<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission file number 0-17848
-------
HUDSON CHARTERED BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1668718
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
PO Box 310, Route 55, Lagrangeville, NY 12540
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914)471-1711
- -------------
(Registrant`s telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 filing
requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
4,300,341 shares of Common Stock outstanding, par value $.80 per share, at
October 31, 1996.
<PAGE>
HUDSON CHARTERED BANCORP, INC. & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C>
PART I
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements
of Income & Expense 2
Condensed Consolidated Statements
of Cash Flows 3
Condensed Consolidated Statement
of Changes in Stockholders' Equity 4
Notes to Unaudited Condensed Consolidated
Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Signatures 27
</TABLE>
<PAGE>
Part 1
Item 1: Financial information
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES Form 10-Q
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 43,609 $ 38,856
Federal funds sold 13,000 28,997
--------- ---------
Total cash and cash equivalents 56,609 67,853
Securities
Available for sale 174,378 167,334
Held to maturity 13,560 14,465
Regulatory securities 2,755 2,107
Loans held for sale 555 273
Loans( see notes)
Gross loans 445,499 422,083
Allowance for loan losses (8,889) (8,770)
--------- ---------
Net loans 436,610 413,313
Premises and equipment, net 16,320 17,062
Accrued Income 5,720 5,618
Other assets 8,149 8,458
--------- ---------
TOTAL ASSETS $ 714,656 $ 696,483
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (see notes)
Non-Interest Bearing $ 144,646 $ 138,656
Interest Bearing 501,264 492,404
--------- ---------
Total deposits 645,910 631,060
Notes payable 1,864 1,896
Other liabilities 3,807 3,598
--------- ---------
TOTAL LIABILITIES 651,581 636,554
STOCKHOLDERS' EQUITY (see notes)
Preferred stock Series B,
7.25%, convertible, cumulative liquidation value 5,713
Common stock 3,464 3,086
Common paid-in capital 29,601 23,378
Retained earnings 31,504 27,454
Net unrealized securities (losses) gains (122) 586
Employee stock ownership plan (139) (171)
Treasury Stock (1,233) (117)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 63,075 59,929
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 714,656 $ 696,483
EQUITY ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
- 1 -
<PAGE>
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 9,816 $ 9,786 $ 29,258 $ 29,563
Federal funds sold 273 616 958 1,415
Taxable securities 2,068 1,929 6,151 5,186
Tax-exempt securities 542 491 1,608 1,519
------- ------- ------- -------
Total interest income 12,699 12,822 37,975 37,683
Interest expense 4,973 5,388 15,083 15,798
------- ------- ------- -------
Net interest income 7,726 7,434 22,892 21,885
Provision for loan loss 750 600 2,100 1,700
------- ------- ------- -------
Net interest income
after provision for loan losses 6,976 6,834 20,792 20,185
------- ------- ------- -------
Noninterest income:
Service charges and fees 1,045 881 3,126 2,622
Trust earnings 168 170 477 483
Gains on sales of securities, net 13 0 105 10
Gains on sales of loans, net 32 169 160 375
Other income 373 286 874 804
------- ------- ------- -------
Total noninterest income 1,631 1,506 4,742 4,294
------- ------- ------- -------
GROSS OPERATING INCOME 8,607 8,340 25,534 24,479
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 2,929 2,822 8,745 8,570
Net occupancy and equipment expense 959 952 2,959 2,785
FDIC insurance 74 (94) 90 617
Stationary & supplies 154 215 462 669
Telephone 112 118 302 375
Other real estate owned 27 8 35 185
Merger related expense 250
Other expenses 1,140 1,282 3,444 3,625
------- ------- ------- -------
Total noninterest expense 5,395 5,303 16,037 17,076
------- ------- ------- -------
Income before income taxes 3,212 3,037 9,497 7,403
Income taxes 1,102 1,091 3,270 2,552
------- ------- ------- -------
Net income $ 2,110 $ 1,946 $ 6,227 $ 4,851
======= ======= ======= =======
Weighted average common shares outstanding:
Primary 4,376,526 3,866,248 4,373,913 3,847,339
Fully diluted 4,395,114 4,307,329 4,392,501 4,288,420
Per common share data:
Primary earnings $ 0.48 $ 0.47 $ 1.46 $ 1.18
Fully diluted earnings 0.48 0.45 1.42 1.13
Cash dividends declared 0.18 0.15 0.50 0.41
Book value outstanding
at period end $ 14.66 $ 13.36
</TABLE>
See notes to condensed consolidated financial statements.
- 2 -
<PAGE>
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine
Months Ended
9/30/96 9/30/95
OPERATING ACTIVITIES ----------------------------
<S> <C> <C>
Net income $ 6,227 $ 4,851
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,100 1,700
Depreciation and amortization 1,246 1,526
Amortization of security premiums and
accretion of discounts 228 280
Amortization of core deposit intangible 99 120
Realized gains on sales of securities and loans (265) (385)
Deferred income tax benefits (50) (133)
Increase in other assets (501) (2,576)
Decrease (Increase) in other liabilities 124 (1,665)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,208 3,718
-------- --------
INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale 15,157 510
Proceeds from maturities of securities available for sale 34,749 29,514
Proceeds from maturities of securities held to maturity 3,282 1,928
Purchases of securities available for sale (56,306) (42,572)
Purchases of securities held to maturity (4,985) (5,157)
Sales of loans 7,010 29,179
Transfer of loans to available for sale (7,200)
Net increase in loans (32,529) (15,666)
Purchases of premises and equipment (504) (1,151)
Proceeds from sale of OREO 1,144 150
-------- ---------
NET CASH USED BY INVESTING ACTIVITIES (32,982) (10,465)
-------- ---------
FINANCING ACTIVITIES
Net increase in deposit accounts 14,850 41,851
Repayments on borrowings (6,106)
Proceeds from issuance of stock 1,011 823
Redemption of Preferred Series B stock (123)
Repurchase of common stock (1,116) (115)
Cash dividends- preferred (193) (312)
Cash dividends- common (1,899) (1,543)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,530 34,598
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,244) 27,851
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 67,853 43,271
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 56,609 $ 71,122
======== ========
CASH PAID FOR:
Interest $ 15,353 $ 15,638
Taxes 3,298 2,320
NON-CASH ITEMS
Transfer from loans to OREO $ 1,174 $ 1,544
Sale of OREO funded by loans 274
Net change in unrealized gains (losses) recorded
on securities available for sale (1,193) 960
Change in deferred taxes on net unrealized (gains)
losses recorded on securities available for sale 485 (400)
Conversion of Preferred Series B stock into common shares 5,590
</TABLE>
See notes to condensed consolidated financial statements.
