<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-13213
-------
PREMIER NATIONAL BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1668718
- - -------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
PO Box 310, Route 55, Lagrangeville, NY 12540
- - ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914)471-1711
- - -------------
(Registrant`s telephone number, including area code)
____________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ______
-------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
14,240,189 shares of Common Stock outstanding, par value $.80 per share, at
October 31, 1998.
<PAGE>
PREMIER NATIONAL BANCORP, INC. & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C> <C>
PART I
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements
of Income & Expense 2
Condensed Consolidated Statements
of Cash Flows 3
Condensed Consolidated Statement
of Changes in Stockholders' Equity 4
Notes to Unaudited Condensed Consolidated
Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 30
PART II
Item 5 - Other Information 31
Item 6(a) Exhibits 31
Item 6(b) Reports on Form 8-K 31
Exhibit Index 32
Signatures 33
</TABLE>
<PAGE>
Item 1: Financial information
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31,
1998 1997
ASSETS ____________ ____________
<S> <C> <C>
Cash and due from banks $56,677 $42,961
Federal funds sold 118,700 50,300
---------- ----------
175,377 93,261
Total cash and cash equivalents
Securities
Available for sale, at fair value 395,230 276,678
Held to maturity, at cost,( fair value of $19,866 in 1998 19,309 155,544
and $156,404 in 1997)
Regulatory securities (at cost which approximates fair value) 9,711 7,720
Loans held for sale 344 679
Loans( see notes)
Gross loans 975,893 1,040,872
Allowance for loan losses (20,564) (19,331)
---------- ----------
955,329 1,021,541
Net loans
Premises and equipment, net 28,851 25,318
Accrued income 12,369 11,181
Other assets 23,159 23,096
---------- ----------
TOTAL ASSETS $1,619,679 $1,615,018
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $241,221 $218,780
Interest bearing 1,209,847 1,233,918
---------- ----------
Total deposits 1,451,068 1,452,698
Notes payable 1,725 1,725
Other liabilities 12,633 11,758
---------- ----------
TOTAL LIABILITIES 1,465,426 1,466,181
STOCKHOLDERS' EQUITY (see notes)
Preferred stock
($.01 par value; 5,000,000 shares authorized; none issued) - -
Common stock ($.80 par value; 50,000,000 shares authorized 1998 11,382 11,308
and 20,000,000 ,1997)
14,228,560 shares issued less 465 treasury shares in 1998 and
14,135,170 shares issued less 85,015 treasury shares in 1997
Additional paid-in capital 60,668 59,628
Retained earnings 79,119 78,612
Accumulated other comprehensive income 3,095 1,647
Treasury stock (11) (2,358)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 154,253 148,837
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' $1,619,679 $1,615,018
EQUITY ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
-1-
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
Interest income: ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Loans, including fees $22,157 $23,527 $68,279 $70,040
Federal funds sold 1,329 906 3,009 1,926
Taxable securities 5,970 5,259 17,420 16,320
Tax-exempt securities 921 849 2,961 2,360
------------- ------------ ------------- -------------
Total interest income 30,377 30,541 91,669 90,646
Interest expense 13,373 14,001 41,242 41,375
------------- ------------ ------------- -------------
Net interest income 17,004 16,540 50,427 49,271
Provision for loan losses 1,199 1,101 4,729 3,501
------------- ------------ ------------- -------------
Net interest income
after provision for loan losses 15,805 15,439 45,698 45,770
------------- ------------ ------------- -------------
Noninterest income:
Service charges and fees 1,964 1,883 5,539 5,765
Trust earnings 219 195 678 540
Gains on sales of securities, net 0 102 51 151
Gains on sales of loans, net 120 119 418 342
Other income 62 41 260 219
------------- ------------ ------------- -------------
Total noninterest income 2,365 2,340 6,946 7,017
------------- ------------ ------------- -------------
GROSS OPERATING INCOME 18,170 17,779 52,644 52,787
------------- ------------ ------------- -------------
Noninterest expense:
Salaries and employee benefits 5,774 5,758 17,464 17,368
Net occupancy and equipment expense 1,780 1,633 5,325 5,094
Other real estate owned 64 50 (260) 201
Merger expenses 5,311 0 7,511 0
Other expenses 2,878 3,245 9,289 9,303
------------- ------------ ------------- -------------
Total noninterest expense 15,807 10,686 39,329 31,966
------------- ------------ ------------- -------------
Income before income taxes 2,363 7,093 13,315 20,821
Income taxes 1,136 2,565 5,243 7,574
------------- ------------ ------------- -------------
Net income $1,227 $4,528 $8,072 $13,247
============= ============ ============= =============
Weighted average common shares outstanding:
Basic 14,213,000 14,216,000 14,174,000 14,225,000
Diluted 14,636,000 14,427,000 14,654,000 14,391,000
Per common share data:
Basic earnings $0.09 $0.32 $0.57 $0.93
Diluted earnings 0.08 0.31 0.55 0.92
Cash dividends declared (1) 0.26 0.13 0.39 0.37
Book value at period end 10.84 9.34
</TABLE>
(1) The normal second quarter dividend of .13 per share was declared on 7/20/98
payable to shareholders of record 7/31/98.
See notes to condensed consolidated financial statements.
-2-
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine
Months Ended
9/30/98 9/30/97
OPERATING ACTIVITIES ____________ ____________
<S> <C> <C>
Net income $8,072 $13,247
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 4,729 3,500
Accrued merger expense 2,950
Depreciation and amortization 2,336 2,085
Amortization of security premiums and
accretion of discounts 286 373
Amortization of core deposit intangible 826 1,134
Realized gains on sales of securities and loans (469) (494)
Deferred income tax benefits (1,012) (554)
Increase in accrued income (1,188) (4,341)
Other, net (4,631) 598
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,899 15,548
------------ -----------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 6,055 47,074
Proceeds from maturities and calls of securities available for sale 180,322 79,812
Proceeds from maturities of securities held to maturity 11,364 20,459
Purchases of securities available for sale (173,403) (103,723)
Purchases of securities held to maturity (6,379) (68,471)
Sales of loans 21,394 15,325
Net (increase) decrease in loans 40,842 (14,586)
Purchases of premises and equipment (5,869) (1,199)
Proceeds from sales of premises and equipment 0 650
Purchase of investment subsidiary (250)
Proceeds from sale of OREO 946 3,319
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 75,022 (21,340)
------------ -----------
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (1,630) 29,479
Proceeds from issuance of common stock 2,223 2,225
Repurchase of common stock (159) (3,853)
Cash dividends- common (5,239) (4,420)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (4,805) 23,431
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS 82,116 17,639
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 93,261 92,849
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $175,377 $110,488
============ ===========
CASH PAID FOR:
Interest $41,570 $43,356
Taxes 6,201 6,291
NON-CASH ITEMS
Transfer from loans to OREO $1,496 $2,529
Net change in unrealized gains (losses) recorded
on securities available for sale 1,448 1,227
Change in deferred taxes on net unrealized (gains)
losses recorded on securities available for sale 1,054 477
Purchase of land by issuance of shares 300
Transfer of securities from held to maturity to available for sale 95,993
Cancellation of predecessor entity treasury stock 10,466
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Balance January 1, 1998 $11,308 $59,628 $78,612 $1,647
Net income 8,072
Cash dividends declared on common stock ($0.39 per share) (1) (6,168)
Dividend reinvestment and stock purchase plan - 39,009 shares 20 552
Options exercised - 90,536 shares 54 488
Purchase of land by issuances of treasury shares- 14,544 shares
Effect of Treasury stock issued at less than cost (1,397)
Purchase of treasury stock from employees - 7,030 shares
Net change in unrealized gain on securities, after tax 1,448
----------------------------------------------------------
Balance September 30, 1998 $11,382 $60,668 $79,119 $3,095
==========================================================
Balance January 1, 1997 $11,301 $59,391 $67,628 $1,065
Net income 13,247
Cash dividends declared on common stock ($0.37 per share) (4,536)
Dividend reinvestment and stock purchase plan - 42,747 shares
Options exercised - 129,739 shares 15 263
Effect of Treasury stock issued at less than cost (33)
Purchase of treasury stock - 129,321 shares
Payments on ESOP borrowings
Net change in unrealized gain on securities, after tax 749
----------------------------------------------------------
Balance September 30, 1997 $11,316 $59,654 $76,306 $1,814
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock ESOP Total
-------- ------- ---------
<S> <C> <C> <C>
Balance January 1, 1998 ($2,358) $148,837
Net income 8,072
Cash dividends declared on common stock ($0.39 per share) (1) (6,168)
Dividend reinvestment and stock purchase plan - 39,009 shares 290 862
Options exercised - 90,536 shares 519 1,061
Purchase of land by issuances of treasury shares- 14,544 shares 300 300
Effect of Treasury stock issued at less than cost 1,397 0
Purchase of treasury stock from employees - 7,030 shares 0
Net change in unrealized gain on securities, after tax 1,448
---------------------------------------
Balance September 30, 1998 $ 11 $154,253
=======================================
Balance January 1, 1997 ($1,549) ($129) $137,707
Net income 13,247
Cash dividends declared on common stock ($0.37 per share) (4,536)
Dividend reinvestment and stock purchase plan - 42,747 shares 634 634
Options exercised - 129,739 shares 1,313 1,591
Effect of Treasury stock issued at less than cost 33 0
Purchase of treasury stock - 129,321 shares (3,491) (3,491)
Payments on ESOP borrowings 33 33
Net change in unrealized gain on securities, after tax 749
---------------------------------------
Balance September 30, 1997 ($3,060) ($96) $145,934
=======================================
</TABLE>
(1) Dividends with respect to the second quarter 1998 were declared on July 10,
1998, payable on July 31, 1998.
See notes to condensed consolidated financial statements.
-4-
<PAGE>
FORM 10-Q
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Merger
- - ------
On July 17, 1998, Progressive Bank, Inc. ("Progressive") merged with and into
Hudson Chartered Bancorp, Inc.(the "Company"). The resulting bank holding
company was re-named Premier National Bancorp, Inc. (the "Continuing
Corporation"). In addition, Pawling Savings Bank, Progressive's wholly owned
subsidiary, merged with and into First National Bank of the Hudson Valley
("Hudson Valley"), a wholly-owned subsidiary of the Company, under the national
bank charter of Hudson Valley and the name Premier National Bank (the "Bank").
The transaction was accounted for on the pooling of interests method.
Accordingly, all financial information has been restated to reflect the
combination of the two companies. In connection with the merger, 3,859,869
shares of Progressive common stock were converted, at an exchange ratio of 1.82,
into 7,024,566 shares of the continuing corporation common stock.
Basis of Presentation
- - ---------------------
The unaudited condensed consolidated financial statements and related notes of
Premier National Bancorp, Inc. have been prepared in accordance with Regulation
S-X under the Securities Exchange Act of 1934, as amended, and consequently the
accompanying unaudited, condensed consolidated financial statements and notes do
not contain all disclosures required by generally accepted accounting
principles. These interim financial statements should be read in conjunction
with the Company's audited restated consolidated financial statements and note
disclosures attached to this Form 10-Q as Exhibit 99.1 and listed under Part II,
Item 5. "Other Information".
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the Company's consolidated
financial position as of September 30, 1998 and December 31, 1997 and its
consolidated results of operations for the three and nine month periods ended
September 30, 1998 and 1997 and the consolidated cash flows and changes in
consolidated stockholders' equity for the nine months ended September 30, 1998
and 1997.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the dates of the consolidated statements of condition and the revenues and
expenses for the periods reported. Actual results could differ significantly
from those estimates.
Estimates that are particularly susceptible to significant change relate to the
determination of the adequacy of the allowance for loan losses and the valuation
of other real estate acquired in connection with foreclosures or in satisfaction
of loan receivables. In connection with the determination of the balances of
the allowance for loan losses and other real estate owned, management obtains
independent appraisals for significant properties, according to Bank policy or
regulation.
-5-
<PAGE>
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for the full year.
Material intercompany items and transactions have been eliminated in
consolidation. Certain reclassifications have been made to conform to the
current presentation.
Forward-Looking Statements
- - --------------------------
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for the remainder of 1998 and, in certain instances, subsequent
periods. The Company cautions that these forward-looking statements are subject
to numerous assumptions, risks and uncertainties, and that statements for
subsequent periods are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products; actions of competitors; changes in
economic conditions; the extent and timing of actions of the Federal Reserve
Board; customer deposit disintermediation; changes in customers' acceptance of
the Company's products and services; other normal business risks such as credit
losses, litigation, etc.; the extent and timing of legislative and regulatory
actions and reform, estimated cost savings from recent or anticipated
acquisitions and mergers cannot be fully realized within the expected time
frame, revenues following such transactions are lower than expected, and costs
or difficulties related to the integration of acquired and existing businesses
are greater than expected or system costs related to the year 2000 are greater
than expected.
The Company's forward-looking statements speak only as of the date on which such
statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
of circumstances.
-6-
<PAGE>
Pending Accounting Pronouncements
- - ---------------------------------
The Financial Accounting Standards Board has issued two new accounting standards
having implementation dates subsequent to September 30, 1998. Implementation of
those standards, individually and in the aggregate, will not have any material
affect on the Company's or financial condition or results of operations. The
new accounting standards are:
. Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
About Segments of an Enterprise and Related Information" requires
disclosures regarding reportable segments of an enterprise. Information
required to be disclosed for each reported segment includes, among other
factors used to identify segments, selected financial data, profit and
loss, revenues and other operating and non-operating expenses.
. SFAS No. 132, "Disclosures About Pensions and Other Postretirement
Benefits", amends disclosure requirements related to pension and other
postretirement benefits previously required under Statements of Financial
Accounts Standards Nos. 87, 88 and 106. SFAS 132 does not change the
measurement or recognition of these plans.
In accordance with the effective date of these SFAS, the disclosures will be
included in the Company's 1998 Annual Report on Form 10-K.
-7-
<PAGE>
Loans
- - -----
Major classifications of loans (excluding loans held for sale) are summarized
below (in thousands):
<TABLE>
<CAPTION>
At September 30, 1998 At December 31, 1997
--------------------- --------------------
<S> <C> <C>
Commercial and industrial $105,344 $ 93,351
Consumer installment 138,186 144,977
Real estate - construction 62,128 61,009
Real estate - mortgage
(Commercial) 234,610 223,542
Real estate - mortgage
(Residential & Home Equity) 431,092 504,544
Other loans 4,533 13,449
-------- ----------
Total $975,893 $1,040,872
======== ==========
</TABLE>
Deposits
- - --------
Major classifications of deposits are summarized below (in thousands):
<TABLE>
<CAPTION>
At September 30, 1998 At December 31, 1997
---------------------- --------------------
<S> <C> <C>
Demand deposits $ 241,221 $ 218,780
NOW accounts 68,567 69,396
Money market deposit
accounts 326,421 284,323
Savings accounts 314,615 356,460
Time deposits under $100,000 375,401 413,448
Time deposits over $100,000 124,843 110,291
---------- ----------
Total $1,451,068 $1,452,698
========== ==========
</TABLE>
-8-
<PAGE>
Securities
- - ----------
Securities consist of the following (in thousands):
<TABLE>
<CAPTION>
At September 30, 1998 At December 31, 1997
--------------------------------------------------------------------------
Carrying Amortized Fair Carrying Amortized Fair
Amount Cost Value Amount Cost Value
--------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Treasury:
Available for Sale $ 64,405 $ 63,117 $ 64,405 $ 64,793 $ 64,444 $ 64,793
US Gov't Agencies:
Available for Sale 48,776 48,437 48,776 51,958 51,926 51,958
Obligations of States and
Political Subdivisions:
Available for Sale 88,417 86,307 88,417 70,946 69,686 70,946
Held to Maturity 19,234 19,234 19,787 24,170 24,170 24,669
Other Securities:
Available for Sale 193,632 192,064 193,632 88,981 87,819 88,981
Held to Maturity 75 75 79 131,374 131,374 131,735
Regulatory Securities 9,711 9,711 9,711 7,720 7,720 7,720
--------------------------------------------------------------------------
Total Securities $424,250 $418,945 $424,807 $439,942 $437,139 $440,802
==========================================================================
Total Available for Sale $395,230 $389,925 $395,230 $276,678 $273,875 $276,678
Total Held to Maturity 19,309 19,309 19,866 155,544 155,544 156,404
Regulatory Securities 9,711 9,711 9,711 7,720 7,720 7,720
--------------------------------------------------------------------------
Total Securities $424,250 $418,945 $424,807 $439,942 $437,139 $440,802
==========================================================================
</TABLE>
At September 30, 1998 the net unrealized gain on securities available for sale
(net of tax effect of $2,210,000) that was included in accumulated other
comprehensive income, a separate component of stockholders' equity, was
$3,095,000. Gross unrealized gains and losses on available for sale securities
at September 30, 1998 were $5,804,000 and $499,000, respectively.
On September 30, 1998, the Company adopted SFAS No. 133, Accounting for
Derivatives Instruments and Hedging Activities. While the Company has no
immediate plans to enter into derivative transactions, it may choose to do so in
the future. As permitted with the adoption of SFAS No. 133, the Company
transferred its remaining Mortgage Backed Securities classified as Held to
Maturity to Available for Sale. The effect of this transfer increased Available
for Sale securities having a cost basis of $96.0 million and the Company
increased its carrying value by $993,000 and recorded an increase in accumulated
other comprehensive income of $576,000 on an after tax basis,
-9-
<PAGE>
which is included in the separate component of stockholders' equity referred to
in the preceding paragraph.
Earnings per common share 1997 data has been adjusted for the three for two
- - -------------------------
stock split paid as a 50% stock dividend which the Company declared in September
1997.
Basic earnings per common share is computed as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Weighted average common shares 14,213 14,216 14,174 14,225
outstanding
Total basic shares 14,213 14,216 14,174 14,225
======= ======= ======= =======
Net income $ 1,227 $ 4,528 $ 8,072 $13,247
======= ======= ======= =======
Basic earnings per common share $ 0.09 $ 0.32 $ 0.57 $ 0.93
======= ======= ======= =======
</TABLE>
Diluted earnings per common share is computed as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares 14,213 14,216 14,174 14,225
outstanding
Net effect of dilutive stock 423 211 480 166
options ------- ------- ------- -------
Total diluted shares 14,636 14,427 14,654 14,391
======= ======= ======= =======
Net income $ 1,227 $ 4,528 $ 8,072 $13,247
======= ======= ======= =======
Diluted earnings per $ 0.08 $ 0.31 $ 0.55 $ 0.92
common share ======= ======= ======= =======
</TABLE>
Stockholders' Equity
- - --------------------
Authorized common stock, $.80 par value was increased from 20,000,000 to
50,000,000 shares upon consummation of the Merger. Issued and outstanding
shares (net of treasury shares) at September 30, 1998 and December 31, 1997,
were 14,228,095 and 14,050,155, respectively. The Company paid a 50% stock
dividend in October 1997 which increased common shares outstanding by 2,351,654
and issued 7,024,566 shares in connection with the Merger. (All 1997 share data
has been accordingly restated in the condensed consolidated statements of
income and expense and Stockholders' Equity.)
Components of Comprehensive Income
- - ----------------------------------
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which established standards for the reporting and display
of comprehensive income (and its components) in financial statements. The
standard does not, however, specify when to recognize or how to measure items
that make up comprehensive income. Comprehensive income represents net income
and certain amounts reported directly in shareholders' equity, such as
-10-
<PAGE>
the net unrealized gain or loss on securities available for sale. While SFAS No.
130 does not require a specific reporting format, it does require that an
enterprise display an amount representing total comprehensive income for the
period.
The Company's only item of accumulated "other comprehensive income" included in
shareholders' equity is the net unrealized gain on securities available for
sale, net of taxes.
The Company's comprehensive income for the nine months ended September 30, 1998
was as follows:
<TABLE>
<CAPTION>
Description Amount
- - ----------- ----------
<S> <C> <C>
Net income $8,072,000
Other comprehensive income, net of tax:
Net unrealized holding gains on securities
available for sale arising during the period $1,466,000
Less effect of securities transferred to
available for sale from held to maturity (576,000)
Reclassification of gains included in net
income, net of tax (18,000) 872,000
---------- ----------
Comprehensive income $8,944,000
==========
</TABLE>
These unrealized holding gains, net of tax benefit, represent an increase in the
unrealized appreciation of available for sale securities, net of tax, during the
nine months ended September 30, 1998. The cumulative balance of this unrealized
gain, net of tax, at September 30, 1998 was $3,095,000.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
- - --------------------
The Company's financial condition on September 30, 1998 reflected total assets
of $1,619.7 million, little changed over total assets at December 31, 1997. Net
loans decreased $66.2 million or 6.5% to $955.3 million at September 30, 1998.
Cash and cash equivalents increased from $93.3 million at December 31, 1997 to
$175.4 million at September 30, 1998. Other assets increased by $4.8 million.
Aggregate securities were $424.3 million at September 30, 1998, a decrease of
$15.7 million or 3.6% from the level at December 31, 1997.
During the first three quarters of 1998, the Bank originated $218.5 million of
new loans. However, normal amortization and prepayments (which were
approximately $262 million during the first three quarters of 1998) and sales of
loans into the secondary market, with servicing retained (which were
approximately $21.4 million) resulted in a net $65.0 million decrease in loan
balances outstanding at September 30,1998 compared to December 31, 1997. The
decreases arose in the categories of residential real estate loans ($73.5
million net of residential construction) due primarily to customers refinancing
adjustable rate mortgages and home equity loans into fixed rate mortgage loans
(some of which were financed by the Company and sold into the secondary market),
and other loans of $9 million. Commercial and industrial loans increased $12.0
million and commercial mortgage loans increased by $11.1 million. Consumer
installment loans decreased by $6.8 million as the Company had ceased writing
indirect automobile loans from used car dealers in the third quarter of last
year. The Company continues its commitment to provide indirect vehicle
financing to new car dealers.
Period end total deposits were little changed in the first nine months of 1998
at $1,451.1 million. Of this amount, total Public (Municipal) Funds increased
$11.5 million or 18.9% to $72.2 million and total non-public funds decreased
marginally by $13,111,000 to $1,378.9 million.
-12-
<PAGE>
The following tables summarize the net changes in public (municipal) fund and
non-public fund deposits from December 31, 1997 to September 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
PUBLIC FUNDS
Percent
Change
Balance Balance Net over
12/31/97 9/30/98 Change Y/E'97
----------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $ 3,061 $ 9,903 $ 6,842 223.52%
NOW accounts 10,299 16,267 5,968 57.95
Money market accounts 10,334 15,242 4,908 47.49
Savings accounts 3,354 2,631 (723) (21.56)
Time deposits 33,670 28,156 (5,514) (16.38)
----------------------------------------
Total public deposits $ 60,718 $ 72,199 $11,481 18.91%
========================================
</TABLE>
Public funds balances increased in the first nine months of 1998 due to the
solicitation of new municipal relationships, actively managing large time
deposits, and receiving deposits of school district tax assessments levied in
September. This latter increase usually reverses by year end as the result of
the municipalities employing their funds.
NON PUBLIC FUNDS
<TABLE>
<CAPTION>
Percent
Change
Balance Balance Net over
12/31/97 9/30/98 Change Y/E'97
--------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $ 215,719 $ 231,318 $ 15,599 7.23%
NOW accounts 59,097 52,300 (6,797) (11.50)
Money market accounts 273,989 311,179 37,190 13.57
Savings accounts 353,106 311,984 (41,122) (11.65)
Time deposits 490,069 472,088 (17,981) (3.67)
--------------------------------------------
Total non public deposits $1,391,980 $1,378,869 $(13,111) (0.94)%
============================================
</TABLE>
Normal non-public deposits were down marginally by $13,111,000 compared to
December 31, 1997. Within these categories, money market accounts increased by
$37.2 million primarily as a result of the success of the "Premier Select"
accounts, a relationship deposit package requiring a demand deposit
relationship. Withdrawals from savings and time deposit accounts primarily
flowed into this product.
