information. During the term of employment or while
------------------------
receiving benefits hereunder, the Participant agrees to keep confidential all
information provided by the Bank except only such information as is already
known to the public, and including such information and material relating to any
customer, vendor, licensee, or other party transacting business with the Bank
and not to release, use, or disclose the same except with the prior written
permission of the Bank.
10
<PAGE>
Participant further agrees to consider all plans, strategies and techniques
with which the Participant has become familiar to be confidential and the
exclusive property of the Bank which will not be disclosed to anyone for any
reason whatsoever. All records, files, reports, lists, customer lists, plans
documents, equipment, and the like relating to the business of the Bank, which
the Participant has used or come into contact with, shall remain the sole
property of the Bank.
Participant agrees that on request of the Bank, and in any event upon
termination, Participant shall turn over to the Bank all documents, papers, or
other material in Participant's possession and under Participant's control which
may contain or be derived from confidential information, together with all
documents, notes, or other work product which is connected with or derived from
Participant's services to the Bank whether or not such material is at the date
hereof in Participant's possession. Participant agrees that he or she shall
have no proprietary interest in any work product developed or used by him or her
arising out of employment with the Bank.
C. Injunctive Relief. Participant acknowledges that the Bank will suffer
------------------
irreparable injury, not readily susceptible of valuation in monetary damages, if
the Participant breaches any of the obligations under paragraphs 10 A or 10 B
above. Accordingly, the Participant agrees that the bank will be entitled to
injunctive relief against any breach or prospective breach by the Participant of
the Participant's obligation's under paragraphs 10 A or 10 B in any federal or
state court of competent jurisdiction sitting in the State of New York. The
Participant hereby submits to the jurisdiction of such courts for the purposes
of any actions or proceeding instituted by the Bank to obtain such injunctive
relief, and agrees that process may be served on the Participant by
11
<PAGE>
registered mail, addressed to the last address of the Participant known to the
Bank, or in any other manner authorized by law.
ARTICLE ELEVEN
--------------
11. INSURANCE
---------
It is the intention of the Bank to purchase a life insurance contract or
contracts on the Participant's life payable to the Bank as a means of
reimbursing itself, in whole or in part, for the cost of the benefits provided
in this Agreement. The Participant agrees to cooperate with the Bank in
obtaining such insurance by giving necessary consents or be submitted to any
necessary physical examinations. Nothing in this Agreement, however shall
create an obligation on the Bank's part to obtain life insurance or to set aside
any assets or funds to meet the obligations under this Agreement and the Bank
hereby reserves the absolute right in its sole discretion to terminate any
insurance contract it may obtain on the Participant's life, or to terminate in
whole or in part, any other funding program it may elect to undertake in
connection with this Agreement.
ARTICLE TWELVE
--------------
12. REORGANIZATION
--------------
If the Bank is merged, consolidated into or with any other Corporation or
substantially all the assets are transferred to another Corporation, the
provisions of this Agreement are binding upon and inure to the benefit of the
corporation resulting from such merger, consolidation, or transfer.
Notwithstanding any other provisions of this Agreement, in the event of a
merger, consolidation or sale of the Bank's assets where the Bank remains the
controlling party, such an
12
<PAGE>
event shall have no effect on this Agreement and this Agreement shall remain in
full force and effect.
Notwithstanding any other provisions of this Agreement, in the event of a
merger, consolidation or sale of substantially all of the Bank's assets where
the Bank is not the controlling party and the Participant would at the time of
said merger, consolidation or sale have ten (10) or more years of service and be
under Age 60, the Participant for purposes of this Agreement shall be deemed to
be Age 60. Even though the Participant may be entitled to receive payments
prior to Age 65 if terminated under this paragraph, the provisions in regard to
postponed retirement under Article Four above shall only be effective after the
Participant's chronological age of 65.
An example of this paragraph is:
Executive Age 55 - 12 Year of Service - Bank is sold - Executive is
terminated without cause 2 years after sale - average 5-Year compensation at
that time is $100,000.
Executive would be entitled to $35,000 less any Qualified Plan Offset 3
years hence, payable for 15 years: i.e.,
$100,000 x 50% x 70% = $35,000
(Pension) (Age 62) (Pension Before Offsets)
ARTICLE THIRTEEN
----------------
13. INCAPACITY OF RECIPIENT
----------------------
In the event a Participant or Beneficiary is declared incompetent or the
provisions of the Participant or Beneficiary's Durable Power of Attorney has
been satisfied, then any benefits payable under the Plan to which such
Participant or Beneficiary shall be entitled may be paid to
13
<PAGE>
such Guardian or Attorney-in-Fact or any other person legally charged with the
care of this person or estate. Except as provided above in this paragraph, if
the Compensation Committee in its sole discretion determines that a Participant
or Beneficiary is unable to manage his or her own financial affairs, the
Compensation Committee may direct the payments to any persons for the benefit of
the Participant or Beneficiary.
ARTICLE FOURTEEN
----------------
14. CLAIMS BY OTHERS
----------------
At no time shall the Participant's estate, Participant's spouse, or any
other beneficiary the Participant may have designated under this Agreement, be
deemed to have any claims, rights, title, or any other interest in or to any
life insurance contract(s) the Bank may have obtained or any specific fund or
asset belonging to the Bank. Regarding any claim for unpaid benefits under this
Agreement, the Participant, Participant's spouse, or any other designated
beneficiary shall be an unsecured creditor of the Bank with no greater rights
than any other creditor having a general claim for unpaid compensation.
ARTICLE FIFTEEN
---------------
15. ENCUMBRANCES
------------
It is expressly agreed all payments under this Agreement and any rights
thereto are nonassignable and nontransferable. Neither the Participant, the
Participant's spouse, nor any other beneficiary shall have the right to commute,
sell, pledge, assign, transfer or otherwise convey the right to receive any
payments under this Agreement. Such payments shall not be subject to legal
process or levy of any kind.
14
<PAGE>
ARTICLE SIXTEEN
---------------
16. RELATION TO OTHER BENEFITS
--------------------------
The benefits under this Agreement shall be independent of, and in addition
to, benefits payable under any other employment agreement that may exist from
time to time between the parties hereto, or any other compensation payable by
the Bank to the Participant whether as salary, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between the parties,
nor shall any provision hereof restrict the absolute right of the Bank to
discharge the Participant at will or restrict the absolute right of the
Participant to terminate his/her employment at will. However, it is intended
that this Agreement shall remain in effect until all benefits have been paid,
except in the event of earlier termination of the Agreement as provided under
any other termination provision of this Agreement.
ARTICLE SEVENTEEN
-----------------
17. LUMP SUM PAYMENT OF BENEFITS
----------------------------
The Corporation shall have the right to commute any benefits after they
become payable under the program but shall be limited to utilizing the Interest
Rate Offset.
An example of this article is:
1. Annual Payment $ 37,500
2. Years Remaining 5
3. Interest Rate Offset 7%
4. Commuted Amount $164,520
15
<PAGE>
ARTICLE EIGHTEEN
----------------
18. AMENDMENTS
----------
During the Participant's lifetime this Agreement may be terminated or
amended in any particular by the mutual written agreement of the Participant and
the Bank.
ARTICLE NINETEEN
----------------
19. BINDING EFFECT
--------------
This Agreement shall be binding upon the parties hereto, their heirs,
executors and administrators, conservators, attorney-in-fact and successors in
interest.
ARTICLE TWENTY
--------------
20. GOVERNING LAW
-------------
This Plan shall be construed in accordance with the laws of the State of
New York, except to the extent (if any) preempted by federal law.
ARTICLE TWENTY-ONE
------------------
21. ARBITRATION
-----------
Unless otherwise provided in this Agreement, any controversy or claim
arising out of or relating to this contract, or the breach thereof, shall be
settled by the American Arbitration Association and the judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof.
