<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
--------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-13213
-------
HUDSON CHARTERED BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1668718
- ------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PO Box 310, Route 55, Lagrangeville, NY 12540
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914)471-1711
- -------------
(Registrant`s telephone number, including area code)
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,167,150 shares of Common Stock outstanding, par value $.80 per share, at May
7, 1998.
<PAGE>
HUDSON CHARTERED BANCORP, INC. & SUBSIDIARIES
INDEX
Page Reference
--------------
PART I
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements
of Income & Expense 2
Condensed Consolidated Statements
of Cash Flows 3
Condensed Consolidated Statement
of Changes in Stockholders' Equity 4
Notes to Unaudited Condensed Consolidated
Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 24
PART II
Item 6(a) Exhibits 25
Item 6(b) Reports on Form 8-K 25
Signatures 26
<PAGE>
Part 1
Item 1: Financial information
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 33,082 $ 29,075
Federal funds sold 31,600 17,400
--------- ---------
Total cash and cash equivalents 64,682 46,475
Securities
Available for sale, at fair value 186,502 171,579
Held to maturity, at cost,( fair value of $25,495 in 1998 25,047 24,245
and $24,772 in 1997)
Regulatory securities (at cost which approximates fair value) 2,843 2,755
Loans held for sale 60 216
Loans (see notes)
Gross loans 464,336 467,021
Allowance for loan losses (9,863) (9,530)
--------- ---------
Net loans 454,473 457,491
Premises and equipment, net 16,495 15,592
Accrued income 6,015 5,504
Other assets 7,047 7,667
--------- ---------
TOTAL ASSETS $ 763,164 $ 731,524
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (see notes)
Non-Interest bearing $ 144,398 $ 151,002
Interest bearing 540,038 503,103
--------- ---------
Total deposits 684,436 654,105
Notes payable 1,725 1,725
Other liabilities 5,000 5,336
--------- ---------
TOTAL LIABILITIES 691,161 661,166
STOCKHOLDERS' EQUITY (see notes)
Preferred stock
($.01 par value; 5,000,000 shares authorized; none issued) -- --
Common stock ($.80 par value; 20,000,000 shares authorized) 5,729 5,729
7,161,278 shares issued less 52,541 treasury shares in 1998
and 85,015 shares in 1997
Additional paid-in capital 38,979 38,979
Retained earnings 27,979 27,042
Accumulated other comprehensive income 884 966
Treasury stock (1,568) (2,358)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 72,003 70,358
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 763,164 $ 731,524
EQUITY ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
- 1 -
<PAGE>
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
3/31/98 3/31/97
Interest income: ---------------- ---------------
<S> <C> <C>
Loans, including fees $10,314 $9,951
Federal funds sold 290 180
Taxable securities 1,905 1,818
Tax-exempt securities 895 743
------- -------
Total interest income 13,404 12,692
Interest expense 5,378 4,965
------- -------
Net interest income 8,026 7,727
Provision for loan losses 600 700
------- -------
Net interest income
after provision for loan losses 7,426 7,027
------- -------
Noninterest income:
Service charges and fees 905 1,020
Trust earnings 220 163
Gains on sales of securities, net 51 9
Gains on sales of loans, net 54 24
Other income 246 361
------- -------
Total noninterest income 1,476 1,577
------- -------
GROSS OPERATING INCOME 8,902 8,604
------- -------
Noninterest expense:
Salaries and employee benefits 3,048 3,020
Net occupancy and equipment expense 1,031 1,069
Other real estate owned 43 36
Merger expenses 280
Other expenses 1,288 1,291
------- -------
Total noninterest expense 5,690 5,416
------- -------
Income before income taxes 3,212 3,188
Income taxes 1,113 1,049
------- -------
Net income $2,099 $2,139
======= =======
Weighted average common shares outstanding:
Basic 7,093,939 7,102,500
Diluted 7,325,058 7,338,000
Per common share data:
Basic earnings $ 0.30 $ 0.30
Diluted earnings 0.29 0.29
Cash dividends declared 0.13 0.12
Book value at period end $10.13 $9.94
</TABLE>
See notes to condensed consolidated financial statements.
- 2 -
<PAGE>
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES FORM 10-Q
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
3/31/98 3/31/97
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,099 $ 2,139
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 600 700
Depreciation and amortization 441 365
Amortization of security premiums and
accretion of discounts 99 53
Amortization of core deposit intangible 24 29
Realized gains on sales of securities and loans (105) (33)
Deferred income tax benefits (140) (112)
Increase in accrued income (511) (538)
Other net 346 (496)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,853 2,107
-------- --------
INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale 6,055 9,022
Proceeds from maturities of securities available for sale 2,813 3,949
Proceeds from maturities of securities held to maturity 1,211 1,478
Purchases of securities available for sale (24,083) (19,240)
Purchases of securities held to maturity (1,995) (1,314)
Sales of loans 2,872 965
Net increase in loans (244) (770)
Purchases of premises and equipment (1,044) (393)
Proceeds from sale of OREO 100 0
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (14,315) (6,303)
-------- --------
FINANCING ACTIVITIES
Net increase in deposit accounts 30,331 5,429
Proceeds from issuance of common stock from treasury 353 319
Repurchase of common stock (95) (728)
Cash dividends- common (920) (775)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,669 4,245
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 18,207 49
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 46,475 46,409
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,682 $ 46,458
======== ========
CASH PAID FOR:
Interest $ 5,242 $ 5,025
Taxes 304 240
NON-CASH ITEMS
Transfer from loans to OREO $ 67 $ 327
Net change in unrealized gains (losses) recorded
on securities available for sale (138) (1,282)
Change in deferred taxes on net unrealized (gains)
losses recorded on securities available for sale 56 538
Purchase of land by issuance of shares 300
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Stock Capital Earnings Income Stock
-------- ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 $5,729 $38,979 $27,042 $966 ($2,358)
Net income 2,099
Cash dividends declared on common stock ($0.13 per share) (930)
Dividend reinvestment and stock purchase
plan - 13,550 shares 295
Options exercised - 6,919 shares 58
Purchase of land by issuances of
treasury shares - 14,544 shares 300
Effect of Treasury stock issued at less than cost (232) 232
Purchase of treasury stock - 2,775 shares (95)
Net change in unrealized gain on securities, after tax (82)
-----------------------------------------------------------------
Balance March 31, 1998 $5,729 $38,979 $27,979 $884 ($1,568)