- 3 -
<PAGE>
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER EQUITY
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings
<S> <C> <C> <C> <C>
Balance January 1, 1996 $5,713 $3,086 $23,378 $27,454
Net Income 6,227
Cash dividends declared on preferred stock (89)
Cash dividends declared on common stock ($0.50 per share) (2,088)
Dividend reinvestment and stock purchase plan - 31,836 shares 25 600
Conversion of Series B preferred stock - 559,055 shares (5,590) 319 5,271
(converted into 431,590 common shares)
Redemption of Series B preferred stock (123)
Options exercised - 41,347 shares 34 352
Purchase of treasury stock
Payments on ESOP borrowings
Net unrealized loss on securities
------------------------------------------------------------------
Balance September 30, 1996 $0 $3,464 $29,601 $31,504
==================================================================
<CAPTION>
Net
Unrealized
Gains(losses) Treasury
on Securities Stock ESOP Total
<S> <C> <C> <C> <C>
Balance January 1, 1996 $586 ($117) ($171) $59,929
Net Income 6,227
Cash dividends declared on preferred stock (89)
Cash dividends declared on common stock ($0.50 per share) (2,088)
Dividend reinvestment and stock purchase plan - 31,836 shares 625
Conversion of Series B preferred stock - 559,055 shares 0
(converted into 431,590 common shares) 0
Redemption of Series B preferred stock (123)
Options exercised - 41,347 shares 386
Purchase of treasury stock (1,116) (1,116)
Payments on ESOP borrowings 32 32
Net unrealized loss on securities (708) (708)
----------------------------------------------------------
Balance September 30, 1996 ($122) ($1,233) ($139) $63,075
==========================================================
</TABLE>
<PAGE>
FORM 10-Q
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
- ---------------------
As permitted by the Securities and Exchange Commission, the accompanying
unaudited and condensed consolidated financial statements and notes have been
condensed and, therefore, do not contain all disclosures required by generally
accepted accounting principles. (See the notes to the financial statements for
the year ended December 31, 1995.)
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the consolidated financial
position as of September 30, 1996 and the consolidated results of operations for
the three and nine month periods ended September 30, 1996 and 1995 and the
consolidated cash flows for the nine month periods ended September 30, 1996 and
1995.
The results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
The Company's consolidated revenues are primarily derived from its commercial
banking subsidiary, The First National Bank of the Hudson Valley (the "Bank").
At September 30, 1996 the Bank had total assets of $708.1 million and total
stockholder's equity of $55.5 million, compared, respectively, to $690.6 million
and $53.0 million in total assets and total stockholder's equity at December 31,
1995. Net income of the Bank included in consolidated net income was $6.4
million and $4.9 million for the nine month periods ended September 30, 1996 and
1995, respectively.
Material intercompany items and transactions have been eliminated in
consolidation.
Forward-Looking Statements
- --------------------------
The Corporation has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 1996 and, in certain instances, subsequent periods. The
Corporation cautions that these forward-looking statements are subject to
numerous assumptions, risks and uncertainties, and that statements for periods
subsequent to 1996 are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Corporation and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; continued
pricing pressures on loan and deposit products; actions of competitors; changes
in economic conditions; the extent and timing of actions of the Federal Reserve
Board; continued customer deposit disintermediation; customers' acceptance of
the Corporation's products and services; and the extent and timing of
legislative and regulatory actions and reforms.
The Corporation's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the
Corporation assumes no duty to update them to reflect new, changing or
unanticipated events of circumstances.
5
<PAGE>
Accounting for Stock-Based Compensation
- ---------------------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation plans and
encourages, but does not require, entities to adopt that method in place of the
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", for all arrangements under which employees
receive shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based on the price of the
stock. SFAS No. 123 also establishes fair value as the measurement basis for
transactions in which an entity acquires goods or services from nonemployees in
exchange for equity instruments.
An entity may continue to apply APB No. 25 in accounting for stock-based
employee compensation arrangements. However, entities doing so will be required
to disclose, in their fiscal year-end accounts, pro forma net income and
earnings per share determined as if the fair value based method established by
SFAS No. 123 had been applied in measuring compensation cost.
The accounting provisions of SFAS No. 123 are effective for transactions entered
into after December 15, 1995. Following adoption of SFAS No. 123, the Company
will continue measuring compensation cost for employee stock compensation plans
in accordance with the provisions of APB No. 25.
Accounting for Mortgage Servicing Rights
- ----------------------------------------
The Company adopted SFAS No. 122 "Accounting for Mortgage Servicing Rights"
effective January 1, 1996. As a result of implementation, $37,000 was recorded
as an asset for originated mortgage servicing rights which accordingly increased
gains on sales of loans. This asset represents the present value of estimated
future net cash flows related to normal servicing rights on $7,010,430 in
originated mortgages sold into the secondary market through September 30, 1996.
The Company regards .25% of sold loans as normal servicing rights. It is
expected that most future originated long-term mortgages will be sold, many of
which will be servicing retained, and thus the asset related to originated
mortgage servicing rights will increase. As a result, gains on sales of loans
may increase, and the annual income related to mortgage servicing may
accordingly decline. The Company will reevaluate the asset on a quarterly basis
for impairment and would establish a reserve if the fair value of such servicing
rights is less than the recorded amounts. All loans, originated and sold before
January 1, 1996, will continue to accrue income at the related servicing income
of .25% as SFAS No. 122 can only be adopted prospectively.
