<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-17848
-------
HUDSON CHARTERED BANCORP, INC.
------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NEW YORK 14-1668718
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ROUTE 55, LAGRANGEVILLE, NEW YORK 12540
--------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 914471-1711
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.80 PER SHARE 7.25% CUMULATIVE CONVERTIBLE
- -------------------------------------- ----------------------------
(TITLE OF CLASS) PREFERRED STOCK, SERIES B
-------------------------
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH REQUIREMENTS
FOR THE PAST 90 DAYS. YES X NO ___
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K ______
AS OF MARCH 1, 1996, THE AGGREGATE MARKET VALUE OF THE 2,507,063 SHARES OF THE
REGISTRANT'S VOTING COMMON STOCK ISSUED AND OUTSTANDING HELD BY NON-AFFILIATES
ON SUCH DATE WAS APPROXIMATELY $ 52,666,509 BASED ON THE REPORTED LAST SALE
PRICE OF THE REGISTRANT'S COMMON STOCK ON SUCH DATE. FOR PURPOSES OF THIS
CALCULATION, IT IS ASSUMED THAT DIRECTORS, EXECUTIVE OFFICERS AND BENEFICIAL
OWNERS OF MORE THAN 5% OF THE REGISTRANT'S VOTING COMMON STOCK ARE AFFILIATES OF
THE REGISTRANT.
AS OF MARCH 1, 1996, THE REGISTRANT HAD 3,857,063 SHARES OF COMMON STOCK ISSUED
AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
1. PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 1996 ANNUAL MEETING OF
STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 ARE INCORPORATED
BY REFERENCE INTO PART III OF THIS FORM 10-K. THE INCORPORATION BY
REFERENCE HEREIN, OF PORTIONS OF THE PROXY STATEMENT, SHALL NOT BE DEEMED
TO SPECIFICALLY INCORPORATE BY REFERENCE THE INFORMATION REFERRED TO IN
ITEM 402(A) 8 OF REGULATION S-K.
<PAGE>
FORM 10-K TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE NO.
- ------
<S> <C> <C>
ITEM 1 BUSINESS 3
ITEM 2 PROPERTIES 17
ITEM 3 LEGAL PROCEEDINGS 17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II
- -------
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS 18
ITEM 6 SELECTED FINANCIAL DATA 19
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 20
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 36
PART III
- --------
ITEMS 10 THROUGH 13. (INCORPORATED BY REFERENCE TO THE
DEFINITIVE POLICY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION NOT LATER THAN 120 DAYS AFTER THE END OF THAT
FISCAL YEAR) 36
PART IV
- -------
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 37
SIGNATURES 72
- ----------
</TABLE>
<PAGE>
PART I
------
ITEM 1 - BUSINESS
- -----------------
MERGER
- ------
Hudson Chartered Bancorp, Inc. (the "Company") is a New York corporation
with headquarters at 20 Mill Street, Rhinebeck, New York, and principal
executive offices at Route 55, LaGrangeville, New York. The Company's principal
subsidiary, accounting for 99% of the consolidated assets and 88% of
consolidated equity, is First National Bank of the Hudson Valley (the "Bank").
The Company is registered with the Board of Governors of the Federal
Reserve System (the "Reserve Board") as a bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended (the "BHCA"). As a
bank holding company, it is required to file annual reports and other
information regarding its business operations and those of its subsidiaries with
the Reserve Board. See "REGULATION AND SUPERVISION - Bank Holding Company
Regulation."
The Bank was chartered under the national banking laws in 1863 and is a
member of the Federal Reserve System. It operates its main office at 289-291
Main Mall, Poughkeepsie, New York, and nineteen other branch offices and eleven
offsite automated teller machines in Dutchess, Ulster, Putnam, and Orange
Counties. Its deposits are insured by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is subject to comprehensive regulation, supervision, and
examination by the Office of the Comptroller of the Currency ("Comptroller"),
the Reserve Board, and the FDIC.
The Bank conducts a general commercial banking and trust business. It
offers retail and wholesale banking services including demand, savings and time
deposits, commercial, mortgage and installment loans, consumer banking, and
trust services. Services offered by the Bank's Trust Department include trust
administration, investment management, and custody services.
As of December 31, 1995, the Company, on a consolidated basis, had total
assets of approximately $696.5 million, total deposits of $631.1 million and
stockholders' equity of $59.9 million. At March 1, 1996, the Company and the
Bank employed 312 full-time equivalent employees.
LENDING
- -------
The Bank engages in a variety of lending activities which are primarily
categorized as residential and commercial mortgage, consumer/installment, and
commercial lending.
The Bank originates virtually all of its loans in its market area. At
December 31, 1995, the Bank's gross loan portfolio totaled approximately $422.4
million. Of this amount, real estate mortgage, consumer/installment, and
commercial loans comprised 67.3%, 16.1%, and 16.6%, respectively, of the Bank's
loan portfolio.
At December 31, 1995, the Bank's unsecured lending limit to one borrower
under applicable regulations was approximately $9.1 million.
In managing the growth of its loan portfolio, the Bank has focused on: (i)
the application of prudent underwriting criteria, (ii) establishment of internal
lending limits below the Bank's legal lending authority, (iii) establishment of
industry concentration limits, (iv) active involvement by senior management and
the Board of Directors in the loan approval process, and (v) active monitoring
of loans to ensure that repayment are made in a timely manner and to identify
potential problem loans.
For information regarding the performance of the loans in the Bank's
portfolio and the amount and composition of the Bank's allowance for loan
losses, see "Item 7 - Management's Discussion of Analysis of Financial Condition
and Results of Operations -- Asset Quality."
3
<PAGE>
RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS. Residential mortgage loans
-----------------------------------------
are comprised primarily of loans on one-to-four family residential units,
construction and land development loans, home equity lines of credit, and
special purpose loans (loans satisfying the objectives of the Community
Reinvestment Act).
In underwriting residential mortgage loans, the Bank evaluates both the
prospective borrower's ability to make payments on the loan when due and the
value of the property securing the loan. As required by banking regulators, an
appraisal of the real estate intended to secure the loan is generally undertaken
by an independent New York State licensed or certified appraiser previously
approved by the Bank. Residential mortgages are generally underwritten up to 80%
loan-to-value ("LTV") ratio. However, the Bank has made a limited number of
loans greater than 80% LTV, up to 95% LTV, with private mortgage insurance
required for loans in excess of the 80% LTV ratio.
The Bank offers fixed rate and adjustable rate residential mortgage loans
with a maximum term of 30 years. Fixed rate loans are underwritten according to
Federal Home Loan Mortgage Corporation criteria in order to qualify for sale in
the secondary market. Individual fixed rate loans are usually sold at the time
of closing without recourse to the Bank. The Bank continues to service these
loans.
In 1995, the Company sold, but retained the servicing rights on, $31.3
million of fixed rate residential mortgage loans of which approximately $25.1
million were originated in previous years. Total loans serviced for others was
$101.1 million at December 31, 1995.
The Bank offers a one year adjustable rate loan (and, on an exception
basis, three and five year adjustable rate loans). This loan provides for annual
adjustments in the interest charged to an amount usually equal to 3% over the
one year U. S. Treasury securities index. Adjustable rate loans are generally
retained in the Bank's portfolio in order to increase the percentage of loans in
its portfolio with greater repricing frequencies than fixed rate loans. Interest
rates or origination fees on adjustable rate loans are priced to be competitive
in the Bank's market area. Periodic adjustments of the interest rate on an
adjustable rate loan is usually limited to not more than 2% per adjustment, with
an interest rate ceiling over the life of the loan ranging from 11% to 15%.
The Bank also offers a "convertible" adjustable rate mortgage, which
provides the borrower an option to convert a one year adjustable rate mortgage
to a fixed rate mortgage at then prevailing market rates at the end of five
years. The current originations of these loans are also sold into the secondary
market with servicing rights retained.
The Bank offers two types of home equity mortgage loans. The first is an
"express loan" subject to a limit of $25,000 with a five or seven year full
payout amortization, as a substitute for a consumer loan but with possible tax
deductibility of interest. The Bank places a second mortgage on the property
with assessed value used as the principal basis for valuation. The second is a
open-end revolving line of credit, which is an adjustable rate loan with a term,
depending on the size of the loan, of up to twenty years. During the revolving
period, which varies from five to ten years based on the size of the loan, the
borrower is only required to make interest payments. Thereafter, payments are
for both principal and interest. All home equity loans are limited to one-to-
four family owner-occupied residences. The Bank restricts its open-end home
equity loans to a maximum of 75% of the appraised value of the collateral
property net of the balance of the first mortgage loan on such property, if any,
and executes a second mortgage as collateral. On closed-end loans, the LTV is
limited to 80% of appraised value. The Bank previously offered a closed end,
fixed rate loan with an amortization basis of 15 years and either as three or
five year balloon maturity. Such product was discontinued in 1994. As such loans
mature, they are rewritten to fully amortize to maturity. Open-end lines of
credit not advanced totaled $12.3 million at December 31, 1995. Loans secured by
residential mortgages totaled $143.7 million at December 31, 1995, of which
$102.6 million were first and $41.1 million were second mortgages.
4
<PAGE>
Commercial real estate loans are generally offered by the Bank on a
variable rate basis with a three or five year balloon maturity, although the
amortization basis may range from 15 to 30 years. These loans are typically
related to commercial business loans and are secured by the underlying real
estate used in these businesses. The maximum loan-to-value ratio on commercial
real estate loans is 75%, with the value of the collateral for loans in excess
of $250,000 being based on independent appraisals. The Bank typically requires
personal guarantees of the principals of corporations to which it lends.
Commercial real estate loans are often larger and may involve greater risks than
other types of lending. Because payments on such loans are often dependent upon
the successful operation of the business involved, repayment of such loans may
be subject to a greater extent to adverse economic conditions. Loans secured by
commercial mortgages totaled $127.4 million at December 31, 1995.
CONSTRUCTION LOANS. The Bank makes short-term (one year or less)
------------------
construction loans secured by land, residential, and non-residential properties.
At December 31, 1995, total construction loans (excluding construction loans
where the Bank committed to provide the subsequent financing) aggregated
approximately $13.3 million and amounts not yet advanced totaled $2.0 million.
The Bank has no major commitments to lend to developers of significant multi-
unit residential or commercial projects. Furthermore, the Bank does not intend
to actively engage in lending to developers of significant multi-unit
residential or commercial projects.
Construction loans on owner occupied dwellings are usually for terms of 6
to 12 months. Funds for construction loans are disbursed as phases of
construction are completed. The Bank's construction loan underwriting procedure
generally limits the loan amount to 80% LTV ratio with an LTV of up to 90%
allowed where private mortgage insurance on the amount over 80% is provided with
respect to the permanent mortgage. The Bank does not generally fund construction
loans for single family homes built by investors until the builder has a firm
sales contract for the residence to be constructed.
COMMERCIAL LOANS. The Bank's commercial loan portfolio consists
----------------
primarily of commercial business loans to small and medium sized businesses. At
December 1995, the Bank's commercial business loans outstanding totaled $69.9
million and an additional $27.0 million under lines of credit not advanced.
Commercial business loans are usually made to finance the purchase of
inventory or new or used equipment or for other short-term working capital
purposes. Generally, these loans are secured, but these loans are also offered
on an unsecured basis. Commercial business loans for the purchase of new or used
equipment are normally written on an installment basis with a term of between
one and seven years. Loans for the purchase of inventory or other working
capital purposes are structured as time or demand loans with a term of 12 months
or less. In granting commercial loans, the Bank looks primarily to the
borrower's cash flow as the principal source of repayment of the loan.
Collateral and personal guarantees may be secondary sources of repayment. The
Bank generally requires commercial borrowers to have a debt service coverage
ratio of 125% or higher. Commercial business loans are often larger and may
involve greater risks than other types of lending. Payments on such loans are
often dependent upon the successful operation of the underlying business and,
therefore, may be subject to a greater extent to adverse economic conditions.
CONSUMER, INSTALLMENT, AND OTHER LOANS. The Bank offers a full range of
---------------------------------------
consumer/installment loans. Such loans include financing for new and used cars,
wholesale and indirect financing programs for autos and other vehicle
dealerships in addition to, on a direct basis, personal loans for consumer
goods, home improvement, overdraft checking, and debt consolidation. wholesale
dealer loans (secured by dealer inventories) are structured as one year lines of
credit and are reviewed annually. Consumer loans are made on both a secured and
unsecured basis. Maturities for consumer loans are for periods of 12 to 60
months, excluding secured home improvement loans which are usually written as
home equity loans. Interest rates for consumer products are structured either at
fixed or variable rates. Leasing services are offered directly by the Bank. Both
Visa and MasterCard credit cards are available. At December 31, 1995,
installment, consumer, and all other loans totaled $67.8 million, of which $44.1
million represents loans generated from the indirect loan program. Indirect
automobile financing can carry a higher risk of loss than direct financing. Such
risk is taken into account in management's evaluation of the adequacy of the
Allowance for Loan Losses. At December 31, 1995, overdraft lines of credit and
credit card lines not advanced totaled $9.9 million.
5
<PAGE>
The average balance sheets (unaudited) for the Company are set forth in
"Management's Discussion and Analysis" at Item 7. Also set forth therein is
information regarding weighted average yields on interest earning assets and
weighted average rates paid on interest bearing liabilities. The following
tables show (1) the Company's loan distribution (exclusive of loans held for
sale) at the end of each of the last five years, (2) the maturity of loans
(excluding consumer, installment, and other miscellaneous loans) outstanding as
of December 31, 1995, and (3) the amounts due after one year classified
according to their sensitivity to changes in interest rates.
1) Loan Distribution (dollars in thousand):
<TABLE>
<CAPTION>
December 31,
1995(A) 1994 1993 1992 1991
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R/E Construction $ 13,347 $ 6,417 $ 3,678 $ 9,612 $ 9,968
R/E Mortgage Comm. 127,395 111,330 99,606 93,774 86,576
R/E Mortgage Res. 143,673 166,263 156,350 152,628 158,951
Com'l. & Industrial 69,889 95,412 69,411 62,196 58,892
Con., Instl. & Other 67,779 52,640 34,469 40,576 56,892
------------------------------------------------------
Total $422,083 $432,062 $363,514 $358,786 $371,279
======================================================
</TABLE>
(A) In September 1995, the Company conformed the presentations of the separate
loan portfolios of the predecessors to the Bank. As a result, $20.7 million of
loans previously classified as "commercial and industrial" were reclassified as
"real estate-mortgage" and $1.6 million of loans were similarly reclassified as
"real estate-construction". In addition, the Company sold $25 million of
previously originated long-term fixed rate residential mortgages.
2) Maturity of Loans at December 31, 1995:
<TABLE>
<CAPTION>
Maturing
After One But After Five
Within One Year Within Five Years Years Total
----------------------------------------------------------------
<S> <C> <C> <C> <C>
R/E Construction $ 12,267 $ 1,080 $ 13,347
R/E Mortgage 69,890 99,781 $101,397 271,068
Comm/Industrial 31,203 28,130 10,556 69,889
----------------------------------------------------------------
Total $113,360 $128,991 $111,953 $354,304
================================================================
</TABLE>
3) Rate Sensitivity of Above Loans Maturing After One Year:
--------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
One to Five Years After Five Years
-------------------------------------
<S> <C> <C>
Fixed Interest Rate $ 57,730 $ 30,798
Variable Interest Rate 71,261 81,155
-------------------------------------
Total $128,991 $111,953
=====================================
</TABLE>
6
<PAGE>
In addition to Federal funds and maturing securities, $113.4 million of
loans mature in one year or less (exclusive of consumer, installment and other
loans), providing additional liquidity to meet customer loan and deposit needs.
Of the remaining loans, $152.4 million have variable interest rates, helping
insulate the Company from the adverse affects of significant changes in interest
rates. For additional information concerning asset/liability management, see
"Item 7 - Management's Discussion and Analysis -- Asset/Liability Management."
SECURITIES
- ----------
The Company implemented SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective December 31, 1993. This statement
requires that unrealized gains and losses on securities classified "available
for sale" be recorded, net of taxes, as a separate component of stockholders'
equity. The net balance of unrealized gains (losses) recorded in stockholders'
equity was $.6 million, ($1.1 million) and $1.4 million at December 31, 1995,
1994 and 1993, respectively. The tax effects recorded in other assets was $.4
million, ($.8 million) and $1.0 million at December 31, 1995, 1994 and 1993,
respectively.
See NOTE A for discussion of accounting policies related to securities and
NOTE B to the 1995 Consolidated Financial Statements, included herein at Item 8,
for information as to the amortized cost and fair value of securities at
December 31, 1995 and 1994:
The table below sets forth the carrying amounts of securities at the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
------------------------------
<S> <C> <C> <C>
U.S. Treasury and U.S. $113,539 $ 89,937 $100,194
Government Agencies
State and political subdivisions 47,684 47,219 50,717
Other securities 22,683 10,569 10,325
------------------------------
Total $183,906 $147,725 $161,236
==============================
</TABLE>
7
<PAGE>
The following table sets forth certain information concerning the
maturities of securities, amortized cost, and the weighted average yields of
such securities (calculated on the basis of their cost and effective yields) at
December 31, 1995. Tax-equivalent adjustments (using a 34% rate) have been made
in calculating yields on obligations of states and political subdivisions
(dollars in thousands):
<TABLE>
<CAPTION>
MATURING
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
(1) (2) (3) (4)
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
------- ----- -------- ----- ------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
US TREASURY AND US $35,499 5.56% $ 60,077 5.89% $ 5,776 5.96% $11,399 6.73% $112,751 5.88%
GOVERNMENT AGENCIES
(%) (5)
SATE AND POLITICAL 9,048 7.89% 24,329 6.97% 10,326 7.55% 3,695 9.12% 47,398 7.44%
SUBDIVISIONS
OTHER 756 6.69% 17,913 6.00% 1,992 6.05% 20,661 6.03%
------- -------- ------- ------- --------
TOTAL $45,303 6.05% $102,319 6.16% $18,094 6.88% $15,094 7.32% $180,810 6.30%
======= ======== ======= ======= ========
</TABLE>
(1) Includes $1.7 million of adjustable rate securities
(2) Includes $20.4 million of adjustable rate securities
(3) Includes $5.4 million of adjustable rate securities
(4) Includes $11.4 million of adjustable rate securities
(5) For purposes of this schedule, mortgage-backed securities consisting of
mortgages guaranteed by U.S. Government agencies and SBA participation
certificates totaling $18.6 million have been included based upon the
estimated average lives of the securities. Prepayments were estimated based
on 1995 levels.
The Company has established written investment, liquidity, and asset/liability
management policies, which are reviewed annually by the Board of Directors.
These policies identify investment criteria and state specific objectives in
terms of risk, interest rate sensitivity, and liquidity. The policies are
administered by the Investment Committee of the Board of Directors. The Company
does not have a trading portfolio. At December 31, 1995, the Company had no
investments in which the aggregate cash value of the securities held by the
Company exceeded 10% of stockholders' equity, except for investments in the
securities of or those guaranteed by the U.S. Government and other U.S.
Government agencies and corporations.
See "Item 7 - Management's Discussion and Analysis of Financial Condition" for
additional information regarding securities.
DEPOSITS
- --------
The Company has developed a variety of deposit products ranging in maturity
from demand-type accounts to certificates of deposit with maturities up to five
years. The Company's deposits are primarily derived from the areas where its
banking offices are located. It does not solicit deposits outside its market
area and does not pay fees to others to obtain deposits for the Company. From
time to time, the Company has used premiums, promotions or special products to
attract depositors to branch offices. One such product is "Merit," a free
package of account services coupled with a high balance Passbook Savings. As of
December 31, 1995, the Company had significant balances in such Merit accounts.
Another product is the "Business Money Manager," which allows business customers
to transfer funds between checking and high yield money market deposit accounts.
The Company influences the flow of deposits primarily by pricing its
accounts to remain generally competitive with other financial institutions in
its market area, although the Company does not necessarily seek to match the
highest rates paid by competing institutions. The Company has established a Rate
Committee which meets bi-weekly to review interest rates on all deposit
products. Periodic changes are made to the rates and product features based on
liquidity needs, competition, and general economic conditions. During recent
years the Company has experienced an increasing proportion of its deposit growth
in interest bearing forms. For further information regarding the Company's
deposits, see Item 7. "Management's Discussion and Analysis of Financial
Condition -- Results of Operations."
8
<PAGE>
The average amount and the average rates paid on deposits are summarized in
the following table (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand $128,697 $120,333 $102,488
deposits
Money Market & NOW 127,960 2.71% 156,094 2.40% 154,594 2.40%
accounts
Savings deposits 191,828 4.39% 166,347 3.13% 148,971 2.94%
Time deposits 163,074 5.66% 122,800 4.40% 122,475 4.29%
-------- -------- --------
Total deposits $611,559 3.45% $565,574 2.54% $528,528 2.53%
======== ======== ========
</TABLE>
The Company assumed $14.4 million in deposits of the First National Bank of
Amenia in April 1994 and $11.0 million in deposits of the Millerton office of
the Wilber National Bank in December 1994., These deposits account for
approximately $10 million of the average increase in deposits in 1994. The
remaining increase was due to the Bank's core business growth.
In December 1994, the Company opened a branch location in Newburgh, Orange
County, and in April opened a supermarket branch in the Town of Poughkeepsie.
These branches accounted for $7.9 million in average balances in 1995.
Additionally, in 1995, the Company ran several promotions of its Certificates of
Deposit and Merit savings accounts. The increase in average balances related to
these product promotions was approximately $29.6 million in certificates and
$26.1 in Merit savings, part of which came from existing savings and money
market account customer funds.
The maturities of time deposits under $100,000 and time deposits of
$100,000 or more outstanding at December 31, 1995, are summarized for the
periods indicated in the following table (balances in thousands):
<TABLE>
<CAPTION>
Time Deposits Time Deposits
Under $100 $100 or More Total
----------------------------------------
<S> <C> <C> <C>
Balances outstanding at December 31,
1995, maturing in:
3 months or less $ 25,413 $18,921 $ 44,334
Over 3 through 6 months 33,163 5,718 38,881
Over 6 through 12 months 23,861 3,586 27,447
Over 12 months 50,458 9,959 60,417
----------------------------------------
Total $132,895 $38,184 $171,079
========================================
</TABLE>
TRUST SERVICES
- --------------
The Bank maintains a Trust Department which offers a wide range of
custodial, investment management, and investment advisory services to the Bank's
customers. The Trust Department also offers self-directed IRA and Keogh
accounts, and the administration of pensions, personal trusts, and estates in
fiduciary capacity. At December 31, 1995, customer assets under management
totaled approximately $182 million, representing approximately 700 accounts.
9
<PAGE>
COMPETITION
- -----------
The Bank principally competes in a market area of four counties (Dutchess,
Putnam, Orange, and Ulster). As of June 1994 (the latest available data), such
market area included 19 commercial banks (209 branches) with deposits of $5.0
billion, 21 thrift institutions (71 branches) with deposits of $3.6 billion, and
27 credit unions (35 branches) with deposits of $1.3 billion. Total market
deposits aggregate $9.90 billion as of such date.
As of that date, the Bank had the largest share of the total commercial
bank deposits in Dutchess and Ulster counties (9.5%), but ranked fifth in
deposits among all commercial banks in the total four county area.
Management believes that the Bank is a prominent financial institution in
its market area. Although the Bank faces competition for deposits from other
financial institutions and other investment vehicles offered by securities
firms, management believes the Bank has been able to compete effectively for
deposits because of its image as a community-oriented bank and the high level of
service it offers its local customers. Many of the Bank's competitors have
substantially greater resources and lending limits, and as such may offer a
greater array of products and services. The Bank has emphasized personalized
banking and the advantage of local decision-making in its banking business,
which strategy appears to have been well received in the Bank's market area. The
Bank does not rely upon any individual, group, or entity for a material portion
of its deposits.
In addition, the Bank is a significant provider of credit in its market
area. Although the Bank faces competition for loans from mortgage banking
companies, savings banks, savings and loan associations, other commercial banks,
insurance companies, and other institutional lenders, management believes that
the Bank's aforementioned business strategy gives it a competitive advantage.
Factors which affect loan growth include the general availability of lendable
funds and credit, general and local economic conditions, and current interest
rate levels.
REGULATION AND SUPERVISION
- --------------------------
Bank holding companies and banks are extensively regulated under both
Federal and State law. The following information describes certain aspects of
that regulation. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular provisions. The following is not intended to be an
exhaustive description of the statutes and regulations applicable to the
business of the Company or the Bank.
BANK HOLDING COMPANY REGULATION
- -------------------------------
The Company is a registered bank holding company under the Bank Holding
Company Act ("BHCA") and is subject to Reserve Board regulations, examination,
supervision, and reporting requirements. Under the BOCA, a bank holding company
must obtain Reserve Board approval before acquiring, directly or indirectly,
ownership or control of any voting shares of a bank or bank holding company if,
after such acquisition, it would own or control more than 5% of such shares
(unless it already owns or controls a majority of such shares). Reserve Board
approval also must be obtained before any bank holding company acquires all or
substantially all of the assets of another bank or bank holding company or
merges or consolidates with another bank holding company.
Under New York State Banking Law, the Company must obtain the prior
approval of the New York State Banking Board before acquiring, directly or
indirectly, 5% or more of the voting stock of another banking institution
located in New York State. On September 29, 1994, President Clinton signed into
law the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA"), which permits adequately capitalized and adequately managed bank
holding companies to acquire banks and bank holding companies in any state,
subject to certain conditions, including certain nationwide and statewide
concentration limits. The IBBEA also permits banks in separate states to be
consolidated into single entities with branches in multiple states.
Consequently, effective September 29, 1995, the Company has the authority to
acquire any bank or bank holding company, and can be acquired by any bank or
bank holding company located anywhere in the United States. The IBBEA also
provided that banks will be able to branch across state lines by acquisition,
10
<PAGE>
merger, or de novo, effective June 1, 1997 (unless state law would permit such
de novo interstate branching at an earlier date), provided certain conditions
are met, including that applicable state law must expressly permit such de novo
interstate branching. New York has enacted an interstate branching law in
response to the federal law. Among other provisions, the IBBEA provides that
branches of interstate banks will be subject to various host state laws,
including laws such as those relating to intrastate branching, consumer
protection, fair lending, community reinvestment, and taxation (unless in the
case of national banks such laws are preempted by Federal law or discriminatory
in effect). This legislation may increase competition as banks branch across
state lines and enter new markets.
The BHCA also prohibits a bank holding company, with certain limited
exceptions, from acquiring or retaining direct or indirect ownership or control
of more than 5% of the voting shares of any company that is not a bank or a bank
holding company, and from engaging in any activities other than those of
banking, managing or controlling banks, or providing service for its
subsidiaries. The principal exceptions to these prohibitions involve certain
activities which the Reserve Board has determined to be so closely related to
the business of banking or managing or controlling banks as to be a proper
incident thereto.
Under the Change in Bank Control Act persons who intend to acquire control
of a bank holding company, whether acting directly or indirectly or through or
in concert with one or more persons, must give 60 days prior written notice to
the Reserve Board, unless the transaction is subject to prior Reserve Board
approval under the BHCA. "Control" exists when the acquiring party has voting
control of at least 25% of the bank holding company's voting securities or the
power to direct the management or policies of such company. Under the Reserve
Board regulations, a rebuttable presumption of control arises with respect to an
acquisition where, after the transaction, the acquiring party has ownership,
control, or the power to vote at least 10% (but less than 25%) of any class of
the Company's voting securities. The Reserve Board may disapprove proposed
acquisitions of control on certain specified grounds.
As a bank holding company, the Company is required to file with the Reserve
Board an annual report and any additional information as the Reserve Board may
require pursuant to the BHCA. The Reserve Board also makes examinations of the
Company and the Bank, and possesses cease and desist powers over bank holding
companies and their non-bank subsidiaries if their actions represent unsafe or
unsound practices.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various State securities commissions for matters relating to the
offering and sale of its securities.
The Company is a legal entity separate and distinct from the Bank and any
non-bank subsidiaries thereof. Accordingly, the right of the Corporation, and
consequently the right of creditors and stockholders of the Corporation, to
participate in any distribution of the assets or earnings of any subsidiary is
necessarily subject to the prior claims of creditors of the subsidiary, except
to the extent that claims of the Corporation in its capacity as a creditor may
be recognized.
BANK REGULATION
- ---------------
As a national bank, the bank is subject to the supervision of, and is
regularly examined by, the Comptroller and is required to furnish quarterly
reports to the Comptroller under the National Bank Act. The approval of the
Comptroller is required for the establishment of additional branch offices by
any national bank, subject to applicable state law restrictions. New York State
Banking Law precludes a bank from establishing a de novo branch in any city or
village with a population of 50,000 or less in which the principal office of
another bank or trust company is located (other than a bank which is a
subsidiary of a bank holding company or is itself a bank holding company).
CAPITAL
- -------
The Company and Bank are subject to capital adequacy guidelines of the
Reserve Board. A bank holding company's ability to pay dividends and expand its
business through the acquisition of new banking subsidiaries can be restricted
if its capital falls below levels established by those guidelines. In addition,
bank holding companies and banks may be required to implement a plan to increase
capital.
11
<PAGE>
The Reserve Board imposes substantially similar minimum capital
requirements on the Company and the Bank. The capital adequacy guidelines
provide for three types of capital: (I) Tier 1 capital (or core capital), (ii)
Tier 2 capital (or supplementary capital), and (iii) total capital. Tier 1
capital generally includes common stockholders, equity, qualifying noncumulative
perpetual preferred stock and related surplus (limited to a maximum of 25% of
Tier 1 elements), and minority interests in the equity accounts of consolidated
subsidiaries. Goodwill is excluded from Tier 1 capital. Inclusion of other
intangible assets in Tier 1 capital is limited.
Tier 2 capital generally includes allowances for loan losses in an amount
up to 1.25% of risk-weighted assets, most perpetual preferred stock and any
related surplus, certain hybrid capital instruments, perpetual debt, mandatory
convertible securities, and certain intermediate-term preferred stock and
subordinated debt instruments (subject to a maximum of 50% of Tier I capital
excluding goodwill and certain other intangible assets, but phased-out as the
instrument approaches maturity). Total capital generally includes Tier 1
capital, plus qualifying Tier 2 capital, minus investments in unconsolidated
subsidiaries, reciprocal holdings of bank holding company capital securities,
and other deductions as may be determined by the Reserve Board.
Under current capital adequacy guidelines, bank holding companies and banks
must maintain minimum leverage ratios of Tier 1 capital to average total
consolidated assets of 3.0% for bank holding companies and banks with a
composite rating of 1, and between 4.0% and 5.0% for all other bank holding
companies and banks, such as the Company and Bank. Bank holding companies and
banks must also maintain minimum ratios of total risk based capital to risk-
weighted assets of 8.0%, including a minimum ratio of Tier 1 capital to risk-
weighted assets of 4.0%. The maximum amount of supplementary capital elements
that qualify as Tier 2 capital is limited to 100% of Tier I capital. The risk-
weighted asset base is determined by assigning each of its assets and the credit
equivalent amount of off-balance sheet items to one or several broad risk
categories, after which the aggregate dollar value of the items in each category
is multiplied by a weight (ranging from 0% to 100%) assigned to each asset
category and totaled.
At December 31, 1995, the Company and Bank exceeded all minimum capital
requirements, the Company had a ratio of Tier I capital to total assets of 8.4%,
a ratio of Tier 1 capital to risk-weighted assets of 13.8%, and a ratio of total
capital to risk-weighted assets of 15.0%. The Bank had a ratio of Tier 1 capital
to total assets of 7.5%, a ratio of Tier 1 capital to risk-weighted assets of
12.3%, and a ratio of total capital to risk-weighted assets of 13.6%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency to revise its risk-based capital
standards, among other things, to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risks of
non-traditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. As a result, the federal
banking agencies revised the risk-based capital guidelines described above to
take account of concentration of credit risk and risk of non-traditional
activities. In addition, the Reserve Board, the FDIC, and the OCC adopted a new
rule that amends, effective September 1, 1995, the capital standards to include
explicitly a bank's exposure to declines in the economic value of its capital
due to changes in interest rates as a factor to be considered in evaluating a
bank's capital adequacy. This rule does not codify a measurement framework for
assessing the level of a bank's interest rate exposure. Such agencies have
issued for comment a joint policy statement that describes the process to be
used to measure and assess the exposure of a bank's net economic value to
changes in interest rates. These agencies have indicated that in the second step
of this regulation process they intend to issue a proposed rule that would
propose to establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate exposure. The agencies
intend to implement the second step after they and the banking industry have had
more experience with the proposed supervisory and measurement process.
At December 31, 1995, the Company and Bank exceeded all applicable minimum
capital requirements. Further increases in capital requirements are possible in
future periods as a result of legislative or regulatory developments. The
Company is unable to predict whether additional capital requirements will be
imposed or future economic conditions. As a result, there can be no assurance
that the Company or Bank will be able to satisfy applicable capital requirements
or any additional capital requirements that may be imposed in the future.
12
<PAGE>
Capital requirements higher than the generally applicable minimum
requirements may be established for a particular national bank if the
Comptroller determines that the Bank's capital was or may become inadequate in
view of its particular circumstances. Individual minimum capital requirements
may be appropriate where the Bank is receiving special supervisory attention,
has a high degree of exposure to interest rate risk, or poses other safety or
soundness concerns.
