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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
For the fiscal year ended December 31, 2006
Commission File number 030525
HUDSON VALLEY HOLDING CORP.
New York (State or other jurisdiction of incorporation or organization) | 13-3148745 (I.R.S. Employer Identification No.) | |
21 Scarsdale Road, Yonkers, New York (Address of principal executive offices) | 10707 (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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o No x
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 o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x
Class | Outstanding at March 1, 2007 | |||
Common Stock ($0.20 par value) | 8,958,511 Shares |
The aggregate market value on June 30, 2006 of voting stock held by non-affiliates of the Registrant was approximately $236,539,000.
Documents incorporated by reference:
Portions of the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders is incorporated by reference in Part III of this report and will be filed no later than 120 days from December 31, 2006.
FORM 10-K
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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 subsidiaries, Hudson Valley Bank (“HVB”), a New York chartered commercial bank headquartered in Westchester County, New York and NYNB Bank (“NYNB”), a New York chartered commercial bank headquartered in Bronx County, New York (together with HVB, “the Banks”). See “Item 1 — Business — Our Market Area” for discussion on our banking charters. HVB is an independent bank established in 1982. NYNB, an independent bank, is the successor to New York National Bank, a national banking association which the Company acquired effective January 1, 2006. HVB has 15 branch offices in Westchester County, New York, 3 in Manhattan, New York, 2 in Bronx County, New York, 1 in Rockland County, New York, and 1 in Queens County, New York. NYNB has 3 branch offices in Manhattan, New York and 2 in Bronx County, New York.
The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a money management firm, thereby generating fee income. ARS has offices at 555 Fifth Avenue in Manhattan, New York.
We derive substantially all of our revenue and income from providing banking and related services to businesses, professionals, municipalities, not-for-profit organizations and individuals within our market area. See “Our Market Area.”
Our principal executive offices are located at 21 Scarsdale Road, Yonkers, New York 10707.
Our principal customers are businesses, professionals, municipalities, not-for-profit organizations and individuals. Our strategy is to operate community-oriented banking institutions dedicated to providing personalized service to customers and focusing on products and services for selected segments of the market. We believe that our ability to attract and retain customers is due primarily to our focused approach to our markets, our personalized and professional services, our product offerings, our experienced staff, our knowledge of our local markets and our ability to provide responsive solutions to customer needs. We provide these products and services to a diverse range of customers and do not rely on a single large depositor for a significant percentage of deposits. We anticipate that we will continue to expand in our current market and surrounding area by acquiring other banks and related businesses, adding staff and continuing to open new branch offices and loan production offices.
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, 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. For a discussion of some factors that could adversely effect our future performance, see “Item 1A — Risk Factors” and “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements.”
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Subsidiaries of the Banks
In 1991, HVB 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 HVB.
In 1993, HVB formed a wholly-owned subsidiary, Sprain Brook Realty Corp., primarily for the purpose of holding property obtained by HVB through foreclosure in its normal course of business.
In 1997, HVB formed a subsidiary (of which it 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 HVB.
In 2001, HVB began originating lease financing transactions through a wholly owned subsidiary, HVB Leasing Corp.
In 2002, HVB formed two wholly-owned subsidiaries. HVB Realty Corp. owns and manages five branch locations in Yonkers, New York and HVB Employment Corp. leases certain branch staff to HVB.
In 2004, HVB acquired for cash A.R. Schmeidler & Co., Inc. as a wholly-owned subsidiary in a transaction accounted for as a purchase. This money management firm provides investment management services to its customers thereby generating fee income.
In 1997, NYNB formed a wholly-owned subsidiary, 369 East 149th Street Corp., primarily for the purpose of owning and operating certain commercial real estate property of which NYNB is a tenant.
The Company has no separate operations or revenues apart from the Banks and their subsidiaries.
Employees
At December 31, 2006, we employed 395 full-time employees and 45 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 household income, based on 2003 census data, was $61,835. The County’s 2004 per capita income of $58,952 placed Westchester County among the highest of the nation’s counties. In 2005, the County’s unemployment rate was 4.1 percent, as compared to New York State at 5.0 percent and the United States at 5.8 percent. The County has over 30,000 businesses, which form a large portion of our current and potential customer base. We continue to evaluate expansion opportunities in Westchester County.
New York City, which borders Westchester County, is the nation’s financial capital and the home of more than 8 million individuals representing virtually every race and nationality. According to the 2002 census data, the median household income in the city was $41,603, while the per capita income was $25,472. This places New York City in the top ranks of cities across the United States. The city also has a vibrant and diverse business community with more than 590,000 businesses and professional service firms. New York City is comprised of five counties or boroughs: Bronx, Kings (Brooklyn), New York (Manhattan), Queens and Richmond (Staten Island).
New York City has many attractive attributes and we believe that there is an opportunity for community banks to service our niche markets of businesses and professionals very effectively. We expanded into the New York City market with the opening of our first branch in the Bronx in 1999 and subsequently opened a second branch in this borough in 2002. We entered the Manhattan market with the opening of a full-service branch in the Lincoln Building in 2002 and followed in April 2004 with a second full-service branch in lower Manhattan
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We expanded into Rockland County, New York, by opening a full service branch in New City, New York in February 2007. Rockland County, New York, a suburban county, borders Westchester County, New York to the west. The County’s 2004 per capita income was $43,751. In 2004, the County’s unemployment rate was 4.4 percent. We believe the County offers attractive opportunities for us to develop new customers within our niche markets of businesses, professionals and not-for-profit organizations.
We expect to expand further into Fairfield County, Connecticut by establishing a full-service branch in Stamford, Connecticut at a site to be determined. We are currently applying for regulatory approvals. Fairfield County has very similar attributes to Westchester County, New York, where we have had success in attracting and retaining customers. We expect to expand further in Fairfield County.
In conjunction with our further expansion into Fairfield County, Connecticut, we have applied to the Office of the Comptroller of the Currency (“OCC”) to convert the Banks’ charters to national bank charters from our current New York state commercial bank charters. We believe this change will enhance our ability to expand on an inter state basis. We anticipate completion of the conversions in the second quarter of 2007.
Competition
The banking and financial services business in our market area is highly competitive. There are approximately 146 banking institutions with 2,382 branch banking offices in our Westchester County, Rockland County, Fairfield County, Connecticut and New York City market area. These banking institutions had deposits of approximately $628 billion as of June 30, 2006 according to FDIC data. Our branches compete with local offices of large New York City commercial banks due to their proximity to and location within New York City. Other financial institutions, such as mutual funds, finance companies, factoring companies, mortgage bankers and insurance companies, also compete with us for both loans and deposits. We are smaller in size than most of our 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.
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 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 view 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 us in pricing, delivery and marketing of their products and services. The passage of the Financial Services Modernization Act of 1999 (the “Gramm-Leach-Bliley Act”) 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 businesses, professionals and not-for-profit organizations 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.
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Our strategy is to increase earnings through growth within our existing market. Our primary market area, Westchester County, Rockland County, Fairfield County and New York City, has a high concentration of the types of customers that we desire to serve. We expect to continue to expand by opening new full-service banking facilities and loan production offices, by expanding deposit gathering and loan originations in our market area, by enhancing and expanding computerized and telephonic products, by diversifying our products and services, by acquiring other banks and related businesses and through strategic alliances and contractual relationships. During 2006, we expanded our loan participation activity. We increased the number of banks with which we would enter into loan participation agreements (to purchase), particularly with banks in New Jersey and on Long Island, New York. We believe this will facilitate accomplishing our loan growth objectives while also expanding lending opportunities outside our primary market area.
During the past five years, we have focused on maintaining existing customer relationships and adding new relationships by providing products and services that meet these customers’ needs. The focus of our products and services continues to be businesses, professionals, not-for-profit organizations and municipalities. We have expanded our market from Westchester County to include sections of New York City, Rockland County and Fairfield County, Connecticut. We have opened eight new facilities during the past five years, one in White Plains, Westchester County, one in Yonkers, Westchester County, three in Manhattan, New York, one in Queens County, New York, one in Bronx County, New York and one in New City, Rockland County. We anticipate opening at least four additional facilities during 2007. We expect to continue to open additional facilities in the future. We have invested in technology based products and services to meet customer needs. In addition, we have expanded products and services in our deposit gathering and lending programs, and our offering of investment management and trust services. As a result, we have approximately doubled our total assets during this five year period.
Lending
We engage in a variety of lending activities which are primarily categorized as real estate, commercial and industrial, individual and lease financing. At December 31, 2006, gross loans totaled $1,225.4 million. Gross loans were comprised of the following loan types:
Real estate | 67.9 | % | ||
Commercial and industrial | 29.0 | |||
Individuals | 2.4 | |||
Lease financing | 0.7 | |||
Total | 100.0 | % | ||
At December 31, 2006, HVB’s unsecured lending limit to one borrower under applicable regulations was approximately $27.3 million and NYNB’s unsecured lending limit to one borrower under applicable regulations was approximately $1.6 million.
In managing our loan portfolios, we focus on:
(i) the application of its established underwriting criteria, |
(ii) | the establishment of individual lending authorities well below the Banks’ legal lending authority, | |
(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. |
We utilize our credit department to assess acceptable and unacceptable credit risks based upon established underwriting criteria. We utilize our 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
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An independent qualified loan review firm reviews loans in our portfolios 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 firm reports directly to the Board of Directors.
In addition, we have participated in loans originated by various other financial institutions within the normal course of business and within standard industry practices.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loan Portfolio” for further information related to our portfolio and lending activities.
Deposits
We offer deposit products ranging in maturity from demand-type accounts to certificates of deposit with maturities of up to 5 years. Deposits are generally derived from customers within our primary marketplace. We solicit only certain types of deposits from outside our market area, primarily from certain professionals and government agencies. We also utilize brokered certificates of deposits as a source of funding and to manage interest rate risk.
We set deposit rates to remain generally competitive with other financial institutions in our market, although we do not generally seek to match the highest rates paid by competing institutions. We have established a process to review interest rates on all deposit products and, based upon this process, update our deposit rates weekly. This process also established a procedure to set deposit interest rates on a relationship basis and to periodically review these deposit rates. Our Asset/ Liability Management Policy and our 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 our primary source of liquidity.
We offer deposit pick up services for certain business customers. We have 19 automated teller machines, or ATMs, at various locations, which generate activity fees based on use by other banks’ customers.
For more information regarding our deposits, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Deposits.”
Portfolio Management Services
We provide investment management services to our customers and others through a subsidiary, A. R. Schmeidler & Co., Inc. The acquisition of this firm has allowed us to expand our investment management services to customers and to expand revenue by offering such services. We anticipate that we will continue to expand this line of business.
Other Services
We also provide a software application to a limited number of customers designed to meet the specific administrative needs of bankruptcy trustees through a marketing and licensing agreement with the application vendor. We have no current plans to expand this line of business.
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.
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As a bank holding company, we are regulated by and subject to the supervision of the Board of Governors of the Federal Reserve System (the “FRB”) and are 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 proper activities 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 limitations 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 Gramm-Leach-Bliley Act. Under this 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 are 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 owns a financial subsidiary, A.R. Schmeidler & Co., Inc.
We believe we meet the regulatory criteria that would enable us to elect to become a financial holding company. At this time, we have determined not to make such an election, although we may do so in the future.
The Gramm-Leach-Bliley Act also makes 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 makes it possible for a variety of financial services firms to offer products and services comparable to the products and services we offer.
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 HVB or NYNB. Federal and state bank regulatory agencies also have the authority to limit further HVB’s or NYNB’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, 2006, HVB could have declared additional dividends of approximately $29.0 million to the Company without prior regulatory approval. Under applicable banking statutes, NYNB could not have declared dividends to the Company at December 31, 2006.
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Under the policy of the FRB, the Company is expected to act as a source of financial strength to its banking subsidiaries and to commit resources to support its banking subsidiaries in circumstances where we might not do so absent such policy. In addition, any subordinated loans by the Company to its banking subsidiaries 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 Banks.
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 Banks described below. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources” and Note 10 to the Consolidated Financial Statements. The Company, HVB and NYNB are subject to various regulatory capital guidelines. To be considered “well capitalized,” an institution must generally have a leverage ratio of at least 5 percent, a Tier 1 ratio of 6 percent and a total capital ratio of 10 percent. The Company, HVB, and NYNB each exceeded all current regulatory capital requirements to be considered in the “well capitalized” category at December 31, 2006. Management intends to conduct the affairs of the Company and its subsidiary banks so as to maintain a strong capital position in the future.
The Banks are currently organized under the Banking Law of the State of New York. Their 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 Banks are not members of the Federal Reserve System, they are subject to certain regulations of the FRB. In addition to banking laws, regulations and regulatory agencies, the Banks are subject to various other laws, regulations and regulatory agencies, all of which directly or indirectly affect their operations. The New York Superintendent of Banks and the FDIC examine the affairs of the Banks for the purpose of determining their 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 Banks.
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. We do not expect such provisions to have a material adverse effect on us.