6
<PAGE>
Loans
- -----
Major classification of loans (not held for sale) are summarized below (in
thousands):
<TABLE>
<CAPTION>
At September 30, 1996 At December 31, 1995
--------------------- --------------------
<S> <C> <C>
Commercial and industrial $71,845 $69,889
Consumer installment 76,234 63,554
Real estate - construction 9,947 13,347
Real estate - mortgage 281,282 271,068
Other loans 6,191 4,225
-------- --------
Total $445,599 $422,083
======== ========
Deposits
- --------
<CAPTION>
Major classifications of deposits are summarized below (in thousands):
At September 30, 1996 At December 31, 1995
--------------------- --------------------
<S> <C> <C>
Demand deposits $144,646 $138,656
NOW accounts 58,604 50,106
Money market deposit account 69,151 66,526
Savings accounts 217,395 204,693
Time deposits under $100,000 130,138 132,895
Time deposits over $100,000 25,976 38,184
-------- --------
Total $645,910 $631,060
======== ========
</TABLE>
7
<PAGE>
Securities
- ----------
Securities consist of the following (in thousands):
<TABLE>
<CAPTION>
At September 30, 1996 At December 31, 1995
----------------------------------------- ------------------------------------------
Carrying Amortized Fair Carrying Amortized Fair
Amount Cost Value Amount Cost Value
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Treasury:
Available for Sale $ 72,546 $ 72,697 $ 72,546 $ 76,984 $ 76,504 $ 76,984
US Gov't Agencies:
Available for Sale 36,482 36,536 36,482 36,555 36,247 36,555
Obligations of States and
Political Subdivisions:
Available for Sale 39,889 39,882 39,889 33,244 32,958 33,244
Held to Maturity 13,535 13,535 13,840 14,440 14,440 14,897
Other Securities:
Available for Sale 25,461 25,467 25,461 20,551 20,636 20,551
Held to Maturity 25 25 25 25 25 25
Regulatory Securities 2,755 2,755 2,755 2,107 2,107 2,107
--------------------------------------------------------------------------------------
Total Securities $190,693 $190,897 $190,998 $183,906 $182,917 $184,363
======================================================================================
Total Available for Sale $174,378 $174,582 $174,378 $167,334 $166,345 $167,334
Total Held to Maturity 13,560 13,560 13,865 14,465 14,465 14,922
Regulatory Securities 2,755 2,755 2,755 2,107 2,107 2,107
--------------------------------------------------------------------------------------
Total Securities $190,693 $190,897 $190,998 $183,906 $182,917 $184,363
======================================================================================
</TABLE>
At September 30, 1996 the net unrealized loss on Securities Available for Sale
(net of tax effect of $82,000) that was included as a separate component of
stockholders' equity was $(122,000).
8
<PAGE>
Earnings per common share (1995 Data adjusted for 10% stock dividend)
- -------------------------
Primary earnings per common share is computed as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 4,293 3,813 4,166 3,793
Net effect of dilutive stock options (at average market price) 84 54 86 54
------ ------ ------ ------
Total "primary" shares 4,377 3,866 4,374 3,847
====== ====== ====== ======
Net Income $2,110 $1,946 $6,227 $4,851
Less preferred stock dividends declared 0 104 89 311
------ ------ ------ ------
Net income applicable to common stock $2,110 $1,842 $6,138 $4,540
====== ====== ====== ======
"Primary" earnings per common share $0.48 $0.47 $1.46 $1.18
====== ====== ====== ======
</TABLE>
Fully diluted earnings per common share is computed as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 4,293 3,813 4,166 3,794
Net effect of dilutive stock options (at period end market price) 102 54 102 54
Assumed conversion of Series B, preferred stock 0 440 125 440
------ ------ ------ ------
Total "fully diluted" shares 4,395 4,307 4,393 4,288
====== ====== ====== ======
Net income applicable to common stock $2,110 $1,946 6,227 4,851
====== ====== ====== ======
"Fully diluted" earnings per common share $0.48 $0.45 $1.42 $1.13
====== ====== ====== ======
</TABLE>
9
<PAGE>
Stockholders' Equity
- --------------------
On March 12, 1996, the Company called all the outstanding (571,301) shares of
the Series B preferred stock for redemption, effective April 15, 1996. Of the
571,301 shares outstanding, 559,055 shares of Series B preferred were converted
into 431,500 shares of common stock of the Company and 12,246 shares were
redeemed, for a total reduction of stockholders' equity related to redemption of
$122,500, which was paid from the Company's liquid assets. Of the 575,000
authorized shares of Series B Preferred, 571,301 shares were outstanding at
December 31, 1995.
Authorized common stock, $.80 par value, is 20,000,000 shares. Issued and
outstanding shares at September 30, 1996 and December 31, 1995, were 4,301,063
and 3,499,825, respectively. The Company paid a 10% stock dividend in January
1996 which increased common shares outstanding by approximately 350,000 shares.
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition
- --------------------
The Company's financial condition on September 30, 1996 reflected total assets
of $714.7 million or an increase of $18.2 million or 2.6% over total assets at
December 31, 1995. Net loans increased some $23.3 million or 5.7% to $436.6
million at September 30, 1996. Cash and cash equivalents decreased $11.2
million or 16.5% to $56.6 million at September 30, 1996. Other assets decreased
by $1.3 million. Aggregate securities investments were $190.7 million at
September 30, 1996, an increase of $6.8 million or 3.7% from the level at
December 31, 1995.
Of the increase in loans, commercial loans increased $2.0 million or 2.8%.
Consumer installment loans increased $12.7 million or 20% as the Bank continues
to generate indirect automobile loans through a network of local automobile
dealerships in order to build its consumer loan volumes. Due to the competitive
nature of this type of financing, the yields obtained on this type of financing
may be somewhat lower than other consumer loan products. Indirect automobile
financing can carry a higher risk of loss than direct financing, but this has
not been the Company's experience thus far. In order to manage the risk, the
Company maintains particular credit policies and procedures on this portfolio.
Real estate mortgage loans (construction and permanent financing) increased by
$6.8 million to $291.2 million at September 30, 1996, reflecting increases in
commercial mortgage lending activities.
