<PAGE>
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarter Ended September 30, 2000
Commission File No. 030525
----------------
HUDSON VALLEY HOLDING CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3148745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21 Scarsdale Road, Yonkers, NY 10707
(Address of principal executive office with zip code)
914-961-6100
(Registrant's telephone number including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class November 9, 2000
----- ----------------
<S> <C>
Common stock, par value $0.20 per share 4,278,615
</TABLE>
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1.Financial Statements
Consolidated Statements of Income for the Three Months Ended September
30, 2000 and 1999 (Unaudited)........................................ 1
Consolidated Statements of Income for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited).............................. 2
Consolidated Statements of Comprehensive Income for the Three and Nine
Month Periods Ended September 30, 2000 and 1999 (Unaudited).......... 3
Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and
December 31, 1999.................................................... 4
Consolidated Statements of Changes In Stockholders' Equity for the
Nine Months Ended September 30, 2000 and 1999 (Unaudited)............ 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited).............................. 6
Notes to Consolidated Financial Statements (Unaudited)................ 7
ITEM 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk......... 21
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 6.Exhibits and Reports on Form 8-K................................... 22
</TABLE>
i
<PAGE>
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Dollars in thousands, except per share amounts
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
--------------
2000 1999
------- ------
<S> <C> <C>
Interest Income:
Loans, including fees......................................... $10,931 $8,298
Securities:
Taxable..................................................... 9,463 8,415
Exempt from Federal income taxes............................ 1,756 1,548
Federal funds sold.............................................. 215 319
------- ------
Total interest income..................................... 22,365 18,580
------- ------
Interest Expense:
Deposits...................................................... 6,883 4,682
Securities sold under repurchase agreements and other short
term borrowings.............................................. 2,389 1,959
Other borrowings.............................................. 1,338 1,041
------- ------
Total interest expense.................................... 10,610 7,682
------- ------
Net Interest Income............................................. 11,755 10,898
Provision for loan losses....................................... 350 225
------- ------
Net interest income after provision for loan losses............. 11,405 10,673
------- ------
Non Interest Income:
Service charges............................................... 278 264
Realized gain on sales of securities, net..................... 25 --
Other income.................................................. 159 131
------- ------
Total non interest income................................. 462 395
------- ------
Non Interest Expense:
Salaries and employees benefits............................... 3,703 2,938
Occupancy..................................................... 576 523
Professional services......................................... 595 294
Equipment..................................................... 432 592
Business development.......................................... 197 195
FDIC assessment............................................... 40 19
Other operating expenses...................................... 926 858
------- ------
Total non interest expense................................ 6,469 5,419
------- ------
Income Before Income Taxes...................................... 5,398 5,649
Income Taxes.................................................... 1,430 1,384
------- ------
Net Income...................................................... $ 3,968 $4,265
======= ======
Basic Earnings Per Common Share................................. $ 0.93 $ 1.01
Diluted Earnings Per Common Share............................... $ 0.90 $ 0.99
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Dollars in thousands, except per share amounts
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
---------------
2000 1999
------- -------
<S> <C> <C>
Interest Income:
Loans, including fees........................................ $30,631 $22,675
Securities:
Taxable.................................................... 27,868 23,139
Exempt from Federal income taxes........................... 5,125 4,591
Federal funds sold............................................. 561 796
------- -------
Total interest income.................................... 64,185 51,201
------- -------
Interest Expense:
Deposits..................................................... 18,639 12,631
Securities sold under repurchase agreements and other short
term borrowings............................................. 7,231 5,001
Other borrowings............................................. 3,869 3,508
------- -------
Total interest expense................................... 29,739 21,140
------- -------
Net Interest Income............................................ 34,446 30,061
Provision for loan losses...................................... 1,050 675
------- -------
Net interest income after provision for loan losses............ 33,396 29,386
------- -------
Non Interest Income:
Service charges.............................................. 828 756
Realized gain on sales of securities, net.................... 25 15
Other income................................................. 640 376
------- -------
Total non interest income................................ 1,493 1,147
------- -------
Non Interest Expense:
Salaries and employees benefits.............................. 10,966 9,168
Occupancy.................................................... 1,672 1,504
Professional services........................................ 1,938 1,399
Equipment.................................................... 1,296 1,504
Business development......................................... 606 660
FDIC assessment.............................................. 122 59
Other operating expenses..................................... 2,775 2,635
------- -------
Total non interest expense............................... 19,375 16,929
------- -------
Income Before Income Taxes..................................... 15,514 13,604
Income Taxes................................................... 4,111 3,333
------- -------
Net Income..................................................... $11,403 $10,271
======= =======
Basic Earnings Per Common Share................................ $ 2.66 $ 2.45
Diluted Earnings Per Common Share.............................. $ 2.60 $ 2.40
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Dollars in thousands
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended September
September 30, 30,
-------------------- -----------------
2000 1999 2000 1999
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Net Income............................ $ 3,968 $ 4,265 $11,403 $ 10,271
--------- --------- ------- --------
Other comprehensive income (loss), net
of tax:
Unrealized holding gain (loss) on
securities available for sale
arising during the period.......... 8,099 (4,077) 10,647 (20,048)
Income tax effect................... (3,523) 1,670 (4,567) 8,211
--------- --------- ------- --------
4,576 (2,407) 6,080 (11,837)
Reclassification adjustment for net
gain realized on securities
available for sale................. (25) -- (25) (15)
Income tax effect................... 11 -- 11 6
--------- --------- ------- --------
(14) -- (14) (9)
--------- --------- ------- --------
Other comprehensive income (loss)..... 4,562 (2,407) 6,066 (11,846)
