UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from ___________ to ____________
Commission file Number 0-15025
PROGRESSIVE BANK, INC.
- -----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York
- -------------------------------
(State or other jurisdiction of
incorporation or organization)
14-1682661
- -----------------------------------
(I.R.S. Employer Identification No.)
1301 Route 52, Fishkill, New York 12524
- --------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 897-7400
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 14, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $67,737,976.
As of March 14, 1996, 2,630,601 shares of registrant's common stock were
outstanding.
<TABLE>
PROGRESSIVE BANK, INC.
Annual Report for 1995 on Form 10-K
TABLE OF CONTENTS
<CAPTION>
PART I Page
<S> <C> <C>
Item 1. Business 1-22
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
</TABLE>
<TABLE>
<CAPTION>
PART II
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 24
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24
</TABLE>
<TABLE>
<CAPTION>
PART III
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
</TABLE>
<TABLE>
<CAPTION>
PART IV
<S> <C> <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25-26
SIGNATURES 27-28
</TABLE>
<TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
<CAPTION>
Documents Part of 10-K
into which incorporated
<S> <C>
Portions of the Annual Report to Shareholders for fiscal year ended December 31, 1995 Parts II and IV
Portions of the Proxy Statement for Annual Meeting of Shareholders to be held April 25, 1996 Part III
</TABLE>
PART I
ITEM 1. BUSINESS
General
Progressive Bank, Inc. ("Progressive", or, together with its wholly-owned
subsidiary, the "Company") is a bank holding company that was organized under
the laws of the State of New York on April 18, 1986 for the purpose of
acquiring all of the issued and outstanding shares of Pawling Savings Bank
("Pawling") under a Plan of Reorganization. The reorganization was completed
on October 17, 1986.
Pawling, a New York state-chartered stock savings bank, was organized in 1870
as a mutual savings bank and converted to stock form in 1984. Pawling
currently conducts business through a network of 15 full service branch
locations in six southern tier counties of New York State: Dutchess,
Sullivan, Orange, Putnam, Ulster and Westchester. In 1993, the Company began
originating loans in the Connecticut counties of Fairfield, Hartford, New
Haven and Litchfield. In addition, originations of one-to-four family
mortgage loans were expanded in 1995 to include the New York counties of
Nassau, Suffolk and Rockland. Pawling provides a full range of community
banking services to meet the needs of the communities it serves. Pawling is
engaged principally in the business of attracting retail deposits from the
general public and the business community and investing those funds in
residential and commercial mortgages, consumer loans and securities.
The Company had net income of $6.8 million, or $2.50 per share, for the year
ended December 31, 1995. Total assets at December 31, 1995 were $743.2
million. At December 31, 1995, the Company employed 250 people on a full-time
equivalent basis.
The executive offices of both Progressive and Pawling are located at 1301
Route 52, Fishkill, New York 12524. The telephone number is (914) 897-7400.
Competition
The Company faces significant competition for both the loans it makes and the
deposits it accepts. The Company's market area has a high density of
financial institutions, many of which are branches of significantly larger
non-local institutions which have greater financial resources than the
Company, and all of which are competitors of the Company to varying degrees.
The Company and its competitors are significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
The Company's competition for loans comes principally from savings banks,
credit unions, savings and loan associations, commercial banks, mortgage
banking companies and insurance companies. The Company competes successfully
for loans primarily by emphasizing the quality of its loan services and by
charging loan fees and interest rates that are generally competitive in its
market area. Its most direct competition for deposits has historically come
from savings banks, credit unions, savings and loan associations and
commercial banks. Additionally, the Company faces competition for deposits
from money market funds, stock and bond mutual funds, brokerage companies and
insurance companies. Competition may eventually increase as a result of the
lifting of restrictions on interstate operations of financial institutions.
The anticipated impact of such legislation on the Company is not expected to
be significant. The Company competes for deposits by offering a variety of
customer services and deposit accounts at generally competitive interest
rates.
Management considers the Company's reputation for financial strength,
customer service and its community bank orientation as its major competitive
advantage in attracting customers in its market area.
Potential Impact of Changes in Interest Rates
The Company's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest and dividend income on earning assets, such
as loans and securities, and its interest expense on interest-bearing
liabilities, such as deposits. When the amount of interest-earning assets
differs from the amount of interest-bearing liabilities expected to mature or
reprice in a given period, a significant change in market rates of interest
will affect net interest income. The Company manages its interest rate risk
primarily by structuring its balance sheet to emphasize holding adjustable
rate loans and mortgage-backed securities in its portfolio and maintaining a
large base of core deposits. The Company has not used synthetic hedging
instruments such as interest rate futures, swaps or options. See further
discussion under "Asset/Liability Management" on page 5 of this report.
Regulation and Supervision
Capital Requirements
Progressive, as a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, is subject to regulation and supervision by
the Federal Reserve Board ("FRB"). Accordingly, its activities are subject to
certain limitations, and transactions between Pawling and Progressive are
subject to certain restrictions. The FRB applies various guidelines in
assessing the adequacy of capital in examining and supervising a bank holding
company and in analyzing applications to the FRB. Under the current leverage
capital guidelines, most banking companies must maintain Tier 1 capital
between 4.0% and 5.0% of total assets. Tier 1 capital is comprised of common
shareholders' equity, noncumulative perpetual preferred stock and minority
interests in consolidated subsidiaries, less substantially all intangible
assets, identified losses and investments in certain subsidiaries.
The FRB also has adopted a set of risk-based capital adequacy guidelines,
which require the Company to maintain capital according to the risk profile
of its asset portfolio and certain of its off-balance sheet items. The
guidelines set forth a system for calculating risk-weighted assets by
assigning assets (and credit-equivalent amounts for certain off-balance sheet
items) to one of four broad risk-weight categories. The amount of
risk-weighted assets is determined by applying a specific percentage (0%,
20%, 50% or 100%, depending on the level of credit risk) to the amounts
assigned to each category. As a percentage of risk-weighted assets, a minimum
ratio of 4.0% must be maintained for Tier 1 capital and 8.0% for total
capital.
At December 31, 1995, Progressive's capital ratios exceeded the FRB's minimum
regulatory capital guidelines as follows:
<TABLE>
<CAPTION>
Risk-Based Capital
Leverage Capital Tier 1 Total
<S> <C> <C> <C> <C> <C> <C>
Amount <F1> Ratio Amount <F1> Ratio Amount <F1> Ratio
(Dollars in
thousands)
Actual $67,501 9.08% $67,501 16.05% $72,794 17.30%
Minimum requirement 29,731 4.00 16,828 4.00 33,656 8.00
Excess $37,770 5.08% $50,673 12.05% $39,138 9.30%
<FN>
<F1> For all capital amounts, actual capital excludes the Company's
consolidated net unrealized gain of $1.1 million (exclusive of a $31,000
unrealized loss on equity securities) on securities available for sale at
December 31, 1995. For total risk-based capital, actual capital includes
approximately $5.3 million of the allowance for loan losses.
</TABLE>
Pawling, as a New York state-chartered stock savings bank, is subject to
regulation and supervision by the New York State Banking Department as its
chartering agency and by the FDIC as its deposit insurer. Pawling derives its
lending, investment and other powers from the applicable provisions of New
York law and the regulations of the New York State Banking Board, subject to
limitation or modification under applicable Federal law and regulations of
such agencies as the FDIC or FRB. FDIC regulations require insured banks,
such as Pawling, to maintain minimum levels of capital. The FDIC regulations
follow, in substance, the leverage and risk-based capital guidelines adopted
by the FRB for bank holding companies.
At December 31, 1995, Pawling's capital ratios exceeded the FDIC's minimum
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
Risk-Based Capital
Leverage Capital Tier 1 Total
Amount <F1> Ratio Amount <F1> Ratio Amount <F1> Ratio
<S> <C> <C> <C> <C> <C> <C>
(Dollars in
thousands)
Actual $61,463 8.35% $61,463 14.78% $66,698 16.03%
Minimum requirement 29,437 4.00 16,639 4.00 33,278 8.00
Excess $32,026 4.35% $44,824 10.78% $33,420 8.03%
<FN>
<F1> For all capital amounts, actual capital excludes Pawling's net unrealized
gain of $1.2 million on securities available for sale at December 31, 1995.
For total risk-based capital, actual capital includes approximately $5.2
million of the allowance for loan losses.
</TABLE>
During 1994, the Company announced two plans to repurchase in each case up to
5% of Progressive's outstanding common stock, to be used for general
corporate purposes. The first repurchase was completed on November 9, 1994
and consisted of 147,000 shares at a total cost of $3.1 million or $21.21 per
share. The second repurchase plan was completed on September 29, 1995 and
consisted of 140,000 shares at a total cost of $3.3 million or $23.84 per
share. On October 24, 1995, the Company announced a third plan to repurchase
134,000 shares. At December 31, 1995, 63,000 shares had been purchased under
the third plan at a cost of $1.8 million or $28.41 per share. The Company
considers its stock to be an attractive investment and believes these
programs will increase shareholder value.
Federal Deposit Insurance Corporation Improvement Act
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") became law. The provisions of FDICIA strengthen
Federal supervision and examination of insured depository institutions,
require prompt regulatory action when a depository institution experiences
financial difficulties, mandate the establishment of a risk-based deposit
insurance assessment system, and require imposition of numerous additional
safety and soundness operational standards.
FDICIA establishes a system of prompt corrective action applicable to
undercapitalized institutions. The system is based on capital levels that are
used to define five categories of banks -- well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. Under this system, the banking regulators are required to
take certain supervisory actions with respect to undercapitalized
institutions. The severity of these actions depends upon the institution's
degree of under capitalization. Generally, subject to a narrow exception,
FDICIA requires the banking regulators to appoint a receiver or conservator
for an institution that is critically undercapitalized within 90 days after
being considered critically undercapitalized. Well-capitalized institutions
are defined as those with a leverage capital ratio over 5.0%, a Tier 1
risk-based capital ratio over 6.0%, and a total risk-based capital ratio over
10.0%. Pawling met the definition of a well-capitalized institution at
December 31, 1995 with leverage, Tier 1 risk-based and total risk-based
capital ratios of 8.35%, 14.78% and 16.03%, respectively.
FDICIA also places restrictions on investments by and activities of insured
state banks such as Pawling. State banks and their subsidiaries may not
engage in activities that are not permissible for national banks or their
subsidiaries unless the FDIC determines that the activity would pose no
significant risk to the deposit insurance fund and the bank is in compliance
with, and continues to comply with, applicable Federal capital standards.
While national banks are not permitted to invest in equity securities, FDICIA
contained a limited exception permitting the continued investment by certain
state-chartered banks in equity securities listed on national securities
exchanges and in shares of companies registered under the Investment Company
Act of 1940. FDICIA requires, however, that such equity investments in the
future not exceed 100% of a bank's Tier 1 capital; moreover, FDICIA allows
the FDIC to further limit the amount of such equity security investments,
based upon an institution's capital position and overall financial condition.
The limitation imposed by FDICIA is not expected to affect Pawling since, at
December 31, 1995, the amount invested by Pawling in such equity securities
represented only 0.3% of its Tier 1 capital.
As required by FDICIA, each Federal banking agency has adopted uniform
regulations prescribing standards for extensions of credit secured by real
estate or made for the purpose of financing the construction of improvements
on real estate. The FDIC regulation requires each bank to establish and
maintain written internal real estate lending standards that are consistent
with safe and sound banking practices and that are appropriate to the size of
the institution and the nature and scope of its real estate lending
activities. The Bank's policy is consistent with accompanying FDIC
guidelines, which include loan-to-value ratio limits for various types of
real estate loans. Institutions are permitted to make a limited number of
loans that do not conform to these loan-to-value limits, provided the
exceptions are reviewed and justified appropriately. Implementation of these
new real estate lending standards did not have a significant effect on the
Company's lending activities.
FDICIA imposes additional reporting requirements on depository institutions
with total assets of more than $500.0 million, such as Pawling. Among other
things, management is required to prepare a report that contains assessments
of (1) the effectiveness as of year end of the institution's internal control
structure and procedures over financial reporting and (2) the institution's
compliance during the year with certain designated safety and soundness laws
and regulations (those applicable to insider transactions and dividend
limitations). The institution is also required to engage an independent
public accountant to (1) attest to management's assertion concerning internal
controls over financial reporting and (2) perform certain agreed-upon
procedures related to the designated laws and regulations. Institutions
affected by these requirements must also have an audit committee composed
entirely of independent outside directors.
In accordance with FDICIA, insured institutions are subject to a risk-based
system for assessing Federal deposit insurance premiums after January 1,
1993. The risk-based assessment is based on the institution's placement by
the FDIC into one of nine categories using a two-step process that considers
the institution's capital ratios and overall risk profile. The risk-based
premiums currently range from an annual rate of 0.00% to 0.27% of assessable
deposits, which reflects a significant reduction from the previous period's
rates of 0.23% to 0.31%. As a result of this reduction in rates in 1995, it
is estimated that FDIC insurance expense for 1996 will be significantly lower
than the previous year.
Asset/Liability Management
The Company's net interest income is an important component of its operating
results. The stability of net interest income in changing interest rate
environments depends on the Company's ability to manage effectively the
interest rate sensitivity and maturity of its assets and liabilities. The
Company's Asset/Liability Management Committee develops and implements risk
management strategies, and uses various risk measurement tools to evaluate
the impact of changes in interest rates on the Company's asset/liability
structure and net interest income.
The Company's asset/liability management goal is to maintain an acceptable
level of interest rate risk to produce relatively stable net interest income
in changing interest rate environments. Management's plan is directed at
shortening the maturities of its interest-sensitive assets while seeking to
lengthen the maturity of interest-bearing deposits. The plan includes: the
use of additional adjustable rate lending products; the sale of certain newly
originated fixed rate mortgages; lengthening the maturity of retail deposits
by marketing and appropriately pricing longer term products; shortening the
average maturity of the securities portfolio through the redeployment of
maturing investments into adjustable rate securities and debt securities with
maturities of no more than five years; and maintaining an appropriate balance
between securities held to maturity and securities available for sale to
provide management with flexibility to restructure the portfolio when
conditions warrant. As economic conditions change, management will modify the
plan as necessary.
To emphasize the origination of assets with a shorter duration, the Company's
asset/liability policy allows the following types of newly originated
mortgage loans to be held in its portfolio: adjustable rate loans and
bi-weekly loans. At December 31, 1995, $298.6 million or 62.1% of the
mortgage loan portfolio had adjustable rates compared to $223.4 million or
52.5% at December 31, 1994 and $132.8 million or 33.4% at December 31, 1993.
Despite the benefits of adjustable rate loans to an institution's interest
rate risk management, they may pose potential additional credit risks,
because when interest rates rise the underlying payments by the borrower
rise, increasing the potential for default.
One measure of the Company's interest rate sensitivity is its interest
sensitivity gap, or the difference between assets and liabilities scheduled
to mature or reprice within a specified time frame. Shorter gaps are a
measure of exposure to changes in interest rates for shorter intervals and
longer gaps measure sensitivity over a longer interval. At December 31, 1995,
the Company had a one-year gap of 3.74% of total assets; that is, it had an
excess of interest-earning assets over interest-bearing liabilities maturing
or repricing within one year. A positive gap may enhance earnings in periods
of rising interest rates in that, during such periods, the interest income
earned on assets may increase more rapidly than the interest expense paid on
liabilities. Conversely, in a falling interest rate environment, a positive
gap may result in a decrease in interest income earned on assets that is
greater than the decrease in interest expense paid on liabilities. While a
positive gap indicates the amount of interest-earning assets which may
reprice before interest-bearing liabilities, it does not indicate the extent
to which they reprice. Therefore, at times, a positive gap may not produce
higher margins in a rising rate environment.
Due to the limitations inherent in the gap analysis, management augments the
asset/liability management process by using simulation analysis. Simulation
analysis estimates the impact on net interest income of changing the balance
sheet structure and/or interest rate environment. This analysis serves as an
additional tool in meeting the Company's goal of maintaining relatively
stable net interest income in varying rate environments.
The following table summarizes the Company's interest rate sensitive assets
and liabilities at December 31, 1995 according to the time periods in which
they are expected to reprice, and the resulting gap for each time period.
<TABLE>
<CAPTION>
Within One to Five Over
One Year Years Five Years Total
<S> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Mortgage loans:
Fixed rate $100,025 54,457 27,531 182,013
Adjustable rate 203,856 89,879 4,821 298,556
Other loans 20,392 24,339 14,392 59,123
U.S. Treasury and agencies,
corporate and other securities 26,398 31,369 -- 57,767
Mortgage-backed securities 51,040 26,684 7,259 84,983
Federal funds sold 22,970 -- -- 22,970
Total interest-earning assets 424,681 226,728 54,003 705,412
Interest-bearing liabilities:
Savings accounts 22,755 30,340 101,330 154,425
NOW accounts 22,814 -- -- 22,814
Money market accounts 80,347 -- -- 80,347
Time deposits 270,992 63,280 13,198 347,470
Total interest-bearing
liabilities $396,908 93,620 114,528 605,056
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 27,773 133,108 (60,525)
Excess (deficiency) as a
percent of total assets 3.74% 17.91% (8.14%)
Cumulative excess as a
percent of total assets 3.74% 21.65% 13.51%
<FN>
</TABLE>
Prepayments and scheduled payments have been estimated for the loan portfolio
based on the Company's historical experience. Certain fixed rate loans are
callable at any time at the Company's option. The majority of these loans are
immediately callable and therefore are included in the "Within One Year" time
period. Adjustable rate mortgage loans are assumed to reprice at the earlier
of scheduled maturity or the contractual interest rate adjustment date.
Non-accrual loans are included in the table at their original contractual
maturities. Savings account repricings are based on the Company's historical
repricing experience and management's belief that these accounts are not
highly sensitive to changes in interest rates.
Lending Activities
General
The Company offers a variety of loan products to serve both consumer and
commercial borrowers within its primary market area of Dutchess, Sullivan,
Orange, Putnam, Ulster and Westchester counties in New York. In 1993, the
Company began originating one-to-four family mortgage loans in Connecticut,
primarily the counties of Fairfield and Litchfield. Originations of
one-to-four family mortgage loans were expanded in 1995 to include the New
York counties of Nassau, Suffolk and Rockland. Certain indirect automobile
loans are also originated in the Albany, New York area.
The Company's mortgage lending activities include loans secured by
one-to-four family homes, multi-family properties with five or more units,
and commercial properties. Loans are made on existing properties and, to a
lesser extent, on properties under construction. The Company satisfies a
variety of consumer credit needs by providing home equity lines of credit,
home improvement loans, automobile loans, mobile home loans, personal loans,
student loans and unsecured lines of credit. Commercial loan products include
secured and unsecured lines of credit, revolving credit, installment loans
and term loans.
The Company's lending is subject to its written underwriting standards and to
loan origination procedures, prescribed by management. Detailed loan
applications are obtained to assist in determining the borrower's ability to
repay. Additional information is obtained through credit reports, financial
statements and confirmations. The Company accepts loan applications at all of
its branch locations, from its mortgage origination staff, mortgage brokers,
and through its commercial loan centers in Pawling, Poughkeepsie, Harriman
and Ellenville. Residential mortgage, consumer and commercial loans are all
serviced at the administrative headquarters in Fishkill.
One-to-four family residential mortgage loans up to $1,000,000 may be
approved by a combination of certain senior lending officers. Commercial real
estate loans up to $500,000 must be approved by Pawling's Loan Committee
which is chaired by Pawling's President or Chief Lending Officer and which
meets on a weekly basis. Pawling's Board of Directors approves residential
mortgage loans in excess of $1,000,000, commercial mortgage loans in excess
of $500,000, and loans which cause the total loans granted to any one
borrower to exceed $1,500,000. Unsecured loans in excess of $250,000 must
also be approved by Pawling's Board of Directors. In general, the Company has
established a limit for any one loan of $1,000,000 and a limit for total
loans to any one borrower of $3,000,000.
Loan Portfolio Composition
At December 31, 1995, the Company's net loans of $531.7 million represented
71.5% of total assets. Approximately 73.3% of the loan portfolio consisted of
residential mortgage loans (principally one-to-four family residential
loans); 13.7% of commercial mortgage loans; 2.0% of construction and land
loans; and 11.0% of other loans (principally automobile financing and mobile
home loans). Of the total mortgage loan portfolio, $448.4 million, or 93.3%,
represent loans of which the Company is in the first lien position.
<TABLE>
The following are summaries of the composition of the Company's loan
portfolio at December 31:
<CAPTION>
1995 1994 1993 1992 1991
Amount % Amount % Amount % Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential
properties:
One-to-four
family $370,591 68.6 322,477 66.7 290,728 65.0 247,217 63.5 234,533 61.7
Multi-family 25,354 4.7 23,651 4.9 19,196 4.3 13,777 3.5 14,220 3.7
Commercial
properties 73,851 13.7 66,410 13.7 78,049 17.5 80,218 20.6 86,893 22.9
Construction
and land 10,773 2.0 12,859 2.7 9,449 2.1 5,658 1.5 8,979 2.3
Total mortgage
loans 480,569 89.0 425,397 88.0 397,422 88.9 346,870 89.1 344,625 90.6
Other loans:
Automobile
financing 21,936 4.1 25,146 5.2 19,993 4.4 14,756 3.8 8,823 2.3
Mobile home 22,885 4.2 20,425 4.2 17,347 3.9 14,495 3.7 12,456 3.3
Consumer
installment 2,621 0.5 3,067 0.6 3,566 0.8 4,059 1.0 3,799 1.0
Business
installment 6,284 1.2 4,277 0.9 3,981 0.9 4,677 1.2 5,232 1.4
Student 1,716 0.3 1,621 0.4 1,256 0.3 696 0.2 852 0.2
Other 3,681 0.7 3,384 0.7 3,446 0.8 3,720 1.0 4,560 1.2
Total other
loans 59,123 11.0 57,920 12.0 49,589 11.1 42,403 10.9 35,722 9.4
Total loans 539,692 100.0 483,317 100.0 447,011 100.0 389,273 100.0 380,347 100.0
Allowance for
loan losses (8,033) (9,402) (13,920) (15,161) (15,814)
Net deferred
loan origination
costs (fees) 55 (836) (2,019) (2,574) (2,143)
Total loans,
net $531,714 473,079 431,072 371,538 362,390
Mortgage loans:
Conventional:
Fixed rate $181,857 33.7 201,801 41.8 264,308 59.1 283,886 72.9 315,948 83.1
Adjustable rate 298,556 55.3 223,370 46.2 132,756 29.7 62,518 16.1 28,103 7.4
FHA and VA 156 0.0 226 0.0 358 0.1 466 0.1 574 0.1
Commercial
loans 6,284 1.2 4,277 0.9 3,981 0.9 4,677 1.2 5,232 1.4
Consumer
loans 52,839 9.8 53,643 11.1 45,608 10.2 37,726 9.7 30,490 8.0
Total
loans $539,692 100.0 483,317 100.0 447,011 100.0 389,273 100.0 380,347 100.0
</TABLE>
The following table sets forth the contractual maturity or period to
repricing of the loan portfolio at December 31, 1995. The table does not
include estimated prepayments but does include scheduled repayments of
principal. Loans that have adjustable rates are shown as being due in the
period in which the interest rates are next subject to change or the
scheduled maturity, whichever is earlier. Management believes that the actual
period to repricing will be shorter than indicated in the table as a result
of prepayments, although prepayments tend to be highly dependent on interest
rate levels.
