<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, 1996
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)
<TABLE>
<S> <C>
New York 14-1668718
________ __________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 55, Lagrangeville, New York
_________________________________
(Address of Principal Executive Offices) 12540
_____
(Zip Code)
</TABLE>
Registrant's telephone number, including area code: 914-471-1711
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 (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 ____ 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, 1997, the aggregate market value of the 3,189,106 shares of
the registrant's voting common stock issued and outstanding held by
non-affiliates on such date was approximately $86,105,862 based on the
reported last sale price of the registrant's common stock on such date.
For purposes of this calculation, only directors, executive officers and
----
beneficial owners of more than 10% of the registrant's voting common stock
are considered affiliates of the registrant.
As of March 1, 1997, the registrant had 4,732,501 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, 1996 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>
PAGE NO.
<S> <C>
PART I
- ------
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, 1996
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 twenty 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, 1996, the Company, on a consolidated basis, had total
assets of approximately $696.9 million, total deposits of $625.8 million and
stockholders' equity of $65.2 million. At March 1, 1997, the Company and the
Bank employed 334 full-time equivalent employees.
FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 1997 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; pricing
pressures on loan and deposit products; actions of competitors; changes in
economic conditions; the extent and timing of actions of the Reserve Board;
customer deposit disintermediation; changes in customers' acceptance of the
Company's products and services; and the extent and timing of legislative and
regulatory actions and reform.
The Company's forward-looking statements speak only as of the date on which
such statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
of circumstances.
3
<PAGE>
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, 1996, the Bank's gross loan portfolio totaled approximately $451.9
million. Of this amount, real estate mortgage, consumer/ installment, and
commercial loans comprised 64.8%, 19.3%, and 15.9%, respectively, of the Bank's
loan portfolio.
At December 31, 1996, the Bank's unsecured lending limit to one borrower
under applicable regulations was approximately $9.9 million.
In managing the growth of its loan portfolio, the Bank has focused on: (i)
the application of prudent underwriting criteria, (ii) establishment of
management lending authorities well 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 repayments 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."
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 regulations, 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
generally 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 promptly
after closing without recourse to the Bank. The Bank continues to service these
loans.
In 1996, the Company sold, but retained the servicing rights on, $8.3
million of fixed rate residential mortgage loans. Total loans serviced for other
investors was $99.4 million at December 31, 1996.
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 constant maturity 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 and 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 originations of these loans are also usually sold into the secondary
market with servicing rights retained.
4
<PAGE>
The Bank offers three 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 an
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. The third type is a closed-end fixed rate home
equity loans with maturities of up to 15 years. 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 including 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
a three or five year balloon maturity. Such product was discontinued in 1994. As
these loans mature, they are being rewritten to fully amortize to maturity.
Open-end lines of credit not yet advanced totaled $14.0 million at December 31,
1996. Loans secured by residential mortgages totaled $141.2 million at December
31, 1996, of which $103.4 million were first and $37.8 million were second
mortgages.
Commercial real estate loans are offered by the Bank generally on a variable
rate basis (but also on a fixed rate basis) with a three or five year balloon
maturity, although the amortization basis may range from 10 to 20 and
exceptionally 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 $140.4 million at December 31, 1996.
CONSTRUCTION LOANS. The Bank makes short-term (one year or less)
construction loans secured by land, residential, and non-residential properties.
At December 31, 1996, total construction loans aggregated approximately $12.2
million and amounts not yet advanced totaled $4.8 million. The Bank has no major
commitments to lend to developments of significant multi-unit residential or
commercial projects. Furthermore, the Bank does not intend to actively engage in
lending for developments of significant multi-unit residential or commercial
projects.
Construction loans are generally only made for owner occupied dwellings or
buildings, and are usually for terms of 6 to 12 months. Funds for construction
loans are disbursed as phases of construction are completed. The Bank's
residential 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 construction. Nonresidential is generally limited to not greater than
75% LTV. The Bank does not generally fund construction loans for single family
homes or commercial real estate built by investors until the builder has a firm
sales contract for the residence or building 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
1996, the Bank's commercial business loans outstanding totaled $71.9 million
with an additional $39.4 million available 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.
5
<PAGE>
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, 1996,
installment, consumer, and all other loans totaled $87.2 million, of which $62.0
million represents loans generated from the indirect (dealer) 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, 1996, overdraft lines
of credit and credit card lines not advanced totaled $5.3 million.
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, 1996, 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,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(A) 1994 1993 1992
---------- ---------- ---------- ---------- ----------
R/E Construction..................................... $ 12,227 $ 13,347 $ 6,417 $ 3,678 $ 9,612
R/E Mortgage Comm.................................... 137,557 127,395 111,330 99,606 93,774
R/E Mortgage Res..................................... 142,868 143,673 166,263 156,350 152,628
Com'l. & Industrial.................................. 71,887 69,889 95,412 69,411 62,196
Con., Instl. & Other................................. 87,212 67,779 52,640 34,469 40,576
---------- ---------- ---------- ---------- ----------
Total................................................ $ 451,751 $ 422,083 $ 432,062 $ 363,514 $ 358,786
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</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.
6
<PAGE>
2) Maturity of Loans at December 31, 1996:
<TABLE>
<CAPTION>
MATURING
-------------------------------------------------------------
<S> <C> <C> <C> <C>
AFTER ONE BUT
WITHIN FIVE AFTER FIVE
WITHIN ONE YEAR YEARS YEARS TOTAL
--------------- ---------------- -------------- ----------
R/E Construction................................. $ 10,501 $ 1,726 $ 12,227
R/E Mortgage..................................... 45,293 114,058 $ 121,074 280,425
Comm/Industrial.................................. 36,876 14,200 20,811 71,887
------- -------- -------------- ----------
Total............................................ $ 92,670 $ 129,984 $ 141,885 $ 364,539
------- -------- -------------- ----------
------- -------- -------------- ----------
</TABLE>
3) Rate Sensitivity of Above Loans Maturing After One Year:
(dollars in thousands)
<TABLE>
<CAPTION>
ONE TO FIVE AFTER FIVE
YEARS YEARS
---------------- ------------
<S> <C> <C>
Fixed Interest Rate........................................ $ 68,747 $ 57,820
Variable Interest Rate..................................... 61,237 84,065
-------- ------------
Total...................................................... $ 129,984 $ 141,885
-------- ------------
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</TABLE>
In addition to Federal funds and maturing securities, $92.7 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, $145.3 million have variable interest rates, helping insulate
the Company from the adverse effects of significant changes in interest rates.
For additional information concerning asset/liability management, see "Item
7--Management's Discussion and Analysis--Asset/ Liability Management."
7
<PAGE>
SECURITIES
- ----------
The Company records its investment in securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." 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 $.3 million, $.6 million
and ($1.1 million) at December 31, 1996, 1995 and 1994, respectively. The tax
effects recorded in other assets was $.2 million, $.4 million, and ($.8
million) at December 31, 1996, 1995 and 1994, respectively.
See Note A and Note B to the 1996 Consolidated Financial Statements,
included herein at Item 8, for discussion of accounting policies related to
securities and for information as to the amortized cost and fair value of
securities at December 31, 1996 and 1995:
The table below sets forth the carrying amounts of securities at the
dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------------------------------
U.S. Treasury and U.S. Government Agencies $ 83,812 $ 113,539 $ 89,937
State and political subdivisions 68,117 47,684 47,219
Other securities 27,309 22,683 10,569
----------------------------------
Total $ 179,238 $ 183,906 $ 147,725
----------------------------------
----------------------------------
</TABLE>
8
<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, 1996. Tax-equivalent adjustments (using a 34% rate) have been
made in calculating yields on obligations of states and political
subdivisions (dollars in thousands):
MATURING
<TABLE>
<CAPTION>
AFTER ONE BUT WITHIN
FIVE YEARS AFTER TEN YEARS
-------------------- ---------------------
AFTER FIVE BUT
WITHIN ONE YEAR (1) WITHIN TEN YEARS (3)
------------------------- (2) -------------------- (4)
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------------- ---------- --------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury and US
Government Agencies
(%) (5) $ 23,163 5.92% $47,293 5.99% $ 5,697 5.96% $ 9,449 5.91% $ 85,602
State and political
subdivisions 8,630 6.47 28,652 7.73 15,983 7.59 14,526 8.14 67,791
Other 995 6.64 17,955 5.91 2,965 7.90 21,915
------------- ---------- --------- --------- --------- --------- --------- ---------- ---------
Total $ 32,788 6.09% $93,900 6.51% $ 24,645 7.25% $ 23,975 7.26% $ 175,308
------------- ---------- --------- --------- --------- --------- --------- ---------- ---------
------------- ---------- --------- --------- --------- --------- --------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
YIELD
---------
<S> <C>
US Treasury and US
Government Agencies
(%) (5) 5.96%
State and political
subdivisions 7.62
Other 6.21
---------
Total 6.64%
---------
---------
</TABLE>
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(1) Includes $2.1 million of adjustable rate securities
(2) Includes $20.2 million of adjustable rate securities
(3) Includes $5.8 million of adjustable rate securities
(4) Includes $5.6 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 $23.4 million have been included based upon the
estimated average lives of the securities. Prepayments were estimated based
on 1996 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,
1996, 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, 1996, 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 monthly 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. While the
Company has $126.9 million in time deposits maturing in 1997, the Company's
previous experience indicates that a significant portion will "roll over" on
maturity. Indeed, of this amount, only $34.7 million represents time deposits
of over $100,000, which are generally considered to be more volatile than
"core" deposits. Management operates under a formal liquidity policy which it
believes maintains adequate cash equivalents and other liquid
9
<PAGE>
assets to meet foreseen outfolows of such deposits, as well as outflows
from other deposit products that the Company offers. 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."
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,
---------------------------------
1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits......... $ 134,176 $ 128,697 $ 120,333
Money Market & NOW accounts................. 119,865 2.47% 127,960 2.71% 156,094 2.40%
Savings deposits............................ 212,389 3.96 191,828 4.39 166,347 3.13
Time deposits............................... 159,704 5.44 163,074 5.66 122,800 4.40
---------- --------- ---------- --------- ---------- ---------
Total deposits.............................. $ 626,134 3.20% $ 611,559 3.45% $ 565,574 2.54%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
The maturities of time deposits under $100,000 and time deposits of $100,000
or more outstanding at December 31, 1996, are summarized for the periods
indicated in the following table (balances in thousands):
<TABLE>
<CAPTION>
TIME DEPOSITS UNDER TIME DEPOSITS
$100,000 $100,000 OR MORE TOTAL
------------------- ---------------- ----------
<S> <C> <C> <C>
Balances outstanding at December 31, 1996, maturing in:
3 months or less.............................................. $ 24,309 $ 19,004 $ 43,313
Over 3 through 6 months....................................... 44,046 11,854 55,900
Over 6 through 12 months...................................... 23,928 3,801 27,729
Over 12 months................................................ 29,479 5,844 35,323
-------- -------- ----------
Total......................................................... $ 121,762 $ 40,503 $ 162,265
-------- -------- ----------
-------- -------- ----------
</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 the administration of
personal trusts and estates in a fiduciary capacity, self-directed IRA and
Keogh accounts and pensions. At December 31, 1996, customer assets under
management totaled approximately $180 million, representing approximately 640
accounts.
COMPETITION
- -----------
The Bank principally competes in a market area of four New York
counties (Dutchess, Putnam, Orange, and Ulster). As of June 1996 (the latest
available data), such market area included 17 commercial banks (195 branches)
with deposits of $5.1 billion, 18 thrift institutions (75 branches) with
deposits of $3.8 billion, and 25 credit unions (32 branches) with deposits of
$1.4 billion. Total market deposits aggregated $10.3 billion as of such date.
10
<PAGE>
As of that date, the Bank had the largest share of the total commercial
bank deposits in Dutchess and Ulster counties (9.8%), and ranked 3rd in
deposits among all commercial banks in the total four county area. In 1997,
the Company plans to open branches in Goshen and Middletown, Orange County,
in the first half of 1997 as well as a service branch in Wappingers Falls,
Dutchess County. The Company closed its service branch at Ames Plaza, Amenia,
Dutchess County, and transferred all of its accounts to its Amenia main
office.
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 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 BHCA, 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. The George Gale Foster Corporation ("GGF"), which controls
approximately 11% of the Company's Common Stock, is also a registered bank
holding company for the Bank under the BHCA. As a result, activities
undertaken by the Company may also require approval of an application filed
by GGF.
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.
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. Federal law permits adequately capitalized and
adequately managed bank
11
<PAGE>
holding companies to acquire banks and bank holding companies in any state,
subject to certain conditions, including certain nationwide and statewide
concentration limits. Consequently, 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. Effective June 1,
1997, federal law will permit banks, subject to certain provisions, including
state opt-out provisions, to merge with banks in other states, or to acquire,
by acquisition or merger, branches outside its home state. States may
affirmatively opt-in to permit these transactions earlier, which New York,
among other states, has done. The establishment of new interstate branches
also will be possible in those states with laws that expressly permit it.
Branches of interstate banks will be subject to various host state laws,
including laws 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 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.
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 Company, and
consequently the right of creditors and stockholders of the Company, 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 Company 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. In addition, the Bank
is insured by and subject to certain regulations of the FDIC. The Bank is
also subject to various requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits,
restrictions on the types, amounts, terms and conditions of loans that may be
granted and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operation of the Bank. 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 the Bank are subject to substantially similar minimum
capital requirements. 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, and qualifying 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,
less certain intangibles. At least half of total capital must be composed of
Tier I capital.