As described in more detail in “Item 1 — Business — Our Market Area”, the Banks have applied to the OCC for approval to convert to national bank charters from New York commercial bank charters. As a result, the OCC will become the Banks’ primary regulator with the FDIC remaining the insurer of deposits. The Banks’ operations will remains subject to federal and state laws applicable to national banks and to extensive regulation, supervision and examination by the OCC. The Banks, as national banks, will become member banks of the Federal Reserve System and remain subject to certain regulations of the FRB.
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 Banks, 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 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
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(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. To be categorized as “well capitalized,” an institution 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. As of December 31, 2006, the most recent notification from the FDIC categorized HVB and NYNB as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions that we believe have changed HVB or NYNB’s category.
In connection with the acquisition of New York National Bank, we have agreed with our regulators to maintain NYNB as “well capitalized” under the regulatory framework for prompt corrective action.
See Note 10 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.
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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 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 Banks’ 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 Banks are currently considered “Well Capitalized Group A” institutions and, therefore, are 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. As a condition of the continuation of deposit insurance by the FDIC for New York National Bank upon its conversion to NYNB, we were required to correct certain deficiencies related to Bank Secrecy Act compliance that existed at New York National Bank prior to its acquisition by the Company. We believe we have complied with the required corrective action. We are not aware of any practice, condition or violation that might lead to termination of deposit insurance.
Community Reinvestment Act and Fair Lending Developments
Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, the Banks have a continuing and affirmative obligation consistent with their safe and sound operation to help meet the credit needs of their 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 bank, 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 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 December 2004, HVB received a rating of “Satisfactory.” As of its latest CRA examination in November 2006, NYNB received a rating of “Satisfactory.”
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USA Patriot Act
The USA Patriot Act of 2001, signed into law on October 26, 2001, enhances the powers of domestic law enforcement organizations and makes numerous other changes aimed at countering the international terrorist threat to the security of the United States. Title III of the legislation most directly affects the financial services industry. It is intended to enhance the federal government’s ability to fight money laundering by monitoring currency transactions and suspicious financial activities. The USA Patriot Act has significant implications for depository institutions and other businesses involved in the transfer of money. Under the USA Patriot Act, a financial institution must establish due diligence policies, procedures and controls reasonably designed to detect and report money laundering through correspondent accounts and private banking accounts. Financial institutions must follow regulations adopted by the Treasury Department to encourage financial institutions, their regulatory authorities, and law enforcement authorities to share information about individuals, entities, and organizations engaged in or suspected of engaging in terrorist acts or money laundering activities. Financial institutions must follow regulations adopted by the Treasury Department setting forth minimum standards regarding customer identification. These regulations require financial institutions to implement reasonable procedures for verifying the identity of any person seeking to open an account, maintain records of the information used to verify the person’s identity, and consult lists of known or suspected terrorists and terrorist organizations provided to the financial institution by government agencies. Every financial institution must establish anti-money laundering programs, including the development of internal policies and procedures, designation of a compliance officer, employee training, and an independent audit function. The passage of the USA Patriot Act has increased our compliance activities, but has not otherwise affected our operations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting.
The Sarbanes-Oxley Act provides for, among other things:
• | a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O); | |
• | independence requirements for audit committee members; | |
• | independence requirements for company auditors; | |
• | certification of financial statements within the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q by the chief executive officer and the chief financial officer; | |
• | the forfeiture by the chief executive officer and the chief financial officer of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by such officers in the twelve month period following initial publication of any financial statements that later require restatement due to corporate misconduct; | |
• | disclosure of off-balance sheet transactions; | |
• | two-business day filing requirements for insiders filing on Form 4; | |
• | disclosure of a code of ethics for financial officers and filing a Current Report on Form 8-K for a change in or waiver of such code; | |
• | the reporting of securities violations “up the ladder” by both in-house and outside attorneys; | |
• | restrictions on the use of non-GAAP financial measures in press releases and SEC filings; | |
• | the formation of a public accounting oversight board; | |
• | various increased criminal penalties for violations of securities laws; | |
• | an assertion by management with respect to the effectiveness of internal control over financial reporting; and |
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• | a report by the company’s external auditor on management’s assertion and the effectiveness of internal control over financial reporting. |
Governmental Monetary Policy
Our business and earnings depend in large part on differences in interest rates. One of the most significant factors affecting our earnings is the difference between (1) the interest rates paid by us on our deposits and other borrowings (liabilities) and (2) the interest rates received by us on loans made to our customers and securities held in our investment portfolios (assets). The value of and yield on our assets and the rates paid on our liabilities are sensitive to changes in prevailing market rates of interest. Therefore, our earnings and growth 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, we cannot predict possible future changes in interest rates, deposit levels, loan demand, or availability of investment securities and the resulting effect our business or earnings.
Investment Advisers Act of 1940
A. R. Schmeidler & Co., Inc., is a money manager registered as an investment adviser under the federal Investment Advisers Act of 1940. ARS and its representatives are also registered under the laws of various states regulating investment advisers and their representatives. Regulation under the Investment Advisers Act requires the filing and updating of a Form ADV, filed with the Securities and Exchange Commission. The Investment Advisers Act regulates, among other things, the fees that may be charged to advisory clients, the custody of client funds, relationships with brokers and the maintenance of books and records.
Available Information
We make available free of charge on our website (http://www.hudsonvalleybank.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We provide electronic or paper copies of filings free of charge upon request.
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ITEM 1A — RISK FACTORS
Risks Related to Our Business
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. Our market area has a very high density of financial institutions, many of which are branches of institutions which are significantly larger than we are 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 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 operate in a highly regulated industry and could be adversely affected by governmental monetary policy or regulatory change.
We are subject to regulation by several government agencies, including the FRB, the FDIC, 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 our ability 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 we 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 efforts to expand within our market and provide additional services by acquiring smaller banks and related businesses may not prove to be successful, and may subject us to unexpected costs or liabilities.
We recently acquired New York National Bank, a community-based national bank headquartered in the Bronx. We could have difficulty integrating this new business within our organization, and the new business may not generate the revenues that we anticipate. This could result in added costs or the diversion of management resources, and we might not achieve the intended benefits of the transaction. In addition, we could be subject to new and unexpected liabilities as a result of making this acquisition.
The opening of new branches could reduce our profitability.
We have recently adopted a strategy of broader expansion of our branch network through de novo branches. The opening of a new branch requires us to incur a number of upfront expenses associated with the leasing and build-out of the space to be occupied by the branch, the staffing of the branch and similar matters. These expenses are typically greater than the income generated by the branch until it builds up its customer base. In opening branches in a new locality we may also encounter unanticipated problems in adjusting to local market conditions.
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Our income is sensitive to changes in interest rates.
Our profitability, like that of most banking institutions, depends to a large extent upon our net interest income. Net interest income is the difference between interest income received on interest-earning assets, including loans and securities, and the interest paid on interest-bearing liabilities, including deposits and borrowings. Accordingly, our results of operations and financial condition depend largely on movements in market interest rates and our ability to manage our assets and liabilities in response to such movements.
We try to manage our interest rate risk exposure by closely monitoring our assets and liabilities in an effort to reduce the effects of changes in interest rates primarily by altering the mix and maturity of our loans, investments and funding sources.
Currently, we believe that our income would be minimally changed in the twelve months following December 31, 2006 due to changes in the interest rate environment. However, a continuation of the flat or inverted yield curve could have an adverse effect on our 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 we originate, as well as the value of our 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 our existing portfolios, 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 we may not pay rates of interest competitive with these alternative investments. “See Quantitative and Qualitative Disclosures About Market Risk.”
We may incur liabilities under federal and state environmental laws with respect to foreclosed properties.
Approximately 88% of the loans held by the Banks as of December 31, 2006 were secured, either on a primary or secondary basis, 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. We currently do not own any property acquired on foreclosure. However, we have in the past and may in the future acquire properties through foreclosure on loans in default. Under federal and state environmental laws, we could face liability for some or all of the costs of removing hazardous substances, contaminants or pollutants from properties we acquire 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 primary lending market area is concentrated in Westchester County, New York and New York City and to an increasing extent, Rockland County and Fairfield County, Connecticut, with a primary focus on businesses, professionals and not-for-profit organizations 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.
A downturn in the real estate market could negatively affect our business.
A downturn in the real estate market could negatively affect our business because a significant portion (approximately 88% as of December 31, 2006) of our loans are secured, either on a primary or secondary basis, by real estate. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.
A downturn in the real estate market could also result in lower customer demand for real estate loans. This could in turn result in decreased profits, as our alternative investments, such as securities, generally yield less than real estate loans.
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Technological change may affect our ability to compete.
The banking industry continues to undergo 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 exposes a bank to various risks, particularly transaction, strategic, reputation and compliance risks. 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 for loan losses 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.
Risks Related to Our Common Stock
For a discussion of risks related to our common stock, see Item 5 of this Annual Report on Form 10-K.
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ITEM 1B — UNRESOLVED STAFF COMMENTS
None.
ITEM 2 — PROPERTIES
Our principal executive offices, including administrative and operating departments, are located at 21 Scarsdale Road, Yonkers, New York, in premises we own. HVB’s main branch is located at 35 East Grassy Sprain Road, Yonkers, New York, in premises we lease. NYNB’s main branch is located at 369 East 149th Street, Bronx, New York in premises that we own.
In addition to HVB’s main branch, we operate 14 branches in Westchester County, New York. We own the following seven branches: 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; 21 Scarsdale Road, Yonkers, New York; and 664 Main Street, Mount Kisco, New York. We lease the following branches: 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, Five Huguenot Street, New Rochelle, New York and 40 Church Street, White Plains, New York. The Company also leases office space at 399 Knollwood Road, White Plains, New York.
In addition to the branches in Westchester County and NYNB’s main branch, we operate three branches in Bronx, New York. We lease the following branches: 3130 East Tremont Avenue, Bronx, New York, 975 Allerton Avenue, Bronx, New York, and 1042 Westchester Avenue, Bronx, New York. We also operate seven branches in Manhattan, New York. We lease the following branches: 60 East 42nd Street, New York, New York, 233 Broadway, New York, New York, 350 Park Avenue, New York, New York, 4211 Broadway, New York, New York, 2256 Second Avenue, New York, New York and 619 Main Street, Roosevelt Island, New York. HVB operates one full service branch office located at 97-77 Queens Boulevard, Rego Park, New York (Queens County), in premises we lease. HVB also operates one full service branch office located at 254 South Main Street, New City, New York (Rockland County), in premises we lease.
Of the leased properties, 4 properties located in Thornwood, Mount Vernon, White Plains and Bronx, New York, have lease terms that expire within the next 2 years, with each lease subject to our renewal option. We currently expect to exercise our renewal option on the leases of each of these properties.
A. R. Schmeidler & Co., Inc is located at 555 Fifth Avenue, New York, New York in leased premises. This lease expired in December 2006. In April 2007, the subsidiary will relocate its offices to 500 Fifth Avenue, New York, New York, to premises leased by the Company.
We currently operate 19 ATM machines, 15 of which are located in the Banks’ facilities. Four ATMs are located at off-site locations: St. Joseph’s Hospital, Yonkers, New York, Lincoln Hospital, Bronx, New York, Segundo Ruis Belvis Diagnostic & Treatment Center, Bronx, New York and Morrisania Diagnostic & Treatment Center, Bronx, New York.
In our opinion, the premises, fixtures and equipment are adequate and suitable for the conduct of our business. 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 2006.
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PART II
ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock was held of record as of March 1, 2007 by approximately 977 shareholders. Our common stock trades on a limited and sporadic basis in the over-the-counter market under the symbol “HUVL”. We have historically purchased shares of common stock from shareholders at a price we believe to be the fair market value at the time. Some of these purchases are made pursuant to Stock Restriction Agreements which give us a right of first refusal if the shareholder wishes to sell his or her shares. The majority of transactions in our common stock are sales to the Company or private transactions. There can be no assurance that we will purchase any additional stock in the future.
The table below sets forth the high and the low prices per share at which we purchased shares of our common stock from shareholders in 2006 and 2005. The price per share has been adjusted to reflect the 10 percent stock dividends to shareholders in December 2006 and 2005.
2006 | 2005 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter | $ | 46.59 | $ | 38.18 | $ | 50.41 | $ | 30.16 | ||||||||
Second Quarter | 52.73 | 38.86 | 47.94 | 30.99 | ||||||||||||
Third Quarter | 52.05 | 41.36 | 47.94 | 30.99 | ||||||||||||
Fourth Quarter | 50.00 | 38.86 | 44.84 | 34.71 |
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 2006, $0.43 per share to shareholders of record on February 10; $0.45 per share to shareholders of record May 5, August 4 and November 10. In 2005, $0.36 per share to shareholders of record on February 10; $0.39 per share to shareholders of record May 6, August 5 and November 4. Dividends per share have been adjusted to reflect the 10 percent stock dividends to shareholders in December 2006 and 2005.