<TABLE>
<CAPTION>
One to Three to Five to
Less than Three Five Ten Over Ten
One Year Years Years Years Years Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $194,387 84,959 11,492 24,091 81,016 395,945
Commercial 32,423 4,470 7,606 22,610 6,742 73,851
Construction
and land 8,577 614 917 329 336 10,773
Total mortgage
loans 235,387 90,043 20,015 47,030 88,094 480,569
Other loans 19,908 16,322 7,158 6,914 8,821 59,123
Total loans $255,295 106,365 27,173 53,944 96,915 539,692
</TABLE>
The following table sets forth, by type of interest rate, the dollar volumes
of all loans contractually due in, and with a period to repricing of, more
than one year at December 31, 1995.
<TABLE>
<CAPTION>
Predetermined Floating or
Rates Adjustable Rates Total
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
Residential $132,383 69,175 201,558
Commercial 27,135 14,293 41,428
Construction
and land 1,338 858 2,196
Total mortgage
loans 160,856 84,326 245,182
Other loans 37,769 1,446 39,215
Total loans $198,625 85,772 284,397
<FN>
</TABLE>
Residential Mortgage Lending
The Company, through its retail mortgage origination staff and its wholesale
loan correspondents, actively solicits residential mortgage loan applications
from new and existing customers, builders, and real estate brokers. All loans
are then underwritten and serviced at the Fishkill Administration
Headquarters. Traditionally, it was Pawling's policy to only make loans
secured by properties located within its primary New York service area.
Beginning in 1993, the Company expanded this policy to include additional
markets in New York State and Connecticut.
The Company's commitments to originate residential mortgage loans are
generally made for periods of up to 60 days from the date of approval. Longer
commitment periods can be negotiated for special programs. Borrowers are
offered the option to lock in the rate at the time of application or to lock
in the rate in effect up to five days prior to the closing, depending on the
mortgage program selected. Outstanding residential mortgage loan commitments
amounted to $54.0 million at December 31, 1995.
The Company's loan-to-value policy, for owner occupied one-to-four family
residences, is to lend up to 97% of the sales price or appraised value,
whichever is less. Private mortgage insurance is required on mortgages with
loan-to-value ratios above 80%. Acceptable loan-to-value ratios decrease for
larger loans. The actual loan-to-value ratios and amounts are determined by
secondary market investor guidelines and market conditions. On non-owner
occupied residential properties, the Company generally makes loans of up to
75% of the sales price or appraised value, whichever is less. These loans are
amortized with principal and interest due on a monthly basis. Residential
mortgage loans are underwritten and approved to be held in the Company's own
loan portfolio or to be sold to investors in the secondary market. Typically,
the Company primarily holds in its portfolio adjustable rate mortgages which
have a contractual maturity of up to 30 years.
As a result of selling mortgage loans in the secondary market while retaining
the related servicing rights, the Company had under service $58.0 million in
primarily fixed-rate mortgage loans for investors at December 31, 1995, for
which the Company is paid a servicing fee. The Company is an approved
seller/servicer for the Federal National Mortgage Association ("FNMA") and
the State of New York Mortgage Agency ("SONYMA"), and also participates in
selected private secondary market programs.
Commercial and Construction Mortgage Lending
Commercial mortgage loans originated directly by the Company require a
primary and secondary source of repayment, a net cash flow of at least 1.2
times debt service payments, and a loan-to-value ratio not greater than 70%.
The Company's construction mortgage loans are primarily originated for
one-to-four family owner occupied residences, multi-family houses and, to a
lesser extent, owner occupied commercial properties. Construction loans on
pre-sold homes are classified in the Company's one-to-four family residential
mortgage portfolio. Loan-to-value ratios vary by property type with
residential construction not exceeding 80% and multi-family and commercial
construction not exceeding 70%. In most cases, the Company continues as the
permanent mortgage lender after construction is completed. Construction loans
originated are usually for an initial term of 12 months after which the loan
may be converted into a permanent loan providing for principal and interest
payments. Disbursements are made during the construction period based on the
percentage of work completed as determined by qualified inspectors.
Commercial and construction mortgage loans may reduce interest rate risk in a
rising rate environment, due generally to their shorter terms and variable
interest rates, but may require a greater level of ongoing service and
management due to a broader range of risks as compared to other residential
mortgage lending. Specifically, the payment experience on loans secured by
income producing properties is dependent on the successful management of
these properties and may be subject to a greater extent to adverse conditions
in the real estate market or the general economy. Construction loans involve
additional risks since loan funds are advanced based upon the security of the
property under construction and are otherwise subject to uncertainties in
estimating construction costs and other unpredictable contingencies that may
make it difficult to evaluate accurately the total loan funds required to
complete the project.
Mortgage Lending Activity
The following is a summary of activity in the Company's mortgage loan
portfolio for the years ended December 31. The table includes residential
mortgage activity, as well as commercial and construction lending activity.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans at
beginning of year $425,397 397,422 346,870 344,625 375,911
Loans originated 143,877 165,946 150,995 76,201 39,468
Loan prepayments (40,415) (47,639) (41,868) (29,391) (27,239)
Other payments (33,736) (33,268) (38,380) (27,188) (24,942)
Loans sold (12,259) (49,942) (11,535) (1,503) (2,844)
Charge-offs (2,135) (5,925) (3,194) (4,375) (7,929)
Other activity, net
(including transfers
to other real estate) (160) (1,197) (5,466) (11,499) (7,800)
Mortgage loans at
end of year $480,569 425,397 397,422 346,870 344,625
</TABLE>
Consumer Lending
In recent years, the Company has increased its emphasis on the origination of
consumer loans to provide a greater variety of financial services and because
these loans generally have shorter terms and higher rates of interest. The
Company offers a variety of consumer loans, including personal loans, home
equity lines of credit, fixed rate home equity loans, home improvement loans,
mobile home loans, passbook or certificate account loans, indirect and direct
automobile loans and student loans.
Consumer loans generally involve more risk of collectibility than residential
mortgage loans because of the type and nature of the collateral and, in
certain cases, the absence of collateral. As a result, consumer loan
collections are more dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by job loss, personal
bankruptcy and adverse economic conditions.
Business Lending
The Company offers a variety of commercial loan products to small businesses
including installment and time notes, lines of credit, revolving credit and
term loans. The Company promotes these products within its defined market
area to companies with sales of typically less than $10.0 million per year.
Commercial loans are underwritten based on the cash flow and financial
condition of the borrowing business and applicable collateral. Repayment of
these loans is guaranteed by the owners of the businesses in question and may
be further collateralized by assets of those individual guarantors. The
interest rates on business loans are generally variable rates that change
with market conditions and are priced in relation to the "prime rate" or to
interest rates on various treasury securities.
Loan Interest Rates and Fees
The interest rates charged by the Company on its loans are determined by a
comparison to competitive rates being offered in its market area, the
availability of lendable funds, the Company's cost of funds, product costs,
the demand for loans and portfolio concentration considerations. The
Company's average interest rate earned on its loan portfolio was 8.75% for
the year ended December 31, 1995, as compared to 8.55% for the year ended
December 31, 1994.
In addition to the contractual rates of interest earned on loans, the Company
receives fees related to existing loans which include late charges, loan
modification fees, prepayment penalties and fees associated with the sale of
credit life and disability insurance. The Company also receives origination
and servicing fees as a result of sales of mortgage loans originated and
serviced for others. In addition, Progressive generates settlement fees by
providing loan related services to Pawling's borrowers. Income realized from
these activities varies with the volume and type of loans made.
Loan origination fees and certain direct origination costs are deferred and
subsequently recognized as interest income, using the level yield method,
over the contractual loan term. Amortization ceases when loans are placed on
non-accrual status.
Asset Quality
In 1995, the Company continued to emphasize residential mortgage and consumer
lending. Mortgage loans secured by one-to-four family residential properties
increased in 1995 by $48.1 million, or 14.9%, to $370.6 million at December
31, 1995, representing 68.6% of total loans. The Company plans to further
diversify the loan portfolio's geographic distribution in 1996 by expanding
to the Rockland County market through the acquisition of branches as further
discussed on page 22.
Management continually reviews delinquent loans to adequately assess problem
situations and to quickly and efficiently remedy these problems whenever
possible. The Company's collection department contacts the borrower when a
loan becomes delinquent. When a payment is not made within 15 days of the due
date, a late notice and late charge is generated and assessed. After 60 days
of delinquency, a notice is sent warning the borrower that foreclosure
proceedings may commence. If the delinquency has not been cured within a
reasonable period of time, the Company institutes appropriate action to
foreclose the property. If the Company is the successful bidder at the
foreclosure sale, the property is recorded as "other real estate". When the
property is acquired, it is recorded at the lower of the recorded investment
in the loan or the fair value of the property less the estimated costs to
dispose of the property. All costs incurred in maintaining the property from
the date of acquisition are expensed.
The Loan Review Committee of Pawling meets at least monthly or more
frequently as deemed necessary to review all real estate loans of $250,000
and over which are more than 30 days delinquent; all delinquent construction
loans; other mortgage loans and consumer loans which are 90 days or more
delinquent; all other real estate properties; all loans in the process of
foreclosure; and all classified loans. The results of this analysis are
reported to the Board of Directors on a monthly basis.
Effective January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," and its amendment, SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
These statements prescribe recognition criteria for loan impairment,
generally relating to commercial and construction loans and measurement
methods for impaired loans and all loans whose terms are modified in troubled
debt restructuring subsequent to the adoption of these statements. A loan is
considered to be impaired when, based on current information and events, it
is probable that the lender will be unable to collect all principal and
interest contractually due according to the original contractual terms of the
loan agreement. The Company generally considers impaired loans to be
commercial and construction non-accrual loans and loans restructured since
January 1, 1995.
SFAS No. 114 requires lenders to measure impaired loans based on (i) the
present value of expected future cash flows discounted at the loan's
effective interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent. Generally,
the Bank's impaired loans are considered to be collateral dependent. The
Company considers estimated cost to sell, on a discounted basis, when
determining the fair value of collateral in the measurement of impairment if
the costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loan. An allowance for loan losses is maintained if the
measure of an impaired loan is less than its recorded investment. Adjustments
to the allowance are made through corresponding charges or credits to the
provision for loan losses.
In addition, SFAS No. 114 makes significant changes to existing accounting
principles applicable to in-substance foreclosures. In accordance with SFAS
No. 114, a loan is classified as an in-substance foreclosure only when the
Company has taken physical possession of the collateral regardless of whether
formal foreclosure proceedings have taken place. Prior to the adoption of
SFAS No. 114, in-substance foreclosured properties included those properties
where the borrower had little or no equity in the property considering its
fair value; where repayment was only to come from the operation or sale of
the property; and where the borrower had effectively abandoned control of the
property or it was doubtful that the borrower would be able to rebuild equity
in the property.
The adoption of these statements did not have a significant effect on the
Company's consolidated financial statements. At December 31, 1995, the
Company's recorded investment in impaired commercial mortgage and
construction loans totaled $3.2 million. The total impaired loans consist of
(i) loans of $674,000 for which there was an allowance for loan losses of
$110,000 determined in accordance with SFAS No. 114 and (ii) loans of $2.5
million for which there was no allowance as determined under SFAS No. 114 due
to the adequacy of related collateral and historical charge-offs associated
with these loans. The average recorded investment in impaired loans was $5.1
million for 1995. Interest income on impaired loans is recognized on a cash
basis and was not significant for the year ended December 31, 1995.
In the fourth quarter of 1994, the Company decided to dispose of certain
troubled assets on a bulk sale basis in order to accelerate the reduction in
loan portfolio credit risk, enhance overall asset quality and better position
the Company to achieve its strategic goals. These transactions resulted in
the sale of assets totaling $9.9 million, which consisted of (i) non-
performing mortgage loans of $3.4 million, (ii) performing mortgage loans of
$4.8 million with relatively high credit risk, and (iii) other real estate
owned of $1.7 million. The net sales proceeds totaled $5.8 million, resulting
in losses of $4.1 million which were charged to the allowance for loan losses
($3.9 million) and the allowance for losses on other real estate ($218,000).
The following table sets forth information with respect to non-performing
loans (non-accrual loans and loans greater than 90 days past due and still
accruing) and other real estate, and certain asset quality ratios at or for
the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Mortgage loans:
Residential properties $2,559 1,636 4,020 7,258 10,323
Commercial properties 2,591 3,009 5,457 6,640 10,449
Construction and land 593 2,736 2,028 4,517 12,997
5,743 7,381 11,505 18,415 33,769
Other loans 20 15 68 508 826
Total non-performing
loans <F1> 5,763 7,396 11,573 18,923 34,595
Other real estate, net 405 2,265 7,609 12,723 8,570
Total non-performing
assets $6,168 9,661 19,182 31,646 43,165
Ratio of total
non-performing loans
to total loans 1.07% 1.53% 2.59% 4.86% 9.06%
Ratio of total
non-performing assets
to total assets 0.83 1.39 3.03 5.10 6.90
Ratio of allowance for
loan losses to total
non-performing loans 139.39 127.12 120.28 80.12 45.71
Ratio of allowance for
loan losses to total
loans 1.49 1.95 3.11 3.89 4.16
<FN>
<F1> Includes loans on non-accrual status of $5.6 million, $7.3 million, $11.5
million, $18.8 million and $33.2 million at December 31, 1995, 1994, 1993,
1992 and 1991, respectively. The remaining balance consists of loans greater
than 90 days past due and still accruing. The Company generally stops
accruing interest on loans that are delinquent over 90 days.
</TABLE>
The provision for loan losses is a charge against income which increases the
allowance for loan losses. The adequacy of the allowance for loan losses is
evaluated periodically and is determined based on management's judgment
concerning the amount of risk and potential for loss inherent in the
portfolio. Management's judgment is based upon a number of factors including
a review of non-performing and other classified loans, the value of
collateral for such loans, historical loss experience, changes in the nature
and volume of the loan portfolio, and current and prospective economic
conditions. When doubt exists in the view of management as to the
collectibility of the remaining balance of a loan, the Company will
charge-off that portion deemed to be uncollectible. While management uses the
best information available in establishing the allowance for loan losses,
future adjustments may be necessary based on changes in economic and real
estate market conditions and in the credit risk inherent in the loan portfolio.
Activity in the allowance for loan losses for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning
of year $ 9,402 13,920 15,161 15,814 14,673
Provision charged
to operations 600 1,500 2,000 3,500 9,025
10,002 15,420 17,161 19,314 23,698
Loans charged-off:
Mortgage loans:
Residential (376) (1,259) (812) (964) (1,439)
Commercial (593) (4,391) (1,078) (916) (1,944)
Construction and land (1,166) (275) (1,304) (2,495) (4,546)
Other loans:
Consumer (219) (235) (257) (295) (267)
Commercial (30) (57) (28) (146) (250)
Total charge-offs <F1> (2,384) (6,217) (3,479) (4,816) (8,446)
Recoveries:
Mortgage loans:
Residential 84 12 48 132 273
Commercial 80 28 110 219 --
Construction and land 189 37 10 103 110
Other loans:
Consumer 56 71 49 44 54
Commercial 6 51 21 165 125
Total recoveries 415 199 238 663 562
Net charge-offs (1,969) (6,018) (3,241) (4,153) (7,884)
Balance at end of year $ 8,033 9,402 13,920 15,161 15,814
Ratio of net charge-offs
to average loans
outstanding during the
year 0.38% 1.29% 0.79% 1.08% 2.01%
<FN>
<F1> Includes $3.9 million in 1994 applicable to bulk sales
of non-performing mortgage loans and other mortgage loans with
relatively high credit risk.
</TABLE>
The following table sets forth the allocation of the Company's allowance for
loan losses by category of loans at December 31 for each of the past five
years. The amount allocated to any category should not be interpreted as an
indication of expected future charge-offs in that category. The allowance for
loan losses consists of allocations for estimated losses on individual
non-performing and other classified loans in the Company's portfolio, as well
as a portion based on the Company's past loss experience, overall risk
characteristics, and management's assessment of current economic and real
estate market conditions.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $1,678 3,706 4,354 4,398 4,787
Commercial and other 5,448 4,870 8,662 10,105 10,377
Other loans 907 826 904 658 650
Total allowance for
loan losses $8,033 9,402 13,920 15,161 15,814
</TABLE>
Securities
The Company has authority to invest in a variety of debt and equity
securities rated AA or better. Securities purchased by the Company conform to
the statutory requirements of the New York State Banking Law, the rules and
regulations of the Federal Deposit Insurance Corporation and the Federal
Reserve Board's policy on investments. The Company can invest in securities
such as United States Treasury obligations, securities of various government
agencies, mortgage-backed securities, corporate obligations, municipal
obligations, and a limited amount of preferred and common stock.
Management recommends and implements the Company's investment policy, subject
to approval by the Board of Directors. The implementation of the policy is
monitored and reviewed by the Board of Directors at its regularly scheduled
meetings.
Effective January 1, 1994, the Company changed its method of accounting for
securities, upon adoption of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under SFAS No. 115, securities are classified as held to
maturity securities, trading securities, or available for sale securities.
Securities held to maturity are limited to debt securities for which the
entity has the positive intent and ability to hold to maturity. Trading
securities are debt and equity securities that are bought principally for the
purpose of selling them in the near term. All other debt and equity
securities are classified as available for sale. At December 31, 1995, the
carrying values of securities available for sale totaled $106.9 million and
securities held to maturity totaled $40.1 million.
Held to maturity securities are carried at amortized cost under SFAS No. 115,
which is the same basis of accounting previously used by the Company for its
debt securities held for investment. Available for sale securities are carried
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity (net of taxes).
Prior to the adoption of SFAS No. 115, available for sale securities were
carried at the lower of cost or fair value in the aggregate, with net
unrealized losses (if any) reported in earnings. The Company has no trading
securities.
In November 1995, the Financial Accounting Standards Board released its
Special Report, "A Guide to the Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities". The Special Report
contained a unique provision that allowed entities to, as of a single date
between November 15, 1995 and December 31, 1995, reassess the appropriateness
of the classification of all securities held at that time. On November 30,
1995, as permitted by the Special Report, the Company made a one-time
transfer of certain adjustable rate mortgage-backed securities with an
amortized cost of $44.9 million and a fair value of $46.3 million, to the
available for sale portfolio from held to maturity. The transfer was made
primarily to enhance liquidity and provide greater flexibility in managing
the Company's securities.
Equity securities at December 31, 1995 and 1994 include Federal Home Loan
Bank stock with a cost basis of $4.0 million and $891,000, respectively.
The following table summarizes the amortized cost and fair value of the
Company's securities as of December 31:
<TABLE>
<CAPTION>
1995 1994 1993
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available
for sale:
Debt securities:
United States
Treasury and
agencies $ 47,458 47,863 29,116 28,644 68,581 70,051
Mortgage-backed
securities 43,462 44,835 -- -- 10,641 11,387
Corporate and other 9,704 9,904 12,849 12,851 20,612 21,661
Total debt securities 100,624 102,602 41,965 41,495 99,834 103,099
Equity securities 4,351 4,299 2,333 2,421 2,223 2,681
Total securities
available for sale 104,975 106,901 44,298 43,916 102,057 105,780
Securities held to
maturity/held for
investment<F1>:
Mortgage-backed
securities 40,148 40,386 83,764 81,172 50,374 51,485
Total securities $145,123 147,287 128,062 125,088 152,431 157,265
<FN>
<F1> Classified as held to maturity in 1995 and 1994 (pursuant to SFAS No.
115) and as held for investment in 1993.
</TABLE>
Mortgage-backed securities represent participating interests in pools of
first mortgage loans originated and serviced by the issuers of the
securities. The Company principally purchases adjustable rate securities and
balloon payment securities. Balloon payment securities, which have an
expected average life of approximately two to four years, generally provide
for principal amortization based on a thirty-year amortization schedule, with
a balloon payment of the remaining principal at the end of a five- or
seven-year period.
The following table summarizes the amortized cost and fair value of the
Company's mortgage-backed securities at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
Available for sale: (In thousands)
FNMA certificates $26,335 27,053 -- -- -- --
FHLMC certificates 17,127 17,782 -- -- -- --
GNMA certificates -- -- -- -- 10,641 11,387
Total available
for sale 43,462 44,835 -- -- 10,641 11,387
Held to maturity/held
for investment<F1>:
FNMA certificates 18,232 18,328 39,635 38,174 9,355 9,679
FHLMC certificates 21,916 22,058 44,129 42,998 41,019 41,806
Total held
to maturity 40,148 40,386 83,764 81,172 50,374 51,485
Total mortgage-backed
securities $83,610 85,221 83,764 81,172 61,015 62,872
<FN>
<F1> Classified as held to maturity in 1995 and 1994 (pursuant to SFAS No.
115) and as held for investment in 1993.
</TABLE>
The following table sets forth the amortized cost and weighted average yields
of the Company's debt securities at December 31, 1995, by type of security
and by remaining term to maturity. With respect to mortgage-backed securities,
the table is based on contractual maturities and does not include estimated
prepayments or scheduled repayments of principal. Management believes that
the actual maturities will be substantially shorter than indicated as a
result of prepayments and scheduled repayments, although prepayments tend to
be highly dependent on interest rate levels.