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
12
<PAGE>
related surplus, certain hybrid capital instruments, perpetual debt,
mandatory convertible debt securities, and certain intermediate-term
preferred stock and subordinated debt instruments (both 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
meeting certain specified criteria, which include having a composite
regulatory examination 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 asset
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. The federal bank regulatory agencies may set
higher capital requirements when particular circumstances warrant. The
risk-based capital standards explicitly identify concentrations of credit
risk and the risk arising from non-traditional activities, as well as an
institutions's ability to manage these risks, as important factors to be
taken into account in assessing overall capital adequacy. The capital
guidelines also provide that an institution's exposure to a decline in the
economic value of its capital due to changes in interest rates be considered
as a factor in evaluating a bank's capital adequacy. The Federal Reserve
Board also has recently issued additional capital guidelines for certain bank
holding companies that engage in trading activities.
At December 31, 1996, the Company and Bank exceeded all minimum capital
requirements. The Company had a ratio of Tier I capital to total assets of
9.2%, a ratio of Tier 1 capital to risk-weighted assets of 13.7%, 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 8.2%, a ratio of Tier 1 capital to
risk-weighted assets of 12.2%, and a ratio of total capital to risk-weighted
assets of 13.5%.
The Company's ability to pay dividends and expand business can be
restricted if capital falls below minimum requirements. In addition, the
Comptroller has established levels at which a national bank is well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, and is required to take
prompt corrective action with respect to banks that fall below minimum
capital standards. The degree of regulatory intervention is tied to an
insured institution's capital category. The prompt corrective actions 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 Comptroller may 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, 1996, the Bank met the requirements for a
"well-capitalized" institution based on its capital ratios as of such date.
In connection with the submission of a capital restoration plan, a
company that has control of an undercapitalized institution must 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 as a condition of Comptroller approval.
TRANSACTIONS WITH AFFILIATES
The Bank is also subject to federal law that limits its transactions to
or on behalf of the Company and to or on behalf of any nonbank subsidiaries.
Such transactions are limited to 10 percent of the Bank's capital and surplus
and, with respect to the Company and all nonbank subsidiaries, to an
aggregate of 20 percent of the Bank's capital and surplus. Further, loans and
extensions of credit generally are required to be secured by eligible
collateral in specified amounts. Federal law also prohibits the Bank from
purchasing "low-quality" assets from affiliates.
13
<PAGE>
DEPOSIT INSURANCE
The deposits of the Bank are insured by the FDIC up to the limits set
forth under applicable law. Most of the deposits of the Bank are subject to
the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the
FDIC. However, approximately $13.6 million in deposits are subject to
assessments imposed by the Savings Association Insurance Fund ("SAIF") of the
FDIC.
Pursuant to budget reconciliation legislation enacted in 1996, the FDIC
imposed a special assessment on SAIF-assessable deposits of 65.7 basis points
per $100 of SAIF-assessable deposits in order to increase the SAIF's net
worth to 1.25 percent of SAIF-insured deposits as of October 1, 1996. The
pre-tax impact of the special assessment on the Bank was approximately
$66,000.
The FDIC thereafter equalized the assessment rates for BIF - and
SAIF-insured deposits, effective January 1, 1997. Thus, for the semi-annual
period beginning January 1, 1997, the assessments imposed on all FDIC
deposits for deposit insurance have an effective rate ranging from 0 to 27
basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. However, because the
legislation enacted in 1996 requires that both SAIF-insured and BIF-insured
deposits pay PRO RATA portions of the interest due on the obligations issued
by the Financing Corporation ("FICO"), the FDIC is assessing BIF-insured
deposits an additional 1.30 basis points per $100 of deposits, and
SAIF-insured deposits an additional 6.48 basis points per $100 of deposits,
to cover those obligations. The Bank's assessment rate was 0 basis points
before the FICO assessment noted above.
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, 1996, of $574,000. The Reserve Board also requires depository
institutions to maintain non-earning reserves against certain transaction
accounts (primarily checking accounts) and non-personal time deposits (those
which are transferable or held by a person other than a natural person). At
December 31, 1996, 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. The Bank is subject to various statutory and regulatory
restrictions on its ability to pay dividends to the Company under such
restrictions. As of January 1997, the amount available for payment of
dividends to the Company by the Bank totaled $9,071,000 plus any accumulated
1997 earnings. In addition, the Comptroller has authority to prohibit the
Bank from paying dividends, depending upon the Bank's financial condition if
such payment is deemed to constitute an unsafe or unsound practice. The
Comptroller and the Reserve Board have indicated their view that it generally
would be an unsafe and unsound practice to pay dividends except out of
current operating earnings. The ability of the Bank to pay dividends could be
further influenced by bank regulatory and supervisory policies.
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.
14
<PAGE>
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. 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. 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 pay 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 Company and the Bank.
EMPLOYEES
As of December 31, 1996, the Company had 276 full-time and 84 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>
POSITION WITH THE COMPANY AND/OR THE BANK AND RECENT
NAME AGE(A) EXPERIENCE
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
T. Jefferson Cunningham III Chairman and Chief Executive Officer of the Company;
54 Chairman of the Executive Committee of the Bank.
John Charles VanWormer President of the Company; President and Chief
49 Executive Officer of the Bank.
Donald H. Weber Executive Vice President and Chief Operations
Officer of the Bank (1995- 1996); Chairman and Chief
Executive Officer, Manufacturers and Traders Trust
Company, Endicott Trust Division (1992-1995);
President and Chief Executive Officer, Endicott
60 Trust Company (1987-1992).
David S. MacFarland Regional Executive Vice President of the Bank
(1994-1996); Regional Chairman, Fleet Bank of New
York, Hudson Valley Region (1993-1994); Regional
President, Fleet Bank of New York, Hudson Valley
53 Region (1988-1993).
Paul A. Maisch Treasurer and Chief Financial Officer of the
41 Company; Senior Vice President of the Bank .
Nancy Behanna Secretary of the Company and the Bank (1996); Senior
Vice President and Chief Credit Officer of the Bank
42 (1994-1996); Vice President of the Bank (1991-1994).
Thomas R.B. Campbell Senior Vice President/Senior Trust Officer
(1993-1996); Senior Vice President, Brown Brothers
58 Harriman & Co. (1962-1993).
Michael H. Graham 59 Senior Vice President, Loan Officer.
Curtis M. Juengerkes Senior Vice President & Chief Information Officer
(1995- 1996); Vice President of Management
Information Systems, A. T. Hudson & Co. (1993-1995);
56 Vice President, Union Savings Bank (1987-1993).
Paul S. Mack Senior Vice President, Senior Loan Officer, of the
49 Bank.
Kim Dillinger Sprossel Vice President and Cashier of the Bank (1994-1996);
41 Vice President and Auditor (1991-1994).
Clifford O. Straub Senior Vice President, Community Banking Sales
Officer (1995-1996); Vice President Area Manager,
46 Shawmut National Corporation (1986-1995).
</TABLE>
- ------------------------
(a) as of February 28, 1997
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 largest branch
(approximately 3,200 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.
In November 1996, the Company relocated its operations and data processing
department to the LaGrange complex, vacating space in its Rhinebeck location.
The Company intends to lease approximately one-half (or 3,000 square feet) of
the vacated space in its Rhinebeck location.
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 is traded on the NASDAQ, National Market System
("NMS") under the symbol "HCBK". On March 1, 1997, there were approximately
1,317 shareholders of record of Common Stock and 4,732,501 shares of Common
Stock issued and outstanding.
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, 1995. This table has been adjusted
retroactively to give effect to the 10% stock dividends declared, December
21, 1995 and December 19, 1996, payable January 31, 1996 and January 15,
1997, respectively.
<TABLE>
<CAPTION>
PRICE
CASH DIVIDENDS PER --------------------
SHARE HIGH LOW
----------------------------------------
<S> <C> <C> <C>
1995
First Quarter............................................................... $0.1240 $14.98 13.44
Second Quarter.............................................................. 0.1240 14.25 13.02
Third Quarter............................................................... 0.1322 14.25 13.02
Fourth Quarter.............................................................. 0.1322 16.53 13.44
1996
First Quarter............................................................... $0.1455 19.55 15.91
Second Quarter.............................................................. 0.1455 19.55 18.19
Third Quarter............................................................... 0.1636 20.00 18.64
Fourth Quarter.............................................................. 0.1636 26.25 18.86
</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, if any, 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,
1996 are derived from the consolidated financial statements of Hudson
Chartered Bancorp Inc. The information presented has been restated for prior
years to reflect the merger of Fishkill National Corporation with and into
Community Bancorp, Inc. to become Hudson Chartered Bancorp, Inc. on September
30, 1994. 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 at or for the
year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Average--assets.......................................... $ 698,875 $ 671,852 $ 627,099 $ 585,921 $ 560,543
- -deposits................................................ 626,134 613,676 565,574 528,528 513,277
- -equity.................................................. 61,983 55,466 52,685 51,707 41,071
Year end--assets......................................... 696,875 696,483 645,977 595,706 581,358
- -deposits................................................ 625,826 631,060 580,070 536,530 526,555
- -equity.................................................. 65,165 59,929 52,538 54,120 49,542
- -Preferred stock included in equity...................... 5,713 5,714 6,555 6,555
- -interest-earning assets................................. 642,507 635,532 596,407 548,537 537,314
- -interest-bearing liabilities............................ 485,423 494,300 452,934 423,373 423,202
Income data:
Net interest income...................................... $ 30,854 $ 29,456 $ 28,095 $ 26,807 $ 25,825
Provision for loan losses................................ (2,850) (2,300) (2,400) (3,266) (2,900)
Realized gains (losses) on sales of securities and loans,
net.................................................... 365 542 (1,762) 941 531
Total other operating income............................. 6,433 5,237 5,225 4,664 4,100
---------- ---------- ---------- ---------- ----------
Gross operating income................................... 34,802 32,935 29,158 29,146 27,556
Total other operating expenses........................... (21,585) (22,456) (23,958) (21,560) (20,314)
---------- ---------- ---------- ---------- ----------
Income before income taxes............................... 13,217 10,479 5,200 7,586 7,242
Income taxes............................................. (4,551) (3,514) (1,936) (2,600) (2,498)
---------- ---------- ---------- ---------- ----------
Net income............................................... 8,666 6,965 3,264 4,986 4,744
Dividend requirements of preferred stock................. (89) (414) (415) (497) (77)
---------- ---------- ---------- ---------- ----------
Net income applicable to common shares................... $ 8,577 $ 6,551 $ 2,849 $ 4,489 $ 4,667
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per common share: (1)
Primary earnings......................................... $ 1.82 $ 1.55 $ 0.69 $ 1.11 $ 1.26
Fully diluted earnings................................... 1.78 1.47 0.69 1.07 1.26
Cash Dividends........................................... 0.62 0.51 0.50 0.48 0.42
Book Value (2)........................................... 13.75 12.69 11.34 11.75 10.72
Weighted average common shares outstanding: (1)
Primary.................................................. 4,716,857 4,240,774 4,157,024 4,062,996 3,708,639
Fully diluted............................................ 4,880,069 4,740,906 4,654,159 4,566,068 3,711,307
Selected Financial Ratios:
Return on average assets................................. 1.25% 1.04% 0.52% 0.85% 0.85%
Return on average equity................................. 13.98 12.56 6.20 9.64 11.55
Average equity to average assets......................... 8.87 8.25 8.40 8.82 7.33
Allowance for loan losses as a percentage of loans....... 2.06 2.08 1.93 2.01 1.61
Allowance for loan losses as a percent of nonperforming
loans.................................................. 169 166 163 123 105
Total nonperforming loans and OREO to total loans and
OREO................................................... 1.36 1.53 1.45 1.92 1.81
Capital to risk-weighted assets.......................... 14.97 15.02 13.41 15.38 14.03
Common dividend payout ratio............................. 30.56 31.20 69.99 42.70 36.58
Tier 1 capital to average assets (leverage ratio)........ 9.21 8.44 8.20 8.96 8.49
</TABLE>
- ------------------------
(1) Information has been adjusted retroactively to give effect to the 10%
stock dividends declared December 1995 and December 1996.
(2) Based upon actual number of common stock shares outstanding at year end
as adjusted retroactively for 10% stock dividend declared December 1996
and as to 1995 includes the dilutive effect of Series B convertible
preferred stock of approximately 485,000 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. Prior period data has been restated to reflect the merger of Fishkill
National Corporation with and into Community Bancorp, Inc. to become Hudson
Chartered Bancorp, Inc. on September 30, 1994. 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, 1995 to December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
NET CHANGE
----------
12/31/96 AMOUNT % 12/31/95
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Cash & cash equivalents $ 46,409 $(21,444) (31.6)% $ 67,853
Securities 179,238 (4,668) (2.54) 183,906
Loans 451,919 29,563 7.00 422,356
Allowance for loan losses (9,302) (532) 6.07 (8,770)
Premises & equipment 16,249 (813) (4.76) 17,062
Other 12,362 (1,714) (12.18) 14,076
-------- -------- ------- --------
Total assets $696,875 $ 392 .06% $696,483
-------- -------- ------- --------
-------- -------- ------- --------
Deposits:
Non-interest bearing $142,256 $ 3,600 2.60% $138,656
Interest bearing 483,570 (8,834) (1.79) 492,404
-------- -------- ------- --------
Total deposits 625,826 (5,234) (.83) 631,060
Other interest bearing liabilities 1,853 (43) (2.27) 1,896
Other liabilities 4,031 433 12.03 3,598
-------- -------- ------- --------
Total liabilities 631,710 (4,844) (0.76) 636,554
-------- -------- ------- --------
Stockholders' equity 65,165 5,236 8.74 59,929
-------- -------- ------- --------
Total liabilities & stockholders'
equity $696,875 $ 392 .06% $696,483
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
20
<PAGE>
Financial Condition
December 31, 1996 compared to December 31, 1995
Total assets in 1996 grew by only $.4 million from year end 1995. During
1996, the Company focused its efforts on the quality of its core net interest
margin. As a result of this focus, efforts were expended on growing the loan
portfolio and consolidating its customer relationships while reducing its
funding cost. Accordingly, loans increased $29.6 million in 1996 while
interest bearing deposits declined by $8.8 million. These changes in the
balance sheet structure were funded by a decline in cash and cash equivalents
of $21.4 million, a decline in the securities portfolio of $4.7 million, an
increase in noninterest bearing deposits of $3.6 million and capital
retention of $5.2 million.