--------- --------- ------- --------
Comprehensive Income (Loss)........... $ 8,530 $ 1,858 $17,469 $ (1,575)
========= ========= ======= ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except per share and share amounts
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and due from banks............................. $ 27,415 $ 26,185
Federal funds sold.................................. 10,500 20,900
Securities available for sale, at estimated fair
value (amortized cost of $687,920 in 2000 and
$656,791 in 1999).................................. 675,853 634,973
Federal Home Loan Bank of New York (FHLB) Stock..... 9,461 9,361
Loans (net of allowance for loan losses of $5,019 in
2000 and $4,047 in 1999)........................... 468,171 412,914
Accrued interest and other receivables.............. 11,812 9,556
Premises and equipment, net......................... 13,240 13,732
Other real estate owned............................. 2,137 2,193
Deferred income taxes............................... 8,489 12,175
Other assets........................................ 7,138 5,483
---------- ----------
TOTAL ASSETS.................................... $1,234,216 $1,147,472
========== ==========
LIABILITIES
-----------
Deposits:
Non interest-bearing.............................. $ 266,225 $ 226,345
Interest-bearing.................................. 621,746 528,501
---------- ----------
Total deposits.................................. 887,971 754,846
Securities sold under repurchase agreements and
other short-term borrowings........................ 161,741 219,484
Other borrowings.................................... 87,964 94,234
Accrued interest and other liabilities.............. 13,562 10,598
---------- ----------
TOTAL LIABILITIES............................... 1,151,238 1,079,162
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $0.20 par value; authorized 10,000,000
shares; outstanding 4,277,149 and 4,223,599 shares
in 2000 and 1999, respectively..................... 1,027 1,011
Additional paid-in-capital.......................... 89,054 87,011
Retained earnings................................... 21,483 13,955
Accumulated other comprehensive loss................ (7,518) (13,584)
Treasury stock, at cost............................. (21,068) (20,083)
---------- ----------
Total stockholders' equity...................... 82,978 68,310
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $1,234,216 $1,147,472
========== ==========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Nine Months Ended September 30, 2000 and 1999
Dollars in thousands, except share amounts
<TABLE>
<CAPTION>
Accumulated
Number of Additional Other
Shares Common Treasury Paid-in Retained Comprehensive
Outstanding Stock Stock Capital Earnings Income (Loss) Total
----------- ------- -------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
2000................... 4,223,599 $ 1,011 $(20,083) $ 87,011 $13,955 $ (13,584) $68,310
Net income............ 11,403 11,403
Exercise of stock
options.............. 80,205 16 1,992 2,008
Purchase of treasury
stock................ (32,338) (1,125) (1,125)
Sale of treasury
stock................ 5,683 140 51 191
Cash dividend......... (3,875) (3,875)
Net unrealized gain on
securities available
for sale............. 6,066 6,066
--------- ------- -------- -------- ------- --------- -------
Balance at September 30,
2000................... 4,277,149 $ 1,027 $(21,068) $ 89,054 $21,483 $ (7,518) $82,978
<CAPTION>
Accumulated
Number of Additional Other
Shares Common Treasury Paid-in Retained Comprehensive
Outstanding Stock Stock Capital Earnings Income (Loss) Total
----------- ------- -------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1999................... 3,802,510 $ 915 $(18,087) $ 72,898 $16,469 $ 3,501 $75,696
Net income............ 10,271 10,271
Exercise of stock
options.............. 80,698 16 1,418 1,434
Purchase of treasury
stock................ (68,270) (2,177) (2,177)
Sale of treasury
stock................ 2,474 59 21 80
Cash dividend......... (3,151) (3,151)
Net unrealized loss on
securities available
for sale............. (11,846) (11,846)
--------- ------- -------- -------- ------- --------- -------
Balance at September 30,
1999................... 3,817,412 $ 931 $(20,205) $ 74,337 $23,589 $ (8,345) $70,307
========= ======= ======== ======== ======= ========= =======
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Dollars in thousands
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
2000 1999
-------- ---------
<S> <C> <C>
Operating Activities:
Net income.............................................. $ 11,403 $ 10,271
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................. 1,050 675
Depreciation and amortization......................... 1,276 1,268
Amortization of premiums on securities, net........... 171 1,427
Realized gain on security transactions, net........... (25) (15)
Increase in deferred loan fees........................ 734 225
Increase in accrued interest and other receivables.... (2,256) (2,020)
(Increase) decrease in other assets................... (1,655) (1,378)
Increase in accrued interest and other liabilities.... 2,964 1,731
Other changes, net.................................... 1 (158)
-------- ---------
Net cash provided by operating activities........... 13,663 12,026
-------- ---------
Investing Activities:
Net (increase) decrease in short term investments....... 10,400 (13,000)
Increase in FHLB stock.................................. (100) (1,249)
Proceeds from maturities and sales of securities
available for sale..................................... 42,120 118,363
Purchases of securities available for sale.............. (73,395) (215,800)
Net increase in loans................................... (57,041) (80,642)
Net purchases of premises and equipment................. (784) (3,082)
Proceeds from other real estate owned................... 56 102
-------- ---------
Net cash used in investing activities............... (78,744) (195,308)
-------- ---------
Financing Activities:
Proceeds from issuance of common stock.................. 2,008 1,434
Proceeds from sale of treasury stock.................... 191 80
Net increase in deposits................................ 133,125 179,280
Cash dividend paid...................................... (3,875) (3,151)
Repayment of other borrowings........................... (27,270) (13,287)
Proceeds from other borrowings.......................... 21,000 2,000
Net increase (decrease) in securities sold under
repurchase agreements
and short term borrowings.............................. (57,743) 15,784
Acquisition of treasury stock........................... (1,125) (2,177)
-------- ---------
Net cash provided by financing activities........... 66,311 179,963
-------- ---------
Increase (decrease) in cash and due from banks............ 1,230 (3,319)
Cash and due from banks, beginning of period.............. 26,185 29,359
-------- ---------
Cash and due from banks, end of period.................... $ 27,415 $ 26,040
======== =========
Supplemental Disclosures:
Interest paid........................................... $ 28,372 $ 20,738
Income tax payments..................................... 3,665 2,246
Change in unrealized gain (loss) on securities available
for sale--net of tax................................... 6,066 (11,846)
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Description of Operations
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 an independent bank headquartered in
Westchester County, New York. The Bank has 13 branch offices in Westchester
County and 1 in Bronx County, New York. The Bank anticipates opening an
additional facility in the northern part of Bronx County in the first half of
2001. The Company and the Bank derive substantially all of their revenue and
income from providing banking and related services to small and medium-sized
business, professionals, municipalities, not-for-profit organizations and
individuals located in Westchester County and, to a lesser extent, the Bronx.
