Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 030525
HUDSON VALLEY HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
NEW YORK 13-3148745
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
21 SCARSDALE ROAD, YONKERS, NEW YORK 10707
(ADDRESS PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 961-6100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, ($0.20 par value per share) None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
CLASS OUTSTANDING AT MARCH 1, 2001
----- ----------------------------
Common Stock 4,728,168 Shares
($0.20 par value)
The aggregate market value on March 1, 2001 of voting stock held by
non-affiliates of the Registrant was approximately $114,635,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders is incorporated by reference in Part III of this report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
FORM 10-K
TABLE OF CONTENTS
PAGE NO.
--------
PART I
ITEM 1 BUSINESS.................................................... 1
ITEM 2 PROPERTIES.................................................. 12
ITEM 3 LEGAL PROCEEDINGS........................................... 12
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 13
ITEM 6 SELECTED FINANCIAL DATA..................................... 16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 17
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 42
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 46
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 74
PART III
ITEMS 10 THROUGH 13. (INCORPORATED BY REFERENCE TO THE DEFINITIVE
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2000 WHICH WILL BE FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION NOT LATER THAN 120 DAYS AFTER THE END OF THAT
FISCAL YEAR)
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 74
SIGNATURES..................................................................... 76
3
PART I
ITEM 1 -- BUSINESS
GENERAL
Hudson Valley Holding Corp. (the "Company") is a New York corporation
founded in 1982. The Company is registered as a bank holding company under the
Bank Holding Company Act of 1956.
The Company provides financial services through its wholly-owned
subsidiary, Hudson Valley Bank (the "Bank"), a New York chartered commercial
bank established in 1972. The Bank is the largest independent bank headquartered
in Westchester County, New York. The Bank has 13 branch offices in Westchester
County and 1 in Bronx County, New York. The Company and the Bank derive
substantially all of their revenue and income from providing banking and related
services to small and medium-sized businesses, professionals, municipalities,
not-for-profit organizations and individuals located in Westchester County and,
to a lesser extent, the Bronx.
Our principal executive offices are located at 21 Scarsdale Road, Yonkers,
New York 10707.
The Bank's principal customers are small and medium-sized businesses,
professionals, individuals, municipalities and not-for-profit organizations
located in Westchester County and, to a lesser extent, Bronx County, New York.
The Bank's strategy is to operate as a community-oriented banking institution
dedicated to providing personalized service to customers and focusing products
and services on selected segments of the market. The Bank believes that its
ability to attract and retain customers is due primarily to its focused approach
to its market, its personalized and professional services, its product
offerings, its experienced staff, its knowledge of its local markets and its
ability to provide responsive solutions to customers needs. The Bank provides
these products and services to a diverse range of customers and does not rely on
a single large depositor for a significant percentage of deposits.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements relate to future events or our future
financial performance. We have attempted to identify forward-looking statements
by terminology including "anticipates," "believes," "can," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "potential," "predicts,"
"should" or "will" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, that may cause our or the banking
industry's actual results, levels of activity, or performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
SUBSIDIARIES OF THE BANK
In 1987, the Bank formed a wholly-owned subsidiary, Hudson Valley Mortgage
Corp., for the purpose of providing mortgage banking services primarily in
Westchester County and surrounding areas. This subsidiary discontinued
operations in 1995, sold its assets and transferred its employees to the Bank.
In late 2000, this subsidiary was renamed HVB Leasing Corp. It commenced
operations in early 2001, originating lease financing transactions on behalf of
the Bank.
In 1991, the Bank formed a wholly-owned subsidiary, Hudson Valley
Investment Corp., a Delaware corporation, primarily for the purpose of acquiring
and managing a portfolio of investment securities, some of which were previously
owned by the Bank.
In 1993, the Bank formed a wholly-owned subsidiary, Sprain Brook Realty
Corp., primarily for the purpose of holding property obtained by the Bank
through foreclosure in its normal course of business.
1
4
In 1997, the Bank formed a subsidiary (of which the Bank owns more than 99
percent of the voting stock), Grassy Sprain Real Estate Holdings, Inc., a real
estate investment trust, primarily for the purpose of acquiring and managing a
portfolio of mortgage-backed securities, loans collateralized by real estate and
other investment securities previously owned by the Bank.
The Company has no separate operations or revenues apart from the Bank and
its subsidiaries. The Bank and its subsidiaries are referred to collectively as
the "Bank".
EMPLOYEES
At December 31, 2000, we employed 214 full-time employees and 44 part-time
employees. We provide a variety of benefit plans, including group life, health,
dental, disability, retirement and stock option plans. We consider our employee
relations to be satisfactory.
OUR MARKET AREA
Westchester County is a suburban county located in the northern sector of
the New York metropolitan area. It has a large and varied economic base
containing many corporate headquarters, research facilities, manufacturing firms
as well as well-developed trade and service sectors. The median family income,
based on 1990 census data, and adjusted by the U.S. Department of Housing and
Urban Development in 1997 and 1998 was $71,600 and $74,200, respectively. The
County's 1995 per capita personal income of $40,696 placed Westchester County
sixth highest among the nation's 3,107 counties. In November, 1997, the County's
unemployment rate was 3.4 percent, as compared to New York State at 5.9 percent
and the United States at 4.3 percent. The County has over 40,000 small and
medium sized businesses, which form a large portion of the Bank's current and
potential customer base.
Bronx County is one of the five boroughs of New York City and borders on
Westchester County. While it also has a large and varied economic base, the
median family income in the Bronx is much lower than Westchester County. The
median family income, based on 1990 census data and adjusted by the U.S.
Department of Housing and Urban Development in 1999, was $49,800. The northern
part of Bronx County has a well-developed and growing base of professionals and
small and medium size businesses. The Company believes that this potential
customer base offers growth opportunities similar to those the Bank has
developed in Westchester County.
COMPETITION
The banking and financial services business in New York generally, and in
Westchester and Bronx Counties specifically, is highly competitive. There are
approximately 19 commercial banks with branch banking offices in our market
area. In addition, a number of other depository institutions compete in our
market area including savings banks, savings and loan associations, credit
unions and brokerage houses. The Bank competes with local offices of large New
York City commercial banks due to its proximity to New York City. Other
financial institutions, such as mutual funds, finance companies, factoring
companies, mortgage bankers and insurance companies also compete with the Bank
for both loans and deposits. The Bank is smaller in size than most of its
competitors. In addition, many non-bank competitors are not subject to the same
extensive federal regulations that govern bank holding companies and federally
insured banks.
According to statistics gathered by the FDIC, there were in 1997 and 1998,
respectively, 320 and 384 separate banks, credit unions, mortgage
brokerages/companies and finance companies operating within our market area that
originated at least one home purchase, home refinance, home improvement or
multi-family loan. In 1997 and 1998, the Bank ranked 64th (0.41 percent market
share) and 59th (0.35 percent market share), respectively, in terms of market
share among these lending institutions. While there are only 9 other lenders
headquartered in Westchester County, we consider 14 financial institutions as
the Bank's primary local competition for small business and mortgage loans.
Competition for depositors' funds and for credit-worthy loan customers is
intense. A number of larger banks are increasing their efforts to serve smaller
commercial borrowers. Competition among financial
2
5
institutions is based upon interest rates and other credit and service charges,
the quality of service provided, the convenience of banking facilities, the
products offered and, in the case of larger commercial borrowers, relative
lending limits.
Federal legislation permits adequately capitalized bank holding companies
to expand across state lines to offer banking services. In light of this, it is
possible for large organizations to enter many new markets, including our market
area. Many of these competitors, by virtue of their size and resources, may
enjoy efficiencies and competitive advantages over the Bank in pricing, delivery
and marketing of their products and services. The passage of the
Gramm-Leach-Bliley Act in 1999 may also increase the number of powerful
competitors in our market by allowing other financial institutions to form or
acquire banking subsidiaries.
In response to competition, we have focused our attention on customer
service and on addressing the needs of small businesses, professionals and
not-for-profits located in the communities in which we operate. We emphasize
community relations and relationship banking. We believe that despite the
continued growth of large institutions and the potential for large out-of-area
banking and financial institutions to enter our market area there will continue
to be opportunities for efficiently-operated, service-oriented,
well-capitalized, community-based banking organizations to grow by serving
customers that are not served well by larger institutions or do not wish to bank
with such large institutions.
The Company's strategy is to increase earnings through moderate growth
within its existing market. The Bank's primary market area, Westchester County
and Bronx County, has a high concentration of the types of customers that the
Bank desires to serve. The Bank expects to continue to expand by opening new
full service banking facilities, by expanding loan originations in its market
area, by enhancing and expanding computerized and telephonic products and
through strategic alliances and contractual relationships.
During the past five years, the Company has focused on maintaining existing
customer relationships and adding new relationships by providing products and
services that meet these customers' needs. The focus of the Bank's products and
services continues to be toward small and medium size businesses, professionals,
not-for-profit organizations and municipalities. The Bank has expanded its
market from Westchester County to include sections of Bronx County. The Bank has
opened two new facilities during the past five years, one in New Rochelle,
Westchester County and one in Bronx County, and anticipates opening additional
facilities in the future. The Bank has also invested in technology based
products and services to meet customer needs. In addition, the Bank has expanded
products and services, particularly in its lending programs, and its offering of
investment management and trust services. As a result, the Bank has
approximately doubled its total assets during this five year period.
LENDING
The Bank engages in a variety of lending activities which are primarily
categorized as real estate, commercial and industrial, individual and lease
financing. At December 31, 2000, gross loans totaled $512.3 million. Gross loans
were comprised of the following loan types:
Real estate................................................. 72.2%
Commercial and industrial................................... 21.6
Individuals................................................. 2.1
Lease financing............................................. 4.1
-----
Total....................................................... 100.0%
At December 31, 2000, the Bank's unsecured lending limit to one borrower
under applicable regulations was approximately $14.5 million.
In managing its loan portfolio, the Bank focuses on:
(i) the application of its established underwriting criteria,
(ii) the establishment of individual lending authorities well below
the Bank's legal lending authority,
3
6
(iii) the involvement by senior management and the Board of Directors
in the loan approval process for designated categories, types or amounts of
loans,
(iv) an awareness of concentration by industry or collateral, and
(v) the monitoring of loans for timely payment and to seek to identify
potential problem loans.
The Bank utilizes its credit department to assess acceptable and
unacceptable credit risks based upon the Bank's established underwriting
criteria. The Bank utilizes its loan officers, branch managers and credit
department to identify changes in a borrower's financial condition that may
affect the borrower's ability to perform in accordance with loan terms. Lending
policies and procedures place an emphasis on assessing a borrower's income flow
as well as collateral values. Further, the Bank utilizes systems and analysis
which assist in monitoring loan delinquencies. The Bank utilizes its loan
officers, loan collection department and legal counsel in collection efforts on
past due loans. Additional collateral or guarantees may be requested where
delinquencies remain unresolved.
An independent loan review department reviews loans in the Bank's portfolio
and assigns a risk grading to each reviewed loan. Loans are reviewed based upon
the type of loan, the collateral for the loan, the amount of the loan and any
other pertinent information. The loan review department reports directly to the
Board of Directors.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Loan Portfolio" for further information related to the
Company's loan portfolio and lending activities.
DEPOSITS
The Bank offers deposit products ranging in maturity from demand-type
accounts to certificates of deposit with maturities of up to 5 years. The Bank's
deposits are generally derived from customers within its primary marketplace.
The Bank solicits only certain types of deposits from outside its market area,
primarily from certain professionals and government agencies. The Bank does not
pay fees to others to obtain deposits.
The Bank sets its deposit rates to remain generally competitive with other
financial institutions in its market, although the Bank does not generally seek
to match the highest rates paid by competing institutions. The Bank has
established a process to review interest rates on all deposit products and,
based upon this process, updates its deposit rates weekly. The Company's
Asset/Liability Management Policy and its Liquidity Policy set guidelines to
manage overall interest rate risk and liquidity. These guidelines can affect the
rates paid on deposits. Deposit rates are reviewed under these policies
periodically since deposits are the Bank's primary source of liquidity.
The Bank provides deposit pick up services for certain business customers.
The Bank has 9 automated teller machines, or ATMs, at various locations, which
generate activity fees based on use by other banks' customers.
For more information regarding the Bank's deposits, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Deposits."
PORTFOLIO MANAGEMENT SERVICES
The Bank provides portfolio management services to certain pension and
retirement accounts and executes securities transactions on behalf of certain
customers by utilizing administrative support, investment products and
methodologies provided to the Bank through an alliance with an unaffiliated
commercial bank. The Bank has periodically explored the possibility of
developing relationships with others that provide similar investment management
services, and the Bank believes that a number of alternative providers of these
services exist. The Bank also provides a software application designed to meet
specific administrative needs of bankruptcy trustees through a marketing and
licensing agreement with the application vendor. While the Bank is interested in
developing new customer relationships with bankruptcy trustees by offering them
access to this software, the Bank does not believe that its relationship with
the application vendor is material to its business.
4
7
In addition, the Bank has participated in loans originated by various other
financial institutions within the normal course of business and within standard
industry practices.
SUPERVISION AND REGULATION
Banks and bank holding companies are extensively regulated under both
federal and state law. We have set forth below brief summaries of various
aspects of supervision and regulation which do not purport to be complete and
which are qualified in their entirety by reference to applicable laws, rules and
regulations.
REGULATIONS TO WHICH THE COMPANY IS SUBJECT
As a bank holding company, the Company is regulated by and subject to the
supervision of the Board of Governors of the Federal Reserve System (the "FRB")
and is required to file with the FRB an annual report and such other information
as may be required. The FRB has the authority to conduct examinations of the
Company as well.
The Bank Holding Company Act of 1956 (the "BHC Act") limits the types of
companies which we may acquire or organize and the activities in which they may
engage. In general, a bank holding company and its subsidiaries are prohibited
from engaging in or acquiring control of any company engaged in non-banking
activities unless such activities are so closely related to banking or managing
and controlling banks as to be a proper incident thereto. Activities determined
by the FRB to be so closely related to banking within the meaning of the BHC Act
include operating a mortgage company, finance company, credit card company,
factoring company, trust company or savings association; performing certain data
processing operations; providing limited securities brokerage services; acting
as an investment or financial advisor; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation service; operating a
collection agency; and providing certain courier services. The FRB also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance unrelated to credit transactions, are not closely related to banking
and therefore are not a proper activity for a bank holding company.
The BHC Act requires every bank holding company to obtain the prior
approval of the FRB before acquiring substantially all the assets of, or direct
or indirect ownership or control of more than five percent of the voting shares
of, any bank. Subject to certain limits and restrictions, a bank holding
company, with the prior approval of the FRB, may acquire an out-of-state bank.
In November 1999, Congress amended certain provisions of the BHC Act
through passage of the Financial Services Modernization Act of 1999 (the
"Gramm-Leach-Bliley Act"). Under this new legislation, a bank holding company
may elect to become a "financial holding company" and thereby engage in a
broader range of activities than would be permissible for traditional bank
holding companies. In order to qualify for the election, all of the depository
institution subsidiaries of the bank holding company must be well capitalized
and well managed, as defined under FRB regulations, and all such subsidiaries
must have achieved a rating of "satisfactory" or better with respect to meeting
community credit needs. Pursuant to the Gramm-Leach-Bliley Act, financial
holding companies will be permitted to engage in activities that are "financial
in nature" or incidental or complementary thereto, as determined by the FRB. The
Gramm-Leach-Bliley Act identifies several activities as "financial in nature",
including, among others, insurance underwriting and agency activities,
investment advisory services, merchant banking and underwriting, and dealing in
or making a market in securities.
The Company believes it would meet the regulatory criteria that would
enable it to elect to become a financial holding company. The Company has not
yet determined whether to make such an election.
The Gramm-Leach-Bliley Act will also make it possible for entities engaged
in providing various other financial services to form financial holding
companies and form or acquire banks. Accordingly, the Gramm-Leach-Bliley Act
will make it possible for a variety of financial services firms to offer
products and services comparable to the products and services offered by the
Bank.
5
8
There are various statutory and regulatory limitations regarding the extent
to which present and future banking subsidiaries of the Company can finance or
otherwise transfer funds to the Company or its non-banking subsidiaries, whether
in the form of loans, extensions of credit, investments or asset purchases,
including regulatory limitation on the payment of dividends directly or
indirectly to the Company from the Bank. Federal and state bank regulatory
agencies also have the authority to limit further the Bank's payment of
dividends based on such factors as the maintenance of adequate capital for such
subsidiary bank, which could reduce the amount of dividends otherwise payable.
Under applicable banking statutes, at December 31, 2000, the Bank could have
declared additional dividends of approximately $27.3 million to the Company
without prior regulatory approval.
Under the policy of the FRB, the Company is expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank in
circumstances where we might not do so absent such policy. In addition, any
subordinated loans by the Company to the Bank would also be subordinate in right
of payment to depositors and obligations to general creditors of such subsidiary
banks. The Company currently has no loans to the Bank.
The FRB has established capital adequacy guidelines for bank holding
companies that are similar to the Federal Deposit Insurance Corporation ("FDIC")
capital requirements for the Bank described below. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources" and Note 8 to the Consolidated Financial Statements. As of December
31, 2000, our Tier 1 and Total risk-based capital ratios were 14.8 percent and
15.6 percent, respectively, and our leverage capital ratio was 7.3 percent. All
ratios exceed the requirements under these regulations and classify us as "well
capitalized."
REGULATIONS TO WHICH THE BANK IS SUBJECT
The Bank is organized under the Banking Law of the State of New York. Its
operations are subject to federal and state laws applicable to commercial banks
and to extensive regulation, supervision and examination by the New York
Superintendent of Banks and the Banking Board of the State of New York, as well
as by the FDIC, as its primary federal regulator and insurer of deposits. While
the Bank is not a member of the Federal Reserve System, it is subject to certain
regulations of the FRB. In addition to banking laws, regulations and regulatory
agencies, the Bank is subject to various other laws, regulations and regulatory
agencies, all of which directly or indirectly affect the Bank's operations. The
New York Superintendent of Banks and the FDIC examine the affairs of the Bank
for the purpose of determining its financial condition and compliance with laws
and regulations.
The New York Superintendent of Banks and the FDIC have significant
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies whether by the FDIC, Congress, the New
York Superintendent of Banks or the New York Legislature could have a material
adverse impact on the Bank.
Federal laws and regulations also limit, with certain exceptions, the
ability of state banks to engage in activities or make equity investments that
are not permissible for national banks. The Company does not expect such
provisions to have a material adverse effect on the Company or the Bank.
Capital Standards
The FDIC has adopted risk-based capital guidelines to which FDIC-insured,
state-chartered banks that are not members of the Federal Reserve System, such
as the Bank, are subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to the
differences in risk profiles among banking organizations. Banks are required to
maintain minimum levels of capital based upon their total assets and total
"risk-weighted assets." For purposes of these requirements, capital is comprised
of both Tier 1 and Tier 2 capital. Tier 1 capital consists primarily of common
stock and retained earnings. Tier 2 capital consists primarily of loan loss
reserves, subordinated debt, and convertible securities. In determining total
capital, the amount of Tier 2 capital may not exceed the amount of Tier 1
capital. A
6
9
bank's total "risk-based assets" are determined by assigning the bank's assets
and off-balance sheet items (e.g., letters of credit) to one of four risk
categories based upon their relative credit risks. The greater the risk
associated with an asset, the greater the amount of such asset that will be
subject to capital requirements. Banks must satisfy the following three minimum
capital standards:
(1) Tier 1 capital in an amount equal to between 4 percent and 5
percent of total assets (the "leverage ratio");
(2) Tier 1 capital in an amount equal to 4 percent of risk-weighted
assets; and
(3) total Tier 1 and Tier 2 capital in an amount equal to 8 percent of
risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), defines specific capital categories based upon an institution's
capital ratios. The capital categories, in declining order, are: (i) well
capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv)
significantly undercapitalized; and (v) critically undercapitalized. Under
FDICIA and the FDIC's prompt corrective action rules, the FDIC may take any one
or more of the following actions against an undercapitalized bank: restrict
dividends and management fees, restrict asset growth and prohibit new
acquisitions, new branches or new lines of business without prior FDIC approval.
If a bank is significantly undercapitalized, the FDIC may also require the bank
to raise capital, restrict interest rates a bank may pay on deposits, require a
reduction in assets, restrict any activities that might cause risk to the bank,
require improved management, prohibit the acceptance of deposits from
correspondent banks and restrict compensation to any senior executive officer.
When a bank becomes critically undercapitalized, (i.e., the ratio of tangible
equity to total assets is equal to or less than 2 percent), the FDIC must,
within 90 days thereafter, appoint a receiver for the bank or take such action
as the FDIC determines would better achieve the purposes of the law. Even where
such other action is taken, the FDIC generally must appoint a receiver for a
bank if the bank remains critically undercapitalized during the calendar quarter
beginning 270 days after the date on which the bank became critically
undercapitalized.
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4 percent, a Tier 1 capital to risk-weighted
assets ratio of at least 4 percent and total Tier 1 and Tier 2 capital to
risk-weighted assets ratio of at least 8 percent. As of December 31, 2000, the
most recent notification from the FDIC categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," the Bank must maintain a minimum total
risk-based capital ratio of 10 percent, a Tier 1 risk-based capital ratio of at
least 6 percent and a Tier 1 leverage ratio of at least 5 percent. There are no
conditions that we believe have changed the Bank's category.
See Note 8 to the Consolidated Financial Statements.
Safety and Soundness Standards
Federal law requires each federal banking agency to prescribe for
depository institutions under its jurisdiction standards relating to, among
other things: internal controls; information systems and audit systems; loan
documentation; credit underwriting; interest rate risk exposure; asset growth;
compensation; fees and benefits; and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
final regulations and Interagency Guidelines Establishing Standards for Safety
and Soundness (the "Guidelines") to implement these safety and soundness
standards. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset quality;
earnings and compensation; fees and benefits. If the appropriate federal banking
agency determines that an institution fails to meet any standard prescribed by
the Guidelines, the agency may require the institution to submit to the agency
an acceptable plan to achieve compliance with the standard set by the Federal
Deposit Insurance Act. The final regulations establish deadlines for submission
and review of such safety and soundness compliance plans.
The federal banking agencies also have adopted final regulations for real
estate lending prescribing uniform guidelines for real estate lending. The
regulations require insured depository institutions to adopt
7
10
written policies establishing standards, consistent with such guidelines, for
extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Premiums for Deposit Insurance
The FDIC has implemented a risk-based assessment system, under which an
institution's deposit insurance premium assessment is based on the probability
that the deposit insurance fund will incur a loss with respect to the
institution, the likely amount of any such loss, and the revenue needs of the
deposit insurance fund.
Under this risk-based assessment system, banks are categorized into one of
three capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three categories based on supervisory evaluations
by its primary federal regulator (in the Bank's case, the FDIC). The three
supervisory categories are: financially sound with only a few minor weaknesses
(Group A), demonstrates weaknesses that could result in significant
deterioration (Group B), and poses a substantial probability of loss (Group C).
The capital ratios used by the FDIC to define well-capitalized, adequately
capitalized and undercapitalized are the same in the FDIC's prompt corrective
action regulations. The Bank is currently considered a "Well Capitalized Group
A" institution and, therefore, is not subject to any quarterly FDIC Bank
Insurance Fund ("BIF") assessments. This could change in the future based on the
capitalization of the BIF.
FDIC insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the insured institution has engaged in
unsafe or unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule or order of, or
conditions imposed by, the FDIC. Neither the Company nor the Bank is aware of
any practice, condition or violation that might lead to termination of deposit
insurance.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal") was enacted to ease restrictions on interstate banking.
Riegle-Neal allows the FRB to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other that such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The FRB may not approve the
acquisition of a bank that has not been in existence for a minimum time period
(not exceeding five years) specified by the statutory law of the host state.
Riegle-Neal also prohibits the FRB from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10 percent of the insured deposits in the United States or 30 percent
or more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Riegle-Neal does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30 percent state-wide
concentration limit contained in Riegle-Neal.
Community Reinvestment Act and Fair Lending Developments
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, the Bank has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
prescribe specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA) amended the CRA to
require public disclosure of an
8
11
institution's CRA rating and require the FDIC to provide a written evaluation of
an institution's CRA performance utilizing a four-tiered descriptive rating
system. Institutions are evaluated and rated by the FDIC as "Outstanding",
"Satisfactory", "Needs to Improve" or "Substantial Non Compliance." Failure to
receive at least a "Satisfactory" rating may inhibit an institution from
undertaking certain activities, including acquisitions of other financial
institutions, which require regulatory approval based, in part, on CRA
Compliance considerations. As of its last CRA examination in June, 1999, the
Bank received a rating of "Satisfactory."