Under FDICIA, the federal banking agencies (including the Comptroller) have
established, by regulation, for each capital measure, the levels at which an
insured institution is well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized, and are required to take prompt corrective action with respect
to insured institutions that fall below minimum capital standards. The degree of
regulatory intervention mandated by FDICIA is tied to an insured institution's
capital category. The prompt corrective actions specified by FDICIA for
undercapitalized institutions include increased monitoring and periodic review
of capital compliance efforts, a requirement to submit a capital plan,
restrictions on dividends and total asset growth, and limitations on certain new
activities (such as opening new branch offices and engaging in acquisitions and
new lines of business). The regulation permits the Comptroller to determine that
a national bank should be classified in a lower category based on other
information, such as the institution's examination report, after written notice.
At December 31, 1995, the Bank met the requirements for a "well-capitalized"
institution based on its capital ratios as of such date.
FDICIA requires any company that has control of an undercapitalized
institution, in connection with the submission of a capital restoration plan, to
guarantee that the institution will comply with the plan and provide appropriate
assurances of performance. The aggregate liability of any such controlling
company under such guaranty is limited to the lesser of (I) 5% of the
institution's assets at the time it became undercapitalized, or (ii) the amount
necessary to bring the institution into capital compliance at the time it failed
to comply with its capital plan. If the Bank becomes undercapitalized, the
Company will be required to guarantee performance of the capital plan submitted
under FDICIA as a condition of Comptroller approval.
TRANSACTIONS WITH AFFILIATES
- ----------------------------
The Bank is also subject to restrictions imposed by Federal law on its
ability to extend credit to affiliates, including the Company, to purchase the
assets thereof, to issue a guarantee, acceptance or letter of credit on the
Company's behalf (including an endorsement or standby letter of credit), or to
purchase or invest in the stock or securities thereof or to take such stock or
securities as collateral for loans to any borrower. Such extensions of credit
and issuances generally must be secured by eligible collateral and are generally
limited, with respect to the Company, to 10% of the Bank's capital and surplus
and, with respect to the Company and its nonbanking subsidiaries, to an
aggregate of 20% of the Bank's capital and surplus.
The operations of the Bank are also subject to numerous Federal, State, and
local laws and regulations which set forth specific restrictions and procedural
requirements with respect to the extension of credit, credit practices, the
disclosure of credit terms, and discrimination in credit transactions. As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Bank's business is particularly susceptible to being affected
by Federal and State legislation and regulations which may have the effect of
increasing the costs of doing business.
DEPOSIT INSURANCE
- -----------------
The deposit accounts of the Bank are insured by the FDIC. The FDIC issues
regulations, requires the filing of reports, and generally supervises the
operations of its insured banks. Any insured bank which does not operate in
accordance with or conform to FDIC regulations, policies, and directives may be
sanctioned for noncompliance. The Bank is required to pay semiannual insurance
premiums for FDIC insurance.
The amount of insurance premiums paid to the FDIC is based on the Bank's
relative risk as measured by regulatory capital ratios and certain other
factors. Until recently, FDIC regulations provided for a minimum assessment of
$.31 per $100 of insured deposits for the weakest-rated banks, and $.23 per $100
of deposits for the best rated banks under the Bank Insurance Fund ("BIF") of
the FDIC. The rate assessed for the Bank under such rate structure during the
first half of 1995 was $.23 per $100 of insured deposits. On August 8, 1995, the
FDIC reduced the assessment rate paid
13
<PAGE>
by the best rated BIF-insured institutions for the second half of 1995 to $.04
per $100 of insured deposits. This was the rate paid by the Bank for the second
half of 1995. In November 1995, the FDIC further reduced the BIF assessment rate
for the 1996 fiscal year to the legal minimum of $2,000 per year for the best
rated institutions, and $.27 per $100 of deposits for the worst rated
institutions. The Bank also has approximately $13.6 million in deposits ("OKAR"
deposits) subject to an insurance assessment rate of $.23 per $100 under the
Savings Association Insurance Fund of the FDIC. Congress and various government
agencies are considering a number of proposals to recapitalize the Savings
Association Insurance Fund of the FDIC, including a one-time assessment on all
SAIF-insured deposits. Management currently cannot predict the outcome or effect
of these proposals on the Company or the Bank.
FEDERAL RESERVE SYSTEM
- ----------------------
The Bank is a member of the Federal Reserve Bank of New York, which is one
of 12 regional Federal Reserve Banks comprising the Federal Reserve System. The
Federal Reserve Bank of New York provides a central credit facility for member
institutions. As a member bank, the Bank is required to own shares of Federal
Reserve Bank capital stock in an amount equal to 6% of the Bank's paid-up
capital and surplus. The Bank is in compliance with this requirement with an
investment in Federal Reserve Bank of New York stock at December 31, 1995, of
$574,000. The Reserve Board also has adopted regulations that require depository
institutions to maintain non-earning reserves against their transaction accounts
(primarily checking accounts) and non-personal time deposits (those which are
transferable or held by a person other than a natural person) with an original
maturity of less than 18 months. At December 31, 1995, the Bank was in
compliance with these requirements.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
- ----------------------------------------
The principal source of the Company's revenue and cash flows is dividends
from the Bank and any non-bank subsidiaries. The Bank is subject to various
statutory and regulatory restrictions on its ability to pay dividends to the
Company. In addition, the Comptroller has authority to prohibit the Bank from
engaging in an unsafe or unsound practice in conducting its business. The
payment of dividends, depending upon the financial condition of the Bank, could
be deemed to constitute such an unsafe or unsound practice. The Comptroller has
stated that a national Bank's dividends should be consistent with the bank's
projections, capital plan and strategic plan, and that it can be an unsafe and
unsound practice for the bank to pay a dividend even when such dividend complies
with statutory and regulatory requirements.
Furthermore, the approval of the Comptroller of any dividend will be
required if the total of all dividends declared by the Bank in any calendar year
exceeds the total of net profits for such year combined with its retained net
profits for the preceding two years, less any required transfer to surplus or a
fund for the retirement of any preferred stock. The Bank may not, however, pay
dividends if it is in default in payment of any assessment due to the FDIC. In
addition, the Bank may only pay dividends to the extent that returned net
profits (including the portion transferred to surplus) exceed statutory bad
debts. Current unrestricted dividend capability is $5,932,000.
Under New York law, the Company may declare and pay dividends on its
outstanding common stock out of available surplus (which includes both capital
reserves and retained earnings), unless such payment would render the Company
insolvent. If dividends are paid from sources other than surplus, New York law
requires that written notice accompany the dividend disclosing the impact of
such dividend on the Company's stated capital, capital reserves, and retained
earnings.
The ability of the Bank to pay dividends could be further influenced by
bank regulatory policies or agreements and by regulatory capital guidelines.
COMMUNITY REINVESTMENT
- ----------------------
Bank holding companies and their subsidiary banks are subject to the
provisions of the Community Reinvestment Act of 1977, as amended (the "CRA").
Under the CRA, a bank's record in meeting the credit needs of its community,
including low-and moderate-income neighborhoods, is generally annually assessed
by the bank's primary regulatory authority. A financial institutions's efforts
in meeting community credit needs currently is evaluated as part of the
examination process, as well as when an institution applies to undertake a
merger, acquisition, or to open a branch facility.
14
<PAGE>
Under recently enacted revisions to the CRA regulations, the current CRA
assessment system is being replaced with a new evaluation system that would rate
institutions based on their actual performance (rather than efforts) in meeting
community credit needs. Under these new regulations, each institution would be
evaluated based on the degree to which it is providing loans (the lending test),
branches and other services (the service test) and investments (the investment
test) to low and moderate income areas in the communities it serves, based on
the communities' demographics, characteristics and the institution's capacity,
product offerings and business strategy. Each depository institution would have
to report to its federal supervisory agency and make available to the public
data on the geographic distribution of its loan applications, denial,
originations and purchases. Institutions would continue to receive one of four
composite ratings: Outstanding, Satisfactory, Needs to Improve or Substantial
Noncompliance. The new rules are going into effect in stages from July 1995 to
January 1997. The Company does not believe that the new CRA regulations will
substantially change its programs and policies designed to meet the needs of its
communities. The Bank received a "satisfactory" CRA rating during its 1995 OCC
examination.
SOURCE OF STRENGTH POLICY
- -------------------------
Under Reserve Board policy, a bank holding company is expected to act as a
source of financial strength to its subsidiary bank and to commit resources to
support the bank. Although this "source of strength" policy has been challenged
in litigation, the Reserve Board continues to take the position that it has the
authority to enforce it. In addition, under Federal law, a bank holding company
may be required to infuse sufficient capital into an insured depository
institution subsidiary to ensure that such subsidiary is in compliance with its
minimum capital requirements. Consistent with its "source of strength" policy
for subsidiary banks, the Reserve Board has stated that, as a matter of prudent
banking, a bank holding company generally should not maintain a rate of cash
dividends unless its net income available to common shareholders has been
sufficient to fund fully the dividends, and the prospective rate of earnings
retention appears to be consistent with the corporation's capital needs, asset
quality, and overall financial condition.
GOVERNMENT POLICIES
- -------------------
Bank holding companies and their subsidiaries are affected by the credit
and monetary polices of the Reserve Board. An important function of the Reserve
Board is to regulate the national supply of bank credit. Among the instruments
of monetary policy used by the Reserve Board to implement its objectives are
open market operations in U.S. Government securities, changes in the discount
rate on bank borrowings, and changes in reserve requirements on bank deposits.
These instruments of monetary policy are used in varying combinations to
influence the overall level of bank loans, investments and deposits, the
interest rates charged on loans and paid for deposits, the price of the dollar
in foreign exchange markets, and the level of inflation. The monetary policies
of the Reserve Board are expected to continue to have a significant effect on
the operating results of banking institutions. It is not possible to predict the
nature or timing of future changes in monetary and fiscal policies, or the
effect that they may have on the Company's business and earnings.
LEGISLATIVE PROPOSALS AND REFORM
- --------------------------------
Certain-significant legislative proposals and reforms affecting the
financial services industry are currently being discussed and evaluated by
Congress. Such proposals include legislation to revise the Glass-Steagall Act
and the BHCA to expand permissible activities for banks, principally to
facilitate the convergence of commercial and investment banking and the
consolidation and/or jurisdictional realignment of various Federal banking
agencies. At this time it is unclear whether any of these proposals, or any form
of them, will become law this year or ever. Consequently, it is difficult to
ascertain what effect they may have on the Corporation and its subsidiaries.
EMPLOYEES
- ---------
As of December 31, 1995, the Company had 270 full-time and 93 part-time
employees. The employees are not represented by a collective bargaining
agreement. The Company believes its relationship with its employees to be
satisfactory.
15
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The following table sets forth the name, age and position for each
executive officer of the Company and the Bank and the business experience of
these individuals for the past five years. Each executive officer held the
position indicated or a similar position with the same entity or one of its
predecessors for the past five years, unless otherwise indicated.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, OTHER DIRECTORSHIPS
NAME AGE AND POSITION WITH THE COMPANY
- ---- --- -----------------------------------------
<S> <C> <C>
T. JEFFERSON CUNNINGHAM III 53 CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF
THE COMPANY; CHAIRMAN OF THE EXECUTIVE
COMMITTEE OF THE BANK.
JOHN CHARLES VANWORMER 48 PRESIDENT OF THE COMPANY; PRESIDENT AND
CHIEF EXECUTIVE OFFICER OF THE BANK.
DONALD H. WEBER 59 EXECUTIVE VICE PRESIDENT AND CHIEF
OPERATIONS OFFICER OF THE BANK (1995 TO
PRESENT); CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, M&T, ENDICOTT TRUST DIVISION
(1992-1995); PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ENDICOTT TRUST COMPANY (1987-
1992).
DAVID S. MACFARLAND 52 REGIONAL EXECUTIVE VICE PRESIDENT OF THE
BANK (1994 TO PRESENT); REGIONAL CHAIRMAN,
FLEET BANK OF NEW YORK, HUDSON VALLEY
REGION (1993-1994); REGIONAL PRESIDENT,
FLEET BANK OF NEW YORK, HUDSON VALLEY
REGION (1988-1993).
PAUL A. MAISCH 40 TREASURER AND CHIEF FINANCIAL
OFFICER OF THE COMPANY; SENIOR VICE
PRESIDENT OF THE BANK (1989 TO PRESENT).
NANCY BEHANNA 41 SECRETARY OF THE COMPANY AND THE BANK
(1995 TO PRESENT); SENIOR VICE PRESIDENT
AND CHIEF CREDIT OFFICER OF THE BANK (1994
TO PRESENT); VICE PRESIDENT OF THE BANK
(1991-1994); VICE PRESIDENT AND LOAN
ADMINISTRATION OFFICER, POUGHKEEPSIE
SAVINGS BANK (1987-1991).
THOMAS R.B. CAMPBELL 57 SENIOR VICE PRESIDENT/SENIOR TRUST
OFFICER (1993 - PRESENT); SENIOR VICE
PRESIDENT, BROWN BROTHERS HARRIMAN & CO.
PAUL S. MACK 48 SENIOR VICE PRESIDENT, SENIOR LOAN
OFFICER, OF THE BANK (1989 TO PRESENT).
KIM DILLINGER SPROSSEL 40 VICE PRESIDENT AND CASHIER OF THE
BANK (1994 TO PRESENT); VICE PRESIDENT AND
AUDITOR (1991-1994); BUSINESS MANAGER,
RHINECLIFF UFSD (1990-1991).
CLIFFORD 0. STRAUB 45 SENIOR VICE PRESIDENT, COMMUNITY
BANKING SALES OFFICER (1995 TO PRESENT);
VICE PRESIDENT AREA MANAGER, SHAWMUT
NATIONAL CORPORATION (1986-1995).
</TABLE>
(A) AS OF FEBRUARY 29, 1996.
16
<PAGE>
ITEM 2. PROPERTIES
- -------------------
The company owns the land and a two-story 20,000 square foot building at 20 Mill
Street, Rhinebeck, New York, which houses the Bank's operations and its largest
branch (approximately 2,400 square feet is leased to tenants).
In addition, the Company owns two buildings at Route 55 in LaGrangeville, New
York. The complex is two parcels of land comprising 23 acres, of which
approximately 18 acres are undeveloped. The buildings house the Company's
executive offices as well as numerous administrative support services and a
branch facility. The facilities contain approximately 36,000 square feet of
which approximately 70% is occupied by the Company and the remaining 30% is
leased to tenants. These properties represent approximately one third the value
of the premises and equipment owned by the Company.
Further, the Company owns a 12,600 square foot two-story office building located
at 289-291 Main Mall in Poughkeepsie, New York. This building houses the branch
network administrative support functions and the Bank's Trust department as well
as a banking office.
It is the Company's intent to relocate more administrative and operations
functions at the LaGrangeville, New York facility, as tenant leases expire.
The Company, through the Bank, also owns nine other banking premises which are
used almost exclusively for conducting commercial banking business. Similarly,
the Bank leases eight other branch banking premises for conducting its
commercial banking business.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
As the nature of the Bank's business involves providing certain financial
services, the collection of loans and the enforcement and validity of security
interests, mortgages and liens, the Bank is plaintiff or defendant in various
legal proceedings which may be considered as arising in the ordinary course of
its business. Neither the Company nor the Bank are presently involved in any
legal proceedings which management or counsel to the Company believe to be
material to its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
17
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's Common Stock has is traded on the NASDAQ, National Market System
("NMS") under the symbol "HCBK". On March 1, 1996, there were approximately
1,270 shareholders of record of Common Stock and 3,857,063 shares of Common
Stock issued and outstanding. The Company's Series B Preferred is also listed-on
the NASDAQ NMS under the symbol "HCBKP".
The following table sets forth the cash dividends declared by the Company on its
Common Stock and the range of high and low prices of the Common Stock during the
two most recent years based on high and low sale prices as quoted by the NASDAQ
NMS since January 1, 1994. This table has been adjusted retroactively to give
effect to the 10% stock dividend declared December 21, 1995, payable January 31,
1996.
<TABLE>
<CAPTION>
Cash Dividends
Per Share Price
--------------------------------
High Low
------ ------
<S> <C> <C> <C>
1994
First Quarter $0.137 $13.86 $12.27
Second Quarter 0.137 14.77 12.95
Third Quarter 0.137 17.27 14.20
Fourth Quarter 0.137 17.27 14.66
1995
First Quarter $0.137 $16.14 14.77
Second Quarter 0.137 15.45 14.32
Third Quarter 0.145 15.68 14.55
Fourth Quarter 0.145 18.41 16.82
</TABLE>
The declaration and payment of future dividends is at the sole discretion of the
Board of Directors and the amount, if any, depends upon the earnings, financial
condition and capital needs of the Company and the Bank and other factors,
including restrictions arising from federal banking laws and regulations to
which the Company and the Bank are subject. In addition, the holders of the
Company's outstanding series of preferred stock will have a priority right prior
to the holders of Common Stock to receive the payment of dividends. The ability
of the Bank to pay cash dividends to the Company on its capital stock is subject
to, among other matters, the restrictions set forth in federal statutes and
regulations. For additional information, see Note N - "Restriction on Subsidiary
Dividends and Loans to Affiliates" of the Notes to Consolidated Financial
Statements under Item 8.
18
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA (dollars in thousands, except per share data)
______________________________________________________________________________
The following selected financial data for the five years ended December 31, 1995
are derived from the consolidated financial statements of Hudson Chartered
Bancorp Inc. The information presented has been restated for 1993 and and prior
years to reflect the merger of Fishkill National Corporation with and into
Community Bancorp, Inc. to become Hudson Chartered Bancorp, Inc. The merger has
been accounted for under the pooling-of-interests method. The data should be
read in conjunction with the consolidated financial statements, related notes,
and other financial information included herein at Item 8 - Financial Statements
and Supplementary Data.
<TABLE>
<CAPTION>
At or For The Year Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Average - assets $671,852 $627,099 $585,921 $560,543 $513,603
- deposits 613,676 565,574 528,528 513,277 469,643
- equity 55,466 52,685 51,707 41,071 37,588
Year end - assets $696,483 $645,977 595,706 581,358 527,210
- deposits 631,060 580,070 536,530 526,555 483,029
- equity 59,929 52,538 54,120 49,542 37,900
- Preferred stock included in equity 5,713 5,714 6,555 6,555
- interest-earning assets 635,532 596,407 548,537 537,314 486,645
- interest-bearing liabilities 494,300 452,934 423,373 423,202 400,033
Income data:
Net interest income $29,174 $28,095 $26,807 $25,825 $22,327
Provision for loan losses (2,300) (2,400) (3,266) (2,900) (2,750)
Realized gains (losses) on sales of
securities and loans, net 542 (1,762) 941 531 408
Total other operating income 5,519 5,225 4,664 4,100 3,759
------- ------- ------- ------- -------
Gross operating income 32,935 29,158 29,146 27,556 23,744
Total other operating expenses (22,456) (23,958) (21,560) (20,314) (19,534)
------- ------- ------- ------- -------
Income before income taxes 10,479 5,200 7,586 7,242 4,210
Income taxes (3,514) (1,936) (2,600) (2,498) (1,001)
------- ------- ------- ------- -------
Net income 6,965 3,264 4,986 4,744 3,209
Dividend requirements of preferred stock (414) (415) (497) (77)
------- ------- ------- ------- -------
Net income applicable to common shares $6,551 $2,849 $4,489 $4,667 $3,209
======= ======= ======= ======= =======
Per common share:
Primary earnings (1) $1.70 $0.75 $1.22 $1.38 $0.98
Fully diluted earnings (1) 1.62 0.75 1.18 1.38 0.98
Cash Dividends (1) 0.56 0.55 0.53 0.46 0.44
Book Value (2) 13.96 12.47 12.92 11.79 11.62
Weighted average common shares outstanding:
Primary 3,855,249 3,779,113 3,693,633 3,371,490 3,256,782
Fully diluted 4,309,914 4,231,053 4,150,971 3,373,916 3,256,782
Selected Financial Ratios:
Return on average assets 1.04% 0.52% 0.85% 0.85% 0.62%
Return on average equity 12.56% 6.20% 9.64% 11.55% 8.62%
Average equity to average assets 8.25% 8.40% 8.82% 7.33% 7.32%
Allowance for loan losses
as a percentage of loans 2.08% 1.93% 2.01% 1.61% 1.22%
Capital to risk-weighted assets 15.02% 13.41% 15.38% 14.03% 11.85%
Common dividend payout ratio 31.20% 69.99% 42.70% 36.58% 47.46%
Tier 1 capital to average assets 8.44% 8.20% 8.96% 8.49% 7.09%
(leverage ratio)
</TABLE>
(1) Information has been adjusted retroactively to give effect to the 10% stock
dividend declared December 1995.
(2) Based upon actual number of common stock shares outstanding at year end as
adjusted retroactively for 10% stock dividend declared December 1995 and as
to 1995 includes the dilutive effect of Series B convertible preferred stock
of approximately 441,000 shares.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion is to be read in conjunction with the Company's
consolidated financial statements, presented elsewhere in this report under Item
8. The 1993 information presented has been restated to reflect the merger of
Fishkill National Corporation with and into Community Bancorp, Inc. to become
Hudson Chartered Bancorp, Inc. The merger has been accounted for under the
pooling-of-interests method.
FINANCIAL CONDITION
- -------------------
The following table compares the changes in major categories of the Company's
balance sheet from December 31, 1993 to December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
CHANGES CHANGES
FROM 1994 FROM 1993
12/31/95 AMOUNT % 12/31/94 AMOUNT % AMOUNT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH & CASH
EQUIVALENTS $ 67,853 $24,582 56.81 % $ 43,271 $ (9,142) (17.4)% $ 52,413
SECURITIES 183,906 36,181 24.49 147,725 (13,511) (8.4) 161,236
LOANS 422,356 (9,801) (2.27) 432,157 66,281 18.1 365,876
ALLOWANCE FOR
LOAN LOSSES (8,770) (444) 5.33 (8,326) (1,004) 13.7 (7,322)
PREMISES &
EQUIPMENT 17,062 (625) (3.53) 17,687 3,015 20.5 14,672
OTHER 14,076 613 4.55 13,463 4,632 52.5 8,831
----------------------------------------------------------------------------
TOTAL ASSETS $696,483 $50,506 7.82 % $645,977 $ 50,271 8.4 % $595,706
============================================================================
DEPOSITS:
NON-INTEREST
BEARING $138,656 $ 3,475 2.57 % $135,181 $ 20,812 18.2% $114,369
INTEREST
BEARING 492,404 47,515 10.68 444,889 22,728 5.4 422,161
----------------------------------------------------------------------------
TOTAL DEPOSITS 631,060 50,990 8.79 580,070 43,540 8.1 536,530
OTHER INTEREST
BEARING LIABILITIES 1,896 (6,149) (76.43) 8,045 6,833 563.8 1,212
OTHER LIABILITIES 3,598 (1,726) (32.42) 5,324 1,480 38.5 3,844
----------------------------------------------------------------------------
TOTAL LIABILITIES 636,554 43,115 7.27 593,439 51,853 9.6 541,586
STOCKHOLDERS'
EQUITY 59,929 7,391 14.07 52,538 (1,582) (2.9) 54,120
----------------------------------------------------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS'
EQUITY $696,483 $50,506 7.82% $645,977 $ 50,271 8.4% $595,706
============================================================================
</TABLE>
20
<PAGE>
Total assets grew in 1995 by $50.5 million or 7.8% from year end 1994, to $696.5
million compared to an increase from December 31, 1993 to December 31, 1994 of
$50.3 million or 8.4%.
In 1995, the securities portfolio increased $36.2 million and cash and cash
equivalents increased $24.6 million. These increases were principally funded by
the $51.0 million increase in deposits. Of the increase in deposits, $3.5
million were in noninterest bearing deposits, $43.0 million were interest
bearing time deposits and $29.5 were in savings accounts, offset by declines of
$25.0 million in money market and NOW accounts. The Bank ran several bankwide
promotions in connection with its new branch openings in Newburgh and the Town
of Poughkeepsie. Of the total increase in deposits, $13 million is related to
the new branches. Additionally, approximately one half of the declines in money
market and NOW accounts is represented by customers shifting their funds into
the savings and time deposit products that were promoted during the branch
opening promotions referred to above. Management will continue to invest in
securities and cash equivalents such as federal funds sold in the absence of
strong loan demand as its "core" deposit levels remain at higher levels than
outstanding loans. Of the Bank's total deposits $38.2 million, or approximately
6%, are time deposits greater than $100,000. For additional information
regarding deposits, see Item 1 -Business "Deposits".
In 1995, total loans decreased $9.8 million or 2.3% from December 31, 1994.
Commercial and industrial loans decreased $25.5 million, principally reflecting
a reclassification to real estate mortgage of $20.7 million and $1.6 million to
real estate construction. In September 1995, the Company conformed the
presentations of the separate loan portfolios of the predecessors to the Bank.
Real estate mortgage loans decreased $6.5 million reflecting the sale of $25.1
million of previously originated long term fixed rate mortgages and the
reclassification referred to above. The Company sold the fixed rate mortgages to
improve its interest rate risk profile. Installment, consumer and other loans
increased $15.1 million reflecting the continued success of the Company's
indirect automobile financing business.
The increase in assets in 1994 was primarily the result of the increase in loans
of $66.3 million over year end 1993. Of this increase, $26.0 million were
commercial and industrial loans which came both from new loans and from
refinancing of existing loans from competitors. Installment, consumer and other
loans increased $18.2 million principally due to the Company's resumption of
indirect automobile financing business. Real estate mortgage loans accounted for
an additional $24.4 million of the increase as the Company retained $10.0
million of originated adjustable rate mortgages and increased its commercial
real estate mortgage loans by $11.7 million.
The growth in loans in 1994 was funded by a decline in cash and cash equivalents
of $9.1 million, a decline in securities of $13.5 million and an increase in
deposits of $43.5 million. Of this increase in deposits, $25.4 million was due
to acquisitions and the remaining $17.3 million was due to the general increase
in the level of deposits.
In November 1995, the Company transferred, at fair value, securities having a
fair value of $63.2 million (carrying value of $61.5 million) from its "held to
maturity" securities to its portfolio of "available for sale" securities. This
was done to enhance the Company's ability to manage its interest rate risk.
The securities transferred represent almost all of the readily marketable
securities that were previously classified as "held to maturity". This transfer
was made in accordance with FASB's "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities" issued in
November 1995. Concurrent with the adoption of this guidance, corporations were
permitted through December 31, 1995, to reclassify their "available for sale"
and "held to maturity" securities without calling into question the past intent
of an entity to hold securities to maturity.
The effect of this transfer, after tax, was a $1.0 million increase in
shareholders' equity. Future changes in unrealized gains or losses on these
transferred securities also will be reflected in a special component of the
Company's equity accounts, on an after-tax basis. If any of the transferred
securities are sold, the realized gains or losses would be reflected in the
Company's results of operations. Securities of $14.5 million remaining in the
Company's "held to maturity" portfolio consist principally of holdings of local,
unrated municipal issues and certain other holdings.
The allowance for loan losses at $8.8 million, represents 2.1% of outstanding
loans and 166% of nonperforming loans and restructured troubled debt at December
31, 1995 compared to $8.3 million or 1.9% and 163% of nonperforming loans and
restructured troubled debt at year end 1994.
21
<PAGE>
Premises and equipment decreased $.6 million in 1995. Expenditures for premises
and equipment totaled $1.3 million primarily related to the opening of two new
branches and completion of the integration of the former banks. This was fully
offset by depreciation expense recorded of $1.9 million.
Premises and equipment increased $3.0 million in 1994 principally due to the
acquisition of a building for $2.5 million on a site adjacent to the Company's
LaGrangeville executive offices. Furniture and equipment increased by $1.8
million in 1994, of which $1.1 million were expenditures necessary for the
integration of the former banks. Such expenditures included communications
equipment, branch equipment, computer upgrades, and proof and transit equipment.
Such increases were somewhat offset by depreciation expense in 1994.
Other assets increased $.6 million in 1995 of which $.5 million relates to
increases in accrued interest income. Other assets increased $4.6 million in
1994. Of this increase, approximately $2.9 million was due to increases in
deferred and prepaid income taxes. Approximately $.6 million was due to the
intangibles associated with the Amenia and Millerton branch office acquisitions,
and $.8 million was due to increases in accrued interest receivable.
Other interest bearing liabilities decreased $6.1 million in 1995 as the Company
repaid its liability associated with securities sold under repurchase
agreements. Other interest bearing liabilities increased by $6.8 million in
1994. These increases include a $1.7 million advance from the Federal Home Loan
Bank to match fund a fixed rate loan and $6.1 million in securities sold under a
repurchase agreement at year end. This increase was offset by the repayment of a
$.8 million loan, from another bank, upon consummation of the merger.
Other liabilities decreased $1.7 million in 1995 as the expenses accrued in 1994
were paid. Other liabilities increased $1.5 million in 1994, primarily due to
increases in staff-related accrued expenses of $.8 million. Of this amount,
approximately $.4 million was related to severances to be paid in 1995 and $.4
million in liabilities related to retirement plan funding. Also, $.5 million was
recorded in other liabilities to reflect post merger integration costs.
Stockholders' equity increased $7.4 million or 14.1% to $59.9 million at
December 31, 1995. Of this increase, $4.4 million was due to retentions of
earnings, $1.3 million was from net sales of new shares under the Company's
Stock option and Dividend Investment and Stock Purchase Plans, and $1.7 from the
increase, after tax, in the net unrealized gain component of stockholders'
equity. The company also repurchased $.l million in treasury stock under its
common stock repurchase program. Additionally, in December of 1995, the Board of
Directors declared a 10% common stock dividend, payable in January 1996. As a
result, $6.3 million of retained earnings was capitalized into common stock and
surplus. Stockholders' Equity declined by $1.6 million or 2.9% in 1994, compared
to December 31, 1993, due to an unrealized after tax depreciation in the fair
market value of the Available For Sale securities portfolio of $2.5 million,
from year end 1993 and the retirement of the Series A preferred Stock of $.8
million. These declines were offset by the issuance of new common stock under
various shareholder and employee stock option plans of $.9 million and earnings
retention of $.9 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be depositors wishing to withdraw funds or borrowers who need
to draw funds under their available credit facilities.
As detailed in the Company's Consolidated Statement of Cash Flows included in
the financial statements, cash flows are derived from three sources: cash flows
from operating activities, cash flows from investing activities and cash flows
from financing activities. Net cash provided by operating activities was $7.1
million in 1995. Investing activities (primarily purchases of securities and the
funding of loans) used $26.1 million in 1995 as purchases of securities of $98.2
million exceeded sales, maturities, and prepayment of loans and securities.
Financing activities provided $43.6 million represented by $51.0 million
increases in deposits and new common stock issuances of $1.3 million offset by
stockholders, dividends of $2.5 million and the repayment of the repurchase
agreements of $6.1 million. The overall result was an increase in cash and cash
equivalents of $24.6 million to $67.9 million at December 31, 1995. The
Company's liquidity ratio (defined as cash and cash equivalents plus securities
available-for-sale ($235.2 million) to total assets) was 33.7% at year end 1995.
The average life of the available-for-sale portfolio, adjusted for rate
sensitivity, is approximately 2.1 years. These liquid
22
<PAGE>
assets, together with maturing loans, are deemed by management to be more than
adequate to meet expected liquidity needs. In addition, the Bank is a member of
the Federal Home Loan Bank and has the ability to borrow substantial funds
($33.9 million) under its secured advance program.
The holding company's own liquidity needs are chiefly for paying dividends. The
principal source of income for the Company is dividends and rents received from
the Bank. Dividends from the Bank are subject to certain regulatory limitations.
The Company has ample cash and investments at the holding company level to meet
its reasonably anticipated cash needs in 1996.
Financial institutions' assets are monetary in nature and are thus impacted by
inflation, interest rate and credit considerations. This results in the need to
maintain an appropriate equity to assets ratio. In addition, the Company and the
Bank are subject to regulatory requirements to maintain minimum capital levels.
These capital requirements and the actual levels maintained by the Bank and the
Company are summarized in Note O to the Consolidated Financial Statements. The
capital levels of both the Bank and the Company exceed all regulatory
requirements and the Company believes that the levels maintained, as of December
31, 1995, qualify both the Company and the Bank for "well capitalized" status
under regulatory definitions. Further, the Company believes that the capital
levels maintained are more than adequate to meet its currently foreseeable needs
and that additional capital resources would be required only for exceptional
investment opportunities.
Stockholders' equity includes $5.7 million of Series B cumulative, convertible
preferred stock carrying a dividend rate of 7.25%. The terms of the Series B
preferred stock allow for the redemption by the Company if the closing bid price
for the common stock exceeds $18.14 for a period of 20 consecutive trading days.
Due to the recent trading levels of the Company's common stock, if the Company
called such common stock for redemption, management believes that shareholders
owning the Series B preferred stock would exercise the conversion privilege
associated with the preferred stock and that it would be unlikely that a
significant decline in capital would result. However, if the Company did redeem
the preferred stock, it believes that the current liquid assets, in addition to
the dividends available from the Bank, are sufficient to fully redeem the Series
B preferred stock and still maintain capital levels for which the Bank and the
Company would continue to be considered "well capitalized".
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, the
Bank's regulator is required to develop risk-based capital standards to ensure
that those standards take adequate account of interest-rate risk, concentration
of credit risk, the risk of nontraditional activities and the actual performance
and expected risk of loss on multi-family mortgages. Such standards may have the
effect of increasing the level of regulatory capital that the Company and Bank
are required to maintain.