Consolidated stockholders' equity at quarter end was $154.3 million, up $5.4
million over year end 1997. The Company's net retained earnings for the first
three quarters of $1.9 million were complimented by $2.3 million of stock
issuance proceeds which included $300,000 issued in connection with the purchase
of land for the Company's Newburgh branch and normal issuances under the
Company's stock option plans of $1.1 million and dividend reinvestment plan of
$.9 million and by the increase in unrealized gains, after tax, in the market
value of the Company's available-for-sale investment portfolio ($1.4 million).
The ratio of shareholders' equity to total assets remained strong at September
30, 1998 standing in excess of 9.5%.
-13-
<PAGE>
Results of Operations
- - ---------------------
Interest income as reported, for the nine months ended September 30, 1998,
compared to the same period in 1997, increased $1.0 million while interest
expense decreased by $.1 million. This resulted in an increase in net interest
income of $1.2 million. Provision for loan losses increased by $1.2 million.
Total non-interest income decreased $71,000 or 1.0%. Total noninterest expenses
increased by $7.4 million or 23.0%, which was due entirely to merger-related
expenses of $7.5 million incurred in the first nine months of 1998. Excluding
merger related expenses, total non-interest expense was down $148,000 or .46%.
Net income after tax decreased by $5.2 million or 39.0%. Diluted earnings per
common share decreased to $.55 for the nine months of 1998 compared to $.92 for
1997. Excluding merger-related expenses incurred in 1998 of $7.5 million or
$5.3 million after-tax earnings, net income on a pro forma basis would have been
$13.4 million and diluted earnings per common share would have been $.91.
The net income and earnings per common share data discussed above is presented
in the following table:
<TABLE>
<CAPTION>
Nine months ended Three months ended
----------------- ------------------
Actual Pro forma Actual Actual Pro forma Actual
------- ---------- -------- ------- ---------- --------
9/30/98 9/30/98(1) 9/30/97* 9/30/98 9/30/98(1) 9/30/97*
------- ---------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income (in
thousands) $8,072 $13,388 $13,247 $1,227 $ 4,922 $4,528
Per common share:*
Basic earnings 0.57 0.94 0.93 0.09 0.35 0.32
Diluted earnings 0.55 0.91 0.92 0.08 0.34 0.31
</TABLE>
(1) Excludes merger-related expenses after tax of $5.3 million and $3.7 million
for the nine and three months ended September 30, 1998, respectively.
* Adjusted for the 50% stock dividend declared September 1997.
The Company's (excluding merger-related expenses of $5.3 million after tax)
return on average assets and return on average equity for both the three months
and nine months ended September 30, 1998 and 1997, are detailed in the table
below:
<TABLE>
<CAPTION>
Nine months ended Three months ended
--------------------------------------------------------------------
Actual Pro forma Actual Actual Pro forma Actual
-------- ---------- -------- -------- ---------- ---------
9/30/98 9/30/98(1) 9/30/97 9/30/98 9/30/98(1) 9/30/97
-------- ---------- -------- --------- ---------- ---------
Actual:
- - -------
<S> <C> <C> <C> <C> <C> <C>
Return on assets .66% 1.09% 1.11% .30% 1.20% 1.13%
Return on total
stockholders' equity 7.07 11.72 12.62 3.20 12.83 12.74
</TABLE>
(1) Excludes merger-related expenses after tax of $5.3 million and $3.7 million
for the nine and three months ended September 30, 1998, respectively.
-14-
<PAGE>
Merger
- - ------
In connection with the merger, the Company incurred during the first nine months
of 1998, $7,511,000 in merger-related expenses or $5.3 million after tax.
Merger-related expenses are expensed as incurred. Since the merger date, the
Company has established a unified management structure under common policies and
procedures and consolidated six branches. Over the Labor Day weekend, the
Company converted its data processing systems, which was originally scheduled
for the date of the merger.
These merger-related items do not reflect potential future cost savings or
revenue enhancements resulting from the merger and do not reflect the second
quarter $702,000, after tax, (exceptional) charge to conform accounting
practices between the constituent companies.
The Company's results are beginning to reflect the expense savings arising from
the merger. Excluding one time merger expenses, total operating expenses are
down approximately 2% in the third quarter of 1998 from the same period last
year, even after absorbing the costs of normal salary increases and the staffing
and related costs of four new branches. While the Company is presently incurring
the expenses of completing its data processing conversion, including temporary
staff and professional assistance, it is expected that the fourth quarter and
future periods will progressively witness the benefits of further implementation
of the revenue enhancement and cost savings opportunities of the merger.
The following is an estimate of the accrued and realized merger-related costs
incurred related to the Merger for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended 9/30/98 ended 9/30/98
--------------- ---------------
<S> <C> <C>
Merger-related costs -
Professional fees $ 940 $ 1,555
Operational & promotional costs 1,401 2,184
Abandonments & redundancies 1,068 1,068
Staff & benefit expenses 1,150 1,952
Net thrift bad debt deduction 752 752
------- -------
Total merger-related charges 5,311 7,511
Tax benefit recognized (1,616) (2,195)
------- -------
Net after tax effect of merger-related
items for the period $ 3,695 $ 5,316
======= =======
</TABLE>
-15-
<PAGE>
Interest income
- - ---------------
On a tax equivalent basis, gross interest income increased by $1.3 million or
1.5% for the nine months ended September 30, 1998 compared to the same period in
1997, due principally to the increase in average earning assets of $43.3
million. Average loans decreased by $35.4 million, securities increased $47.1
million and federal funds increased by $31.6 million.
Total interest expense decreased by $133,000 or .32% for the nine months period
ended September 30, 1998 as compared to the nine months ended September 30, 1997
due primarily to lower interest rates paid on deposits. For the nine month
period ended 1998 compared to 1997, the growth in average assets of $48.0 was
principally funded by an increase in average deposits of $35.7 million (of which
$14.3 million were interest- bearing deposits), and an increase in average
shareholders' equity of $12.2 million.
Average yields on interest earning assets decreased to 8.07% for the nine months
ended September 30, 1998 vs. 8.18% as of the same period in 1997 due to declines
in tax exempt investment yields (due to the growth in tax exempt investment
portfolio in a lower interest rate environment) as well as lower yields on
taxable securities. Average interest bearing liability rates decreased to 4.41%
for the nine months ended September 30, 1998 vs. 4.48% for the nine months ended
September 1997 (due primarily to the Company's downward management of deposit
interest rates paid to reflect its increasing liquidity). Net interest margins
on a tax equivalent basis remained unchanged at 4.50% for the nine months ended
September 30, 1998 compared to the same period in 1997. Thus, overall growth in
the balance sheet was achieved while maintaining net interest margins, and such
growth created overall increases in net interest income. Variances due to
changes in rates (primarily reductions in interest expense) produced a $929,000
increase in net interest income in the nine months of 1998 compared to the same
period in 1997, while the increase in average earning assets of $43.3 million
(compared to an increase in interest bearing liabilities of $14.3 million)
principally contributed to the $227,000 increase in net interest income due to
volume variances over the same period. The net effect was that net interest
income before provisions for loan losses grew to $50.4 million for the nine
months ended September 30, 1998 compared to $49.3 million for the comparable
period in 1997, or an increase of $1.2 million (2.35%).
-16-
<PAGE>
The table below sets forth the consolidated average balance sheets for the
Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---- ----
Average Interest Yield/ Average Interest Yield/
Balance Cost Balance Cost
- - ------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $1,011,768 $68,279 9.00% $1,047,128 $70,040 8.92%
Taxable Securities 366,488 17,420 6.34% 336,605 16,320 6.46%
Tax-exempt Securities (2) 83,079 4,486 7.20% 65,898 3,575 7.23%
Fed Funds Sold 78,806 3,009 5.09% 47,229 1,926 5.44%
---------- ------- ---------- -------
Total Interest Earning Assets 1,540,141 93,194 8.07% 1,496,860 91,861 8.18%
NonInterest Earning Assets:
Cash & Due from Banks 50,110 46,800
Premises & Equipment 27,085 26,041
Other Assets 44,852 43,452
Allowance for Loan Losses (19,948) (18,895)
---------- ------ ---------- -------
Total Assets $1,642,240 $93,194 7.57% $1,594,258 $91,861 7.68%
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Savings Deposits $ 341,507 $ 9,162 3.58% $ 372,883 $10,552 3.77%
NOW Accounts 72,358 638 1.18% 71,388 727 1.36%
Money Market Accounts 311,018 10,360 4.44% 260,772 8,856 4.53%
CD's over $100,000 128,007 5,194 5.41% 89,626 3,810 5.67%
Other Time Deposits 391,956 15,817 5.38% 435,768 17,350 5.31%
Borrowed Funds 1,725 71 5.49% 1,838 80 5.80%
---------- ------- ---------- -------
Total Interest-Bearing Liabilities 1,246,571 41,242 4.41% 1,232,275 41,375 4.48%
Noninterest-Bearing Liabilities:
Demand Deposits 223,727 202,080
Other 19,676 19,893
---------- ----------
Total Noninterest-Bearing 243,403 3.69% 221,973 3.79%
Liabilities
Stockholders' Equity 152,266 140,010
---------- ------- ---------- -------
Total Liabilities and $1,642,240 41,242 $1,594,258 41,375 3.46%
Stockholders' Equity ========== ------- ========== -------
Net interest Margin 51,952 4.50% 50,486 4.50%
Less Tax Equivalent Adjustments (1,525) (1,215)
------- -------
Net Interest Income $50,427 4.37% $49,271 4.39%
======= ==== ======= ====
Excess of interest earning assets
over interest bearing liabilities $ 293,570 $ 264,585
Ratio of Average Interest-Earning
Assets to Average Interest-Bearing
Liabilities 123.55% 121.47%
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average Balances include non-accrual loans.
(2) Tax Equivalent Yields on tax-exempt securities based on a Federal tax rate
of 34%.
-17-
<PAGE>
The table below details the changes in interest income and interest expense for
the period indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
Rate/Volume Analysis (in thousands)
- - -----------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
1998 vs. 1997
Increase (Decrease) due to
-----------------------------------------
Volume Rate Net(1)
-------------- ---------- ------------
<S> <C> <C> <C>
Interest Income:
Loans $(2,386) $ 625 $(1,761)
Taxable investment securities 1,420 (320) 1,100
Tax-exempt investment(2)
securities 928 (17) 911
Federal funds sold 1,205 (122) 1,083
--------- --------- ----------
Total interest income 1,167 166 1,333
Interest expense:
Savings deposits (842) (548) (1,390)
NOW/accounts 9 (98) (89)
Money market accounts 1,674 (170) 1,504
Certificates over $100,000 1,557 (173) 1,384
Other Time Deposits (1,768) 235 (1,533)
Borrowed funds (5) (4) (9)
--------- --------- ----------
Total interest expense 625 (758) (133)
--------- --------- ----------
Net interest margin 542 924 1,466
Less tax equivalent affect (315) 5 (310)
--------- --------- ----------
Net interest income $ 227 $ 929 $ 1,156
========= ========= ==========
</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%.
Provision for loan losses and credit quality
- - --------------------------------------------
Provisions for loan losses are based on management's assessment of risk of loss
inherent in the loan portfolio and as such reflect, among other things, both
trends in local economic conditions and the categorization of the credit quality
of individual loans. Such assessment is ongoing, and may not directly reflect
the charge-offs taken in any accounting period, although the trend in charge-
offs is an important element in the evaluation of the adequacy of the allowance
for loan losses. Provision for loan losses
-18-
<PAGE>
increased from $3.5 million to $4.7 million in the first three quarters of 1998
compared to 1997. Of this increase, $1.1 million reflected additional provisions
required to conform the accounting policies, relating to the evaluation of the
allowance for loan losses, of the predecessor institutions in the second quarter
of 1998.
Total net charge-offs for the first nine months of 1998 were $3.5 million
compared to $3.0 million for the same period in 1997. The ratio of net
chargeoffs to average loans, on an annualized basis, increased to .35% in the
first nine months of 1998 vs. .28% for the same period of 1997.
Total non-performing assets were approximately $13.3 million at the end of
September, up $2.9 million over the $10.4 million at year end 1997, representing
.82% of total assets, vs. .64% at year end. While OREO balances at $1.2 million
were down from the $1.4 million reported at year end 1997, quarter end non-
performing loans of $12.1 million were up $3.1 million over the December 31,
1997 level of $9 million due to a $2.0 million increase in the Company's non-
accrual residential mortgage loans and a $1.1 million increase in the Company's
non-accrual commercial mortgages. The increase in commercial mortgage non-
accruals principally reflects one large loan which is the subject of a legal
dispute over the Company's title interest. The increase in residential mortgage
non-accruals is spread over 13 loans with an average balance of approximately
$160,000 per loan.
Nonperforming assets represent 151 loans or OREO properties of which on1y 7 have
balances in excess of $300,000, and no nonperforming asset has a balance greater
than $900,000. Of the total nonperforming loans, 57% is collateralized by
residential property, 36% by commercial property, and 7% by other assets or
unsecured.
Management believes that the allowance for loan losses is adequate to cover the
risk of loss inherent in the portfolio. However, the Company has experienced
substantial growth in its residential mortgage and related residential housing
construction portfolios over the past several years. As a result of this
growth, a portion of the Company's loan portfolio may be considered unseasoned.
Until these portfolios become more "seasoned", no assurance can be given that
the latent risk in those portfolios is not greater than the Company's current
assessments, based on the present payment, loss and other performance indices of
this portfolio. Furthermore, no assurance can be given that the relatively
stable current economic conditions of the Company's overall market area will not
be unsettled by future events. Any such developments would be expected to
adversely effect the financial performance of the Company.
-19-
<PAGE>
The table below summarizes the Company's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
For the nine months For the year
ended September 30, ended December 31,
1998 1997 1997 1996 1995
---------- --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $19,331 $ 18,533 $18,533 $16,803 $17,728
Chargeoffs:
Commercial & industrial 334 1,210 1,448 894 441
Consumer installment & other 1,069 750 1,146 821 812
Real estate mortgage 2,695 1,804 2,164 2,575 3,299
------------------------- --------------------------------
Total charge-offs 4,098 3,764 4,758 4,290 4,552
Recoveries:
Commercial & industrial 102 85 164 118 81
Consumer installment & other 352 110 160 180 249
Real estate mortgage 148 592 757 572 397
------------------------- --------------------------------
Total recoveries 602 787 1,081 870 727
------------------------- --------------------------------
Net charge-offs (3,496) (2,977) (3,677) (3,420) (3,825)
Provision for loan losses 4,729 3,501 4,475 5,150 2,900
------- ------- ------- ------- -------
Balance at end of period $20,564 $19,057 $19,331 $18,533 $16,803
========================= ================================
Ratio of net charge-offs to
average loans outstanding
during the period
(annualized) .35% .28% .35% .34% .41%
Allowance for loan losses as
a percent of period-end loans 2.11% 1.83% 1.86% 1.78% 1.75%
Allowance as a percent of
non-performing loans 170% 146% 214% 171% 134%
Nonperforming loans and OREO
to total loans and OREO 1.36% 1.41% 1.00% 1.32% 1.47%
</TABLE>
-20-
<PAGE>
The table below summarizes the Company's nonperforming assets and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
at September 30, at December 31,
--------------------- ------------------------------
1998 1997 1997 1996 1995
--------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate mortgage $11,022 $ 9,696 $ 7,602 $ 8,088 $ 8,837
Commercial & Industrial 441 421 164 712 1,013
Consumer & other 37 691 123 313 148
--------------------- ------------------------------
Total nonaccrual loans 11,500 10,808 7,889 9,113 9,998
Loans 90 days or more
past due and still
accruing:
Real estate mortgage 37 548 129 430 200
Commercial & industrial 233 297 188 193 476
Consumer & other 32 121 126 22 18
--------------------- ------------------------------
Total 90 days past due
accruing 302 966 443 645 694
Restructured - real
estate 311 1,278 712 1,105 1,849
--------------------- ------------------------------
Total non-performing
and restructured loans 12,113 13,052 9,044 10,863 12,541
Other real estate owned 1,167 1,656 1,366 2,923 1,601
--------------------- ------------------------------
Total non-performing
assets $13,280 $14,708 $10,410 $13,786 $14,142
===================== ==============================
Non-performing and re-
structured loans as a
percent of total loans 1.24% 1.25% .87% 1.04% 1.30%
===================== ==============================
Nonperforming assets as
a percent of total
assets .82% .91% .64% .88% .98%
===================== ==============================
</TABLE>
(1) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of interest is unlikely, or loans that meet other nonaccrual criteria
as established by regulatory authorities. Payments received on loans classified
as nonaccrual are either applied to the outstanding principal balance or
recorded as interest income, depending upon management's assessment of the
collectibility of the loan.
Other real estate owned totals $1,167,000 at September 30, 1998 and includes 16
properties acquired through foreclosure: one parcel of land, 9 residences, and 6
non-farm nonresidential properties. Management believes that the carrying values
of such properties adequately reflect the risk of loss in their orderly
disposal.
-21-
<PAGE>
At September 30, 1998, the Company had approximately $17.1 million in loans
requiring special attention (substandard), in addition to the nonperforming
loans and other nonperforming assets noted above. Such loans are being
monitored so that if present concerns about the borrowers ability to comply with
repayment terms becomes evident, management will be able to quickly assess
impairment. Approximately 85% of all such loans are collateralized by real
estate. Further deterioration in such borrowers' financial position may result
in classifying them as nonperforming assets. The following table summarizes
impaired loans for the periods indicated (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------- -----------------
<S> <C> <C>
Impaired loans for which an allowance was not
required $-0- $5,627,000
Impaired loans with allowance established
($900,000 and $912,000, respectively) 6,707,000
2,390,000
Impaired loans with a writedown
($2,184,000 and $1,483,000, respectively) 5,075,000 1,232,000
----------- ----------
Total $11,782,000 $9,249,000
=========== ==========
Average amount of impaired loans
for the period $10,515,500 $9,243,000
=========== ==========
</TABLE>
The following table shows, at the dates indicated, the allocation of the
allowance for loan losses, by category, and the percentage of loans in each
category to total gross loans (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997 1996 1995
------------------------------------ -----------------------------------------------------------
Balance at end % of % of % of % of % of
of period Amount total Amount total Amount total Amount total Amount total
applicable to: loans loans loans loans loans
------------------------------------ -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial &
industrial $ 2,096 10.79% $ 2,056 6.98% $ 2,131 8.97% $ 2,476 7.88% $ 2,355 7.27%
Consumer & other 3,494 14.62 3,832 16.65 3,699 15.22 3,341 14.52 2,307 13.19
Real estate -
construction 6.37 6.24 5.86 6.55 6.17
Real estate -
mortgage 12,978 68.22 12,071 70.13 12,124 69.95 11,577 71.05 11,373 73.37
Unallocated 1,996 1,097 1,377 1,139 768
------------------------------------ -----------------------------------------------------------
Total $20,564 100.00% $19,056 100.00% $19,331 100.00% $18,533 100.00% $16,803 100.00%
==================================== ===========================================================
</TABLE>
-22-
<PAGE>
Noninterest Income
- - ------------------
Total noninterest income decreased $71,000 in the first nine months of 1998 to
$6,946,000 compared to the same period of 1997. Trust earnings increased
$138,000 and net gains on sales of loans increased by $76,000. These increases
were offset by declines in net service charges and fees of $226,000 (due
primarily to customers maintaining deposit balances to avoid charges), and a
decrease in gains on sale of securities of $100,000.
Other Expenses
- - --------------
In total, noninterest expense was up by $7.4 million or 23.0% to $39.3 million
for the first nine months of 1998 compared to the same period of 1997, due
entirely to merger-related expenses incurred of $7.5 million.
Salaries and employee benefits increased by $96,000 in the first nine months of
1998 compared to 1997. However, underlying salary and benefit expense declined
by approximately $24,000, due to a first quarter 1997 recovery of $120,000 in
compensation expense related to officers waiving tandem stock appreciation
rights (but retaining the rights to underlying stock options) partially offset
by normal salary increases and opening of four new branches. The declines in
salary and benefits expense during the nine months primarily relates to not
filling vacant positions in contemplation of the merger in the third quarter of
1998.
Occupancy and equipment expense showed an increase of $231,000 over the same
period in 1997, due to the addition of new branches and the opening of the new
Newburgh facility. The effect of branch closings in connection with the merger
will begin to be realized in the fourth quarter of 1998. Other real estate
owned expense decreased by $461,000, primarily due to reversal of OREO valuation
reserves no longer required, $(260,000) for the nine months ended September 30,
1998. Other expenses declined by $14,000 primarily in the areas of trust,
postage, advertising, directors' expense and employee education and travel
largely offset by other expenses incurred in connection with the merger but not
categorized mostly as merger-related expense.
Pretax income decreased by $7.5 million. However, income tax expense only
decreased by $2.3 million primarily due to $2.2 million of the merger-related
expenses being considered nontax-deductible. The Company's effective tax rate,
therefore, increased to 39.4% from 36.4% as a result of the nondeductible
expenses incurred. Net income was $8.1 million for the nine months ended
September 30, 1998 vs $13.2 million for the same period in 1997, a decrease of
$5.2 million or 39.1%.
-23-
<PAGE>
Three months ended September 30, 1998 vs. September 30, 1997
- - ------------------------------------------------------------
Net interest income increased $464,000 or 2.8% for the three months ended
September 30, 1998 compared to 1997, primarily due to higher average investment
balances, partially offset by interest expense related to growth in underlying
Money Market balances.
The following chart shows a summary of average balance and tax equivalent yield
for the three months ended September 30, 1998 compared to the three months ended
September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets $1,535,000 $30,991 8.07% $1,504,000 $30,978 8.23%
Interest bearing liabilities 1,235,000 13,373 4.33 1,231,000 14,001 4.55
------- -------
Non-interest bearing liabilities 257,000 231,000
Net interest margin $17,618 4.59% $16,977 4.52%
Less tax equivalency adjustment (614) (437)
------- -------
Net interest income $17,004 4.43% $16,540 4.40%
======= ==== ======= ====
</TABLE>
Provisions for loan losses increased by $98,000 to $1,199,000 for the three
month period ended September 30, 1998 vs. September 30, 1997.
Other income increased $25,000 to $2,365,000 for the three months ended
September 30, 1998 compared to 1997, primarily as a result of service charge and
fees increasing by $81,000, trust earnings increasing by $24,000 and other
income increasing by $23,000 in the three months ended September 30, 1998,
partially offset by a $102,000 decline in gain on sales of securities.
Total noninterest expense increased $5.1 million to $15.8 million for the three
months ended September 30, 1998 compared to September 30, 1997 due entirely to
merger related expenses of $5.3 million incurred in 1998.
Salary and benefit costs for the quarter were stable at $5.8 million. Full time
equivalent staff at 557 was down 31 from the level at September 30, 1997,
despite 17 additional staff at the Company's four new branches. However,
occupancy and equipment expense rose approximately $147,000 to $1.8 million from
$1.6 million principally reflecting the expenses associated with these new
offices and the Company's new Orange County headquarters building. Other
operating costs at $2.9 million were $300,000 below the $3.2 million of the same
quarter last year as the Company began to realize economies, principally in
marketing and administrative expenses. The one time merger costs of $5.3
million were also expended or accrued during this quarter. Although certain
categories of merger expenses have varied from original estimates, post-tax year
to date merger costs have remained within the level projected at the time of the
merger.