16
<PAGE>
ARTICLE TWENTY-TWO
------------------
22. SEVERABILITY
------------
It is agreed that the invalidity or unenforceability of any article,
section, provision of this Agreement shall not affect the validity or
enforceability of any one or more of the other articles, sections, paragraphs or
provisions.
HUDSON VALLEY BANK
BY: __________________________
Chairman of the Board
November 16, 1998
ATTEST:
_______________________________
Secretary
A:\RETIRE.WPD
17
<PAGE>
EXHIBIT 10.4
HUDSON VALLEY HOLDING CORP.
1992 STOCK OPTION PLAN
<PAGE>
HUDSON VALLEY HOLDING CORP.
1992 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
-------------------
The purpose of the Hudson Valley Holding Corp. 1992 Stock Option Plan (the
"1992 Plan") is to provide a means by which Hudson Valley Holding Corp. (the
"Corporation"), through the grant of incentive stock options and nonstatutory
stock options to eligible employees, directors, consultants and advisors, may
attract and retain persons of ability and motivate these persons to exert their
best efforts on behalf of the Corporation and any Subsidiary Corporation of the
Corporation, ("Subsidiary Corporation"). For the purposes of the 1992 Plan, and
any option agreement under the 1992 Plan, the term "Subsidiary Corporation"
means a Subsidiary Corporation as defined by Section 424(f) of the Internal
Revenue Code of 1986, as amended. It is intended that options issued under the
Plan may be either incentive stock options which meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory
stock options.
2. SHARES SUBJECT TO THE 1992 PLAN.
-------------------------------
Subject to the provisions of Section 5B(9) of the 1992 Plan, 275,000 shares
of the common stock of the Corporation (the "Common Stock") shall be reserved
and may be optioned under the 1992 Plan. The reserved shares may be authorized
and unissued shares, treasury shares, or any combination of both. Subject to the
provisions of Section 5B(9) of the 1992 Plan, if an option granted under the
1992 Plan expires, terminates, or is canceled for any reason, the shares of
stock representing that option shall be available again under the 1992 Plan.
3. ADMINISTRATION OF THE 1992 PLAN.
-------------------------------
<PAGE>
The 1992 Plan shall be administered by the Compensation Committee of the
Corporation (the "Committee"). The Committee shall have plenary authority in its
sole discretion, subject to and not inconsistent with the express provisions of
the 1992 Plan, to grant options; to determine the purchase price of the Common
Stock covered by each option, the term of each option, the employees, directors,
consultants, and advisors to whom, and the time or times at which, options shall
be granted, and the number of shares to be covered by each option; to designate
options as incentive stock options or nonstatutory stock options; to interpret
the 1992 Plan; to prescribe, amend, and rescind rules and regulations relating
to the 1992 Plan; to determine the terms and provisions of the option agreements
(which need not be identical) for options granted under the 1992 Plan; and to
make all other determinations deemed necessary or advisable for the
administration and operation of the 1992 Plan.
The Committee shall keep minutes of its meetings. All actions of the
Committee shall be taken by a majority of its members. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all persons who have received awards, the Corporations,
any Subsidiary Corporation, and all other interested persons.
4. ELIGIBILITY AND GRANT OF OPTIONS UNDER THE 1992 PLAN.
----------------------------------------------------
A. Incentive stock options may be granted to any employee of the Corporation
or of any Subsidiary Corporation who is a signatory to a Stock Restriction
Agreement with respect to all of his or her common stock, including all stock
presently owned, or hereinafter acquired. This Agreement will be substantially
in the form of Exhibit "A", attached hereto. No incentive stock option may be
granted to any employee who at the time of such grant owns more than 10 percent
-3-
<PAGE>
of the total combined voting power of all classes of stock of the Corporation or
of any Subsidiary Corporation.
B. Nonstatutory stock options may be granted to any director, consultant, or
advisor of the Corporation or of any Subsidiary Corporation who is not an
employee of either the Corporation or of any Subsidiary Corporation and who is a
signatory to a Stock Restriction Agreement with respect to all of his or her
common stock, including all stock presently owned, or hereinafter acquired. This
Agreement will be substantially in the form of Exhibit "A", attached hereto.
5. TERMS AND CONDITIONS OF OPTIONS GRANTED UNDER THE 1992 PLAN
-----------------------------------------------------------
Each option granted under the 1992 Plan shall be evidenced by a written
agreement in a form determined by the Committee. Such agreement shall be subject
to the following express terms and conditions, and such other terms and
conditions as the Committee may deem appropriate.
A. IDENTIFICATION OF OPTION STATUS AND OPTION PERIOD.
-------------------------------------------------
Each option agreement shall identify the status of the option as an
incentive stock option intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended, or as a nonstatutory stock option. An
incentive stock option and a nonstatutory stock option may not be granted
subject to a tandem exercise arrangement. Each option agreement shall specify
the period for which the option thereunder is granted and shall provide that the
option shall expire at the end of such period. The period for which an option is
granted may not exceed 10 years from the date of the grant of the option.
-4-
<PAGE>
B. EXERCISE OF OPTION.
------------------
(1) BY AN OPTIONEE WHILE AN EMPLOYEE. DIRECTOR, CONSULTANT OR ADVISOR.
-----------------------------------------------------------------
Subject to the provisions of this Section 5B of the 1992 Plan, each option shall
be exercisable by an optionee while an employee, director, consultant, or
advisor of the Corporation or of any Subsidiary Corporation from time to time
over a period beginning on the date of the grant of the option and ending on the
earliest of the expiration, termination, or cancellation of the option;
provided, however, that the Committee may, by the provisions of any option
agreement, limit the period of time during which the option is exercisable and
limit the number of shares purchasable in any period of time during which the
option is exercisable.
(2) EXERCISE IN THE EVENT OF DEATH OR DISABILITY
--------------------------------------------
a. DEATH - If an optionee under an incentive stock option dies
-----
while an employee of the Corporation or of any Subsidiary
Corporation, or if an optionee under a nonstatutory stock
option dies while a director, consultant or advisor of the
Corporation or of any Subsidiary Corporation, his or her
option(s) under the 1992 Plan may be exercised by the estate of
the deceased optionee or by any person who acquired such
option(s) by bequest or inheritance or by reason of the death
of the optionee within the twelve (12) months immediately
following his or her death, and to the extent that the deceased
optionee was entitled to exercise such option(s) on the date of
his or her death; provided, however, that no option may be
exercised after the fixed period of that option.
-5-
<PAGE>
b. DISABILITY - If an optionee under an incentive stock option
----------
ceases to be an employee of the Corporation or of any
Subsidiary Corporation, or if an optionee under a nonstatutory
stock option ceases to be a director consultant or advisor of
the Corporation or of any Subsidiary Corporation, because of a
disability as defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended, his or her right to exercise
the option(s) under the 1992 Plan may be exercised by him or
her, his or her attorney-infact or conservator, within the 12
months immediately following the date when he or she ceases to
be an employee, director, consultant or advisor to the extent
that the optionee was entitled to exercise such option(s) on
the date when his or her employment with, directorship of, or
engagement as a consultant or advisor by the Corporation or any
Subsidiary Corporation ceases; provided, however, that no
option may be exercised after the fixed period of that option
and that the exercise of any incentive stock option by an
attorney-infact or conservator of the optionee does not
disqualify that option as an incentive stock option under
Section 422 of the Internal Revenue Code of 1986, as amended.
As to all employee optionees, if the disability leave does not exceed 90
days, the optionee will be deemed to be in the continuous employment of his or
her employer during the leave period. However, if the disability leave exceeds
90 days, the optionee will be deemed to have terminated his or her employment on
the 91st day of that leave, and will not, pursuant to Section
-6-
<PAGE>
22(E) 3, continue to accrue hours of service, unless reemployment is guaranteed
by statute or contract.