Total deposits increased $14.9 million or 2.4% in the first nine months of 1996
to $645.9 million. Of this amount, total Public (Municipal) Funds increased
$21.5 million or 51.2% to $63.4 million and total non-public funds decreased
$6.6 million or 1.1% to $582.5 million. The following tables summarize the net
changes in public (municipal) fund and non-public fund deposits from
December 31, 1995 to September 30, 1996 (in thousands):
11
<PAGE>
Public Funds
<TABLE>
<CAPTION>
Percent
Change
Balance Balance Net over
12/31/95 9/30/96 Change Y/E'95
---------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $2,947 $7,545 $4,598 156.0%
NOW accounts 8,237 20,014 11,777 143.0
Money market accounts 12,223 18,279 6,056 49.5
Savings accounts 3,094 3,206 112 3.6
Time deposits 15,465 14,403 (1,062) (6.9)
---------------------------------------------------
Total public deposits $41,966 $63,447 $21,481 51.2%
===================================================
</TABLE>
The increase in public funds is primarily attributable to school district
balances. Tax receipts for school districts occur regularly in the third
quarter of each year.
Non Public Funds
<TABLE>
<CAPTION>
Percent
Change
Balance Balance Net over
12/31/95 9/30/96 Change Y/E'95
---------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $135,709 $137,101 $1,392 1.03%
NOW accounts 41,869 38,590 (3,279) (7.8)
Money market accounts 54,303 50,872 (3,431) (6.3)
Savings accounts 201,599 214,189 12,590 6.2
Time deposits 155,614 141,711 (13,903) (8.9)
---------------------------------------------------
Total non public deposits $589,094 $582,463 $(6,631) (1.1)%
===================================================
</TABLE>
The increase in nonpublic savings funds of $12.6 million is principally
attributable to the growth in savings due to the Bank's Merit savings product (a
package of free services with a savings account whose interest rate is tied to
the Federal Reserve discount rate). This increase partially offset declines in
other accounts. Management believes the decline in Money Market and NOW
accounts represent a continued migration of these balances to higher interest
products (time and savings accounts). The decline in time deposit accounts of
$13.9 million represents maturing certificates of deposit which had interest
rates higher than the renewal rates offered by the Company. Many of these funds
were also reinvested in the Merit savings products which pay a relatively high
rate of interest without the term restrictions associated with time deposits.
These shifts in deposits may raise the cost of interest bearing liabilities.
However, the impact of such deposit migration on the Company's overall average
cost of funds is mitigated by the high level of the Company's demand deposit
base.
12
<PAGE>
In this connection, it should also be noted that the Company previously offered
a premium rate "15 month" certificate of deposit. Such deposits totaled
approximately $17.0 million and carried interest rates between 6.75% and 7.25%.
These deposits matured during the second quarter of 1996. Although the Company
promoted alternative products to these customers, due to the significantly lower
general market rates approximately $6.0 million of these deposits left the bank.
The remainder of these deposits were retained at substantially lower interest
costs. This had a positive effect on interest expense by reducing the overall
cost of the bank's liabilities. Thus, comparing the Company's net interest
margin between the third quarter of 1995 and the third quarter of 1996, the net
interest margin increased by four basis points to 4.94%.
Total stockholders' equity showed an increase of $3,146,000 or 5.3%. This
increase is due to net income of $6,227,000, for the nine months ended
September 30, 1996 and additional common stock of $1,011,000 issued through the
dividend reinvestment plan and the exercise of stock options. These increases
in stockholders' equity were partially offset by dividends declared of
$2,177,000, purchases of treasury stock of $1,116,000, and a decline of $708,000
(after tax) in unrealized securities gains due to movement in market rates. On
March 12, 1996, the Company called all the outstanding (571,301) shares of the
Series B preferred stock for redemption, effective April 15, 1996. Of the
571,301 shares outstanding, 559,055 shares of Series B preferred were converted
into 431,500 shares of common stock of the Company and 12,246 shares were
redeemed, for a total reduction of stockholders' equity related to redemption of
$122,500, which was paid from the Company's liquid assets.
The Company increased its quarterly dividend from $.16 to $.18 per share,
effective September 30, 1996. At current dividend rates on its common stock,
the redemption/conversion of the preferred stock will reduce the overall
dividends paid by approximately $103,000 per annum from the levels previously
paid on the preferred stock.
Results of Operations
- ---------------------
Interest income as reported, for the nine months ended September 30, 1996
compared to the same period in 1995 increased $292,000 while interest expense
decreased by $715,000. This resulted in an increase in net interest income of
$1,007,000. Provision for loan losses increased by $400,000. Total noninterest
expenses decreased by $1,039,000. Net income increased by $1,376,000 or 28.4%.
Fully diluted earnings per share increased $.28 to $1.42 for the nine months of
1996 vs. 1995.
13
<PAGE>
Net income and earnings per common share data is presented in the following
table:
<TABLE>
<CAPTION>
Three months ended Nine months ended
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (in thousands) $2,110 $1,946 $6,227 $4,851
Per common share:
Primary earnings $0.48 $0.47 $1.46 $1.18
Fully diluted earnings $0.48 $0.45 $1.42 $1.13
</TABLE>
The Company's return on assets, return on equity and return on common equity for
the nine months ended September 30, 1996 and 1995, are detailed in the table
below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
Return on assets 1.20% 1.13% 1.20% .97%
Return on total
stockholders' equity 13.70 13.25 13.55 11.65
Return on common equity 13.70 13.90 14.16 12.16
</TABLE>
Interest income
- ---------------
On a tax equivalent basis, gross interest income increased by $337,000 or .9%
for the nine months ended September 30, 1996 compared to the same period in
1995. Total interest expense decreased by $715,000 or 4.5% for the nine months
period ended September 30, 1996 as compared to the nine months ended September
30, 1995. For the first nine months of 1996, the Company experienced a net
increase in average earning assets compared to the same period of 1995 of $26.4
million. Average loans remained relatively unchanged, although there were sales
of $25.0 million in long-term fixed rate mortgages at the end of the second and
beginning third quarter of 1995. (Average loans thus increased sufficiently in
1996 to offset these 1995 sales although at somewhat lower interest yields due
to competitive pressures, changes in portfolio concentration and a lower prime
rate during 1996 than in 1995.)
Asset growth was principally funded by an increase in average deposits of $21.1
million for the nine month period ended 1996 compared to 1995, of which $13.4
million were interest bearing (generally higher yielding products such as Merit
savings and time deposits) and $7.7 million were non-interest-bearing. The
remaining growth was funded by an increase in shareholders' equity.
