<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K/A
Amendment No. 1
[ 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, 1997
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: 1-13213
--------
HUDSON CHARTERED BANCORP, INC.
------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NEW YORK 14-1668718
- ------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ROUTE 55, LAGRANGEVILLE, NEW YORK 12540
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 914-471-1711
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
COMMON STOCK, PAR VALUE $.80 PER SHARE AMERICAN STOCK
- -------------------------------------- --------------
EXCHANGE, INC.
- --------------
(TITLE OF CLASS) (NAME OF EXCHANGE ON WHICH
REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH REQUIREMENTS
FOR THE PAST 90 DAYS. YES X NO
------- ------
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K ____
AS OF MARCH 2, 1998, THE AGGREGATE MARKET VALUE OF THE 4,740,702 SHARES OF THE
REGISTRANT'S VOTING COMMON STOCK ISSUED AND OUTSTANDING HELD BY NON-AFFILIATES
ON SUCH DATE WAS APPROXIMATELY $99,554,742 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 2, 1998, THE REGISTRANT HAD 7,104,357 SHARES OF COMMON STOCK ISSUED
AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
1. PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF
STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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>
This form 10-K/A is being filed to revise the Consolidated Statements of
Stockholders' Equity of Hudson Chartered Bancorp, Inc. ("Company") to (i) change
from 70,494 to 77,418 the number of shares of Company common stock purchased by
the Company in 1996, (ii) add a new Note 1 thereto to indicate that the number
of shares of Company Common Stock purchased by the Company in 1997 has not been
adjusted for a 50% stock dividend declared by the Company in September 1997, and
(iii) file a revised Independent Auditors' Report of Deloitte & Touche LLP that
indicates that the report was issued in Stamford, Connecticut.
<PAGE>
PART I
------
ITEM 1 - BUSINESS
- -----------------
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 98% of the consolidated assets and 83% 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 Act 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") to the extent permitted by law. 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, 1997, the Company, on a consolidated basis, had total
assets of approximately $731.5 million, total deposits of $654.1 million and
stockholders' equity of $70.4 million. At December 31, 1997, the Company and
the Bank employed 319 employees on a full-time equivalent basis.
PENDING MERGER
As previously disclosed in the Company's current Report on Form 8-K filed
on December 29, 1997, on
December 16, 1997, the Company signed a definitive Agreement and Plan of
Reorganization with Progressive Bank, Inc. (Progressive), a New York state-
chartered bank holding company, that contemplates the merger of Progressive with
and into Hudson Chartered, 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 in the merger. At December 31, 1997, Progressive had
total assets of $883 million, total deposits of
$799 million, and stockholders' equity of $78.5 million. Progressive's net
income for the year ended December 31, 1997 was $8.6 million. Progressive is a
one bank holding company with its principal subsidiary being Pawling Savings
Bank, a New York State Chartered Savings Bank with 17 full service offices.
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 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.
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 local
and national economic conditions; the extent and timing of actions
3
<PAGE>
of the Reserve Board or the Comptroller; 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, 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
or circumstances.
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, 1997, the Bank's gross loan portfolio totaled approximately $467.0
million. Of this amount, real estate mortgage, consumer/installment, and
commercial loans comprised 62.2%, 20.6%, and 17.2%, respectively, of the Bank's
loan portfolio.
At December 31, 1997, the Bank's unsecured lending limit to one borrower
under applicable regulations was approximately $10.1 million.
In managing the growth of its loan portfolio, the Bank has focused on: (i)
the application of prudent underwriting criteria, (ii) establishment of
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 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 1997, the Company sold, but retained the servicing rights on, $9.2
million of fixed rate residential mortgage loans. Total loans serviced for
other investors was $99.1 million at December 31, 1997.
The Bank generally offers a one year adjustable rate loan (and, more
selectively, three and five year adjustable rate loans). This loan provides for
annual adjustments in the interest charged to an amount usually equal to 2.5 -
3% over the applicable constant maturity U. S. Treasury securities index.
Adjustable rate loans are generally retained in the Bank's
4
<PAGE>
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 when the loan has been converted into a fixed rate, with servicing rights
retained.
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 loan 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. Open-end lines of credit
not yet advanced totaled $10.9 million at December 31, 1997. Loans secured by
residential mortgages totaled $133.5 million at December 31, 1997, of which
$90.7 million were first and $42.8 million were second mortgages.
Commercial real estate loans are offered by the Bank generally on a fixed
or variable rate basis with a three to five and exceptionally seven 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 valuation 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 negatively
impacted to a greater extent by adverse changes in economic conditions. Loans
secured by commercial mortgages totaled $146.4 million at December 31, 1997.
CONSTRUCTION LOANS. The Bank makes short-term (one year or less)
------------------
construction loans secured by land, residential, and non-residential properties.
At December 31, 1997, total construction loans aggregated approximately $10.9
million and amounts not yet advanced totaled $6.0 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 the purpose of 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. 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
31, 1997, the Bank's commercial business loans outstanding totaled $80.1 million
with an additional $45.8 million available under committed lines and letters of
credit.
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 are also offered on an
unsecured basis.
5
<PAGE>
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 involved and, therefore, repayment of such
loans may be negatively impacted by adverse changes in economic conditions.
CONSUMER, INSTALLMENT, AND OTHER LOANS. The Bank offers a full range of
----------------------------------------
consumer/installment loans. Such loans include financing for new and used cars,
wholesale and indirect financing programs for autos and other vehicle
dealerships in addition to, on a direct basis, personal loans for consumer
goods, home improvement, overdraft checking, and debt consolidation. Wholesale
dealer loans (secured by dealer inventories) are structured as one year lines of
credit and are reviewed annually. Consumer loans are made on both a secured and
unsecured basis. Maturities for consumer loans are generally 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,
1997, installment, consumer, and all other loans totaled $96.2 million, of which
$70.0 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, 1997, overdraft
lines of credit and credit card lines not advanced totaled $10.0 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 and expected
amortization) outstanding as of December 31, 1997, and (3) the amounts due for
loans as previously stated in (2) after one year classified according to their
sensitivity to changes in interest rates.
1) LOAN DISTRIBUTION (DOLLARS IN THOUSAND):
-----------------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 % 1996 % 1995(A) % 1994 % 1993 %
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
R/E CONST. $ 10,871 2.3% $ 12,227 2.7% $ 13,347 3.2% $ 6,417 1.5% $ 3,678 1.0%
R/E
MORTGAGE
(COMM.) 146,368 31.3 137,557 30.5 127,395 30.2 111,330 25.7 99,606 27.4
R/E
MORTGAGE
(RES.) 133,460 28.6 142,868 31.6 143,673 34.0 166,263 38.5 155,350 43.0
COM'L. &
INDUSTRIAL 80,097 17.2 71,887 15.9 69,889 16.6 95,412 22.1 69,411 19.1
CON., INSTL.
& OTHER 96,225 20.6 87,212 19.3 67,779 16. 0 52,640 12.2 34,469 9.5
-----------------------------------------------------------------------------------------------
TOTAL $467,021 100.0% $451,751 100.0% $422,083 100.0% $432,062 100.0% $363,514 100.0%
===============================================================================================
</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, 1997:
--------------------------------------
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------
---------------------------------------------------------------
Within One Year After One But After Five Years Total
Within Five Years
---------------------------------------------------------------
<S> <C> <C> <C> <C>
R/E Construction $ 9,314 $ 1,557 $ 10,871
R/E Mortgage 35,631 131,665 $112,532 279,828
Comm/Industrial (A) 38,293 30,895 10,909 80,097
-----------------------------------------------------------------
Total $83,238 $164,117 $123,441 $370,796
=================================================================
</TABLE>
(A)Demand loans are categorized as due within one year.
3) Rate Sensitivity of Above Loans Maturing After One Year:
--------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
One to Five Years After Five Years
-----------------------------------
<S> <C> <C>
Fixed Interest Rate $130,927 $ 52,067
Variable Interest Rate 33,190 71,374
-----------------------------------
Total $164,117 $123,441
===================================
</TABLE>
In addition to Federal funds and maturing securities, $83.2 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, $104.6 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."
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
recorded in stockholders' equity was $.97 million, $.3 million and $.6 million
at December 31, 1997, 1996 and 1995, respectively. The tax liability recorded
in other assets offsetting other deferred tax assets was $.7 million, $.2
million, and $.4 million at December 31, 1997, 1996 and 1995, respectively.
See Note A and Note B to the 1997 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, 1997, 1996 and 1995:
The table below sets forth the carrying amounts of securities at the
dates indicated (dollars in thousands) :
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996 1995
----------------------------
<S> <C> <C> <C>
U.S. Treasury and U.S.
Government Agencies $ 73,024 $ 83,812 $113,539
State and political subdivisions 95,116 68,117 47,684
Other securities 30,439 27,309 22,683
----------------------------
Total $198,579 $179,238 $183,906
============================
</TABLE>
7
<PAGE>
The following table sets forth certain information concerning the
maturities of securities, amortized cost, and the weighted average yields of
such securities (calculated on the basis of their cost and effective yields) at
December 31, 1997. Tax-equivalent adjustments (using a 34% rate) have been made
in calculating yields on obligations of states and political subdivisions
(dollars in thousands):
<TABLE>
<CAPTION>
MATURING
AFTER ONE BUT (1) AFTER FIVE BUT
WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
WITHIN ONE YEAR (1) (2) (3) (4)
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
------- ----- -------- ----- ------- ----- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
US TREASURY $ 5,668 5.49% $ 38,577 6.08% $ 1,498 6.27% $ 26,913 6.22% $ 72,656 6.17%
AND US
GOVERNMENT
AGENCIES (5)
STATE AND 22,186 6.97 43,619 6.78 14,481 7.30 13,570 8.10 93,856 7.02
POLITICAL
SUBDIVISIONS
OTHER 1,998 5.65 19,029 5.94 6,647 6.15 2,755 6.82% 30,429 5.97
------- ----- -------- ----- ------- ----- -------- ------ -------- ------
TOTAL $29,852 6.60% $101,225 6.36% $22,626 6.90% $43,238 6.85% $196,941 6.55%
======= ======== ======= ======= ========
</TABLE>
(1) Includes $3.0 million of adjustable rate securities
(2) Includes $18.9 million of adjustable rate securities
(3) Includes $6.3 million of adjustable rate securities
(4) Includes $28.1 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 $28.8 million have been included based upon the
estimated average lives of the securities. Prepayments were estimated
based on 1997 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, 1997, 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.
Following the merger, it is expected that it will be necessary to reevaluate the
maturity distribution, concentrations of types of securities and interest rate
risk associated with the consolidated securities portfolio resulting from the
merger. SEE "Pending Merger".
See "Item 7 - Management's Discussion and Analysis of Financial Condition" for
additional information regarding securities and interest rate risk.
DEPOSITS
- --------
The Company has developed a variety of deposit products ranging in
maturity from demand-type accounts to certificates of deposit with maturities of
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, 1997, 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 higher 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 $159.3 million in time deposits maturing in 1998, the Company's
8
<PAGE>
previous experience indicates that a significant portion will "roll over" on
maturity. Of this amount, $51.9 million represent time deposits over $100,000
(primarily municipalities whose deposits are collateralized) which are generally
considered to be more volatile than "core" deposits. Management operates under
a formal liquidity policy which it believes insures adequate cash equivalents
and other liquid assets to meet foreseen outflows of time deposits, as well as
outflows from other deposit products that the Company offers. Demand deposit
growth has more than kept pace with overall deposit growth. 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,
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
deposits $143,187 $134,176 $128,697
Money Market & NOW
accounts 116,549 2.4% 119,865 2.5% 127,960 2.7%
Savings deposits 209,196 4.0 212,389 4.0 191,828 4.4
Time deposits 171,541 5.5 159,704 5.4 163,074 5.7
-------- -------- --------
Total deposits $640,473 3.2% $626,134 3.2% $611,559 3.5%
======== ======== ========
</TABLE>
The maturities of time deposits under $100,000 and time deposits of $100,000 or
more outstanding at December 31, 1997, are summarized for the periods indicated
in the following table (balances in thousands):
<TABLE>
<CAPTION>
Time Deposits Time Deposits Total
Under $100,000 or More
$100,000
--------------------------------------------------
Balances outstanding at December 31,
1997, maturing in:
<S> <C> <C> <C>
3 months or less $ 54,553 $44,197 $ 98,750
Over 3 through 6 months 17,798 3,311 21,109
Over 6 through 12 months 35,071 4,366 39,437
Over 12 months 24,393 2,943 27,336
--------------------------------------------------
Total $131,815 $54,817 $186,632
====================================================
</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 pension accounts. At December 31, 1997, customer assets under
administration totaled approximately $225 million, representing approximately
624 accounts.
9
<PAGE>
COMPETITION
- -----------
The Bank principally competes in a market area of four New York
counties (Dutchess, Putnam, Orange, and Ulster). As of June 1997 (the latest
available data), such market area included 19 commercial banks (209 branches)
with deposits of $5.2 billion, 19 thrift institutions (86 branches) with
deposits of $7.6 billion, and 25 credit unions (25 branches) with deposits of
$1.4 billion. Total market deposits aggregated $10.4 billion as of such date.
As of that date, the Bank had the largest share of the total
commercial bank deposits in combined Dutchess and Ulster counties (11.9%), and
ranked 3rd in deposits among all commercial banks in the total four county area.
The Company plans to open branches in Wappingers Falls, Dutchess County and
Middletown, Orange County, in the first half of 1998.
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. Other factors which affect loan growth include the general
availability of lendable funds and credit, general and local economic
conditions, and current interest rate levels.
RISK MANAGEMENT
- ---------------
In the normal course of business, the Company is subject to various
risks, the most significant of which are credit, liquidity and interest rate.
Although it cannot eliminate these risks, the Company has risk management
processes designed to provide for risk identification, measurement, monitoring
and control.
Credit Risk. Credit risk represents the possibility that a customer
-----------
or counterparty may not perform in accordance with contractual terms. Credit
risk results from extending credit to customers, purchasing securities and
entering into certain off-balance-sheet financial transactions. Risk associated
with the extension of credit includes general risk, which is inherent in the
lending business, industry risk, and risk specific to individual borrowers. The
Company seeks to manage credit risk through portfolio diversification,
underwriting policies and procedures, and loan monitoring practices.
Liquidity Risk. Liquidity represents an institution's ability to
---------------
generate cash or otherwise obtain funds at reasonable rates to satisfy
commitments to borrowers and demands of depositors and debtholders, and invest
in strategic initiatives. Liquidity risk represents the likelihood the Company
would be unable to generate cash or otherwise obtain funds at reasonable rates
for such purposes. Liquidity is managed through deposit and loan pricing the
coordination of the relative maturities and liquidity of assets, liabilities and
off-balance-sheet positions and is enhanced by the ability to raise funds in
capital markets through securities sales, direct borrowing or securitization of
assets, such as mortgage loans.