Stock dividends of 10 percent each (one share for every 10 outstanding shares) were declared by the Company for shareholders of record on December 9, 2006 and December 9, 2005.
Effective December 9, 2006, the Board of Directors of the Company adjusted the price at which the Company would repurchase shares to $42.75 per share, or $49.25 per share for a transaction of at least 2,500 shares, taking into consideration the 10 percent stock dividend to shareholders in December 2006. This offer was limited to 100,000 shares and expired February 27, 2007, at which time the Company offered to repurchase up to 100,000 shares at a price of $43.75 per share or $50.50 per share for a transaction of at least 2,500 shares. This offer expires May 29, 2007.
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 HVB 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 Banks and their 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 Banks. The Company’s right to participate in any distribution of the assets or earnings of the Banks is subordinate to prior claims of creditors of the Banks.
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The following table sets forth information with respect to purchases made by the Company of its common stock during the three months ended December 31, 2006.
Maximum | ||||||||||||||||
Total Number | Number of | |||||||||||||||
of Shares | Shares That | |||||||||||||||
Purchased as | May Yet Be | |||||||||||||||
Total Number | Average | Part of Publicly | Purchased | |||||||||||||
of Shares | Price Paid | Announced | Under the | |||||||||||||
Period | Purchased | Per Share | Programs | Programs(2) | ||||||||||||
October 2006(1) | 3,705 | $ | 51.47 | 3,705 | ||||||||||||
November 2006(1) | 3,868 | $ | 46.75 | 3,868 | ||||||||||||
December 1 - December 8, 2006(1) | 9,630 | $ | 49.09 | 9,630 | ||||||||||||
December 9 - December 31, 2006(2) | 5,886 | $ | 46.35 | 5,486 | 94,514 | |||||||||||
Total December 2006 | 15,516 | $ | 48.05 | 15,116 | ||||||||||||
Total | 23,089 | $ | 48.38 | 22,689 | ||||||||||||
(1) | In August 2006, the Company announced that the Board of Directors had approved a share repurchase program, effective August 30, 2006, which authorized the repurchase of up to 100,000 of the Company’s shares at a price of $46.75 per share, or a price of $53.75 per share for transactions of at least 2,500 shares. This offer expired on December 8, 2006. |
(2) | In November 2006, the Company announced that the Board of Directors had approved a share repurchase program, effective December 9, 2006, which authorized the repurchase of up to 100,000 of the Company’s shares at a price of $42.75 per share, or a price of $49.25 per share for transactions of at least 2,500 shares. This offer expired on February 27, 2007. |
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.
We have determined not to apply, at this time, for the listing of our common stock on a securities exchange. If we do apply in the future for such listing, there can be no assurance that the common stock will be listed on any securities exchange. Even if we successfully list the common stock on a 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 such exchange, such as requirements 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.
We have historically created a secondary market for our stock by issuing offers to repurchase shares from any shareholder. However, we are not obligated to issue such offers to repurchase shares in the future and may discontinue or limit such offers at any time.
If our 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.
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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. 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 shares 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 HVB are the only current significant source of cash for the Company. There are various statutory and regulatory limitations regarding the extent to which HVB and NYNB can pay dividends or otherwise transfer funds to the Company. Federal and state bank regulatory agencies also have the authority to limit further the Banks’ payment of dividends based on such factors as the maintenance of adequate capital for each Bank, which could reduce the amount of dividends otherwise payable. We paid a cash dividend to our shareholders of $1.76 per share in 2006, and $1.53 per share in 2005 (adjusted for subsequent stock dividends). Under applicable banking statutes, at December 31, 2006, HVB could have declared dividends of approximately $29.0 million to the Company without prior regulatory approval. Under applicable banking statutes, NYNB could not have declared dividends to the Company at December 31, 2006. No assurance can be given that the Banks 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 us to maintain adequate levels of capital. The failure to maintain adequate capital or to comply with applicable laws, regulations and supervisory agreements could subject us 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, dividends can be restricted by any of our regulatory authorities if the agency believes that our financial condition warrants such a restriction.
In addition, our 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 Banks, the ability of holders of debt and equity securities of the Company to benefit from the distribution of assets from the Banks upon any such liquidation or reorganization would be subordinate to prior claims of creditors of the Banks (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 Banks.
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Stockholder Return Performance Graph
The following graph compares the Company’s total stockholder return for the years 2002, 2003, 2004, 2005 and 2006 based on prices as reported on the over-the-counter bulletin board with (1) the Russell 2000 and (2) the SNL $1 billion to $5 billion Bank Index.
Total Return Performance
Period Ending | ||||||||||||||||||||||||
Total Return Index for: | 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | 12/30/05 | 12/31/06 | ||||||||||||||||||
Hudson Valley Holding Corp. | 100.00 | 123.23 | 222.70 | 220.09 | 195.89 | 211.15 | ||||||||||||||||||
Russell 2000 | 100.00 | 79.52 | 117.09 | 138.55 | 144.86 | 171.47 | ||||||||||||||||||
SNLBank $1B-$5B | 100.00 | 115.44 | 156.98 | 193.74 | 190.43 | 220.36 | ||||||||||||||||||
The graph assumes $100 was invested on December 31, 2001 and dividends were reinvested. Returns are market-capitalization weighted.
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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, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, 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, 2004, 2003 and 2002 and for the years ended December 31, 2003 and 2002 are derived from our consolidated financial statements that are not included in this Annual Report on Form 10-K. Share and per share data have been restated to reflect the effects of 10 percent stock dividends issued in 2006, 2005, 2004 and 2003. 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, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
(000’s except share data) | ||||||||||||||||||||
Operating Results: | ||||||||||||||||||||
Total interest income | $ | 141,157 | $ | 110,364 | $ | 88,432 | $ | 76,520 | $ | 84,743 | ||||||||||
Total interest expense | 41,600 | 25,306 | 16,795 | 15,444 | 22,982 | |||||||||||||||
Net interest income | 99,557 | 85,058 | 71,637 | 61,076 | 61,761 | |||||||||||||||
Provision for loan losses | 2,130 | 2,059 | 473 | 437 | 3,902 | |||||||||||||||
Income before income taxes | 58,412 | 46,983 | 40,970 | 35,962 | 30,744 | |||||||||||||||
Net income | 34,058 | 30,945 | 27,540 | 24,207 | 21,584 | |||||||||||||||
Basic earnings per common share | 3.80 | 3.47 | 3.11 | 2.78 | 2.52 | |||||||||||||||
Diluted earning per common share | 3.69 | 3.37 | 3.05 | 2.72 | 2.45 | |||||||||||||||
Weighted average shares outstanding | 8,952,652 | 8,929,679 | 8,847,452 | 8,694,924 | 8,561,880 | |||||||||||||||
Adjusted weighted average share outstanding | 9,240,278 | 9,175,591 | 9,025,235 | 8,894,056 | 8,796,938 | |||||||||||||||
Cash dividends per common share | 1.76 | 1.53 | 1.30 | 1.08 | 0.90 |
December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Financial position: | ||||||||||||||||||||
Securities | $ | 917,660 | $ | 883,992 | $ | 875,120 | $ | 861,410 | $ | 743,884 | ||||||||||
Loans, net | 1,205,243 | 1,009,819 | 862,496 | 707,104 | 642,438 | |||||||||||||||
Total assets | 2,291,734 | 2,032,721 | 1,840,874 | 1,669,513 | 1,506,883 | |||||||||||||||
Deposits | 1,626,441 | 1,407,996 | 1,235,341 | 1,124,900 | 1,027,176 | |||||||||||||||
Borrowings | 456,559 | 435,212 | 427,593 | 386,400 | 327,383 | |||||||||||||||
Stockholders’ equity | 185,566 | 169,789 | 159,662 | 142,361 | 136,807 |
(1) | Excludes unrealized losses in 2006 and 2005, and unrealized gains in 2004, 2003, and 2002, net of tax, on securities available for sale. |
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Financial Ratios
Significant ratios of the Company for the periods indicated are as follows:
December 31, | |||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||
Earnings Ratios | |||||||||||||||||||||
Net income as a percentage of: | |||||||||||||||||||||
Average earning assets | 1.63 | % | 1.66 | % | 1.64 | % | 1.62 | % | 1.58 | % | |||||||||||
Average total assets | 1.53 | 1.58 | 1.56 | 1.54 | 1.50 | ||||||||||||||||
Average total stockholders’ equity(1) | 18.57 | 18.54 | 18.55 | 18.51 | 18.72 | ||||||||||||||||
Capital Ratios | |||||||||||||||||||||
Average total stockholders’ equity to average total assets | 8.26 | % | 8.53 | % | 8.40 | % | 8.31 | % | 8.02 | % | |||||||||||
Average net loans as a multiple of average total stockholders’ equity(1) | 6.17 | 5.56 | 5.25 | 5.07 | 5.37 | ||||||||||||||||
Leverage capital | 7.74 | 8.30 | 8.17 | 8.43 | 8.28 | ||||||||||||||||
Tier 1 capital (to risk weighted assets) | 12.32 | 13.82 | 14.46 | 15.63 | 17.05 | ||||||||||||||||
Total risk-based capital (to risk weighted assets) | 13.49 | 14.94 | 15.59 | 16.88 | 18.30 | ||||||||||||||||
Other | |||||||||||||||||||||
Allowance of loan losses as a percentage of year-end loans | 1.39 | % | 1.32 | % | 1.35 | % | 1.59 | % | 1.76 | % | |||||||||||
Loans (net) as a percentage of year-end total assets | 52.59 | 49.68 | 46.85 | 42.35 | 42.63 | ||||||||||||||||
Loans (net) as a percentage of year-end total deposits | 74.10 | 71.72 | 69.82 | 62.86 | 62.54 | ||||||||||||||||
Securities as a percentage of year-end total assets | 38.30 | 41.02 | 47.54 | 51.60 | 49.37 | ||||||||||||||||
Average interest earning assets as a percentage of average interest bearing liabilities | 149.28 | 154.24 | 155.00 | 153.18 | 147.71 | ||||||||||||||||
Dividends per share as a percentage of dilutes earnings per share | 47.70 | 45.40 | 42.62 | 39.71 | 36.72 |
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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, 2006 and 2005, and consolidated results of operations for each of the three years in the period ended December 31, 2006. The Company is consolidated with its wholly-owned subsidiaries, Hudson Valley Bank and its subsidiaries, Hudson Valley Investment Corp., Grassy Sprain Real Estate Holdings, Inc., Sprain Brook Realty Corp., HVB Leasing Corp., HVB Employment Corp., HVB Realty Corp. and A.R. Schmeidler & Co., Inc. (collectively “HVB”) and NYNB Bank and it’s subsidiary, 369 East 149th Street Corp. (collectively “NYNB”). NYNB Bank was acquired by the Company effective January 1, 2006. Pro-forma effects of this acquisition on periods prior to 2006 are not presented herein as NYNB is not deemed a “significant subsidiary” as defined by Regulation S-X of the Securities and Exchange Commission. 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.
Overview of Management’s Discussion and Analysis
This overview is intended to highlight selected information included in this Annual Report on Form 10-K. It does not contain sufficient information for a complete understanding of the Company’s financial condition and operating results and, therefore, should be read in conjunction with this entire Annual Report on Form 10-K.
The Company derives substantially all of its revenue from providing banking and related services to businesses, professionals, municipalities, not-for profit organizations and individuals within its market area, primarily Westchester County and portions of New York City. The Company’s assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company’s basic strategy is to grow net interest income and non interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and surrounding areas. 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.
Effective January 1, 2006, the Company acquired NYNB (formerly known as New York National Bank) which it operates as a New York State chartered bank with five branch locations in the Bronx and Manhattan boroughs of New York City. The Company acquired NYNB in a tax free stock purchase transaction for approximately $13.5 million. At the time of the acquisition, including the effects of purchase accounting, NYNB had total assets of $136.5 million, net loans of $59.9 million and total deposits of $117.7 million.
Net income for 2006 was $34.1 million or $3.69 per diluted share, an increase of $3.2 million or 10.4 percent compared to $30.9 million or $3.37 per diluted share in 2005. Net income for 2006 and 2005 included approximately $0.1 million and $0.7 million, respectively, of after-tax net realized losses on sales of securities available for sale. These sales were conducted as part of the Company’s ongoing asset/liability management process, which reflected management’s efforts to effectively reposition its portfolio during periods of changing economic conditions and interest rates. The Company achieved substantial growth in both of its core businesses, loans and deposits, during the year ended December 31, 2006, primarily as a result of the acquisition of NYNB, the addition of new customers and additional loans to existing customers, partially offset by declines in certain deposit balances related to a slowdown in the overall economy in general and, in particular, in activity related to the commercial real estate industry, a significant source of business for the Company. Overall asset quality continued to be good as a result of the Company’s conservative underwriting and investment standards. In addition, the Company continued to increase its fee based revenue through its subsidiary A.R. Schmeidler & Co., Inc., a registered investment advisory firm located in Manhattan, New York, which at December 31, 2006 had approximately $1.0 billion in assets under management as compared to approximately $780 million as of December 31, 2005.