Of the increase in loans, consumer loans (primarily indirect automobile
financing) increased by $19.4 million or 28.7%, commercial mortgage loans
increased by $10.2 million or 8.0%, and commercial and industrial loans
increased $2.0 million or 2.9%. These increases were the result of the
business plan of the Company to increase its lending in those sectors. The
increases were partially offset by decreases in residential mortgages held by
the Bank and construction loans of $1.9 million or 1.2%. It should be noted
that although residential mortgages held by the Bank declined, new
originations of such loans of $8.3 million were sold into the secondary
market in order to maintain the Company's interest rate risk management
profile at planned levels.
Although securities declined by $4.7 million, the Company actively
positioned its portfolio during 1996. As a result, U.S. Treasury and U.S.
Government Agency securities declined $29.7 million or 26.2%. However,
municipal holdings increased by $20.4 million or 42.9% and corporate
securities increased by $4.6 million or 20.4%. This shift was made by
investing in "bank-qualified" municipal bonds with approximate maturities of
15 years, where the tax equivalent yields are significantly higher (and
market value risks lower) than other securities of comparable maturity.
Overall deposits declined by $5.2 million. Of this amount, noninterest
bearing deposits increased by $3.6 million and interest bearing deposits
declined by $8.8 million. Of the decline in interest bearing deposits, $5.5
million or 4.7% were in NOW and money market deposit accounts and $8.8
million or 5.2% were certificates of deposits. In April and May of 1996,
approximately $15 million of special promotional 15 month certificates of
deposits matured which bore higher interest rates than the renewal rate
offered by the Company at time of renewal. These declines were somewhat
offset by the growth in savings accounts of $5.4 million or 2.7%, a portion
of which increase was funded from maturing certificates noted above. For
additional information regarding deposits, see Item 1--Business "Deposits".
Additionally, investments in premises and equipment declined by $.8 million
as depreciation of $1.8 million outpaced additions to equipment of $1.0
million. Other assets declined $1.7 million, primarily due to net declines of
Other Real Estate Owned of $.5 million, accrued income of $.4 million, and a
$.7 million decline in income tax refund receivables.
The allowance for loan losses grew by $.5 million to $9.3 million or a 6%
increase, as provisions for loan losses of $2.8 million were offset by net
charge-offs of $2.3 million. The allowance for loan losses represented 2.1%
of total loans in both 1996 and 1995. Further, the allowance for loan losses
is 169% of nonperforming loans and restructured troubled debt at December 31,
1996 compared to 166% at December 31, 1995.
Stockholders' equity grew $5.2 million or 8.7% in 1996 compared to year end
1995. Of this increase, $8.7 million resulted from net income and $1.4
million from the sale of additional shares of stock through the Company's
dividend reinvestment and employee stock option plans. These increases were
offset by dividends declared of $3.0 million, stock repurchases of $1.5
million and the net change in the net unrealized gains on securities
available for sale, after tax of $.3 million. Further, in January 1996, the
Company called for redemption the entire issue of Series B preferred stock.
The Company redeemed $.1 million of the Series B preferred stock issued and
the remaining shares were converted into 474,750 shares of common stock.
Additionally, in December 1996, the Board of Directors declared a 10% stock
dividend, payable in January 1997. As a result, $11.3 million of retained
earnings was capitalized into common stock and additional paid in capital.
21
<PAGE>
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 $14.1 million in 1996. Investing activities (primarily
purchases of securities and the funding of loans) used $27.3 million in 1996
as purchases of securities and new loans of $124.4 million exceeded sales,
maturities, and prepayment of loans and securities. Financing activities used
$8.3 million represented by $5.2 million decrease in deposits, dividends of
$2.9 million and stock repurchases and redemptions of $1.6 million offset by
new common stock issuances of $1.3 million. The overall result was a decrease
in cash and cash equivalents of $21.4 million to $46.4 million at December
31, 1996. The Company's liquidity ratio (defined as cash and cash equivalents
plus securities available-for-sale ($209.3 million) to total assets) was
30.0% at year end 1996. The average life of the available-for-sale portfolio,
on a rate sensitivity basis, is approximately 2.9 years. These liquid 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
($33.8 million) under its secured advance program.
In August 1995, the Board of Directors approved a stock repurchase program
and authorized management to repurchase up to 100,000 shares of the Company's
stock from the market. In December 1996, the Company's Board of Directors
authorized a second repurchase program for management to repurchase an
additional 200,000 shares of the Company's stock. The purpose of these
repurchase programs is to offset the effects of new stock issuances under the
Company's dividend reinvestment and stock option plans. As of December 31,
1996, the Company had repurchased 86,400 shares (as adjusted for the 10%
stock dividends declared December 1995 and December 1996) of the Company's
stock. Commencing in December 1996, the Company began re-issuing treasury
stock to directly fund stock options exercises and Dividend Reinvestment Plan
purchases. Since that time, the Company has re-issued 6,776 of its treasury
stock purchases for these purposes.
22
<PAGE>
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 liquid investments at
the holding company level to meet its reasonably anticipated cash needs in
1997.
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, included herein under Item 8. 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, 1996,
qualify both the Company and the Bank for "well capitalized" status under
appropriate 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.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Bank's regulator developed risk-based capital standards that take
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. The Company's risk based capital ratio as of December
31, 1996 was 15.0% vs. 10.0% for well capitalized institutions.
The Company continues to seek profitable opportunities for growth in its
markets and, in this regard the Company recently received approval from the
Office of the Comptroller of the Currency (Comptroller) to establish three
new branches in Orange County, New York, one of the fastest growing counties
in the State. The Company opened in Monroe in December 1996, Goshen in
February 1997, and plans to open in Middletown during the summer of 1997. The
Company recently filed another application with the Comptroller to establish
a service branch in Wappingers Falls, Dutchess County, and plans to open in
that location in the fall of 1997. Such branch expansion is expected to
increase operating expenses at a running annual rate of approximately
$1,200,000, but to improve profitability over the longer term. The success of
these new offices 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
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. Further, the
historical level of demand deposits (approximately 20% of total assets)
serves to mitigate the effects of increases in interest rates and reduces the
average cost of total liabilities.
23
<PAGE>
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 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 assess 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, 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 December 31, 1996, assuming
no management action, the Company's near-term interest rate risk (within 3
months) 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 1997, the Company's interest rate sensitivity (approximately 5.6%
of earnings assets) 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 (10.9% of earning assets), principally due
to a high level of liabilities that will reprice relative to similarly
situated assets 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 rate and spread movements nor management's
actions that may be taken to manage this risk.
24
<PAGE>
<TABLE>
<CAPTION>
TOTAL
THREE MONTHS FOUR MONTHS WITHIN ONE ONE YEAR TO GREATER THAN
MATURITY REPRICING DATE (1) (2) OR LESS TO ONE YEAR YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------- ------------- ------------ ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Securities (3).......................... $ 40,012 $ 34,929 $ 74,941 $ 69,535 $ 34,262 $ 178,738
Fed Funds............................... 11,350 11,350 11,350
Commercial loans (3).................... 76,985 5,170 82,155 13,304 697 96,156
Consumer loans (3)...................... 35,030 19,744 54,774 66,769 2,359 123,902
Mortgage loans (3)...................... 67,706 80,441 148,147 74,518 4,169 226,834
------------- ------------ ----------- ----------- ------------ ----------
Total interest earning assets (1)....... 231,083 140,284 371,367 224,126 41,487 636,980
------------- ------------ ----------- ----------- ------------ ----------
Savings (4)............................. 67,364 142,766 210,130 210,130
NOW (5)................................. 47,304 47,304 47,304
MMDA (5)................................ 63,871 63,871 63,871
Time/Other (5).......................... 64,023 55,353 119,376 44,743 164,119
------------- ------------ ----------- ----------- ------------ ----------
Total interest-bearing liabilities...... 195,258 245,423 440,681 44,743 485,424
------------- ------------ ----------- ----------- ------------ ----------
Interest Sensitivity gap (6)............ $ 35,825 $ (105,139) $ (69,314) $ 179,383 $ 41,487 $ 151,556
------------- ------------ ----------- ----------- ------------ ----------
------------- ------------ ----------- ----------- ------------ ----------
Gap as a percent of earning assets...... 5.6% (16.5%) (10.9%) 28.2% 6.5% 23.8%
------------- ------------ ----------- ----------- ------------ ----------
------------- ------------ ----------- ----------- ------------ ----------
</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, 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 $142.2 million
at December 31, 1996.
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, 1996, the Company had $3.5 million in
fixed rate securities and $20.0 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 prepayments by the borrowers on
the underlying loans. As a general rule, when interest rates rise,
prepayments slow down, extending the anticipated 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, 1996, 1995 and 1994. Net income increased
$1.7 million in 1996 over 1995. This increase is primarily due to increases
of $1.4 million in net interest income, increases in other income of $1.0
million, and reductions in expenses of $.9 million, offset by an increase in
the provision for loan losses of $.6 million and an increase in income tax
expense of $1.0 million. Fully diluted earnings per share increased to $1.78,
a $.31 per share increase or 21.1%
Net income for 1995 was $7.0 million or $1.47 per fully diluted share
compared to net income for 1994 of $3.3 million or $.68 per fully diluted
share. If the Company had not incurred the 1994 merger-related costs and the
securities portfolio restructuring losses (totalling $3.1 million after
taxes), net income for that year would have been approximately $6.4 million
or $1.34 per fully diluted share.
Return on average assets was 1.25%, 1.04% and .52% in 1996, 1995 and
1994, respectively. The return on average equity was 14.0%, 12.6% and 6.2% in
1996, 1995 and 1994, respectively. Returns on average common equity were
14.2%, 13.2% and 7.0% for the similar periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 VS. % CHANGE 1995 VS. % CHANGE
1995 1996 VS. 1994 1995 VS.
1996 VARIANCE 1995 1995 VARIANCE 1994
--------- ----------- ----------- --------- ----------- -----------
Total interest income........................... $ 51,028 $ 313 .62% $ 50,715 $ 8,100 19.01%
Total interest expense.......................... 20,174 (1,085) (5.10) 21,259 6,739 46.4
--------- ----------- ----- --------- ----------- -----------
Net Interest income............................. 30,854 1,398 4.75 29,456 1,361 4.84
Provision for loan losses....................... 2,850 550 23.91 2,300 (100) (4.2)
--------- ----------- ----- --------- ----------- -----------
Net interest income after provision for loan
losses........................................ 28,004 848 3.12 27,156 1,461 5.69
Other income.................................... 6,798 1,019 17.63 5,779 2,316 66.88
--------- ----------- ----- --------- ----------- -----------
Gross operating income.......................... 34,802 1,867 5.67 32,935 3,777 12.9
<S> <C>
1994
---------
Total interest income........................... $ 42,615
Total interest expense.......................... 14,520
---------
Net Interest income............................. 28,095
Provision for loan losses....................... 2,400
---------
Net interest income after provision for loan
losses........................................ 25,695
Other income.................................... 3,463
---------
Gross operating income.......................... 29,158
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------
1996 VS. % CHANGE 1995 VS. % CHANGE
1995 1996 VS. 1994 1995 VS.
1996 VARIANCE 1995 1995 VARIANCE 1994
--------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Other expense................................... 21,585 (871) (3.88) 22,456 (1,502) (6.3)
--------- ----------- ----- --------- ----------- -----------
Income before income taxes...................... 13,217 2,738 26.13 10,479 5,279 101.5
Income taxes.................................... 4,551 1,037 29.51 3,514 1,578 81.5
--------- ----------- ----- --------- ----------- -----------
Net income...................................... $ 8,666 $ 1,701 24.42% $ 6,965 $ 3,701 113.4%
--------- ----------- ----- --------- ----------- -----------
--------- ----------- ----- --------- ----------- -----------
Net income per common share (*)................. $ 1.78 $ 1.47
--------- ----------- ----- --------- ----------- -----------
--------- ----------- ----- --------- ----------- -----------
<S> <C>
1994
---------
Other expense................................... 23,958
---------
Income before income taxes...................... 5,200
Income taxes.................................... 1,936
---------
Net income...................................... $ 3,264
---------
---------
Net income per common share (*)................. $ .69
---------
---------
</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 dividends declared December 1995 and 1996.
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.
27
<PAGE>
The following table presents, for each of the years 1996, 1995 and 1994, 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.