Interest Rate Risk. Interest rate risk arises primarily through the
-------------------
Company's normal business activities of extending loans and taking deposits.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the timing, magnitude and frequency of changes
in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets, liabilities, and off-balance-
sheet positions. Interest rate risk also results from, among other factors,
changes in the relationship or spread between interest rates. Many factors,
including economic and financial conditions, general movements in market
interest rates and consumer preferences, affect the spread between interest
earned on assets and interest paid on liabilities. The Company uses a number of
measures to monitor and manage interest rate risk, including income simulation
and interest sensitivity ("gap") analyses.
For additional information relating to the Company's risk management processes,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
10
<PAGE>
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 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 unless by way of merger. Federal law permits
adequately capitalized and adequately managed bank holding companies to acquire
banks and bank holding companies in any state, subject to certain conditions,
including certain nationwide and statewide concentration limits. Consequently,
subject to such conditions, 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. Federal law permits 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. The establishment of new interstate branches also is possible in those
states with laws that expressly permit it. Branches of interstate banks are
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). Competition may increase further 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 has registered its common stock with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). As a result of such registration, the proxy and tender
offer rules, periodic reporting requirements and insider trading restrictions
and reporting requirements, as well as certain
11
<PAGE>
other requirements of the Exchange Act, are applicable to the Company. Because
the Company's stock is listed on the American Stock Exchange (the "AMEX"), the
Company is also subject to the rules and regulations of the AMEX. The Company
also may, from time to time, be subject to regulation by various state
securities commissions with respect to the offer 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, the activities that
may be engaged in, 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 primarily
includes common stockholders' equity, and qualifying perpetual preferred stock
and related surplus less goodwill and certain disallowed tangibles. At least
half of total capital must be composed of Tier I capital.
Tier 2 capital generally includes allowances for credit losses in an
amount up to 1.25% of risk-weighted assets, other perpetual preferred stock and
any related surplus, certain hybrid capital instruments, and subordinated and
other qualifying debt, subject to certain limitations. Total capital generally
includes Tier 1 capital, plus qualifying Tier 2 capital, minus investments in
unconsolidated subsidiaries and other adjustments. At least 50% of total
capital must consist of Tier 1 capital.
Under current capital adequacy guidelines, bank holding companies and
banks must maintain minimum leverage ratios of Tier 1 capital to adjusted
average total consolidated assets of 3.0% for bank holding companies and banks
meeting certain specified criteria, which include having the highest composite
regulatory examination rating, 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. Regulators also
consider interest rate risk, concentrations of credit risk and the risk arising
from non-traditional activities, as well as the ability to manage these risks,
as important factors in assessing overall capital adequacy. Exposure to a
decline in the economic value of capital due to changes in interest rates is
also considered in evaluating capital adequacy.
At December 31, 1997, the Company and Bank exceeded all minimum
capital requirements. The Company had a ratio of Tier I capital to total assets
of 9.6%, 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 8.1%, a ratio of Tier 1 capital to risk-weighted
assets of 11.7%, and a ratio of total capital to risk-weighted assets of 13.0%.
12
<PAGE>
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, 1997, 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 the
approval of the Comptroller.
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 individually 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.
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 $11.2 million in deposits are subject to assessments of
the Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC 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 effective rate of assessments imposed on all FDIC deposits
for deposit insurance ranges from 0 to 27 basis points per $100 of insured
deposits, depending on the institution's capital position and other supervisory
factors. However, because legislation enacted in 1996 requires all FDIC-insured
institutions to bear the cost of bonds issued by the Financing Corporation
("FICO"), the FDIC assesses BIF-insured deposits an additional 1.26 basis points
per $100 of deposits, and SAIF-insured deposits an additional 6.30 basis points
per $100 of deposits, in each case on an annualized basis, 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, 1997, 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, 1997, the Bank was in
compliance with these requirements.
13
<PAGE>
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. As of
January 1998, the amount available for payment of dividends to the Company by
the Bank totaled $5,312,000 plus any accumulated 1998 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, 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
surplus, and earned surplus.
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 federal 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 1997 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
- --------------------------------
The United States Congress has periodically considered and adopted
legislation which has resulted in and could result in further deregulation of
banks and other financial institutions. Such legislation could place the
Company and the Bank in more direct competition with other financial
institutions, including mutual funds, insurance companies, credit unions and
securities brokerage firms. No assurance can be given as to whether any
additional legislation will be enacted or as to the effect of such legislation
on the business of the Company.
14
<PAGE>
EMPLOYEES
- ---------
As of December 31, 1997, the Company had 281 full-time and 77 part-
time employees. The employees are not represented by a collective bargaining
agreement. The Company believes its relationship with its employees to be
satisfactory.
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>
NAME AGE(A) POSITION WITH THE COMPANY AND/OR THE BANK AND RECENT EXPERIENCE
- ----------------------------------- ------ ----------------------------------------------------------------------
<S> <C> <C>
T. JEFFERSON CUNNINGHAM III 55 CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF THE COMPANY; CHAIRMAN OF THE
EXECUTIVE COMMITTEE OF THE BANK.
JOHN CHARLES VANWORMER 50 PRESIDENT OF THE COMPANY; PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE
BANK.
DAVID S. MACFARLAND 54 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 REGION (1988-1993).
PAUL A. MAISCH 42 TREASURER AND CHIEF FINANCIAL OFFICER OF THE COMPANY;
SENIOR VICE PRESIDENT OF THE BANK .
NANCY BEHANNA 43 SECRETARY OF THE COMPANY AND THE BANK (1996-1997); SENIOR VICE
PRESIDENT AND CHIEF CREDIT OFFICER OF THE BANK (1994-1996); VICE
PRESIDENT OF THE BANK (1991-1994).
PAUL S. MACK 50 SENIOR VICE PRESIDENT, SENIOR LOAN OFFICER, OF THE
BANK.
KIM DILLINGER SPROSSEL 42 VICE PRESIDENT AND CASHIER OF THE BANK
(1994-1997); VICE PRESIDENT AND AUDITOR (1991-1994).
GEORGE ELFERINK 58 SENIOR VICE PRESIDENT/SENIOR TRUST OFFICER (1997); PRESIDENT OF KEY TRUST
CO. (1993-1995); EXECUTIVE VICE PRESIDENT OF KEY TRUST CO. (1996-1997).
DONALD H. WEBER 61 EXECUTIVE VICE PRESIDENT OF THE BANK (1995-1996; CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, MANUFACTURERS AND TRADERS TRUST COMPANY, ENDICOTT
TRUST DIVISION (1992-1995)
</TABLE>
(A) AS OF FEBRUARY 28, 1998
15
<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 are 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.
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 nine 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.
16
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- -----------------------------------------------------------------------
The Company's Common Stock has been listed on American Stock Exchange (AMEX),
since August 4, 1997, under the symbol "HCK". Previously, the Company's common
stock was traded on the Nasdaq National Market System (NASDAQ). On March 2,
1998, there were approximately 1,300 shareholders of record of Common Stock and
7,104,357 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 AMEX
or Nasdaq, as applicable, since January 1, 1996. This table has been adjusted
retroactively to give effect to the 10% stock dividends declared, December
21, 1995 and December 19, 1996, paid January 31, 1996 and January 15, 1997,
respectively, and the 50% stock dividend declared September 25, 1997 and paid
October 31, 1997.
<TABLE>
<CAPTION>
Cash
Dividends
Per Share Price
- --------------------------------------------------------
High Low
--------- ---------
<S> <C> <C> <C>
1996
First Quarter $0.097 $ 13 1/32 $10 39/64
Second Quarter 0.097 13 1/32 12 1/8
Third Quarter 0.109 13 21/64 12 27/64
Fourth Quarter 0.109 17 1/2 12 37/64
1997
First Quarter 0.120 18 43/64 17 11/64
Second Quarter 0.120 19 17 21/64
Third Quarter 0.127 22 21/64 18 37/64
Fourth Quarter 0.130 23 20
</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. 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.
17
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------
THE FOLLOWING SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1997
ARE DERIVED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF HUDSON CHARTERED
BANCORP INC. THE INFORMATION PRESENTED HAS BEEN RESTATED FOR 1993 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>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
AVERAGE - ASSETS $ 715,136 $ 695,875 $ 672,476 $ 627,099 $ 585,921
- DEPOSITS 497,286 491,958 482,862 565,574 528,528
- LOANS 456,209 435,952 428,505 392,619 357,620
- EQUITY 66,421 61,983 55,466 52,685 51,707
YEAR END - ASSETS 731,524 696,875 696,483 645,977 595,706
- DEPOSITS 654,105 625,826 631,060 580,070 536,530
- LOANS 457,707 442,617 413,586 423,831 358,554
- EQUITY 70,358 65,165 59,929 52,538 54,120
- PREFERRED STOCK INCLUDED IN EQUITY 5,713 5,714 6,555
- INTEREST-EARNING ASSETS 683,216 642,507 635,532 596,407 548,537
- INTEREST-BEARING LIABILITIES 504,828 485,423 494,300 452,934 423,373
INCOME DATA:
NET INTEREST INCOME $ 31,988 $ 30,854 $ 29,456 $ 28,095 $ 26,807
PROVISION FOR LOAN LOSSES (2,300)
REALIZED GAINS (LOSSES) ON SALES OF SECURITIES AND LOANS, 490 365 542 941
TOTAL OTHER OPERATING INCOME 5,777 6,433 5,237 5,225 4,664
---------- ---------- ---------- ---------- ----------
GROSS OPERATING INCOME 35,755 34,802 32,935 29,158 29,146
TOTAL OTHER OPERATING EXPENSES (22,345) (21,585) (22,456) (21,560)
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 13,410 13,217 10,479 5,200 7,586
INCOME TAXES (4,402) (4,551) (3,514) (2,600)
---------- ---------- ---------- ---------- ----------
NET INCOME 9,008 8,666 6,965 3,264 4,986
DIVIDEND REQUIREMENTS OF PREFERRED STOCK 0 (89) (414) (415) (497)
---------- ---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON SHARES $ 9,008 $ 8,577 $ 6,551 $ 2,849 $ 4,489
========== ========== ========== ========== ==========
PER COMMON SHARE: (1)
BASIC EARNINGS $ 1.28 $ 1.25 $ 1.04 $ 0.46 $ 0.74
DILUTED EARNINGS 1.24 1.19 0.98 0.46 0.73
CASH DIVIDENDS 0.50 0.41 0.34 0.33 0.32
BOOK VALUE (2) 9.94 9.17 8.46 7.56 7.83
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: (1)
BASIC 7,059,000 6,932,000 6,274,000 6,133,000 6,042,000
DILUTED 7,263,000 7,228,000 7,089,000 6,963,000 6,827,000
SELECTED FINANCIAL RATIOS:
RETURN ON AVERAGE ASSETS 1.26% 1.25% 1.04% 0.52% 0.85%
RETURN ON AVERAGE EQUITY 13.56 13.98 12.56 6.20 9.64
AVERAGE EQUITY TO AVERAGE ASSETS 9.29 8.87 8.25 8.40 8.82
ALLOWANCE FOR LOAN LOSSES AS A PERCENTAGE OF LOANS 2.04 2.06 2.08 1.93 2.01
ALLOWANCE FOR LOAN LOSSES AS A PERCENT OF NONPERFORMING 305 169 166 163 123
TOTAL NONPERFORMING LOANS AND OREO TO TOTAL LOANS AND OREO .83 1.36 1.53 1.45 1.92
CAPITAL TO RISK-WEIGHTED ASSETS 14.97 14.97 15.02 13.41 15.38
COMMON DIVIDEND PAYOUT RATIO 37.32 30.56 31.20 69.99 42.70
TIER 1 CAPITAL TO AVERAGE ASSETS (LEVERAGE RATIO) 9.64 9.21 8.44 8.20 8.96
</TABLE>
(1) INFORMATION HAS BEEN ADJUSTED RETROACTIVELY TO GIVE EFFECT TO THE 10% STOCK
DIVIDENDS DECLARED DECEMBER 1995 AND DECEMBER 1996, AS WELL AS A 50% STOCK
DIVIDEND DECLARED SEPTEMBER 1997.
(2) BASED UPON ACTUAL NUMBER OF COMMON STOCK SHARES OUTSTANDING AT YEAR END AS
ADJUSTED RETROACTIVELY FOR 10% STOCK DIVIDENDS DECLARED DECEMBER 1995 AND
1996 AND THE 50% STOCK DIVIDEND DECLARED SEPTEMBER 1997 AND AS TO 1995
INCLUDES THE DILUTIVE EFFECT OF SERIES B CONVERTIBLE PREFERRED STOCK OF
APPROXIMATELY 727,000 SHARES.
18
<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.
FINANCIAL CONDITION
- -------------------
The following table compares the changes in major categories of the Company's
balance sheet from December 31, 1996 to December 31, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
CHANGE 12/31/97 VS. 12/31/96
------------------------------
12/31/97 AMOUNT % 12/31/96
-------------------------------------------------------
<S> <C> <C> <C> <C>
CASH & CASH EQUIVALENTS $ 46,475 $ (804) (1.7)% $ 47,279
SECURITIES 198,579 19,341 10.8 179,238
LOANS 467,237 15,318 3.4 451,919
ALLOWANCE FOR LOAN LOSSES (9,530) (228) 2.5 (9,302)
PREMISES & EQUIPMENT 15,592 (657) (4.0) 16,249
OTHER 13,171 1,679 14.6 11,492
---------------------------- -----------------
TOTAL ASSETS $ 731,524 $34,649 5.0% $ 696,875
============================ =================
DEPOSITS:
NON-INTEREST BEARING $ 151,002 $ 8,746 6.1% $ 142,256
INTEREST BEARING 503,103 19,533 4.0 483,570
---------------------------- -----------------
TOTAL DEPOSITS 654,105 28,279 4.5 625,826
OTHER INTEREST BEARING LIABILITIES 1,725 (129) (7.0) 1,854
OTHER LIABILITIES 5,336 1,306 32.4 4,030
---------------------------- -----------------
TOTAL LIABILITIES 661,166 29,456 4.7 631,710
STOCKHOLDERS' EQUITY 70,358 5,193 8.0 65,165
---------------------------- -----------------
TOTAL LIABILITIES & $ 731,524 $34,649 5.0% $ 696,875
STOCKHOLDERS' EQUITY
============================ =================
</TABLE>
19
<PAGE>
FINANCIAL CONDITION
DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
- -----------------------------------------------
Total assets in 1997 grew by $34.6 million from year end 1996 or 5.0%. The
Company focused its efforts, during 1997, 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 customer relationships without increasing
average funding cost. Accordingly, increases in noninterest bearing deposits of
$8.7 million, increases in interest bearing deposits of $19.5 million, and
capital retentions of $5.2 million funded increased loans of $15.3 million, and
increased security holdings of $19.3 million, while cash and cash equivalents
remained relatively unchanged.
Of the increase in loans, commercial mortgage loans increased by $8.8 million or
6.4%, commercial and industrial loans increased $8.2 million or 11.4%, and
consumer loans (primarily indirect automobile financing) increased by $9.0
million or 10.3%. 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 and construction loans held by the
Bank of $9.4 million or 6.6%. It should be noted that although residential
mortgages held by the Bank declined, new originations of such loans of $9.5
million were sold into the secondary market reflecting the Company's interest
rate risk management policy.