Interest rates, particularly short-term interest rates, rose gradually during 2005 and the first half of 2006. The immediate effect of this rise in interest rates was positive to the Company, due to more assets than
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The effects of the rise in short-term interest rates and growth in the Company’s core businesses of loans and deposits, including the acquisition of NYNB, resulted in tax equivalent basis net interest income increasing by $14.7 million or 16.4 percent to $104.5 million in 2006, compared to $89.8 million in 2005. The effect of the adjustment to a tax equivalent basis was $4.9 million and $4.7 million for 2006 and 2005, respectively.
Non interest income, excluding securities net gains and losses, was $13.3 million for 2006, an increase of $3.8 million or 40.0 percent compared to $9.5 million in 2005. The increase was primarily due to an increase in the investment advisory fees of A.R. Schmeidler & Co., Inc., an increase in trust fees and also reflects growth in deposit activity and other service fees and increases in scheduled fees.
Non interest expense for 2006 was $58.4 million, an increase of $14.1 million or 31.8 percent compared to $44.3 million in 2005. The increase reflects the Company’s continued investment in its branch offices, technology and personnel to accommodate growth in both loans and deposits and the expansion of services and products available to new and existing customers. Noninterest expense for 2006 included approximately $7.7 million of operating expenses of NYNB and certain nonrecurring expenses related to the acquisition and operational integration of NYNB.
The Company uses a simulation analysis to estimate the effect that specific movements in interest rates would have on net interest income. Excluding the effects of planned growth and anticipated new business, the simulation analysis at December 31, 2006 reflects minimal near term interest rate risk with the Company’s net interest income decreasing slightly if rates rise or fall.
The Company has established specific policies and operating procedures governing its liquidity levels to address future liquidity needs, including contingent sources of liquidity. The Company believes that its present liquidity and borrowing capacity are sufficient for its current business needs.
The Company, HVB and NYNB are subject to various regulatory capital guidelines. To be considered “well capitalized,” an institution must generally have a leverage ratio of at least 5 percent, a Tier 1 ratio of 6 percent and a Total capital ratio of 10 percent. The Company, HVB and NYNB each exceeded all current regulatory capital requirements to be considered in the “well-capitalized” category at December 31, 2006. Management plans to conduct the affairs of the Company and its subsidiary banks so as to maintain a strong capital position in the future.
Critical Accounting Policies
Application of Critical Accounting Policies —The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The Company’s significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. Certain accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, management evaluates its estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require management to make estimates and judgements, and therefore, are critical to understanding the Company’s results of operations. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of the Company’s Board of Directors.
Allowance for Loan Losses —The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Company’s
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The formula component is calculated by applying loss factors to outstanding loans by type. Loss factors are based on historical loss experience. The introduction of 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 component.
The appropriateness of the unallocated component is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company 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 component. 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 Company’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, 2006 and 2005. 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 Company’s service area, since the majority of the Company’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments at the time of their examination.
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
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Securities —Securities are classified as either available for sale, representing securities the Company may sell in the ordinary course of business, or as held to maturity, representing securities the Company 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 to maturity are stated at amortized cost (specific identification). 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.
Goodwill and Other Intangible Assets —In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company’s impairment evaluations as of December 31, 2006 did not indicate impairment of its goodwill or identified intangible assets.
Results of Operations for Each of the Three Years in the Period Ended December 31, 2006
Summary of Results
The Company reported net income of $34.1 million in 2006, an increase of $3.2 million or 10.4 percent compared to $30.9 million in 2005, which increased $3.4 million or 12.4 percent compared to $27.5 million in 2004. The increase in 2006 net income, compared to 2005, reflects higher net interest income, higher non interest income and lower net losses on securities transactions, partially offset by higher non interest expense, a higher provision for loan losses and a higher effective tax rate. The increase in 2005 net income, compared to 2004, reflects higher net interest income and higher non interest income partially offset by higher non interest expense, net losses on securities transactions, a higher provision for loan losses and a higher effective tax rate.
Diluted earnings per share were $3.69 in 2006 an increase of $0.32 or 10.4 percent compared to $3.37 in 2005, which increased $0.32 or 12.4 percent compared to $3.05 in 2004. These increases reflect the higher net income in 2006 and 2005 compared to their respective prior years. Prior period per share amounts have been adjusted to reflect the 10 percent stock dividend distributed in December, 2006. Returns on average equity, excluding the effects of net unrealized gains and losses on securities available for sale, were 18.57 percent in 2006, compared to 18.54 percent in 2005 and 18.55 percent in 2004. Returns on average assets, excluding the effects of net unrealized gains and losses on securities available for sale, were 1.53 percent in 2006, compared to 1.58 percent in 2005 and 1.56 percent in 2004.
Net interest income for 2006 was $99.6 million, an increase of $14.5 million or 17.0 percent compared to $85.1 million in 2005, which increased $13.5 million or 18.9 percent compared to $71.6 million in 2004. The 2006 increase over 2005 was primarily due to $235.4 million growth in the average balance of interest earning assets which was in excess of the $197.8 million growth in the average balance of interest bearing liabilities and an increase in the tax equivalent basis net interest margin to 4.99% from 4.83%. The 2005 increase over 2004 was primarily due to $176.8 million growth in the average balance of interest earning assets which was in excess of the $120.0 million growth in the average balance of interest bearing liabilities and an increase in the tax equivalent basis net interest margin to 4.83% from 4.53%.
The 2006 and 2005 increases in the tax equivalent basis net interest margin, compared to their respective prior year periods, resulted primarily from the effects of the growth in loans, the Company’s highest yielding asset, as a percentage of interest earning assets, and the overall positive effect of increases short-term interest rates on average net interest earning assets. The 2006 increase in the average balance of interest earning assets
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Non interest income, excluding securities gains and losses, increased $3.8 million or 40.0 percent to $13.3 million in 2006 compared to $9.5 million in 2005, which increased $4.1 million or 75.9 percent compared to $5.4 million in 2004. The increases in 2006 and 2005, compared to their respective prior year periods, were primarily due to increases in investment advisory fees of A.R. Schmeidler & Co., Inc. and also reflect growth in deposit activity and other service fees and increases in scheduled fees. The Company’s acquisition of NYNB contributed $1.5 million to non interest income for 2006. Sales of investment securities resulted in net losses of $0.2 million and $1.2 million in 2006 and 2005, respectively, and net gains of $1.1 in 2004. The sales were conducted as part of the Company’s ongoing asset/ liability management process.
Non interest expenses increased $14.1 million or 31.8 percent to $58.4 million in 2006 compared to $44.3 million in 2005, which increased $7.6 million or 20.7 percent compared to $36.7 million in 2004. These increases reflect the overall growth of the Company, including, in 2006, the acquisition of NYNB and resulted from higher amounts in employee salaries and benefits, occupancy and equipment expense and other expenses resulting from the Company’s continuing growth and investments in people, technology, products and branch facilities. The acquisition of NYNB added $7.3 million of non interest expenses for 2006. The 2005 and 2004 expenses included higher professional and other expenses associated with the Sarbanes-Oxley Act and other regulatory requirements. The effective tax rate in 2006 increased to 34.6 percent, compared to 34.1 percent in 2005, which increased slightly compared to 32.8 percent in 2004. The 2006 and 2005 increases, compared to their respective prior year periods, were primarily as a result of increases in the percentage of the Company’s income subject to Federal, New York State, and particularly New York City taxes, reflecting the Company’s growth in the New York City markets.
The Company’s total capital ratio under the risk-based capital guidelines exceeds regulatory guidelines of 8.0 percent, as the total ratio equaled 13.5 percent and 14.9 percent at December 31, 2006 and 2005, respectively. The Company’s leverage capital ratio was 7.7 percent and 8.3 percent at December 31, 2006 and 2005, respectively.
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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 35 percent in 2006, 2005 and 2004.
(000’s except percentages) | |||||||||||||||||||||||||||||||||||||
Year ended December 31, | |||||||||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | |||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | ||||||||||||||||||||||||||||||||
Balance | Interest(3) | Rate | Balance | Interest(3) | Rate | Balance | Interest(3) | Rate | |||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||||||||
Interest earning assets: | |||||||||||||||||||||||||||||||||||||
Deposits in banks | $ | 4,749 | $ | 205 | 4.32 | % | $ | 2,992 | $ | 129 | 4.31 | % | $ | 4,566 | $ | 46 | 1.01 | % | |||||||||||||||||||
Federal funds sold | 12,669 | 600 | 4.74 | 23,907 | 841 | 3.52 | 14,540 | 209 | 1.44 | ||||||||||||||||||||||||||||
Securities:(1) | |||||||||||||||||||||||||||||||||||||
Taxable | 733,062 | 34,591 | 4.72 | 703,359 | 28,377 | 4.03 | 692,026 | 25,307 | 3.66 | ||||||||||||||||||||||||||||
Exempt from federal income taxes | 213,885 | 14,206 | 6.64 | 201,188 | 13,612 | 6.77 | 191,991 | 13,437 | 7.00 | ||||||||||||||||||||||||||||
Loans, net(2) | 1,131,300 | 96,527 | 8.53 | 928,866 | 72,169 | 7.77 | 780,331 | 54,136 | 6.94 | ||||||||||||||||||||||||||||
Total interest earning assets | 2,095,665 | 146,129 | 6.97 | 1,860,312 | 115,128 | 6.19 | 1,683,454 | 93,135 | 5.53 | ||||||||||||||||||||||||||||
Non interest earning assets: | |||||||||||||||||||||||||||||||||||||
Cash and due from banks | 46,836 | 42,706 | 40,604 | ||||||||||||||||||||||||||||||||||
Other assets | 78,093 | 53,500 | 44,166 | ||||||||||||||||||||||||||||||||||
Total non interest earning assets | 124,929 | 96,206 | 84,770 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 2,220,594 | $ | 1,956,518 | $ | 1,768,224 | |||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | |||||||||||||||||||||||||||||||||||||
Deposits: | |||||||||||||||||||||||||||||||||||||
Money market | $ | 431,628 | $ | 8,950 | 2.07 | % | $ | 384,214 | $ | 4,115 | 1.07 | % | $ | 327,055 | $ | 1,823 | 0.56 | % | |||||||||||||||||||
Savings | 97,567 | 675 | 0.69 | 74,317 | 386 | 0.52 | 70,321 | 160 | 0.28 | ||||||||||||||||||||||||||||
Time | 246,538 | 8,181 | 3.32 | 188,460 | 3,907 | 2.07 | 165,349 | 1,963 | 1.19 | ||||||||||||||||||||||||||||
Checking with interest | 134,874 | 1,053 | 0.78 | 125,934 | 462 | 0.37 | 110,499 | 238 | 0.22 | ||||||||||||||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | 234,959 | 11,149 | 4.75 | 170,072 | 4,909 | 2.89 | 181,870 | 2,140 | 1.18 | ||||||||||||||||||||||||||||
Other borrowings | 258,308 | 11,592 | 4.49 | 263,108 | 11,527 | 4.38 | 231,014 | 10,471 | 4.53 | ||||||||||||||||||||||||||||
Total interest bearing liabilities | 1,403,874 | 41,600 | 2.96 | 1,206,105 | 25,306 | 2.10 | 1,086,108 | 16,795 | 1.55 | ||||||||||||||||||||||||||||
Non interest bearing liabilities: | |||||||||||||||||||||||||||||||||||||
Demand deposits | 601,983 | 562,533 | 517,532 | ||||||||||||||||||||||||||||||||||
Other liabilities | 31,347 | 20,927 | 16,083 | ||||||||||||||||||||||||||||||||||
Total non interest bearing liabilities | 633,330 | 583,460 | 533,615 | ||||||||||||||||||||||||||||||||||
Stockholders’ equity(1) | 183,390 | 166,953 | 148,501 | ||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity(1) | $ | 2,220,594 | $ | 1,956,518 | $ | 1,768,224 | |||||||||||||||||||||||||||||||
Net interest earnings | $ | 104,529 | $ | 89,822 | $ | 76,340 | |||||||||||||||||||||||||||||||
Net yield on interest earning assets | 4.99 | % | 4.83 | % | 4.53 | % |
(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 $4,972, $4,764 and $4,703 for the years ended December 31, 2006, 2005 and 2004, respectively. |
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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, 2006 and 2005, and the years ended December 31, 2006 and 2005, on a tax equivalent basis.