14
<PAGE>
The table below sets forth the consolidated average balance sheets for the
Company for the periods included. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
---- ----
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $432,009 $29,258 9.03% $432,046 $29,563 9.12%
Taxable Securities 138,768 6,151 5.91% 106,601 5,186 6.49%
Tax-exempt Securities (2) 45,130 2,436 7.20% 42,948 2,302 7.15%
Fed Funds Sold 24,759 958 5.16% 32,719 1,415 5.77%
-------- -------- -------- -------
Total Interest Earning Assets 640,666 38,803 8.08% 614,314 38,466 8.35%
Cash & Due from Banks 30,990 27,812
Premises & Equipment 16,702 17,706
Other Assets 12,774 14,328
Allowance for Loan Losses (8,898) (8,523)
-------- --------
Total Assets $692,234 $665,637
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Savings $212,382 $ 6,259 3.93% $188,870 $ 6,183 4.36%
NOW accounts 50,410 460 1.22% 53,186 749 1.88%
Money Market Accounts 68,989 1,745 3.37% 75,483 1,994 3.52%
Certificates over $100,000 22,206 899 5.40% 25,161 1,048 5.55%
Other Time Deposits 136,612 5,637 5.50% 134,234 5,711 5.67%
Borrowed Funds 1,880 83 5.89% 2,172 113 6.94%
-------- ------- -------- -------
Total Interest-Bearing Liabilities 492,479 15,083 4.08% 479,106 15,798 4.40%
Demand Deposits 134,400 126,659
Other 4,084 4,358
-------- --------
Total Noninterest-
Bearing Liabilities 138,484 3.19% 131,017 3.45%
Stockholders' Equity 61,271 55,514
-------- --------
Total Liabilities and
Stockholders' Equity $692,234 $655,637
======== ========
Net interest Margin 23,720 4.94% 22,668 4.92%
Ratio of Average Interest-Earning
Assets to Average Interest-Bearing
Liabilities 130.09% 128.22%
Less Tax Equivalent Adjustments (828) (783)
------- -------
Net Interest Income $22,892 4.76% $21,885 4.75%
======== ======== ========
</TABLE>
(1) Average Balances include non-accrual loans.
(2) Tax Equivalent Yields on tax-exempt securities based on a Federal tax rate
of 34%.
15
<PAGE>
The following table reflects the effects of changes in volumes and interest
rates for each of the same categories on a tax equivalent basis:
Rate/Volume Analysis (in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 vs. 1995
-------------------------------------
Increase (Decrease) due to
-------------------------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest Income:
Loans $ (3) $(302) $(305)
Taxable investment 1,563 (598) 965
securities
Tax-exempt investment 117 17 134
securities
Federal funds sold (344) (113) (457)
---------- --------- ---------
Total interest income 1,333 (996) 337
Interest expense:
Savings deposits 770 (694) 76
NOW/accounts (39) (250) (289)
Money market accounts (172) (77) (249)
Certificates over (123) (26) (149)
$100,000
Other time 101 (175) (74)
Borrowed funds (15) (15) (30)
---------- --------- ---------
Total interest expense 522 (1,237) (715)
---------- --------- ---------
Net interest margin 811 241 1,052
---------- --------- ---------
Less tax equivalent affect (40) (5) (45)
---------- --------- ---------
Net interest income $771 $236 $1,007
========== ========= =========
</TABLE>
Average yields on interest earning assets decreased .27% to 8.08% for the nine
months ended September 30, 1996 vs. 1995. The average cost of interest-bearing
liabilities decreased .32% to 4.08% in the same period. Net interest margins on
a tax equivalent basis increased .02% to 4.94% for the nine months ended
September 30, 1996 compared to the same period in 1995. Variances due to
changes in rates produced a $236,000 increase in net interest income in the
first through third quarters of 1996 compared to the same period in 1995.
Additionally, the increase in average earning assets of $26.4 million
contributed $771,000 in additional net interest income over the same period.
16
<PAGE>
The net effect was that net interest income before provisions for loan losses
increased to $22.9 million for the nine months ended September 30, 1996 compared
to $21.9 million for the comparable period in 1995, or an increase of $1.0
million (4.6%).
Provision for loan losses and credit quality
- --------------------------------------------
The loan loss provision for the nine month period ended September 30, 1996 was
$2,100,000 compared to $1,700,000 for the comparable period in 1995, a 23.5%
increase. Total net charge-offs for the nine months of 1996 were $1,981,000,
compared to $1,383,000 for the same period in 1995. The ratio of net chargeoffs
to loans, on an annualized basis, increased to .61% in the first nine months of
1996 vs. .43% over the full year of 1995. The increase in charge-offs over the
first nine months of 1995 is spread almost equally between commercial loans and
commercial real estate related loans. Most of the increase is associated with
increasing difficulties being experienced by borrowers in our northern region
unable to cope with the extended economic impact of the complete closure of the
IBM Kingston facility in 1995. While there was significant turnover in the
Company's OREO portfolio, OREO balances outstanding declined $164,000 at
September 30, 1996 from $1,196,000 at year end 1995, and non-performing loans
increased by some $305,000, from $5.3 million to $5.6 million, attributable to
$810,000 increase in nonperforming construction/land development and residential
real estate loans offset by a $290,000 decline in commercial and industrial
loans and a $170,000 decline in commercial mortgage loans. The Company's ratio
of loan loss allowance to non-performing loans stood at 159% at September 30,
1996 compared to 166% at year-end 1995, and the allowance represented 2% of
loans vs. 2.1% at the end of 1995. The period-end ratio of non-performing assets
to total assets remained the same at .93% at September 30, 1996 and December 31,
1995.
These nonperforming assets represent 115 loans or properties of which 23 have
balances in excess of $100,000, and no loan has a balance greater than $400,000.
Of the nonperforming assets total, 42.8% is secured by residential property,
41.7% by commercial property, and 15.5% by other assets or unsecured.
Provisions for loan losses are based on management's assessment of risk of loss
inherent in the loan portfolio and as such reflect both trends in local economic
conditions and the categorization of the credit quality of the individual loans
it has made. Such assessment is ongoing, and may not directly reflect the
charge-offs taken in any accounting period, although the trend in charge-offs is
an important element in the evaluation of the adequacy of the allowance for loan
losses, and accordingly, provisions have tended to increase in periods when the
level of charge-offs might indicate a deteriorating condition in the loan
portfolio. Provisioning policy during the recent years has resulted in a ratio
of allowance for loan losses to total loans of approximately 2.0%. The ratio of
the allowance for loan losses to total nonperforming loans does not reflect
collateral values, although 84.5% of all of the Bank's nonperforming assets are
collateralized by owned real estate.