(3) TERMINATION OF EMPLOYMENT.
-------------------------
If an optionee under an incentive stock option ceases to be an
employee of the Corporation or of any Subsidiary Corporation, for any reason
other than death or disability, his or her right to exercise eligible option(s)
as of the date of termination under the 1992 Plan may be exercised by him or her
within the 3 months immediately following the date of his or her termination of
employment, or the expiration date of any mutually agreed salary continuation
agreement, to the extent that the optionee was entitled to exercise such
option(s) at the date of his or her termination of employment; provided,
however, that no option may be exercised after the fixed period of that option;
provided further, that if an optionee ceases to be an employee of the
Corporation or of any Subsidiary Corporation because he or she voluntarily
terminates his or her employment or because his or her employment is
involuntarily terminated by the corporation or of any Subsidiary Corporation as
a result of his or her willful misconduct, as determined in the sole discretion
of the Committee, all right to exercise the option(s) under the 1992 Plan shall
terminate on the date his or her employment ceases.
Amendment (in bold lettering) approved October 16,1995
(4) TERMINATION OF DIRECTORSHIP OR OF ENGAGEMENT AS A CONSULTANT OR
---------------------------------------------------------------
ADVISOR. If an optionee under a nonstatutory option ceases to be a director,
- -------
consultant or advisor of the Corporation or of any Subsidiary Corporation for
any reason other than his or death or disability, his or her right to exercise
the option(s) under the
-7-
<PAGE>
1992 Plan may be exercised within the 3 months immediately following the date
when his or directorship terminates or when his or her engagement as a
consultant or advisor terminates, to the extent that the optionee was entitled
to exercise such option(s) at the date of that termination; provided, however,
that no option may be exercised after the fixed period of that option; provided
further, that if an optionee ceases to be a director, consultant, or advisor of
the Corporation or of any Subsidiary corporation because he or she voluntarily
resigns from his or her directorship or from his or her engagement as a
consultant or advisor or because he or she is removed for cause by the
shareholders of the Corporation or of any Subsidiary Corporation, or by the
board of directors of the Corporation or of a Subsidiary Corporation in the case
of a consultant or advisor, all right to exercise the option(s) under the 1992
Plan shall terminate on the date when his or her directorship or engagement as a
consultant or advisor ceases.
(5) OPTION PRICE. The option price per share shall be determined
------------
in good faith by the Committee at the time an option is granted and shall be not
less than 100 percent of the fair market value of a share of the Common Stock of
the Corporation on the date of the grant. Each option shall provide that the
optionee agrees that the option price per share is determined in good faith by
the Committee at the time when that option is granted as not less than 100
percent of the fair market value of a share of the Common Stock of the
Corporation on the date of the grant.
(6) PAYMENT OF PURCHASE PRICE UPON EXERCISE. Each option shall
---------------------------------------
provide that the purchase price of the shares for which an option may be
exercised shall be paid in cash to the Corporation at the time of exercise.
-8-
<PAGE>
(7) NONTRANSFERABILITY. No option granted under the 1992 Plan shall
------------------
be transferable other than by a will of an optionee or by the laws of descent
and distribution. During his or her lifetime, an option shall be exercisable
only by an optionee or by the optionee's attorney-in-fact or conservator, unless
in the case of an incentive stock option, such exercise by the attorney-infact
or conservator of the optionee would disqualify the option as an incentive stock
option under Section 422 of the Internal Revenue Code of 1986, as amended.
(8) INVESTMENT REPRESENTATION. The shares of stock to be issued upon
-------------------------
the exercise of all or any portion of any option granted under the 1992 Plan
shall be issued on the condition that the optionee represents that the purchase
of stock upon exercise of the option shall be for investment purposes and not
with a view to resale, distribution, offering, transferring, mortgaging,
pledging, hypothecating, or otherwise disposing of any such stock under
circumstances which would constitute a public offering or distribution under the
Securities Act of 1933 or the applicable securities laws of any state. No shares
of stock shall be issued upon the exercise of any option unless the Corporation
shall have received from the optionee a written statement satisfactory to the
Corporation, or its counsel, containing the above representations, stating that
certificates representing such shares may bear a legend restricting their
transfer, and stating that the Corporation's transfer agent or agents may be
given instructions to stop transfer of any certificate bearing such legend;
provided, however, that such representation and restrictions shall not be
required if (a) an effective registration statement for such shares under the
Securities Act of 1933 and any applicable state laws has been filed with the
Securities and Exchange Commission and with the appropriate agency or commission
of any state whose laws
-9-
<PAGE>
apply to the transaction, or (b) the Corporation has received an opinion of
counsel satisfactory to the Corporation, or its counsel, that registration is
not required under the Securities Act of 1933 or under the applicable securities
laws of any state.
(9) ADJUSTMENTS. Notwithstanding any other provision of the 1992
-----------
Plan, in the event of any change in the outstanding Common Stock of the
Corporation by reason of any stock dividend, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares, rights
offering to purchase the Common Stock at a price substantially below fair market
value, or of any similar change affecting the Common Stock, the number and kind
of shares which thereafter may be optioned and sold under the 1992 Plan and the
number and kind of shares subject to option in outstanding option agreements and
the purchase price per share thereof shall be appropriately adjusted consistent
with such change in such manner as the Committee may deem equitable to prevent
substantial dilution or enlargement of the rights granted to, or available for
an optionee under the 1992 Plan.
(10) NO RIGHTS AS A SHAREHOLDER. No optionee shall have any right as
--------------------------
a shareholder with respect to any share subject to his or her option under the
1992 Plan prior to the date of issuance to him or her of a certificate for such
share.
(11) NO RIGHTS TO CONTINUED DIRECTORSHIP OR ENGAGEMENT AS A
------------------------------------------------------
CONSULTANT OR ADVISOR. The 1992 Plan and any option granted under the 1992 Plan
- ---------------------
shall neither confer upon any optionee any right with respect to continuance of
any directorship or engagement as a consultant or advisor of the Corporation or
-10-
<PAGE>
of any Subsidiary Corporation, nor shall it interfere in any way with the right
of the shareholders, or the board of directors of the Corporation or of a
Subsidiary Corporation in the case of a consultant or advisor, to remove him or
her at anytime.
(12) NO RIGHTS TO CONTINUED EMPLOYMENT. The 1992 Plan and any option
---------------------------------
granted under the 1992 Plan shall neither confer upon any optionee any right
with respect to continuance of employment by the Corporation or by any
Subsidiary Corporation, nor shall it interfere in any way with the right of his
or her employer to terminate his or her employment at any time.
(13) REORGANIZATION. MERGER, CONSOLIDATION, DISSOLUTION,
--------------------------------------------------
LIQUIDATION, OR SALE OF ASSETS. Upon a reorganization in which the Corporation
- ------------------------------
is not the surviving Corporation, all unexercised options under the 1992 Plan
shall be canceled as of the effective date of the reorganization; provided,
however, that the Committee shall give to an optionee, or the holder of the
option(s) granted under the 1992 Plan, at least 15 days' written notice of the
reorganization and during the period beginning when the optionee, or the holder
of the option(s), shall have the right to exercise the unexercised option(s)
under the 1992 Plan without regard to employment or directorship tenure
requirements or installment exercise limitations, if any; provided further,
however, that the option(s) may not be exercised after the period provided in
either Section 5A or 5B of the 1992 Plan. For the purposes of the 1992 Plan, and
any option agreement under the 1992 Plan, the term "reorganization" shall mean
any merger, consolidation, sale of substantially all of the assets of the
Corporation, or sale
-11-
<PAGE>
of the securities of the. Corporation pursuant to which the Corporation is
or becomes a wholly-owned subsidiary of another Corporation after the
effective date of the reorganization.