=================================================================
Balance January 1, 1997 $3,854 $40,863 $21,830 $296 ($1,549)
Net income 2,139
Cash dividends declared on common stock ($0.12 per share) (851)
Dividend reinvestment and stock
purchase plan - 10,525 shares 181
Options exercised - 23,298 shares 199
Effect of Treasury stock issued at less than cost (61) 61
Purchase of treasury stock - 29,408 shares (789)
Payments on ESOP borrowings
Net change in unrealized gain on securities, after tax (744)
-----------------------------------------------------------------
Balance March 31, 1997 $3,854 $40,863 $23,057 ($448) ($1,897)
=================================================================
ESOP Total
------- ---------
<S> <C> <C>
Balance January 1, 1998 $70,358
Net income 2,099
Cash dividends declared on common stock ($0.13 per share) (930)
Dividend reinvestment and stock
purchase plan - 13,550 shares 295
Options exercised - 6,919 shares 58
Purchase of land by issuances of
treasury shares - 14,544 shares 300
Effect of Treasury stock issued at less than cost 0
Purchase of treasury stock - 2,775 shares (95)
Net change in unrealized gain on securities, after tax (82)
--------------------
Balance March 31, 1998 $72,003
====================
Balance January 1, 1997 ($129) 65,165
Net income 2,139
Cash dividends declared on common stock ($0.12 per share) (851)
Dividend reinvestment and stock
purchase plan - 10,525 shares 181
Options exercised - 23,298 shares 199
Effect of Treasury stock issued at less than cost 0
Purchase of treasury stock - 29,408 shares (789)
Payments on ESOP borrowings 11 11
Net change in unrealized gain on securities, after tax (744)
--------------------
Balance March 31, 1997 ($118) $65,311
====================
</TABLE>
<PAGE>
FORM 10-Q
HUDSON CHARTERED BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
- ---------------------
The consolidated financial statements and related notes have been prepared in
accordance with Regulation S-X under the Securities Exchange Act of 1934, as
amended, and consequently the accompanying unaudited and condensed consolidated
financial statements and notes do not contain all disclosures required by
generally accepted accounting principles. These interim financial statements
should be read in conjunction with the audited consolidated financial statements
and note disclosures in the Annual Report on Form 10-K for the year ended
December 31, 1997.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the Company's consolidated
financial position as of March 31, 1998 and its consolidated results of
operations, consolidated cash flows and changes in consolidated stockholders'
equity for the three months ended March 31, 1998 and 1997.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the dates of the consolidated statements of condition and the revenues and
expenses for the periods reported. Actual results could differ significantly
from those estimates.
Estimates that are particularly susceptible to significant change relate to the
determination of the adequacy of the allowance for loan losses and the valuation
of other real estate acquired in connection with foreclosures or in satisfaction
of loan receivables. In connection with the determination of the balances of the
allowance for loan losses and other real estate owned, management obtains
independent appraisals for significant properties, when appropriate, according
to Bank policy or regulation.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
Material intercompany items and transactions have been eliminated in
consolidation. Certain reclassifications have been made to conform to current
presentation.
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 the remainder of 1998 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.
5
<PAGE>
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 Federal Reserve
Board; customer deposit disintermediation; changes in customers' acceptance of
the Company's products and services; other normal business risks such as credit
losses, litigation, etc.; the extent and timing of legislative and regulatory
actions and reform, estimated cost savings from recent or anticipated
acquisitions and mergers cannot be fully realized within the expected time
frame, revenues following such transactions are lower than expected, and costs
or difficulties related to the integration of acquired and existing businesses
are greater than expected or system costs related to the year 2000 are greater
than expected.
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.
Pending Mergers
- ---------------
On December 16, 1997, "Progressive" (Progressive Bank, Inc.) entered into an
agreement to merge with and into the Company and form a bank holding company to
be named Premier National Bancorp, Inc. (the "Continuing Corporation"). In
addition, Pawling Savings Bank, Progressive's wholly owned subsidiary, agreed to
merge with and into First National Bank of the Hudson Valley ("Hudson Valley"),
a wholly-owned subsidiary of the Company, under the national bank charter of
Hudson Valley and the name Premier National Bank. Consummation of the mergers is
subject to satisfaction of a number of conditions, including approval of the
merger agreement by the shareholders of each of Progressive and the Company at
stockholder meetings to be held on May 21, 1998. All required regulatory
approvals, consents or waivers have now been obtained. The mergers, which are
anticipated to be consummated in July 1998, would create the largest independent
banking institution headquartered in the Hudson Valley with approximately $1.6
billion in assets.
Year 2000
- ---------
As described in greater detail in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, the Company continues with its systematic
plans to address the Year 2000 compliance requirements. Management believes it
remains on its current schedule to be at the proper stage of assessment,
remediation and testing to be Year 2000 compliant, by year end 1998. Further,
management continues to believe that it will not incur expenses in excess of
$150,000, although it may also need to replace certain hardware and software, at
immaterial costs, which would be capitalized.
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT IMPLEMENTED
Disclosures About Segments of an Enterprise and Related Information
- -------------------------------------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures About Segments of an Enterprise and Related Information".
6
<PAGE>
This SFAS requires disclosures regarding reportable segments of an enterprise.
Information required to be disclosed for each reported segment includes among
other factors used to identify segments, selected financial data; profit and
loss, revenues and other operating and non-operating expenses. In accordance
with the effective date of this SFAS, the disclosures will be included in the
Company's 1998 Annual Report on Form 10-K. The adoption of SFAS No. 131 will not
have any significant effect on the Company's financial condition or results of
operations.