Recent statistical data indicates that regional economic conditions may have
stabilized, except for Ulster County, which relatively, was the county most
17
<PAGE>
severely impacted by the IBM cutbacks. Ulster County has lost approximately
4,800 jobs, or 8.0% of its employment, since June 1992 (just prior to the IBM
cutbacks). Although the State previously announced 4,000 public sector jobs
planned to move to the IBM Kingston facility, approximately 3,000 private sector
jobs have now been agreed by the State, although many of these jobs will
initially be seasonal. The move of the remaining jobs (state employees) has
been put on hold pending further analysis by State officials. Despite some
clear signs of recovery in certain sectors, taken as a whole, the local region
continues to perform less favorably in comparison to many other regions in the
United States. Management, therefore, continues to closely monitor local
economic conditions relative to the impact of IBM's downsizing and the
significant vacancy rates of commercial office and industrial space and has
taken a proactive role in the early identification of weaker credits. Given
that some softness remains in the local economy, management expects that the
levels of charge-offs experienced recently may continue as long as these
conditions persist. Management believes that the allowance for loan losses is
adequate to cover the risk of loss inherent in the portfolio but no assurance
can be given that the current apparent stabilization of the Company's overall
market area will not be unsettled by future events. Any such developments would
be expected to adversely effect the financial performance of the Company.
18
<PAGE>
The table below summarizes the Company's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
For the nine months For the year
ended September 30, ended December 31,
1996 1995 1995 1994 1993
---------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of $ 8,770 $ 8,326 $ 8,326 $ 7,322 $ 5,794
period
Chargeoffs:
Commercial & industrial 652 311 411 350 435
Consumer installment &
other 468 584 593 292 449
Real estate mortgage 1,049 715 1,164 1,059 1,103
---------------------- --------------------------
Total charge-offs 2,169 1,610 2,168 1,701 1,987
Recoveries:
Commercial 39 37 75 63 124
Installment 111 145 193 153 123
Real estate 38 45 44 20 2
---------------------- --------------------------
Total recoveries 188 227 312 236 249
---------------------- --------------------------
Net charge-offs (1,981) (1,383) (1,856) (1,465) (1,738)
Provision for Loan Losses 2,100 1,700 2,300 2,400 3,266
Transfers, other * 69
---------------------- --------------------------
Balance at end of period $ 8,889 $ 8,643 $ 8,770 $ 8,326 $ 7,322
====================== ==========================
Ratio of net charge-offs
to average loans
outstanding during the .61% .43% .43% .37% .49%
period (annualized)
Allowance for loan losses
as a percent of
period-end loans 2.00% 2.07% 2.08% 1.93% 2.01%
Allowance as a percent of
non-performing loans 159% 195% 166% 163% 123%
Nonperforming loans and
OREO to total loans and OREO 1.41% 1.61% 1.53% 1.45% 1.97%
</TABLE>
* An adjustment of $69,000 was transferred to the allowance for loan losses as
a result of the acquisition of loans of the First National Bank of Amenia.
19
<PAGE>
The table below summarizes the Company's nonperforming assets and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
at September 30, at December 31,
1996 1995 1995 1994 1993
---------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate mortgage $4,056 $3,238 $3,246 $3,866 $4,759
Commercial & Industrial 968 671 1,013 200 331
Consumer & other 121 42 148 39 48
---------------------- --------------------------
Total nonaccrual loans 5,145 3,951 4,407 4,105 5,138
Loans 90 days or more past
due and still accruing:
Real estate mortgage 53 28 620 313
Commercial & industrial 231 60 476 84
Consumer & other 13 18 191 16
---------------------- --------------------------
Total 90 days past due 231 126 522 895 329
accruing
Restructured - real 207 350 349 119 457
estate
---------------------- --------------------------
Total non-performing and
restructured loans 5,583 4,427 5,278 5,119 5,924
Percent of total loans 1.25% 1.06% 1.23% 1.18% 1.63%
Other real estate owned(2) 1,032 2,322 1,196 1,150 1,072
---------------------- --------------------------
Total non-performing assets $6,615 $6,749 $6,474 $6,269 $6,996
====================== ==========================
Nonperforming assets as a
percent of total assets .93% .99% .93% .97% 1.17%
===================================================
</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) Net of allowance of $250,000 in 1993.
20
<PAGE>
Other real estate owned totals $1,032,000 at September 30, 1996 and includes
twelve properties acquired through foreclosure: four parcels of land, four
residences, and four non-farm nonresidential properties. Of this amount, there
are contracts currently in place for sales totaling approximately $650,000.
Management believes that the carrying values of such properties adequately
reflect the risk of loss in their orderly disposal.
At September 30, 1996, the Company had approximately $10.5 million in loans
requiring special attention (substandard), in addition to the nonperforming
loans and other nonperforming assets noted above. Such loans are being
monitored so that if present concerns about the borrowers ability to comply with
repayment terms becomes evident, management will be able to quickly assess
impairment. Approximately two-thirds of all such loans are collateralized by
real estate. Further deterioration in such borrowers' financial position may
result in classifying them as nonperforming assets.
The following table summarizes impaired loans for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Impaired loans with allowance
established ($1,007 and $1,239,
respectively) $3,636 $3,450
Impaired loans with a writedown
($1,086 and $740, respectively) 1,716 1,071
------ ------
Total $5,352 $4,521
====== ======
Average amount of impaired loans
for the period $5,019 $4,287
====== ======
</TABLE>
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 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Balance at end % of % of % of % of % of
of period Amount total Amount total Amount total Amount total Amount total
applicable to: loans loans loans loans loans
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial &
industrial $2,492 16.13% $2,393 15.47% $2,355 16.6% $2,010 22.10% $2,520 19.10%
Consumer & other 1,687 18.50 1,443 15.42% 1,400 16.1% 1,363 12.20% 881 9.50%
Real estate -
construction 2.23 3.38% 3.1% 1.50% 1.00%
Real estate -
mortgage 3,855 63.14 4,106 65.73% 4,247 64.2% 4,100 64.20% 3,155 70.40%
Unallocated 855 701 768 853 766
-----------------------------------------------------------------------------------------------------------
Total $8,889 100.00% $8,643 100.00% $8,770 100.00% $8,326 100.00% $7,332 100.00%
===========================================================================================================
</TABLE>
21
<PAGE>
Noninterest Income
- ------------------
Noninterest income increased $448,000 in the first nine months of 1996 to
$4,742,000 compared to the same period of 1995. Of this amount, the level of
service charges and fee income increased $504,000 due to implementation of a new
service charge structure effective February 1996. An additional $95,000 related
to an increase in gains on sales of securities. While comparative gains on loan
sales decreased $215,000, there was a $310,000 one-time gain on sale of fixed
rate residential mortgage loans in June 1995. Therefore, underlying gains on
sales of loans into the secondary mortgage market during 1996 increased by
$95,000.