Gramm-Leach-Bliley Act
The present bank regulatory scheme is undergoing significant change, both
as it affects the banking industry itself and as it affects competition between
banks and non-banking financial institutions. There has been a significant
regulatory change in the bank merger and acquisition area, in the products and
services banks can offer, and in the non-banking activities in which bank
holding companies may engage. Under the Gramm-Leach-Bliley Act enacted by
Congress on November 12, 1999, banks and bank holding companies may now
affiliate with insurance and securities companies. In part as a result of these
changes, banks are now actively competing with other types of non-depository
institutions, such as money market funds, brokerage firms, insurance companies
and other financial services enterprises. It is not possible at this time to
assess what impact these changes in the regulatory scheme will ultimately have
on the Bank.
Governmental Monetary Policy
The Company's and Bank's business and earnings depend in large part on
differences in interest rates. One of the most significant factors affecting the
Company's and the Bank's earnings is the difference between (1) the interest
rates paid by the Bank on its deposits and its other borrowings (liabilities)
and (2) the interest rates received by the Bank on loans made to its customers
and securities held in its investment portfolio (assets). The value of and yield
on its assets and the rates paid on its liabilities are sensitive to changes in
prevailing market rates of interest. Therefore, the earnings and growth of the
Company and the Bank will be influenced by general economic conditions, the
monetary and fiscal policies of the federal government, including the Federal
Reserve System, whose function is to regulate the national supply of bank credit
in order to influence inflation and overall economic growth. Its policies are
used in varying combinations to influence overall growth of bank loans,
investments and deposits and may also affect interest rates charged on loans,
earned on investments or paid for deposits.
In view of changing conditions in the national and local economies, no
prediction can be made by the Company as to possible future changes in interest
rates, deposit levels, loan demand, or availability of investment securities and
the resulting effect on the business or earnings of the Company and the Bank.
RISK FACTORS
OUR MARKETS ARE INTENSELY COMPETITIVE, AND OUR PRINCIPAL COMPETITORS ARE LARGER
THAN US.
We face significant competition both in making loans and in attracting
deposits. This competition is based on, among other things, interest rates and
other credit and service charges, the quality of services rendered, the
convenience of the banking facilities, the range and type of products offered
and the relative lending limits in the case of loans to larger commercial
borrowers. The Westchester County and Bronx County area of New York has a very
high density of financial institutions, many of which are branches of
institutions which are significantly larger than us and have greater financial
resources and higher lending limits. Many of these institutions offer services
that we do not or cannot provide. Nearly all such institutions compete with us
to varying degrees.
Our competition for loans comes principally from commercial banks, savings
banks, savings and loan associations, credit unions, mortgage banking companies,
insurance companies and other financial service companies. Our most direct
competition for deposits has historically come from commercial banks, savings
banks, savings and loan associations, and money market funds and other
securities funds offered by brokerage
9
12
firms and other similar financial institutions. We face additional competition
for deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms, and insurance companies.
Competition may increase in the future as a result of regulatory change in
the financial services industry. We expect to face increased competitive
pressure from non-banking sources as a result of the passage by Congress of the
Financial Services Modernization Act of 1999 (the "Gramm-Leach-Bliley Act"),
which permits banks and bank holding companies to affiliate more easily with
other financial service institutions, such as insurance companies and brokerage
firms. Although the impact of this legislation on us cannot be predicted, it is
likely that financial institutions in our market will begin to offer a wider
range of services. Because of our smaller size, we may have less opportunity to
take advantage of the flexibility offered by the new legislation.
WE OPERATE IN A HIGHLY REGULATED INDUSTRY AND COULD BE ADVERSELY AFFECTED BY
GOVERNMENTAL MONETARY POLICY OR REGULATORY CHANGE.
The Company, as a bank holding company, and the Bank are subject to
regulation by several government agencies, including the Federal Reserve Board,
the Federal Deposit Insurance Corporation, the New York Superintendent of Banks,
and the Banking Board of the State of New York. Changes in governmental economic
and monetary policy not only can affect the ability of the Bank to attract
deposits and make loans, but can also affect the demand for business and
personal lending and for real estate mortgages.
Government regulations affect virtually all areas of our operations,
including our range of permissible activities, products and services, the
geographic locations in which our services can be offered, the amount of capital
required to be maintained to support operations, the right to pay dividends and
the amount which the Bank can pay to obtain deposits. The passage of the
Gramm-Leach-Bliley Act, which permits banks and bank holding companies to
affiliate more easily with other financial service firms, could significantly
change the nature of the financial services market over the next few years.
There can be no assurance that we will be able to adapt successfully to changes
initiated by this or other governmental or regulatory action.
OUR INCOME IS SENSITIVE TO CHANGES IN INTEREST RATES.
The Bank's profitability, like that of most banking institutions, depends
to a large extent upon its net interest income. Net interest income is the
difference between interest income received on interest-earning accounts,
including loans and securities, and the interest paid on interest-bearing
liabilities, including deposits and borrowings. Accordingly, the Bank's results
of operations and financial condition depend largely on movements in market
interest rates and its ability to manage its assets and liabilities in response
to such movements.
The Bank tries to manage its interest rate risk exposure by closely
monitoring its assets and liabilities in an effort to reduce the effects of
changes in interest rates primarily by altering the mix and maturity of the
Bank's loans, investments and funding sources.
The Bank is currently positioned to benefit from a falling interest rate
environment. Significant rate increases could have an adverse effect on the
Bank's net interest income by decreasing the spread between the rates earned on
assets and paid on liabilities. Changes in interest rates also affect the volume
of loans originated by the Bank, as well as the value of its loans and other
interest-earning assets, including investment securities.
In addition, changes in interest rates may result in an increase in higher
cost deposit products within the Bank's existing portfolio, as well as a flow of
funds away from bank accounts into direct investments (such as U.S. Government
and corporate securities, and other investment instruments such as mutual funds)
to the extent that the Bank does not pay competitive rates of interest. "See
Quantitative and Qualitative Disclosures About Market Risk."
10
13
WE MAY INCUR LIABILITIES UNDER FEDERAL AND STATE ENVIRONMENTAL LAWS WITH RESPECT
TO FORECLOSED PROPERTIES.
Approximately 72% of the loans held by the Bank as of December 31, 2000
were secured by real estate. Approximately half of these loans were commercial
real estate loans, with most of the remainder being for single or multi-family
residences. The Bank currently does not own any property acquired on
foreclosure. However, the Bank has in the past and may in the future acquire
properties through foreclosure on loans in default. Under federal and state
environmental laws, the Bank could face liability for some or all of the costs
of removing hazardous substances, contaminants or pollutants from properties
acquired by the Bank on foreclosure. While other persons might be primarily
liable, such persons might not be financially solvent or able to bear the full
cost of the clean up. It is also possible that a lender that has not foreclosed
on property but has exercised unusual influence over the borrower's activities
may be required to bear a portion of the clean up costs under federal or state
environmental laws.
A DOWNTURN IN THE ECONOMY IN OUR MARKET AREA WOULD ADVERSELY AFFECT OUR LOAN
PORTFOLIO AND OUR GROWTH POTENTIAL.
Our lending market area is concentrated in Westchester County, New York
and, to a lesser extent, Bronx County, New York with a primary focus on small to
medium-sized businesses located in this area. Accordingly, the asset quality of
our loan portfolio is largely dependent upon the area's economy and real estate
markets. A downturn in the economy in our primary lending area would adversely
affect our operations and limit our future growth potential.
TECHNOLOGICAL CHANGE MAY AFFECT OUR ABILITY TO COMPETE.
The banking industry is undergoing rapid technological changes, with
frequent introductions of new technology-driven products and services. In
addition to improving customer services, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. Our
future success will depend, in part, on our ability to address the needs of
customers by using technology to provide products and services that will satisfy
customer demands, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. There can be no assurance that we will be
able to effectively implement new technology-driven products and services or be
successful in marketing such products and services to the public.
In addition, because of the demand for technology-driven products, banks
are increasingly contracting with outside vendors to provide data processing and
core banking functions. The use of technology-related products, services,
delivery channels and processes expose a bank to various risks, particularly
transaction, strategic, reputation and compliance risk. There can be no
assurance that we will be able to successfully manage the risks associated with
our increased dependency on technology.
OUR PROFITABILITY DEPENDS ON OUR CUSTOMERS' ABILITY TO REPAY THEIR LOANS AND OUR
ABILITY TO MAKE SOUND JUDGMENTS CONCERNING CREDIT RISK.
There are risks inherent in making all loans, including risks with respect
to the period of time over which loans may be repaid, risks resulting from
changes in economic conditions, risks inherent in dealing with individual
borrowers, and, in the case of a collateralized loan, risks resulting from
uncertainties about the future value of the collateral. We maintain an allowance
for loan losses based on, among other things, historical experience, an
evaluation of economic conditions, and regular reviews of delinquencies and loan
portfolio quality. Our judgment as to the adequacy of the allowance is based
upon a number of assumptions which we believe to be reasonable but which may or
may not prove to be correct. Thus, there can be no assurance that charge-offs in
future periods will not exceed the allowance for loan losses or that additional
increases in the allowance for loan losses will not be required. Additions to
the allowance for loan losses would result in a decrease in net income and
capital.
11
14
ITEM 2 -- PROPERTIES
The principal executive offices of the Company and the Bank, including
administrative and operating departments, are located at 21 Scarsdale Road,
Yonkers, New York, in premises that are owned by the Bank. The Bank's main
branch is located at 35 East Grassy Sprain Road, Yonkers, New York, in premises
that are leased by the Bank.
In addition to the main branch, the Bank operates 12 branches in
Westchester County, New York. The following six branches are owned by the Bank:
37 East Main Street, Elmsford, New York; 61 South Broadway, Yonkers, New York;
150 Lake Avenue, Yonkers, New York; 865 McLean Avenue, Yonkers, New York; 512
South Broadway, Yonkers, New York; and 664 Main Street, Mount Kisco, New York.
The following six branches are leased by the Bank: 403 East Sandford Boulevard,
Mount Vernon, New York; 1835 East Main Street, Peekskill, New York; 500
Westchester Avenue, Port Chester, New York; 233 Marble Avenue, Thornwood, New
York; 328 Central Avenue, White Plains, New York; and Five Huguenot Street, New
Rochelle, New York.
In addition to the branches in Westchester County, the Bank operates a
branch at 3130 East Tremont Avenue, Bronx, New York, in a premise leased by the
Bank.
Of the leased properties, 2 properties, located in White Plains and New
Rochelle, New York, have lease terms that expire within the next 2 years, with
each lease subject to the Bank's renewal option. The Bank expects to exercise
its renewal option on the leases of each of these properties.
The Bank also operates 9 ATM machines, 5 of which are located in the Bank's
facilities. Four ATMs are located at different off-site locations -- Westchester
County Airport, Harrison, New York; Rye Playland, Rye, New York; Yonkers General
Hospital in Yonkers, New York; and St. Joseph's Hospital in Yonkers, New York.
In the opinion of management, the premises, fixtures and equipment used by
the Company and the Bank are adequate and suitable for the conduct of their
businesses. All facilities are well maintained and provide adequate parking.
ITEM 3 -- LEGAL PROCEEDINGS
Various claims and lawsuits are pending against the Company and its
subsidiaries in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, resolution of each matter is not expected
to have a material effect on the financial condition or results of operations of
the Company and its subsidiaries.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Hudson Valley
Holding Corp during the fourth quarter of 2000.
12
15
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was held of record as of March 1, 2001 by
approximately 635 shareholders. The Company's common stock trades on a limited
and sporadic basis in the over-the-counter market under the symbol "HUVL", but
no public trading market has developed. The Company has historically purchased
shares of common stock from shareholders at a price that the Company believes to
be the fair market value at the time. Some of these purchases are made pursuant
to Stock Restriction Agreements which give the Company a right of first refusal
if the shareholder wishes to sell his or her shares. The majority of
transactions in the Company's common stock are sales to the Company or private
transactions. There can be no assurance that the Company will purchase any
additional stock in the future.
The table below sets forth the high and the low prices per share at which
the Company purchased shares of its common stock from shareholders in 1999 and
2000. The price per share has been adjusted to reflect the 10 percent stock
dividend to shareholders in December 2000 and 1999.
2000 1999
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter........................................... $29.09 $29.09 $26.04 $25.21
Second Quarter.......................................... 33.18 29.09 28.10 26.04
Third Quarter........................................... 33.18 33.18 28.51 28.10
Fourth Quarter.......................................... 33.75 33.18 29.09 28.51
The foregoing prices were not subject to retail markup, markdown or
commission.
In 1998, the Board of Directors of the Company adopted a policy of paying
quarterly cash dividends to holders of its common stock. Quarterly cash
dividends were paid as follows: In 2000, $0.27 per share to holders of record on
February 7; $0.28 to shareholders of record on May 8, August 7 and November 6.
In 1999, $0.21 per share to holders of record on February 8; $0.24 per share to
holders of record on May 6, August 5 and November 8.
Stock dividends of 10 percent each (one share for every 10 outstanding
shares) were declared by the Company for shareholders of record on December 4,
2000 and December 2, 1999.
Effective December 15, 2000, the Board of Directors of the Company adjusted
the price at which the Company would purchase shares to $33.75 per share, taking
into consideration the ten percent stock dividend to shareholders in December
2000.
Any funds which the Company may require in the future to pay cash
dividends, as well as various Company expenses, are expected to be obtained by
the Company chiefly in the form of cash dividends from the Bank and secondarily
from sales of common stock pursuant to the Company's stock option plan. The
ability of the Company to declare and pay dividends in the future will depend
not only upon its future earnings and financial condition, but also upon the
future earnings and financial condition of the Bank and its ability to transfer
funds to the Company in the form of cash dividends and otherwise. The Company is
a separate and distinct legal entity from the Bank. The Company's right to
participate in any distribution of the assets or earnings of the Bank is
subordinate to prior claims of creditors of the Bank.
THERE IS CURRENTLY NO ACTIVE MARKET FOR THE COMMON STOCK AND THERE CAN BE NO
ASSURANCE THAT A MARKET WILL DEVELOP.
Our common stock trades from time to time in the over-the-counter bulletin
board market under the symbol "HUVL." Trading in this market is sporadic. In the
absence of an active market for our common stock, there can be no assurance that
a shareholder will be able to find a buyer for his or her shares. Stock prices
as a whole may also be lower than they would be if an active market were to
develop, and may tend to fluctuate more dramatically.
13
16
We have not determined whether we will apply for the listing of the common
stock on the American Stock Exchange ("AMEX") or another securities exchange. If
we do apply for such listing, there can be no assurance that the common stock
will be listed on the AMEX or any securities exchange. Even if we successfully
list the common stock on the AMEX or another securities exchange, there can be
no assurance that any organized public market for the securities will develop or
that there will be any private demand for the common stock. We could also fail
to meet the requirements for continued inclusion on the AMEX or such other
exchange, such as the requirement relating to the minimum number of public
shareholders or the aggregate market value of publicly held shares.
The liquidity of the common stock depends upon the presence in the
marketplace of willing buyers and sellers. Liquidity also may be limited by
other factors, including restrictions imposed on the common stock by
shareholders.
The Company has historically created a secondary market for its stock by
issuing offers to repurchase shares from any shareholder. However, the Company
is not obligated to issue such offers to repurchase shares in the future and may
discontinue or limit such offers at any time.
If the common stock is not listed on an exchange, it may not be accepted as
collateral for loans, or if accepted, its value may be substantially discounted.
As a result, investors should regard the common stock as a long-term investment
and should be prepared to bear the economic risk of an investment in the common
stock for an indefinite period. Investors who may need or wish to dispose of all
or a part of their investments in the common stock may not be able to do so
except by private, direct negotiations with third parties.
THE DEVELOPMENT OF A MARKET FOR THE COMMON STOCK COULD BE LIMITED BY EXISTING
AGREEMENTS WITH RESPECT TO RESALE.
A significant number of our shareholders are current or former directors
and employees (or their family members) who purchased their shares subject to
various Stock Restriction Agreements. Pursuant to these Stock Restriction
Agreements, we enjoy a right of first refusal if the shareholder proposes to
sell his or her shares to a third party. Historically, we have exercised our
right of first refusal and have purchased a substantial portion of the shares
offered to us pursuant to the Stock Restriction Agreements. Our repurchase of
stock has effectively created a secondary market for the stock. We have no
obligation to repurchase the common stock under the Stock Restriction Agreements
or otherwise and there can be no assurance that we will purchase any additional
stock in the future. If we continue to exercise our right to repurchase shares
subject to the Stock Restriction Agreements, this will limit the availability of
shares in public markets.
GOVERNMENT REGULATION RESTRICTS OUR ABILITY TO PAY CASH DIVIDENDS.
Dividends from the bank are the only significant source of cash for the
Company. However, there are various statutory and regulatory limitations
regarding the extent to which the Bank can pay dividends or otherwise transfer
funds to the Company. Federal and state bank regulatory agencies also have the
authority to limit further the Bank's payment of dividends based on such factors
as the maintenance of adequate capital for the Bank, which could reduce the
amount of dividends otherwise payable. The Company paid a cash dividend to our
shareholders of $1.11 per share in 2000, $0.93 per share in 1999 and $0.75 per
share in 1998 (adjusted for subsequent stock dividends). Under applicable
banking statutes, at December 31, 2000, the Bank could have declared dividends
of approximately $27.3 million to the Company without prior regulatory approval,
which would have enabled the Company to pay an additional dividend of
approximately $5.80 per share without prior regulatory approval. No assurance
can be given that the Bank will have the profitability necessary to permit the
payment of dividends in the future; therefore, no assurance can be given that
the Company would have any funds available to pay dividends to shareholders.
Federal and state agencies require the Company and the Bank to maintain
adequate levels of capital. The failure to maintain adequate capital or to
comply with applicable laws, regulations and supervisory agreements could
subject the Company, the Bank or its subsidiaries to federal and state
enforcement provisions, such as the termination of deposit insurance, the
imposition of substantial fines and other civil penalties and, in the most
severe cases, the appointment of a conservator or receiver for a depositary
institution. Moreover,
14
17
dividends can be restricted by any of the Bank's regulatory authorities if the
agency believes that the Bank's financial condition warrants such a restriction.
In addition, the Company's ability to declare and pay dividends is
restricted under the New York Business Corporation Law, which provides that
dividends may only be paid by a corporation out of its surplus.
In the event of a liquidation or reorganization of the Bank, the ability of
holders of debt and equity securities of the Company to benefit from the
distribution of assets from the Bank upon any such liquidation or reorganization
would be subordinate to prior claims of creditors of the Bank (including
depositors), except to the extent that the Company's claim as a creditor may be
recognized. The Company is not currently a creditor of the Bank.
15
18
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the years ended and as of the dates indicated. The selected historical
consolidated financial data as of December 31, 2000 and 1999, and for the years
ended December 31, 2000, 1999 and 1998, are derived from our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K. The
selected historical consolidated financial data as of December 31, 1998, 1997
and 1996 and for the years ended December 31, 1997 and 1996 are derived from our
consolidated financial statements that are not included in this Annual Report on
Form 10-K. The information set forth below should be read in conjunction with
the consolidated financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(000'S EXCEPT SHARE DATA)
OPERATING RESULTS:
Total interest income................................... $ 87,266 $ 70,816 $ 62,445 $ 57,853 $ 47,434
Total interest expense.................................. 40,785 29,658 27,622 24,330 18,111
---------- ---------- ---------- ---------- ----------
Net interest income..................................... 46,481 41,158 34,823 33,523 29,323
Provision (credit) for loan losses...................... 1,144 600 (300) 600 (1,258)
Income before income taxes.............................. 21,983 18,648 15,821 14,596 14,023
Net income.............................................. 16,158 14,004 12,254 11,080 9,946
Basic earnings per common share......................... 3.45 3.01 2.65 2.46 2.19
Diluted earning per common share........................ 3.35 2.94 2.58 2.41 2.15
Weighted average shares outstanding..................... 4,685,004 4,654,183 4,621,533 4,496,819 4,541,860
Adjusted weighted average shares outstanding............ 4,820,389 4,758,867 4,757,148 4,601,739 4,631,912
Cash dividends per common share......................... $ 1.11 $ 0.93 $ 0.75 $ 0.51 $ 0.43
DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- -------- -------- --------
FINANCIAL POSITION:
Securities.............................................. $ 655,029 $ 634,973 $565,616 $483,698 $407,627
Loans, net.............................................. 506,101 412,914 308,131 264,254 235,641
Total assets............................................ 1,289,970 1,147,472 939,802 814,219 744,158
Deposits................................................ 879,575 754,846 627,297 595,382 539,304
Borrowings.............................................. 285,831 313,718 223,683 143,363 137,197
Stockholders' equity.................................... 93,345 68,310 75,696 64,821 56,946
FINANCIAL RATIOS
Significant ratios of the Company for the periods indicated are as follows:
DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- -------- -------- --------
EARNINGS RATIOS
Net income as a percentage of:
Average earning assets................................ 1.41% 1.39% 1.40% 1.46% 1.60%
Average total assets.................................. 1.32 1.31 1.32 1.35 1.46
Average total stockholders' equity(1)................. 18.61 18.60 18.44 18.60 18.55
CAPITAL RATIOS
Average total stockholders' equity to average total
assets(1)........................................... 7.12% 7.06% 7.16% 7.27% 7.20%
Average net loans as a multiple of average total
stockholders' equity(1)............................. 5.15 4.72 4.20 4.18 4.11
Leverage capital...................................... 7.30 7.20 7.40 7.40 7.65
Tier I capital (to risk weighted assets).............. 14.80 15.70 19.40 18.60 18.40
Total risk-based capital (to risk weighted assets).... 15.60 16.50 20.20 19.60 19.20
OTHER
Allowance for loan losses as a percentage of year-end
loans................................................. 0.94% 0.97% 1.00% 1.32% 1.07%
Loans (net) as a percentage of year-end total assets.... 39.23 35.98 32.79 32.45 31.67
Loans (net) as a percentage of year-end total
deposits.............................................. 57.54 54.70 49.12 44.38 43.69
Securities as a percentage of year-end total assets..... 50.78 55.34 60.18 59.41 55.09
Average interest earning assets as a percentage of
average interest bearing liabilities.................. 133.91 134.46 134.74 132.81 149.37
Dividends per share as a percentage of diluted earnings
per share............................................. 33.11 31.48 28.87 21.96 --
- ---------------
(1) Excludes unrealized gains in 2000 and unrealized losses in 1999, net of tax,
on securities available for sale
16
19
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section presents discussion and analysis of the Company's consolidated
financial condition at December 31, 2000 and 1999 and consolidated results of
operations for each of the three years in the period ended December 31, 2000.
The Company is consolidated with its wholly-owned subsidiary, Hudson Valley
Bank, and the Bank's subsidiaries, Hudson Valley Investment Corp., Grassy Sprain
Real Estate Holdings, Inc., Sprain Brook Realty Corp. and HVB Leasing Corp.
(collectively the "Bank"). This discussion and analysis should be read in
conjunction with the financial statements and supplementary financial
information contained elsewhere in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS FOR EACH OF THREE YEARS IN THE PERIOD ENDED DECEMBER 31,
2000
Summary of Results
The Company reported net income of $16.2 million for the year ended
December 31, 2000, a 15.4 percent increase over 1999. Net income was $14.0
million for the year ended December 31, 1999, a 14.3 percent increase over 1998
net income of $12.3 million. The increase in 2000 net income, compared to 1999
primarily reflects higher net interest income, higher non interest income and
higher securities gains, partially offset by a higher provision for loan losses,
higher operating expenses and a higher effective tax rate. The increase in 1999
net income, compared to 1998 primarily reflects higher net interest income,
partially offset by a higher provision for loan losses, lower securities gains,
higher operating expenses and a higher effective tax rate.
Diluted earnings per share of $3.35 in 2000 increased 13.9 percent over the
$2.94 recorded in 1999, while diluted earnings per share increased 14.0 percent
in 1999 compared to the $2.58 recorded in 1998, reflecting the higher net
income. Prior period per share amounts have been adjusted to reflect the 10
percent stock dividend distributed on December 4, 2000. Return on average equity
(excluding the available for sale securities unrealized gain in 2000, loss in
1999 and gain in 1998) was 18.61 percent in 2000, compared to 18.60 percent in
1999, and 18.44 percent in 1998. Return on average assets (excluding the
available for sale securities unrealized gain in 2000, loss in 1999 and gain in
1998) was 1.32 percent in 2000, compared to 1.31 percent in 1999, and 1.32
percent in 1998.
Net interest income for 2000 rose to $46.5 million, a 12.9 percent increase
over the $41.2 million recorded in 1999, while 1999 net interest income
increased 18.2 percent compared to the $34.8 million recorded in 1998. These
increases resulted principally from continuing growth in interest earning
assets, primarily loans and securities, partially offset by the growth in
interest bearing liabilities and, in 2000, by a narrowing interest rate margin,
compared to 1999. The interest rate margin, on a tax equivalent basis, decreased
in 2000 to 4.36 percent, compared to 4.41 percent in 1999, which increased over
the 4.33 percent in 1998. The decrease in 2000 was primarily the result of
higher interest rates and a shifting of funding to higher rate deposits and
borrowings, offsetting higher overall yields on interest earning assets. The
increase in 1999 was primarily the result of growth in loans and securities,
partially offset by the effects of additional leveraging of the balance sheet
and a relatively flat yield curve. Non interest income increased $949,000
compared to 1999 as a result of higher securities gains and service charges and
a gain of $233,000 from the sale of a branch facility which was relocated in
1999. Non interest income for 1999 decreased $383,000 compared to 1998, as a
result of lower securities gains, partially offset by higher service charges.