Loans
- -----
Major classifications of loans (excluding loans held for sale) are summarized
below (in thousands):
<TABLE>
<CAPTION>
At March 31, 1998 At December 31, 1997
----------------- --------------------
<S> <C> <C>
Commercial and industrial $82,604 $79,138
Consumer installment 87,355 88,375
Real estate - construction 11,254 10,871
Real estate - mortgage (Commercial) 148,203 147,327
Real estate - mortgage
(Residential & Home Equity) 128,122 133,460
Other loans 6,798 7,850
-------- --------
Total $464,336 $467,021
======== ========
</TABLE>
Deposits
- --------
Major classifications of deposits are summarized below (in thousands):
<TABLE>
<CAPTION>
At March 31, 1998 At December 31, 1997
----------------- --------------------
<S> <C> <C>
Demand deposits $144,398 $151,002
NOW accounts 64,591 49,921
Money market deposit accounts 71,441 59,028
Savings accounts 208,704 207,522
Time deposits under $100,000 133,000 131,815
Time deposits over $100,000 62,302 54,817
-------- --------
Total $684,436 $654,105
======== ========
</TABLE>
7
<PAGE>
Securities
- ----------
Securities consist of the following (in thousands):
<TABLE>
<CAPTION>
At March 31, 1998 At December 31, 1997
-------------------------------------- --------------------------------------
Carrying Amortized Fair Carrying Amortized Fair
Amount Cost Value Amount Cost Value
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Treasury:
Available for Sale $46,621 $46,453 $46,621 $40,615 $40,386 $40,615
US Gov't Agencies:
Available for Sale 30,558 30,392 30,558 32,409 32,270 32,409
Obligations of States and
Political Subdivisions:
Available for Sale 76,780 75,603 76,780 70,946 69,686 70,946
Held to Maturity 24,972 24,972 25,420 24,170 24,170 24,669
Other Securities:
Available for Sale 32,543 32,555 32,543 27,609 27,599 27,609
Held to Maturity 75 75 75 75 75 75
Regulatory Securities 2,843 2,843 2,843 2,755 2,755 2,755
--------------------------------------------------------------------------------
Total Securities $214,392 $212,893 $214,840 $198,579 $196,941 $199,078
================================================================================
Total Available for Sale $186,502 $185,003 $186,502 $171,579 $169,941 $171,579
Total Held to Maturity 25,047 25,047 25,495 24,245 24,245 24,744
Regulatory Securities 2,843 2,843 2,843 2,755 2,755 2,755
--------------------------------------------------------------------------------
Total Securities $214,392 $212,893 $214,840 $198,579 $196,941 $199,078
================================================================================
</TABLE>
At March 31, 1998 the net unrealized gain on Securities Available for Sale (net
of tax effect of $616,000) that was included as a separate component of
stockholders' equity was $884,000.
8
<PAGE>
Earnings per common share (1997 data has been adjusted for the three for two
- -------------------------
stock split paid as a 50% stock dividend declared September 1997.)
Basic earnings per common share is computed as follows (in thousands, except per
share data):
Three months ended
March 31,
------------------
1998 1997
---- ----
Weighted average common shares
outstanding 7,094 7,103
Total basic shares 7,094 7,103
===== =====
Net income $2,099 $2,139
====== ======
Basic earnings per common share $0.30 $0.30
===== =====
Diluted earnings per common share is computed as follows (in thousands, except
per share data):
Three months ended
March 31,
------------------
1998 1997
---- ----
Weighted average common shares
outstanding 7,094 7,103
Net effect of dilutive stock options 231 235
------ ------
Total "diluted" shares 7,325 7,338
====== ======
Net income $2,099 $2,139
====== ======
"Diluted" earnings per
common share $0.29 $0.29
===== =====
Stockholders' Equity
- --------------------
Authorized common stock, $.80 par value, is 20,000,000 shares. Issued and
outstanding shares (net of treasury shares) at March 31, 1998 and December 31,
1997, were 7,108,737 and 7,076,263, respectively. The Company paid a 50% stock
dividend in October 1997 which increased common shares outstanding by 2,351,654.
(All 1997 share data has been accordingly restated in the condensed consolidated
statements of income and expense and Stockholders' Equity.)
Components of Comprehensive Income
- ----------------------------------
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which established standards for the reporting and display
of comprehensive income (and its components) in financial statements. The
standard does not, however, specify when to recognize or how to measure items
that make up comprehensive income. Comprehensive income represents net income
and certain amounts reported directly in shareholders' equity, such as the net
unrealized gain or loss on securities available for sale. While SFAS No. 130
does not require a specific reporting format, it does require that an enterprise
display an amount representing total comprehensive income for the period.
9
<PAGE>
The Company's only item of accumulated other comprehensive income included in
shareholders' equity is the net unrealized gain on securities available for
sale, net of taxes.
The Company's comprehensive income for the three months ended March 31, 1998 was
as follows:
Description Amount
- ----------- ------
Net income $2,099,000
Other comprehensive income, net of tax:
unrealized holding losses on securities
available for sale arising during the period $(64,000)
Less reclassification of gains included in net
income, net of tax (18,000) (82,000)
--------- -----------
Comprehensive income $2,017,000
==========
These unrealized holding losses, net of tax benefit, represent a decrease in the
unrealized appreciation of available for sale securities, net of tax, during the
three months ended March 31, 1998. The cumulative balance of this unrealized
gain, net of tax, at March 31, 1998 was $884,000.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
- -------------------
The Company's financial condition on March 31, 1998 reflected total assets of
$763.2 million, an increase of $31.6 million or 4.3% over total assets at
December 31, 1997. Net loans decreased $3.0 million or .69% to $454.5 million at
March 31, 1998. Cash and cash equivalents increased from $46.5 million at
December 31, 1997 to $64.7 million at March 31, 1998. Other assets increased by
$794,000. Aggregate securities investments were $214.4 million at March 31,
1998, an increase of $15.8 million or 7.9% from the level at December 31, 1997.