Other Expenses
- --------------
Salaries and employee benefits increased $175,000. This increase is due almost
entirely to the impact of the increase of the Company's share price in the
first quarter, on the value of certain stock appreciation rights previously
granted to officers ($139,000), a substantial part of which were exercised.
Accordingly, underlying salary and benefit expense increased by only $36,000, or
less than one-half of one percent.
Occupancy and equipment expense increased by $174,000 to $2,959,000 at
September 30, 1996. This increase is due to harsh weather experienced in the
first quarter of 1996 compared to the mild weather in the first quarter of 1995,
higher level of equipment expense in 1996 vs. 1995, and increases in real estate
taxes on company-owned properties (primarily school district tax increases).
Supplies expense decreased by $207,000 to $462,000 for the nine months ended
September 30, 1996 vs. 1995. Telephone expense also decreased in the nine months
of 1996 by $73,000 to $302,000. Both these expense categories decreased due to
initiatives undertaken to reduce overhead expenses.
Other real estate owned expense decreased $150,000 to $35,000 for the nine
months ended September 30, 1996 as a result of gains recognized on disposals
totaling $169,000.
FDIC insurance expense decreased $527,000 to $90,000 as a result of the Bank
Insurance Fund (B.I.F) reaching the statutory limits of 1.25% of insured
deposits. The Bank is currently billed at the B.I.F. statutory minimum of
$2,000 per annum. However, the Bank has approximately $13.0 million in deposits
insured by the Savings Association Insurance Fund (SAIF) of the FDIC ("OAKAR"
deposits), for which it is required to pay $.23 per thousand dollars of
deposits. On September 30, 1996, legislation was passed to recapitalize the
SAIF. As a result, the Company recorded a one-time assessment of $66,000
related to such SAIF deposits, which is included in the $90,000 of FDIC
insurance expense recorded in 1996.
All other expenses decreased $431,000 to $3,444,000 for the first nine months
of 1996 compared to the same period of 1995. This decrease relates primarily to
operational issues in connection with the post merger organization of the
combined banks expended as well as the provision recorded for merger-related
expenses in 1995.
22
<PAGE>
Income tax expense rose $718,000, or 28%, as a result of the increase in pretax
income noted above. The Company's effective tax rate was 34.5% and 33.5% for
the nine months ended September 30, 1996 and 1995, respectively as more of the
Company's increase in pretax income was taxable at the statutory tax rates.
Three months ended September 30, 1996 vs. September 30, 1995
- ------------------------------------------------------------
Net interest income increased $292,000 for the three months ended September 30,
1996 compared to 1995, primarily due to reductions in interest expense of
$415,000, which was partially offset by lower interest on investments and
Federal Funds due to the lower interest rate environment in the third quarter of
1996 vs. 1995 of $153,000.
Provisions for loan losses increased $150,000 or 25.0% to $750,000 due to
management's assessment of the amounts necessary to maintain an adequate
allowance for possible loan losses.
Non-Interest income increased $125,000 to $1,631,000 for the three months ended
September 30, 1996, primarily as a result of an increase in service charge and
fees of $164,000 and an increase in annuity income of $40,000 for the three
months ended September 30, 1996 compared to 1995. This increase was partially
offset by the decrease in gains on sales of loans of $137,000 in the three
months ended 1996 vs. 1995. Of this amount, approximately $130,000 relates to
the one-time sale of $7.1 million in fixed rate loans previously held in the
Bank's loan portfolio.
Total noninterest expense decreased $92,000 to $5,395,000 for the three months
ended September 30, 1996 compared to September 30, 1995.
Salaries and benefits increased by $107,000 in this period partially due to
increases in staffing in 1996 and reduction in benefit accruals of $60,000 in
the third quarter of 1995. Occupancy expenses increased by $58,000 as equipment
expenses and real estate taxes for school districts exceeded the prior year.
Other real estate owned expense increased $19,000 to $27,000 in the three months
ended September 30, 1996 over 1995 as there were less recoveries on sales of
properties in 1996 than in 1995 to offset operating expenses.
FDIC insurance premiums increased $168,000 in the third quarter of 1996 as a
result of a one-time assessment of $66,000 for the Bank's SAIF insured deposits
compared to a refund of one month's assessment of FDIC insurance in the third
quarter of 1995 ($89,000).
Other noninterest expense decreased $142,000 of which $120,000 relates to the
1995 A.T. Hudson consulting work on the integration of the predecessor banks.
Pretax income increased $175,000 or 5.8% for the three months ended September
30, 1996 compared to the same period of 1995, and income taxes increased $11,000
or 1.0%. Income after taxes increased $164,000 to $2,110,000 or 8.4% for the
three months ended September 30, 1996.
23
<PAGE>
Income taxes increased at a lower rate than taxable income as the Company
realized the benefit of a lower New York State surtax rate in the third quarter.
The Company has produced fairly consistent levels of revenue and expense in each
of the past five quarters, while experiencing modest growth in assets. The
Company's performance during this period substantially exceeds levels achieved
prior to the September 1994 merger that created the Company and is in line with
the Company's pre-merger expectations. The Company continues to seek profitable
opportunities for growth in its markets and, in this regard the Company
recently filed applications with the Office of the Comptroller of the Currency
to establish three new branches in Orange County, New York, one of the fastest
growing counties in the State. The Company plans to open in Monroe in December
1996, Goshen in late 1996 or early 1997, and Middletown the first half of 1997.
Such branch expansion is expected to increase annual operating expenses by
approximately $1,000,000, but to improve profitability over the longer term.