The overall increases in revenues were partially offset by increases in non
interest expense of $2.2 million and $1.5 million in 1999 and 1998,
respectively, reflecting increases in such expenses as employee salaries and
benefits, occupancy and equipment expense and other expenses, as a result of the
Company's continuing growth, investment in people, technology, products and
branch facilities. The higher effective tax rates in 2000 compared to 1999, and
in 1999 compared to 1998, decreased net income in each year from 1998 to 2000.
The effective tax rate increased primarily due to the decrease in tax exempt
income as a percentage of total interest income and the Company becoming subject
to New York City tax during the second half of 1999.
The Company's total capital ratio under the risk-based capital guidelines
exceeds regulatory guidelines of 8 percent, as the total ratio equaled 15.6
percent and 16.5 percent at December 31, 2000 and 1999,
17
20
respectively. The leverage capital ratio was 7.3 percent and 7.2 percent at
December 31, 2000 and 1999, respectively.
AVERAGE BALANCES AND INTEREST RATES
The following table sets forth the average balances of interest earning
assets and interest bearing liabilities for each of the last three years as well
as total interest and corresponding yields and rates. The data contained in the
table has been adjusted to a tax equivalent basis, based on the federal
statutory rate of 34 percent.
(000'S EXCEPT PERCENTAGES)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------- -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(3) BALANCE INTEREST RATE(3) BALANCE INTEREST RATE(3)
---------- -------- ------- ---------- -------- ------- -------- -------- -------
ASSETS
Interest earning assets:
Deposits in banks........... -- -- -- -- -- -- $ 123 $ 8 6.50%
Federal funds sold.......... $ 11,661 $ 735 6.30% $ 18,164 $ 908 5.00% 41,824 2,303 5.51
Securities:(1)
Taxable................... 547,619 37,336 6.82 505,260 32,002 6.33 439,085 27,716 6.31
Exempt from federal income
taxes................... 140,782 10,489 7.45 125,798 9,366 7.45 112,832 8,748 7.75
Loans, net(2)............... 446,843 42,272 9.46 355,628 31,724 8.92 279,378 26,644 9.54
---------- ------- ---------- ------- -------- -------
Total interest earning
assets.................... 1,146,905 90,832 7.92 1,004,850 74,000 7.36 873,242 65,419 7.49
---------- ------- ---------- ------- -------- -------
Non interest earning assets:
Cash and due from banks... 28,509 26,730 23,514
Other assets.............. 44,680 34,316 30,799
---------- ---------- --------
Total non interest earning
assets.................... 73,189 61,046 54,313
---------- ---------- --------
Total assets................ $1,220,094 $1,065,896 $927,555
========== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Money market.............. $ 148,663 $ 4,323 2.91% $ 129,690 $ 3,292 2.54% $110,471 $ 2,987 2.70%
Savings................... 51,472 777 1.51 52,847 820 1.55 53,376 1,073 2.01
Time...................... 339,305 19,802 5.84 265,665 12,524 4.71 244,933 12,695 5.18
Checking with interest.... 62,049 840 1.35 58,379 810 1.39 54,606 968 1.77
Securities sold under
repurchase agreements and
other short-term
borrowings................ 165,993 10,181 6.13 147,502 7,221 4.90 129,405 6,933 5.36
Other borrowings............ 89,011 4,862 5.46 93,254 4,991 5.35 55,307 2,966 5.36
---------- ------- ---------- ------- -------- -------
Total interest bearing
liabilities............... 856,493 40,785 4.76 747,337 29,658 3.97 648,098 27,622 4.26
---------- ------- ---------- ------- -------- -------
Non interest bearing
liabilities:
Demand deposits........... 255,386 228,905 201,249
Other liabilities......... 21,395 14,368 11,760
---------- ---------- --------
Total non interest bearing
liabilities............... 276,781 243,273 213,009
---------- ---------- --------
Stockholders' equity(1)..... 86,820 75,286 66,448
---------- ---------- --------
Total liabilities and
stockholders' equity(1)... $1,220,094 $1,065,896 $927,555
========== ========== ========
Net interest earnings....... $50,047 $44,342 $37,797
======= ======= =======
Net yield on interest
earning assets............ 4.36% 4.41% 4.33%
- ---------------
(1) Excludes unrealized gains and losses on securities available for sale.
(2) Includes loans classified as non-accrual.
(3) Effect of adjustment to a tax equivalent basis was $3,566, $3,184 and $2,974
for the years ended December 31, 2000, 1999 and 1998, respectively.
18
21
INTEREST DIFFERENTIAL
The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income between the years ended
December 31, 2000 and 1999, and the years ended December 31, 1999 and 1998, on a
tax equivalent basis.
(000'S)
----------------------------------------------------------
2000 COMPARED TO 1999 1999 COMPARED TO 1998
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
---------------------------- ---------------------------
VOLUME RATE TOTAL(1) VOLUME RATE TOTAL(1)
------- ------- -------- ------ ------- --------
Interest income:
Deposits in banks.......................... -- -- -- $ (8) -- $ (8)
Federal funds sold......................... $ (325) $ 152 $ (173) (1,303) $ (92) (1,395)
Securities:
Taxable.................................. 2,683 2,651 5,334 4,177 109 4,286
Exempt from federal income taxes......... 1,116 7 1,123 1,005 (387) 618
Loans, net................................. 8,137 2,411 10,548 7,272 (2,192) 5,080
------- ------- ------- ------ ------- ------
Total interest income...................... 11,611 5,221 16,832 11,143 (2,562) 8,581
------- ------- ------- ------ ------- ------
Interest expense:
Deposits:
Money market............................. 482 727 1,209 520 (215) 305
Savings.................................. (21) (22) (43) (11) (242) (253)
Time..................................... 3,472 3,806 7,278 1,075 (1,246) (171)
Checking with interest................... 51 (199) (148) 66 (224) (158)
Securities sold under repurchase agreements
and other short-term borrowings.......... 905 2,055 2,960 970 (682) 288
Other borrowings........................... (227) 98 (129) 2,035 (10) 2,025
------- ------- ------- ------ ------- ------
Total interest expense..................... 4,662 6,465 11,127 4,655 (2,619) 2,036
------- ------- ------- ------ ------- ------
Increase (decrease) in interest
differential............................. $ 6,949 $(1,244) $ 5,705 $6,488 $ 57 $6,545
======= ======= ======= ====== ======= ======
- ---------------
(1) Changes attributable to both rate and volume are allocated between the rate
and volume variances based upon their absolute relative weights to the total
change.
NET INTEREST INCOME
Net interest income, the difference between interest income and interest
expense, is the most significant component of the Company's consolidated
earnings. Net interest income of $50.0 million, on a tax equivalent basis, for
2000 reflects a 12.9 percent increase over the $44.3 million for 1999. Net
interest income, on a tax equivalent basis, for 1999 reflects an increase of
17.3 percent over the $37.8 million for 1998. Net interest income rose because
of the increase in the excess of average interest earning assets over average
interest bearing liabilities to $290.4 million in 2000, from $257.5 million in
1999 and $225.1 million in 1998, partially offset, for 2000, by a narrowing
interest rate margin compared to 1999.
Interest income is determined by the volume of, and related rates earned
on, interest earning assets. Volume increases in securities and loans, together
with overall higher interest rates, partially offset by lower volume in Federal
funds sold, contributed to the higher interest income in 2000, compared to 1999.
Volume increases in securities and loans, partially offset by lower volume in
Federal funds sold and overall lower rates (lower in all categories except
taxable securities), contributed to the higher interest income in 1999, compared
to 1998. Average interest earning assets increased in 2000 to $1,146.9 million
from $1,004.9 million in 1999 and from $873.2 million in 1998, reflecting a 14.1
percent and 15.1 percent increase in 2000 and 1999, respectively. The Company's
ability to make changes in its asset mix allows management to capitalize on more
desirable yields, as available, on various interest earning assets.
19
22
Securities are the largest component of interest earning assets. In 2000,
average total securities increased $57.3 million to $688.4 million compared to
1999, while average total securities increased $79.1 million in 1999 compared to
1998. Total securities increased $20.1 million to $655.0 million at December 31,
2000 from $635.0 million at December 31, 1999, or a 3.2 percent increase,
compared to an increase of $69.4 million, or 12.3 percent in 1999 over 1998. The
increase in average total securities in 2000 and 1999 was principally due to
management's efforts to effectively leverage capital and to balance the risk and
liquidity of the total securities portfolio. Interest income on total securities
increased in both 2000 and 1999 due to higher volume, due to higher interest
rates in 2000, and partially offset by lower interest rates in 1999.
In 2000, average net loans increased $91.2 million to $446.8 million
compared to 1999, while average net loans increased $76.3 million in 1999
compared to 1998. Net loans increased $93.2 million to $506.1 at December 31,
2000 from $412.9 million at December 31, 1999, or a 22.6 percent increase,
compared to an increase of $104.8 million, or 34.0 percent in 1999 compared to
$308.1 million at year end 1998. The increase in average net loans in 2000 and
1999 was principally due to management's greater emphasis on making new loans,
more effective market penetration and continuing strong economic conditions in
the Company's primary market. Interest income on net loans increased in both
2000 and 1999 due to higher volume, due to higher interest rates in 2000, and
partially offset by lower interest rates in 1999.
Interest expense is a function of the volume of and rates paid, for
interest bearing liabilities, comprised of deposits and borrowings. Interest
expense in 2000 increased $11.1 million, or 37.5 percent to $40.8 million, while
interest expense increased $2.0 million, or 7.4 percent in 1999 compared to
1998. Average balances in substantially all deposit categories, except for
savings accounts, increased in both 2000 and 1999. Deposits increased
principally from existing customer relationships and branches as well as new
relationships and the opening of new branches, in New Rochelle, New York in 1998
and in Bronx, New York in 1999. In addition, in a continuing effort to
effectively leverage capital, management increased, in the aggregate, time and
other deposits of municipalities, FHLB advances and borrowings under securities
sold under repurchase agreements and other short-term borrowings. These funds
were invested in loans and securities. The amount of non interest bearing
average demand deposits which increased in 2000 to $255.4 million from $228.9
million in 1999, compared to $201.2 million in 1998, is an important component
of the Company's liability management and has a direct impact on the
determination of net interest income. Interest rates paid on average interest
bearing deposits generally increased in 2000 due to a higher interest rate
environment. Interest rates paid on average interest bearing deposits generally
decreased in 1999 due to a lower interest rate environment.
The interest rate spread on a tax equivalent basis for each of the three
years in the period ended December 31, 2000 is as follows:
2000 1999 1998
---- ---- ----
Average interest rate on:
Total average interest earning assets..................... 7.92% 7.36% 7.49%
Total average interest bearing liabilities................ 4.76 3.97 4.26
Total interest rate spread................................ 3.16 3.39 3.23
In 2000, the interest rate spread decreased due to higher overall rates on
interest bearing liabilities which were partially offset by higher yields on
interest earning assets and a shifting of funding to higher rate deposits and
borrowings. In 1999, the interest rate spread increased primarily due to loans,
which generally have higher yields than securities, growing as a component of
total interest earning assets and from generally lower rates paid on interest
bearing liabilities. The leveraging of capital generally tends to decrease the
interest rate spread, however, it adds net interest income without adding
significant operating costs. Management cannot predict what impact market
conditions will have on its interest rate spread and future compression in net
interest rate spread may occur.
NON INTEREST INCOME
Non interest income for 2000 was $2,548,000 compared to $1,599,000 for
1999. The increase in non interest income in 2000 compared to 1999 was primarily
a result of higher securities gains and higher services
20
23
fees and other income. Non interest income for 1999 decreased $383,000 compared
to 1998. The decrease in non interest income in 1999 compared to 1998 was
primarily a result of lower security gains in 1999 than in 1998.
Net gains on securities transactions of $692,000, $19,000 and $439,000 for
the years ended December 31, 2000, 1999 and 1998, respectively, principally
resulted from the sale of securities to restructure the portfolio, manage cash
flow and enhance portfolio yield, and efforts to manage the Company's overall
interest rate risk in response to changes in interest rates or changes in
composition of the balance sheet.
Service charges increased by 7.7 percent in 2000 and by 3.7 percent in
1999. The increases reflect a higher level of accounts and fees charged.
Other income increased to $729,000 in 2000 compared to $534,000 in both
1999 and 1998. The increase in 2000 was primarily a result of a gain on the sale
of a branch facility which was relocated in 1999.
NON INTEREST EXPENSE
Non interest expense rose to $25.9 million for 2000, or a 10.2 percent
increase over the $23.5 million for 1999, compared to a 10.5 percent increase in
1999 over the $21.3 million in 1998. These increases reflect the overall growth
of the Company. The Company's efficiency ratio (a lower ratio indicates greater
efficiency) which compares non interest expense to total adjusted revenue
(taxable equivalent net interest income, plus non interest income, excluding
gain or loss on security transactions) was 49.9 percent in 2000, compared to
51.2 percent in 1999 and 54.1 percent in 1998.
Salaries and employee benefits, the largest component of non interest
expense, rose 15.1 percent in 2000 to $14.8 million, compared to a 13.0 percent
increase in 1999 to $12.8 million from $11.4 million for 1998. The Company
opened one new branch in each of 1999 and 1998, resulting in increased staff.
The increases in both 2000 and 1999 also reflected the cost of additional
personnel necessary for the Bank to accommodate the growth in both deposits and
loans, the expansion of services and products available to customers, increases
in the number of customer relationships, and annual merit increases. Increases
in salaries and employee benefits in both 2000 and 1999 were also attributable
to incentive compensation programs and other benefit plans necessary to be
competitive in attracting and retaining high quality and experienced personnel,
as well as higher health care costs and costs associated with related payroll
taxes.
2000 1999 1998
EMPLOYEES AT DECEMBER 31, ------- ------- -------
Full Time Employees................................... 214 206 191
Part Time Employees................................... 44 44 44
(000'S EXCEPT PERCENTAGES)
SALARIES AND EMPLOYEE BENEFITS
Salaries.............................................. $10,431 $ 8,816 $ 7,965
Payroll Taxes......................................... 828 718 644
Medical Plans......................................... 737 680 629
Incentive Compensation Plans.......................... 1,009 949 680
Deferred Compensation Plans........................... 64 56 54
Employee Retirement Plans............................. 825 1,040 879
Other................................................. 886 584 512
------- ------- -------
Total................................................. $14,780 $12,843 $11,363
======= ======= =======
Percentage of total non interest expense.............. 57.1% 54.6% 53.4%
======= ======= =======
Occupancy expense rose to $2.3 million for 2000, a 10.8 percent increase
over 1999, compared to $2.0 million in 1999, a 12.1 percent increase over 1998.
The increases are due to a full year of expenses for the branches opened in the
prior years. All years also reflect the rising costs of such items as rent on
leased
21
24
facilities, utility costs, real estate taxes, maintenance costs and other costs
of operating the Company's facilities.
Professional services increased 27.3 percent to $2.6 million in 2000 from
$2.0 million in 1999, which was a 7.1 percent increase from $1.9 million for
1998. The increase in 2000 resulted from professionals engaged to assist with
first-time filings with the Securities and Exchange Commission and also due to
professionals engaged to perform a customer satisfaction survey. The increase in
1999 was principally the result of increased utilization of business development
consultants and information systems consultants, partially offset by reduced
legal and compensation consultant expense.
Equipment expense decreased 8.1 percent to $1.7 million in 2000 from $1.9
million in 1999, which was a 22.6 percent increase from $1.5 million in 1998.
The decrease in 2000 was primarily a result of lower equipment related expenses
than in 1999, which included expenses related to the opening of a new branch.
The increase in 1999 as compared in 1998 was the result of higher depreciation
and maintenance costs associated with the Bank's in-house computer systems as
well as the capital investments made over the last several years designed to
enhance and expand Bank-wide technology, operating and processing capabilities.
Business development expense decreased 6.3 percent to $948,000 in 2000 from
$1,012,000 in 1999, which was a 31.1 percent increase over $772,000 in 1998. The
decrease in 2000 as compared to 1999 resulted from expenses in 1999 to promote a
new branch. The increase in 1999 as compared to 1998 resulted from increased
promotion of products and services, expanded business development efforts, and
promotion of one new branch opened in each of 1999 and 1998.
FDIC assessment increased to $165,000 for 2000 compared to $81,000 for 1999
and $76,000 for 1998. The increases primarily resulted from increases in the
Bank's deposits subject to FDIC assessment as well as a general increase in the
overall assessment rate in 2000.
Other operating expenses, as reflected in the following table, decreased
4.9 percent in 2000 and 5.2 percent in 1999.
2000 1999 1998
------ ------ ------
(000'S EXCEPT PERCENTAGES)
OTHER OPERATING EXPENSES
Other insurance.......................................... $ (36) $ 59 $ 197
Stationery and printing.................................. 502 528 465
Communications expense................................... 714 672 558
Courier expense.......................................... 367 319 265
Other loan expense....................................... 160 485 890
Outside services......................................... 747 691 565
Dues, meetings and seminars.............................. 351 194 293
Other.................................................... 664 701 616
------ ------ ------
Total.................................................... $3,469 $3,649 $3,849
====== ====== ======
Percentages of total non interest expense................ 13.4% 15.5% 18.1%
====== ====== ======
The 2000 increases reflect higher outside service fees, including computer
program licensing fees, higher customer service related expenses including
communications and courier expenses, and higher dues, meetings and conventions
expenses all related to growth in customers and business activity. The 2000
decreases reflect reduction in the estimates of net cost of certain life
insurance programs, lower stationary and printing due to higher prior year cost
connected with a new branch opening, and lower other loan expenses, principally
due to reduced costs associated with other real estate owned ("OREO").
The 1999 increases reflect higher outside service fees, including computer
program licensing fees and higher customer service related costs, including
communications and courier expenses. The decreases reflect reduced net cost of
certain insurance expense, a reduction in meetings and seminar expense and
reduced other loan expense primarily associated with OREO.
22
25
To monitor and control the amount of non interest expenses, as well as non
interest income, the Company continually monitors the system of internal
budgeting, including analysis and follow up of budget variances.
INCOME TAXES
Income taxes of $5,825,000, $4,644,000 and $3,567,000 were recorded in
2000, 1999 and 1998, respectively. The Company is currently subject to a
statutory incremental Federal tax rate of 35 percent (34 percent for the first
$10 million of taxable income), a New York State tax rate of 9 percent, plus a
17 percent surcharge and, in 2000 and the second half of 1999, a New York City
tax rate of 9 percent. The Company's overall effective tax rate was 26.5
percent, 24.9 percent and 22.5 percent in 2000, 1999 and 1998, respectively. The
increase in the overall effective tax rates for 2000 and 1999 primarily reflects
higher state taxes and a decrease in tax exempt interest income as a percentage
of total interest income. Other pertinent tax information is set forth in the
Notes to Consolidated Financial Statements included elsewhere herein.
FINANCIAL CONDITION AT DECEMBER 31, 2000 AND 1999
Securities Portfolio
Securities are selected to provide safety of principal, liquidity, pledging
capabilities (to collateralize certain deposits and borrowings), income and to
leverage capital. The Company's investment strategy focuses on maximizing income
while providing for safety of principal, maintaining appropriate utilization of
capital, providing adequate liquidity to meet loan demand or deposit outflows
and to manage overall interest rate risk. The Company selects individual
securities whose credit, cash flow, maturity and interest rate characteristics,
in the aggregate, effect the stated strategies.
The securities portfolio consists of securities available for sale totaling
$655.0 million, $635.0 million and $565.6 million and FHLB stock totaling $9.5
million, $9.4 million and $5.3 million at December 31, 2000, 1999 and 1998,
respectively.
In accordance with SFAS No. 115, the Bank's investment policies include a
determination of the appropriate classification of securities at the time of
purchase. If management has the intent and ability to hold securities until
maturity, they are classified as held-to-maturity and carried at amortized cost.
Securities held for indefinite periods of time and not intended to be
held-to-maturity include the securities management intends to use as part of its
asset/liability strategy and liquidity management and the securities that may be
sold in response to changes in interest rates, resultant prepayment risks,
liquidity demands and other factors. Such securities are classified as available
for sale and are carried at fair value. All securities have been classified as
available for sale at December 31, 2000, 1999 and 1998.
During 1998, the Company held U.S. Treasury securities primarily as
collateral for municipal deposits. The securities were purchased with the intent
to hold them to maturity, as the Company did not foresee any changes in the
collateral requirements. When the collateral requirements changed and higher
yields were available from alternative investments that met the changed
collateral requirements the Company elected to sell the U.S. Treasury securities
and reinvested the proceeds in higher yielding securities. The Company reviewed
SFAS No. 115 and concluded that the change in circumstance that led to the sale
of the held-to-maturity securities did not meet the requirements of SFAS No. 115
that would allow the Company to continue to designate securities as
held-to-maturity. Accordingly, in December 1998, the Company transferred all
securities classified as held-to-maturity which had an amortized cost of $140.8
million to securities available for sale. At the date of this transfer, these
securities had an unrealized gain of $5.5 million. This unrealized gain, net of
tax, was recorded in "Stockholders' Equity -- Other Comprehensive Income," in
accordance with SFAS No. 115.
Securities represent 60.0 percent, 62.8 percent and 63.2 percent of average
interest earning assets in 2000, 1999 and 1998, respectively. Emphasis on the
securities portfolio will continue to be an important part of the Company's
investment strategy. The size of the securities portfolio will depend on loan
and deposit growth, the level of capital and the Company's ability to take
advantage of leveraging opportunities.
23
26
The following table sets forth the amortized cost, gross unrealized gains
and losses and the estimated fair value of securities classified as available
for sale at December 31:
2000 (000'S)
AMORTIZED ESTIMATED
CLASSIFIED AS AVAILABLE FOR SALE COST GROSS UNREALIZED FAIR VALUE
- -------------------------------- --------- ----------------- ----------
GAINS LOSSES
------ -------
U.S. Treasury and government agencies.............. $225,591 $ 546 $ 2,923 $223,214
Mortgage-backed securities......................... 281,663 1,322 2,216 280,769
Obligations of states and political subdivisions... 144,024 3,735 311 147,448
Other debt securities.............................. 2,564 -- 182 2,382
-------- ------ ------- --------
Total debt securities.............................. 653,842 5,603 5,632 653,813
Equity securities.................................. 851 365 -- 1,216
-------- ------ ------- --------
Total.............................................. $654,693 $5,968 $ 5,632 $655,029
======== ====== ======= ========
1999 (000'S)
AMORTIZED ESTIMATED
CLASSIFIED AS AVAILABLE FOR SALE COST GROSS UNREALIZED FAIR VALUE
- -------------------------------- --------- ----------------- ----------
GAINS LOSSES
------ -------
U.S. Treasury and government agencies.............. $199,679 -- $11,843 $187,836
Mortgage-backed securities......................... 319,221 $ 173 9,526 309,868
Obligations of states and political subdivisions... 133,733 1,133 2,001 132,865
Other debt securities.............................. 3,079 3 190 2,892
-------- ------ ------- --------
Total debt securities.............................. 655,712 1,309 23,560 633,461
Equity securities.................................. 1,079 433 -- 1,512
-------- ------ ------- --------
Total.............................................. $656,791 $1,742 $23,560 $634,973
======== ====== ======= ========
1998 (000'S)
AMORTIZED ESTIMATED
CLASSIFIED AS AVAILABLE FOR SALE COST GROSS UNREALIZED FAIR VALUE
- -------------------------------- --------- ----------------- ----------
GAINS LOSSES
------ -------
U.S. Treasury and government agencies.............. $136,505 $ 428 $ 325 $136,608
Mortgage-backed securities......................... 302,438 2,293 474 304,257
Obligations of states and political subdivisions... 118,537 4,993 69 123,461
Other debt securities.............................. 400 3 -- 403
-------- ------ ------- --------
Total debt securities.............................. 557,880 7,717 868 564,729
Equity securities.................................. 495 392 -- 887
-------- ------ ------- --------
Total.............................................. $558,375 $8,109 $ 868 $565,616
======== ====== ======= ========
The following table presents the amortized cost of securities available for
sale at December 31, 2000, distributed based on contractual maturity or earlier
call date for securities expected to be called, and weighted average yields
computed on a tax equivalent basis. Mortgage-backed securities which may have
principal prepayments are distributed to a maturity category based on estimated
average lives. Actual maturities will
24
27
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
AFTER 1 BUT WITHIN AFTER 5 BUT WITHIN
WITHIN 1 YEAR 5 YEARS 10 YEARS AFTER 10 YEARS TOTAL
--------------- ------------------ ------------------ --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- --------- ------ --------- ------ ------- ----- -------- -----
(000'S EXCEPT PERCENTAGES)
U.S. Treasury and
government agencies... $ 1,002 6.14% $ 18,463 5.93% $170,014 6.73% $36,112 7.21% $225,591 6.74%
Mortgage-backed
securities............ 40,026 6.99 116,745 6.95 111,092 6.79 13,800 6.76 281,663 7.04
Obligations of states
and political
subdivisions.......... 9,954 6.67 31,475 6.85 56,952 7.16 45,643 7.12 144,024 7.04
Other debt securities... -- -- 25 6.34 500 7.20 2,039 7.69 2,564 7.58
------- -------- -------- ------- --------
Total................... $50,982 6.91% $166,708 6.95% $338,558 6.83% $97,594 7.11% $653,842 6.87%
------- -------- -------- ------- --------
Estimated fair value.... $51,081 $166,889 $337,733 $98,110 $653,813
======= ======== ======== ======= ========
Obligations of U.S. Treasury and government agencies principally include
U.S. Treasury securities and debentures and notes issued by the FHLB, the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). The total balances held of such securities was
$223.2 million, $187.8 million and $136.6 million at December 31, 2000, 1999 and
1998, respectively. The December 31, 2000 balance increased $35.4 million
resulting from $40.9 million in purchases, gain on sales of $0.1 million and
other increases of $10.1 million, offset by $10.0 million of maturities and
calls and sales of $5.7 million. The purchases consisted primarily of callable
U.S. government agency bonds that offered attractive yields. The calls resulted
from generally lower interest rates at the time of the calls. The sales were
conducted as part of the Company's ongoing portfolio management. The December
31, 1999 balance increased $51.2 million, resulting from $109.6 million in
purchases offset by $46.1 million of maturities and calls and other decreases of
$12.3 million. The purchases consisted primarily of callable U.S. government
agency bonds that offered attractive yields. The calls resulted from generally
lower interest rates.
