<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, 1999
------------------
/ / 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, 240 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.
14,989,911 shares of Common Stock outstanding, par value $.80 per share, at
October 31, 1999.
<PAGE>
PREMIER NATIONAL BANCORP, INC. & SUBSIDIARIES
INDEX
Page Reference
--------------
PART I
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements
of Income and Expense 2
Condensed Consolidated Statements
of Cash Flows 3
Condensed Consolidated Statements
of Changes in Stockholders' Equity 4
Condensed Consolidated Statements of
Comprehensive Income 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 29
PART II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 30
Exhibit Index 31
Signatures 32
<PAGE>
<TABLE>
<CAPTION>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited) September 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 41,545 $ 53,230
Federal funds sold 34,082 121,100
----------- -----------
Total cash and cash equivalents 75,627 174,330
Securities
Available for sale, at fair value 485,708 359,612
Held to maturity, at cost, (fair value of $15,735 in 1999 15,506 17,536
and $18,117 in 1998)
Regulatory securities (at cost which approximates fair value) 9,727 9,703
Gross loans 961,958 973,847
Allowance for loan losses (21,911) (21,270)
----------- -----------
Net loans 940,047 952,577
Premises and equipment, net 27,197 28,714
Accrued income 12,861 8,940
Deferred Taxes 15,705 10,463
Other real estate owned 1,605 628
Intangible assets, net 5,180 6,734
Other assets 2,233 4,932
--------------------------
TOTAL ASSETS $ 1,591,396 $ 1,574,169
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing $ 254,275 $ 241,289
Interest bearing 1,106,067 1,165,770
--------------------------
Total deposits 1,360,342 1,407,059
Notes payable & securities sold under agreements 75,000 1,725
to repurchase
Other liabilities 11,919 9,231
--------------------------
TOTAL LIABILITIES 1,447,262 1,418,015
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) 12,620 12,558
15,049,154 shares issued net of 777,040 treasury shares in 1999 and
15,697,290 shares issued net of 2,166 treasury shares in 1998
Additional paid-in capital 85,516 84,492
Retained earnings 63,788 57,621
Accumulated other comprehensive income/(loss) (4,366) 1,521
Treasury stock (13,424) (38)
--------------------------
TOTAL STOCKHOLDERS' EQUITY 144,134 156,154
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,591,396 $ 1,574,169
==========================
</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
09/30/99 09/30/98 09/30/99 09/30/98
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $20,219 $22,113 $60,893 $68,279
Federal finds sold 262 1,213 1,402 3,009
Taxable securities 5,782 5,899 15,438 17,420
Tax-exempt securities 1,323 1,152 3,373 2,961
----------------------------------------------------------------------------
Total interest income 27,586 30,377 81,106 91,669
Interest expense 11,050 13,373 32,009 41,242
----------------------------------------------------------------------------
Net interest income 16,536 17,004 49,097 50,427
Provision for loan losses 300 1,199 1,800 4,729
----------------------------------------------------------------------------
Net interest income
after provision for loan losses 16,236 15,805 47,297 45,698
----------------------------------------------------------------------------
Noninterest income:
Service charges and fees 2,035 1,964 6,067 5,539
Trust earnings 292 219 828 678
Gains on sales of securities, net (16) 0 155 51
Gains on sales of loans, net 7 120 85 418
Other income 160 62 632 260
----------------------------------------------------------------------------
Total noninterest income 2,478 2,365 7,767 6,946
----------------------------------------------------------------------------
GROSS OPERATING INCOME 18,714 18,170 55,064 52,644
----------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,311 5,774 16,553 17,464
Net occupancy and equipment expense 1,872 1,780 5,451 5,325
Other real estate owned 0 64 5 (260)
Merger expenses 0 5,311 0 7,511
Other expenses 3,404 2,878 9,987 9,289
----------------------------------------------------------------------------
Total noninterest expense 10,587 15,807 31,996 39,329
----------------------------------------------------------------------------
Income before income taxes 8,127 2,363 23,068 13,315
Income taxes 2,800 1,136 8,017 5,243
----------------------------------------------------------------------------
Net income $5,327 $1,227 $15,052 $8,072
============================================================================
Weighted average common shares outstanding (1)
Basic 15,148,000 15,634,000 15,397,000 15,591,000
Diluted 15,353,000 16,100,000 15,589,000 16,119,000
Per common share data:
Basic earnings $0.35 $0.08 $0.98 $0.52
Diluted earnings $0.35 $0.08 $0.97 $0.50
Cash dividends declared $0.15 $0.12 $0.28 $0.39
Book value at period end $9.58 $9.86
</TABLE>
(1) Adjusted for 10% Stock Dividend declared December 1998.
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
OPERATING ACTIVITIES 09/30/99 09/30/98
-------- --------
<S> <C> <C>
Net income $15,052 $8,072
Adjustment to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,800 4,729
Depreciation and amortization 2,290 2,336
Amortization of security premiums and
accretion of discounts 1,017 286
Amortization of goodwill/core deposit intangible/acquistion costs 1,358 1,144
Realized gains on sales of securities and loans (240) (469)
Gains on sales of other real estate (24) 0
Gains on sale of premises and equipment (216) 0
Deferred income tax benefits (1,737) (1,012)
Increase in accrued income (3,921) (1,188)
Other, net 4,460 (1,681)
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,839 12,217
--------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 51,236 6,055
Proceeds from maturities of securities available for sale 70,209 180,322
Proceeds from maturities of securities held to maturity 6,244 11,364
Purchases of securities available for sale (254,125) (173,403)
Purchases of securities held to maturity (8,599) (6,379)
Sale of loans 3,760 21,394
Net decrease in loans 7,055 40,842
Purchase of premises and equipment (1,154) (5,869)
Purchase of investment subsidiary (250)
Proceeds from sales of premises and equipment 597
Proceeds from sale of OREO 645 946
--------------------------------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (124,132) 75,022
--------------------------------
FINANCING ACTIVITIES
Net decreases in deposit accounts (46,717) (1,630)
Proceeds from reissuance of common stock 4,303 2,223
Repurchase of common stock (18,950) (159)
Borrowings 75,000 0
Repayment of borrowings (1,725) 0
Cash dividends-common (6,321) (5,239)
--------------------------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 5,590 (4,805)
--------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (98,703) 82,434
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 174,330 93,261
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $75,627 $175,695
================================
CASH PAID FOR:
Interest $31,681 $41,570
Taxes 7,476 6,201
NON-CASH ITEMS
Transfer from loans to OREO 1,808 1,496
Net change in unrealized gains (losses) recorded
on securities available for sale (10,083) 2,502
Change in deferred taxes on unrealized (gains)
losses recorded on securities available for sale 4,196 (1,054)
Purchase of land by issuance of shares - 300
Transfer of securities from held to maturity to available for sale - 95,993
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $12,558 $84,492 $57,621 $ 1,521 ($ 38) $156,154
Net Income 15,052 15,052
Cash dividends declared on common stock ($0.43 per share) (6,538) (6,538)
Dividend reinvestment and stock purchase plan - 52,930 shares 14 285 635 934
Options exercised - 290,631 shares 48 750 2,582 3,380
Cash in lieu issued for fractional shares (11) (11)
Effect of Treasury stock issued at less than cost (2,347) 2,347 0
Purchase of treasury stock - 1,021,493 shares (18,950) (18,950)
Net change in unrealized gain (loss) on securities, after tax (5,887) (5,887)
--------------------------------------------------------------------
Balance September 30, 1999 $12,620 $85,516 $63,788 ($ 4,366) ($13,424) $144,134
====================================================================
Balance January 1, 1998 $11,308 $59,628 $78,612 $ 1,647 ($ 2,358) $148,837
Net Income 8,072 8,072
Cash dividends declared on common stock ($0.35 per share) (6,168) (6,168)
Dividend reinvestment and stock purchase plan - 42,909 shares 20 552 290 862
Options exercised - 99,589 shares 54 488 519 1,061
Purchase of land by issuances of treasury
shares - 15,998 shares 300 300
Effect of Treasury stock issued at less than cost (1,397) 1,397 0
Purchase of treasury stock - 7,030 shares (159) (159)
Net change in unrealized gain (loss) on securities,
after tax 1,448 1,448
--------------------------------------------------------------------
Balance September 30, 1998 $11,382 $60,668 $79,119 $ 3,095 ($ 11) $154,253
====================================================================
</TABLE>
See notes to condensed consolidated financial statements
-4-
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $15,052 $8,072 $5,327 $1,227
Other Comprehensive income, net of tax:
Net unrealized gains (loss) on securities:
Net unrealized holding gains (losses)
arising during year (6,494) 1,466 (1,189) 1,298
Less effect of transfer of securities from Held to Maturity
from Available for Sale (576)
Less reclassification adjustment for (gains)
losses included in net income: 607 (18) 220 0
---------------- ---------- ---------------- ------------
Other comprehensive income (loss) (5,887) 872 (969) 1,298
---------------- ---------- ---------------- ------------
COMPREHENSIVE INCOME $9,165 $8,944 $4,358 $2,525
================ ========== ================ ============
</TABLE>
See notes to condensed consolidated financial statements
-5-
<PAGE>
FORM 10-Q
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
- ---------------------
The unaudited condensed consolidated financial statements and related notes of
Premier National Bancorp, Inc. (the "Company") have been prepared in accordance
with Regulation S-X under the Securities Exchange Act of 1934, as amended, and
consequently do not contain all disclosures required by generally accepted
accounting principles. The condensed consolidated financial statements include
the Company's wholly owned subsidiary, Premier National Bank, and its
subsidiaries (the "Bank"). These interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
note disclosures in the Annual Report on Form 10-K for the year ended December
31, 1998.
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, 1999 and December 31, 1998 and its
consolidated results of operations and comprehensive income for the three and
nine month periods ended September 30, 1999 and 1998 and the consolidated cash
flows and changes in consolidated stockholders' equity for the nine months ended
September 30, 1999 and 1998.
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.