During the first quarter of 1998, the Bank wrote new loan originations of $29.1
million. However, normal amortization and prepayments (which were approximately
$28.9 million during the quarter) and sales of loans into the secondary market,
with servicing retained (which were approximately $2.9 million) resulted in a
net $3.0 million decrease in loans outstanding at March 31, 1998 compared to
December 31, 1997. The decreases arose in the categories of residential real
estate loans ($5.3 million) due primarily to customers refinancing adjustable
rate mortgages and home equity loans into fixed rate mortgage loans (many of
which were financed by the Company and sold into the secondary market), and all
other categories remained relatively unchanged.
Period end total deposits increased seasonally $30.3 million or 4.6% in the
first three months of 1998 to $684.4 million. Of this amount, total Public
(Municipal) Funds increased $33.3 million or 35.4% to $94 million and total
non-public funds decreased $3.0 million or 0.5% to $590.4 million.
11
<PAGE>
The following tables summarize the net changes in public (municipal) fund and
non-public fund deposits from December 31, 1997 to March 31, 1998 (in
thousands):
Public Funds
<TABLE>
<CAPTION>
Percent
Balance Balance Net Change over
12/31/97 3/31/98 Change Y/E`97
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $3,061 $3,120 $59 1.93%
NOW accounts 10,299 23,489 13,190 128.07
Money market accounts 10,334 19,384 9,050 87.57
Savings accounts 3,354 2,835 (519) (15.47)
Time deposits 33,670 45,193 11,523 34.22
-------------------------------------------------------------------
Total public deposits $60,718 $94,021 $33,303 54.85
===================================================================
</TABLE>
Public funds balances increased in the first quarter due both to the receipt of
state aid payments for school districts and to town and county tax assessments
levied in January. This increase may reverse by year end as the result of the
municipalities employing their funds. However, similar increased are expected in
the third quarter due to school district tax levies.
Non Public Funds
<TABLE>
<CAPTION>
Percent
Balance Balance Net Change over
12/31/97 3/31/98 Change Y/E`97
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $147,941 $141,278 $ (6,663) (4.50)%
NOW accounts 39,622 41,102 1,480 3.74
Money market accounts 48,694 52,057 3,363 6.91
Savings accounts 204,167 205,869 1,702 0.83
Time deposits 152,963 150,109 (2,854) (1.87)
------------------------------------------------------------------
Total non public deposits $593,387 $590,415 $(2,972) (0.50)%
==================================================================
</TABLE>
Non-municipal demand deposits historically decline during the first and third
quarters of each year. Additionally, the Company has been less aggressive in the
smaller CD market accounting for minor runoff in time deposits during the
quarter.
Consolidated shareholders' equity at quarter end was $72 million, up $1.6
million over year end 1997. The Company's retained earnings for the quarter
($1.0 million) were complimented by $.7 million of stock issuance proceeds which
included $.3 million issued in connection with the purchase of land for the
Company's Newburgh branch and normal issuances under the Company's stock option
plans and dividend reinvestment plan, offset slightly ($.1 million) by the
decrease in unrealized gains, after tax, in the market value of the Company's
available-for-sale investment portfolio. The ratio of shareholders' equity to
total assets remained strong at quarter end standing in excess of 9.4%.
12
<PAGE>
Results of Operations
- ---------------------
Interest income as reported, for the three months ended March 31, 1998,
compared to the same period in 1997, increased $712,000 while interest expense
increased by $413,000. This resulted in an increase in net interest income of
$299,000. Provision for loan losses decreased by $100,000. Total non-interest
income decreased $101,000 or 6.4%. Total noninterest expenses increased by
$274,000 or 5.1%, which was due entirely to merger-related expenses of $280,000
incurred in the first quarter of 1998. Net income after tax decreased by $40,000
or 1.9%. Diluted earnings per common share remained the same at $.29 for the
three months of 1998 and 1997. Excluding merger-related expenses incurred in
1998 of $280,000 or $263,000 after-tax earnings, net income on a pro forma basis
would have been $2,362,000 or diluted earnings per common share would have been
$.32.
The Net income and earnings per common share data discussed above is presented
in the following table:
<TABLE>
<CAPTION>
Three months ended
Actual Actual
------ ------
3/31/98 Pro forma 3/31/98(1) 3/31/97*
------- -------------------- --------
<S> <C> <C> <C>
Net income (in thousands) $2,099 $ 2,362 $ 2,139
Per common share:*
Basic earnings $0.30 $0.33 $0.30
Diluted earnings 0.29 0.32 0.29
</TABLE>
(1)Excludes merger-related expenses.
*Adjusted for the 50% stock dividend declared September 1997.
The Company's actual and pro forma (excluding merger-related expenses) return
on average assets and return on average equity for the three months ended March
31, 1998 and 1997, are detailed in the table below:
<TABLE>
<CAPTION>
Three months ended
Actual Actual
------ ------
3/31/98 Pro forma 3/31/98(1) 3/31/97
------- -------------------- -------
<S> <C> <C> <C>
Actual:
- ------
Return on assets 1.13% 1.27% 1.23%
Return on total stockholders'
equity 11.80 13.27 13.11
</TABLE>
(1)Excludes merger-related expenses
13
<PAGE>
Interest income
- ---------------
On a tax equivalent basis, gross interest income increased by $799,000 or 6.1%
for the three months ended March 31, 1998 compared to the same period in 1997.
Total interest expense increased by $413,000 or 8.3% for the three months period
ended March 31, 1998 as compared to the three months ended March 31, 1997 due
primarily to an increased volume of interest-bearing accounts. For the first
three months of 1998, the Company experienced a net increase in average earning
assets compared to the same period of 1997 of $44.7 million. Average loans
increased by $16.8 million, securities increased $20.5 million and federal funds
increased by $7.4 million.
The growth in average assets was principally funded by an increase in average
deposits of $40.6 million (of which $28.5 million were interest- bearing
deposits), and an increase in average shareholders' equity of $5.9 million for
the three month period ended 1998 compared to 1997.