The Company's success will be dependent on a number of factors, many of which
are beyond management's control, including the state of the local and national
economy, customer demand and competitive conditions.
Asset/Liability Management
- --------------------------
Management believes the Company's ability to plan for changes in interest rates
is a significant profitability factor. The Company's primary objective in
managing interest rate sensitivity is to maintain a broadly balanced position
between interest sensitive assets and liabilities in order to minimize the
impact of significant interest rate fluctuations. Further, the historical level
of demand deposits (approximately 20% of total deposits) helps to mitigate
increases in interest rates and reduces the average cost of all liabilities to a
level significantly below the average cost of only interest-bearing liabilities.
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of September 30, 1996 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 September 30, 1996, 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 next three months of 1996, approximately 6.8%
of the Company's interest rate sensitivity is related to changes in short term
interest rates, particularly the prime rate. However, interest rate risk
exposure in the one year time frame is to a rising rate scenario, principally
due to a lower 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 actions that may be
taken to manage this risk.
24
<PAGE>
<TABLE>
<CAPTION>
Maturity Repricing Greater
Date (1)(2) Total One yr. than
3 months 4 months within to 5 five
or less to one yr. one yr. yrs. yrs. Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities $54,849 $27,497 $82,346 $89,277 $19,274 $190,897
Fed Funds 13,000 13,000 13,000
Commercial loans (3) 77,704 4,763 82,467 12,329 692 95,488
Consumer loans (3) 29,711 18,999 48,710 63,850 2,153 114,713
Mortgage loans (3) 68,353 81,255 149,608 61,985 11,622 223,215
------ ------ ------- ------ ------ -------
Total interest
earning assets (1) 243,617 132,514 376,131 227,441 33,741 637,313
------- ------- ------- ------- ------ -------
Savings (4) 68,465 148,930 217,395 217,395
NOW (5) 58,604 58,604 58,604
MMDA (5) 69,151 69,151 69,151
Time (5) 62,858 52,704 115,562 40,552 156,114
------ ------ ------- ------ -------
Other interest-bearing
liabilities 1,864 1,864
Total interest-bearing
liabilities 200,474 260,238 460,712 40,380 503,128
------- ------- ------- ------ -------
Interest Sensitivity
gap (6) $43,143 $(127,724) $(97,581) $187,061 $33,741 $134,185
-----------------------------------------------------------------------------------------
Gap as a percent of
earnings assets 6.8% (20.0)% (15.3)% 29.4% 5.3% 21.1%
=========================================================================================
</TABLE>
(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 losses recorded on "available-for-
sale" securities as of September 30, 1996.
(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 $145 million
at September 30, 1996.
25
<PAGE>
Capital Resources and Liquidity
- -------------------------------
The following summarizes the minimum capital requirements and capital position
at September 30, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Capital Position Minimum Capital
at September 30, 1996 Requirements
--------------------- ----------------
Bank Only Consolidated
--------- ------------
Total Capital
to Risk-Weighted Assets 12.69% 14.56% 10%
===== =====
Tier 1 Capital
to Risk-Weighted Assets 11.48 13.30 6
===== =====
Tier 1 Capital to Average
Assets (Leverage Ratio) 7.72 8.78 5(1)
===== =====
</TABLE>
(1) Regulatory authorities require all but the most highly rated banks and bank
holding companies to have a leverage ratio of at least between 4.0% - 5.0%.
The Company believes that its cash and cash equivalents of $56.6 million in
addition to its securities available for sale of $174.4 million at September 30,
1996 are sufficient to meet both the funding needs of its borrowers and the
liquidity requirements of its depositors.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed in its behalf by the undersigned
thereunto duly authorized.
Hudson Chartered Bancorp, Inc.
(Registrant)
Date: November 8, 1996 /s/ Paul A. Maisch
------------------
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed in its behalf by the undersigned
thereunto duly authorized.
Hudson Chartered Bancorp, Inc.
(Registrant)
Date: November 8, 1996 ___________________________
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.2 By-Laws, as amended, of Hudson Chartered Bancorp, Inc.
27 Financial Data Schedule
<PAGE>
EXHIBIT 3.2
- -------
Amendment to Section 305 of the By-Laws of Hudson Chartered Bancorp, Inc.
- ------------------------------------------------------------------------
Section 305. Personnel and Compensation Committee
------------------------------------
There shall be a standing committee known as the Personnel and Compensation
Committee elected annually by the Board of Directors. Each member shall serve
until his successor is appointed and shall consist of at least three (3) members
of the Board of Directors, none of whom shall be active officers of the
Corporation. This Committee is empowered to set and maintain employment policies
and procedures, a performance appraisal system, and to fix compensation levels
for all Executive or similar senior officers. All meetings of this Committee
shall be recorded in writing and reported to the Board of Directors at its next
meeting for ratification.
Amended 8/22/96
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 56,609
<INT-BEARING-DEPOSITS> 501,264
<FED-FUNDS-SOLD> 13,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 174,378
<INVESTMENTS-CARRYING> 16,315
<INVESTMENTS-MARKET> 16,620
<LOANS> 445,499
<ALLOWANCE> 8,889
<TOTAL-ASSETS> 714,656
<DEPOSITS> 645,910
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,807
<LONG-TERM> 1,864
0
0
<COMMON> 63,075
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 714,656
<INTEREST-LOAN> 29,258
<INTEREST-INVEST> 7,759
<INTEREST-OTHER> 958
<INTEREST-TOTAL> 37,975
<INTEREST-DEPOSIT> 15,000
<INTEREST-EXPENSE> 83
<INTEREST-INCOME-NET> 22,892
<LOAN-LOSSES> 2,100
<SECURITIES-GAINS> 105
<EXPENSE-OTHER> 16,037
<INCOME-PRETAX> 9,497
<INCOME-PRE-EXTRAORDINARY> 6,227
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,227
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.42
<YIELD-ACTUAL> 8.08
<LOANS-NON> 5,145
<LOANS-PAST> 231
<LOANS-TROUBLED> 207
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,889
<CHARGE-OFFS> 2,169
<RECOVERIES> 188
<ALLOWANCE-CLOSE> 8,889
<ALLOWANCE-DOMESTIC> 8,034
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 855
</TABLE>