The results of operations for the three and nine months ended September 30, 1999
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 1999 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.
6
<PAGE>
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products; continued high level of prepayments of
loans; 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.; continued performance of unseasoned loans; continued increases in the
levels of nonperforming assets; the extent and timing of legislative and
regulatory actions and reform, estimated cost savings from recent or anticipated
acquisitions and mergers cannot be fully realized within the expected time
frame, revenues following such transactions are lower than expected, and costs
or difficulties related to the integration of acquired and existing businesses
are greater than expected or system costs related to the year 2000 are greater
than expected.
The Company's forward-looking statements speak only as of the date on which such
statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
7
<PAGE>
Loans
Major classifications of loans (excluding loans held for sale, of which there
are none at September 30, 1999 and December 31, 1998) are summarized below (in
thousands):
<TABLE>
<CAPTION>
At September 30, 1999 At December 31, 1998
--------------------- --------------------
<S> <C> <C>
Commercial and industrial $113,558 $113,680
Consumer installment 135,009 134,152
Real estate - construction 53,147 50,888
Real estate - mortgage (Commercial)
255,365 242,062
Real estate - mortgage
(Residential & Home Equity) 399,315 427,440
Other loans 5,564 5,625
-------- --------
Total $961,958 $973,847
======== ========
<CAPTION>
Deposits
- --------
Major classifications of deposits are summarized below- (in thousands):
At September 30, 1999 At December 31, 1998
--------------------- --------------------
<S> <C> <C>
Demand deposits $254,275 $241,289
NOW accounts 59,574 61,816
Money market deposit accounts
309,967 326,102
Savings accounts 248,395 304,578
Time deposits under $100,000 327,369 347,662
Time deposits over $100,000 160,762 125,612
------- -------
Total $1,360,342 $1,407,059
========== ==========
</TABLE>
8
<PAGE>
Securities
- ----------
Securities consist of the following (in thousands):
<TABLE>
<CAPTION>
At September 30, 1999 At December 31, 1998
-------------------------------------- --------------------------------------
Carrying Amortized Fair Carrying Amortized Fair
Amount Cost Value Amount Cost Value
----------- ------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
US Treasury:
Available for Sale $39,554 $39,667 $39,554 $64,933 $64,027 $64,933
US Gov't Agencies:
Available for Sale 84,559 85,271 84,559 28,461 28,270 28,461
Obligations of States and
Political Subdivisions:
Available for Sale 154,275 156,908 154,275 97,082 94,905 97,082
Held to Maturity 15,431 15,431 15,659 17,461 17,461 18,038
Other Securities:
Available for Sale 207,320 211,330 207,320 169,136 169,795 169,136
Held to Maturity 75 75 76 75 75 79
Regulatory Securities 9,727 9,727 9,727 9,703 9,703 9,703
----------- ------------- ------------ ------------ ------------- -----------
Total Securities $510,941 $518,409 $511,170 $386,851 $384,236 $387,432
=========== ============= ============ ============ ============= ===========
Total Available for Sale $485,708 $493,176 $485,708 $359,612 $356,997 $359,612
Total Held to Maturity 15,506 15,506 15,735 17,536 17,536 18,117
Regulatory Securities 9,727 9,727 9,727 9,703 9,703 9,703
----------- ------------- ------------ ------------ ------------- -----------
Total Securities $510,941 $518,409 $511,170 $386,851 $384,236 $387,432
=========== ============= ============ ============ ============= ===========
</TABLE>
At September 30, 1999 and December 31, 1998, the net unrealized gain (loss) on
securities available for sale (net of tax benefit/(charge) of $3,102,000 and
($1,094,000), respectively) that was included in accumulated other comprehensive
income (loss), a separate component of stockholders' equity, was $(4,366,000)
and $1,521,000, respectively. Gross (pre-tax effected), unrealized gains and
(losses) on available for sale securities at September 30, 1999 and December 31,
1998, were $(7,468,000) and $2,615,000, respectively.
9
<PAGE>
Earnings per common share 1998 data has been adjusted for the 10% stock dividend
- -------------------------
which the Company declared in December 1998.
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,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 15,148 15,634 15,397 15,591
====== ====== ====== ======
Total basic shares 15,148 15,634 15,397 15,591
====== ====== ====== ======
Net income $5,327 $1,227 $15,052 $8,072
====== ====== ======= ======
Basic earnings per common share $0.35 $0.08 $0.98 $0.52
===== ===== ===== =====
<CAPTION>
Diluted earnings per common share is computed as follows (in thousands, except
per share data):
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 15,148 15,634 15,397 15,591
Effect of dilutive stock options 205 466 195 528
--- --- --- ---
Total diluted shares 15,353 16,100 15,592 16,119
====== ====== ====== ======
Net income $5,327 $1,227 $15,052 $8,072
====== ====== ======= ======
Diluted earnings per common share $0.35 $0.08 $0.97 $0.50
--------------------------------- ===== ===== ===== =====
</TABLE>
Stockholders' Equity
- --------------------
Issued and outstanding shares (net of treasury shares) at September 30, 1999 and
December 31, 1998, were 15,049,154 and 15,697,290, respectively. The Company
purchased approximately 1,021,500 treasury shares during the nine months of 1999
and reissued 326,500 shares through its dividend reinvestment plan and stock
option exercises. The Company paid a 10% stock dividend in January 1999 which
increased common shares outstanding by 1,426,800. (All 1998 share data has been
accordingly restated in the condensed consolidated statements of income and
expense and Stockholders' Equity.)
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
- -------------------
Total assets of the Company increased to $1,591.4 million at September 30, 1999,
from $1,574.2 million at December 31, 1998. Increases in securities of $124.1
million to $510.9 million at September 30, 1999 were largely offset by declines
in cash and cash equivalents of $98.7 million to $75.6 million and net loans of
$12.5 million to $940.0 million.
In the first nine months of 1999 the Bank originated $205.9 million of new
loans. Amortization, prepayments and sales into the secondary market were $217.7
million resulting in a net decrease from year end 1998 in gross loans
outstanding of $11.9 million at September 30, 1999. The net increase in
commercial mortgages of $13.3 million or 5.5%, consumer installment loans of $.9
million or .6%, and real estate construction of $2.3 million or 4.4% was offset
by declines in residential mortgage loans (including home equity) of $28.1
million or 6.6%. Continuing the trend established in 1998, consumers have been
refinancing and consolidating first lien adjustable mortgages and home equity
loans resulting in significant prepayments of the Company's loan balances in
these categories. As of September 30, 1999, the Company held approximately $23.8
million in adjustable rate first lien mortgage loans that are scheduled to
reprice during the remainder of 1999. Although interest rates on fixed rate
mortgage loans have risen recently, customers may still choose to refinance to a
long-term fixed rate mortgage in lieu of maintaining an adjustable rate
mortgage. The Company continues its practice of not retaining significant
balances in long-term fixed rate mortgages in its portfolio. Therefore,
residential mortgage balances may continue to decline as refinancing and sales
into the secondary market exceed new originations. While the Company continues
to emphasize its competitive advantages in business banking, it also seeks to
increase its mortgage and Home Equity loan originations and to mitigating the
runoff of residential mortgages through active solicitation of residential
mortgage borrowers identified as more likely to refinance their balances. The
interest earned on refinanced loans may be lower than that currently earned on
the existing loans.
Period end total deposits decreased $46.7 million in the first nine months of
1999 to $1,360.3 million. Of this amount, total Public (Municipal) Funds
increased $57.5 million or 86.6% to $123.8 million and total non-public funds
decreased by $104.2 million or 7.8% to $1,236.6 million. The declines in
non-public deposit balances principally reflect the result of the Company's
account pricing policies and management of interest expense paid on deposits. As
a result, some customers seeking the highest rates paid by competitor
institutions or unwilling to pay appropriate fees on lower balances have been
consequently withdrawing their account balances.
11
<PAGE>
The following tables summarize the net changes in public (municipal) fund and
non-public fund deposits from December 31, 1998 to September 30, 1999 (in
thousands):
PUBLIC FUNDS
Percent
Change over
Balance Balance Net Y/E`98
12/31/98 9/30/99 Change
------------ ------------ ----------- ------------
Demand accounts $2,482 $8,284 $5,802 233.8%
NOW accounts 12,211 20,344 8,133 66.6
Money market accounts 10,901 19,276 8,375 76.8
Savings accounts 2,418 2,592 174 7.2
Time deposits 38,309 73,287 34,978 91.3
------------ ------------ ----------- ------------
Total public deposits $66,321 $123,783 $57,462 86.6%
============ ============ =========== ============
Public funds balances increased in the first nine months of 1999 due to both
matching competitive pricing on large time deposits as funding for a portion of
the securities portfolio and seasonal increases due to school tax assessments
levied in September. Historically, this increase reverses by year end as
municipalities employ their funds.
NON PUBLIC FUNDS
Percent
Change over
Balance Balance Net Y/E`98
12/31/98 9/30/99 Change
----------- ------------- ------------- ------------
Demand accounts $238,807 $245,991 $7,184 3.0%
NOW accounts 49,605 39,230 (10,375) (20.9)
Money market accounts 315,201 290,691 (24,510) (7.8)
Savings accounts 302,160 245,803 (56,357) (18.7)
Time deposits 434,965 414,844 (20,121) (4.6)
----------- ------------- ------------- ------------
Total non public deposits $1,340,738 $1,236,559 ($104,179) (7.8)%
=========== ============= ============= ============
Non-public deposits declined $104.2 compared to December 31, 1998. The increase
in demand accounts reflects the historical seasonality experienced by the Bank.
Money market, savings and time deposit declines are believed to be the result of
the Company's pricing policies, as the Company has actively reduced the rates
paid on these deposits in order to protect its net interest margin during a
period of declining rates on earning assets.