(14) STOCK RESTRICTION AGREEMENT. The Corporation shall not be
---------------------------
required to or deliver any shares of Common Stock upon the exercise of any
option granted under the 1992 Plan until the optionee, or the holder of the
option(s) becomes a signatory to a stock restriction agreement with respect
to all of his or her Common Stock, including all shares presently owned or
hereinafter acquired. This Agreement will be substantially in the form of
Exhibit "A", attached hereto.
6. COMPLIANCE WITH LAWS AND REGULATIONS.
------------------------------------
The 1992 Plan, the grant and exercise of options under the 1992 Plan,
and the obligation of the Corporation to sell and deliver shares under such
options, shall be subject to all applicable federal and state laws and
rules and regulations and to such approvals by any government or regulatory
agency as may be required. The Corporation shall not be required to issue
or deliver any certificates for shares of Common Stock prior to the
completion of any registration or qualification or such shares under any
federal or state law or any ruling or regulation of any governmental body
which the Corporation shall, in its sole discretion, determine to be
necessary or advisable.
7. AMENDMENT AND DISCONTINUANCE.
----------------------------
The Committee may amend, suspend, or discontinue the 1992 Plan;
provided, however, that no action of the Committee may (a) increase the
number of shares reserved for options
-12-
<PAGE>
pursuant to Section 2 or (b) permit the granting of options which expire
beyond the period provided for in Section 5B (7). Without the written
consent of an optionee, no amendment or suspension of the 1992 Plan shall
alter or impair any option previously granted to him or her under the 1992
Plan.
8. EFFECTIVE DATE.
--------------
The effective date of the 1992 Plan is July 27, 1992. The 1992 Plan was
approved by a majority of the shareholders of the Corporation on October
20,1992.
On April 7, 1994, the Committee amended and restated the 1992 Plan
pursuant to Section 7. No option shall be granted under the 1992 Plan after
July 26, 2002.
9. NAME OF THE 1992 PLAN.
---------------------
The Plan shall be known as the "Hudson Valley Holding Corp. 1992 Stock
Option Plan".
10. EFFECT OF THE PLAN ON OTHER STOCK PLANS.
---------------------------------------
The adoption of the 1992 Plan shall have no effect on awards made or to
be made pursuant to other stock plans covering directors, officers,
employees, or advisors of the Corporation, any Subsidiary Corporation, a
parent corporation, or any predecessors or successors thereto.
The foregoing constitutes the entire agreement known as the Hudson
Valley Holding Corp. Stock Option Plan of 1992 .
Amendment (in bold lettering) approved October 16, 1995
-13-
<PAGE>
SHAREHOLDER AGREEMENT
EXHIBIT "A"
<PAGE>
SHAREHOLDER AGREEMENT
This Agreement (the "Agreement") is made and entered into this _____ day of
________________,199 , by and among Hudson Valley Holding Corp., a New York
Corporation (the "Company"), and _______________________ ("Stockholder").
RECITALS
A. WHEREAS, Stockholder may now own or may hereinafter own shares of common
stock of the Company (the "Shares") and has received options under the Hudson
Valley Holding Corp. 1992 Stock Option Plan (the "1992 Plan"); and
B. WHEREAS, the terms of the 1992 Plan require that all shares now, or
hereinafter acquired, either by option or otherwise be subject to the provisions
of a stock restriction agreement at the time of any grant of any option under
the 1992 Plan; and
C. WHEREAS, the parties hereto desire to promote, protect, and preserve
their mutual interests and the interests of the Company by showing continuity of
share ownership and corporate control, and by imposing certain restrictions and
obligations upon themselves, the Company and the Shares.
<PAGE>
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual promises contained in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Right of First Refusal. The Stockholder shall not sell, assign,
----------------------
transfer, or give, or in any manner, dispose of (gifts to family members
excepted, provided however, that the donee must become a signatory to the Stock
Restriction Agreement) all or any part of his or her Shares, now owned or
hereafter acquired, or any right or interest therein, whether voluntarily or by
operation of law, without first giving to the Company written notice by
Certified or Registered Mail (the "Sale Notice") of his or her receipt of an
offer from a prospective purchaser. The Sale Notice must be in writing, giving
the name and address of the prospective purchaser, the number of Shares
involved, and the terms of such purchase.
Within ten (10) days after receipt of the Sale Notice by the Company, the
Company, by action of its Board of Directors or its designated committee, may
elect to purchase all, but not less than all, of such Shares offered for
disposition, or may elect to designate a person, including an officer, director
or employee of the Company, to purchase all but not less than all of such
Shares. The purchase price for any Shares purchased under the terms of this
Agreement shall be on the same terms and conditions as that offered by the
prospective purchaser.
2. Termination of Restrictions. If all of the Shares of the Stockholder or
---------------------------
transfer desiring to make a disposition thereof are not purchased by the Company
or its designee in accordance with the provisions of Paragraph 1 hereof, then
all restrictions imposed by this
<PAGE>
Agreement upon the unsold Shares shall terminate and the Stockholder desiring to
make a disposition therefor shall be free to sell the unsold Shares to the
prospective purchaser at the price and terms set forth in the original offer, at
any time within twenty (20) days thereafter; provided, however, that at the end
of the twenty (20) day period, all restrictions shall again be applicable in the
same manner and under the same terms as set forth in this Agreement.
3. Terms of the Purchase.
---------------------
A. Closing. The consummation of the purchase and sale of the Shares
shall be referred to as the "Closing", and should take place at a time and place
as to which the parties shall agree, but in no event shall it occur more than
twenty (20) days after the Company receives the Sale Notice pursuant to
Paragraph 1 of this Agreement.
B. Transfer of Shares. At such time as the agreed consideration has
been paid and delivered to the selling Stockholder or his estate, the Shares
shall be transferred to the purchaser.
C. Payment of Purchase Price. The purchase price for any shares
purchased pursuant to this Agreement shall be paid, either in cash or certified
funds.
4. Endorsement on Share Certificate. Each certificate representing shares
--------------------------------
of the Company shall have endorsed conspicuously on its face a legend in
substantially the following form:
(i) SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO
-17-
<PAGE>
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OF 1933 ("THE ACT"), OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO
BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
(ii) THE OFFER, SALE, TRANSFER, OR OTHER DISPOSITION OF THE
SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY AND
SUBJECT TO THE TERMS OF THAT CERTAIN SHAREHOLDER AGREEMENT
DATED _________ 1992, INCLUDING ANY AMENDMENTS THERETO, AND
NOT BE AFFECTED IN CONTRAVENTION OF THE PROVISIONS OF SUCH
AGREEMENT. A COPY OF SUCH MAY AGREEMENT WILL BE FURNISHED TO
THE HOLDER HEREOF BY THE SECRETARY OF THE COMPANY UPON
WRITTEN REQUEST.
5. Miscellaneous.
-------------
A. Binding Effect. This Agreement shall be binding upon the parties to
this Agreement and upon their respective heirs, legatees, personal
representatives, successors, assigns and donees.
-18-
<PAGE>
B. No Waiver. No waiver of any breach or default under this Agreement shall
be considered valid unless in writing, and no such waiver shall be deemed a
waiver of any subsequent breach or default of the same or similar nature.
C. Amendment. This Agreement may only be amended by written instrument
executed by both parties hereto.
D. Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties with respect to the transaction contemplated
pursuant to this Agreement, and supersedes all prior agreements, arrangements
and understandings related to its subject matter among the parties.
E. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which shall
constitute the same document.
F. Governing Law. The laws of the State of New York shall govern this
Agreement and the construction of its terms. If any provision is unenforceable
or invalid for any reason, the remainder of this Agreement shall continue in
effect.