2. Summary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (comprising only normal recurring
adjustments) necessary to present fairly the financial position of the Company
at September 30, 2000 and December 31, 1999 and the results of its operations,
comprehensive income, cash flows and changes in stockholders' equity for the
three and nine month periods ended September 30, 2000 and 1999. The results of
operations for the three and nine month periods ended September 30, 2000 are
not necessarily indicative of the results of operations to be expected for the
remainder of the year.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
predominant practices used within the Banking industry. Certain information and
note disclosures normally included in annual financial statements have been
omitted.
In preparing such financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated balance sheets and income and
expenses for the periods reported. 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.
These unaudited consolidated financial statements should be read in
conjunction with our audited consolidated financial statements as of and for
the year ended December 31, 1999 and notes thereto.
Intercompany items and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior period accounts to conform to
the current period's presentation.
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.
7
<PAGE>
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," replacing
SFAS No. 125. SFAS No. 140 revises the standard for accounting and reporting
for transfers and servicing of financial assets and extinguishment of
liabilities, providing consistent guidelines for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
Company is required to adopt SFAS No. 140 by March 31, 2001. The Company does
not believe that adoption of this statement will have a material impact on its
financial position or results of operations.
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per common share for each of the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(000's except share data)
<S> <C> <C> <C> <C>
Numerator:
Net income available to common
shareholders
for basic and diluted earnings
per share....................... $3,968 $4,265 $11,403 $10,271
Denominator:
Denominator for basic earnings
per common
share--weighted average shares.. 4,279,847 4,202,471 4,287,984 4,191,769
Effect of diluted securities:
Stock options.................. 106,911 88,306 103,054 96,249
---------- ---------- ---------- ----------
Denominator for dilutive earnings
per common
share--adjusted weighted average
shares............................ 4,386,758 4,290,777 4,391,038 4,288,018
========== ========== ========== ==========
Basic earnings per common share.... $0.93 $1.01 $2.66 $2.45
Diluted earnings per common share.. $0.90 $0.99 $2.60 $2.40
</TABLE>
8
<PAGE>
ITEM 2. 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 September 30, 2000 and consolidated results of
operations for the three and nine month periods ended September 30, 2000 and
September 30, 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 HVB Leasing Corp. (collectively the "Bank"). This discussion and
analysis should be read in conjunction with the financial statements and
supplementary financial information contained in the Company's Registration
Statement on Form 10.
Results of Operations for the Three and Nine Month Periods Ended September 30,
2000 and September 30, 1999
Summary of Results
The Company reported net income of $4.0 million and $11.4 million for the
three and nine month periods ended September 30, 2000, respectively. This
compares to $4.3 million and $10.3 million for the three and nine month periods
ended September 30, 1999, respectively. The decrease in net income in the three
month period ended September 30, 2000 compared to the same period in the prior
year was primarily due to higher net interest income and higher non interest
income offset by higher non interest expense, a higher provision for loan
losses and a higher effective tax rate. The increase in net income in the nine
month period ended September 30, 2000 compared to the same period in the prior
year was primarily due to higher net interest income and higher non interest
income partially offset by higher non interest expense, a higher provision for
loan losses and a higher effective tax rate.
Diluted earnings per share were $0.90 and $2.60 for the three and nine month
periods ended September 30, 2000, respectively. This compares to $0.99 and
$2.40 of diluted earnings per share for the three and nine month periods ended
September 30, 1999, respectively. On this basis, diluted earnings per share
decreased $0.09 or 9.1 percent and increased $0.20 or 8.3 percent,
respectively. Return on average equity was 17.89 percent and 17.81 percent for
the three and nine month periods ended September 30, 2000, respectively,
compared to 22.34 percent and 18.52 percent for the three and nine month
periods ended September 30, 1999, respectively. Return on average assets for
the three and nine month periods ended September 30, 2000 was 1.30 percent and
1.27 percent, respectively. This compares to 1.54 percent and 1.32 percent for
the three and nine month periods ended September 30, 1999, respectively.
9
<PAGE>
Average Balances and Interest Rates
The following table sets forth the average balances of interest earning
assets and interest bearing liabilities for the three month periods ended
September 30, 2000 and September 30, 1999, as well as total interest and
corresponding yields and rates. The data contained in the table has been
adjusted to a tax equivalent basis, based on the federal statutory rate of 34
percent.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Interest Rate(3) Balance Interest Rate(3)
---------- -------- ------- ---------- -------- -------
(000's except percentages)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Interest earning assets:
Federal funds sold.... $ 12,951 $ 215 6.64% $ 24,485 $ 319 5.21%
Securities: (1)
Taxable.............. 551,264 9,463 6.87 522,020 8,415 6.45
Exempt from Federal
income taxes........ 142,833 2,660 7.45 126,657 2,345 7.41
Loans, net (2)....... 451,570 10,931 9.68 372,069 8,298 8.92
---------- ------- ---------- -------
Total interest
earning assets.... 1,158,618 23,269 8.03 1,045,231 19,377 7.42
---------- ------- ---------- -------
Non interest earning
assets:
Cash and due from
banks................ 28,895 25,454
Other assets.......... 37,025 35,039
---------- ----------
Total non interest
earning assets.... 65,920 60,493
---------- ----------
Total assets....... $1,224,538 $1,105,724
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
---------------------
Interest bearing
liabilities:
Deposits:
Money market......... $ 150,330 $ 1,118 2.98% $ 145,354 $ 956 2.63%
Savings.............. 52,060 195 1.50 53,968 201 1.49
Time................. 349,389 5,338 6.11 281,618 3,318 4.71
Checking with
interest............ 68,813 232 1.35 60,221 207 1.37
Securities sold under
Repurchase
agreements and other
short-term
borrowings.......... 146,246 2,389 6.53 156,442 1,959 5.01
Other borrowings..... 94,232 1,338 5.68 77,529 1,041 5.37
---------- ------- ---------- -------
Total interest
bearing
liabilities....... 861,070 10,610 4.93 775,132 7,682 3.96
---------- ------- ---------- -------
Non interest bearing
liabilities:
Demand deposits....... 260,959 237,226
Other liabilities..... 14,038 17,010
---------- ----------
Total non interest
bearing
liabilities....... 274,997 254,236
---------- ----------
Stockholders' equity
(1).................... 88,471 76,356
---------- ----------
Total liabilities
and stockholders'
equity(1)......... $1,224,538 $1,105,724
========== ==========
Net interest earnings... $12,659 $11,695
======= =======
Net yield on interest
earning assets......... 4.37% 4.48%
</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 $904 and $797 for the
three months ended September 30, 2000 and September 30, 1999, respectively.