Securities increased by $19.3 million, as the Company actively positioned its
portfolio during 1997. As a result, U.S. Treasury and U.S. Government Agency
securities declined $10.8 million or 12.9%. However, municipal holdings
increased by $27.0 million or 39.6%. This shift was made principally by
investing in local issue "bank-qualified" bonds, where the tax equivalent yields
are significantly higher (and market price volatility value risks lower) than
other securities of comparable maturity. Corporate securities also increased by
$3.1 million or 11.5% principally in floating rate instruments.
Deposits increased by $28.3 million. Of this amount, noninterest bearing
deposits increased by $8.7 million and interest bearing deposits increased by
$19.5 million. Of the increase in interest bearing deposits, $24.4 million of
growth in certificates of deposits (primarily short-term municipal certificates)
was offset by small declines in savings accounts of $2.6 million and in NOW and
money market deposit accounts of $2.2 million. For additional information
regarding deposits, see Item 1 - Business "Deposits".
Additionally, investments in premises and equipment declined by $.7 million as
depreciation of $1.9 million outpaced additions of $1.2 million. Other assets
increased $1.7 million, primarily due to higher levels of interest income
receivable and prepaid income tax.
The allowance for loan losses grew by $.2 million to $9.5 million or a 2.5%
increase, as provisions for loan losses of $2.5 million exceeded net charge-offs
of $2.3 million. The allowance for loan losses represented 2.04% of total loans
for 1997 compared to 2.06% in 1996. Further, the allowance for loan losses was
305% of nonperforming loans at December 31, 1997 compared to 169% at December
31, 1996, as nonperforming loans declined from $5.5 million at year end 1996 to
$3.1 million at year end 1997.
Stockholders' equity grew $5.2 million or 8.0% in 1997 compared to year end
1996. Of this increase, $9.0 million arose from net income and $2.4 million from
the sale of additional shares of stock through the Company's dividend
reinvestment and employee stock option plans and $.7 million from the net change
in the unrealized gains on securities available for sale, after tax. These
sources were offset by dividends declared of $3.5 million and treasury stock
repurchases of $3.5 million. In September 1997, the Board of Directors declared
a three for two stock split in the form of a 50% stock dividend, payable in
October 1997. As a result, $1.9 million of "additional paid in capital" was
capitalized into common stock.
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 $11.2
million in 1997. Investing activities (primarily
20
<PAGE>
purchases and sales of securities and the funding of loans) used $35.8 million
in 1997 as purchases of securities and net new loans of $26.9 million exceeded
sales, maturities, and prepayment of loans and securities. Financing activities
provided $23.8 million represented by $28.3 million increase in deposits, and
the proceeds of new common stock issuances of $2.4 million, offset by dividends
of $3.5 million and stock repurchases and redemptions of $3.5 million. The
overall result was that cash and cash equivalents remained relatively unchanged
at $46.5 million at December 31, 1997. The Company's liquidity ratio (defined as
cash and cash equivalents plus securities available-for-sale ($218.1 million) to
total assets) was 30% at year end 1997. The average life of the available-for-
sale portfolio, on a rate sensitivity basis, is approximately 2.6 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 ($35.6 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, 1997, the Company had
repurchased 207,287 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 option
exercises and Dividend Reinvestment Plan purchases. Since that time, the Company
has re-issued 121,521 of its treasury stock purchases for these purposes. As a
result of the pending merger with Progressive Bank, Inc. (See Item 1 Business--
Pending merger). The Board of Directors of the Company rescinded its
authorization to repurchase its common shares in the open market, in December
1997.
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 1998.
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 Regulatory agencies have informed
management that, as of December 31, 1997, both the Company and the Bank qualify
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, 1997 was 15.0% compared to
the 10.0% minimum required for well capitalized institutions.
The Company continues to seek profitable opportunities for growth in its markets
and, in this regard the Company has received approval from the Office of the
Comptroller of the Currency (Comptroller) to establish two new branches in
Middletown, Orange County, and Wappingers Falls, Dutchess County, New York,
respectively. 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.
IMPACT OF YEAR 2000 ISSUE
- -------------------------
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year
21
<PAGE>
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Although the Company's principal operating software is supplied by a nationally
recognized vendor, the Company has determined that the vendor will be required
to modify or replace significant portions of their software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company also
has several "P.C." based software systems which will require modification or
replacement. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue can be
successfully mitigated. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.
The Company will utilize both internal and external resources to reprogram, or
replace, and test all software for Year 2000 modifications. The Company plans to
complete the Year 2000 project not later than December 31, 1998. The total cost
of the Year 2000 project, which is not anticipated to exceed $150,000, is being
funded through operating cash flows, and will be expensed as incurred over the
next two years, except in the case of the purchase of any new software required,
which will be capitalized. The total resources required is not expected to have
a material effect on the results of operations.
In connection with the Company's announced plan of merger with Progressive Bank,
Inc. (Progressive), if approved by shareholders and applicable regulatory
authorities, the Company has decided that it will outsource its deposit, loan
and general ledger processing to the provider currently used by Progressive.
Management has investigated the current plans of Progressive and believes that
the Progressive plan for assessment, remediation and testing is also in the
proper stage to be Year 2000 compliant by year end 1998.
The estimated resources required of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors in respect of both the Company and its suppliers
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this field, the ability to locate
and correct all relevant computer codes, testing complications and similar
uncertainties.
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.
22
<PAGE>
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of December 31, 1997, 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, 1997, assuming no
management action, the Company's near-term interest rate risk within three
months (7.3% of earning assets) and within twelve months (21.3% of earning
assets) is to a rising rate environment, that is, net interest revenue would be
expected to be adversely affected by an increase in interest rates above the
rates embedded in the current yield curve. This is principally due to the higher
level of liabilities that will reprice relative to similarly situated assets in
that time frame.
The Company's long-term exposure (greater than one year) is to a declining rate
environment as the Company has an aggregate $174.7 million more interest earning
assets than interest bearing liabilities.
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.
<TABLE>
<CAPTION>
MATURITY REPRICING DATE (1) THREE MONTHS FOUR MONTHS TO TOTAL WITHIN ONE YEAR TO FIVE GREATER THAN TOTAL
(2) OR LESS ONE YEAR ONE YEAR YEARS FIVE YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES (3) $ 35,446 $ 27,123 $ 62,569 $ 97,802 $36,570 $196,941
FED FUNDS 17,400 17,400 17,400
FIXED RATE LOANS (3) 31,351 70,955 102,306 184,888 23,869 311,063
FLOATING RATE LOANS (3) 93,192 55,225 148,417 5,715 154,132
-------- -------- --------- -------- ------- --------
TOTAL INTEREST 177,389 153,303 330,692 288,405 60,439 679,536
EARNING ASSETS (1) -------- -------- --------- -------- ------- --------
OTHER INTEREST BEARING DEPOSITS(4) 128,886 187,585 316,471 316,471
TIME OTHER (4) 98,289 60,548 158,837 29,509 11 188,357
-------- -------- --------- -------- ------- --------
TOTAL INTEREST- 227,175 248,133 475,308 29,509 11 504,828
BEARING LIABILITIES -------- -------- --------- -------- ------- --------
INTEREST SENSITIVITY $(49,786) $(94,830) $(144,616) $258,896 $60,428 $174,708
GAP (5)
=============================================================================================
GAP AS A PERCENT OF (7.3)% (14.0%) (21.3%) 38.1% 8.9% 25.7%
EARNING ASSETS
=============================================================================================
</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, 1997.
(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. 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.
(5) NON-INTEREST BEARING DEPOSIT LIABILITIES WERE APPROXIMATELY $151.0 MILLION
AT DECEMBER 31, 1997.
23
<PAGE>
INTEREST RATE RISK
- ------------------
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. To effectively measure and manage interest
rate risk, the Company uses simulation analysis to determine the impact on EAR
and MVPE under various interest rate scenarios. From these simulations, interest
rate risk is quantified and appropriate strategies are developed and
implemented. Model parameters are determined based on past interest rate
movements and are periodically 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 parallel change in market interest rates up 300 basis points and down
300 basis points over a one year shock. Since interest bearing non-maturity
deposit liabilities (money market, NOW and savings deposits) are reflected in
the model by assumed repricing date [vs. a decay factor which would extend the
life of such liabilities beyond one year] the present value effect of such
liabilities is not calculated over an expected life of the liabilities, and,
therefore, the "core deposit intangible" value of such deposit liabilities has
been eliminated from the MVPE. Such core deposit value would tend to minimize
the level of actual MVPE changes as the value of core deposits rise in
increasing interest rate environments and declines in decreasing rate
environments.
While the Company principally utilizes the parallel rate shift model for
monitoring its compliance with its interest rate risk limits, it also
periodically reviews and assesses its rate risk exposure to non-parallel yield
curve changes (including inversion).
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. Such limits are a maximum 50%
change in MVPE and not greater than a $10 million change in EAR over a 300 basis
points up or down of parallel shift in the yield curve.
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income and market value of portfolio equity (market value
of assets, less liabilities). The interest rate scenarios presented in the table
are based on interest rates at December 31, 1997 adjusted by instantaneous
parallel rate changes upward and downward of up to 300 basis points. Each rate
scenario reflects unique prepayment and repricing assumptions.
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, this analysis is not intended to
be a forecast of the actual effect of a change in market interest rates on the
Company. The net interest income variability reflects the Company's negative
interest rate sensitivity gap (defined foregoing). The market value of portfolio
equity is significantly impacted by the estimated effect of prepayments on the
value of loans, and amortizing investment securities. Further, this analysis is
based on the Company's present profile of assets, liabilities and equity and
does not contemplate any actions the Company might undertake in response to
changes in market interest rates. This action could minimize the decrease in
market value of portfolio equity in the upward rate scenarios (in thousands).
24
<PAGE>
<TABLE>
<CAPTION>
Change in Net Interest Market Value of
Interest Rates Income (EAR) Portfolio Equity (MVPE) % change MVPE
- ---------------- ------------- ------------------------ ---------------
<S> <C> <C> <C>
+300 $ (40) $(19,727) (21.3%)
+200 169 (12,834) (13.9%)
+100 203 (6,231) (6.7%)
0 0 0 0
-100 (298) 5,756 6.2%
-200 (443) 11,979 12.9%
-300 (688) 18,458 19.9%
</TABLE>
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, 1997, the Company had $1.6 million in fixed rate
securities and $27.2 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.
25
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The table below sets forth the major components of net income for each of the
three years ended December 31, 1997, 1996 and 1995. Net income increased $.34
million in 1997 over 1996. This increase is primarily due to an increase of $1.1
million in net interest income, a decrease of $.4 million in the provision for
loan loss and a decrease in income tax expense of $.2 million, partially offset
by a decrease in other income of $.5 million and increases in expenses of $.8
million (including $.3 million of merger related expenses). Diluted earnings per
share increased to $1.24, a $.05 per share or 4.2% increase.
Net income for 1996 was $8.7 million or $1.19 per diluted share compared to net
income for 1995 of $7.0 million or $.98 per diluted share.
Return on average assets was 1.26%, 1.25% and 1.04% in 1997, 1996 and 1995,
respectively. The return on average equity was 13.6%, 14.0% and 12.6% in 1997,
1996 and 1995, respectively. Returns on average common equity were 13.6%, 14.2%
and 13.2 % for the similar periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1997 VS. % CHANGE 1996 1996 VS. 1995 % CHANGE 1995
1996 1997 VS. VARIANCE 1996 VS. 1995
VARIANCE 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL INTEREST $52,736 $1,708 3.3% $51,028 $ 313 0.6% $50,715
INCOME
TOTAL INTEREST 20,748 574 2.8 20,174 (1,085) (5.1) 21,259
EXPENSE
------------------ ---------------------- ---------------
NET INTEREST INCOME 31,988 1,134 3.7 30,854 1,398 4.7 29,456
PROVISION FOR LOAN 2,500 (350) (12.3) 2,850 550 23.9 2,300
LOSSES
------------------ ---------------------- ---------------
NET INTEREST INCOME 29,488 1,484 5.3 28,004 848 3.1 27,156
AFTER PROVISION
FOR LOAN LOSSES
OTHER INCOME 6,267 (531) (7.8) 6,798 1,019 17.6 5,779
------------------ ---------------------- ---------------
GROSS OPERATING 35,755 953 2.7 34,802 1,867 5.7 32,935
INCOME
OTHER EXPENSE 22,345 760 3.5 21,585 (871) (3.9) 22,456
------------------ ---------------------- ---------------
INCOME BEFORE 13,410 193 1.5 13,217 2,738 26.1 10,479
INCOME TAXES
INCOME TAXES 4,402 (149) (3.3) 4,551 1,037 29.5 3,514
------------------ ---------------------- ---------------
NET INCOME $ 9,008 $ 342 3.9% $ 8,666 $ 1,701 24.4% $ 6,965
================== ========================= ==========
PER COMMON SHARE:*
BASIC EARNINGS $1.28 $1.25 $1.04
================== ========================= ==========
DILUTED EARNINGS 1.24 1.19 .98
================== ========================= ==========
</TABLE>
(*) BASED UPON THE WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OF COMMON STOCK
OUTSTANDING DURING EACH OF THE PERIODS, ADJUSTEDRETROACTIVELY FOR 10% STOCK
DIVIDENDS DECLARED DECEMBER 1996 AND 1997, AND THE 50% STOCK DIVIDEND
DECLARED SEPTEMBER 1997.
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.
26
<PAGE>
THE FOLLOWING TABLE PRESENTS, FOR EACH OF THE YEARS 1997, 1996 AND 1995, 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 TAX
EQUIVALENT 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>
1997 1996 1995
--------- --------- ---------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE YIELD/ BALANCE YIELD/ BALANCE YIELD/
COST COST COST
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
LOANS (1) $456,209 $41,083 9.01% $435,952 $39,373 9.03% $428,505 $39,413 9.20%
TAXABLE 118,476 7,290 6.15 136,353 8,192 6.01 112,750 7,270 6.45
SECURITIES
TAX-EXEMPT 69,199 5,002 7.23 47,656 3,409 7.15 42,808 3,036 7.09
SECURITIES (2)
FED FUNDS SOLD 19,754 1,062 5.38 23,470 1,213 5.17 35,189 2,028 5.76
-------- ------- -------- ------- -------- -------
TOTAL INTEREST 663,638 54,437 8.20 643,431 52,187 8.09 619,252 51,747 8.36
EARNING ASSETS
CASH & DUE FROM 30,989 32,541 29,634
BANKS
PREMISES & 15,987 16,207 17,621
EQUIPMENT
OTHER ASSETS 13,982 12,650 14,535
ALLOWANCE FOR (9,460) (8,954) (8,566)
LOAN LOSS -------- -------- --------
TOTAL NON- INTEREST 51,498 52,444 53,224
EARNING ASSETS -------- -------- --------
TOTAL ASSETS $715,136 54,437 7.61% $695,875 52,187 7.50% $672,476 51,747 7.69%
======== ======== ========
LIABILITIES
MONEY MARKET $ 67,333 $ 2,270 3.37 $ 69,190 $ 2,351 3.40 $ 75,058 $ 2,556 3.41
NOW ACCOUNTS 49,216 566 1.15 50,675 615 1.21 52,902 915 1.73
SAVINGS 209,196 8,446 4.04 212,389 8,408 3.96 191,828 8,427 4.39
TIME DEPOSITS 171,541 9,359 5.46 159,704 8,690 5.44 163,074 9,231 5.66
OTHER 1,809 107 5.91 1,855 110 5.93 2,117 130 6.14
-------- ------- -------- ------- -------- -------
TOTAL INTEREST 499,095 20,748 4.16 493,813 20,174 4.09 484,979 21,259 4.38
BEARING
LIABILITIES
DEMAND DEPOSITS 143,187 134,176 128,697
OTHER 6,433 5,903 3,334
-------- -------- --------
TOTAL NON- 149,620 3.20% 140,079 3.18% 132,031 3.45%
INTEREST BEARING
LIABILITIES
STOCKHOLDERS' 66,421 61,983 55,466
EQUITY -------- -------- --------
TOTAL LIABILITIES $715,136 20,748 2.90% $695,875 20,174 2.89% $672,476 21,259 3.16%
AND EQUITY ======== ======== ------- ======== -------
</TABLE>
(TABLE CONTINUED ON NEXT PAGE.)