G. Enforcement. If a stockholder proposes to make a transfer of any shares
by assignment, pledge, sale, gift or other transfer in violation of the terms of
this Agreement, the Company may apply to any court for injunctive order
prohibiting such proposed transfer except in compliance with the terms of this
Agreement. The Company may institute or maintain proceedings against the
violating stockholder to compel specific performance of this Agreement. Any
attempt to transfer the Shares in violation of this Agreement shall be void.
-19-
<PAGE>
H. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by Certified or
Registered Mail to:
As to the "Company" to:
Chairman of the Board
HudsonValley Holding Corp.
21 Scarsdale Road
Yonkers, New York 10707
As to the"Stockholder" to:
(Name)
--------------------- -------
(Address)
---------------------
(Address)
---------------------
Any party, by notice given as provided above, may change the address to
which his, her, or its future notices shall be sent.
I. Termination. This Agreement shall terminate upon the unanimous written
agreement of the parties hereto.
-20-
<PAGE>
IN WITNESS WHEREOF, the Company and the Stockholder have executed this
Agreement effective as of the date first above written.
HUDSON VALLEY HOLDING CORP.
BY:__________________________________
STOCKHOLDER:
BY:__________________________________
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF WESTCHESTER )
On the day of , 199 , before me personally came
___________________ to me known, who, being by me duly sworn, did depose and say
that he resides at ____________ _____________________; that he is the
______________ of HUDSON VALLEY HOLDING CORP., the corporation described in and
which executed the foregoing instrument; that he knows the seal of said
Corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said Corporation,
and that he signed his name thereto by like order.
______________________________
STATE OF NEW YORK )
) ss.:
COUNTY OF WESTCHESTER )
On the day of , 199 , before me personally came
___________________ to me known to be the individual described in and who
executed the foregoing instrument, and acknowledged that he executed the same.
______________________________
<PAGE>
EXHIBIT 10.5
HUDSON VALLEY HOLDING CORP.
1992 STOCK OPTION PLAN
NON-STATUTORY STOCK OPTION AGREEMENT
AGREEMENT, dated this 27th day of March, 1997, between HUDSON VALLEY
HOLDING CORP. (the "Corporation"), a New York Corporation, and
____________________ (the "Optionee").
WHEREAS, the Compensation Committee of the Board of Directors of the
Corporation (the "Committee") approved the Hudson Valley Holding Corp. 1992
Stock Option Plan (the "Plan") on July 27, 1992; and,
WHEREAS, the Plan was approved by a majority of the shareholders of the
Corporation on October 20,1992; and,
WHEREAS, the Corporation seeks to provide a means by which the Corporation,
through the grant of stock options to the Optionee, may retain the Optionee as a
[Director/Consultant/Advisor] of Hudson Valley Bank and motivate the Optionee to
- -----------------------------
exert his or her best efforts on behalf of the Corporation and any Subsidiary
corporation.
NOW THEREFORE, in consideration of the promises contained in this Agreement
and the benefits to be derived from those promises, the Corporation and the
Optionee agree as follows.
1. GRANT OF OPTION. From time to time, the Committee may grant to the
---------------
Optionee a right and option to purchase from the Corporation an aggregate of one
or more shares of the common stock of the Corporation (the "Common Stock"):
provided, that at the time of any such grant the Optionee owns not more than 10
percent of the total combined voting power of all classes of stock of the
Corporation and of any Subsidiary Corporation. It is intended that each such
option shall be a nonstatutory stock option and shall not qualify as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended. Each such option shall be evidenced by an Option Grant Notice
addressed to the Optionee from the Corporation and shall be subject to the terms
and conditions of the 1992 Plan, of this Agreement and of the Option Grant
Notice.
2. TERMS AND CONDITIONS. It is understood and agreed that any option
--------------------
evidenced by an Option Grant Notice to the Optionee is subject to the following
terms and conditions:
A. EXPIRATION DATE. The option shall expire on the day before the 10th
---------------
anniversary of the option grant date as provided in the Option Grant Notice.
B. EXERCISE OF OPTION DURING CONTINUOUS SERVICE:
--------------------------------------------
Subject to the provisions of this Agreement and the 1992 Plan, no part of the
option may be exercised until the Optionee has completed 1 year of service with
the Corporation and/or Subsidiary Corporation. Thereafter, the option shall be
exercisable from time to time over a period beginning on the first day of the
calendar year immediately following the close of the
<PAGE>
calendar year when the Optionee completes 1 year of service with the Corporation
and/or Subsidiary Corporation and ending on the earliest of the expiration,
termination of service, or cancellation of the option. An exercise of any part
of the option shall be accompanied by a written notice to the Corporation
specifying the number of shares as to which the option is being exercised.
C. EXERCISE IN THE EVENT OF DEATH. DISABILITY OR TERMINATION OF
---------------------------------------------------------------
SERVICE.
- -------
(1) DEATH. If the Optionee dies while an employee of the
-----
Corporation or of any Subsidiary Corporation, the option may be exercised by the
Optionee's estate or by any person who acquired the option by bequest or
inheritance or by reason of the death of the Optionee, within the 12 months
immediately following his or her death and to the extent that the Optionee was
entitled to exercise the option at the date of his or her death; provided,
however, that the option may not be exercised after the expiration date provided
in Section 2A of this Agreement.
(2) DISABILITY. If the Optionee ceases to be a [director/consultant
----------
/advisor] of the Corporation or of any Subsidiary Corporation because of his or
her disability, as defined in Section 22(e)(3) of the Internal Revenue Code of
1986, as amended, the option may be exercised by him or her, his or her
attorney-in-fact or conservator, as appropriate, within 12 months immediately
following the date that he or she ceased to be an employee and to the extent
that the Optionee was entitled to exercise the option on the date when his or
her services ceased; provided, however, that the option may not be exercised
after the expiration date provided in Section 2A of this Agreement.
(3) TERMINATION OF SERVICE: If the Optionee ceases to be in the
----------------------
service of the Corporation or of any Subsidiary Corporation for any reason other
than death or disability, the option may be exercised by him or her within the 3
months immediately following his or her termination of service to the extent
that the Optionee was entitled to exercise the option on the date of his or her
termination; provided, however that the option may not be exercised after the
expiration date provided in Section 2A of this Agreement; provided further, that
if the Optionee ceases to be in the service of the Corporation or of any
Subsidiary Corporation because he or she voluntarily terminates his or her
service or because his or her service is involuntarily terminated by the
Corporation or by any Subsidiary Corporation as a result of his or her willful
misconduct, as determined in the sole discretion of this Committee, all right to
exercise the option shall terminate on the date when his or her service ceases.
D. PAYMENT OF PURCHASE PRICE UPON EXERCISE. At the time of any
---------------------------------------
exercise, the purchase price of the shares for which the option may be exercised
shall be paid in cash to the Corporation. The Optionee agrees that the purchase
price is determined in good faith by the Committee at the time when the option
is granted as not less than 100 percent of the fair market value of a share of
the Common Stock on the date of the grant of the option.
E. NONTRANSFERABILITY. The option shall not be transferable other
------------------
than by a will of the Optionee or by the laws of descent and distribution.
During the lifetime of
2 of 6
<PAGE>
the Optionee, the option shall be exercisable only by the Optionee or by his or
her attorney-in fact or conservator.
F. ADJUSTMENTS. In the event of any change in the Common Stock by
-----------
reason of any stock dividend, recapitalization, reorganization, merger,
consolidation, split-up, combination or exchange of shares, rights offering to
purchase Common Stock at a price substantially below fair market value, or of
any similar change affecting the Common Stock, then, the number and kind of
shares subject to the option and the purchase price per share of those subject
shares, shall be appropriately adjusted consistent with such change in a manner
as the Committee may deem equitable to prevent substantial dilution or
enlargement of the rights granted to the Optionee hereunder. Any adjustment so
made shall be final and binding upon the Optionee.