Notes payable increased to $75.0 million at September 30, 1998 vs. $1.7 million
at year end 1998, as the Company has employed a modest leverage strategy
utilizing borrowings (in addition to municipal time deposits) to fund an
increase in its securities portfolio. Although such spreads on the incremental
assets acquired are lower than on loan assets, the Company believes this
strategy will improve its net interest income. See also "Asset/Liability
Management".
12
<PAGE>
Consolidated stockholders' equity at September 30, 1999 was $144.1 million, down
$12.0 million over year end 1998, primarily due to the purchase of approximately
1,021,500 shares of Treasury stock during the first nine months of 1999 ($19.0
million) and by the decline of $5.9 million in accumulated other comprehensive
income/(loss) (principally due to changes in the net unrealized gains and
losses, after tax, in the market value of available for sale securities). These
decreases were partially offset by the Company's net retentions of earnings for
the first nine months of the year of $8.5 million and by $3.0 million of stock
issuance proceeds from the Company's stock option and dividend reinvestment
plans. The ratio of shareholders' equity to total assets remained strong at
September 30, 1999 standing at 9.1%, compared to 9.9% at December 31, 1998.
Results of Operations
- ---------------------
Interest income as reported, for the nine months ended September 30, 1999,
compared to the same period in 1998, decreased $10.6 million while interest
expense decreased by $9.2 million. This resulted in a decrease in net interest
income of $1.3 million. The provision for loan losses decreased by $2.9 million.
Total non-interest income increased $821,000 or 11.8%. Total noninterest
expenses decreased by $7.3 million or 18.7% from the first nine months of 1998,
due mainly to the non-recurrence of merger-related expenses of $7.5 million
incurred in the first nine months of 1998. Excluding merger related expenses,
total non-interest expense increased only $.2 million over September 30, 1998
levels. Net income after tax increased by $7.0 million or 86.5% to $15.1
million. Diluted earnings per common share increased to $.97 for the nine months
of 1999 compared to $.50 for 1998. Excluding merger-related expenses incurred in
1998 of $7.5 million (or $5.3 million after-tax) comparative net income for the
1998 first nine months of 1998 on a pro forma basis would have been $13.4
million and diluted earnings per common share would have been $.83.
The net income and earnings per common share data discussed above is presented
in the following table:
<TABLE>
<CAPTION>
Nine months ended
-----------------
Actual Actual Pro forma
------ ------ ---------
9/30/99 9/30/98 9/30/98(1)
------- ------- ----------
<S> <C> <C> <C>
Net income (in thousands) $15,052 $8,072 $13,388
Per common share:*
Basic earnings 0.98 0.52 0.86
Diluted earnings 0.97 0.50 0.83
</TABLE>
(1)Excludes merger-related expenses after tax of $5.3 million for the nine
months ended September 30, 1998. (Includes $.7 million after tax of
conforming accounting adjustments recorded in connection with the Merger.)
* Adjusted for the 10% stock dividend declared December 1998.
13
<PAGE>
<TABLE>
<CAPTION>
Three months ended
------------------
Pro forma
---------
Actual 9/30/99 Actual 9/30/98 9/30/98(1)
-------------- -------------- ----------
<S> <C> <C> <C>
Net income (in thousands) $5,327 $1,227 $4,922
Per common share:*
Basic earnings 0.35 0.08 0.31
Diluted earnings 0.35 0.08 0.31
</TABLE>
(1)Excludes merger-related expenses after tax of $5.3 million for the nine
months ended September 30, 1998.
* Adjusted for the 10% stock dividend declared December 1998.
The Company's return on average assets and return on average equity for the
three and nine months ended September 30, 1999 and 1998, and pro forma
(excluding merger-related expenses of $3.7 and $5.3 million after tax for the
three and nine month periods ended September 30, 1998), are detailed in the
table below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
Actual Actual Pro forma Actual Actual Pro forma
------ ------ --------- ------ ------ ---------
9/30/99 9/30/98 9/30/98(1) 9/30/99 9/30/98 9/30/98(1)
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Actual:
- ------
Return on average
assets 1.36% .30% 1.20% 1.30% .66% 1.09%
Return on average
stockholders' equity 14.67 3.20 12.83 13.41 7.07 11.72
</TABLE>
(1)Excludes merger-related expenses after tax of $3.7 million and $5.3 million
respectively for the three months and nine months ended September 30, 1998.
(Includes $.7 million of conforming accounting adjustments in connection with
the Merger.)
Interest income
- ---------------
On a tax equivalent basis, gross interest income decreased by $10.4 million or
11.1% for the nine months ended September 30, 1999 compared to the same period
in 1998, due principally to the decrease in average earning assets of $81.1
million. Average loans decreased by $52.3 million, average securities increased
$12.0 million and average federal funds sold decreased by $40.8 million.
Total interest expense decreased by $9.2 million or 22.4% for the nine month
period ended September 30, 1999 as compared to the nine months ended September
30, 1998 due both to lower interest rates paid on deposits and declines in
average balances of $45.9 million and $69.8 million in time and savings
deposits, respectively.
Consistent with general market interest rates in the comparative periods,
average yields on interest earning assets continued the declining trend (49basis
points) witnessed in recent quarters to 7.58% for the nine months ended
September 30, 1999 vs. 8.07% as of the same period in 1998 reflecting both
declines in loan yields as well as lower yields on taxable securities and fed
funds sold. These declines were modestly offset by an increase in yield on
tax-exempt securities. However, average interest bearing liability rates paid
decreased (67 basis points) to 3.74% for the nine months ended September 30,
1999 vs. 4.41% for the nine months ended September 1998 due
14
<PAGE>
primarily to the Company's continued downward management of deposit interest
rates paid. Accordingly, net interest margins on a tax equivalent basis
increased to 4.65% for the nine months ended September 30, 1999 compared to
4.50% in 1998. However, this improvement in net interest margin was not
sufficient to offset the full impact of the decline in interest earning assets
(principally loans). Thus, while variances due to changes in rates (primarily
lower deposit costs) produced an $1.3 million increase in net interest income in
the nine months of 1999 compared to the same period in 1998, the decrease in
average earning assets and liabilities principally contributed to a $2.6 million
volume related decrease in net interest income over the same period. The net
effect was that net interest income before provisions for loan losses was $49.1
million for the nine months ended September 30, 1999 compared to $50.4 million
for the comparable period in 1998, a decrease of $1.3 million or (2.6%).
15
<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 (dollars in thousands).
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $959,501 $60,893 8.46% $1,011,768 $68,278 9.00%
Taxable Securities 363,280 15,438 5.67% 366,488 17,420 6.34%
Tax-exempt Securities (2) 98,201 5,189 7.05% 83,079 4,486 7.20%
Fed Funds Sold 38,034 1,402 4.91% 78,806 3,009 5.09%
------ -----
Total Interest Earning
Assets 1,459,016 82,922 7.58% 1,540,141 $93,194 8.07%
NonInterest Earning Assets:
Cash & Due from Banks 45,714 50,110
Premises & Equipment 27,759 27,085
Other Assets 29,236 44,852
Allowance for Loan Losses (21,572) (19,948)
--------- ------ -------- -------
Total Assets $1,540,153 $82,922 7.18% $1,642,240 $93,194 7.57%
========== ------- ========== -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Savings Deposits $271,750 $5,248 2.58% $341,507 $9,162 3.58%
NOW Accounts 56,777 427 1.00% 72,358 638 1.18%
Money Market Accounts 313,408 8,298 3.53% 311,018 10,360 4.44%
CD's over $100,000 142,912 6,077 5.67% 128,007 5,194 5.41%
Other Time Deposits 331,133 10,913 4.39% 391,956 15,817 5.38%
Borrowed Funds 26,011 1,046 5.36% 1,725 71 5.49%
--------- ------ -------- -------
Total Interest-Bearing 1,141,991 32,009 3.74% 1,246,571 41,242 4.41%
Noninterest-Bearing
Demand Deposits 236,867 223,727
Other 11,615 19,676
--------- --------
Total Noninterest-Bearing
Liabilities 248,482 3.07% 243,403 3.69%
----- -----
Stockholders' Equity 149,680 152,266
--------- --------
Total Liabilities and
Stockholders' Equity $1,540,153 32,009 $1,642,240 41,242
========== ------ ========== -------
Net interest Margin 50,913 4.65% 51,952 4.50%
Less Tax Equivalent
Adjustments (1,816) (1,525)
------- -------
Net Interest Income $49,097 4.49% $50,427 4.37%
======= ===== ======= =====
Excess of interest earning
assets over interest
bearing liabilities $317,024 $293,570
======== ========
Ratio of Average Interest-
Earning Assets to Average
Interest-Bearing
Liabilities 127.76% 123.55%
======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average Balances include non-accrual loans.
(2) Tax Equivalent Yields on tax-exempt securities based on a Federal tax rate
of 35% in 1999 and 34% in 1998.
16
<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:
Rate/Volume Analysis (in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 vs. 1998
-----------------------------------------------------------------
Increase (Decrease) due to
-----------------------------------------------------------------
Volume Rate Net(1)
------ ---- ---
<S> <C> <C> <C>
Interest Income:
Loans $(3,317) $(4,069) $(7,386)
Taxable investment securities (136) (1,846) (1,982)
Tax-exempt investment(2) 799 (96) 703
securities
Federal funds sold (1,503) (104) (1,607)
-------------- --------------- --------------
Total interest income (4,157) (6,115) (10,272)
Interest expense:
Savings deposits (1,347) (2,567) (3,914)
NOW/accounts (117) (94) (211)
Money market accounts 63 (2,125) (2,062)
Certificates over $100,000 634 249 883
Other Time Deposits (2,004) (2,900) (4,904)
Borrowed funds 977 (2) 975
-------------- --------------- --------------
Total interest expense (1,794) (7,439) (9,233)
-------------- --------------- --------------
Net interest margin (2,363) 1,324 (1,039)
Less tax equivalent effect (280) (11) (291)
-------------- --------------- --------------
Net interest income $(2,643) $1,313 $(1,330)
============== =============== ==============
</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 35% in 1999
and 34% in 1998.
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.