10
<PAGE>
Average Balances and Interest Rates
The following table sets forth the average balances of interest earning
assets and interest bearing liabilities for the nine month periods ended
September 30, 2000 and September 30, 1999, as well as total interest and
corresponding yields and rates. The data contained in the table has been
adjusted to a tax equivalent basis, based on the federal statutory rate of 34
percent.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Interest Rate(3) Balance Interest Rate(3)
---------- -------- ------- ---------- -------- -------
(000's except percentages)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Interest earning assets:
Federal funds sold.... $ 12,044 $ 561 6.21% $ 21,465 $ 796 4.94%
Securities:(1)
Taxable.............. 546,558 27,868 6.80 495,386 23,139 6.23
Exempt from Federal
income taxes........ 139,252 7,765 7.43 124,157 6,956 7.47
Loans, net (2)....... 434,963 30,631 9.39 340,485 22,675 8.88
---------- ------- ---------- -------
Total interest
earning assets.... 1,132,817 66,825 7.87 981,493 53,566 7.28
Non interest earning
assets:
Cash and due from
banks................ 28,145 25,580
Other assets.......... 36,063 33,339
---------- ----------
Total non interest
earning assets.... 64,208 58,919
---------- ----------
Total assets....... $1,197,025 $1,040,412
LIABILITIES AND
STOCKHOLDERS' EQUITY
---------------------
Interest bearing
liabilities:
Deposits:
Money market......... $ 149,670 $ 3,243 2.89% $ 124,208 $ 2,307 2.48%
Savings.............. 51,570 585 1.51 53,094 625 1.57
Time................. 329,952 14,186 5.73 262,594 9,086 4.61
Checking with
interest............ 63,161 625 1.32 58,279 613 1.40
Securities sold under
Repurchase
agreements and other
short-term
borrowings.......... 162,939 7,231 5.92 139,316 5,001 4.79
Other borrowings..... 91,457 3,869 5.64 88,027 3,508 5.31
---------- ------- ---------- -------
Total interest
bearing
liabilities....... 848,749 29,739 4.67 725,518 21,140 3.88
Non interest bearing
liabilities:
Demand deposits....... 249,951 226,960
Other liabilities..... 12,937 13,974
---------- ----------
Total non interest
bearing
liabilities....... 262,888 240,934
---------- ----------
Stockholder's equity
(1).................... 85,388 73,960
---------- ----------
Total liabilities
and stockholders'
equity(1)......... $1,197,025 $1,040,412
========== ==========
Net interest
earnings............... $37,086 $32,426
======= =======
Net yield on interest
earning assets......... 4.37% 4.40%
==== ====
</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 $2,640 and $2,365 for
the nine months ended September 30, 2000 and September 30, 1999,
respectively.
11
<PAGE>
Interest Differential
The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income between the three and nine
month periods ended September 30, 2000 and September 30, 1999.
<TABLE>
<CAPTION>
Nine Month Period Three Month Period
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------ ------------------------
Volume Rate Total(1) Volume Rate Total(1)
------ ------ -------- ------ ------ --------
(000's)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold......... $ (292) $ 57 $ (235) $ (150) $ 46 $(104)
Securities:
Taxable.................. 2,390 2,339 4,729 471 577 1,048
Exempt from Federal
income taxes(2)......... 822 (13) 809 299 16 315
Loans, net............... 6,292 1,664 7,956 1,774 859 2,633
------ ------ ------- ------ ------ -----
Total interest
income................ 9,212 4,047 13,259 2,394 1,498 3,892
------ ------ ------- ------ ------ -----
Interest expense:
Deposits:
Money market............. $ 473 $ 463 $ 936 $ 33 $ 129 $ 162
Savings.................. (18) (22) (40) (7) 1 (6)
Time..................... 2,768 2,331 5,099 798 1,221 2,019
Checking with interest... 36 (24) 12 29 (4) 25
Securities sold under
repurchase agreements
and other short-term
borrowings.............. 848 1,382 2,230 (128) 558 430
Other borrowings......... 137 224 361 225 72 297
------ ------ ------- ------ ------ -----
Total interest
expense............... 4,244 4,354 8,598 950 1,977 2,927
------ ------ ------- ------ ------ -----
Increase (decrease) in
interest differential....... $4,968 $ (307) $ 4,661 $1,444 $ (479) $ 965
====== ====== ======= ====== ====== =====
</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.
(2) Equivalent yields on securities exempt from federal income taxes are based
on a federal statutory rate of 34 percent.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is the most significant component of the Company's consolidated
earnings. For the three and nine month periods ended September 30, 2000, net
interest income, on a tax equivalent basis, increased 8.3 percent to $12.7
million from $11.7 million, and 14.4 percent to $37.1 million from $32.4
million, respectively, compared to the prior year periods. Net interest income
rose because of the increase in the excess of average interest earning assets
over average interest bearing liabilities for the three and nine month periods
ended September 30, 2000 to $297.5 million from $270.1 million, and to $284.1
million from $256.0 million, respectively, compared to the prior year periods.
The net interest margin, on a tax equivalent basis, was virtually unchanged
during these periods.