14
<PAGE>
The table below sets forth the consolidated average balance sheets for the
Company for the periods included. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $466,660 $10,314 8.84% $449,884 $9,951 8.85%
Taxable Securities 124,646 1,905 6.11% 120,859 1,818 6.02%
Tax-exempt Securities (2) 77,441 1,356 7.00% 60,706 1,117 7.36%
Fed Funds Sold 20,981 290 5.53% 13,615 180 5.29%
-------- ------- -------- -------
Total Interest Earning Assets 689,728 13,865 8.04% 645,064 13,066 8.10%
NonInterest Earning Assets:
Cash & Due from Banks 34,635 32,417
Premises & Equipment 15,918 16,347
Other Assets 13,198 12,524
Allowance for Loan Losses (9,658) (9,406)
-------- --------
Total Assets $743,821 13,865 7.46% $696,946 13,066 7.50%
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Savings Deposits $204,667 $2,061 4.03% $209,436 $2,072 3.96%
NOW Accounts 56,029 147 1.05% 49,676 147 1.18%
Money Market Accounts 66,063 533 3.23% 67,673 576 3.40%
CD's over $100,000 60,261 827 5.49% 40,038 540 5.39%
Other Time Deposits 131,505 1,787 5.44% 123,200 1,604 5.21%
Borrowed Funds 1,725 23 5.33% 1,848 26 5.63%
-------- ------- -------- -------
Total Interest-Bearing Liabilities 520,250 5,378 4.13% 491,871 4,965 4.04%
Noninterest-Bearing Liabilities:
Demand Deposits 146,283 133,963
Other 6,107 5,873
-------- --------
Total Noninterest-Bearing Liabilities 152,390 5,378 3.20% 139,836 4,965 3.14%
Stockholders' Equity 71,181 65,239
-------- --------
Total Liabilities and $743,821 5,378 2.89% $696,946 4,965 2.85%
======== ========
Stockholders' Equity
Net interest Margin 8,487 4.92% 8,101 5.02%
Less Tax Equivalent Adjustments (461) (374)
------- ------
Net Interest Income $8,026 4.65% $7,727 4.79%
====== ===== ====== =====
Excess of interest earning assets over
interest bearing liabilities $169,478 $153,193
Ratio of Average Interest-Earning Assets to
Average Interest-Bearing Liabilities 132.58% 131.14%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average Balances include non-accrual loans.
(2) Tax Equivalent Yields on tax-exempt securities based on a Federal tax rate
of 34%.
15
<PAGE>
The following table reflects the effects of changes in volumes and interest
rates for each of the same categories on a tax equivalent basis:
Rate/Volume Analysis (in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 vs. 1997
-----------------------------------------------------------------
Increase (Decrease) due to
-----------------------------------------------------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest Income:
Loans $371 $(8) $363
Taxable investment securities 58 29 87
Tax-exempt investment securities 293 (54) 239
Federal funds sold 102 8 110
------------ ------------- -------------
Total interest income 824 (25) 799
Interest expense:
Savings deposits (48) 37 (11)
NOW/accounts 17 (17)
Money market accounts (13) (30) (43)
Certificates over $100,000 278 9 287
Other Time Deposits 113 70 183
Borrowed funds (2) (1) (3)
------------ ------------- -------------
Total interest expense 345 68 413
------------ ------------- -------------
Net interest margin 479 (93) 386
Less tax equivalent affect (100) (13) (87)
------------ ------------- -------------
Net interest income $379 $(80) $299
============ ============= =============
</TABLE>
Average yields on interest earning assets decreased to 8.04% for the three
months ended March 31, 1998 vs. 8.10% as of the same period in 1997 due to
declines in investment yields (due primarily to the growth in the securities
portfolio in a lower interest rate environment). Liability rates increased to
4.13% for the three months ended March 31, 1998 vs. 4.04% as of March 1997 (due
primarily to the growth in certificates of deposit which are at higher rates
than other deposit products). However, due to the growth in noninterest bearing
demand deposit balances, net interest margins on a tax equivalent basis only
declined .10% to 4.92% for the three months ended March 31, 1998 compared to the
same period in 1997. Variances due to changes in rates produced a $80,000
decrease in net interest income in the three months of 1998 compared to the same
period in 1997, while the increase in average earning assets of $44.7 million
(compared to an increase in interest bearing liabilities of $28.4 million)
principally contributed to the $379,000 increase in net interest income due to
volume variances over the same period.
16
<PAGE>
The net effect was that net interest income before provisions for loan losses
grew to $8.0 million for the three months ended March 31, 1998 compared to $7.7
million for the comparable period in 1997, or an increase of $299,000 (3.9%).
Provision for loan losses and credit quality
- --------------------------------------------
Provisions for loan losses are based on management's assessment of risk of loss
inherent in the loan portfolio and as such reflect, among other things, both
trends in local economic conditions and the categorization of the credit quality
of individual loans. Such assessment is ongoing, and may not directly reflect
the charge-offs taken in any accounting period, although the trend in
charge-offs is an important element in the evaluation of the adequacy of the
allowance for loan losses. The ratio of the allowance for loan losses to total
nonperforming loans does not reflect collateral values, although 83.1% of the
Bank's nonperforming loans are collateralized by real estate. Provision for loan
losses declined from $700,000 to $600,000 in the first quarter of 1998 compared
to 1997, primarily due to the significant decline in nonperforming assets and
lower levels of charge-offs compared to the prior year, which are detailed
below, and the assessments by management noted above.
Total net charge-offs for the three months of 1998 were $266,000, compared to
$550,000 for the same period in 1997. The ratio of net chargeoffs to average
loans, on an annualized basis, decreased to .23% in the first three months of
1998 vs. .49% for the same period of 1997. Nonperforming assets decreased to
$3.9 million at March 31, 1998 compared to $6.1 million at March 31, 1997.