ASSET/LIABILITY MANAGEMENT
- --------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities and capital resources. The Company's
Investment Committee of the Board operating through its treasury division
controls the rate sensitivity of the balance sheet while maintaining an
appropriate level of net interest income contribution to the operations of the
Company.
The Company's net interest revenue is affected by fluctuations in market
interest rates as a result of timing differences in the repricing of its assets
and liabilities. These repricing differences are quantified in specific time
intervals and are referred to as interest rate sensitivity gaps. The Company
manages the interest rate risk of current and future earnings to a level that is
consistent with its mix of businesses and seeks to limit such risk exposure to
appropriate percentages of both earnings and the value of stockholders' equity.
The objective in managing interest rate risk is to support the achievement of
business strategies, while controlling earnings variability and ensuring
appropriate liquidity.
Management of interest rate risk focuses on both tactical (one year or less) and
structural (beyond one year) time frames. The Company has established interest
rate risk limits based on an Earnings at Risk (EAR) concept and a market value
of portfolio's equity (MVPE). EAR measures the potential adverse impact on
earnings from a given change in the yield curve, while the market value of
portfolio equity risk limit is set in terms of changes in the economic present
value of future cash
23
<PAGE>
flow streams. Model parameters are determined based on past interest rate
movements and are regularly updated. EAR is calculated by multiplying the gap
between asset and liability maturities/repricings by given changes in the yield
curve. MVPE is calculated by subtracting the net present value of deposits and
other interest bearing liabilities from the net present value of interest
earning assets using the same yield curve model. Both MVPE and EAR are measured
assuming a change in market interest rates up 300 basis points and down 300
basis points over both a one year and three year horizon.
Compliance with established limits is monitored by the Investment Committee and
the Company's interest rate risk profile is presented quarterly to the Board of
Directors. Both MVPE and EAR assesses the Company's interest rate risk based on
the Company's current asset and liability mix.
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of December 31, 1995, based upon the known
repricing dates of certain assets and liabilities and the assumed repricing
dates of others. As shown in the chart below, at December 31, 1995, assuming no
management action, the Company's near-term interest rate risk is to a declining
rate environment, that is, net interest revenue would be expected to be
adversely affected by a decline in interest rates below the rates embedded in
the current yield curve. Over the first three months of 1996, approximately 9%
of the Company's interest rate sensitivity is related to changes in short term
interest rates, particularly the prime rate. Interest rate risk exposure in the
one year time frame is to a rising rate scenario, principally due to a high
level of fixed-rate assets relative to liabilities that would reprice in that
time frame. This chart displays only a static view of the Company's interest
rate sensitivity gap and does not capture the dynamics of balance sheet, rate
and spread movements nor management's actions that may be taken to manage this
position.
24
<PAGE>
<TABLE>
<CAPTION>
MATURITY REPRICING DATE (1) THREE MONTHS FOUR MONTHS TOTAL WITHIN ONE YEAR TO GREATER THAN TOTAL
(2) OR LESS TO ONE YEAR ONE YEAR FIVE YEARS FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES $ 40,605 $ 42,584 $ 83,189 $ 85,212 $13,401 $181,802
FED FUNDS 28,997 28,997 28,997
COMMERCIAL LOANS (3) 82,614 5,502 88,116 11,126 907 100,149
CONSUMER LOANS (3) 31,182 17,520 48,702 51,380 1,277 101,359
MORTGAGE LOANS (3) 64,300 80,679 144,979 46,929 19,538 211,446
TOTAL INTEREST
EARNING ASSETS (1) 247,698 146,285 393,983 194,647 35,123 623,753
SAVINGS (4) 61,258 143,435 204,693 204,693
NOW (5) 50,106 50,106 50,106
MMDA (5) 66,526 66,526 66,526
TIME (5) 63,562 63,279 126,841 44,238 171,079
TOTAL INTEREST-
BEARING LIABILITIES 191,346 256,820 448,166 44,238 492,404
-------- --------- -------- -------- --------
INTEREST SENSITIVITY
GAP (6) $ 56,352 $(110,535) $(54,183) $150,409 $35,123 $131,349
==============================================================================
GAP AS A PERCENT OF
EARNING ASSETS 9.0% (17.7%) (8.7%) 24.1% 5.6% 21.0%
==============================================================================
</TABLE>
NOTES TO CHART:
(1) INTEREST RATE SENSITIVITY GAPS ARE DEFINED AS THE FIXED RATE POSITIONS
(ASSETS LESS LIABILITIES) FOR A GIVEN TIME PERIOD. THE GAPS MEASURE THE
TIME WEIGHTED DOLLAR EQUIVALENT VOLUME OF POSITIONS FIXED FOR A PARTICULAR
PERIOD. THE GAP POSITIONS REFLECT A REPRICING DATE AT WHICH DATE FUNDS ARE
ASSUMED TO "MATURE" AND REPRICE TO A CURRENT MARKET RATE FOR THE ASSET OR
LIABILITY. THE TABLE DOES NOT INCLUDE LOANS IN NONACCRUAL STATUS OR NET
UNREALIZED GAINS RECORDED ON "AVAILABLE-FOR-SALE" SECURITIES AS OF DECEMBER
31, 1995.
(2) VARIABLE RATE BALANCES ARE REPORTED BASED ON THEIR REPRICING FORMULAS.
FIXED RATE BALANCES ARE REPORTED BASED ON THEIR SCHEDULED CONTRACTUAL
MATURITY DATES, EXCEPT FOR CERTAIN INVESTMENT SECURITIES AND LOANS SECURED
BY 1-4 FAMILY RESIDENTIAL PROPERTIES THAT ARE BASED ON ANTICIPATED CASH
FLOWS.
(3) PRIME-PRICED LOANS AND INVESTMENTS ARE CONSIDERED AS 1 TO 3 MONTH ASSETS.
(4) SAVINGS ACCOUNTS: ONE HALF OF THE LEVEL OF MERIT SAVINGS ACCOUNTS, WHICH
REPRICE AGAINST CHANGES IN THE FEDERAL RESERVE DISCOUNT RATE, ARE
CLASSIFIED AS THREE MONTHS OR LESS MATURITIES. MANAGEMENTS' ANALYSIS OF
CHANGES IN LEVELS INDICATE THAT CHANGES IN THIS RATE ARE APPROXIMATELY HALF
AS OFTEN AS CHANGES IN OTHER MARKET RATES. THE BALANCE OF THESE ACCOUNTS
AND OTHER SAVINGS ACCOUNTS ARE CLASSIFIED AS FOUR MONTHS TO ONE YEAR
MATURITIES, REFLECTING THE LAGGING PERIOD THAT HISTORICALLY EXISTS IN RATES
PAID ON PASSBOOK AND SAVINGS ACCOUNTS.
(5) OTHER DEPOSITS: TIME DEPOSITS ARE CLASSIFIED BY CONTRACTUAL MATURITY OR
REPRICING FREQUENCY. NOW ACCOUNTS ARE CLASSIFIED AS FOUR MONTHS TO ONE YEAR
MATURITIES. THE BALANCE OF DEPOSITS ARE CONSIDERED LESS THAN THREE MONTH
MATURITIES, INCLUDING ALL MONEY MARKET DEPOSIT ACCOUNTS. THE INTEREST RATE
SENSITIVITY ASSUMPTIONS PRESENTED FOR THESE DEPOSITS ARE BASED ON
HISTORICAL AND CURRENT EXPERIENCES REGARDING BALANCE RETENTION AND INTEREST
RATE REPRICING BEHAVIOR.
(6) NON-INTEREST BEARING DEPOSIT LIABILITIES WERE APPROXIMATELY $138.7
MILLION AT DECEMBER 31, 1995.
25
<PAGE>
MORTGAGE-BACKED AND SBA SECURITIES OF U.S. GOVERNMENT AGENCIES
- --------------------------------------------------------------
The Company currently invests in mortgage-backed securities (FHLMC, FNMA, and
GNMA) and SBA pooled loans in connection with its asset/liability management
strategy. As of December 31, 1995, the Company had $2.5 million in fixed rate
securities and $16.1 million in adjustable rate securities of this nature. These
securities are all guaranteed by U.S. Government agencies and are, therefore, of
the highest investment grade. These securities are subject to varying monthly
payments due to varying early prepayments by the borrowers on the underlying
loans. As a general rule, when interest rates rise, prepayments slow down,
extending the maturities of the fixed rate securities. Conversely, when interest
rates decline, prepayments rise, as many of the borrowers refinance their loans
at lower rate levels. The Company may not be able to reinvest the proceeds of
prepayments in securities or other earning assets with comparable yields, which
can adversely affect net interest income. Prepayment levels affect the
contractual repayment profile of the securities.
These uncertainties cause more volatile market value shifts than do serial or
single payment bonds, particularly as interest rates rise. The Company manages
this portion of its investment portfolio by only investing in such fixed rate
securities with expected average lives of 2-4 years but not greater than 5
years, or in adjustable rate securities which evidence lower price volatility
due to the adjustable rate feature. The Company has no holdings of "high risk"
securities as defined by the Federal Financial Institutions Examination Council.
26
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The table below sets forth the major components of net income for each of the
three years ended December 31, 1995, 1994 and 1993. Net income increased $3.7
million in 1995 over 1994.
Net income for 1995 was $7.0 million or $1.62 per fully diluted share compared
to net income for 1994 of $3.3 million or $.75 per fully diluted share. If the
Company had not incurred the 1994 merger-related costs and the securities
portfolio restructuring losses (of $3.1 million after taxes), net income for
that year would have been approximately $6.4 million or $1.49 per fully diluted
share. This compares to net income of $5.0 million or $1.18 per fully diluted
share in 1993.
Return on average assets was 1.04%, .52% and .85% in 1995, 1994 and 1993,
respectively. The return on average equity was 12.6%, 6.2% and 9.6% in 1995,
1994 and 1993, respectively. Returns on average common equity were 13.2%, 7.0%
and 9.9% for the similar periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 VS. % CHANGE 1994 VS. % CHANGE
1994 1995 VS. 1993 1994 VS.
1995 VARIANCE 1994 1994 VARIANCE 1993 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL INTEREST
INCOME $50,433 $ 7,818 18.4% $42,615 $ 2,334 5.8% $40,281
TOTAL INTEREST
EXPENSE 21,259 6,739 46.4 14,520 1,046 7.8 13,474
------------------------------------------------------------------------
NET INTEREST INCOME 29,174 1,079 3.8 28,095 1,288 4.8 26,807
PROVISION FOR LOAN
LOSSES 2,300 (100) -4.2 2,400 (866) -26.5 3,266
------------------------------------------------------------------------
NET INTEREST INCOME
AFTER PROVISION
FOR LOAN LOSSES 26,874 1,179 4.6 25,695 2,154 9.2 23,541
OTHER INCOME 6,061 2,598 75.0 3,463 (2,142) -38.2 5,605
------------------------------------------------------------------------
GROSS OPERATING
INCOME 32,935 3,777 12.9 29,158 12 29,146
OTHER EXPENSE 22,456 (1,502) -6.3 23,958 2,398 11.1 21,560
------------------------------------------------------------------------
INCOME BEFORE
INCOME TAXES 10,479 5,279 101.5 5,200 (2,386) -31.5 7,586
INCOME TAXES 3,514 1,578 81.5 1,936 (664) -25.5 2,600
------------------------------------------------------------------------
NET INCOME $ 6,965 $ 3,701 113.4% $ 3,264 $ 1,722 (34.5)% $ 4,986
=======================================================================
NET INCOME PER
COMMON SHARE (*) $1.62 $.75 $1.18
======= ======= =======
</TABLE>
(*) BASED UPON THE WEIGHTED-AVERAGE NUMBER OF FULLY-DILUTED SHARES OF COMMON
STOCK OUTSTANDING DURING EACH OF THE PERIODS, ADJUSTED RETROACTIVELY FOR
10% STOCK DIVIDEND DECLARED DECEMBER 1995.
Net interest income is the primary component of the Company's earnings and is
derived from interest income earned on loans and securities offset by interest
expense paid on deposits and other interest-bearing liabilities.
The following table presents, for each of the years 1995, 1994 and 1993, the
average balances of the various categories of the Company's balance sheet and
the related interest income on earning assets and interest expense on interest-
bearing deposits and liabilities. Also presented are the related average
interest yields and interest rates paid associated with interest-earning assets
and interest-bearing liabilities.
27
<PAGE>
Average Balances, Interest, and Average Yields/Costs for the year ended December
31, (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
LOANS (1) $428,505 $39,131 9.13% $392,619 $32,735 8.34% $357,620 $30,845 8.63%
TAXABLE 112,750 7,270 6.45 117,197 6,915 5.90 116,140 6,808 5.86
SECURITIES
TAX-EXEMPT 42,808 3,036 7.09 45,990 3,044 6.62 39,808 2,714 6.82
SECURITIES (2)
FED FUNDS SOLD 35,189 2,028 5.76 25,248 956 3.79 28,038 837 2.99
-------- ------- -------- ------- -------- -------
TOTAL INTEREST
EARNING ASSETS 619,252 51,465 8.31 581,054 43,650 7.51 541,606 41,204 7.61
CASH & DUE FROM
BANKS 29,634 27,437 27,555
PREMISES &
EQUIPMENT 17,621 15,308 14,130
OTHER ASSETS 14,535 11,235 9,376
ALLOWANCE FOR (8,566) (7,935) (6,746)
LOAN LOSS
TOTAL NON-
INTEREST 53,224 46,045 44,315
EARNING ASSETS -------- -------- --------
TOTAL ASSETS $672,476 51,465 7.65% $627,099 43,650 6.96% $585,921 41,204 7.03%
======== ======== ========
LIABILITIES
MONEY MARKET $ 75,058 $ 2,556 3.41 $ 99,326 $ 2,706 2.72 $101,420 $ 2,716 2.68
NOW ACCOUNTS 52,902 915 1.73 56,768 1,036 1.82 53,174 1,001 1.88
SAVINGS 191,828 8,427 4.39 166,347 5,207 3.13 148,971 4,377 2.94
TIME DEPOSITS 163,074 9,231 5.66 122,800 5,403 4.40 122,475 5,259 4.29
OTHER 2,117 130 6.14 2,291 168 7.33 2,004 121 6.04
-------- ------- -------- ------- -------- -------
TOTAL INTEREST
BEARING
LIABILITIES 484,979 21,259 4.38 447,532 14,520 3.24 428,044 13,474 3.15
DEMAND DEPOSITS 128,697 120,333 102,488
OTHER 3,334 6,549 3,682
-------- -------- --------
TOTAL NON-
INTEREST BEARING
LIABILITIES 132,031 126,882 106,170
STOCKHOLDER
EQUITY 55,466 52,685 51,707
-------- -------- --------
TOTAL LIABILITIES
AND EQUITY $672,476 21,259 3.16% $627,099 14,520 2.32% $585,921 13,474 2.30%
======== ------- ======== ------- ======== -------
NET INTEREST 30,206 4.88 29,130 5.01 27,730 5.12
MARGIN
LESS TAX
EQUIVALENT (1,032) (1,035) (923)
ADJUSTMENTS ------- ------- -------
NET INTEREST
INCOME $29,174 4.71% $28,095 4.84% $26,807 4.95%
======= ==== ======= ==== ======= ====
</TABLE>
(1) AVERAGE BALANCES INCLUDE NON-ACCRUAL LOANS.
(2) YIELDS ON TAX-EXEMPT SECURITIES BASED ON A FEDERAL TAX RATE OF 34%.
28
<PAGE>
The table below details the changes in interest income and interest expense for
the periods indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
--------------------- ---------------------
INCREASE/(DECREASE)
DUE TO: VOLUME RATE TOTAL (1) VOLUME RATE TOTAL (1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
LOANS $2,991 $3,405 $6,396 $2,981 $(1,091) $1,890
TAXABLE SECURITIES (262) 617 355 62 45 107
TAX-EXEMPT SECURITIES (211) 203 (8) 422 (92) 330
FEDERAL FUNDS SOLD 376 696 1,072 (106) 225 119
---------------------------------------------------------
TOTAL INTEREST INCOME 2,894 4,921 7,815 3,359 (913) 2,446
INTEREST PAID ON:
MONEY MARKET ACCOUNTS (661) 511 (150) (56) 46 (10)
NOW ACCOUNTS (71) (50) (121) 65 (30) 35
SAVINGS ACCOUNTS 798 2,422 3,220 546 284 830
TIME DEPOSITS 1,772 2,056 3,828 12 132 144
OTHER (13) (25) (38) 21 26 47
---------------------------------------------------------
TOTAL INTEREST EXPENSE 1,825 4,914 6,739 588 458 1,046
---------------------------------------------------------
NET INTEREST MARGIN 1,069 7 1,076 2,771 (1,371) 1,400
LESS TAX EQUIVALENT EFFECT 72 (69) 3 (144) 32 (112)
---------------------------------------------------------
NET INTEREST INCOME $1,141 $ (62) $1,079 $2,627 $(1,339) $1,288
=========================================================
</TABLE>
(1) THE CHANGE IN INTEREST DUE TO BOTH RATE AND VOLUME HAS BEEN ALLOCATED TO
VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE
DOLLAR AMOUNTS OF THE CHANGE IN EACH TO THE TOTAL CHANGE.
In 1995 vs. 1994, net interest income was positively impacted by $1.1 million
due to increases in average earning assets, primarily in average loans. However,
the growth in savings and time deposits was greater than the growth in average
earning assets. Therefore, the Company's increase in interest cost due to higher
interest rates paid on deposits offset the increases in income received on
securities and loans resulting in a lower "net interest margin" (net interest
income as a percentage of earning assets). Although the level of interest rates
declined during 1995, the average level of interest rates remained higher during
1995 vs. the average level of interest rates for 1994. Net interest income was
negatively impacted by less than one hundred thousand dollars due to the average
effects of the interest rate changes.
In 1994 vs. 1993, net interest income was positively impacted by $2.6 million
due to increases in average balances. The primary component of this increase was
increases in average outstanding loan balances offset somewhat by increases in
average savings account balances. Net interest income was negatively impacted by
$1.3 million due to changes in interest rates. Of this amount, average loan
interest yields declined $1.1 million reflecting new business generated at lower
yields than the portfolio earned in 1993, as well as increases of $.5 million in
interest expense as interest costs began to rise on interest bearing deposits,
primarily savings accounts. In order to protect net interest margin, the Bank
emphasized variable rate loans in 1994 which generally start with lower interest
rates which will increase as interest rates rise. The rise in variable loan
rates in the portfolio, however, is on a lagging basis as loans typically adjust
from one to three months after a prime rate change occurs. The Bank has
approximately $175 million or 40.5% of its loan portfolio adjustable with prime
rate changes.
29
<PAGE>
ASSET QUALITY AND PROVISIONS FOR LOAN LOSSES
- --------------------------------------------
The following table presents details of the Company's nonperforming assets and
restructured loans. The accrual of interest income is generally discontinued
when a loan becomes 90 days past due as to interest or principal or, with
respect to current loans, if management has doubts about the ability of the
borrower to regularly pay interest and/or principal on a timely basis. When
interest accruals are discontinued, any interest income credited to the current
year which has not been collected is reversed, and any interest accrued in the
prior year is charged to the allowance for loan losses. Management may elect to
continue the accrual of interest when the loan is in the process of collection
and the estimated fair value of the collateral is sufficient to cover the
principal and accrued interest. If payments on nonaccrual loans are made, income
is recorded when received unless management has reason to doubt the ultimate
collectibility of the principal remaining on the loan. Loans are returned to
accrual status once the doubt concerning collectibility has been removed and the
borrower has demonstrated performance in accordance with the loan terms and
conditions.
The table below summarizes the Company's nonperforming assets and restructured
loans for the years indicated (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1) $4,407 $4,105 $5,146 $4,427 $2,529
Accruing loans past due 90 days or more (2) 522 895 329 449 648
Restructured loans and troubled debt 349 119 457 625 317
------------------------------------------------
Total non-performing loans 5,278 5,119 5,932 5,501 3,494
------------------------------------------------
Amount collateralized by real estate 4,398 4,486 4,041 3,612 2,121
------------------------------------------------
Other real estate owned (3) 1,196 1,150 1,064(4) 817 1,219
------------------------------------------------
Total non-performing assets $6,474 $6,269 $6,996 $6,318 $4,713
================================================
</TABLE>
(1) NONACCRUAL STATUS DENOTES LOANS ON WHICH, IN THE OPINION OF MANAGEMENT,
THE COLLECTION OF INTEREST IS UNLIKELY, OR LOANS THAT MEET OTHER NONACCRUAL
CRITERIA AS ESTABLISHED BY REGULATORY AUTHORITIES. PAYMENTS RECEIVED ON
LOANS CLASSIFIED AS NONACCRUAL ARE EITHER APPLIED TO THE OUTSTANDING
PRINCIPAL BALANCE OR RECORDED AS INTEREST INCOME, DEPENDING UPON
MANAGEMENT'S ASSESSMENT OF THE COLLECTIBILITY OF THE LOAN.
(2) INCLUDES LOANS AND MORTGAGES SECURED BY RESIDENTIAL REAL ESTATE OF
$354,000, $534,000, $313,000, $163,000 AND $407,000 AT DECEMBER 31, 1995,
1994, 1993, 1992, AND 1991 RESPECTIVELY.
(3) EXCLUDES "INSUBSTANCE FORECLOSURES" OF $1.0 MILLION, $1.4 MILLION, $2.1
MILLION, $1.7 MILLION AND $1.6 MILLION AD DECEMBER 31, 1995, 1994 1993,
1992 AND 1991 RESPECTIVELY, WHICH ARE INCLUDED IN NONACCRUAL LOANS.
(4) NET OF AN ALLOWANCE OF $250,000.
With continued difficult economic conditions in the region, nonperforming loans
increased slightly by $.2 million to $5.3 million at December 31, 1995. Of this
amount, $4.4 million is collateralized by real estate (approximately 83%). At
December 31, 1994, the Company had $5.1 million in nonperforming loans of which
$4.5 million (88%) was collateralized by real estate compared to December 31,
1993 total nonaccrual loans of $5.9 million (68% being collateralized by real
estate). Other real estate owned (OREO) comprised twelve properties at December
31, 1995 of which one was a commercial office building, one commercial business,
seven were residences and three were small parcels of vacant land. During the
year, the Company disposed of $1.6 million in OREO properties. Management
continues to secure loans with real estate in order to minimize the risks of
collectibility of its loan portfolio.
For a discussion of concentrations of credit risk and impaired loans, see Notes
C and D to the 1995 Consolidated Financial Statements under Item 8 contained
herein. At December 31, there were no commitments to lend additional funds to
borrowers whose loans were classified as nonperforming.
30
<PAGE>
If the Company's nonaccrual loans had been current in accordance with the
original loan terms, $400,000 in additional gross interest income would have
been recorded in 1995 vs. $228,000 in 1994 and $250,000 in 1993. The actual
amount of interest income on nonaccrual loans recorded in interest income for
1995 was $265,000 vs. $198,000 in 1994 and $206,000 in 1993.
At December 31, 1995, the Company had a total of approximately $11.4 million in
loans classified as substandard, in addition to the nonperforming assets noted
above. Of this amount, $9.5 million are loans collateralized by real estate.
Real estate values have declined significantly over the past several years. Such
loans may be classified as nonperforming in the future, if present concerns
about the borrowers ability to comply with repayment terms become clearly
evident.
The following table details changes in the Allowance for Loan Losses for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 8,326 $ 7,332 $ 5,794 $ 4,534 $ 3,523
Chargeoffs:
Commercial 411 350 435 682 382
Installment 593 292 449 856 1,291
Real estate 1,164 1,059 1,103 405 385
-----------------------------------------------
Total chargeoffs 2,168 1,701 1,987 1,943 2,058
-----------------------------------------------
Recoveries:
Commercial 75 63 124 91 105
Installment 193 153 123 211 214
Real estate 44 20 2 1
-----------------------------------------------
Total recoveries: 312 236 249 303 319
-----------------------------------------------
Net charge-offs (1,856) (1,465) (1,738) (1,640) (1,739)
-----------------------------------------------
Provision for loan losses 2,300 2,400 3,266 2,900 2,750
Transfers, other* 69
-----------------------------------------------
Balance at end of year $ 8,770 $ 8,326 $ 7,322 $ 5,794 $ 4,534
===============================================
Ratio of net charge-offs to
average loans outstanding
during year: .43% .37% .49% .44% .71%
Allowance for loan losses as a
percent of year-end loans: 2.08% 1.93% 2.01% 1.61% 1.22%
Allowance as a percent of non-
performing loans: 166% 163% 123% 105% 130%
</TABLE>
*An adjustment of $69,000 was transferred to the allowance for the loan losses
as a result of the acquisition of First National Bank of Amenia.
31
<PAGE>
The following table shows, at the dates indicated, the allocation of the
allowance for loan losses, by category, and the percentage of loans in each
category to total gross loans:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------------- --------------- -------------- --------------- ---------------
% OF % OF % OF % OF % OF
BALANCE AT END OF TOTAL TOTAL TOTAL TOTAL TOTAL
YEAR APPLICABLE TO: AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL $2,355 16.6% $2,010 22.1% $2,520 19.1% $2,606 17.3% $1,681 15.9%
CONSUMER & OTHER 1,400 16.1 1,363 12.2 881 9.5 1,256 11.3 1,240 15.3
REAL ESTATE - CONSTRUCTION 3.1 1.5 1.0 2.7 2.7
REAL ESTATE - MORTGAGE 4,247 64.2 4,100 64.2 3,155 70.4 1,608 68.7 1,006 66.1
UNALLOCATED 768 853 766 324 607
-----------------------------------------------------------------------------------------
TOTAL ALLOWANCE
FOR LOAN LOSSES $8,770 100% $8,326 100% $7,332 100% $5,794 100% $4,534 100%
=========================================================================================
</TABLE>
The provision for loan losses, which is charged to operations, is based on both
the amount of net loan losses incurred and management's ongoing evaluation of
the level and composition of risk in the loan portfolio. The evaluation
considers, in addition to the results of a continuous program of individual loan
assessment, factors including, but not limited to, general economic conditions
and recent trends, loan portfolio composition, the level of nonperforming
assets, prior loan loss experience and trends, growth of the portfolio and
management's statistical estimate of losses inherent in the portfolio. The
Company has not been involved in any foreign loans or highly leveraged
transactions, which are generally considered high risk loans. The provision for
loan losses decreased by $100,000 or 4% in 1995 compared to a decrease of
$866,000 or 27% in 1994.
Provisioning policy has led to an increase in the allowance for loan losses in
recent years. The ratio of allowance for loan losses to total loans has
increased from 1.2% in 1991 to 2.1% in 1995. The ratio of the allowance to
nonperforming loans does not reflect collateral values, although the large
majority of the Bank's nonperforming assets are collateralized by real estate.
Net charge-offs of loans were $1.8 million in 1995 as compared to $1.5 million
in 1994 and $1.7 million in 1993. Management is very cognizant of the
uncertainties of the local marketplace, due to the employment cutbacks of the
region's principal employers, IBM and the State of New York. Although Dutchess
County's unemployment rate has dropped to 3.6%, its lowest level in five years,
Ulster County continues to experience a loss of jobs, with an unemployment rate
of 5.6% at year end 1995. While Dutchess County appears to be rebounding with
slight increases in both manufacturing and service sector jobs, Ulster County
has yet to show any overall improvement. Manufacturing employment in both
counties remains some 30%-40% below its 1992 peak. Total 1995 home sales were
comparable to 1994 levels in both Dutchess County and Ulster County, but with
continued decreases in average selling prices of 1 -5%, somewhat reflecting the
lower purchasing power associated with retail and trade employment.
Management has also considered the direct effect of the IBM cutbacks. The Bank
has no credit exposure to IBM, although it provides consumer and residential
mortgage loans to IBM employees. Loans to such employees do not represent a
material proportion of the Bank's portfolio.
Commercial office and industrial vacancy rates (excluding IBM space) remain high
(20-30%). There has been some "take up" of space previously rented by IBM or
businesses previously connected with IBM, and as IBM appears to have completed
its downsizing, its efforts to rent its own space have yielded some significant
results to date, particularly in East Fishkill. Furthermore, Governor Pataki
plans to move approximately 4,000 State related jobs to and occupy over
1,000,000 square feet of IBM space in Kingston. Although the proposal has
encountered many political problems, if fully implemented in late 1996 or early
1997, as planned, this could have a positive effect both on commercial and
office property values, as well as residential property values.
Despite these positive developments, the local economy continues to perform less
favorably in comparison to many other regions of the United States.
32
<PAGE>
Management believes the allowance for loan losses is adequate to cover credit
risk inherent in the portfolio but no assurance can be given that the current
apparent stabilization of the local economy will not be unsettled by future
events. Such developments would be expected to adversely affect the financial
performance of the Company.
The following table details the components of noninterest income for the years
ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
CHANGE CHANGE
1995 AMOUNT PERCENT 1994 AMOUNT PERCENT 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM FIDUCIARY $ 694 $ 196 39.4% $ 498 $ 20 4.2% $ 478
ACTIVITIES
SERVICE CHARGE INCOME 3,505 (27) (.8) 3,532 382 12.1 3,150
NET REALIZED GAINS 138 2,018 107.3 (1,880) (2,518) (395.3) 638
(LOSSES) ON SECURITIES
NET GAINS ON SALES OF 404 286 242.4 118 (185) (61.2) 303
LOANS
OTHER 1,320 125 10.5 1,195 159 15.3 1,036
----------------------------------------------------------------------
TOTAL $6,061 $2,598 75.0% $ 3,463 $(2,142) (38.2)% $5,605
======================================================================
</TABLE>
Noninterest income increased $2.6 million in 1995 vs. 1994. Of this amount, $2.0
million represents the net effect of realized losses on sales of securities of
$1,800,000 in 1994 vs. realized gains of $138,000 in 1995. Net gains on loan
sales increased $286,000 due to the sale of approximately $32.2 million of
mortgages into the secondary market. Income from fiduciary activities increased
$196,000, reflecting both increased fee levels and an increase in assets under
administration. Noninterest income decreased $2.1 million in 1994 compared to
1993 primarily due to realized losses on securities. During the 1994 third
quarter, the Company repositioned its portfolio of securities in order to
restructure its balance sheet in light of the merger and to maintain an
appropriate consolidated interest rate risk position. As a result of such
restructuring, approximately $46.0 million of securities were sold, and net
losses of $1.9 million, or $1.1 million net of tax, were realized.
The following chart outlines the major changes in noninterest expense for the
years ended December 31, 1995, 1994 and 1993, respectively (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
NET CHANGE NET CHANGE
1995 AMOUNT PERCENT 1994 AMOUNT PERCENT 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SALARIES & BENEFITS $11,309 $ 670 6.3% $10,639 $ (405) (3.7)% $11,044
OCCUPANCY & 3,700 95 2.6 3,605 207 6.1 3,398
EQUIPMENT
OREO 141 220 * (79) (826) * 747
MERGER-RELATED 250 (2,710) * 2,960 2,960 *
FDIC 682 (576) (45.8) 1,258 52 4.3 1,206
OTHER 6,374 799 14.3 5,575 410 7.9 5,165
------------------------------------------------------------------
TOTAL $22,456 $(1,502) (6.3)% $23,958 $2,398 11.1% $21,560
==================================================================
</TABLE>
* not meaningful
33
<PAGE>
Salaries and benefits expense increased by $670,000 in 1995 vs. 1994, primarily
due to the new branches ($600,000) opened during 1994 and 1995 in Amenia,
Millerton, Newburgh and Town of Poughkeepsie. Salaries and Benefits decreased
$405,000 in 1994 vs. 1993 as the Company froze staff positions in anticipation
of the merger.
Occupancy and equipment expense increased by $95,000 in 1995 vs. 1994 primarily
due to approximately $200,000 of costs related to new branches offset by the
disposition of redundant buildings occupied by the banks prior to the merger.
Expenses increased by $207,000 in 1994 vs. 1993 primarily related to the
depreciation of equipment in connection with the merger, the full year operating
cost of the Town of Ulster branch and the severe winter experienced in the first
quarter of 1994.
Other Real Estate Owned expense was $141,000 in 1995 compared to a recovery of
$79,000 in 1994. In 1994, the Company recorded a net recovery on disposition of
an OREO property of some $300,000 compared to a recovery in the fourth quarter
of 1995 of $125,000. Exclusive of these large items, OREO expense principally
relates to the levels of properties carried during the year. OREO writedowns and
provisions were $151,000, $373,000 and $354,000 in 1995, 1994 and 1993,
respectively. Writedowns of properties after foreclosure reflect the continuing
difficulty of maintaining "distressed" real estate values in the Company's
marketplace.
Merger-related expenses of $250,000 in 1995 relate principally to finalizing the
conversion of the Company's data processing system. Merger-related expenses
amounted to $2,960,000 in 1994. The following is a summary of the costs incurred
in connection with the merger in 1994:
Legal, accounting, etc. $ 750,000
Operational and promotional costs 945,000
Abandonments and redundancies 365,000
Staff & benefit expenses 900,000
----------
Total merger-related expenses $2,960,000
==========
FDIC insurance decreased $576,000 in 1995 vs. 1994 as the assessment rate
charged to the Bank was reduced effective June 1, 1995 to $.04 per hundred
dollars of insured deposits from $.23 per hundred dollars of insured deposits.
FDIC expense increased $52,000 in 1994 vs. 1993 as a result of the general
levels of deposit increases. For further information regarding FDIC assessments,
see Item I Business - "Supervision and Regulation".