<TABLE>
<CAPTION>
After One After Five
Year But Years But
Within Within Within Over
One Year Five Years Ten Years Ten Years Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
FNMA certificates $ -- 8,231 10,001 26,335 44,567
FHLMC certificates 1,193 19,457 -- 18,393 39,043
Total $ 1,193 27,688 10,001 44,728 83,610
Weighted average yield 7.82% 6.78% 6.84% 5.24% 5.98%
Other debt securities:
U.S. Treasury and agencies $16,461 30,997 -- -- 47,458
Corporate and other 6,953 2,751 -- -- 9,704
Total $23,414 33,748 -- -- 57,162
Weighted average yield 7.45% 6.39% -- -- 6.82%
</TABLE>
Deposits
Deposits are the Company's principal source of funds. The Company attracts
deposits from the general public and small businesses by offering a variety
of deposit accounts at competitive rates. The Company's deposit accounts
include day-of-deposit to day-of-withdrawal passbook savings accounts,
personal and commercial checking accounts, money market accounts, NOW
accounts, savings certificate accounts ("time deposits") and club accounts.
The Company also offers tax deferred retirement savings accounts and savings
certificate accounts of $100,000 or more ("jumbo certificates"). At December
31, 1995, the Company had $50.3 million in jumbo certificates, compared to
$45.3 million at December 31, 1994 and $52.2 million at December 31, 1993.
The Company does not solicit or accept brokered deposits.
At December 31, 1995, the dollar amount of jumbo certificates by remaining
maturity dates and the weighted average interest rates were as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Amount Average Rate
<S> <C> <C>
(Dollars in thousands)
Under 90 days $12,224 5.94%
90 - 179 days 9,663 5.70
180 days - 1 year 11,385 5.62
1 - 2 years 6,853 6.05
2 - 3 years 2,172 5.85
3 - 5 years 1,891 6.06
Over 5 years 6,091 6.13
Total $50,279 5.86%
</TABLE>
Deposit inflows and outflows are generally dependent on market conditions,
interest rates, the general economic environment in the Company's market area
and other competitive factors. The variety of accounts offered by the Company
has enabled it to be more competitive in obtaining funds and to respond with
more flexibility to changes in the interest rate environment. Management's
policy is to review deposit interest rates at least weekly and to adjust
appropriately based on the need for funds, competition and the effect on the
net interest margin. The Company's interest costs on time and savings
deposits may continue to trend upward in a higher interest rate environment.
Fixed rate, fixed term certificate of deposit accounts are generally a
significant source of funds for the Company. At December 31, 1995,
certificate accounts amounted to $347.5 million or 57.4% of total
interest-bearing deposits, compared to $308.7 million or 53.4% at December
31, 1994 and $273.6 million or 52.5% at December 31, 1993. Certificates
offered by the Company have maturities of 32 days or more, impose a minimum
balance requirement of $1,000, and pay interest compounded on a daily basis.
Savings deposits amounted to $154.4 million or 25.5% of the Company's total
interest-bearing deposits at December 31, 1995, compared to $210.8 million or
36.5% at December 31, 1994 and $180.3 million or 34.6% at December 31, 1993.
Savings deposits primarily consist of passbook savings accounts and statement
savings accounts. Passbook and other savings accounts amounted to $104.1
million or 17.2% of the Company's total interest-bearing deposits at December
31, 1995, compared to $129.4 million or 22.4% at December 31, 1994 and $180.3
million or 34.6% at December 31, 1993. Passbook savings offered by the
Company pay interest monthly, compounded on a daily basis, to accounts with a
minimum average daily balance of $100. In 1994, the Company introduced a
tiered statement savings account. The first tier has a minimum balance of $500
and earns interest if the account maintains a minimum average balance of
$500 for the month. The second tier has a minimum balance of $25,000 and earns
interest at a higher rate if the account maintains a minimum average balance
of $25,000 for the month. There is a service charge incurred if the daily
average balance falls below $500. Interest on all statement savings accounts
is compounded daily and credited monthly. Statement savings accounts amounted
to $50.4 million, or 8.3% of the Company's total interest-bearing deposits at
December 31, 1995 and $81.4 million, or 14.1% at December 31, 1994.
The Company offers negotiable order of withdrawal ("NOW") accounts with
unlimited check writing privileges. The minimum initial deposit required is
$1,000. There is a service charge incurred if the daily average balance for
the month falls below $1,000. Interest is compounded daily and credited at
the end of the month, at the current rate determined by the Company, on
accounts that have maintained a minimum average balance of $1,000. NOW
accounts amounted to $22.8 million, or 3.8% of the Company's total
interest-bearing deposits, at December 31, 1995, compared to $29.1 million,
or 5.0%, at December 31, 1994 and $34.5 million, or 6.6%, at December 31,
1993.
The Company also offers a tiered money market account with limited check
writing privileges. The first tier has a minimum balance of $2,500 and earns
interest at the Company's money market rate if the account maintains a
minimum average balance of $2,500 for the month. The second tier has a
minimum balance of $25,000 and earns interest at a higher money market rate
if the account maintains a minimum average balance of $25,000 for the month.
There is a service charge incurred if the daily average balance falls below
$2,500. Interest on all money market accounts is compounded daily and
credited monthly. Money market accounts amounted to $80.3 million, or 13.3%
of the Company's total interest-bearing deposits, at December 31, 1995,
compared to $29.4 million, or 5.1%, at December 31, 1994 and $32.4 million,
or 6.2%, at December 31, 1993.
In 1995, the Company introduced its first relationship banking product,
Premier Banking. Premier Banking requires a minimum average balance of $1,500
in a checking account and offers higher rates on certain money market and
certificate of deposit accounts, as well as reduced rates on a line of credit
or a mortgage. In addition, various other services are free, including
traveler's cheques, official checks and money orders. As of December 31,
1995, Premier Banking accounts totaled $58.1 million.
The following table presents the Company's interest-bearing deposits and
related weighted average interest rates at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 22,814 1.99% $ 29,066 1.99% $ 34,499 2.00%
Savings accounts 154,425 3.54 210,849 3.64 180,265 3.25
Money market accounts 80,347 5.26 29,351 4.91 32,379 2.95
257,586 3.94 269,266 3.60 247,143 3.22
Time deposits by
remaining period to
maturity:
One year or less 270,992 5.63 223,146 4.57 204,094 4.30
One to two years 42,027 5.88 41,762 5.40 36,737 4.40
Two to three years 10,810 5.62 16,347 5.83 9,251 5.20
Three to five years 10,443 5.99 13,938 5.68 18,655 5.71
Over five years 13,198 6.29 13,476 6.02 4,835 5.64
347,470 5.70 308,669 4.86 273,572 4.47
Total savings and
time deposits $605,056 4.95% $577,935 4.27% $520,715 3.79%
</TABLE>
The Company also offers noninterest-bearing demand deposit accounts which
include personal and business checking. Personal checking and business
checking requires a minimum initial deposit of $10 and $100, respectively.
Demand deposits amounted to $52.0 million at December 31, 1995 compared to
$46.4 million at December 31, 1994 and $41.4 million at December 31, 1993.
Management believes the variety of deposit accounts offered by the Company
allows it to compete for funds effectively. However, these sources of funds
generally are interest rate sensitive and therefore can be more costly in a
high interest rate environment. Although the Company will continue to
carefully monitor deposit flows, the ability of the Company to control
deposit flows will continue to be significantly affected by the general
market rate environment and economic conditions.
Other Sources of Funds
Additional sources of funds are interest and principal payments on loans and
securities, and positive cash flows generated from operations. Interest and
principal payments on loans are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general market
interest rates, economic conditions and competitive factors. Pawling is a
member of the Federal Home Loan Bank of New York ("FHLBNY") and, at December
31, 1995, had immediate access to additional liquidity in the form of
borrowings from the FHLBNY of $80.0 million. The Company also has access to
the discount window of the Federal Reserve Bank. There were no borrowings
under these arrangements in 1995 and 1994.
Selected Ratios
The following is a summary of selected ratios for the years ended December
31:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Return on average assets:
Net income divided by average
total assets <F1> 0.95% 1.15% 1.12%
Return on average equity:
Net income divided by average
equity <F1> 10.04 11.65 11.63
Equity-to-assets ratio:
Shareholders' equity divided by
total assets 9.24 9.47 10.07
<FN>
<F1> Based on net income. For 1993, excluding the cumulative effect of
accounting changes, the return on average assets was 1.17% and the return on
average equity was 12.23%.
</TABLE>
Income Taxes
With certain exceptions, the Company is generally taxed in the same manner as
other corporations. Progressive and Pawling file a consolidated Federal
income tax return on a calendar year basis. The filing of a consolidated tax
return has the effect of eliminating intercompany transactions in the
computation of consolidated taxable income.
Under applicable provisions of the Internal Revenue Code of 1986 (the "Code")
as amended, Pawling, as a savings institution, has benefited from provisions
of the Code permitting it to take deductions for reasonable annual additions
to the reserves for bad debts. There are two methods available to Pawling for
computation of the bad debt deduction: the "experience" method and the
"percentage of taxable income" method. Institutions must meet specified asset
definition and other tests in order to benefit from the special bad debt
deduction. The asset test requires that "qualifying assets" (generally
including cash, obligations of the United States or an agency or
instrumentality thereof or of a state or political subdivision thereof,
residential real estate related loans, loans secured by savings accounts, and
property used in the conduct of the institution's business) constitute at
least 60.0% of total assets. Pawling's "qualifying assets" as of December 31,
1995 were 78.7% of total assets.
The experience method generally results in a bad debt deduction equal to
actual bad debt losses (net loan charge-offs) for the current year. The
deduction under the percentage of taxable income method is based on 8% of
taxable income with certain adjustments. Pawling used the experience method
in 1995, 1994 and 1993.
Pending Acquisition of Branches
On December 26, 1995, Pawling entered into a Purchase and Assumption
Agreement (the "Agreement") with GreenPoint Bank ("GreenPoint") regarding the
purchase by the Company of two branch offices in Rockland County, New York.
Pursuant to the Agreement, the Company will purchase deposit liabilities of
approximately $154.0 million. In addition, the Company will also purchase
real estate and certain branch furniture, fixtures and equipment and will
assume certain leasehold liabilities of GreenPoint. There will be no loans
acquired in the transaction except for a small amount of passbook loans.
ITEM 2. PROPERTIES
The Company presently has a network of 15 branch offices located in Dutchess,
Sullivan, Orange, Putnam, Ulster and Westchester counties. Of these
facilities, 8 are owned and 7 are leased. The Brewster branch has a long-term
land lease, while the building is owned by the Company. Facilities are
generally leased for a period of 5 to 20 years with renewal options. The
termination of any short-term lease would not have a material adverse effect
on the operations of the Company.
The following are the locations of Pawling's offices:
Administrative Headquarters<F1>
1301 Route 52
Fishkill, New York
Ellenville Branch<F1>
80 North Main Street
Ellenville, New York
Village Branch<F1>
11 West Main Street
Pawling, New York
Dover Plains Branch<F2>
Route 22
Dover Plains, New York
Brewster Branch<F3>
Route 22
Brewster, New York
LaGrange Branch<F3>
Route 55
LaGrange, New York
Pawling Branch<F1>
Route 22
Pawling, New York
Liberty Branch<F1>
Route 52
Liberty, New York
Millbrook Branch<F2>
Cors. Route 44 & 82
Millbrook, New York
Monticello Branch<F1>
Route 42
Monticello, New York
Roscoe Branch<F1>
13 Broad Street
Roscoe, New York
Poughkeepsie Branch<F2>
4 Jefferson Place
Poughkeepsie, New York
North Salem Branch<F2>
Cors. Route 116 & 124
North Salem, New York
Fishkill Branch<F2>
Route 9
Fishkill, New York
Newburgh Branch<F1>
200 Stony Brook Court
Newburgh, New York
Red Hook Branch<F2>
21 South Broadway
Red Hook, New York
Harriman Loan Center<F2>
Triangle Plaza - Suite 19
Harriman, New York
<F1> Owned
<F2> Leased
<F3> Land leased/building owned
ITEM 3. LEGAL PROCEEDINGS
In August 1992, a shareholder of Progressive commenced an action against
Progressive and its directors in New York Supreme Court seeking to declare
void the March 8, 1991 retirement agreement entered into with E. Hale Mayer,
the retiring Chairman of the Board and Chief Executive Officer of Progressive
and its subsidiary, Pawling Savings Bank, and to recover monies paid
thereunder. On March 25, 1994 the judge, upon a motion for summary judgement,
ruled in favor of Progressive and its directors dismissing the complaint
against them. The plaintiff appealed that decision. In February 1996, his
appeal was denied.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, there were no matters submitted to a vote
of shareholders of Progressive.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following information included in the Annual Report to Shareholders for
the fiscal year ended December 31, 1995 (the "Annual Report"), is
incorporated herein by reference: "SHAREHOLDER INFORMATION - Common Stock",
which appears on page 52 of the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The following information included in the Annual Report is incorporated
herein by reference: "SELECTED CONSOLIDATED FINANCIAL DATA", which appears on
page 5 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information included in the Annual Report is incorporated
herein by reference: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF INCOME", which appears on pages 7-21 of the Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information included in the Annual Report is incorporated
herein by reference: The consolidated balance sheets of Progressive Bank,
Inc. and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995, together
with the related notes and the independent auditors' report thereon, all of
which appears on pages 22-50 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information included in the Proxy Statement is incorporated
herein by reference: "ELECTION OF DIRECTORS", "EXECUTIVE OFFICERS", and
"OTHER INFORMATION ABOUT THE BOARD AND CERTAIN COMMITTEES", which appears on
pages 2, 3, 5, 6 and 7 of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information included on page 8 of the Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in the Proxy Statement is incorporated
herein by reference: "VOTING SECURITIES" and "STOCK OWNERSHIP OF DIRECTORS
AND OTHERS", which appears on pages 1 and 4 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included on pages 7 and 11 of the Proxy Statement is
incorporated herein by reference: "EXECUTIVE OFFICERS - Transactions With
Management".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed as part of
this report:
(1) The consolidated balance sheets of Progressive Bank, Inc. and subsidiary
as of December 31, 1995 and 1994, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995, together with the related notes
and the independent auditors' report thereon, appearing in the Annual Report
on pages 22-50 are incorporated herein by reference.
(2) Schedules omitted as they are not applicable
(3) Exhibits
<TABLE>
<CAPTION>
Designation Description
<S> <C>
3.1 Certificate of Incorporation of Progressive Bank, Inc. (incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form S-4, No.
33-7362, of Progressive Bank, Inc. filed on July 18, 1986 (hereinafter "Form
S-4"), as amended June 13, 1988.
3.2 By-laws of Progressive Bank, Inc. (incorporated by reference to Exhibit
3.2 to the Annual Report on Form 10-K, No. 0-15025, of Progressive Bank, Inc.
filed March 26, 1993 (hereinafter "1992 Form 10-K").
4 Specimen Stock Certificate (incorporated by reference to Exhibit 2(a) to
the Registration Statement on Form 8-A, No. 0-15025, of Progressive Bank,
Inc. filed October 1, 1986).
10.2 Progressive Bank, Inc. Amended and Restated Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K,
No. 0-15025, of Progressive Bank, Inc., filed March 22, 1988 (hereinafter
"1987 Form 10-K").
10.4 Employment Agreement by and between Progressive Bank, Inc. and each of
the members of its Board of Directors (incorporated by reference to Exhibit
10.5 to the 1987 Form 10-K).
10.5 Indemnification Agreement by and between Progressive Bank, Inc. and each
of the members of its Board of Directors (incorporated by reference to
Exhibit 10.5 to the 1987 Form 10-K).
10.7 Retirement Agreement by and between Progressive, Pawling and E. Hale Mayer.
10.8 Progressive Bank, Inc. Non-Qualified Stock Option Plan -Directors
(incorporated by reference to Exhibit 10.8 to the 1992 Form 10-K).
10.9 Progressive Bank, Inc. 1993 Non-Qualified Stock Option Plan - Directors
(incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K,
No. 0-15025, of Progressive Bank, Inc. filed March 23, 1994).
10.10 Employment Agreement by and between Progressive Bank, Inc., Pawling
Savings Bank, and Peter Van Kleeck.
10.11 Progressive Bank, Inc. Noncontributory Retirement and Severance Plan
for Certain Members of the Board of Directors.
13 1995 Annual Report to security holders.
22 Subsidiaries of the registrant.
24 Consent of KPMG Peat Marwick LLP.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PROGRESSIVE BANK, INC.
(Registrant)
By: /s/ Peter Van Kleeck
Peter Van Kleeck
President & Chief
Executive Officer
Date: March 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
President & Chief
/s/ Peter Van Kleeck Executive Officer,
Peter Van Kleeck Progressive Bank, Inc. March 12, 1996
Treasurer (Principal
Financial Officer &
/s/ Robert Gabrielsen Principal Accounting
Robert Gabrielsen Officer) March 12, 1996
/s/ Elizabeth P. Allen
Elizabeth P. Allen Director March 12, 1996
Director & Chairman of
the Board, Progressive
/s/ Thomas C. Aposporos Bank, Inc. March 12, 1996
Thomas C. Aposporos
/s/ George M. Coulter Director March 12, 1996
George M. Coulter
/s/ Donald B. Dedrick Director March 12, 1996
Donald B. Dedrick
/s/ Harold Harris Director March 12, 1996
Harold Harris
/s/ Richard T. Hazzard Director March 12, 1996
Richard T. Hazzard
/s/ Armando Mostachetti Director March 12, 1996
Armando Mostachetti
Director March 12, 1996
Richard Novik
/s/ John J. Page Director March 12, 1996
John J. Page
/s/ Archibald A. Smith Director March 12, 1996
Archibald A. Smith
/s/ Roger W. Smith Director March 12, 1996
Roger W. Smith
/s/ David A. Swinden Director March 12, 1996
David A. Swinden
</TABLE>
Exhibit 13
<TABLE>
Selected Consolidated Financial Data
<CAPTION>
At or for the Year Ended December 31,
1995 1994 1993 1992 1991
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $743,214 696,292 633,917 619,999 625,434
Loans, net 531,714 473,079 431,072 371,538 362,390
Total securities, net 147,049 127,680 152,431 189,734 186,031
Deposits 657,012 624,329 562,093 557,320 569,759
Shareholders' equity 68,658 65,940 63,821 57,340 52,736
Operations Data
Interest and dividend income 55,501 50,247 50,281 52,504 56,192
Interest on deposits 27,692 21,177 21,237 27,207 36,870
Net interest income 27,809 29,070 29,044 25,297 19,322
Provision for loan losses 600 1,500 2,000 3,500 9,025
Net interest income after provision for loan losses 27,209 27,570 27,044 21,797 10,297
Other income<F1> 3,306 156 3,110 3,534 1,308
Other expense 19,279 20,684 21,819 18,285 16,682
Income (loss) before income taxes and cumulative
effect of changes in accounting principles 11,236 7,042 8,335 7,046 (5,077)
Income tax expense (benefit) 4,450 (628) 911 2,473 (858)
Income (loss) before cumulative effect of changes
in accounting principles 6,786 7,670 7,424 4,573 (4,219)
Cumulative effect of changes in
accounting principles<F2> -- -- (363) -- --
Net income (loss) $ 6,786 7,670 7,061 4,573 (4,219)
Per Common Share Data
Income (loss) before cumulative effect of changes
in accounting principles $ 2.50 2.66 2.53 1.57 (1.45)
Cumulative effect of changes in
accounting principles -- -- (0.12) -- --
Net income (loss) 2.50 2.66 2.41 1.57 (1.45)
Dividends declared<F3> 0.65 0.375 0.15 -- --
Book value 26.13 24.00 21.72 19.60 18.07
Performance Ratios
Return on average assets<F4> 0.95% 1.15% 1.12% 0.73% (0.68%)
Return on average equity<F4> 10.04 11.65 11.63 8.34 (7.94)
Net interest rate spread 3.46 3.96 4.23 3.58 2.51
Net interest margin 4.09 4.51 4.77 4.18 3.23
Capital and Other Ratios
Leverage capital ratio 9.08 9.50 10.07 9.25 8.43
Total risk-based capital ratio 17.30 18.41 17.66 16.17 14.56
Ratio of non-performing loans to total loans<F5> 1.07 1.53 2.59 4.86 9.06
Ratio of non-performing assets to total assets 0.83 1.39 3.03 5.10 6.90
Ratio of allowance for loan losses
to non-performing loans<F5> 139.39 127.12 120.28 80.12 45.71
<FN>
<F1> The 1994 amount includes net losses of $2.5 million on sales of loans and available-for-sale securities.
<F2> Represents the net effect of changes in accounting for income taxes and postretirement benefits, effective January 1, 1993.
See notes 1, 8, and 11 to the consolidated financial statements.
<F3> The dividend payout ratio (dividends paid as a percentage of net income) was 26.02% for 1995, 14.15% for 1994 and 6.23%
for 1993.
<F4> Based on net income (loss). For 1993, excluding the cumulative effect of accounting changes, the return on average assets
was 1.17% and the return on average equity was 12.23%.
<F5> Non-performing loans include non-accrual loans and loans greater than 90
days past due and still accruing.
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
The financial condition and operating results of Progressive Bank, Inc.
("Progressive," or, together with its subsidiary, the "Company") are
primarily dependent upon the financial condition and operating results of its
wholly-owned subsidiary, Pawling Savings Bank ("Pawling"). Progressive is a
bank holding company whose principal asset is its investment in Pawling's
common stock. Pawling is a New York state-chartered stock savings bank
providing a full range of community banking services to individual and
corporate customers. Progressive and Pawling are subject to the regulations
of certain Federal and state agencies and undergo periodic examinations by
those regulatory authorities.
The Company is engaged principally in the business of attracting retail
deposits from the general public and the business community and investing
those funds in residential and commercial mortgages, consumer loans and
securities. The operating results of the Company depend primarily on its net
interest income after provision for loan losses. Net interest income is the
difference between interest and dividend income on earning assets, primarily
loans and securities, and interest expense on deposits. Net income of the
Company is also affected by other income, which includes service fees and net
gain (loss) on securities and loans; other expense, which includes salaries
and employee benefits and other operating expenses; and Federal and state
income taxes.