G. NO RIGHTS AS A SHAREHOLDER. The Optionee shall have no right as a
--------------------------
shareholder with respect to shares of stock subject to the option prior to the
date of issuance to him or her of a certificate or certificates for such shares.
H. NO RIGHTS TO CONTINUED EMPLOYMENT. The option shall not confer
---------------------------------
upon the Optionee any right with respect to continuance of the Optionee's
current position within the Corporation or any Subsidiary Corporation, nor shall
it interfere in any way with the right of the Corporation to terminate his or
her service at anytime.
I. REORGANIZATION. MERGER. CONSOLIDATION. DISSOLUTION. LIQUIDATION.
----------------------------------------------------------------
SALE OF ASSETS. Upon a reorganization in which the Corporation is not the
- --------------
surviving or acquiring corporation, the unexercised portion of the option shall
be canceled on the effective date of the reorganization; provided, however, that
the Committee shall provide the Optionee, or the holder of the Optionee's
option, with 15 days' written notice of the reorganization, and the Optionee, or
the holder of the option, shall have the right to exercise the option,
regardless of any exercise limitations provided in Section 2B of this Agreement,
within the period beginning when the Optionee, or the holder of the option,
receives the notice and ending on the date immediately preceding the date of the
reorganization; provided, further, that the option may not be exercised after
the period provided in Section 2 of this Agreement. For the purposes of the 1992
Plan and this Agreement, the term "reorganization" shall mean any merger,
consolidation, sale of substantially all of the assets of the Corporation, or
sale of the securities of the Corporation pursuant to which the Corporation is
or becomes a wholly-owned subsidiary of another corporation after the effective
date of the reorganization.
J. COMPLIANCE WITH LAWS AND REGULATIONS. The option and the
------------------------------------
obligation of the Corporation to sell and deliver shares hereunder, shall be
subject to all applicable federal and state laws and rules and regulations and
to such approvals by any government or regulatory agency as may be required. The
Corporation shall not be required to issue or deliver any certificates for
shares of Common Stock prior to the completion of any registration or
qualification of such shares under any federal or state law or any rule or
regulation of any governmental body which the Corporation shall, in its sole
discretion, determine to be necessary or advisable
3 of 6
<PAGE>
3. STOCK RESTRICTION AGREEMENT. The Corporation shall not be required to
---------------------------
issue or deliver any share of Common Stock upon the exercise of any option
granted under the 1992 Plan until the Optionee, or the holder of the option
becomes a signatory to a stock restriction agreement with respect to all of his
or her Common Stock, including all shares presently owned or hereinafter
acquired. This Agreement will be substantially in the form of Exhibit "A"
attached hereto.
4. INVESTMENT REPRESENTATION. The Committee shall require the Optionee to
-------------------------
furnish to the Corporation, prior to the issuance of any share upon the exercise
of all or any part of an option, an agreement (in such form as the Committee may
specify) in which the Optionee represents that the shares acquired by him or her
upon exercise of the option are being acquired for investment and not with a
view to the resale, distribution, offering, transferring, mortgaging, pledging,
hypothecating, or otherwise disposing of any such stock under the circumstances
which would constitute a public offering or distribution under the Securities
Act of 1933 or applicable securities laws of any state. No shares of stock shall
be issued upon the exercise of the option unless the Corporation shall have
received from the Optionee a written statement satisfactory to the Corporation,
or its counsel, containing the above representations, stating that certificates
representing such shares may bear a legend restricting their transfer, and
stating that the Corporation's transfer agent or agents may be given
instructions to stop transfer of any certificate bearing such legend; provided,
however, that such representation and restrictions shall not be required if (A)
an effective registration statement for such shares under the Securities Act of
1933 and any applicable state laws has been filed with the Securities and
Exchange Commission and with the appropriate agency or commission of any state
whose laws apply to the transaction, or (B) the Corporation has received an
opinion of counsel satisfactory to the Corporation, or its counsel, that
registration is not required under the Securities Act of 1933 or under the
applicable securities laws of any state.
5. OPTIONEE BOUND BY 1992 PLAN. The Optionee hereby acknowledges receipt
---------------------------
of a copy of the 1992 Plan and agrees to be bound by all the terms and
provisions thereof. To the extent that the terms of this Agreement or of any
Option Grant Notice are inconsistent with the terms of the 1992 Plan, the terms
of the 1992 Plan shall govern. This Agreement shall be construed in accordance
with the laws of the State of New York.
6. NOTICES. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and if sent by Certified or
Registered Mail. As to the Corporation any required notice shall be addressed to
the Chairman of the Board, Hudson Valley Holding Corp., 21 Scarsdale Road,
Yonkers, New York 10707. As to the Optionee any required notice shall be
addressed to him or her at his or her last address on file with Hudson Valley
Bank.
Any party, by notice given as provided above, may change the address to
which its future notices shall be sent.
7. COUNTERPARTS. This Agreement has been executed in two counterparts
------------
each of which shall constitute one and the same instrument.
4 of 6
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its President and the Optionee has executed this Agreement, both as
of the day and year first above written.
HUDSON VALLEY HOLDING CORP.
By: __________________________________
William M. Mooney, President & CEO
Attest:_______________________________
OPTIONEE
______________________________________
5 of 6
<PAGE>
STATE OF NEW YORK )
) s.s.:
COUNTY OF WESTCHESTER )
On the _____ day of _____________ 1997, before me personally came William
M. Mooney to me known, who, being by me duly sworn, did depose and say that he
resides at 87 Cliffield Road. Bedford, New York. 10506; and that he is the
President & CEO of HUDSON VALLEY HOLDING CORP., the Corporation described in and
which executed the foregoing instrument; that he knows the seal of said
Corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said Corporation,
and that he signed his name thereto by like order.
______________________
STATE OF NEW YORK )
) s.s.:
COUNTY OF WESTCHESTER )
On the 27th day of March, 1997, before me personally came _______________
to me known to be the individual described in and who
executed the foregoing instrument, and acknowledged that he/she executed the
same.
_____________________
6 of 6
<PAGE>
EXHIBIT 10.6
HUDSON VALLEY HOLDING CORP
1992 STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
AGREEMENT, dated this 23 day of July, 1996, between HUDSON VALLEY HOLDING
CORP. (the "Corporation"), a New York Corporation, and _____________________
(the "Optionee").
WHEREAS, the Compensation Committee of the Board of Directors of the
Corporation (the "Committee") approved the Hudson Valley Holding Corp. 1992
Stock Option Plan (the "Plan") on July 27,1992;
WHEREAS, the 1992 plan was approved by a majority of the shareholders of
the Corporation on October 20,1992; and
WHEREAS, the Corporation seeks to provide a means by which the Corporation,
through the grant of stock options to the Optionee, may retain the Optionee as
an employee of Hudson Valley Bank and motivate the Optionee to exert his or her
best efforts on behalf of the Corporation and any Subsidiary Corporation.
NOW THEREFORE, in consideration of the promises contained in the Agreement
and the benefits to be derived from those promises, the Corporation and the
Optionee agree as follows.
1. GRANT OF OPTION. From time to time, the Committee may grant to the
---------------
Optionee a right and option to purchase from the Corporation an aggregate of one
or more shares of the common stock of the Corporation (the "Common Stock"):
provided, that at the time of any such grant the Optionee owns not more than 10
percent of the total combined voting power of all classes of stock of the
Corporation and of any Subsidiary Corporation. It is intended that each such
option shall qualify as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986, as amended. Each such option shall be evidenced
by an Option Grant Notice addressed to the Optionee from the Corporation and
shall be subject to the terms and conditions of the 1992 Plan, of this Agreement
and of the Option Grant Notice.