The Company invests in mortgage-backed securities, including collateralized
mortgage obligations ("CMOs"), that are primarily issued by the Government
National Mortgage Association ("GNMA"), FNMA, FHLMC and, to a lesser extent,
such securities issued by others. GNMA securities are backed by the full faith
and credit of the U.S. Treasury, assuring investors of receiving all of the
principal and interest due from the mortgages backing the securities. FNMA and
FHLMC guarantee the payment of interest at the applicable certificate rate and
the full collection of the mortgages backing the securities; however, such
securities are not backed by the full faith and credit of the U.S. Treasury. At
December 31, 2000, the Company held $10.0 million of mortgage-backed securities
issued by Residential Funding Mortgage Corp. and $2.7 million of mortgage-backed
securities issued by Countrywide Mortgage Corp. Both of these private issues
have a "AAA" rating issued by Standard and Poors, a nationally recognized credit
rating organization.
Mortgage-backed securities, including CMO's, decreased $29.1 million to
$280.8 million and increased $5.6 million to $309.9 million at December 31, 2000
and 1999, respectively, as compared to the $304.3 million at December 31, 1998.
The decrease for 2000 was due to purchases of $52.3 million, gain on sales of
$0.5 million and other increases of $7.8 million that were offset by principal
paydowns and redemptions of $53.2 million and sales of $36.5 million. The
increase for 1999 was due to purchases of $95.2 million that were offset by
principal paydowns and redemptions of $77.2 million and other decreases of $12.4
million.
For 2000, purchases of fixed rate mortgage-backed securities totaling $46.0
million, gains on sales of $0.5 million and other increases of $6.7 million were
offset by sales of $36.5 million and principal paydowns and redemptions of $43.8
million. For 2000, purchases of adjustable rate mortgage-backed securities
totaling $6.3 million and other increases of $1.1 million were offset by
principal paydowns and redemptions of $9.4 million. The sales in 2000 were
transacted to take advantage of market opportunities to restructure the
portfolio as part of the Company's ongoing portfolio management.
25
28
For 1999, purchases of fixed rate mortgage-backed securities, including
CMO's totaling $95.2 million, were offset by principal paydowns and redemptions
of $50.4 million of similar fixed rate securities. In addition, principal
paydowns and redemptions of adjustable rate mortgage-backed securities totaled
$26.8 million. In the aggregate, purchases during 1999 replaced principal
paydowns and redemptions. The Company purchased only fixed rate securities of
this type in 1999 considering the yield available and other asset liability
considerations.
The outstanding balances in obligations of states and political
subdivisions at December 31, 2000, 1999 and 1998 were $147.4 million, $132.9
million and $123.5 million, respectively. The December 31, 2000 balance
increased $14.5 million resulting from purchases of $27.8 million, gains on
sales of $0.1 million and other increases of $4.1 million offset by maturities
of $15.6 million and sales of $1.8 million. The sales were conducted as part of
the Company's ongoing portfolio management. The December 1999 balance increased
$9.4 million resulting from purchases of $28.3 million, offset by maturities of
$12.9 million and other decreases of $6.0 million. The obligations at year end
2000 were comprised of approximately 66 percent for New York State political
subdivisions and 34 percent for a variety of other states and their subdivisions
all with diversified final maturities. The Company considers such securities to
have favorable tax equivalent yields and further utilizes such securities for
their favorable income tax treatment.
The Company invests in FHLB stock and other securities which are rated with
an investment grade by nationally recognized credit rating organizations. As a
matter of policy, the Company invests in non-rated securities, on a limited
basis, when the Company is able to satisfy itself as to the credit. These
non-rated securities outstanding at December 31, 2000 totaled approximately $5.5
million comprised primarily of obligations of municipalities located within the
Company's market area. The Bank, as a member of the FHLB, invests in stock of
the FHLB as a prerequisite to obtaining funding under various advance programs
offered by the FHLB. The Bank must purchase additional shares of FHLB stock to
obtain increases in such borrowings.
The Company continues to exercise a conservative approach to investing by
purchasing high credit quality investments with various maturities and cash
flows to provide for liquidity needs and prudent asset liability management. The
Company's security portfolio provides for a significant source of income,
liquidity and is utilized in managing Company-wide interest rate risk. These
securities are used to collateralize borrowings and deposits to the extent
required or permitted by law. Therefore, the securities portfolio is an integral
part of the Company's funding strategy.
Except for securities of the U.S. Treasury and government agencies, FHLB
stock having a book value and estimated market value of $9.5 million and
mortgage-backed securities issued by Residential Funding Mortgage Corp. having a
book value of $10.0 million and an estimated market value of $9.5 million, there
were no obligations of any single issuer which exceeded ten percent of
stockholders' equity at December 31, 2000.
LOAN PORTFOLIO
Real Estate Loans: Real estate loans are comprised primarily of loans
collateralized by interim and permanent commercial mortgages, construction
mortgages and residential mortgages including home equity loans. The Bank
originates these loans primarily for its portfolio, although a significant
portion of its residential real estate loans, in addition to meeting the Bank's
underwriting criteria, comply with nationally recognized underwriting criteria
("conforming loans") and can be sold in the secondary market.
Commercial real estate loans are offered by the Bank generally on a fixed
or variable rate basis with 5 year terms and, exceptionally, up to 10 year
terms. Amortizations generally range up to 25 years.
In underwriting commercial real estate loans, the Bank evaluates both the
prospective borrower's ability to make timely payments on the loan and the value
of the property securing the loan. The Bank generally utilizes licensed or
certified appraisers, previously approved by the Bank, to determine the
estimated value of the property. Commercial mortgages are generally underwritten
for up to 75% of the value of the property depending on the type of the
property. Repayment of such loans may be negatively impacted should the borrower
default or should there be a substantial decline in the value of the property
securing the loan, or a decline in general economic conditions.
26
29
Where the owner occupies the property, the Bank also evaluates the
business's ability to repay the loan on a timely basis. In addition, the Bank
may require personal guarantees, lease assignments or the guarantee of the
operating company when the property is owner occupied. These types of loans are
often for larger amounts than other types of loans made by the Bank and may
involve greater risks than other types of lending. Because payments on such
loans are often dependent upon the successful operation of the business
involved, repayment of such loans may be negatively impacted by adverse changes
in economic conditions.
Construction loans are short-term loans (generally up to 24 months) secured
by land for both residential and commercial development. The loans are generally
made for acquisition and improvements. Funds are disbursed as phases of
construction are completed. The majority of these loans are made with variable
rates of interest, although some fixed rate financing is provided on residential
property. The loan amount is generally limited to 75% of value. Most
non-residential construction loans require pre-approved permanent financing or
pre-leasing with the Bank providing the permanent financing. The Bank does not
generally fund construction loans for single family homes or commercial real
estate built by investors until the builder has a firm sales contract for the
building to be constructed, although in certain projects, model homes may be
financed within the overall site improvement financing. Repayment of such loans
may be negatively impacted by the builders' inability to complete construction,
by a downturn in the new construction market, by a significant increase in
interest rates or by a decline in general economic conditions.
Residential real estate loans are offered by the Bank with terms of up to
30 years and loan to value ratios of up to 95%. However, for loan to value
ratios in excess of 80%, the Bank generally requires private mortgage insurance.
The Bank offers fixed and adjustable rate loans. Adjustable rate loans generally
have a fixed rate for the first 3, 5 or 7 years and then convert to an annual
adjustable rate, generally based upon the applicable constant maturity U.S.
Treasury securities index plus 2.5% to 3.0%. These adjustable rate loans
generally provide for a maximum annual change in the rate of 2% with an interest
rate ceiling over the life of the loan. Fixed rate loans are generally
underwritten to Federal Home Loan Mortgage Corp. guidelines that allow for the
sale of such loans in the secondary market. Repayment of such loans may be
negatively impacted should the borrower default, should there be a significant
decline in the value of the property securing the loan or should there be a
decline in general economic conditions.
The Bank offers three types of home equity loans. The first is a no cost
home equity line of credit subject to a limit of $500,000 with a maximum
combined loan to value ratio of 80%. The interest rate for the first year of the
loan is the Bank's prime rate. For the remaining term of the loan, the interest
rate is prime plus 1%. The loan has a term of 25 years, with the first 10 years
structured as a line of credit with payments of interest only, with the loan
converting to a fully amortizing term loan for the remaining 15 years. The Bank
pays the costs associated with originating this loan. The loan contains a
prepayment penalty during the first two years. Second, the Bank offers a home
equity line of credit subject to a limit of $200,000 with a maximum combined
loan to value ratio of 80%. The interest rate for the first year is the Bank's
prime rate, with the rate changing to prime plus 1% for the remaining term of
the loan. The loan has a term of 25 years with the first 10 years structured as
a line of credit with payments of interest only, with the loan converting to a
fully amortizing term loan for the remaining 15 years. The borrower pays all
costs associated with originating this loan. There are no prepayment penalties.
Third, the Bank offers a home secured loan subject to a limit of $100,000 with a
maximum combined loan to value ratio of 80%. The loan has a 15 year term with a
fixed rate of interest. The Bank pays the costs associated with originating this
loan and requires a prepayment penalty during the first three years of the loan.
Commercial and Industrial Loans: The Bank's commercial and industrial loan
portfolio consists primarily of commercial business loans and lines of credit to
small and medium sized businesses and professionals. These loans are usually
made to finance the purchase of inventory, new or used equipment or other short
or long-term working capital purposes. These loans are generally secured but are
also offered on an unsecured basis. These loans generally have variable rates of
interest. Commercial loans, for the purpose of purchasing equipment and/or
inventory, are usually written for the terms of 1 to 5 years with,
exceptionally, a 7 year term. In granting this type of loan, the Bank primarily
looks to the borrower's cash flow as the source of repayment with collateral and
personal guarantees, where obtained, as a secondary source. The Bank generally
requires a debt service coverage ratio of at least 125%. The Bank is an approved
Small Business
27
30
Administration (SBA) lender and offers a variety of SBA products. Commercial
loans are often larger and may involve greater risks than other types of loans
offered by the Bank. Payments on such loans are often dependent upon the
successful operation of the underlying business involved and, therefore,
repayment of such loans may be negatively impacted by adverse changes in
economic conditions, management's inability to effectively manage the business,
claims of others against the borrower's assets which may take priority over the
Bank's claims against assets, death or disability of the borrower or loss of
market for the borrower's products or services.
Loans to Individuals and Leasing: The Bank offers installment loans and
reserve lines of credit to individuals. Installment loans are limited to $50,000
and lines of credit are limited to $5,000. These loans have 5 year terms with
fixed or variable rates of interest. The rate of interest is dependent on the
term of the loan and the type of collateral. The Bank does not place an emphasis
on originating these types of loans.
In March 2000, the Company ended its participation, which began in 1998, in
an automobile leasing program due to the sale of the company that originated and
serviced the leases and resulting changes to various aspects of the program. The
balance of $21.0 million of such leases at December 31, 2000 will continue to
decline as repayments of existing leases continue. The Company has not
determined if it will seek to participate in a similar program in the future.
During the fourth quarter of 2000, the Company began originating lease
financing transactions. These transactions are primarily conducted with
businesses, professionals and not-for-profit organizations and provide financing
principally for office equipment, telephone systems, computer systems and other
special use equipment. The terms vary depending on the equipment being leased,
but are generally 3 to 5 years. The interest rate is dependent on the term of
the lease, the type of collateral, and the overall credit of the customer.
During 2000, average net loans increased $91.2 million to $446.8 million,
and increased $76.2 million in 1999 to $355.6 million, as compared to $279.4
million in 1998. At December 31, 2000, gross loans increased $93.9 million to
$512.3 million, or 22.4 percent compared to the $418.4 million at December 31,
1999. Gross loans at December 31, 1999 increased $106.2 million, or 34.0 percent
compared to December 31, 1998 gross loans of $312.2 million. This growth in
gross loans resulted primarily from:
- Increases during 2000 and 1999 of $27.9 million and $42.4 million,
respectively, in commercial real estate mortgages, due primarily to
increased activity and greater market penetration
- Increases in construction loans of $6.4 million and $14.2 million,
respectively, resulting from a greater emphasis on this product including
an expanded offering and focused marketing
- Increases in residential real estate mortgages of $27.5 million and $13.9
million, respectively, primarily as a result of increased activity,
particularly during 2000
- Increases in commercial and industrial loans of $33.3 million and $11.4
million, respectively, primarily due to a continuing strong economic
environment, increased activity and a greater emphasis on this product
with resulting increased market penetration, particularly during 2000
- A decrease of $2.6 million and an increase of $20.8 million,
respectively, in lease financings resulting from the participation in an
automobile leasing program beginning in late 1998 and discontinued in
March 2000, and
- Increases in loans to individuals of $1.4 million and $3.5 million,
respectively.
28
31
Major classifications of loans, including loans held for sale, at December
31 are as follows:
(000'S)
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Real Estate:
Commercial........................ $181,735 $153,823 $111,397 $107,277 $ 85,091
Construction...................... 32,869 26,526 12,311 5,197 6,313
Residential....................... 155,449 127,959 114,020 94,690 83,991
Commercial and industrial........... 110,555 77,276 65,923 55,962 56,736
Individuals......................... 10,677 9,280 5,801 5,620 6,814
Lease financing..................... 20,970 23,543 2,755 -- --
-------- -------- -------- -------- --------
Total............................... 512,255 418,407 312,207 268,746 238,945
Deferred loan fees.................. (1,338) (1,446) (973) (959) (745)
Allowance for loan losses........... (4,816) (4,047) (3,103) (3,533) (2,559)
-------- -------- -------- -------- --------
Loans, net.......................... $506,101 $412,914 $308,131 $264,254 $235,641
======== ======== ======== ======== ========
The Company's primary lending emphasis is for loans to businesses and
developers, primarily in the form of commercial real estate mortgages,
construction loans, and commercial and industrial loans, including lines of
credit. The Company will continue to emphasize these types of loans, which have
increased significantly during both 2000 and 1999, and which enable the Company
to meet the borrowing needs of businesses in the communities it serves. These
loans are made at both fixed rates of interest and variable or floating rates of
interest, generally based upon the prime rate as published in the Wall Street
Journal. At December 31, 2000, the Company had total gross loans with fixed
rates of interest of $318.9 million, or 62.2 percent, and total gross loans with
variable or floating rates of interest of $193.4 million, or 37.8 percent, as
compared to $257.7 million or 61.6 percent of fixed rate loans and $160.7
million or 38.4 percent of variable or floating rate loans at December 31, 1999.
At December 31, 2000 and 1999, the Company had approximately $114.6 million
and $103.2 million, respectively, of committed but unissued lines of credit,
commercial mortgages, construction loans and commercial and industrial loans.
The following table presents the maturities of loans outstanding at
December 31, 2000 excluding loans to individuals, real estate mortgages (other
than construction loans) and lease financings, and the amount of such loans by
maturity date that have pre-determined interest rates and the amounts that have
floating or adjustable rates.
(000'S EXCEPT PERCENTAGES)
--------------------------------------------------------
AFTER 1
WITHIN 1 BUT WITHIN AFTER 5
YEAR 5 YEARS YEARS TOTAL PERCENT
-------- ---------- ------- -------- -------
Loans:
Real estate -- construction.............. $18,739 $10,068 $ 4,062 $ 32,869 22.9%
Commercial and industrial................ 53,830 30,079 26,646 110,555 77.1%
------- ------- ------- -------- -----
Total.................................... $72,569 $40,147 $30,708 $143,424 100.0%
------- ------- ------- -------- -----
Rate Sensitivity:
Fixed or predetermined interest rates.... $ 2,257 $13,336 $21,964 $ 37,557 26.2%
Floating or adjustable interest rates.... 70,312 26,811 8,744 105,867 73.8%
------- ------- ------- -------- -----
Total.................................... $72,569 $40,147 $30,708 $143,424 100.0%
------- ------- ------- -------- -----
Percent.................................. 50.6% 28.0% 21.4% 100.0%
It is the Company's policy to discontinue the accrual of interest on loans
when, in the opinion of management, a reasonable doubt exists as to the timely
collectibility of the amounts due. Regulatory requirements generally prohibit
the accrual of interest on certain loans when principal or interest is due and
remains unpaid for 90 days or more, unless the loan is both well secured and in
the process of collection.
29
32
The following table summarizes the Company's non-accrual loans, loans past
due 90 days or more and still accruing, restructured loans, OREO and related
interest income not recorded on non-accrual loans as of and for the year ended
December 31:
(000'S EXCEPT PERCENTAGES)
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Non-accrual loans at year end......... $4,584 $3,855 $ 633 $1,580 $1,795
OREO at year end...................... 2,117 2,193 2,102 2,641 2,694
Restructured loans at year end........ -- 323 428 568 2,934
------ ------ ------ ------ ------
Total nonperforming assets............ 6,701 6,371 3,163 4,789 7,423
Loans past due 90 days or more and
still accruing...................... 469 264 1,442 1,638 883
Additional interest income that would
have been recorded if these
borrowers had complied with
contractual loan terms.............. 763 698 362 809 1,347
Nonperforming assets to total assets
at year end......................... 0.52% 0.56% 0.34% 0.59% 1.00%
Substantially all non-accruing loans are collateralized by real estate. At
December 31, 2000, the Company had no commitments to lend additional funds to
customers with non-accrual or restructured loan balances. Non-accrual loans
increased in 2000 to $4.6 million and in 1999 to $3.9 million, from $0.6 million
in 1998. Net income is adversely impacted by the level of non-performing assets
caused by the deterioration of the borrowers' ability to meet scheduled interest
and principal payments. In addition to forgone revenue, the Company must
increase the level of provision for loan losses, incur higher collection costs
and other costs associated with the management and disposition of foreclosed
properties.
At December 31, 2000, loans that aggregated approximately $1.7 million,
which are not on non-accrual status, were potential problem loans that may
result in their being placed on non-accrual status in the future.
Restructured loans in the amounts of $0, $323,000 and $428,000, at December
31, 2000, 1999 and 1998, respectively, that were considered to be impaired due
to a reduction in the contractual interest rate, are on accrual status since the
collateral securing these loans is sufficient to protect the contractual
principal and interest of the restructured loans. These loans have been
performing for a reasonable period of time. Interest accrued on these loans not
yet collected as of December 31, 2000 was immaterial.
In accordance with SFAS No. 114, which establishes the accounting treatment
of impaired loans, loans that are within the scope of SFAS No. 114 totaling $2.1
million, $3.0 million and $364,000 at December 31, 2000, 1999 and 1998,
respectively, have been measured based on the estimated fair value of the
collateral since these loans are all collateral dependent. The total allowance
for loan losses specifically allocated to impaired loans was $125,000, $57,000
and $78,000 at December 31, 2000, 1999 and 1998, respectively. The average
recorded investment in impaired loans for the years ended December 31, 2000,
1999 and 1998 was approximately $2.2 million, $1.7 million and $0.3 million,
respectively. No income was recorded on impaired loans during the portion of the
year that they were impaired.
ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
Allowance for Loan Losses
The Bank maintains an allowance for loan losses to absorb losses inherent
in the loan portfolio based on ongoing quarterly assessments of the estimated
losses. The Bank's methodology for assessing the appropriateness of the
allowance consists of several key components, which include a specific allowance
for identified problem loans, a formula allowance, and an unallocated allowance.
The specific allowance incorporates the results of measuring impaired loans as
provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures." These accounting standards prescribe the
measurement methods, income recognition and disclosures related to impaired
loans.
The formula allowance is calculated by applying loss factors to outstanding
loans by type, excluding loans for which a specific allowance has been
determined. Loss factors are based on historical loss experience. New
30
33
loan types, for which there has been no historical loss experience, as explained
further below, is one of the considerations in determining the appropriateness
of the unallocated allowance.
The appropriateness of the unallocated allowance is reviewed by management
based upon its evaluation of then-existing economic and business conditions
affecting the key lending areas of the Bank and other conditions, such as new
loan products, credit quality trends (including trends in nonperforming loans
expected to result from existing conditions), collateral values, loan volumes
and concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions were
believed to have had on the collectibility of the loan portfolio. Senior
management reviews these conditions quarterly. Management's evaluation of the
loss related to these conditions is reflected in the unallocated allowance. The
evaluation of the inherent loss with respect to these conditions is subject to a
higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments.
A summary of the components of the allowance for loan losses, changes in
the components and the impact of charge-offs/recoveries on the resulting
provision/credit for loan losses for the dates indicated is as follows:
(000'S)
------------------------------------------------------------------------------------
DECEMBER 31, CHANGE DECEMBER 31, CHANGE DECEMBER 31, CHANGE
2000 DURING 2000 1999 DURING 1999 1998 DURING 1998
------------ ----------- ------------ ----------- ------------ -----------
COMPONENTS:
Specific..................... $ 125 $ 68 $ 57 $(21) $ 78 $ (65)
Formula...................... 391 (476) 867 124 743 50
Unallocated.................. 4,300 1,177 3,123 841 2,282 (415)
------ ------ ------ ---- ------ -----
Total allowance.............. $4,816 $4,047 $3,103
====== ====== ======
Net change................... 769 944 (430)
Net
recoveries/(charge-offs)... (375) 344 (130)
------ ---- -----
Provision (credit) amount.... $1,144 $600 $(300)
====== ==== =====
DECEMBER 31, CHANGE DECEMBER 31, CHANGE DECEMBER 31,
1997 DURING 1997 1996 DURING 1996 1995
------------ ----------- ------------ ----------- ------------
COMPONENTS:
Specific......................... $ 143 $ (35) $ 178 $ (75) $ 253
Formula.......................... 693 (310) 1,003 (126) 1,129
Unallocated...................... 2,697 1,319 1,378 (1,422) 2,800
------ ------ ------ ------- ------
Total allowance.................. $3,533 $2,559 $4,182
====== ====== ======
Net change....................... 974 (1,623)
Net recoveries/(charge-offs)..... 374 (365)
------ -------
Provision (credit) amount........ $ 600 $(1,258)
====== =======
The changes in the specific component of the allowance for loan losses are
the result of our analysis of impaired loans and our determination of the amount
required to reduce the carrying amount of such loans to estimated fair value.
The changes in the formula component of the allowance for loan losses are
the result of the application of historical loss experience to outstanding loans
by type. Loss experience for each year is based upon average charge-off
experience for the prior three year period by loan type.
The changes in the unallocated component of the allowance for loan losses
are the result of management's consideration of other relevant factors affecting
loan collectibility. Due to the inherent uncertainty in the process, management
does not attempt to quantify separate amounts for each of the conditions
considered in estimating the unallocated component of the allowance. Management
periodically adjusted the unallocated component to an amount that, when
considered with the specific and formula components, represented its best
31
34
estimate of probable losses in the loan portfolio as of each balance sheet date.
The following factors affected the changes in the unallocated component of the
allowance for loan losses each year:
- Concentration -- Concentration in commercial and industrial loans
increased to 21.6 percent of the portfolio from 18.5 percent at the prior
year end, an increase of $33.3 million. These types of loans generally
have a higher degree of risk than other types of loans which the Bank
makes since the repayment of the loans is largely dependent on the
borrowers' ability to successfully operate their businesses. An increase
in such concentration, and the associated increase in risk, is not
reflected in the formula component of the allowance due to the lag caused
by using three year historical losses in determining the loss factors.