Financial Condition
Total assets of the Company were $743.2 million at December 31, 1995 as
compared to $696.3 million at December 31, 1994, an increase of $46.9 million
or 6.7%. This increase was primarily funded by the $32.7 million or 5.2%
increase in deposits from $624.3 million at December 31, 1994 to $657.0
million at December 31, 1995. Net loans totaled $531.7 million or 71.5% of
total assets at December 31, 1995, and increased by $58.6 million or 12.4%
during the year. Total securities increased by $19.4 million or 15.2% to
$147.0 million at December 31, 1995, representing 19.8% of total assets at
that date.
The $19.4 million increase in securities for the year consisted of a $63.0
million increase in securities available for sale, partially offset by a $43.6
million decrease in securities held to maturity. The increase in securities
available for sale and the decrease in securities held to maturity primarily
reflects the transfer of held to maturity securities, with an amortized cost
of $44.9 million and a fair value of $46.3 million, to available for sale.
This transfer as allowed by the FASB's "Special Report" consisted of
adjustable rate mortgage-backed securities and is further discussed within
note 2 to the consolidated financial statements. In addition, available for
sale securities also increased due to the $19.2 million increase in U.S.
Treasury securities primarily reflecting additional purchases of treasury
notes.
The $58.6 million increase in net loans during 1995 was due primarily to
increased loan originations which exceeded principal payments by $71.1
million, partially offset by loan sales of $12.3 million. The residential
mortgage segment of the loan portfolio increased $49.8 million or 14.4%
during 1995 from $346.1 million to $395.9 million. The commercial mortgage
segment of the loan portfolio increased $7.4 million, or 11.2%, from $66.4
million at December 31, 1994 to $73.9 million at December 31, 1995. Other
loans increased $1.2 million or 2.1% during 1995 from $57.9 million to $59.1
million, primarily due to increases in the business installment and mobile
home loan categories, partially offset by the decline in automobile
financings.
The $11.5 million increase in accrued expenses and other liabilities
primarily reflects a $6.7 million increase due to the purchase of securities
not settled at December 31, 1995 as well as a $3.8 million increase in income
tax liabilities.
The $32.7 million increase in deposits during 1995 was primarily attributable
to the $38.8 million increase in time deposits and the $51.0 million increase
in money market accounts, partially offset by the decline in savings accounts
of $56.4 million. These increases in time deposits and money market accounts
were primarily due to selective marketing and aggressive pricing of these
deposit products.
Shareholders' equity at December 31, 1995 was $68.7 million, an increase of
$2.7 million or 4.1% from December 31, 1994. This increase primarily reflects
net income of $6.8 million and an increase of $1.3 million resulting from the
market value changes of securities available for sale, net of taxes,
partially offset by treasury stock purchases of $3.9 million and cash
dividends of $1.8 million. Shareholders' equity, as a percent of total
assets, was 9.24% at December 31, 1995 compared to 9.47% at December 31, 1994.
Book value per common share increased to $26.13 at December 31, 1995 from
$24.00 a year earlier.
<TABLE>
Analysis of Net Interest Income
The following table shows the Company's average consolidated balances,
interest income and expense, and average rates for the years ended December 31:
<CAPTION>
1995 1994 1993
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans<F1> $453,243 39,123 8.63% $411,354 34,607 8.41% $366,507 33,694 9.19%
Other loans<F1> 58,623 5,683 9.69 54,603 5,239 9.59 45,102 4,861 10.78
Mortgage-backed securities<F2> 81,088 5,124 6.32 78,853 4,268 5.41 60,571 2,926 4.83
U.S. Treasury and
agencies, corporate and
other securities<F2>,<F3> 51,185 3,513 6.86 76,812 5,121 6.67 119,464 8,269 6.92
Federal funds sold and other 35,182 2,058 5.85 22,861 1,012 4.43 17,033 531 3.12
Total interest earning assets 679,321 55,501 8.17% 644,483 50,247 7.80% 608,677 50,281 8.26%
Non-interest-earning assets 32,898 22,656 18,281
Total assets $712,219 $667,139 $626,958
Interest-bearing liabilities:
Savings deposits<F4> $251,471 9,236 3.67% $273,614 8,886 3.25% 242,669 7,635 3.15%
Time deposits 336,781 18,456 5.48 277,510 12,291 4.43% 284,754 13,602 4.78
Total interest-bearing
liabilities 588,252 27,692 4.71% 551,124 21,177 3.84% 527,423 21,237 4.03%
Non-interest-bearing liabilities 56,350 50,170 38,954
Total liabilities 644,602 601,294 566,377
Shareholders' equity 67,617 65,845 60,581
Total liabilities and
shareholders' equity $712,219 $667,139 $626,958
Net earning balance $ 91,069 $ 93,359 $ 81,254
Net interest income 27,809 29,070 29,044
Interest rate spread<F5> 3.46% 3.96% 4.23%
Net yield on interest-earning
assets (margin)<F6> 4.09% 4.51% 4.77%
<FN>
<F1> Interest income on loans does not include interest on non-accrual loans;
however, such loans have been included in the calculation of the average
balances outstanding.
<F2> Average balances calculated using amortized cost.
<F3> Yields on tax-exempt obligations have not been computed on a
tax-equivalent basis, as the effect thereof is not material.
<F4> Includes NOW accounts, passbook and statement savings accounts, and
money market accounts.
<F5> Average rate on total interest-earning assets less average rate on total
interest-bearing liabilities.
<F6> Net interest income divided by total average interest-earning assets.
</TABLE>
<TABLE>
The following table sets forth, for the years indicated, an analysis of
changes in interest and dividend income, interest expense and net interest
income resulting from changes in average balances ("volume") and changes in
average rates ("rate").
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) Increase (Decrease)
Volume Rate Net Volume Rate Net
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Change in interest and dividend income:
Mortgage loans $3,616 900 4,516 3,773 (2,860) 913
Other loans 390 54 444 912 (534) 378
Mortgage-backed securities 141 715 856 990 352 1,342
U.S. Treasury and agencies,
corporate and other securities (1,759) 151 (1,608) (2,844) (304) (3,148)
Federal funds sold and other 721 325 1,046 258 223 481
Total change in interest and dividend income 3,109 2,145 5,254 3,089 (3,123) (34)
Change in interest expense:
Savings deposits (813) 1,163 350 1,005 246 1,251
Time deposits 3,248 2,917 6,165 (321) (990) (1,311)
Total change in interest expense 2,435 4,080 6,515 684 (744) (60)
Change in net interest income $ 674 (1,935) (1,261) 2,405 (2,379) 26
</TABLE>
Results of Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
General
For the year ended December 31, 1995, the Company's net income was $6.8
million or $2.50 per share as compared to $7.7 million or $2.66 per share for
1994. The $884,000 decrease in net income was primarily the result of a $5.1
million increase in income tax expense, a $1.3 million decrease in net
interest income, and a $694,000 increase in other non-interest expense. These
items were partially offset by a $3.2 million increase in other income due
primarily to the improved results from the sale of securities and loans, a
$1.6 million decrease in the net cost of other real estate, a $900,000
decrease in the provision for loan losses, and a $653,000 decrease in FDIC
deposit insurance premium. The decrease in earnings per share resulting from
the reduced net income in 1995 as compared to 1994 was partially offset by
the Company's stock repurchase programs which resulted in the buyback of
146,000 shares in 1995.
Net Interest Income
Net interest income decreased $1.3 million, or 4.3%, to $27.8 million for 1995
compared to $29.1 million for 1994. The components of net interest income
are interest and dividend income, which increased $5.3 million or 10.5%, and
interest expense on deposits, which increased $6.5 million or 30.8%. The
Company's interest rate spread narrowed by 50 basis points from 3.96% in 1994
to 3.46% in 1995, reflecting an 87 basis point increase in the average cost
of interest-bearing liabilities, partially offset by the 37 basis point
increase in the average yield on earning assets. The net interest margin also
narrowed by 42 basis points from 4.51% in 1994 to 4.09% in 1995, primarily
reflecting the narrower interest rate spread.
Interest on loans increased $5.0 million, or 12.4%, primarily reflecting an
increase in the volume of loans outstanding. The yields on loans were
generally higher in 1995, despite the changing mix of the portfolio toward
adjustable rate loans which generally have initial rates lower than
comparable fixed rate loans. At December 31, 1995, adjustable rate loans
represented approximately 56.4% of the loan portfolio compared to 48.5% at
December 31, 1994 and 31.0% at December 31, 1993. These factors were
partially offset by the positive effect on interest income of continued
reductions in non-accrual loans. Loans on non-accrual status totaled $5.6
million at December 31, 1995 compared to $7.3 million at December 31, 1994
and $11.5 million at December 31, 1993.
Interest on mortgage-backed securities increased $856,000, or 20.1%,
primarily due to increases in the average yield earned on the portfolio due
to purchases of securities with higher yields as well as upward adjustments
on adjustable rate mortgage-backed securities.
Interest and dividends on U.S. Treasury and agencies, corporate and other
securities decreased by $1.6 million, or 31.4%, primarily reflecting a
decrease in the average balance outstanding from $76.8 million in 1994 to
$51.2 million in 1995. This decrease was primarily the result of maturities
and, to a lesser degree, the effect of corporate securities being called prior
to maturity. Funds provided by maturities and calls were generally used toward
reinvestment into U.S. Treasury notes and purchases of mortgage-backed
securities. The average rate earned on U.S. Treasury and agencies, corporate
and other securities increased from 6.67% in 1994 to 6.86% in 1995 as a
result of purchases of securities with higher yields as well as the sale of
lower yielding securities during the fourth quarter of 1994.
Interest on Federal funds sold and other earning assets increased $1.0
million due to an increase in the average balance outstanding from $22.9
million in 1994 to $35.2 million in 1995 as well as an increase in the rate
earned to 5.85% in 1995 from 4.43% in 1994.
The $6.5 million increase in interest on interest-bearing liabilities was due
primarily to an increase in the cost of funds as a result of the generally
higher rate environment in 1995 as well as the shift in the mix of deposits
from lower cost savings deposits to higher cost time and money market
deposits. For the year ended December 31, 1995, average savings deposits
decreased $22.1 million and average time deposits increased $59.3 million as
compared to the previous year. Management's policy is to review deposit
interest rates at least weekly and to adjust appropriately based on the need
for funds, competition and the effect on the net interest margin. The
Company's interest costs on time and savings deposits may begin to trend
downward in a declining interest rate environment.
Provision for Loan Losses
The provision for loan losses is a charge against income which increases the
allowance for loan losses. The adequacy of the allowance for loan losses is
evaluated periodically and is determined based on management's judgment
concerning the amount of risk and potential for loss inherent in the
portfolio. Management's judgment is based upon a number of factors including
a review of non-performing and other classified loans, the value of
collateral for such loans, historical loss experience, changes in the nature
and volume of the loan portfolio, and current and prospective economic
conditions. When doubt exists in the view of management as to the
collectibility of the remaining balance of a loan, the Company will
charge-off that portion deemed to be uncollectible.
For the year ended December 31, 1995, the provision for loan losses was
$600,000, a reduction of $900,000 from the provision of $1.5 million in 1994.
The lower provision primarily reflects the continued reduction in
non-performing loans, and continued stable conditions in the local economy
and most sectors of the real estate market. Non-performing loans declined to
$5.8 million, or 1.07% of total loans, at December 31, 1995 from $7.4
million, or 1.53% of total loans, at December 31,1994. In addition, the ratio
of the allowance for loan losses to non-performing loans increased to 139.39%
at December 31, 1995 from 127.12% for the previous year.
In determining the allowance for loan losses, management also considers the
level of slow paying loans, or loans where the borrower is contractually past
due thirty to eighty-nine days or more, but has not yet been placed on
non-accrual status. At December 31, 1995, slow paying loans amounted to $3.4
million as compared to $2.9 million at December 31, 1994.
Loan loss provisions in future periods will continue to depend on trends in
the credit quality of the Company's loan portfolio and the level of loan
charge-offs which, in turn, will depend in part on the economic and real
estate market conditions prevailing within the Company's lending region. If
general economic conditions or real estate values deteriorate, the level of
delinquencies, non-performing loans, and charge-offs may increase and higher
provisions for loan losses may be necessary.
Other Income
Sources of other income include deposit and other service fees, net gain
(loss) on the sale of securities available for sale, net gain (loss) on sales
of loans, and other non-interest income. For the year ended December 31, 1995,
other income increased by $3.2 million to $3.3 million from $156,000 for 1994.
Deposit service fees, the largest component of other income, increased by
$209,000, or 11.1%, to $2.1 million for 1995 from $1.9 million for 1994. This
was primarily the result of an increase in the amount of retail checking
account fees collected in 1995. Other service fees remained relatively
unchanged at $620,000 for 1995 from $644,000 for the previous year.
Net gain on securities was $349,000 for the year ended December 31, 1995
compared to a net loss of $1.0 million for 1994. The net gain on securities
in 1995 primarily reflects the gain of $538,000 recorded on the sale of
equity securities in the fourth quarter of 1995. The net loss in 1994
primarily represents losses of $1.2 million on the sale of U.S. Treasury and
agency securities of $22.9 million and other debt securities of $3.8 million,
partially offset by gains of $168,000 on the sale of mortgage-backed securities
of $8.2 million and equity securities of $781,000. The securities
sold were classified as available for sale securities and primarily represented
debt securities with longer maturities, low yielding equity securities, and
mortgage-backed securities with low remaining principal balances. The 1994
sales were primarily made to restructure portions of the portfolio, to
shorten maturities and improve yield. There were no sales of securities
classified as held to maturity in either 1995 or 1994.
Net gain on the sale of loans was $203,000 for the year ended December 31,
1995 compared to a net loss of $1.5 million for 1994. The net loss in 1994
primarily reflects the sale of seasoned conforming fixed rate mortgages that
management decided to sell in the fourth quarter of 1994 as part of the
Company's on-going effort to manage interest rate risk and increase
liquidity. In addition, sales of mortgage loans in both years reflect the
Company's current practice of selling newly originated fixed rate mortgage
loans.
Other Expense
Other expense consists of general and administrative expenses incurred in
managing the core business of the Company and the net costs associated with
managing and selling other real estate properties. For the year ended
December 31, 1995, other expense decreased by $1.4 million, or 6.8%, to $19.3
million from $20.7 million for 1994, primarily due to decreases in the net
cost of other real estate and FDIC deposit insurance expense, partially
offset by the increase in other non-interest expense.
Salaries and employee benefits, the largest component of other expense,
increased by $117,000, or 1.3%, to $9.1 million for the year ended December
31, 1995 from $8.9 million for 1994. The increase was primarily the
hiring additional staff and normal merit and promotional salary increases,
partially offset by lower medical insurance costs as a result of a change in
insurance provider and a reduction in postretirement benefit expense.
Occupancy and equipment costs increased $82,000, or 3.6%, to $2.4 million for
the year ended December 31, 1995 from $2.3 million for 1994.
The net cost of other real estate decreased $1.6 million, or 82.3%, to
$355,000 for the year ended December 31, 1995 from $2.0 million for the
previous year, primarily reflecting a $925,000 reduction in the provision for
losses as a result of the decline in the other real estate owned portfolio
and management's assessment of the adequacy of the allowance for other real
estate losses. The investment in other real estate properties (before the
allowance for losses) declined substantially from $2.7 million at December 31,
1994 to $608,000 at December 31, 1995. The decline in the net cost of other
real estate also includes a $1.1 million decrease in net holding costs,
reflecting the smaller portfolio of properties in the current year.
FDIC deposit insurance expense decreased $653,000, or 47.5%, to $721,000 for
the year ended December 31, 1995 from $1.4 million for 1994.The significant
decrease in FDIC deposit insurance expense primarily reflects the reduction
of the insurance premium on Pawling's deposits.
Other non-interest expense increased $694,000, or 11.4%, to $6.8 million for
1995 from $6.1 million for 1994. The increase primarily reflects a $1.0
million provision for probable losses which may result from the Nationar
seizure as further discussed on page 17. The provision was partially offset
by reduction of $631,000 in foreclosure and collection expense.
Income Tax Expense
The Company recognized income tax expense of $4.5 million in 1995, or 39.6%
of pre-tax income for the year. For 1994, the Company recognized an income
tax benefit of $628,000, consisting of a benefit of $3.5 million from a
reduction in the valuation allowance for deferred tax assets, less a
provision of $2.9 million or 40.8% of pre-tax income for the year.
For 1995, the Company reduced the valuation allowance on deferred tax assets
by $174,000, primarily due to the utilization of capital loss carryforwards
during the year. The valuation allowance applicable to the Company's Federal
deferred tax asset was reduced by $1.3 million in 1994 commensurate with the
increase during 1994 in Federal income taxes recoverable by loss carryback.
In addition, the valuation allowance applicable to the Company's state
deferred tax asset was reduced by $2.2 million in the fourth quarter of 1994.
This latter reduction was based on management's reevaluation of the Company's
prospects for future earnings considering factors such as (i) the reduction
in non-performing assets and other higher-risk assets primarily attributable
to the bulk sales in the fourth quarter of 1994, (ii) the reduction in
interest rate risk attributable to the sale of primarily lower yielding fixed
rate loans and securities in the fourth quarter of 1994, and (iii) the
sustained level of recent historical pre-tax earnings, including the
achievement of three consecutive years of consistent profitability. The state
deferred tax asset has been recognized on the basis of expected earnings in
future years, as the New York State tax law does not allow net operating loss
carrybacks or carryforwards.
The Company's net deferred tax assets were $5.2 million at December 31, 1995,
net of a remaining valuation allowance of $88,000. At December 31, 1994, the
Company's net deferred tax assets were $6.3 million, net of a remaining
valuation allowance of $262,000. Based on recent historical and anticipated
future pre-tax earnings, management believes it is more likely than not that
the Company will realize its net deferred tax assets. Management anticipates
that the Company's near-term results of operations will not be significantly
affected by further adjustments to the valuation allowance for deferred tax
assets.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
General
For the year ended December 31, 1994, the Company's net income was $7.7
million or $2.66 per share as compared to $7.1 million or $2.41 per share for
1993. The $609,000 increase in net income was primarily the result of a $1.8
million decrease in net cost of other real estate and a $1.5 million decrease
in income tax expense, partially offset by a $3.0 million decrease in other
income. Net income for 1993 reflects a net charge of $363,000 for the
cumulative effect of two changes in accounting principles.
Net Interest Income
The rising interest rate environment and the Company's continued asset growth
in 1994 combined to produce a stable level of net interest income for the
year, although net interest margins were narrower in 1994 compared to 1993.
Net interest income increased $26,000, or 0.1%, to $29.1 million for 1994
compared to $29.0 million for 1993. The components of net interest income are
interest and dividend income, which decreased $34,000 or 0.1%, and interest
expense on deposits, which decreased $60,000 or 0.3%. The Company's interest
rate spread narrowed by 27 basis points from 4.23% in 1993 to 3.96% in 1994,
reflecting a 46 basis point decline in the average yield on earning assets,
partially offset by the 19 basis point decline in the average cost of
deposits. The net interest margin also narrowed by 26 basis points from 4.77%
in 1993 to 4.51% in 1994, primarily reflecting the narrower interest rate
spread.
The $34,000 decrease in interest and dividend income was primarily the result
of a $3.1 million decrease in interest and dividends earned on U.S. Treasury
and agencies, corporate and other securities, partially offset by a $1.3
million increase in interest on mortgage-backed securities and a $1.3 million
increase in interest on loans. The decline in interest on U.S. Treasury and
agencies, corporate and other securities primarily reflects a $42.7 million
decrease in the average balance due to sales, maturities and, to a lesser
degree, the effect of corporate securities being called prior to maturity.
Funds provided by sales, maturities and calls were generally used for loan
originations and purchases of mortgage-backed securities. Interest on
mortgage-backed securities increased primarily due to an increase in the
average balance outstanding as the Company continued to emphasize the
purchase of certain mortgage-backed securities in order to reduce interest
rate risk, as well as increases in the yield earned on the portfolio. The
increase in interest on loans was attributable to increases in the average
balance outstanding, partially offset by a decrease in the weighted average
rate earned on the portfolio. The lower yield primarily reflects mortgage
originations at relatively low interest rates during 1993 and early 1994,
partially offset by new originations at higher rates during the remainder of
1994. The lower yield also reflects the changing mix of the portfolio toward
adjustable rate loans which generally provide higher returns in a rising rate
environment but have initial rates lower than comparable fixed rate loans.
The $60,000 decrease in interest on deposits was due primarily to a decrease
in the average rate paid on deposits as well as the continuing shift in the
mix of deposits from higher-cost time deposits to lower-cost savings
deposits.
Provision for Loan Losses
For the year ended December 31, 1994, the provision for loan losses was $1.5
million as compared to $2.0 million for 1993. The $500,000 reduction
primarily reflects the continued reduction in the Company's non-performing
loans, and stabilization in the local economy and certain sectors of the real
estate market. Non-performing loans declined to $7.4 million, or 1.53% of
total loans, at December 31, 1994 from $11.6 million, or 2.59% of total
loans, at December 31, 1993.
In determining the provision for loan losses, management also considers the
level of slow paying loans, or loans where the borrower is contractually past
due thirty days or more, but has not yet been placed on non-accrual status.
At December 31, 1994, slow paying loans amounted to $2.9 million as compared
to $6.3 million at December 31, 1993.
Other Income
For the year ended December 31, 1994, other income decreased by $3.0 million
to $156,000 from $3.1 million in 1993. Deposit service fees, the largest
component of other income, decreased $103,000, or 5.2%, to $1.9 million for
1994 from $2.0 million for 1993. This was primarily the result of a reduction
in the volume of retail checking account fees.
Net loss on securities was $1.0 million for the year ended December 31, 1994
compared to a net gain of $184,000 for 1993. The net loss in 1994 primarily
represents the sale of certain available for sale securities that primarily
represented debt securities with longer maturities, low yielding equity
securities, and mortgage-backed securities with lower remaining principal
balances. The sales were primarily made to restructure portions of the
portfolio and improve yield. Net loss on the sale of loans was $1.5 million
for the year ended December 31, 1994 compared to a net gain of $169,000 for
1993. The net loss in 1994 primarily reflects the sale of seasoned conforming
fixed rate mortgages that management decided to sell in the fourth quarter of
1994 as part of the Company's on-going effort to manage interest rate risk
and increase liquidity.