OREO balances outstanding of $706,000 showed a decrease of $54,000 at March 31,
1998 from year end 1997, and non-performing loans increased over the same period
by some $108,000, from $3.1 million to $3.2 million. Real estate mortgage
nonperforming loans, including restructured troubled debt, increased by $312,000
while nonperforming commercial and industrial loans decreased by $148,000, and
consumer and other nonperforming loans decreased by $56,000. The Company's ratio
of loan loss allowance to non-performing loans stood at 305% at both March 31,
1998 and year-end 1997, and the allowance represented 2.12% of loans at March
31, 1998 vs. 2.04% at the end of 1997. The period-end ratio of non-performing
assets, to total assets, at .52%, declined slightly for March 31, 1998 compared
to .53% at December 31, 1997.
Nonperforming assets represent 67 loans or OREO properties of which on1y 11 have
balances in excess of $100,000, and no nonperforming assets have a balance
greater than $400,000. Of the total nonperforming assets, 29% is collateralized
by residential property, 56% by commercial property, and 15% by other assets or
unsecured.
Management believes that the allowance for loan losses is adequate to cover the
risk of loss inherent in the portfolio but no assurance can be given that the
relatively stable current economic conditions of the Company's overall market
area will not be unsettled by future events. Any such developments would be
expected to adversely effect the financial performance of the Company.
17
<PAGE>
The table below summarizes the Company's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
For the three months For the year
ended March 31, ended December 31,
1998 1997 1997 1996 1995
------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $9,530 $9,302 $9,302 $8,770 $8,326
Chargeoffs:
Commercial & industrial 26 404 1,448 889 411
Consumer installment & other 157 143 742 554 593
Real estate mortgage 170 68 629 1,289 1,164
------------------------ ----------------------------------
Total charge-offs 353 615 2,819 2,732 2,168
Recoveries:
Commercial & industrial 28 6 147 89 75
Consumer installment & other 46 5 80 130 193
Real estate mortgage 13 54 320 195 44
------------------------ ----------------------------------
Total recoveries 87 65 547 414 312
------------------------ ----------------------------------
Net charge-offs (266) (550) (2,272) (2,318) (1,856)
Provision for Loan Losses 600 700 2,500 2,850 2,300
Balance at end of period $9,864 $9,452 $9,530 $9,302 $8,770
======================== ==================================
Ratio of net charge-offs to average
loans outstanding during the period
(annualized) .23% .49% .50% .53% .43%
Allowance for loan losses as a
percent of period-end loans 2.12% 2.09% 2.04% 2.06% 2.08%
Allowance as a percent of
non-performing loans 305% 187% 305% 169% 166%
Nonperforming loans and OREO
to total loans and OREO .85% 1.35% .83% 1.36% 1.53%
</TABLE>
18
<PAGE>
The table below summarizes the Company's nonperforming assets and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
at March 31, at December 31,
1998 1997 1997 1996 1995
---------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate mortgage $2,345 $2,720 $1,756 $3,503 $3,246
Commercial & Industrial 90 997 214 712 1,013
Consumer & other 68 196 73 313 148
---------------------------- ----------------------------------------
Total nonaccrual loans 2,503 3,913 2,043 4,528 4,407
Loans 90 days or more past due and
still accruing:
Real estate mortgage 62 310 128 216 28
Commercial & industrial 164 264 188 193 476
Consumer & other 31 51 22 18
---------------------------- ----------------------------------------
Total 90 days past due accruing 226 605 367 431 522
Restructured - real estate 501 532 712 534 349
---------------------------- ----------------------------------------
Total non-performing and restructured
loans 3,230 5,050 3,122 5,493 5,278
Percent of total loans .69% 1.13% .67% 1.22% 1.23%
Other real estate owned 706 1,011 760 653 1,196
---------------------------- ----------------------------------------
Total non-performing assets $3,936 $6,061 $3,882 $6,146 $6,474
============================ ========================================
Nonperforming assets as a percent of
total assets .52% .86% .53% .88% .93%
============================ ========================================
</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.
Other real estate owned totals $706,000 at March 31, 1998 and includes eight
properties acquired through foreclosure: one parcel of land, five residences,
and two non-farm nonresidential properties. Of this amount, there are currently
contracts in place for sales totaling approximately $365,000. Management
believes that the carrying values of such properties adequately reflect the risk
of loss in their orderly disposal.
19
<PAGE>
At March 31, 1998, the Company had approximately $9.4 million in loans requiring
special attention (substandard) compared to $9.8 million at December 31, 1997,
in addition to the nonperforming loans and other nonperforming assets noted
above. Such loans are being monitored so that if concern about the borrowers
ability to comply with repayment terms becomes evident, management will be able
to quickly assess impairment. Approximately 75% of all such loans are
collateralized by real estate. Further deterioration in such borrowers'
financial position may result in classifying them as nonperforming assets. The
following table summarizes impaired loans for the periods indicated (in
thousands):
March 31, 1998 December 31, 1997
-------------- -----------------
Impaired loans with allowance established
($1,182,000 and $901,000, respectively) $1,882,000 $2,335,000
Impaired loans with a writedown
($1,109,000 and $1,133,000, respectively) 1,091,000 1,068,000
---------- ----------
Total $2,973,000 $3,403,000
========== ==========
Average amount of impaired loans
for the period $3,013,602 $4,177,000
========== ==========
The following table shows, at the dates indicated, the allocation of the
allowance for loan losses, by category, and the percentage of loans in each
category to total gross loans (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 1997 1996 1995
-------------------------------------------- ------------------------------------------------------------
Balance at end of % of % of % of % of % of
period applicable to: Amount total Amount total Amount total Amount total Amount total
loans loans loans loans loans
-------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial &
industrial $ 1,907 17.8% $2,571 16.5% $ 2,131 17.2% $2,476 15.9% $ 2,355 16.6%
Consumer & other 1,910 20.3 1,993 19.7 1,873 20.6 1,702 19.3 1,400 16.1
Real estate -
construction 2.4 2.7 2.3 2.7 3.1
Real estate - mortgage 4,222 59.5 3,871 61.1 4,149 59.9 3,985 62.1 4,247 64.2
Unallocated 1,824 1,017 1,377 1,139 768
-------------------------------------------- ------------------------------------------------------------
Total $ 9,863 100.00% $ 9,452 100.00% $ 9,530 100.00% $9,302 100.00% $ 8,770 100.00%
============================================ ============================================================
</TABLE>
Noninterest Income
- ------------------
Total noninterest income decreased $101,000 in the first three months of 1998 to
$1,476,000 compared to the same period of 1997. Gains on sales of securities
increased by $42,000. Trust earnings increased $57,000 and net gains on sales of
loans increased by $30,000. These increases were offset by declines in net
service charges and fees of $115,000 (due primarily to customers maintaining
deposit balances to avoid charges), and decrease in "other" non-interest income
of $115,000, the majority of which was due to
20
<PAGE>
declines in annuity commissions of $50,000, other loan fees of $17,000, and
interest on a previous year income tax refund of $22,000 received in 1997.