Other expenses increased by $799,000 in 1995 vs. 1994. Of this increase,
approximately $250,000 relates to expenses and amortization of goodwill incurred
on new branches and approximately $625,000 relates to the costs outside services
focusing on improving efficiencies and integrating the Company's banking
operations and meeting the filing and reporting requirements of the merged bank.
Income taxes increased to $3.5 million in 1995 compared to $1.9 million in 1994
and $2.6 million in 1993. Taxes for 1995 increased $1.6 million due to the
increase in pretax income from $5.2 million to $10.5 million. The 1994 decrease
of $.7 million is directly attributable to the merger-related expenses and
realized securities losses in that year (approximately 25% of the merger-related
expenses were not considered as deductible). The Company's effective tax rates
were 33.5%, 37.2% and 34.3% in 1995, 1994 and 1993, respectively. For further
information regarding income taxes, see Note J to the consolidated financial
statements under Item 8.
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------
The following table shows selected quarterly financial data of the Company for
the periods indicated. The information contained in the table does not purport
to be complete and is qualified in its entirety by the more detailed financial
information contained elsewhere herein.
34
<PAGE>
Selected Quarterly Financial Data (Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1995 MAR 31 JUN 30 SEP 30 DEC 31
----------------------------------------
<S> <C> <C> <C> <C>
Interest income $12,086 $12,658 $12,725 $12,964
Interest expense 4,927 5,483 5,388 5,461
----------------------------------------
Net interest income 7,159 7,175 7,337 7,503
Provision for loan losses 500 600 600 600
----------------------------------------
Net interest income after
provision for loan losses 6,659 6,575 6,737 6,903
Net security gains 10 128
Other income 1,286 1,609 1,603 1,425
Merger related expense (250)
Other expenses (5,627) (5,896) (5,303) (5,380)
----------------------------------------
Income before income taxes 2,068 2,298 3,037 3,076
Provision for income taxes 682 779 1,091 962
----------------------------------------
NET INCOME $ 1,386 $ 1,519 $ 1,946 $ 2,114
========================================
Fully diluted earnings per share* $.33 $.35 $.45 $.49
========================================
- ----------------------------------------------------------------------------
1994
Interest income $ 9,753 $10,462 $11,159 $11,241
Interest expense 3,262 3,512 3,714 4,032
----------------------------------------
Net interest income 6,491 6,950 7,445 7,209
Provision for loan losses 525 375 800 700
----------------------------------------
Net interest income after
provision for loan losses 5,966 6,575 6,645 6,509
Net security gains (losses) 68 (9) (1,875) (64)
Other income 1,275 1,442 1,278 1,416
Merger related expense (310) (1,690) (960)
Other expenses (5,328) (5,556) (4,971) (5,211)
----------------------------------------
Income before income taxes 1,981 2,142 (613) 1,690
Provision for income taxes 640 839 (217) 674
----------------------------------------
NET INCOME $ 1,341 $ 1,303 $ (396) $ 1,016
========================================
Fully diluted earnings per share* $.32 $.29 $(.14) $.24
========================================
</TABLE>
*Fully diluted earnings per share have been retroactively adjusted to give
effect to the 10% stock dividend declared December 1995.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following are included in this item beginning on the pages indicated:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 39
Consolidated Balance Sheets at December 31, 1995 and 1994 42
Consolidated Statements of Income and Expense for each of
the three years in the period ended December 31, 1995 43
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1995 44
Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended
December 31, 1995 45
Notes to Consolidated Financial Statements 46
</TABLE>
Selected quarterly financial data of the Company for 1995 and 1994 are reported
in "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of operations - Selected Quarterly Financial Data."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
-----------------------------------------------------------------------
Not applicable.
PART III
ITEMS 10 THROUGH 13.
Information required by Part III (Items 10 through 13) of this Form 10-K is
incorporated by reference to the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held on May 2, 1996, which will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the fiscal year to which this report relates.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) List of Documents Filed as Part of This Report.
(1) Financial Statements Filed:
1. Independent Auditors' Report
2. Consolidated Balance Sheets as of December 31, 1995 and 1994
3. Consolidated Statements of Income and Expense for each of the
three years in the period ended December 31, 1995
4. Consolidated Statements of Changes in Stockholders' Equity for
each of the three years in the period ended December 31, 1995
5. Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1995
6. Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules are omitted because of
the absence of conditions under which they are required or because the
required information is included in the consolidated financial
statements or related notes.
(3) Exhibits. The exhibits listed on the Exhibit Index on page 38 of
this Form 10-K are filed herewith or are incorporated herein by
reference.
(b) Reports on Form 8-K
None.
37
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
3.1 RESTATED CERTIFICATE OF INCORPORATION OF HUDSON CHARTERED BANCORP,
INC. (INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 3.1 TO THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994).
3.2 BYLAWS, AS AMENDED, OF HUDSON CHARTERED BANCORP, INC. (INCORPORATED
HEREIN BY REFERENCE TO EXHIBIT 3.2 TO THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994).
10.1 FISHKILL NATIONAL CORPORATION INCENTIVE STOCK OPTION PLAN, AS AMENDED
(INCORPORATED HEREIN BY REFERENCE TO THE FISHKILL NATIONAL CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1990, FILE NO. 33-38288).+
10.2 EXECUTIVE SUPPLEMENTAL INCOME PLAN BETWEEN THE COMPANY AND JOHN C.
VANWORMER (INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 10(J) TO THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1993).+
10.3 DIRECTORS DEFERRED COMPENSATION PLAN (FILED HEREWITH).+
10.4 HUDSON CHARTERED BANCORP, INC. 1995 INCENTIVE STOCK PLAN (FILED
HEREWITH).+
10.5 EMPLOYMENT AGREEMENT OF T. JEFFERSON CUNNINGHAM III DATED JULY 1, 1995
(FILED HEREWITH).+
10.6 EMPLOYMENT AGREEMENT OF JOHN CHARLES VANWORMER DATED JULY 1, 1995
(FILED HEREWITH).+
10.7 EMPLOYMENT AGREEMENT OF PAUL A. MAISCH DATED APRIL 1, 1995 (FILED
HEREWITH).+
10.8 STOCK APPRECIATION RIGHTS AGREEMENT OF T. JEFFERSON CUNNINGHAM III,
DATED JULY 19, 1995, (FILED HEREWITH).+
10.9 EMPLOYMENT AGREEMENT OF DAVID S. MACFARLAND (INCORPORATED HEREIN BY
REFERENCE TO EXHIBIT 10.9 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994).+
10.10 EMPLOYMENT AGREEMENT OF DONALD H. WEBER (INCORPORATED HEREIN BY
REFERENCE TO EXHIBIT 10.10 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994).+
11 COMPUTATION OF EARNINGS PER SHARE (FILED HEREWITH).
21 SUBSIDIARIES OF HUDSON CHARTERED BANCORP, INC. (FILED HEREWITH).
23.1 CONSENT OF ERNST & YOUNG LLP (FILED HEREWITH).
23.2 CONSENT OF DELOITTE & TOUCHE LLP (FILED HEREWITH).
27 FINANCIAL DATA SCHEDULE (FILED HEREWITH).
99 REPORT OF ERNST & YOUNG LLP (FILED HEREWITH).
</TABLE>
- ------------------
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN.
38
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hudson Chartered Bancorp, Inc.
We have audited the consolidated balance sheets of Hudson Chartered Bancorp,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of income and expense, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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. The consolidated financial statements give retroactive effect to
the merger of Fishkill National Corporation and Community Bancorp, Inc. as
of September 30, 1994, which has been accounted for as a pooling of interests as
described in Note A to the consolidated financial statements. We did not audit
the statements of income and expense, stockholders' equity and cash flows of
Community Bancorp, Inc. for the year ended December 31, 1993, which statements
reflect net interest income of $13.4 million. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Community Bancorp, Inc. for 1993, is
based solely on the report of such other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Hudson Chartered Bancorp, Inc. and subsidiaries at
December 31, 1995 and 1994 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As also described in Note A, the Company changed its method of accounting for
securities as of December 31, 1993.
/s/ Deloitte & Touche LLP
January 30, 1996
[LOGO OF DELOITTE TOUCHE TOHMATSU INTERNATIONAL]
39
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT ACCOUNTANTS' REPORT
To the Audit Committee
Hudson Chartered Bancorp, Inc.
Lagrangeville, N.Y.
We have examined management's assertion that , as of December 31, 1995, Hudson
Chartered Bancorp, Inc. and subsidiaries maintained an effective internal
control structure over financial reporting, including safeguarding of assets,
presented in conformity with both generally accepted accounting principles and
Federal Financial Institutions Examination Council instructions for Consolidated
Reports of Condition and Income ("Call Report" instructions) included in the
accompanying Report of Management to the Stockholders.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing and evaluating the design and operating effectiveness of the
internal control structure over financial reporting, including safeguarding of
assets, and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable basis for
our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also , projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies may deteriorate.
In our opinion, management's assertion that, as of December 31, 1995, Hudson
Chartered Bancorp, Inc. maintained an effective internal control structure over
financial reporting, including safeguarding of assets, presented in conformity
with both generally accepted accounting principles and the Call Report
instructions is fairly stated, in all material respects, based on the criteria
established in "Internal Control-Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
January 30, 1996
[LOGO OF DELOITTE TOUCHE TOHMATSU INTERNATIONAL]
40
<PAGE>
January 30, 1996
REPORT OF MANAGEMENT TO THE STOCKHOLDERS
- ----------------------------------------
Financial Statements
- --------------------
The management of Hudson Chartered Bancorp, Inc., ("the Company") is responsible
for the preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgements
and estimates made by management.
Internal Control
- ----------------
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting, including safeguarding of assets,
presented in conformity with both generally accepted accounting principles and
the Federal Financial Institutions Examination Council instructions for the
Consolidated Reports of Condition and Income ("Call Report" instructions). The
structure contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any structure of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the institution's internal control structures based on
criteria for effective internal control over financial reporting, including
safeguarding of assets, described in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes that the Company maintained an
effective internal control structure over financial reporting, including
safeguarding of assets, presented in conformity with both generally accepted
accounting principles and the Call Report instructions as of December 31, 1995.
The Audit Committee of the Board of Directors is comprised entirely of outside
directors who are independent of the Company's management. The Audit Committee
is responsible for recommending to the Board of Directors the selection of
independent auditors. It meets periodically with management, the independent
auditors, and the internal auditors to ensure that they are carrying out their
responsibilities. The Committee also carries out its oversight role by
reviewing and monitoring the financial, accounting and auditing procedures of
the Company in addition to reviewing the Company's financial reports. The
independent auditors and the internal auditors have full and free access to the
Audit Committee, with or without the presence of management, to discuss the
adequacy of the internal control structure for financial reporting and any other
matters which they believe should be brought to the attention of the Committee.
Compliance with Laws and Regulations
- ------------------------------------
Management is also responsible for ensuring compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the as FDIC safety and soundness laws and regulations.
Management assessed its compliance with the designated safety and soundness laws
and regulations and has maintained records of its determinations and assessments
as required by the FDIC. Based on this assessment, Management believes that the
Company has complied, in all material respects, with the designated safety and
soundness laws and regulations for the year ended December 31, 1995.
/s/ T. Jefferson Cunningham /s/ John C. VanWormer /s/ Paul A. Maisch
T. Jefferson Cunningham III John C. VanWormer Paul A. Maisch
Chief Executive Officer President Chief Financial Officer
41
<PAGE>
HUDSON CHARTERED BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------
Notes 1995 1994
----- --------- ----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks K $ 38,856 $ 26,746
Federal funds sold 28,997 16,525
-------- --------
Total cash and cash equivalents 67,853 43,271
Securities: B
Available for sale, at fair value 167,334 53,837
Held to maturity, fair value of
$14,922 in 1995 and $90,792
in 1994. 14,465 92,974
Regulatory securities 2,107 914
Loans held for sale K 273 95
Loans: C,D,K,L
Gross loans 422,083 432,062
Allowance for loan losses E (8,770) (8,326)
-------- --------
Net loans 413,313 423,736
Premises and equipment F 17,062 17,687
Accrued income 5,618 5,076
Other assets D 8,458 8,387
-------- --------
TOTAL ASSETS $696,483 $645,977
======== ========
LIABILITIES
Deposits: G
Demand deposits $138,656 $135,181
Interest bearing deposits 492,404 444,889
-------- --------
Total deposits 631,060 580,070
Repurchase agreements 6,106
Other interest bearing liabilities M 1,896 1,939
Other liabilities 3,598 5,324
-------- --------
TOTAL LIABILITIES 636,554 593,439
Commitments and contingencies C,K
STOCKHOLDERS' EQUITY N,O
Preferred - 7.25% Series B,
convertible 5,713 5,714
Common stock 3,086 2,730
Common paid-in capital 23,378 16,099
Retained earnings 27,454 29,353
Net unrealized securities gains
(losses) 586 (1,144)
Treasury stock (117)
Employee stock ownership plan (171) (214)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 59,929 52,538
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $696,483 $645,977
======== ========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
HUDSON CHARTERED BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
Notes 1995 1994 1993
----- ------- ------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $39,131 $32,735 $30,845
Federal funds sold 2,028 956 837
Taxable securities 7,270 6,915 6,808
Tax-exempt securities 2,004 2,009 1,791
------- ------- -------
Total interest income 50,433 42,615 40,281
Interest expense:
Deposits G 21,129 14,352 13,353
Other 130 168 121
------- ------- -------
Total interest expense 21,259 14,520 13,474
------- ------- -------
NET INTEREST INCOME 29,174 28,095 26,807
Provision for loan losses E 2,300 2,400 3,266
------- ------- -------
Net interest income after
provision for loan losses 26,874 25,695 23,541
Noninterest income:
Service charges on deposit
accounts 2,968 3,173 2,849
Other service charges,
commissions and fees 537 359 301
Income from fiduciary activities 694 498 478
Realized gains (losses) on sales
of securities, net 138 (1,880) 638
Gains on sales of loans, net 404 118 303
Other 1,320 1,195 1,036
------- ------- -------
Total noninterest income 6,061 3,463 5,605
------- ------- -------
GROSS OPERATING INCOME 32,935 29,158 29,146
Noninterest expense:
Salaries and employee benefits H 11,309 10,639 11,044
Net occupancy I 1,606 1,759 1,640
Equipment 2,094 1,846 1,758
Postage and supplies 1,306 1,236 1,130
FDIC Insurance 682 1,258 1,206
Merger related costs 250 2,960
Other real estate owned D 141 (79) 747
Other 5,068 4,339 4,035
------- ------- -------
Total noninterest expense 22,456 23,958 21,560
------- ------- -------
Income before income taxes 10,479 5,200 7,586
Income taxes J 3,514 1,936 2,600
------- ------- -------
NET INCOME 6,965 3,264 4,986
Dividend requirements of
preferred stock O 414 415 497
------- ------- -------
NET INCOME APPLICABLE TO
COMMON SHARES $6,551 $2,849 $4,489
======= ======= =======
Weighted average shares outstanding:*
Primary 3,855,249 3,779,113 3,693,633
Fully diluted 4,309,914 4,231,053 4,150,971
Per common share:*
Earnings - primary $ 1.70 $ 0.75 $ 1.22
Earnings - fully diluted 1.62 0.75 1.18
Dividends declared 0.56 0.55 0.53
Book value 13.96 12.47 12.92
</TABLE>
*adjusted for 10% stock dividend declared December 1995
See notes to consolidated financial statements.
43
<PAGE>
HUDSON CHARTERED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,965 $ 3,264 $ 4,986
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,300 2,400 3,266
Depreciation and amortization 1,928 1,641 1,585
Provision for losses in other real estate owned 117 354
Amortization of security premiums, net 227 862 1,049
Amortization of core deposit intangible 141 75 52
Realized (gains) losses on sales of securities
and loans 542 1,762 (941)
Deferred income tax benefits (121) (118) (816)
Increase in other assets (3,071) (3,120) (334)
Increase (decrease) in other liabilities (1,774) 1,434 548
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,137 8,317 9,749
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sales of securities
available-for-sale 33,129 86,928 24,862
Proceeds from maturities of securities 37,276 39,894
Proceeds from maturities of securities
available-for-sale 21,743
Proceeds from maturities of securities
held-to-maturity 17,395
Purchases of securities (94,901)
Purchases of securities available-for-sale (98,177) (72,179)
Purchases of securities held-to-maturity (7,679) (45,598)
Proceeds from sales of loans 31,305 10,434 40,140
Net increase in loans (23,764) (77,993) (44,248)
Purchases of premises and equipment (1,303) (4,956) (2,459)
Proceeds from sales of buildings 300
Proceeds from sales of other real estate owned 1,211 230 966
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (26,140) (65,558) (35,746)
-------- -------- --------
FINANCING ACTIVITIES:
Deposits acquired from purchase and
assumption transactions 25,399
Net increase in demand, money market,
NOW and savings accounts 7,960 16,898 18,731
Net increase (decrease) in other time deposits 43,030 1,243 (8,756)
Proceeds from borrowings 1,725
Repayment of borrowings (955) (319)
Increase (decrease) in securities sold under
repurchase agreements (6,106) 6,106
Net proceeds from issuance of common and
preferred stock 1,334 852 436
Repurchase of preferred stock (1) (805)
Repurchase of common stock (116)
Cash dividends - preferred (414) (415) (413)
Cash dividends - common (2,102) (1,949) (1,882)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,585 48,099 7,797
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,582 (9,142) (18,200)
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF YEAR 43,271 52,413 70,613
-------- -------- --------
AT END OF YEAR $ 67,853 $ 43,271 $ 52,413
======== ======== ========
Non-cash investing activities:
Transfer from loans to OREO $ 2,058 $ 611 $ 2,458
Transfer of loans to held for sale 25,066 2,267
Net unrealized gains (losses) recorded
on securities 2,957 (1,967) 2,375
Deferred taxes on net unrealized (gains) losses (1,227) 823 (993)
Transfer of securities from available for sale
to held to maturity 73,105
Transfer of securities from held to maturity
to available for sale 61,465
Additional cash flow disclosures:
Interest paid 21,069 14,275 13,647
Income taxes paid 3,702 2,824 3,309
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
HUDSON CHARTERED BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Additional Unrealized
Preferred Common Paid-in Retained Gains (Losses) Treasury
Stock Stock Capital Earnings on Securities Stock ESOP Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $6,555 $2,651 $14,855 $25,926 ($445) $49,542
Net income 4,986 4,986
Dividends declared on
preferred stock (497) (497)
Dividends declared on common
stock ($0.53 per share)* (1,917) (1,917)
Stock reinvestment and
purchase plan - 27,301
shares* 20 309 329
Options exercised - 9,780* 7 100 107
Payments on ESOP borrowings 188 188
Net unrealized gains on
securities $1,382 1,382
------ ------ ------ ------ ------ -------- ----- -------
Balance at December 31, 1993 6,555 2,678 15,264 28,498 1,382 (257) 54,120
Net income 3,264 3,264
Dividends declared on
preferred stock (415) (415)
Dividends declared on common
stock ($0.55 per share)* (1,994) (1,994)
Stock reinvestment and
purchase plan - 28,921
shares* 21 386 407
Redemption of Series A
preferred stock (805) (805)
Conversion of Series B
preferred stock - 2,526
shares (36) 2 34
Options exercised - 38,382
shares* 29 415 444
Payments on ESOP borrowings 43 43
Net unrealized losses on
securities (2,526) (2,526)
------ ------ ------ ------ ------ -------- ----- -------
BALANCE AT DECEMBER 31, 1994 5,714 2,730 16,099 29,353 (1,144) (214) 52,538
Net income 6,965 6,965
Cash dividends declared
on preferred stock (414) (414)
Cash dividends declared on
common stock ($0.56 per
share)* (2,150) (2,150)
Stock reinvestment and
purchase plan - 41,646
shares* 30 581 611
Conversion of Series B
preferred stock - 77 shares (1) 1
Options exercised - 61,353
shares* 45 678 723
Purchase of Treasury stock ($117) (117)
Payments on ESOP borrowings 43 43
Net unrealized gains on
securities 1,730 1,730
Stock dividend declared
on common stock (10%) 280 6,020 (6,300)
------ ------ ------ ------ ------ -------- ----- -------
BALANCE AT DECEMBER 31, 1995 $5,713 $3,086 $23,378 $27,454 $586 $(117) ($171) $59,929
====== ====== ======= ======= ====== ======== ===== =======
</TABLE>
*adjusted for 10% stock dividend declared December 1995
See notes to consolidated financial statements.
<PAGE>
HUDSON CHARTERED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated, except per share data)
- -------------------------------------------------------------------------
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
- --------------------
Hudson Chartered Bancorp, Inc. is a New York State Bank Holding Company.
Through its banking subsidiary, First National Bank of the Hudson Valley (Bank),
it operates 20 branches in the Dutchess, Ulster, Northern Putnam and Eastern
Orange counties in New York State. The Bank is principally engaged in a variety
of lending activities and deposit gathering activities within the above noted
market place. As such, its future growth and profitability is dependent, in
large part, on the performance of the local economy. In both these lines of
business, the Bank competes with a significant number of other financial
institutions. Diversity of product lines, availability of funds, interest rates
charged on loans and offered on deposits, responsiveness and customer
convenience are all factors in effectively competing with these other financial
institutions. The economy is impacted by employment levels of two large
employers, IBM and certain State institutions. In recent years, the economy has
been weakened from large employment cutbacks from these employers.
Additionally, approximately 67% of the Company's loans outstanding are
collateralized by real estate. The Company also has made commitments to lend
funds secured by real estate in the amount of approximately $30 million.
The Company does not engage in hedging activities, utilize derivative financial
instruments or maintain a trading portfolio.
BASIS OF PRESENTATION
- ---------------------
The Company's consolidated financial statements include the accounts of Hudson
Chartered Bancorp, Inc., its commercial banking subsidiary, The First National
Bank of the Hudson Valley (the "Bank"), and Hudson Chartered Realty, Inc., a
company organized to hold title to foreclosed real estate properties which
commenced operations on January 1, 1994. The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles.
All significant intercompany transactions have been eliminated in consolidation.
Assets held in an agency or fiduciary capacity for trust department customers of
the Bank are not included in the consolidated financial statements.
In preparing financial statements, management is required to make estimates and
assumptions, particularly in determining the adequacy of the allowance for loan
losses, that affect the reported amounts of assets and liabilities as of the
date of the consolidated balance sheet and the results of operations for the
period. Actual results could differ significantly from those estimates.
MERGER
- ------
Effective September 30, 1994, Fishkill National Corporation ("FNC") was merged
with and into Community Bancorp, Inc. ("CBI") under the new name of Hudson
Chartered Bancorp, Inc. pursuant to a plan of merger dated March 25, 1994. The
merger was approved by the stockholders of CBI and FNC at their respective
special meetings held on September 8, 1994. Stockholders of FNC were entitled to
exercise dissenters' rights, but none did so. Each share of FNC common stock
was converted into 5.6 shares of Hudson Chartered common stock. Approximately
1,825,000 common shares were issued for the outstanding common stock of FNC. In
connection with the merger, the Company's authorized shares were increased to
5,000,000 for preferred stock and 20,000,000 shares for common stock.
At the same time, First National Bank of Rhinebeck ("Rhinebeck Bank"), a
subsidiary of CBI, was merged with and into The Fishkill National Bank & Trust
Company ("Fishkill Bank"), a subsidiary of FNC, and the name of Fishkill Bank
was changed to First National Bank of the Hudson Valley.
46
<PAGE>
The transaction was accounted for using the pooling-of-interests method and,
accordingly, all historical financial data has been restated to include both
entities for all periods presented. Direct costs of mergers accounted for by
the pooling-of-interests method are expensed as incurred. Such merger related
costs aggregated $250 ($150 net of tax) and $2,960 ($2,038 net of tax)in 1995
and 1994, respectively. The following table presents summary results of
operations information for the companies for the year prior to the merger:
<TABLE>
<CAPTION>
Year Ended December 31, 1993
----------------------------
Net
Interest Net
Income Income
-------------- ----------
<S> <C> <C>
FNC $13,386 $2,386
------- ------
CBI 13,421 2,600
------- ------
Consolidated $26,807 $4,986
======= ======
</TABLE>
ACQUISITIONS
- ------------
In April 1994, the Bank acquired the banking assets and assumed the deposit
liabilities of the First National Bank of Amenia. Such acquisition increased
loans by $3,700 and deposits by $14,356. In December 1994, the Bank acquired
certain banking assets and assumed the deposit liabilities of the Millerton
branch of the Wilber National Bank. Such acquisition increased loans by
$1,714 and deposits by $11,043. These acquisitions were accounted for by the
purchase method of accounting. The premiums for these transactions were not
material.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience and current trends, domestic economic
conditions, the volume, growth and composition of the loan portfolio, and
other relevant factors. The allowance is increased by provisions for loan
losses charged against income.
While management uses available information to determine possible loan losses,
future additions to the allowance may be necessary based on changes in
economic conditions, particularly in the Bank's primary market area, Dutchess,
Orange, Ulster and northern Putnam counties, New York. In addition,
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 of information available to them at the time of their examination.
Regulatory examinations of the Bank and the Company were conducted in 1995 and
the allowance was not required to be increased as a result of these
examinations.
IMPAIRED LOANS
- --------------
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by
SFAS No. 118, "Accounting for Impairment of a Loan - Income Recognition and
Disclosures", was adopted by the Company as of January 1, 1995. Adoption of
SFAS No. 114 did not result in any adjustment to the allowance for loan losses
as of January 1, 1995.
A loan is recognized as impaired when it is probable that principal and/or
interest are not collectible in accordance with the contractual terms of the
loan. When a loan is considered impaired, it is placed on nonaccrual status.
Income is recorded using the income recognition principles outlined below.
Measurement of impairment is based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or, at the loan's
observable market price or the fair value of the collateral, if the loan is
collateral dependent. Small homogenous loans such as consumer loans and credit
cards are not separately reviewed for impaired status. These loans typically
are for maturities less than five years and require monthly payments.
Separate allocations to the allowance for loan losses are made based upon trends
and prior loss experience and composition of credit risk in these types of
loans. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
47
<PAGE>
If the fair value of the impaired loan is less than the related recorded amount,
a specific valuation allowance is established or if the impairment is considered
to be permanent, the write down is charged against the allowance for loan
losses.
INCOME RECOGNITION
- ------------------
Interest on loans is determined using the level yield method. Under this
method, discount accretion and premium amortization on loans are included in
interest income.
The accrual of interest income generally is discontinued when its receipt is in
doubt but no later than when a loan becomes 90 days past due as to principal
or interest. When interest accruals are discontinued, any interest credited to
income in the current year which has not been collected is reversed, and any
interest accrued in the prior year is charged to the allowance for loan
losses. If payments on nonaccrual loans are made, income is recorded when
received unless management has reason to doubt the ultimate collectibility of
the principal remaining on the loan. Management may elect to continue the
accrual of interest when a loan is in the process of collection and the
estimated fair value of collateral is sufficient to cover the principal
balance and accrued interest. Loans are returned to accrual status once the
doubt concerning collectibility has been removed and the borrower has
demonstrated performance in accordance with the loan terms and conditions.
OTHER REAL ESTATE OWNED (OREO)
- ------------------------------
OREO includes properties for which the Bank has obtained title through
foreclosure. These properties are recorded at the lower of cost or estimated
fair value (net of estimated disposal costs). If a valuation loss exists when
properties are acquired, the loss is recorded as a charge to the allowance for
loan losses. Management periodically monitors the value of such OREO
properties. If, due to further reductions in estimated fair value, further
losses are anticipated, such losses are recorded as OREO expense. Any gains
on disposition of such properties reduce OREO expense.
A loan is classified as in substance foreclosed when it is clear that the
Company will have to take possession of the collateral regardless of whether
formal foreclosure procedures have been completed. In accordance with SFAS No.
114, loans previously classified as in substance foreclosed (and reported with
real estate owned) in prior years have been reclassified to loans. This
reclassification did not impact the Company's financial condition or results of
operations.
LOAN ORIGINATION FEES
- ---------------------
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount is amortized or accreted as an adjustment of
interest income using the level yield method. These deferrals are amortized
over expected lives of the respective loan categories, which generally vary
from one to twelve years.
SECURITIES
- ----------
Securities include U.S. Government, Agency, municipal and corporate bonds.
Those securities which management has the positive intent and ability to hold
until maturity are classified as held to maturity and are carried at amortized
cost (specific identification) with amortization of premiums and accretion of
discounts determined using the level yield method to the earlier of the call
or maturity date. Held to maturity securities primarily include local municipal
bonds purchased from municipalities in the Company's market area and certain
other securities with yield and/or maturity characteristics such that
management intends to retain until maturity. Although unlikely, if a security
classified as held to maturity is sold before maturity, the specific cost of
the security is used to compute gain or loss on sale.
Securities which have been identified as assets for which there is not a
positive intent to hold to maturity are classified as available for sale.
Dispositions of such securities may be appropriate for either liquidity or
interest rate risk management. SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", requires that available for sale
securities be reported at fair value with unrealized gains and losses (net of
tax) excluded from operations and reported as a separate component of
stockholders' equity. The Company elected early adoption of SFAS No. 115
effective December 31, 1993. Accordingly, there was a $1,382 increase in
equity related to the net unrealized gain on available for sale securities as
of December 31, 1993. At December 31, 1994, the net unrealized loss, after tax,
on available for sale securities was $1,144, and at December 31, 1995, the net
unrealized gain, after tax, on available for sale securities was $586. In
November 1995, the Company transferred securities having a fair market value of
48
<PAGE>
$63,192 from held to maturity to available for sale in accordance with a
recent issuance by the FASB. See Note B "Securities" for a further description
of the transaction. Prior to adoption of SFAS No. 115, the Company accounted
for securities in accordance with SFAS No. 12, " Accounting for Certain
Marketable Securities" and prevalent industry practices. The Company does not
acquire securities for purposes of, or engage in, securities trading
activities.
RELATED PARTY TRANSACTIONS
- --------------------------
It is the policy of the Company that loans and other business transactions with
directors, officers and other related parties be made on terms and conditions
no less favorable than those with unrelated parties.
LOANS HELD FOR SALE
- -------------------
Loans held for sale are carried at the lower of cost or market value as
determined on an aggregate basis.
PREMISES AND EQUIPMENT
- ----------------------
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method based on estimated useful lives of 3 to 40 years. Leasehold improvements
are amortized over the shorter of the terms of the respective leases or the
estimated useful lives of the assets.
INCOME TAXES
- ------------
The provision for income taxes is based on income as reported in the financial
statements. Deferred taxes are provided when income or expense is recognized
in different periods for tax purposes than for financial reporting purposes
using an asset- liability approach for recognizing the tax effects of temporary
differences between tax and financial reporting. 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 the income statement in the period the
change is enacted.
EARNINGS PER COMMON SHARE
- -------------------------
Primary earnings per common share is computed by dividing net income, adjusted
for preferred stock dividends, by the weighted average number of common shares
outstanding and the additional dilutive effect of stock options outstanding
during the respective period. The dilutive effect of stock options is
computed using the average market price of the Company's common stock for the
period. Fully diluted earnings per common share includes the additional
dilutive effect of stock options using the greater of the closing market price
or the average market price of the Company's common stock for the period.
Fully diluted earnings per common share also includes the dilution which would
result if the Preferred Stock, Series B, outstanding during the period had
been converted at the beginning of the period.
In December 1995, the Board of Directors declared a 10% stock dividend, payable
in January 1996. Weighted average shares outstanding, used to calculate
earnings per share, have been retroactively adjusted to give effect to the stock
dividend.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
- ------------------------------------------
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requires the recognition of the cost of these benefits over an
employee's working career on an accrual basis. The Company adopted SFAS No. 106
in 1993, which had no effect on the Company's financial position or results of
operations.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits", establishes
standards for accounting and reporting the cost of benefits provided by an
employer to its former or inactive employees after employment but before
retirement. SFAS No. 112 requires an employer to recognize an obligation for
such benefits if certain conditions are met. The Company adopted SFAS No. 112
in 1994 which did not have a material effect on the Company's financial position
or results of operations.
49
<PAGE>
FINANCIAL INSTRUMENTS
- ---------------------
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments" became effective in 1994 and requires disclosures
about derivative financial instruments, which are defined as futures, forward,
swap and option contracts and other financial instruments with similar
characteristics. On balance sheet receivables and payables are excluded from
this definition. The Company did not hold derivative financial instruments as
defined by SFAS No. 119 at December 31, 1995 or December 31, 1994.
MORTGAGE SERVICING RIGHTS
- -------------------------
In May 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 122 "Accounting for Mortgage Servicing Rights" (SFAS 122). Such statement
allows banks to report purchased and originated mortgage servicing rights as
assets on the balance sheet. Such asset would be reported as the present value
of estimated future net cash flows related to servicing mortgages for secondary
market investors.
SFAS No. 122 must be implemented by January 1, 1996 and can only be applied on a
prospective basis. The Company has not elected early adoption of SFAS No. 122
and, accordingly, has not recorded an asset related to originated mortgage
serving rights. The Company sold $31.3 million in loans in 1995 into the
secondary market and retained servicing income rights related to such loans at
approximately .25% per annum. The servicing income related to such loans sold
will be recorded in the statement of income and expense as earned. Had the
Company recorded the value of these servicing rights as an asset,"other income"
would have increased in 1995 for the value of such rights. However, future
income related to the amounts recorded would be correspondingly reduced. The
value of servicing rights, when recorded, must be re-evaluated for impairment on
a quarterly basis and a valuation allowance must be established if their fair
value is lower than the recorded amounts.