Therefore, consideration of increases in concentration is a part of the
determination of the unallocated component of the allowance.
- Credit quality -- Non-accrual loans and loans past due 90 days or more
increased by $0.9 million. Certain of the loans are also considered in
connection with the analysis of impaired loans performed to determine the
specific component of the allowance. However, due to the uncertainty of
that determination, such loans are also considered in the process of
determining the unallocated component of the allowance.
- Change in underwriting criteria -- The Bank increased its loan to value
ratio guidelines on all loans secured by real estate (except for loans
secured by 1-4 family residential real estate) to remain competitive for
such loans.
- New loan products -- The Bank began financing business equipment leases
during the period. Any probable losses with respect to business equipment
leases are not reflected in the formula component of the allowance for
loan losses since there is no loss history.
- Economic and business conditions -- Increasing interest rates negatively
affected the general ability of borrowers to repay their loans.
As a result of our detailed review process and consideration of the
identified relevant factors, management determined that an increase in the
unallocated component of the allowance of $1.2 million reflects our best
estimate of probable losses which have been incurred as of December 31, 2000.
1999
- Concentration -- The Bank's concentration in construction loans increased
to 6.3 percent of the portfolio from 3.9 percent of the portfolio at the
end of the prior year, an increase of $14.2 million. The Bank has had no
charge-offs of such loans during the past three years, and therefore,
there is no formula component of the allowance for loan losses for
construction loans.
- Credit quality -- Non-accrual loans and loans past due 90 days or more
increased by $2.0 million. Other loans aggregating approximately $2.5
million, which are not in a non-accrual status, were identified at
December 31, 1999 as potential problem loans. An analysis of impaired
loans is performed to determine the specific component of the allowance.
However, due to the uncertainty of that determination such loans are also
considered in the process of determining the unallocated component of the
allowance.
- New loan products -- Automobile lease financing, with which the Bank has
no historical loss experience, increased by $20.1 million. Any probable
losses with respect to automobile lease financing are not reflected in
the formula component of the allowance for loan losses since there is no
loss history.
The Bank introduced an SBA loan product, and hired an employee designated
to originate such loans. While the Bank has made several SBA loans in the
past, this new emphasis is designed to aggressively increase these types
of loans. While these loans contain a guarantee from the SBA for a major
portion of the loan, there is increased exposure due to the credit
profile of the businesses that generally obtain such loans. In addition,
the Bank's general lack of familiarity with such loans, including the
extensive documentation and compliance process that, if deficient, could
void the SBA guarantee, adds to increased risk.
32
35
- Geographic expansion -- The Bank made construction loans on Long Island,
New York, a geographic area with which the Bank has little experience. In
addition, the Bank established a physical presence in Bronx County, New
York, through the opening of a full service branch and, as a result,
expanded its general lending activities in a new market.
- Increase in Loans to One Borrower limits -- The Bank increased its
lending limits to select customers to as high as the Bank's legal lending
limit. This increased the Bank's exposure to certain customers and
increased concentrations to certain customers.
- Economic and business conditions -- Increasing collateral values
resulting from a favorable real estate market were partially offset by
the effect of increasing interest rates on the general ability of
borrowers to repay their loans.
As a result of our detailed review process and consideration of the
identified relevant factors, management determined that an increase in the
unallocated component of the allowance of $841,000 reflects our best estimate of
probable losses which have been incurred as of December 31, 1999.
1998
- Credit quality -- Non-accrual loans and loans past due 90 days or more
decreased by $1.1 million. Certain of the loans are also considered in
connection with the analysis of impaired loans performed to determine the
specific component of the allowance. However, due to the uncertainty of
that determination such loans are also considered in the process of
determining the unallocated component of the allowance.
- New loan products -- The Bank introduced limited new loan products during
1998.
- Economic and business conditions -- Declining interest rates increased
the general ability of borrowers to repay their loans.
As a result of our detailed review process and consideration of the
identified relevant factors, management determined that a decrease in the
unallocated component of the allowance of $415,000 reflects our best estimate of
probable losses which have been incurred as of December 31, 1998.
1997
- Concentrations -- Concentration in commercial real estate loans increased
to 39.9 percent of the portfolio from 35.6 percent at the end of the
prior year, an increase of $22.2 million. This increased the Bank's
exposure to volatility in real estate values within a limited geographic
area. An increase in such concentration, and the associated increase in
risk, is not reflected in the formula component of the allowance due to
the lag caused by using three year historical losses in determining the
loss factors. Therefore, consideration of increases in concentration is a
part of the determination of the unallocated component of the allowance.
- Credit quality -- Non-accrual loans and loans past due 90 days or more
increased by $540,000. Certain of the loans are also considered in
connection with the analysis of impaired loans performed to determine the
specific component of the allowance. However, due to the uncertainty of
that determination, such loans are also considered in the process of
determining the unallocated component of the allowance.
- New loan products -- The Bank expanded its lending efforts to
not-for-profit organizations increasing the aggregate outstanding amounts
of these loan types to approximately $37.7 million at December 31, 1997
from approximately $30.7 million at the end of 1996. These efforts
increased the Bank's exposure to credit risk due to the larger loan
amounts to borrowers for these loan types, an expanded geographic area
within which the Bank would make these loans and the lack of personal
guarantees on most loans to not-for-profit organizations. The lack of
personal guarantees for these borrowers represented a departure from the
Bank's standard underwriting criteria for other loan products.
33
36
- Change in underwriting criteria -- The Bank increased its secured lending
limits from $2.0 million per transaction to $3.0 million in an effort to
more aggressively grow the loan portfolio. Further, the Bank raised its
loan to value ratios for loans secured by real estate from 60% to as much
as 70% on a loan specific basis.
- Expansion of transaction lending -- The Bank historically has made loans
to customers with whom a deposit relationship existed. In conjunction
with the new loan products introduced, the Bank also expanded its
marketing to non-customers on a transaction basis. This increased the
Bank's exposure due to the lack of familiarity with certain borrowers
with whom no previous relationship existed.
- Economic and business conditions -- General economic conditions did not
significantly impact the determination of the unallocated component of
the allowance for loan losses because there was no significant change in
interest rates or other economic factors that, in management's judgement,
impacted the collectibility of the portfolio.
As a result of our detailed review process and consideration of the
identified relevant factors, management determined that an increase in the
unallocated component of the allowance of $1.3 million reflects our best
estimate of probable losses which have been incurred as of December 31, 1997.
1996
- Concentrations -- Concentration in commercial real estate loans increased
to 35.6 percent of the portfolio from 30.2 percent at the end of the
prior year, an increase of $19.4 million. This increased the Bank's
exposure to volatility of real estate values within a limited geographic
area. An increase in such concentration, and the associated increase in
risk, is not reflected in the formula component of the allowance due to
the lag caused by using three year historical losses in determining the
loss factors. Therefore, consideration of increases in concentration is a
part of the determination of the unallocated component of the allowance.
- Credit quality -- Non-accrual loans and loans past due 90 days or more
decreased by $2.7 million. This reduction was due in large part to one
loan secured by residential real estate being transferred to OREO. The
collateral value of this property was uncertain prior to the resolve of
the foreclosure. The unallocated component of the allowance was reduced
when the loan was transferred to OREO in 1996. Certain of the loans are
also considered in connection with the analysis of impaired loans
performed to determine the specific component of the allowance. However,
due to the uncertainty of that determination such loans are also
considered in the process of determining the unallocated component of the
allowance.
- New loan products -- The Bank introduced limited new loan products during
1996.
- Economic and business conditions -- Interest rates declined slightly and
a relatively stable interest rate environment was sustained. This
increased the general ability of borrowers to repay their loans.
As a result of our detailed review process and consideration of the
identified relevant factors, management determined that a decrease in the
unallocated component of the allowance of $1.4 million reflects our best
estimate of probable losses which have been incurred as of December 31, 1996.
34
37
A summary of the allowance for loan losses for the years ended December 31,
is as follows:
(000'S EXCEPT PERCENTAGES)
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Net loans outstanding at end of
year.............................. $506,101 $412,914 $308,131 $264,254 $235,641
-------- -------- -------- -------- --------
Average net loans outstanding during
the year.......................... 446,843 355,628 279,378 249,259 220,604
-------- -------- -------- -------- --------
Allowance for loan losses:
Balance, beginning of year.......... $ 4,047 $ 3,103 $ 3,533 $ 2,559 $ 4,182
Provision (credit) charged to
expense........................... 1,144 600 (300) 600 (1,258)
-------- -------- -------- -------- --------
5,191 3,703 3,233 3,159 2,924
Charge-offs and recoveries during
the year:
Charge offs:
Real estate:
Commercial..................... -- -- -- -- --
Construction................... -- -- -- -- --
Residential.................... (29) (11) (70) (1) (347)
Commercial and industrial......... (378) (85) (250) (275) (209)
Lease financing and individuals... (21) (14) (18) (35) (109)
Recoveries:
Real estate:
Commercial..................... -- 381 36 -- 45
Construction................... -- -- -- -- --
Residential.................... -- -- 35 499 --
Commercial and industrial......... 49 73 135 161 236
Lease financing and individuals... 4 -- 2 25 19
-------- -------- -------- -------- --------
Net (charge-offs) recoveries during
the year.......................... (375) 344 (130) 374 (365)
-------- -------- -------- -------- --------
Balance, end of year................ $ 4,816 $ 4,047 $ 3,103 $ 3,533 $ 2,559
======== ======== ======== ======== ========
Ratio of net charge-offs to average
net loans outstanding during the
year.............................. 0.08% -- 0.05% -- 0.17%
Ratio of allowance for loan losses
to gross loans outstanding at end
of the year....................... 0.94% 0.97% 1.00% 1.32% 1.07%
35
38
The distribution of our allowance for loan losses at the dates indicated is
summarized as follows:
(000'S EXCEPT PERCENTAGES)
--------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
AMOUNT OF LOAN CATEGORY BY AMOUNT OF LOAN CATEGORY BY
LOAN LOSS AMOUNTS BY TOTAL LOAN LOSS AMOUNTS BY TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
--------- ---------- ----------- --------- ---------- -----------
Real Estate:
Commercial............... -- $181,735 35.48% -- $153,823 36.77%
Construction............. $ 125 32,869 6.42 -- 26,526 6.34
Residential.............. 27 155,449 30.35 $ 167 127,959 30.58
Commercial and
industrial............... 322 110,555 21.58 520 77,276 18.47
Lease financing and
individuals.............. 42 31,647 6.17 237 32,823 7.84
Unallocated................ 4,300 -- 3,123 -- --
------ -------- ------ ------ -------- ------
Total...................... $4,816 $512,255 100.00% $4,047 $418,407 100.00%
====== ======== ====== ====== ======== ======
(000'S EXCEPT PERCENTAGES)
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
LOAN IN EACH LOAN IN EACH LOAN IN EACH
AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY
LOAN LOSS BY BY TOTAL LOAN LOSS BY BY TOTAL LOAN LOSS BY BY TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
--------- -------- -------- --------- -------- -------- --------- -------- --------
Real Estate:
Commercial......... $ 180 $111,397 35.68% $ 173 $107,277 39.92% $ 537 $ 85,091 35.61%
Construction....... -- 12,311 3.94 -- 5,197 1.94 50 6,313 2.64
Residential........ 148 114,020 36.52 140 94,690 35.23 121 83,991 35.15
Commercial and
industrial......... 437 65,923 21.12 445 55,962 20.82 365 56,736 23.75
Lease financing and
individuals........ 56 8,556 2.74 78 5,620 2.09 108 6,814 2.85
Unallocated.......... 2,282 -- -- 2,697 -- -- 1,378 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total................ $3,103 $312,207 100.00% $3,533 $268,746 100.00% $2,559 $238,945 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
Actual losses can vary significantly from the estimated amounts. The Bank's
methodology permits adjustments to the allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the loan portfolio as of the evaluation date have changed. By assessing the
estimated losses inherent in the loan portfolio on a quarterly basis, the Bank
is able to adjust specific and inherent loss estimates based upon any more
recent information that has become available.
Management believes the allowance for loan losses is the best estimate of
probable losses which have been incurred as of December 31, 2000. There is no
assurance that the Company will not be required to make future adjustments to
the allowance in response to changing economic conditions or regulatory
examinations. During 1999, the FDIC, and during 1998, the New York State Banking
Department, completed examinations of the Bank. In 1999, the Federal Reserve
completed an off-site examination of the Company. The regulatory agencies
concluded that the process of internal asset review and the allowance for loan
losses were adequate.
Provision for Loan Losses
The Bank recorded a provision for loan losses of $1,144,000 during 2000,
compared to $600,000 during 1999 and a credit of $300,000 during 1998. The
provision (credit) for loan losses is charged to income to bring
36
39
the Bank's allowance for loan losses to a level deemed appropriate by management
based on the factors previously discussed under "Allowance for Loan Losses."
DEPOSITS
The Company's fundamental source of funds supporting interest earning
assets is deposits, consisting of non interest bearing demand deposits, checking
with interest, money market, savings and various forms of time deposits. The
maintenance of a strong deposit base is key to the development of lending
opportunities and creates long term customer relationships, which enhance the
ability to cross sell services. Depositors include various sized businesses,
professionals, not-for-profits, municipalities and individuals. To meet the
requirements of a diverse customer base, a full range of deposit instruments are
offered, which has allowed the Company to maintain and expand its deposit base
despite intense competition from other banking institutions and non-bank
financial service providers.
The following table presents a summary of deposits at December 31:
(000'S)
--------------------------------
2000 1999 1998
-------- -------- --------
Demand deposits.................................... $274,738 $226,345 $209,824
Money market accounts.............................. 145,294 140,462 109,780
Savings accounts................................... 51,623 52,548 53,034
Time deposits of $100,000 or more.................. 288,094 226,997 146,335
Time deposits of less than $100,000................ 60,541 50,146 49,717
Checking with interest............................. 59,285 58,348 58,607
-------- -------- --------
Total.............................................. $879,575 $754,846 $627,297
======== ======== ========
At December 31, 2000 and 1999, certificates of deposits and other time
deposits of $100,000 or more totaled $288.1 million and $227.0 million,
respectively. At December 31, 2000, such deposits classified by time remaining
to maturity were as follows:
(000'S)
--------
3 months or less............................................ $215,999
Over 3 through 6 months..................................... 59,925
Over 6 through 12 months.................................... 12,070
Over 12 months.............................................. 100
--------
Total....................................................... $288,094
========
Total deposits at December 31, 2000 increased 16.5 percent to $879.6
million, from $754.8 million at December 31, 1999, an increase of 20.3 percent
from $627.3 million at the end of 1998. Average deposits outstanding increased
16.5 percent in 2000 and 10.7 percent in 1999. Excluding municipal CD's, which
are acquired on a bid basis, total deposits increased 16.4 percent and 12.0
percent, and average deposits increased 14.1 percent and 10.0 percent in 2000
and 1999, respectively.
Average non interest bearing deposits increased 11.6 percent or $26.5
million for 2000 compared to 1999, and 13.7 percent or $27.7 million in 1999
compared to 1998, due to the Company's continuing emphasis on developing this
funding source. Average interest bearing deposits in 2000 increased $94.9
million and, in 1999, increased $43.2 million, reflecting increases in all
deposit categories except savings.
Average balances in money market deposits increased $19.0 million in 2000
and $19.2 million in 1999, due principally to increased account activity by
customers and, particularly in 1999, due to increased deposits from municipal
customers.
37
40
Checking with interest average deposits increased $3.7 million in 2000 and
$3.8 million in 1999 due to increased activity by customers and the addition of
new customer relationships through business development efforts.
The increase of $73.6 million in 2000 and $20.7 million in 1999 of average
time deposits principally reflects increases in municipal CD's and other jumbo
CD's. These increases resulted from the Company's continuing business
development effort of municipal customers as well as other customers placing
deposits into higher rate CD's.
Average savings deposits decreased $1.4 million in 2000 and $0.5 million in
1999, as the rate on savings accounts was maintained at a lower competitive rate
and customers switched to other higher rate accounts.
In general, deposit rates in 2000 increased from 1999 due to a higher
interest rate environment.
Time deposits of over $100,000, including municipal deposits, increased
$61.1 million and $80.7 million in 2000 and 1999, respectively. The increases
result from increases in municipal CD's which are used to expand or maintain
lower cost municipal deposits, fund securities purchases and for capital
leveraging. These CD's are acquired on a bid basis. Time deposits over $100,000
from other customers increased in 2000 by $49.5 million over 1999 and $18.5
million in 1999 compared to 1998 principally due to the more attractive rates as
compared to other deposit products. Time deposits of over $100,000 are generally
for maturities of 7 to 180 days and are acquired to fund loans and securities,
and to leverage capital under the Company's asset liability policy by matching
such funds with investments and loan production in excess of other deposit
growth.
The Company also utilizes wholesale borrowings and other sources of funds
interchangeably with time deposits in excess of $100,000 depending upon
availability and rates paid for such funds at any point in time. Due to the
generally short maturity of these fundings, the Company can experience higher
volatility of interest margins during periods of both rising and declining
interest rates. The Company does not generally acquire brokered deposits.
The following table summarizes the average amounts and rates of various
classifications of deposits for the periods indicated:
(000'S EXCEPT PERCENTAGES)
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998
AVERAGE AVERAGE AVERAGE
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
Demand deposits -- Non
interest bearing........... $255,386 -- $228,905 -- $201,249 --
Money market accounts........ 148,663 2.91% 129,690 2.54% 110,471 2.70%
Savings accounts............. 51,472 1.51 52,847 1.55 53,376 2.01
Time deposits................ 339,305 5.84 265,665 4.71 244,933 5.18
Checking with interest....... 62,049 1.35 58,379 1.39 54,606 1.77
-------- -------- --------
Total........................ $856,875 3.00% $735,486 2.37% $664,635 2.67%
======== ======== ========
BORROWINGS
Borrowings with original maturities of one year or less totaled $197.9
million and $219.5 million at December 31, 2000 and 1999, respectively. Such
short-term borrowings consisted of securities sold under agreements to
repurchase and borrowings from the FHLB. Other borrowings totaled $88.0 million
and $94.2 million at December 31, 2000 and 1999, respectively, consisting of
borrowings from the FHLB with stated maturities of ten years and 1 to 3 year
call options.
Interest expense on all borrowings totaled $15.0 million, $12.2 million and
$9.9 million in 2000, 1999 and 1998, respectively. The following table
summarizes the average balances, weighted average interest rates and
38
41
the maximum month-end outstanding amounts of securities sold under agreements to
repurchase and FHLB borrowings for each of the years:
(000'S EXCEPT PERCENTAGES)
--------------------------------
2000 1999 1998
-------- -------- --------
Average balance: Short-term $165,993 $147,502 $129,405
Other borrowings 89,011 93,254 55,307
Weighted average interest rate
(for the year): Short-term 6.1% 4.9% 5.4%
Other borrowings 5.5% 5.4% 5.4%
Weighted average interest rate
(at year end): Short-term 6.1% 4.7% 4.8%
Other borrowings 5.6% 5.4% 5.3%
Maximum month-end outstanding
amount: Short-term $197,889 $219,484 $148,147
Other borrowings 94,229 94,234 75,536
In addition, at December 31, 2000, the Bank had available unused lines of
credit of $75 million from FHLB, $5 million from BankBoston and $60 million from
Merrill Lynch, all of which are subject to various terms and conditions.
CAPITAL RESOURCES
Stockholders' equity increased to $93.3 million or 36.7 percent at December
31, 2000 from $68.3 million at December 31, 1999, which was a decrease of 9.8
percent from $75.7 million at December 31, 1998. In each year, stockholders'
equity was increased by record net income and the exercise of stock options,
offset by cash dividends of $5.2 million and $4.3 million in 2000 and 1999,
respectively, and repurchases of outstanding shares of stock. Stockholders'
equity also increased by $13.1 million at December 31, 2000 and decreased by
$17.2 million at December 31, 1999 as a result of the effect of the net
unrealized gain in 2000 and net unrealized loss in 1999 on securities available
for sale, net of tax.
The Company paid its first cash dividend in 1996, and the Board of
Directors authorized a quarterly cash dividend policy in the first quarter of
1998. The Bank's payment of dividends to the Company, the Company's primary
source of funds, is subject to limitation by federal and state regulators based
on such factors as the maintenance of adequate capital, which could reduce the
amount of dividends otherwise payable. See "Business -- Supervision and
Regulation."
The various components and changes in stockholders' equity are reflected in
the Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998 included elsewhere herein.
Management believes that future retained earnings will provide the
necessary capital for current operations and the planned growth in total assets.
All banks and bank holding companies are subject to risk-based capital
guidelines. These guidelines define capital as Tier 1 and Total capital. Tier 1
capital consists of common stockholders' equity and qualifying preferred stock,
less intangibles; and Total capital consists of Tier 1 capital plus the
allowance for loan losses up to certain limits, preferred stock and certain
subordinated and term-debt securities. The guidelines require a minimum total
risk-based capital ratio of 8.0 percent, and a minimum Tier 1 risk-based capital
ratio of 4.0 percent.
39
42
The risk-based capital ratios at December 31, follow:
2000 1999 1998
---- ---- ----
Tier 1 capital:
Company................................................... 14.8% 15.7% 19.4%
Bank...................................................... 14.9 15.5 19.3
Total capital:
Company................................................... 15.6 16.5 20.2
Bank...................................................... 15.7 16.3 20.1
Banks and bank holding companies must also maintain a minimum leverage
ratio of 4 percent, which consists of Tier 1 capital based on risk-based capital
guidelines, divided by average tangible assets (excluding intangible assets that
were deducted to arrive at Tier 1 capital).
The leverage ratios were as follows at December 31:
2000 1999 1998
---- ---- ----
Company..................................................... 7.3% 7.2% 7.4%
Bank........................................................ 7.4 7.1 7.4
To be considered "well-capitalized" under FDICIA, an institution must
generally have a leverage ratio of at least 5 percent, Tier 1 ratio of 6 percent
and a Total capital ratio of 10 percent. The Bank exceeds all current regulatory
capital requirements and was in the "well capitalized" category at December 31,
2000. Management plans to conduct the affairs of the Bank so as to maintain a
strong capital position in the future.
LIQUIDITY
The Asset/Liability Strategic Committee ("ALSC") of the Board of Directors
of the Bank establishes specific policies and operating procedures governing the
Company's liquidity levels and develops plans to address future liquidity needs,
including contingent sources of liquidity. The primary functions of asset
liability management are to provide safety of depositor and investor funds,
assure adequate liquidity and maintain an appropriate balance between interest
earning assets and interest bearing liabilities. Liquidity management involves
the ability to meet the cash flow requirement of depositors wanting to withdraw
funds or borrowers needing assurance that sufficient funds will be available to
meet their credit needs. Interest rate sensitivity management seeks to manage
fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates.
The Bank's liquid assets, at December 31, 2000, include cash and due from
banks of $30.4 million and Federal funds sold of $7.3 million. Federal funds
sold represents the Bank's excess liquid funds that are invested with other
financial institutions in need of funds and which mature daily.
Other sources of liquidity include maturities and principal and interest
payments on loans and securities. The loan and securities portfolios are of high
credit quality and of mixed maturity, providing a constant stream of maturing
and re-investable assets, which can be converted into cash should the need
arise. The ability to redeploy these funds is an important source of medium to
long term liquidity. The amortized cost of securities available for sale having
contractual maturities or expected call dates or average lives of one year or
less amounted to $102.7 million at December 31, 2000. This represented 15.7
percent of the amortized cost of the securities portfolio. Excluding installment
loans to individuals, real estate loans other than construction loans and lease
financing, $69.5 million, or 48.5 percent of loans at December 31, 2000, mature
in one year or less. The Bank may increase liquidity by selling certain
residential mortgages, or exchanging them for mortgage-backed securities that
may be sold, in the secondary market.
The Bank is a member of the FHLB. The Bank has a borrowing capacity of up
to $120 million at December 31, 2000, at various terms secured by FHLB stock
owned and to be purchased and certain other assets of the Bank. The Bank had
advances from the FHLB totaling $45 million at December 31, 2000. The Bank
borrowed $136.6 million under securities sold under agreements to repurchase at
December 31, 2000,
40
43
and had securities totaling $27 million at December 31, 2000 that could be sold
under agreements to repurchase, thereby increasing liquidity. In addition, the
Bank has an agreement with a primary investment firm to borrow up to $60 million
under Retail CD Brokerage Agreements and has agreements with two correspondent
banks for Federal funds purchased totaling $15 million. The Bank had $10 million
outstanding under these agreements at December 31, 2000. Additional liquidity is
provided by the ability to borrow from the Federal Reserve Bank's discount
window, which borrowings must be collateralized by U.S. Treasury and government
agency securities.