Other Expenses
- --------------
In total, noninterest expense was up by $274,000 or 5.1% to $5,690,000 for the
first three months of 1998 compared to the same period of 1997, due entirely to
merger-related expenses incurred of $280,000.
Salaries and employee benefits increased by $28,000 in the first three months of
1998 compared to 1997. However, underlying salary and benefit expense declined
by approximately $90,000, which was offset by first quarter 1997 recovery of
$120,000 in compensation expense related to officers waiving tandem stock
appreciation rights, but retaining the rights to underlying stock options.
Occupancy and equipment expense showed a decrease of $38,000 over the same
period in 1997, despite new branches, due to declines in depreciation expense
(as a substantial portion of the Company's equipment is fully depreciated).
Other real estate owned expense increased slightly by $7,000 to $43,000 for the
three months ended March 31, 1998.
Pretax income increased by $24,000. However, income tax expense increased by
$64,000 primarily due to $240,000 of the merger-related expenses being
considered nontax-deductible. The Company's effective tax rate, therefore,
increased to 34.7% from 32.9% as a result of the nondeductible expenses
incurred.
Asset/Liability Management
- --------------------------
Management believes the Company's ability to plan for changes in interest rates
is a significant profitability factor. The Company's primary objective in
managing interest rate sensitivity is to maintain a broadly balanced position
between interest sensitive assets and liabilities in order to minimize the
impact of significant interest rate fluctuations. Further, the historical level
of demand deposits (approximately 20-25% of total deposits) tends to mitigate
increases in interest rates and reduces the average cost of all liabilities to a
level significantly below the average cost of only interest-bearing liabilities.
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of March 31, 1998 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 March 31, 1998, assuming no
management action, the Company's near-term interest rate risk is to a rising
rate environment over the one year time frame, principally due to a higher level
of rate sensitive liabilities relative to assets (22.5%) that would reprice in
that time frame. However, beyond one year due to higher levels of assets
repricing, the Company's long-term exposure is to an extended period of
declining rates as the excess of assets repricing over liabilities may cause a
contraction in net interest margins. This chart displays only a static view of
the Company's interest rate sensitivity gap and does not capture the dynamics of
balance sheet, rate and spread movements nor management actions that may be
taken to manage this risk.
21
<PAGE>
<TABLE>
<CAPTION>
Maturity Repricing Greater
Date (1)(2) Total One yr. than
3 months 4 months to within to 5 five
or less one yr. one yr. yrs. yrs. Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities (3) $39,184 $34,155 $73,339 $95,929 $43,625 $212,893
Fed Funds 31,600 31,600 31,600
Fixed rate loans 37,433 53,085 90,518 180,037 20,565 291,120
Floating rate loans (3) 106,257 54,932 161,189 5,172 166,361
Total interest
earning assets (1) 214,474 142,172 356,646 281,138 64,190 701,974
------- ------- ------- ------- ------- -------
Other interest bearing
deposits (4) 138,700 206,670 345,370 345,370
Time/Other (5) 99,973 69,340 169,313 27,081 196,394
Total interest-bearing
liabilities 238,673 276,010 514,683 27,081 0 541,764
------- ------- ------- ------- ------- -------
Interest Sensitivity
gap (6) $(24,199) $(133,838) $(158,037) $254,057 $64,190 $160,210
================================================================================
Gap as a percent of earnings
assets (3.4)% (19.1)% (22.5)% 36.2% 9.1% 22.8%
================================================================================
</TABLE>
(1) Interest rate sensitivity gaps are defined as the fixed rate positions
(assets less liabilities) for a given time period. The gaps measure the
time weighted dollar equivalent volume of positions fixed for a
particular period. The gap positions reflect a repricing date at which
date funds are assumed to "mature" and reprice to a current market rate
for the asset or liability. The table does not include loans in
nonaccrual status or net unrealized losses recorded on
"available-for-sale" securities as of March 31, 1998.
(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) Other interest-bearing deposits include Money Market accounts (three
months or less) and Savings and NOW accounts (four months to one year)
reflecting the lagging period that historically exists in Savings and
NOW account interest rate movements. The remainder of other
interest-bearing deposits are "Merit" accounts (savings accounts whose
yield is repriced directly with the Federal Reserve Discount Rate).
This discount rate changes less frequently than other market rates. As
a result, management places these balances at one-half is the three
month or less category and the balance in four months to one year
repricing category (the Federal Reserve Discount Rate has not changes
since January 1996k.) The interest rate sensitivity assumptions
presented for these deposits are based on historical and current
experiences regarding balance retention and interest rate repricing
behavior.
(5) Time/Other: Time deposits and other interest-bearing liabilities are
classified by contractual maturity or repricing frequency.
(6) Non-interest bearing deposit liabilities were approximately $144
million at March 31, 1998.