Average Balances, Interest, and Average Yields/Costs for the year ended
December 31, (dollar in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST
---------- --------- ----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1)........................ $ 435,952 $ 39,373 9.03% $ 428,505 $ 39,413 9.20% $ 392,619 $ 32,735
Taxable Securities 136,353 8,192 6.01 112,750 7,270 6.45 117,197 6,915
Tax-exempt Securities (2)........ 47,656 3,409 7.15 42,808 3,036 7.09 45,990 3,044
Fed Funds Sold................... 23,470 1,213 5.17 35,189 2,028 5.76 25,248 956
---------- --------- --- ---------- --------- --- ---------- ---------
Total Interest Earning Assets.... 643,431 52,187 8.09 619,252 51,747 8.36 581,054 43,650
Cash & Due from Banks............ 32,541 29,634 27,437
Premises & Equipment............. 16,207 17,621 15,308
Other Assets..................... 12,650 14,535 11,235
Allowance for Loan Loss.......... (8,954) (8,566) (7,935)
---------- --------- --- ---------- --------- --- ---------- ---------
Total Non-interest Earning
Assets......................... 52,444 53,224 46,045
---------- --------- --- ---------- --------- --- ---------- ---------
Total Assets..................... $ 695,875 52,187 7.50% $ 672,476 51,747 7.69% $ 627,099 43,650
LIABILITIES
Money Market..................... $ 69,190 2,351 3.40 $ 75,058 $ 2,556 3.41 $ 99,326 $ 2,706
NOW accounts..................... 50,675 615 1.21 52,902 915 1.73 56,768 1,036
Savings.......................... 212,389 8,408 3.96 191,828 8,427 4.39 166,347 5,207
Time Deposits.................... 159,704 8,690 5.44 163,074 9,231 5.66 122,800 5,403
Other............................ 1,855 110 5.93 2,117 130 6.14 2,291 168
Total Interest Bearing
Liabilities.................... 493,813 20,174 4.09 484,979 21,259 4.38 447,532 14,520
Demand Deposits.................. 134,176 128,697 120,333
Other............................ 5,903 3,334 6,549
---------- --------- --- ---------- --------- --- ---------- ---------
Total Non-interest Bearing
Liabilities.................... 140,079 132,031 126,882
Stockholders' Equity............. 61,983 55,466 52,685
Total Liabilities and Equity..... $ 695,875 20,174 2.89% $ 672,476 21,259 3.16% $ 627,099 14,520
Net interest Margin.............. 32,013 4.98 30,488 4.92 29,130
Less Tax Equivalent
adjustments.................... (1,159) (1,032) (1,035)
---------- --------- --- ---------- --------- --- ---------- ---------
Net Interest Income.............. $ 30,854 4.80% $ 29,456 4.76% $ 28,095
---------- --------- --- ---------- --------- --- ---------- ---------
---------- --------- --- ---------- --------- --- ---------- ---------
AVERAGE
YIELD/
COST
-----------
<S> <C>
ASSETS
Loans (1)........................ 8.34%
Taxable Securities 5.90
Tax-exempt Securities (2)........ 6.62
Fed Funds Sold................... 3.79
Total Interest Earning Assets.... 7.51
Cash & Due from Banks............
Premises & Equipment.............
Other Assets.....................
Allowance for Loan Loss..........
Total Non-interest Earning
Assets.........................
Total Assets..................... 6.96%
LIABILITIES
Money Market..................... 2.72
NOW accounts..................... 1.82
Savings.......................... 3.13
Time Deposits.................... 4.40
Other............................ 7.33
Total Interest Bearing
Liabilities.................... 3.24
Demand Deposits..................
Other............................
Total Non-interest Bearing
Liabilities....................
Stockholders' Equity.............
Total Liabilities and Equity..... 2.32%
Net interest Margin.............. 5.01
Less Tax Equivalent
adjustments....................
Net Interest Income.............. 4.84%
-----
-----
</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>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE/(DECREASE)DUE TO: INCREASE/(DECREASE) DUE TO:
--------------------------------- ----------------------------------
VOLUME RATE TOTAL(1) VOLUME RATE TOTAL(1)
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans.................................................. $ 685 $ (725) $ (40) $ 2,993 $ 3,685 $ 6,678
Taxable securities..................................... 1,522 (600) 922 (262) 617 355
Tax-exempt securities.................................. 344 29 373 (211) 203 (8)
Federal funds sold..................................... (675) (140) (815) 376 696 1,072
--------- --------- ----------- --------- --------- -----------
Total interest income.................................. 1,876 (1,436) 440 2,896 5,201 8,097
Interest paid on:
Money market accounts.................................. (200) (5) (205) (661) 511 (150)
NOW accounts........................................... (39) (261) (300) (71) (50) (121)
Savings accounts........................................ 903 (922) (19) 798 2,422 3,220
Time deposits........................................... (191) (350) (541) 1,772 2,056 3,828
Other................................................... (16) (4) (20) (13) (25) (38)
--------- --------- ----------- --------- --------- ---------
Total interest expense.................................. 457 (1,542) (1,085) 1,825 4,914 6,739
--------- --------- ----------- --------- --------- ---------
Net interest margin..................................... 1,419 106 1,525 1,071 287 1,358
Less tax equivalent effect.............................. (117) (10) (127) 72 (69) 3
--------- --------- ----------- --------- --------- ---------
Net interest income..................................... $ 1,302 $ 96 $ 1,398 $ 1,143 $ 218 $ 1,361
</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 1996 vs. 1995, net interest income was positively impacted by $1.3
million due changes in to volumes. The primary components of this increase were
increases in average outstanding securities and loans offset somewhat by
increases in average savings account balances. Net interest income was impacted
by $.1 million due to changes in interest rates. Of this amount, average loan
interest yields declined $.7 million reflecting new business generated at lower
yields than the portfolio earned in 1995, and the decreases in the prime rate
that took place throughout 1995 and early 1996, as well as decreases of $.6
million in interest on taxable securities. Such decreases in assets yields were
mirrored by decreases in deposit costs as the Company was able to keep pace with
the declines in the general level of rates in 1995, which effects were realized
in the full year 1996. Additionally, the Company restructured the interest
indexing mechanism of its "Merit" product, which led to a sharper decline in the
rate of interest paid on that product. Finally, its 15 month promotional CD
product matured in April and May of 1996, at which time renewal rates were much
lower than the rates paid on that product.
In 1995 vs. 1994, net interest income was positively impacted by $1.1
million (due to changes in volume) as the impact of increases in average earning
assets, primarily in average loans more than offset the impact of increasing
interest bearing deposit balances. However, rates paid on savings and time
deposits grew more rapidly than rates earned on average earning assets.
Therefore, the Company's increase in interest cost due to higher interest rates
paid on deposits offset most of 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. Overall, net interest income was
positively impacted by $.2 million due to the average effects of the interest
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,
------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1)...................................................... $ 4,528 $ 4,407 $ 4,105 $ 5,146 $ 4,427
Accruing loans past due 90 days or more (2)............................... 431 522 895 329 449
Restructured loans and troubled debt...................................... 534 349 119 457 625
--------- --------- --------- --------- ---------
Total non-performing loans................................................ 5,493 5,278 5,119 5,932 5,501
--------- --------- --------- --------- ---------
Amount collateralized by real estate...................................... 4,003 4,398 4,486 4,041 3,612
--------- --------- --------- --------- ---------
Other real estate owned (3)............................................... 653 1,196 1,150 1,064(4) 817
--------- --------- --------- --------- ---------
Total non-performing assets............................................... $ 6,146 $ 6,474 $ 6,269 $ 6,996 $ 6,318
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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 $216,000,
$354,000, $534,000, $313,000 and $163,000 at December 31, 1996, 1995, 1994,
1993, and 1992 respectively.
(3) Excludes "insubstance foreclosures" of $1.5 million,$1.0 million, $1.4
million, $2.1 million and $1.7 million at December 31, 1996, 1995 1994, 1993
and 1992 respectively, which are included in nonaccrual loans.
(4) Net of an allowance of $250,000.
With continued difficult economic conditions in the region compared to the
national economy, nonperforming loans increased slightly by $.2 million to $5.5
million at December 31, 1996. Of this amount, $4.0 million is collateralized by
real estate (approximately 73%). At December 31, 1995, the Company had $5.3
million in nonperforming loans of which $4.4 million (83%) was collateralized by
real estate compared to December 31, 1994 total nonaccrual loans of $5.1 million
(88% being collateralized by real estate). Other real estate owned (OREO)
comprised nine properties at December 31, 1996 of which one was a commercial
office building, five were residences and three were small parcels of vacant
land. During the year, the Company disposed of $1.9 million in OREO properties.
For a discussion of concentrations of credit risk and impaired loans, see
Notes C and D to the 1996 Consolidated Financial Statements, under Item 8
contained herein. At December 31, 1996, 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, $529,000 in additional gross interest income would have
been recorded in 1996 vs. $400,000 in 1995 and $228,000 in 1994. The actual
amount of interest income on nonaccrual loans recorded in interest income for
1996 was $215,000 vs. $265,000 in 1995 and $198,000 in 1994.
At December 31, 1996, the Company had a total of approximately $10.2 million
in loans classified as substandard, in addition to the nonperforming assets
noted above. Of this amount, $8.3 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>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year..................................... $ 8,770 $ 8,326 $ 7,332 $ 5,794 $ 4,534
Chargeoffs:
Commercial....................................................... 889 411 350 435 682
Installment...................................................... 554 593 292 449 856
Real estate...................................................... 1,289 1,164 1,059 1,103 405
--------- --------- --------- --------- ---------
Total chargeoffs................................................. 2,732 2,168 1,701 1,987 1,943
--------- --------- --------- --------- ---------
Recoveries:
Commercial....................................................... 89 75 63 124 91
Installment...................................................... 130 193 153 123 211
Real estate...................................................... 195 44 20 2 1
--------- --------- --------- --------- ---------
Total recoveries:................................................ 414 312 236 249 303
--------- --------- --------- --------- ---------
Net charge-offs.................................................. (2,318) (1,856) (1,465) (1,738) (1,640)
--------- --------- --------- --------- ---------
Provision for loan losses........................................ 2,850 2,300 2,400 3,266 2,900
Transfers, other*................................................ 69
--------- --------- --------- --------- ---------
Balance at end of year........................................... $ 9,302 $ 8,770 $ 8,326 $ 7,322 $ 5,794
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs to average loans outstanding during
year........................................................... .53% .43% .37% .49% .44%
Allowance for loan losses as a percent of year-end loans......... 2.06 2.08 1.93 2.01 1.61
Allowance as a percent of non-performing loans................... 169 166 163 123 105
</TABLE>
- ------------------------
* An adjustment of $69,000 was transferred to the allowance for the loan
losses as a result of the acquisition of assets and liabilities of the 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>
1996 1995 1994 1993 1992
------------------- ------------------- ----------------- ------------------ -----------------
% 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 $2,476 15.9% $2,355 16.6% $2,010 22.1% $2,520 19.1% $2,606 17.3%
Consumer & other 1,702 19.3 1,400 16.1 1,363 12.2 881 9.5 1,256 11.3
Real Estate - Construction 2.7 3.1 1.5 1.0 2.7
Real Estate - Mortgage 3,985 62.1 4,247 64.2 4,100 64.2 3,155 70.4 1,608 68.7
Unallocated 1,139 768 853 766 324
----------------------------------------------------------------------------------------------------
Total allowance
for loan losses $9,302 100% $8,770 100% $8,326 100% $7,322 100% $5,794 100%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</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 increased by $550,000 or 24% in 1996 compared to a
decrease of $100,000 or 4% in 1995.
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 1.6% in 1992 to 2.1% in 1996. 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 $2.3 million in 1996 as compared to
$1.9 million in 1995 and $1.5 million in 1994.
Management is very cognizant of the uncertainties of the local marketplace,
due to the employment cutbacks by the region's principal employers, IBM and
the State of New York. The unemployment rates, as of December 31, 1996, in
Dutchess, Ulster and Orange County area declined to 3.5%, 3.6% and 3.5%,
respectively, the lowest levels since 1989. Dutchess County's employment grew
by approximately 1,000 persons while Ulster County grew by 700. Orange County
experienced lower growth. However, the major increases in employment are in
the services sector, and a contributing factor to the lower levels of
unemployment is due to an increasing trend in commutation to points south of
the market area, primarily Westchester County and New York City. Total 1996
home sales were comparable to 1995 levels in Dutchess and Ulster County.
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. However, the effect
of these cutbacks has been felt by the local business community that directly
and indirectly benefited from IBM's and the State's previously higher levels
of employment, and has been a contributing factor to the levels of net
charge-offs experienced in the past three years.
Commercial office and industrial vacancy rates (excluding IBM space) remain
high (20-30%). There has been some "take up" of space previously occupied 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 at its East Fishkill facility. At
its Kingston facility, which IBM has completely vacated, Fleet Bank has
recently taken a portion of the site as its Processing Center, and the State
of New York still claims to be considering this site for consolidation of its
many data processing centers.
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 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.
NONINTEREST INCOME
The following table details the components of noninterest income for the
years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
NET CHANGE NET CHANGE
---------------------- ----------------------
1996 AMOUNT PERCENT 1995 AMOUNT PERCENT 1994
--------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from fiduciary
activities $ 643 $ (51) (7.4)% $ 694 $ 196 39.4% $ 498
Service charge income 4,148 643 18.4 3,505 (27) (.8)
3,532
Net realized gains
(losses) on securities 162 24 17.4 138 2,018 107.3 (1,880)
Net gains on sales of
loans 203 (201) (49.8) 404 286 242.4 118
Other 1,642 604 58.2 1,038 (157) 13.1 1,195
----------------------------------------------------------------------------------
Total $ 6,798 $ 1,019 17.6% $ 5,779 $ 2,316 66.9% $3,463
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
Noninterest income increased $1.0 million in 1996 compared to 1995 primarily
due to increases in service charge income of $.6 million and the sale of the
Company's merchant processing services in which the Company recorded a
one-time gain of $.4 million. Gains on sales of loans declined by $.2 million
(approximately $.3 million relates to the one-time sale in 1995 of some $25
million in previously originated mortgages into the secondary market).
Underlying gains on sales of loans therefore actually increased by $.1
million.
Noninterest income increased $2.3 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 (due to the repositioning of the Company's
securities portfolio in connection with the merger) vs. realized gains of
$162,000 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 (of
which $25 million of the sales were previously originated fixed rate
mortgages sold in order to reblance the Company's interest rate risk
profile). Income from fiduciary activities increased $196,000, reflecting
both increased fee levels and an increase in assets under administration.
NONINTEREST EXPENSE
The following chart outlines the major changes in noninterest expense for the
years ended December 31, 1996, 1995 and 1994, respectively (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
NET CHANGE NET CHANGE
---------------------- ----------------------
1996 AMOUNT PERCENT 1995 AMOUNT PERCENT 1994
--------- ----------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries & benefits $ 11,867 $ 558 4.93% $ 11,309 $ 670 6.3% $ 10,639
Occupancy & equipment 4,010 310 8.38 3,700 95 2.6 3,605
OREO 73 (68) (48.23) 141 220 * (79)
Merger-related 0 (250) (100.00) 250 (2,710) * 2,960
FDIC 89 (593) (86.95) 682 (576) (45.8) 1,258
Other 5,546 (828) (12.99) 6,374 799 14.3 5,575
--------------------------------------------------------------------------------
Total $ 21,585 $ (871) (3.88% $ 22,456 $ (1,502) (6.3)% $ 23,958
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
* not meaningful
33
<PAGE>
Salaries and benefits expense increased in 1996 by $558,000 primarily due to
the staffing increases in the fourth quarter for the anticipated new Orange
County branches $(150,000), increase in pension and profit sharing expense
($115,000) and the increased compensation expense recorded due to the value
of certain stock appreciation rights previously granted to officers
$(168,000). The remainder reflects the general levels of salary increases
received by employees during the year. 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.