2. TERMS AND CONDITIONS. It is understood and agreed that any option
--------------------
evidenced by a Option Grant Notice to the Optionee is subject to the following
terms and conditions:
A. EXPIRATION DATE. The option shall expire on the day before the
---------------
10th anniversary of the option grant date as provided in the Option Grant
Notice.
B. EXERCISE OF OPTION DURING CONTINUOUS EMPLOYMENT. Subject to the
-----------------------------------------------
provisions of this Agreement and the 1992 Plan, no part of the option may be
exercised until the Optionee has completed 5 years of service with the
Corporation and/or Subsidiary Corporation. Thereafter, the option shall be
exercisable from time to time over a period beginning on the first day of the
calendar year immediately following the close of the
Page 1
<PAGE>
calendar year when the Optionee completes 5 years of service with the
Corporation and/or Subsidiary Corporation and ending on the earliest of the
expiration, termination, or cancellation of the option. For the purposes of this
Agreement, the term "year of service" shall mean a calendar year during which
the Optionee completes at least 1000 hours for which he or she is paid for the
performance of duties for the Corporation and/or Subsidiary Corporation. An
exercise of any part of the option shall be accompanied by a written notice to
the Corporation specifying the number of shares as to which the option is being
exercised.
C. EXERCISE IN THE EVENT OF DEATH, DISABILITY OR TERMINATION OF
------------------------------------------------------------
EMPLOYMENT.
- ----------
(1) DEATH. If the Optionee dies while an employee of the Corporation
-----
or of any Subsidiary Corporation, the option may be exercised by the
Optionee's estate or by any person who acquired the option by bequest or
inheritance or by reason of the death of the Optionee, within the 12 months
immediately following his or her death and to the extent that the Optionee was
entitled to exercise the option at the date of his or her death; provided,
however, that the option may not be exercised after the expiration date provided
in Section 2A of this Agreement.
(2) DISABILITY. If the Optionee ceases to be an employee of the
----------
Corporation of any Subsidiary Corporation because of his or her disability, as
defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended,
the option may be exercised by him or her, his or her attorney-in-fact or
conservator, as appropriate, within 12 months immediately following the date
that he or she ceased to be an employee and to the extent that the Optionee was
entitled to exercise the option on the date when his or her employment ceased;
provided, however, that the option may not be exercised after the expiration
date provided in Section of this Agreement and that such exercise by the
attorney-in-fact or by the conservator of the Optionee does not disqualify the
option as an incentive stock option under Section 422 of the Internal Revenue
Code of 1986, as amended.
If the disability leave does not exceed ninety (90) days, the Optionee will
be deemed to be in continuous employment of his or her employer during the leave
period. However, if the disability leave exceeds ninety (90) days, the Optionee
will be deemed to have terminated his or her employment on the ninety-first
(91st) day of that leave, and will not, pursuant to Section 22 (e)(3), continue
to accrue hours of service unless reemployment is guaranteed by statute or
contract.
(3) TERMINATION OF EMPLOYMENT. If the Optionee ceases to be an
-------------------------
employee of the Corporation or of any Subsidiary Corporation for any reason
other than death or disability, the option may be exercised by him or her within
the 3 months immediately following his or her termination of employment to the
extent that the Optionee was entitled to exercise the option on the date of his
or her termination of employment; provided, however that the option may not be
exercised after the expiration date provided in Section of this Agreement;
provided further, that if the Optionee ceases to be an employee of the
Corporation or of any Subsidiary Corporation because he or she voluntarily
terminates his or her employment or because his or her employment is
involuntarily terminated by the Corporation or by any Subsidiary Corporation as
-2-
<PAGE>
a result of his or her willful misconduct, as determined in the sole discretion
of this Committee, all right to exercise the option shall terminate on the date
when his or her employment ceases.
D. PAYMENT OF PURCHASE PRICE UPON EXERCISE. At the time of any
---------------------------------------
exercise, the purchase price of the shares for which the option may be exercised
shall be paid in cash to the Corporation. The Optionee agrees that the purchase
price is determined in good faith by the Committee at the time when the option
is granted as not less than 100 percent of the fair market value of a share of
the Common Stock on the date of the grant of the option.
E. NONTRANSFERABILITY. The option shall not be transferable other
------------------
than by a will of the Optionee or by the laws of descent and distribution.
During the lifetime of the Optionee, the option shall be exercisable only by the
Optionee or by his or her attorney-in-fact or conservator, unless such exercise
by the attorney-in-fact or by the conservator of the Optionee would disqualify
the option as an incentive stock option under Section 422 of the Internal
Revenue Code of 1986, as amended.
F. ADJUSTMENTS. In the event of any change in the Common Stock by
-----------
reason of any stock dividend, recapitalization, reorganization merger,
consolidation, split-up, combination or exchange of shares, rights offering to
purchase Common Stock at a price substantially below fair market value, or of
any similar change affecting the Common Stock, then, the number and kind of
shares subject to the option and the purchase price per share of those subject
shares, shall be appropriately adjusted consistent with such change in a manner
as the Committee may deem equitable to prevent substantial dilution or
enlargement of the rights granted to the Optionee hereunder. Any adjustment so
made shall be final and binding upon the Optionee.
G. NO RIGHTS AS A SHAREHOLDER. The Optionee shall have no right as a
--------------------------
shareholder with respect to shares of stock subject to the option prior to the
date of issuance to him or her of a certificate or certificates for such shares.
H. NO RIGHTS TO CONTINUED EMPLOYMENT. The option shall not confer
---------------------------------
upon the Optionee any right with respect to continuance of employment by the
Corporation or by any Subsidiary Corporation, nor shall it interfere in any way
with the right of his or her employer to terminate his or her employment at any
time.
I. REORGANIZATION, MERGER, CONSOLIDATION, DISSOLUTION, LIQUIDATION,
----------------------------------------------------------------
OR SALE OF ASSETS. Upon a reorganization in which the Corporation is not the
- -----------------
surviving or acquiring corporation, the unexercised portion of the option shall
be canceled on the effective date of the reorganization; provided, however, that
the Committee shall provide the Optionee, or the holder of the Optionee's
option, with 15 days' written notice of the reorganization, and the Optionee, or
the holder of the option, shall have the right to exercise the option,
regardless of any exercise limitations provided in Section 2B of this Agreement,
within the period beginning when the Optionee, or the holder of the option,
receives the notice and ending on the date immediately preceding the date of the
reorganization; provided, further, that the option may not be exercised after
the period provided in Section 2 of this Agreement. For the purposes of the 1992
Plan and this Agreement, the term "reorganization" shall mean any merger,
consolidation, sale of substantially all of the assets of the Corporation, or
sale of the
-3-
<PAGE>
securities of the Corporation pursuant to which the Corporation is or becomes a
wholly-owned subsidiary of another corporation after the effective date of the
reorganization.
J. COMPLIANCE WITH LAWS AND REGULATIONS. The option and the
------------------------------------
obligation of the Corporation to sell and deliver shares hereunder, shall be
subject to all applicable federal and state laws and rules and regulations and
to such approvals by any government or regulatory agency as may be required. The
Corporation shall not be required to issue or deliver any certificates for
shares of Common Stock prior to the completion of any registration or
qualification of such shares under any federal or state law or any rule or
regulation of any governmental body which the Corporation shall, in its sole
discretion, determine to be necessary or advisable.
3. STOCK RESTRICTION AGREEMENT. The Corporation shall not be required to
---------------------------
issue or deliver any share of Common Stock upon the exercise of any option
granted under the 1992 Plan until the Optionee, or the holder of the option
becomes a signatory to a stock restriction agreement with respect to all of his
or her Common Stock, including all shares presently owned or hereinafter
acquired. This Agreement will be substantially in the form of Exhibit "A"
attached hereto.