Other real estate owned expense increased $14,000 to $64,000 in the three months
ended September 30, 1998.
Pretax income decreased $4.7 million or 66.7% for the three months ended
September 30, 1998 compared to the same period of 1997, while income taxes
decreased by only $1.4 million. Comparative income after taxes decreased
-24-
<PAGE>
$3.3 million to $1.2 million or 72.9% for the quarter ended September 30, 1998
vs. 1997, due solely to merger-related expenses incurred.
Asset/Liability Management
- - --------------------------
Management believes the Company's ability to plan for changes in interest rates
is a significant profitability factor. The Company's primary objective in
managing interest rate sensitivity is to maintain a broadly balanced position
between interest sensitive assets and liabilities in order to minimize the
impact of significant interest rate fluctuations. Further, the historical level
of demand deposits (approximately 15% of total deposits) tends to mitigate
increases in interest rates and reduces the average cost of all liabilities to a
level significantly below the average cost of only interest-bearing liabilities.
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of September 30, 1998 based upon the known
repricing dates of certain assets and liabilities and the assumed repricing
dates of others. As shown in the chart below, at September 30, 1998, assuming
no management action, the Company's near-term interest rate risk is to a rising
rate environment over the one year time frame, principally due to a higher level
of rate sensitive liabilities relative to assets (16.6%) that would reprice in
that time frame. However, beyond one year due to higher levels of assets
repricing, the Company's long-term exposure is to an extended period of
declining rates as the excess of assets repricing over liabilities may cause a
contraction in net interest margins. This chart displays only a static view of
the Company's interest rate sensitivity gap and does not capture the dynamics of
balance sheet, rate and spread movements nor management actions that may be
taken to manage this risk.
-25-
<PAGE>
<TABLE>
<CAPTION>
Maturity Repricing Greater
Date (1)(2) Total than
3 months 4 months within One yr. five
or less to one yr. one yr. to 5 yrs. yrs. Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities (3) $120,100 $ 72,530 $ 192,630 $181,680 $44,635 $ 418,945
Fed Funds 118,700 118,700 118,700
Fixed rate loans 65,885 102,111 167,996 244,905 50,245 463,146
Floating rate loans (3) 202,099 187,231 389,330 111,862 501,192
-------- --------- ---------- -------- ------- ----------
Total interest
earning assets (1) 506,784 361,872 868,656 538,447 94,880 1,501,983
-------- --------- ---------- -------- ------- ----------
Other interest bearing
deposits (4) 392,183 317,420 709,603 709,603
Time/Other (5) 199,634 210,184 409,818 88,627 3,524 501,969
-------- --------- ---------- -------- ------- ----------
Total interest-bearing
liabilities 591,817 527,604 1,119,421 88,627 3,524 1,211,572
-------- --------- ---------- -------- ------- ----------
Interest Sensitivity
gap (6) $(85,033) $(165,732) $ (250,765) $449,820 $91,356 $ 290,411
========================================================================
Gap as a percent of
earnings assets (5.66)% (11.02)% (16.70)% 29.95% 6.07% 19.34%
========================================================================
</TABLE>
(1) Interest rate sensitivity gaps are defined as the fixed rate positions
(assets less liabilities) for a given time period. The gaps measure the
time weighted dollar equivalent volume of positions fixed for a particular
period. The gap positions reflect a repricing date at which date funds are
assumed to "mature" and reprice to a current market rate for the asset or
liability. The table does not include loans in nonaccrual status or net
unrealized losses recorded on "available-for-sale" securities as of
September 30, 1998.
(2) Variable rate balances are reported based on their repricing formulas.
Fixed rate balances are reported based on their scheduled contractual
maturity dates, except for certain investment securities and loans secured
by 1-4 family residential properties that are based on anticipated cash
flows.
(3) Prime-priced loans and investments are considered as 1 to 3 month assets.
(4) Other interest-bearing deposits include Money Market accounts (three months
or less) and Savings and NOW accounts (four months to one year) reflecting
the lagging period that historically exists in Savings and NOW account
interest rate movements. The remainder of other interest-bearing deposits
are "Merit" accounts (savings accounts whose yield is repriced directly
with the Federal Reserve Discount Rate). This discount rate changes less
frequently than other market rates. As a result, management places these
balances at one-half is the three month or less category and the balance in
four months to one year repricing category (the Federal Reserve Discount
Rate has not changes since January 1996.) The interest rate sensitivity
assumptions presented for these deposits are based on historical and
current experiences regarding balance retention and interest rate repricing
behavior.
(5) Time/Other: Time deposits and other interest-bearing liabilities are
classified by contractual maturity or repricing frequency.
(6) Non-interest bearing deposit liabilities were approximately $241,000
million at September 30, 1998.
-26-
<PAGE>
Capital Resources and Liquidity
- - -------------------------------
The following summarizes the minimum capital requirements and capital position
at September 30, 1998:
<TABLE>
<CAPTION>
To be Well Capitalized
Under "Prompt
Capital Position at Corrective Action"
September 30, 1998 Provision of FIDICIA
------------------------- -----------------------
Bank Only Consolidated
---------- -------------
<S> <C> <C> <C>
Total Capital
to Risk-Weighted Assets 13.7% 15.3% 10%
Tier 1 Capital
to Risk-Weighted Assets 12.5 14.1 6
Tier 1 Capital to Average
Assets (Leverage Ratio) 7.8 8.8 5(1)
</TABLE>
(1) Regulatory authorities require all but the most highly rated banks and
bank holding companies to have a leverage ratio of at least between
4.0% - 5.0%.
At September 30, 1998, the Bank met the requirements for a "well capitalized"
institution based on its capital ratios as of such date.
The Company believes that its cash and cash equivalents of $175.4 million in
addition to its securities available for sale of $395.2 million at
September 30, 1998 are sufficient to meet both the funding needs of its
borrowers and the liquidity requirements of its depositors.
The Company's total capital to assets level is approximately 9.5% at
September 30, 1998. As such, management believes that the Company has ample
capital available for future expansion and diversification and regularly
evaluates appropriate business opportunities to efficiently deploy its capital
resources.
Year 2000
- - ---------
1) The Company's state of readiness
Information Technology: The Company relies heavily on complex internal and
third party computer systems for all phases of its operations, including
document and electronic transaction processing, interest calculation,
financial record keeping and customer service.
The Company uses third party provided services and software for
substantially all its mission critical systems, and has been working with
these third party providers since mid-1997 to address year 2000 concerns.
By September 30, 1998 substantially all providers of these mission critical
applications had advised the Company that their applications are year 2000
compliant. The Company intends to complete its own testing and validation
of the year 2000 readiness of these applications by January 31, 1999.
-27-
<PAGE>
The original target date for completing the Company's validation phase has
been deferred from December 31, 1998 to January 31, 1999 due, in part, to
the systems integration during the third quarter of 1998. [The systems were
integrated in connection with the July 17, 1998 merger of PBI and HCBI.]
This deferral is not anticipated to have an adverse impact on the overall
ability of the Company to be year 2000 compliant in advance of regulatory
time frames.
A bank-wide evaluation of non-mission critical software and hardware is
also underway. As the result of this process, the Company has already
determined that it will have to replace a significant portion of its
inventory of personal computers and certain software applications. Some of
this replacement process was undertaken and completed as part of a planned
1998 installation of branch automation software. Other non-compliant
hardware and software will be replaced or upgraded as necessary. The
remediation or replacement of all non-compliant non-mission critical
hardware and software is targeted for completion by June 30, 1999.
Non-Information technology: The Company's exposure to non-information
technology systems is not material, in that its equipment such as vaults,
elevators and environmental control systems is not generally equipped with
date sensitive microchips.
Third Parties: During 1998, the Company implemented a process for
evaluating the credit risk associated with its major customers. The year
2000 risk associated with each significant credit exposure is based in part
on the borrowers' responses to a year 2000 questionnaire, in part on
evaluations completed by account officers and in part on other
considerations, such as the general reliance of the customer's industry on
automated systems. The Company notes that it explicitly disclaims any
liability or obligation for the completeness, or lack thereof, of its
customers' year 2000 remediation plans. To the extent that this process
discloses significant year 2000 risk for a customer, the Company
establishes appropriate reserves for possible losses. To date, the
Company has established modest but not significant, reserves for losses
based on its assessment of its risk associated with the year 2000 readiness
of its customers.
The Company is also working with its key vendors and suppliers and its
correspondent banks and brokers to assure no interruption in the business
relationship between the Company and these important third party providers.
These key providers include, but are not limited to, payroll service
providers, secondary market software providers, credit card processors and
fiduciary record keeping processors. The Company plans to complete
additional testing in cooperation with critical providers. To date, the
Company is not aware of the potential failure of any of these suppliers,
but will continue to monitor and evaluate their year 2000 readiness.
The Company notes that it is critically dependent on certain unrelated
third parties for the conduct of its business, such as the Federal Reserve
payment system, the automated clearinghouse system, the telecommunications
and local energy providers. The Company exercises no influence over these
providers, and, although it is monitoring these parties' progress and year
2000 readiness, there are few, if any, alternatives for obtaining these
services.
-28-
<PAGE>
2) The costs to address the Company's year 2000 issues
Management does not consider the amounts expended to date to be material,
and the projected costs to be incurred over the next 15 months are not
expected to have a material effect on the Company's results of operations
or financial position. These projected costs include upgrading a number of
the Company's ATMs, replacing non-compliant network software and replacing
non-compliant personal computers. Costs will also be incurred in
connection with certain phases of the Company's test plan, which will
include proxy testing and test time with the bank's primary service bureau.
To date, the Company has expended less than 10% of the $300,000 in
anticipated year 2000 costs. These costs consisted primarily of amounts
paid in connection with the renovation of custom code by a third party
provider of mission critical software.
The Company estimates that year 2000 capital expenditures during the
remainder of 1998 and during 1999 will approximate $270,000, primarily in
costs associated with replacing non-compliant, non-mission critical
software and hardware, as well as costs associated with the upgrade of
non-compliant ATMs and to fund additional year 2000 testing.
Although the Company does not specifically monitor the cost of internal
resources diverted to the year 2000 project, these costs have consumed, and
can be expected to continue to consume, a substantial amount of time and
energy of key staff, notably information technology department resources.
Management will fund these year 2000 costs, which represent our current
best estimates, from normal cash flow.
3) The risks of the Company's year 2000 issues
The most likely worst case scenario, in the opinion of the Company, is an
extended disability to properly service the depository, money transfer and
borrowing needs of its customers. If the Company's mission critical
systems are not compliant by January 1, 2000, it may not be able to
accurately process transactions, or do so in a reasonable period of time.
A similar disruption in service would also be experienced if one or more of
the unrelated suppliers on which the bank is critically dependent is not
year 2000 compliant by January 1, 2000. Either scenario could result in a
wide variety of claims for improper handling of their business by its
customers.
Management is unable to calculate the probability of either or both
scenarios happening, or the cost associated with either eventuality, but
the impact of any such disruption on the Company would be anticipated to be
material, and could raise serious concerns about the ability of the Company
to continue.
A more likely scenario is one where the Company's own, related and
unrelated third party provider's systems are substantially year 2000
compliant but a number of its commercial borrowers experience cash flow
problems due to significant year 2000 difficulties related to their
business operations, and that its investments in municipal issues may
-29-
<PAGE>
lose significant market value due to the inability of these municipalities
to bill for and subsequently collect taxes, thus impairing their ability to
meet their contractual debt obligations.
Based on the Company's high level of liquidity, and its program of customer
assessment of its borrowers' year 2000 risk and associated provisioning
levels, the Company believes that, while such impact could have a material
effect on its operations, they would not threaten its ability to continue
as a going concern.
4) The Company's contingency plans
The Company expects to complete mission critical year 2000 testing and its
initial mission critical contingency planning by January 31, 1999.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Quantitative and qualitative disclosure about market risk is presented at
December 31, 1997 in Item 7A in the Company's Annual Report (formerly Hudson
Chartered Bancorp, Inc.) on Form 10-K/A filed with the Securities and Exchange
Commission on April 9, 1998. The following is an update of the discussion
provided therein:
General. The Company's largest component of market risk continues to be
interest rate risk. The Company is not subject to foreign currency exchange or
commodity price risk. At September 30, 1998, neither the Company nor the Bank
owned any trading assets, nor did they utilize hedging transactions such as
interest rate swaps and caps.
On July 17, 1998, the Company merged with Progressive Bank Inc. As a result of
the combination, the interest earning assets increased by $846.5 million.
Interest bearing liabilities increased by $727.3 million and noninterest bearing
liabilities and capital increased by $156 million. The following chart shows
the relative interest rate exposure of the Company to changes in market rates as
of September 30, 1998: (in thousands)
<TABLE>
<CAPTION>
Net interest Market value of
Change in income earnings Portfolio equity
interest rates at risk (MVPE) % change in MVPE
- - --------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
- - -300 $(1,847) $(15,579) (7.72%)
+300 1,633 10,621 5.26%
</TABLE>
GAP Analysis. The one-year and five-year cumulative interest sensitivity gap as
a percentage of total assets have reduced from (21.3%) and 16.8% at December 31,
1997, respectively, to (16.7%) and 13.3% at September 30, 1998, respectively,
utilizing similar assumptions as at December 31, 1997.
Interest Rate Risk Compliance. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at December 31, 1997. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value change at September 30, 1998 compared to December 31, 1997, and the
projected changes continue to fall within all board approved limits for
potential interest rate volatility.
-30-
<PAGE>
Part II
Item 5. Other Information
- - ------- -----------------
Restated Financial Statements
Attached as Exhibit 99.1 to this Form 10-Q are the restated financial statements
of Premier National Bancorp, Inc. under the pooling of interests method of
accounting as follows:
1. Independent Auditors' Report Deloitte & Touche, LLP
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. Consolidated Statements of Comprehensive Income for each of the three years
in the period ended December 31, 1997.
7. Notes to Consolidated Financial Statements
Consent of Deloitte & Touche LLP
Independent Auditors' Report - KPMG Peat Marwick LLP
Consent of KPMG Peat Marwick LLP
Item 6(a). Exhibits
- - --------------------
The exhibits listed on the exhibit index on Page 32 of this Form 10-Q are filed
herewith or are incorporated herein by reference.
Item 6(b). Reports on Form 8-K
- - -------------------------------
On July 20, 1998, the Company filed a Current Report on Form 8-K to disclose
pursuant to Item 2, the completion of the Merger of Progressive Bank, Inc. With
and into the Company effective July 17, 1998. The Company's new name is Premier
National Bancorp, Inc. (Premier). In connection with the Merger, the Company
issued 7,024,566 shares of Premier National Bancorp, Inc. Common stock in
exchange for 3,859,431 shares of Progressive common stock at an exchange ratio
of 1.82 shares of Premier for each share of Progressive (Premier).
-31-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- - ------- -----------
10.1 Employment Agreement of T. Jefferson Cunningham III
(filed herewith)
10.2 Employment Agreement of Peter Van Kleeck (filed herewith)
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of KPMG Peat Marwick LLP (filed herewith)
27 Financial Data Schedule
27.1 Related Financial Data Schedule 12/31/97
27.2 Related Financial Data Schedule 12/31/96
27.3 Related Financial Data Schedule 12/31/95
99.1 Premier National Bancorp, Inc. Restated Financial
Statements for the applicable periods ended
December 31, 1997
99.2 KPMG Peat Marwick LLP Independent Auditor's Report
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed in its behalf by the undersigned
thereunto duly authorized.
Premier National Bancorp, Inc.
(Registrant)
Date: November 13, 1998 /s/ Paul A. Maisch
------------------
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
-33-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------- -----------
<S> <C>
10.1 Employment Agreement of T. Jefferson Cunningham III
(filed herewith)
10.2 Employment Agreement of Peter Van Kleeck (filed herewith)
23.1 Consent of Deloitte & Touche LLP (filed herewith)
23.2 Consent of KPMG Peat Marwick LLP (filed herewith)
27 Financial Data Schedule
27.1 Related Financial Data Schedule 12/31/97
27.2 Related Financial Data Schedule 12/31/96
27.3 Related Financial Data Schedule 12/31/95
99.1 Premier National Bancorp, Inc. Restated Financial
Statements for the applicable periods ended
December 31, 1997
99.2 KPMG Peat Marwick LLP Independent Auditor's Report
</TABLE>
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made as of July 11, 1998
(the "Effective Date"), is by and between Premier National Bancorp, Inc. (the
"Company"), Route 55, LaGrangeville, New York 12540 and T. Jefferson Cunningham
III, residing at 7 East Hook Road, Hopewell Junction, New York 12533 (the
"Executive").
RECITALS
WHEREAS, the Company, through its Board of Directors (the "Board"),
considers the maintenance of competent and experienced executive officers to be
essential to its long-term success;
WHEREAS, in this regard, the Company has determined that it is in its
best interests that the Executive serve as Chairman of the Company, pursuant to
a written employment agreement;
NOW, THEREFORE, in furtherance of the interests described above and in
consideration of the respective covenants and agreements herein contained, the
parties hereto agree as follows:
1. Certain Defined Terms. As used in this Agreement, the following
---------------------
terms shall have the following meanings:
(a) "Applicable Interest" means interest at the rate provided in
Section 1274(b)(2)(B) of the Code.
(b) "Cause" means the occurrence of any of the following:
(i) the Willful and continued failure of the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from incapacity due to physical or mental illness), after
a written demand for substantial performance is delivered to the Executive by
the Board which specifically identifies the manner in which the Board believes
that the Executive has not substantially performed the Executive's duties;
(ii) the Willful engaging by the Executive in illegal conduct
(excluding traffic violations, minor misdemeanors or similar offenses) or gross
misconduct that, in the Board's reasonable opinion, may reflect adversely on the
business or reputation of the Company;
<PAGE>
(iii) the removal and/or permanent prohibition of the Executive
from participation in the conduct of the affairs of the Company or any of its
subsidiary banks by an order issued under Section 8(e)(4) or 8(g)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. (S) 1818(e)(4) or 1818(g)(1);
(iv) the issuance by any court having appropriate jurisdiction
of an order under Section 21(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), 15 U.S.C. (S) 78u(d)(2), prohibiting the Executive
from acting as an officer or director of the Company; or
(v) the conviction of the Executive for commission of a
felony.
(c) "Change in Control" means the occurrence of any of the
following events:
(i) there shall be consummated any consolidation, merger,
stock-for-stock exchange or similar transaction (collectively, "Merger
Transactions") involving securities of the Company in which the holders of
voting securities of the Company immediately prior to such consummation own, as
a group, immediately after such consummation, voting securities of the Company
(or, if the Company does not survive the Merger Transaction, voting securities
of the corporation surviving such transaction) having less than 50% of the total
voting power in an election of directors of the Company (or such other surviving
corporation), excluding securities received by any members of such group which
represent disproportionate percentage increases in their shareholdings vis-a-vis
the other members of such group;
(ii) any individual, corporation (other than the Company),
partnership, trust, association, pool, syndicate, or any other entity or any
group or persons acting in concert (other than an employee benefit plan of the
Company or one of its affiliates) becomes the beneficial owner (as that concept
is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Exchange Act) as a result of any one or more securities transactions,
including gifts and stock repurchases but excluding any Merger Transactions, of
securities of the Company possessing one-third or more of the voting power for
the election of directors of the Company;
(iii) during any period of twenty-four consecutive months
after the date hereof, individuals who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election or nomination for election by the Company's shareholders was approved
by a vote of at least a majority of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute at
least a majority of the Board (excluding any Board seat that is vacant or
otherwise unoccupied); or
-2-
<PAGE>
(iv) there shall be consummated any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions,
excluding any Merger Transactions), of all, or substantially all, of the assets
of the Company to a party which is not controlled by or under common control
with the Company.
Notwithstanding the foregoing, the Merger shall not be treated as a "Change in
Control" for purposes of this Agreement.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Company Bonus Plan" means any bonus, stock option, profit-
sharing or other cash-based or equity-based incentive plan offered by the
Company.
(f) "Company Benefit Plan" means any pension, thrift, deferred
compensation, stock purchase, life insurance, medical, dental, education,
accident, disability, welfare, retirement or other employee benefit plan offered
by the Company other than a Company Bonus Plan.
(g) "Designated Office" means Route 55, LaGrangeville, New York
12540, or such other office of the Company designated by the Board from time to
time other than in anticipation of, or following, a Change in Control.
(h) "Merger" means the merger of Progressive Bank, Inc. into Hudson
Chartered Bancorp, Inc.
(i) "Triggering Event" means the occurrence of any of the following
events:
(i) the termination by the Company of the employment of the
Executive for any reason other than Cause;
(ii) the assignment to the Executive without his consent of
any duties inconsistent in any material respect with the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties or responsibilities, or any other action by the Company which results in
a diminution in any material respect in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith that is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(iii) in anticipation of, or following a Change in Control,
the requirement by the Company that the Executive be based at any office or
location that is more than 50 miles from the Designated Office;
-3-
<PAGE>
(iv) after the Effective Date, the failure without the consent
of the Executive, to nominate the Executive for election as a member of the
Board, or if nominated, the failure of shareholders to elect the Executive as a
member of the Board;
(v) after the Effective Date, the failure of the Company
without the Executive's consent to:
(A) continue in effect any Company Bonus Plan in which the
Executive participates that is material to the Executive's total compensation,
unless a substantially equivalent arrangement, embodied in an ongoing substitute
or alternative plan, has been established;
(B) continue the Executive's participation in any Company
Bonus Plan and eligibility for bonuses or other compensation thereunder, or in
any substitute or alternative plan, on a basis at least as favorable as that
existing at the date hereof, both in terms of the amount of benefits provided
and the level of the Executive's participation relative to other participants;
(C) continue to provide the Executive with benefits
comparable to those received by the Executive under any Company Benefit Plan in
which the Executive was participating as of the date hereof, at participation
costs substantially similar to those paid by the Executive; provided, however,
that it shall not be deemed a Triggering Event if the Company, for bona fide
business purposes and not in anticipation of or following a Change in Control,
modifies the terms or conditions of any Company Bonus Plan or Company Benefit
Plan, so long as such modifications have or would have a substantially similar
effect upon all executive employees or all employees of the Company who
participate or who are eligible to participate in the plan;
(vi) the Company shall have materially breached any provision
of this Agreement and such breach shall not have been cured within 15 days after
delivery of written notice thereof to the Board by the Executive, identifying
the breach with reasonable particularity;
(vii) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof, as the same may be increased from
time to time as provided for in this Agreement; or
(viii) the Company issues a Non-Renewal Notice to the
Executive as provided in Section 2 of this Agreement.
(j) "Willful" means that an action, conduct or deed is done, or
omitted to be done, by the Executive in bad faith or without reasonable belief
that the Executive's action or omission was in the best interests of the
Company. Any act, or failure to act, based upon the instructions or prior
approval of the Board or based upon the advice of counsel for the Company, shall
be conclusively presumed to be done, or
-4-
<PAGE>
omitted to be done, by the Executive in good faith and in the best interests of
the Company.
2. Employment Term. The initial term of employment under this
---------------
Agreement shall be for a period of three years commencing on the Effective Date.
Each year, prior to the anniversary date of the Effective Date, the Board shall
formally extend, or decline to extend, this Agreement for one additional year.
If the Board formally decides not to extend this Agreement, it shall provide
written notice (a "Non-Renewal Notice") to the Executive informing him of such
decision. The Executive shall promptly notify the Board if he declines to agree
to any one-year extension of the Agreement. References herein to the term of
this Agreement shall refer both to such initial term and such successive terms.