27
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET INTEREST 33,689 5.08 32,013 4.98 30,488 4.92
MARGIN
LESS TAX (1,701) (1,159) (1,032)
EQUIVALENT ------- ------- -------
ADJUSTMENTS
NET INTEREST $31,988 4.82% $30,854 4.80% $29,456 4.76%
INCOME ======= ==== ======= ==== ======= ====
EXCESS OF INTEREST $164,543 $149,618 $134,273
EARNING ASSETS OVER
INTEREST BEARING
LIABILITIES
RATIO OF AVERAGE 132.97% 130.30% 127.69%
INTEREST EARNING
ASSETS TO AVERAGE
INTEREST BEARING
LIABILITIES
</TABLE>
(1) AVERAGE BALANCES INCLUDE NON-ACCRUAL LOANS.
(2) YIELDS ON TAX-EXEMPT SECURITIES BASED ON A FEDERAL TAX RATE OF 34%.
The Company's net interest margin (tax equivalent net interest income dividend
by average earning assets) has continued to improve over the period from 4.92%
in 1995 to 4.98% in 1996 and 5.08% in 1997 as the Company continued its efforts
to improve the quality of its core net interest income. In 1997, the Company's
interest margin increased due to income earned on higher levels of loans and
tax-exempt securities which outpaced the growth in interest expense paid on
interest bearing deposits and other interest bearing liabilities. In 1996, net
interest margin improved primarily from absolute reductions in interest paid on
interest bearing deposits without an overall attrition in deposits.
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>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
--------------------- ---------------------
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:(2)
LOANS $ 1,824 $(114) $1,710 $ 685 $ (725) $ (40)
TAXABLE SECURITIES (1,100) 198 (902) 1,522 (600) 922
TAX-EXEMPT SECURITIES 1,557 36 1,593 344 29 373
FEDERAL FUNDS SOLD (200) 49 (151) (675) (140) (815)
------- ----- ------ ------ ------- -------
TOTAL INTEREST INCOME 2,081 169 2,250 1,876 (1,436) 440
INTEREST PAID ON:
MONEY MARKET ACCOUNTS (63) (18) (81) (200) (5) (205)
NOW ACCOUNTS (17) (32) (49) (39) (261) (300)
SAVINGS ACCOUNTS (129) 167 38 903 (922) (19)
TIME DEPOSITS 646 23 669 (191) (350) (541)
OTHER (3) (3) (16) (4) (20)
------- ----- ------ ------ ------- -------
TOTAL INTEREST EXPENSE 434 140 574 457 (1,542) (1,085)
------- ----- ------ ------ ------- -------
NET INTEREST MARGIN 1,647 29 1,676 1,419 106 1,525
LESS TAX EQUIVALENT EFFECT (530) (12) (542) (117) (10) (127)
------- ----- ------ ------ ------- -------
NET INTEREST INCOME $ 1,117 $ 17 $1,134 $1,302 $ 96 $ 1,398
======= ===== ====== ====== ======= =======
</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.
(2)YIELDS ON TAX EXEMPT SECURITIES BASED ON A FEDERAL TAX RATE OF 34%.
In 1997 vs. 1996, net interest income was positively impacted by $1.1 million
due to changes in volumes. The primary components of this increase were
increases in average outstanding securities and loans partially offset by
increases in average time deposit balances. While overall net interest income
was relatively unchanged due to changes in interest rates, average loan interest
yields declined $.1 million reflecting new business generated at slightly lower
yields than the portfolio earned in 1996.
In 1996 vs. 1995, net interest income was positively impacted by $1.3 million,
due to changes in volume, as the impact of increases in average earning assets,
primarily in average loans and securities offset the impact of increasing
savings account balances. Net interest income also was also positively impacted
$.1 million in 1996 due to changes in interest rates. Of this amount, average
loan interest declined $.7 million reflecting new business generated at lower
yields than the portfolio earned in 1995 as well as 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 asset yields were
mirrored by decreases in deposit costs as the Company aggressively managed down
interest costs in 1996 in view of the general decline in market rates that
occurred between 1995 and early 1996 by restructuring the interest indexing
mechanism of its "Merit" product and the run off of its higher rate 15 month CD
promotion launched in 1995.
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
29
<PAGE>
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,
----------------------------------------
1997 1996 1995 1994 1993
----------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans (1) $2,043 $4,528 $4,407 $4,105 $5,146
Accruing loans past due 90 days or more (2) 367 431 522 895 329
Restructured loans and troubled debt 712 534 349 119 457
----------------------------------------
Total nonperforming loans 3,122 5,493 5,278 5,119 5,932
----------------------------------------
Amount collateralized by real estate 2,574 4,003 4,398 4,486 4,041
----------------------------------------
Other real estate owned 760 653 1,196 1,150 1,064
----------------------------------------
Total non-performing assets $3,882 $6,146 $6,474 $6,269 $6,996
========================================
</TABLE>
(1) NONACCRUAL STATUS DENOTES LOANS ON WHICH, IN THE OPINION OF MANAGEMENT, THE
COLLECTION OF INTEREST OR PRINCIPAL 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
$128,000, $216,000, $354,000, $534,000 AND $313,000 AT DECEMBER 31, 1997,
1996, 1995, 1994, AND 1993, RESPECTIVELY.
Nonperforming loans decreased by $2.4 million to $3.1 million at December 31,
1997 as the result of aggressive management within the portfolio which included,
dn large part, management requiring borrowers to dispose of property and/or
refinance their credit elsewhere. Of the amount outstanding at December 31,
1997, $2.6 million is collateralized by real estate (approximately 82%). At
December 31, 1996, the Company had $5.5 million in nonperforming loans of which
$4.0 million (73%) was collateralized by real estate compared to December 31,
1995 total nonperforming loans of $5.3 million (83% being collateralized by real
estate). Other real estate owned (OREO) comprised ten properties at
December 31, 1997 of which five were commercial office buildings, three were
residences and two were small parcels of vacant land. During the year, the
Company's net disposal of OREO properties was $.97 million.
For a discussion of concentrations of credit risk and impaired loans, see Notes
C and D to the 1997 Consolidated Financial Statements, under Item 8 contained
herein. At December 31, 1997, 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, $342,000 in gross interest income would have been recorded
in 1997 vs. $529,000 in 1996 and $400,000 in 1995. The actual amount of
interest income on nonaccrual loans recorded in interest income for 1997 was
$273,000 vs. $215,000 in 1996 and $265,000 in 1995.
At December 31, 1997, the Company had a total of approximately $9.8 million in
loans classified as substandard vs. $10.2 million at December 31, 1996, in
addition to the nonperforming assets noted above. Of this amount, $8.4 million
are loans collateralized by real estate. Such loans may be classified as
nonperforming in the future, if present concerns about the borrower's 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>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 9,302 $ 8,770 $ 8,326 $ 7,322 $ 5,794
Chargeoffs:
Commercial 1,448 889 411 350 435
Installment 742 554 593 292 449
Real estate 629 1,289 1,164 1,059 1,103
-----------------------------------------------
Total chargeoffs 2,819 2,732 2,168 1,701 1,987
-----------------------------------------------
Recoveries:
Commercial 147 89 75 63 124
Installment 80 130 193 153 123
Real estate 320 195 44 20 2
-----------------------------------------------
Total recoveries: 547 414 312 236 249
-----------------------------------------------
Net charge-offs (2,272) (2,318) (1,856) (1,465) (1,738)
Provision for loan losses 2,500 2,850 2,300 2,400 3,266
Transfers, other* 69
-----------------------------------------------
Balance at end of year $ 9,530 $ 9,302 $ 8,770 $ 8,326 $ 7,322
=================================================
Ratio of net charge-offs to .50% .53% .43% .37% .49%
average loans outstanding
during year
Allowance for loan losses as a 2.04 2.06 2.08 1.93 2.01
percent of year-end loans
Allowance as a percent of non- 305 169 166 163 123
performing loans
</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 provision for loan losses, which is charged to operations, is based on both
the amount of net loan losses incurred and management's ongoing evaluation of
the level and composition of risk in the loan portfolio. The evaluation
considers, in addition to the results of a continuous program of individual loan
assessment, factors including, but not limited to, general economic conditions
and recent trends, loan portfolio composition, the level of nonperforming
assets, prior loan loss experience and trends, growth of the portfolio and
management's statistical estimate of losses inherent in the portfolio. The
Company has not been involved in any foreign loans or highly leveraged
transactions, which are generally considered high risk loans. The provision for
loan losses decreased by $350,000 or 12.3% in 1997 compared to an increase of
$550,000 or 24% in 1996.
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 1997 1995 1994 1993
------------- ------------- -------------- -------------- --------------
Amount % of Amount % of Amount % of Amount % of Amount % of
Balance at end of total total total total total
year applicable to: loans loans loans loans loans
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $2,131 17.2% $2,476 15.9% $2,355 16.6% $2,010 22.1% $2,520 19.1%
Consumer & other 1,873 20.6 1,702 19.3 1,400 16.1 1,363 12.2 881 9.5
Real Estate - Construction 2.3 2.7 3.1 1.5 1.0
Real Estate - Mortgage 4,149 59.9 3,985 62.1 4,247 64.2 4,100 64.2 3,155 70.4
Unallocated 1,377 1,139 768 853 766
Total allowance
for loan losses $9,530 100% $9,302 100% $8,770 100% $8,326 100% $7,322 100%
===================================================================================
</TABLE>
The ratio of allowance for loan losses to total loans has remained relatively
stable at approximately 2% from 1993 through 1997. 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 1997 as compared to $2.3 million
in 1996 and $1.9 million in 1995.
Management believes that economic conditions in its local marketplace have
stabilized over the past two years, and is cautiously optimistic about future
growth. Unemployment in all four counties in which the Company operates is
below 4%, and recently IBM announced plans to invest approximately $700 million
to develop its new chip at its East Fishkill Plant. IBM also completed the sale
of its Kingston facility closed several years ago, while Stewart International
Airport in Newburgh is undergoing a major expansion at its terminal facilities.
With these positive developments, the local economy's performance has begun to
rebound and now compares more favorably with the broader U.S. economy.
Management believes the allowance for loan losses is adequate to cover credit
risk inherent in the portfolio but no assurance can be given that the current
apparent stabilization of the local economy will not be unsettled by future
events. Such developments would be expected to adversely affect the financial
performance of the Company.
32
<PAGE>
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
----------------- ----------------
1997 AMOUNT PERCENT 1996 AMOUNT PERCENT 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME FROM FIDUCIARY $ 737 $ 94 14.6% $ 643 $ (51) (7.4)% $ 694
ACTIVITIES
SERVICE CHARGE INCOME 3,947 (201) (4.8) 4,148 643 18.4 3,505
NET REALIZED GAINS 314 152 93.8 162 24 17.4 138
ON SECURITIES
NET GAINS ON SALES OF 176 (27) 203 (201) (49.8) 404
LOANS (13.3)
OTHER 1,093 (549) (33.4) 1,642 604 58.2 1,038
---------------- ----------------- -------------
TOTAL $6,267 $(531) (7.8)% $6,798 $1,019 17.6% $5,779
================ ================= =============
</TABLE>
Noninterest income decreased $.5 million in 1997 compared to 1996 primarily due
to a one-time gain recorded in 1996 from the sale of the Company'S Merchant
portfolio of $.4 million and a service charge income decrease of $.2 million as
the Company continued to pursue its policy of increasing average account
balance. Such increased average balances result in lower service charges but
higher levels of interest income. Such declines in service charge income were
partially offset by a $.1 million increase in income from fiduciary activities
(trust fees) and a $.1 million increase in net gains on sales of securities and
loans.
Noninterest income increased $1.0 million in 1996 compared to 1995, primarily
due to an increase 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 EXPENSE
The following chart outlines the major changes in noninterest expense for the
years ended December 31, 1997, 1996 and 1995, respectively (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
NET CHANGE NET CHANGE
------------------ ----------------
1997 AMOUNT PERCENT 1996 AMOUNT PERCENT 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SALARIES & BENEFITS $12,425 $ 558 4.7% $11,867 $ 558 4.9% $11,309
OCCUPANCY & 4,027 17 0.4 4,010 310 8.4 3,700
EQUIPMENT
OREO 201 128 175.3 73 (68) (48.2) 141
MERGER-RELATED 255 255 100.0 0 (250) (100.00) 250
FDIC 84 (5) (5.6) 89 (593) (87.0) 682
OTHER 5,353 (193) (3.5) 5,546 (828) (13.0) 6,374
----------------- ------------------ -------------
TOTAL $22,345 $ 760 3.5% $21,585 $(871) (3.9)% $22,456
================= ================== =============
</TABLE>
Salaries and benefits expense increased in 1997 by $.6 million primarily due to
the staffing increases ($.4 million) in late 1996 for the new Orange County
branches (branches full year of operation in 1997) and the restructuring of the
Company's commercial lending division, new hires and normal salary increases.
These increases were partially offset by a change in the amount recorded related
to stock appreciation rights. In 1997 officers who had stock appreciation
rights
33
<PAGE>
in tandem with stock options waived such appreciation rights but retained
the rights to the related underlying options. As such, the Company recorded a
recovery of $.1 million in previous expense vs. a charge in 1996 of $.2
million. Salaries and benefits expense increased in 1996 by $.6 million
compared to 1995 due to the $.2 million charge in connection with stock
appreciation rights. $.1 million in the fourth quarter of 1996 for the new
anticipated Orange County branches. $.1 million increase in pension and profit
sharing expense and the remainder due to general salary increases received by
employees during the year.
Occupancy and equipment expenses increased by less than $.1 million in 1997 vs.