The Bank pledges certain of its assets as collateral for deposits of
municipalities and other deposits allowed or required by law, FHLB borrowings
and repurchase agreements. By utilizing collateralized funding sources, the Bank
is able to access a variety of cost effective sources of funds. The assets
pledged consist of U.S. Treasury and government agency securities,
mortgage-backed securities and other securities. Management monitors its
liquidity requirements by assessing assets pledged, the level of assets
available for sale, additional borrowing capacity and other factors. Management
does not anticipate any negative impact to its liquidity from its pledging
activities.
Non interest bearing demand deposits and interest bearing deposits from
businesses, professionals, not-for-profit organizations and individuals are a
relatively stable, low-cost source of funds. The deposits of the Bank generally
have shown a steady growth trend as well as a generally consistent deposit mix.
However, there can be no assurance that deposit growth will continue or that the
deposit mix will not shift to higher rate products.
Another source of funding for the Company is capital market funds, which
includes common stock, preferred stock, convertible debentures, retained
earnings and long-term debt qualifying as regulatory capital.
Each of the Company's sources of liquidity is vulnerable to various
uncertainties beyond the control of the Company. Scheduled loan and security
payments are a relatively stable source of funds, while loan and security
prepayments and calls, and deposit flows vary widely in reaction to market
conditions, primarily prevailing interest rates. Asset sales are influenced by
general market interest rates and other unforeseen market conditions. The
Company's ability to borrow at attractive rates is affected by its financial
condition and other market conditions.
Management considers the Company's sources of liquidity to be adequate to
meet any expected funding needs and also to be responsive to changing interest
rate markets.
QUARTERLY RESULTS OF OPERATIONS
Set forth below are certain quarterly results of operations for 2000 and
1999.
(000'S EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------
2000 QUARTERS 1999 QUARTERS
---------------------------------------- ----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- ------- ------- ------- ------- ------- ------- -------
Interest income...... $23,081 $22,365 $21,365 $20,455 $19,615 $18,580 $16,964 $15,657
Net interest
income............. 12,035 11,755 11,469 11,222 11,097 10,897 9,949 9,215
Provision (credit)
for loan losses.... 94 350 350 350 (75) 225 225 225
Income before income
taxes.............. 6,469 5,398 4,954 5,162 5,044 5,649 4,023 3,932
Net income........... 4,755 3,968 3,641 3,794 3,734 4,265 3,037 2,968
Basic earnings per
common share....... 1.02 0.85 0.77 0.81 0.80 0.91 0.65 0.65
Diluted earnings per
common share....... 0.99 0.82 0.75 0.79 0.78 0.89 0.64 0.63
41
44
FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for periods subsequent to December 31, 2000. The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements relating to subsequent
periods increasingly are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements:
- competitive pressure on loan and deposit product pricing;
- other actions of competitors;
- changes in economic conditions;
- the extent and timing of actions of the Federal Reserve Board;
- a loss of customer deposits;
- changes in customer's acceptance of the Banks' products and services;
- increases in federal and state income taxes and/or the Company's
effective income tax rate; and
- the extent and timing of legislative and regulatory actions and reform.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential for economic losses to be incurred on market
risk sensitive instruments arising from adverse changes in market indices such
as interest rates, foreign currency exchange rates and commodity prices. Since
all Company transactions are denominated in U.S. dollars with no direct foreign
exchange or changes in commodity price exposures, the Company's primary market
risk exposure is interest rate risk.
Interest rate risk is the exposure of net interest income to changes in
interest rates. Interest rate sensitivity is the relationship between market
interest rates and net interest income due to the repricing characteristics of
assets and liabilities. If more liabilities than assets reprice in a given
period (a liability-sensitive position or "negative gap"), market interest rate
changes will be reflected more quickly in liability rates. If interest rates
decline, such positions will generally benefit net interest income.
Alternatively, where assets reprice more quickly than liabilities in a given
period (an asset-sensitive position or "positive gap"), a decline in market
rates could have an adverse effect on net interest income. Excessive levels of
interest rate risk can result in a material adverse effect on the Company's
future financial condition and results of operations. Accordingly, effective
risk management techniques that maintain interest rate risk at prudent levels is
essential to the Company's safety and soundness.
The Company has no financial instruments entered into for trading purposes.
Federal funds, both purchases and sales, on which rates change daily, and loans
and deposits tied to certain indices, such as the prime rate and federal
discount rate, are the most market sensitive and have the most stable fair
values. The least sensitive instruments include long-term fixed rate loans and
securities and fixed rate savings deposits, which have the least stable fair
value. On those types falling between these extremes, the management of maturity
distributions is as important as the balances maintained. Management of maturity
distributions involve the matching of interest rate maturities, as well as
principal maturities, and is a key determinant of net interest income. In
periods of rapidly changing interest rates, an imbalance ("gap") between the
rate sensitive assets and liabilities can cause major fluctuations in net
interest income and in earnings. The Company's management of liquidity and
interest rate sensitivity has been successful in the past, as evidenced by the
continued net interest income growth. Continuing to establish patterns of
sensitivity which will enhance future growth regardless of frequent shifts in
the market conditions is one of the objectives of the Company's asset/liability
management strategy.
Evaluating the Company's exposure to changes in interest rates is the
responsibility of ALSC and includes assessing both the adequacy of the
management process used to control interest rate risk and the
42
45
quantitative level of exposure. When assessing the interest rate risk management
process, the Company seeks to ensure that appropriate policies, procedures,
management information systems and internal controls are in place to maintain
interest rate risk at appropriate levels. Evaluating the quantitative level of
interest rate risk exposure, requires the Company to assess the existing and
potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity and asset
quality.
The Company uses two methods to evaluate market risk to changes in interest
rates. A "Static Gap" analysis shows the Company as liability-sensitive in the
one-year time frame as of December 31, 2000. The simulation analysis also
indicates a liability-sensitive position at that same date. The Company believes
the simulation analysis is a more accurate analysis of interest rate risk.
The "Static Gap" as of December 31, 2000 and 1999 is presented in the
tables below. Balance sheet items are appropriately categorized by contractual
maturity, expected average lives for mortgage-backed securities, or repricing
dates, with prime rate indexed loans and certificates of deposit. Checking with
interest accounts, savings accounts, money market deposits and other borrowings
constitute the bulk of the floating rate category. The determination of the
interest rate sensitivity of non contractual items is arrived at in a subjective
fashion. Savings accounts are viewed as a relatively stable source of funds and
are therefore classified as intermediate funds.
At December 31, 2000, the "Static Gap" showed a negative cumulative gap of
$327.4 million in the one day to one year repricing period, as compared to a
negative cumulative gap of $289.2 million at December 31, 1999. The cumulative
gap at December 31, 2000 is due principally to fixed rate securities and loans
in the over one year to five years and over five years categories to maximize
yield on assets and the treatment of deposit accounts, and other borrowings, as
previously discussed above. A significant portion of the loans in the over one
year to five year category represents five year fixed rate commercial mortgages
and commercial loans. Origination of such loans has allowed the Company to
generate an asset repriceable within five years to reduce long-term interest
rate risk. The change in the cumulative static gap between December 31, 2000 and
December 31, 1999 reflects the increase in such fixed rate loans, the reduced
expectation of prepayment of securities with such provisions and the reduced
expectation of calls on securities with such provisions, thereby extending the
estimated repricing dates. In addition, borrowing in total increased, as did the
expectation of calls on such borrowings. These shifts in estimated repricing
dates resulted from increases in interest rates at year end 2000 as compared to
year end 1999.
The Company uses the simulation analysis to estimate the effect that
specific movements in interest rates would have on net interest income. This
analysis incorporates management assumptions about the levels of future balance
sheet trends, different patterns of interest rate movements, and changing
relationships between interest rates (i.e. basis risk). These assumptions have
been developed through a combination of historical analysis and future expected
pricing behavior. For a given level of market interest rate changes, the
simulation can consider the impact of the varying behavior of cash flows from
principal prepayments on the loan portfolio and mortgage-backed securities, call
activities on investment securities, balance charges on non contractual maturity
deposit products (demand deposits, checking with interest, money market and
savings accounts), and embedded option risk by taking into account the effects
of interest rate caps and floors. The impact of planned growth and anticipated
new business activities is not integrated into the simulation analysis. The
Company can assess the results of the simulation and, if necessary, implement
suitable strategies to adjust the structure of its assets and liabilities to
reduce potential unacceptable risks to net interest income.
The Company's policy limit on interest rate risk is that if interest rates
were to gradually increase or decrease 200 basis points from current rates, the
percentage change in estimated net interest income for the subsequent 12 month
measurement period should not decline by more than 5.0 percent. Net interest
income is forecasted using various interest rate scenarios that management
believes are reasonably likely to impact the Company's financial condition. A
base case scenario, in which current interest rates remain stable, is used for
comparison to other scenario simulations. The table below illustrates the
estimated exposures under a rising rate scenario and a declining rate scenario
calculated as a percentage change in estimated net interest income from the base
case scenario, assuming a gradual shift in interest rates for the next 12 month
measurement period, beginning December 31, 2000 and 1999.
43
46
PERCENTAGE CHANGE IN PERCENTAGE CHANGE IN
ESTIMATED NET INTEREST ESTIMATED NET INTEREST
INCOME FROM INCOME FROM
GRADUAL CHANGE IN INTEREST RATES DECEMBER 31, 2000 DECEMBER 31, 1999
- -------------------------------- ---------------------- ----------------------
+200 basis points............................. (5.5)% (5.3)%
- -200 basis points............................. 4.0% 9.7%
The percentage change in estimated net interest income in the +200 basis
points scenario of (5.5%) exceeds the Company's policy limit of (5.0%). As a
result, the ALSC reviewed the contributing factors and determined that no
immediate corrective action was necessary.
As with any method of measuring interest rate risk, there are certain
limitations inherent in the method of analysis presented. Actual results may
differ significantly from simulated results should market conditions and
management strategies, among other factors, vary from the assumptions used in
the analysis. The model assumes that certain assets and liabilities of similar
maturity or period to repricing will react the same to changes in interest
rates, but, in reality, they may react in different degrees to changes in market
interest rates. Specific types of financial instruments may fluctuate in advance
of changes in market interest rates, while other types of financial instruments
may lag behind changes in market interest rates. Additionally, other assets,
such as adjustable-rate loans, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Furthermore, in the
event of a change in interest rates, expected rates of prepayments on loans and
securities and early withdrawals from time deposits could deviate significantly
from those assumed in the simulation.
One way to minimize interest rate risk is to maintain a balanced or matched
interest rate sensitivity position. However, profits are not always maximized by
matched funding. To increase net interest earnings, the Company selectively
mis-matches asset and liability repricing to take advantage of short-term
interest rate movements and the shape of the U.S. Treasury yield curve. The
magnitude of the mismatch depends on a careful assessment of the risks presented
by forecasted interest rate movements. The risk inherent in such a mismatch, or
gap, is that interest rates may not move as anticipated.
Interest rate risk exposure is reviewed in quarterly meetings in which
guidelines are established for the following quarter and the longer term
exposure. The structural interest rate mismatch is reviewed periodically by ALSC
and management.
Risk is mitigated by matching maturities or repricing more closely, and by
reducing interest rate risk by the use of interest rate contracts. The Company
does not use derivative financial instruments extensively. However, as
circumstances warrant, the Company purchases derivatives such as interest rate
contracts to manage its interest rate exposure. Any derivative financial
instruments are carefully evaluated to determine the impact on the Company's
interest rate risk in rising and declining interest rate environments as well as
the fair value of the derivative instruments. Use of derivative financial
instruments is included in the Bank's Asset/Liability policy, which has been
approved by the Board of Directors. Additional information on derivative
financial instruments is presented in Note 1 to the Consolidated Financial
Statements.
44
47
The tables below set forth the interest rate sensitivity analysis by
repricing date at year end 2000 and 1999.
INTEREST RATE SENSITIVITY ANALYSIS BY REPRICING DATE
DECEMBER 31, 2000
(000'S EXCEPT PERCENTAGES)
-----------------------------------------------------------------------------------
ONE DAY OVER ONE
AND DAY TO OVER THREE OVER ONE NON-
FLOATING THREE MONTHS TO YEAR TO OVER FIVE INTEREST
RATE MONTHS ONE YEAR FIVE YEARS YEARS BEARING TOTAL
-------- --------- ---------- ---------- --------- --------- ----------
Assets:
Loans, net.......................... -- $ 192,316 $ 42,935 $ 156,430 $114,420 -- $ 506,101
Mortgage-backed securities.......... -- 15,888 56,789 97,044 111,942 -- 281,663
Other securities.................... -- 28,013 43,485 97,858 213,471 -- 382,827
Other earning assets................ $ 7,300 -- -- -- -- -- 7,300
Other assets........................ -- -- -- -- -- $ 112,079 112,079
-------- --------- --------- --------- -------- --------- ----------
Total assets........................ 7,300 236,217 143,209 351,332 439,833 112,079 1,289,970
-------- --------- --------- --------- -------- --------- ----------
Liabilities and stockholders'
equity:
Interest bearing deposits........... -- 393,412 93,823 6,478 111,124 -- 604,837
Other borrowed funds................ 91,980 108,898 26,019 37,617 21,317 -- 285,831
Demand deposits..................... -- -- -- -- -- 274,738 274,738
Other liabilities................... -- -- -- -- -- 31,219 31,219
Stockholders' equity................ -- -- -- -- -- 93,345 93,345
-------- --------- --------- --------- -------- --------- ----------
Total liabilities and stockholders'
equity............................ 91,980 502,310 119,842 44,095 132,441 399,302 $1,289,970
-------- --------- --------- --------- -------- --------- ----------
Net interest rate sensitivity gap... $(84,680) $(266,093) $ 23,367 $ 307,237 $307,392 $(287,223) --
-------- --------- --------- --------- -------- --------- ----------
Cumulative gap...................... $(84,680) $(350,773) $(327,406) $ (20,169) $287,223 -- --
-------- --------- --------- --------- -------- --------- ----------
Cumulative gap to interest-earning
assets............................ (7.19)% (29.78)% (27.80)% (1.71)% 24.38% -- --
-------- --------- --------- --------- -------- --------- ----------
DECEMBER 31, 1999
(000'S EXCEPT PERCENTAGES)
------------------------------------------------------------------------------------
ONE DAY OVER ONE
AND DAY TO OVER THREE OVER ONE NON-
FLOATING THREE MONTHS TO YEAR TO OVER FIVE INTEREST
RATE MONTHS ONE YEAR FIVE YEARS YEARS BEARING TOTAL
--------- --------- ---------- ---------- --------- --------- ----------
Assets:
Loans, net......................... -- $ 167,220 $ 32,382 $ 124,586 $ 88,726 -- $ 412,914
Mortgage-backed securities......... -- 55,523 44,980 83,813 125,552 -- 309,868
Other securities................... -- 4,158 18,795 65,629 236,523 -- 325,105
Other earning assets............... $ 20,900 -- -- -- -- -- 20,900
Other assets....................... -- 9,361 -- -- -- $ 69,324 78,685
--------- --------- --------- --------- -------- --------- ----------
Total assets....................... 20,900 236,262 96,157 274,028 450,801 69,324 1,147,472
--------- --------- --------- --------- -------- --------- ----------
Liabilities and stockholders'
equity:
Interest bearing deposits.......... -- 364,018 45,466 8,028 110,989 -- 528,501
Other borrowed funds............... 126,269 103,720 3,018 80,358 353 -- 313,718
Demand deposits.................... -- -- -- -- -- 226,345 226,345
Other liabilities.................. -- -- -- -- -- 10,598 10,598
Stockholders' equity............... -- -- -- -- -- 68,310 68,310
--------- --------- --------- --------- -------- --------- ----------
Total liabilities and stockholders'
equity........................... 126,629 467,738 48,484 88,386 111,342 305,253 $1,147,472
--------- --------- --------- --------- -------- --------- ----------
Net interest rate sensitivity
gap.............................. $(105,369) $(231,476) $ 47,673 $ 185,642 $339,459 $(235,929) --
--------- --------- --------- --------- -------- --------- ----------
Cumulative gap..................... $(105,369) $(336,845) $(289,172) $(103,530) $235,929 -- --
--------- --------- --------- --------- -------- --------- ----------
Cumulative gap to interest-earning
assets........................... (9.77)% (31.24)% (26.82)% (9.60)% 21.88% -- --
--------- --------- --------- --------- -------- --------- ----------
45
48
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT................................ 47
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000
AND 1999 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 2000:
Consolidated Statements of Income......................... 48
Consolidated Statements of Comprehensive Income........... 49
Consolidated Balance Sheets............................... 50
Consolidated Statements of Changes in Stockholders'
Equity................................................. 51
Consolidated Statements of Cash Flows..................... 52
Notes to Consolidated Financial Statements................ 53
MANAGEMENT'S REPORT TO THE STOCKHOLDERS..................... 71
INDEPENDENT ACCOUNTANTS' REPORT............................. 73
46
49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Hudson Valley Holding Corp.
We have audited the accompanying consolidated balance sheets of Hudson
Valley Holding Corp. and its subsidiary, Hudson Valley Bank, (collectively the
"Company"), as of December 31, 2000 and 1999 and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Hudson Valley Holding Corp. and
its subsidiary at December 31, 2000 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 29, 2001
47
50
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
2000 1999 1998
------- ------- -------
INTEREST INCOME:
Loans, including fees....................................... $42,272 $31,724 $26,644
Securities:
Taxable................................................... 37,336 32,002 27,716
Exempt from Federal income taxes.......................... 6,923 6,182 5,774
Federal funds sold.......................................... 735 908 2,303
Deposits in banks........................................... -- -- 8
------- ------- -------
Total interest income....................................... 87,266 70,816 62,445
------- ------- -------
INTEREST EXPENSE:
Deposits.................................................... 25,742 17,446 17,723
Securities sold under repurchase agreements and other
short-term borrowings..................................... 10,181 7,221 6,933
Other borrowings............................................ 4,862 4,991 2,966
------- ------- -------
Total interest expense...................................... 40,785 29,658 27,622
------- ------- -------
NET INTEREST INCOME......................................... 46,481 41,158 34,823
Provision (credit) for loan losses.......................... 1,144 600 (300)
------- ------- -------
Net interest income after provision (credit) for loan
losses.................................................... 45,337 40,558 35,123
------- ------- -------
NON INTEREST INCOME:
Service charges............................................. 1,127 1,046 1,009
Realized gain on sales of securities, net................... 692 19 439
Other income................................................ 729 534 534
------- ------- -------
Total non interest income................................... 2,548 1,599 1,982
------- ------- -------
NON INTEREST EXPENSE:
Salaries and employee benefits.............................. 14,780 12,843 11,363
Occupancy................................................... 2,257 2,038 1,818
Professional services....................................... 2,560 2,011 1,877
Equipment................................................... 1,723 1,875 1,529
Business development........................................ 948 1,012 772
FDIC assessment............................................. 165 81 76
Other operating expenses.................................... 3,469 3,649 3,849
------- ------- -------
Total non interest expense.................................. 25,902 23,509 21,284
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 21,983 18,648 15,821
INCOME TAXES................................................ 5,825 4,644 3,567
------- ------- -------
NET INCOME.................................................. $16,158 $14,004 $12,254
======= ======= =======
BASIC EARNINGS PER COMMON SHARE............................. $ 3.45 $ 3.01 $ 2.65
DILUTED EARNINGS PER COMMON SHARE........................... $ 3.35 $ 2.94 $ 2.58
See notes to consolidated financial statements.
48
51
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS IN THOUSANDS
2000 1999 1998
------- -------- -------
NET INCOME.................................................. $16,158 $ 14,004 $12,254
------- -------- -------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gain (loss) on securities available for
sale arising during the year.............................. 22,847 (29,036) (574)
Income tax effect........................................... (9,365) 11,890 235
------- -------- -------
13,482 (17,146) (339)
Unrealized holding gain as a result of reclassification of
securities from held for investment to available for
sale...................................................... -- -- 5,539
Income tax effect........................................... -- -- (2,268)
------- -------- -------
-- -- 3,271
Reclassification adjustment for net (gain) loss realized on
securities available for sale............................. (692) (19) (439)
Income tax effect........................................... 284 5 99
------- -------- -------
(408) (14) (340)
------- -------- -------
Unrealized holding gain (loss) on securities, net........... 13,074 (17,160) 2,592
Minimum pension liability adjustment........................ (17) 127 (14)
Income tax effect........................................... 7 (52) 6
------- -------- -------
(10) 75 (8)
------- -------- -------
Other comprehensive income (loss)........................... 13,064 (17,085) 2,584
------- -------- -------
COMPREHENSIVE INCOME (LOSS)................................. $29,222 $ (3,081) $14,838
======= ======== =======
See notes to consolidated financial statements.
49
52
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS
2000 1999
---------- ----------
ASSETS
Cash and due from banks..................................... $ 30,420 $ 26,185
Federal funds sold.......................................... 7,300 20,900
Securities available for sale, at estimated fair value
(amortized cost of $654,693 in 2000 and $656,791 in
1999)..................................................... 655,029 634,973
Federal Home Loan Bank of New York (FHLB) stock............. 9,461 9,361
Loans (net of allowance for loan losses of $4,816 in 2000
and $4,047 in 1999)....................................... 506,101 412,914
Receivable for securities sold.............................. 44,326 --
Accrued interest and other receivables...................... 14,604 9,556
Premises and equipment, net................................. 13,345 13,732
Other real estate owned..................................... 2,117 2,193
Deferred income taxes, net.................................. -- 12,175
Other assets................................................ 7,267 5,483
---------- ----------
TOTAL ASSETS................................................ $1,289,970 $1,147,472
========== ==========
LIABILITIES
Deposits:
Non interest-bearing...................................... $ 274,738 $ 226,345
Interest-bearing.......................................... 604,837 528,501
---------- ----------
Total deposits............................................ 879,575 754,846
Securities sold under repurchase agreements and other
short-term borrowings..................................... 197,872 219,484
Other borrowings............................................ 87,959 94,234
Payable for securities purchased............................ 14,913 --
Deferred income taxes, net.................................. 1,652 --
Accrued interest and other liabilities...................... 14,654 10,598
---------- ----------
TOTAL LIABILITIES........................................... 1,196,625 1,079,162
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common Stock, $0.20 par value; authorized 10,000,000 and
5,000,000 shares in 2000 and 1999, respectively;
outstanding 4,702,660 and 4,223,599 shares in 2000 and
1999, respectively........................................ 1,114 1,011
Additional paid-in capital.................................. 104,825 87,011
Retained earnings........................................... 9,279 13,955
Accumulated other comprehensive loss........................ (520) (13,584)
Treasury stock, at cost..................................... (21,353) (20,083)
---------- ----------
Total stockholders' equity.................................. 93,345 68,310
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,289,970 $1,147,472
========== ==========
See notes to consolidated financial statements.