(000’s) | |||||||||||||||||||||||||
2006 Compared to 2005 | 2005 Compared to 2004 | ||||||||||||||||||||||||
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 | $ | 76 | — | $ | 76 | $ | (16 | ) | $ | 99 | $ | 83 | |||||||||||||
Federal funds sold | (395 | ) | $ | 154 | (241 | ) | 135 | 497 | 632 | ||||||||||||||||
Securities: | |||||||||||||||||||||||||
Taxable | 1,198 | 5,016 | 6,214 | 414 | 2,656 | 3,070 | |||||||||||||||||||
Exempt from federal income taxes | 859 | (265 | ) | 594 | 644 | (469 | ) | 175 | |||||||||||||||||
Loans, net | 15,728 | 8,630 | 24,358 | 10,305 | 7,728 | 18,033 | |||||||||||||||||||
Total interest income | 17,466 | 13,535 | 31,001 | 11,482 | 10,511 | 21,993 | |||||||||||||||||||
Interest expense: | |||||||||||||||||||||||||
Deposits: | |||||||||||||||||||||||||
Money market | 508 | 4,327 | 4,835 | 319 | 1,973 | 2,292 | |||||||||||||||||||
Savings | 121 | 168 | 289 | 9 | 217 | 226 | |||||||||||||||||||
Time | 1,204 | 3,070 | 4,274 | 274 | 1,670 | 1,944 | |||||||||||||||||||
Checking with interest | 33 | 558 | 591 | 33 | 191 | 224 | |||||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | 1,873 | 4,367 | 6,240 | (139 | ) | 2,908 | 2,769 | ||||||||||||||||||
Other borrowings | (210 | ) | 275 | 65 | 1,455 | (399 | ) | 1,056 | |||||||||||||||||
Total interest expense | 3,529 | 12,765 | 16,294 | 1,951 | 6,560 | 8,511 | |||||||||||||||||||
Increase in interest differential | $ | 13,937 | $ | 770 | $ | 14,707 | $ | 9,531 | $ | 3,951 | $ | 13,482 | |||||||||||||
(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. After an extended period of declining interest rates from 2001 through the first half of 2004, interest rates, particularly short-term interest rates, rose gradually from the second half of 2004 through the first half of 2006. The initial impact of the gradual rise in short-term interest rates on the Company’s net interest income was positive due to more assets than liabilities repricing in the near term. The rise in short-term rates, however, has not been accompanied with similar increases in longer term interest rates, which resulted in an initial flattening of, and, more recently, inverting of the yield curve. This condition has put downward pressure on the Company’s net interest income as liabilities continue to reprice at higher rates, and maturing longer term assets reprice at similar or only slightly higher rates.
The Company has made efforts throughout these periods of fluctuating interest rates to minimize the impact on its net interest income by appropriately repositioning its securities portfolio and funding sources while maintaining prudence in its asset and interest rate risk profiles In 2004, the Company increased its long-term borrowings by $75.0 million in an effort to continue to effectively utilize its capital. The proceeds from
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Net interest income, on a tax equivalent basis, increased $14.7 million or 16.4 percent to $104.5 million in 2006, compared to $89.8 million in 2005, which increased $13.5 million or 17.7 percent from $76.3 million in 2004. The increase in 2006, compared to 2005, primarily resulted from an increase of $37.6 million or 5.7 percent in the excess of interest earning assets over interest bearing liabilities to $691.8 million in 2006 from $654.2 million in 2005 and an increase in the tax equivalent basis net interest margin to 4.99 percent in 2006 from 4.83 percent in 2005. The increase in 2005, compared to 2004, primarily resulted from an increase of $56.8 million or 9.5 percent in the excess of interest earning assets over interest bearing liabilities to $654.2 million in 2005 from $597.4 million in 2004 and an increase in the tax equivalent basis net interest margin to 4.83 percent in 2005 from 4.53 percent in 2004. The effect of the adjustment to tax equivalent basis net interest income was $4.9 million, $4.7 million and $4.7 million for 2006, 2005 and 2004, respectively.
Interest income is determined by the volume of and related rates earned on interest earning assets. Volume increases in loans and securities and higher average rates, partially offset by a volume decrease in Federal funds sold resulted in higher interest income in 2006, compared to 2005. Volume increases in loans, securities and Federal funds sold and higher average rates resulted in higher interest income in 2005, compared to 2004.
Average interest earning assets in 2006 increased $235.4 million or 12.7 percent to $2,095.7 million from $1,860.3 million in 2005, which increased $176.8 million or 10.5 percent from $1,683.5 million in 2004. 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.
Loans are the largest component of interest earning assets. Net loans increased $195.4 million or 19.4 percent to $1,205.2 million at December 31, 2006 from $1,009.8 million at December 31, 2005, which increased $147.3 million or 17.1 percent from $862.5 million at December 31, 2004. Average net loans increased $202.4 million or 21.8 percent to $1,131.3 million in 2006 from $928.9 million in 2005, which increased $148.6 million or 19.0 percent from $780.3 million in 2004. The increases in average net loans reflect the Company���s continuing emphasis on making new loans, expansion of loan production capabilities and more effective market penetration, including the acquisition of NYNB. The average yield on loans was 8.53 percent in 2006, compared to 7.77 percent in 2005 and 6.94 percent in 2004. As a result, interest income on loans increased in 2006 and 2005, compared to their respective prior year periods, due to higher volume and higher interest rates.
Total securities, including Federal Home Loan Bank (“FHLB”) stock and excluding net unrealized gains, increased $33.1 million or 3.6 percent to $940.1 million at December 31, 2006 from $907.0 million at December 31, 2005, which increased $20.0 million or 2.3 percent from $887.0 million at December 31, 2004. Average total securities, including FHLB stock and excluding net unrealized gains, increased $42.4 million or 4.7 percent to $946.9 million in 2006 from $904.5 million in 2005, which increased $20.5 million or 2.3 percent from $884.0 million in 2004. The increase in average total securities in 2006 compared to 2005 reflects volume increases in U.S. Treasury and Agency securities, mortgage-backed securities including CMO’s, obligations of state and political subdivisions, FHLB stock and other securities. The increase in 2006 resulted primarily from the acquisition of NYNB. The average tax equivalent basis yield on securities was 5.15 percent for 2006 compared to 4.64 percent in 2005. As a result, tax equivalent basis interest income on securities increased in 2006, compared to 2005, due to higher volume and higher interest rates. The increase in average total securities in 2005 compared to 2004 reflects volume increases in mortgage-backed securities including CMOs, obligations of states and political subdivisions, FHLB stock and other investments partially offset by volume
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Interest expense is a function of the volume of, and rates paid for, interest bearing liabilities, comprised of deposits and borrowings. Interest expense increased $16.3 million or 64.4 percent to $41.6 million in 2006 from $25.3 million in 2005, which increased $8.5 million or 50.6 percent from $16.8 million in 2004. Average balances of interest bearing liabilities increased $197.8 million or 16.4 percent to $1,403.9 million in 2006 from $1,206.1 million in 2005, which increased $120.0 million or 11.0 percent from $1,086.1 million in 2004. The increase in average interest bearing liabilities in 2006, compared to 2005, was due to volume increases in interest bearing demand deposits, time deposits and short-term borrowings, partially offset by a slight volume decrease in other borrowed funds. Deposits increased from new customers, existing customers, continued growth resulting from the opening of new branches and increases arising from the acquisition of NYNB. The increase in borrowings was used primarily to fund loan growth. The increase in average interest bearing liabilities in 2005, compared to 2004, was due to increases in interest bearing demand deposits, time deposits and other borrowings, partially offset by a decrease in securities sold under repurchase agreements and other short-term borrowings. The increases in average interest bearing demand deposits and average time deposits in 2005, compared to 2004, resulted from growth in existing customers, new customers and continuing growth resulting from the opening of new branches. The increase in average other borrowings in 2005, compared to 2004, resulted from the full year effect of an addition of $75.0 million in long-term borrowings during 2004, discussed below. The decrease in average securities sold under repurchase agreements and other short-term borrowings in 2005, compared to 2004, resulted primarily from timing of reinvestment of available funds. Overall average increases in funding in 2006 and 2005 were invested in loans and securities. Average interest rates paid on interest bearing liabilities were 2.96 percent in 2006, compared to 2.10 percent in 2005 and 1.55 percent in 2004. As a result of these factors, interest expense on average interest bearing liabilities was higher in 2006 and 2005, compared to their respective prior year periods due to higher volume and higher interest rates.
Average non interest bearing demand deposits increased $39.5 million or 7.0 percent to $602.0 million in 2006 from $562.5 million in 2005, which increased $45.0 million or 8.7 percent from $517.5 million in 2004. Non interest bearing demand deposits are an important component of the Company’s ongoing asset liability management, and also have a direct impact on the determination of net interest income.
The interest rate spread on a tax equivalent basis for each of the three years in the period ended December 31, 2006 is as follows:
2006 | 2005 | 2004 | |||||||||||
Average interest rate on: | |||||||||||||
Total average interest earning assets | 6.97 | % | 6.19 | % | 5.53 | % | |||||||
Total average interest bearing liabilities | 2.96 | 2.10 | 1.55 | ||||||||||
Total interest rate spread | 4.01 | 4.09 | 3.98 |
In 2006, the interest rate spread decreased reflecting a greater increase in interest rates on interest bearing liabilities compared to interest rates on interest earning assets. In 2005, the interest rate spread increased as short-term interest rates rose steadily and longer term rates rose to a lesser degree. The increase was primarily due to earning assets repricing at a faster rate than interest bearing liabilities, and an increase in loans, the Company’s highest yielding asset, as a percentage of total earning assets. Management cannot predict what impact market conditions will have on its interest rate spread and future compression in net interest rate spread may occur.
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Non Interest Income
Non interest income, excluding net realized gains and losses on security sales, was $13.3 million for 2006, an increase of $3.8 million or 40.0 percent compared to $9.5 million in 2005, which increased $4.1 million or 75.9% compared to $5.4 million in 2004. Non interest income includes service charge income, investment advisory fees, gains and losses on securities transactions and other income. Non interest income increased in 2006 and 2005 primarily as a result of an increase in investment advisory fees.
Service charges increased $0.5 million or 12.5 percent to $4.5 million in 2006 from $4.0 million in 2005, which increased $0.6 million or 17.6 percent from $3.4 million in 2004. The increases were primarily due to growth in deposit activity and other service charges and increases in scheduled fees as well as increases resulting from the acquisition of NYNB.
Investment advisory fees increased $2.4 million or 52.1 percent to $7.0 million in 2006 from $4.6 million in 2005, which increased $3.2 million or 228.5 percent from $1.4 million in 2004. The growth in both 2005 and 2006 was primarily due to increases in the investment advisory fees of A.R. Schmeidler & Co., Inc., a money management firm acquired by HVB in the fourth quarter of 2004.
Sales of securities available for sale resulted in net losses of $0.2 million and $1.2 million in 2006 and 2005, respectively, and gains of $1.1 million in 2004. Sales are generally conducted as part of the Company’s overall asset/liability management efforts designed 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 the composition of the balance sheet.
Other income increased $0.8 million or 88.8 percent to $1.7 million in 2006 from $0.9 million in 2005, which increased $0.2 million or 31.7 percent from $0.7 million in 2004. The increase in 2006, compared to 2005 resulted primarily from rental and other miscellaneous income arising from the acquisition of NYNB.
Non Interest Expense
Non interest expense increased $14.1 million or 31.8 percent to $58.4 million in 2006, from $44.3 million in 2005, which increased $7.6 million or 20.7 percent from $36.7 million in 2004. The 2006 increase resulted in part from the addition of $7.3 million of non interest expense of NYNB. The 2005 increase was partially the due to nonrecurring expenses related to the acquisition of New York National Bank and additional professional expenses associated with the requirements of the Sarbanes-Oxley Act of 2002. The remainder of the 2006 and 2005 increases reflects 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 49.6 percent in 2006, compared to 44.6 percent in 2005 and 44.9 percent in 2004.
Salaries and employee benefits, the largest component of non interest expense, increased $7.2 million or 28.1 percent in 2006 to $32.8 million, from $25.6 million in 2005, which increased $4.5 million or 21.3 percent from $21.1 million in 2004. These increases were due to additional staff requirements resulting from the acquisitions of NYNB and A.R. Schmeidler & Co. Inc., the opening of new branches and increases in personnel necessary for the Company to accommodate the growth in 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 2006 and 2005 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 costs associated with related payroll taxes.
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2006 | 2005 | 2004 | ||||||||||
Employees at December 31, | ||||||||||||
Full Time Employees | 395 | 314 | 281 | |||||||||
Part Time Employees | 45 | 45 | 28 |
(000’s except percentages) | ||||||||||||
Salaries and Employee Benefits | ||||||||||||
Salaries | $ | 22,956 | $ | 17,902 | $ | 15,413 | ||||||
Payroll Taxes | 2,005 | 1,472 | 1,217 | |||||||||
Medical Plans | 1,734 | 1,328 | 1,204 | |||||||||
Incentive Compensation Plans | 3,725 | 2,755 | 1,648 | |||||||||
Employee Retirement Plans | 1,657 | 1,570 | 1,278 | |||||||||
Other | 714 | 547 | 312 | |||||||||
Total | $ | 32,791 | $ | 25,574 | $ | 21,072 | ||||||
Percentage of total non interest expense | 56.1 | % | 57.7 | % | 57.4 | % | ||||||
Occupancy expense increased $2.0 million or 52.6 percent to $5.8 million in 2006 from $3.8 million in 2005 which increased $0.7 million or 22.6 percent from $3.1 million in 2004. The increase in 2006 included the addition of costs related to the acquisition of NYNB. The increase in 2005 included costs related to the opening of new branch offices. The increases in both 2005 and 2006 included rising costs on leased facilities, real estate taxes, utility costs, maintenance costs and other costs to operate the Company’s facilities.