1996 primarily due to the expense of the new Orange County branches in 1997,
somewhat offset by the effects of a milder winter than that experienced in 1996
and the closure of the Amenia satellite branch in January 1997. Occupancy and
equipment expense increased in 1996 vs. 1995 primarily due to the severe winter
experienced in the first quarter of 1996, higher levels of equipment expense and
a $.1 million charge in connection with the closure of the Amenia satellite
branch.
Other Real Estate Owned expense was $.2 million in 1997 compared to $.1 million
in 1996. in 1997, the Company recorded net recoveries on dispositions of OREO
properties of some $.1 million compared to a recovery in 1996 of $.2 million.
Exclusive of these large items, OREO expense principally relates to the levels
of properties carried during the year. OREO writedowns and provisions were $.1
million, $.1 million and $.2 million in 1997, 1996 and 1995, 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 $.3 million in 1997 relate to the pending merger with
Progressive Bancorp, Inc. Merger-related expenses amounted to $.3 million in
1995 in connection with its prior 1994 merger for finalizing the conversion of
the Company's data processing system.
FDIC insurance expense decreased in 1996 by $.6 million to $.1 million 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 continue to pay into the SAIF
fund. On September 30, 1996, legislation was passed to recapitalize the SAIF.
As a result, the Company recorded a one-time assessment of almost $.1 million
related to such SAIF deposits, which is included in the $.1 million of FDIC
insurance expense recorded in 1996. FDIC insurance expense remained relatively
unchanged in 1997 as the result of the assessments for FDIC required for FICO
bond funding and the higher level of assessments on SAIF insured deposits. For
further information regarding FDIC assessments, see Item I Business -
"Supervision and Regulation".
Other expenses decreased by $.2 million in 1997, of which $.3 million represents
savings achieved in the levels of expense for postage, supplies, insurance and
consultant fees, somewhat offset by increases in advertising and promotions of
$.3 million. Other expenses decreased by $.8 million in 1996 vs. 1995 mainly
due to the absence of costs incurred for outside services in 1995 for
integration of banking operations.
Income taxes decreased to $4.4 million in 1997 compared to $4.6 million in 1996
and $3.5 million in 1995, reflecting pretax income of $13.4 million, $13.2
million and $10.5 million in 1997, 1996 and 1995, respectively. The Company's
effective tax rates were 32.8%, 34.4% and 33.5% in 1997, 1996 and 1995,
respectively. The decline in the Company's effective tax rate in 1997 relates
primarily to the increased investment term municipal bonds as a strategy to
achieve higher tax equivalent income while minimizing its tax liability. 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>
1997
---------------------------------------
MARCH 31 JUN 30 SEPT 30 DEC 31
---------------------------------------
<S> <C> <C> <C> <C>
Interest income $12,692 $13,144 $13,263 $13,637
Interest expense 4,965 5,237 5,234 5,312
---------------------------------------
Net interest income 7,727 7,907 8,029 8,325
Provision for loan losses 700 600 600 600
---------------------------------------
Net interest income after
provision for loan losses 7,027 7,307 7,429 7,725
Net security gains 9 25 102 178
Other income 1,568 1,519 1,467 1,399
Merger related expense (1) (255)
Other expenses (5,416) (5,465) (5,544) (5,665)
---------------------------------------
Income before income taxes 3,188 3,386 3,454 3,382
Provision for income taxes 1,049 1,121 1,121 1,111
NET INCOME $ 2,139 $ 2,265 2,333 2,271
=========================================
Diluted earnings per share* $.29 $.31 $.32 $.31
=========================================
1996
-------
---------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
---------------------------------------
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 6,939 6,877 6,976 7,212
provision for loan losses
Net security gains 73 19 13 57
Other income (2) 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
=======================================
Diluted earnings per share* $.28 $.29 $.29 $.34
=======================================
</TABLE>
*DILUTED EARNINGS PER SHARE HAVE BEEN RETROACTIVELY ADJUSTED TO GIVE EFFECT TO
THE 10% STOCK DIVIDENDS, DECLARED DECEMBER 1995 AND DECEMBER 1996 AND THE
THREE FOR TWO STOCK SPLIT IN THE FORM OF A 50% STOCK DIVIDEND DECLARED SEPTEMBER
1997.
1) THE MERGER RELATED EXPENSE CHARGE OF $255,000 REDUCED FOURTH QUARTER 1997
INCOME BY $167,000 AFTER TAX OR $0.02 PER SHARE.
2) THE FOURTH QUARTER OF 1996 INCLUDES A GAIN OF $450,000 ON THE SALE OF ITS
MERCHANT PROGRAM, OR $261,000 AFTER TAX. THIS GAIN INCREASED FOURTH QUARTER
1996 EARNINGS PER SHARE BY $0.03 PER SHARE.
35
<PAGE>
Item 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -----------------------------------------------------------------
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations "Asset/Liability Management".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The following are included in this item beginning on the pages indicated:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Management to the Stockholders 40
Independent Accountants' Report 41
Independent Auditors' Report 42
Consolidated Balance Sheets at December 31, 1997 and 1996 43
Consolidated Statements of Income and Expense for each of the three years in the
period ended December 31, 1997 44
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997 45
Consolidated Statements of Changes in Stockholders' Equity for each of the three
years in the period ended December 31, 1997 46
Notes to Consolidated Financial Statements 47
</TABLE>
Selected quarterly financial data of the Company for 1997 and 1996 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 21, 1998, 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, 1997 and
1996
3. Consolidated Statements of Income and Expense for each of
the three years in the period ended December 31, 1997
4. Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period ended
December 31, 1997
5. Consolidated Statements of Cash Flows for each of the
three years in the period ended
December 31, 1997
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 41 of
this Form 10-K are filed herewith or are incorporated herein by
reference.
(b) Reports on Form 8-K
On December 29, 1997, the Company filed a current report on Form 8-K to
report the proposed merger of Progressive with an into Hudson Chartered
and disclose the underlying transaction documents.
37
<PAGE>
REPORT OF MANAGEMENT TO THE STOCKHOLDERS
CONSOLIDATED 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 CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND, AS SUCH, INCLUDE
AMOUNTS BASED ON INFORMED JUDGMENTS AND ESTIMATES MADE BY MANAGEMENT.
THE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN AUDITED BY AN INDEPENDENT
ACCOUNTING FIRM, WHICH WAS GIVEN UNRESTRICTED ACCESS TO ALL FINANCIAL RECORDS
AND RELATED DATA, INCLUDING MINUTES OF ALL MEETINGS OF THE STOCKHOLDERS, THE
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD. MANAGEMENT BELIEVES ALL
REPRESENTATIONS MADE TO THE INDEPENDENT AUDITORS DURING THEIR AUDIT WERE VALID
AND APPROPRIATE. THE INDEPENDENT AUDITORS' REPORT IS PRESENTED ON PAGE 42.
INTERNAL CONTROL
MANAGEMENT IS RESPONSIBLE FOR ESTABLISHING AND MAINTAINING INTERNAL CONTROL
OVER FINANCIAL REPORTING, INCLUDING SAFEGUARDING OF ASSETS, PRESENTED IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND, FOR THE COMPANY'S
BANK SUBSIDIARY, FIRST NATIONAL BANK OF THE HUDSON VALLEY, IN CONFORMITY WITH
THE FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL INSTRUCTIONS CONSOLIDATED
REPORTS OF CONDITION AND INCOME ("CALL REPORT" INSTRUCTIONS). INTERNAL CONTROL
CONTAINS MONITORING MECHANISMS AND ACTIONS ARE TAKEN TO CORRECT DEFICIENCIES
IDENTIFIED.
THERE ARE INHERENT LIMITATIONS IN THE EFFECTIVENESS OF ANY INTERNAL
CONTROL, INCLUDING THE POSSIBILITY OF HUMAN ERROR AND THE CIRCUMVENTION OR
OVERRIDING OF CONTROLS. ACCORDINGLY, EVEN EFFECTIVE INTERNAL CONTROL CAN
PROVIDE ONLY REASONABLE ASSURANCE WITH RESPECT TO FINANCIAL STATEMENT
PREPARATION. FURTHER, BECAUSE OF CHANGES IN CONDITIONS, THE EFFECTIVENESS OF
INTERNAL CONTROL MAY VARY OVER TIME.
MANAGEMENT ASSESSED THE COMPANY'S INTERNAL CONTROL OVER FINANCIAL
REPORTING, INCLUDING SAFEGUARDING OF ASSETS, PRESENTED IN CONFORMITY WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND CALL REPORT INSTRUCTIONS AS OF
DECEMBER 31, 1997. 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 EFFECTIVE INTERNAL CONTROL OVER FINANCIAL
REPORTING, INCLUDING SAFEGUARDING OF ASSETS, PRESENTED IN CONFORMITY WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND, FOR ITS BANK SUBSIDIARY, CALL
REPORT INSTRUCTIONS AS OF DECEMBER 31, 1997.
AUDIT COMMITTEE
THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS IS COMPRISED ENTIRELY OF NON-
EMPLOYEE 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. THE AUDIT COMMITTEE MEETS PERIODICALLY WITH
MANAGEMENT, THE INDEPENDENT AUDITORS, AND THE INTERNAL AUDITORS TO ENSURE THAT
THEY ARE CARRYING OUT THEIR RESPONSIBILITIES. THE AUDIT COMMITTEE IS ALSO
RESPONSIBLE FOR PERFORMING AN 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 INTERNAL CONTROL
FOR FINANCIAL REPORTING AND ANY OTHER MATTERS WHICH THEY BELIEVE SHOULD BE
BROUGHT TO THE ATTENTION OF THE AUDIT COMMITTEE.
COMPLIANCE WITH LAWS AND REGULATIONS
MANAGEMENT IS ALSO RESPONSIBLE FOR ENSURING COMPLIANCE WITH THE FEDERAL
LAWS AND REGULATIONS CONCERNING LOANS TO INSIDERS AND FEDERAL AND STATE LAWS AND
REGULATIONS CONCERNING DIVIDEND RESTRICTIONS, BOTH OF WHICH ARE DESIGNATED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION 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 FEDERAL DEPOSIT INSURANCE CORPORATION. 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, 1997.
T. JEFFERSON CUNNINGHAM III JOHN C. VANWORMER PAUL A. MAISCH
CHAIRMAN & CEO PRESIDENT CHIEF FINANCIAL OFFICER
40
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD APPEARS HERE]
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, 1997, HUDSON
CHARTERED BANCORP, INC. AND SUBSIDIARIES (THE "COMPANY") MAINTAINED EFFECTIVE
INTERNAL CONTROL OVER FINANCIAL REPORTING, INCLUDING SAFEGUARDING OF ASSETS,
PRESENTED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND, FOR
THE COMPANY'S BANK SUBSIDIARY, 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 OVER FINANCIAL REPORTING,
TESTING AND EVALUATING THE DESIGN AND OPERATING EFFECTIVENESS OF INTERNAL
CONTROL 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, MISSTATEMENTS DUE TO
ERRORS OR FRAUD MAY OCCUR AND NOT BE DETECTED. ALSO, PROJECTIONS OF ANY
EVALUATION OF THE INTERNAL CONTROL 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, 1997, THE
COMPANY MAINTAINED EFFECTIVE INTERNAL CONTROL 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.
/S/ DELOITTE & TOUCHE LLP
JANUARY 27, 1998
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
41
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD APPEARS HERE]
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 (THE "COMPANY") AS OF DECEMBER 31, 1997 AND 1996 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, 1997.
THESE FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT.
OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED
ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS OF 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, 1997 AND 1996 AND RESULTS OF THEIR OPERATIONS AND
THEIR CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31,
1997 IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
/S/ DELOITTE & TOUCHE LLP
Stamford, Connecticut
JANUARY 27, 1998
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
42
<PAGE>
<TABLE>
<CAPTION>
HUDSON CHARTERED BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
Notes 1997 1996
---- ----
<S> <C> <C> <C>
ASSETS
Cash and due from banks K $29,075 $35,929
Federal funds sold 17,400 11,350
Total cash and cash equivalents 46,475 47,279
Securities: B
Available for sale, at fair value 171,579 162,915
Held to maturity, fair value of $24,744 in 1997 24,245 13,568
and $13,904 in 1996.
Regulatory securities 2,755 2,755
Loans held for sale K 216 168
Loans: C,D,K,L
Gross loans 467,021 451,751
Allowance for loan losses E (9,530) (9,302)
-------- --------
Net loans 457,491 442,449
Premises and equipment, net F 15,592 16,249
Accrued income 5,504 5,191
Deferred taxes 2,987 3,075
Other real estate owned 760 653
Other assets D 3,920 2,573
TOTAL ASSETS $731,524 $696,875
======== ========
LIABILITIES
Deposits: G
Demand deposits $151,002 $142,256
Interest bearing deposits 503,103 483,570
Total deposits 654,105 625,826
Other interest bearing liabilities M 1,725 1,854
Other liabilities 5,336 4,030
TOTAL LIABILITIES 661,166 631,710
Commitments and contingencies C,K
STOCKHOLDERS' EQUITY N,O
Preferred Stock 0 0
($.01 par value; 5,000,000 shares authorized;none issued) - -
Common stock ($.80 par value; 20,000,000 shares authorized)
7,161,278 shares issued less 85,015 Treasury shares in 1997 and 5,729 3,854
4,816,813 shares issued less 77,981 Treasury shares in 1996
Additional paid-in capital 38,979 40,863
Retained earnings 27,042 21,830
Net unrealized securities gains 966 296
Treasury stock, at cost (2,358) (1,549)
Employee stock ownership plan (ESOP) 0 (129)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 70,358 65,165
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $731,524 $696,875
======== ========
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
( in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $41,083 $39,373 $39,413
Federal funds sold 1,062 1,213 2,028
Taxable securities 7,290 8,192 7,270
Tax-exempt securities 3,301 2,250 2,004
Total interest income 52,736 51,028 50,715
Interest expense:
Deposits G 20,641 20,064 21,129
Other 107 110 130
Total interest expense 20,748 20,174 21,259
NET INTEREST INCOME 31,988 30,854 29,456
Provision for loan losses E 2,500 2,850 2,300
Net interest income after provision
for loan losses 29,488 28,004 27,156
Noninterest income:
Service charges on deposit accounts 3,554 3,731 2,968
Other service charges, commissions and fees 393 417 537
Income from fiduciary activities 737 643 694
Realized gains on sales of securities, net 314 162 138
Gains on sales of loans, net 176 203 404
Other 1,093 1,642 1,038
------ ------ ------
Total noninterest income 6,267 6,798 5,779
GROSS OPERATING INCOME 35,755 34,802 32,935
Noninterest expense:
Salaries and employee benefits H 12,425 11,867 11,309
Net occupancy I 1,885 1,816 1,606
Equipment 2,142 2,194 2,094
Postage and supplies 817 1,019 1,306
FDIC insurance 84 89 682
Advertising and public relations 639 378 353
Merger related costs 255 0 250
Other real estate owned D 201 73 141
Other 3,897 4,149 4,715
Total noninterest expense 22,345 21,585 22,456
Income before income taxes 13,410 13,217 10,479
Income taxes J 4,402 4,551 3,514
NET INCOME 9,008 8,666 6,965
Dividend requirements of preferred stock O 89 414
------ ------ ------
NET INCOME APPLICABLE TO COMMON SHARES $9,008 $8,577 $6,551
====== ====== ======
Weighted average shares outstanding: *
Basic 7,059,000 6,932,000 6,274,000
Diluted 7,263,000 7,228,000 7,089,000
Per common share: *
Earnings - basic $1.28 $1.24 $1.04
Earnings - diluted 1.24 1.19 0.98
Dividends declared 0.50 0.41 0.34
</TABLE>
* adjusted for 10% stock dividends declared December 1995 and December 1996 and
the 3 for 2 stock split in the form of a 50% stock dividend declared
September 1997.