50
53
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
SHARES COMMON TREASURY PAID-IN RETAINED COMPREHENSIVE
OUTSTANDING STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
----------- ------ -------- ---------- -------- ------------- --------
BALANCE AT JANUARY 1, 1998........ 3,458,126 $ 839 $(16,791) $ 61,637 $ 18,219 $ 917 $ 64,821
Net income........................ 12,254 12,254
Exercise of stock options......... 39,133 7 684 691
Purchase of treasury stock........ (46,964) (1,456) (1,456)
Sale of treasury stock............ 6,896 160 57 217
Stock dividend.................... 345,319 69 10,462 (10,531) --
Cash dividends.................... (3,473) (3,473)
Minimum pension liability
adjustment...................... (8) (8)
Tax benefit from exercise of stock
options......................... 58 58
Net unrealized gain on securities
available for sale.............. 2,592 2,592
--------- ------ -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998...... 3,802,510 915 (18,087) 72,898 16,469 3,501 75,696
Net income........................ 14,004 14,004
Exercise of stock options......... 96,216 19 1,700 1,719
Purchase of treasury stock........ (76,239) (2,443) (2,443)
Sale of treasury stock............ 18,574 447 158 605
Stock dividend.................... 382,538 77 12,165 (12,242) --
Cash dividends.................... (4,276) (4,276)
Minimum pension liability
adjustment...................... 75 75
Tax benefit from exercise of stock
options......................... 90 90
Net unrealized loss on securities
available for sale.............. (17,160) (17,160)
--------- ------ -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999...... 4,223,599 1,011 (20,083) 87,011 13,955 (13,584) 68,310
Net income........................ 16,158 16,158
Exercise of stock options......... 85,112 17 2,116 2,133
Purchase of treasury stock........ (40,897) (1,436) (1,436)
Sale of treasury stock............ 6,825 166 68 234
Stock dividend.................... 428,021 86 15,537 (15,623) --
Cash dividends.................... (5,211) (5,211)
Minimum pension liability
adjustment...................... (10) (10)
Tax benefit from exercise of stock
options......................... 93 93
Net unrealized gain on securities
available for sale.............. 13,074 13,074
--------- ------ -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000...... 4,702,660 $1,114 $(21,353) $104,825 $ 9,279 $ (520) $ 93,345
========= ====== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
51
54
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
DOLLARS IN THOUSANDS
2000 1999 1998
--------- --------- ---------
OPERATING ACTIVITIES:
Net income.................................................. $ 16,158 $ 14,004 $ 12,254
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision (credit) for loan losses........................ 1,144 600 (300)
Valuation adjustment of other real estate owned -- -- 516
Depreciation and amortization............................. 1,697 1,727 1,488
Realized gain on security transactions, net............... (692) (19) (439)
Amortization of premiums on securities, net............... 188 1,662 2,322
Realized gains on sale of loans held for sale, net........ (5) (46) --
Originations of loans held for sale......................... (612) (4,904) --
Proceeds from sale of loans held for sale................... 617 4,950 --
Deferred taxes (benefit).................................... 4,753 351 (364)
Increase (decrease) in deferred loan fees................... (108) 473 14
Increase in accrued interest and other receivables.......... (5,048) (1,527) (9)
Increase in other assets.................................... (1,784) (393) (665)
Increase (decrease) in accrued interest and other
liabilities............................................... 4,039 (2,528) 2,473
Other changes, net.......................................... 93 (108) 68
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 20,440 14,242 17,358
--------- --------- ---------
INVESTING ACTIVITIES:
Net (increase) decrease in short-term investments........... 13,600 (17,400) 9,700
Increase in FHLB stock...................................... (100) (4,084) (2,227)
Proceeds from maturities of securities available for sale... 79,330 136,186 176,564
Proceeds from maturities of securities held for
investment................................................ -- -- 41,726
Proceeds from sales of securities available for sale........ 44,320 -- 153,668
Purchases of securities available for sale.................. (121,047) (236,283) (410,979)
Purchases of securities held for investment................. -- -- (40,392)
Increase in receivable for securities sold.................. (44,326) -- --
Increase in payable for securities purchased................ 14,913 -- --
Net increase in loans....................................... (94,223) (105,688) (44,021)
Net purchases of premises and equipment..................... (1,310) (3,438) (1,494)
Proceeds from sales of other real estate owned.............. 76 102 430
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES....................... (108,767) (230,605) (117,025)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 2,133 1,719 691
Proceeds from sale of treasury stock........................ 234 605 217
Net increase in deposits.................................... 124,729 127,549 31,915
Cash dividends paid......................................... (5,211) (4,276) (3,473)
Repayment of other borrowings............................... (30,275) (13,500) --
Proceeds from other borrowings.............................. 24,000 32,198 74,948
Net increase (decrease) in securities sold under repurchase
agreements and short-term borrowings...................... (21,612) 71,337 5,372
Acquisition of treasury stock............................... (1,436) (2,443) (1,456)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 92,562 213,189 108,214
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS.............. 4,235 (3,174) 8,547
Cash and due from banks, beginning of year.................. 26,185 29,359 20,812
--------- --------- ---------
Cash and due from banks, end of year........................ $ 30,420 $ 26,185 $ 29,359
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................... $ 39,055 $ 29,808 $ 27,103
Income tax payments......................................... 4,331 6,903 1,800
Increase in other real estate owned due to transfer of
loans..................................................... -- -- 407
Change in unrealized gain (loss) on securities available for
sale -- net of tax........................................ 13,074 (17,160) 2,592
Transfer of securities from held for investment to available
for sale.................................................. -- -- 140,762
See notes to consolidated financial statements.
52
55
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations and Basis of Presentation -- The consolidated
financial statements include the accounts of Hudson Valley Holding Corp. and its
wholly-owned subsidiary, Hudson Valley Bank (the "Bank"), (collectively the
"Company"). The Bank offers a broad range of lending and depository products to
businesses, individuals and government units through 12 branches and a business
center in Westchester County, New York, and one branch in Bronx County, New
York. All inter-company accounts are eliminated. The consolidated financial
statements have been prepared in accordance 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 and liabilities as of the date of the consolidated balance sheet and
income and expenses for the period. Actual results could differ significantly
from those estimates. An estimate that is particularly susceptible to
significant change in the near term relates to the determination of the
allowance for loan losses. In connection with the determination of the allowance
for loan losses, management utilizes the work of professional appraisers for
significant properties.
Securities -- Securities are classified as either available for sale,
representing securities the Bank may sell in the ordinary course of business, or
as held for investment, representing securities the Bank has the ability and
positive intent to hold until maturity. Securities available for sale are
reported at fair value with unrealized gains and losses (net of tax) excluded
from operations and reported in other comprehensive income. Securities held for
investment are stated at amortized cost (specific identification). There were no
securities held for investment at December 31, 2000 and 1999. The amortization
of premiums and accretion of discounts is determined by using the level yield
method to the earlier of the call or maturity date. Securities are not acquired
for purposes of engaging in trading activities. Realized gains and losses from
sales of securities are determined using the specific identification method.
Loans -- Loans are reported at their outstanding principal balance, net of
charge-offs, and deferred loan origination fees and costs. Loan origination fees
and certain direct loan origination costs are deferred and recognized over the
life of the related loan or commitment as an adjustment to yield, or taken
directly into income when the related loan is sold or commitment expires.
Loans Held for Sale -- Loans held for sale are valued at the lower of cost
or market, decreases in the carrying value, if any, are reported in earnings.
Realized gains or losses on sales of loans are reported in earnings in the
period the sale occurs. There were no loans held for sale at December 31, 2000
and 1999.
Interest Rate Contracts -- The Company, from time to time, uses various
interest rate contracts such as forward rate agreements, interest rate swaps,
caps and floors, primarily as hedges against specific assets and liabilities.
Contracts accounted for as hedges must meet certain criteria, including the
following: the hedged item must expose the Company to interest rate risk; the
interest rate contract must reduce that exposure; and must have a high
correlation of change in fair value of the interest rate contract and change in
fair value of the item hedged. For contracts designated as hedges, gains or
losses are deferred and recognized as adjustments to interest income or expense
of the underlying assets or liabilities over the life of the contract. Net
payments on interest rate swaps designated as hedges are accounted for on the
accrual basis. Gains or losses resulting from early terminations of contracts
are deferred and amortized over the remaining term of the underlying assets or
liabilities. If the contracts do not meet the criteria for hedge accounting, the
contract is valued at its estimated fair value and any gain or loss is recorded
in the Statements of Consolidated Income. Any fees received or disbursed which
represent adjustments to the yield on interest rate contracts are capitalized
and amortized over the term of the interest rate contracts. During 2000 and 1999
the Company had no forward rate agreements, no interest rate swaps and no
interest rate caps. At December 31, 2000 and 1999, the Company had outstanding
interest rate floors with a notional amount of $50 million for each of the
years. The estimated fair value of the interest rate floors, determined based on
a market bid indication, was $29 and $21 at December 31, 2000 and 1999,
respectively. The fees paid in conjunction with the interest rate floors
53
56
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregated $131 and are amortized over the term of the interest rate contracts.
Amortization expense totaled $26, $26 and $15 in 2000, 1999 and 1998,
respectively.
Allowance for Loan Losses -- The Bank maintains an allowance for loan
losses to absorb losses inherent in the loan portfolio based on ongoing
quarterly assessments of the estimated losses. The Bank's methodology for
assessing the appropriateness of the allowance consists of several key
components, which include a specific allowance for identified problem loans, a
formula allowance, and an unallocated allowance. The specific allowance
incorporates the results of measuring impaired loans as provided in Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to outstanding
loans by type. Loss factors are based on historical loss experience. New loan
types, for which there has been no historical loss experience, as explained
further below, is one of the considerations in determining the appropriateness
of the unallocated allowance.
The appropriateness of the unallocated allowance is reviewed by management
based upon its evaluation of then-existing economic and business conditions
affecting the key lending areas of the Bank and other conditions, such as new
loan products, credit quality trends (including trends in nonperforming loans
expected to result from existing conditions), collateral values, loan volumes
and concentrations, specific industry conditions within portfolio segments that
existed as of the balance sheet date and the impact that such conditions were
believed to have had on the collectibility of the loan portfolio. Senior
management reviews these conditions quarterly. Management's evaluation of the
loss related to these conditions is reflected in the unallocated allowance. Due
to the inherent uncertainty in the process, management does not attempt to
quantify separate amounts for each of the conditions considered in estimating
the unallocated component of the allowance. The evaluation of the inherent loss
with respect to these conditions is subject to a higher degree of uncertainty
because they are not identified with specific credits or portfolio segments.
Actual losses can vary significantly from the estimated amounts. The Bank's
methodology permits adjustments to the allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the loan portfolio as of the evaluation date have changed.
Management believes the allowance for loan losses is the best estimate of
probable losses which have been incurred as of December 31, 2000 and 1999. There
is no assurance that the Company will not be required to make future adjustments
to the allowance in response to changing economic conditions, particularly in
the Bank's service area, since the majority of the Bank's loans are
collateralized by real estate. In addition, various regulatory agencies, as an
integral part of the examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments at the time of their
examination.
Impaired Loans -- A loan is recognized as impaired when it is probable that
principal and/or interest are not collectible in accordance with the loan's
contractual terms. A loan is not deemed to be impaired if there is a short delay
in receipt of payment or if, during a longer period of delay, the Company
expects to collect all amounts due including interest accrued at the contractual
rate during the period of delay. Measurement of impairment can be based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change. If the fair value of the impaired loan is less than the
related recorded amount, a specific valuation allowance is established within
the allowance for loan losses or a writedown is charged against the allowance
for loan losses if the impairment is considered to be permanent. Measurement of
impairment does
54
57
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not apply to large groups of smaller balance homogenous loans that are
collectively evaluated for impairment such as the Company's portfolios of home
equity loans, real estate mortgages, installment and other loans.
Loan Restructurings -- Loan restructurings are renegotiated loans for which
concessions have been granted to the borrower that the Company would not have
otherwise granted. Restructured loans are returned to accrual status when said
loans have demonstrated performance, generally evidenced by six months of
payment performance in accordance with the restructured terms, or by the
presence of other significant factors.
Income Recognition on Loans -- Interest on loans is accrued monthly. Net
loan origination and commitment fees are deferred and recognized as an
adjustment of yield over the lives of the related loans. Loans, including
impaired loans, are placed on a non-accrual status when management believes that
interest or principal on such loans may not be collected in the normal course of
business. When a loan is placed on non-accrual status, all interest previously
accrued, but not collected, is reversed against interest income. Interest
received on non-accrual loans generally is either applied against principal or
reported as interest income, in accordance with management's judgment as to the
collectability of principal. Loans can be returned to accruing status when they
become current as to principal and interest, demonstrate a period of performance
under the contractual terms, and when, in management's opinion, they are
estimated to be fully collectible.
Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
generally 3 to 31.5 years. Leasehold improvements are amortized over the lesser
of the term of the lease or the estimated useful life of the asset.
Other Real Estate Owned -- Real estate properties acquired through loan
foreclosure are recorded at the lower of cost or estimated fair value, net of
estimated selling costs, at time of foreclosure. Credit losses arising at the
time of foreclosure are charged against the allowance for loan losses.
Subsequent valuations are periodically performed by management and the carrying
value is adjusted by a charge to expense to reflect any subsequent declines in
the estimated fair value. Routine holding costs are charged to expense as
incurred. Any gains on dispositions of such properties reduce OREO expense.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period the change is enacted.
Transfers and Servicing of Financial Assets -- The Company follows the
provision of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," as amended by SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," in determining the accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and for
distinguishing whether a transfer of financial assets in exchange for cash or
other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing.
Stock-Based Compensation -- SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
55
58
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per Common Share -- SFAS No. 128, "Earnings per Share,"
establishes standards for computing and presenting earnings per share. The
statement requires disclosure of basic earnings per share (i.e. common stock
equivalents are not considered) and diluted earnings per share (i.e. common
stock equivalents are considered using the treasury stock method) on the face of
the statement of operations, along with a reconciliation of the numerator and
denominator of basic and diluted earnings per share. Basic earnings per share
are computed by dividing net income by the weighted average number of common
shares outstanding during the period. The computation of diluted earnings per
share is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares, consisting
solely of stock options, had been issued.
Weighted average common shares outstanding used to calculate basic and
diluted earnings per share were as follows:
2000 1999 1998
--------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES:
Basic............................................. 4,685,004 4,654,182 4,621,533
Effect of stock options........................... 135,385 104,685 135,615
Diluted........................................... 4,820,389 4,758,867 4,757,148
In December 2000, 1999 and 1998 the Board of Directors of the Company
declared 10 percent stock dividends. Share amounts have been retroactively
restated to reflect the issuance of the additional shares.
Disclosures About Segments of an Enterprise and Related Information -- SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
establishes standards for the way business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in subsequent
interim financial reports issued to shareholders. It also establishes standards
for related disclosure about products and services, geographic areas, and major
customers. The statement requires that a business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and assess performance. The
statement also requires that business enterprises report a measure of segment
profit or loss, certain specific revenue and expense items and segment assets.
It also requires that information be reported about revenues derived from the
enterprises' products or services, or about the countries in which the
enterprises earn revenues and holds assets, and about major customers,
regardless of whether that information is used in making operating decisions.
The Company has one operating segment, "Community Banking."
Pending Accounting Pronouncements.
Accounting for Derivative Instruments and Hedging Activities -- In June
1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133."
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivative instruments
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The adoption of this statement in
January 2001 did not have a material impact on its financial position or results
of operations.
Accounting for Transfers of Financial Assets -- In September 2000, FASB
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", replacing
56
59
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 125. SFAS No. 140 provides consistent application of a financial
components approach that recognizes the financial servicing assets a company
controls and the liabilities a company has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. SFAS No. 140 provides consistent guidelines for distinguishing
transfers of financial assets from transfers that are secured borrowings. SFAS
No. 140 is effective for transfers, servicing, or extinguishments occurring
after March 31, 2001, except for certain provisions relating to the accounting
and disclosure for secured borrowings and collateral, for which the effective
date was December 15, 2000. The adoption of the effective provisions of this
statement did not have a material impact on the Company's financial position or
results of operations. Management does not believe the adoption of the remaining
provisions will have a material impact on its financial condition or results of
operations.
Other -- Certain 1999 and 1998 amounts have been reclassified to conform to
the 2000 presentation.
2 SECURITIES
DECEMBER 31
----------------------------------------------------------------------------------
2000 1999
---------------------------------------- ---------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
AMORTIZED ----------------- FAIR AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ------- ------- -------- --------- ------ ------- --------
CLASSIFIED AS AVAILABLE FOR SALE
U.S. Treasury and government
agencies....................... $225,591 $ 546 $2,923 $223,214 $199,679 -- $11,843 $187,836
Mortgage-backed securities....... 281,663 1,322 2,216 280,769 319,221 $ 173 9,526 309,868
Obligations of states and
political subdivisions......... 144,024 3,735 311 147,448 133,733 1,133 2,001 132,865
Other debt securities............ 2,564 -- 182 2,382 3,079 3 190 2,892
-------- ------ ------ -------- -------- ------ ------- --------
Total debt securities............ 653,842 5,603 5,632 653,813 655,712 1,309 23,560 633,461
Equity securities................ 851 365 -- 1,216 1,079 433 -- 1,512
-------- ------ ------ -------- -------- ------ ------- --------
Total............................ $654,693 $5,968 $5,632 $655,029 $656,791 $1,742 $23,560 $634,973
======== ====== ====== ======== ======== ====== ======= ========
In December 1998, the Company transferred all securities classified as held
to maturity which had an amortized cost of $140,762 to securities classified as
available for sale. At the date of this transfer, these securities had an
unrealized gain of $5,539. This unrealized gain, net of tax, was recorded in
"Stockholders' Equity -- Other Comprehensive Income," in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt or Equity Securities."
At December 31, 2000, securities having a stated value of approximately
$533,414 were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required or permitted by
law.
Gross gains of $692, $19 and $619 were recorded as a result of securities
available for sale sold or redeemed in 2000, 1999 and 1998 respectively. Gross
losses of $180 were incurred on sales or redemptions of securities available for
sale in 1998. Applicable income taxes relating to such transactions were $179,
$5 and $99 in 2000, 1999 and 1998, respectively.
57
60
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contractual maturity of all debt securities held at December 31, 2000
is shown below. Actual maturities may differ from contractual maturities because
some issuers have the right to call or prepay obligations with or without call
or prepayment penalties.
AVAILABLE FOR SALE
---------------------
AMORTIZED FAIR
COST VALUE
--------- --------
CONTRACTUAL MATURITY
Within 1 year............................................... $ 10,956 $ 10,991
After 1 but within 5 years.................................. 49,963 50,294
After 5 but within 10 years................................. 227,465 227,556
After 10 years.............................................. 83,795 84,203
Mortgage-backed Securities.................................. 281,663 280,769
-------- --------
Total....................................................... $653,842 $653,813
======== ========
3 CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Bank has outstanding, at any time, a significant number of commitments
to extend credit and also provide financial guarantees to third parties. Those
arrangements are subject to strict credit control assessments. Guarantees
specify limits to the Bank's obligations. The amounts of those loan commitments
and guarantees are set out in the following table. Because many commitments and
almost all guarantees expire without being funded in whole or in part, the
contract amounts are not estimates of future cash flows.
2000 1999
CONTRACT CONTRACT
AMOUNT AMOUNT
-------- --------
Credit commitments.......................................... $114,538 $103,163
Guarantees written.......................................... $ 5,123 $ 4,433
The majority of loan commitments have terms up to one year, with either a
floating interest rate or contracted fixed interest rates ranging from 8.5% to
10.5% Guarantees written generally have terms up to one year.
Loan commitments and guarantees written have off-balance-sheet credit risk
because only origination fees and accruals for probable losses are recognized in
the balance sheet until the commitments are fulfilled or the guarantees expire.
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted. The
credit risk amounts are equal to the contractual amounts, assuming that the
amounts are fully advanced and that, in accordance with the requirements of SFAS
No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," collateral or other security would have no value.
The Bank's policy is to require customers to provide collateral prior to
the disbursement of approved loans. For loans and financial guarantees, the Bank
usually retains a security interest in the property or products financed or
other collateral which provides repossession rights in the event of default by
the customer.
Concentrations of credit risk (whether on or off-balance-sheet) arising
from financial instruments exist in relation to certain groups of customers. A
group concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Bank
does not have a significant exposure to any individual customer or counterparty.
A geographic concentration arises because the Bank operates principally
58
61
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in Westchester County and Bronx County, New York. Loans and credit commitments
collateralized by real estate are as follows:
RESIDENTIAL COMMERCIAL
PROPERTY PROPERTY TOTAL
----------- ---------- --------
2000
Loans............................................. $155,449 $214,604 $370,053
Credit commitments................................ 12,495 42,023 54,518
-------- -------- --------
$167,944 $256,627 $424,571
======== ======== ========
1999
Loans............................................. $119,609 $156,396 $276,005
Credit commitments................................ 19,556 26,021 45,577
-------- -------- --------
$139,165 $182,417 $321,582
======== ======== ========
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to have no value. The Bank
has experienced little difficulty in accessing collateral when required.
4 LOANS
The loan portfolio is comprised of the following:
DECEMBER 31
--------------------
2000 1999
-------- --------
Real Estate:
Commercial................................................ $181,735 $153,823
Construction.............................................. 32,869 26,526
Residential............................................... 155,449 127,959
Commercial and industrial................................... 110,555 77,276
Individuals................................................. 10,677 9,280
Lease financing............................................. 20,970 23,543
-------- --------
Total....................................................... 512,255 418,407
Deferred loan fees.......................................... (1,338) (1,446)
Allowance for loan losses................................... (4,816) (4,047)
-------- --------
Loans, net.................................................. $506,101 $412,914
======== ========
The Bank has established credit policies applicable to each type of lending
activity in which it engages. The Bank evaluates the credit worthiness of each
customer and extends credit based on credit history, ability to repay and market
value of collateral. The customers' credit worthiness is monitored on an ongoing
basis. Additional collateral is obtained when warranted. Real estate is the
primary form of collateral. Other important forms of collateral are bank
deposits and marketable securities. While collateral provides assurance as a
secondary source of repayment, the Bank ordinarily requires the primary source
of payment to be based on the borrower's ability to generate continuing cash
flows.
59
62
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity in the allowance for loan losses follows:
DECEMBER 31
--------------------------
2000 1999 1998
------ ------ ------
Balance, beginning of year............................... $4,047 $3,103 $3,533
Add (deduct):
Provision (credit) for loan losses..................... 1,144 600 (300)
Recoveries on loans previously charged-off............. 53 454 208
Charge-offs............................................ (428) (110) (338)
------ ------ ------
Balance, end of year..................................... $4,816 $4,047 $3,103
====== ====== ======
The recorded investment in impaired loans at December 31, 2000 was $2,148,
for which an allowance of $125 has been established. At December 31, 1999, the
recorded investment in impaired loans was $2,999, for which an allowance of $57
had been established. Generally, the fair value of these loans was determined
using the fair value of the underlying collateral of the loan.
The average investment in impaired loans during 2000, 1999 and 1998 was
$2,154, $1,682 and $322, respectively. During the years reported, no income was
recorded on impaired loans during the portion of the year that they were
impaired.
Loans which were restructured prior to adoption of SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and non-accrual loans at
December 31, 2000, 1999 and 1998 and related interest income are summarized as
follows:
2000 1999 1998
-------------------------- -------------------------- --------------------------
NON-ACCRUAL RESTRUCTURED NON-ACCRUAL RESTRUCTURED NON-ACCRUAL RESTRUCTURED
LOANS LOANS LOANS LOANS LOANS LOANS
----------- ------------ ----------- ------------ ----------- ------------
Amount..................... $4,584 -- $3,855 $323 $633 $428
Interest income recorded... -- -- -- 34 -- 42
Interest income that would
have been recorded under
the original contract
terms.................... 586 -- 507 17 84 20
Non-accrual loans at December 31, 2000 and 1999 include $2,148 and $2,999,
respectively, of loans considered to be impaired under SFAS No. 114.
Loans made directly or indirectly to employees, directors or principal
shareholders were approximately $14,535 and $13,599 at December 31, 2000 and
1999, respectively. During 2000, new loans granted to these individuals and the
effects of changes in board member composition totaled $3,183 and payments
totaled $2,247.
60
63
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
DECEMBER 31
------------------
2000 1999
------- -------
Land........................................................ $ 1,139 $ 1,139
Buildings................................................... 10,367 10,109
Leasehold improvements...................................... 2,094 2,060
Furniture, fixtures and equipment........................... 11,377 10,479
Automobiles................................................. 219 233
------- -------
Total....................................................... 25,196 24,020
Less accumulated depreciation and amortization.............. 11,851 10,288
------- -------
Premises and equipment, net................................. $13,345 $13,732
======= =======
6 OTHER BORROWINGS
Borrowings with original maturities of one year or less totaled $197,872
and $219,484 at December 31, 2000 and 1999, respectively. Such short-term
borrowings consisted of securities sold under agreements to repurchase of
$136,622 and $126,484 at December 31, 2000 and 1999, respectively, borrowings
from the Federal Home Loan Bank of New York (FHLB) of $51,250 and $93,000 at
December 31, 2000 and 1999, respectively, and $10,000 of other overnight
borrowings at December 31, 2000. Other borrowings totaled $87,959 and $94,234 at
December 31, 2000 and 1999, respectively, consisting of borrowings from FHLB
with stated maturities of ten years and 1 to 3 year call options.
Interest expense on all borrowings totaled $15,043, $12,212 and $9,899 in
2000, 1999 and 1998, respectively. The following table summarizes the average
balances, weighted average interest rates and the maximum month-end outstanding
amounts of securities sold under agreements to repurchase and FHLB borrowings
for each of the years:
2000 1999 1998
-------- -------- --------
Average balance:
Short-term....................................... $165,993 $147,502 $129,405
Other Borrowings................................. 89,011 93,254 55,307
Weighted average interest rate:
Short-term....................................... 6.1% 4.9% 5.4%
Other Borrowings................................. 5.5% 5.4% 5.4%
Maximum month-end outstanding amount:
Short-term....................................... $197,889 $219,484 $148,147
Other Borrowings................................. 94,229 94,234 75,536
As of December 31, 2000 and 1999, these borrowings were collateralized by
securities with an estimated fair value of $280,853 and $291,161, respectively.
In addition, at December 31, 2000, the Bank had available unused lines of
credit of $75 million from FHLB, $5 million from BankBoston and $60 million from
Merrill Lynch, all of which are subject to various terms and conditions.