Occupancy and equipment expenses increased by $310,000 in 1996 vs. 1995
primarily related to the severe winter experienced in the first quarter of
1996, increases in real estate taxes on Company-owned properties and higher
levels of equipment expense in 1996 vs. 1995. 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.
Other Real Estate Owned expense was $73,000 in 1996 compared to $141,000 in
1995. In 1996, the Company recorded net recoveries on dispositions of OREO
properties of some $170,000 compared to a recovery in 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 $90,000, $151,000 and $373,000 in 1996, 1995 and 1994, 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.
FDIC insurance expense decreased in 1996 by $593,000 to $89,000 from 1995
levels as a result of decreases in the rate of insurance premiums to the Bank
Insurance Fund (BIF). 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 was 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
$89,000 of FDIC insurance expense recorded in 1996.
FDIC insurance decreased $576,000 in 1995 vs. 1994 as the BIF 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. For further information regarding FDIC assessments, see Item I
Business--"Supervision and Regulation".
Other expenses decreased by $828,000 in 1996, of which $625,000 relates to
the costs of outside services in 1995 for integration of banking operations
and the remainder represents savings achieved in the levels of expense for
telephone, supplies and insurance services. Other expenses increased by
$799,000 in 1995 vs. 1994. Of this increase, approximately $250,000 relates
to amortization of goodwill and expenses incurred on new branches and
approximately $625,000 relates to the costs of 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 $4.6 million in 1996 compared to $3.5 million in
1995 and $1.9 million in 1994, reflecting pretax income of $13.2 million,
$10.5 million and $5.2 million in 1996, 1995 and 1994, respectively. The
Company's effective tax rates were 34.4%, 33.5% and 37.2% in 1996, 1995 and
1994, respectively. In 1994, approximately $750,000 of merger-related
expenses were considered nondeductible. For further information regarding
income taxes, see Note J to the consolidated financial statements under
Item 8.
34
<PAGE>
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.
Selected Quarterly Financial Data (Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1996 MARCH 31 JUN 30 SEPT 30 DEC 31
------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 12,704 $ 12,572 $ 12,699 $ 13,053
INTEREST EXPENSE 5,165 4,945 4,973 5,091
------------------------------------------------------
NET INTEREST INCOME 7,539 7,627 7,726 7,962
PROVISION FOR LOAN LOSSES 600 750 750 750
------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,939 6,877 6,976 7,212
NET SECURITY GAINS 73 19 13 57
OTHER INCOME 1,472 1,547 1,618 1,999
OTHER EXPENSES (5,390) (5,252) (5,395) (5,548)
------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,094 3,191 3,212 3,720
PROVISION FOR INCOME TAXES 1,081 1,087 1,102 1,281
------------------------------------------------------
NET INCOME $ 2,013 $ 2,104 2,110 2,439
------------------------------------------------------
------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE* $ .42 $ .43 $ .44 $ .50
------------------------------------------------------
------------------------------------------------------
1995 MARCH 31 JUNE 30 SEPT 30 DEC 31
-------------------------------------------------------
INTEREST INCOME (1) $ 12,086 $12,775 $12,822 $13,032
INTEREST EXPENSE 4,927 5,483 5,388 5,461
-------------------------------------------------------
NET INTEREST INCOME 7,159 7,292 7,434 7,571
PROVISION FOR LOAN LOSSES 500 600 600 600
-------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,659 6,692 6,834 6,971
NET SECURITY GAINS 10 128
OTHER INCOME (1) 1,286 1,492 1,506 1,357
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* $ .30 $ .32 $ .41 $ .45
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
- -----------------------------------------------------------------------------
*Fully diluted earnings per share have been retroactively adjusted to give
effect to the 10% stock dividends, declared December 1995 and December 1996.
(1) Certain other loan fees were reclassified to interest income to conform to
current year presentation.
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, 1996 and 1995............. 42
Consolidated Statements of Income and Expense for each of the three
years in the period ended December 31, 1996......................... 43
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996.................................. 44
Consolidated Statements of Changes in Stockholders' Equity for each of
the three years in the period ended December 31, 1996............... 45
Notes to Consolidated Financial Statements............................ 46
</TABLE>
Selected quarterly financial data of the Company for 1996 and 1995 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 1, 1997, 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, 1996 and 1995
3. Consolidated Statements of Income and Expense for each of
the three years in the period ended December 31, 1996
4. Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended December 31,
1996
5. Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1996
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 Quarterly Report on Form 10-Q for the quarters ended March 31, 1996 and September 30,
1996).
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. 33-79844).+
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 (incorporated herein by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).+
10.4 Hudson Chartered Bancorp, Inc. 1995 Incentive Stock Plan (incorporated herein by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).+
10.5 Employment agreement of T. Jefferson Cunningham III dated July 1, 1995 (incorporated herein by reference
to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995).+
10.6 Employment agreement of John Charles VanWormer dated July 1, 1995 (incorporated herein by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).+
10.7 Employment agreement of Paul A. Maisch dated April 1, 1995 (incorporated herein by reference to Exhibit
10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).+
10.8 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 (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).+
10.9 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 Deloitte & Touche LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>
- ----------------
+ Management contract of compensatory plan.
38
<PAGE>
Deloitte &
Touche LLP
Stamford Harbor Park Telephone: (203) 708-4000
333 Ludlow Street Facsimile: (203) 708-4797
P.O. Box 10098
Stamford, CT 06904
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, 1996 and 1995 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, 1996.
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 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 misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hudson Chartered Bancorp, Inc.
and subsidiaries at December 31, 1996 and 1995 and results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
[sig]
January 30, 1997
39
<PAGE>
Deloitte &
Touche LLP
Stamford Harbor Park Telephone: (203) 708-4000
333 Ludlow Street Facsimile: (203) 708-4797
P.O. Box 10098
Stamford, CT 06904
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, 1996, Hudson
Chartered Bancorp, Inc. and subsidiaries (the "Company") maintained an
effective internal control structure over financial reporting, including
safeguarding of assets, presented in conformity with generally accepted
accounting principles and, for the Company's bank subsidiary, The First
National Bank of the Hudson Valley, in conformity with 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, 1996, the
Company maintained an effective internal control structure over financial
reporting, including safeguarding of assets, presented in conformity with
generally accepted accounting principles and, for its bank subsidiary, 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.
[sig]
January 30, 1997
40
<PAGE>
January 30, 1997
REPORT OF MANAGEMENT TO THE STOCKHOLDERS
Financial Statements
The management of Hudson Chartered Bancorp, Inc.and subsidiaries ("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 generally accepted accounting principles and, for
the Company's bank subsidiary, the First National Bank of the Hudson Valley, in
conformity with the Federal Financial Institutions Examination Council
instructions for Schedules RC, RI, and RI-A of 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 structure over financial
reporting, including safeguarding of assets, presented in conformity with both
generally accepted accounting principles and Call Report instructions for
Schedules RC, RI, and RI-A as of December 31, 1995. This assessment was 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 generally accepted
accounting principles, for its bank subsidiary, and Call Report instructions for
Schedules RC, RI, and RI-A 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 FDIC as 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, 1996.
/s/ T. Jefferson Cunningham III /s/ John C. VanWormer /s/ 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,
----------------------
<S> <C> <C> <C>
NOTES 1996 1995
--------- ---------- ----------
ASSETS
Cash and due from banks................................................ K $ 35,059 $ 38,856
Federal funds sold..................................................... 11,350 28,997
---------- ----------
Total cash and cash equivalents........................................ 46,409 67,853
Securities:............................................................ B
Available for sale, at fair value...................................... 162,915 167,334
Held to maturity, fair value of $13,904 in 1996 and $14,922 in
1995................................................................ 13,568 14,465
Regulatory securities................................................. 2,755 2,107
Loans held for sale................................................... K 168 273
Loans:................................................................ C,D,K,L
Gross loans........................................................... 451,751 422,083
Allowance for loan losses............................................. E (9,302) (8,770)
Net loans............................................................. 442,449 413,313
---------- ----------
Premises and equipment................................................ F 16,249 17,062
Accrued income........................................................ 5,191 5,618
Other assets.......................................................... D 7,171 8,458
---------- ----------
TOTAL ASSETS.......................................................... $ 696,875 $ 696,483
---------- ----------
---------- ----------
LIABILITIES
Deposits:............................................................. G
Demand deposits....................................................... $ 142,256 $ 138,656
Interest bearing deposits............................................. 483,570 492,404
---------- ----------
Total deposits........................................................ 625,826 631,060
Repurchase agreements
Other interest bearing liabilities.................................... M 1,854 1,896
Other liabilities..................................................... 4,030 3,598
---------- ----------
TOTAL LIABILITIES..................................................... 631,710 636,554
Commitments and contingencies......................................... C,K
STOCKHOLDERS' EQUITY.................................................. N,O
Preferred Stock- 7.25% Series B, convertible......................... 5,713
Common stock......................................................... 3,854 3,086
Additional paid-in capital........................................... 40,863 23,378
Retained earnings.................................................... 21,830 27,454
Net unrealized securities gains...................................... 296 586
Treasury stock....................................................... (1,549) (117)
Employee stock ownership plan (ESOP)................................ (129) (171)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.......................................... 65,165 59,929
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $ 696,875 $ 696,483
---------- ----------
---------- ----------
</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,
----------------------------------
<S> <C> <C> <C> <C>
NOTES 1996 1995 1994
----- ---------- ---------- ----------
Interest income:
Loans, including fees............................................... $ 39,373 $ 39,413 $ 32,735
Federal funds sold.................................................. 1,213 2,028 956
Taxable securities.................................................. 8,192 7,270 6,915
Tax-exempt securities............................................... 2,250 2,004 2,009
---------- ---------- ----------
Total interest income............................................... 51,028 50,715 42,615
Interest expense:
Deposits............................................................ G 20,064 21,129 14,352
Other............................................................... 110 130 168
---------- ---------- ----------
Total interest expense.............................................. 20,174 21,259 14,520
---------- ---------- ----------
NET INTEREST INCOME................................................. 30,854 29,456 28,095
Provision for loan losses........................................... E 2,850 2,300 2,400
---------- ---------- ----------
Net interest income after provision for loan losses................. 28,004 27,156 25,695
Noninterest income:
Service charges on deposit accounts................................. 3,731 2,968 3,173
Other service charges, commissions and fees......................... 417 537 359
Income from fiduciary activities.................................... 643 694 498
Realized gains (losses) on sales of securities, net................. 162 138 (1,880)
Gains on sales of loans, net........................................ 203 404 118
Other............................................................... 1,642 1,038 1,195
---------- ---------- ----------
Total noninterest income............................................ 6,798 5,779 3,463
---------- ---------- ----------
GROSS OPERATING INCOME.............................................. 34,802 32,935 29,158
Noninterest expense:
Salaries and employee benefits...................................... H 11,867 11,309 10,639
Net occupancy....................................................... I 1,816 1,606 1,759
Equipment........................................................... 2,194 2,094 1,846
Postage and supplies................................................ 1,019 1,306 1,236
FDIC insurance...................................................... 89 682 1,258
Merger related costs................................................ 250 2,960
Other real estate owned............................................. D 73 141 (79)
Other............................................................... 4,527 5,068 4,339
---------- ---------- ----------
Total noninterest expense........................................... 21,585 22,456 23,958
Income before income taxes.......................................... 13,217 10,479 5,200
Income taxes........................................................ J 4,551 3,514 1,936
---------- ---------- ----------
NET INCOME.......................................................... 8,666 6,965 3,264
Dividend requirements of preferred stock............................ O 89 414 415
---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON SHARES.............................. $ 8,577 $ 6,551 $ 2,849
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding: *
Primary............................................................. 4,716,857 4,240,774 4,157,024
Fully diluted....................................................... 4,880,069 4,740,906 4,654,159
Per common share: *
Earnings--primary................................................... $ 1.82 $ 1.55 $ 0.69
Earnings--fully diluted............................................. 1.78 1.47 0.69
Dividends declared.................................................. 0.62 0.51 0.50
Book value.......................................................... 13.75 12.69 11.34
</TABLE>
- ------------------------
* adjusted for 10% stock dividends declared December 1995 and December 1996
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,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
OPERATING ACTIVITIES:
Net income.......................................................................... $ 8,666 $ 6,965 $ 3,264
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses......................................................... 2,850 2,300 2,400
Depreciation and amortization..................................................... 1,863 1,928 1,641
Provision for losses in other real estate owned................................... 117
Amortization of security premiums, net............................................ 298 227 862
Amortization of core deposit intangible........................................... 132 141 75
Realized (gains) losses on sales of securities and loans.......................... (365) (542) 1,762
Deferred income tax benefits...................................................... (554) (121) (118)
(Increase) decrease in other assets............................................... 908 (3,071) (3,120)
Increase (decrease) in other liabilities.......................................... 321 (1,774) 1,434
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 14,119 6,053 8,317
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale................................ 39,281 33,129 86,928
Proceeds from maturities of securities.............................................. 37,276
Proceeds from maturities of securities available-for-sale........................... 44,271 21,743
Proceeds from maturities of securities held-to-maturity............................. 4,916 17,671
Purchases of securities.............................................................