Interest income is determined by the volume of, and related rates earned on,
interest earning assets. Volume increases in securities and loans plus rate
increases in all asset categories (except securities exempt from federal income
taxes during the nine month period ended September 30, 2000), partially offset
by lower volume in Federal funds sold, contributed to the higher interest
income in the current year periods as compared to the same periods in the prior
year. For the three and nine month periods ended September 30, 2000, average
interest earning assets increased 10.8 percent to $1,158.6 million from
$1,045.2 million, and 17.9 percent to $1,132.8 million from $981.5 million,
respectively, compared to the prior year periods. Interest income, on a tax
equivalent basis, for the three and nine month periods ended September 30,
2000, increased 20.1 percent to $23.3 million from $19.4 million, and 24.8
percent to $66.8 million from $53.6 million, respectively, compared to the
prior year periods.
12
<PAGE>
Average total securities increased $45.4 million, or 7.0 percent to $694.1
million for the three month period ended September 30, 2000 compared to the
prior year period. For the nine month period ended September 30, 2000, average
total securities increased $66.3 million, or 10.7 percent to $685.8 million
compared to the prior year period. These increases in average total securities
in the current year periods, as compared to the same periods in the prior year,
were principally the result of management's efforts to effectively leverage
capital. Interest income on securities increased in the current year periods
due to higher volume and higher aggregate rates.
Average net loans increased $79.5 million, or 21.4 percent to $451.6 million
for the three month period ended September 30, 2000 compared to the prior year
period. For the nine month period ended September 30, 2000, average net loans
increased $94.5 million, or 27.7 percent to $435.0 million compared to the
prior year period. These increases in average net loans reflect management's
greater emphasis on making new loans, more effective market penetration and
continuing strong economic conditions in the Company's primary market. Interest
income on net loans increased in the current year periods due to higher volume
and higher rates.
Interest expense is a function of the volume of, and rates paid for,
interest bearing liabilities, comprised of deposits and borrowings. Interest
expense for the three and nine month periods ended September 30, 2000 increased
38.1 percent to $10.6 million from $7.7 million, and 40.7 percent to $29.7
million from $21.1 million, respectively, compared to the prior year periods.
For the three and nine month periods ended September 30, 2000, average balances
in all deposit categories, except for savings accounts, increased compared to
the prior year periods. Deposits increased from existing customers, new
customers and the opening of a new branch in June, 1999 in the Bronx, New York.
In addition, time deposits increased, principally from municipalities, which
are obtained on a bid basis, and borrowings increased in a continuing effort to
effectively leverage capital. These funds were invested in loans and
securities. The average amount of non interest bearing demand deposits, which
increased 10.0 percent to $261.0 million from $237.2 million, and 10.1 percent
to $250.0 million from $227.0 million, respectively, compared to the prior year
periods, is an important component of the Company's liability management and
has a direct impact on the determination of net interest income. Interest rates
paid on average money market accounts, time deposits and borrowings, increased
in the current year periods compared to the prior year periods due to a higher
interest rate environment. Savings accounts and checking with interest accounts
were not as sensitive to general interest rate changes and, therefore, the
rates on these deposits showed only small changes during these periods.
The interest rate spread on a tax equivalent basis for the three and nine
month periods ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Month Nine Month
Period Ended Period Ended
September 30, September 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Average interest rate on:
Total average interest earning assets......... 8.03% 7.42% 7.87% 7.28%
Total average interest bearing liabilities.... 4.93 3.96 4.67 3.88
Total interest rate spread.................... 3.10 3.46 3.20 3.40
</TABLE>
Higher overall yields on interest earning assets offset by higher rates on
interest bearing liabilities, resulting from: a higher interest rate
environment; a shifting of funding to higher rate deposits and borrowings; and
loans, the highest yielding asset category, growing as a component of total
interest earning assets, reduced the interest rate spread in the current year
periods compared to the prior year periods. Management cannot predict what
impact market conditions will have on the Company's interest rate spread and
compression in net interest rate spread may occur. The leveraging of capital
generally tends to decrease the interest rate spread, however, it adds net
interest income without adding significant operating costs.
13
<PAGE>
Provision for Loan Losses
The Bank recorded a provision for loan losses of $350,000 and $225,000 for
the three month periods ended September 30, 2000 and 1999, respectively, and
$1,050,000 and $675,000 for the nine month periods ended September 30, 2000 and
1999, respectively. The provision for loan losses is charged to income to bring
the Bank's allowance for loan losses to a level deemed appropriate by
management. See "Financial Condition" for further discussion.
Non Interest Income
Non interest income for the three and nine month periods ended September 30,
2000 increased 17.0 percent to $462,000 from $395,000, and 30.2 percent to $1.5
million from $1.1 million, respectively, compared to the prior year periods.
Service charges for the three and nine month periods ended September 30,
2000 increased 5.3 percent to $278,000 from $264,000, and 9.5 percent to
$828,000 from $756,000, respectively, compared to the prior year periods. These
increases reflect a higher level of fees charged and increased activity.
Other income for the three and nine month periods ended September 30, 2000
increased 21.4 percent to $159,000 from $131,000, and 70.2 percent to $640,000
from $376,000, respectively, compared to the prior year periods. The increase
for the three month period ended September 30, 2000 compared to the prior year
period was principally the result of an increase in transaction fees. The
increase for the nine month period ended September 30, 2000 compared to the
prior year period was principally the result of a gain of $233,000 in the
current year period from the sale of a branch facility which was relocated
during 1999.
Non Interest Expense
Non interest expense for the three and nine month periods ended September
30, 2000 increased 19.4 percent to $6.5 million from $5.4 million, and 14.4
percent to $19.4 million from $17.0 million, respectively, compared to the
prior year periods. These increases reflect the overall growth of the Company
and resulted from increases in salaries and employee benefits, occupancy costs,
professional services, equipment expense, FDIC assessment and other operating
expense, partially offset by a decrease in business development expense in the
three month period ended September 30, 2000 compared to the prior year period.
For the nine month period ended September 30, 2000, increases in salaries and
employee benefits, occupancy costs, professional services, FDIC assesment and
other operating expense were partially offset by decreases in equipment expense
and business development expense as compared to the same period in the prior
year.