3. Employment; Board Membership. During the term of employment
----------------------------
provided for in this Agreement, the Company agrees to employ the Executive in
the office or position set forth in the second Recital of this Agreement, and
the Executive agrees to serve in such office or position and to perform the
duties and discharge the responsibilities associated therewith or such other
duties and responsibilities as may reasonably be assigned to the Executive from
time to time by the Board. The Executive shall not undertake executive
responsibilities with any other corporation, partnership, association or other
entity and shall devote the necessary and customary time and attention to the
business and affairs of the Company and its subsidiaries, provided, however,
that the Executive may, with the approval of the Board, serve as a director or
officer of any non-competing business or engage in any other activity, including
without limitation charitable or community activity, to the extent that it does
not inhibit the performance of his duties hereunder. Subject to applicable
fiduciary duties, the Executive shall be nominated for membership on the Board
and the board of directors of the Company's bank subsidiary.
4. Office and Services. In connection with the Executive's employment
-------------------
hereunder, the Executive shall be based at the Designated Office, except for
required travel on the Company's business. The Company shall furnish the
Executive with office space, secretarial assistance, and such other facilities
and services as shall be suitable to the Executive's position and adequate for
the performance of his duties hereunder.
5. Compensation. The regular compensation and benefits payable to the
------------
Executive under this Agreement with respect to his period of employment shall
include the following:
(a) Salary. The Company shall pay the Executive an annual base salary
------
hereunder of not less than $ 250,000, payable in equal semimonthly installments
or at such other intervals as shall be agreed upon by the parties. The
Executive's annual base salary may be increased from time to time as determined
by the Board and, if so increased, such annual base salary shall not thereafter
during the Executive's employment under this Agreement be decreased and the
obligation of the Company hereunder to pay
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<PAGE>
the Executive's annual base salary shall thereafter relate to such increased
annual base salary.
(b) Board Compensation. The Executive shall be entitled to receive
------------------
any fees or additional payments for serving as a member of the Board or as a
member of any board of directors (or the equivalent thereof) of any subsidiary
of the Company to the extent provided to other directors of the Company or
applicable subsidiary; provided, however, that the Executive shall not be
entitled to fees for serving on any committee or subcommittee of the Board or
board of directors (or the equivalent thereof) of any subsidiary.
(c) Discretionary Bonuses. During the term of this Agreement, the
---------------------
Executive shall be eligible to participate in an equitable manner with other
executive employees of the Company and its subsidiaries in any Company Bonus
Plan or in other discretionary bonuses authorized and declared by the Board, the
board of directors (or the equivalent thereof) of the Company's subsidiaries, or
by their respective delegees.
(d) Participation in Benefit Plans. In addition to any compensation
------------------------------
and benefits provided for in this Agreement, the Executive shall be eligible to
participate in any Company Benefit Plan or any other employee fringe benefits
offered by the Company or its subsidiaries for the benefit of executive
employees or all employees generally in which the Executive is eligible to
participate. The Executive's participation in any such Company Benefit Plan
shall be subject to all generally applicable eligibility requirements thereof
and shall not in any way limit or reduce the obligation of the Company to pay
the Executive's annual base salary hereunder (except pursuant to, in accordance
with, or as required by the generally applicable terms of participation of any
such Company Benefit Plan).
(e) Vacation. The Executive shall be entitled to annual paid vacation
--------
during the term of this Agreement of not less than four weeks per year.
(f) Reimbursement of Business Expenses. The Company shall promptly
----------------------------------
reimburse the Executive for all reasonable travel and other business expenses
incurred by him in the performance of his duties and responsibilities, subject
to such reasonable requirements with respect to substantiation and documentation
as may be specified by the Company.
(g) Automobile. The Company shall provide the Executive with the full
----------
time use of an automobile and shall bear the cost of maintenance of such
vehicle.
(h) Deferred Compensation. The Company shall maintain a nonqualified
---------------------
deferred compensation plan that will allow the Executive the right to defer the
payment to him of such portion of his annual base salary and cash bonus as the
Executive shall elect.
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<PAGE>
(i) Supplemental Retirement Benefits. The Executive shall be entitled
--------------------------------
to earn and accrue, for the term of employment, benefits under a supplemental
retirement benefit plan that provides benefits that are at least equal to those
provided under the plan or arrangement that covered the Executive prior to the
Merger.
(j) Club Membership. The Company shall pay the dues, assessments and
---------------
bond obligations for the Executive's and his wife's membership in one country
club.
6. Termination Procedures.
----------------------
(a) Termination Notice. If the Executive's employment by the Company
------------------
is terminated for any reason during the term of this Agreement (other than by
reason of the Executive's death or as a result of a consensual termination as
provided in Section 8(c) of this Agreement), the terminating party shall provide
the other party with written notice (the "Termination Notice") specifying: (i)
the effective date of the termination (the "Termination Date"), (ii) the
specific provisions of this Agreement upon which the termination is based and
that are applicable to the termination, and (iii) a reasonably detailed
description of the facts and circumstances providing the basis for the
termination under the specified provisions of this Agreement.
(b) Termination Date. If the Executive's employment is terminated by
----------------
the Executive, the Termination Date shall not be less than thirty days after the
date the Termination Notice is tendered to the Company. If the Executive's
employment is terminated by the Company, the Termination Date shall not be less
than 30 days after the date the Termination Notice is tendered to the Executive.
Termination of the Executive's employment shall occur on the Termination Date
even if there is a dispute between the parties relating to the provisions of
this Agreement applicable to such termination (a "Termination Dispute").
(c) Termination Dispute. If, prior to the Termination Date, the party
-------------------
receiving the Termination Notice provides written notice to the other party of
the existence of a Termination Dispute (which notice shall provide a reasonably
detailed description of the nature of the dispute, including the specific
provisions of this Agreement that the disputing party believes are applicable to
the termination), the Termination Dispute shall be resolved by: (i) mutual
written agreement of the parties hereto or (ii) a final judgment, order or
decree of a court of competent jurisdiction or arbitrator (which is not
appealable or with respect to which the time for appeal therefrom has expired
and no appeal has been perfected). The parties hereto shall pursue the
resolution of any Termination Dispute with reasonable diligence.
(d) Termination Payments. If there is no Termination Dispute, any
--------------------
amount owed by the Company to the Executive as a result of the termination of
the Executive's employment under this Agreement shall be payable in immediately
available funds on the Termination Date. If there is a Termination Dispute, any
amount owed by the Company to the Executive as a result of the termination of
the Executive's
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<PAGE>
employment under this Agreement that is not in dispute shall be paid on the
Termination Date, and all other amounts shall be paid within five business days
of the resolution of the Termination Dispute as provided for in Section 7(c)
hereto, together with Applicable Interest.
7. Termination Due to a Triggering Event.
-------------------------------------
(a) If, during the term of this Agreement, the Executive's employment
by the Company is terminated (whether by the Company or by the Executive) upon
the occurrence of, or within 90 days after, a Triggering Event: (i) the Company
shall make a lump sum cash payment to the Executive in an amount equal to 299%
of the sum of (A) the Executive's annual base salary at the time the Triggering
Event occurs, and (B) the amount of any discretionary bonuses paid by the
Company to the Executive within the 12 months immediately preceding the
occurrence of the Triggering Event; (ii) the Company shall continue to provide
to the Executive for a three-year period the Executive's then-existing coverage
under the Company's health, dental and life insurance plans or, if continued
coverage under such plans cannot be provided, substantially equivalent coverage
under alternative arrangements; and (iii) any restrictions remaining on any
restricted shares issued to the Executive under the Company's restricted stock
plans shall immediately lapse, any performance shares issued to the Executive
under the Company Bonus Plans shall immediately vest and any stock options
granted to the Executive shall become immediately exercisable.
(b) In the event that the Executive becomes entitled to receive any
benefit or payment in connection with a Triggering Event or the Company's
termination of the Executive's employment, whether pursuant to the terms of this
Agreement or otherwise (collectively, the "Total Benefits"), and any of the
Total Benefits will be subject to any excise tax (the "Excise Tax") imposed
under Section 4999 of the Code, the Company shall pay to the Executive an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the Executive from the Gross-Up Payment, after deduction of any federal, state
and local income taxes, Excise Tax, and FICA and Medicare withholding taxes on
the Gross-Up Payment, shall be equal to the Excise Tax on the Total Benefits.
For purposes of determining the amount of such Excise Tax on the Total Benefits,
the amount of the Total Benefits that shall be treated as subject to the Excise
Tax shall be equal to (i) the Total Benefits, minus (ii) the amount of such
Total Benefits that, in the opinion of tax counsel selected by the Company and
reasonably acceptable to the Executive ("Tax Counsel"), are not excess parachute
payments (within the meaning of Section 280G(b)(1) of the Code).
(c) For purposes of Section 7(b), the Executive shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Excise Tax is payable and state and local income
taxes at the highest marginal rate of taxation in the state and locality of the
Executive's residence on the effective date of his termination, net of the
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes (calculated by assuming that any reduction under Section
68 of the Code in the amount of itemized deductions
-8-
<PAGE>
allowable to the Executive applies first to reduce the amount of such state and
local income taxes that would otherwise be deductible by the Executive). Except
as otherwise provided herein, all determinations required to be made under this
Section 7 shall be made by Tax Counsel, which determinations shall be conclusive
and binding on the Executive and the Company absent manifest error.
(d) In the event that the Excise Tax on the Total Benefits is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax, federal, state and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in any such taxes
and/or a federal, state or local income tax deduction) plus Applicable Interest.
In the event that the Excise Tax on the Total Benefits is finally determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment, which shall be calculated by
Tax Counsel in the same manner and using the same assumptions as set forth in
Sections 7(b) and 7(c), to the Executive in respect of such excess (plus any
interest, penalties or additions payable by the Executive to the Internal
Revenue Service or any other federal, state, local or foreign taxing authority
with respect to such excess or with respect to the additional Gross-Up Payment)
at the time that the amount of such additional Excise Tax is finally determined.
(e) Following the occurrence of a Triggering Event, if the Company or
the Executive brings any action, suit or proceeding for the enforcement,
performance or construction of this Agreement, the Company agrees to reimburse
the Executive for all reasonable costs and expenses incurred by him in such
action, suit or proceeding, including reasonable attorneys' and accountants'
fees and expenses.
8. Other Termination. Notwithstanding any other provision of this
-----------------
Agreement, the Executive's employment hereunder shall terminate under the
following circumstances with the following consequences:
(a) Termination By Company for Cause. The Company may terminate the
--------------------------------
Executive's employment under this Agreement for Cause. The termination of the
Executive's employment under this Agreement shall not be deemed for Cause unless
and until (i) the Company, through the Board delivers reasonable notice to the
Executive that it intends to terminate the Executive for Cause, (ii) the
Executive is given an opportunity, together with counsel, to be heard before the
Board, (iii) the Executive's termination is approved by the affirmative vote of
at least two-thirds of the Board, and (4) the Company provides the Executive
with a copy of the resolutions duly adopted by the Board finding that, in the
good faith opinion of the Board, the Executive should be
-9-
<PAGE>
terminated for Cause and specifying the particulars thereof in detail. Upon
termination for Cause, the Executive will not be entitled to any further
compensation for any period subsequent to the effective date of such
termination, except for pay or benefits, if any, in accordance with the then
existing severance policies of the Company and the severance terms of the
Company Bonus Plans and Company Benefit Plans.
(b) Termination By Company for Disability. If, as a result of the
-------------------------------------
Executive's incapacity due to physical or mental illness, the Executive shall
not have performed his duties hereunder on a full-time basis for six consecutive
months, the Executive's employment under this Agreement may be terminated by the
Company upon written notice. Such termination for disability shall require the
affirmative vote of a majority of the entire Board. The Executive's
compensation during any period of disability prior to the effective date of such
termination shall be the amounts normally payable to him in accordance with his
then current annual base salary, reduced by the amounts of disability pay, if
any, paid to the Executive under any Company Benefit Plan that provides
disability benefits. The Executive shall not be entitled to any further
compensation from the Company or its subsidiaries for any period subsequent to
the effective date of such termination, except for pay or benefits, if any, in
accordance with then existing severance policies of the Company or its
subsidiaries and the severance terms of the Company Bonus Plans and Company
Benefit Plans. The Company agrees to continue to maintain in effect, during the
Executive's term of employment hereunder, the Company Benefit Plan that
currently provides long-term disability coverage to the Executive (or a
substitute plan or arrangement that provides long-term disability benefits that
are at least substantially equivalent).
(c) Consensual Termination. The parties hereto may agree at any time
----------------------
to terminate both this Agreement and the Executive's employment hereunder upon
such terms and conditions as the parties may mutually agree.
(d) Termination By Executive. If the Executive terminates his
------------------------
employment with the Company for any reason other than the occurrence of a
Triggering Event as provided for in Section 7 hereof or a consensual termination
as provided for in Section 8(c) hereof, the Executive will not be entitled to
any further compensation for any period subsequent to the effective date of such
termination, except for pay or benefits, if any, in accordance with the then
existing severance policies of the Company and the severance terms of the
Company Bonus Plans and the Company Benefit Plans.
9. Supervisory Suspension. In the event the Executive is suspended
----------------------
from office and/or temporarily prohibited from participating in the conduct of
the affairs of the Company or any of its subsidiary banks by a notice served
under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S) 1818(e)(3) or 1818(g)(1), the Company's obligations under this Agreement
shall be suspended effective as of the service date of the notice of suspension
or temporary prohibition, unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Company shall (a) pay the Executive all
compensation withheld while its obligations under this
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<PAGE>
Agreement were suspended, together with Applicable Interest and (b) reinstate
all obligations under this Agreement that were suspended.
10. Confidential Information. During the Executive's employment with
------------------------
the Company and thereafter, the Executive shall not disclose or use in any way
any confidential business or technical information or any trade secret acquired
in the course of such employment, other than (a) information that is generally
known in the Company's industry or acquired from public sources, (b) as required
in the course of such employment, (c) as required by any court, supervisory
authority, administrative agency or applicable law, or (d) with the prior
written consent of the Company. This Section 10 shall survive termination of
this Agreement.
11. No-Raid. The Executive agrees that, in the event that the
-------
Executive's employment with the Company is terminated other than upon the
occurrence of, or within 90 days after, a Triggering Event and as a result of
such termination the Executive is entitled to receive compensation, benefits or
payments hereunder or under the Company's then existing severance policies that,
in the aggregate, equal or exceed 100% of the Executive's annual base salary at
the time of termination plus the amount of any discretionary bonuses paid by the
Company to the Executive within the 12 months immediately preceding the
termination, the Executive shall not, for a period of one year (or such lesser
period as may be determined by the Board and disclosed to the Executive in
writing) after the effective date of the Executive's termination of employment,
solicit, actively interfere with the Company's or any Company affiliate's
relationship with, or attempt to divert or entice away, any officer of the
Company or its affiliates.
12. Payment Obligation Absolute. The obligation of the Company to pay
---------------------------
the Executive the compensation, benefits or payments provided herein during the
term hereof shall be absolute and unconditional and shall not be affected by any
circumstances, including without limitation any set-off, counterclaim,
recoupment, defense or other right which the Company may have against the
Executive. All amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final and the Company will not seek to recover all or any part of such payment
from the Executive, or from whosoever may be entitled thereto, for any reason
whatsoever except as provided in Section 8(d) hereof. The Executive shall not
be obligated to seek other employment in mitigation of the amounts payable under
any provision of this Agreement and the obtaining of any such other employment
shall in no event limit or reduce the obligations of the Company to make the
payments required to be made under this Agreement.
13. No Right to Continued Employment. Nothing in this Agreement shall
--------------------------------
be deemed to give the Executive the right to be retained in the employ or
service of the Company, or to interfere with the right of the Company to
discharge the Executive at any time, subject in all cases to the terms of this
Agreement.
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<PAGE>
14. Withholding. Any payments provided for hereunder shall be paid net
-----------
of any applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed.
15. Successors and Assigns. This Agreement is a personal services
----------------------
contract which may not be assigned by the Company, or assumed from the Company
by, any other party without the prior written consent of the Executive. Subject
to the foregoing limitation, all rights hereunder shall inure to the benefit of
the parties hereto, their personal or legal representatives, heirs, successors
and assigns. The Company will require any successor (whether direct or
indirect, by purchase, assignment, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume this Agreement and to agree to perform hereunder in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. References herein to the Company will be understood
to refer to the successor or successors of the Company, respectively.
16. Notices. Any notice required or desired to be given hereunder
-------
shall be in writing and shall be deemed given when delivered personally or sent
by certified or registered mail, postage prepaid, to the address of the other
party set forth in the first paragraph of this Agreement, provided that any
notice to the Company shall be directed to the Chairman of the Board's Personnel
and Compensation Committee.
17. Waiver of Breach. Waiver by any party of a breach of any provision
----------------
shall not operate as or be construed a waiver by such party of any subsequent
breach hereof.
18. Entire Agreement; Effect on Prior Agreement. This agreement
-------------------------------------------
contains the entire agreement among the parties concerning the employment of the
Executive by the Company, and supersedes any employment or change in control
agreements between the Executive and the Company or any of its predecessors,
subsidiaries or predecessors of subsidiaries. Executive agrees that, for
purposes of the Employment Agreement entered into between Hudson Chartered
Bancorp, Inc. and the Executive, dated as of July 1, 1995, the Merger will not
constitute a "change in control" for purposes of such agreement and that the
Executive waives all change in control benefits under such agreement that are
associated with the Merger.
19. Written Modification, Amendment or Waiver. No modification,
-----------------------------------------
amendment or waiver of any provision hereof shall be effective unless in writing
specifically referring hereto and signed by the party against whom such
provision as modified or amended or such waiver is sought to be enforced.
20. Counterparts. This Agreement may be executed in counterparts, all
------------
of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party hereto and delivered
to the other party, it being understood that all parties need not sign the same
counterpart.
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<PAGE>
21. Governing Law. This Agreement is governed by and is to be
-------------
construed and enforced in accordance with the laws of the State of New York
applicable to contracts made and to be performed entirely therein.
22. Consent to Jurisdiction. Each party hereto irrevocably consents to
-----------------------
the exclusive jurisdiction of the courts of the State of New York and the
federal courts situated in the State of New York in connection with any action
to enforce the provisions of this Agreement, to recover damages or other relief
for breach or default under this Agreement, to enforce any decision or award of
any arbitrators, or otherwise arising under or by reason of this Agreement.
23. Construction.
------------
(a) The section headings of this Agreement have been inserted for
convenience of reference only and shall not be deemed to be a part of this
Agreement.
(b) All personal pronouns used in this Agreement, whether used in
the masculine, feminine or neuter gender, shall include all other genders where
the context so requires.
(c) The singular shall include the plural, and vice versa, where
the context so requires.
(d) All references to sections of, or regulations promulgated
under, the Exchange Act, the Code or other statutes shall be deemed also to
refer to such sections or regulations as amended from time to time and to any
successor provisions to such sections or regulations. All references to employee
benefit plans of the Company shall be deemed also to refer to such plans as
amended from time to time and to any successor plans thereto.
24. Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
affecting the validity or enforceability of any other term or provision hereof
in that or any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted so as to be
enforceable.
25. Authorization. The Company represents and warrants that the
-------------
execution of this Agreement has been duly authorized by resolution of the Board.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Agreement as of the date first above written.
PREMIER NATIONAL BANCORP
/s/ T. Jefferson Cunningham III
---------------------------------
Chairman of Premier
/s/ Thomas Aposporos
---------------------------------
Chairman Personnel & Compensation
Committee
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<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made as of July 11, 1998
(the "Effective Date"), is by and between Premier National Bancorp, Inc. (the
"Company"), Route 55, LaGrangeville, New York 12540 and Peter Van Kleeck,
residing at 99 New Hackensack Rd. Poughkeepsie, New York 12603 (the
"Executive").
RECITALS
WHEREAS, the Company, through its Board of Directors (the "Board"),
considers the maintenance of competent and experienced executive officers to be
essential to its long-term success;
WHEREAS, in this regard, the Company has determined that it is in its
best interests that the Executive serve as President and Chief Executive Officer
of the Company, pursuant to a written employment agreement;
NOW, THEREFORE, in furtherance of the interests described above and in
consideration of the respective covenants and agreements herein contained, the
parties hereto agree as follows:
1. Certain Defined Terms. As used in this Agreement, the following
---------------------
terms shall have the following meanings:
(a) "Applicable Interest" means interest at the rate provided in
Section 1274(b)(2)(B) of the Code.
(b) "Cause" means the occurrence of any of the following:
(i) the Willful and continued failure of the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from incapacity due to physical or mental illness), after
a written demand for substantial performance is delivered to the Executive by
the Board which specifically identifies the manner in which the Board believes
that the Executive has not substantially performed the Executive's duties;
(ii) the Willful engaging by the Executive in illegal conduct
(excluding traffic violations, minor misdemeanors or similar offenses) or gross
misconduct that, in the Board's reasonable opinion, may reflect adversely on the
business or reputation of the Company;
<PAGE>
(iii) the removal and/or permanent prohibition of the
Executive from participation in the conduct of the affairs of the Company or any
of its subsidiary banks by an order issued under Section 8(e)(4) or 8(g)(1) of
the Federal Deposit Insurance Act, 12 U.S.C. (S) 1818(e)(4) or 1818(g)(1);
(iv) the issuance by any court having appropriate
jurisdiction of an order under Section 21(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), 15 U.S.C. (S) 78u(d)(2), prohibiting
the Executive from acting as an officer or director of the Company; or
(v) the conviction of the Executive for commission of a
felony.
(c) "Change in Control" means the occurrence of any of the
following events:
(i) there shall be consummated any consolidation, merger,
stock-for-stock exchange or similar transaction (collectively, "Merger
Transactions") involving securities of the Company in which the holders of
voting securities of the Company immediately prior to such consummation own, as
a group, immediately after such consummation, voting securities of the Company
(or, if the Company does not survive the Merger Transaction, voting securities
of the corporation surviving such transaction) having less than 50% of the total
voting power in an election of directors of the Company (or such other surviving
corporation), excluding securities received by any members of such group which
represent disproportionate percentage increases in their shareholdings vis-a-vis
the other members of such group;
(ii) any individual, corporation (other than the Company),
partnership, trust, association, pool, syndicate, or any other entity or any
group or persons acting in concert (other than an employee benefit plan of the
Company or one of its affiliates) becomes the beneficial owner (as that concept
is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Exchange Act) as a result of any one or more securities transactions,
including gifts and stock repurchases but excluding any Merger Transactions, of
securities of the Company possessing one-third or more of the voting power for
the election of directors of the Company;
(iii) during any period of twenty-four consecutive months
after the date hereof, individuals who at the beginning of such period
constituted the Board (including for this purpose any new director whose
election or nomination for election by the Company's shareholders was approved
by a vote of at least a majority of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute at
least a majority of the Board (excluding any Board seat that is vacant or
otherwise unoccupied); or
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<PAGE>
(iv) there shall be consummated any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions,
excluding any Merger Transactions), of all, or substantially all, of the assets
of the Company to a party which is not controlled by or under common control
with the Company.
Notwithstanding the foregoing, the Merger shall not be treated as a "Change in
Control" for purposes of this Agreement.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Company Bonus Plan" means any bonus, stock option, profit-
sharing or other cash-based or equity-based incentive plan offered by the
Company.
(f) "Company Benefit Plan" means any pension, thrift, deferred
compensation, stock purchase, life insurance, medical, dental, education,
accident, disability, welfare, retirement or other employee benefit plan offered
by the Company other than a Company Bonus Plan.
(g) "Designated Office" means Route 55, LaGrangeville, New York
12540, or such other office of the Company designated by the Board from time to
time other than in anticipation of, or following, a Change in Control.
(h) "Merger" means the merger of Progressive Bank, Inc. into Hudson
Chartered Bancorp, Inc.