Professional services increased $0.6 million or 14.0 percent to $4.9 million in 2006 from $4.3 million in 2005, which was a $0.8 million or 22.9 percent increase from $3.5 million for 2004. The increases in 2006 and 2005 were primarily due to expenses related to the acquisition and operation of NYNB and higher audit costs related to Sarbanes-Oxley compliance and other accounting and regulatory requirements.
Equipment expense increased $0.5 million or 21.7 percent to $2.8 million in 2006 from $2.3 million in 2005, which was a increase of $0.2 million or 9.5 percent from $2.1 million in 2004. The 2006 increase includes additional expenses related to the acquisition of NYNB. The increases in both 2006 and 2005 reflect higher costs to maintain the Company’s equipment and additional equipment necessary to support the Company’s branches.
Business development expense increased $0.4 million or 23.5 percent to $2.1 million in 2006 from $1.7 million in 2005, which was a $0.2 million or 13.3 percent increase over $1.5 million in 2004. The increases reflected costs associated with increased general promotion of products and services, expanded business development efforts and promotion of new branches.
FDIC assessment was $0.4 million for 2006, $0.2 million in 2005 and $0.2 million for 2004. The increases resulted from growth in deposits subject to assessment and, in 2006, increases from the acquisition of NYNB.
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Other operating expenses, as reflected in the following table increased 48.1 percent in 2006 and increased 21.5 percent in 2005.
2006 | 2005 | 2004 | ||||||||||
(000’s except percentages) | ||||||||||||
Other Operating Expenses | ||||||||||||
Other insurance | $ | (9 | ) | $ | (186 | ) | $ | 40 | ||||
Stationery and printing | 1,338 | 872 | 731 | |||||||||
Communications expense | 1,220 | 1,073 | 1,123 | |||||||||
Courier expense | 1,003 | 772 | 750 | |||||||||
Other loan expense | 350 | 351 | 181 | |||||||||
Outside services | 2,537 | 1,587 | 1,256 | |||||||||
Dues, meetings and seminars | 482 | 471 | 204 | |||||||||
Other | 2,659 | 1,529 | 1,038 | |||||||||
Total | $ | 9,580 | $ | 6,469 | $ | 5,323 | ||||||
Percentages of total non interest expense | 16.4 | % | 14.6 | % | 14.5 | % | ||||||
The 2006 increases reflect higher outside service fees, higher customer service related expenses including courier expenses and communications expense, higher dues, meetings and seminar expenses, higher insurance costs and higher stationery and printing costs, all related to Company’s continued growth in customer and business activities, including the acquisition of NYNB.
The 2005 increases reflect higher outside service fees, higher customer service related expenses including courier expenses, higher other loan expenses and higher dues, meetings and seminar expenses, and higher stationery and printing costs, all related to growth in customer and business activities. The 2005 decreases reflect lower insurance costs and lower communication expenses, primarily due to greater efficiencies gained due to a change in service providers.
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 $18.0 million, $16.0 million and $13.4 million were recorded in 2006, 2005 and 2004, respectively. The Company is currently subject to a statutory Federal tax rate of 35 percent, a New York State tax rate of 7.5 percent plus a 17 percent surcharge, and a New York City tax rate of approximately 9 percent. The Company’s overall effective tax rate was 34.6 percent, 34.1 percent and 32.8 percent in 2006, 2005 and 2004, respectively. The increase in the overall effective tax rates for 2006 and 2005, compared to the prior year periods, resulted from increases in the percentages of income subject to Federal, New York State, and New York City taxes.
In the normal course of business, the Company’s Federal, New York State and New York City corporation tax returns are subject to audit. The Company has reached a final agreement with New York State on all open issues for tax years 1996 through 2004, and, as previously reported, the settlement did not have a significant impact on the Company’s financial position or results of operations. Other pertinent tax information is set forth in the Notes to Consolidated Financial Statements included elsewhere herein.
Financial Condition at December 31, 2006 and 2005
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.
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The securities portfolio consists of various debt and equity securities totaling $917.7 million and $884.0 million and FHLB stock totaling $14.0 million and $13.7 million at December 31, 2006 and 2005, respectively.
In accordance with SFAS No. 115, the Company’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. The held to maturity portfolio totaled $39.9 million and $50.1 million at December 31, 2006 and 2005, respectively.
Average aggregate securities and FHLB stock represented 45.2 percent and 48.6 percent of average interest earning assets in 2006 and 2005, 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.
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 and held to maturity at December 31:
2006 (000’s)
Gross | ||||||||||||||||
Unrealized | ||||||||||||||||
Amortized | Estimated | |||||||||||||||
Classified as Available for Sale | Cost | Gains | Losses | Fair Value | ||||||||||||
U.S. Treasury and government agencies | $ | 137,180 | $ | 12 | $ | 2,711 | $ | 134,481 | ||||||||
Mortgage-backed securities | 480,955 | 167 | 9,165 | 471,957 | ||||||||||||
Obligations of states and political subdivisions | 209,502 | 3,427 | 676 | 212,253 | ||||||||||||
Other debt securities | 27,889 | 357 | 5 | 28,241 | ||||||||||||
Total debt securities | 855,526 | 3,963 | 12,557 | 846,932 | ||||||||||||
Mutual funds and other equity securities | 30,644 | 604 | 442 | 30,806 | ||||||||||||
Total | $ | 886,170 | $ | 4,567 | $ | 12,999 | $ | 877,738 | ||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities | $ | 34,791 | — | $ | 596 | $ | 34,195 | |||||||||
Obligations of states and political subdivisions | 5,131 | $ | 93 | 3 | 5,221 | |||||||||||
Total | $ | 39,922 | $ | 93 | $ | 599 | $ | 39,416 | ||||||||
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2005 (000’s)
Gross | ||||||||||||||||
Unrealized | ||||||||||||||||
Amortized | Estimated | |||||||||||||||
Classified as Available for Sale | Cost | Gains | Losses | Fair Value | ||||||||||||
(000’s) | ||||||||||||||||
U.S. Treasuries and government agencies | $ | 119,200 | $ | 1 | $ | 2,969 | $ | 116,232 | ||||||||
Mortgage-backed securities | 468,731 | 448 | 9,761 | 459,418 | ||||||||||||
Obligations of state and political subdivisions | 203,204 | 4,203 | 1,300 | 206,107 | ||||||||||||
Other debt securities | 27,906 | 179 | 246 | 27,839 | ||||||||||||
Total debt securities | 819,041 | 4,831 | 14,276 | 809,596 | ||||||||||||
Mutual funds and other equity securities | 24,159 | 609 | 491 | 24,277 | ||||||||||||
Total | $ | 843,200 | $ | 5,440 | $ | 14,767 | $ | 833,873 | ||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities | $ | 44,990 | — | $ | 499 | $ | 44,491 | |||||||||
Obligations of state and political subdivisions | 5,129 | $ | 36 | 23 | 5,142 | |||||||||||
Total | $ | 50,119 | $ | 36 | $ | 522 | $ | 49,633 | ||||||||
The following table presents the amortized cost of securities at December 31, 2006, 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 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 | $ | 36,255 | 4.76 | % | $ | 80,930 | 3.76 | % | $ | 19,995 | 5.11 | % | — | — | $ | 137,180 | 4.22 | % | ||||||||||||||||||||||
Mortgage-backed securities | 146,039 | 4.84 | 318,829 | 5.08 | 45,790 | 4.88 | $ | 5,088 | 4.90 | % | 515,746 | 4.99 | ||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 32,540 | 7.22 | 78,162 | 7.13 | 101,961 | 5.96 | 1,970 | 6.44 | 214,633 | 6.58 | ||||||||||||||||||||||||||||||
Other debt securities | 27,089 | 7.16 | 800 | 6.31 | — | — | — | — | 27,889 | 7.14 | ||||||||||||||||||||||||||||||
Total | $ | 241,923 | 5.41 | % | $ | 478,721 | 5.19 | % | $ | 167,746 | 5.57 | % | $ | 7,058 | 5.33 | % | $ | 895,448 | 5.32 | % | ||||||||||||||||||||
Estimated fair value | $ | 239,265 | $ | 472,243 | $ | 167,851 | $ | 6,989 | $ | 886,348 | ||||||||||||||||||||||||||||||
Obligations of U.S. Treasury and government agencies principally include U.S. Treasury securities and debentures and notes issued by the FHLB, Fannie Mae, Freddie Mac and the Federal Farm Credit Banks Funding Corporation (“FFCB”). The total balances held of such securities classified as available for sale increased $18.3 million to $134.5 million as of December 31, 2006, from $116.2 million as of December 31, 2005, which decreased $49.8 million from $166.0 million at December 31, 2004. The 2006 increase resulted from purchases of $61.2 million and other increases of $0.3 million partially offset by maturities and calls of $32.5 million and sales of $10.7 million. The 2005 decrease resulted from sales of $50.0 million, maturities and calls of $16.6 million, and other decreases of $2.5 million partially offset by purchases of $19.3 million.
The Company invests in mortgage-backed securities, including CMO’s that are primarily issued by the Government National Mortgage Association (“GNMA”), Fannie Mae, Freddie Mac and, to a lesser extent from time to time, 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. Fannie Mae and Freddie Mac guarantee the payment of interest at the applicable
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Mortgage-backed securities, including CMO’s, classified as available for sale increased $12.6 million to $472.0 million as of December 31, 2006 from $459.4 million as of December 31, 2005, which increased $68.0 million from $391.4 million at December 31, 2004. The 2006 increase was due to purchases of $150.9 million partially offset by principal paydowns of $103.4 million, sales of $34.7 million and other decreases of $0.2 million. The 2005 increase was due to purchases of $184.1 million partially offset by principal paydowns of $107.2 million and other decreases of $8.9 million. The purchases were fixed and variable rate mortgage-backed securities and CMO’s with average lives of less than five years at the time of purchase. The sales were conducted as a result of management’s efforts to reposition the portfolio during the periods of changing economic conditions and interest rates. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $34.8 million at December 31, 2006 which was a decrease of $10.2 million from $45.0 million as of December 31, 2005 which was a decrease of $20.7 million from $65.7 million as of December 31, 2004. The decrease in 2006 was due to principal paydowns of $10.3 million partially offset by other increases of $0.1 million. The decrease in 2005 was due to principal paydowns of $20.9 million partially offset by other increases of $0.2 million.
During 2006, purchases of fixed rate mortgage-backed securities classified as available for sale of $150.9 million and other changes of $12.6 million were partially offset by principal paydowns of $72.5 million and sales of $34.7 million. During 2005, purchases of fixed rate mortgage-backed securities classified as available for sale of $184.1 million were partially offset by sales of principal paydowns of $70.5 million and other changes of $8.9 million. There were no purchases of adjustable rate mortgage-backed securities classified as available for sale or held to maturity during 2006 or 2005. Principal paydowns of adjustable rate mortgage-backed securities were $30.9 million in 2006 and $36.7 million in 2005.
Obligations of states and political subdivisions classified as available for sale increased $6.2 million to $212.3 million at December 31, 2006, from $206.1 million at December 31, 2005, which increased $9.9 million from $196.2 million at December 31, 2004. The 2006 increase resulted from purchases of $35.7 million partially offset by maturities and redemptions of $29.1 million, sales of $0.2 million and other decreases of $0.2 million. The 2005 increase resulted from purchases of $33.6 million partially offset by maturities and calls of $20.8 million and other decreases of $2.9 million. Obligations of states and political subdivisions classified as held to maturity totaled $5.1 million at both December 31, 2006 and December 31, 2005. The obligations at year end 2006 were comprised of approximately 68 percent for New York State political subdivisions and 32 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.
Other debt securities classified as available for sale increased $0.4 million to $28.2 million at December 31, 2006 from $27.8 million at December 31, 2005, which decreased $1.4 million from $29.2 million at December 31, 2004. The 2006 increase was due to purchases of $0.4 million and other increases of $0.3 million partially offset by maturities and calls of $0.3 million. The 2005 decrease was due to maturities and calls of $1.3 and other decreases of $0.1 million. The purchases consisted of fixed rate corporate bonds and variable rate trust preferred securities acquired as part of the Company’s redeployment of the proceeds from maturing short term investments. There were no other debt securities classified as held to maturity during 2006, 2005 or 2004.
Mutual funds and other equities classified as available for sale totaled $30.8 million at December 31, 2006, which increased $6.5 million from $24.3 million at December 31, 2005, which was an increase of $2.8 million from $21.5 million at December 31, 2004. The 2006 increase was due to purchases of $6.5 million. The 2005 increase was due to purchases of $3.1 million and other decreases of $0.3 million. The purchases were shares of a mutual fund which invests primarily in variable rate mortgage-backed securities with characteristics consistent with the Company’s investment strategy. There were no mutual funds or other equities classified as held to maturity during 2006, 2005 or 2004.