17
<PAGE>
The 1998 provision for loan losses included a $1.4 million charge to conform
accounting policies in connection with the merger. Excluding this charge, the
provision for loan losses decreased from $3.3 million in 1998 to $1.8 million in
1999.
Net charge-offs for the first nine months of 1999 were $1.2 million compared to
$3.5 million for the same period in 1998. [In the third quarter of 1999 the
Company recorded a $680,000 recovery on a previously written down commercial
mortgage loan.] The ratio of net chargeoffs to average loans, on an annualized
basis, decreased to .16% in the first nine months of 1999 vs. .35% for the same
period of 1998.
Total non-performing assets were approximately $12.3 million at the end of
September 1999, down $1.0 million over the $13.3 million at September 1998, but
up $2.2 million from the year end 1998 level of $10.1 million representing .77%
of total assets, vs. .64% at year end. OREO balances at $1.6 million were up
$1.0 million from the $.6 million reported at year end 1998 and period end
non-performing loans of $10.7 million were up $1.2 million over the December 31,
1998 level of $9.4 million. These increases in non-performing assets are
primarily due to three larger commercial mortgages, two of which are in process
of foreclosure while one is held in OREO and three commercial and industrial
loans which are primarily secured by real estate.
Nonperforming assets represent 148 loans or OREO properties of which on1y
five have balances in excess of $300,000, and none are in excess of $835,000. Of
the total nonperforming loans, 48% are collateralized by residential property,
49% by commercial property, and 3% 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 in recent 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", it is more difficult to assess the latent
risk in these portfolios, and, therefore, the allowances are based on the
present 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 affect the financial performance of
the Company.
18
<PAGE>
The table below summarizes the Company's allowance for loan losses and its loan
loss experience for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
For the nine months For the year
ended September 30, ended December 31,
1999 1998 1998 1997 1996
----------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $21,270 $19,331 $19,331 $18,533 $16,803
Chargeoffs:
Commercial & industrial 196 334 406 1,448 894
Consumer installment & other 1,379 1,069 1,620 1,146 821
Real estate mortgage 831 2,695 3,344 2,164 2,575
----------- ------------ ----------- ---------- -------------
Total charge-offs 2,406 4,098 5,370 4,758 4,290
Recoveries:
Commercial & industrial 64 102 462 164 118
Consumer installment & other 418 352 481 160 180
Real estate mortgage 765 148 437 757 572
----------- ------------ ----------- ---------- -------------
Total recoveries 1,247 602 1,380 1,081 870
----------- ------------ ----------- ---------- -------------
Net charge-offs (1,159) (3,496) (3,990) (3,677) (3,420)
Provision for loan losses 1,800 4,729 5,929 4,475 5,150
----- ----- ----- ----- -----
Balance at end of period $21,911 $20,564 $21,270 $19,331 $18,533
=========== ============ =========== ========== =============
Ratio of net charge-offs to
average loans outstanding
during the period
(annualized) .16% .35% .40% .35% .34%
Allowance for loan losses as
a percent of period-end loans 2.28% 2.11% 2.18% 1.85% 1.78%
Allowance as a percent of
non-performing loans 205% 170% 226% 214% 181%
Nonperforming loans and OREO
to total loans and OREO 1.27% 1.36% 1.03% 1.00% 1.32%
</TABLE>
19
<PAGE>
The table below summarizes the Company's nonperforming assets and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
at September 30, at December 31,
1999 1998 1998 1997 1996
--------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate mortgage $8,483 $11,022 $8,282 $7,602 $8,088
Commercial & Industrial 1,564 441 558 164 712
Consumer & other 362 37 83 123 313
--------------------------- -----------------------------------------
Total nonaccrual loans 10,409 11,500 8,923 7,889 9,113
Loans 90 days or more past
due and still accruing:
Real estate mortgage - 37 224 129 430
Commercial & industrial 253 233 205 188 193
Consumer & other 5 32 68 126 22
--------------------------- -----------------------------------------
Total 90 days past due
accruing 258 302 497 443 645
Restructured - real estate - 311 28 682 500
--------------------------- -----------------------------------------
Total non-performing and
restructured loans 10,667 12,113 9,448 9,014 10,258
Other real estate owned (2) 1,605 1,167 628 1,366 2,923
--------------------------- -----------------------------------------
Total non-performing assets $12,272 $13,280 $10,076 $10,380 $13,181
=========================== =========================================
Non-performing and re-
structured loans as a
percent of total loans 1.11% 1.24% .96% .87% .98%
=========================== =========================================
Nonperforming assets as a
percent of total assets .77% .82% .64% .64% .84%
=========================== =========================================
</TABLE>
(1) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of interest is unlikely, or loans that meet other nonaccrual criteria
as established by regulatory authorities. Payments received on loans classified
as nonaccrual are either applied to the outstanding principal balance or
recorded as interest income, depending upon management's assessment of the
collectibility of the loan.
(2) Other real estate owned totals $1,605,000 at September 30, 1999 and includes
15 properties acquired through foreclosure: 11 residences, and 4 non-farm
nonresidential properties.
20
<PAGE>
In addition to the nonperforming loans and other nonperforming assets noted
above, at September 30, 1999, the Company had approximately $19.6 million in
loans requiring special attention (substandard) compared to $19.0 million of
similar loans at December 31, 1998. 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. Further
deterioration in such borrowers' financial position may result in reclassifying
them as nonperforming assets.
Management recently completed an expanded evaluation of its loan portfolio
related to homogenous pools of loans (primarily larger balance residential
mortgages). As a result of this review, certain loans previously evaluated in a
"pool" of loans were individually reviewed for impairment. As a result of this
review, loans classified as impaired increased from year end 1998 levels by
approximately $8.6 million (even though total nonperforming loans decreased by
$1.4 million in the same period). Further, as a result of this review, allowance
allocations related to such impaired loans increased by $2.5 million which were
reallocated from within the overall balance of the allowance for loan losses.
The following table summarizes impaired loans for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Impaired loans with allowance established $4,754,000
and $2,242,000, respectively) $16,197 $5,545
Impaired loans which have been written down
$670,000 and $1,641,000, respectively) 1,295 3,323
------- ------
Total $17,492 $8,868
======= ======
Average amount of impaired loans
for the period $11,785 $8,700
======= ======
</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,
1999 1998 1998 1997 1996
-------------------------------------------- -----------------------------------------------------------------
Balance at end of % of % of % of % of % of
period applicable Amount total Amount total Amount total Amount total Amount total
to: loans loans loans loans loans
-------------------------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial &
industrial $ 4,902 11.8% $2,096 10.8% $ 2,472 11.7% $ 2,131 9.0% $2,476 7.9%
Consumer & other 3,184 14.6 3,494 14.6 3,530 14.4 3,699 15.2 3,341 14.5
Real estate -
mortgage 12,069 73.6 12,978 74.6 11,679 73.9 12,124 75.8 11,577 77.6
Unallocated 1,756 - 1,996 - 3,589 - 1,377 - 1,139 -
============================================ =================================================================
Total $ 21,911 100% $21,270 100% $21,270 100% $ 19,331 100% $18,533 100.00%
============================================ =================================================================
</TABLE>
21
<PAGE>
Noninterest Income
- ------------------
Total non interest income increased by $821,000 or 11.8% to $7.8 million during
the first nine months of 1999 compared to the same period of 1998. Specifically,
service charges and fees increased $528,000 as a result of the implementation of
a singular fee schedule for the merged bank. In addition, nonrecurring sales of
properties contributed $216,000 to the increase. While trust and investment
sales income and gains on sales of securities increased by $150,000 and
$104,000, respectively, lower levels of sales of loans into the secondary market
resulted in a decrease in gains on sales of loans of $333,000.
Other Expenses
- --------------
In total, noninterest expense decreased by $7.3 million or 18.6% to $32.0
million for the first nine months of 1999 compared to the same period of 1998,
due mainly to merger-related expenses incurred in 1998 of $7.5 million.
Salaries and employee benefits expense decreased $911,000 to $16.6 million at
September 30, 1999 vs. $17.5 in the first nine months of 1998, as merger-related
reductions in salary expense allowed the Company to absorb normal salary
increases for its staff during the year and the addition of 14 full time
equivalent staff in connection with new branches established during the second
and third quarters of 1998.
Occupancy and equipment expense was up slightly over the same period in 1998, as
the effect of branch closings in connection with the merger was offset by the
costs of new branches opened in 1998. Other real estate owned expense were
$265,000 higher due to the reversal in 1998 of valuation reserves no longer
required. Other expenses increased by $698,000 as Y2K expenses of $265,000
incurred in 1999 and computer service bureau costs and consulting fee increases
of $581,000 respectively were partially offset by reductions in legal and other
professional fees, loan processing and advertising expenditures.
Net Income
- ----------
Pretax income increased by $9.8 million. The Company's effective tax rate
decreased to 34.8% from 39.4% as a result of higher levels of investments in tax
preferenced securities and the utilization of a State tax advantaged investment
subsidiary and the non-recurrence of the non-deductible expenses associated with
the merger. Net income was $15.1 million for the nine months ended September 30,
1999 vs. $8.1 million for the same period in 1998, an increase of $7.0 million
or 86.5% excluding the after tax effect of merger related expenses in 1998, net
income showed an increase of $1.7 million or 12.7%
Three months ended September 30, 1999 vs. September 30, 1998
- ------------------------------------------------------------
Net interest income decreased $468,000 or 2.8% for the three months ended
September 30, 1999 compared to the same period in 1998, primarily due to
declines in average loan balances and generally lower levels of interest rates
earned causing gross interest income to decline faster than reductions in
interest expense.
Provisions for loan losses decreased by $.9 million for the three month period
ended September 30, 1999 to $300,000 vs. September 30, 1998 due to lower levels
of new provisions, the company also experienced a recovery on a commercial
mortgage of $680,000 during the third quarter of 1999.