Other Expense
For the year ended December 31, 1994, other expense decreased by $1.1
million, or 5.2%, to $20.7 million from $21.8 million for 1993, primarily due
to a decrease in the net cost of other real estate.
Salaries and employee benefits, the largest component of other expense,
increased $235,000, or 2.7%, to $8.9 million for 1994 from $8.7 million for
1993. The increase was primarily the result of hiring additional staff, normal
merit and promotional salary increases, and higher fringe benefit expense.
Occupancy and equipment costs decreased $121,000, or 5.1%, to $2.3 million
for the year ended December 31, 1994 from $2.4 million for 1993.
The net cost of other real estate decreased $1.8 million, or 46.8%, to $2.0
million for 1994 from $3.8 million for the previous year, primarily
reflecting a $1.3 million reduction in the provision for losses. The lower
provision reflects the decline in the real estate portfolio and management's
assessment of the adequacy of the allowance for other real estate losses.
FDIC deposit insurance expense decreased $146,000, or 9.6%, to $1.4 million
for 1994 from $1.5 million for 1993. This reflects lower assessment rates in
1994, partially offset by the effect of an increase in assessable deposits.
Other non-interest expense increased $656,000, or 12.0%, to $6.1 million for
1994 from $5.4 million for 1993. This reflects a $279,000 increase in
advertising expense due to additional marketing efforts and higher
miscellaneous operating expenses.
Income Tax Expense
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, effective January 1, 1993. Among other things, SFAS No. 109 requires
recognition of a valuation allowance for a deferred tax asset if, based on an
analysis of available evidence, management determines that it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. The valuation allowance is subject to ongoing adjustment based on
changes in circumstances that affect management's judgment about the
realizability of the deferred tax asset. Adjustments to increase or decrease
the valuation allowance are charged or credited, respectively, to income tax
expense. A valuation allowance of $6.3 million was established at January 1,
1993, upon adoption of SFAS No. 109.
The Company recognized an income tax benefit of $628,000 in 1994, consisting
of a benefit of $3.5 million from a reduction in the valuation allowance for
deferred tax assets less a tax provision of $2.9 million or 40.8% of pre-tax
income for the year. For 1993, tax expense of $911,000 consisted of a
provision of $3.5 million or 41.6% of pre-tax income for the year less a
benefit of $2.6 million from a reduction in the valuation allowance for
deferred tax assets.
The valuation allowance applicable to the Company's Federal deferred tax
asset was reduced by $1.3 million in 1994 and $2.6 million in 1993
commensurate with the increases during those years in Federal income taxes
recoverable by loss carryback. In addition, the valuation allowance
applicable to the Company's state deferred tax asset was reduced by $2.2
million in the fourth quarter of 1994. This latter reduction was based upon
management's reevaluation of the Company's prospects for future earnings
considering factors such as (i) the reduction in non-performing assets and
other higher-risk assets primarily attributable to the bulk sales in the
fourth quarter of 1994, (ii) the reduction in interest rate risk attributable
to the sale of primarily lower yielding fixed rate loans and securities in
the fourth quarter of 1994, and (iii) the sustained level of recent
historical pre-tax earnings, including the achievement of three consecutive
years of consistent profitability. The state deferred tax asset has been
recognized on the basis of expected earnings in the future years, as the New
York State law does not allow net operating loss carrybacks or carryforwards.
Asset Quality
Non-performing assets are principally comprised of non-performing loans
(non-accrual loans and loans greater than 90 days past due and still
accruing) and other real estate properties. The Company's policy is to place
a loan on non-accrual status with respect to interest income recognition when
collection of the interest is uncertain. Generally, this occurs when
principal or interest payments are 90 days or more past due, although
interest accruals may continue in limited situations when loans are
adequately secured and in the process of collection. The classification of a
loan as non-accruing does not necessarily indicate that the principal and
interest ultimately will be uncollectible. The Company's historical
experience indicates that a portion of assets so classified will eventually
be recovered. All non-performing loans are in various stages of workout,
settlement or foreclosure. Other real estate includes properties acquired
through foreclosure or deed in lieu of foreclosure and properties which have
been effectively abandoned by the borrower.
At December 31, 1995, non-performing assets totaled $6.2 million, or 0.83% of
total assets, compared to $9.7 million, or 1.39% of total assets, at December
31, 1994. The $3.5 million or 36.2% reduction in non-performing assets in 1995
consisted of a $1.6 million decrease in non-performing loans and a $1.9
million decrease in other real estate properties. These decreases reflect the
Company's continuing efforts to workout loans and to sell other real estate
on an asset-by-asset basis.
<TABLE>
The following table sets forth information with respect to non-performing loans (non-accrual loans and loans greater
than 90 days past due and still accruing) and other real estate, activity in the allowance for loan losses, and
certain asset quality ratios at December 31:
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-performing loans:
Mortgage loans:
Residential properties $2,559 1,636 4,020 7,258 10,323
Commercial properties 2,591 3,009 5,457 6,640 10,449
Construction and land 593 2,736 2,028 4,517 12,997
5,743 7,381 11,505 18,415 33,769
Other loans 20 15 68 508 826
Total non-performing loans<F1> 5,763 7,396 11,573 18,923 34,595
Other real estate, net 405 2,265 7,609 12,723 8,570
Total non-performing assets $6,168 9,661 19,182 31,646 43,165
Allowance for loan losses:
Beginning of year $9,402 13,920 15,161 15,814 14,673
Provision for losses 600 1,500 2,000 3,500 9,025
Charge-offs<F2> (2,384) (6,217) (3,479) (4,816) (8,446)
Recoveries 415 199 238 663 562
End of year $8,033 9,402 13,920 15,161 15,814
Ratios:
Allowance for loan losses to:
Non-performing loans 139.39% 127.12% 120.28% 80.12% 45.71%
Total loans 1.49 1.95 3.11 3.89 4.16
Non-performing loans to total loans 1.07 1.53 2.59 4.86 9.06
Non-performing assets to total assets 0.83 1.39 3.03 5.10 6.90
Net charge-offs to average loans 0.38 1.29 0.79 1.08 2.01
<FN>
<F1> Includes loans on non-accrual status of $5.6 million, $7.3 million, $11.5 million, $18.8 million and $33.2 million at
December 31, 1995, 1994, 1993, 1992 and 1991, respectively. The remaining balance consists of loans greater than 90 days past
due and still accruing. The Company generally stops accruing interest on loans that are delinquent over 90 days.
<F2> Includes $3.9 million in 1994 applicable to bulk sales of non-performing
mortgage loans and other mortgage loans with relatively high credit risk.
</TABLE>
In the fourth quarter of 1994, the Company decided to dispose of certain
troubled assets on a bulk sale basis in order to accelerate the reduction in
loan portfolio credit risk, enhance overall asset quality and better position
the Company to achieve its strategic goals. These transactions resulted in
the sale of assets totaling $9.9 million, which consisted of (i)
non-performing mortgage loans of $3.4 million, (ii) performing mortgage loans
of $4.8 million with relatively high credit risk, and (iii) other real estate
of $1.7 million. The net sales proceeds totaled $5.8 million, resulting in
losses of $4.1 million which were charged to the allowance for loan losses
($3.9 million) and the allowance for losses on other real estate ($218,000).
Stability in the local economy and certain sectors of the real estate market
in 1995 and 1994 contributed to positive trends in the Company's asset
quality. The allowance for loan losses as a percentage of non-performing
loans rose to 139.39% in 1995, compared to 127.12% in 1994 and 120.28% in
1993. As a percentage of total loans, the allowance for loan losses was 1.49%
in 1995, compared to 1.95% in 1994 and 3.11% in 1993. These ratios reflect
the ongoing improvement in asset quality, both in terms of the lower level of
non-performing loans and the shift in portfolio mix toward lower risk
residential mortgage and consumer loans.
The loan portfolio also includes certain restructured loans that are current
in accordance with modified payment terms and, accordingly, are not included
in the preceding table. These restructured loans are loans for which
concessions, including reduction of interest rates to below-market levels or
deferral of payments, have been granted due to the borrowers' financial
condition. Restructured loans totaled $1.5 million, $1.8 million and $4.1
million at December 31, 1995, 1994 and 1993, respectively.
Additionally, at December 31, 1995, management has identified approximately
$2.4 million in potential problem loans which represent loans having more
than normal credit risk. Although these loans are currently performing at
December 31, 1995, management believes that if economic conditions
deteriorate in the Company's lending area, some of these loans could become
non-performing in the future.
Effective January 1, 1995, the Company adopted the provisions of SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and its amendment, SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures." These statements prescribe recognition criteria for loan
impairment, generally relating to commercial and construction loans and
measurement methods for impaired loans and all loans whose terms are modified
in trouble debt restructuring subsequent to the adoption of these statements.
A loan is considered to be impaired when, based on current information and
events, it is probable that the lender will be unable to collect all
principal and interest contractually due according to the original
contractual terms of the loan agreement.
SFAS No. 114 requires lenders to measure impaired loans based on (i) the
present value of expected future cash flows discounted at the loan's
effective interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent. Generally,
the Bank's impaired loans are considered to be collateral dependent. The
Company considers estimated cost to sell, on a discounted basis, when
determining the fair value of collateral in the measurement of impairment if
the costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loan. An allowance for loan losses is maintained if the
measure of an impaired loan is less than its recorded investment. Adjustments
to the allowance are made through corresponding charges or credits to the
provision for loan losses.
In addition, SFAS No. 114 makes significant changes to existing accounting
principles applicable to in-substance foreclosures. In accordance with SFAS
No. 114, a loan is classified as an in-substance foreclosure only when the
Company has taken physical possession of the collateral regardless of whether
formal foreclosure proceedings have taken place. Prior to the adoption of
SFAS No. 114, in-substance foreclosed properties included those properties
where the borrower had little or no equity in the property considering its
fair value; where repayment was only to come from the operation or sale of
the property; and where the borrower had effectively abandoned control of the
property or it was doubtful that the borrower would be able to rebuild equity
in the property.
The adoption of these statements did not have a significant effect on the
Company's consolidated financial statements. At December 31, 1995, the
Company's recorded investment in impaired commercial mortgage and
construction loans totaled $3.2 million. The total impaired loans consist of
(i) loans of $674,000 for which there was an allowance for loan losses of
$110,000 determined in accordance with SFAS No. 114 and (ii) loans of $2.5
million for which there was no allowance determined under SFAS No. 114 due to
the adequacy of related collateral and historical charge-offs associated with
these loans. The average recorded investment in impaired loans was $5.1
million for 1995. Interest income on impaired loans is recognized on a cash
basis and was not significant for the year ended December 31, 1995.
Liquidity
Liquidity is defined as the ability to generate sufficient cash flow to meet
all present and future funding commitments. Management monitors the Company's
liquidity position on a daily basis and evaluates its ability to meet
depositor withdrawals and to make new loans and investments as opportunities
arise. The Asset/Liability Committee, consisting of members of senior
management, is responsible for setting general guidelines to ensure
maintenance of prudent levels of liquidity. The mix of liquid assets and
various deposit products, at any given time, reflects management's view of
the most efficient use of these sources of funds.
The Company's cash flows are classified according to their source-operating
activities, investing activities, and financing activities. For 1995, net
cash of $7.9 million was provided by operating activities. Net cash of $69.1
million was used in investing activities, which primarily consisted of
disbursements for loan originations and security purchases, partially offset
by loan principal collections, proceeds from sales of loans and proceeds from
payments, maturities and calls of securities. Net cash provided by financing
activities was $27.3 million, which consisted primarily of a net increase in
deposits. Further details concerning the Company's cash flows are provided in
the "Consolidated Statements of Cash Flows".
One measure used by the Company to assess its liquidity position is the
primary liquidity ratio (defined as the ratio of cash and due from banks,
Federal funds sold and securities maturing within one year to total assets).
At December 31, 1995, the Company had a primary liquidity ratio of 8.21% as
compared to 12.27% at December 31, 1994. The decline was primarily due to the
$34.7 million decrease in Federal funds sold, partially offset by a $9.4
million increase in securities maturing within one year.
An important source of funds is Pawling's core deposit base. Management
believes that a substantial portion of Pawling's deposits of $657.0 million
at December 31, 1995 are core deposits. Core deposits are generally
considered to be a highly stable source of liquidity due to the long-term
relationships with deposit customers. Pawling recognizes the importance of
maintaining and enhancing its reputation in the consumer market to enable
effective gathering and retention of core deposits. The Company does not
currently utilize brokered deposits as a source of funds.
In addition to the funding sources discussed above, the Company has the
ability to borrow funds from several sources. Pawling is a member of the
Federal Home Loan Bank of New York ("FHLBNY") and, at December 31, 1995, had
immediate access to additional liquidity in the form of borrowings from the
FHLBNY of $80.0 million. The Company also has access to the discount window
of the Federal Reserve Bank.
At December 31, 1995, Pawling had outstanding loan commitments and unadvanced
customer lines of credit totaling $72.8 million. These commitments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully drawn
upon. The sources of liquidity discussed above are deemed by management to be
sufficient to fund outstanding loan commitments and to meet the Company's
other obligations.
On February 6, 1995, the Superintendent of Banks for the State of New York
(the "Superintendent") seized Nationar, a check-clearing and trust company,
freezing all of Nationar's assets. The Superintendent is now in the process
of winding up the affairs of Nationar and liquidating its assets. The Company
used Nationar for Federal funds transactions, as well as certain custodial
and investment services. At the time of seizure, the Company had
approximately $3.6 million in Federal funds sold and other deposits invested
with Nationar.
Substantial uncertainties exist regarding amounts ultimately distributable to
creditors of Nationar. These uncertainties include (i) the aggregate dollar
amounts of claims asserted by creditors; (ii) the legal process and results
of evaluation of claims, evaluation of asserted preferences, and resolution
of contested claims; (iii) the amounts that will be realized on the assets of
Nationar in its liquidation; and (iv) the legal and administrative expenses
that will be incurred during the course of liquidation. The Superintendent
has given preliminary indications that the assets may be inadequate to
satisfy all claims of creditors in full.
Based on the foregoing and a deficit in net shareholders' equity that was
noted in a report issued by the Superintendent in April 1995, management, as
advised by legal counsel, believes that there is reasonable likelihood that
the Company will not recover all of its investments in Federal funds and
other deposits at Nationar. As of December 31, 1995, the Company has
reclassified the Federal funds sold to other assets and has provided a
reserve of $1.0 million for probable loss of a portion of these Nationar
assets. The Company will periodically review this reserve as developments
occur, and future reserves may be required.
The foregoing events will not have any material effect on the Company's
ability to meet their liquidity needs. Management is taking all steps
necessary to recover the amounts owed to the Company by Nationar.
Capital
Progressive, as a bank holding company, is subject to regulation and
supervision by the Federal Reserve Board ("FRB"). The FRB applies various
guidelines in assessing the adequacy of capital in examining and supervising
a bank holding company and in analyzing applications to the FRB. Under the
current leverage capital guidelines, most banking companies must maintain
Tier 1 capital of between 4.0% and 5.0% of total assets. Tier 1 capital is
comprised of common shareholders' equity, noncumulative perpetual preferred
stock and minority interests in consolidated subsidiaries, less substantially
all intangible assets, identified losses and investments in certain
subsidiaries.
The FRB also has adopted a set of risk-based capital adequacy guidelines,
which require the Company to maintain capital according to the risk profile
of its asset portfolio and certain off-balance sheet items. The guidelines
set forth a system for calculating risk-weighted assets by assigning assets
(and credit-equivalent amounts for certain off-balance sheet items) to one of
four broad risk-weight categories. The amount of risk-weighted assets is
determined by applying a specific percentage (0%, 20%, 50% or 100%, depending
on the level of credit risk) to the amounts assigned to each category. As a
percentage of risk-weighted assets, a minimum ratio of 4.0% must be
maintained for Tier 1 capital and 8.0% for total capital.
<TABLE>
At December 31, 1995, Progressive's capital ratios exceeded the
FRB's minimum regulatory capital guidelines as follows:
<CAPTION>
Risk-Based Capital
Leverage Capital Tier 1 Total
Amount<F1> Ratio Amount<F1> Ratio Amount<F1> Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual $67,501 9.08% $67,501 16.05% $72,794 17.30%
Minimum requirement 29,731 4.00 16,828 4.00 33,656 8.00
Excess $37,770 5.08% $50,673 12.05% $39,138 9.30%
<FN>
<F1> For all capital amounts, actual capital excludes the Company's consolidated net unrealized gain of $1.1 million (exclusive
of a $31,000 unrealized loss on equity securities) on securities available
for sale at December 31, 1995. For total risk-based capital, actual capital
includes approximately $5.3 million of the allowance for loan losses.
</TABLE>
Pawling, as a New York state-chartered stock savings bank, is subject to
regulation and supervision by the New York State Banking Department as its
chartering agency and by the FDIC as its deposit insurer. FDIC regulations
require insured banks, such as Pawling, to maintain minimum levels of
capital. The FDIC regulations follow, in substance, the leverage and
risk-based capital guidelines adopted by the FRB for bank holding companies.
<TABLE>
At December 31, 1995, Pawling's capital ratios exceeded the FDIC's
minimum regulatory capital requirements as follows:
<CAPTION>
Risk-Based Capital
Leverage Capital Tier 1 Total
Amount<F1> Ratio Amount<F1> Ratio Amount<F1> Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual $61,463 8.35% $61,463 14.78% $66,698 16.03%
Minimum requirement 29,437 4.00 16,639 4.00 33,278 8.00
Excess $32,026 4.35% $44,824 10.78% $33,420 8.03%
<FN>
<F1> For all capital amounts, actual capital excludes Pawling's net unrealized gain of $1.2 million on securities available for
sale at December 31, 1995. For total risk-based capital, actual capital includes approximately $5.2 million of the allowance for
loan losses.
</TABLE>
During 1994, the Company announced two plans to repurchase in each case up to
5% of Progressive's outstanding common stock, to be used for general
corporate purposes. The first repurchase was completed on November 9, 1994
and consisted of 147,000 shares at a total cost of $3.1 million or $21.21 per
share. The second repurchase plan was completed on September 29, 1995 and
consisted of 140,000 shares at a total cost of $3.3 million or $23.84 per
share. On October 24, 1995, the Company announced a third plan to repurchase
134,000 shares. At December 31, 1995, 63,000 shares had been purchased under
the third plan at a cost of $1.8 million or $28.41 per share. The Company
considers its stock to be an attractive investment and believes these
programs will increase shareholder value.
Asset/Liability Management
The Company's asset/liability management goal is to maintain an acceptable
level of interest rate risk to produce relatively stable net interest income
in changing interest rate environments. Management continually monitors the
Company's interest rate risk. Risk management strategies are developed and
implemented by the Asset/Liability Committee which uses various risk
measurement tools to evaluate the impact of changes in interest rates on the
Company's asset/liability structure and net interest income.
Earnings are susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. These interest rate repricing "gaps" provide an
indication of the extent that net interest income may be affected by future
changes in interest rates. A one-year period is a common measurement interval
of interest sensitivity known as the one-year gap. The Company's one-year gap
as a percentage of total assets was 3.74% at December 31, 1995. A positive
gap exists when the amount of interest-earning assets exceeds the amount of
interest-bearing liabilities expected to mature or reprice in a given period.
A positive gap may enhance earnings in periods of rising interest rates in
that, during such periods, the interest income earned on assets may increase
more rapidly than the interest expense paid on liabilities. Conversely, in a
falling interest rate environment, a positive gap may result in a decrease in
interest income earned on assets that is greater than the decrease in
interest expense paid on liabilities. While a positive gap indicates the
amount of interest-earning assets which may reprice before interest-bearing
liabilities, it does not indicate the extent to which they will reprice.
Therefore, at times, a positive gap may not produce higher margins in a
rising rate environment.
Due to limitations inherent in the gap analysis, management augments the
asset/liability management process by using simulation analysis. Simulation
analysis estimates the impact on net interest income of changing the balance
sheet structure and/or interest rate environment. This analysis serves as an
additional tool in meeting the Company's goal of maintaining relatively
stable net interest income in varying rate environments.
The Company manages its interest rate risk primarily by structuring its
balance sheet to emphasize holding adjustable rate loans and mortgage-backed
securities in its portfolio and maintaining a large base of core deposits.
The Company has not used synthetic hedging instruments such as interest rate
futures, swaps or options.
<TABLE>
The following table summarizes the Company's interest rate
sensitive assets and liabilities at December 31, 1995 according to the time
periods in which they are expected to reprice, and the resulting gap for each
time period.
<CAPTION>
Within One One to Five Over Five
Year Years Years Total
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans:
Fixed rate $100,025 54,457 27,531 182,013
Adjustable rate 203,856 89,879 4,821 298,556
Other loans 20,392 24,339 14,392 59,123
U.S. Treasury and agencies,
corporate and other securities 26,398 31,369 -- 57,767
Mortgage-backed securities 51,040 26,684 7,259 84,983
Federal funds sold 22,970 -- -- 22,970
Total interest-earning assets 424,681 226,728 54,003 705,412
Interest-bearing liabilities:
Savings accounts 22,755 30,340 101,330 154,425
NOW accounts 22,814 -- -- 22,814
Money market accounts 80,347 -- -- 80,347
Time deposits 270,992 63,280 13,198 347,470
Total interest-bearing liabilities 396,908 93,620 114,528 605,056
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities $ 27,773 133,108 (60,525)
Excess (deficiency) as a percent of total assets 3.74% 17.91% (8.14%)
Cumulative excess as a percent of total assets 3.74% 21.65% 13.51%
</TABLE>
Prepayments and scheduled payments have been estimated for the loan
portfolio based on the Company's historical experience.
Certain fixed rate loans are callable at any time at the Company's option.
The majority of these loans are immediately callable and therefore are
included in the "Within One Year" time period. Adjustable rate mortgage loans
are assumed to reprice at the earlier of scheduled maturity or the
contractual interest rate adjustment date. Non-accrual loans are included in
the table at their original maturities. Savings account repricings are based
on the Company's historical repricing experience and management's belief that
these accounts are not highly sensitive to changes in interest rates.