Salaries and employee benefits, the largest component of non interest
expense, for the three and nine month periods ended September 30, 2000
increased 26.0 percent to $3.7 million from $2.9 million, and 19.6 percent to
$11.0 million from $9.2 million, respectively, compared to the prior year
periods. These increases resulted from increased staff to accommodate the
increases in loans and deposits, the opening of a new branch facility, as well
as merit increases. In addition, salaries and employee benefits increased as a
result of higher costs of employee benefit programs such as medical coverage,
retirement, costs associated with related payroll taxes and training expenses.
Further, recruitment related costs increased due to increased recruiting
activity. The cost of providing severance pay to a former executive of the
Company also contributed to these increases.
Occupancy expense for the three and nine month periods ended September 30,
2000 increased 10.1 percent to $576,000 from $523,000, and 11.2 percent to $1.7
million from $1.5 million, respectively, compared to the prior year periods.
These increases reflect the opening of a new branch facility in June, 1999, as
well as rising costs on leased facilities, real estate taxes, utility costs,
maintenance costs and other costs to operate the Company's facilities.
Professional services for the three and nine month periods ended September
30, 2000 increased 102.3 percent to $595,000 from $294,000, and 38.5 percent to
$1.9 million from $1.4 million, respectively, compared to the prior year
periods. These increases resulted from professionals engaged to assist with
first-time filings
14
<PAGE>
with the Securities and Exchange Commission and to review certain operating
functions. The increase for the nine month period ended September 30, 2000 was
additionally due to professionals engaged to perform a customer satisfaction
survey, compared to the prior year period.
Equipment expense for the three and nine month periods ended September 30,
2000 decreased 27.0 percent to $432,000 from $592,000, and 13.8 percent to $1.3
million from $1.5 million, respectively, compared to the prior year periods.
These decreases reflect higher depreciation costs associated with the Company's
in-house computer systems offset by equipment related expenditures made during
the prior year periods, not made in the current year periods, associated with
the opening of a new branch facility in June, 1999.
Business development expense for the three month period ended September 30,
2000 increased 1.0 percent to $197,000 from $195,000 during the same period in
the prior year, and decreased 8.2 percent to $606,000 from $660,000 during the
nine month period ended September 30, 2000 compared to the prior year period.
These changes reflect costs associated with increased general promotion of
products and services as well as expanded business development efforts, offset
by business development costs in the prior year periods, not incurred in the
current year periods, associated with the opening of a new branch in June,
1999.
The assessment of the Federal Deposit Insurance Corporation (FDIC) for the
three and nine month periods ended September 30, 2000 increased 110.5 percent
to $40,000 from $19,000, and 106.8 percent to $122,000 from $59,000,
respectively, compared to the prior year periods. These increases resulted from
increases in the Bank's deposits subject to FDIC assessment as well as a
general increase in the overall assessment rate.
Significant changes, more than 5 percent, in other components of non
interest expense for the three and nine month periods ended September 30, 2000
compared to September 30, 1999, were due to the following:
. decrease of $19,000 (14.4%) and increase of $15,000 (4.0%), respectively,
in stationery and printing costs related primarily to increases in
supplies, forms and stationery due to increased business activity and a
new branch facility. The decrease for the three month period is primarily
due to the timing of purchases of certain supplies.
. Increase of $22,000 (13.6%) and $62,000 (12.9%), respectively, in
communications expense, due to added voice and data lines associated with
expansion of technology usage and growth in customers and business
activity.
. Increase of $7,000 (8.1%) and $36,000 (15.4%), respectively, in courier
expense due to increased customer utilization of the service and an
increase in costs of such service.
. Increase of $34,000 (66.6%) and $113,000 (73.6%), respectively, in dues,
meetings and seminar costs due to increased participation in such events.
. Decrease of $24,000 (29.4%) and $63,000 (26.9%), respectively, in other
insurance expense resulting from reductions in the estimates of the net
cost of certain life insurance programs, partially offset by higher
automobile insurance costs.
. Decrease of $38,000 (45.0%) and $176,000 (60.7%), respectively, in other
loan expense principally due to reduced costs associated with OREO.
Income Taxes
Income taxes for the three and nine month periods ended September 30, 2000
were unchanged at $1.4 million, and increased 23.3 percent to $4.1 million from
$3.3 million, respectively, compared to the prior year periods. The effective
tax rate was 26.5 percent for the current year periods compared to 24.5 percent
in the prior year periods. The increase in the effective tax rate reflects an
increase in income subject to tax largely due to the decrease in tax exempt
income as a percentage of total interest income and the Company becoming
subject to New York City tax during the last half of 1999.
15
<PAGE>
Financial Condition
At September 30, 2000, the Company had total assets of $1,234.2 million, an
increase of $86.7 million, or 7.6 percent, from the $1,147.5 million at
December 31, 1999.
The securities portfolio consists of securities available for sale of $675.9
million and $635.0 million and Federal Home Loan Bank of New York (FHLB) stock
totaling $9.5 million and $9.4 million at September 30, 2000 and December 31,
1999, respectively.
The following table sets forth the amortized cost, gross unrealized gains
and losses and the estimated fair value of securities classified as available
for sale at September 30, 2000 (the Company had no securities classified as
held to maturity at September 30, 2000):
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Amortized -------------- Fair
Cost Gains Losses Value
--------- ------ ------- ---------
(000's)
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies...... $219,565 $ 102 $ 8,581 $211,086
Mortgage-backed securities................. 318,660 776 5,816 313,620
Obligations of state and political
subdivisions.............................. 145,096 2,275 929 146,442
Other debt securities...................... 3,758 -- 227 3,531
-------- ------ ------- --------
Total debt securities...................... 687,079 3,153 15,553 674,679
Equity securities.......................... 841 351 18 1,174
-------- ------ ------- --------
Total.................................... $687,920 $3,504 $15,571 $675,853
======== ====== ======= ========
</TABLE>
During the nine months ended September 30, 2000, U.S. Treasury and
government agency obligations increased $23.1 million to $211.1 million due to
purchases of $24.7 million and other increases of $3.4 million, offset by
maturities of $5.0 million. The purchases were made based upon the attractive
yield available in the market.