22
<PAGE>
Total noninterest income increased $113,000 to $2.5 million for the three months
ended September 30, 1999 compared to 1998, primarily as a result of increases in
service charges and fees of $71,000, trust earnings increases of $73,000 and
other income increases (primarily income derived from outsourcing official
checks) of $98,000. These increases were partially offset by a decrease in gains
on sales of loans ($113,000) and net losses realized on sales of securities of
$16,000.
Total noninterest expense decreased $5.2 million for the three months ended
September 30, 1999 compared to 1998 due almost entirely to merger-related
expenses incurred in 1998 of $5.3 million. Decreases were also seen in salaries
and benefits ($463,000) and OREO expense ($64,000). "Other" expense increased
$526,000 (primarily computer service bureau and Y2K remediation costs).
Occupancy expense remained relatively unchanged as the cost of new branches was
offset by savings associated with the closure of branches due to the merger.
Pretax income increased $5.8 million to $8.1 million for the three months ended
September 30, 1999 compared to the same period of 1998, while income taxes
increased by $1.9 million. Comparative income after taxes increased $4.1 million
to $5.3 million for the quarter ended September 30, 1999 vs. 1998. Excluding the
after tax effect of merger-related items, net income increased by $405,000 or
8.2%.
Asset/Liability Management
- --------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities and capital resources. The Company's
Investment Committee of the Board monitors, and the Bank, through its treasury
division, controls the rate sensitivity of the balance sheet while seeking to
maintain an appropriate level of net interest income contribution to the
operations of the Company.
The Company's net interest income is affected by fluctuations in market interest
rates as a result of timing differences in the repricing of its assets and
liabilities. These repricing differences are quantified in specific time
intervals and are referred to as interest rate sensitivity gaps. The Company
manages the interest rate risk of current and future earnings to a level that is
consistent with its mix of businesses and seeks to limit such risk exposure to
appropriate percentages of both earnings and the imputed value of stockholders'
equity. The objective in managing interest rate risk is to support the
achievement of business strategies, while controlling earnings variability and
ensuring appropriate liquidity. Further, the historical level of demand deposits
(greater than 10% of total assets) serves to mitigate the effects of increases
in interest rates and reduce the average cost of total liabilities. In the
second and third quarters of 1999, the Company implemented a leverage strategy,
whereby it increased investment assets by $100 million and funded such increased
assets with a portion of its available line of credit with the Federal Home Loan
Bank, borrowings under repurchase agreements and municipal deposits. The Company
expects the strategy over time to generate average pretax net interest income of
approximately 1% per annum on the assets acquired. The component securities and
funding sources utilized in the transaction (a combination of fixed and floating
rate securities funded primarily with variable rate liabilities) is not expected
to raise significantly the Company's overall exposure to fluctuations in market
interest rates.
23
<PAGE>
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of September 30, 1999, based upon the known
repricing dates of certain assets, at amortized cost, and liabilities and the
assumed repricing dates of others. As shown in the chart below, at September 30,
1999, assuming no management action, the Company's principal interest rate risk
is to a rising rate environment and particularly within one year time frame.
That is, net interest revenue would be expected to be adversely affected by an
increase in interest rates (on a one-for-one basis) above the rates embedded in
the current yield curve, principally due to the higher level of liabilities
($969.7 million) that would reprice relative to similarly classified assets
($697.8 million) in that time frame.
This exposure would be mitigated over the longer term as the Company has
$665.2 million more in repriceable interest earning assets than interest bearing
liabilities beyond one year.
24
<PAGE>
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
(in thousands).
<TABLE>
<CAPTION>
Total Greater
Maturity Repricing 3 months or 4 months to within One yr. than
Date (1)(2) less one yr. one yr. to 5 yrs. five yrs. Total
-------------- -------------- --------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Securities (3) $137,674 $50,013 $187,687 $189,887 $140,833 $518,407
Fed Funds 34,082 34,082 34,082
Fixed rate loans 86,273 130,482 216,755 254,360 33,016 504,131
Floating rate loans (3) 162,363 96,945 259,308 179,209 8,901 447,418
-------------- -------------- --------------- -------------- ------------ -------------
Total interest
earning assets (1) 420,392 277,440 697,832 623,456 182,750 1,504,038
-------------- -------------- --------------- -------------- ------------ -------------
Other interest bearing
deposits (4) 327,123 250,139 577,262 40,674 617,936
Time/Other (5) 290,664 101,800 392,464 97,438 2,921 492,823
-------------- -------------- --------------- -------------- ------------ -------------
Total interest-bearing
liabilities 617,787 351,939 969,726 138,112 2,921 1,110,759
-------------- -------------- --------------- -------------- ------------ -------------
Interest Sensitivity
gap (6) $(197,395) $(74,499) $(271,894) $485,344 $179,829 $393,279
============== ============== =============== ============== ============ =============
Gap as a percent of earnings
assets (13.1)% (5.0)% (18.1)% 32.3% 12.0% 26.1%
============== ============== =============== ============== ============ =============
</TABLE>
(1) Interest rate sensitivity gaps are defined as the fixed rate positions
(assets less liabilities) for a given time period. The gaps measure the
time weighted dollar equivalent volume of positions fixed for a particular
period. The gap positions reflect a repricing date at which date funds are
assumed to "mature" and reprice to a current market rate for the asset or
liability. The table does not include loans on nonaccrual status or net
unrealized losses recorded on available-for-sale securities as of September
30, 1999.
(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 in the three month to six month category and the
balance beyond one year repricing category (the Federal Reserve Discount
Rate has not changed since November 1998.) 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 $488.1 million and other interest-bearing
liabilities ($75 million) are classified by contractual maturity or
repricing frequency.
(6) Non-interest bearing deposit liabilities were approximately $254 million at
September 1999.
25
<PAGE>
Capital Resources and Liquidity
- -------------------------------
The following summarizes the minimum capital requirements and capital position
at September 30, 1999:
<TABLE>
<CAPTION>
To be Well Capitalized Under
Capital Position at "Prompt Corrective Action"
September 30, 1999 Provision of FDICIA
---------------------------- ------------------------------
Bank Only Consolidated
--------- ------------
<S> <C> <C> <C>
Total Capital
to Risk-Weighted Assets 12.57% 13.42% 10%
Tier 1 Capital
to Risk-Weighted Assets 11.31 12.80 6
Tier 1 Capital to Average
Assets (Leverage Ratio) 8.38 8.99 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, 1999, 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 $75.6 million in
addition to its securities available for sale of $485.8 million at September 30,
1999 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 9.1% at September 30, 1999. 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. The Company
also has available lines of credit with the Federal Home Loan Bank, Federal
Reserve and other commercial banks.
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 has outsourced
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.
At September 30, 1999, the Company has completed the testing of its
mission-critical software, including 1998 testing of the wire transfer and
automated clearinghouse systems. Based on its review of the test results,
the Company believes that its mission critical systems are now year 2000
compliant.
26
<PAGE>
Replacement of non-compliant non-mission critical hardware and software was
largely undertaken as part of the planned 1998 and 1999 upgrade of branch
automation software. At September 30, 1999, the Company has completed the
installation of certain non-mission critical hardware and software,
including optical data storage software, a telephone interface for the
Company's call center and certain file servers.
Non-Information Technology: The Company's exposure to non-information
technology systems is not material, in that its fixtures such as vaults,
elevators and environmental control systems are 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 credit is based in part on responses to a
Year 2000 questionnaire, in part on evaluations completed by account
officers and in part on other considerations, such as the type of industry
and reliance on automated systems. The Company disclaims any liability or
obligation for the completeness, or lack thereof, of its customers' Year
2000 remediation plans.
To the extent that this process disclosed borrowers or classes of borrowers
with significant Year 2000 risk, the Company has allocated reserves for
possible Y2K related credit losses.
This allocation was based on the Company's assessment that credit risk
combined with Year 2000 risk increases its exposure to loss. The amount of
the allocation for each individual loan varied depending on the degree of
credit weakness, whether the Year 2000 risk was deemed to be moderate or
high, and whether the Company demonstrated satisfactory or unsatisfactory
Year 2000 compliance programs. At September 30, 1999, the Company has
allocated additional Year 2000 credit reserves totaling $2.5 million. This
amount did not have a material effect on the level of its allowance for
loan losses.
The Company continues to work with 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, telephone and utility
companies and fiduciary record keeping processors. The Company has
completed testing of those key vendors with whom it directly outsources
through dedictated processing arrangements, and plans to obtain test
results or assurances from all other such vendors and suppliers.
At September 30, 1999, the Company is not aware of the likely failure of
any of these providers, 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, and telecommunications
and local energy providers. The Company exercises
27
<PAGE>
no influence over these providers, and there are few, if any, alternatives
for obtaining these services.
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 remainder of 1999 are not
expected to have a material effect on the Company's results of operations
or financial position. To date, the Company has incurred costs associated
with the renovation of custom code by a third party provider, proxy
testing, the cost of consultants, and the renovation of certain ATMs. In
addition, costs were incurred in connection with certain phases of the
Company's test plan, such as test time with the Bank's primary service
bureau and the costs of consultants engaged to evaluate the results of the
Company's Year 2000 testing program.
At September 30, 1999, the Company has expensed approximately $265,000 of
the originally estimated $300,000 in anticipated Year 2000 costs. Although
this original estimate appears to remain appropriate, no assurance can be
given that challenges will not arise in the future that will require
additional expense to resolve.
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 portion of these
internal resources, 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
At September 30, 1999, the Company views an extended disruption in service
to its customers as the most likely worst case scenario. If the Company's
mission critical systems are not compliant, it may not be able to correctly
process transactions in a reasonable period of time. This scenario could
result in a wide variety of claims for improper handling of its assets as
well as liabilities and other borrowings from its customers.
At September 30, 1999, management deems the probability of this scenario to
be low, but the impact of any such disruption on the Company could be
anticipated to be material, and to raise serious concerns about the ability
of the Company to continue as a going concern.