See notes to consolidated financial statements.
44
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $9,008 $8,666 $6,965
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,500 2,850 2,300
Depreciation and amortization 1,900 1,863 1,928
Amortization of security premiums, net 349 298 227
Amortization of core deposit intangible 115 132 141
Realized gains on sales of securities and loans (490) (365) (542)
Deferred income tax benefits (379) (554) (121)
(Increase) decrease in accrued income (313) 427 (542)
Other ,net (1,459) 1,672 (4,303)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,231 14,989 6,053
INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale 60,695 39,281 33,129
Proceeds from maturities of securities available-for-sale 22,224 44,271 21,743
Proceeds from maturities of securities held-to-maturity 5,107 4,916 17,671
Purchases of securities available-for-sale (89,352) (78,497) (98,177)
Purchases of securities held-to-maturity (16,912) (5,929) (7,679)
Proceeds from sales of loans 9,463 8,329 31,305
Net increase in loans (26,877) (40,007) (22,956)
Purchases of premises and equipment (1,243) (1,050) (1,303)
Proceeds from sales of other real estate owned 1,050 1,428 1,211
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES (35,845) (27,258) (25,056)
FINANCING ACTIVITIES:
Net increase in demand, money market, NOW and savings accounts 3,912 3,600 7,960
Net increase (decrease) in other time deposits 24,367 (8,834) 43,030
Decrease in securities sold under repurchase agreements (6,106)
Proceeds from issuance of common stock from treasury 2,389 1,354 1,334
Repurchase of preferred stock (123)
Repurchase of common stock (3,496) (1,461) (117)
Cash dividends - preferred (193) (414)
Cash dividends - common (3,362) (2,648) (2,102)
------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 23,810 (8,305) 43,585
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (804) (20,574) 24,582
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF YEAR 47,279 67,853 43,271
------- ------- -------
AT END OF YEAR $46,475 $47,279 $67,853
======= ======= =======
Non-cash investing activities:
Transfer from loans to OREO $985 $1,526 $2,058
Net unrealized gains recorded on securities 1,143 490 2,957
Deferred taxes on net unrealized (gains) losses 467 200 (1,227)
Transfer of securities from held to maturity to available for sale 61,465
Additional cash flow disclosures:
Interest paid 20,667 20,402 21,069
Income taxes paid 4,102 5,305 3,702
Conversion of preferred stock to common stock 5,590 1
</TABLE>
See notes to consolidated financial statements.
45
<PAGE>
HUDSON CHARTERED BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
( in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $5,714 $2,730 $16,099 $29,353
Net income 6,965
Dividends declared on preferred stock (414)
Dividends declared on common stock ($0.34 per share)* (2,150)
Stock reinvestment and purchase plan - 68,716 shares* 30 581
Conversion of Series B preferred stock - 140 shares* (1) 1
Options exercised - 101,233 shares* 45 678
Purchase of Treasury stock - 7,318 shares
Payments on ESOP borrowings
Net unrealized gains on securities
Stock dividend declared on common stock (10%) ($10.91 per share) 280 6,020 (6,300)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 5,713 3,086 23,378 27,454
Net income 8,666
Cash dividends declared on preferred stock (89)
Cash dividends declared on common stock ($0.41 per share)* (2,863)
Stock reinvestment and purchase plan - 69,573 shares* 33 773
Conversion of Series B preferred stock - 727,000 shares* (5,590) 345 5,245
Redemption of Series B preferred stock (123)
Options excercised - 95,289 shares 45 503
Effect of Treasury stock issued at less than cost (29)
Purchase of Treasury stock - 77,418 shares
Payments on ESOP borrowings
Net unrealized losses on securities
Stock dividend declared on common stock (10%) ( $17.50 per share) 345 10,964 (11,309)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1996 0 3,854 40,863 21,830
Net income 9,008
Cash dividends declared on common stock ($0. 50 per share)* (3,506)
Stock reinvestment and purchase plan - 48,814 shares*
Cash in lieu paid on fractional shares (9)
Options exercised - 126,931 shares*
Effect of Treasury stock issued at less than cost (290)
Purchase of Treasury stock - 129,475 shares(1)
Payments on ESOP borrowings
Net unrealized gains on securities
Stock dividend declared on common stock (50%) 1,875 (1,875)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1997 $0 $ 5,729 $38,979 $27,042
======= ======= ======= =======
Net
Unrealized
Gains (Losses) Treasury
on Securities Stock ESOP Total
<S> <C> <C> <C> <C>
------- ------- ------- -------
BALANCE AT JANUARY 1, 1995 ($1,144) ($214) $52,538
Net income 6,965
Dividends declared on preferred stock (414)
Dividends declared on common stock ($0.34 per share)* (2,150)
Stock reinvestment and purchase plan - 68,716 shares* 611
Conversion of Series B preferred stock - 140 shares*
Options exercised - 101,233 shares* 723
Purchase of Treasury stock - 7,318 shares ($117) (117)
Payments on ESOP borrowings 43 43
Net unrealized gains on securities 1,730 1,730
Stock dividend declared on common stock (10%) ($10.91 per share)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 586 (117) (171) 59,929
Net income 8,666
Cash dividends declared on preferred stock (89)
Cash dividends declared on common stock ($0.41 per share)* (2,863)
Stock reinvestment and purchase plan - 69,573 shares* 806
Conversion of Series B preferred stock - 727,000 shares*
Redemption of Series B preferred stock (123)
Options excercised - 95,289 shares 548
Effect of Treasury stock issued at less than cost 29
Purchase of Treasury stock - 70,494 shares (1,461) (1,461)
Payments on ESOP borrowings 42 42
Net unrealized losses on securities (290) (290)
Stock dividend declared on common stock (10%) ( $17.50 per share)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1996 296 (1,549) (129) 65,165
Net income 9,008
Cash dividends declared on common stock ($0. 50 per share)* (3,506)
Stock reinvestment and purchase plan - 48,814 shares* 923 923
Cash in lieu paid on fractional shares (9)
Options exercised - 126,931 shares* 1,474 1,474
Effect of Treasury stock issued at less than cost 290
Purchase of Treasury stock - 129,475 shares (3,496) (3,496)
Payments on ESOP borrowings 129 129
Net unrealized gains on securities 670 670
Stock dividend declared on common stock (50%)
------- ------- ------- -------
BALANCE AT DECEMBER 31, 1997 $966 ($2,358) 0 $70,358
======= ======= ======= =======
</TABLE>
* adjusted for 10% stock dividends declared in December 1995 and 1996 and a 3
for 2 stock split in the form of a 50% stock dividend declared in September
1997.
(1) Treasury shares not adjusted for 50% stock dividend declared in September
1997. The effect of such shares reissued prior to the 50% stock dividend
included in the shares (adjusted for the stock dividend) for the "stock
reinvestment and purchase plan" and "options exercised" is 53,304 shares.
See notes to consolidated financial statements.
46
<PAGE>
HUDSON CHARTERED BANCORP, INC. & SUBSIDIARIES
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 commercial 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 local economy is impacted by employment levels of
two large employers, IBM and certain New York State institutions. Although
present conditions are stable, the local economy was weakened, in recent years,
from large employment cutbacks from these employers. Approximately 62% of the
Company's loans outstanding are collateralized by real estate. The Company also
has made commitments to lend additional funds collateralized by real estate in
the amount of approximately $16.9 million.
The Company does not engage in hedging activities, utilize derivative financial
instruments or maintain a trading portfolio.
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; receipt of all required regulatory approvals,
consents or waivers; and the ability to account for the merger as a pooling-of-
interests.
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.
At December 31, 1997, Progressive had total assets of $883 million, total
deposits of $799 million, and stockholders' equity of $78.5 million.
Progressive's net income for the year ended December 31, 1997 was $8.6 million.
Progressive is a one bank holding company with its principal subsidiary being
Pawling Savings Bank, a New York-chartered savings bank with 17 full service
offices.
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 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.
47
<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 local
and national economic conditions; the extent and timing of actions of the
Reserve Board or the Comptroller; 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, 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
or circumstances.
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 utilized to hold title to certain complex 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 and mortgages
serviced for others 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 and the
disclosure of contingent 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.
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 1997 and no increase in the allowance
was required as a result of these examinations.
IMPAIRED LOANS
Statement of Financial Standards ("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
48
<PAGE>
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, a write down is charged against the allowance for
loan losses.
INCOME RECOGNITION
Interest on loans is determined using the level yield method. Under this
method, discount accretion and premium amortization on loans are included in
interest income.
The accrual of interest income generally is discontinued when its receipt is in
doubt but no later than when a loan becomes 90 days past due as to principal or
interest. When interest accruals are discontinued, any interest credited to
income in the current year which has not been collected is reversed, and any
interest accrued in the prior year is charged to the allowance for loan losses.
If payments on nonaccrual loans are made, income is recorded when received
unless management has reason to doubt the ultimate collectibility of the
principal remaining on the loan. Management may elect to continue the accrual
of interest when a loan is in the process of collection and the estimated fair
value of collateral is sufficient to cover the principal balance and accrued
interest. Loans are returned to accrual status once the doubt concerning
collectibility has been removed and the borrower has demonstrated performance in
accordance with the loan terms and conditions.
OTHER REAL ESTATE OWNED (OREO)
OREO includes properties for which the Bank has obtained title through
foreclosure. These properties are recorded at the lower of cost or estimated
fair value (net of estimated disposal costs). If a valuation loss exists when
properties are acquired, the loss is recorded as a charge to the allowance for
loan losses. Management periodically monitors the value of such OREO
properties. If, due to further reductions in estimated fair value, further
losses are anticipated, such losses are recorded as OREO expense. Any gains on
disposition of such properties reduce OREO expense. If the Bank lends funds in
conjunction with dispositions of OREO, such loans are required to meet normal
loan underwriting criteria.
LOAN ORIGINATION FEES
Loan origination and commitment fees and 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 or commitment period of the respective loan or commitment
period categories, which generally vary from one to twelve years.
SECURITIES
Securities include U.S. Government, U. S. Government Agency, municipal and
corporate bonds and Regulatory securities. 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. Regulatory securities include equity
investments required for membership in the Federal Reserve System, Federal Home
Loan Bank, and New York State Business Development Corporation. Such
investments are carried at cost unless considered impaired, in which case a
writedown would be taken and charged to the results of operations.
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
49
<PAGE>
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, 1995, 1996 and 1997, the net
unrealized gain, after tax, on available for sale securities was $586, $296 and
$966, respectively. In November 1995, the Company transferred securities having
a fair value of $63,192 from held to maturity to available for sale in
accordance with a then recent issuance by the FASB. Realized gains and losses
from sales of securities are recognized on the trade date by specific
identification of the security sold.
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 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.
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. 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. SFAS No. 106 and No. 112 have had
no 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", 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 during the
years ended December 31, 1997, 1996 or 1995.
EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earning Per Share", which became effective in
the fourth quarter of 1997. As required, the Company has restated all prior
periods to the new definitions of Basic and Diluted Earnings per share. The
restatement did not have a material effect on previously reported earnings per
share amounts. Basic earnings per common share is computed by dividing net
income, adjusted for preferred stock dividends, by the weighted average number
of common shares outstanding. Diluted earnings per common share includes the
additional dilutive effect of stock options using the average market price of
the Company's common stock for the period. 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 was converted into 712,125 shares common stock. See Note O.
50
<PAGE>
A summary of the basic and diluted earnings per share ("EPS") calculations for
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 9,008 $ 8,666 $ 6,965
Less preferred stock dividends declared 89 414
---------- ---------- ----------
Income available to common shareholders $ 9,008 $ 8,577 $ 6,551
========== ========== ==========
Weighted average basic shares outstanding 7,058,692 6,932,373 6,274,419
Effect of dilutive stock options 204,317 142,912 86,742
Approved conversion of Series B preferred stock 153,129 727,783
---------- ---------- ----------
Weighted average diluted shares outstanding 7,263,009 7,228,414 7,088,944
========== ========== ==========
Earnings per share
Basic $ 1.28 $ 1.24 $ 1.04
Diluted 1.24 1.19 .98
</TABLE>
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. Additionally, in September 1997, the Board declared a three for
two stock split in the form of a 50% stock dividend payable October 1997.
Weighted average shares outstanding, used to calculate earnings per share, have
been retroactively adjusted to give effect to the stock dividends.
MORTGAGE SERVICING RIGHTS
The Company's mortgage servicing portfolio totaled $98.9 million, $99.4 million
and $101.1 million for the benefit of third party investors (primarily Federal
Home Loan Mortgage Corporation and Federal National Mortgage Association) at
December 31, 1997, 1996 and 1995, respectively, and it recorded servicing fee
income of $331, $338 and $303 for each of the years ended December 31, 1997,
1996 and 1995, respectively. The Company records the sale of loans in which
servicing is retained on the basis of the proceeds received with normal
servicing rights retained. The Company sold loans of $9.5 million, $9.1
million, and $31.3 million in 1997, 1996 and 1995, respectively, with servicing
rights retained, and recorded normal servicing assets of $66 and $41, in 1997
and 1996, respectively. Prior to 1996, the Company did not record a servicing
asset. The value of servicing rights, when recorded, must be re-evaluated for
impairment on a quarterly basis and a valuation allowance established if fair
value is lower than the recorded amounts.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value. No impairment of
servicing assets was experienced in 1997 or 1996.
When participating interests in loans sold have an average contractual interest
rate, adjusted for normal servicing fees, that differs from the agreed yield to
the purchaser, gains or losses are recognized equal to the present value of such
differential over the estimated remaining life of such loans. The resulting
"excess servicing receivable" or "deferred servicing revenue" is amortized over
the estimated life using a method approximating the interest method.
Quoted market prices are not available for the excess servicing receivables.
Thus, the excess servicing receivables and the amortization thereon are
periodically evaluated in relation to estimated future servicing revenues,
taking into consideration changes in interest rates, current prepayment rates,
and expected future cash flows. The Company evaluates the carrying value of the
excess servicing receivables by estimating the future servicing income of the
excess servicing receivables based on management's best estimate of remaining
loan lives and discounted at the original discount rate.
51
<PAGE>
STOCK-BASED COMPENSATION
SFAS 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. As permitted, 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 based 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," adopted by the Company, 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 has not had any material impact on the Company's consolidated
financial statements.
PENDING ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130, "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as are the financial statements. Comprehensive income is
defined as "the change in equity (net assets) of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period, except those
resulting from investments by owners and distributions to owners."