Further, the Company's mortgage servicing portfolio totaled $101,127, $77,470
and $76,985 for the benefit of third party investors (primarily Federal Home
Loan Mortgage Corporation and Federal National Mortgage Association) at December
31, 1995, 1994 and 1993, respectively, and it recorded servicing fee income of
$303, $305 and $167 for each of the years ended December 31, 1995, 1994 and
1993, respectively. The Company records the sale of loans in which servicing is
retained on the basis of the proceeds received with normal servicing rights. If
the Company retains "excess" servicing rights, a receivable is recorded
representing the net present value of the excess servicing right in a manner
similar to that required under SFAS No. 122 for normal servicing.
STOCK BASED COMPENSATION
- ------------------------
SFAS No. 123 "Accounting for Stock Based Compensation" requires expanded
disclosures of stock based compensation arrangements and encourages, but does
not require, employers to adopt a fair value method of accounting for employee
stock based compensation. While the statement became effective January 1,
1996, the Company has not yet determined if it will adopt the fair value or
intrinsic method of accounting for stock options. Regardless of the method
adopted, Management does not believe it will have a significant impact on the
Company's financial position or results of operations.
CASH FLOW INFORMATION
- ---------------------
Cash and cash equivalents include federal funds sold which generally are
available to the bank on one day's notice.
RECLASSIFICATION
- ----------------
Certain reclassifications have been made to prior years' financial statements to
conform to the presentation of 1995 financial information.
50
<PAGE>
NOTE B - SECURITIES
SECURITIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------------------------------
CARRYING AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
-------- --------- ---------------- ---------------- --------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES
AVAILABLE FOR SALE $ 76,984 $ 76,504 $ 482 $ 2 $ 76,984
U.S. GOVERNMENT AGENCIES:
AVAILABLE FOR SALE 36,555 36,247 335 27 36,555
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS
AVAILABLE FOR SALE 33,244 32,958 355 69 33,244
HELD TO MATURITY 14,440 14,440 478 21 14,897
OTHER SECURITIES
AVAILABLE FOR SALE 20,551 20,636 24 109 20,551
HELD TO MATURITY 25 25 25
REGULATORY SECURITIES 2,107 2,107 2,107
-------- -------- ------ ------ --------
TOTAL SECURITIES $183,906 $182,917 $1,674 $ 228 $184,363
======== ======== ====== ====== ========
TOTAL AVAILABLE FOR SALE $167,334 $166,345 $1,196 $ 207 $167,334
TOTAL HELD TO MATURITY 14,465 14,465 478 21 14,922
REGULATORY SECURITIES 2,107 2,107 2,107
-------- -------- ------ ------ --------
TOTAL SECURITIES $183,906 $182,917 $1,674 $ 228 $184,363
======== ======== ====== ====== ========
<CAPTION>
AT DECEMBER 31, 1994
---------------------------------------------------------------------
CARRYING AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
AMOUNT COST GAINS GAINS VALUE
-------- --------- ---------------- ---------------- --------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES
AVAILABLE FOR SALE $ 15,079 $ 15,187 $ 108 $ 15,079
HELD TO MATURITY 13,751 13,826 468 13,358
U.S. GOVERNMENT AGENCIES:
AVAILABLE FOR SALE 27,716 27,942 2 228 27,716
HELD TO MATURITY 33,391 34,616 2,148 32,468
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS
AVAILABLE FOR SALE 1,412 1,470 58 1,412
HELD TO MATURITY 45,807 46,005 26 1,090 44,941
OTHER SECURITIES
AVAILABLE FOR SALE 9,630 9,707 13 90 9,630
HELD TO MATURITY 25 25 25
REGULATORY SECURITIES 914 914 914
-------- -------- ------ ------ --------
TOTAL SECURITIES $147,725 $149,692 $ 41 $4,190 $145,543
======== ======== ====== ====== ========
TOTAL AVAILABLE FOR SALE $ 53,837 $ 54,306 $ 15 $ 484 $ 53,837
TOTAL HELD TO MATURITY 92,974 94,472 26 3,706 90,792
REGULATORY SECURITIES 914 914 914
-------- -------- ------ ------ --------
TOTAL SECURITIES $147,725 $149,692 $ 41 $4,190 $145,543
======== ======== ====== ====== ========
</TABLE>
51
<PAGE>
At December 31, 1995, the net unrealized gain on securities "available for sale"
(net of tax effect at a tax rate of 41% of $404) that was included as a separate
component of stockholders' equity was $586.
As a result of the merger in 1994, certain securities classified as available
for sale when acquired were transferred to the held to maturity portfolio.
The securities were transferred at their estimated fair value of $71,468 on the
date transferred. The difference between amortized cost and fair value on the
transfer date aggregated ($1,637) or ($953) after tax. This difference was to
be amortized over the remaining term of the securities. The unamortized balance
at December 31, 1994 (net of tax effect of $627) which was included as a
component of stockholders' equity was $871.
In late November 1995, the Company transferred, at fair value, securities having
a fair value of $63,192 (carrying value of $61,465) from its "held to
maturity" portfolio to its portfolio of "available for sale" securities. This
was done to enhance the Company's ability to flexibly respond to changes in
the interest rate environment.
The securities transferred represent almost all of the readily marketable
securities that were previously classified as "held to maturity". This
transfer was made in accordance with FASB's "A Guide to Implementation of
Statement 115 on Accounting for Certain Investment in Debt and Equity
Securities" issued in November 1995. Concurrent with the adoption of this
guidance, corporations were permitted through December 31, 1995, to reclassify
their "available for sale" and "held to maturity" securities without calling
into question the past intent of an entity to hold securities to maturity.
The effect of this transfer, after tax, was a $1,017 increase in shareholders'
equity. Future changes in unrealized gains or losses on these transferred
securities also will be reflected in a special component of the Company's equity
accounts, on an after-tax basis. If any of the transferred securities are
sold, the realized gains or losses would be reflected in the Company's results
of operations. Securities remaining in the Company's "held to maturity"
portfolio consist principally of holdings of local, unrated municipal issues
($14,190) and several other holdings ($275).
The Company has no plans to establish a trading account.
The contractual maturities at December 31, 1995 of the Company's available for
sale and held to maturity debt securities are summarized in the following table.
Actual maturities may differ from contractual maturities because certain issuers
have the right to call or prepay obligations with or without call premiums.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------- ---------------------
AMORTIZED FAIR CARRYING FAIR
MATURITY PERIOD COST VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 1 year $ 40,293 $ 40,372 $ 3,843 $ 3,840
1-5 years 95,853 96,502 2,675 2,750
5-10 years 11,330 11,364 4,502 4,713
Over 10 years 250 280 3,445 3,619
Mortgage-backed and SBA securities of U.S.
Government Agencies not allocated by maturity date 18,619 18,816
-------- --------
TOTAL DEBT SECURITIES $166,345 $167,334 $14,465 $14,922
======== ======== ======= =======
</TABLE>
Gross realized gains from sales of securities were $238, $220 and $659 in 1995,
1994 and 1993, respectively, and gross realized losses were $100, $2,100 and
$21.
52
<PAGE>
At December 31, 1995, securities with a carrying amount of $65,579 were pledged
as available collateral for municipal deposits and other purposes. Municipal
deposits so secured totaled $43,568 at the same date.
NOTE C - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company utilizes financial instruments with off-balance-sheet risk to
accommodate the financing needs of its customers and reduce its own exposure to
fluctuations in interest rates. These instruments involve varying degrees of
credit or interest-rate risk which are not recognized on the balance sheet.
Credit risk is defined as the possibility of sustaining a loss because the other
parties to a financial instrument fail to perform in accordance with the terms
of the contract, whereas interest-rate risk arises from changes in the market
value of positions stemming from movements in interest rates. In order to
minimize credit risk, the Company subjects such commitments to its lending
policy which includes a formal credit approval and monitoring process. This
lending policy requires collateral where customer credit evaluation determines
that the inherent risk in the transaction warrants such collateral. In order to
minimize interest-rate risk, the Company has established an asset/liability
management policy, adherence to which is monitored by the Bank's Investment
Committee of the Board. The contract amounts of the instruments referred to in
the chart below reflect the extent of involvement in particular classes of
financial instruments.
UNUSED COMMITMENTS AND STANDBY LETTERS OF CREDIT
- ------------------------------------------------
Unused commitments include loan origination commitments, which are legally
binding agreements to lend with a specified interest rate and purpose, usually
containing an expiration date, and lines of credit, which represent loan
agreements under which the lender has an obligation, subject to certain
conditions, to lend funds up to a particular amount, whereby the borrower may
repay and re-borrow at any time within the contractual period. Standby letters
of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party.
The Company's maximum exposure to accounting loss related to the contract
amounts of these financial instruments at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Loan Origination Unused Lines of Standby Letters
Commitments Credit of Credit Total
---------------- --------------- --------------- --------
<S> <C> <C> <C> <C>
Real Estate - Construction $ 2,036 $ 2,036
Real Estate - Mortgage $11,901 11,901
Home Equity Loans 12,297 12,297
Other Consumer Loans 3,255 3,255
Commercial Loans 39,780 $3,731 43,511
------- ------ -------
TOTAL $11,901 $57,368 $3,731 $73,000
======= ======= ====== =======
December 31, 1994 $ 5,305 $62,665 $3,145 $71,115
======= ======= ====== =======
</TABLE>
The Company lends primarily in the Dutchess, Ulster, northern Putnam and eastern
Orange counties of New York State and, therefore, the quality of its loan
portfolio is dependent in large part on the performance of its local economy.
This has been seriously weakened in recent years by large employment cutbacks by
both IBM and certain State institutions. As their future employment plans remain
uncertain, the full impact of these cutbacks remains to be ascertained.
53
<PAGE>
Approximately 67% of the Company's loans (commercial, residential and personal)
are collateralized by real estate. In addition to such loans outstanding, as
shown on the balance sheet, the Company has standby letters of credit and other
off-balance sheet credit risk exposure related to real estate loans. The Company
generally requires collateral on all real estate related facilities and loan to
value ratios not exceeding 75% to 80%. Within this real estate credit risk
concentration, a number of the Company's loan customers are principally engaged
in the real estate development and construction industry (i.e. developers,
builders and contractors). Each of such loans and commitments is reviewed at
least annually as part of the Bank's regular credit process and quarterly in
summary form by the Board of Directors.
NOTE D - NON-PERFORMING ASSETS, PAST DUE LOANS AND IMPAIRED LOANS
The following table represents the balance of non-performing assets
outstanding at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Non performing loans, including in-substance
foreclosures of $1,001, $1,381 and $2,141 $4,929 $5,000 $5,467
Restructured troubled debt 349 119 457
Other real estate owned, net
(included in other assets) 1,196 1,150 1,064
Other 8
------ ------ ------
Total nonperforming assets $6,474 $6,269 $6,996
====== ====== ======
</TABLE>
Information concerning interest income on non-performing loans and restructured
troubled debt is summarized below:
<TABLE>
<CAPTION>
1995 1994 1993
----- ------ ------
<S> <C> <C> <C>
Interest income which would have been recorded
under original terms $ 665 $ 426 $ 456
Interest income recorded $ 265 $ 198 $ 206
</TABLE>
At December 31, there were no commitments to lend additional funds to the
borrowers associated with the non-performing assets noted above.
Loans past due 30-89 days were as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Amount past due $4,650 $4,220
------ ------
Percent of total loans 0.011 0.01
====== ======
</TABLE>
54
<PAGE>
As described in Note A, effective January 1, 1995, the Company adopted a new
accounting standard which defines when certain loans are considered to be
impaired and requires such loans to be measured at the present value of expected
future cash flows, the loan's observable market price or fair value of the
collateral, if the loan is collateral dependent. The recorded investment in
impaired loans at December 31, 1995 consists of the following:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Impaired loans for which an allowance of $1,239 has been established $3,450
Impaired loans for which an impairment write down of $740 has been taken 1,071
------
Total impaired loans $4,521
======
</TABLE>
Generally, the fair value of the above loans was determined using the fair value
of the underlying collateral of the loan.
Additional information regarding impaired loans is as follows:
<TABLE>
<S> <C>
Income recorded on impaired loans in 1995 during the
portion of the year that they were impaired $ 265
Average investment in impaired loans during 1995 $4,287
</TABLE>
All of the income recorded on "impaired" loans was recognized on a cash basis.
Loans which were restructured prior to adoption of SFAS 114 and non-accrual
loans at December 31, 1995, 1994 and 1993 and related income data are summarized
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------- -------------------------- --------------------------
NON-ACCRUAL RESTRUCTURED NON-ACCRUAL RESTRUCTURED NON-ACCRUAL RESTRUCTURED
LOANS LOANS LOANS LOANS LOANS LOANS
----------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT $4,407 $349 $4,105 $ 119 $5,146 $457
INTEREST INCOME RECORDED 244 21 197 1 206
INTEREST INCOME THAT WOULD
HAVE BEEN RECORDED UNDER
THE ORIGINAL CONTRACT TERMS 632 33 420 6 417 39
</TABLE>
NON-ACCRUAL AND RESTRUCTURED LOANS AT DECEMBER 31, 1995 INCLUDE $4,521 OF LOANS
CONSIDERED TO BE IMPAIRED UNDER SFAS 114.
55
<PAGE>
NOTE E - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table outlines the balances for loan categories for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Commercial & Industrial $ 69,889 $ 95,412
Consumer & Installment 63,554 50,135
Real Estate - Construction 13,347 6,417
Real Estate - Mortgage 271,068 277,593
Other Loans 4,225 2,505
-------- --------
TOTAL $422,083 $432,062
======== ========
</TABLE>
In September 1995, the Company conformed the presentations of the separate loan
portfolios of the predecessors to the Bank. As a result, $20.7 million of loans
previously classified as "commercial and industrial" were reclassified as "real
estate-mortgage" and $1.6 million of loans were similarly reclassified as "real
estate-construction". In addition, the Company sold $25 million of previously
originated long-term fixed rate residential mortgages.
Changes in the allowance for loan losses for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 8,326 $ 7,322 $ 5,794
Charge-offs (2,168) (1,701) (1,987)
Recoveries 312 236 249
Net charge-offs (1,856) (1,465) (1,738)
Provision for loan losses 2,300 2,400 3,266
Transfers, other 69
------- -------- --------
Balance, end of year $ 8,770 $ 8,326 $ 7,322
======= ======== ========
</TABLE>
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment is comprised of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Land $ 2,120 $ 2,118
Banking houses and improvements 15,566 15,278
Furniture and equipment 13,007 12,007
-------- --------
30,693 29,403
Accumulated depreciation (13,631) (11,716)
-------- --------
TOTAL $ 17,062 $ 17,687
======== ========
</TABLE>
56
<PAGE>
NOTE G - DEPOSITS
The following table outlines balances at December 31 for interest bearing
accounts:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Money Market $ 66,526 $ 85,989
NOW 50,106 55,698
Savings 204,693 175,153
Time 171,079 128,049
-------- --------
TOTAL $492,404 $444,889
======== ========
</TABLE>
At December 31, 1995 and 1994, certificates of deposit of $100 or more included
in time deposits totaled $38,184 and $20,840, respectively. Interest expense on
deposits was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Savings accounts $ 8,427 $ 5,237 $ 4,377
Certificates of deposit ($100 or more) 1,423 974 1,126
Other time deposits 7,808 4,386 4,133
NOW Accounts 915 1,046 1,001
Money market accounts 2,556 2,709 2,716
------- -------- --------
TOTAL $21,129 $ 14,352 $ 13,353
======= ======== ========
</TABLE>
NOTE H - EMPLOYEE BENEFIT PLANS
THRIFT PLANS
- ------------
The Hudson Chartered Bancorp, Inc. Retirement and Thrift Plan is a qualified
401(k) defined contribution plan covering substantially all of its full-time
employees who have attained age 21 and have one year of service. Plan
contributions vest as follows: 30% after 3 years, 40% after 4 years, 60% after
5 years, 80% after 6 years and 100% after 7 years of service. The Company
determines an annual amount of profit sharing to be funded. The plan also calls
for the Company to match employee contributions under deferred salary
reduction agreements up to 4% of eligible compensation. Employees can
contribute up to 10% (up to 8% for highly compensated employees) by way of such
salary reduction agreements and, in addition, can voluntarily contribute up to
an additional 10% of their eligible compensation. Prior to 1995, CBI maintained
CBI Profit Sharing and Thrift Plan, a qualified 401(k) plan, and, based upon the
earnings of the Company made matching contributions on a portion of each
employee's voluntary salary reduction contribution. Employees could contribute
up to 10% of base compensation with up to 6% being eligible for matching
contributions. Employees were fully vested after five years of service.
Expense for these plans was $588, $275 and $269 for 1995, 1994 and 1993,
respectively. Employees are always 100% vested in their own contributions.
OTHER RETIREMENT PLANS
- ----------------------
The Company has certain employment agreements which include supplemental
retirement benefits for certain key executives. These arrangements are
unfunded and are a general liability of the Company. The unfunded liability at
December 31, 1995 and 1994 was not material.
57
<PAGE>
The Executive Supplemental Income Plan, a nonqualified plan, provides certain
former CBI executives with supplemental retirement benefits. The plan utilizes
life insurance contracts for indirect funding of preretirement benefits. Related
expense was $91, ($105) and $111 in 1995, 1994 and 1993, respectively. These
plans also provide that in the event of a "change of control", employees who
have attained age 55 may retire and are immediately eligible to receive benefits
without prior board approval and without satisfying any minimum years of service
requirement. Other covered employees who are terminated, without just cause, or
who voluntarily terminate employment, after a change in control, are entitled to
receive their retirement benefits upon reaching their normal retirement age.
The Company terminated the following plan effective January 1, 1995 and the
former CBI employees joined the Hudson Chartered Bancorp Inc. Retirement and
Thrift Plan on that date. The final termination liability was calculated and the
Company recorded an additional expenses of $59 and $175 in 1995 and 1994,
respectively. The following describes the plan prior to termination.
A non-contributory defined benefit pension plan covered substantially all former
CBI employees. Benefits were based on years of service and average compensation.
The funding policy was to contribute annually the maximum amount that could be
deducted for federal income tax purposes. Contributions were intended to provide
for benefits attributed to present service and also for those expected to be
earned in the future. Employees were fully vested after five years of service.
The pension plan's funded status is as follows:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Accumulated benefit obligation, inlcuding vested benefits of $554 in 1994 $ 907
Effect of estimated future compensation increases 0
Projected benefit obligation 907
Plan assets at fair value 758
Projected benefit obligation in excess of plan assets (149)
Unrecognized net loss (58)
Unrecognized net asset 0
----- -----
Pension liability carried in " other liabilities" $ 0 $(207)
===== =====
</TABLE>
Net periodic pension expense included the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Service Cost N/A $ 183 $ 163
Interest Cost N/A 66 59
Return (loss) on plan assets N/A 39 (43)
Amortization and deferral N/A (99) (7)
---- ----- -----
Pension expense N/A $ 189 $ 172
==== ===== =====
</TABLE>
58
<PAGE>
Assumptions used in accounting for the pension plan were as follows:
<TABLE>
<CAPTION>
1994 1993
------- -----
<S> <C> <C>
Weighted average discount rate 8% 8%
Rates of increase in compensation level 6% 6%
Expected long-term rate of return on assets 8% 8%
</TABLE>
Plan assets are invested primarily in group annuity contracts from a life
insurance company.
EMPLOYMENT AGREEMENTS
- ---------------------
The Company has entered into employment agreements with certain of its key
executives. The agreements range in period from two to three years,
expiring in 1997 and 1998, and contain specified conditions for extension,
either annually or prior to expiration. In certain cases, conditions exist which
allow for lump sum payments in connection with defined changes in control or
termination without cause. The maximum liability, if such payments were required
for all executives, would be $1,633 at December 31, 1995. In 1994, the Company
recorded a payment of $292 to a key executive, who terminated employment under
the change in control provision of his agreement.
NOTE I - LEASES
Total rental expense for operating leases for 1995, 1994 and 1993 was $293, $438
and $332, respectively. Future minimum payments, by year-end and in the
aggregate, under non-cancelable operating leases with initial or remaining terms
of one year or more consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996 $ 288
1997 230
1998 216
1999 216
2000 188
Thereafter 804
------
TOTAL $1,942
======
</TABLE>
The Company purchased a building in 1994. Approximately 65% of the building is
leased to tenants for various terms with varying renewal periods. The initial
leases expire between 1995 and 1997 and the option periods expire between 2000
and 2002. The Company intends to occupy the tenanted spaces as the leases
expire. Rental income received was $270 and $62 in 1995 and 1994, respectively.
59
<PAGE>
NOTE J - INCOME TAXES
The following is a reconciliation between the effective income tax rate and the
amount computed by using the statutory federal income tax rates:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Income tax based on pretax income at the statutory rate 34.0% 34.0% 34.0%
Charges (credits) resulting from:
State taxes, net of federal tax benefit 6.5% 7.4% 8.0%
Income from tax-exempt securities (5.9%) (12.5%) (8.2%)
Non-deductible merger related expenses 5.1%
Other (1.1%) 3.2% 0.5%
---- ----- ----
Effective income tax rate 33.5% 37.2% 34.3%
==== ===== ====
</TABLE>
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current: Federal $2,642 $1,470 $2,475
State 993 584 941
------ ------ ------
3,635 2,054 3,416
Deferred (121) (118) (816)
------ ------ ------
$3,514 $1,936 $2,600
====== ====== ======
</TABLE>
Temporary differences arising from the recognition of income and expense in
different periods for tax and financial reporting purposes resulted in deferred
income tax benefits as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Provision for loan losses $ (306) $ (132) $ (840)
Accelerated depreciation 125 (59) 102
Deferred fee income 209 85 (16)
Compensation (107) (60) (66)
Other (42) 48 4
------ ------ ------
$ (121) $ (118) $ (816)
====== ====== ======
</TABLE>
60
<PAGE>
The tax effects of temporary differences that give rise to portions of deferred
tax assets and deferred tax liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses and OREO $ 3,266 $2,960
Compensation 440 333
Unrealized holding losses 823
Other 133 70
------- ------
Gross deferred tax assets 3,839 4,186
DEFERRED TAX LIABILITIES:
Depreciation expense (591) (468)
Unrealized holding gains (404)
Pension (21)
Deferred fee income (205)
Excess servicing (17) (18)
Accretion on securities (101) (10)
------- ------
Gross deferred tax liabilities (1,318) (517)
------- ------
Net deferred tax asset before valuation allowance 2,521 3,669
Valuation allowance (200) (242)
------- ------
Net deferred tax asset $ 2,321 $3,427
======= ======
</TABLE>
NOTE K - OTHER COMMITMENTS AND CONTINGENCIES
The financial statements do not reflect various commitments, contingent
liabilities and fiduciary liability for assets held in trust, which arise in
the normal course of business. Management does not anticipate any losses
arising from these transactions. Trust Department assets under administration
total approximately $182,000 at December 31, 1995.
The Bank regularly sells certain types of long-term fixed rate mortgages to a
United States agency which are under recourse arrangements for four months.
As of December 31, 1995, $3,355 of these sales are subject to such recourse.
The Bank is required to maintain a deposit balance with the Federal Reserve
Bank, which averaged approximately $5,628 during 1995.
The Bank is a party to various legal proceedings in the normal course of
business, the ultimate outcome of which, in management's opinion, will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
61
<PAGE>
NOTE L - RELATED PARTY TRANSACTIONS
The Bank has granted loans to the officers and directors of the Company and to
their associates. The following table summarizes activity associated with these
loans.
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Balance, beginning of year $20,743 $18,204
New loans 8,691 6,654
Repayments (7,846) (4,115)
------- -------
Balance, end of year $21,588 $20,743
======= =======
</TABLE>
The Bank renewed a lease for premises with an affiliate of a director which will
now expire in December 1999. Payments made to such affiliate in 1995, 1994 and
1993 were $103, $103 and $126, respectively. Entities in which directors have
interests provide insurance and legal services to the Company. The cost of such
services aggregated $523, $1,022 and $558 in 1995, 1994 and 1993, respectively.
NOTE M - OTHER INTEREST BEARING LIABILITIES
Interest bearing liabilities are summarized as follows, at December 31,:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
ESOP Loan Payable $ 171 $ 214
Federal Home Loan Bank 1,725 1,725
------- -------
$ 1,896 $ 1,939
======= =======
</TABLE>
The ESOP note is payable in quarterly principal installments of $11 plus
interest at the prime rate plus 1-1/2% (10.0% at December 31, 1995), with the
balance due in December 1999. The loan is collateralized by approximately
15,000 shares of the Company's common stock owned by the ESOP.
The Company pays monthly interest installments on the Federal Home Loan Bank
advance at a rate of 5.49%. The principal balance outstanding at December 31,
1995 is payable in 1999.
Maturities on non-deposit interest bearing liabilities outstanding as of
December 31, 1995 are summarized as follows:
<TABLE>
<S> <C>
1996 $ 43
1997 43
1998 43
1999 1,767
------
$1,896
======
</TABLE>
In addition to these interest bearing liabilities, the Company also had a short
term security repurchase agreement outstanding in the amount of $6,106 at
December 31, 1994. The principal plus interest at a rate of 5.75% was re-paid
on January 6, 1995.
62
<PAGE>
NOTE N - RESTRICTION ON SUBSIDIARY DIVIDENDS AND LOANS TO AFFILIATES
Dividends are paid by the Company from its liquid assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Company in the form
of cash dividends, loans or advances. The approval of the Office of the
Comptroller of the Currency is required to pay dividends in excess of earnings
retained in the current year plus retained net earnings for the preceding two
years. After December 31, 1995, $5,932 is available for distribution to the
Company as dividends without prior regulatory approval (in addition to the 1996
results of operations of the Bank).
Under Federal Reserve regulations, the Bank also is limited as to the amount it
may loan to its affiliates, including the Company, unless such loans are
collateralized by specific obligations. At December 31, 1995, the maximum amount
available for lending by the Bank to the Company or its affiliates in the form
of loans approximated 20% of consolidated net assets with a maximum per
affiliate of 10%. The Company has a mortgage loan from the Bank at December 31,
1995 of $1,158. Interest is payable at the prime rate plus one percent. Such
amounts eliminate in consolidation.
NOTE O - STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1995, the Board of Directors approved a 10% stock dividend, payable
in January 1996. All shares have been retroactively adjusted to reflect the
issuance of the stock dividend. The 1995 financial statements reflect the
capitalization of $6,300 of retained earnings reflecting a market value of $18
per share on the date of declaration.
Common stock is stated at par of $0.80 per share. The following table summarizes
the number of shares at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Issued and Outstanding 3,752,062 3,654,130
Issued and held by ESOP 97,746 98,992
---------- ----------
Total issued shares 3,849,808 3,753,122
Reserved shares:
Dividend reinvestment and stock purchase plan 374,978 416,624
Option Plan I 71,579 94,138
Option Plan II 61,419 192,581
Non-qualified stock option plan 116,626 523,510
Hudson Chartered Incentive Stock Plan 494,913
Conversion of Series B Preferred Stock 441,004 441,081
Other authorized but unissued shares 14,589,672 14,578,944
---------- ----------
Total authorized 20,000,000 20,000,000
========== ==========
</TABLE>
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company's Dividend Reinvestment and Stock Purchase Plan allows common
stockholders to receive common stock dividends (at 95% of market value) in lieu
of cash dividends and gives participants the right to elect to make optional
cash payments to purchase up to $5,000 per quarter of newly-issued shares of
common stock (at market value), subject to the terms and limitations of the
plan.
63
<PAGE>
PREFERRED STOCK
- ---------------
On January 15, 1994, all the issued and outstanding shares of the Company's 10%
cumulative perpetual Preferred Stock, Series A, were redeemed at $100 per share.
This transaction reduced equity capital by $805. Of the 60,000 shares
authorized, 8,050 shares were issued and outstanding at December 31, 1993.
Dividends of $10 per share were declared on the Series A Preferred in 1993.
The cumulative convertible perpetual Preferred Stock, Series B, is convertible
at the option of the holder into shares of common stock at a conversion price of
$12.9545 per share of common stock (equivalent to approximately 0.7720 shares of
common stock for each share of Series B). The conversion price is subject to
adjustment upon the occurrence of certain events. The Series B is redeemable at
$10 per share (the original issue and liquidation price) at the Company's option
prior to January 1, 1998, if the closing bid price of the Company's common stock
has been at least 140% of the conversion price for 20 consecutive trading days
at any time during the period. On or after January 1, 1998, the Series B is
redeemable at the Company's option at prices declining annually from $10.40 per
share in 1998 to $10.00 per share after 2002. Of the 575,000 authorized shares,
571,301 and 571,401 were outstanding at December 31, 1995 and 1994,
respectively. Cumulative cash dividends are payable quarterly at the rate of
7.25% per year on the original issue price of $10 per share. Dividends of $0.725
per share were declared on Series B Preferred Stock in 1995 and 1994.
Shares of all the Company's preferred stock issuances rank prior to common stock
as to dividends and liquidation. Except for a limited right of each series of
preferred stock to elect two Directors if full cumulative dividends have not
been paid for six quarterly dividend periods, and a right to vote as a class on
amendments to the Company's Certificate of Incorporation which could adversely
affect the rights of the preferred shareholders, the preferred shareholders are
not entitled to vote.
The Company has authorized a total of 5,000,000 shares of preferred stock, $.01
par value, which the Board of Directors has the authority to divide into series
and to fix the rights and preferences of any series so established. The Series A
and Series B represent 635,000 of the 5,000,000 authorized shares.
INCENTIVE STOCK OPTION PLANS
- ----------------------------
Under the FNC Plan (Option Plan I), options to purchase shares of common stock
have been granted to key personnel of the former Fishkill National Corporation
and its subsidiaries based upon their performance for terms up to 10 years at
exercise prices not less than the fair value of these shares at the date of
grant. Such options vest and are exercisable on a cumulative basis at 20% per
year with a maximum exercise period of 5 years from date of vesting. Stock
purchased under the plan is subject to certain resale restrictions and the
Company retains the right to redeem outstanding shares at book value for
employees terminating prior to retirement. The plan was not merged with the
Hudson Chartered Incentive Stock Plan (Plan IV) and no new options will be
granted under this plan.
CBI established an Incentive Stock Option Plan (Option Plan II) in 1986 which
was implemented as an employment incentive to key executives of CBI. Stock
options may be granted at an exercise price equal to fair value of the stock at
the date of the grant. Options vest immediately and expire 10 years after the
date granted, or earlier, if employment is terminated. No new options will be
granted under this plan.
64
<PAGE>
The following table summarizes the activity for the incentive stock option
plans:
<TABLE>
<CAPTION>
PLAN I PLAN II
OPTIONS OPTION PRICE OPTIONS OPTION PRICE
-------- --------------- -------- --------------
<S> <C> <C> <C> <C>
JANUARY 1, 1993 73,304 $11.36 - $12.50 75,612 $6.23 - $13.64
GRANTED 36,036 12.01 - 13.22 5,940 11.48 - 13.18
FORFEITED (4,620) 11.36 (2,983) 13.64
DECEMBER 31, 1993 104,720 11.36 - 13.22 78,569 6.23 - 13.64
EXERCISED (726) 11.36 - 12.01
FORFEITED (9,856) 11.36 - 12.01
DECEMBER 31, 1994 94,138 11.36 - 13.22 78,569 6.23 - 13.64
EXERCISED (18,220) 11.36 - 12.50 (15,422) 11.48
FORFEITED (4,338) 11.36 - 12.01 (1,728) 11.48
DECEMBER 31, 1995 71,580 $11.36 - $13.22 61,419 $6.23 - $13.64
VESTED 57,276 $11.36 - $13.22 61,419 $6.23 - $13.64
</TABLE>
NON-QUALIFIED STOCK OPTION PLAN
The Company established a non-qualified stock plan (Plan III) in 1988 to attract
and retain the services of experienced and knowledgeable persons as directors
and officers. Directors who are not employees of the Company could offset
against the exercise price an amount equal to the number of shares being
optioned to the director (1,500 maximum authorized each year) divided into
aggregate directors' fees otherwise due to each director. Stock options could be
granted along with stock appreciation rights, of which 61,030 were issued with
such rights. Options granted to officers and key employees (including directors
who are employees) shall be limited to a maximum of 10,000 shares each year.
Options may be granted at an exercise price of no less than the greater of 50%
of the fair value of the shares on the date of the grant or 100% of the par
value of the shares on such date. Options vest one year after the date they were
granted, if the director or officer remains with the Company for that time, but
expire 20 years after the date granted (or earlier if employment is terminated).
options will be granted under this plan. No grants made have been at less than
fair value.