A more likely scenario is one in which the Company experiences temporary
disruptions in service if one or more of the unrelated vendors on which the
Bank is critically dependent is not Year 2000 compliant. These unrelated
vendors include providers of telecommunication services and other
utilities. The Company would manage this risk by relying, temporarily, on
manual record keeping; as well as by closing or limiting hours of
operations at selected offices,
28
<PAGE>
and by transferring staff and equipment to locations not affected by the
loss of service.
4) The Company's contingency plans
Although the Company believes that its mission-critical systems are ready
for the century date rollover, contingency plans for each essential
business activity have been developed. Management believes that these
contingency plans provide reasonable substitutes for the completion of
these business activities.
The significant elements of these contingency plans were validated by June
30, 1999, and additional testing and validation was completed during
September 1999.
The Company has also expanded its Contingency Funding Plan to reflect its
concern that a potential year end increase in demand for cash and credit
may have an extraordinary impact on its liquidity levels. The primary
components of the Y2K Contingency Funding Plan include increases in branch
cash levels, increases in the Company's federal funds position, as well as
a process for interviewing customers to identify year-end cash and credit
needs.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Quantitative and qualitative disclosure about market risk is presented at
December 31, 1998 in Item 7A in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on September 30, 1999.
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, 1999, neither the Company nor the Bank owned any
trading assets, nor did they utilize hedging transactions such as interest rate
swaps and caps.
GAP Analysis. The one-year and five-year cumulative interest sensitivity gap as
a percentage of total assets have changed from (18.2%) and 11.1% at December 31,
1998, respectively, to (17.1%) and 13.4% at September 30, 1999, respectively,
utilizing similar assumptions as at December 1998.
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, 1998. 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, 1999 compared to December 31, 1998, and the
projected changes continue to fall within all board approved limits for
potential interest rate volatility.
See also Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations "Asset/Liability Management".
29
<PAGE>
Part II
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a. Exhibits
10.3 Employment Agreement of Ian C. Lucy
27 Financial Data Schedule (with EDGAR filings included)
Item 6(b). Reports on Form 8-K
- ---------- -------------------
None.
30
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.3 Employment Agreement of Ian C. Lucy
27 Financial Data Schedule (with EDGAR filings included)
31
<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 12, 1999 /s/ Paul A. Maisch
------------------
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
32
<PAGE>
Schedule 1
----------
<PAGE>
Exhibit 10.3
------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made as of September 7, 1999
is by and between Premier National Bank, a national banking association having
its principal place of business at Route 55, LaGrangeville, New York 12540 (the
"Company"), and Ian C. Lucy, residing at 7 Colby Court, Bedford, NH 03110 (the
"Executive").
W I T N E S S E T H:
-------------------
WHEREAS, the Company, a wholly-owned subsidiary of Premier (as hereinafter
defined), has determined that it is in its best interests to employ the
Executive as Chief Administrative Officer pursuant to a written employment
agreement, as hereinafter provided; and
WHEREAS, the Executive desires to accept such employment, upon the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in furtherance of the interests described above and in
consideration of the respective covenants and agreements contained herein, the
parties hereto agree as follows:
1. Agreement of Employment. During the term of employment provided for in
-----------------------
this Agreement, the Company agrees to employ the Executive, and the Executive
agrees to accept employment and to serve the Company, as Chief Administrative
Officer, all upon the terms and conditions hereinafter set forth.
2. Term.
----
(a) Effective Date. This Agreement and the employment of the Executive
--------------
under this Agreement shall become effective as of September 7, 1999 (the
"Effective Date").
(b) Duration of Agreement. This Agreement shall terminate on the twelve
---------------------
(12) month anniversary of the Effective Date (the "Initial Term"), but shall be
extended automatically for additional one year periods (each, a "Renewal Term")
unless the Company or the Executive gives written notice to the other party that
the Agreement shall not be so extended at least twelve (12) months prior to the
expiration of the Initial Term or any Renewal Term (a "Failure to Renew"), in
which case this Agreement shall terminate on the expiration of such Initial Term
or such Renewal Term; provided, however, that after a Change in Control (as
-------- -------
hereinafter defined) no termination of this Agreement pursuant to a Failure to
Renew by the Company shall be effective prior to the expiration of twenty-four
(24) months after such Change in Control (such period being referred to herein
as the "CIC Coverage Period"). Notwithstanding any other provision of this
Agreement, nothing contained in this Agreement shall prohibit or prevent the
<PAGE>
continued employment of the Executive by the Company, as Chief Administrative
Officer or in any other capacity, after the termination of this Agreement as a
result of a Failure to Renew. Except as specifically set forth herein, the terms
and provisions of this Agreement shall not govern, control or be applied to any
such continued employment of the Executive by the Company in any capacity after
the termination of this Agreement as a result of a Failure to Renew.
Notwithstanding any other provision of this Agreement, nothing contained in this
Agreement shall be deemed to create any obligation on the part of the Company or
the Executive to extend this Agreement beyond the Initial Term or any Renewal
Term.
(c) Duration of Employment Pursuant to this Agreement. Notwithstanding any
-------------------------------------------------
Failure to Renew this Agreement, the employment of the Executive under this
Agreement shall be terminated only pursuant to, and in compliance with, the
terms and conditions set forth in Section 6 herein. A Failure to Renew this
Agreement in and of itself shall not (i) constitute termination of the
employment of the Executive under this Agreement pursuant to, or for purposes
of, any provision of Section 6 herein or (ii) give rise to any obligation on the
part of the Company to make, or any right on the part of the Executive to
receive, any payments or other benefits provided for pursuant to Section 6
herein.
3. Duties. The Executive shall perform the duties and discharge the
------
responsibilities of Chief Administrative Officer of the Company and shall
perform all other duties and responsibilities as may reasonably be assigned from
time to time by the Chief Executive Officer of the Company. The Executive agrees
to devote substantially all of his business time to the Company's business and
affairs and the performance of the services provided for herein.
4. Compensation. For the services rendered by the Executive to the Company
------------
under this Agreement, the Company shall compensate the Executive as follows:
(a) Salary. The Company shall pay the Executive for services an annual
------
salary of $ 200,000 (the "Annual Base Salary"), payable in accordance with the
payroll practices of the Company applicable to all employees and subject to
periodic review and increase in accordance with the Company's salary
administration program and policies as may be in effect from time to time.
(b) Bonus and Executive Benefits. The Executive shall be entitled to
----------------------------
participate, on an equitable basis with other executive personnel of the
Company, in such bonus programs as the Company may extend from time to time to
its executive personnel. The Executive shall be entitled to receive, on the same
basis as other executive personnel of the Company, group employee benefits such
as sick leave, group disability and health, life and accident insurance and
similar benefits as the Company may extend from time to time to its employees.
2
<PAGE>
5. 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 hereunder, subject to
such reasonable requirements with respect to substantiation and documentation as
may be specified by the Company.
6. Termination.
-----------
(a) Termination for Cause. The Company may terminate the employment of
---------------------
the Executive hereunder if the Executive (i) commits any violation of any law,
rule or regulation or of a cease and desist order with respect to Premier, the
Company or any of their subsidiaries (each hereinafter referred to as a
"Subsidiary") which has become final, (ii) engages or participates in any unsafe
or unsound practice in connection with Premier, the Company or any Subsidiary
regardless of whether actual harm or damages result to Premier, the Company or
any Subsidiary, (iii) commits or engages, or fails to commit or engage, in any
act or practice, which action or practice or the failure to engage in such
action or practice involves personal dishonesty on the part of the Executive or
demonstrates a willful or continuing disregard for the best interests of
Premier, the Company, or any Subsidiary, (iv) is adjudicated to be of an unsound
mind, (v) is adjudicated to be bankrupt, (vi) intentionally destroys the
property of Premier, the Company or any Subsidiary, (vii) breaches or violates
in any material respect any agreement with Premier, the Company or any
Subsidiary signed by the Executive, including, but not limited to, this
Agreement and any other confidentiality and nondisclosure agreements, (viii)
engages in dishonorable or disruptive behavior, practices or acts that would be
reasonably expected to harm or bring into disrepute Premier, the Company or any
Subsidiary, or any of their businesses or employees, (ix) is convicted of a
felony, or (x) continually fails to substantially perform his duties under
Section 3 hereof for a period of thirty (30) days (other than as a result of a
disability pursuant to Section 6(g) hereof) after delivery by the Company to the
Executive of a written demand for substantial performance, stating with
reasonable detail the nature of such failure and affording the Executive an
opportunity, as soon as practicable, to correct the acts or omissions specified.
Termination pursuant to this Section 6(a) shall be referred to herein as a
"Termination for Cause." A Termination for Cause shall be effective immediately
upon written notification thereof by the Company unless otherwise specified in
the written notice. Upon a Termination for Cause, whether such Termination for
Cause occurs prior or subsequent to a Change in Control (as hereinafter
defined), the Company shall have no further obligation to pay the Executive's
Annual Base Salary or to provide any employee or other benefits hereunder except
for any Annual Base Salary or other such benefits that have fully accrued and
vested but not been paid as of the effective date of such termination.
(b) Termination Without Cause. At any time after the Effective Date, the
-------------------------
Company may terminate the employment of the Executive hereunder without cause
for any reason. Such termination shall be effective by the Company providing the
Executive
3
<PAGE>
with a written notice of termination at least thirty (30) days prior to the
effective date of such termination. Termination pursuant to this Section 6(b)
shall be referred to herein as "Termination Without Cause."