Purchases of securities available-for-sale.......................................... (78,497) (98,177) (72,179)
Purchases of securities held-to-maturity............................................ (5,929) (7,679) (45,598)
Proceeds from sales of loans........................................................ 8,329 31,305 10,434
Net increase in loans............................................................... (40,007) (22,956) (77,993)
Purchases of premises and equipment................................................. (1,050) (1,303) (4,956)
Proceeds from sales of buildings.................................................... 300
Proceeds from sales of other real estate owned...................................... 1,428 1,211 230
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES........................................... (27,258) (25,056) (65,558)
--------- --------- ---------
FINANCING ACTIVITIES:
Deposits acquired from purchase and assumption transactions......................... 25,399
Net increase in demand, money market, NOW and savings accounts...................... 3,600 7,960 16,898
Net increase (decrease) in other time deposits...................................... (8,834) 43,030 1,243
Proceeds from borrowings............................................................ 1,725
Repayment of borrowings............................................................. (955)
Increase (decrease) in securities sold under repurchase agreements.................. (6,106) 6,106
Net proceeds from issuance of common and preferred stock............................ 1,325 1,334 852
Repurchase of preferred stock....................................................... (123) (1) (805)
Repurchase of common stock.......................................................... (1,432) (116)
Cash dividends--preferred........................................................... (193) (414) (415)
Cash dividends--common.............................................................. (2,648) (2,102) (1,949)
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES................................ (8,305) 43,585 48,099
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (21,444) 24,582 (9,142)
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF YEAR................................................................ 67,853 43,271 52,413
--------- --------- ---------
AT END OF YEAR...................................................................... $ 46,409 $ 67,853 $ 43,271
--------- --------- ---------
--------- --------- ---------
Non-cash investing activities:
Transfer from loans to OREO......................................................... $ 1,526 $ 2,058 $ 611
Transfer of loans to held for sale.................................................. 25,066
Net unrealized gains (losses) recorded on securities................................ 490 2,957 (1,967)
Deferred taxes on net unrealized (gains) losses..................................... 200 (1,227) 823
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....................................................................... 20,402 21,069 14,275
Income taxes paid................................................................... 5,305 3,702 2,824
Conversion of preferred stock to common stock....................................... 5,590 1
</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
----------- ----------- ----------- --------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994........... $ 6,555 $ 2,678 $ 15,264 $ 28,498 $ 1,382 ($ 257)
Net income......................... 3,264
Dividends declared on preferred
stock............................ (415)
Dividends declared on common stock
($0.50 per share)*............... (1,994)
Stock reinvestment and purchase
plan--31,813 shares*............. 21 386
Redemption of Series A preferred
stock............................ (805)
Conversion of Series B preferred
stock--2,779 shares*............. (36) 2 34
Options exercised--42,220
shares*.......................... 29 415
Payments on ESOP borrowings........ 43
Net unrealized losses on
securities....................... (2,526)
----------- ----------- ----------- --------- ------ --------- ---------
BALANCE AT DECEMBER 31, 1994......... 5,714 2,730 16,099 29,353 (1,144) (214)
Net income........................ 6,965
Cash dividends declared on
preferred stock................. (414)
Cash dividends declared on common
stock ($0.51 per share)*........ (2,150)
Stock reinvestment and purchase
plan--45,811 shares*............ 30 581
Conversion of Series B preferred
stock--93 shares*............... (1) 1
Options exercised--67,489
shares*......................... 45 678
Purchase of Treasury stock........ ($ 117)
Payments on ESOP borrowings....... 43
Net unrealized gains on
securities...................... 1,730
Stock dividend declared on common
stock (10%) ( $16.36 per
share).......................... 280 6,020 (6,300)
----------- ----------- ----------- --------- ------ --------- ---------
BALANCE AT DECEMBER 31, 1995...... 5,713 3,086 23,378 27,454 586 (117) (171)
Net income........................ 8,666
Cash dividends declared on
preferred stock................. (89)
Cash dividends declared on common
stock ($0.62 per share)*........ (2,863)
Stock reinvestment and purchase
plan--46,382 shares*............ 33 773
Conversion of Series B preferred
stock--474,750 shares........... (5,590) 345 5,245
Redemption of Series B preferred
stock........................... (123)
Options exercised--63,526
shares*......................... 45 503
Sale of treasury stock............ (29) 29
Purchase of Treasury stock........ (1,461)
Payments on ESOP borrowings....... 42
Net unrealized gains on
securities...................... (290)
Stock dividend declared on common
stock (10%) ( $26.25 per
share).......................... 345 10,964 (11,309)
----------- ----------- ----------- --------- ------ --------- ---------
BALANCE AT DECEMBER 31, 1996...... $ 3,854 $ 40,863 $ 21,830 $ 296 ($ 1,549) ($ 129)
----------- ----------- ----------- --------- ------ --------- ---------
----------- ----------- ----------- --------- ------ --------- ---------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE AT JANUARY 1, 1994........ $ 54,120
Net income........................ 3,264
Dividends declared on preferred
stock........................... (415)
Dividends declared on common stock
($0.50 per share)*.............. (1,994)
Stock reinvestment and purchase
plan--31,813 shares*............ 407
Redemption of Series A preferred
stock........................... (805)
Conversion of Series B preferred
stock--2,779 shares*............
Options exercised--42,220
shares*......................... 444
Payments on ESOP borrowings....... 43
Net unrealized losses on
securities...................... (2,526)
---------
BALANCE AT DECEMBER 31, 1994...... 52,538
Net income........................ 6,965
Cash dividends declared on
preferred stock................. (414)
Cash dividends declared on common
stock ($0.51 per share)*........ (2,150)
Stock reinvestment and purchase
plan--45,811 shares*............ 611
Conversion of Series B preferred
stock--93 shares*...............
Options exercised--67,489
shares*......................... 723
Purchase of Treasury stock........ (117)
Payments on ESOP borrowings....... 43
Net unrealized gains on
securities...................... 1,730
</TABLE>
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
Stock dividend declared on common
stock (10%) ( $16.36 per
share)..........................
---------
BALANCE AT DECEMBER 31, 1995...... 59,929
Net income........................ 8,666
Cash dividends declared on
preferred stock................. (89)
Cash dividends declared on common
stock ($0.62 per share)*........ (2,863)
Stock reinvestment and purchase
plan--46,382 shares*............ 806
Conversion of Series B preferred
stock--474,750 shares...........
Redemption of Series B preferred
stock........................... (123)
Options exercised--63,526
shares*......................... 548
Sale of treasury stock............
Purchase of Treasury stock........ (1,461)
Payments on ESOP borrowings....... 42
Net unrealized gains on
securities...................... (290)
Stock dividend declared on common
stock (10%) ( $26.25 per
share)..........................
---------
BALANCE AT DECEMBER 31, 1996...... $ 65,165
---------
---------
</TABLE>
* adjusted for 10% stock dividend declared December 1995 & 1996
See notes to consolidated financial statements.
45
<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. (Company) is a New York State Bank Holding
Company. Through its banking subsidiary, First National Bank of the Hudson
Valley (Bank), it operates 21 branches in Dutchess, Ulster, Northern Putnam
and 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 and the
value of local real estate. 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 New York State
institutions. In recent years, the local economy has been weakened from large
employment cutbacks from these employers. Approximately 65% of the Company's
loans outstanding are collateralized by real estate. The Company also has
made commitments to lend additional funds secured by real estate in the
amount of approximately $21.7 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 the
Company, its commercial banking subsidiary, and Hudson Chartered Realty,
Inc., a company organized to hold title to foreclosed real estate properties.
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.
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.
46
<PAGE>
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 1996
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 of 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.
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.
47
<PAGE>
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" only when the Company, with
agreement of the borrower, will 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, 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, respectively. Held to maturity
securities primarily include local municipal bonds purchased from smaller
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.
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. At December 31, 1994, the net unrealized loss, after
tax, on available for sale securities was $1,144, and the net unrealized
gain, after tax, on available for sale securities was $586 and $296 at
December 31, 1995 and 1996, respectively. In November 1995, the Company
transferred securities having a fair market value of $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.
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, including available extensions, 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
48
<PAGE>
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 March
1996, the Company called the entire Series B Preferred Stock for redemption
and 474,750 shares were converted into common stock. See Note O.
In December 1995, the Board of Directors declared a 10% stock dividend,
payable in January 1996, and a 10% stock dividend was declared in December
1996, payable January 1997. Weighted average shares outstanding, used to
calculate earnings per share, have been retroactively adjusted to give effect
to the stock dividends.
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. SFAS No. 106 has no material
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.
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, forwards, 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 any derivative
financial instruments as defined by SFAS No. 119 at December 31, 1996, 1995
or 1994.
MORTGAGE SERVICING RIGHTS
- -------------------------
In May 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 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 was implemented on January 1, 1996; however, it can only be
applied on a prospective basis. The Company did not elect early adoption of
SFAS No. 122 and, accordingly, did not record an asset related to originated
mortgage serving rights prior to 1996. 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.
49
<PAGE>
Further, the Company's mortgage servicing portfolio totaled $99.4 million,
$101.1 million and $77.5 million for the benefit of third party investors
(primarily Federal Home Loan Mortgage Corporation and Federal National
Mortgage Association) at December 31, 1996, 1995 and 1994, respectively, and
it recorded servicing fee income of $338, $303 and $305 for each of the years
ended December 31, 1996, 1995 and 1994, respectively. The Company recorded
the sale of loans in which servicing is retained on the basis of the proceeds
received with normal servicing rights retained. If the Company retains
"excess" servicing rights, a receivable is recorded representing the net
present value of the excess servicing rights in a manner similar to that
required under SFAS No. 122 for normal servicing. In 1996, the Company sold
$9.1 million in residential first mortgages, with servicing rights retained,
and recorded a normal servicing asset of $41.
STOCK-BASED COMPENSATION
- ------------------------
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, "encourages", but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock. Compensation cost for stock appreciation
rights is recorded annually in each reporting period on the quoted market
price of the Company's stock at the end of the period. See Note O.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
- -------------------------------------------
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," specifies accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities and for distinguishing whether a transfer of financial assets in
exchange for cash or other consideration should be accounted for as a sale or
as a pledge of collateral in a secured borrowing. SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, except for certain provisions
(relating to the accounting for secured borrowings and collateral and the
accounting for transfers and servicing of repurchase agreements, dollar
rolls, securities lending and similar transactions) which have been deferred
until January 1, 1998 in accordance with SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." The adoption
of these standards is not expected to have a material impact on the Bank's
consolidated financial statements.
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 1996 financial information.
50
<PAGE>
NOTE B--SECURITIES
Securities consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CARRYING AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
---------- --------- ----------------- ---------------- ----------
U.S. Treasury Securities
Available for sale $ 54,780 $ 54,716 $ 93 $ 29 $ 54,780
U.S. Government Agencies:
Available for sale 29,032 28,858 189 15 29,032
Obligations of States and Political
Subdivisions
Available for sale 54,574 54,247 446 119 54,574
Held to maturity 13,543 13,543 339 3 13,879
Other Securities
Available for sale 24,529 24,594 11 76 24,529
Held to maturity 25 25 25
Regulatory securities 2,755 2,755 2,755
---------- --------- ------ ------- ----------
TOTAL SECURITIES $ 179,238 $ 178,738 $ 1,078 $ 242 $ 179,574
---------- --------- ------ ------- ----------
---------- --------- ------ ------- ----------
Total available for sale $ 162,915 $ 162,415 $ 739 $ 239 $ 162,915
Total held to maturity 13,568 13,568 339 3 13,904
Regulatory securities 2,755 2,755 2,755
---------- --------- ------ ------- ----------
TOTAL SECURITIES $ 179,238 $ 178,738 $ 1,078 $ 242 $ 179,574
---------- --------- ------ ------- ----------
---------- --------- ------ ------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CARRYING AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
---------- ---------- ----------------- ------------------- ----------
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
---------- ---------- ------ ----- ----------
---------- ---------- ------ ----- ----------
</TABLE>
51
<PAGE>
At December 31, 1996, the net unrealized gain on securities "available for
sale" (net of tax effect at a tax rate of 41% or $204) that was included as a
separate component of stockholders' equity was $296.
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.
The Company has no plans to establish a trading account.
The contractual maturities at December 31, 1996 of the Company's available
for sale and held to maturity debt securities are summarized in the following
table. At December 31, 1996, securities remaining in the Company's "held to
maturity" portfolio consist principally of holdings of local unrated
municipal issues. 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
----------------------- --------------------
<S> <C> <C> <C> <C> <C>
AMORTIZED FAIR CARRYING FAIR
MATURITY PERIOD COST VALUE AMOUNT VALUE
- --------------------------------------------------------- ----------- ---------- --------- ---------
Within 1 year $24,711 $ 24,753 $ 5,107 $ 5,121
1-5 years 81,886 82,086 4,445 4,572
5-10 years 18,754 18,780 3,195 3,347
Over 10 years 13,706 13,805 820 864
Mortgage-backed and SBA securities of U.S.
Government Agencies not allocated by maturity date 23,358 23,491
----------- ---------- --------- --------- ---------
TOTAL DEBT SECURITIES $162,415 $ 162,915 $ 13,568 $ 13,904
----------- ---------- --------- --------- ---------
----------- ---------- --------- --------- ---------
</TABLE>
Gross realized gains from sales of securities were $225, $238 and $220 in
1996, 1995 and 1994, respectively, and gross realized losses were $63, $100
and $2,100.
At December 31, 1996, securities with a carrying amount of $74.9 million were
pledged as available collateral for municipal deposits and other purposes.
Municipal deposits so secured totaled $40.4 at the same date.
52
<PAGE>
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, 1996 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............. $ 2,439 $ 2,439
Real Estate--Mortgage................. $ 2,356 2,356
Home Equity Loans..................... 13,993 13,993
Other Consumer Loans.................. 8,466 8,466
Commercial Loans...................... 36,256 $ 5,779 42,035
----------- --------------- -------------- -------------
TOTAL................................. $ 2,356 $ 61,154 $ 5,779 $ 69,289
---------- -------------- -------------- -------------
---------- -------------- -------------- -------------
December 31, 1995..................... $ 11,901 $ 57,368 $ 3,731 $ 73,000
---------- -------------- -------------- -------------
---------- -------------- -------------- -------------
</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.