Impact of Inflation
The consolidated financial statements and related consolidated financial
information presented in this annual report have been prepared in conformity
with generally accepted accounting principles, which require the measurement
of financial position and operating results in terms of historical dollars
without considering changes in the relative purchasing power of money over
time due to inflation. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
New Accounting Standards
In May 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Various assets are excluded from the
scope of SFAS No. 121, including financial instruments which constitute the
majority of the Company's assets. For long-lived assets included in the scope
of SFAS No. 121, such as premises and equipment, an impairment loss must be
recognized when the estimate of total undiscounted future cash flows
attributable to the asset is less than the asset's carrying amount.
Measurement of the impairment loss is determined by reducing the carrying
amount of the asset to its fair value. Long-lived assets to be disposed of
such as other real estate or premises to be sold, are reported at the lower
of carrying amount or fair value less costs to sell. The Company will adopt
SFAS No. 121 in the first quarter of 1996. Management anticipates the
adoption of SFAS No. 121 will not have a material effect on the Company's
consolidated financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities." SFAS No. 122 requires that entities recognize as separate
assets, the rights to service mortgage loans for others, regardless of how
those servicing rights are acquired. Additionally, SFAS No. 122 requires that
the capitalized mortgage servicing rights be assessed for impairment based on
the fair value of those rights, and that impairment, if any, be recognized
through a valuation allowance. The Company will adopt SFAS No. 122 in the
first quarter of 1996. The adoption of SFAS No. 122 will result in increased
gains recognized on the sale of mortgage loans when servicing rights are
retained, offset by the amortization of the capitalized mortgage servicing
rights. Based on the current volume of mortgage loans sold on a servicing
retained basis, management does not anticipate the adoption of SFAS No. 122
will have a material effect on the Company's consolidated financial
statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
employee stock options, such as the Company's stock option plans or similar
equity instruments. Under SFAS No. 123, entities can recognize stock-based
compensation expense in the basic financial statements using either (i) the
intrinsic value based approach set forth in the APB Opinion No. 25 or (ii)
the fair value based method introduced in SFAS No. 123. Entities electing to
remain with the accounting in APB Opinion No. 25, must make pro forma
disclosures of net income and earnings per share, as if the fair value based
method of accounting defined in SFAS No. 123 had been applied. Under the
method currently utilized by the Company (APB Opinion No. 25), compensation
expense is determined based upon the option's intrinsic value, or the excess
(if any) of the market price of the underlying stock at the measurement date
over the amount the employee is required to pay. Under the fair value based
method introduced by SFAS No. 123, compensation expense is based on the
option's estimated fair value at the grant date and is generally recognized
over the vesting period. Management anticipates that it will elect to measure
stock-based compensation costs in accordance with APB Opinion No. 25 and will
adopt the pro forma disclosure requirements of SFAS No. 123 in 1996.
Report of Management
The accompanying consolidated financial statements of Progressive Bank, Inc.
and subsidiary are the responsibility of and have been prepared by management
in conformity with generally accepted accounting principles. These statements
necessarily include some amounts that are based on best judgments and
estimates. Other financial information in the annual report is consistent
with that in the consolidated financial statements.
Management is responsible for maintaining a system of internal accounting
control. The purpose of the system is to provide reasonable assurance that
transactions are recorded in accordance with management's authorization, that
assets are safeguarded against loss or unauthorized use, and that underlying
financial records support the preparation of financial statements. The system
includes written policies and procedures, selection of qualified personnel,
appropriate segregation of responsibilities, and the ongoing internal audit
function.
The independent auditors conduct an annual audit of the Company's
consolidated financial statements to enable them to express an opinion as to
the fair presentation of the statements. In connection with the audit, the
independent auditors consider the internal control structure, to the extent
they consider necessary to determine the nature, timing and extent of their
auditing procedures. The independent auditors also prepare recommendations
regarding internal controls and other accounting and financial related
matters. The implementation of these recommendations by management is
monitored directly by the Audit Committee of the Board of Directors.
(signature) (signature)
Peter Van Kleeck Robert Gabrielsen
President and CEO Treasurer and CFO
Independent Auditors' Report
The Board of Directors and Shareholders
Progressive Bank, Inc.:
We have audited the accompanying consolidated balance sheets of Progressive
Bank, Inc. and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Progressive Bank, Inc. and subsidiary as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in notes 1, 2, 8 and 11 to the consolidated financial
statements, the Company changed its methods of accounting for income taxes
and the cost of postretirement benefits in 1993, and its method of accounting
for certain securities in 1994, to adopt the provisions of Financial
Accounting Standards Board's Statement of Financial Accounting Standards Nos.
109 "Accounting for Income Taxes," 106 "Employer's Accounting for
Postretirement Benefits Other Than Pensions" and 115 "Accounting for Certain
Investments in Debt and Equity Securities," respectively.
(signature)
Albany, New York
January 19, 1996
<TABLE>
Consolidated Balance Sheets
<CAPTION>
(In thousands, except shares and per share amounts)
December 31,
1995 1994
<S> <C> <C>
Assets
Cash and due from banks (note 9) $ 14,923 14,054
Federal funds sold 22,970 57,700
Securities (note 2):
Available for sale, at fair value 106,901 43,916
Held to maturity (fair value of $40,386 in 1995 and $81,172 in 1994) 40,148 83,764
Total securities 147,049 127,680
Loans, net (note 3):
Mortgage loans 480,569 425,397
Other loans 59,123 57,920
Allowance for loan losses (8,033) (9,402)
Net deferred loan origination costs (fees) 55 (836)
Total loans, net 531,714 473,079
Accrued interest receivable 5,029 4,208
Other real estate, net (note 4) 405 2,265
Premises and equipment, net (note 5) 9,673 8,091
Deferred income taxes, net (note 8) 5,223 6,333
Other assets (notes 11 and 12) 6,228 2,882
Total assets $743,214 696,292
Liabilities and Shareholders' Equity
Liabilities:
Savings and time deposits (note 6) $605,056 577,935
Demand deposits 51,956 46,394
Accrued expenses and other liabilities (note 11) 17,544 6,023
Total liabilities 674,556 630,352
Commitments and contingencies (note 12)
Shareholders' equity (notes 8, 9 and 10):
Preferred stock ($1.00 par value; 5,000,000 shares authorized; none issued) -- --
Common stock ($1.00 par value; 15,000,000 shares authorized; 2,951,974 shares issued) 2,952 2,952
Paid-in capital 27,355 27,355
Retained earnings 44,880 40,165
Treasury stock, at cost (323,705 shares in 1995 and 205,090 shares in 1994) (7,655) (4,310)
Net unrealized gain (loss) on securities available for sale, net of taxes (note 2) 1,126 (222)
Total shareholders' equity 68,658 65,940
Total liabilities and shareholders' equity $743,214 696,292
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Income
<CAPTION>
(In thousands, except per share amounts)
For the Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Interest and dividend income:
Mortgage loans $39,123 34,607 33,694
Other loans 5,683 5,239 4,861
Securities 8,637 9,389 11,195
Federal funds sold and other 2,058 1,012 531
Total interest and dividend income 55,501 50,247 50,281
Interest on deposits (note 6) 27,692 21,177 21,237
Net interest income 27,809 29,070 29,044
Provision for loan losses (note 3) 600 1,500 2,000
Net interest income after provision for loan losses 27,209 27,570 27,044
Other income:
Deposit service fees 2,084 1,875 1,978
Other service fees 620 644 738
Net gain (loss) on securities (note 2) 349 (1,019) 184
Net gain (loss) on sale of loans (note 3) 203 (1,455) 169
Other non-interest income 50 111 41
Total other income 3,306 156 3,110
Net interest and other income 30,515 27,726 30,154
Other expense:
Salaries and employee benefits 9,052 8,935 8,700
Occupancy and equipment 2,352 2,270 2,391
Net cost of other real estate (note 4) 355 2,000 3,759
FDIC deposit insurance 721 1,374 1,520
Other non-interest expense (note 7) 6,799 6,105 5,449
Total other expense 19,279 20,684 21,819
Income before income taxes and cumulative effect
of changes in accounting principles 11,236 7,042 8,335
Income tax expense (benefit) (note 8) 4,450 (628) 911
Income before cumulative effect of changes in accounting principles 6,786 7,670 7,424
Cumulative effect at January 1, 1993 of changes in accounting principles:
Income taxes (note 8) -- -- 709
Postretirement benefits, net of related income taxes (note 11) -- -- (1,072)
Total -- -- (363)
Net income $ 6,786 7,670 7,061
Net income per common share:
Income before cumulative effect of changes in accounting principles $ 2.50 2.66 2.53
Cumulative effect of changes in accounting principles -- -- (0.12)
Net income $ 2.50 2.66 2.41
Weighted average common shares outstanding 2,713 2,879 2,932
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Shareholders' Equity
<CAPTION>
(In thousands, except shares and per share amounts)
Common Stock
Net Unrealized
Shares Paid-in Retained Treasury Gain (Loss)
Outstanding Amount Capital Earnings Stock on Securities Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 2,925,174 $2,952 27,355 27,445 (412) -- 57,340
Net income -- -- 7,061 -- -- 7,061
Cash dividends declared
($0.15 per share) -- -- (440) -- -- (440)
Stock options exercised 28,800 -- -- (318) 448 -- 130
Purchases of treasury stock (15,400) -- -- -- (270) -- (270)
Balance at December 31, 1993 2,938,574 2,952 27,355 33,748 (234) -- 63,821
Net income -- -- 7,670 -- -- 7,670
Cash dividends declared
($0.375 per share) -- -- (1,085) -- -- (1,085)
Stock options exercised 12,310 -- -- (168) 231 -- 63
Purchases of treasury stock (204,000) -- -- -- (4,307) -- (4,307)
Net unrealized gain (loss) on
securities available for sale,
net of taxes:
As of January 1, 1994 -- -- -- -- 2,165 2,165
Net change during the year -- -- -- -- (2,387) (2,387)
Balance at December 31, 1994 2,746,884 2,952 27,355 40,165 (4,310) (222) 65,940
Net income -- -- 6,786 -- -- 6,786
Cash dividends declared
($0.65 per share) -- -- (1,766) -- -- (1,766)
Stock options exercised 27,385 -- -- (305) 593 -- 288
Purchases of treasury stock (146,000) -- -- -- (3,938) -- (3,938)
Net change in unrealized gain
(loss) on securities available
for sale, net of taxes -- -- -- -- 1,348 1,348
Balance at December 31, 1995 2,628,269 $2,952 27,355 44,880 (7,655) 1,126 68,658
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
(In thousands)
For the Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Operating activities:
Net income $ 6,786 7,670 7,061
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 600 1,500 2,000
Depreciation expense 850 693 1,074
Deferred income tax provision (benefit) 150 (1,781) (2,191)
Provision for losses on other real estate 325 1,250 2,500
Gain on sales of other real estate (346) (687) (1,151)
Net (gain) loss on securities and loans (552) 2,474 (353)
Amortization of net deferred loan origination fees (494) (817) (764)
Amortization of net premiums on securities 37 607 1,639
Net increase (decrease) in accrued interest receivable (821) 378 831
Net change in income tax payables and receivables 3,791 (3,550) (727)
Cumulative effect of changes in accounting principles, net -- -- 363
Other, net (2,398) 1,553 831
Net cash provided by operating activities 7,928 9,290 11,113
Investing activities:
Purchases of securities:
Securities available for sale (28,787) (15,183) (23,628)
Securities held to maturity (14,208) (48,084) --
Securities held for investment -- -- (34,600)
Proceeds from principal payments, maturities and calls of securities:
Securities available for sale 18,529 38,085 2,252
Securities held to maturity 12,949 14,292 --
Securities held for investment -- -- 90,381
Proceeds from sales of securities available for sale 1,459 33,633 1,475
Disbursements for loan originations, net of principal collections (71,057) (92,618) (72,457)
Proceeds from sales of loans 12,462 48,487 11,704
Purchases of premises and equipment (2,432) (3,715) (186)
Proceeds from sales of other real estate 2,029 4,867 3,995
Net cash used in investing activities (69,056) (20,236) (21,064)
Financing activities:
Net increase (decrease) in time deposits 38,801 35,097 (12,810)
Net increase (decrease) in other deposits (6,118) 27,139 17,583
Cash dividends paid on common stock (1,766) (1,085) (440)
Net proceeds on issuance of common stock 288 63 130
Purchases of treasury stock (3,938) (4,307) (270)
Net cash provided by financing activities 27,267 56,907 4,193
Net increase (decrease) in cash and cash equivalents (33,861) 45,961 (5,758)
Cash and cash equivalents at beginning of year 71,754 25,793 31,551
Cash and cash equivalents at end of year $37,893 71,754 25,793
Supplemental data:
Interest paid $27,461 19,281 21,237
Income taxes paid, net of refunds received 508 4,665 3,513
Loans transferred to other real estate 1,215 3,035 6,407
Loans originated to finance sales of other real estate 1,308 2,708 6,170
Transfer of securities to available for sale upon the adoption of SFAS No. 115 -- 102,057 --
Amortized cost of securities transferred from held to maturity to available
for sale upon the adoption of the FASB's "Special Report" on SFAS No. 115 44,891 -- --
See accompanying notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
Progressive Bank, Inc. ("Progressive") is a bank holding company whose sole
subsidiary is Pawling Savings Bank ("Pawling"). Collectively, these entities
are referred to herein as the "Company." Pawling is a New York
state-chartered stock savings bank providing a full range of community
banking services to individual and corporate customers. Progressive and
Pawling are subject to the regulations of certain Federal and state agencies
and undergo periodic examinations by those regulatory authorities.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Material estimates that are particularly susceptible to
near-term change include the allowances for losses on loans and other real
estate, and the valuation allowance for deferred tax assets. The Company's
accounting policies with respect to these estimates are discussed below.
The consolidated financial statements include the accounts of Progressive and
Pawling. All significant intercompany accounts and transactions are
eliminated in consolidation.
For purposes of reporting cash flows, cash equivalents are defined as Federal
funds sold and other highly liquid instruments with an original term of three
months or less.
Reclassifications are made whenever necessary to conform to the current
year's presentation.
Securities
Effective January 1, 1994, the Company changed its method of accounting for
securities, upon adoption of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under SFAS No. 115, securities are classified as held to
maturity securities, trading securities, or available for sale securities.
Securities held to maturity are limited to debt securities for which the
entity has the positive intent and ability to hold to maturity. Trading
securities are debt and equity securities that are bought principally for the
purpose of selling them in the near term. All other debt and equity
securities are classified as available for sale.
Held to maturity securities are carried at amortized cost under SFAS No. 115,
which is the same basis of accounting previously used by the Company for its
debt securities held for investment. Available for sale securities are
carried at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity (net of
taxes). Prior to the adoption of SFAS No. 115, available for sale securities
were carried at the lower of cost or fair value in the aggregate, with net
unrealized losses (if any) reported in earnings. The Company has no trading
securities.
Non-marketable equity securities (principally stock of the Federal Home Loan
Bank) are included in the securities available for sale at cost as there is
no readily available market value.
Premiums and discounts on debt securities are recognized as adjustments to
interest income. Realized gains and losses on sales of securities are
determined using the specific identification method. Unrealized losses on
held to maturity and available for sale securities are charged to earnings
when the decline in fair value of a security is judged to be other than
temporary.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level deemed adequate by
management based on an evaluation of the known and inherent risks in the
portfolio, past loan loss experience, estimated value of underlying
collateral, and current and prospective economic conditions. The allowance is
increased by provisions for loan losses charged to operations. Loan losses
and recoveries of loans previously written-off are charged or credited to the
allowance as incurred or realized, respectively.
Effective January 1, 1995, the Company adopted the provisions of SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and its amendment, SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan- Income
Recognition and Disclosures." These statements prescribe recognition criteria
for loan impairment, generally relating to commercial and construction loans
and measurement methods for impaired loans and all loans whose terms are
modified in trouble debt restructuring subsequent to the adoption of these
statements. A loan is considered to be impaired when, based on current
information and events, it is probable that the lender will be unable to
collect all principal and interest contractually due according to the
original contractual terms of the loan agreement. The Company generally
considers impaired loans to be commercial and construction non-accrual loans
and loans restructured since January 1, 1995.
SFAS No. 114 requires lenders to measure impaired loans based on (i) the
present value of expected future cash flows discounted at the loan's
effective interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent. Generally,
the Bank's impaired loans are considered to be collateral dependent. The
Company considers estimated cost to sell, on a discounted basis, when
determining the fair value of collateral in the measurement of impairment if
the costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loan. An allowance for loan losses is maintained if the
measurement of an impaired loan is less than its recorded investment.
Adjustments to the allowance are made through corresponding charges or
credits to the provision for loan losses.
Interest and Fees on Loans
Interest income is accrued monthly on outstanding loan principal balances
unless management considers collection to be uncertain (generally, when
principal or interest payments are ninety days or more past due). When loans
are placed on non-accrual status, previously accrued but unpaid interest is
reversed by charging interest income of the current period. Loans are
returned to accrual status when collectibility is no longer considered
uncertain.
Loan origination fees and certain direct loan origination costs are deferred.
The net fee or cost is amortized to interest income, using the level yield
method, over the contractual loan term. Amortization ceases when loans are
placed on non-accrual status and resumes when loans are returned to accrual
status.
Other Real Estate
Other real estate consists of properties acquired through foreclosure or deed
in lieu of foreclosure and properties securing loans classified as
in-substance foreclosures. A property is initially recorded at the lower of
the recorded investment in the loan or the fair value of the property, with
any resulting write-down charged to the allowance for loan losses.
Thereafter, an allowance for losses on other real estate is established if
the cost of a property exceeds its current fair value less estimated sales
costs. Fair value estimates are based on recent appraisals and other
available information.
The Company adopted SFAS No. 114, effective January 1, 1995, which makes
significant changes to existing accounting principles applicable to
in-substance foreclosures. In accordance with SFAS No. 114, a loan is
classified as an in-substance foreclosure only when the Company has taken
physical possession of the collateral regardless of whether formal
foreclosure proceedings have taken place. Prior to the adoption of SFAS No.
114, in-substance foreclosed properties included those properties where the
borrower had little or no equity in the property considering its fair value;
where repayment was only to come from the operation or sale of the property;
and where the borrower had effectively abandoned control of the property or
it was doubtful that the borrower would be able to rebuild equity in the
property.
Holding costs on properties ready for sale are included in current
operations, while costs that improve such properties are capitalized.
Gains on sales of other real estate are credited to income and losses are
charged against the allowance for losses on other real estate. Gain or loss
is recognized upon disposition of the property and the transfer of the risks
and rewards of ownership.
Premises and Equipment
Land is carried at cost. Buildings, furniture and equipment are carried at
cost less accumulated depreciation. Depreciation expense is computed on a
straight-line basis over the estimated useful lives of the related assets.
Maintenance and repair costs are charged to operating expenses as incurred,
while costs of significant renewals and betterments are capitalized.
Income Taxes
Effective January 1, 1993, the Company changed its method of accounting for
income taxes upon adoption of SFAS No. 109, "Accounting for Income Taxes,"
and reported the cumulative effect of the accounting change in the 1993
consolidated statement of income. Under the asset and liability method
required by SFAS No. 109, deferred taxes are recognized for the estimated
future tax effects attributable to "temporary differences" and tax loss
carryforwards. Temporary differences are differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
Under SFAS No. 109, a deferred tax liability is recognized for all temporary
differences that will result in future taxable income. A deferred tax asset
is recognized for all temporary differences that will result in future tax
deductions and for all unused tax loss carryforwards, subject to reduction of
the asset by a valuation allowance in certain circumstances. This valuation
allowance is recognized if, based on an analysis of available evidence,
management determines that it is more likely than not that some portion or
all of the deferred tax asset will not be realized. The valuation allowance
is subject to ongoing adjustment based on changes in circumstances that
affect management's judgment about the realizability of the deferred tax
asset. Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to income tax expense.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax laws or rates is recognized in
income in the period that includes the enactment date of the change.
Postretirement Benefits
Effective January 1, 1993, the Company changed its method of accounting for
postretirement benefits upon adoption of SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," and reported the cumulative
effect of the accounting change in the 1993 consolidated statement of income.
Under SFAS No. 106, the cost of postretirement benefits is recognized on an
accrual basis as such benefits are earned by active employees.
Net Income Per Common Share
Net income per common share is computed based on the weighted average number
of shares outstanding during each period, adjusted for the effect of common
stock equivalents when such adjustment results in a significant dilution of
the per share data.
2. Securities
<TABLE>
A summary of the Company's securities at December 31 follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
United States Treasury and agencies $ 47,458 415 (10) 47,863
Mortgage-backed securities 43,462 1,373 -- 44,835
Corporate and other 9,704 200 -- 9,904
Total debt securities 100,624 1,988 (10) 102,602
Equity securities 4,351 10 (62) 4,299
Total securities available for sale 104,975 1,998 (72) 106,901
Securities held to maturity:
Mortgage-backed securities 40,148 276 (38) 40,386
Total securities $145,123 2,274 (110) 147,287
1994
Securities available for sale:
Debt securities:
United States Treasury and agencies $ 29,116 58 (530) 28,644
Corporate and other 12,849 77 (75) 12,851
Total debt securities 41,965 135 (605) 41,495
Equity securities 2,333 177 (89) 2,421
Total securities available for sale 44,298 312 (694) 43,916
Securities held to maturity:
Mortgage-backed securities 83,764 172 (2,764) 81,172
Total securities $128,062 484 (3,458) 125,088
</TABLE>
Equity securities at December 31, 1995 and 1994 include Federal Home Loan
Bank stock with a cost basis of $4.0 million and $891,000, respectively.
In November 1995, the Financial Accounting Standards Board released its
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The Special Report
contained a unique provision that allowed entities to, as of a single date
between November 15, 1995 and December 31, 1995, reassess the appropriateness
of the classification of all securities held at that time. On November 30, 1995,
as permitted by the Special Report, the Company made a one-time transfer
of certain adjustable rate mortgage-backed securities with an amortized cost
of $44.9 million and a fair value of $46.3 million, to the available for sale
portfolio from held to maturity. The transfer was made primarily to enhance
liquidity and provide greater flexibility in managing the Company's
securities.