65
<PAGE>
Outstanding options under the non-qualified stock option plan are summarized as
follows:
<TABLE>
<CAPTION>
PLAN III
--------------------------
OPTIONS OPTION PRICE
-------- ---------------
<S> <C> <C>
JANUARY 1, 1993 120,157 $ 7.85 - $19.05
GRANTED 101,061 11.36 - 13.18
EXERCISED (9,780) 11.48
FORFEITED (10,826) 11.36 - 19.05
-------
DECEMBER 31, 1993 200,612 7.85 - 19.05
EXERCISED (37,656) 11.36 - 12.27
FORFEITED (8,953) 9.52 - 16.36
-------
DECEMBER 31, 1994 154,003 7.85 - 19.05
EXERCISED (27,711) 10.11 - 11.48
FORFEITED (9,666) 7.85 - 19.05
-------
DECEMBER 31, 1995 116,626 $ 9.52 - $19.05
=======
VESTED 116,626 $ 9.52 - $19.05
=======
</TABLE>
INCENTIVE STOCK PLAN
In 1995, the Company established the Hudson Chartered Bancorp, Inc. 1995
Incentive Stock Plan (Plan IV) as the successor plan to the former CBI Incentive
and Nonqualified Stock Option Plans to assist in attracting, retaining and
providing incentives to key officers and employees. Grants under the plan may be
in the form of incentive stock options, nonqualified stock options, restricted
stock or stock appreciation rights. Stock options may be granted with the rights
or the rights may be issued separately. Options may not be granted at less than
100% of the fair market value on the date of grant. However, options on rights
may be granted at greater than the fair market value on the date of grant.
Options vest no less than six months after the date they were granted and expire
no later than 10 years from the grant date. The determination and grant of an
incentive stock option, nonqualified stock option, a stock appreciation right or
restricted stock is determined solely at the discretion of the Personnel and
Compensation Committee of the Board of Directors. The maximum number of shares
of common stock with respect to which options or rights may be outstanding to
any eligible employee under the plan (or any other plans) is 71,584 shares.
Compensation expense recorded on stock appreciation rights was $23 in 1995.
Options and rights issued under the plan are summarized as follows:
<TABLE>
<CAPTION>
PLAN IV
--------------------------
OPTIONS OPTION PRICE
------- ---------------
<S> <C> <C>
GRANTED IN 1995 54,384 $14.95 - $16.14
FORFEITED (1,188) 14.95
-------
DECEMBER 31, 1995 53,196 $14.95 - $16.14
-------
VESTED (AS OF JANUARY 19, 1996) 33,000 $ 16.14
=======
</TABLE>
66
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
- -----------------------------------
The Company has established an ESOP covering all full-time employees who meet
certain service requirements. Discretionary contributions by the Company are
determined annually by the Board of Directors, up to the maximum amount
permitted under the Internal Revenue Code. The ESOP borrowed money from an
unrelated bank to purchase shares of common stock. The Company has guaranteed
the ESOP's loan and is obligated to contribute sufficient cash to the ESOP to
repay the loans; therefore, the unpaid balance of the loan is reflected in the
accompanying balance sheet as long-term debt and the amount representing
unearned employee benefits has been recorded as a reduction of the Company's
stockholders' equity. As of December 31, 1995, all full-time employees with one
year of service were eligible for this plan.
Both the loan obligation and the unearned benefit expense are reduced by the
amount of any loan repayments made by the ESOP. As of December 31, 1995, the
ESOP owned 97,987 shares of the Company's common stock, most of which was
purchased with proceeds from borrowings. Contribution expense related to the
ESOP amounted to $43, $43 and $200 for the years ended December 31, 1995, 1994
and 1993, respectively. Interest incurred on the ESOP's loans amounted to
approximately $20, $21 and $28 for the years ended December 31, 1995, 1994 and
1993, respectively.
CAPITAL RATIOS
- --------------
The following summarizes the minimum capital requirements and capital position
at December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL POSITION MINIMUM
AT DECEMBER 31, 1995 CAPITAL REQUIREMENTS
------------------------- --------------------
BANK ONLY CONSOLIDATED
--------- ------------
<S> <C> <C> <C>
Total Capital to Risk Weighted Assets 13.55% 15.02% 8.00%
Tier 1 Capital to Risk Weighted Assets 12.29% 13.76% 4.00%
Tier 1 Capital to Average Assets (Leverage Ratio) 7.48% 8.44% 4.00% - 5.00%
</TABLE>
67
<PAGE>
NOTE P - PARENT COMPANY ONLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31,
1995 1994
------- --------
<S> <C> <C>
ASSETS
Cash (deposited in Bank) $ 1,745 $ 687
Securities available for sale 1,463 1,412
Other securities 109 109
Investment in subsidiaries:
Bank 52,964 47,107
Other 444 460
Premises 4,547 4,692
Other assets 773 342
------- -------
TOTAL ASSETS $62,045 $54,809
======= =======
LIABILITIES
Notes payable:
Bank subsidiary $ 1,158 $ 1,239
Other 171 214
Other liabilities 787 818
STOCKHOLDERS' EQUITY 59,929 52,538
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $62,045 $54,809
======= =======
STATEMENTS OF INCOME AND EXPENSE
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Dividends from Bank $ 2,917 $ 2,546 $ 3,358
Other income 474 476 499
Expenses (684) (1,635) (1,188)
------- ------- -------
Income before income taxes and equity in undistributed net income
(loss) of subsidiaries 2,707 1,387 2,669
Income tax benefit 108 175 325
------- ------- -------
Income before equity in undistributed net income (loss) of 2,815 1,562 2,994
subsidiaries
Equity in undistributed net income (loss):
Bank subidiary 4,165 1,767 1,992
Non bank subsidiary (15) (65)
------- ------- -------
NET INCOME $ 6,965 $ 3,264 $ 4,986
======= ======= =======
</TABLE>
68
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 6,965 $ 3,264 $ 4,986
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (4,150) (1,702) (1,992)
Provision for depreciation 145 145 145
Realized losses on sales of securities 50
Other (522) 931 (797)
------- ------- -------
Net cash provided by operating activities 2,438 2,688 2,342
INVESTING ACTIVITIES
Proceeds from sales of securities 1,414 3,141
Proceeds from maturities of securities 610
Purchase of securities (3,778)
Purchase of premises and equipment (5)
Investment in nonbank subsidiary (1) (500) (25)
Investment in Bank subsidiary (122)
------- ------- -------
Net cash provided (used) by investing activities 914 (179)
------- ------- -------
FINANCING ACTIVITIES
Payments on borrowings (81) (1,114) (399)
Decrease in due to or from Bank (83) 225
Proceeds from issuance of stock 1,334 848 436
Repurchase of preferred stock (1) (805)
Repurchase of common stock (116)
Cash dividends (2,516) (2,455) (2,295)
------- ------- -------
Net cash used by financing activities (1,380) (3,609) (2,033)
------- ------- -------
INCREASE (DECREASE) IN CASH 1,058 (7) 130
CASH, BEGINNING OF YEAR 687 694 564
------- ------- -------
CASH, END OF YEAR $ 1,745 $ 687 $ 694
======= ======= =======
</TABLE>
(1) In 1994, the Company invested $500 in the subsidiary, Hudson Chartered
Realty, Inc., to facilitate its ability to carry and administer "troubled"
OREO properties purchased from the Bank (properties which management
estimates will require significant holding periods to realize their fair
value). Such holdings totaled $72 at year end 1994, represented by one
property. All such holdings had been disposed prior to December 31, 1995.
69
<PAGE>
NOTE Q - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that the Company disclose estimated fair values for certain financial
instruments. Estimated fair values are as of December 31, 1995 and December 31,
1994, respectively, and have been determined using available market information
and various valuation estimation methodologies. Considerable judgment is
required to interpret the effects on fair value of such items as future expected
loss experience, current economic condition, risk characteristics of various
financial instruments and other factors. The estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. Also, the use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
values.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------------------------
(dollars in millions) Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 67.9 $ 67.9 $ 43.3 $ 43.3
Securities $183.9 $184.4 $147.7 $145.5
Loans, net $410.3 $420.4 $421.7 $415.1
LIABILITIES
Deposits without stated maturities $460.0 $460.0 $316.8 $316.8
Time deposits $171.1 $172.4 $128.0 $122.9
</TABLE>
The fair value estimates presented above are based on pertinent information
available to management as of December 31, 1995 and December 31, 1994. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since December 31, 1995, and therefore, current estimates of fair value
may differ significantly from the amounts presented above.
FAIR VALUE METHODS AND ASSUMPTIONS ARE AS FOLLOWS:
- --------------------------------------------------
Cash and Cash Equivalents - The estimated fair value is based on current rates
for similar assets.
Securities - The fair value of securities is estimated based on quoted market
prices or dealer quotes, or if not available, estimated using quoted market
prices for similar securities.
Loans - The fair value of fixed rate loans has been estimated by discounting
projected cash flows using current rates for similar loans. For other loans,
which reprice frequently to market rates, the carrying amount approximates the
estimated fair value. The fair value of nonaccrual loans having a net carrying
value of approximately $4,521 and $3,141 in 1995 and 1994, respectively, are not
estimated because it was not practical to reasonably assess the timing of the
cash flows or the credit adjustment that would be applied in the market-place
for such loans. The total amount of loans included has been reduced by the
general reserves of $7,531 and $7,326 in 1995 and 1994, respectively.
Deposits Without Stated Maturities - Under the provision of SFAS No. 107, the
estimated fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings accounts, NOW accounts, money market and
checking accounts, is equal to the amount payable on demand as of December 31,
1995 and December 31, 1994.
Time Deposits - The fair value of certificates of deposits is based on the
discounted value of contractual cash flows. The discount rates used are the
rates currently offered for deposits of similar remaining maturities. The excess
of the estimated fair value of time deposits over their recorded amounts
represents the discounted value of contractual rates over rates currently being
offered.
70
<PAGE>
Financial Instruments with Off-Balance Sheet Risk - As described in Note C, the
Company was a party to financial instruments with off-balance sheet risk at
December 31, 1995. Such financial instruments consist of commitments to extend
permanent financing and letters of credit. If the options are exercised by the
prospective borrowers, these financial instruments will become interest-earning
assets of the Company. If the options expire, the Company retains any fees paid
by the counterparty in order to obtain the commitment or guarantee. The fair
value of commitments is estimated based upon fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed-
rate commitments, the fair value estimation takes into consideration an interest
rate risk factor. The fair value of guarantees and letters of credit is based on
fees currently charged for similar agreements. The fair value of these off-
balance sheet items at December 31, 1995 and 1994, respectively, approximates
the recorded amounts of the related fees, which are not material. The Company
has not engaged in hedge transactions such as interest rate futures contracts or
interest rate swaps.
71
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HUDSON CHARTERED BANCORP, INC.
BY: /s/ T. Jefferson Cunningham III
Chairman of the Board & CEO
Date: March 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
/s/ T. Jefferson Cunningham III March 12, 1996
Chairman of the Board & CEO
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ Paul A. Maisch March 12, 1996
Treasurer
Directors:
/s/ Robert M. Bowman March 12, 1996
/s/ H. Todd Brinckerhoff March 12, 1996
/s/ Edward vK. Cunningham Jr. March 12, 1996
/s/ T. Jefferson Cunningham III March 12, 1996
/s/ Tyler Dann March 12, 1996
/s/ Robert R. Fraleigh March 12, 1996
/s/ Robert J. Marvin March 12, 1996
/s/ Jack A. McEnroe March 12, 1996
/s/ Lewis J. Ruge March 12, 1996
/s/ John C. Vanwormer March 12, 1996
/s/ James R. Williams March 12, 1996
72
<PAGE>
EXHIBIT 10.3
HUDSON CHARTERED BANCORP, INC.
DIRECTORS DEFERRED COMPENSATION PLAN
This Hudson Chartered Bancorp, Inc. Directors Deferred Compensation Plan
(the "Plan") is adopted by the Board of Directors of Hudson Chartered Bancorp,
Inc. (the "Company") on this 16th day of March, 1995, to be effective as of
March 31, 1995.
1. Definitions
-----------
In addition to any other terms defined in this Plan, the following terms
have the following meanings:
(a) "Board" means the Board of Directors of the Company or any
Participating Subsidiary.
(b) "Director" means a member of a Board.
(c) "Dreyfus Fund Investment" means a hypothetical investment within a
group of mutual funds of the Dreyfus Corporation or its affiliates ("Dreyfus")
that are designated by the Company from time to time as eligible for
hypothetical investment hereunder. A Dreyfus Fund Investment does not provide
voting, dividend or other rights associated with actual investment in the mutual
funds; it merely appreciates (or depreciates) in the identical manner as does
the value of interests in such mutual funds.
(d) "Election Form" means the form attached as Exhibit A to this Plan
pursuant to which a Director may elect, by delivering such form to the Company's
Secretary or Treasurer, to
<PAGE>
defer compensation under this Plan. The Company's Chief Executive Officer or
other officer or committee duly authorized by the Board of Directors of the
Company is authorized to amend or modify the Election Form as necessary to
achieve the purposes of this Plan.
(e) "Participating Director" means a Director who elects to defer
compensation under this Plan.
(f) "Participating Subsidiary" means a corporation or other entity, at
least 80% of the total combined voting power of which is owned by the Company
either directly or indirectly through one or more subsidiaries, that expressly
adopts the Plan.
(g) "Phantom Stock Investment" means a hypothetical investment in shares
of the Company's common stock determined in accordance with the provisions of
Section 4. A Phantom Stock Investment does not provide voting, dividend or
other rights associated with actual stock ownership; it merely appreciates (or
depreciates) in the identical manner as does the Company's common stock. If the
Company's common stock is subject to a stock dividend, stock split,
recapitalization or other event affecting
-2-
<PAGE>
its value, a Phantom Stock Investment shall be correspondingly adjusted.
(h) "Plan Year" means each calendar year during the duration of this
Plan, provided, however, that the 1995 Plan Year shall be the period commencing
April 1, 1995, and ending December 31, 1995.
(i) "Termination of Service" means any termination of a Director's
service on a Board for any reason, including resignation, failure to be
reelected, death, disability or retirement.
(f) "Unforeseeable Emergency" means an unanticipated emergency that is
caused by an event beyond the control of the affected Participating Director (or
his successors or heirs) and that would result in severe financial hardship if
early withdrawal were not permitted.
2. Purpose
-------
This Plan is intended to aid in attracting and retaining qualified
Directors and in maintaining and developing strong management loyalty by giving
suitable recognition to the ability and industry which contribute materially to
the success of the business interests of the Company and its subsidiaries.
-3-
<PAGE>
3. Eligibility and Elections
-------------------------
(a) In general. Each Director may elect prior to January 1 of each
----------
Plan Year to defer all or part of his compensation for services as a member of a
Board for that Plan Year. An election shall be made by delivering to the
Company's Secretary or Treasurer a fully completed and executed Election Form.
An election, once made, shall apply to the first Plan Year commencing after the
date the Election Form is received by the Company and to all subsequent Plan
Years until this Plan is terminated by the Company or the Participating Director
modifies or terminates the election as permitted by this Plan.
(b) Special rules. (i) For the 1995 Plan Year only, an election may
-------------
be made after the Plan becomes effective and no later than March 31, 1995, and
shall apply to compensation for services performed on or after April 1, 1995;
provided, however, that a Participating Director must elect to defer a
percentage of his or her compensation for 1995 that is at least as great as the
percentage of 1995 compensation the Participating Director has elected to defer
under any other agreement or arrangement with the Company or the Participating
Subsidiary.
(ii) For the Plan Year in which a person becomes a Director, the new
Director may make an election to defer compensation for services to be
-4-
<PAGE>
performed subsequent to the election within thirty (30) days of the date the
person becomes a Director.
(c) Modifications and revocations. A Participating Director may
-----------------------------
modify or revoke an election to defer compensation under this Plan by submitting
a new Election Form to the Company's Secretary or Treasurer. The new Election
Form may increase or decrease (including to zero) the percentage of the
Participating Director's compensation that will be deferred under this Plan.
The new Election Form will be effective with respect to compensation earned in
the first Plan Year commencing after the date on which the Election Form is
received by the Company's Secretary or Treasurer, and shall apply to all
subsequent Plan Years until modified or revoked by the Participating Director by
filing a new Election Form.
4. Investment Elections
--------------------
(a) In general. Each Participating Director shall designate on the
----------
Election Form the percentage of his or her compensation deferred under this Plan
to be hypothetically invested in a Phantom Stock Investment and the percentage
of his or her compensation deferred under this Plan to be hypothetically
invested in a Dreyfus Fund Investment. If a Participating Director fails to
specify an investment, all eligible deferred compensation amounts shall be
invested in a Phantom Stock Investment.
-5-
<PAGE>
(b) Prior deferred compensation. Effective as of March 31, 1995, any
---------------------------
agreement or arrangement with the Company or the Participating Subsidiary under
which any Director has elected previously to defer compensation shall terminate,
and no further compensation shall be deferred thereunder. All prior deferred
compensation of such a Director will remain hypothetically invested in the
investment vehicle(s) specified in the agreement or arrangement pursuant to
which the compensation was deferred until such deferred compensation is paid to
the Director as required by the terms of such agreement or arrangement.
(c) Deferred Compensation Accounts. The Company or the Participating
------------------------------
Subsidiary shall maintain accounts on its books for each Participating Director
electing to defer a portion of his or her compensation under this Plan. These
accounts shall reflect amounts deferred hereunder ("Deferred Compensation
Accounts"). Account balances invested in a Dreyfus Fund Investment shall be
denominated in dollars. Account balances invested in a Phantom Stock Investment
shall be denominated in shares of the Company's common stock.
All compensation deferred under this Plan shall be credited to a
Participating Director's account as of the date the deferred compensation would
have been paid to the Participating Director but for the deferral under this
Plan ("Deferral Date").
-6-
<PAGE>
(d) Maximum Phantom Stock Investment. Notwithstanding any other
--------------------------------
provision of this Plan, in no event may a Participating Director's Deferred
Compensation Account hereunder reflect more than 5,000 shares of Phantom Stock
Investment. Any potential Phantom Stock Investment in excess of the amount
permitted by this Section 4(d) shall be transferred to a Dreyfus Fund
Investment.
(e) Modifications. A Participating Director may modify his or her
-------------
investment election with respect only to amounts deferred under this Plan. Any
such modification shall be made by submitting a new Election Form to the
Company's Secretary or Treasurer indicating the appropriate changes.
Notwithstanding the above, a Participating Director shall not be permitted to
transfer amounts that have previously been deferred under this Plan from the
Phantom Stock Investment to a Dreyfus Fund Investment or from a Dreyfus Fund
Investment to the Phantom Stock Investment. Amounts deferred under any prior
agreement or arrangement between a Participating Director and the Company or the
Participating Subsidiary shall remain hypothetically invested only as specified
under such agreement or arrangement.
(f) Company's responsibility. The Company and the Participating
------------------------
Subsidiary shall have no responsibility for the performance of the hypothetical
-7-
<PAGE>
investments selected by a Participating Director. The responsibility of the
Company and the Participating Subsidiary is to make payments based on the
balance in each Participating Director's Deferred Compensation Account in
accordance with the provisions of this Plan and the Participating Director's
elections pursuant hereto.
(g) Dreyfus Fund Investments. The Company's Chief Executive Officer
------------------------
or other officer or committee duly authorized by the Board is authorized to
promulgate appropriate rules and guidelines governing the calculation of a
Participating Director's hypothetical investment under this Plan in a Dreyfus
Fund Investment. Such rules and guidelines shall include the Dreyfus mutual
funds eligible for hypothetical investment, the transfer of hypothetical
investments among such funds, and any and all other matters as the Company's
Chief Executive Officer or other officer or committee duly authorized by the
Board shall determine in his or her sole discretion. Unless otherwise
determined by the Company's Chief Executive Officer or other officer or
committee duly authorized by the Board of Directors of the Company, the portion
of a Participating Director's Deferred Compensation Account that is
hypothetically invested in a Dreyfus Fund Investment shall be credited with the
earnings (or losses) that would have been realized by actual
-8-
<PAGE>
investments in the eligible mutual funds, and such earnings (or losses) shall be
credited on the last day of each calendar quarter.
(h) Phantom Stock Investments. Any amounts directed to be
-------------------------
hypothetically invested in a Phantom Stock Investment shall be accumulated and
translated into hypothetical whole shares of the Company's common stock on the
last day of each calendar quarter. The portion of a Participating Director's
Deferred Compensation Account invested in a Phantom Stock Investment shall be
valued on the last day of each calendar quarter to reflect appreciation (or
depreciation) equal to the appreciation (or depreciation) realized by the
Company's common stock as of the close of business on each such valuation date.
In addition, the Participating Director's Deferred Compensation Account shall,
on each date dividends are paid on the Company's common stock ("Dividend Date"),
be credited with phantom dividends equal to the amount of dividend per share
paid on the Company's common stock multiplied by the number of hypothetical
whole shares of the Company's common stock in the Deferred Compensation Account
on the Dividend Date. Each accumulated deferral amount and each phantom
dividend shall be hypothetically invested in a Phantom Stock Investment on the
last day of the calendar quarter during which such amount or phantom dividend
was
-9-
<PAGE>
credited to the Participating Director's Deferred Compensation Account, and such
Phantom Stock Investment shall be equal to the number of additional hypothetical
whole shares of the Company's common stock determined by dividing the total
dollar amount of accumulated deferral amounts and/or phantom dividend by the
fair market value of the Company's common stock, rounding to the nearest higher
or lower whole number of shares.
The fair market value of the Company's common stock shall be determined
by the average closing price on the last five trading days ending on the last
day of the calendar quarter, valuation date or other relevant date.
(i) Investments Following Termination of Service. Commencing with the
--------------------------------------------
last day of the calendar quarter in which a Participating Director's Termination
of Service shall occur, all amounts credited to the Participating Director's
Deferred Compensation Account shall be hypothetically invested in a Dreyfus Fund
Investment and thereafter no amounts in the Deferred Compensation Account shall
be hypothetically invested in a Phantom Stock Investment. In the case of a
Participating Director who, at the time of his or her Termination of Service,
has a Phantom Stock Investment in his or her Deferred Compensation Account, the
value of such Phantom Stock Investment shall be determined on the last day of
the calendar quarter in which the
-10-
<PAGE>
Termination of Service occurs and such value shall be transferred to a Dreyfus
Fund Investment as of the same day.
5. Payment Elections.
-----------------
(a) In general. On the first Election Form filed by a Participating
----------
Director under this Plan, the Participating Director shall elect the method
pursuant to which amounts in his or her Deferred Compensation Account are to be
paid to the Participating Director (the "Payout Election"). The Payout
Election, once made, is irrevocable and may not be modified, amended or revoked,
except as provided in the following sentence or in Section 5(d). In the event
of a material change in the personal circumstances of a Participating Director,
the Participating Director may request in writing a change in his or her Payout
Election, which change the Company in its sole discretion may accept or reject.
Any change in the Payout Election pursuant to the preceding sentence shall apply
only to amounts deferred under this Plan for the first Plan Year commencing
- ----
after the date the change is accepted by the Company and to all subsequent Plan
Years, and under no circumstances shall any change apply to amounts deferred
from the Plan Year in which the change is accepted or any prior Plan Years.
-11-
<PAGE>
(b) Payout options. Cash payments of amounts deferred under this Plan
--------------
will be paid by the Company or the Participating Subsidiary, as the case may be,
to the Participating Director following Termination of Service of the
Participating Director pursuant to one of the following options:
(i) In a single lump sum on the first January 15 following
Termination of Service of the Participating Director;
(ii) In sixteen (16) quarterly payments commencing with the first
January 15 following Termination of Service of the Participating Director;
(iii) In forty (40) quarterly payments commencing with the first
January 15 following Termination of Service of the Participating Director; or
(iv) In a partial lump sum on the first January 15 following
Termination of Service of the Participating Director and the balance in sixteen
(16) or forty (40) quarterly payments commencing with the first January 15
following Termination of Service of the Participating Director.
In the case of quarterly payments, each quarterly payment shall be equal to the
then balance in the Participating Director's Deferred Compensation Account
-12-
<PAGE>
on the payment date multiplied by a fraction the numerator of which shall be one
(1) and the denominator of which shall be the number of quarterly payments
(including the current payment) yet to be made.
(c) Death of a Participating Director. If a Participating Director
---------------------------------
should die at any time, regardless of whether prior to or after the
Participating Director's Termination of Service and regardless of whether the
Participating Director has begun to receive payments under the Payment Election
elected by the Participating Director, the Company or the Participating
Subsidiary, as the case may be, shall make payments to the Participating
Director's estate of amounts deferred under this Plan pursuant to the terms of
the Participating Director's Payout Election.
(d) Unforeseeable Emergency. To the extent permitted by applicable
-----------------------
federal securities and other laws, in the event of an Unforeseeable Emergency, a
Participating Director (or his successors or heirs) may apply to the Company or
the Participating Subsidiary, as the case may be, for approval of an accelerated
withdrawal of funds previously deferred under this Plan. Any accelerated
withdrawal so approved shall be limited to the amount necessary to meet the
Unforeseeable Emergency.
(e) Prior agreements or arrangements. Amounts deferred by a
--------------------------------
Participating Director under any
-13-
<PAGE>
prior agreement or arrangement with the Company or the Participating Subsidiary
shall be paid by the Company or the Participating Subsidiary, as the case may
be, to such Participating Director, his estate, heirs or beneficiaries, pursuant
to the terms of such prior agreement or arrangement notwithstanding any other
terms or provisions of this Plan.
6. Transferability, Attachment, Etc.
---------------------------------
A Participating Director's rights to benefit payments under this Plan are
not subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment, or garnishment by creditors of the
Participating Director or creditors of any successors or heirs of the
Participating Director. A Participating Director's rights to benefits under
this Plan shall not be transferable other than by will or the laws of descent
and distribution.
7. General Creditor Status
-----------------------
Each Participating Director shall have the status of a general unsecured
creditor of the Company or the Participating Subsidiary, as the case may be,
with respect to his rights under this Plan. This Plan and any elections made
pursuant to this Plan constitute a mere promise by the Company or the
Participating Subsidiary, as the case may be, to make payments to each
Participating Director in the future. It is the
-14-
<PAGE>
intention of the Company, each Participating Subsidiary, and each Participating
Director that the arrangements provided under this Plan are unfunded for tax
purposes and for purposes of Title I of ERISA.
8. Termination
-----------
The Board of Directors of the Company shall have the power at any time to
terminate this Plan and to amend it in any respect, provided that no termination
or amendment of the Plan shall, without his or her consent, adversely affect the
rights or obligations of any Participating Director.
9. General Provisions
------------------
(a) The Plan is intended to comply with the requirements of Section 16
of the Securities Exchange Act of 1934, as amended, and, if applicable, any
rules or regulations promulgated thereunder. Should any provision of this Plan
not be necessary to comply with the requirements of Section 16 or any rules or
regulations promulgated thereunder or should any additional provisions be
necessary for the Plan to comply with such requirements, the Board of Directors
of the Company may amend the Plan to delete, add, or modify the provisions of
the Plan accordingly.
(b) The establishment of the Plan shall not confer upon any Director
any legal or equitable right against the Company or any of its subsidiaries,
except as expressly provided in the Plan.
-15-
<PAGE>
(c) The Plan does not constitute inducement or consideration for the
service of any Director, nor is it a contract between the Company or the
Participating Subsidiary and any Director. Participation in the Plan shall not
give a Director any right to be retained in the service of the Company or any
Participating Subsidiary.
(d) This Plan shall be construed under the laws of the State of New
York.
-16-
<PAGE>
EXHIBIT 10.4
EXHIBIT A
HUDSON CHARTERED BANCORP, INC.
1995 INCENTIVE STOCK PLAN
1. DEFINITIONS
-----------
In this Plan, except where the context otherwise indicates, the following
definitions apply:
1.1. "Agreement" means a written agreement evidencing the grant of an
option or Right or the award of Restricted Stock or Incentive Shares.
1.2. "Award" means an Option or Right or an award of Incentive Shares or
Restricted Stock hereunder.
1.3. "Board" means the Board of Directors of the Corporation.
1.4. "CBI Incentive Stock Option Plan" means the Community Bancorp, Inc.
Incentive Stock Option Plan.
1.5. "CBI Non-Qualified Stock Option Plan" means the Community Bancorp 1988
Non-Qualified Stock Option Plan.
1.6. "Code" means the Internal Revenue Code of 1986, as amended.
1.7. "Committee" means the committee of the Board meeting the standards of
Rule 16b-3(c)(2)(i) under the Exchange Act, or any similar successor rule,
appointed by the Board to administer the Plan. Unless otherwise determined by
the Board, the Personnel and Compensation Committee of the Board shall be the
Committee.
1.8. "Common Stock" means the common stock, par value $.80 per share, of
the Corporation.
1.9. "Corporation" means Hudson Chartered Bancorp, Inc.
1.10. "Date of Exercise" means the date on which the corporation receives
notice of the exercise of an Option or Right in accordance with the terms of
Article 8.
1.11. "Date of Grant" means the date on which an Option or Right is
granted to an Eligible Employee by the Committee.
1.12. "Effective Date" shall mean April 1, 1995.
1.13. "Eligible Employee" means any person determined by the Committee to
be an officer or key employee of the Corporation or a Subsidiary.
1.14. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1.15. "Exercise Price" means the price per share at which an option may be
exercised, as determined by the Committee in accordance with Section 6.2 hereof.
A-1
<PAGE>
1.16. "Fair Market Value" of a share of Common Stock means an amount equal
to the fair market value of a share of Common Stock determined pursuant to a
reasonable method adopted by the Committee in good faith for such purpose.
Unless the Committee has adopted another method, the fair market value of a
share of Common Stock shall equal the average of the last reported sale prices
of the Common Stock on the Nasdaq National Market System on the five trading
days immediately preceding the date such fair market value is to be determined.
1.17. "Incentive Shares" means a contingent award of shares of Common
Stock made pursuant to the provisions of Article 10.
1.18. "Incentive Stock Option" means an Option that is intended to qualify
as an incentive stock option under section 422 of the Code and that is
designated as such in the applicable Agreement.
1.19. "Nonqualified Stock Option" means an Option that is not an Incentive
Stock Option.
1.20. "Option" means an option to purchase shares of Common Stock granted
under the Plan after the Effective Date.
1.21. "Option Period" means the period during which an Option may be
exercised.
1.22. "Participant" means an Eligible Employee who has received an Award
hereunder.
1.23. "Performance Goals" means performance goals established by the
Committee which may be based on earnings or earnings growth, sales, return on
assets, equity or investment, regulatory compliance, satisfactory internal or
external audits, improvement of financial ratings, achievement of balance sheet
or income statement objectives, or any other objective goals established by the
Committee, and may be absolute in their terms or measured against or in
relationship to other companies comparably, similarly or otherwise situated.
Such performance standards may be particular to an employee or the department,
branch, Subsidiary or other division in which he works, or may be based on the
performance of the Corporation generally, and may cover such period as may be
specified by the Committee.
1.24. "Plan" means the Hudson Chartered Bancorp, Inc. 1995 Incentive Stock
Plan. The Plan constitutes an amendment, restatement, and continuation of the
CBI Incentive Stock Option Plan and CBI Non-Qualified Stock Option Plan.
1.25. "Pre-1995 Stock Option" means a stock option (and any related stock
appreciation rights) granted prior to January 1, 1995 under the CBI Incentive
Stock Option Plan or the CBI Non-Qualified Stock option Plan.
1.26. "Related option" means an Option in connection with which, or by
amendment to which, a Right is granted hereunder.
1.27. "Related Right" means a Right granted in connection with, or by
amendment to, an option granted hereunder.
1.28. "Restricted Stock" means shares of Common Stock awarded pursuant to the
provisions of Article 9.
1.29. "Right" means a stock appreciation right granted under the Plan after
the Effective Date.
1.30. "Right Period" means the period during which a Right may be exercised.
1.31. "Rule 16b-3" means Rule 16b-3 under Section 16 of the Exchange Act.
1.32. "Subsidiary" means a corporation at least 50% of the total
combined voting power of all classes of stock of which is owned by the
Corporation, either directly or through one or more other Subsidiaries.
A-2
<PAGE>
2. PURPOSE
-------
The purpose of the Plan is to assist the corporation and its subsidiaries
in attracting, retaining and providing incentives to officers and key employees
by offering them the opportunity to acquire or increase their proprietary
interest in the Corporation and to promote the identification of their interests
with those of the shareholders of the corporation.
3. Administration
--------------
The Committee shall administer the Plan and shall have plenary authority,
in its discretion, to award Options, Rights, Restricted Stock and Incentive
Shares to Eligible Employees. The Committee shall have plenary authority and
discretion to determine the terms of all Awards (which terms need not be
identical), including, but not limited to, the exercise price of Options, the
time or times at which Awards are made, the number of shares covered by Awards,
whether an option shall be an Incentive Stock Option or a Nonqualified Stock
Option, and the period during which options and Rights may be exercised and
Restricted Stock shall be subject to restrictions. In making its
determinations, the Committee may take into account the nature of the services
rendered by the respective employees, their present and potential contributions
to the success of the Corporation and its Subsidiaries, and such other factors
as the Committee in its discretion shall deem relevant. Subject to the express
provisions of the Plan, the Committee shall have plenary authority to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to it
and to make all other determinations deemed necessary or advisable for the
administration of the Plan. The determinations of the Committee on the matters
referred to in this Section 3 shall be binding and final.
4. ELIGIBILITY
-----------
Options, Rights, Restricted Stock and Incentive Shares may be granted or
awarded only to Eligible Employees. The provisions of this Article 4 shall
supersede the eligibility provisions of the CBI Incentive Stock Option Plan and
the CBI Non-Qualified Stock Option Plan as of the Effective Date.