(i) "Triggering Event" means the occurrence of any of the following
events:
(i) the termination by the Company of the employment of the
Executive for any reason other than Cause;
(ii) the assignment to the Executive without his consent of
any duties inconsistent in any material respect with the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties or responsibilities, or any other action by the Company which results in
a diminution in any material respect in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith that is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(iii) in anticipation of, or following a Change in Control,
the requirement by the Company that the Executive be based at any office or
location that is more than 50 miles from the Designated Office;
-3-
<PAGE>
(iv) after the Effective Date, the failure without the
consent of the Executive, to nominate the Executive for election as a member of
the Board, or if nominated, the failure of shareholders to elect the Executive
as a member of the Board;
(v) after the Effective Date, the failure of the Company
without the Executive's consent to:
(A) continue in effect any Company Bonus Plan in which
the Executive participates that is material to the Executive's total
compensation, unless a substantially equivalent arrangement, embodied in an
ongoing substitute or alternative plan, has been established;
(B) continue the Executive's participation in any
Company Bonus Plan and eligibility for bonuses or other compensation thereunder,
or in any substitute or alternative plan, on a basis at least as favorable as
that existing at the date hereof, both in terms of the amount of benefits
provided and the level of the Executive's participation relative to other
participants;
(C) continue to provide the Executive with benefits
comparable to those received by the Executive under any Company Benefit Plan in
which the Executive was participating as of the date hereof, at participation
costs substantially similar to those paid by the Executive;
provided, however, that it shall not be deemed a Triggering Event if the
Company, for bona fide business purposes and not in anticipation of or following
a Change in Control, modifies the terms or conditions of any Company Bonus Plan
or Company Benefit Plan, so long as such modifications have or would have a
substantially similar effect upon all executive employees or all employees of
the Company who participate or who are eligible to participate in the plan;
(vi) the Company shall have materially breached any provision
of this Agreement and such breach shall not have been cured within 15 days after
delivery of written notice thereof to the Board by the Executive, identifying
the breach with reasonable particularity; or
(vii) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof, as the same may be increased from
time to time as provided for in this Agreement.
(j) "Willful" means that an action, conduct or deed is done, or
omitted to be done, by the Executive in bad faith or without reasonable belief
that the Executive's action or omission was in the best interests of the
Company. Any act, or failure to act, based upon the instructions or prior
approval of the Board or based upon the advice of counsel for the Company, shall
be conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company.
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<PAGE>
2. Employment Term. The initial term of employment under this
---------------
Agreement shall be for a period of three years commencing on the Effective Date.
This Agreement shall be extended automatically for one additional year on each
annual anniversary date of the Effective Date unless either the Company, through
the Board, or the Executive gives contrary written notice (a "Non-Renewal
Notice") to the other not less than three months in advance of such anniversary
date. References herein to the term of this Agreement shall refer both to such
initial term and such successive terms.
3. Employment; Board Membership. During the term of employment
----------------------------
provided for in this Agreement, the Company agrees to employ the Executive in
the office or position set forth in the second Recital of this Agreement, and
the Executive agrees to serve in such office or position and to perform the
duties and discharge the responsibilities associated therewith or such other
duties and responsibilities as may reasonably be assigned to the Executive from
time to time by the Board. The Executive shall not undertake executive
responsibilities with any other corporation, partnership, association or other
entity and shall devote the necessary and customary time and attention to the
business and affairs of the Company and its subsidiaries, provided, however,
that the Executive may, with the approval of the Board, serve as a director or
officer of any non-competing business or engage in any other activity, including
without limitation charitable or community activity, to the extent that it does
not inhibit the performance of his duties hereunder. Subject to applicable
fiduciary duties, the Executive shall be nominated for membership on the Board
and the board of directors of the Company's bank subsidiary.
4. Office and Services. In connection with the Executive's employment
-------------------
hereunder, the Executive shall be based at the Designated Office, except for
required travel on the Company's business. The Company shall furnish the
Executive with office space, secretarial assistance, and such other facilities
and services as shall be suitable to the Executive's position and adequate for
the performance of his duties hereunder.
5. Compensation. The regular compensation and benefits payable to the
------------
Executive under this Agreement with respect to his period of employment shall
include the following:
(a) Salary. The Company shall pay the Executive an annual base
------
salary hereunder of not less than $ 272,160, payable in equal semimonthly
installments or at such other intervals as shall be agreed upon by the parties.
The Executive's annual base salary may be increased from time to time as
determined by the Board and, if so increased, such annual base salary shall not
thereafter during the Executive's employment under this Agreement be decreased
and the obligation of the Company hereunder to pay the Executive's annual base
salary shall thereafter relate to such increased annual base salary.
(b) Board Compensation. The Executive shall be entitled to receive
------------------
any fees or additional payments for serving as a member of the Board or as a
-5-
<PAGE>
member of any board of directors (or the equivalent thereof) of any subsidiary
of the Company to the extent provided to other directors of the Company or
applicable subsidiary; provided, however, that the Executive shall not be
entitled to fees for serving on any committee or subcommittee of the Board or
board of directors (or the equivalent thereof) of any subsidiary.
(c) Discretionary Bonuses. During the term of this Agreement, the
---------------------
Executive shall be eligible to participate in an equitable manner with other
executive employees of the Company and its subsidiaries in any Company Bonus
Plan or in other discretionary bonuses authorized and declared by the Board, the
board of directors (or the equivalent thereof) of the Company's subsidiaries, or
by their respective delegees.
(d) Participation in Benefit Plans. In addition to any
------------------------------
compensation and benefits provided for in this Agreement, the Executive shall be
eligible to participate in any Company Benefit Plan or any other employee fringe
benefits offered by the Company or its subsidiaries for the benefit of executive
employees or all employees generally in which the Executive is eligible to
participate. The Executive's participation in any such Company Benefit Plan
shall be subject to all generally applicable eligibility requirements thereof
and shall not in any way limit or reduce the obligation of the Company to pay
the Executive's annual base salary hereunder (except pursuant to, in accordance
with, or as required by the generally applicable terms of participation of any
such Company Benefit Plan).
(e) Vacation. The Executive shall be entitled to annual paid
--------
vacation during the term of this Agreement of not less than four weeks per year.
(f) Reimbursement of Business Expenses. The Company shall promptly
----------------------------------
reimburse the Executive for all reasonable travel and other business expenses
incurred by him in the performance of his duties and responsibilities, subject
to such reasonable requirements with respect to substantiation and documentation
as may be specified by the Company.
(g) Automobile. The Company shall provide the Executive with the
----------
full time use of an automobile and shall bear the cost of maintenance of such
vehicle.
(h) Deferred Compensation. (i) The Company shall maintain a
---------------------
nonqualified deferred compensation plan that will allow the Executive the right
to defer the payment to him of such portion of his annual base salary and cash
bonus as the Executive shall elect. Any such deferred amounts that the
Executive elects to have hypothetically invested in one or more mutual funds
shall be transferred to a "rabbi trust" (the "Trust") and invested in such
manner as shall be provided by the Trust. Amounts deferred by the Executive
shall be paid to the Executive upon his retirement or other termination of
employment, in a lump sum or in such installments, as elected by the Executive
prior to retirement or termination in accordance with the terms of the plan.
The Executive acknowledges that, in the event of the insolvency of the Company,
the Trust's assets would be subject to the claims of the Company's creditors and
in such event
-6-
<PAGE>
the Executive would have the status of an unsecured creditor with respect to
deferred amounts.
(ii) The Company agrees that it shall fund the Trust for a
period of up to two calendar years following the onset of a period of long-term
disability of the Executive in an amount equal to the amount deferred by the
Executive in the year period prior to the onset of the period of long-term
disability. If the period of long-term disability ends prior to the commencement
of the second calendar year following the onset of such long-term disability
period, no payment shall be made by the Company for such year unless the
Executive elects deferral of salary for such year pursuant to Section 5(h)(i)
above.
(i) Supplemental Retirement Benefits. The Executive shall be
--------------------------------
entitled to earn and accrue, for the term of employment, benefits under a
supplemental retirement benefit plan that provides benefits that are at least
equal to those provided under the plan or arrangement that covered the Executive
prior to the Merger.
(j) Club Membership. The Company shall pay the dues, assessments
---------------
and bond obligations for the Executive's and his wife's membership in one
country club.
(k) Supplemental Long-Term Disability Benefits. The Company shall
------------------------------------------
pay such additional amounts to the Executive from time-to-time that are
sufficient, on an after-tax basis, to pay the premiums on a long-term disability
policy previously transferred to the Executive.
6. Termination Procedures.
----------------------
(a) Termination Notice. If the Executive's employment by the
------------------
Company is terminated for any reason during the term of this Agreement (other
than by reason of the Executive's death or as a result of a consensual
termination as provided in Section 8(c) of this Agreement), the terminating
party shall provide the other party with written notice (the "Termination
Notice") specifying: (i) the effective date of the termination (the "Termination
Date"), (ii) the specific provisions of this Agreement upon which the
termination is based and that are applicable to the termination, and (iii) a
reasonably detailed description of the facts and circumstances providing the
basis for the termination under the specified provisions of this Agreement.
(b) Termination Date. If the Executive's employment is terminated
----------------
by the Executive, the Termination Date shall not be less than thirty days after
the date the Termination Notice is tendered to the Company. If the Executive's
employment is terminated by the Company, the Termination Date shall not be less
than 30 days after the date the Termination Notice is tendered to the Executive.
Termination of the Executive's employment shall occur on the Termination Date
even if there is a dispute between the parties relating to the provisions of
this Agreement applicable to such termination (a "Termination Dispute").
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<PAGE>
(c) Termination Dispute. If, prior to the Termination Date, the
-------------------
party receiving the Termination Notice provides written notice to the other
party of the existence of a Termination Dispute (which notice shall provide a
reasonably detailed description of the nature of the dispute, including the
specific provisions of this Agreement that the disputing party believes are
applicable to the termination), the Termination Dispute shall be resolved by:
(i) mutual written agreement of the parties hereto or (ii) a final judgment,
order or decree of a court of competent jurisdiction or arbitrator (which is not
appealable or with respect to which the time for appeal therefrom has expired
and no appeal has been perfected). The parties hereto shall pursue the
resolution of any Termination Dispute with reasonable diligence.
(d) Termination Payments. If there is no Termination Dispute, any
--------------------
amount owed by the Company to the Executive as a result of the termination of
the Executive's employment under this Agreement shall be payable in immediately
available funds on the Termination Date. If there is a Termination Dispute, any
amount owed by the Company to the Executive as a result of the termination of
the Executive's employment under this Agreement that is not in dispute shall be
paid on the Termination Date, and all other amounts shall be paid within five
business days of the resolution of the Termination Dispute as provided for in
Section 7(c) hereto, together with Applicable Interest.
7. Termination Due to a Triggering Event.
-------------------------------------
(a) If, during the term of this Agreement, the Executive's
employment by the Company is terminated (whether by the Company or by the
Executive) upon the occurrence of, or within 90 days after, a Triggering Event:
(i) the Company shall make a lump sum cash payment to the Executive in an amount
equal to 299% of the sum of (A) the Executive's annual base salary at the time
the Triggering Event occurs, and (B) the amount of any discretionary bonuses
paid by the Company to the Executive within the 12 months immediately preceding
the occurrence of the Triggering Event; (ii) the Company shall continue to
provide to the Executive for a three-year period the Executive's then-existing
coverage under the Company's health, dental and life insurance plans or, if
continued coverage under such plans cannot be provided, substantially equivalent
coverage under alternative arrangements; (iii) any restrictions remaining on any
restricted shares issued to the Executive under the Company's restricted stock
plans shall immediately lapse, any performance shares issued to the Executive
under the Company Bonus Plans shall immediately vest and any stock options
granted to the Executive shall become immediately exercisable, and (iv) the
Executive may exercise any such option that is not intended to be an incentive
stock option (within the meaning of Section 422 of the Code) until the later of
(i) the earlier of the expiration of the original term of the option or one year
after the effective date of the Executive's termination or (ii) such later date
as may be provided for under the terms of the option or applicable plan.
-8-
<PAGE>
(b) In the event that the Executive becomes entitled to receive any
benefit or payment in connection with a Triggering Event or the Company's
termination of the Executive's employment, whether pursuant to the terms of this
Agreement or otherwise (collectively, the "Total Benefits"), and any of the
Total Benefits will be subject to any excise tax (the "Excise Tax") imposed
under Section 4999 of the Code, the Company shall pay to the Executive an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the Executive from the Gross-Up Payment, after deduction of any federal, state
and local income taxes, Excise Tax, and FICA and Medicare withholding taxes on
the Gross-Up Payment, shall be equal to the Excise Tax on the Total Benefits.
For purposes of determining the amount of such Excise Tax on the Total Benefits,
the amount of the Total Benefits that shall be treated as subject to the Excise
Tax shall be equal to (i) the Total Benefits, minus (ii) the amount of such
Total Benefits that, in the opinion of tax counsel selected by the Company and
reasonably acceptable to the Executive ("Tax Counsel"), are not excess parachute
payments (within the meaning of Section 280G(b)(1) of the Code).
(c) For purposes of Section 7(b), the Executive shall be deemed to
pay federal income taxes at the highest marginal rate of federal income taxation
in the calendar year in which the Excise Tax is payable and state and local
income taxes at the highest marginal rate of taxation in the state and locality
of the Executive's residence on the effective date of his termination, net of
the reduction in federal income taxes which could be obtained from deduction of
such state and local taxes (calculated by assuming that any reduction under
Section 68 of the Code in the amount of itemized deductions allowable to the
Executive applies first to reduce the amount of such state and local income
taxes that would otherwise be deductible by the Executive). Except as otherwise
provided herein, all determinations required to be made under this Section 7
shall be made by Tax Counsel, which determinations shall be conclusive and
binding on the Executive and the Company absent manifest error.
(d) In the event that the Excise Tax on the Total Benefits is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax, federal, state and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in any such taxes
and/or a federal, state or local income tax deduction) plus Applicable Interest.
In the event that the Excise Tax on the Total Benefits is finally determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment, which shall be calculated by
Tax Counsel in the same manner and using the same assumptions as set forth in
Sections 7(b) and 7(c), to the Executive in respect of such excess (plus any
interest, penalties or additions payable by the Executive to the Internal
Revenue Service
-9-
<PAGE>
or any other federal, state, local or foreign taxing authority with respect to
such excess or with respect to the additional Gross-Up Payment) at the time that
the amount of such additional Excise Tax is finally determined.
(e) Following the occurrence of a Triggering Event, if the Company
or the Executive brings any action, suit or proceeding for the enforcement,
performance or construction of this Agreement, the Company agrees to reimburse
the Executive for all reasonable costs and expenses incurred by him in such
action, suit or proceeding, including reasonable attorneys' and accountants'
fees and expenses.
8. Other Termination. Notwithstanding any other provision of this
-----------------
Agreement, the Executive's employment hereunder shall terminate under the
following circumstances with the following consequences:
(a) Termination By Company for Cause. The Company may terminate
--------------------------------
the Executive's employment under this Agreement for Cause. The termination of
the Executive's employment under this Agreement shall not be deemed for Cause
unless and until (i) the Company, through the Board delivers reasonable notice
to the Executive that it intends to terminate the Executive for Cause, (ii) the
Executive is given an opportunity, together with counsel, to be heard before the
Board, (iii) the Executive's termination is approved by the affirmative vote of
at least two-thirds of the Board, and (4) the Company provides the Executive
with a copy of the resolutions duly adopted by the Board finding that, in the
good faith opinion of the Board, the Executive should be terminated for Cause
and specifying the particulars thereof in detail. Upon termination for Cause,
the Executive will not be entitled to any further compensation for any period
subsequent to the effective date of such termination, except for pay or
benefits, if any, in accordance with the then existing severance policies of the
Company and the severance terms of the Company Bonus Plans and Company Benefit
Plans.
(b) Termination By Company for Disability. If, as a result of the
-------------------------------------
Executive's incapacity due to physical or mental illness, the Executive shall
not have performed his duties hereunder on a full-time basis for six consecutive
months, the Executive's employment under this Agreement may be terminated by the
Company upon written notice. Such termination for disability shall require the
affirmative vote of a majority of the entire Board. The Executive's
compensation during any period of disability prior to the effective date of such
termination shall be the amounts normally payable to him in accordance with his
then current annual base salary, reduced by the amounts of disability pay, if
any, paid to the Executive under any Company Benefit Plan that provides
disability benefits. The Executive shall not be entitled to any further
compensation from the Company or its subsidiaries for any period subsequent to
the effective date of such termination, except for pay or benefits, if any, in
accordance with then existing severance policies of the Company or its
subsidiaries and the severance terms of the Company Bonus Plans and Company
Benefit Plans and Section 5(h) hereof. The Company agrees to continue to
maintain in effect, during the Executive's term of employment hereunder, the
Company Benefit Plan that currently provides long-term
-10-
<PAGE>
disability coverage to the Executive (or a substitute plan or arrangement that
provides long-term disability benefits that are at least substantially
equivalent).
(c) Consensual Termination. The parties hereto may agree at any
----------------------
time to terminate both this Agreement and the Executive's employment hereunder
upon such terms and conditions as the parties may mutually agree.
(d) Termination By Executive. (i) If the Executive terminates his
------------------------
employment with the Company for any reason other than the occurrence of a
Triggering Event as provided for in Section 7 hereof or a consensual termination
as provided for in Section 8(c) hereof, the Executive will not be entitled to
any further compensation for any period subsequent to the effective date of such
termination, except for pay or benefits, if any, in accordance with the then
existing severance policies of the Company and the severance terms of the
Company Bonus Plans and the Company Benefit Plans.
(ii) The Executive may voluntarily resign as President and
Chief Executive Officer of the Company only after serving in such capacity for a
period of at least one year; provided, however, that the Executive may resign
prior to the expiration of such one-year period by reason of the occurrence of a
Triggering Event or the Executive's illness or disability. If the Executive
receives a Non-Renewal Notice, he may voluntarily resign as President and Chief
Executive Officer and continue to receive his annual base salary (as in effect
as of the date of his resignation) for the remaining term of his employment
period under the Agreement. If the Executive voluntarily resigns as President
and Chief Executive Officer of the Company prior to serving in such capacity for
at least one year and other than due to a Triggering Event, the Executive shall
forfeit all of his rights with respect to the receipt of compensation and
benefits under this Agreement.
9. Supervisory Suspension. In the event the Executive is suspended
----------------------
from office and/or temporarily prohibited from participating in the conduct of
the affairs of the Company or any of its subsidiary banks by a notice served
under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S) 1818(e)(3) or 1818(g)(1), the Company's obligations under this Agreement
shall be suspended effective as of the service date of the notice of suspension
or temporary prohibition, unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Company shall (a) pay the Executive all
compensation withheld while its obligations under this Agreement were suspended,
together with Applicable Interest and (b) reinstate all obligations under this
Agreement that were suspended.
10. Consulting Services. Upon termination of the Executive's service
-------------------
as President and Chief Executive Officer of the Company (unless (a) such
termination shall have been upon the occurrence of or within 90 days after a
Triggering Event or by the Company for Cause, or (b) the Executive shall have
voluntarily resigned (other than by reason of illness/disability or the issuance
of a Non-Renewal Notice) prior to serving as President and Chief Executive
Officer of the Company for at least one year), the Executive shall be entitled
to serve as a consultant to the Company for a period of five
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<PAGE>
years and shall be available to render such advisory or consulting services as
and when the Company may reasonably request of him from time to time. The
Executive shall perform consulting services hereunder as an independent
contractor and the provisions of this Agreement relating to the Executive's
employment by the Company, including by not limited to Section 5 hereof, shall
only apply and be effective for the period hereunder that the Executive serves
as President and Chief Executive Officer of the Company. In consideration for
the Executive's consulting services, the Company shall pay to the Executive an
annual consulting fee equal to $100,000, reduced by the amount of Board fees
paid to the Executive for service on the Board, other than fees paid to all
directors; provided, however, that no fee for consulting services shall be
payable to the Executive with respect to any period during which the Executive
is receiving his base salary pursuant to Section 8(d)(ii) hereof. Such annual
consulting fee shall be paid in substantially equal monthly installments. In the
event that the Executive is unable to perform the consulting services
contemplated by this Section 10 (whether such inability occurs before or after
the commencement of consulting services) by reason of the Executive's death or
disability at any time prior to the end of the five-year consulting period
provided for by this Section 10, the Executive (or in the event of his death,
his spouse or, if he has no spouse at such time, his estate) shall nonetheless
be entitled to receive the annual $100,000 consulting fee, in monthly
installments, for the remaining term of the five-year consulting period. If,
after a Change in Control, the Executive's consulting services are involuntarily
terminated prior to the expiration of the 5-year consulting period provided for
herein, the Company shall make a lump sum cash payment to the Executive in the
amount of $300,000. During the period that the Executive serves as a consultant
to the Company, he shall not engage in any Competitive Activity. "Competitive
Activity" shall mean any participation in, employment by, ownership of any
equity interest exceeding 1% in, or promotion or organization of, any person,
partnership, corporation, firm, association or other business organization,
entity or enterprise that is engaged in a business that is substantially similar
to some or all of the businesses of the Company whether the Executive is acting
as agent, consultant, employee, officer, director, investor, partner,
shareholder, proprietor or in any other individual or representative capacity
therein.
11. Confidential Information. During the Executive's employment with
------------------------
the Company and thereafter, the Executive shall not disclose or use in any way
any confidential business or technical information or any trade secret acquired
in the course of such employment, other than (a) information that is generally
known in the Company's industry or acquired from public sources, (b) as required
in the course of such employment, (c) as required by any court, supervisory
authority, administrative agency or applicable law, or (d) with the prior
written consent of the Company. This Section 11 shall survive termination of
this Agreement.
12. No-Raid. The Executive agrees that, in the event that (a) the
-------
Executive's employment with the Company is terminated other than upon the
occurrence of, or within 90 days after, a Triggering Event and as a result of
such termination the Executive is entitled to receive compensation, benefits or
payments hereunder or under the Company's then existing severance policies that,
in the aggregate, equal or exceed
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<PAGE>
100% of the Executive's annual base salary at the time of termination plus the
amount of any discretionary bonuses paid by the Company to the Executive within
the 12 months immediately preceding the termination, or (b) the Executive
becomes entitled to the $300,000 payment described in Section 10 hereof, the
Executive shall not, for a period of one year (or such lesser period as may be
determined by the Board and disclosed to the Executive in writing) after the
effective date of the Executive's termination of employment or service as a
consultant, solicit, actively interfere with the Company's or any Company
affiliate's relationship with, or attempt to divert or entice away, any officer
of the Company or its affiliates.
13. Payment Obligation Absolute. The obligation of the Company to pay
---------------------------
the Executive the compensation, benefits or payments provided herein during the
term hereof shall be absolute and unconditional and shall not be affected by any
circumstances, including without limitation any set-off, counterclaim,
recoupment, defense or other right which the Company may have against the
Executive. All amounts payable by the Company hereunder shall be paid without
notice or demand. Each and every payment made hereunder by the Company shall be
final and the Company will not seek to recover all or any part of such payment
from the Executive, or from whosoever may be entitled thereto, for any reason
whatsoever except as provided in Section 8(d) hereof. The Executive shall not
be obligated to seek other employment in mitigation of the amounts payable under
any provision of this Agreement and the obtaining of any such other employment
shall in no event limit or reduce the obligations of the Company to make the
payments required to be made under this Agreement.
14. No Right to Continued Employment. Nothing in this Agreement shall
--------------------------------
be deemed to give the Executive the right to be retained in the employ or
service of the Company, or to interfere with the right of the Company to
discharge the Executive at any time, subject in all cases to the terms of this
Agreement.
15. Withholding. Any payments provided for hereunder shall be paid net
-----------
of any applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed.