Approximately 65% 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.
53
<PAGE>
NOTE D--NON-PERFORMING ASSETS, PAST DUE LOANS AND IMPAIRED LOANS
The following table presents non-performing assets outstanding at December
31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Non performing loans...................... $ 4,959 $ 4,929 $ 5,000
Restructured troubled debt................ 534 349 119
Other real estate owned, net
(included in other assets)................ 653 1,196 1,150
--------- --------- ---------
Total nonperforming assets................ $ 6,146 $ 6,474 $ 6,269
--------- --------- ---------
--------- --------- ---------
</TABLE>
Information concerning interest income on non-performing loans and
restructured troubled debt is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest income recorded................... $ 215 $ 265 $ 198
</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>
1996 1995
--------- ---------
<S> <C> <C>
Amount past due...................... $ 5,258 $ 4,650
--------- ---------
--------- ---------
Percent of total loans............... 1.16% 1.10%
--------- ---------
--------- ---------
</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. Generally, the fair value of
impaired loans was determined using the fair value of the underlying collateral
of the loan. The recorded investment in impaired loans at December 31 consists
of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Impaired loans for which an
allowance of $844 and $1,239,
respectively, has been established.... $3,202 $ 3,450
Impaired loans for which an
impairment write down of
$1,197 and $740, respectively, has
been taken 1,750 1,071
------------ -----------
Total impaired loans................... $4,952 $ 4,521
------------ -----------
------------ -----------
Additional information regarding
impaired loans is as follows: 1996 1995
----------- ------------
Income recorded on impaired loans
in the period during the portion
of the year that they were impaired,
on a cash basis...................... $ 215 $ 265
Average investment in impaired loans
during the period.................... $ 5,002 $4,287
</TABLE>
Loans which were restructured prior to adoption of SFAS 114 (1994) and
non-accrual loans at December 31, 1996, 1995 and 1994 and related income data
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
NON-ACCRUAL NON-ACCRUAL NON-ACCRUAL RESTRUCTURED
LOANS LOANS LOANS LOANS
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Amount.................................................... $ 5,028 $ 4,756 $ 4,105 $ 119
Interest income recorded.................................. 215 265 197
Interest income that would have been recorded under the
original contract terms................................. 744 665 420 6
</TABLE>
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>
1996 1995
---------- ----------
<S> <C> <C>
Commercial & Industrial............................................... $ 71,887 $ 69,889
Consumer & Installment................................................ 80,998 63,554
Real Estate--Construction............................................. 12,227 13,347
Real Estate--Mortgage................................................. 280,425 271,068
Other Loans........................................................... 6,214 4,225
---------- ----------
TOTAL................................................................. $ 451,751 $ 422,083
---------- ----------
---------- ----------
</TABLE>
Changes in the allowance for loan losses for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year........................................................... $ 8,770 $ 8,326 $ 7,322
Charge-offs.......................................................................... (2,732) (2,168) (1,701)
Recoveries........................................................................... 414 312 236
--------- --------- ---------
Net charge-offs...................................................................... (2,318) (1,856) (1,465)
Provision for loan losses............................................................ 2,850 2,300 2,400
Transfers, other..................................................................... 69
--------- --------- ---------
Balance, end of year................................................................. $ 9,302 $ 8,770 $ 8,326
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE F--PREMISES AND EQUIPMENT
Premises and equipment is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land..................................................................... $ 2,120 $ 2,120
Banking houses and improvements.......................................... 15,175 15,566
Furniture and equipment.................................................. 13,842 13,007
--------- ---------
31,137 30,693
Accumulated depreciation and amortization................................ (14,888) (13,631)
--------- ---------
TOTAL.................................................................... $ 16,249 $ 17,062
--------- ---------
--------- ---------
</TABLE>
56
<PAGE>
NOTE G--DEPOSITS
The following table outlines balances at December 31, for interest bearing
accounts:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Money Market.......................................................... $ 63,871 $ 66,526
NOW................................................................... 47,304 50,106
Savings............................................................... 210,130 204,693
Time.................................................................. 162,265 171,079
---------- ----------
TOTAL................................................................. $ 483,570 $ 492,404
---------- ----------
---------- ----------
</TABLE>
At December 31, 1996 and 1995, certificates of deposit of $100 or more
included in time deposits totaled $40,503 and $38,184, respectively. Interest
expense on deposits was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Savings accounts................................................................. $ 8,408 $ 8,427 $ 5,237
Certificates of deposit ($100 or more)........................................... 1,428 1,423 974
Other time deposits.............................................................. 7,262 7,808 4,386
NOW Accounts..................................................................... 615 915 1,046
Money market accounts............................................................ 2,351 2,556 2,709
--------- --------- ---------
TOTAL............................................................................ $ 20,064 $ 21,129 $ 14,352
--------- --------- ---------
--------- --------- ---------
</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 full-time employees
who have attained age 21 and have one year of service. Plan contributions vest
as follows: 40% after 2 years, 60% after 3 years, 80% after 4 years and 100%
after 5 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 $752,
$588 and $275 for 1996, 1995 and 1994, 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, 1996 and 1995 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 $103, $91and ($105) in 1996, 1995 and 1994,
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 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)
---------
Pension liability carried in " other liabilities".............................. $ 0 $ (207)
----- ---------
----- ---------
</TABLE>
Net periodic pension expense included the following:
<TABLE>
<CAPTION>
1995 1994
----- ---------
<S> <C> <C>
Service Cost................................................................... $ 183
Interest Cost.................................................................. 66
Return on plan assets.......................................................... 39
Amortization and deferral...................................................... (99)
Pension expense................................................................ $ 0 $ 189
----- ---------
----- ---------
</TABLE>
58
<PAGE>
Assumptions used in accounting for the pension plan were as follows:
<TABLE>
<CAPTION>
1994
-----
<S> <C>
Weighted average discount rate......................................................... 8%
Rates of increase in compensation level................................................ 6%
Expected long-term rate of return on assets............................................ 8%
</TABLE>
Plan assets were 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
from 1997 through 1999, and contain specified conditions for extension or
expiration, either annually or prior to expiration. In certain cases, conditions
exist which allow for lump sum payments in connection with defined changes in
control, termination without cause or failure to extend. The maximum liability,
if such payments were required for all executives, would be $1,479 at December
31, 1996. 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 1996, 1995 and 1994 was $461,
$293 and $438, 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, 1996:
DATE AMOUNT
---- ------
1997 ........................ 294
1998 ........................ 292
1999 ........................ 267
2000 ........................ 206
2001 ........................ 58
Thereafter................... 746
------
TOTAL........................ $1,863
-------
-------
The Company purchased a building in 1994. Approximately 30% of the building
is leased to tenants for various terms with varying renewal periods. The
expiration dates of initial leases were between 1995 and 2002, including option
periods. The Company intends to occupy the tenanted spaces as the leases expire
or are not renewed. Rental income received was $255, $270 and $62 in 1996, 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:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
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 5.7 6.5 7.4
Income from tax-exempt securities (5.3) (5.9) (12.5)
Non-deductible merger related expenses 5.1
Other (1.1) 3.2
----------- ----------- -----------
Effective income tax rate 34.4% 33.5% 37.2%
----------- ----------- -----------
----------- ----------- -----------
The provision (benefit) for income taxes
is comprised of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Current: Federal $ 3,826 $ 2,642 $ 1,470
State 1,279 993 584
----------- ----------- -----------
5,105 3,635 2,054
Deferred (554) (121) (118)
----------- ----------- -----------
$ 4,551 $ 3,514 $ 1,936
----------- ----------- -----------
----------- ----------- -----------
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) expense as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Provision for loan losses $ (380) $ (306) $ (132)
Accelerated depreciation (43) 125 (59)
Deferred fee income 132 209 85
Compensation (147) (107) (60)
Other (116) (42) 48
----------- ----------- -----------
$ (554) $ (121) $ (118)
----------- ----------- -----------
----------- ----------- -----------
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:
1996 1995
----------- -----------
Deferred Tax assets:
Allowance for loan losses and OREO $ 3,641 $ 3,266
Compensation 548 440
Core deposit 81 53
Other 90 80
----------- -----------
Gross deferred tax assets 4,360 3,839
Deferred tax liabilities:
Depreciated expense (510) (591)
Unrealized holding gains (204) (404)
Deferred fee income (337) (205)
Mortgage servicing (24) (17)
Accretion on securities (60) (101)
----------- -----------
Gross deferred tax liabilities (1,135) (1,318)
----------- -----------
Net deferred tax assets before valuation allowance 3,225 2,521
Valuation allowance (150) (200)
----------- -----------
Net deferred tax asset $ 3,075 $ 2,321
----------- -----------
----------- -----------
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 $180,000 at December 31, 1996.
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, $4,189 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 $8,936 during 1996.
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 officers and directors of the Company and to
their associates. The following table summarizes activity associated with these
loans.
1996 1995
----------- -----------
Balance, beginning of year $ 21,588 $ 20,743
New loans 4,191 8,691
Repayments (3,201) (7,846)
----------- -----------
Balance, end of year $ 22,578 $ 21,588
----------- -----------
----------- -----------
The Bank renewed a lease for premises with an affiliate of a director which
will expire in December 1999. Payments made to such affiliate in 1996, 1995 and
1994 were $134, $103 and $103, respectively. Entities in which directors have
interests provide automotive, insurance and legal services to the Company. The
cost of such services aggregated $887, $523 and $1,022 in 1996, 1995 and 1994,
respectively.
NOTE M--OTHER INTEREST BEARING LIABILITIES
Interest bearing liabilities are summarized as follows, at December 31,:
1996 1995
----------- -----------
ESOP Loan Payable $ 129 $ 171
Federal Home Loan Bank 1,725 1,725
----------- -----------
$ 1,854 $ 1,896
----------- -----------
----------- -----------
The ESOP note is payable in quarterly principal installments of $11 plus
interest at the prime rate plus 1-1/2% (9.75% at December 31, 1996), with the
balance due in December 1999. The loan is collateralized by approximately 13,000
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,
1996 is payable in 1999.
Maturities on non-deposit interest bearing liabilities outstanding as of
December 31, 1996 are summarized as follows:
Date Amount
----------- -----------
1997 $ 43
1998 43
1999 1,768
-----------
$ 1,854
-----------
-----------
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, 1996, $9,071 is available for distribution to the
Company as dividends without prior regulatory approval (in addition to the 1997
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, 1996, 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,
1996 of $1,058. Interest is payable at the prime rate plus one percent. Such
amounts eliminate in consolidation.
NOTE O--STOCKHOLDERS' EQUITY
Common Stock
- -------------
In both December 1995 and 1996, the Board of Directors approved separate 10%
stock dividends, payable in January 1996 and 1997, respectively. All shares
and share prices have been retroactively adjusted to reflect the issuance of
the stock dividends. The 1995 and 1996 financial statements reflect the
capitalization of $6,300 and $11,309, respectively, of retained earnings
reflecting a market value of $26.25 and $16.36 per share on the respective
dates 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>
1996 1995
------------ ------------
<S> <C> <C>
Issued and Outstanding............................................ 4,644,970 4,127,268
Issued and held by ESOP........................................... 93,862 107,521
------------ ------------
Total issued shares............................................... 4,738,832 4,234,789
Reserved shares:
Dividend reinvestment and stock purchase plan..................... 366,094 412,476
Option Plan I..................................................... 56,727 78,737
Hudson Chartered Incentive Stock (Plan II)........................ 661,909 740,254
Treasury Shares................................................... 77,981 8,855
Conversion of Series B Preferred Stock............................ -- 485,104
Other authorized but unissued shares................................ 14,098,457 14,039,785
------------ ------------
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 (at 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 in 1994.
Of the 60,000 shares authorized, no shares were issued and outstanding after
January 15, 1994.
The cumulative convertible perpetual Preferred Stock, Series B, was
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 0.8492 shares of common stock for each share of Series B). The
conversion price was subject to adjustment upon the occurrence of certain
events. The Series B was 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.
Having met this criteria, 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 474,750 shares of common stock of the
Company and 12,246 shares were redeemed, for a total reduction of stockholders'
equity related to redemption of $123 which was paid from the Company's liquid
assets. Of the 575,000 authorized shares, 571,301 were outstanding at December
31, 1995. Cumulative cash dividends were payable quarterly at the rate of 7.25%
per year on the original issue price of $10 per share. Dividends of $.18125 and
$0.725 per share were declared on Series B Preferred Stock in 1996 and 1995,
respectively.
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 represented 635,000 of the 5,000,000 authorized shares.
TREASURY STOCK PURCHASE PROGRAM
From time to time, the Company's Board of Directors has authorized the
repurchase of shares of the Company's common stock in the open market. During
fiscal 1996, the Company repurchased 77,418 shares of common stock at a cost of
$1,461, and in fiscal 1995 repurchased 7,288 shares for $141.
64
<PAGE>
STOCK COMPENSATION PLANS
INCENTIVE STOCK OPTION PLANS
Under the FNC Plan (Option Plan I), established in 1990, 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 II) and no new
options will be granted under this plan.
INCENTIVE STOCK PLAN
In 1995, the Company established the Hudson Chartered Bancorp, Inc. 1995
Incentive Stock Plan (Plan II) 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 stock
appreciation rights or the stock appreciation 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.
The Company maintains stock option plans as described above. The Company
applies APB Opinion No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plans. The compensation cost that was charged to income for stock
appreciation rights vested was $196, $39, and $32 for the years ended December
31, 1996, 1995 and 1994. Had compensation cost for the Company's stock based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS No. 123
(Black-Scholes Model), the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below for the years ended
December 31:
1996 1995
---------- ---------
Net income............................... As reported $ 8,666 $ 6,965
Pro forma 8,189 6,857
Primary earnings per share............... As reported 1.82 1.55
Pro forma 1.72 1.52
Fully diluted earnings per share......... As reported 1.78 1.47
Pro forma 1.69 1.45
The effects of applying SFAS No. 123 for disclosing compensation cost under
this pronouncement may not be representative of the effects on reported net
income for future years.