5. STOCK SUBJECT TO THE PLAN
-------------------------
5.1. The maximum number of shares of Common Stock that may be issued
pursuant to Awards made hereunder after the Effective Date and Pre-1995 Stock
Options is 715,838 shares. Notwithstanding any other provision of this Plan, no
Award may be made to an Eligible Employee hereunder to the extent that the
number of shares of Common Stock covered by such Award and all other Awards
(whether or not outstanding) made hereunder to the Eligible Employee after the
Effective Date exceeds 71,584 reduced by the number of shares of Common Stock
covered by Pre-1995 Stock Options granted to the Eligible Employee that are
outstanding as of the date of the Award. For purposes of the preceding
sentence, an Option and corresponding Related Right shall be treated as a single
Award covering the number of shares with respect to which the option and Related
Right may be exercised.
5.2. If an Option, Right or a Pre-1995 Stock Option expires or terminates
for any reason (other than termination by virtue of the exercise of a Related
option or Related Right, as the case may be) without having been fully
exercised, if shares of Restricted Stock are forfeited or if an award of
Incentive Shares is forfeited, the unissued or forfeited shares of Common Stock
which had been subject to the Award or the Pre-1995 Stock Option shall become
available for the grant of additional Awards.
5.3. Upon exercise of a Right (regardless of whether the Right is settled in
cash or shares of Common Stock), the number of shares of Common Stock with
respect to which the Right is exercised shall be charged against the number of
shares of Common Stock issuable under the Plan and shall not become available
for the grant of other Awards.
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6. OPTIONS
-------
6.1. Options granted under the Plan to Eligible Employees shall be either
Incentive Stock options or Nonqualified Stock options, as designated by the
Committee. Each option granted under the Plan shall be clearly identified
either as a Nonqualified Stock option or an Incentive Stock option and shall be
evidenced by an Agreement that specifies the terms and conditions of the grant.
Options shall be subject to the terms and conditions set forth in this Article 6
and such other terms and conditions not inconsistent with this Plan as the
Committee may specify.
6.2. The price per share of Common Stock at which an Option granted under
this Plan may be exercised shall not be less than one hundred percent (100%) of
the Fair Market Value of the Common Stock on the Date of Grant. Notwithstanding
the foregoing, in the case of an Incentive Stock Option granted to a Participant
who (applying the rules of Section 424(d) of the Code) owns stock possessing
more than ten percent of the total combined voting power of all classes of stock
of the Corporation or a Subsidiary (a "Ten-Percent Shareholder"), the exercise
price per share shall not be less than one hundred and ten percent (110%) of the
Fair Market Value of the Common Stock on the date on which the option is
granted.
6.3. Options granted hereunder shall be exercisable at such times and under
such conditions as shall be established by the Committee; provided, however,
-------- -------
that no Option shall be exercisable after the expiration of ten years (five
years in the case of an Incentive Stock Option granted to a Ten-Percent
Shareholder) from its Date of Grant.
6.4. The maximum number of shares of Common Stock with respect to which
Options may be granted to any Eligible Employee under this Plan is 71,584
shares.
7. RIGHTS
------
7.1. Rights granted under the Plan shall be evidenced by an Agreement
specifying the terms and conditions of the grant. A Right may be granted under
the Plan: (a) in connection with, and at the same time as, the grant of an
Option under the Plan; (b) by amendment of an outstanding Option granted under
the Plan; or (c) independently of any Option granted under the Plan. A Right
described in clause (a) or (b) of the preceding sentence is a Related Right. A
Related Right may, in the Committee's discretion, apply to all or a portion of
the shares subject to the Related Option.
7.2. A Right may be exercised in whole or in part as provided in the
applicable Agreement, and, subject to the terms of the Agreement, entitles a
Participant to receive, without payment to the Corporation (but subject to
required tax withholding), either cash or that number of shares of Common Stock
(equal to the highest whole number of shares), or a combination thereof, in an
amount or having a Fair Market Value determined as of the Date of Exercise not
to exceed the number of shares of Common Stock subject to the portion of the
Right exercised multiplied by an amount equal to the excess of (a) the Fair
Market Value of a share of Common Stock on the Date of Exercise of the Right
over (b) either (I) the Fair Market Value of a share of Common Stock on the Date
of Grant of the Right if it is not a Related Right, or (ii) the Exercise Price
as provided in the Related Option if the Right is a Related Right.
7.3. The Right Period shall be determined by the Committee and set forth in
the Agreement; provided, however --
(a) a Right may not be exercised until the expiration of six months from
the Date of Grant (except that this limitation need not apply in the event of
the death or disability of a Participant within the six-month period);
(b) a Right will expire no later than the earlier of (i) ten years from the
Date of Grant, or (ii) in the case of a Related Right, the expiration of the
Related option;
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(c) a Right may be exercised only when the Fair Market Value of a share of
Common Stock exceeds either (i) the Fair Market Value of a share of Common Stock
on the Date of Grant of the Right if it is not a Related Right, or (ii) the
Exercise Price of the Related option if the Right is a Related Right; and
(d) a Right that is a Related Right to an Incentive Stock option may be
exercised only when and to the extent the Related option is exercisable.
7.4. The exercise, in whole or in part, of a Related Right shall cause a
reduction in the number of shares of Common Stock subject to the Related Option
equal to the number of shares with respect to which the Related Right is
exercised. Similarly, the exercise, in whole or in part, of a Related option
shall cause a reduction in the number of shares of Common Stock subject to the
Related Right equal to the number of shares with respect to which the Related
Option is exercised.
7.5. Rights granted under the Plan shall comply with all applicable
requirements of Rule 16b-3(e) with respect to a Participant. Should any
provision of this Article 7 necessary for that purpose no longer be necessary to
comply with the requirements of Rule 16b-3(e) or should any additional
provisions be necessary for this Article 7 to comply with the requirements of
Rule 16b-3(e), the Board or the Committee may amend this Plan to delete, add to
or modify the provisions of the Plan accordingly. The Corporation intends to
comply, if and to the extent applicable, with the public information and
reporting requirements of Rule 16b-3(e)(1); however, the Corporation's failure
for any reason whatsoever to comply with such requirements or with any other
requirements of Rule 16b-3, and any resultant unavailability of Rule 16b-3(e) to
Participants shall not result in any liability on the Corporation to any
Participant or any other party.
7.6. To the extent required by Rule 16b-3(e) or otherwise provided in the
Agreement, the Committee shall have sole discretion to consent to or disapprove
the election by any Participant to receive cash in full or partial settlement of
a Right. In cases where an election of settlement in cash must be consented to
by the Committee, the Committee may consent to, or disapprove, such election at
any time after such election, or within such period for taking action as is
specified in the election, and failure to give consent shall be disapproval.
Consent may be given in whole or as to a portion of the Right surrendered by a
Participant. If the election to receive cash is disapproved in whole or in
part, the Right shall be deemed to have been exercised for shares of Common
Stock, or, if so specified in the notice of exercise and election, not to have
been exercised to the extent the election to receive cash is disapproved.
7.7. The maximum number of shares of Common Stock with respect to which Rights
may be granted to any Eligible Employee under this Plan is 71,584 shares.
8. EXERCISE OF OPTIONS AND RIGHTS
------------------------------
8.1. An Option or Right may, subject to the terms of the applicable
Agreement, be exercised in whole
or in part by the delivery to the Corporation of written notice of the exercise,
in such form as the Committee may prescribe, accompanied, in the case of an
option, by full payment for the shares of Common Stock with respect to which the
Option is exercised. To the extent provided in the applicable Agreement,
payment may be made, in whole or in part, in shares of Common Stock (other than
Restricted Stock) valued at Fair Market Value on the Date of Exercise or by
delivery of a promissory note as provided in Section 8.2 hereof.
8.2. To the extent provided in an option Agreement and permitted by
applicable law, the Committee may accept as partial payment of the Exercise
Price of an option a promissory note executed by the Participant evidencing his
obligation to make future cash payment thereof; provided, however, that in no
event may the Committee accept a promissory note for an amount in excess of the
difference between the aggregate Exercise Price and the par value of the shares.
Promissory notes delivered as partial payment of an Option's Exercise Price
shall be payable upon such terms as may be established by the Committee, shall
be secured by a pledge of the shares of Common Stock received upon exercise of
the Option, and shall bear interest at a rate fixed by the Committee.
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9. RESTRICTED STOCK AWARDS
-----------------------
9.1. Restricted Stock awarded under the Plan shall be evidenced by an
Agreement specifying the terms and conditions of the Award. Each Agreement
evidencing an award of Restricted Stock shall:
(a) prohibit the sale, assignment, transfer, exchange, pledge,
hypothecation, or other encumbrance of (i) the shares awarded as Restricted
Stock under the Plan, (ii) the right to vote the shares, and (iii) the right to
receive dividends thereon in each case during the restriction period applicable
to the shares; provided, however, that the Participant shall have all the other
rights of a shareholder including, but not limited to, the right to receive
dividends and the right to vote the shares;
(b) require that each certificate representing shares of Restricted Stock
be deposited with the Corporation, or its designee, and bear the following
legend:
"This certificate and the shares of stock represented hereby are subject to
the terms and conditions (including forfeiture provisions and restrictions
against transfer) contained in the Hudson Chartered Bancorp, Inc. 1995 Incentive
Stock Plan, and an Agreement entered into between the registered owner and
Hudson Chartered Bancorp, Inc. Release from such terms and conditions shall be
made only in accordance with the provisions of the Plan and the Agreement, a
copy of each of which is on file in the office of the Secretary of Hudson
Chartered Bancorp, Inc."
(c) contain such other terms, conditions and restrictions as the Committee
in its discretion may specify, including, without limitation, terms that
condition the lapse of forfeiture and transfer restrictions upon the achievement
of Performance Goals; and
(d) specify the terms and conditions upon which the restrictions applicable
to the shares of Restricted Stock shall lapse and new certificates free of the
foregoing legend shall be issued to the Participant or his legal representative.
9.2. The maximum number of shares of Restricted Stock that may be awarded
to any Eligible Employee under this Plan is 71,584 shares.
10. INCENTIVE SHARE AWARDS
----------------------
10.1. Incentive Shares awarded under the Plan shall be evidenced by an
Agreement specifying the terms and conditions of such Award. Incentive Share
awards shall provide for the issuance of shares of Common Stock to a Participant
at such times and subject to such terms and conditions as the Committee shall
deem appropriate including, but not limited to, terms and conditions that
condition the issuance of shares of Common Stock upon the achievement of
Performance Goals.
10.2. The maximum number of Incentive Shares that may be awarded after the
Effective Date to any Eligible Employee under this Plan is 71,584 shares.
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<PAGE>
11. NONTRANSFERABILITY
------------------
Awards made hereunder shall not be transferable other than (a) by will or
the laws of descent and distribution, or (b) pursuant to a qualified domestic
relations order as defined in section 414(p) of the Code. An Option or Right
may be exercised during the lifetime of a Participant only by the Participant
or, in the event of his or her legal disability, by his legal representative. A
Related Right is transferable only when the Related Option is transferable and
only with the Related Option and under the same conditions that apply to the
Related Option.
12. CAPITAL ADJUSTMENTS
-------------------
In the event of any change in the outstanding Common Stock by reason of any
stock dividend, split-up, recapitalization, reclassification, combination or
exchange of shares, merger, consolidation or liquidation and the like, the
Committee may, in its discretion, provide for a substitution for or adjustment
in (a) the number and class of shares of stock subject to outstanding Options,
Rights, Restricted Stock and Incentive Share awards, (b) the Exercise Price of
Options and the base price upon which payments under Rights that are not Related
Rights are determined, and (c) the aggregate number and class of shares of stock
for which Awards thereafter may be made under the Plan and to individual
Participants.
13. TERMINATION OR AMENDMENT
------------------------
The Board may amend, alter or terminate the Plan in any respect at any
time; provided, however, that no amendment, alteration or termination of the
-----------------
Plan shall be made by the Board without approval of (a) the Corporation's
shareholders to the extent shareholder approval of the amendment is required to
comply with the requirements of Rule 16b-3, and (b) each affected Participant if
such amendment, alteration or termination would impair the rights of a
Participant under any Award made hereunder prior to the date of such amendment,
alteration or termination.
14. MODIFICATION, EXTENSION AND RENEWAL OF STOCK OPTIONS, RIGHTS,
RESTRICTED STOCK AND INCENTIVE SHARES; SUBSTITUTED OPTIONS AND RIGHTS
------------------------------
14.1. Subject to the terms and conditions of the Plan, the Committee may
modify, extend or renew outstanding Options and Rights, or accept the surrender
of outstanding options and stock appreciation rights (to the extent not
theretofore exercised) granted under the Plan or under any other plan of the
Corporation, or a Subsidiary, and authorize the granting of new Options and
Rights pursuant to the Plan in substitution therefor (to the extent not
theretofore exercised), and the substituted options or Rights may specify a
lower exercise price than the surrendered options and stock appreciation rights,
a longer term than the surrendered options and stock appreciation rights, or
have any other provisions that are authorized by the Plan. Subject to the terms
and conditions of the Plan, the Committee may modify the terms of any
outstanding awards of Restricted Stock or Incentive Shares. Notwithstanding the
foregoing, however, no modification of an Option or Right granted under the
Plan, or an award of Restricted Stock or Incentive Shares, shall, without the
consent of the Participant, alter or impair any such Participant's rights or
obligations under such Awards.
14.2. Anything contained herein to the contrary notwithstanding, options
and Rights may, at the discretion of the Committee, be granted under the Plan in
substitution for stock appreciation rights and options to purchase shares of
capital stock of another corporation which is merged into, consolidated with, or
all or a substantial portion of the property or stock of which is acquired by,
the Corporation or one of its Subsidiaries. The terms and conditions of the
substitute options and Rights so granted may vary from the terms and conditions
set forth in this Plan to such extent as the Committee may deem appropriate (but
only to the extent consistent with the requirements of Rule 16b-3) in order to
conform, in whole or part, to the provisions of the options and stock
appreciation rights in substitution for which they are granted. Such options
and Rights shall not be subject to the provisions of Sections 6.4 and 7.7
hereof, except to the
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<PAGE>
extent it is determined by the Committee that the applicability of such sections
is required in order for grants of Options and Rights hereunder to be eligible
to qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code.
15. EFFECTIVENESS OF THE PLAN: GOVERNING PROVISIONS
-----------------------------------------------
This Plan constitutes an amendment, restatement and continuation of the CBI
Incentive Stock Option Plan, which was adopted by the Corporation on October 30,
1986, and the CBI 1988 Non-Qualified Stock Option Plan, which was adopted by the
Corporation on April 4, 1988. The Plan shall be effective as of April 1, 1995,
subject to shareholder approval of the Plan at the Corporation's May 4, 1995
annual shareholders' meeting. Notwithstanding the foregoing, Pre-1995 Stock
Options shall be governed by the terms of the agreements evidencing such awards,
as amended, except that the provisions of the Plan relating to administration of
the Plan after the Effective Date shall apply to Pre-1995 options and any
determinations relating to such options required to be made by the Board
pursuant to such agreements shall be made by the Committee.
16. WITHHOLDING
-----------
The Corporation's obligation to deliver shares of Common Stock or pay any
amount pursuant to the terms of any Award hereunder shall be subject to the
satisfaction of applicable federal, state and local tax withholding
requirements. To the extent provided in the applicable Agreement and in
accordance with rules prescribed by the Committee, a Participant may satisfy any
such withholding tax obligation by any of the following means or by a
combination of such means: (a) tendering a cash payment, (b) authorizing the
Corporation to withhold shares of Common Stock from the shares otherwise
issuable to the Participant, or (c) delivering to the Corporation already owned
and unencumbered shares of Common Stock.
17. TERM OF THE PLAN
----------------
Unless sooner terminated by the Board pursuant to Article 13, the Plan
shall terminate on March 31, 2005, and no options, Rights, Restricted Stock or
Incentive Shares may be granted or awarded after such date. Termination of the
Plan shall not affect the validity of any Award outstanding on the date of
termination.
18. INDEMNIFICATION OF COMMITTEE
----------------------------
In addition to such other rights of indemnification as they may have as
Directors or as members of the Committee, the members of the Committee shall be
indemnified by the Corporation against the reasonable expenses, including
attorneys' fees, actually and reasonably incurred in connection with the defense
of any action, suit or proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any option, Right,
Restricted Stock or Incentive Shares granted or awarded hereunder, and against
all amounts reasonably paid by them in settlement thereof or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, if such
members acted in good faith and in a manner which they believed to be in, and
not opposed to, the best interests of the Corporation.
19. GENERAL PROVISIONS
------------------
19.1. The establishment of the Plan shall not confer upon any Eligible
Employee any legal or equitable right against the Corporation, any Subsidiary or
the Committee, except as expressly provided in the Plan.
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<PAGE>
19.2. The Plan does not constitute inducement or consideration for the
employment of any Eligible Employee, nor is it a contract between the
Corporation or any Subsidiary and any Eligible Employee. Participation in the
Plan shall not give an Eligible Employee any right to be retained in the service
of the corporation or any Subsidiary.
19.3. Neither the adoption of this Plan, nor its submission to the
Corporation's shareholders, shall be taken to impose any limitations on the
powers of the Corporation or its Subsidiaries to issue, grant, or assume
options, warrants, rights, or restricted stock, otherwise than under this Plan,
or to adopt other stock option or restricted stock plans or to impose any
requirement of shareholder approval upon the same.
19.4. The interests of any Participant under the Plan are not subject to
the claims of creditors and may not, in any way, be assigned, alienated or
encumbered except as provided in Article 11.
19.5. The Committee may require each person acquiring shares of Common
Stock pursuant to Awards hereunder to represent to and agree with the
Corporation in writing that such person is acquiring the shares without a view
to distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Common Stock issued pursuant to the Plan shall be
subject to such stock transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Common
Stock is then listed, and any applicable federal or state securities laws. The
Committee may place a legend or legends on any such certificates to make
appropriate reference to such restrictions.
19.6. The Corporation shall not be required to issue any certificate or
certificates for shares of Common Stock with respect to awards under this Plan,
or record any person as a holder of record of such shares, without obtaining, to
the complete satisfaction of the Committee, the approval of all regulatory
bodies deemed necessary by the Committee, and without complying to the
Committee's complete satisfaction, with all rules and regulations, under
federal, state or local law deemed applicable by the Committee.
19.7. Notwithstanding any other provision of this Plan to the contrary,
Pre-1995 options and Awards made hereunder may be amended at any time after the
date of grant or award by agreement between the Committee and the Participant or
holder thereof to contain any terms and conditions that are permissible with
respect to Awards made hereunder after the Effective Date.
19.8. If any of the terms or provisions of this Plan conflict with the
requirements of Rule 16b-3 and/or Section 422 of the Code, then such terms or
provisions shall be deemed inoperative to the extent they so conflict with the
requirements of Rule 16b-3 and/or Section 422 of the Code. If this Plan does
not contain any provision required to be included herein under Rule 16b-3 and/or
Section 422 of the Code, such provision shall be deemed to be incorporated
herein with the same force and effect as if such provision had been set forth
herein.
19.9. The masculine pronoun whenever used shall include the feminine
pronoun, and the singular shall include the plural unless the context clearly
indicates the distinction.
19.10. The Plan shall be governed, construed and administered in
accordance with the laws of the State of New York.
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<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
AGREEMENT effective as of July 1, 1995 between HUDSON CHARTERED BANCORP, INC., a
New York Corporation with its principal offices at Route 55, LaGrangeville, New
York 12540 (the "Employer"), First National Bank of the Hudson Valley, a New
York Corporation with its principal offices at Route 55, LaGrangeville, New York
12540 (the "Bank"), and T. Jefferson Cunningham III, residing at 71 East Hook
Road, Hopewell Junction, New York 12533 (the "Employee").
WITNESSETH:
WHEREAS, the Employee has provided invaluable leadership while serving as the
Chief Executive Officer of the Employer and its predecessor for over five years,
and the Employer desires to assure the continued service of the Employee for an
extended period, and the Bank is the wholly owned subsidiary of the Employer.
NOW THEREFORE, the parties agree as follows:
1. The Employer agrees to employ, and the Employee agrees to be employed by the
Employer, under the terms and conditions set forth in this Agreement. For
all purposes of this Agreement, the Employer and the Bank shall include
their successors and assigns, whether by merger, acquisition, purchase or
any other means or method of consolidation. The parties intend that the Bank
shall satisfy all financial, compensation, employee benefit, supplemental
retirement payment and severance payment obligations under this agreement,
without, however, releasing the Employer from such obligations in the event
the Bank shall fail to fulfill them or any of them.
2. The Employee shall serve as the Chairman and Chief Executive Officer of the
Employer for the entire term of this Agreement, as hereinafter set forth. As
Chairman and Chief Executive Officer, the Employee shall serve as the senior
executive officer of the Employer, to whom all other officers and employees
of the Employer shall directly or indirectly report and be responsible. The
Employee shall report and be responsible solely to the Board of Directors of
the Employer.
3. The initial term of this Agreement shall be three (3) years commencing on
July 1, 1995 ("Commencement Date"), and expiring on June 30, 1998. Each
year, prior to the anniversary of the Commencement Date, the board of
Directors of the Employer shall formally extend, or refuse to extend this
Agreement for one (1) additional year. If the Board of Directors of the
Employer formally decides not to extend this Agreement, the Board shall also
formally decide and resolve whether or not it elects to retain the services
of the Employee for the remaining two (2) year term of this Agreement. If
the Board resolves to retain the services of the Employee for the remaining
two (2) year term of the Agreement, all terms and conditions of the
Agreement shall remain in full force and effect for the remaining two (2)
year term of this Agreement, and the provisions of section 7 hereof shall
---
apply at the expiration of the term of the Agreement. If the Board resolves
not to retain the Employee's services for
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<PAGE>
such two (2) year period, the provisions of section 7 shall apply
immediately.
4. Beginning as of the Commencement Date, Employee shall be paid, by the
Employer directly a base salary of two hundred eighteen thousand dollars
($218,000). The Board of Directors of the Employer shall have the discretion
to increase the Employee's base salary, at any time and from time to time.
Any such increase shall reflect the Employee's contribution to the financial
and business performance of the Employer during the preceding period.
5. In addition to his base salary, the Employee shall participate in each
compensation, employee benefit and fringe benefit program provided directly
or indirectly by the Employer to its employees including without limitation,
each bonus, stock grant, stock option, stock purchase, retirement, insurance
and welfare plan or program. The Employee's participation in each such plan
or program shall be in accordance with the terms and provisions thereof as
generally applicable to all participants. In addition, the Employee shall be
provided with an automobile, subject to any income and payroll tax reporting
and withholding relating thereto, and the Employee shall be entitled to
participate in the supplemental retirement program described in the next
section.
6. The Employee shall be eligible to participate in and benefit from a
supplemental retirement program ("SRP") as described in this section. The
SRP shall provide supplemental retirement and tax deferral benefits to the
extent benefits under the Hudson Chartered Bancorp, Inc. Retirement and
Thrift Plan or any successor plan (the "Plan") are limited by provisions of
the Internal Revenue Code, ERISA, or any other applicable law or regulation
(the "Limitations").
The SRP shall provide to the Employee an annual profit-sharing contribution
equal to the excess of the amount that would have been contributed for the
Employee under the Plan absent the Limitations, over the amount actually
contributed to the Plan. The SRP will also permit the Employee to defer from
his eligible compensation, as defined in the Plan, a dollar amount equal to
the excess he could have deferred under the 401(k) feature of the Plan,
absent the Limitations, over the amount he actually deferred under that
plan; provided however, that the Employee has deferred the maximum amount
permitted by the Limitations. The SRP will also provide, with respect to the
supplemental deferral described in the previous sentence, a matching
contribution equal to the matching contribution that the Plan would have
provided if the supplemental deferral had been made into the 401(k) feature
of the Plan.
The SRP shall be an account maintained on the books of the Employer on
behalf of the Employee which shall include each of the amounts described in
the preceding paragraph for each year of employment under this Agreement.
Each of such amounts shall be recorded in the SRP at the same time it would
have been paid or credited to the Employee's accounts under the Plan. The
Employee's Account under the SRP shall be credited with earnings equal to
the Chase Bank prime rate in effect from time to time, at the same time that
earnings would be credited under the Plan. Although the SRP is a
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<PAGE>
bookkeeping account maintained by the Employer to record its supplemental
retirement liability to the Employee, the Employer may create a reserve or a
fund to cover some or all of such liability. However, any such reserve or
fund shall at all times be subject to the claims of creditors of the
Employer. Benefits under the SRP shall be paid solely from the general
assets of the Employer, and the Employee shall be a general unsecured
creditor of the Employer with respect to the Employer's liability to the
Employee under the SRP.
Benefits under the SRP shall be fully vested at all times and shall be paid
to the Employee in the same manner and at the same time as benefits shall be
paid to the Employee from the Plan.
7. Upon termination of the employment of the Employee under this Agreement, for
any reason other than death, disability, termination for cause, voluntary
resignation by the Employee, or retirement at age 65, the Employer shall pay
the Employee a severance payment in the amount equal to two times the
highest total compensation received by the Employee in any one of the three
years preceding such termination. In addition, the Employer shall continue,
at no cost to the Employee, coverage under the medical welfare plans in
which he and his dependents participated prior to the termination, for a
period of 18 months following the date such coverage would otherwise have
expired due to the termination.
For purposes of this section, "total compensation" means the sum of base
salary, bonus, other compensation such as stock grants, profit-sharing and
matching contributions under the Plan , and the amount credited to the
Employee's SRP account.
"Termination" shall include:
(i) Any merger, acquisition or change of control of the Employer to which the
Employee does not consent in writing, with "change of control" meaning
acquisition by any person or group of persons (other than shareholders of the
Employer on the effective date of this Agreement) of fifty percent (50%) or
more of the beneficial ownership of the voting stock of the Employer;
(ii) Failure to extend the term of this Agreement as provided in section 3
hereof; and
(iii) "Termination in fact" which shall mean any action or failure to take
action by the Employer as defined in section 1 hereof to employ the Employee as
the Chief Executive Officer of the Employer or other entity which in fact
controls the operation of the business or businesses which comprise the Employer
as defined in section 1 hereof.
"Termination for cause" shall mean a termination of the Employee's employment by
the Employer on account of:
(i) a material breach by the Employee of his obligations to the Employer;
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<PAGE>
(ii) material Employment of the Employee by another employer or material
competition by the Employee against the Employer while employed by the
Employer;
(iii) a material act of dishonesty or disloyalty or a breach of trust or a
willful neglect or injurious act against the Employer; and
(iv) conviction of the Employee of a felony.
Payment of the severance payment shall be made in four (4) equal annual
installments commencing on the first anniversary of the date of termination of
the Employee; provided, however, that by written request not later than thirty
(30) days after the date of termination, the Employee may require that the
Employer pay the entire severance payment in a single lump sum on the first
anniversary of the date of termination.
Upon termination of the Employee's employment and payment to the Employee of all
amounts he earned while employed under this Agreement and of all amounts to
which he is entitled under the Plan, the SRP and this section, the Employee
shall have no right to any continued compensation or benefits from the Employer,
except as otherwise provided by law (e.g., COBRA health coverage continuation
rights).
8. Notices to be given to the parties shall be sent first class mail or
facsimile to the above addresses.
9. This Agreement shall be binding upon and enforceable by the parties hereto,
and their heirs, executors, successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
HUDSON CHARTERED BANCORP, INC.
by:/s/ Robert Bowman
-------------------------------------------------------
Signature
Robert Bowman,Chairman,Personnel/CompensationCommittee
Print Name and Title
FIRST NATIONAL BANK OF THE HUDSON VALLEY
by:/s/ Robert Bowman
-------------------------------------------------------
Signature
Robert Bowman,Chairman,Personnel/Compensation Committee
-------------------------------------------------------
Print Name and Title
/s/ T.J. Cunningham III
-------------------------------------------------------
T. Jefferson Cunningham III
19466
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EXHIBIT 10.6
EMPLOYMENT AGREEMENT, AS AMENDED
THIS AGREEMENT amended effective as of July 1, 1995 ("Effective Date"), by
and between Hudson Chartered Bancorp, Inc. (the "Company"), First National Bank
of the Hudson Valley (the "Bank"), and John C. VanWormer (the"Employee").
WHEREAS, the Employee has heretofore been employed by the Bank and the
Company as their President and is experienced in all phases of the business of
the Bank and the Company; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank, the Company and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. The Employment Agreement dated November 24, 1993, and amended March 3, 1994,
between the Employee and the predecessors of the Company and the Bank, which
Agreement has been assumed by the Company and the Bank, shall remain in full
force and effect until the Effective Date.
2. Employment. The Employee is employed as the President and Chief Executive
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Officer of the Bank and as the President of the Company. The Employee shall
render such administrative and management services for the Bank and the Company
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Bank and the Company. The Employee's other duties shall be such as the
Board of Directors of the Bank or the Company may from time to time reasonably
direct, including normal duties as an officer of the Bank and of the Company.
3. Base Compensation. The Bank agrees to pay the Employee, beginning as of the
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Effective Date, a salary at the rate of $198,000 per annum, payable in cash not
less frequently than monthly. In lieu of paying the Employee a base salary
during the term of this Agreement, the Company agrees that to the extent
permitted by law, it shall be jointly and severally liable with the Bank for the
payment of all amounts due thereunder. The Board of Directors of the Company
may nevertheless at any time agree to pay the Employee, during the remaining
term of this Agreement, a salary for his services rendered for the Company. The
Board of Directors of the Bank and of the Company shall have the discretion to
increase the Employee's salary, at any time and from time to time. Any such
increase shall reflect the Employee's contribution to the financial and business
performance of the Company and the Bank during the preceding period.
4. Discretionary Bonuses. The Employee shall participate in an equitable
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manner with all other senior management employees of the Bank and/or the Company
in discretionary bonuses that their respective Board of Directors may award from
time to time to its senior management employees. No other compensation provided
for in this agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
5. (a) Participation in Retirement, Medical and Other Plans. Blue Cross/Blue
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Shield medical insurance coverage, including major medical insurance coverage,
or similar insurance coverage provided by another insurance company, shall be
maintained for the Employee and his dependents. In addition, the Employee shall
participate in any plan that the Bank or the Company maintains generally for the
benefit of its employees if the plan relates to (I) pension, profit-sharing, or
other retirement benefits, (ii) medical insurance or the reimbursement of
medical or dependent care expenses, or (iii) other group
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benefits, including disability and life insurance plans. The Employee's
participation in each such plan or program shall be in accordance with the terms
and provisions thereof as generally applicable to all participants.
(b) Employee Benefits; Expenses. The Employee shall participate in any
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fringe benefits which are approved by the Board of Directors, including for
example: any stock option or incentive compensation plans, club memberships,
and any other benefits which are commensurate with the responsibilities and
functions to be performed by the Employee under this Agreement. The Employee
shall be reimbursed for all reasonable out-of-pocket expenses which he shall
incur in connection with his services under this Agreement upon substantiation
of such expenses in accordance with the policies of the Bank and/or the Company.
6. Term. The Bank and the Company employed the Employee, and the Employee
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hereby accepted such employment, for the period commencing on November 24, 1993
("Employment Date") and ending thirty-six months thereafter (or such earlier
date as is determined in accordance with Section 10). On each annual
anniversary date from the Employment Date, the Employee's term of employment
shall be extended for a one-year period beyond the then effective expiration
date, unless the Bank or the Company provides written notice to the Employee
prior to such anniversary date advising the Employee that this Agreement shall
not be further extended. Any such extension shall be subject to the consent of
the Employee, which shall be presumed to be received unless the Employee
provides the Company or the Bank with written notice on the contrary.
7. The Employee shall be eligible to participate in and benefit from a
supplemental retirement program ("SRP") as described in this section. The SRP
shall provide supplemental retirement and tax deferral benefits to the extent
benefits under the Hudson Chartered Bancorp, Inc. Retirement and Thrift Plan or
any successor plan (the "Plan") are limited by provisions of the Internal
Revenue Code, ERISA, or any other applicable law or regulation (the
"Limitations").
The SRP shall provide to the Employee an annual profit-sharing
contribution equal to the excess of the amount that would have been contributed
for the Employee under the Plan absent the Limitations, over the amount actually
contributed to the Plan. The SRP will also permit the Employee to defer from
his eligible compensation, as defined in the Plan, a dollar amount equal to the
excess he could have deferred under the 401(k) feature of the Plan, absent the
Limitations, over the amount he actually deferred under that plan; provided
however, that the Employee has deferred the maximum amount permitted by the
Limitations. The SRP will also provide, with respect to the supplemental
deferral described in the previous sentence, a matching contribution equal to
the matching contribution that the Plan would have provided if the supplemental
deferral had been made into the 401(k) feature of the Plan.
The SRP shall be an account maintained on the books of the Employer on
behalf of the Employee which shall include each of the amounts described in the
preceding paragraph for each year of employment under this Agreement. Each of
such amounts shall be recorded in the SRP at the same time it would have been
paid or credited to the Employee's accounts under the Plan. The Employee's
Account under the SRP shall be credited with earnings equal to the Chase Bank
prime rate in effect from time to time, at the same time that earnings would be
credited under the Plan. Although the SRP is a bookkeeping account maintained
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by the Employer to record its supplemental retirement liability to the Employee,
the Employer may create a reserve or a fund to cover some or all of such
liability. However, any such reserve or fund shall at all times be subject to
the claims of creditors of the Employer. Benefits under the SRP shall be paid
solely from the general assets of the Employer, and the Employee shall be a
general unsecured creditor of the Employer with respect to the Employer's
liability to the Employee under the SRP.
Benefits under the SRP shall be fully vested at all times and shall be paid to
the Employee in the same manner and at the same time as benefits shall be paid
to the Employee from the Plan.