16. Successors and Assigns. This Agreement is a personal services
----------------------
contract which may not be assigned by the Company, or assumed from the Company
by, any other party without the prior written consent of the Executive. Subject
to the foregoing limitation, all rights hereunder shall inure to the benefit of
the parties hereto, their personal or legal representatives, heirs, successors
and assigns. The Company will require any successor (whether direct or
indirect, by purchase, assignment, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume this Agreement and to agree to perform hereunder in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. References herein to the Company will be understood
to refer to the successor or successors of the Company, respectively.
-13-
<PAGE>
17. Notices. Any notice required or desired to be given hereunder
-------
shall be in writing and shall be deemed given when delivered personally or sent
by certified or registered mail, postage prepaid, to the address of the other
party set forth in the first paragraph of this Agreement, provided that any
notice to the Company shall be directed to the Chairman of the Board.
18. Waiver of Breach. Waiver by any party of a breach of any provision
----------------
shall not operate as or be construed a waiver by such party of any subsequent
breach hereof.
19. Entire Agreement; Effect on Prior Agreement. This agreement
-------------------------------------------
contains the entire agreement among the parties concerning the employment of the
Executive by the Company, and supersedes any employment or change in control
agreements between the Executive and the Company or any of its predecessors,
subsidiaries or predecessors of subsidiaries. Executive agrees that, for
purposes of the Employment Agreement entered into between Progressive Bank, Inc.
and the Executive, dated as of December 1, 1994, the Merger will not constitute
a "change of control" for purposes of such agreement and that the Executive
waives all change of control benefits under such agreement that are associated
with the Merger.
20. Written Modification, Amendment or Waiver. No modification,
-----------------------------------------
amendment or waiver of any provision hereof shall be effective unless in writing
specifically referring hereto and signed by the party against whom such
provision as modified or amended or such waiver is sought to be enforced.
21. Counterparts. This Agreement may be executed in counterparts, all
------------
of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party hereto and delivered
to the other party, it being understood that all parties need not sign the same
counterpart.
22. Governing Law. This Agreement is governed by and is to be
-------------
construed and enforced in accordance with the laws of the State of New York
applicable to contracts made and to be performed entirely therein.
23. Consent to Jurisdiction. Each party hereto irrevocably consents to
-----------------------
the exclusive jurisdiction of the courts of the State of New York and the
federal courts situated in the State of New York in connection with any action
to enforce the provisions of this Agreement, to recover damages or other relief
for breach or default under this Agreement, to enforce any decision or award of
any arbitrators, or otherwise arising under or by reason of this Agreement.
24. Construction.
------------
(a) The section headings of this Agreement have been inserted for
convenience of reference only and shall not be deemed to be a part of this
Agreement.
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<PAGE>
(b) All personal pronouns used in this Agreement, whether used in
the masculine, feminine or neuter gender, shall include all other genders where
the context so requires.
(c) The singular shall include the plural, and vice versa, where
the context so requires.
(d) All references to sections of, or regulations promulgated
under, the Exchange Act, the Code or other statutes shall be deemed also to
refer to such sections or regulations as amended from time to time and to any
successor provisions to such sections or regulations. All references to employee
benefit plans of the Company shall be deemed also to refer to such plans as
amended from time to time and to any successor plans thereto.
25. Severability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
affecting the validity or enforceability of any other term or provision hereof
in that or any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted so as to be
enforceable.
26. Authorization. The Company represents and warrants that the
-------------
execution of this Agreement has been duly authorized by resolution of the Board.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Agreement as of the date first above written.
PREMIER NATIONAL BANCORP
By: /s/ Peter Van Kleek
-------------------------------
Name: Peter Van Kleek
Title: President & CEO
/s/T. Jefferson Cunningham III
-------------------------------
Executive: Chairman of Premier
-16-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference, in the Registration Statements
listed below, of our report dated January 27, 1998 (July 17, 1998 as to the
effects of the merger of Progressive Bank, Inc. into Hudson Chartered Bancorp,
Inc. under the name of Premier National Bancorp, Inc. in a transaction accounted
for using the pooling-of-interests method, including the restatement of all
historical financial data to include both entities for all periods presented)
relating to the consolidated financial statements of Premier National Bancorp,
Inc. (the "Company") and subsidiaries, appearing in this Quarterly Report on
Form 10-Q of the Company for the quarterly period ended September 30, 1998:
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)
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 Progressive Bank,
Inc. 1997 Employee Stock Option Plan, the Progressive Bank, Inc. 1993 Non-
Qualified Stock Option Plan for Directors, the Progressive Bank, Inc.
Amended and Restated Incentive Stock Option Plan and the Pawling Savings
Bank Incentive Stock Option Plan (File No. 333-49793).
/s/ Deloitte & Touche LLP
Stamford, Connecticut
November 16, 1998
<PAGE>
Exhibit 23.2
Consent of Independent Certified Public Accountants
---------------------------------------------------
The Board of Directors
Premier National Bancorp, Inc.:
We consent to the incorporation by reference (in the Registration Statements
listed below) of our report dated February 2, 1998 relating to the consolidated
balance sheets of Progressive Bank, Inc. and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997 Annual Report
on Form 10-K of Progressive Bank, Inc. and is incorporated by reference in the
Quarterly Report on Form 10-Q of Premier National Bancorp, Inc. (the "Company")
for the quarterly period ended September 30, 1998:
. Form S-8 relating to the Company's 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)
. 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 Progressive Bank,
Inc. 1997 Employee Stock Option Plan; the Progressive Bank, Inc. 1993 Non-
Qualified Stock Option Plan for Directors; the Progressive Bank, Inc.
Amended and Restated Incentive Stock Option Plan; and the Pawling Savings
Bank Incentive Stock Option Plan (File No. 333-49793)
/s/ KPMG Peat Marwick LLP
Stamford, Connecticut
November 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 56,677
<INT-BEARING-DEPOSITS> 1,209,847
<FED-FUNDS-SOLD> 118,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 395,230
<INVESTMENTS-CARRYING> 29,020
<INVESTMENTS-MARKET> 19,866
<LOANS> 976,237
<ALLOWANCE> 20,564
<TOTAL-ASSETS> 1,619,679
<DEPOSITS> 1,451,068
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,633
<LONG-TERM> 1,725
0
0
<COMMON> 11,382
<OTHER-SE> 142,871
<TOTAL-LIABILITIES-AND-EQUITY> 1,619,679
<INTEREST-LOAN> 68,279
<INTEREST-INVEST> 20,381
<INTEREST-OTHER> 3,009
<INTEREST-TOTAL> 91,669
<INTEREST-DEPOSIT> 41,171
<INTEREST-EXPENSE> 41,242
<INTEREST-INCOME-NET> 50,427
<LOAN-LOSSES> 4,729
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 39,329
<INCOME-PRETAX> 13,315
<INCOME-PRE-EXTRAORDINARY> 13,315
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,072
<EPS-PRIMARY> .57
<EPS-DILUTED> .55
<YIELD-ACTUAL> 9.00
<LOANS-NON> 11,500
<LOANS-PAST> 302
<LOANS-TROUBLED> 311
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,331
<CHARGE-OFFS> 4,098
<RECOVERIES> 602
<ALLOWANCE-CLOSE> 20,564
<ALLOWANCE-DOMESTIC> 20,564
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1996
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 44,588
<INT-BEARING-DEPOSITS> 1,231,503
<FED-FUNDS-SOLD> 65,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 275,978
<INVESTMENTS-CARRYING> 139,579
<INVESTMENTS-MARKET> 139,718
<LOANS> 1,040,627
<ALLOWANCE> 19,056
<TOTAL-ASSETS> 1,607,925
<DEPOSITS> 1,449,506
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,026
<LONG-TERM> 1,821
0
0
<COMMON> 9,280
<OTHER-SE> 135,931
<TOTAL-LIABILITIES-AND-EQUITY> 1,607,925
<INTEREST-LOAN> 70,040
<INTEREST-INVEST> 18,680
<INTEREST-OTHER> 1,926
<INTEREST-TOTAL> 90,646
<INTEREST-DEPOSIT> 41,295
<INTEREST-EXPENSE> 41,375
<INTEREST-INCOME-NET> 49,271
<LOAN-LOSSES> 3,501
<SECURITIES-GAINS> 151
<EXPENSE-OTHER> 31,966
<INCOME-PRETAX> 20,821
<INCOME-PRE-EXTRAORDINARY> 20,821
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,247
<EPS-PRIMARY> .93
<EPS-DILUTED> .92
<YIELD-ACTUAL> 8.92
<LOANS-NON> 10,808
<LOANS-PAST> 966
<LOANS-TROUBLED> 1,278
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,533
<CHARGE-OFFS> 3,764
<RECOVERIES> 787
<ALLOWANCE-CLOSE> 19,057
<ALLOWANCE-DOMESTIC> 19,057
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,097
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 53,779
<INT-BEARING-DEPOSITS> 1,097,460
<FED-FUNDS-SOLD> 51,967
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 274,235
<INVESTMENTS-CARRYING> 56,720
<INVESTMENTS-MARKET> 55,308
<LOANS> 961,830
<ALLOWANCE> 16,803
<TOTAL-ASSETS> 1,439,697
<DEPOSITS> 1,288,072
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,035
<LONG-TERM> 1,896
0
5,713
<COMMON> 10,219
<OTHER-SE> 112,655
<TOTAL-LIABILITIES-AND-EQUITY> 1,439,697
<INTEREST-LOAN> 84,219
<INTEREST-INVEST> 17,911
<INTEREST-OTHER> 4,086
<INTEREST-TOTAL> 106,216
<INTEREST-DEPOSIT> 48,821
<INTEREST-EXPENSE> 48,951
<INTEREST-INCOME-NET> 57,265
<LOAN-LOSSES> 2,900
<SECURITIES-GAINS> 487
<EXPENSE-OTHER> 41,735
<INCOME-PRETAX> 21,715
<INCOME-PRE-EXTRAORDINARY> 21,715
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,751
<EPS-PRIMARY> .98
<EPS-DILUTED> .94
<YIELD-ACTUAL> 8.96
<LOANS-NON> 9,998
<LOANS-PAST> 694
<LOANS-TROUBLED> 1,849
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,728
<CHARGE-OFFS> 4,552
<RECOVERIES> 727
<ALLOWANCE-CLOSE> 16,803
<ALLOWANCE-DOMESTIC> 16,803
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 768
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 50,999
<INT-BEARING-DEPOSITS> 1,220,149
<FED-FUNDS-SOLD> 41,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 296,267
<INVESTMENTS-CARRYING> 93,377
<INVESTMENTS-MARKET> 86,219
<LOANS> 1,043,327
<ALLOWANCE> 18,533
<TOTAL-ASSETS> 1,572,055
<DEPOSITS> 1,420,027
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,467
<LONG-TERM> 1,854
0
0
<COMMON> 11,301
<OTHER-SE> 126,406
<TOTAL-LIABILITIES-AND-EQUITY> 1,572,055
<INTEREST-LOAN> 88,778
<INTEREST-INVEST> 24,943
<INTEREST-OTHER> 3,155
<INTEREST-TOTAL> 116,876
<INTEREST-DEPOSIT> 53,862
<INTEREST-EXPENSE> 54,023
<INTEREST-INCOME-NET> 62,853
<LOAN-LOSSES> 5,150
<SECURITIES-GAINS> (37)
<EXPENSE-OTHER> 42,959
<INCOME-PRETAX> 24,891
<INCOME-PRE-EXTRAORDINARY> 24,891
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,987
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 8.92
<LOANS-NON> 9,113
<LOANS-PAST> 645
<LOANS-TROUBLED> 1,105
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 16,803
<CHARGE-OFFS> 4,290
<RECOVERIES> 870
<ALLOWANCE-CLOSE> 18,533
<ALLOWANCE-DOMESTIC> 18,533
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,139
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 42,961
<INT-BEARING-DEPOSITS> 1,233,918
<FED-FUNDS-SOLD> 50,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 276,678
<INVESTMENTS-CARRYING> 163,264
<INVESTMENTS-MARKET> 156,404
<LOANS> 1,040,872
<ALLOWANCE> 19,331
<TOTAL-ASSETS> 1,615,018
<DEPOSITS> 1,452,698
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,758
<LONG-TERM> 1,725
0
0
<COMMON> 11,308
<OTHER-SE> 137,529
<TOTAL-LIABILITIES-AND-EQUITY> 1,615,018
<INTEREST-LOAN> 93,795
<INTEREST-INVEST> 25,083
<INTEREST-OTHER> 2,613
<INTEREST-TOTAL> 121,491
<INTEREST-DEPOSIT> 55,384
<INTEREST-EXPENSE> 55,491
<INTEREST-INCOME-NET> 66,000
<LOAN-LOSSES> 4,475
<SECURITIES-GAINS> 329
<EXPENSE-OTHER> 43,801
<INCOME-PRETAX> 27,637
<INCOME-PRE-EXTRAORDINARY> 27,637
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,640
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.22
<YIELD-ACTUAL> 8.98
<LOANS-NON> 7,889
<LOANS-PAST> 443
<LOANS-TROUBLED> 712
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,533
<CHARGE-OFFS> 4,758
<RECOVERIES> 1,081
<ALLOWANCE-CLOSE> 19,331
<ALLOWANCE-DOMESTIC> 19,331
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,377
</TABLE>
<PAGE>
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Premier National Bancorp, Inc.
We have audited the consolidated balance sheets of Premier National Bancorp,
Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996 and the
related consolidated statements of income and expense, comprehensive income,
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. The consolidated financial statements
give retroactive effect to the merger of Progressive Bank, Inc. and Hudson
Chartered Bancorp, Inc., which has been accounted for as a pooling of interests
as described in Note A to the consolidated financial statements. We did not
audit the consolidated balance sheets of Progressive Bank, Inc. as of December
31, 1997 or 1996, or the related statements of income, stockholders' equity and
cash flows of Progressive Bank, Inc. for each of the three years in the period
ended December 31, 1997, which statements reflect total assets of $883.5 million
and $875.2 million as of December 31, 1997 and 1996, and net interest income of
$34.0 million, $32.0 million and $27.8 million for the years ended December 31,
1997, 1996, and 1995, respectively. Those statements were audited by other
auditors whose unqualified report dated February 2, 1998 has been furnished to
us, and our opinion, insofar as it relates to the amounts included for
Progressive Bank, Inc. for 1997, 1996 and 1995, is based solely on the report of
such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Premier National Bancorp, Inc. and subsidiaries at
December 31, 1997 and 1996 and the 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
Deloitte & Touche LLP
Stamford, Connecticut
January 27, 1998
(July 17, 1998 as to the effects
of the merger described in Note A)
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
December 31,
Notes 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks K $ 42,961 $ 50,999
Federal funds sold 50,300 41,850
---------- ----------
Total cash and cash equivalents 93,261 92,849
Securities: B
Available for sale, at fair value 276,678 296,267
Held to maturity, fair value of $156,404 in 1997 155,544 86,182
and $86,219 in 1996.
Regulatory securities 7,720 7,195
Loans held for sale K 679 1,377
Loans: C,D,K,L
Gross loans 1,040,872 1,043,327
Allowance for loan losses (19,331) (18,533)
---------- ----------
Net loans E 1,021,541 1,024,794
Premises and equipment, net F 25,318 26,572
Accrued income 11,181 11,259
Deferred taxes 8,844 9,209
Other real estate owned 1,366 2,923
Intangible assets, net G 7,490 8,887
Other assets D 5,396 4,541
---------- ----------
TOTAL ASSETS $1,615,018 $1,572,055
========== ==========
LIABILITIES
Deposits: G
Non-interest bearing deposits $ 218,780 $ 199,878
Interest bearing deposits 1,233,918 1,220,149
---------- ----------
Total deposits 1,452,698 1,420,027
Other interest bearing liabilities M 1,725 1,854
Other liabilities 11,758 12,467
---------- ----------
TOTAL LIABILITIES 1,466,181 1,434,348
Commitments and contigencies C,K
STOCKHOLDERS' EQUITY N,O
Preferred stock ($.01 par value; 5,000,000 shares authorized; none issue - -
Common stock ($.80 par value; 20,000,000 shares authorized) 11,308 11,301
14,135,170 shares issued less 85,015 treasury shares in 1997 and
14,126,250 shares issued less 77,981 treasury shares in 1996
Additional paid-in capital 59,628 59,391
Retained earnings 78,612 67,628
Accumulated other comprehensive income 1,647 1,065
Treasury stock, at cost (2,358) (1,549)
Employee stock ownership plan (ESOP) - (129)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 148,837 137,707
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,615,018 $1,572,055
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(dollars in thousands, except share data)
- - ------------------------------------------------------------------------------------------------------------
Year ended December 31,
Notes 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C>
Loans, including fees $93,795 $88,778 $84,219
Federal funds sold 2,613 3,155 4,086
Taxable securities 21,782 22,692 15,905
Tax-exempt securities 3,301 2,251 2,006
------- ------- -------
Total interest income 121,491 116,876 106,216
------- ------- -------
Interest expense:
Deposits G 55,384 53,862 48,821
Other 107 161 130
------- ------- -------
Total interest expense 55,491 54,023 48,951
------- ------- -------
NET INTEREST INCOME 66,000 62,853 57,265
Provision for loan losses E 4,475 5,150 2,900
------- ------- -------
Net interest income after provision for loan losses 61,525 57,703 54,365
Noninterest income:
Service charges on deposit accounts 5,789 6,130 5,052
Other service charges, commissions and fees 1,189 1,077 1,157
Income from fiduciary activities 737 643 694
Realized gains (losses) on sales of securities, net B 329 (37) 487
Gains on sales of loans, net E 453 364 471
Other 1,416 1,970 1,224
------- ------- -------
Total noninterest income 9,913 10,147 9,085
------- ------- -------
GROSS OPERATING INCOME 71,438 67,850 63,450
Noninterest expense:
Salaries and employee benefits H 23,244 22,438 20,361
Net occupancy and equipment I 6,745 7,052 6,052
Printing, postage, telephone and supplies 2,725 3,118 3,182
FDIC insurance 184 91 1,403
Advertising and public relations 1,542 1,227 1,221
Merger related expense 541 - 250
Other real estate owned D 222 866 496
Amortization of intangible assets 1,516 1,135 141
Other 7,082 7,032 8,629
------- ------- -------
Total noninterest expense 43,801 42,959 41,735
------- ------- -------
Income before income taxes 27,637 24,891 21,715
Income taxes J 9,997 6,904 7,964
------- ------- -------
NET INCOME 17,640 17,987 13,751
Dividend requirements of preferred stock - 89 414
------- ------- -------
NET INCOME AVAILABLE TO COMMON SHARES $17,640 $17,898 $13,337
======= ======= =======
Weighted average common shares:
Basic 14,019,000 14,059,000 13,681,000
Diluted 14,403,000 14,448,000 14,580,000
Per common share
Earnings - basic $ 1.26 $ 1.27 $ 0.98
Earnings - diluted 1.22 1.25 0.94
Dividends declared 0.50 0.41 0.34
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 17,640 $ 17,987 $ 13,751
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 4,475 5,150 2,900
Provision for losses on other real estate - 525 325
Depreciation and amortization 2,800 3,009 2,778
Amortization of security premiums, net 622 200 264
Amortization of intangible assets 1,516 1,135 141
Realized gains on sales of securities and loans (782) (327) (958)
Gains on sales of premises and equipment (186) - -
Gains on sales of other real estate (627) (242) (346)
Deferred income tax (benefit) expense (39) (1,212) 29
(Increase) decrease in accrued income 78 (612) (1,363)
Other, net (3,041) 2,929 (3,404)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,456 28,542 14,117
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale 60,695 45,234 34,588
Proceeds from maturities of securities available-for-sale 108,872 141,382 40,272
Proceeds from maturities of securities held-to-maturity 33,199 18,753 30,620
Purchase of securities available-for-sale (148,411) (219,729) (126,964)
Purchase of securities held-to-maturity (103,956) (52,370) (21,887)
Proceeds from sales of loans 21,495 19,936 43,631
Net increase in loans (22,761) (108,597) (94,013)
Purchase of premises and equipment (2,010) (2,846) (3,735)
Proceeds from sales of premises and equipment 650 - -
Proceeds from sales of other real estate owned 4,588 2,716 3,240
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (47,639) (155,521) (94,248)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in demand, money market, NOW and savings accounts 43,578 (37,220) 1,842
Net increase (decrease) in other time deposits (10,907) 16,423 81,831
Increase in deposits from acquisition of branches, net of premium paid - 143,030 -
Decrease in securities sold under repurchase agreements - - (6,106)
Repurchase of common stock held in treasury (3,858) (5,250) (4,055)
Proceeds from issuance of common stock from treasury 2,745 2,151 1,622
Repurchase of preferred stock - (123) -
Cash dividends - preferred - (193) (414)
Cash dividends - common (5,963) (4,736) (3,868)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,595 114,082 70,852
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 412 (12,897) (9,279)
CASH AND CASH EQUIVALENTS:
AT BEGINNING OF YEAR 92,849 105,746 115,025
-------- -------- --------
AT END OF YEAR $ 93,261 $ 92,849 $105,746
======== ======== ========
Non-cash investing activities:
Transfer from loans to OREO $ 2,898 $ 5,509 $ 3,273
Net unrealized gains (losses) recorded on securities 987 (1,110) 5,265
Increase (decrease) in deferred tax liability on net unrealized securities gains 405 (453) 2,187
Transfer of securites from held to maturity to available-for-sale - - 106,356
Loans originated to finance sales of other real estate 676 431 1,308
Additional cash flow disclosures:
Interest paid $ 57,466 $ 54,195 $ 48,530
Income taxes paid 9,206 9,297 4,210
Conversion of preferred stock to common stock - 5,590 1
Cancellation of predecessor entity treasury stock 362 3,789 3,938
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
Year ended December 31,
1997 1996 1995
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $17,640 $17,987 $13,751
Other comprehensive income, net of tax:
Net unrealized gains (losses) on securities:
Net unrealized holding gains (losses)
arising during year 829 (804) 3,603
Less reclassification adjustment for (gains)
losses included in net income: (247) 157 (525)
------- ------- -------
Other comprehensive income (loss) 582 (647) 3,078
------- ------- -------
COMPREHENSIVE INCOME $18,222 $17,340 $16,829
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Additional Accumulated Other
Preferred Common Paid-in Retained Comprehensive Treasury ESOP Total
Stock Stock Capital Earnings Income Stock
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995, $ 5,714 $ 9,835 $36,630 $ 67,879 $(1,366) $(214) $118,478
Net income - - 13,751 - - 13,751
Dividends declared on preferred stock - - - (414) - - (414)
Dividends declared on common stock - - - (3,916) - - (3,916)
Stock reinvestment and purchase
plan - 68,716 shares* - 55 556 - - - 611
Conversion of Series B preferred
stock - 140 shares* (1) - 1 - - - -
Options exercised - 101,233 shares* - 45 678 - - - 723
Purchase of treasury stock -
7,318 shares* - - - - - $ (117) - (117)
Payments on ESOP borrowings - - - - - - 43 43
Other comprehensive income - - - - 3,078 - - 3,078
Stock dividend declared on common - 462 5,838 (6,300) - - - -
Predecessor entity transactions:
Purchase and retirement of
treasury stock - (219) (1,280) (2,439) - - - (3,938)
Options exercised - 74,760 shares - 41 247 - - - 288
------- ------- ------- -------- ------- ------- ----- --------
BALANCE AT DECEMBER 31, 1995 5,713 10,219 42,670 68,561 1,712 (117) (171) 128,587
Net income 17,987 17,987
Cash dividends declared on preferred stock - (89) - - - (89)
Cash dividends declared on common stock - (4,951) - - - (4,951)
Stock reinvestment and purchase
plan - 69,573 shares* - 56 750 - - - - 806
Conversion of Series B preferred stock
- 712,000 shares* (5,590) 582 5,008 - - - - -
Redemption of Series B preferred stock (123) - - - - - - (123)
Options exercised - 95,289 shares* - 45 503 - - - - 548
Effect of treasury stock issued at less
than cost - - - (29) - 29 - -
Purchase of treasury stock - 77,418 shares - - - - - (1,461) - (1,461)
Payments on ESOP borrowings - - - - - - 42 42
Other comprehensive loss - - - - (647) - - (647)
Stock dividend declared on common - 517 10,792 (11,309) - - - -
Predecessor entity tranactions:
Purchase and retirement of treasury stock - (182) (1,065) (2,542) - - - (3,789)
Options exercised - 117,377 shares - 64 733 - - - - 797
------- ------- ------- -------- ------- ------- ----- --------
BALANCE AT DECEMBER 31, 1996 - 11,301 59,391 67,628 1,065 (1,549) (129) 137,707
Net income 17,640 17,640
Cash dividends declared on common stock - - (6,107) - - - (6,107)
Stock reinvestment and purchase plan
- 48,814 shares* - - - - 923 - 923
Cash in lieu paid on fractional shares
- 336 shares - (9) - - - - (9)
Options exercised - 126,931 shares* - - - - 1,474 - 1,474
Effect of treasury stock issued at less
than cost - - (290) - 290 - -
Purchase of treasury stock
- 129,475 shares (1) - - - - (3,496) - (3,496)
Payments on ESOP borrowings - - - - - 129 129
Other comprehensive income - - - 582 - - 582
Stock dividend declared on common - - - - - - -
Predecessor entity transactions:
Purchase and retirement of treasury stock (15) (88) (259) - - - (362)
Options exercised - 40,268 shares 22 334 - - - - 356
------- ------- ------- -------- ------- ------- ----- --------
BALANCE AT DECEMBER 31, 1997 - $11,308 $59,628 $78,612 $ 1,647 $(2,358) - $148,837
======= ======= ======= ======= ======= ======= ===== ========
</TABLE>
* Adjusted for 10% stock dividends declared in December 1995 and 1996 and 3
for 2 stock splits in the form of 50% dividends declared in in November 1996 and
September 1997. See Note O.