The Company's mortgage-backed securities are pass-through securities
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Federal National Mortgage Association ("FNMA"). Mortgage-backed securities
held to maturity at December 31, 1995 and 1994 consisted of (i) FHLMC
certificates with an amortized cost of $21.9 million and $44.1 million,
respectively, and (ii) FNMA certificates with an amortized cost of $18.2
million and $39.6 million, respectively. At December 31, 1995,
mortgage-backed securities held to maturity are principally five- and
seven-year balloon payment securities. Mortgage-backed securities available
for sale at December 31, 1995 are adjustable rate securities consisting of
(i) FHLMC certificates with a fair value of $17.8 million, and (ii) FNMA
certificates with a fair value of $27.1 million.
<TABLE>
The following is a summary of the amortized cost and fair value of debt
securities available for sale (other than mortgage-backed securities) at
December 31, 1995, by remaining term to contractual maturity. Actual
maturities will differ from contractual maturities because certain issuers
have the right to call or prepay obligations with or without call or
prepayment penalties.
<CAPTION>
Remaining Term to Contractual Maturity
Amortized Fair
Cost Value
(In thousands)
<S> <C> <C>
One year or less $23,414 23,093
More than one year to five years 33,748 34,674
Total $57,162 57,767
</TABLE>
The net gain (loss) on the sale of securities available for sale includes
gross realized gains and gross realized losses applicable to available for
sale securities of approximately $379,000 and $30,000, respectively, in 1995
and $300,000 and $1.3 million, respectively, in 1994 and $197,000 and $13,000,
respectively, in 1993.
3. Loans
<TABLE>
Loans at December 31 consist of the following:
1995 1994
(In thousands)
<S> <C> <C>
Mortgage loans:
Residential properties:
One-to-four family dwellings $370,591 322,477
Five or more dwelling units 25,354 23,651
Commercial properties 73,851 66,410
Construction and land 10,773 12,859
480,569 425,397
Other loans:
Automobile financing 21,936 25,146
Mobile home 22,885 20,425
Consumer installment 2,621 3,067
Business installment 6,284 4,277
Other 5,397 5,005
59,123 57,920
Total loans 539,692 483,317
Allowance for loan losses (8,033) (9,402)
Net deferred loan origination costs (fees) 55 (836)
Total loans, net $531,714 473,079
</TABLE>
Mortgage loans are comprised of adjustable rate loans of $298.6 million and
fixed rate loans of $182.0 million at December 31, 1995 ($223.4 million and
$202.0 million, respectively, at December 31, 1994). Residential mortgage
loans include home equity loans of $32.2 million and $28.7 million at
December 31, 1995 and 1994, respectively. Construction loans are net of the
unadvanced portion of such loans of $16.6 million and $15.3 million at
December 31, 1995 and 1994, respectively.
<TABLE>
The following loans were on non-accrual status at December 31:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
Residential properties $2,407 1,593 4,008
Commercial properties 2,591 3,009 5,457
Construction and land 593 2,736 2,028
Total $5,591 7,338 11,493
</TABLE>
The loan portfolio also includes certain restructured loans that are current
in accordance with modified payment terms and, accordingly, are not included
in the preceding table. These restructured loans are loans for which
concessions, including reduction of interest rates to below-market levels or
deferral of payments, have been granted due to the borrowers' financial
condition. Restructured loans totaled $1.5 million, $1.8 million and $4.1
million at December 31, 1995, 1994 and 1993, respectively. There were no
commitments to lend additional funds to borrowers with restructured loans at
December 31, 1995.
If interest payments on non-accrual and restructured loans at December 31 had
been made during the respective years in accordance with the original
contractual loan terms, additional interest income of approximately $489,000,
$1.0 million and $1.5 million would have been recognized in 1995, 1994 and
1993, respectively.
The Company originates loans primarily in the New York counties of Dutchess,
Sullivan, Orange, Putnam, Ulster and Westchester. In 1993, the Company began
originating loans in the Connecticut counties of Fairfield, Hartford, New
Haven and Litchfield. The ability of borrowers to make principal and interest
payments in the future will depend upon, among other things, the level of
overall economic activity and the real estate market conditions prevailing
within the Company's lending region.
<TABLE>
Activity in the allowance for loan losses for the years ended December 31 is
summarized as follows:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 9,402 13,920 15,161
Provision charged to operations 600 1,500 2,000
10,002 15,420 17,161
Loans charged-off:
Mortgage loans:
Residential (376) (1,259) (812)
Commercial (593) (4,391) (1,078)
Construction and land (1,166) (275) (1,304)
Other loans:
Consumer (219) (235) (257)
Commercial (30) (57) (28)
Total charge-offs (2,384) (6,217) (3,479)
Recoveries:
Mortgage loans:
Residential 84 12 48
Commercial 80 28 110
Construction and land 189 37 10
Other loans:
Consumer 56 71 49
Commercial 6 51 21
Total recoveries 415 199 238
Net charge-offs (1,969) (6,018) (3,241)
Balance at end of year $ 8,033 9,402 13,920
</TABLE>
In 1994, the Company completed bulk sales of (i) non-performing mortgage
loans of $3.4 million and (ii) performing mortgage loans of $4.8 million with
relatively high credit risk. The net sales proceeds totaled $4.3 million,
resulting in losses of $3.9 million which were charged against the allowance
for loan losses. There were no bulk sales in 1995 or 1993.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and its amendment, SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures."
The adoption of these statements did not have a significant effect on the
Company's consolidated financial statements. At December 31, 1995, the
Company's recorded investment in impaired commercial mortgage and
construction loans totaled $3.2 million. The total impaired loans consist of
(i) loans of $674,000 for which there was an allowance for loan losses of
$110,000 determined in accordance with SFAS No. 114 and (ii) loans of $2.5
million for which there was no allowance determined under SFAS No. 114 due to
the adequacy of related collateral and historical charge-offs associated with
these loans. The average recorded investment in impaired loans was $5.1
million for 1995. Interest income on impaired loans is recognized on a cash
basis and was not significant for the year ended December 31, 1995.
Certain mortgage loans originated by the Company have been sold without
recourse in the secondary market. The net realized gain (loss) on these sales
was $203,000, ($1.5) million and $169,000 in 1995, 1994 and 1993,
respectively. The net loss in 1994 primarily reflects the sale of seasoned
fixed rate mortgages. Other realized gains and losses during the three-year
period relate to the Company's current practice of selling newly
originated fixed rate mortgage loans. At December 31, 1995, mortgage loans
held for sale had a cost basis of $891,000 which approximated fair value.
There were no mortgage loans held for sale at December 31, 1994.
The Company generally retains the servicing rights on loans sold. The
principal balances of loans serviced for others, which are not included in
the consolidated balance sheets, were $58.0 million and $49.1 million at
December 31, 1995 and 1994, respectively.
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122, "Accounting for Mortgage Servicing Rights," which amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 122
requires that entities recognize as separate assets, the rights to service
mortgage loans for others, regardless of how those servicing rights are
acquired. Additionally, SFAS No. 122 requires that the capitalized mortgage
servicing rights be assessed for impairment based on the fair value of those
rights, and that impairment, if any, be recognized through a valuation
allowance. The Company will adopt SFAS No. 122 in the first quarter of 1996.
The adoption of SFAS No. 122 will result in increased gains recognized on the
sale of mortgage loans when servicing rights are retained, offset by the
amortization of the capitalized mortgage servicing rights. Based on the
current volume of mortgage loans sold on a servicing retained basis,
management does not anticipate the adoption of SFAS No. 122 will have a
material effect on the Company's consolidated financial statements.
4. Other Real Estate
<TABLE>
Other real estate consisted of the following properties at December 31:
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Residential properties $160 798
Commercial properties 296 1,080
Construction and land 152 858
608 2,736
Allowance for losses (203) (471)
Total other real estate, net $405 2,265
</TABLE>
<TABLE>
Activity in the allowance for losses is summarized as follows for the years
ended December 31:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $471 1,047 360
Provision charged to net cost of other real estate 325 1,250 2,500
Charge-offs for realized losses (593) (1,826) (1,813)
Balance at end of year $203 471 1,047
</TABLE>
<TABLE>
The components of the net cost of other real estate were as follows for the
years ended December 31:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Provision for losses $325 1,250 2,500
Net holding costs 376 1,437 2,410
Gain on sales of properties (346) (687) (1,151)
Net cost of other real estate $355 2,000 3,759
</TABLE>
5. Premises and Equipment
<TABLE>
Premises and equipment consisted of the following at December 31:
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Land $ 752 752
Buildings 9,936 8,652
Furniture and equipment 6,909 5,803
17,597 15,207
Less accumulated depreciation 7,924 7,116
Total premises and equipment, net $ 9,673 8,091
</TABLE>
In May 1995, the FASB issued SFAS No. 121 "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." Various
assets are excluded from the scope of SFAS No. 121, including financial
instruments which constitute the majority of the Company's assets. For
long-lived assets included in the scope of SFAS No. 121, such as premises and
equipment, an impairment loss must be recognized when the estimate of total
undiscounted future cash flows attributable to the asset is less than the
asset's carrying amount. Measurement of the impairment loss is determined by
reducing the carrying amount of the asset to its fair value. Long-lived
assets to be disposed of such as other real estate or premises to be sold,
are reported at the lower of carrying amount or fair value less costs to
sell. The Company will adopt SFAS No. 121 in the first quarter of 1996.
Management anticipates the adoption of SFAS No. 121 will not have a material
effect on the Company's consolidated financial statements.
6. Savings and Time Deposits
<TABLE>
The following is an analysis of savings and time deposits at December 31:
<CAPTION>
1995 1994
Weighted Weighted
Amount Average Rate Amount Average Rate
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts $ 22,814 1.99% $ 29,066 1.99%
Savings accounts 154,425 3.54 210,849 3.64
Money market accounts 80,347 5.26 29,351 4.91
Time deposits 347,470 5.70 308,669 4.86
Total savings and time deposits $605,056 4.95% $577,935 4.27%
</TABLE>
<TABLE>
The following is a summary of time deposits by remaining term to contractual maturity at December 31:
<CAPTION>
1995 1994
Remaining Term to Contractual Maturity Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C>
Six months or less $186,438 5.67% $138,493 4.33%
More than six months to one year 84,554 5.54 84,653 4.96
More than one year to two years 42,027 5.88 41,762 5.40
More than two years to three years 10,810 5.62 16,347 5.83
More than three years to five years 10,443 5.99 13,938 5.68
More than five years 13,198 6.29 13,476 6.02
Total time deposits $347,470 5.70% $308,669 4.86%
</TABLE>
Time deposits issued in amounts of $100,000 or more amounted to approximately
$50.3 million and $45.3 million at December 31, 1995 and 1994, respectively.
Interest expense on time deposits over $100,000 amounted to approximately
$2.7 million, $2.3 million and $3.0 million in 1995, 1994 and 1993,
respectively.
<TABLE>
Interest expense for the years ended December 31 is summarized as follows:
1995 1994 1993
(In thousands)
<CAPTION>
<S> <C> <C> <C>
NOW accounts $ 511 638 832
Savings accounts 6,265 7,386 5,670
Money market accounts 2,460 862 1,133
Time deposits 18,456 12,291 13,602
Total interest on deposits $27,692 21,177 21,237
</TABLE>
7. Other Non-Interest Expense
<TABLE>
The components of other non-interest expense for the years ended December 31
are as follows:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Professional and outside service fees $1,553 1,564 1,420
Printing, postage, telephone and office supplies 1,283 1,229 1,218
Provision for probable losses of Federal funds
sold to a correspondent (note 12) 1,000 -- --
Foreclosure and collection expense 411 1,042 995
Data processing 612 611 536
Other 1,940 1,659 1,280
Total $6,799 6,105 5,449
</TABLE>
8. Income Taxes
As discussed in note 1, the Company adopted SFAS No. 109 effective January 1,
1993. The cumulative effect of the accounting change, in the amount of
$709,000, has been reported as a separate credit to earnings in the 1993
consolidated statement of income.
<TABLE>
The components of income tax expense (benefit) are summarized as follows for
the years ended December 31:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Current:
Federal $3,191 865 2,191
State 1,109 288 911
4,300 1,153 3,102
Deferred:
Federal 243 1,243 367
State 81 478 --
Reductions in the valuation allowance for deferred tax assets (174) (3,502) (2,558)
150 (1,781) (2,191)
Total income tax expense (benefit) $4,450 (628) 911
</TABLE>
<TABLE>
The following is a reconciliation of the expected income tax expense and the
actual income tax expense (benefit). The expected income taxes have been
computed by applying the applicable statutory Federal tax rate of 34.0% to
income before income taxes and cumulative effect of changes in accounting
principles.
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Income tax at applicable Federal statutory rate $3,820 2,394 2,834
Increase (decrease) in income tax expense resulting from:
Reductions in the valuation allowance for deferred tax assets (174) (3,502) (2,558)
State income taxes, net of Federal tax effect 804 506 601
Other -- (26) 34
Actual income tax expense (benefit) $4,450 (628) 911
</TABLE>
The valuation allowance applicable to the Company's Federal deferred tax asset
was reduced by $174,000 in 1995 primarily due to the utilization of the capital
loss carryforwards during the year.
The valuation allowance applicable to the Company's Federal deferred tax asset
was reduced by $1.3 million in 1994 and $2.6 million in 1993 commensurate with
the increases during those years in Federal income taxes recoverable by loss
carryback. In addition, the valuation allowance applicable to the Company's
state deferred tax asset was reduced by $2.2 million in the fourth quarter of
1994. This latter reduction was based on management's reevaluation of the
Company's prospects for future earnings considering factors such as (i) the
reduction in non-performing assets and other higher-risk assets primarily
attributable to the bulk sales in the fourth quarter of 1994, (ii) the reduction
in interest rate risk attributable to the sale of primarily lower yielding fixed
rate loans and securities in the fourth quarter of 1994, and (iii) the sustained
level of recent historical pre-tax earnings, including the achievement of three
consecutive years of consistent profitability. The state deferred tax asset has
been recognized on the basis of expected earnings in future years, as the New
York State tax law does not allow net operating loss carrybacks or
carryforwards.
The Company's deferred tax assets were $5.2 million at December 31, 1995, net
of a remaining valuation allowance of $88,000. Based on recent historical and
anticipated future pre-tax earnings, management believes it is more likely
than not that the Company will realize its net deferred tax assets.
<TABLE>
The tax effect of temporary differences that give rise to the Company's
deferred tax assets and deferred tax liabilities at December 31 are as
follows:
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $3,309 3,873
Allowance for other real estate losses 84 194
Net deferred loan origination fees 1,037 1,317
Accrued postretirement benefits 909 896
Other deductible temporary differences and unused capital loss carryforward 1,542 1,062
Total gross deferred tax assets 6,881 7,342
Less valuation allowance 88 262
Deferred tax assets, net of valuation allowance 6,793 7,080
Deferred tax liabilities:
Excess of tax over book accumulated depreciation on premises and equipment 142 171
Other taxable temporary differences 628 736
Total gross deferred tax liabilities 770 907
Net deferred tax assets 6,023 6,173
Net deferred tax (liability) asset associated with net unrealized (gain)
loss on securities available for sale (800) 160
Net deferred tax assets $5,223 6,333
</TABLE>
If certain definition tests and other conditions are met, Pawling is allowed
a special bad debt deduction in determining its taxable income, based upon
either specified experience formulas or a percentage of taxable income
(currently 8.0% for Federal income tax purposes). For income tax purposes,
bad debt reserves are maintained equal to the excess of tax bad debt
deductions over actual losses. At December 31, 1995, Pawling's tax bad debt
reserves were $9.4 million, including $8.8 million for which deferred tax
liabilities have not been recognized since the Company does not expect that
these reserves will become taxable in the foreseeable future. Events that
would result in taxation of these reserves include (i) reductions in the
reserves for purposes other than tax bad debt losses (including reductions
for certain distributions to shareholders) and (ii) failure to maintain a
minimum 60.0% ratio of qualifying assets to total assets for tax purposes.
The unrecognized deferred tax liability applicable to the tax bad debt
reserves was $3.7 million at December 31, 1995.
9. Regulatory Matters
Capital Requirements
Under the minimum leverage capital regulations of the Federal Deposit
Insurance Corporation (the "FDIC"), most banks are required to maintain a
ratio of Tier 1 capital to total assets of between 4.0% and 5.0%. At December
31, 1995, Pawling had a Tier 1 capital ratio of approximately 8.35% of total
assets, thereby satisfying the minimum leverage capital requirement.
The FDIC regulations also require ratios of Tier 1 capital and total capital
to risk-weighted assets of at least 4.0% and 8.0%, respectively.
Risk-weighted assets are calculated by assigning assets (and
credit-equivalent amounts for certain off-balance sheet items) to one of four
broad risk-weight categories. The amount of risk-weighted assets is
determined by applying a specified percentage (0%, 20%, 50% or 100%,
depending on the level of credit risk) to the amounts assigned to each
category. Pawling satisfied these capital requirements at December 31, 1995
with a Tier 1 capital ratio of approximately 14.78% of risk-weighted assets
and a total capital ratio of approximately 16.03% of risk-weighted assets.
Progressive is subject to the leverage capital and risk-based capital
guidelines of the Federal Reserve Board (the "FRB"), which are similar to the
FDIC requirements. Progressive complied with the FRB guidelines at December
31, 1995 with a leverage capital ratio of approximately 9.08% of total assets,
a Tier 1 capital ratio of approximately 16.05% of risk-weighted assets, and
a total capital ratio of approximately 17.30% of risk-weighted assets.
Dividend Restrictions
Dividend payments by Progressive must be within certain guidelines of the FRB
which provide, among other things, that dividends generally should be paid
only from current earnings. Pawling's ability to pay dividends to Progressive
is also subject to various restrictions. Under New York State Banking Law,
dividends may be declared and paid only from Pawling's net profits, as
defined. The approval of the Superintendent of Banks of the State of New York
is required if the total of all dividends declared in any calendar year will
exceed the net profit for the year plus the retained net profits of the
preceding two years. At December 31, 1995, Pawling's retained net profits
available for dividends of the preceding two years were $8.7 million.
Reserve Requirements
Pawling is required to maintain reserves (primarily in the form of cash on
hand and Federal Reserve Bank balances) with respect to certain types of
deposit liabilities. Reserves maintained at December 31, 1995 and 1994 were
$2.8 million and $2.1 million, respectively.
10. Stock Option Plans
The Company has established stock option plans for certain of its employees
and directors. Under the plans, the option exercise price may not be less
than the fair market value of the common stock at the date of the grant.
Options under the employees' incentive stock option plan are generally
exercisable any time within ten years of the date of grant. In 1995, 73,166
shares were granted of which 14,000 vest in 1996 and 17,000 in 1997.
Unexercised options automatically expire 90 days from the date of termination
of an employee's continuous employment by the Company. At December 31, 1995,
options for the purchase of 65,191 shares were exercisable under this plan at
a weighted average exercise price of $22.15 per share.
During 1992, the Company adopted a new non- qualified stock option plan for
directors. All outstanding options granted under the prior stock option plan
for directors were canceled. A second non-qualified directors' option plan
was adopted in 1993 and was approved by the shareholders in 1994. Pursuant to
the plans, which have ten-year terms, options vest and become fully
exercisable six months after the date of grant. At December 31, 1995, options
for the purchase of 77,500 shares were exercisable under these plans at a
weighted average exercise price of $14.21 per share.
<TABLE>
Option activity during 1995, 1994 and 1993 was as follows:
<CAPTION>
Employees' Plan Directors' Plans
Option Price Option Price
Shares Per Share Shares Per Share
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992 66,760 $2.88 - $22.50 38,400 $10.50
Granted -- -- 48,000 16.50
Exercised (28,300) 3.63 - 5.75 (500) 10.50
Cancelled (1,000) 22.50 (3,200) 10.50
Outstanding at December 31, 1993 37,460 2.88 - 22.50 82,700 10.50 - 16.50
Granted 17,660 17.75 - 19.25 -- --
Exercised (11,810) 3.75 - 5.75 (500) 16.50
Outstanding at December 31, 1994 43,310 2.88 - 22.50 82,200 10.50 - 16.50
Granted 73,166 23.63 - 28.00 3,200 18.75
Exercised (19,485) 2.88 - 23.63 (7,900) 10.50 - 16.50
Cancelled (800) 4.25 -- --
Outstanding at December 31, 1995 96,191 $3.25 - $28.00 77,500 $10.50 - $18.75
</TABLE>
At December 31, 1995, shares available for future grant totaled 50,584 for
the employees' plan and 38,600 for the directors' plans.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
employee stock options, such as the Company's stock option plans or similar
equity instruments. Under SFAS No. 123, entities can recognize stock-based
compensation expense in the basic financial statements using either (i) the
intrinsic value based approach set forth in the APB Opinion No. 25 or (ii)
the fair value based method introduced in SFAS No. 123. Entities electing to
remain with the accounting in APB Opinion No. 25, must make pro forma
disclosures of net income and earnings per share, as if the fair value based
method of accounting defined in SFAS No. 123 had been applied. Under the
method currently utilized by the Company (APB Opinion No. 25), compensation
expense is determined based upon the option's intrinsic value, or the excess
(if any) of the market price of the underlying stock at the measurement date
over the amount the employee is required to pay. Under the fair value based
method introduced by SFAS No. 123, compensation expense is based on the
option's estimated fair value at the grant date and is generally recognized
over the vesting period. Management anticipates that it will elect to measure
stock-based compensation costs in accordance with APB Opinion No. 25 and will
adopt the pro forma disclosure requirements of SFAS No. 123 in 1996.
11. Employee Benefits
Pension Benefits
The Company maintains a non-contributory defined benefit pension plan which
covers substantially all employees who meet certain age and length of service
requirements. Benefits are based on the employees' years of accredited
service and their average annual three years' earnings, as defined by the
plan. Plan benefits are funded through Company contributions at least equal
to the amounts required by applicable regulations.