61
64
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7 INCOME TAXES
A reconciliation of the income tax provision and the amount computed using
the federal statutory rate is as follows:
YEARS ENDED DECEMBER 31
--------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Income tax at statutory
rate....................... $ 7,474 34.0% $ 6,340 34.0% $ 5,379 34.0%
State income tax, net of
Federal benefit............ 472 2.1 432 2.3 273 1.7
Tax-exempt interest income... (2,032) (9.2) (1,865) (10.0) (1,675) (10.6)
Other........................ (89) (.4) (263) (1.4) (410) (2.6)
------- ----- ------- ----- ------- -----
Provision for income taxes... $ 5,825 26.5% $ 4,644 24.9% $ 3,567 22.5%
======= ===== ======= ===== ======= =====
The components of the provision for income taxes (benefit) are as follows:
YEARS ENDED DECEMBER 31
--------------------------
2000 1999 1998
------ ------ ------
FEDERAL:
Current................................................ $ 866 $3,734 $3,464
Deferred............................................... 4,218 255 (333)
STATE:
Current................................................ 206 559 467
Deferred............................................... 535 96 (31)
------ ------ ------
TOTAL.................................................... $5,825 $4,644 $3,567
====== ====== ======
The tax effect of temporary differences giving rise to the Company's
deferred tax assets and liabilities are as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
------ --------- ------- ---------
Allowance for loan losses..................... $1,917 $ 1,602
Treasury securities........................... $ 504 $477
Supplemental pension benefit.................. 1,112 921
Minimum pension liability..................... 473 477
Deferred compensation......................... 659 633
Securities available for sale................. 146 8,934
Interest on non-accrual loans................. 249 294
Undistributed income from subsidiary.......... 5,187 -- --
Depreciation.................................. 226 204
Other......................................... 1 5
------ ------ ------- ----
$4,411 $6,063 $12,861 $686
====== ====== ======= ====
8 STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on their financial statements. Under capital
adequacy guidelines and the regulatory framework for
62
65
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
Management believes, as of December 31, 2000, that both the Company and the
Bank meet all capital adequacy requirements to which they are subject.
The following summarizes the capital requirements and capital position at
December 31, 2000 and 1999:
MINIMUM
TO BE WELL
MINIMUM FOR CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
---------------- ------------------ ------------------
BANK ONLY AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------- ------- ----- -------- ------ -------- ------
As of December 31, 1999:
Total Capital (To Risk Weighted
Assets).............................. $83,477 16.3% $40,948 8.0% $51,185 10.0%
Tier 1 Capital (To Risk Weighted
Assets).............................. 79,430 15.5 20,474 4.0 30,711 6.0
Tier 1 Capital (To Average Assets)..... 79,430 7.1 44,668 4.0 55,834 5.0
As of December 31, 2000:
Total Capital (To Risk Weighted
Assets).............................. $96,754 15.7% $49,435 8.0% $61,794 10.0%
Tier 1 Capital (To Risk Weighted
Assets).............................. 91,938 14.9 24,717 4.0 37,076 6.0
Tier 1 Capital (To Average Assets)..... 91,938 7.4 49,755 4.0 62,194 5.0
MINIMUM FOR
CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------- ------------------
CONSOLIDATED AMOUNT RATIO AMOUNT RATIO
- ------------ ------- ----- -------- ------
As of December 31, 1999:
Total Capital (To Risk Weighted Assets).................. $84,528 16.5% $41,022 8.0%
Tier 1 Capital (To Risk Weighted Assets)................. 80,481 15.7 20,501 4.0
Tier 1 Capital (To Average Assets)....................... 80,481 7.2 44,701 4.0
As of December 31, 2000:
Total Capital (To Risk Weighted Assets).................. $97,147 15.6% $49,874 8.0%
Tier 1 Capital (To Risk Weighted Assets)................. 92,331 14.8 24,937 4.0
Tier 1 Capital (To Average Assets)....................... 92,331 7.3 50,332 4.0
As of December 31, 2000, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk based, Tier 1 risk based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
STOCK DIVIDEND
In December 2000 and 1999 the Board of Directors of the Company declared 10
percent stock dividends. Share and per share amounts have been retroactively
restated to reflect the issuance of the additional shares.
63
66
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
The Company has stock option plans that provide for the granting of options
to directors, certain officers, and to all eligible employees. Options to
purchase 345,875 shares of common stock were outstanding at December 31, 2000
under all plans. The stock options are exercisable at prices that approximate
the market value of the Company's stock at dates of grant. Certain options
become exercisable in up to five annual installments, commencing one year from
date of grant. Other options become exercisable in their entirety, upon
completion of 5 years of service. Options have a maximum duration of 10 years.
Stock option transactions under the Plans were as follows:
SHARES WEIGHTED
UNDERLYING AVERAGE EXERCISE
OUTSTANDING OPTIONS OPTIONS PRICE PER SHARE
- ------------------- ---------- ----------------
As of January 1, 1998...................................... 389,060 $13.14
Granted.................................................... 43,703 27.38
Cancelled or expired....................................... (4,543) 21.09
Exercised.................................................. (43,046) 16.54
-------- ------
As of December 31, 1998.................................... 385,174 14.28
Granted.................................................... 74,876 27.89
Cancelled or expired....................................... (65,155) 16.00
Exercised.................................................. (105,838) 16.10
-------- ------
As of December 31, 1999.................................... 289,057 16.75
Granted.................................................... 154,685 29.11
Cancelled or expired....................................... (4,412) 26.19
Exercised.................................................. (93,455) 22.82
-------- ------
As of December 31, 2000.................................... 345,875 $20.52
Exercisable as of December 31, 2000........................ 309,032 $20.09
Available for future grant................................. 504,899
The following table summarizes the range of exercise prices of the
Company's stock options outstanding and exercisable at December 31, 2000:
WEIGHTED AVERAGE
----------------------
NUMBER OF REMAINING EXERCISE
EXERCISE PRICE OPTIONS LIFE (YRS) PRICE
---------------- --------- ---------- --------
$ 7.87 to $15.20 119,541 3.4 $11.59
15.27 to 26.26 113,189 7.1 21.37
28.51 to 29.94 113,145 9.0 29.10
-------
$ 7.87 to $29.44 345,875 6.5 $20.52
Exercisable....................... $ 7.87 to $29.44 309,032 6.3 $20.09
Not Exercisable................... $15.37 to $29.94 36,843 7.6 $24.10
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to continue to account for stock-based compensation
plans in accordance with APB No. 25, rather than adopt the accounting
requirements of SFAS No. 123. Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the
64
67
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
2000 1999 1998
------- ------- -------
Net income
As reported......................................... $16,158 $14,004 $12,254
Pro forma........................................... 15,807 13,710 12,162
Basic earnings per share
As reported......................................... $ 3.45 $ 3.01 $ 2.65
Pro forma........................................... 3.37 2.95 2.63
Diluted earnings per share
As reported......................................... $ 3.35 $ 2.94 $ 2.58
Pro forma........................................... 3.28 2.88 2.56
The fair value (present value of the estimated future benefit to the option
holder) of each option grant in 2000, 1999 and 1998 is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998,
respectively: dividend yield of 3.5%, 3.4% and 3.3%; expected volatility of 10%,
12% and 9%; risk-free interest rates of 5.05%, 6.42% and 4.65% and expected life
of 6 years for 2000 and 1999 and 7 years for 1998. All option grants expire
within 10 years of the date of grant. The weighted average fair value of options
granted during 2000, 1999 and 1998 was $3.42, $4.15 and $3.78, respectively.
9 BENEFIT PLANS
The Hudson Valley Bank Employees' Defined Contribution Pension Plan covers
substantially all employees. Pension costs accrued and charged to current
operations include 5 percent of each participant's earnings during the year.
Pension costs charged to other operating expenses (including pension costs for
directors) totaled approximately $400, $522 and $422 in 2000, 1999 and 1998,
respectively.
The Hudson Valley Bank Employees' Savings Plan covers substantially all
employees. The Bank matches 25 percent of employee contributions annually, up to
4 percent of base salary. Savings Plan costs charged to expense totaled
approximately $64, $56 and $54 in 2000, 1999 and 1998, respectively.
Additional retirement benefits are provided to certain officers pursuant to
supplemental plans. Costs for the officers' supplemental pension plan totaled
approximately $605, $640 and $579 in 2000, 1999 and 1998, respectively. The Bank
records an additional minimum pension liability to the extent that its
accumulated pension benefit obligation exceeds the fair value of pension plan
assets and accrued pension liabilities. This additional minimum pension
liability is offset by an intangible asset, not to exceed prior service costs of
the pension plan. Amounts in excess of prior service costs are reflected as a
reduction in other comprehensive income net of related tax benefits.
65
68
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth the status of the Bank's plans as of
December 31, 2000 and 1999:
2000 1999
------- -------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $ 4,729 $ 4,372
Service cost.............................................. 193 232
Interest cost............................................. 364 298
Amendments................................................ -- 371
Actuarial (gain) loss..................................... 38 (184)
Benefits paid............................................. (329) (360)
------- -------
Benefit obligation at end of year........................... 4,995 4,729
------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............. -- --
Actual return on assets................................... -- --
Employer contributions.................................... 329 360
Benefits paid............................................. (329) (360)
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status............................................... (4,995) (4,729)
Unrecognized transition obligation.......................... 209 250
Unrecognized prior service cost............................. 561 655
Unrecognized net loss....................................... 1,322 1,377
------- -------
Accrued benefit cost........................................ $(2,903) $(2,447)
======= =======
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate............................................... 8% 8%
Expected return on plan assets.............................. -- --
Rate of compensation increase............................... 4% 4%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................................ $ 193 $ 232
Interest cost............................................... 364 298
Expected return on plan assets.............................. -- --
Amortization of transition obligation....................... 41 41
Amortization of prior service cost.......................... 94 37
Amortization of net loss.................................... 93 154
------- -------
Net periodic benefit cost................................... $ 785 $ 762
======= =======
Set forth below is a summary of the amounts reflected in the Bank's balance
sheets as of December 31:
2000 1999
------- -------
Accrued benefit liability................................... $(4,857) $(4,271)
Intangible asset............................................ 770 658
Accumulated other comprehensive income (pre-tax net
reduction in equity)...................................... 1,184 1,166
------- -------
Accrued benefit cost........................................ $(2,903) $(2,447)
======= =======
66
69
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10 COMMITMENTS, CONTINGENT LIABILITIES AND OTHER DISCLOSURES
The Company is obligated under leases for certain of its branches and
equipment. Minimum rental commitments for bank premises and equipment under
noncancelable operating leases are as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
2001........................................................ $ 710
2002........................................................ 620
2003........................................................ 377
2004........................................................ 116
Thereafter.................................................. 79
------
Total minimum future rentals................................ $1,902
======
Rent expense for premises and equipment was approximately $783, $778 and
$737 in 2000, 1999 and 1998, respectively. In the normal course of business,
there are various outstanding commitments and contingent liabilities which are
not reflected in the consolidated balance sheets. No losses are anticipated as a
result of these transactions.
In the ordinary course of business, the Company is party to various legal
proceedings, none of which, in the opinion of management, will have a material
effect on the Company's consolidated financial position or results of
operations.
At December 31, 2000, the Company was a party to two interest rate floor
agreements, as more fully discussed in Note 1 to these consolidated financial
statements. These agreements are subject to the counterparties' ability to
perform in accordance with the terms of the agreements. The Company's risk of
loss is equal to the unamortized premium paid to enter into these agreements. At
December 31, 2000 the unamortized premium related to these agreements was $63
and the fair value was $29.
CASH RESERVE REQUIREMENTS
The Bank is required to maintain average reserve balances under the Federal
Reserve Act and Regulation D issued thereunder. Such reserves totaled
approximately $849 at December 31, 2000 and $603 at December 31, 1999.
RESTRICTIONS ON FUNDS TRANSFERS
There are various restrictions which limit the ability of a bank subsidiary
to transfer funds in the form of cash dividends, loans or advances to the parent
company. Under federal law, the approval of the primary regulator is required if
dividends declared by the Bank in any year exceed the net profits of that year,
as defined, combined with the retained net profits for the two preceding years.
11 SEGMENT INFORMATION
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the others.
For example, commercial lending is dependent upon the ability of the Bank to
fund itself with retail deposits and other borrowings and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.
General information required by SFAS No. 131 is disclosed in the
Consolidated Financial Statements and accompanying notes. The Company operates
only in the U.S. domestic market, primarily the counties of
67
70
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Westchester and Bronx, New York. For the years ended December 31, 2000, 1999 and
1998, there is no customer that accounted for more than 10% of the Company's
revenue.
12 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of the estimated fair value of certain financial
instruments. These estimated fair values as of December 31, 2000 and 1999 have
been determined using available market information and appropriate valuation
methodologies. Considerable judgment is required to interpret market data to
develop estimates of fair value. The estimates presented are not necessarily
indicative of amounts the Company could realize in a current market exchange.
The use of alternative market assumptions and estimation methodologies could
have had a material effect on these estimates of fair value.
DECEMBER 31
------------------------------------------------
2000 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
ASSETS:
Financial assets for which carrying value
approximates fair value.......................... $ 84.2 $ 84.2 $ 47.1 $ 47.1
Securities, FHLB stock and accrued interest........ 671.5 671.5 650.8 650.8
Loans and accrued interest......................... 514.2 517.0 415.2 417.2
LIABILITIES:
Deposits with no stated maturity and accrued
interest......................................... 531.5 531.5 478.1 478.1
Time deposits and accrued interest................. 351.0 351.7 278.5 277.8
Securities sold under repurchase agreements and
other short-term borrowings and accrued
interest......................................... 198.8 198.8 219.7 219.7
Other borrowings and accrued interest.............. 88.6 87.0 94.9 94.3
Financial liabilities for which carrying value
approximates fair value.......................... 14.9 14.9 -- --
The estimated fair value of the indicated items was determined as follows:
Financial assets for which carrying value approximates fair
value -- The estimated fair value approximates carrying amount because of
the immediate availability of these funds or based on the short maturities
and current rates for similar deposits. Cash and due from banks as well as
Federal funds sold are reported in this line item.
Securities, FHLB stock and accrued interest -- The fair value was
estimated based on quoted market prices or dealer quotations. FHLB stock
and accrued interest are stated at their carrying amounts.
Loans and accrued interest -- The fair value of loans was estimated by
discounting projected cash flows at the reporting date using current rates
for similar loans, reduced by specific and general loan loss allowances.
Additionally, under SFAS No. 114, all loans considered impaired are
reported at either the fair value of collateral or present value of
expected future cash flows. Accrued interest is stated at its carrying
amount.
Deposits with no stated maturity and accrued interest -- The estimated
fair value of deposits with no stated maturity and accrued interest, as
applicable, are considered to be equal to their carrying amounts.
68
71
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time deposits and accrued interest -- The fair value of time deposits
has been estimated by discounting projected cash flows at the reporting
date using current rates for similar deposits. Accrued interest is stated
at its carrying amount.
Securities sold under repurchase agreements and other short-term
borrowings and accrued interest -- The fair value of these instruments
approximate carrying amount because of their short maturities and variable
rates. Accrued interest is stated at its carrying amount.
Other borrowings and accrued interest -- The fair value of callable
FHLB advances was estimated by discounting projected cash flows at the
reporting date using the rate applicable to the first call date option.
Accrued interest is stated at its carrying amount.
Off-Balance-Sheet Financial Instruments -- Estimated fair value for
the Company's off-balance-sheet financial instruments are not material.
13 CONDENSED FINANCIAL INFORMATION OF HUDSON VALLEY HOLDING CORP.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31, 2000 and 1999
Dollars in thousands
2000 1999
------- -------
ASSETS
Cash........................................................ $ 208 $ 520
Investment in subsidiary.................................... 92,753 67,001
Equity securities........................................... 816 1,112
Other assets................................................ -- 26
------- -------
TOTAL ASSETS................................................ $93,777 $68,659
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................... $ 432 $ 349
Stockholders' equity........................................ 93,345 68,310
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $93,777 $68,659
======= =======
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 2000, 1999 and 1998
Dollars in thousands
2000 1999 1998
------- ------- -------
Dividends from the Bank..................................... $ 3,926 $ 4,900 $ 4,600
Dividends from equity securities............................ 29 26 18
Other income................................................ 25 7 --
Operating expenses.......................................... 375 67 83
------- ------- -------
Income before equity in undistributed earnings in the
Bank...................................................... 3,605 4,866 4,535
Equity in undistributed earnings of the Bank................ 12,553 9,138 7,719
------- ------- -------
NET INCOME.................................................. $16,158 $14,004 $12,254
======= ======= =======
69
72
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
Dollars in thousands
2000 1999 1998
-------- ------- -------
OPERATING ACTIVITIES:
Net income.................................................. $ 16,158 $14,004 $12,254
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of the Bank.............. (12,553) (9,138) (7,719)
Increase (decrease) in other liabilities.................. 83 12 (303)
(Increase) decrease in other assets....................... 26 (21) 2
Other changes, net........................................ 2 -- --
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 3,716 4,857 4,234
-------- ------- -------
INVESTING ACTIVITIES:
Proceeds from sales of equity securities.................... 275 -- --
Purchase of equity securities............................... (23) (184) --
-------- ------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............ 252 (184) --
-------- ------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and sale of treasury
stock..................................................... 2,367 2,324 908
Acquisition of treasury stock............................... (1,436) (2,443) (1,456)
Cash dividends paid......................................... (5,211) (4,270) (3,461)
-------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES....................... (4,280) (4,389) (4,009)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS.............. (312) 284 225
Cash and due from banks, beginning of year.................. 520 236 11
-------- ------- -------
Cash and due from banks, end of year........................ $ 208 $ 520 $ 236
======== ======= =======
70
73
MANAGEMENT'S REPORT TO THE STOCKHOLDERS
January 29, 2001
To the Stockholders of Hudson Valley Holding Corp.
CONSOLIDATED FINANCIAL STATEMENTS
The management of Hudson Valley Holding Corp. and its subsidiary, Hudson
Valley Bank, (collectively the "Company"), is responsible for the preparation,
integrity, and fair presentation of its published financial statements and all
other information presented in this Annual Report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in The United States of America and, as such, include amounts based on
informed judgments and estimates made by management.
The consolidated financial statements have been audited by an independent
accounting firm, which was given unrestricted access to all financial records
and related data, including minutes of all meetings of the stockholders, the
Board of Directors and committees of the Board. Management believes all
representations made to the independent auditors during their audit were valid
and appropriate.
INTERNAL CONTROL
Management is responsible for establishing and maintaining effective
internal control over financial reporting, including safeguarding of assets, for
financial presentations in conformity with generally accepted accounting
principles and, for Hudson Valley Bank, in conformity with the Federal Financial
Institutions Examination Council Instructions for Consolidated Reports of
Condition and Income (Call Report Instructions). The internal control contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may vary
over time.
Management assessed the Company's internal control over financial
reporting, including safeguarding of assets, for financial presentations in
conformity with accounting principles generally accepted in The United States of
America and, for Hudson Valley Bank, in conformity with the Call Report
Instructions as of December 31, 2000. This assessment was based on criteria for
effective internal control over financial reporting, including safeguarding of
assets, established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that the Company maintained effective internal
control over financial reporting, including safeguarding of assets, presented in
conformity with accounting principles generally accepted in The United States of
America and, for Hudson Valley Bank, in conformity with the Call Report
Instructions, as of December 31, 2000.
AUDIT COMMITTEE
The Audit Committee of the Board of Directors is comprised entirely of
outside directors who are independent of the Company's management. The Audit
Committee is responsible for recommending to the Board of Directors the
selection of independent auditors, which selection is then ratified by the
stockholders. The Audit Committee meets periodically with management, the
independent auditors, and the internal auditors to ensure that they are carrying
out their responsibilities. The Audit Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial,
accounting and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The independent auditors and the internal auditors
have full and free access to the Audit Committee, with or without the presence
of management, to discuss the adequacy of internal control for financial
reporting and any other matters which they believe should be brought to the
attention of the Audit Committee.
71
74
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with the federal
laws and regulations concerning loans to insiders and Federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the Federal Deposit Insurance Corporation (FDIC) as safety and soundness laws
and regulations.
Management assessed Hudson Valley Bank's compliance with the designated
safety and soundness laws and regulations and has maintained records of its
determinations and assessments as required by the FDIC. Based on this
assessment, management believes that Hudson Valley Bank has complied, in all
material respects, with the designated safety and soundness laws and regulations
for the year ended December 31, 2000.
James J. Landy Stephen R. Brown
President & Senior Executive Vice President,
Chief Executive Officer Chief Operating Officer &
Chief Financial Officer
72
75
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
Hudson Valley Holding Corp.
We have examined management's assertion, included in the accompanying
Management's Report to Stockholders, that Hudson Valley Holding Corp. and its
subsidiary, Hudson Valley Bank (collectively the "Company") maintained effective
internal control over financial reporting, including safeguarding of assets,
presented in conformity with accounting principles generally accepted in The
United States of America and, for Hudson Valley Bank, in conformity with the
Federal Financial Institutions Examination Council Instructions for Consolidated
Reports of Condition and Income as of December 31, 2000 based on the criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO report).
Management is responsible for maintaining effective internal control over
financial reporting. Our responsibility is to express an opinion on management's
assertion based on our examination.
Our examination was conducted in accordance with attestation standards
established by the American Institute of Certified Public Accountants and,
accordingly, included obtaining an understanding of internal control over
financial reporting, testing, and evaluating the design and operating
effectiveness of the internal control, and performing, such other procedures as
we considered necessary in the circumstances. We believe that our examination
provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due
to error or fraud may occur and not be detected. Also, projections of any
evaluation of internal control over financial reporting to future periods are
subject to the risk that the internal control may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assertion that the Company maintained
effective internal control over financial reporting, including safeguarding of
assets, presented in conformity with accounting principles generally accepted in
The United States of America and, for Hudson Valley Bank, in conformity with the
Federal Financial Institutions Examination Council Instructions for Consolidated
Reports of Condition and Income as of December 31, 2000, is fairly stated, in
all material respects, based on the criteria established in the COSO report.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 29, 2001
73
76
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)1. Financial Statements
The following financial statements of the Company are included in this
document in Item 8 -- Financial Statements and Supplementary Data:
- Independent Auditors' Report
- Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998
- Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2000, 1999 and 1998
- Consolidated Balance Sheets at December 31, 2000 and 1999
- Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998
- Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998
- Notes to Consolidated Financial Statements
(A)2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown elsewhere in the document in the
Financial Statements or Notes thereto, or in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(B) Reports on Form 8-K Filed During the Quarter ended December 31, 2000
None
(C) Exhibits Required by Securities and Exchange Commission Regulation S-K
NUMBER EXHIBIT TITLE
- ------ -------------
Amended and Restated Certificate of Incorporation of Hudson
Valley Holding Corp.(1)
3.1
By-Laws of Hudson Valley Holding Corp.(1)
3.2
Specimen of Common Stock Certificate(1)
3.3
Specimen Stock Restriction Agreement Between the Company and
a Shareholder Granted Stock Options(1)
4.1
Specimen Stock Restriction Agreement Between the Company and
a Shareholder who Acquired Such Shares from a Shareholder
Subject to the Agreement(1)
4.2
Hudson Valley Bank Directors' Retirement Plan*(1)
10.1
Hudson Valley Bank Restated and Amended Supplemental
Retirement Plan, effective
December 1, 1995*(1)
10.2
Hudson Valley Bank Supplemental Retirement Plan of 1997*(1)
10.3
1992 Stock Option Plan*(1)
10.4
Specimen Non-Statutory Stock Option Agreement*(1)
10.5
74
77
NUMBER EXHIBIT TITLE
- ------ -------------
Specimen Incentive Stock Option Agreement*(1)
10.6
Consulting Agreement Between the Company and Director John
A. Pratt, Jr.*(1)
10.7
Statements re: Computation of Per Share Earnings(2)
11
Subsidiaries of the Company(2)
21
Consents of Experts and Counsel(2)
23
- ---------------
* Management compensation plan
(1) Incorporated herein by reference in this document to the Registration
Statement on Form 10 initially filed on May 1, 2000
(2) Filed herewith
75
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HUDSON VALLEY HOLDING CORP.
March 29, 2001 By: /s/ JAMES J. LANDY
------------------------------------
James J. Landy
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 29, 2001 by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
/s/ JAMES J. LANDY
- ------------------------------------------------------
James J. Landy
President, Chief Executive Officer and Director
/s/ STEPHEN R. BROWN
- ------------------------------------------------------
Stephen R. Brown
Senior Executive Vice President, Chief Operating
Officer, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ WILLIAM E. GRIFFIN
- ------------------------------------------------------
William E. Griffin
Chairman of the Board and Director
/s/ JAMES M. COOGAN
- ------------------------------------------------------
James M. Coogan
Director
/s/ GREGORY F. HOLCOMBE
- ------------------------------------------------------
Gregory F. Holcombe
Director
/s/ ANGELO R. MARTINELLI
- ------------------------------------------------------
Angelo R. Martinelli
Director
/s/ RONALD F. POE
- ------------------------------------------------------
Ronald F. Poe
Director
/s/ JOHN A. PRATT, JR.
- ------------------------------------------------------
John A. Pratt, Jr.
Director
/s/ CECILE D. SINGER
- ------------------------------------------------------
Cecile D. Singer
Director
/s/ CRAIG S. THOMPSON
- ------------------------------------------------------
Craig S. Thompson
Director
76