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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 underlying credit. These non-rated securities outstanding at December 31, 2006 totaled approximately $11.5 million comprised primarily of obligations of municipalities located within the Company’s market area. The Banks, as a members of the FHLB, invest in stock of the FHLB as a prerequisite to obtaining funding under various advance programs offered by the FHLB. The Banks 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 securities 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, there were no obligations of any single issuer which exceeded ten percent of stockholders’ equity at December 31, 2006.
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 Company originates these loans primarily for its portfolio, although a portion of its residential real estate loans, in addition to meeting the Company’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 Company on a fixed or variable rate basis generally with up to 10 year terms. Amortizations generally range up to 25 years. The Company also originates 15 year fixed rate self-amortizing commercial mortgages.
In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loan. The Company generally utilizes licensed or certified appraisers, previously approved by the Company, 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. The Company generally requires lease assignments where applicable. 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.
Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied. These types of loans 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, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions affecting the borrowers’ business.
Construction loans are short-term loans (generally up to 18 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. The loan amount is generally limited to 65% to 75% of completed value, depending on the type of property. Most non-residential construction loans require pre-approved permanent financing or pre-leasing by the company or other Bank providing the permanent financing. The Company funds construction of single family homes and commercial real estate, when no contract of sale exists, based upon the experience of the builder, the financial strength of the owner, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the
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Residential real estate loans are offered by the Company with terms of up to 30 years and loan to value ratios of up to 80%. The Company 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 Fannie Mae and Freddie Mac guidelines. 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 Company offers a variety of home equity line of credit products. These products include credit lines on primary residences, vacation homes and 1-6 unit residential investment properties. Low cost and no income verification options are available to qualified borrowers who intend to actively utilize the lines. Depending on the product, loan amounts of $50,000 to $2,000,000 are available for terms ranging from 5 years to 30 years with various repayment terms. Required combined maximum loan to value ratios range from 65% to 80%, and the lines generally have interest rates ranging from the prime rate minus 1% (prime rate as published in the Wall Street Journal) to prime plus 1%.
Commercial and Industrial Loans: The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to 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, often with real estate as secondary collateral, 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 terms of 1 to 5 years with, exceptionally, longer terms. In granting this type of loan, the Company 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 Company generally requires a debt service coverage ratio of at least 125%. Commercial loans are often larger and may involve greater risks than other types of loans offered by the Company. 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 Company’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 Company offers installment loans and reserve lines of credit to individuals. Installment loans are limited to $50,000 and lines of credit are generally limited to $5,000. These loans have terms up to 5 years 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 Company does not place an emphasis on originating these types of loans.
The Company also originates 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, energy saving improvements 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.
Average net loans increased $202.4 million or 21.8 percent to $1,131.3 million in 2006 from $928.9 million in 2005, which increased $148.5 million or 19.0 percent from $780.3 million in 2004. Gross loans increased $199.1 million or 19.4 percent to $1,225.4 million at December 31, 2006 from $1,026.4 million at
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• | Increase of $69.8 million and decrease of $13.1 million in 2006 and 2005, respectively, in commercial real estate mortgages. The increase was due to the acquisition of NYNB and increased activity in commercial mortgages and the decreases was due primarily to accelerated prepayment experience due to the low interest rate environment, | |
• | Increases in construction loans of $74.2 million and $62.7 million in 2006 and 2005, respectively, resulting from a greater emphasis on this product including an expanded offering and focused marketing, | |
• | Increases in residential real estate mortgages of $13.2 million and $54.0 million in 2006 and 2005, respectively, primarily as a result of increased activity primarily in multi-family loans and the acquisition of NYNB, | |
• | Increases in commercial and industrial loans of $38.3 million and $39.9 million in 2006 and 2005, respectively, primarily due to increased activity and a greater emphasis on this product with resulting increased market penetration and the acquisition of NYNB, | |
• | Increases of $0.4 million and $2.1 million in 2006 and 2005, respectively, in lease financings, and | |
• | Increases in loans to individuals of $3.1 million and $3.8 million in 2006 and 2005, respectively. |
Major classifications of loans, including loans held for sale, at December 31 are as follows:
(000’s) | |||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||
Real Estate: | |||||||||||||||||||||
Commercial | $ | 290,185 | $ | 220,384 | $ | 233,452 | $ | 241,566 | $ | 231,411 | |||||||||||
Construction | 252,941 | 178,731 | 116,064 | 60,892 | 56,691 | ||||||||||||||||
Residential | 289,553 | 276,384 | 222,392 | 178,518 | 164,287 | ||||||||||||||||
Commercial and industrial | 355,214 | 316,907 | 277,013 | 218,130 | 179,288 | ||||||||||||||||
Individuals | 28,777 | 25,632 | 21,787 | 15,256 | 14,509 | ||||||||||||||||
Lease financing | 8,766 | 8,348 | 6,276 | 6,000 | 9,224 | ||||||||||||||||
Total | 1,225,436 | 1,026,386 | 876,984 | 720,362 | 655,410 | ||||||||||||||||
Deferred loan fees | (3,408 | ) | (3,042 | ) | (2,687 | ) | (1,817 | ) | (1,462 | ) | |||||||||||
Allowance for loan losses | (16,784 | ) | (13,525 | ) | (11,801 | ) | (11,441 | ) | (11,510 | ) | |||||||||||
Loans, net | $ | 1,205,244 | $ | 1,009,819 | $ | 862,496 | $ | 707,104 | $ | 642,438 | |||||||||||
The Company’s primary lending emphasis is for loans to businesses and developers, primarily in the form of commercial and multi-family residential 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 2006 and 2005, 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, 2006, the Company had total gross loans with fixed rates of interest of $608.6 million, or 49.7 percent, and total gross loans with variable or floating rates of interest of $616.9 million, or 50.3 percent, as compared to $456.1 million or 44.4 percent of fixed rate loans and $570.3 million or 55.6 percent of variable or floating rate loans at December 31, 2005.
At December 31, 2006 and 2005, the Company had approximately $300.7 million and $306.6 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, 2006 excluding loans to individuals, real estate mortgages (other than construction loans) and lease financings, and the amount of
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(000’s except percentages) | ||||||||||||||||||||
After 1 | ||||||||||||||||||||
Within 1 | But within | After 5 | ||||||||||||||||||
Year | 5 years | Years | Total | Percent | ||||||||||||||||
Loans: | ||||||||||||||||||||
Real estate — commercial | $ | 39,150 | $ | 157,106 | $ | 93,929 | $ | 290,185 | 32.3 | % | ||||||||||
Real estate — construction | 231,495 | 21,446 | — | 252,941 | 28.2 | |||||||||||||||
Commercial and industrial | 110,126 | 148,752 | 96,336 | 355,214 | 39.5 | |||||||||||||||
Total | $ | 380,771 | $ | 327,234 | $ | 190,265 | $ | 898,340 | 100.0 | % | ||||||||||
Rate Sensitivity: | ||||||||||||||||||||
Fixed or predetermined interest rates | $ | 49,001 | $ | 277,024 | $ | 169,434 | $ | 495,459 | 55.2 | % | ||||||||||
Floating or adjustable interest rates | 331,770 | 50,280 | 20,831 | 402,881 | 44.8 | |||||||||||||||
Total | $ | 380,771 | $ | 327,304 | $ | 190,265 | $ | 898,340 | 100.0 | % | ||||||||||
Percent | 42.4 | % | 36.4 | % | 21.2 | % | 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.
The following table summarizes the Company’s non-accrual loans, loans past due 90 days or more and still accruing, restructured loans, Other Real Estate Owned (“OREO”) and related interest income not recorded on non-accrual loans as of and for the year ended December 31:
(000’s except percentages) | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Non-accrual loans at year end | $ | 5,572 | $ | 3,837 | $ | 2,301 | $ | 2,913 | $ | 4,758 | ||||||||||
OREO at year end | — | — | — | — | 1,831 | |||||||||||||||
Restructured loans at year end | — | — | — | — | — | |||||||||||||||
Total nonperforming assets | $ | 5,572 | $ | 3,837 | $ | 2,301 | $ | 2,913 | $ | 6,589 | ||||||||||
Loans past due 90 days or more and still accruing | 3,879 | 3,522 | 3,227 | 1,431 | 1,596 | |||||||||||||||
Additional interest income that would have been recorded if these borrowers had complied with contractual loan terms | 474 | 283 | 243 | 188 | 179 | |||||||||||||||
Nonperforming assets to total assets at year end | 0.24 | % | 0.19 | % | 0.13 | % | 0.17 | % | 0.43 | % |
At December 31, 2006, the Company had no commitments to lend additional funds to customers with non-accrual or restructured loan balances. Non-accrual loans increased $1.8 million to $5.6 million at December 31, 2006 from $3.8 million at December 31, 2005, which increased $1.5 million from $2.3 million at December 31, 2004. 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, 2006, loans that aggregated approximately $33.6 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. There were no restructured loans considered to be impaired at December 31, 2006, 2005 and 2004.
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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 $5.6 million, $3.8 million and $2.3 million at December 31, 2006, 2005 and 2004, 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 and other identified problem loans was $1.8 million, $1.3 million and $1.6 million at December 31, 2006, 2005 and 2004, respectively. The average recorded investment in impaired loans for the years ended December 31, 2006, 2005 and 2004 was approximately $5.3 million, $3.7 million and $2.7 million, respectively.
Allowance for Loan Losses and Provision for Loan Losses
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The Company’s methodology for assessing the appropriateness of the allowance consists of several key components, which include a specific component for identified problem loans, a formula component, and an unallocated component. The specific component 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 component 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 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 component.
The appropriateness of the unallocated component is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company 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 component. 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.
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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, | ||||||||||||||||
2006 | During 2006 | 2005 | During 2005 | 2004 | ||||||||||||||||
Components: | ||||||||||||||||||||
Specific | $ | 1,795 | $ | 495 | $ | 1,300 | $ | (315 | ) | $ | 1,615 | |||||||||
Formula | 1,089 | 464 | 625 | (761 | ) | 1,386 | ||||||||||||||
Unallocated | 13,900 | 2,300 | 11,600 | 2,800 | 8,800 | |||||||||||||||
Total Allowance | $ | 16,784 | $ | 13,525 | $ | 11,801 | ||||||||||||||
Net Change | 3,259 | 1,724 | ||||||||||||||||||
Amount Acquired | 1,529 | — | ||||||||||||||||||
Net recoveries/(charge-offs) | (400 | ) | (335 | ) | ||||||||||||||||
Provision for loan losses | $ | 2,130 | $ | 2,059 | ||||||||||||||||
Change | December 31, | Change | December 31, | |||||||||||||
During 2004 | 2003 | During 2003 | 2002 | |||||||||||||
Components: | ||||||||||||||||
Specific | $ | 83 | $ | 1,532 | $ | 250 | $ | 1,282 | ||||||||
Formula | 77 | 1,309 | (19 | ) | 1,328 | |||||||||||
Unallocated | 200 | 8,600 | (300 | ) | 8,900 | |||||||||||
Total Allowance | $ | 11,441 | $ | 11,510 | ||||||||||||
Net Change | 360 | (69 | ) | |||||||||||||
Net recoveries/(charge-offs) | (113 | ) | (506 | ) | ||||||||||||
Provision for loan losses | $ | 473 | $ | 437 | ||||||||||||
The changes in the specific component of the allowance for loan losses are the result of our analysis of impaired loans and other identified problem 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 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:
2006
• | Economic and business conditions — Indications of increased inflation, such as the pronounced rise in energy costs, increases in the cost of raw materials used in construction, significant increases in real estate taxes within the Company’s market area and the steady rise in short-term interest rates which began in the third quarter of 2004, continued throughout 2005 and the first half of 2006. Such conditions have had negative effects on the demand for and value of real estate, the primary collateral for the Company’s loans, and the ability of borrowers to repay their loans. Consideration of such events |
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that trigger economic uncertainty or possible slowing economic conditions are part of the determination of the unallocated component of the allowance. | ||
• | Concentration — Construction loans increased to $252.9 million or 20.6 percent of total loans at December 31, 2006 from $178.7 million or 17.4 percent of total loans at December 31, 2005. These loans generally have a higher degree of risk than other types of loans which the Company makes, since repayment of the loans is generally dependent on the borrowers’ ability to successfully construct and sell or lease completed properties. Increases in such concentrations, and the associated increase in risk, is not reflected in the formula component of the allowance due to the lag caused by using three years historical losses in determining the loss factors. Therefore, consideration of changes in concentrations is a part of the determination of the unallocated component of the allowance. | |
• | Credit quality — Delinquencies increased within HVB and NYNB’s portfolios during the year ended December 31, 2006. In addition, the dollar amount of nonperforming loans increased, partially due to the addition of $1.0 million of nonperforming loans acquired with NYNB. Although the Company’s regular periodic loan review process noted continued strength in overall credit quality, the continuation of recent trends of rising construction, energy and interest costs, as well as real estate taxes, an increase in the inventory of new residential construction and its time on the market and recent indications of a decline in real estate values in the Company’s primary market area may negatively impact the borrowers’ ability to pay and collateral values. Certain loans were downgraded due to potential deterioration of collateral values, the borrowers’ cash flows or other specific factors that negatively impacted the borrowers’ ability to meet their loan obligations. Certain of these 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. | |
• | Loan Participations — We expanded the number of banks from which we will purchase loan participations, particularly outside our primary market area. While we review each loan, we greatly rely on the other bank’s knowledge of their customer and marketplace. Since many of these relationships are new, we do not yet have an established record of performance and, therefore, any probable losses with respect to these new loan participation relationships are not reflected in the formula component of the allowance for loan losses. |
As a result of our detailed review process and consideration of the identified relevant factors, management determined that a $2.3 million increase in the unallocated component of the allowance to $13.9 million reflects our best estimate of probable losses which have been incurred as of December 31, 2006.