(c) Termination by the Executive for Good Reason. At any time after the
--------------------------------------------
Effective Date, the Executive may terminate his employment hereunder if any one
or more of the following occurs without the written consent of the Executive:
(i) a reduction by the Company in the Executive's Annual Base Salary as in
effect on the Effective Date or as the same may be increased from time to time;
(ii) the failure by the Company to pay to the Executive any portion of the
Executive's then-current compensation, or to pay to the Executive any portion of
an installment of deferred compensation under any deferred compensation program
of the Company, in each case within seven (7) days of the date such compensation
is due; (iii) any failure by the Company to comply with and satisfy Section
10(b) hereof; (iv) any material breach by the Company of this Agreement if such
breach is not cured within a period of thirty (30) days after delivery by the
Executive to the Company of a written notice stating with reasonable detail the
nature of such breach and affording the Company an opportunity, as soon as
practicable, to cure such breach; (v) the Executive is required by the Company
to occupy a position or positions in the Company, the function or functions of
which is or are materially inconsistent with the Executive's skills and
experience at that time; (vi) after or in connection with any Change in Control
(as hereinafter defined), the Executive is required to be based at any office or
location that is more than fifty (50) miles from the nearer of (A) the
Executive's residence or (B) the Company's administrative headquarters
immediately prior to the Change in Control. Termination pursuant to this Section
6(c) shall be referred to herein as a "Termination for Good Reason." A
Termination for Good Reason shall be effective immediately upon written
notification thereof by the Executive.
(d) Benefits in the Event of a Termination Without Cause or a Termination
---------------------------------------------------------------------
for Good Reason. In the event of a Termination Without Cause or a Termination
- ---------------
for Good Reason the Executive shall be entitled to the following:
(i) If a Termination Without Cause or a Termination for Good Reason
occurs at any time other than during the CIC Coverage Period, the Company
shall be obligated to make an undiscounted lump sum payment to the
Executive equal to the Executive's Annual Base Salary as in effect on the
effective date of such termination (without giving effect to any
reduction in Annual Base Salary described in Section 6(c)(i) hereof),
such payment to be made within ten (10) business days of the effective
date of such Termination Without Cause or Termination for Good Reason, as
the case may be.
4
<PAGE>
(ii) If a Termination Without Cause or a Termination for Good Reason
occurs during the CIC Coverage Period, the Executive shall be entitled to
an undiscounted lump sum payment equal to the product of (A) the
Executive's Annual Base Salary as in effect on the effective date of such
termination (without giving effect to any reduction in Annual Base Salary
described in Section 6(c)(i) hereof) and (B) three (3).
(e) Termination by the Executive Without Good Reason. The Executive may
------------------------------------------------
voluntarily terminate his employment hereunder without cause for any reason
other than the occurrence of any event set forth in Section 6(c) hereof by
providing the Company with a written notice of termination at least forty-five
(45) days prior to the effective date of such termination. Termination pursuant
to this Section 6(e) shall be referred to herein as a "Termination Without Good
Reason." Upon a Termination Without Good Reason, whether such Termination
Without Good Reason occurs prior or subsequent to a Change in Control (as
hereinafter defined), the Company shall have no further obligation to pay the
Executive's Annual Base Salary or to provide any other employee or other
benefits hereunder except for any Annual Base Salary or other such benefits that
have fully accrued and vested but not been paid as of the effective date of such
termination.
(f) Death. The employment of the Executive hereunder shall terminate
-----
automatically effective as of the death of the Executive, in which case the
Company shall have no further obligation to pay the Executive's Annual Base
Salary or to provide any other employee or other benefits hereunder except for
any Annual Base Salary or other such benefits that have fully accrued and vested
but not been paid as of the effective date of such termination.
(g) Disability. If, during the Initial Term or any Renewal Term, the
----------
Executive suffers an illness or incapacity of such a character as to prevent or
preclude him from devoting substantially full working time to his employment
hereunder or otherwise from carrying out any substantial portion of the normal
and usual duties of his employment hereunder for 180 days (whether or not
consecutive) during any twelve-month period, then the employment of the
Executive hereunder may be terminated by the Company (a "Disability
Termination") upon thirty (30) days' prior written notice to the Executive, such
Disability Termination to be effective as of the expiration date of such thirty
(30) days' notice. During the period of the Executive's disability and until the
expiration date of such thirty (30) days' notice, the Executive shall continue
to earn all compensation provided herein as if he had not been disabled, such
compensation to be paid at the time, in the amounts, and in the manner provided
for herein. Upon the effectiveness of any Disability Termination, whether such
Disability Termination occurs prior or subsequent to a Change in Control (as
hereinafter defined), the Company shall have no further obligation to pay the
Executive's Annual Base Salary or to provide any other employee or other
benefits hereunder except for any Annual Base Salary or other such benefits that
have fully accrued and vested but not been paid as of the effective date of such
termination.
5
<PAGE>
(h) Change in Control. As used in this Agreement, "Change in Control" shall
-----------------
mean a change in control of Premier National Bancorp, Inc., a New York
corporation, or any successor thereto ("Premier"), of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A (or in response to any similar item on any similar schedule or form)
promulgated under the Securities Exchange Act of 1934, as amended from time to
time, whether or not Premier is then subject to such reporting requirement;
provided, however, that without limitation, a Change in Control shall be deemed
to have occurred if:
(i) Premier consummates a merger, consolidation, share exchange,
division or other reorganization or transaction of Premier (a
"Fundamental Transaction") with any other corporation, other than a
Fundamental Transaction that the Board of Directors of Premier declares a
"Merger of Equals" or that results in the voting securities of Premier
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty-one percent (51%) of the combined voting
power immediately after such Fundamental Transaction of (i) Premier's
outstanding securities, (ii) the surviving entity's outstanding
securities, or (iii) in the case of a division, the outstanding
securities of each entity resulting from the division;
(ii) the shareholders of Premier approve a plan of complete
liquidation or winding-up of Premier or an agreement for the sale or
disposition (in one transaction or a series of transactions) of all or
substantially all of Premier's assets;
(iii) as a result of a proxy contest, individuals who, prior to the
conclusion thereof, constituted the Board of Directors of Premier
(including for this purpose any new director whose election or nomination
for election by Premier's shareholders in connection with such proxy
contest was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who were directors prior to such proxy
contest) cease to constitute at least a majority of the Board of
Directors of Premier (excluding any Board of Directors seat that is
vacant or otherwise unoccupied); or
(iv) the Board of Directors of Premier determines that a Change in
Control has occurred.
(i) Continued Benefits. After any Termination Without Cause pursuant to
------------------
Section 6(b) or any Termination for Good Reason pursuant to Section 6(c),
whether prior or subsequent to a Change in Control, the Company shall provide
the Executive with life and health insurance benefits substantially similar to
those which the Executive is receiving
6
<PAGE>
immediately prior to the effective date of such Termination Without Cause or
Termination for Good Reason (such effective date being referred to as the "Date
of Termination"), as the case may be, for (i) with respect to any such
termination that occurs at any time other than during the CIC Coverage Period, a
twelve-month period beginning on the Date of Termination, and (ii) with respect
to any such termination that occurs during the CIC Coverage Period, a
twenty-four (24) month period beginning on the Date of Termination (the
applicable period described in the preceding clause (i) or (ii) being referred
to as the "Benefits Period"). Benefits otherwise receivable by the Executive
pursuant to this Section 6(i) shall be reduced to the extent comparable benefits
are actually received by or made available to the Executive by any other
employer(s) during the Benefits Period at a cost to the Executive that is
commensurate with the cost incurred by the Executive immediately prior to the
Date of Termination; provided, however, that if the Executive becomes employed
by a new employer which maintains a medical plan that either (A) does not cover
the Executive or a family member or dependent with respect to a preexisting
condition which was covered under the applicable Company medical plan, or (B)
does not cover the Executive or a family member or dependent for a designated
waiting period, the Executive's coverage under the applicable Company medical
plan shall continue until the earlier of the end of the applicable period of
noncoverage under the new employer's plan or the end of the applicable period as
set forth in this Section 6(i). If health insurance benefits are provided or
made available to the Executive by any other employer(s) of the Executive during
the Benefits Period at a cost that is not commensurate with the cost incurred by
the Executive immediately prior to the Executive's Date of Termination, the
Company may, at its election, make periodic cash payments to the Executive that
are sufficient to reimburse the Executive, in advance and on a before-tax basis,
for the additional cost incurred by the Executive for such health insurance
benefits. During any period with respect to which the Company makes such
reimbursement payments to the Executive, the Executive shall be treated herein
as receiving such health insurance benefits at a cost that is commensurate with
the cost incurred by the Executive immediately prior to the Executive's Date of
Termination. The Executive shall be entitled to elect to change his level of
coverage and/or his choice of coverage options (such as Executive only or family
medical coverage) with respect to the benefits to be provided by the Company to
the Executive to the same extent that active employees of the Company are
permitted to make such changes; provided, however, that in the event of any such
change the Executive shall pay the amount of any cost increase that would
actually be paid by an active employee of the Company by reason of making the
same change in his level of coverage or coverage options. Any such benefits
actually received by or made available to the Executive from such other
employer(s) shall be reported to the Company by the Executive.
(j) Limitation on Certain Benefits. Notwithstanding any other provision of
------------------------------
this Agreement, in the event that any payment or benefit received or to be
received by the Executive in connection with a Change in Control or the
termination of the Executive's employment pursuant to Section 6 hereof (whether
under the terms of this Agreement or any other plan, arrangement or agreement)
(all such payments and benefits, including the payments and benefits provided
for hereunder, being hereinafter called "Total Payments")
7
<PAGE>
would not be deductible (in whole or part) by the Company, an affiliate or other
person or entity making such payment or providing such benefit as a result of
section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
then, to the extent necessary to make such portion of the Total Payments
deductible, (A) any cash payments provided for by Section 6 hereof shall first
be reduced (if necessary, to zero), and (B) any non-cash benefits provided for
by Section 6 hereof shall next be reduced. For purposes of this limitation, no
portion of the Total Payments the receipt or enjoyment of which the Executive
shall have waived by written notice to the Company prior to the date of any cash
payment provided for by Section 6 hereof shall be taken into account. All
determinations required to be made under the provisions of this Section 6(j)
shall be made by tax counsel selected by the Company's or Premier's independent
auditors and reasonably acceptable to the Executive.
(k) Survival. Notwithstanding any other provision herein, the Company's
--------
obligations to make payments and provide benefits pursuant to the terms and
conditions set forth in this Section 6 shall survive termination of employment
under this Agreement pursuant to this Section 6 hereof and/or termination of
this Agreement by reason of a Failure to Renew pursuant to Section 2(b) hereof.