(1) Treasury shares not adjusted for 50% stock dividend declared in Sept. 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.
<PAGE>
PREMIER NATIONAL BANCORP, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated, except share data)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Premier National Bancorp, Inc. is a New York State bank holding company which
operates 36 branches in Dutchess, Ulster, Sullivan, Orange, Westchester, Putnam
and Rockland counties of Southeastern New York State through its commercial
banking subsidiary, Premier National Bank (Bank). Collectively, these entities
are referred to herein as the "Company". 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 are 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 competing effectively 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 75% 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 $105.0 million.
The Company does not engage in hedging activities, utilize derivative financial
instruments or maintain a trading portfolio.
MERGER
Effective July 17, 1998, Progressive Bank, Inc. ("PBI") was merged with and into
Hudson Chartered Bancorp, Inc. ("HCB") under the name of Premier National
Bancorp, Inc. pursuant to a plan of merger dated December 16, 1997. Each share
of PBI common stock was converted into 1.82 shares of the Company's common
stock. Approximately 7,231,196 common shares were issued for the outstanding
common stock of PBI. At the same time, Pawling Savings Bank ("Pawling"), a
subsidiary of PBI, was merged with and into First National Bank of the Hudson
Valley ("Hudson Valley"), a subsidiary of HCB, under the name Premier National
Bank.
The transaction was accounted for using the pooling-of-interests method and,
accordingly, all historical financial data has been restated to include both
entities for all periods presented. Direct costs of mergers accounted for by
the pooling-of-interests method are expensed as incurred. Merger related costs
expensed in 1997 aggregated $541 ($314 net of tax), and remaining merger related
expenses to be recognized in 1998 are expected to aggregate $6.9 million before
taxes and $5.3 million after taxes. These merger expenses are expected to
include legal, accounting, regulatory and severance costs as well as integration
costs such as conversions, abandonments and relocations etc. The following
table presents summary results of operations for the companies for the
immediate years prior to the merger.
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
Net Interest Net Income Net Interest Net Income Net Interest Net Income
Income Income Income
<S> <C> <C> <C> <C> <C> <C>
PBI $34,012 $ 8,632 $31,999 $ 9,321 $27,809 $ 6,786
HCB 31,988 9,008 30,854 8,666 29,456 6,965
------- ------- ------- ------- ------- -------
Consolidated $66,000 $17,640 $62,853 $17,987 $57,265 $13,751
======= ======= ======= ======= ======= =======
</TABLE>
F-6
<PAGE>
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 of the
Federal Reserve Board or the Office of the Comptroller of the Currency; customer
deposit disintermediation; changes in customers' acceptance of the Company's
products and services; 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 or 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 Premier
National Bancorp, Inc., its commercial banking subsidiary, Premier National
Bank, and Premier National Realty, Inc., a company utilized to hold title to
certain 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 by 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 and by recoveries of loans previously charged off.
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 Company's primary market area, Dutchess, Ulster,
Sullivan, Orange, Westchester, Putnam and Rockland counties of Southeastern New
York State. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the 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 predecessor banks and companies
were conducted in 1997 and no increase in the allowance was required as a result
of those examinations.
F-7
<PAGE>
IMPAIRED LOANS
Statement of Financial Accounting 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 as of
January 1, 1995 and did not result in any adjustment to the allowance for loan
losses at that time.
A loan is recognized as impaired when it is probable that principal and/or
interest are not collectible in accordance with the contractual terms of the
loan. When a loan is considered impaired, it is placed on nonaccrual status.
Income is recorded using the income recognition principles outlined below.
Measurement of impairment is based on the present value of expected future cash
flows discounted at the loan's effective interest rate or at the loan's
observable market price or the fair value of the collateral, if the loan is
collateral dependent. Smaller homogenous loans, principally residential
mortgages, consumer loans, and credit cards, are not separately reviewed for
impaired status. Separate allocations of the allowance for loan losses for
these loans 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 an 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, which typically occurs at or prior to the date 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. When the
ultimate collectibility of the loan principal is in doubt, such payments are
applied to reduce the principal balance of 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 or deed in lieu of 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. Holding costs
on properties are included in current operations, while costs that improve such
properties may be capitalized. 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 the expected lives or commitment period of the respective categories, which
generally vary from one to twelve years.
F-8
<PAGE>
SECURITIES
Securities include U.S. Treasury, mortgage-backed and other U. S. Government
Agency, municipal and corporate bonds, regulatory and equity securities. Those
debt 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, certain fixed rate mortgage backed securities and certain other
securities with yield and/or maturity characteristics such that management
intends to retain them 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 income.
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. Available for sale securities are 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 gains, after tax, on
available for sale securities were $1,712, $1,065 and $1,647, respectively. In
November 1995, the Company transferred securities having a fair value of
$109,492 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. Maintenance
and repair costs are charged to operating expenses as incurred.
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. A valuation allowance is recognized if, based on analysis
of available evidence, management determines that some portion or all of the
deferred tax asset is not "more likely than not" to be realized. Adjustments to
increase or decrease the valuation allowance are charged or credited,
respectively, to income tax expense. 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.
F-9
<PAGE>
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. Implementation of SFAS Nos. 106 and No. 112 resulted in the regcognition
of a postretirement benefit liability of $2,219.
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 significant 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 any 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 treasury stock method
based on the average market price of the Company's common stock for the period
and the effects of converting preferred shares.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 17,640 $ 17,987 $ 13,751
Less preferred stock dividend requirements 89 414
----------- ----------- -----------
Net income available to common shares $ 17,640 $ 17,898 $ 13,337
=========== =========== ===========
Weighted average basic shares outstanding 14,019,000 14,059,000 13,681,000
Effect of dilutive stock options 384,000 235,871 172,217
Approved conversion of Series B preferred stock 153,129 727,783
----------- ----------- -----------
Weighted average diluted shares 14,403,000 14,448,000 14,581,000
=========== =========== ===========
Earnings per common share:
Basic $ 1.26 $ 1.27 $ 0.98
Diluted 1.22 1.25 0.94
</TABLE>
MORTGAGE SERVICING RIGHTS
The Company's mortgage servicing portfolio totaled $150.6 million, $154.6
million and $159.1 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 $458, $523 and $439 for the years ended December 31,
1997, 1996 and 1995. The Company records the sale of loans in which servicing
is retained on the basis of the relative fair values of the loans and the
servicing rights. The Company sold loans of $21.5 million, $19.9 million, and
$43.6 million in 1997, 1996 and 1995, respectively, with servicing rights
retained, and recorded servicing rights of $118 in 1997 and $96 in 1996. Prior
to 1996, the Company did not record servicing rights. The value of servicing
rights must be re-evaluated for impairment on a quarterly basis and a valuation
allowance established if fair value is lower than the recorded amounts.
F-10
<PAGE>
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 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
"mortgage 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 mortgage servicing receivables.
Thus, the mortgage 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
mortgage servicing receivables by estimating the future servicing income of the
mortgage servicing receivables based on management's best estimate of remaining
loan lives and discounted at the original discount rate.
BRANCH PURCHASE PREMIUM
The purchase premium paid in connection with the 1996 acquisition of two
branches has been capitalized as an intangible asset. The premium is being
amortized on a straight-line basis over seven years (the estimated average
remaining life of the acquired customer base). The unamortized premium is
reviewed for impairment if events or changes in circumstances indicate that the
carrying amount may not be fully recoverable.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", "encourages" but does
not require, companies to record compensation cost from 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.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The effective provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," has been
adopted by the Company as of January 1, 1997 and had no significant effect on
the Company's consolidated financial statements. This standard 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.
Certain provisions of SFAS No. 125 (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) were 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 deferred provisions is not expected to have any
material impact on the Company's consolidated financial statements.
F-11
<PAGE>
COMPREHENSIVE INCOME
SFAS NO. 130, "Reporting Comprehensive Income", has been adopted by the Company
as of January 1, 1998 and financial statements for earlier periods have been
reclassified to reflect the application of the provisions of this standard.
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." The Company's only current source of other comprehensive income is net
unrealized gains and losses on available for sale securities which, in
accordance with prior accounting standards, had been directly included, net of
tax, in a separate component of stockholders' equity. Under SFAS No. 130, all
items that are recognized as components of comprehensive income are required to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Adoption of this standard had no effect on the
Company's financial condition or results of operations.
PENDING ACCOUNTING PRONOUNCEMENT
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. SFAS No. 131 is effective for the
Company in 1998 and will require disclosures in the Company `s financial
statements or notes thereto. 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, and other highly liquid
instruments with an original term of three months or less
F-12
<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 $ 64,793 $ 64,444 $ 350 $ 1 $ 64,793
U.S. Government Agencies
Available for sale 51,958 51,926 79 47 51,958
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
Mortgage Backed Securities
Available for sale 60,055 58,963 1,165 73 60,055
Held to maturity 131,299 131,299 628 267 131,660
Other Debt Securities
Available for sale 28,734 28,694 89 49 28,734
Held to maturity 75 75 75
Equity Securities
Available for sale 192 162 30 192
Regulatory securities 7,720 7,720 7,720
-------- -------- ------ ---- --------
TOTAL SECURITIES $439,942 $437,139 $4,122 $459 $440,802
======== ======== ====== ==== ========
TOTAL AVAILABLE FOR SALE $276,678 $273,875 $2,995 $192 $276,678
Total held to maturity 155,544 155,544 1,127 267 156,404
Regulatory securities 7,720 7,720 7,720
-------- -------- ------ ---- --------
TOTAL SECURITIES $439,942 $437,139 $4,122 $459 $440,802
======== ======== ====== ==== ========
</TABLE>
F-13
<PAGE>
<TABLE>
<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 $ 87,204 $ 87,094 $ 157 $ 47 $ 87,204
U.S. Government Agencies
Available for sale 60,000 59,983 108 91 60,000
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
Mortgage Backed Securities
Available for sale 66,376 64,998 1,483 105 66,376
Held to maturity 72,614 72,614 194 493 72,315
Other Debt Securities
Available for sale 27,971 27,968 79 76 27,971
Held to maturity 25 25 25
Equity Securities
Available for sale 142 162 6 26 142
Regulatory securities 7,195 7,195 7,195
-------- -------- ------ ---- --------
TOTAL SECURITIES $389,644 $387,829 $2,812 $960 $389,681
======== ======== ====== ==== ========
Total available for sale $296,267 $294,452 $2,279 $464 $296,267
Total held to maturity 86,182 86,182 533 496 86,219
Regulatory securities 7,195 7,195 7,195
-------- -------- ------ ---- --------
TOTAL SECURITIES $389,644 $387,829 $2,812 $960 $389,681
======== ======== ====== ==== ========
</TABLE>
At December 31, 1997, the net unrealized gain on securities "available for sale"
(net of tax effect, at a tax rate of 41% or $1,156) that was included in a
separate component of stockholders' equity was $1,647.
In late November 1995, the Company transferred, at fair value, securities having
a fair value of $109,492 (carrying value of $106,365) 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 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 $1,843
increase in stockholders' equity. Subsequent changes in unrealized gains or
losses on these transferred securities also have been reflected in the separate
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.
F-14
<PAGE>
The Company has no plans to establish a trading account.
The Company's mortgage-backed securities are principally pass-through securities
issued by Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal
National Mortgage Association (Fannie Mae). Mortgage-backed securities held to
maturity are principally five- and seven-year balloon payment and seasoned pass-
through 15 year securities. Mortgage-backed securities available for sale are
adjustable rate securities.
The contractual maturities at December 31, 1997 of the Company's available for
sale and held to maturity debt securities other than mortgage-backed and SBA
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 and the mortgage-
backed securities noted above. 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 $ 28,282 $ 28,704 $ 16,262 $ 16,311
1-5 years 163,106 163,525 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.
Government Agencies not allocated by maturity
date 58,963 60,055 131,299 131,660
-------- -------- -------- --------
TOTAL DEBT SECURITIES $273,713 $276,486 $155,544 $156,404
======== ======== ======== ========
</TABLE>
Gross realized gains from sales of securities were $338, $225 and $617 in 1997,
1996 and 1995, respectively, and gross realized losses were $9, $262 and $130.
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.
F-15
<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 the 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, assuming they are fully funded, the
borrower defaults and any collateral proves to be worthless, 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 - Mortgage $31,930 $ 19,996 $ 51,926
Real Estate - Construction 16,610 4,996 21,606
Home Equity Loans 31,416 31,416
Other Consumer Loans 15,168 15,168
Commercial Loans 42,121 $3,389 45,510
------- -------- ------ --------
TOTAL (December 31, 1997) $48,540 $113,697 $3,389 $165,626
======= ======== ====== ========
TOTAL (December 31, 1996) $35,270 $121,395 $6,090 $162,755
======= ======== ====== ========
</TABLE>
The Company lends primarily in the Dutchess, Ulster, Sullivan, Orange,
Westchester, Putnam and Rockland counties of Southeastern New York State. The
Company also originates one-to-four family mortgage and commercial mortgage
loans in the Connecticut counties of Fairfield, Hartford, New Haven and
Litchfield and one-to-four family mortgage loans in the New York counties of
Nassau and Suffolk. The ability of borrowers to make principal and interest
payments in the future will depend upon, among other things, the level of
overall economic activity and the real estate market conditions prevailing
within the Company's lending region.
F-16
<PAGE>
Approximately 75% 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%. Private mortgage insurance is
generally required on mortgages with loan to value ratios above 80%.
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>
$ 7,859 $ 9,113 $ 9,998
Nonaccrual loans
Loans past due 90 days and still accruing 443 645 694
Restructured troubled debt 712 1,105 1,849
------- ------- -------
Total nonperforming loans 9,014 10,863 12,541
Other real estate owned, net 1,366 2,923 1,601
------- ------- -------
Total nonperforming assets $10,380 $13,786 $14,142
======= ======= =======
</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 if all loans were current $858 $1,038 $889
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 $7,392 $11,511 $8,090
====== ======= ======
0.71% 1.10% 0.84%
Percent of total loans ====== ======= ======
</TABLE>
As described in Note A, effective January 1, 1995, the Company adopted SFAS No.
114, which applies to loans individually evaluated for collectibility
(principally commercial mortgage, commercial and industrial and construction
loans), defines when those 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 underlying collateral. Impaired loans of
$9,429, 8,907 and 10,102 at December 31, 1997, 1996 and 1995, respectively,
include residential mortgages in nonaccrual status of $3,556, $3,656 and $2,407.
Additional impaired residential mortgages might have been identified if the
impairment identification procedures of SFAS No. 114 were required to be applied
to homogenous loan portfolios. In the opinion of management, the amount of any
such additional impaired loans would not be significant to the Company's
consolidated financial position or results of operations.
F-17
<PAGE>
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 was not required $5,627 $3,743 $ 2,931
Impaired loans for which an allowance of $912, $933 and 2,390 3,071 4,124
$1,349, respectively, has been established
Impaired loans for which an impairment write down of $1,483,
$1,672 and $1,613, respectively, has been taken 1,232 2,093 3,047
------ ------ -------
$9,249 $8,907 $10,102
Total recorded investment in impaired loans ====== ====== =======
</TABLE>
Additional information regarding impaired loans is
as follows:
<TABLE>
<S> <C> <C> <C>
Income recorded on impaired loans while they were
considered to be impaired, on a cash basis $ 273 $ 215 $ 265
Average investment in impaired loans during the year $9,243 $10,245 $11,794
</TABLE>
Activity in the allowance for losses on "other real estate owned" is summarized
as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
$ 671 $ 203 $ 471
Balance at beginning of year
Provision charged to other real estate
owned expense 525 325
(207) (57) (593)
Charge-offs for realized losses ----- ----- -----
Balance at end of year $ 464 $ 671 $ 203
===== ===== =====
</TABLE>
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>
CATEGORY 1997 1996
- - -------- ---------- ----------
<S> <C> <C>
Real Estate - Residential $ 504,544 $ 520,018
Real Estate - Commercial 223,542 221,229
Consumer & Installment 144,977 136,599
Commercial & Industrial 93,351 82,221
Real Estate - Construction 61,009 68,331
Other loans 13,449 14,929
---------- ----------
$1,040,872 $1,043,327
Total ========== ==========
</TABLE>
F-18
<PAGE>
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 $18,533 $16,803 $17,728
Charge-offs (4,758) (4,290) (4,552)
Recoveries 1,081 870 727
------- ------- -------
Net charge-offs (3,677) (3,420) (3,825)
Provision for loan losses 4,475 5,150 2,900
------- ------- -------
Balance, end of year $19,331 $18,533 $16,803
======= ======= =======
</TABLE>
Substantially all newly originated fixed rate residential mortgage loans with 20
and 30 year terms are sold in the secondary market. The net realized gains on
these sales were $453, $364 and $471 in 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, mortgage loans held for sale had a cost basis of
$679, and $1,377, respectively, which approximated fair value.
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment is comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
$ 3,880 $ 3,959
Land
Buildings and improvements 24,482 24,901
Furniture and equipment 22,628 21,305
-------- --------
50,990 50,165
Accumulated depreciation and amortization (25,672) (23,593)
-------- --------
TOTAL $ 25,318 $ 26,572
======== ========
</TABLE>
NOTE G - DEPOSITS
The following table outlines balances at December 31, for interest bearing
accounts:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Money Market $ 284,323 $ 233,536
NOW 69,396 72,133
Savings 356,460 379,860
Time 523,739 534,620
---------- ----------
TOTAL $1,233,918 $1,220,149
========== ==========
</TABLE>
F-19
<PAGE>
At December 31, 1997 and 1996, certificates of deposit of $100 or more included
in time deposits totaled $110,291 and $93,141, 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 $13,955 $14,316 $14,692
Certificates of deposit ($100 or more) 5,392 4,341 4,170
Other time deposits 22,950 25,122 23,517
NOW accounts 944 1,077 1,426
Money market accounts 12,143 9,006 5,016
------- ------- -------
TOTAL $55,384 $53,862 $48,821
======= ======= =======
</TABLE>
In April 1996, Pawling completed the acquisition of two branch offices located
in Rockland County, New York and assumed deposit liabilities of approximately
$152.8 million. Assets recorded in the acquisition were principally cash and a
deposit purchase premium. The unamortized purchase premium of $7.3 million and
$8.7 million at December 31, 1997 and 1996, respectively, is included in
intangible assets in the consolidated balance sheets.
NOTE H- EMPLOYEE BENEFIT PLANS
At the date of the Merger, all predecessor plans were carried forward to the
Company. The existing plans are described below. The Company is in the process
of amending its benefit plans to present uniform coverage. For purposes of this
note, employees of the predecessor companies continue to be described as being
employees of these entities.
Thrift Plan
- - -----------
The HCB 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. Employee contributions vest immediately,
while plan contributions vest as follows: 40% after 2 years, 60% after 3 years,
80% after 4 years and 100% after 5 years of service. HCB determines an annual
amount of profit sharing to be funded. The plan also calls for HCB to match
employee contributions under deferred salary reduction agreements dollar for
dollar 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. PBI also
maintains a qualified 401(k) defined contribution plan. Eligible employees may
elect to contribute up to 8% of their compensation. PBI makes contributions
equal to 50% of the first 5% of a participant's contribution for non-highly
compensated employees, and 50% of the first 3% for highly-compensated employees.
Employee contributions vest immediately, while employer contributions vest
ratably over a five-year period beginning after the first year of participation.
Expense for these plans was $768, $869 and $680 for 1997, 1996 and 1995,
respectively.
HCB terminated a defined benefit plan of one of its predecessor banks effective
January 1, 1995 and the affected employees joined the HCB Retirement and Thrift
Plan on that date. The final termination liability was calculated and HCB
recorded additional expense of $59 in 1995.
Cash Balance Plan
- - -----------------
A retirement plan established by PBI covers substantially all employees of PBI
who meet certain age and length of service requirements. Prior to October 1,
1997, the plan was a defined benefit plan providing for benefits based on the
employees' years of accredited service and their average annual three years'
earnings, as defined by the plan. Plan benefits were funded through PBI
contributions at least equal to the amounts required by law. Effective October
1, 1997, the defined benefit plan was amended and restated as a cash balance
plan. The annual service credit under the cash balance plan equals 5% of annual
compensation (8% for those employees who were 50 years of age or older with at
least 10 years of service as of September 30, 1997).
F-20
<PAGE>
The following is a reconciliation of the funded status of the plan at December
31, 1997 and 1996. The 1997 information was measured based on the restated
provisions of the cash balance plan.
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $ 6,268 $5,352
Accumulated benefit obligation - nonvested 106 313
--------------------------
6,374 5,665
Effect of projected future compensation levels 686 1,255
--------------------------
Projected benefit obligation for service rendered to date 7,060 6,920
Plan assets, at fair value (primarily investments in mutual funds) 10,133 8,643
--------------------------
Plan assets in excess of projected benefit obligation 3,073 1,723
Unrecognized net gain from past experience different from
that assumed and effect of changes in assumptions (1,950) (975)
Unrecognized prior service cost (567) (143)
Unrecognized net transition obligation 13 21
--------------------------
Prepaid pension expense (included in other assets) $ 569 $ 626
==========================
</TABLE>
The components of net pension expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the year $ 263 $ 271 $ 241
Interest cost on projected benefit obligation 508 489 460
Actual return on plan assets (1,870) (1,082) (1,279)
Net amortization and deferral 1,155 472 766
--------------------------------------------
Net pension expense $ 56 $ 150 $ 188
============================================
</TABLE>
A discount rate of 7.25% and a rate of increase in future compensation levels of
5.0% were used in determining the actuarial present value of the projected
benefit obligation at December 31, 1997 (7.75% and 5.5%, respectively, at
December 31, 1996, and 7.50% and 5.5%, respectively, at December 31, 1995). The
expected long-term rate of return on plan assets was 8.0% for each year.