Mortgage-backed securities, including CMO's, increased $3.7 million during
the period to $313.6 at September 30, 2000. The increase was due to purchases
of $27.4 million and other increases of $3.9 million, offset by principal
paydowns and redemptions of $27.6 million. These purchases were fixed rate
mortgage- backed securities with average lives of less than ten years at the
time of purchase.
Obligations of state and political subdivisions increased $13.6 million
during the period to $146.4 million due to purchases of $21.4 million,
maturities of $9.7 million and other increases of $1.9 million. The purchases
were made for the attractive yields in the market and for their favorable
income tax treatment.
The Company invests in FHLB stock and other securities which are rated with
an investment grade by nationally recognized credit rating organizations and,
on a limited basis, in non-rated securities. Non-rated securities totaled $9.2
million at September 30, 2000 comprised primarily of obligations of
municipalities located within the Company's market area.
Except for securities of the U.S. Treasury and government agencies, FHLB
stock having a book value and estimated fair value of $9.5 million and
mortgage-backed securities having a book value of $10.0 million and an
estimated fair value of $9.2 million issued by Residential Funding Mortgage
Corp. (a subsidiary of General Motors Acceptance Corp., which in turn is a
wholly-owned subsidiary of General Motors, a company with an estimated market
value of $31 billion at September 30, 2000), there were no obligations of any
single issuer which exceeded ten percent of stockholders' equity at September
30, 2000.
Total loans were $475.4 at September 30, 2000 compared to $418.4 million at
December 31, 1999, reflecting a $57.0 million increase. This increase resulted
principally from a $22.9 million increase in commercial real estate loans, a
$13.9 million increase in residential real estate loans, a $19.3 million
increase in commercial and industrial loans and a $2.4 million increase in
construction loans, partially offset by a decrease of $1.9 million in lease
financing. All other loan types showed little change during the nine month
period ended September 30, 2000.
16
<PAGE>
Major classifications of loans at September 30, 2000 and December 31, 1999
are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(000's)
<S> <C> <C>
Real Estate:
Commercial...................................... $176,682 $153,823
Construction.................................... 28,888 26,526
Residential..................................... 141,821 127,959
Commercial and industrial......................... 96,581 77,276
Individuals....................................... 9,741 9,280
Lease financing................................... 21,657 23,543
-------- --------
Total......................................... 475,370 418,407
Deferred loan fees................................ (2,180) (1,446)
Allowance for loan losses......................... (5,019) (4,047)
-------- --------
Loans, net.................................... $468,171 $412,914
======== ========
</TABLE>
In March 2000, the Company ended its participation in an automobile leasing
program due to the sale of the company that originated and serviced the leases
and resulting changes to various aspects of the program. The balance of $21.7
million of such leases at September 30, 2000 will continue to decline as
repayments of existing leases continue. The Company has not determined if it
will seek to participate in a similar program in the future.
During the quarter ended June 30, 2000, certain loans were reclassified by
type. The December 31, 1999 loan classifications by type in the above table
have been reclassified to conform to the September 30, 2000 presentation.
The following table summarizes the Company's non-accrual loans, loans past
due 90 days or more and still accruing, restructured loans and OREO as of
September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(000's except percentages)
<S> <C> <C>
Non accrual loans at period end................. $3,099 $3,855
OREO at period end.............................. 2,137 2,193
Restructured loans at period end................ -- 323
------ ------
Total nonperforming assets.................... 5,236 6,371
Loans past due 90 days or more and still
accruing....................................... 1,867 264
Nonperforming assets to total assets at period
end............................................ 0.42% 0.56%
</TABLE>
Gross interest income that would have been recorded if these borrowers had
been current in accordance with their original loan terms was $149,000,
$534,000 and $524,000 for the three and nine months ended September 30, 2000
and the year ended December 31, 1999, respectively. There was no interest
income on these loans included in net income for the three and nine month
periods ended September 30, 2000 and the year ended December 31, 1999.
The Bank maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio based on ongoing quarterly assessments of estimated losses.
The Bank's methodology for assessing the appropriateness of the allowance
consists of several key components, which include a specific allowance for
identified problem loans, a formula allowance and an unallocated allowance.
17
<PAGE>
A summary of the components of the allowance for loan losses, changes in the
components and the impact of charge-offs/recoveries on the resulting provision
for loan losses for the dates indicated is as follows:
<TABLE>
<CAPTION>
September 30, Change During December 31,
2000 Period 1999
------------- ------------- ------------
(000's)
<S> <C> <C> <C>
Specific component.................. $ 290 $ 233 $ 57
Formula component................... 369 (498) 867
Unallocated component............... 4,360 1,237 3,123
------ ------ ------
Total allowance................... $5,019 $4,047
====== ======
Net change.......................... 972
Net charge-offs..................... 78
------
Provision amount.................... $1,050
======
</TABLE>
The change in the specific component of the allowance for loan losses is the
result of our analysis of impaired loans and other problem loans and our
determination of the amount required to reduce the carrying amount of such
loans to estimated fair value.
The change in the formula component of the allowance for loan losses is the
result of the application of historical loss experience to outstanding loans by
type. Loss experience for each year is based upon average charge-off experience
for the prior three year period by loan type.
The change in the unallocated component of the allowance for loan losses is
the result of our consideration of other relevant factors affecting loan
collectibility. Due to the inherent uncertainty in the process, we do not
attempt to quantify separate amounts for each of the conditions considered in
estimating the unallocated component of the allowance. We periodically adjust
the unallocated component to an amount that, when considered with the specific
and formula components, represents our best estimate of probable losses in the
loan portfolio as of each balance sheet date. The following factors affected
the changes in the unallocated component for loan losses at September 30, 2000:
. Credit quality--Non-accrual loans and loans past due 90 days or more
increased by $0.8 million. Certain of the loans are also considered in
connection with the analysis of impaired loans performed to determine the
specific component of the allowance. However, due to the uncertainty of
that determination, such loans are also considered in the process of
determining the unallocated component of the allowance.