8. Loyalty Noncompetition.
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(a) During the period of his employment thereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties thereunder; provided, however, from
time to time, Employee may serve on boards of directors of, and hold any other
offices or positions in, companies or organizations, which will not present any
conflict of interest with the Company or the Bank or any of their subsidiaries
or affiliates, or unfavorably affect the performance of Employee's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined by the fact that the
Employee cannot be gainfully employed in any other position or job, but the time
devoted to the Company and the Bank shall be that amount of time usually devoted
to like companies by similarly situated executive officers. During the term of
his employment under this Agreement, the Employee shall not engage in any
business or activity contrary to or conflicting with the business affairs or
interests of the bank or the Company or any of their subsidiaries or affiliates.
(b) Nothing contained in this Paragraph 8 shall be deemed to prevent or
limit the Employee's right to invest in the capital stock or other securities of
any business dissimilar from that of the Bank and the Company, or, solely as a
passive or minority investor, in any business.
9. Standards. The Employee shall perform his duties under this Agreement in
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accordance with such reasonable standards as the Board of Directors of the Bank
and/or of the Company may establish from time to time ("Performance Standards").
The Bank will provide Employee with the working facilities and staff customary
for similar executives and necessary for him to perform his duties.
10. Vacation and Sick Leave. At such reasonable times as the Board of
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Directors of the Ban and/or the Company shall in its discretion permit, the
Employee shall be entitled, without loss of pay to absent himself voluntarily
from the performance of his employment under this Agreement, all such voluntary
absences to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation of not less than
four weeks, in accordance with the policies that the Board of Directors of the
Bank and/or the Company periodically establishes for senior management employees
of the Bank or the Company.
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(b) The Employee shall not receive any additional compensation from the Bank
or the Company on account of his failure to take a vacation, and the Employee
shall not accumulate unused vacation from one fiscal year to the next, except in
accordance with the policies that the Board of Directors of the Bank and/or the
Company periodically establishes for the employees of the Bank or the Company.
(c) The Board of Directors of the Bank or the Company may grant to the
Employee a leave or leaves or absence, with or without pay, at such time or
times and upon such terms and conditions as such Board of Directors in its
discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors of the Bank or the Company.
11. Termination and Termination Pay. Subject to Section 13 hereof, the
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Employee's employment thereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall terminate
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upon his death during the term of this Agreement, in which event the Employee's
estate shall be entitled to receive the salary provided pursuant to Section 3
hereof through the last day of the calendar month in which his death occurred.
(b) Just Cause. The Board of Directors of the Bank or the Company may, by
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written notice to the Employee, immediately terminate his employment at any
time, for Just Cause. The Employee shall have no right to receive compensation
or other benefits for any period after termination for Just Cause. Termination
for "Just Cause" shall mean termination because of, in the good faith
determination of the Company's or the Bank's Board of Directors, the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
consistent failure to meet Performance Standards (after notice to the Employee),
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, (I) the Employee
shall not be deemed to have been terminated for Just Cause unless there shall
have been delivered to the Employee a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire membership of the
Board of Directors of the Bank or the Company at a meeting of the Board called
and held for the purpose (after reasonable notice to the Employee and an
opportunity for the Employee to be heard before the Board), a finding that in
the good faith opinion of the Board the Employee was guilty of conduct set forth
above in the second sentence of this Subsection (b) and specifying the
particulars thereof in detail.
(c) Without Just Cause. Subject to Section 13 hereof, the Board of Directors
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of the Bank or the Company may, by written notice to the Employee, immediately
terminate his employment at any time for a reason other than Just Cause, in
which event the Employee shall be entitled to receive salary provided
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pursuant to Section 3 hereof, up to the date of termination of the term of this
Agreement (including any renewal term of this Agreement previously agreed to by
the Board of Directors) plus paid salary for an additional 12-month period.
Said sum shall be paid, at the option of the Employee, either(I) in periodic
payments over the remaining term of this Agreement, as if the Employee's
employment had not been terminated, or (II) in one lump sum with ten (10) days
of such termination. In addition, the Company or the Bank shall continue, at no
cost to the Employee, coverage under the medical welfare plans in which he and
his dependents participated prior to the termination, for a period of 18 months
following the date such coverage would otherwise have expired due to the
termination.
(d) Termination or Supervision Under Federal Law.
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(1) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Company and the Bank under
this Agreement shall terminate, as of the effective date of the order, but
vested rights of the parties shall not be affected.
(2) If the bank is in default (as defined in Section 3(x)(1) of FDIA),
all obligations of the parties under this Agreement shall terminate as of the
date of default, but this Section 9(e)(2) shall not affect any vested rights of
the parties.
(3) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12
U.S.C. 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the Employee
from participating in the conduct of the Bank's affairs, the Bank's and the
Company's obligations under this Agreement shall be suspended as of the date of
such service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may (I) pay the Employee all or part of the
compensation withheld while its contract obligations were suspended, and (ii)
reinstate (in whole or in part) any of its obligations which were suspended.
(e) Voluntary Termination by Employee. Subject to Section 13 hereof, the
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Employee may voluntarily terminate employment with the Bank and the Company
during the term of this Agreement, upon at least 60 days' prior written notice
to each of their Board of Directors, in which case the Employee shall receive
only his compensation vested rights in the employee benefits up to the date of
his termination.
12. No Mitigation. The Employee shall not be required to mitigate the amount
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of any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset; or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
13. Change in Control.
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(a) Notwithstanding any provision herein to the contrary, if the Employee's
employment under this Agreement is terminated by the Company or the Bank,
without the Employee's prior written consent and for a reason other than Just
Cause, in connection with or within twelve (12) months after any change in
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control of the Bank or the Company, the Employee shall be paid an amount equal
to difference between (I) the product of 2.99 times his "base amount" as defined
in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code") and regulations promulgated thereunder and (ii) the sum of any other
parachute payments as defined under Section 280G(b)(2) of the Code that the
Employee receives on account of the change in control. Said Sum shall be paid
in one lump sum within ten (10) days after such termination.
The term "change in control" shall mean (1) the ownership, holding or
power to vote more than 25% of the Bank's or Company's voting stock, (2) the
control of the election of a majority of the Bank's or Company's directors, (3)
the exercise of a controlling influence over the management or policies of the
Bank or the Company by any person or by persons acting as a "group" within the
meaning of Section 13(d) of the Securities Exchange Act of 1934 (except in the
case of (1), (2) and (3) hereof, ownership or control of the Bank or its
Directors by the Company itself shall not constitute a "change in control") and
(4) during any period of two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Company or the Bank (the
"Continuing Directors") cease for any reason to constitute at least two-thirds
thereof, provided that any individual whose election or nomination for election
as a member of either of such Boards was approved by a vote of at least two-
thirds of the Continuing Directors then in office shall be considered a
Continuing Director. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary, the
Employee may voluntarily terminate his employment under this Agreement within
twelve (12) months following a change in control of the Bank or the Company, and
the Employee shall thereupon be entitled to receive the payment described in
Section 12(a) of this Agreement, upon the occurrence of any of the following
events, or within ninety (90) days thereafter, which have not been consented to
in advance by the Employee in writing: (I) the requirement that the Employee
perform his principal executive functions, more than thirty-five (35) miles from
his primary office as of the Effective Date of this Agreement; (ii) a reduction
in the Employee's base compensation as in effect on the Effective Date of this
Agreement or as the same may have been increased from time to time; (iii) the
failure by the Bank or the Company to continue to provide the Employee with
compensation and benefits provided for employees or senior officers of the
Company or the Bank on the terms and conditions generally applicable to such
participants, or the taking of any action by the Company or the Bank which would
directly or indirectly reduce any such benefits or deprive the Employee of any
material fringe benefit enjoyed by him at the time of the change in control;
(iv) the assignment to the Employee of material duties and responsibilities
other than those normally associated with his position as referenced at Section
1l (v) a failure to elect or reelect the Employee to the Board of Directors of
the Bank or the Company; or (vi) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting responsibilities)
in connection with his employment with the Bank or the Company.
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(c) In the event that any dispute arises between the Employee and the Bank as
to the terms or interpretation of this Agreement, including this Section 11,
whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Section 11 or to
defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions provided that the Employee shall obtain a
final judgment by a court of competent jurisdiction in favor of the Employee.
Such reimbursement shall be paid with ten (10) days of Employee's furnishing to
the Bank written evidence, which may be in the form, among other things, of a
canceled check or receipt, of any costs or expenses incurred by the Employee.
14. Successors and Assigns.
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(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or the Company which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or the Company.
(b) Since the Bank and the Company are contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties thereunder without first obtaining the written
consent of the Bank and the Company, such consent to be within the sole
discretion of the Bank and the Company.
15. Joint and Several Liability. To the extent permitted by law, the Company
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and the Bank shall be jointly and severally liable for the payment of all
amounts due, and shall be jointly and severally entitled to the benefits and
remedies of this Agreement.
16. Amendments. No amendments or additions to this Agreement shall be
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binding unless made in writing and signed by all parties, except as herein
otherwise specifically provided.
17. Applicable Law. Except to the extent preempted by Federal law, the laws
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of the State of New York shall govern this Agreement in all respects, whether as
to its validity, construction, capacity, performance or otherwise.
18. Severability. The provisions of this Agreement shall be deemed severable
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and the invalidity or unenforceability of any provision shall not effect the
validity or enforceability of the other provisions hereof.
19. Entire Agreement. This Agreement, together with any understanding or
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modifications hereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto, and shall supersede any prior
agreements between the parties (including but not limited to the agreement dated
May 15, 1985, as thereafter amended, between the Employee and the predecessor of
the Bank).
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first thereinabove written.
HUDSON CHARTERED BANCORP, INC.
By: /s/ Robert Bowman
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Chairman, Personnel & Compensation Committee
FIRST NATIONAL BANK OF THE HUDSON VALLEY
By: /s/ Robert Bowman
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Chairman, Personnel & Compensation Committee
/s/ John C. Van Wormer
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
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THIS AGREEMENT made the 1st day of April 1995, by and between Hudson
Chartered Bancorp, Inc., a company, organized and existing under and by virtue
of the laws of the State of New York with principal offices located at Route 55,
LaGrangeville, New York 12540, hereinafter (the "Company") and Paul A. Maisch,
residing at 7 Lorene Drive, LaGrangeville, New York 12540, hereinafter
("Maisch").
WHEREAS, Maisch is now employed by the Company as its Chief Financial
Officer and is considered an Executive Officer as defined by the United States
Code and regulations promulgated by the Federal Reserve Board of the United
States of America, and
WHEREAS, the Board of Directors of the Company has adopted several
personnel policies relating to Officers employed by the Company, and
WHEREAS, the parties desire to enter into an agreement to incorporate these
personnel policies as well as to set forth their agreement with respect to other
issues relating to the employment of Maisch as Chief Financial Officer of the
Company.
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter contained, it is agreed by and between the parties as follows:
1. Employment: The Company employs and engages Maisch as its Chief
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Financial Officer and Maisch accepts and agrees to employment, subject to the
general supervision of the Chairman and Chief Executive Officer and pursuant to
the orders, advice, and direction of the Board of Directors of the Company.
Maisch shall perform such other duties as customarily performed by one holding
such a position in the business of banking.
2. Term of Employment: The term of this Agreement shall be a period of
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two (2) years, commencing April 1, 1995, and terminating March 31, 1997,
subject, however, to prior termination as hereinafter provided. At the
expiration of March 31, 1997, and at subsequent expiration dates, this Agreement
shall be considered automatically renewed for successive periods of one (1)
year, provided neither party submits a written notice of termination not later
than thirty (30) days prior to the expiration date.
3. Compensation: The Company shall pay Maisch, and Maisch shall accept
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from the Company in full payment for his services as Chief Financial Officer,
base compensation at the rate of ONE HUNDRED FIVE THOUSAND ($105,000) DOLLARS
payable at the rate of FOUR THOUSAND THIRTY-EIGHT DOLLARS AND FORTY-SIX CENTS
($4,038.46) per pay period while this Agreement shall be in force ("Base
Compensation"). Maisch will also be appointed as a Senior Vice President of the
First National Bank of the Hudson Valley (the "Bank"). Additionally, Maisch
will be a member of the Senior Management Committee of the First National Bank
of the Hudson Valley. Maisch's compensation shall be periodically reviewed in
accordance with the Company's normal compensation review program.
4. Benefits: Maisch shall participate in all generally available
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employee benefit plans and programs for Senior Officers of the Company and the
Bank of every nature and shall, in fact, be entitled to participate in and be a
member of all such benefit plans and, where such plans are "proportionate to
compensation" plans, in proportion to his compensation hereunder. Benefit plans
shall include, but not be limited to group life, disability, hospitalization and
major medical insurance coverages, stock options, stock purchase or bonus plans,
retirement programs, profit sharing arrangements and other incentive
compensation plans. Maisch's eligible dependents shall also be covered under
any such plans and benefit programs to the extent that dependents of other
employees are similarly provided for.
Maisch shall be provided with a company automobile under arrangements at
least equivalent to those currently in effect with respect to other Bank Senior
Vice Presidents.
Maisch is authorized to incur reasonable expenses for promoting the
business of the Bank and the Company. Upon submission of proper documentation,
the Bank shall reimburse him for all expenses including entertainment, travel,
and miscellaneous other expenses reasonably incurred in promoting the business
of the Bank and the Company and in performing his duties as an Officer of the
Bank and the Company.
5. Performance of Duties: Maisch agrees that he will at all times
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faithfully, industriously, and to the best of his ability, experience and
talent, perform all of the duties that may be required of and from him pursuant
to the express terms herein and to the reasonable satisfaction of the Company.
Such duties shall be rendered at Route 55, LaGrangeville, New York, and at such
other place or places as the Company shall in good faith require or as the
interest, needs, business or opportunity of the Bank shall require or make
advisable.
6. Termination: This Agreement may be terminated by either party on
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thirty (30) days written notice to the other. If the Company terminates this
Agreement for any reason other than willful misconduct, gross negligence, or
illegal behavior, Maisch shall be entitled to compensation equaling twelve (12)
months of one hundred (100%) percent of his Base Compensation received by him at
such time; and payment for all accrued sick days and vacation days not used by
Maisch as of the date of termination to be paid on a per diem rate of
compensation for such days. This payment shall be a lump-sum to Maisch no later
than ten (10) days from the effective date of his termination.
In addition, the Company shall provide and continue to provide for twelve
(12) months after termination such insurance benefits (including medical and
life insurance) as the Company generally provides for any group or class of
employee of which the employee would have been a member if his employment had
continued on the same terms and conditions generally applicable to participants.
In addition to providing severance pay and benefits, as described above,
the Company will also provide out-placement services, at the Company's expense.
In the event the Company elects not to renew this contract upon any
expiration date in accordance with Paragraph 2, but does not elect to terminate
Maisch's employment, Maisch may elect, by written notice not later than thirty
(30) days following expiration of this contract, to terminate his employment.
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Upon the effective date of his termination, Maisch shall be entitled to receive
payment equal to six (6) months of one hundred (100%) percent of his then
current Base Compensation plus payment for his accrued sick days and vacation
days not used as of the date of termination (to be paid on a per diem rate of
compensation for such days.)
If Maisch shall terminate this Agreement other than as indicated
immediately above, he shall be entitled to payment for his accrued sick days and
vacation days not used as of the date of termination to be paid on a per diem
rate of compensation for such days. Maisch shall not be entitled to payment for
sick or vacation days if he fails to provide thirty (30) days notice to the
Company.
7. Option in the Event of Merger or Sale: In the event that the Company
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shall cease to operate as an "independent" Company or part of an "independent"
banking group, whether by sale merger, or otherwise, and Maisch is not appointed
Chief Financial Officer of the successor company, then and in that event Maisch
shall have the option to terminate this Agreement immediately or to elect to
continue employment. In the event Maisch elects to terminate this Agreement, he
shall be entitled to receive payment equal to the remaining Base Compensation at
the rate then in effect for the period until the then expiration date of the
Agreement (but not less than twelve (12) months of Base Compensation) either in
a lump-sum payment payable not later than thirty (30) days from the effective
date of termination or monthly payments over the remaining period until the then
expiration date of the Agreement. Maisch shall also be entitled to participate
in all benefit plans until the then expiration date of the Agreement on the same
terms and conditions generally applicable to participants.
8. Contract Terms to be Exclusive: This written Agreement contains the
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entire agreement between the parties and supersedes any and all other agreements
between the parties. The parties acknowledge and agree that neither of them has
made any representation with respect to the subject matter of this Agreement or
any representations inducing the execution and delivery hereof except such
representations as are specifically set forth herein, and each of the parties
hereto acknowledges that he or it has relied on his or her own judgement in
entering into the same. The parties hereto further acknowledge that any
statements or representations that may have heretofore been made by either of
them to the other are void and of no effect and that neither of them has relied
thereon in connection with his or its dealing with the other.
9. Waiver or Modification Ineffective Unless in Writing: It is further
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agreed that no waiver or modification of this Agreement or of any covenant,
condition, or limitation herein contained shall be valid unless in writing and
duly executed by the party to be charged therewith and that no evidence of any
waiver or modification shall be offered or received in evidence in any
proceedings, arbitration, or litigation between the parties hereto arising out
of or affecting this Agreement, or the rights or obligations of any party
hereunder, unless such waiver or modification is in writing, duly executed as
aforesaid, and the parties further agree that the provisions of this paragraph
may not be waived except as herein set forth. Notwithstanding anything to the
contrary contained in this Agreement, in the event that this Agreement is
renewed as provided herein, the approval of a new rate of compensation and other
benefits for Maisch as established by the Board of Directors of the Company
shall be
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considered to be an amendment to this Agreement, but that all other terms and
provisions of this Agreement shall govern in all respects in subsequent years.
10. Contract Governed by Law of State of New York: The parties hereto
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agree that it is their intention and covenant that this Agreement and
performance hereunder and all suits and special proceedings hereunder be
construed in accordance with and under and pursuant to the laws of the Sate of
New York and that any action, special proceedings, or other proceeding that may
be brought arising out of, in connection with, or by reason of this Agreement,
the laws of the State of New York shall be applicable and shall govern to the
exclusion of the law of any other forum, without regard to the jurisdiction in
which any action or special proceeding may be instituted.
11. Survivorship of Benefits: This Agreement shall be binding on and
------------------------
inure to the benefit of the respective parties hereto and their executors,
administrators, heirs, successors, assigns, and personal representatives.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
HUDSON CHARTERED BANCORP, INC.
By: /s/ T. Jefferson Cunningham
----------------------------
T. Jefferson Cunningham
/s/ Paul A. Maisch
-----------------------------
Paul A. Maisch
4
<PAGE>
STATE OF NEW YORK
COUNTY OF DUTCHESS
On this 29th day of June, 1995, before me, personally came T. Jefferson
Cunningham III to me known, who being by me, duly sworn, did depose and say that
he resides at East Fishkill, New York; that he is the Chairman and CEO of Hudson
Chartered Bancorp, Inc., the corporation described in and which execute the
above 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.
/s/ Eunice D. Landry
------------------------------
Notary Public
STATE OF NEW YORK
COUNTY OF DUTCHESS
On this 29th day of June, 1995, before me, the subscriber, personally
appeared PAUL A. MAISCH, to me personally known and known to me to be the same
person described in and who executed the within instrument and he acknowledged
to me that he executed the same.
/s/ Eunice D. Landry
-------------------------------
Notary Public
5
<PAGE>
EXHIBIT 10.8
SAR NO: 1995-SAR-1
EMPLOYEE: T. Jefferson Cunningham III
DATE OF GRANT: July 19, 1995
GRANT PRICE: $17.75
COVERED SHARES: 30,000
HUDSON CHARTERED BANCORP, INC.
1995 INCENTIVE STOCK PLAN
* * *
STOCK APPRECIATION RIGHT AGREEMENT
1. Definitions. In this Agreement, except where the context otherwise
-----------
indicates, the following definitions apply:
(a) "Agreement" means this Stock Appreciation Right Agreement.
(b) "Board" means the Board of Directors of the Corporation.
(c) "Committee" means the committee charged, pursuant to the provisions of
the Plan, with the administration of the Plan. Unless otherwise determined by
the Board, the Personnel and Compensation Committee of the Board shall be the
Committee.
(d) "Common Stock" means the common stock, par value $.80 per share, of the
Corporation.
(e) "Corporation" means Hudson Chartered Bancorp, Inc.
(f) "Covered Shares" means the shares of Common Stock subject to the Right
set forth as the "Covered Shares" on page 1 of this Agreement.
(g) "Date of Exercise" means the date on which the Corporation receives
notice pursuant to Paragraph 8(a) of the exercise, in whole or in part, of the
Right.
(h) "Date of Expiration" means the date on which the Right shall expire,
which shall be the earliest of the following times:
(i) the date of the Employee's termination of employment if such
termination of employment would constitute a "termination for cause" within the
meaning of Paragraph 7 of the Employment Agreement;
<PAGE>
(ii) ninety days after the Employee terminates his employment with the
Corporation and its Subsidiaries other than: (A) a termination by the Employee
following (a) any event that constitutes a "termination," as described in the
first appearing clauses (i), (ii), and (iii) of Paragraph 7 of the Employment
Agreement or (b) a material breach of the Employment Agreement by the
Corporation (as successor to Fishkill National Corporation's obligations under
the Employment Agreement); or (B) by reason of Retirement;
(iii) one year after termination of the Employee's employment with the
Corporation and its Subsidiaries by reason of the Employee's death or
disability; or
(iv) ten years after the Date of Grant.
(i) "Date of Grant" means the date set forth as the "Date of Grant" on page
1 of this Agreement.
(j) "Employee" means the person identified as the "Employee" on page 1 of
this Agreement.
(k) "Employment Agreement" means the Employment Agreement, dated as of
December 31, 1993, between the Employee and Fishkill National Corporation.
(l) "Fair Market Value" of a share of Common Stock means the average of the
last reported sale price as reported by NASDAQ for the five trading days
preceding the Date of Exercise, unless an alternate method of determining Fair
Market Value is specified by the Committee in accordance with the terms of the
Plan.
(m) "Grant Price" means the "Grant Price" set forth on
page 1 of this Agreement.
(n) "Plan" means the Hudson Chartered Bancorp, Inc. 1995 Incentive Stock
Plan, as amended.
(o) "Retirement" means the Employee's retirement from employment with the
Corporation and its Subsidiaries after attaining age 65 or the Board's adoption
of a resolution consenting to any earlier retirement.
(p) "Right" means the stock appreciation right granted to the Employee in
Paragraph 2 of this Agreement.
(q) "Subsidiary" means a corporation at least fifty percent of the total
combined voting power of all classes of stock of which is owned by the
Corporation, either directly or through one or more other Subsidiaries.
2
<PAGE>
2. Grant of Right. Pursuant to the Plan and subject to the terms of this
--------------
Agreement, the Corporation hereby grants to the Employee or his successors the
Right to receive in cash an amount equal to the number of Covered Shares
multiplied by an amount equal to the excess of (a) the Fair Market Value per
share of Common Stock on the Date of Exercise over (b) the Grant Price.
3. Term of the Right. During the period commencing on the Date of Grant
-----------------
and terminating on the Date of Expiration, the Right may be exercised with
respect to all or a portion of the Covered Shares (in full shares) to the extent
the Right has not been previously exercised with respect to such Covered Shares;
provided, however, that no part of the Right may be exercised during the first
six months following the Date of Grant.
4. Date of Exercise Fair Market Value Must Exceed Grant Price.
----------------------------------------------------------
The Right may be exercised only when the Fair Market Value of a share of Common
Stock exceeds the Grant Price.
5. Cash Payment Only. Payment upon the exercise of the Right shall be
-----------------
made only in cash.
6. Nontransferability. The Right may not be transferred by the Employee
------------------
other than by will or by the laws of descent and distribution and shall be
exercisable; during the Employee's lifetime, only by the Employee or, in the
event of the Employee's legal disability, by the Employee's legal
representative.
7. Capital Adjustments. The number of Covered Shares and the Grant Price
-------------------
shall be subject to such adjustment, if any, as the Committee in its sole
discretion deems appropriate to reflect such events as stock dividends, stock
splits, recapitalizations, mergers, consolidations or reorganizations of or by
the Corporation.
8. Exercise.
--------
(a) Notice. The Right shall be exercised, in whole or in part, by the
------
delivery to the Corporation of written notice of such exercise, in such form as
the Committee may from time to time prescribe. Upon exercise, the Corporation
shall withhold any amounts required to be withheld pursuant to applicable income
tax laws in connection with such exercise. Until the Committee notifies the
Employee to the contrary, the form attached to this Agreement as Exhibit A shall
be used to exercise the Right.
(b) Effect. The exercise, in whole or in part, of the Right shall cause
------
a reduction in the number of Covered Shares equal to the number of shares of
Common Stock with respect to which the Right is exercised.
9. Employment. Neither the granting of the Right evidenced by this
----------
Agreement nor any term or provision of this Agreement shall constitute or be
evidence of any understanding, express or implied, on the part of the
3
<PAGE>
Corporation or any of its Subsidiaries to employ the Employee for any period.
Whenever reference is made in this Agreement to the employment of the Employee,
it means employment by the Corporation or a Subsidiary.
10. Subject to the Plan. The Right evidenced by this Agreement and the
-------------------
exercise thereof are subject to the terms and conditions of the Plan, which are
incorporated herein by reference and made a part hereof, but the terms of the
Plan shall not be considered an enlargement of any benefits under this
Agreement. In addition, the Right is subject to any rules and regulations
promulgated by the Committee.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed
on its behalf effective as of the Date of Grant.
ATTEST HUDSON CHARTERED BANCORP, INC.
/s/ Kathy D. Seaboldt By: /s/ Robert Bowman
- ------------------------------- ----------------------------
Accepted and agreed to as of the Date of Grant.
/s/ T. J. Cunningham III
----------------------------
Employee
4
<PAGE>
"EXHIBIT A"
EXERCISE OF RIGHT
Board of Directors
Hudson Chartered Bancorp, Inc.
Route 55
LaGrangeville, New York 12540
Ladies and Gentlemen:
The undersigned, the Employee under the Stock Appreciation Right Agreement
identified as SAR No. 1995-SAR-1, granted pursuant to the Hudson Chartered
Bancorp, Inc. 1995 Incentive Stock Plan hereby irrevocably elects to exercise
the Right granted in the Agreement to receive cash in an amount determined
pursuant to the provisions of the Plan and the Agreement, representing the
appreciation in value of _________ shares of Common Stock.
Date: ______________________________ _________________________________
Signature of Employee
Date Received by Hudson Chartered Bancorp, Inc.: __________________________
Received by: _________________________________
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Weighted average common shares, net dilutive effect of stock options and
conversion of preferred stock for all years are adjusted for 10% stock dividend
declared December 21, 1995.
Primary earnings per common share is computed as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding 3,802,678 3,716,702 3,661,600
Net effect of dilutive stock options at
average market price 52,571 62,411 32,033
------------------------------------
Total shares 3,855,249 3,779,113 3,693,633
====================================
Net income (in thousands) $ 6,965 $ 3,264 $ 4,986
Less preferred stock dividends declared 414 415 497
Net income applicable to common stock $ 6,551 $ 2,849 $ 4,489
====================================
Per common share amount $1.70 $0.75 $1.22
====================================
</TABLE>
Fully diluted earnings per common share is computed as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding 3,802,678 3,716,702 3,661,600
Net effect of dilutive stock options 66,155 73,270 45,511
Assumed conversion of series B, preferred stock 441,081 441,081 443,860
---------------------------------------
Total shares 4,309,914 4,231,053 4,150,971
=======================================
Net income (in thousands) $ 6,965 $ 3,264 $ 4,986
Less preferred stock dividends declared 81
---------------------------------------
Net income applicable to common stock $ 6,965 $ 3,264 $ 4,905
=======================================
Per common share amount $1.62 $.75(1) $1.18
=======================================
</TABLE>
(1) ABA Opinion 15 states that when there are antidilutive effects of common
stock equivalents, such effect should not be reported. Therefore, fully
diluted earnings (loss) per share for 1994 is $.75. These are the same as
primary earnings (loss) per share of $.75.
<PAGE>
Exhibit 21
Subsidiaries of Hudson Chartered Bancorp, Inc.
<TABLE>
<CAPTION>
Name Under Which
Name of Subsidiary Jurisdiction of Incorporation Subsidiary Conducts Business
<S> <C> <C>
First National Bank of the First National Bank of the
Hudson Valley United States Hudson Valley
Hudson Chartered Realty, Inc. New York State Hudson Chartered Realty, Inc.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
WE CONSENT TO THE INCORPORATION BY REFERENCE, IN THE REGISTRATION STATEMENTS
LISTED BELOW, OF OUR REPORT DATE FEBRUARY 10, 1994, WITH RESPECT TO THE
CONSOLIDATED FINANCIAL STATEMENTS (NOT PRESENTED SEPARATELY HEREIN) OF COMMUNITY
BANCORP, INC. (PREDECESSOR TO HUDSON CHARTERED BANCORP, INC.) AND SUBSIDIARIES
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K OF HUDSON CHARTERED BANCORP, INC.
FOR THE YEAR ENDED DECEMBER 31, 1995.
FORM S-8 RELATED TO THE HUDSON CHARTERED BANCORP, INC. (FORMERLY COMMUNITY
BANCORP, INC.) EMPLOYEE STOCK OPTION PLAN (FILE NO. 33-71806)
POST-EFFECTIVE AMENDMENT NO. 2 TO FORM S-3 RELATING TO THE HUDSON CHARTERED
BANCORP, INC. DIVIDEND INVESTMENT AND STOCK PURCHASE PLAN (FILE NO. 33-48188)
POST-EFFECTIVE AMENDMENT NO. 1 (ON FORM S-8) TO FORM S-4 RELATING TO SHARES OF
HUDSON CHARTERED BANCORP, INC. COMMON STOCK OFFERED PURSUANT TO THE FISHKILL
NATIONAL CORPORATION INCENTIVE STOCK OPTION PLAN (FILE NO. 33-79844)
POST-EFFECTIVE AMENDMENT NO. 2 (ON FORM S-3) TO FORM S-2 RELATING TO THE
OFFERING OF SHARES OF HUDSON CHARTERED BANCORP, INC. COMMON STOCK BY CERTAIN
SELLING STOCKHOLDERS (FILE NO. 33-48660)
/S/ ERNST & YOUNG LLP
CLEVELAND, OHIO
MARCH 15, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference, in the Registration Statements
listed below, of our report dated January 30, 1996, relating to the consolidated
financial statements of Hudson Chartered Bancorp, Inc. (The "Company") and
subsidiaries, appearing in this Annual Report on Form 10-K of the Company for
the year ended December 31, 1995:
Form S-8 relating to the Company's employee stock option plan (File No.
33-71806)
Post-Effective Amendment No. 1 (on Form S-8) to Form S-4 relating to shares of
the Company's common stock offered pursuant to the Fishkill National Corporation
Incentive Stock Option Plan (File No. 33-79844)
Post-Effective Amendment No. 2 (on Form S-3) to Form S-2 relating to the
offering of shares of the Company's common stock by certain selling stockholders
(File No. 33-48660)
/s/ Deloitte & Touche LLP
Stamford, Connecticut
March 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 67,853
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,997
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 167,334
<INVESTMENTS-CARRYING> 16,572
<INVESTMENTS-MARKET> 17,029
<LOANS> 422,083
<ALLOWANCE> 8,770
<TOTAL-ASSETS> 696,483
<DEPOSITS> 631,060
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,598
<LONG-TERM> 1,896
0
5,713
<COMMON> 54,216
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 696,483
<INTEREST-LOAN> 39,131
<INTEREST-INVEST> 9,274
<INTEREST-OTHER> 2,028
<INTEREST-TOTAL> 50,433
<INTEREST-DEPOSIT> 21,129
<INTEREST-EXPENSE> 21,259
<INTEREST-INCOME-NET> 29,174
<LOAN-LOSSES> 2,300
<SECURITIES-GAINS> 138
<EXPENSE-OTHER> 22,456
<INCOME-PRETAX> 10,479
<INCOME-PRE-EXTRAORDINARY> 10,479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,965
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 8.31
<LOANS-NON> 4,407
<LOANS-PAST> 522
<LOANS-TROUBLED> 349
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,326
<CHARGE-OFFS> 2,168
<RECOVERIES> 312
<ALLOWANCE-CLOSE> 8,770
<ALLOWANCE-DOMESTIC> 8,002
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 768
</TABLE>
<PAGE>
EXHIBIT 99
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
COMMUNITY BANCORP, INC.
WE HAVE AUDITED THE CONSOLIDATED BALANCE SHEET OF COMMUNITY BANCORP, INC. (A
PREDECESSOR TO HUDSON CHARTERED BANCORP, INC.) AND SUBSIDIARIES AS OF DECEMBER
31, 1993 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME, CHANGES IN
SHAREHOLDERS' EQUITY, AND CASH FLOWS FOR EACH OF THE TWO YEARS IN THE PERIOD
ENDED DECEMBER 31, 1993 (NOT PRESENTED SEPARATELY HEREIN). THESE FINANCIAL
STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF
COMMUNITY BANCORP, INC. AND SUBSIDIARIES AT DECEMBER 31, 1993, AND THE
CONSOLIDATED RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE
TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1993, IN CONFORMITY WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES.
/S/ ERNEST & YOUNG LLP
ALBANY, NEW YORK
FEBRUARY 10, 1994