F-21
<PAGE>
Other Retirement Plans
- - ----------------------
Both HCB and PBI have certain employment arrangements which include supplemental
retirement benefits for certain key executives that offset the reduction in
benefits due to certain limitations imposed under the federal income tax laws.
These arrangements are unfunded and are a general liability of the Company. The
unfunded liability at December 31, 1997 and 1996 was not material.
HCB maintains the Executive Supplemental Income Plan ("ESI Plan"), a
nonqualified plan that provides certain employees with supplemental retirement
benefits. The ESI 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 in 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 normal retirement age.
PBI established a non-qualified, unfunded retirement and severance plan for
members of its Board of Directors. Under this plan, each member leaving the
Board after at least five years of service is entitled to a benefit consisting
of the annual retainer fee at the time of departure multiplied by the director's
number of years of service, up to 15 years. The annual cost of this plan was $80
for 1997, $85 for 1996 and $95 for 1995. The accumulated benefit obligation was
$415 at December 31, 1997.
HCB established a change in control plan for its directors which allows for
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.
Other Postretirement Benefits
- - -----------------------------
PBI provides certain postretirement health care benefits. Substantially all PBI
employees become eligible for postretirement benefits if they meet certain age
and length of service requirements. PBI accrues the cost of these benefits as
they are earned by active employees.
The actuarial and recorded liabilities for postretirement benefits, none of
which have been funded, were as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Accumulated postretirement obligations:
Retirees $ 850 $ 613
Fully eligible employees 383 138
Other active participants 159 613
------ ------
Total accumulated postretirement benefit obligation 1,392 1,364
Unrecognized gain from the effect of changes in assumptions and plan
amendments 461 459
Unrecognized prior service cost 366 408
------ ------
Accrued postretirement benefit cost (included in other
liabilities) $2,219 $2,231
====== ======
</TABLE>
F-22
<PAGE>
The components of net postretirement benefits expense are as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the year $ 26 $ 58 $ 48
Interest cost on accumulated benefit obligation 96 100 91
Net amortization and deferral (69) (60) (72)
----------------------------------------
Net postretirement benefits expense $ 53 $ 98 $ 67
========================================
</TABLE>
The accumulated postretirement benefit obligation was determined using discount
rates of 7.25%, 7.75% and 7.50% at December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the assumed rate of increase in future
health care costs was 7.5% for 1998, gradually decreasing to 5.0% in the year
2006 and remaining at that level thereafter. Increasing the assumed health care
cost trend rate by 1.0% in each future year would increase the accumulated
benefit obligation as of December 31, 1997 by $146 and the aggregate of the
service and interest cost by $11 for the year then ended.
Employment Agreements
- - ---------------------
HCB and PBI have entered into employment and change in control agreements with
certain of their 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 at December 31, 1997, if such payments were required for all
executives, would be approximately $3.3 million, none of which has been accrued.
NOTE I - LEASES
Total rental expense for operating leases for 1997, 1996 and 1995 was $857, $894
and $680, 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 $ 811
1999 706
2000 592
2001 382
2002 306
Thereafter 2,255
------
Total $5,052
======
</TABLE>
The Company leases a portion of its buildings to tenants for various terms with
varying renewal periods. Rental income received was $348, $369 and $352 in 1997,
1996 and 1995, respectively.
F-23
<PAGE>
NOTE J - INCOME TAXES
<TABLE>
<CAPTION>
The following is a reconciliation between the effective income tax rate and the statutory federal tax
rate:
Year Ended
December 31,
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Income tax based on pretax income at statutory
rate 34.0% 34.0% 34.0%
Charges (credits) resulting from:
State taxes, net of federal tax benefit 5.7 6.3 6.8
Income from tax-exempt securities (3.7) (2.8) (2.8)
Favorable resolution of prior years' tax
examinations (9.8)
Reduction in the valuation allowance for
deferred tax assets (.8)
Other, net .2 (.5)
-----------------------------------------------------
Effective income tax rate 36.2% 27.7% 36.7%
=====================================================
</TABLE>
Federal and state tax benefits of $1.5 million and $941, respectively, were
recognized in 1996 upon settlement with the tax authorities of audits of certain
prior years' tax returns.
The valuation allowance applicable to the Company's federal deferred tax asset
was reduced by $224 in 1995 primarily due to the utilization of capital loss
carryforwards during the year.
The components of income tax expense are as follows for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,666 $ 6,405 $5,833
State 2,370 1,711 2,102
------------------------------------------------------------
10,036 8,116 7,935
Deferred expense (benefit) (39) (1,212) 29
------------------------------------------------------------
Total $ 9,997 $ 6,904 $7,964
============================================================
</TABLE>
F-24
<PAGE>
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>
Provision for loan losses and OREO $(524) $(1,132) $ 425
Accelerated depreciation 37 (200) 94
Deferred fee income 237 253 485
Compensation (240) (100) (74)
Core deposit intangible 305 249 53
Other 146 (282) (954)
----- ------- -----
Deferred expense (benefit) $ (39) $(1,212) $ 29
===== ======= =====
</TABLE>
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 $ 8,042 $ 7,518
Compensation 1,454 1,214
Core deposit intangible 607 302
Deferred fee income 342 579
Other 450 1,243
------- -------
Gross deferred tax assets 10,895 10,856
------- -------
DEFERRED TAX LIABILITIES:
Depreciation expenses (496) (533)
Unrealized holding gains on "available for sale"
securities (1,156) (751)
Mortgage servicing (31) (24)
Accretion on securities (130) (101)
------- -------
Gross deferred tax liabilities (1,813) (1,409)
------- -------
Net deferred tax assets before valuation allowance 9,082 9,447
Valuation allowance (238) (238)
------- -------
Net deferred tax asset $ 8,844 $ 9,209
======= =======
</TABLE>
F-25
<PAGE>
Based on recent historical and anticipated future pre-tax earnings, management
believes it is more likely than not that the Company will realize its net
deferred tax assets.
As a thrift institution, Pawling was subject to special provisions in the
federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically
have been determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves are maintained equal to the excess of
allowable deductions over actual bad debt losses and other reserve reductions.
These reserves consist of a defined base-year amount, plus additional amounts
("excess reserves") accumulated after the base year. SFAS No. 109 requires
recognition of deferred tax liabilities with respect to such excess reserves, as
well as any portion of the base-year amount which is expected to become taxable
(or "recaptured") in the foreseeable future.
Certain amendments to the federal and New York State tax laws regarding bad debt
deductions were enacted in July and August 1996. The federal amendments
included elimination of the percentage of taxable income method for tax years
beginning after December 31, 1995 and imposition of a requirement to recapture
into taxable income (over a six-year period) the bad debt reserves in excess of
the base-year amounts. Pawling established a deferred tax liability with
respect to such excess federal reserves. The New York State amendments
redesignated all of Pawling's state bad debt reserves as the base-year amount.
In accordance with SFAS No. 109, the Company has not recognized deferred tax
liabilities with respect to Pawling's federal and state base-year tax bad debt
reserves of $8.8 million and $27.5 million, respectively. The unrecognized
deferred tax liabilities at December 31, 1997 with respect to the federal and
state base-year reserves were $3.0 million and $1.9 million, respectively.
Under the tax laws as amended, events that would result in taxation of these
reserves include (i) redemptions of Pawling's stock or certain excess
distributions to Progressive and (ii) failure of Pawling to maintain a specified
qualifying assets ratio or meet other thrift definition tests for New York State
tax purposes. As a result of the merger decribed in Note A, the Company will be
required to recapture Pawling's state base-year reserve and expects to
recognize a tax liability of $1.5 million in the 1998 financial statements of
the combined company. Under the present tax laws, however, Pawling's federal
base-year reserve would not be subject to recapture as a result of the proposed
merger.
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 $10 million 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.
F-26
<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 $23,698 $22,588
New loans 3,651 4,500
Repayments (3,735) (3,390)
------- -------
Balance, end of year $23,614 $23,698
======= =======
</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
Other interest bearing liabilities are summarized as follows, at December 31,:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
ESOP note $ 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). On
December 12, 1997, 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.
From time to time, the Company also purchases federal funds. These borrowings
generally matured within one to four days of the transaction date. During 1996,
the maximum balance outstanding as of any month end was $17.9 million, and the
average balance was $927 with a weighted average interest rate of 5.50%. There
were no such borrowings outstanding at December 31, 1996 or at any time during
1997 or 1995.
The Bank maintains a line of credit with the Federal Home Loan Bank and, at
December 31, 1997, had immediate access to additional liquidity in the amount of
$134.9 million under FHLB's 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.
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
F-27
<PAGE>
years. After December 31, 1997, $15,946 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 limit of 10%. The parent 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 in September 1997, payable October 1997.
All shares and share prices have been retroactively adjusted to reflect the
issuance of the stock dividends and the stock splits. 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 adjusted share on the respective dates of declaration of the 10%
stock dividends. In connection with the merger, the equity accounts of PBI have
been retroactively restated to reflect the 1.82 exchange ratio.
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
---------- ----------
<S> <C> <C>
Total issued and outstanding shares 14,050,155 14,044,221
Other issued shares - Treasury shares 85,015 77,981
---------- ----------
Total issued shares 14,135,170 14,122,202
Reserved shares (not yet issued):
Dividend reinvestment and stock purchase plan 500,322 366,094
HCB 1990 Incentive Stock Option (Plan I) 46,048 56,727
HCB 1995 Incentive Stock Option (Plan II) 918,088 661,909
PBI Employees Stock Option Plan 612,141 92,063
PBI Directors Stock Option Plan 85,722 70,252
Other authorized but unissued shares 3,702,509 4,630,753
---------- ----------
Total authorized 20,000,000 20,000,000
========== ==========
</TABLE>
Under its Certificate of Incorporation as amended and restated in the Merger,
Premier National Bancorp, Inc. is authorized to issue 50,000,000 shares of
common stock, par value $0.80 per share. Due to the merger, the number of
authorized common shares was increased from 20,000,000 to 50,000,000 shares.
The Company also has 5,000,000 shares of preferred stock authorized.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
- - ---------------------------------------------
The Company has a Dividend Reinvestment and Stock Purchase Plan that allows
participating 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.
F-28
<PAGE>
Preferred Stock
- - ---------------
The HCB 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 HCB'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, HCB 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 Boards of Directors of both HCB and PBI authorized the
repurchase of shares of their common stock in the open market. HCB purchased
129,475, and 77,418 shares of common stock at a cost of $3,496, and $1,461 in
1997 and 1996, respectively, for the stock reinvestment and purchase plan and
option exercises. PBI purchased 27,300 and 331,695 shares of common stock at a
cost of $362 and $3,789 in 1997 and 1996, respectively. Such shares purchased
by PBI were retired as a result of the merger. On December 16, 1997, in
conjunction with the approval of the Plan of Merger (described in Note A) the
Boards of Directors of HCB and PBI rescinded their authorizations for open
market purchases of their common stock under the Repurchase Programs.
STOCK COMPENSATION PLANS
- - ------------------------
HCB Incentive Stock Option Plan
- - -------------------------------
Under the HCB 1990 Incentive Option Plan, 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 the 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 HCB retains the right to redeem outstanding shares at
book value for employees terminating prior to retirement. The plan was not
merged with the HCB 1995 Incentive Stock Plan (Plan II) and no new options will
be granted under this plan.
In 1995, HCB established the HCB 1995 Incentive Stock Plan (Plan II) as the
successor plan of a predecessor company. Incentive and nonqualified stock
options are utilized 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 or 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
F-29
<PAGE>
the plan (or any other HCB plans) is 129,925 shares. At December 31, 1997,
shares available for future grants totaled 481,938.
PBI Employees and Directors Stock Option Plans
- - ----------------------------------------------
PBI established stock option plans for its employees and directors. Under the
plans, the option exercise price may not be less than the fair market value of
the common stock at the date of the grant. Options granted pursuant to the
employees' plan are generally exercisable any time within ten years of the date
of grant. Unexercised options generally expire either 90 days or one year
(options granted after 1996) after termination of an employee's continuous
employment by the Company, except in connection with severance arrangements
which provide employees up to nine months to exercise the options. Options
granted pursuant to the directors' non-qualified stock option plans have ten-
year terms, and vest and become fully exercisable six months after the date of
grant.
At December 31, 1997, shares available for future option grants totaled 612,141
for the employees' plan and 85,722 for the directors' plans. In January 1998,
options for an additional 103,285 shares were granted under the employees' plan
at an exercise price of $19.37.
Combined Option Plan Information
- - --------------------------------
In connection with the merger of HCB and PBI, all of the outstanding PBI options
were converted into options to purchase common stock of the Company.
Transactions under the Company's Stock Option Plan for the years ended as of
December 31, 1997, 1996 and 1995, are presented below:
<TABLE>
<CAPTION>
Stock Option Plan
-------------------------------------
Weighted
Shares Average Exercise
Price
-------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 890,452 $ 6.33
Granted 289,476 9.28
Exercised (175,989) 5.63
Forfeited (16,223) 6.67
---------
Outstanding at December 31, 1995 987,716 7.20
Granted 290,412 11.19
Exercised (267,116) 7.05
Forfeited (29,375) 9.20
---------
Outstanding at December 31, 1996 981,637 8.47
Granted 180,208 15.42
Exercised (154,085) 8.34
Forfeited (2,730) 9.64
---------
Outstanding at December 31, 1997 1,005,030 $ 9.70
=========
Exercisable at December 31:
1995 832,278 $ 6.86
1996 859,276 8.02
1997 928,335 8.96
</TABLE>
F-30
<PAGE>
The following table summarizes information about the Company's stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
--------------------------------------------------
Exercise Price Number Remaining Life (years) Exercise Price
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$3.85 to $5.76 61,152 4.5 $ 3.85
5.77 to 8.39 307,227 8.1 6.57
8.40 to 12.77 547,156 7.6 10.69
12.78 to 18.68 12,800 6.6 16.95
-------
$3.85 to $18.68 Exercisable 928,335 7.3 $ 8.96
=============== ======= === ======
$18.68 Not exerciseable 76,695 4.6 $18.68
=========== ====== === ======
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and 1995 were
$5.48, $4.70 and $4.40, respectively.
The fair value of each option grant was estimated on the date of grant by HCB
and PBI, respectively, using the Black - Scholes option pricing model with the
following weighted average assumptions used for grants in 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Dividend yield 2.2 - 3.0% 3.0 - 4.1% 3.0 - 4.3%
Expected volatility 23.6 - 27.8% 25.0 - 44.5% 26.4 - 53.3%
Risk free rate of return 6.05 - 6.45% 5.25 - 5.95% 5.25 - 6.89%
Expected life (years) 5.0 - 5.4 6.0 - 7.4 5.0 - 6.2
</TABLE>
The Company maintains stock option plans as described above. The Company
applies APB 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 $17,640 $17,987 $13,751
Pro forma 16,982 17,068 13,303
Basic earnings per share As reported $ 1.26 $ 1.27 $ .98
Pro forma 1.21 1.21 .97
Diluted earnings per share As reported $ 1.22 $ 1.25 $ 94
Pro forma 1.18 1.18 .91
</TABLE>
F-31
<PAGE>
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.
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, which was paid in full in December 1997. Prior to the payoff, the
Company was obligated to contribute sufficient cash to the ESOP to service 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 Premier National Bancorp, Inc. and Premier National Bank 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 are 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 and 1996, 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 each of the
predecessor bank's primary regulator (the Office of the Comptroller of the
Currency as to Hudson Valley and the FDIC as to Pawling) categorized the banks
as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as " well capitalized" a bank must maintain or exceed
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since those notifications
that management believes have changed either institution's category.
F-32
<PAGE>
CAPITAL RATIOS
- - --------------
THE FOLLOWING SUMMARIZES THE MINIMUM CAPITAL REQUIREMENTS AND THE ACTUAL CAPITAL
POSITION AT DECEMBER 31, 1996 AND 1997 ON A COMBINED BASIS AFTER GIVING EFFECT
TO THE MERGER DESCRIBED IN NOTE A:
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL 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) $125,767 13.51% $74,484 8.0% $93,104 10.0%
Tier I Capital
(to Risk Weighted Assets) 114,046 12.25 37,242 4.0 55,863 6.0
Tier I Capital
(to Average Assets) 114,046 7.32 62,332 4.0 77,916 5.0
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) 134,680 13.64 78,995 8.0 98,744 10.0
Tier I Capital
(to Risk Weighted Assets) 122,241 12.38 39,498 4.0 59,246 6.0
Tier I Capital
(to Average Assets) 122,241 7.68 63,662 4.0 79,578 5.0
CONSOLIDATED
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $139,367 14.88% $74,940 8.0%
Tier I Capital
(to Risk Weighted Assets) 127,578 13.62 37,470 4.0
Tier I Capital
(to Average Assets) 127,578 8.11 62,932 4.0
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) 152,158 15.30 79,583 8.0
Tier I Capital
(to Risk Weighted Assets) 139,638 14.04 39,791 4.0
Tier I Capital
(to Average Assets) 139,638 8.69 64,290 4.0
</TABLE>
F-33
<PAGE>
NOTE P - PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash (deposited in Bank) $ 1,266 $ 1,958
Federal funds sold 3,800 5,200
Securities available for sale, at fair value 7,815 2,568
Other securities 109 109
Investment in subsidiaries:
Bank 131,382 124,188
Other 376 429
Premises 4,976 5,124
Other assets 3,023 1,055
-------- --------
TOTAL ASSETS $152,747 $140,631
======== ========
LIABILITIES
Notes payable:
Bank subsidiary $ 959 $ 1,058
Other 129
Other liabilities 2,951 1,737
STOCKHOLDERS' EQUITY 148,837 137,707
-------- --------
$152,747 $140,631
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ======== ========
</TABLE>
STATEMENTS OF INCOME AND EXPENSE
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividends from Bank $11,105 $ 8,194 $ 8,569
Other income 1,511 1,053 1,063
Merger related expenses (541)
Other expenses (1,305) (411) (2,602)
------- ------- -------
Income before income taxes and equity in undistributed net income (loss) of
subsidiaries 10,770 8,836 7,030
Income tax benefit (expense) 237 (94) 657
------- ------- -------
Income before equity in undistributed net income (loss) of subsidiaries 11,007 8,742 7,687
Equity in undistributed net income (loss):
Bank 6,686 9,260 6,079
Non bank subsidiary (53) (15) (15)
------- ------- -------
$17,640 $17,987 $13,751
NET INCOME ======= ======= =======
</TABLE>
F-34
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $17,640 $17,987 $13,751
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (6,633) (9,245) (6,064)
Provision for depreciation 208 141 145
Other (945) 2,916 (3,439)
------- ------- -------
Net cash provided by operating activities 10,270 11,799 4,393
INVESTING ACTIVITIES
Purchase of premises and equipment from bank (2,500)
Sale of premises and equipment to bank 1,700
Purchase of available for sale securities (5,586)
Proceeds from sales of available for sale securities 1,801
Proceeds from maturities of available for sale securities 400 250 303
------- ------- -------
Net cash provided (used) by investing activities (5,186) (550) 2,104
------- ------- -------
FINANCING ACTIVITIES
Payments on borrowings (100) (100) (81)
Proceeds from issuance of stock 2,745 2,151 1,622
Repurchase of preferred stock (123)
Repurchase of common stock (3,858) (5,250) (4,055)
Cash dividends (5,963) (4,929) (4,282)
------- ------- -------
Net cash used by financing activities (7,176) (8,251) (6,786)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,092) 2,998 299
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,158 4,160 4,459
------- ------- -------
$ 5,066 $ 7,158 $ 4,160
CASH AND CASH EQUIVALENTS, END OF YEAR ======= ======= =======
</TABLE>
F-35
<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 $ 93.3 $ 93.3 $ 92.9 $ 92.9
Securities 440.0 440.8 389.6 389.7
Loans, net 1,014.2 1,024.9 1,017.4 1,023.9
Accrued income 11.2 11.2 11.3 11.3
LIABILITIES
Deposits without stated maturities 928.6 928.6 885.0 885.0
Time deposits 524.1 524.3 535.0 535.0
Accrued interest payable 1.0 1.0 3.0 3.0
</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 $8,034 and $8,769 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
allowance for loan losses of $19,331 and $18,533 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 and 1996. Such financial instruments consist of commitments
to extend permanent financing and letters of credit. If the options are
exercised by the prospective borrowers, these financial instruments will become
interest-earning assets of the company. If the options expire, the Company
retains any fees paid by the counterparty in order to obtain the commitment or
guarantee. The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate commitments, the fair value estimation takes into consideration
an interest rate risk factor. The fair value of guarantees and letters of
credit is based on fees currently charged for similar agreements. The fair
value of these off-balance sheet items at December 31, 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.
F-36
<PAGE>
NOTE R - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table shows selected quarterly financial data (unaudited) of the
Company for the three month periods ended:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 29,671 $ 30,410 $ 30,533 $ 30,877
Interest expense 13,532 13,842 14,001 14,116
--------------------------------------------------------
Net interest income 16,139 16,568 16,532 $ 16,761
Provision for loan losses 1,300 1,100 1,100 975
Other income 2,497 2,456 2,471 2,489
Merger related expense(1) (541)
Other expense (10,681) (10,851) (10,821) (10,907)
--------------------------------------------------------
Income before income taxes 6,655 7,073 7,082 6,827
Income tax expense 2,413 2,596 2,554 2,434
--------------------------------------------------------
Net income $ 4,242 $ 4,477 $ 4,528 $ 4,393
========================================================
Weighted average common shares
Basic 14,063,541 13,986,693 13,992,989 14,234,312
Diluted 14,440,377 14,412,514 14,450,094 14,518,083
Earnings per common share*
Basic $ 0.30 $ 0.32 $ 0.32 $ 0.31
Diluted 0.29 0.31 0.31 0.30
<CAPTION>
1996
----------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 27,387 $ 29,667 $ 29,806 $ 30,016
Interest expense 12,538 13,728 13,929 13,828
--------------------------------------------------------
Net interest income 14,849 15,939 15,877 16,188
Provision for loan losses 900 1,350 1,350 1,550
Other income(2) 2,451 2,245 2,452 2,999
Other expense 10,027 11,222 11,048 10,662
--------------------------------------------------------
Income before income taxes 6,373 5,612 5,931 6,975
Income tax expense(3) 2,438 574 1,276 2,616
========================================================
Net income $ 3,935 $ 5,038 $ 4,655 $ 4,359
Weighted average common shares
Basic 13,641,163 14,259,927 14,210,756 14,198,417
Diluted 14,462,324 14,517,706 14,495,742 14,379,388
Earnings per common share*
Basic $ 0.29 $ 0.35 $ 0.33 $ 0.31
Diluted 0.27 0.35 0.32 0.30
</TABLE>
* 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 $541 reduced fourth quarter 1997
income by $314 after tax and reduced basic earnings per share by $0.02.
(2) The fourth quarter of 1996 includes a gain of $450 on the sale of the
Company's Merchant program, or $261 after tax. This gain increased fourth
quarter 1996 basic earnings per share by $0.03 per share.
(3) The second and third quarters of 1996 reflect tax benefits of $1.6 million
and $941, respectively, related to settlements with tax authorities. See
Note J.
F-37
<PAGE>
Exhibit 99.2
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Progressive Bank, Inc.:
We have audited the consolidated balance sheets of Progressive Bank, Inc. and
subsidiary (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Progressive Bank,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Stamford, Connecticut
February 2, 1998