65
<PAGE>
A summary of the status of the Company's Fixed Stock Options, Incentive
Stock Options (ISOP) and Non-qualified Options (NQ-OP), as of December 31, 1996,
1995 and 1994, and changes during the years ending on those dates, is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------------------- --------- --------------------- --------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year:
ISOP................. 168,515 $ 10.47 189,979 $ 10.17 201,618 $ 10.18
NQ-OP................ 164,589 11.52 169,403 11.22 220,673 11.15
-------- -------- --------
Total outstanding.... 333,104 10.93 359,382 10.66 422,291 10.69
ISOP granted......... 47,340 18.64 23,522 13.60
NQ-OP granted
(including SAR).... 41,800 19.32 36,300 14.67
ISOP exercised....... (56,148) 8.69 (37,006) 10.78 (798) 10.33
NQ-OP exercised
nonSAR............. (7,378) 8.86 (30,480) 9.96 (41,422) 10.74
NQ-OP SAR
exercised.......... (36,300) 14.67
ISOP forfeited....... (7,980) 11.20 (10,841) 10.33
NQ-OP forfeited...... (10,634) 11.21 (9,848) 11.76
--------- --------- ---------
Outstanding at end of
year:
ISOP................. 159,707 13.41 168,515 10.47 189,979 10.17
NQ-OP................ 162,711 13.62 164,589 11.52 169,403 11.22
--------- --------- ---------
Total outstanding.... 322,418 $ 13.52 333,104 $ 10.93 359,382 $ 10.66
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Options exercisable
at year end........ 264,504 $ 12.42 295,154 $ 10.73 316,314 $ 10.83
Weighted average fair
value of options
granted during the
year............... $ 6.90 $ 4.85 *
</TABLE>
- ------------------------
* Not calculated
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively:
Dividend yield of 4.13% and 4.33%, respectively; expected volatility of
44.5% and 53.3%, respectively; risk free rate of 5.25% for both years; and
expected lives of 7.35 and 5.0 years, respectively. This information was not
required for the year ended 1994.
66
<PAGE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE NUMBER EXERCISABLE WEIGHTED
RANGE OF EXERCISE NUMBER OUTSTANDING AT CONTRACTUAL EXERCISE AT DECEMBER 31, AVERAGE EXERCISE
PRICES DECEMBER 31, 1996 LIFE PRICE 1996 PRICE
- ---------------------- ---------------------- --------------- ------------- ------------------- ---------------
<C> <C> <S> <C> <C> <C>
$8.66-$12.59....... 185,067 9.0 years $ 10.55 179,993 $ 10.54
13.60--18.64....... 131,851 7.8 17.23 84,511 16.44
24.45.............. 5,500 10.0 24.45
------- ------ ------- ------
$8.66-$24.45....... 322,418 8.6 years $ 13.52 264,504 $ 12.42
------- --------------- ------ ------- ------
------- --------------- ------ ------- ------
</TABLE>
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, 1996, 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, 1996, 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 for each of the years ended December 31, 1996, 1995 and
1994, respectively. Interest incurred on the ESOP's loans amounted to
approximately $15, $20 and $21 for the years ended December 31, 1996, 1995
and 1994, respectively.
CAPITAL ADEQUACY
Both Hudson Chartered Bancorp, Inc. and First National Bank of the Hudson
Valley are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--
actions by regulators that, if undertaken, could have a direct material
effect on their financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, they must meet
specific capital guidelines that involve quantitative measures of their
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Capital amounts and classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank and its parent company to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). Management believes, as
of December 31, 1996, that both the Bank and its parent company meet all
capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
67
<PAGE>
CAPITAL RATIOS
The following summarizes the minimum capital requirements and capital
position at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ADEQUACY PURPOSES: ACTION PROVISIONS:
---------------------- -----------------
BANK ONLY ACTUAL
AS OF DECEMBER 31, 1995: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)........................ $ 57,232 13.55% $ 33,801 8.0% $ 42,251 10.0%
Tier I Capital (to Risk Weighted Assets)....................... 51,913 12.29 16,900 4.0 25,351 6.0
Tier I Capital (to Average Assets)............................. 51,913 7.48 27,746 4.0 34,683 5.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)........................ 62,816 13.48 37,291 8.0 46,614 10.0
Tier I Capital (to Risk Weighted Assets)....................... 56,951 12.22 18,646 4.0 27,968 6.0
Tier I Capital (to Average Assets)............................. 56,951 8.21 27,774 4.0 34,717 5.0
CONSOLIDATED
As of December 31, 1995:
Total Capital (to Risk Weighted Assets)........................ $ 64,258 15.02% $ 34,231 8.0%
Tier I Capital (to Risk Weighted Assets)....................... 58,873 13.76 17,116 4.0
Tier I Capital (to Average Assets)............................. 58,873 8.44 27,891 4.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)........................ 70,451 14.97 37,645 8.0
Tier I Capital (to Risk Weighted Assets)....................... 64,531 13.71 18,822 4.0
Tier I Capital (to Average Assets)............................. 64,531 9.21 28,031 4.0
</TABLE>
68
<PAGE>
NOTE P--PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31,
-----------------------
1996 1995
--------- ------------
ASSETS
Cash (deposited in Bank)........................... $ 1,823 $ 1,745
Securities available for sale...................... 1,448 1,463
Other securities................................... 109 109
Investment in subsidiaries:
Bank............................................. 57,579 52,964
Other............................................ 429 444
Premises........................................... 5,124 4,547
Other assets....................................... 785 773
--------- ------------
TOTAL ASSETS....................................... $ 67,297 $ 62,045
--------- ------------
--------- ------------
LIABILITIES
Notes payable:
Bank subsidiary.................................. $ 1,058 $ 1,158
Other............................................ 129 171
Other liabilities.................................. 945 787
STOCKHOLDERS' EQUITY............................... 65,165 59,929
--------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 67,297 $ 62,045
--------- ------------
--------- ------------
STATEMENTS OF INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Dividends from Bank.................................................................. $ 3,896 $ 2,917 $ 2,546
Other income......................................................................... 513 474 476
Expenses............................................................................. (698) (684) (1,635)
Income before income taxes and equity in undistributed net income (loss) of
subsidiaries......................................................................... 3,711 2,707 1,387
Income tax benefit................................................................... 64 108 175
--------- --------- ---------
1,562
Income before equity in undistributed net income (loss)
of subsidiaries...................................................................... 3,775 2,815
Equity in undistributed net income (loss):
Bank subidiary..................................................................... 4,906 4,165 1,767
Non bank subsidiary................................................................ (15) (15) (65)
--------- --------- ---------
NET INCOME........................................................................... $ 8,666 $ 6,965 $ 3,264
--------- --------- ---------
--------- --------- ---------
</TABLE>
69
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
<S> --------- --------- ---------
OPERATING ACTIVITIES <C> <C> <C>
Net Income........................................................................... $ 8,666 $ 6,965 $ 3,264
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries................................. (4,891) (4,150) (1,702)
Provision for depreciation......................................................... 141 145 145
Realized losses on sales of securities............................................. -- 50
Other.............................................................................. 134 (522) 931
--------- --------- ---------
Net cash provided by operating activities............................................ 4,050 2,438 2,688
INVESTING ACTIVITIES
Proceeds from sales of securities.................................................... 1,414
Purchase of premises and equipment from subsidiary bank.............................. (2,500)
Sale of premises and equipment to subsidiary bank.................................... 1,700
Investment in nonbank subsidiary (1)................................................. (500)
--------- --------- ---------
Net cash provided (used) by investing activities..................................... (800) 914
--------- --------- ---------
FINANCING ACTIVITIES
Payments on borrowings............................................................... (100) (81) (1,114)
Decrease in due to Bank.............................................................. (83)
Proceeds from issuance of stock...................................................... 1,325 1,334 848
Repurchase of preferred stock........................................................ (123) (1) (805)
Repurchase of common stock........................................................... (1,432) (116)
Cash dividends....................................................................... (2,841) (2,516) (2,455)
--------- --------- ---------
Net cash used by financing activities................................................ (3,171) (1,380) (3,609)
--------- --------- ---------
INCREASE (DECREASE) IN CASH.......................................................... 79 1,058 (7)
CASH, BEGINNING OF YEAR.............................................................. 1,745 687 694
--------- --------- ---------
CASH, END OF YEAR.................................................................... $ 1,824 $ 1,745 $ 687
--------- --------- ---------
--------- --------- ---------
</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.
70
<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, 1996 and
December 31, 1995, 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, 1996 DECEMBER 31, 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
(DOLLARS IN MILLIONS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------- ----------- ----------- ----------- -----------
ASSETS
Cash and cash equivalents............................................ $ 46.4 $ 46.4 $ 67.9 $ 67.9
Securities........................................................... 179.2 179.6 183.9 184.4
Loans, net........................................................... 438.4 443.1 410.3 420.4
LIABILITIES
Deposits without stated maturities................................... 463.5 463.5 460.0 460.0
Time deposits........................................................ 162.3 163.5 171.1 172.4
</TABLE>
The fair value estimates presented above are based on pertinent
information available to management as of December 31, 1996 and December 31,
1995. 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, 1996 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 $4,184 and $4,521 in 1996 and 1995,
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 $8,458 and $7,531 in
1996 and 1995, 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, 1996 and December 31, 1995.
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.
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, 1996. 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, 1996 and 1995, 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 18, 1997
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 18, 1997
Chairman of the Board & CEO
Principal Financial and
Accounting Officer:
/s/ Paul A. Maisch March 18, 1997
Treasurer
Directors:
/s/ Robert M. Bowman March 18, 1997
/s/ H. Todd Brinckerhoff March 18, 1997
/s/ Edward vK. Cunningham Jr. March 18, 1997
/s/ T. Jefferson Cunningham III March 18, 1997
/s/ Warren R. Marcus March 18, 1997
/s/ Robert L. Patrick March 18, 1997
/s/ Lewis J. Ruge March 18, 1997
/s/ John Charles VanWormer March 18, 1997
/s/ James R. Williams March 18, 1997
72
<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 and December 19, 1996.
Primary earnings per common share is computed as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding................................. 4,621,582 4,182,946 4,088,372
Net effect of dilutive stock options at average market price............... 95,275 57,828 68,652
---------- ---------- ----------
Total shares............................................................... 4,716,857 4,240,774 4,157,024
---------- ---------- ----------
---------- ---------- ----------
Net income (in thousands).................................................. $ 8,666 $ 6,965 $ 3,264
Less preferred stock dividends declared.................................... 89 414 415
---------- ---------- ----------
Net income applicable to common stock...................................... $ 8,577 $ 6,551 $ 2,849
---------- ---------- ----------
---------- ---------- ----------
Per common share amount.................................................... $ 1.82 $ 1.55 $ .69
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Fully diluted earnings per common share is computed as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding................................. 4,621,582 4,182,946 4,088,372
Net effect of dilutive stock options....................................... 156,401 72,771 80,597
Assumed conversion of series B, preferred stock............................ 102,086 485,189 485,189
---------- ---------- ----------
Total shares............................................................... 4,880,069 4,740,906 4,654,159
---------- ---------- ----------
---------- ---------- ----------
Net income (in thousands).................................................. $ 8,666 $ 6,965 $ 3,264
Less preferred stock dividends declared
---------- ---------- ----------
Net income applicable to common stock...................................... $ 8,666 $ 6,965 $ 3,264
---------- ---------- ----------
---------- ---------- ----------
Per common share amount.................................................... $ 1.78 $ 1.47 $ .69
---------- ---------- ----------
---------- ---------- ----------
</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 per share for 1994 is $.69. These are the same as primary
earnings per share of $.69.
<PAGE>
Exhibit 21
Subsidiaries of Hudson Chartered Bancorp, Inc.
<TABLE>
<S> <C> <C>
Name of Subsidiary Jurisdiction of Incorporation Name Under Which Subsidiary
Conducts Business
First National Bank of the United States First National Bank of the
Hudson Valley Hudson Valley
Hudson Chartered Realty, Inc. New York State Hudson Chartered Realty, Inc.
</TABLE>
<PAGE> Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference, in the Registration Statements
listed below, of our report dated January 30, 1997, 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 he year ended December 31, 1996:
Form S-8 relating to the Company's employee stock option plan (File No.
33-71806)
Post-Effective Amendment No. 3 to Form S-3 relating to the Company's
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 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)
Deloitte & Touche LLP
Stamford, Connecticut
March 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 35,059
<INT-BEARING-DEPOSITS> 483,570
<FED-FUNDS-SOLD> 11,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 162,915
<INVESTMENTS-CARRYING> 16,323
<INVESTMENTS-MARKET> 16,659
<LOANS> 451,919
<ALLOWANCE> 9,302
<TOTAL-ASSETS> 696,875
<DEPOSITS> 625,826
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,030
<LONG-TERM> 1,854
0
0
<COMMON> 3,854
<OTHER-SE> 61,311
<TOTAL-LIABILITIES-AND-EQUITY> 696,875
<INTEREST-LOAN> 39,373
<INTEREST-INVEST> 10,442
<INTEREST-OTHER> 1,213
<INTEREST-TOTAL> 51,028
<INTEREST-DEPOSIT> 20,064
<INTEREST-EXPENSE> 20,174
<INTEREST-INCOME-NET> 30,854
<LOAN-LOSSES> 2,850
<SECURITIES-GAINS> 162
<EXPENSE-OTHER> 21,585
<INCOME-PRETAX> 13,217
<INCOME-PRE-EXTRAORDINARY> 13,217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,666
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 8.09
<LOANS-NON> 4,528
<LOANS-PAST> 431
<LOANS-TROUBLED> 534
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,770
<CHARGE-OFFS> 2,732
<RECOVERIES> 414
<ALLOWANCE-CLOSE> 9,302
<ALLOWANCE-DOMESTIC> 8,163
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,139
</TABLE>