4. INVESTMENT REPRESENTATION. The Committee shall require the Optionee to
-------------------------
furnish to the Corporation, prior to the issuance of any share upon the exercise
of all or any part of an option, an agreement (in such form as the Committee may
specify) in which the Optionee represents that the shares acquired by him or her
upon exercise of the option are being acquired for investment and not with a
view to the resale, distribution, offering, transferring, mortgaging, pledging,
hypothecating, or otherwise disposing of any such stock under the circumstances
which would constitute a public offering or distribution under the Securities
Act of 1933 or applicable securities laws of any state. No shares of stock
shall be issued upon the exercise of the option unless the Corporation shall
have received from the Optionee a written statement satisfactory to the
Corporation, or its counsel, containing the above representations, stating that
certificates representing such shares may bear a legend restricting their
transfer, and stating that the Corporation's transfer agent or agents may be
given instructions to stop transfer of any certificate bearing such legend;
provided, however, that such representation and restrictions shall not be
required if (A) an effective registration statement for such shares under the
Securities Act of 1933 and any applicable state laws has been filed with the
Securities and Exchange Commission and with the appropriate agency or commission
of any state whose laws apply to the transaction, or (B) the Corporation has
received an opinion of counsel satisfactory to the Corporation, or its counsel,
that registration is not required under the Securities Act of 1933 or under the
applicable securities laws of any state.
5. OPTIONEE BOUND BY 1992 PLAN. The Optionee hereby acknowledges receipt
---------------------------
of a copy of the 1992 Plan and agrees to be bound by all the terms and
provisions thereof. To the extent that the terms of this Agreement or of any
Option Grant Notice are inconsistent with the terms of the 1992 Plan, the terms
of the 1992 Plan shall govern. This Agreement shall be construed in accordance
with the laws of the State of New York.
6. NOTICES. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and if sent by Certified or
Registered Mail. As to the Corporation
-4-
<PAGE>
any required notice shall be addressed to the Chairman of the Board, Hudson
Valley Holding Corp., 21 Scarsdale Road, Yonkers, New York 10707. As to the
Optionee any required notice shall be addressed to him or her at his or her last
address on file with Hudson Valley Bank.
Any party, by notice given as provided above, may change the address to
which its future notices shall be sent.
7. COUNTERPARTS. This Agreement has been executed in two counterparts
------------
each of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its President and the Optionee has executed this Agreement, both as
of the day and year first above written.
HUDSON VALLEY HOLDING CORP.
By:_______________________________
William M. Mooney, President & CEO
Attest:____________________________
OPTIONEE
___________________________________
-5-
<PAGE>
STATE OF NEW YORK )
) s.s.:
COUNTY OF WESTCHESTER)
On the 31st day of July 1996, before me personally came William M. Mooney
to me known, who, being by me duly sworn, did depose and say that he resides at
87 Cliffield Road, Bedford, New York, 10506; and that he is the President & CEO
of HUDSON VALLEY HOLDING CORP., the Corporation described in and which executed
the foregoing instrument; that he knows the seal of said Corporation; that the
seal affixed to said instrument is such corporate seal; that it was so affixed
by order of the Board of Directors of said Corporation, and that he signed his
name thereto by like order.
____________________________________
STATE OF NEW YORK )
) s.s.:
COUNTY OF WESTCHESTER)
On the of 19th day of August 1996, before me personally came
____________________ to me known to be the individual described in and who
executed the foregoing instrument, and acknowledged that he/she executed the
same.
___________________________________
-6-
<PAGE>
April 5, 2000
PERSONAL & CONFIDENTIAL
- -----------------------
Mr. John A. Pratt Jr.
Hudson Valley Bank
21 Scarsdale Road
Yonkers, New York 10707
Dear John:
I am writing this letter to confirm our understanding that you will continue to
act as a Consultant to the Bank through December 31, 2000, primarily in its
business Retention and Business Development programs.
The plan is for you to make between 30 and 40 calls a month, which you will
schedule at your convenience. These calls generally will fall into two
categories: (1) present VIP customers, and (2) present Major Accounts who we
believe may become VIP's or who are fairly high income producers in the Major
category. Follow-up on the Business Development Lists will be re-assigned to
others.
We are hopeful that you can make many of these calls alone, but if you
believe others should accompany you, this will b e your call. You should
prepare a monthly report, which will be directed, to me.
You will be operating through me as the Chairman of the Board and I hope to
be providing you with updated lists each quarter. The concentration this year
should again be on the VIP's and the very high Majors.
<PAGE>
Mr. John A. Pratt Jr. -2- April 5, 2000
You will be paid a consulting fee of Fifty Thousand Dollars ($50,000) for
the year 2000, payable monthly at the beginning of the month at the rate of
$4,166.66. A make-up for the first 4 months of this year will be issued
sometime this month.
If this is your understanding, please sign the enclosed copy of this letter
where indicated and return to me.
Regards,
William E. Griffin
Chairman of the Board
AGREED & ACCEPTED:
_______________________________
John A. Pratt Jr.
Dated:____________________ 2000
-2-
<PAGE>
Exhibit 11 -- Computation of Earnings per share
<TABLE>
<CAPTION>
(000's except share data)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 14,004 $ 12,254 $ 11,080
- -------------------------------------------------------------------------------------------
Weighted average basic shares
outstanding 4,231,075 4,201,987 4,263,347
- -------------------------------------------------------------------------------------------
Effect of stock options 95,168 112,078 86,711
- -------------------------------------------------------------------------------------------
Weighted average diluted shares 4,326,243 4,314,065 4,350,058
- -------------------------------------------------------------------------------------------
Earnings per common share:
- -------------------------------------------------------------------------------------------
Basic $ 3.31 $ 2.92 $ 2.60
- -------------------------------------------------------------------------------------------
Diluted 3.24 2.84 2.55
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Subsidiaries of the Company
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation Names Under Which Subsidiary
- ---------------------------------------- ------------------------------ ----------------------------
Transacts Business
------------------
<S> <C> <C>
Hudson Valley Bank New York Hudson Valley Bank
Hudson Valley Mortgage Corp. New York Hudson Valley Mortgage Corp.
Hudson Valley Investment Corp. Delaware Hudson Valley Investment Corp.
Sprain Brook Realty Corp. New York Sprain Brook Realty Corp.
Grassy Sprain Real Estate Holdings, Inc. New York Grassy Sprain Real Estate Holdings, Inc.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,185
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 634,973
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 416,961
<ALLOWANCE> 4,047
<TOTAL-ASSETS> 1,147,472
<DEPOSITS> 754,846
<SHORT-TERM> 219,484
<LIABILITIES-OTHER> 10,598
<LONG-TERM> 94,234
0
0
<COMMON> 1,011
<OTHER-SE> 67,299
<TOTAL-LIABILITIES-AND-EQUITY> 1,147,472
<INTEREST-LOAN> 31,724
<INTEREST-INVEST> 38,184
<INTEREST-OTHER> 908
<INTEREST-TOTAL> 70,816
<INTEREST-DEPOSIT> 17,446
<INTEREST-EXPENSE> 29,658
<INTEREST-INCOME-NET> 41,158
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 23,509
<INCOME-PRETAX> 18,648
<INCOME-PRE-EXTRAORDINARY> 18,648
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,004
<EPS-BASIC> 3.31
<EPS-DILUTED> 3.24
<YIELD-ACTUAL> 7.36
<LOANS-NON> 3,855
<LOANS-PAST> 264
<LOANS-TROUBLED> 323
<LOANS-PROBLEM> 2,500
<ALLOWANCE-OPEN> 3,103
<CHARGE-OFFS> 110
<RECOVERIES> 454
<ALLOWANCE-CLOSE> 4,047
<ALLOWANCE-DOMESTIC> 924
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,123
</TABLE>