22
<PAGE>
Capital Resources and Liquidity
- -------------------------------
The following summarizes the minimum capital requirements and capital position
at March 31, 1998:
<TABLE>
<CAPTION>
To be Well Capitalized Under
Capital Position at Prompt Corrective Action
March 31, 1998 Provision
------------------- ----------------------------
Bank Only Consolidated
--------- ------------
<S> <C> <C> <C>
Total Capital
to Risk-Weighted Assets 12.43% 14.88% 10%
====== ======
Tier 1 Capital
to Risk-Weighted Assets 11.18 13.62 6
===== =====
Tier 1 Capital to Average
Assets (Leverage Ratio) 7.56 9.21 5(1)
==== ====
</TABLE>
(1) Regulatory authorities require all but the most highly rated banks and bank
holding companies to have a leverage ratio of at least between 4.0% - 5.0%.
At March 31, 1998, the Bank met the requirements for a "well capitalized"
institution based on its capital ratios as of such date.
The Company believes that its cash and cash equivalents of $64,682 million in
addition to its securities available for sale of $186,502 million at March 31,
1998 are sufficient to meet both the funding needs of its borrowers and the
liquidity requirements of its depositors.
The Company plans to open a new branch in Middletown, NY (Orange County) as well
as relocate its Newburgh Branch facility. Such new facilities are now expected
to be completed in the summer of 1998. The construction and land costs
associated with these new facilities are anticipated to total approximately
$1,500,000 of which $970,000 has been expended to date. The Company has
sufficient capital resources to fund such construction.
The Company's total capital to assets level is approximately 9.4% at
March 31, 1998. As such, management believes that the Company has ample capital
available for future expansion and diversification and regularly evaluates
appropriate business opportunities to efficiently deploy its capital resources.
Pending Merger
- --------------
On December 16, 1997, the Company signed a definitive Merger Agreement and Plan
of Reorganization with Progressive Bank, Inc. (Progressive), a New
York-chartered bank holding company, in a transaction anticipated to be
accounted for under the pooling of interests method of accounting. According to
the agreement, each share of Progressive common stock, will be exchanged for
1.82 shares of the Company's common stock.
Consummation of the merger is subject to satisfaction of a number of conditions,
including approval of the merger agreement by the stockholders of each of
Progressive and the Company, and the ability to account for the merger as a
pooling-of-interests.
23
<PAGE>
In connection with the merger agreement, Progressive and the Company executed
stock option agreements pursuant to which (i) Progressive has an option to
purchase up to 1,415,250 unissued shares of the Company's common stock at $21.75
per share and (ii) the Company has an option to purchase up to 766,300 unissued
shares of Progressive's common stock at $36.63 per share. The shares issuable
upon exercise of each option represent approximately 16.7% of the number of
common shares of the issuer that would be outstanding after exercise of the
option. The options are exercisable only upon the occurrence of certain events
that could jeopardize consummation of the proposed merger.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Quantitative and qualitative disclosure about market risk is presented at
December 31, 1997 in Item 7A in the Company's Annual Report on Form 10-K/A filed
with the Securities and Exchange Commission on April 9, 1998. There have been no
material changes in the Company's market risk at March 31, 1998 compared to
December 31, 1997. The following is an update of the discussion provided
therein:
General. The Company's largest component of market risk continues to be interest
rate risk. The Company is not subject to foreign currency exchange or commodity
price risk. At March 31, 1998, neither the Company nor the Bank owned any
trading assets, nor did they utilize hedging transactions such as interest rate
swaps and caps.
Assets and Deposit Liabilities. During the three months ended March 31, 1998,
the Company has added $15.8 million in securities and $14.9 million in fed
funds, funded by an increase in municipal deposits of which $11.5 million are
short-term certificates of deposits. However, the Company's overall level of
interest rate risk, inclusive of the effects of these transactions, has not
changed materially from December 31, 1997 to March 31, 1998. There have been no
other material changes in the composition of assets or deposit liabilities from
December 31, 1997 to March 31, 1998.
GAP Analysis. The one-year and five-year cumulative interest sensitivity gap as
a percentage of total assets fall within 2% of their levels at March 31, 1998
utilizing the same assumptions as at December 31, 1997.
Interest Rate Risk Compliance. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at December 31, 1997. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value at March 31, 1998 compared to December 31, 1997, and the projected changes
continue to fall within all board approved limits for potential interest rate
volatility.
24
<PAGE>
Part II
Item 6(a). Exhibits
- --------------------
Exhibit 27 Financial Data Schedule
Item 6(b). Reports on Form 8-K
- -------------------------------
On April 30, 1998, the Company filed a Current Report on Form 8-K to disclose a
press release announcing the Company's results of operations for the first
quarter of 1998 and to file a revised Opinion of Keefe, Bruyette & Woods
relating to the proposed merger of the Company and Progressive.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed in its behalf by the undersigned
thereunto duly authorized.
Hudson Chartered Bancorp, Inc.
(Registrant)
Date: May 12, 1998 /s/ Paul A. Maisch
------------------
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
26
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 33,082
<INT-BEARING-DEPOSITS> 540,038
<FED-FUNDS-SOLD> 31,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 186,502
<INVESTMENTS-CARRYING> 27,890
<INVESTMENTS-MARKET> 28,338
<LOANS> 464,396
<ALLOWANCE> 9,863
<TOTAL-ASSETS> 763,164
<DEPOSITS> 684,436
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,000
<LONG-TERM> 1,725
0
0
<COMMON> 5,729
<OTHER-SE> 66,274
<TOTAL-LIABILITIES-AND-EQUITY> 763,164
<INTEREST-LOAN> 10,314
<INTEREST-INVEST> 2,800
<INTEREST-OTHER> 290
<INTEREST-TOTAL> 13,404
<INTEREST-DEPOSIT> 5,355
<INTEREST-EXPENSE> 5,378
<INTEREST-INCOME-NET> 8,026
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 5,690
<INCOME-PRETAX> 3,212
<INCOME-PRE-EXTRAORDINARY> 3,212
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,099
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
<YIELD-ACTUAL> 8.84
<LOANS-NON> 2,503
<LOANS-PAST> 226
<LOANS-TROUBLED> 501
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,530
<CHARGE-OFFS> 353
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 9,864
<ALLOWANCE-DOMESTIC> 9,864
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,824
</TABLE>