7. Confidentiality. The Company and the Executive acknowledge that each of
---------------
Premier and the Company competes in a highly competitive industry and in
competitive markets and that, as an executive officer of the Company, the
Executive may have access to proprietary and confidential information, technical
information and trade secrets of Premier, the Company and/or a Subsidiary.
During the term of the Executive's employment hereunder and thereafter, the
Executive agrees that he will not, without the written consent of the Company,
disclose or permit any person under his control to disclose to any person or
entity not properly entitled to the information or use in any way for his own
benefit or the benefit of any other person or entity other than Premier, the
Company or any Subsidiary any confidential or proprietary information or
technical information or any trade secret of or relating to Premier, the Company
or any Subsidiary other than (a) information that is publicly disseminated or
(b) as required by any court, supervisory authority, administrative agency or
applicable law. Notwithstanding any other provision herein, the provisions of
this Section 7 shall survive termination of employment under this Agreement
pursuant to Section 6 hereof and/or termination of this Agreement by reason of a
Failure to Renew pursuant to Section 2(b) hereof.
8. Competition.
-----------
(a) Noncompete Agreement. In consideration of the Company's agreement to
------------------------
employ the Executive hereunder, the Executive hereby agrees that during the
Noncompete Period (as hereinafter defined), without the prior written approval
of the Company, the Executive shall not, directly or indirectly, enter into or
in any manner take part in any business, either individually or as an officer,
director, employee, agent, consultant, partner, investor (excluding passive
investments in publicly traded securities not aggregating more than 1% of any
such entity's total outstanding voting securities),
8
<PAGE>
principal or otherwise, which is in competition with the business of Premier,
the Company or any Subsidiary in any business in which Premier, the Company or
any Subsidiary is materially engaged on the date of termination in any state or
territorial jurisdiction (including the District of Columbia) in which Premier,
the Company or any Subsidiary is so materially engaged on the date of
termination. The Executive further agrees that during the Noncompete Period he
shall not, directly or indirectly, acting either alone or in concert with
others, seek to (i) influence any employee of Premier, the Company or any
Subsidiary to leave or otherwise terminate his or her employment with such
entity or (ii) solicit business from or otherwise do business or deal with any
person or entity who is, on the date of termination, a customer of Premier, the
Company or any Subsidiary, in connection with any product or service similar to
or competitive with any product or service offered or provided by Premier, the
Company or any such Subsidiary (to such customer or otherwise) on the date of
termination.
(b) Certain Definitions.
-----------------------
(i) As used herein, "Noncompete Period" shall mean the period
commencing on the Effective Date and ending on (i) in the case of any
Termination Without Cause or Termination for Good Reason occurring
subsequent to a Change in Control, the effective date of such termination
pursuant to Section 6, or (ii) in the case of any other termination of
employment pursuant to Section 6 hereof, the first anniversary of the
effective date of such termination pursuant to Section 6.
(ii) As used herein, the phrase "a customer of Premier, the Company or
any Subsidiary" shall mean any person or entity who has, at the time, an
effective contract with Premier, the Company or a Subsidiary, as the case
may be, under which Premier, the Company or such Subsidiary provides
products, services or a loan. In the case of any customer which is a
subsidiary, division or other business unit, or a department, agency,
authority or other political subdivision or instrumentality of a municipal,
state or federal government (in each case, a "Unit"), the phrase " a
customer of Premier, the Company or any Subsidiary" shall mean only such
Unit, and not any affiliated or related business unit or any other
department, agency or subdivision of such government (unless such other
unit, department, agency or subdivision is itself a customer of Premier,
the Company or a Subsidiary).
(c) Executive's Acknowledgment. The Executive acknowledges that he has
------------------------------
carefully read and considered all of the terms of this Agreement, including
particularly the terms of this Section 8 and the preceding Section 7, that each
of Premier and the Company has made a substantial investment in Premier's and
the Company's business and that the restrictions provided in this Section 8 and
the preceding Section 7 are reasonable and necessary for Premier's and the
Company's protection. The Executive
9
<PAGE>
further acknowledges that damages at law will not be a measurable or adequate
remedy for breach of the covenants contained in this Section 8 or in Section 7
and, accordingly the Executive consents to the entry by any court of competent
jurisdiction of any order enjoining him from violating any such covenants. The
parties hereto further agree that if, in any judicial proceeding, a court should
refuse to enforce any covenants set forth in this Section 8 or in Section 7
because of their term or geographical scope, then such covenants shall be deemed
to be modified to permit their enforcement to the maximum extent permitted by
law. Notwithstanding any other provision herein, the provisions of this Section
8 shall survive termination of employment under this Agreement pursuant to
Section 6 hereof and/or termination of this Agreement by reason of a Failure to
Renew pursuant to Section 2(b) hereof.
9. Governing Law; Consent to Jurisdiction. This Agreement shall in all
--------------------------------------
respects, including all matters of construction, validity and performance, be
governed by and construed and enforced in accordance with the laws of the State
of New York applicable to agreements made and to be performed entirely within
such 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.
10. Successors and Assigns.
----------------------
(a) Personal Services Agreement. This Agreement is a personal services
---------------------------
contract which may not be assigned or delegated by the Executive to, or assumed
from the Executive by, any other person or entity without the prior written
consent of the Company. Subject to the foregoing limitation, this Agreement and
all rights hereunder shall inure to the benefit of and be enforceable by the
parties hereto, their personal or legal representatives, heirs and permitted
successors and assigns. If the Executive should die while any amounts still are
payable to him hereunder if he had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's devisee, legatee, or other designee or, if there be
no such designee, to the Executive's estate.
(b) Successors to the Company. In addition to any obligations imposed by
-------------------------
law upon any successor to the Company, the Company shall be obligated to require
any successor (whether direct or indirect, by purchase, merger, consolidation,
operation of law or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place; in the event of
such a succession, references to the "Company" herein shall thereafter be deemed
to include such successor. Failure of the Company to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement.
10
<PAGE>
11. Miscellaneous.
-------------
(a) Notices. Any and all notices required or permitted to be given
-------
hereunder shall be in writing and shall be deemed to have been given when
delivered personally or by facsimile or, if mailed, upon mailing by certified or
registered mail, postage prepaid, addressed as follows (or at such other address
as may hereafter be designated by notice given in compliance with the terms
hereof):
If to the Executive: 7 Colby Court
Bedford, NH 03110
Facsimile: (603) 647-9654
If to the Company: Premier National Bank
c/o Premier National Bancorp, Inc.
Route 55
LaGrangeville, New York 12540
Attention: Chairman of the Board's Personnel and
Compensation Committee
Facsimile: (914) 471-1114
Any party may change by notice the address to which notices to it are to be
addressed.
(b) Waivers. A waiver by any party hereto of any of the terms or conditions
-------
of this Agreement shall not operate as, constitute or be construed to be a
waiver thereof for the future or of any subsequent breach thereof.
(c) Amendments, Etc. This Agreement may not be varied, altered, modified,
---------------
waived, changed, departed from or in any way amended except by an instrument in
writing executed by the parties hereto or their legal representatives.
(d) 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.
(e) Withholding. All payments to the Executive provided for hereunder shall
-----------
be paid net of (a) any applicable Social Security taxes and withholding taxes
required under federal, state or local law or regulation, (b) any other taxes
that may be lawfully levied by any governmental authority which may be required
by law from time to time to be withheld and (c) any additional withholding to
which the Executive has agreed.
11
<PAGE>
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts, which taken together shall be deemed to constitute one original.
(g) 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 any successor thereto), or to interfere with the right of the
Company (or any successor thereto) to discharge the Executive at any time,
subject in all cases to the terms of this Agreement.
(h) Entire Agreement. This agreement contains the entire agreement between
----------------
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.
(i) Headings and Captions. Headings and paragraph captions used in this
---------------------
Agreement are intended for convenience of reference only and shall not affect
the interpretation of this Agreement.
(j) Supervisory Suspension. Notwithstanding any other provision of this
----------------------
Agreement, in the event the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the affairs of
Premier, the Company or any Subsidiary by a notice served under Section 8(e)(3)
or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. ss. 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 (i) pay the Executive all compensation
withheld while its obligations under this Agreement were suspended, and (ii)
reinstate all obligations under this Agreement that were suspended.
(k) Authorization. The Company represents and warrants that it is duly
-------------
authorized to execute and enter into this Agreement.
(l) Reimbursement of Legal Costs. The Company (or any successor thereto)
----------------------------
shall pay to the Executive all reasonable legal fees and expenses incurred by
the Executive after a Change in Control as a result of or in connection with a
bona fide dispute regarding the application of any provision of this Agreement
that arises after a Change in Control, including, without limitation, all such
fees and expenses, if any, incurred (i) in disputing any termination under
Section 6, or (ii) in seeking to enforce or obtain any right or benefit provided
by this Agreement; provided, however, that the Company (or any successor
thereto) shall only be obligated to make payments under this Section 11(l) for
legal fees and expenses incurred by the Executive in connection with or as a
result of any such bona fide dispute regarding which the Executive has obtained
a final, nonappealable decision or determination in his favor (a "Final
Determination"). Any payments pursuant to this Section 11(l) shall be made only
if a Final Determination has been rendered and shall be made within five (5)
business days after delivery of the
12
<PAGE>
Executive's respective written requests for payment accompanied by such evidence
of fees and expenses incurred as the Company (or any successor thereto)
reasonably may require.
-- end of page --
[signatures appear on the following page]
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement effective as of the date set forth above.
PREMIER NATIONAL BANK
By: /s/ T. J. Cunningham III
------------------------
Name: T. J. Cunningham III
Title: Chairman
/s/ Ian C. Lucy
---------------------------------
Executive: Ian C. Lucy
13
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<PAGE>
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<S> <C>
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<PERIOD-START> JAN-01-1999
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0
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<LOANS-NON> 10,409
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