. Change in underwriting criteria--The Bank increased its loan to value
ratio guidelines on all loans secured by real estate (except for loans
secured by 1-4 family residential real estate) to remain competitive for
such loans.
. New loan products--The Bank began financing business equipment leases
during the period. Any probable losses with respect to business equipment
leases are not reflected in the formula component of the allowance for
loan losses since there is no loss history.
. Economic and business conditions--Increasing interest rates negatively
affected the general ability of borrowers to repay their loans.
As a result of our detailed review process and consideration of the
identified relevant factors, management determined that an increase in the
unallocated component of the allowance of $1,237,000 reflects our best estimate
of probable losses which have been incurred as of September 30, 2000.
Total deposits increased $133.1 million for the nine month period ended
September 30, 2000 to $888.0 million, or 17.6 percent from $754.8 million at
December 31, 1999.
18
<PAGE>
The following table presents a summary of deposits at September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31, Increase
2000 1999 (Decrease)
------------- ------------ ---------
(000's)
<S> <C> <C> <C>
Demand deposits....................... $266,225 $226,345 $ 39,880
Money market accounts................. 154,595 140,462 14,133
Savings accounts...................... 52,165 52,548 (383)
Time deposits of $100,000 or more..... 300,654 226,997 73,657
Time deposits of less than $100,000... 51,397 50,146 1,251
Checking with interest................ 62,935 58,348 4,587
-------- -------- --------
$887,971 $754,846 $133,125
======== ======== ========
</TABLE>
The increase in non interest bearing demand deposits reflects the Company's
continuing emphasis on developing this funding source. The increase in time
deposits of $100,000 or more primary resulted from an increase in CD's from
municipal customers which are acquired on a bid basis. The increase in checking
with interest, money market accounts and time deposits of less than $100,000
reflects new customer relationships and increased account activity. The
decrease in savings accounts reflects the lower rate paid on such accounts and
customers switching to other higher rate accounts or to other investments.
Total borrowings decreased $64.0 million to $249.7 million at September 30,
2000 from $313.7 million at December 31, 1999. This overall decrease in
borrowings resulted from deposit growth in excess of growth in loans and
securities.
Stockholders' equity increased $14.7 million to $83.0 million at September
30, 2000 from $68.3 million at December 31, 1999. Increases in stockholders'
equity resulted from:
. Net income of $11.4 million for the nine months ended September 30, 2000
. $2.0 million of stock options exercised
. $0.2 million of treasury stock sales
. $6.1 million unrealized gain on securities available for sale
Decreases in stockholders' equity resulted from:
. $1.1 million treasury stock purchases
. $3.9 million cash dividend paid on common stock
19
<PAGE>
The Company's and the Bank's capital ratios at September 30, 2000 and
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Minimum for
Capital
September 30, December 31, Adequacy
2000 1999 Purposes
------------- ------------ -----------
<S> <C> <C> <C>
Leverage ratio:
Company............................. 7.1% 7.2% 4.0%
Bank................................ 7.0% 7.1 4.0
Tier 1 capital:
Company............................. 16.1% 15.7 4.0
Bank................................ 16.0% 15.5 4.0
Total capital:
Company............................. 16.9% 16.5 8.0
Bank................................ 16.8% 16.3 8.0
</TABLE>
The Company and the Bank exceed all current regulatory capital requirements.
In addition, the Bank was in the "well capitalized" category at September 30,
2000 and December 31, 1999.
The Bank's liquid assets, at September 30, 2000, include cash and due from
banks of $27.4 million and Federal funds sold of $10.5 million. Other sources
of liquidity at September 30, 2000 include maturities and principal and
interest payments on loans and securities, comprised of approximately $174
million of loans maturing in one year or less, and approximately $54 million of
securities having contractual maturities or expected call dates or average
lives of one year or less. In addition, at September 30, 2000, the Bank had an
available borrowing capacity of approximately $90 million from the FHLB, $12.5
million under two Federal funds purchased facilities, $60 million available
under Retail CD Brokerage Agreements and had securities totaling approximately
$122 million that could be sold under agreements to repurchase.
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 September 30, 2000. 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.
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<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk at December 31,
1999 were previously reported in the Company's Registration Statement on Form
10. There have been no material changes in the Company's market risk exposure
at September 30, 2000 compared to December 31, 1999.
The Company's primary market risk exposure is interest rate risk since
substantially all transactions are denominated in U.S. dollars with no direct
foreign exchange or changes in commodity price exposure.
All market risk sensitive instruments continue to be classified as available
for sale with no financial instruments entered into for trading purposes. The
Company does not use derivative financial instruments extensively. However, an
interest rate floor with a notional amount of $50 million was in place as of
September 30, 2000 to manage the Company's interest rate exposure. The Company
did not enter into any new derivative financial instruments during the nine
months ended September 30, 2000.
The Company uses two methods to evaluate market risk to changes in interest
rates, a "Static Gap" analysis and a simulation analysis of the impact of
changes in interest rates on the Company's net interest income. Both methods
show the Company's net interest income declining if interest rates gradually
rise.
The Company's "Static Gap" at September 30, 2000 was negative $352 million
in the one year time frame.
The Company's policy limit on interest rate risk has remained unchanged
since December 31, 1999. The following table illustrates the estimated exposure
under a rising rate scenario and a declining rate scenario calculated as a
percentage change in estimated net interest income assuming a gradual shift in
interest rates for the next 12 month measurement period, beginning September
30, 2000.
<TABLE>
<CAPTION>
Percentage Change in
Estimated Net Interest Income
Gradual Change in Interest Rates from September 30, 2000 Policy Limit
-------------------------------- ----------------------------- ------------
<S> <C> <C>
+200 basis points............... (4.9)% (5.0)%
-200 basis points............... 4.1% (5.0)%
</TABLE>
The percentage change in estimated net interest income in the +200 and -200
basis points scenario is within the Company's policy limits.
21
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 2000.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report 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
November 14, 2000
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