SFAS NO. 131, "Disclosures About Segments of An Enterprise and Related
Information" establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. The statement requires that public
business enterprises report a measure of segment profit or loss, certain
specific revenue/expense items and segment assets. It also requires that
information be reported about revenues derived from the enterprises' products or
services, or about the countries in which the enterprises earn revenues and
holds assets, and about major customers, regardless of whether that information
is used in making operating decisions.
Both SFAS No. 130 and No. 131 are effective for the Company in 1998 and require
disclosures in the Company 's financial statements or notes thereto, beginning
in 1998. Implementation of these statements will not have any significant
effect on the results of operations or financial condition, as currently
reported by the Company.
CASH FLOW INFORMATION
Cash and cash equivalents include federal funds sold, which generally are
available to the Company on one day's notice.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial statements to
conform to the presentation of 1997 financial information.
52
<PAGE>
NOTE B - SECURITIES
SECURITIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------
CARRYING AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
-------- --------- ---------------- ---------------- --------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES
Available for sale $ 40,615 $ 40,386 $ 229 $ 40,615
U.S. Government Agencies:
Available for sale 32,409 32,270 148 $ 9 32,409
Obligations of States and
Political Subdivisions
Available for sale 70,946 69,686 1,282 22 70,946
Held to maturity 24,170 24,170 499 24,669
Other Securities
Available for sale 27,609 27,599 59 49 27,609
Held to maturity 75 75 75
Regulatory securities 2,755 2,755 _____ _____ 2,755
-------- -------- ------ --- --------
TOTAL SECURITIES $198,579 $196,941 $2,217 $80 $199,078
======== ======== ====== === ========
Total available for sale $171,579 $169,941 $1,718 $80 $171,579
Total held to maturity 24,245 24,245 499 24,744
Regulatory securities 2,755 2,755 _____ 2,755
-------- -------- ------ --------
TOTAL SECURITIES $198,579 $196,941 $2,217 $80 $199,078
======== ======== ====== === ========
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------------
CARRYING AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
-------- --------- ---------------- ---------------- --------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES
AVAILABLE FOR SALE $ 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>
53
<PAGE>
at December 31, 1997, the net unrealized gain on securities "available for sale"
(net of tax effect at a tax rate of 41% or $672) that was included as a separate
component of stockholders' equity was $966.
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. Subsequent changes in unrealized gains or losses on these
transferred securities also have been 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, 1997 of the Company's available for
sale and held to maturity debt securities are summarized in the following table.
At December 31, 1997, securities remaining in the Company's "held to maturity"
portfolio consisted 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
------------------- -----------------
MATURITY PERIOD AMORTIZED FAIR CARRYING FAIR
COST VALUE AMOUNT VALUE
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Within 1 year $ 11,778 $ 12,138 $16,262 $16,311
1-5 years 105,995 107,356 4,256 4,364
5-10 years 11,405 11,611 2,707 2,913
Over 10 years 11,957 12,591 1,020 1,156
Mortgage-backed and SBA securities of U.S. 28,806 27,883
Government Agencies not allocated by maturity date -------- -------- ------- -------
TOTAL DEBT SECURITIES $169,941 $171,579 $24,245 $24,744
======== ======== ======= =======
</TABLE>
Gross realized gains from sales of securities were $323, $225 and $238 in 1997,
1996 and 1995, respectively, and gross realized losses were $9, $63 and $100.
At December 31, 1997, securities with a carrying amount of $98.2 million were
pledged as collateral for municipal deposits and other purposes. Municipal
deposits so collateralized totaled $63 million at the same date.
54
<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. 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, 1997 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 $1,032 $ 1,291 $ 2,323
Real Estate - Mortgage 5,912 5,912
Home Equity Loans 10,862 10,862
Other Consumer Loans 10,044 10,044
Commercial Loans 34,205 $2,846 37,051
------ ------- ------ -------
TOTAL (December 31, 1997) $6,944 $56,402 $2,846 $66,192
====== ======= ====== =======
December 31, 1996 $2,356 $61,154 $5,779 $69,289
====== ======= ====== =======
</TABLE>
CONCENTRATIONS OF CREDIT RISK
- -----------------------------
The Company lends primarily in the Dutchess, Ulster, Orange and northern Putnam
counties of New York State and, therefore, the quality of its loan portfolio is
dependent in large part on the performance of the local economy. This economy
has been weakened in recent years by large employment cutbacks by both IBM and
certain State institutions. However, the local economy appears to have
stabilized as evidenced by favorable unemployment rates (3-4%) stable and rising
housing values, lower commercial real estate vacancy rates, and a major
investment program ($700 million) at IBM's East Fishkill facility.
Approximately 62% 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. local
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.
55
<PAGE>
NOTE D - NONPERFORMING ASSETS, PAST DUE LOANS AND IMPAIRED LOANS
The following table presents nonperforming assets outstanding at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans $2,043 $4,528 $4,407
Loans past due 90 days and still accruing 367 431 522
Restructured troubled debt 712 534 349
------ ------ ------
Total nonperforming loans 3,122 5,493 5,278
Other real estate owned, net 760 653 1,196
------ ------ ------
Total nonperforming assets $3,882 $6,146 $6,474
====== ====== ======
</TABLE>
Information concerning interest income on nonperforming loans and restructured
troubled debt is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Interest income recorded if all loans were current $ 342 $ 529 $ 400
Interest income recorded 273 215 265
</TABLE>
At December 31, 1997 there were no commitments to lend additional funds to the
borrowers associated with the nonperforming assets noted above.
Loans past due 30-89 days were as follows at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Amount past due $2,795 $5,258 $4,650
====== ====== ======
Percent of total loans 0.60% 1.16% 1.10%
====== ====== ======
</TABLE>
As described in Note A, effective January 1, 1995, the Company adopted SFAS No.
114 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.
Information regarding the recorded investment in impaired loans at December 31
and for the year then ended consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Impaired loans for which an allowance of $901, $844 and $2,335 $3,202 $3,450
$1,239, respectively, has been established
Impaired loans for which an impairment write down of 1,068 1,750 1,071
$1,133, $1,197 and $740, respectively, has been taken ------ ------ ------
Total recorded investment in impaired loans $3,403 $4,952 $4,521
====== ====== ======
Additional information regarding impaired loans is as follows:
Income recorded on impaired loans in the period during the
year that they were impaired, on a cash basis $ 273 $ 215 $ 265
Average investment in impaired loans during the year $4,177 $5,002 $4,287
</TABLE>
56
<PAGE>
NOTE E - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table outlines the balances, including related deferred loan fees
and costs, of loan categories at
December 31:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Commercial & Industrial $ 80,097 $ 71,887
Consumer & Installment 90,870 80,998
Real Estate - Construction 10,871 12,227
Real Estate - Mortgage 279,828 280,425
Other loans 5,355 6,214
-------- --------
Total $467,021 $451,751
======== ========
</TABLE>
Changes in the allowance for loan losses for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance, beginning of year $ 9,302 $ 8,770 $ 8,326
Charge-offs (2,819) (2,732) (2,168)
Recoveries 547 414 312
------- ------- -------
Net charge-offs (2,272) (2,318) (1,856)
Provision for loan losses 2,500 2,850 2,300
------- ------- -------
Balance, end of year $ 9,530 $ 9,302 $ 8,770
======= ======= =======
</TABLE>
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment is comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land $ 2,120 $ 2,120
Banking houses and improvements 15,608 15,175
Furniture and equipment 14,573 13,842
-------- --------
32,301 31,137
Accumulated depreciation and amortization (16,709) (14,888)
-------- --------
TOTAL $ 15,592 $ 16,249
======== ========
</TABLE>
57
<PAGE>
NOTE G - DEPOSITS
The following table outlines balances at December 31, for interest bearing
accounts:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Money Market $ 59,028 $ 63,871
NOW 49,921 47,304
Savings 207,522 210,130
Time 186,632 162,265
-------- --------
TOTAL $503,103 $483,570
======== ========
</TABLE>
At December 31, 1997 and 1996, certificates of deposit of $100 or more included
in time deposits totaled $54,817 and $40,503, respectively. The Company does
not accept brokered deposits. Interest expense on deposits was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Savings accounts $ 8,446 $ 8,408 $ 8,427
Certificates of deposit ($100 or more) 2,379 1,428 1,423
Other time deposits 6,980 7,262 7,808
NOW accounts 566 615 915
Money market accounts 2,270 2,351 2,556
------- ------- -------
TOTAL $20,641 $20,064 $21,129
======= ======= =======
</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 at least 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% by way of such
salary reduction agreements and, in addition, can voluntarily contribute up to
an additional 10% of their eligible compensation. Expense for these plans was
$657, $752 and $588 for 1997, 1996 and 1995, 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, 1997 and 1996 was not material.
58
<PAGE>
The Executive Supplemental Income Plan, a nonqualified plan, provides certain
employees with supplemental retirement benefits. The plan utilizes life
insurance contracts for indirect funding of preretirement benefits. Related
expense was $117, $103 and $91 in 1997, 1996 and 1995, 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 a defined benefit plan of one of its predecessor banks
effective January 1, 1995 and the affected 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 expense of $59 in
1995.
EMPLOYMENT AGREEMENTS
- ---------------------
The Company has entered into employment agreements with certain of its key
executives. The agreements range in period from one to three years, expiring
from 1998 through 2000, 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 $1,400 at
December 31, 1997.
In 1997, the Bank established a change of control plan for its directors which
allows for a payment in the event of a change in control of one-twelfth of a
year's retainer for each year of service with a minimum payment of one year's
retainer for any director terminated in connection with a change in control.
Such liability, if incurred, would not have a significant impact on the
financial condition of the Company.
NOTE I - LEASES
Total rental expense for operating leases for 1997, 1996 and 1995 was $388, $461
and $293, respectively. Future minimum payments, under non-cancelable operating
leases with initial or remaining terms of one year or more, consisted of the
following at December 31, 1997:
<TABLE>
<CAPTION>
Year Amount
----- ------
<S> <C>
1998 $ 402
1999 365
2000 310
2001 166
2002 144
Thereafter 1,346
------
TOTAL $2,733
======
</TABLE>
The Company leases approximately 45% (9,000 square feet) of one of its buildings
to tenants for various terms with varying renewal periods. The expiration dates
of leases were between 1995 and 2002, including option periods. The Company may
occupy the tenanted spaces as the leases expire or are not renewed or may re-
lease the space vacated if the Company does not occupy the space. Rental income
received was $224, $255 and $270 in 1997, 1996 and 1995, 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 rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Income tax based on pretax income at the statutory rate 34.0% 34.0% 34.0%
Charges (credits) resulting from:
State taxes, net of federal tax benefit 6.1 5.7 6.5
Income from tax-exempt securities (7.6) (5.3) (5.9)
Other, net 0.3 (1.1)
---- ---- ----
Effective income tax rate 32.8% 34.4% 33.5%
==== ==== ====
</TABLE>
The provision benefit for taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------- ------------ -----------
<S> <C> <C> <C>
Current: Federal $3,450 $3,826 $2,642
State 1,331 1,279 993
------ ------ ------
4,781 5,105 3,635
Deferred (379) (554) (121)
------ ------ ------
$4,402 $4,551 $3,514
====== ====== ======
</TABLE>
Temporary differences arising from the recognition of income and expense in
different periods for tax and financial reporting purposes resulted in deferred
income tax (benefit) expense as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------ ------------ -----------
<S> <C> <C> <C>
Provisions for loan losses and OREO $(307) $(380) $(306)
Accelerated depreciation (29) (43) 125
Deferred fee income 121 132 209
Compensation (163) (147) (107)
Other (1) (116) (42)
----- ----- -----
$(379) $(554) $(121)
===== ===== =====
</TABLE>
60
<PAGE>
The tax effects of temporary differences that give rise to portions of deferred
tax assets and deferred tax liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses and OREO $ 3,948 $ 3,641
Compensation 711 548
Core deposit 78 81
Other 90 90
------- -------
Gross deferred tax assets 4,827 4,360
DEFERRED TAX LIABILITIES:
Depreciation expense (481) (510)
Unrealized holding gains (672) (204)
Deferred fee income (458) (337)
Mortgage servicing (31) (24)
Accretion on securities (48) (60)
------- -------
Gross deferred tax liabilities (1,690) (1,135)
------- -------
Net deferred tax assets before valuation 3,137 3,225
allowance
Valuation allowance (150) (150)
------- -------
Net deferred tax asset (included in other assets) $ 2,987 $ 3,075
======= =======
</TABLE>
Management has evaluated its deferred tax assets and its prospects for future
earnings. A portion of the deferred tax assets have been recognized based on
New York State tax regulations which have limitations on net operating loss
carrybacks and carryforwards. Based on recent historical and anticipated future
pretax earnings, management believes it is more likely than not that the Company
will realize its net deferred tax asset.
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 $225,000 at December 31, 1997.
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, 1997, $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 $7,804 during 1997; the Bank does not earn
interest or other income on such deposited funds.
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.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance, beginning of year $22,578 $21,588
New loans 3,490 4,191
Repayments (3,137) (3,201)
------- -------
Balance, end of year $22,931 $22,578
======= =======
</TABLE>
The Bank leases premises from an affiliate of a director which lease will
expire in December 1999. Payments made to this affiliate in 1997, 1996 and 1995
were $142, $134 and $103, respectively. Entities in which directors have
interests provide automotive, insurance and legal services to the Company. The
cost of such services aggregated $713, $887 and $523 in 1997, 1996 and 1995,
respectively.
NOTE M - OTHER INTEREST BEARING LIABILITIES
Interest bearing liabilities are summarized as follows, at December 31,:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ESOP Loan Payable $ 129
Federal Home Loan Bank advance $1,725 1,725
------ ------
$1,725 $1,854
====== ======
</TABLE>
The ESOP note was payable in quarterly principal installments of $11 plus
interest at the prime rate plus 1-1/2% (10.00% at December 12, 1997), at which
date such loan was paid in full by the Company. The loan was collateralized by
approximately 13,000 shares of the Company's common stock owned by the ESOP,
which shares were released to the Plan when the loan was paid.
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,
1997 is payable in 1999.
The Bank maintains a line of credit with the Federal Home Loan Bank in the
amount of $35.6 million under its secured advance program, including the
outstanding advance. Additionally, the Bank maintains a federal funds line of
credit in the amount of $5 million with one of its correspondents.
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, 1997, $5,312 is available for distribution to the
Company as dividends without prior regulatory approval (in addition to the 1998
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, 1997, 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,
1997 of $959. Interest is payable at the prime rate plus one percent (9.5% at
December 31, 1997). 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. The Board also
declared a three for two stock split payable by way of a 50% stock dividend in
September 1997, payable October 1997. 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 $10.91 and
$17.50 per share on the respective dates of declaration. The 1997 financial
statements reflect the capitalization of $1,875 of additional paid in capital at
the par value of the 50% stock dividend on the date of declaration of $.80 per
share.