<TABLE>
The following is a reconciliation of the funded status of the plan at
December 31:
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $5,125 4,344
Accumulated benefit obligation - nonvested 286 284
5,411 4,628
Effect of projected future compensation levels 1,226 944
Projected benefit obligation for service rendered to date 6,637 5,572
Plan assets, at fair value (primarily investments in mutual funds) 7,639 6,315
Plan assets in excess of projected benefit obligation 1,002 743
Unrecognized net transition obligation 30 39
Unrecognized net gain from past experience different from
that assumed and effect of changes in assumptions (461) (375)
Prepaid pension expense (included in other assets) $ 571 407
</TABLE>
<TABLE>
The components of the net pension expense are as follows for the years ended December 31:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the year $241 264 278
Interest cost on projected benefit obligation 460 388 389
Actual return on plan assets (505) (514) (453)
Net amortization and deferral (8) (3) 12
Net pension expense $188 135 226
</TABLE>
A discount rate of 7.5% and a rate of increase in future compensation levels
of 5.5% were used in determining the actuarial present value of the projected
benefit obligation at December 31, 1995 (8.25% and 6.0%, respectively, at
December 31, 1994 and 7.0% and 5.5%, respectively, at December 31, 1993).
The expected long-term rate of return on plan assets was 8.0% for 1995, 1994
and 1993.
In 1994, the Company implemented a non-qualified, unfunded retirement and
severance plan for members of the Board of Directors. Under this plan, each
member leaving the Board after at least five years of service is entitled to a
benefit consisting of the annual retainer fee at the time of departure
multiplied by the director's number of years of service, up to 15 years. The
cost of this plan was $95,000 for both 1995 and 1994. The accumulated benefit
obligation was $470,000 in 1995 and $460,000 in 1994.
Postretirement Benefits
The Company also provides certain postretirement benefits. Under the current
plan, as amended, substantially all Company employees become eligible for
postretirement benefits if they meet certain age and length of service
requirements. As discussed in note 1, the Company adopted SFAS No. 106
effective January 1, 1993. SFAS No. 106 requires accrual of the cost of
postretirement benefits as they are earned by active employees. The Company
recognized the full amount of its accumulated benefit obligation as of
January 1, 1993, in the amount of $1.8 million, as a charge to earnings. The
after-tax charge of $1.1 million has been reported in the 1993 consolidated
statement of income as the cumulative effect of a change in accounting
principle.
<TABLE>
The actuarial and recorded liabilities for postretirement benefits, none of
which have been funded, were as follows at December 31:
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Accumulated postretirement obligations:
Retirees $ 593 569
Fully-eligible employees 138 118
Other active participants 549 395
Total accumulated postretirement benefit obligation 1,280 1,082
Unrecognized gain from the effect of
changes in assumptions and plan amendments 910 1,093
Accrued postretirement benefit cost
(included in other liabilities) $2,190 2,175
</TABLE>
<TABLE>
The components of the net postretirement expense are as follows for the years
ended December 31:
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the year $48 67 70
Interest cost on projected benefit obligation 91 170 150
Net amortization and deferral (72) -- --
Net postretirement expense $67 237 220
</TABLE>
The accumulated postretirement benefit obligation was determined using
discount rates of 7.5% and 8.25% at December 31, 1995 and 1994,
respectively. At December 31, 1995, the assumed rate of increase in
future health care costs was 10.5% for 1996, gradually
decreasing to 5.5% in the year 2005 and remaining at that level thereafter.
Increasing the assumed health care cost trend rate by 1.0% in each future
year would increase the accumulated benefit obligation as of December 31,
1995 by $96,500 and the service cost by $2,400 for the year then ended.
401(k) Savings Plan
In July 1993, the Company implemented a defined contribution plan established
under Section 401(k) of the Internal Revenue Code, pursuant to which eligible
employees may elect to contribute up to 8.0% of their compensation. The
Company makes contributions equal to 50% of the first 5.0% of a participant's
contribution for non-highly compensated employees and 50% of the first 3.0%
for highly-compensated employees. Voluntary and matching contributions are
invested, in accordance with the participant's direction, in one or a number
of investment options including a fund consisting of shares of Progressive's
common stock. Employee contributions vest immediately, while employer
contributions vest ratably over a five-year period beginning after the first
year of participation. Savings plan expense amounted to $92,000 for 1995,
$79,000 for 1994, and $34,000 for 1993.
12. Commitments and Contingencies
Off-Balance Sheet Financial Instruments
The Company's financial instruments with off-balance sheet risk consist of
loan origination commitments, unadvanced lines of credit and standby letters
of credit. These instruments involve various degrees of credit risk, interest
rate risk and liquidity risk. The Company's exposure to credit loss is
represented by the contractual amounts of the instruments. The Company does
not utilize off-balance sheet financial instruments for trading purposes.
<TABLE>
The contractual amounts of the Company's off-balance sheet financial
instruments at December 31 were as follows:
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Commitments and unadvanced lines of credit:
Mortgage loans:
Residential $54,023 63,416
Commercial and other 10,184 3,350
Other loans 8,617 6,239
Total $72,824 73,005
Standby letters of credit $ 274 215
Commitments to originate loans and unadvanced lines of credit are comprised
of commitments of $64.0 million relating to adjustable rate loans and $8.8
million relating to fixed rate at December 31, 1995.
At December 31, 1995, the Company had mortgage loans held for sale of
$891,000 which approximated their fair value. For mortgage loans which
are to be sold into the secondary market, the Company enters into
commitments to sell loans to third parties at the time that rate lock
agreements are entered into with the potential borrowers. At December 31,
1995, the Company had commitments to sell loans to third parties amounting
to $1.2 million. There were no mortgage loans held for sale and there were
commitments to sell mortgage loans to third parties of $170,000 as of
December 31, 1994.
The contractual amounts of the Company's off-balance sheet financial
instruments do not necessarily represent future cash requirements since
certain of these instruments may expire without being funded and others may
not be fully drawn upon. Loan origination commitments are contractual
agreements to lend to customers within specified time periods at interest
rates and other terms based on market conditions existing on the commitment
or closing date. Management evaluates each customer's creditworthiness on a
case-by-case basis and requires collateral based on this evaluation. Standby
letters of credit are issued on behalf of customers in connection with
contracts between the customer and third parties. Under a standby letter of
credit, the Company assures that a third party will receive specified funds
if a customer fails to meet his contractual obligation.
Lease Commitments
At December 31, 1995, the Company was obligated under a number of
noncancellable operating leases for office space. Certain leases contain
renewal options and provide for increased rentals based principally on
increases in the average Consumer Price Index. Rent expense under operating
leases was approximately $387,000, $415,000 and $403,000 for 1995, 1994
and 1993, respectively. The future minimum lease payments under operating
leases at December 31, 1995 were $325,000 for 1996, $291,000 for 1997,
$153,000 for 1998, $90,000 for 1999, $24,000 for 2000, and a total of
$538,000 for 2001 and later years.
Borrowing Lines
Pawling is a member of the Federal Home Loan Bank of New York ("FHLBNY") and,
at December 31, 1995, had immediate access to additional liquidity in the
form of borrowings from the FHLBNY of $80.0 million. The Company also has
access to the discount window of the Federal Reserve Bank. There were no
borrowings under these arrangements during 1995 and 1994.
Loss Contingency
On February 6, 1995, the Superintendent of Banks for the State of New York
(the "Superintendent") seized Nationar, a check-clearing and trust company,
freezing all of Nationar's assets. The Superintendent is now in the process
of winding up the affairs of Nationar and liquidating its assets. The Company
used Nationar for Federal funds transactions, as well as certain custodial
and investment services. At the time of seizure, the Company had
approximately $3.6 million in Federal funds sold and other deposits invested
with Nationar.
Substantial uncertainties exist regarding amounts ultimately distributable to
creditors of Nationar. These uncertainties include (i) the aggregate dollar
amounts of claims asserted by creditors; (ii) the legal process and results
of evaluation of claims, evaluation of asserted preferences, and resolution
of contested claims; (iii) the amounts that will be realized on the assets of
Nationar in its liquidation; and (iv) the legal and administrative expenses
that will be incurred during the course of liquidation. The Superintendent
has given preliminary indications that the assets may be inadequate to
satisfy all claims of creditors in full.
Based on the foregoing and a deficit in net shareholders' equity that was
noted in a report issued by the Superintendent in April 1995, management, as
advised by legal counsel, believes that there is reasonable likelihood that
the Company will not recover all of its investments in Federal funds and
other deposits at Nationar. As of December 31, 1995, the Company has
reclassified the Federal funds sold to other assets and has provided a
reserve of $1.0 million for probable loss of a portion of these Nationar
assets. The Company will periodically review this reserve as developments
occur, and future reserves may be required.
The foregoing events will not have any material effect on the Company's
ability to meet their liquidity needs. Management is taking all steps
necessary to recover the amounts owed to the Company by Nationar.
Legal Proceedings
In the normal course of business, the Company is involved in various
outstanding legal proceedings. Management has discussed the nature of these
proceedings with legal counsel. In the opinion of management, the financial
position of the Company will not be affected materially as a result of the
outcome of such legal proceedings.
Pending Acquisition of Branches
On December 26, 1995, Pawling entered into a Purchase and Assumption
Agreement (the "Agreement") with GreenPoint Bank ("GreenPoint") regarding the
purchase by the Company of two branch offices in Rockland County, New York.
Pursuant to the Agreement, the Company will purchase deposit liabilities of
approximately $154.0 million. In addition, the Company will also purchase
real estate and certain branch furniture, fixtures and equipment and will
assume certain leasehold liabilities of GreenPoint. There will be no loans
acquired in the transaction except for a small amount of passbook loans.
13. Fair Values Of Financial Instruments
SFAS No. 107 requires disclosures about the fair value of financial
instruments for which it is practicable to estimate fair value. The
definition of a financial instrument includes many of the assets and
liabilities recognized in the Company's consolidated balance sheet, as well
as certain off-balance sheet items.
Fair value is defined in SFAS No. 107 as the amount at which a financial
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Quoted market prices are
used to estimate fair values when those prices are available. However, active
markets do not exist for many types of financial instruments. Consequently,
fair values for these instruments must be estimated by management using
techniques such as discounted cash flow analysis and comparison to similar
instruments. Estimates developed using these methods are highly subjective
and require judgments regarding significant matters such as the amount and
timing of future cash flows and the selection of discount rates that
appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. Since these
estimates are made as of a specific point in time, they are susceptible to
material near-term changes.
Fair values estimated in accordance with SFAS No. 107 do not reflect any
premium or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect possible tax
ramifications or transaction costs. In addition, these fair values are not
necessarily indicative of the amounts at which financial assets will be
recovered or financial liabilities will be settled by the Company in the
ordinary course of business.
</TABLE>
<TABLE>
The following is a summary of the carrying amounts and fair values of the
Company's financial assets and financial liabilities (none of which are held
for trading purposes) at December 31:
<CAPTION>
1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
(In millions)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 14.9 14.9 14.1 14.1
Federal funds sold 23.0 23.0 57.7 57.7
Securities 147.0 147.3 127.7 125.1
Loans 531.7 530.0 473.1 460.7
Accrued interest receivable 5.0 5.0 4.2 4.2
Financial liabilities:
Demand, NOW, savings and
money market deposits 309.5 309.5 315.7 315.7
Time deposits 347.5 347.5 308.7 308.7
Accrued interest payable 2.1 2.1 1.9 1.9
</TABLE>
The following paragraphs describe the valuation methods used by the Company
to estimate fair values.
Securities
The fair values of securities were based on market prices or dealer quotes.
Loans
For valuation purposes, the loan portfolio was segregated into its
significant categories such as residential mortgages, commercial mortgages
and consumer loans. These categories were further analyzed, where
appropriate, based on significant financial characteristics such as type of
interest rate (fixed or adjustable) and payment status (performing or
non-performing). Fair values were estimated for each component using a
valuation method selected by management.
The fair values of performing residential mortgage and consumer installment
loans were estimated based on current secondary market prices or current
interest rates for similar loans, adjusted judgmentally for differences in
loan characteristics. The fair values of performing commercial mortgage and
construction loans were estimated by discounting the anticipated cash flows
from the respective portfolios. Estimates of the timing and amount of these
cash flows considered factors such as future loan prepayments and credit
losses. The discount rates reflected current market rates for loans with
similar terms to borrowers of similar credit quality.
The fair values of non-performing loans were based on management's analysis
of available market information, recent collateral appraisals and other
borrower- specific information.
Deposit Liabilities
In accordance with SFAS No. 107, the fair values of deposit liabilities with
no stated maturity (demand, NOW, savings and money market accounts) are equal
to the carrying amounts payable on demand. The fair values of time deposits
represent contractual cash flows discounted using interest rates currently
offered on deposits with similar characteristics and remaining maturities.
While at December 31, 1995 and 1994, the fair value indicated that time
deposits could be settled for an amount less than their carrying value,
depositors have the right to withdraw funds at carrying value less a penalty,
prior to contractual maturity. The Company does not consider the amount of
penalties associated with such early withdrawals to be material and
accordingly, at December 31, 1995 and 1994, the fair values of time deposits
is estimated to be the carrying value.
As required by SFAS No. 107, these estimated fair values do not include the
value of core deposit relationships which comprise a significant portion of
the Company's deposit base. Management believes that the Company's core
deposit relationships provide a relatively stable, low-cost funding source
which has a substantial intangible value separate from the deposit balances.
Other Financial Instruments
The other financial assets and financial liabilities shown in the preceding
table have fair values that approximate the respective carrying amounts
because the instruments are payable on demand or have short-term maturities
and present relatively low credit risk and interest rate risk.
Fair values of the loan origination commitments, unadvanced lines of credit
and standby letters of credit described in note 12 were estimated based on an
analysis of the interest rates and fees currently charged to enter into
similar transactions, considering the remaining terms of the instruments and
the creditworthiness of the potential borrowers. At December 31, 1995 and
1994, the fair values of these financial instruments were not significant.
The Company has no derivative investment products as defined in SFAS No. 119
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," at December 31, 1995 and 1994, nor has the Company
ever invested in such vehicles. Therefore, the disclosures as required by
SFAS No. 119 are not presented except as it relates to the fair value
disclosures in this note.
14. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
<TABLE>
The following are the condensed balance sheets of Progressive at December 31,
1995 and 1994, and its condensed statements of income and cash flows for 1995,
1994, and 1993:
<CAPTION>
1995 1994
Condensed Balance Sheets (In thousands)
<S> <C> <C>
Assets:
Cash and due from banks $ 45 72
Federal funds sold 2,370 3,700
Securities available for sale, at fair value 1,346 3,322
Investment in Pawling 62,629 59,471
Other assets 4,429 541
Total assets $70,819 67,106
Liabilities and shareholders' equity:
Accrued expenses and other liabilities $ 2,161 1,166
Shareholders' equity 68,658 65,940
Total liabilities and shareholders' equity $70,819 67,106
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
Condensed Statements of Income (In thousands)
<S> <C> <C> <C>
Operating income:
Dividends received from Pawling $5,652 7,485 440
Interest and other dividends 193 324 450
Management and service fees 418 523 199
(Loss) gain on securities (22) 25 --
6,241 8,357 1,089
Operating expense:
Salaries and employee benefits 407 463 434
Other 1,511 320 293
1,918 783 727
Income before income taxes 4,323 7,574 362
Income tax (benefit) expense (549) 37 (33)
Income before equity in undistributed income of Pawling 4,872 7,537 395
Equity in undistributed income of Pawling 1,914 133 6,666
Net income $6,786 7,670 7,061
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
Condensed Statements of Cash Flows (In thousands)
<S> <C> <C> <C>
Operating activities:
Net income $6,786 7,670 7,061
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of Pawling (1,914) (133) (6,666)
Other, net (2,917) 40 219
Net cash provided by operating activities 1,955 7,577 614
Investing activities:
Purchases of securities -- (202) (2,095)
Proceeds from maturities of securities 303 652 1,450
Proceeds from sales of securities 1,801 385 --
Net cash provided by (used in) investing activities 2,104 835 (645)
Financing activities:
Cash dividends paid on common stock (1,766) (1,085) (440)
Net proceeds on issuance of common stock 288 63 130
Purchases of treasury stock (3,938) (4,307) (270)
Net cash used in financing activities (5,416) (5,329) (580)
Net increase (decrease) in cash and cash equivalents (1,357) 3,083 (611)
Cash and cash equivalents at beginning of year 3,772 689 1,300
Cash and cash equivalents at end of year $2,415 3,772 689
Supplemental data:
Transfer of securities to available
for sale upon adoption of SFAS No. 115 $ -- 4,305 --
15. Quarterly results of operations (unaudited)
</TABLE>
<TABLE>
<CAPTION>
Quarterly unaudited financial information follows:
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter Year
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest and dividend income $13,074 13,657 14,248 14,522 55,501
Interest expense 6,221 6,737 7,248 7,486 27,692
Net interest income 6,853 6,920 7,000 7,036 27,809
Provision for loan losses 125 125 150 200 600
Net (loss) gain on securities -- (8) 53 304 349
Net gain on sale of loans 40 61 35 67 203
Other income 639 675 662 778 2,754
Other expense 4,834 4,778 4,468 5,199 19,279
Income before income taxes 2,573 2,745 3,132 2,786 11,236
Income tax expense 1,059 1,121 1,290 980 4,450
Net income $ 1,514 1,624 1,842 1,806 6,786
Net income per common share $ 0.55 0.59 0.68 0.68 2.50
</TABLE>
<TABLE>
<CAPTION>
1994
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 11,921 12,361 12,878 13,087 50,247
Interest expense 4,791 4,985 5,445 5,956 21,177
Net interest income 7,130 7,376 7,433 7,131 29,070
Provision for loan losses 250 250 250 750 1,500
Net gain (loss) on securities 14 (18) 43 (1,058) (1,019)
Net gain (loss) on sale of loans 40 (65) 32 (1,462) (1,455)
Other income 646 599 676 709 2,630
Other expense 5,556 5,521 4,685 4,922 20,684
Income (loss) before
income taxes 2,024 2,121 3,249 (352) 7,042
Income tax expense (benefit) 219 237 1,333 (2,417) (628)
Net income $ 1,805 1,884 1,916 2,065 7,670
Net income per common share $ 0.61 0.65 0.66 0.74 2.66
Shareholder Information
Corporate Offices
Progressive Bank, Inc.
1301 Route 52
Fishkill, New York 12524-7000
(914) 897-7400
Annual Meeting
The annual meeting of Progressive Bank, Inc. will be held at 6:30 p.m.,
Thursday, April 25, 1996 at the Bank's offices on Route 22, Pawling, New
York.
Form 10-K
For the 1995 fiscal year, Progressive Bank, Inc. will file an Annual Report
on Form 10-K. Shareholders wishing a copy may obtain one free of charge by
writing:
Beatrice D. Parent, Secretary
Progressive Bank, Inc.
1301 Route 52
Fishkill, New York 12524-7000
Transfer Agent and Registrar
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Counsel
McCarthy, Fingar, Donovan, Drazen & Smith, L.L.P.
11 Martine Avenue
White Plains, New York 10606-1908
Independent Auditors
KPMG Peat Marwick LLP
74 North Pearl Street
Albany, New York 12207
Common Stock
The common stock of Progressive Bank, Inc. is traded on the NASDAQ Stock
Market under the symbol PSBK. The approximate number of shareholders was 1,077
at December 31, 1995.
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<CAPTION>
The high and low sales prices of the Company's common stock in the
Over-the-Counter market for each quarterly period during the past two years
were as follows:
1995 High Low
<S> <C> <C>
First Quarter $25.50 22.25
Second Quarter 28.25 24.00
Third Quarter 27.75 25.00
Fourth Quarter 29.50 24.25
1994
First Quarter $19.75 16.50
Second Quarter 23.25 18.50
Third Quarter. 25.00 21.75
Fourth Quarter 23.25 19.75
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These quotations represent prices between dealers and do not include retail
markup, markdown or commission. They do not necessarily represent actual
transactions.
A quarterly cash dividend of $0.20 per common share was paid in the fourth
quarter of 1995. Quarterly cash dividends of $0.15 per common share were
declared and paid in the first, second and third quarters of 1995. Quarterly
cash dividends of $0.10 per common share were declared and paid in the
second, third and fourth quarters of 1994. A quarterly cash dividend of $0.075
per common share was declared and paid in the first quarter of 1994.
Exhibit 22
Subsidiaries of Registrant
The Registrant only has one subsidiary, Pawling Savings Bank.
Exhibit 24
Consent of Independent Certified Public Accountants
The Board of Directors and Shareholders
Progressive Bank, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-10235 and 33-64888) on Forms S-8 of Progressive Bank, Inc. of our report
dated January 19, 1996, relating to the consolidated balance sheets of
Progressive Bank, Inc. and subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report appears in the December 31, 1995 annual report on Form 10-K of
Progressive Bank, Inc. Our report refers to a change in the method of
accounting for income taxes and postretirement benefits in 1993 and for
certain securities in 1994.
/s/ KPMG Peat Marwick LLP
Albany, New York
March 16, 1996
Financial Data Statement
[ARTICLE] 9
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-END] DEC-31-1995
[CASH] 14,923
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 22,970
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 106,901
[INVESTMENTS-CARRYING] 40,148
[INVESTMENTS-MARKET] 40,386
[LOANS] 539,692
[ALLOWANCE] 8,033
[TOTAL-ASSETS] 743,214
[DEPOSITS] 657,012
[SHORT-TERM] 0
[LIABILITIES-OTHER] 17,544
[LONG-TERM] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 2,952
[OTHER-SE] 65,706
[TOTAL-LIABILITIES-AND-EQUITY] 743,214
[INTEREST-LOAN] 44,806
[INTEREST-INVEST] 8,637
[INTEREST-OTHER] 2,058
[INTEREST-TOTAL] 55,501
[INTEREST-DEPOSIT] 27,692
[INTEREST-EXPENSE] 27,692
[INTEREST-INCOME-NET] 27,809
[LOAN-LOSSES] 600
[SECURITIES-GAINS] 349
[EXPENSE-OTHER] 19,279
[INCOME-PRETAX] 11,236
[INCOME-PRE-EXTRAORDINARY] 11,236
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 6,786
[EPS-PRIMARY] 2.50
[EPS-DILUTED] 2.50
[YIELD-ACTUAL] 4.09
[LOANS-NON] 5,591
[LOANS-PAST] 172
[LOANS-TROUBLED] 1,340
[LOANS-PROBLEM] 2,430
[ALLOWANCE-OPEN] 9,402
[CHARGE-OFFS] 2,384
[RECOVERIES] 415
[ALLOWANCE-CLOSE] 8,033
[ALLOWANCE-DOMESTIC] 8,033
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