Common stock is stated at par of $0.80 per share. The following table summarizes
the number of shares at December 31:
<TABLE>
<CAPTION>
1997 1996(1)
---------- ----------
<S> <C> <C>
Total issued and outstanding shares 7,076,263 4,738,832
Other issued shares - Treasury shares 85,015 77,981
---------- ----------
Total issued shares 7,161,278 4,816,813
Reserved shares (not yet issued):
Dividend reinvestment and stock purchase plan 500,322 366,094
Option Plan I 46,048 56,727
Hudson Chartered Incentive Stock (Plan II) 918,088 661,909
Other authorized but unissued shares (including 7,621,821 common shares
at December 31, 1997 that will be issued or reserved should the merger
described in Note A be consummated as planned) 11,374,264 14,098,457
---------- ----------
Total authorized 20,000,000 20,000,000
========== ==========
</TABLE>
(1) Numbers of shares at December 31, 1996 have not been restated to reflect the
three for two stock split in the form of a 50% stock dividend declared in
September 1997.
63
<PAGE>
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 per quarter of shares of common stock (at market value),
subject to the terms and limitations of the plan.
PREFERRED STOCK
- ---------------
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
$8.64 (as adjusted for stock dividends) per share of common stock (equivalent to
approximately 1.2738 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 712,125 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.
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 1997, the Company repurchased 129,475 shares of common stock at a cost of
$3,496, and in fiscal 1996 repurchased 77,418 shares at a cost of $1,461. Such
repurchased shares are being utilized for stock option and dividend reinvestment
and stock purchase plan issuances on a first in, first out basis. On December
16, 1997, in conjunction with the approval of the Plan of Merger with
Progressive Bank, Inc. (described in Note A) the Board of Directors rescinded
its authorization for open market purchases of its common stock under the
Repurchase Program.
64
<PAGE>
STOCK COMPENSATION PLANS
- -------------------------
Incentive Stock Option Plans
- ----------------------------
Under the Option Plan established in 1990, options to purchase shares of common
stock have been granted to key personnel of a predecessor bank, 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 of a predecessor company.
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 129,925 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. In 1997, the Company's officers who were granted stock appreciation
rights in tandem with stock options waived the stock appreciation rights while
maintaining the right to the underlying option grant. As such, the compensation
cost accrued to the stock appreciation rights was reversed and a credit to
compensation cost was recorded in the amount of $116. As of December 31, 1997,
there are no stock appreciation rights outstanding. 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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C> <C>
Net income As reported $9,008 $8,666 $6,965
Pro forma 8,673 8,189 6,857
Basic earnings per share As reported $ 1.28 $ 1.25 $ 1.04
Pro forma 1.23 1.17 1.03
Diluted earnings per share As reported 1.24 1.19 .98
Pro forma 1.20 1.13 .97
</TABLE>
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, 1997, 1996
and 1995, and changes during the years ended on those dates, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year:
ISOP 239,561 $ 8.94 252,773 $ 6.98 284,969 $6.78
NQ-OP 257,949 9.08 260,766 7.68 254,105 7.48
-------- -------- --------
Total outstanding 497,510 9.01 513,539 7.29 539,074 7.11
ISOP granted 58,695 18.68 71,010 12.42 35,283 9.07
NQ-OP granted (including SAR) 18,000 18.68 62,700 12.88 54,450 9.78
ISOP exercised (72,948) 8.27 (84,222) 5.79 (55,509) 7.19
NQ-OP exercised nonSAR (40,869) 7.98 (11,067) 5.91 (45,720) 6.64
NQ-OP SAR exercised (54,450) 9.78
ISOP forfeited (11,970) 7.47
NQ-OP forfeited (2,069) 7.47
--------
Outstanding at end of year:
ISOP 225,308 11.69 239,561 8.94 252,773 6.98
NQ-OP 235,080 9.89 257,949 9.08 260,766 7.68
-------- -------- --------
Total outstanding 460,388 10.77 497,510 $ 9.01 513,539 $7.29
======== ====== ======== ====== ======== =====
Options exercisable at year end 383,693 $ 9.19 410,639 $ 8.28 442,731 $7.15
Weighted average fair value of
options granted during the year $4.85 $4.60 $3.23
</TABLE>
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 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Dividend yield 2.24% 4.13% 4.33%
Expected volatility 27.8% 44.5% 53.3%
Risk free rate of return 6.05% 5.25% 5.25%
Expected life (years) 5.0 7.4 5.0
</TABLE>
66
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options
Exercisable
Options Outstanding ----------------
---------------------------------------------------- Number Weighted
Number Weighted Average Weighted Exercisable at Average
Outstanding at Remaining Average December 31, Exercise
Range of Exercise Prices December 31, 1997 Contractual Life Exercise Price 1997 Price
- --------------------------- ------------------ ---------------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
$5.77 - $8.01 187,646 9.5 years $ 6.79 187,646 $ 6.79
8.40 - 12.42 187,797 6.6 11.29 187,797 11.29
16.30 - 18.68 84,945 4.9 18.45 8,250 16.30
------- --- ------ ------- ------
$5.77 - $18.68 460,388 7.5 years $10.77 383,693 $ 9.19
======= ================= ====== ======= ======
</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 guaranteed the
ESOP's loan and paid off the remaining balance in December 1997. Prior to the
payoff, the Company was obligated to contribute sufficient cash to the ESOP to
repay the loans; therefore, the unpaid balance of the loan was reflected in the
accompanying balance sheet as long-term debt and the amount representing
unearned employee benefits was recorded as a reduction of the Company's
stockholders' equity. All full-time employees with one year of service are
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 12, 1997, the
Company paid off the loan obligation and subsequently recorded a total
contribution expense related to the ESOP in 1997 of $129 compared to
compensation expense of $43 in both 1996 and 1995. The unallocated shares
associated with the ESOP loan were subsequently released to participant
accounts. As of December 31, 1997, the ESOP owned 122,895 shares of the
Company's common stock (all of which were available to participants and
considered in total issued and outstanding shares). Interest expense incurred on
the ESOP loan was $12, $15 and $20 for 1997, 1996 and 1995, 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 or exceed 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 or exceed 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, 1997, that both the Bank and its parent company meet all capital
adequacy requirements to which they are subject.
As of December 31, 1997, 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 or exceed 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 THE ACTUAL CAPITAL
POSITION AT DECEMBER 31, 1996 AND 1997:
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
CAPITALIZED UNDER
MINIMUM PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
--------------- --------------- ------------------
BANK ONLY
AS OF DECEMBER 31, 1996: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
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
AS OF DECEMBER 31, 1997:
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS) 63,724 12.95 39,773 8.0 49,717 10.0
TIER I CAPITAL
(TO RISK WEIGHTED ASSETS) 57,471 11.68 19,887 4.0 29,830 6.0
TIER I CAPITAL
(TO AVERAGE ASSETS) 57,471 8.14 28,243 4.0 35,304 5.0
<CAPTION>
CONSOLIDATED
AS OF DECEMBER 31, 1996:
<S> <C> <C> <C> <C>
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
AS OF DECEMBER 31, 1997:
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS) 75,512 14.97 40,361 8.0
TIER I CAPITAL
(TO RISK WEIGHTED ASSETS) 69,169 13.71 20,180 4.0
TIER I CAPITAL
(TO AVERAGE ASSETS) 69,169 9.64 28,706 4.0
</TABLE>
68
<PAGE>
NOTE P - PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------- ------------
<S> <C> <C>
ASSETS
Cash (deposited in Bank) $ 1,212 $ 1,824
Securities available for sale 5,552 1,448
Other securities 109 109
Investment in subsidiaries:
Bank 58,612 57,579
Other 376 429
Premises 4,976 5,124
Other assets 2,653 784
------- -------
TOTAL ASSETS $73,490 $67,297
======= =======
LIABILITIES
Notes payable:
Bank subsidiary $ 959 $ 1,058
Other 129
Other liabilities 2,173 945
STOCKHOLDERS' EQUITY 70,358 65,165
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $73,490 $67,297
======= =======
</TABLE>
STATEMENTS OF INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------- ------------ -----------
<S> <C> <C> <C>
Dividends from Bank $8,504 $3,896 $2,917
Other income 874 513 474
Merger related expenses (255)
Expenses (478) (698) (684)
------ ------ ------
Income before income taxes and equity in undistributed net income (loss) of
subsidiaries 8,645 3,711 2,707
Income tax benefit 10 64 108
------ ------ ------
Income before equity in undistributed net income (loss) of subsidiaries 8,655 3,775 2,815
Equity in undistributed net income (loss):
Bank subidiary 406 4,906 4,165
Non bank subsidiary (53) (15) (15)
------ ------ ------
NET INCOME $9,008 $8,666 $6,965
====== ====== ======
</TABLE>
69
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 9,008 $ 8,666 $ 6,965
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (353) (4,891) (4,150)
Provision for depreciation 208 141 145
Other (814) 134 (522)
------- ------- -------
Net cash provided by operating activities 8,049 4,050 2,438
INVESTING ACTIVITIES
Purchase of premises and equipment from subsidiary bank (2,500)
Sale of premises and equipment to subsidiary bank 1,700
Purchase of available for sale securities (4,092) _____
-------
Net cash (used) by investing activities (4,092) (800)
------- -------
FINANCING ACTIVITIES
Payments on borrowings (100) (100) (81)
Proceeds from issuance of stock 2,389 1,354 1,334
Repurchase of preferred stock (123)
Repurchase of common stock (3,496) (1,461) (117)
Cash dividends (3,362) (2,841) (2,516)
------- ------- -------
Net cash used by financing activities (4,569) (3,171) (1,380)
------- ------- -------
INCREASE (DECREASE) IN CASH (612) 79 1,058
CASH, BEGINNING OF YEAR 1,824 1,745 687
------- ------- -------
CASH, END OF YEAR $ 1,212 $ 1,824 $ 1,745
======= ======= =======
</TABLE>
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, 1997 and December 31,
1996, 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, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- -----------------
<S> <C> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 46.5 $ 46.5 $ 47.3 $ 47.3
SECURITIES 198.6 199.1 179.2 179.6
LOANS, NET 455.5 461.6 438.4 443.1
LIABILITIES
DEPOSITS WITHOUT STATED MATURITIES 467.5 467.5 463.5 463.5
TIME DEPOSITS 186.6 186.8 162.3 163.5
</TABLE>
THE FAIR VALUE ESTIMATES PRESENTED ABOVE ARE BASED ON PERTINENT INFORMATION
AVAILABLE TO MANAGEMENT AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996. 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, 1997 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 $2,188 AND $4,184 IN 1997 AND 1996, 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 $8,629 AND $8,458 IN 1997 AND 1996, 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,
1997 AND DECEMBER 31, 1996.
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, 1997. 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, 1997 AND 1996, 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: April 9, 1998
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 April 9, 1998
Chairman of the Board & CEO
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ Paul A. Maisch April 9, 1998
Treasurer
<TABLE>
<CAPTION>
DIRECTORS:
<S> <C>
/S/ ROBERT M. BOWMAN April 9, 1998
/S/ EDWARD VK. CUNNINGHAM JR. April 9, 1998
/S/ T. JEFFERSON CUNNINGHAM III April 9, 1998
/S/ R. ABEL GARRAGHAN April 9, 1998
/S/ ROBERT L. PATRICK April 9, 1998
/S/ LEWIS J. RUGE April 9, 1998
/S/ JOHN CHARLES VANWORMER April 9, 1998
</TABLE>
72
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF DECEMBER 16, 1997, BY
AND AMONG HUDSON CHARTERED BANCORP, INC., FIRST NATIONAL BANK OF THE
HUDSON VALLEY, PROGRESSIVE BANK, INC. AND PAWLING SAVINGS BANK
(INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.1 TO THE COMPANY'S CURRENT
REPORT ON FORM 8-K FILED ON DECEMBER 29, 1997).
2.2 PLAN OF MERGER, DATED AS OF DECEMBER 16, 1997, BY AND BETWEEN HUDSON
CHARTERED BANCORP, INC. AND PROGRESSIVE BANK, INC. (INCORPORATED HEREIN
BY REFERENCE TO EXHIBIT 2.2 TO THE COMPANY'S CURRENT REPORT ON FORM 8-K
FILED ON DECEMBER 29, 1997).
2.3 AGREEMENT AND PLAN OF MERGER, DATED AS OF DECEMBER 16, 1997, BY AND
BETWEEN FIRST NATIONAL BANK OF THE HUDSON VALLEY AND PAWLING SAVINGS BANK
(INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 2.3 TO THE COMPANY'S CURRENT
REPORT ON FORM 8-K FILED ON DECEMBER 29, 1997).
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).
3.3 BYLAWS AMENDMENT OF HUDSON CHARTERED BANCORP, INC. (INCORPORATED HEREIN
BY REFERENCE TO EXHIBIT 3.1 TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997.
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*
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)+
10.10 FIRST NATIONAL BANK OF THE HUDSON VALLEY DIRECTORS' SEVERANCE PLAN+*
11 COMPUTATION OF EARNINGS PER SHARE (INCLUDED IN NOTE A TO THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENT *
1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
21 SUBSIDIARIES OF HUDSON CHARTERED BANCORP, INC.*
23 CONSENT OF DELOITTE & TOUCHE LLP (FILED HEREWITH).
27 FINANCIAL DATA SCHEDULE.*
99.1 STOCK OPTION AGREEMENT, DATED AS OF DECEMBER 16, 1997, BY AND BETWEEN
HUDSON CHARTERED BANCORP, INC. (AS THE ISSUER) AND PROGRESSIVE BANK, INC.
(AS THE GRANTEE)(INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 99.1 TO THE
COMPANY'S CURRENT REPORT ON FORM 8-K FILED ON DECEMBER 29, 1997).
99.2 STOCK OPTION AGREEMENT, DATED AS OF DECEMBER 16, 1997, BY AND BETWEEN
PROGRESSIVE BANK, INC. (AS THE ISSUER) AND HUDSON CHARTERED BANCORP, INC.
(AS THE GRANTEE)(INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 99.2 TO THE
COMPANY'S CURRENT REPORT ON FORM 8-K FILED ON DECEMBER 29, 1997).
______________________
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN.
* Previously filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (filed on March 30, 1998)
2
<PAGE>
EXHIBIT 23
- ----------
DELOITTE & TOUCHE LLP STAMFORD HARBOR PARK
333 LUDLOW STREET
PO BOX 10098
STAMFORD, CT 06904
CONSENT OF INDEPENDENT AUDITORS
WE CONSENT TO THE INCORPORATION BY REFERENCE, IN THE REGISTRATION STATEMENTS
LISTED BELOW, OF OUR REPORT DATED JANUARY 27, 1998, RELATING TO THE CONSOLIDATED
FINANCIAL STATEMENTS OF HUDSON CHARTERED BANCORP, INC. (THE "COMPANY") AND
SUBSIDIARIES, APPEARING IN THIS ANNUAL REPORT ON FORM 10-K, AS AMENDED BY
AMENDMENT NO. 1 ON FORM 10K/A FILED ON APRIL 9, 1998, OF THE COMPANY FOR THE
YEAR ENDED DECEMBER 31, 1997.
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
APRIL 9, 1998
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