2005
• | Economic and business conditions — Signs of increased inflation, such as the recent pronounced rise in energy costs, increases in the cost of raw materials used in construction, significant increases in real estate taxes within the Company’s market area and the gradual rise in short-term interest rates which began in the third quarter of 2004, continued throughout 2005 and into the first quarter of 2006. Continuation of such conditions could have negative effects on the demand for or value of real estate, the primary collateral for the Company’s loans, and the ability of borrowers to repay their loans. Consideration of such events that trigger economic uncertainty is part of the determination of the unallocated component of the allowance. | |
• | Concentration — Concentration in construction loans increased to 17.4 percent of total loans at December 31, 2005 from 13.2 percent at December 31, 2004. These loans generally have a higher degree of risk than other types of loans which the Company makes, since repayment of the loans is generally dependent on the borrowers’ ability to successfully construct and sell or lease completed properties. Increases in such concentrations, and the associated increase in risk, is not reflected in the formula component of the allowance due to the lag caused by using three years historical losses in determining the loss factors. Therefore consideration of changes in concentrations is a part of the determination of the unallocated component of the allowance. |
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• | Credit quality — Delinquencies increased slightly during the year ended December 31, 2005, and the dollar amount of nonperforming loans also increased, primarily due to the addition of a $1.6 million construction loan on which the Company has been notified of a title issue on its collateral, apparently as a result of fraudulent satisfactions filed by the borrower on the Company’s lien and a prior lien. Other than the aforementioned loan, the Company’s regular periodic loan review process noted continued strength in overall credit quality which is believed to have been mainly attributable to the continued strength in real estate values in the Company’s primary market area. However, continuation of recent trends of rising construction, energy and interest costs, as well as real estate taxes, may negatively impact the borrowers’ ability to pay and collateral values. Certain loans were downgraded due to potential deterioration of collateral values, the borrower’s cash flows or other specific factors that negatively impact the borrower’s ability to meet their loan obligations. Certain of these loans, including the aforementioned $1.6 million loan, 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 Company introduced a series of low cost home equity products since the fourth quarter of 2002. As of December 31, 2005, home equity loans represent approximately 7.8 percent of total loans. Any probable losses with respect to these products are not reflected in the formula component of the allowance for loan losses since there is no loss history. |
As a result of our detailed review process and consideration of the identified relevant factors, management determined that a $2.8 million increase in the unallocated component of the allowance to $11.6 million reflects our best estimate of probable losses which have been incurred as of December 31, 2005.
2004
• | Economic and business conditions — Continuation of the improvements in the overall economy which began during the second half of 2003, as evidenced by reduced unemployment and improvements in productivity and corporate profits, became less certain during the second half of 2004. Signs of increased inflation, such as the recent pronounced rise in energy costs, increases in the cost of raw materials used in construction and significant increases in real estate taxes within the Company’s market area, as well as a rise in short-term interest rates, which began in the third quarter of 2004 and has continued into the first quarter of 2005, could have negative effects on the demand for or value of real estate, the primary collateral for the Company’s loans, and the ability of borrowers to repay their loans. Consideration of such events that trigger economic uncertainty is part of the determination of the unallocated component of the allowance. | |
• | Concentration — Concentration in construction loans increased to 13.2 percent of total loans at December 31, 2004 from 8.5 percent at December 31, 2003. These loans generally have a higher degree of risk than other types of loans which the Company makes, since repayment of the loans is generally dependent on the borrowers’ ability to successfully construct and sell or lease completed properties. In addition, concentration in commercial and industrial loans increased to 31.6 percent of total loans at December 31, 2004 from 30.3 percent at December 31, 2003. These loans also generally have a higher degree of risk than other types of loans which the Company makes since repayment of these loans is largely based on the borrowers’ ability to successfully operate their businesses. Increases in such concentrations, and the associated increase in risk, is not reflected in the formula component of the allowance due to the lag caused by using three years historical losses in determining the loss factors. Therefore consideration of changes in concentrations is a part of the determination of the unallocated component of the allowance. | |
• | Credit quality — Nonperforming loans decreased during the year ended December 31, 2004, although the Company experienced an increase in delinquencies. As a result of the Company’s regular periodic loan review process, management noted overall improvement in credit quality which is believed to have been mainly attributable to the continued rise in real estate values in the Company’s primary market |
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area. However, continuation of recent trends of rising construction, energy and interest costs may negatively impact the borrowers’ ability to meet their loan obligations. Certain loans were downgraded due to potential deterioration of collateral values, the borrowers’ cash flows or other specific factors that negatively impact the borrowers’ ability to meet their loan obligations. Certain of these 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 Company has introduced several low cost home equity products since the fourth quarter of 2002. As of December 31, 2004, home equity loans represent approximately 7.2% of total loans. Any probable losses with respect to these products are not reflected in the formula component of the allowance for loan losses since there is no loss history. |
As a result of our detailed review process and consideration of the identified relevant factors, management determined that a $200,000 increase in the unallocated component of the allowance to $8.8 million reflects our best estimate of probable losses which have been incurred as of December 31, 2004.
A summary of the allowance for loan losses for each of the prior five years ended December 31, is as follows:
(000’s except percentages) | ||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||
Net loans outstanding at end of year | $ | 1,205,243 | $ | 1,009,819 | $ | 862,496 | $ | 707,104 | $ | 642,438 | ||||||||||||
Average net loans outstanding during the year | 1,131,300 | 928,866 | 780,331 | 662,800 | 619,098 | |||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance, beginning of year | $ | 13,525 | $ | 11,801 | $ | 11,441 | $ | 11,510 | $ | 8,018 | ||||||||||||
Amount acquired | 1,529 | — | — | — | — | |||||||||||||||||
Provision charged to expense | 2,130 | 2,059 | 473 | 437 | 3,902 | |||||||||||||||||
17,184 | 13,860 | 11,914 | 11,947 | 11,920 | ||||||||||||||||||
Charge-offs and recoveries during the year: | ||||||||||||||||||||||
Charge offs: | ||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||
Commercial | — | — | (62 | ) | (540 | ) | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||||
Residential | (153 | ) | — | — | — | — | ||||||||||||||||
Commercial and industrial | (216 | ) | (318 | ) | (102 | ) | (176 | ) | (290 | ) | ||||||||||||
Lease financing and individuals | (76 | ) | (53 | ) | (30 | ) | (1 | ) | (189 | ) | ||||||||||||
Recoveries: | ||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||
Commercial | — | 4 | — | — | — | |||||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||||
Residential | — | — | — | — | — | |||||||||||||||||
Commercial and industrial | 22 | 26 | 72 | 197 | 66 | |||||||||||||||||
Lease financing and individuals | 23 | 6 | 9 | 14 | 3 | |||||||||||||||||
Net charge-offs during the year | (400 | ) | (335 | ) | (113 | ) | (506 | ) | (410 | ) | ||||||||||||
Balance, end of year | $ | 16,784 | $ | 13,525 | $ | 11,801 | $ | 11,441 | $ | 11,510 | ||||||||||||
Ratio of net charge-offs to average net loans outstanding during the year | 0.04 | % | 0.04 | % | 0.01 | % | 0.08 | % | 0.07 | % | ||||||||||||
Ratio of allowance for loan losses to gross loans outstanding at end of the year | 1.39 | % | 1.32 | % | 1.35 | % | 1.59 | % | 1.76 | % |
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The distribution of our allowance for loan losses at the dates indicated is summarized as follows:
2006 | 2005 | ||||||||||||||||||||||||
Percentage | Percentage | ||||||||||||||||||||||||
of Loans | of Loans | ||||||||||||||||||||||||
in each | in each | ||||||||||||||||||||||||
Amount of | Loan | Category | Amount of | Loan | Category | ||||||||||||||||||||
Loan Loss | Amounts | by Total | Loan Loss | Amounts | by Total | ||||||||||||||||||||
Allowance | by Category | Loans | Allowance | by Category | Loans | ||||||||||||||||||||
Real Estate: | |||||||||||||||||||||||||
Commercial | $ | 337 | $ | 290,185 | 23.68 | % | $ | 168 | $ | 220,384 | 21.47 | % | |||||||||||||
Construction | 800 | 252,941 | 20.64 | % | 800 | 178,731 | 17.41 | % | |||||||||||||||||
Residential | 16 | 289,553 | 23.63 | % | 153 | 276,384 | 26.93 | % | |||||||||||||||||
Commercial and industrial | 1,389 | 355,214 | 28.99 | % | 794 | 316,907 | 30.88 | % | |||||||||||||||||
Lease financing and individuals | 342 | 37,543 | 3.06 | % | 10 | 33,980 | 3.31 | % | |||||||||||||||||
Unallocated | 13,900 | — | — | 11,600 | — | — | |||||||||||||||||||
Total | $ | 16,784 | $ | 1,225,436 | 100.00 | % | $ | 13,525 | $ | 1,026,386 | 100.00 | % | |||||||||||||
2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||||||
Percentage | Percentage | Percentage | |||||||||||||||||||||||||||||||||||
of Loans | of Loans | of Loans | |||||||||||||||||||||||||||||||||||
in each | in each | in each | |||||||||||||||||||||||||||||||||||
Amount of | Loan | Category | Amount of | Loan | Category | Amount of | Loan | Category | |||||||||||||||||||||||||||||
Loan Loss | Amounts | by Total | Loan Loss | Amounts | by Total | Loan Loss | Amounts | by Total | |||||||||||||||||||||||||||||
Allowance | by Category | Loans | Allowance | by Category | Loans | Allowance | by Category | Loans | |||||||||||||||||||||||||||||
Real Estate: | |||||||||||||||||||||||||||||||||||||
Commercial | $ | 779 | $ | 233,452 | 26.62 | % | $ | 167 | $ | 241,566 | 33.53 | % | $ | 375 | $ | 231,411 | 35.31 | % | |||||||||||||||||||
Construction | 122 | 116,064 | 13.23 | % | 79 | 60,892 | 8.45 | % | 100 | 56,691 | 8.65 | % | |||||||||||||||||||||||||
Residential | — | 222,392 | 25.36 | % | 85 | 178,518 | 24.78 | % | 12 | 164,287 | 25.07 | % | |||||||||||||||||||||||||
Commercial and industrial | 2,091 | 277,013 | 31.59 | % | 2,498 | 218,130 | 30.28 | % | 2,116 | 179,288 | 27.36 | % | |||||||||||||||||||||||||
Lease financing and individuals | 9 | 28,063 | 3.20 | % | 12 | 21,256 | 2.96 | % | 7 | 23,733 | 3.61 | % | |||||||||||||||||||||||||
Unallocated | 8,800 | — | — | 8,600 | — | — | 8,900 | — | — | ||||||||||||||||||||||||||||
Total | $ | 11,801 | $ | 876,984 | 100.00 | % | $ | 11,441 | $ | 720,362 | 100.00 | % | $ | 11,510 | $ | 655,410 | 100.00 | % | |||||||||||||||||||
Actual losses can vary significantly from the estimated amounts. The Company’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 Banks are 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, 2006. 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 2004, the FDIC and the New York State Banking Department completed examinations of the Bank. The regulatory agencies concluded that the process of internal asset review and the allowance for loan losses were adequate.
Provision for Loan Losses
The Company recorded a provision for loan losses of $2.1 million during 2006, $2.1 million during 2005 and $0.5 million during 2004. The provision for loan losses is charged to income to bring the Company’s allowance for loan losses to a level deemed appropriate by management based on the factors previously discussed under “Allowance for Loan Losses.”
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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 businesses, professionals, municipalities, not-for-profit organizations 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) | ||||||||
2006 | 2005 | |||||||
Demand deposits | $ | 644,447 | $ | 576,032 | ||||
Money market accounts | 417,089 | 421,720 | ||||||
Savings accounts | 95,741 | 73,028 | ||||||
Time deposits of $100,000 or more | 197,794 | 149,231 | ||||||
Time deposits of less than $100,000 | 112,089 | 57,217 | ||||||
Checking with interest | 159,281 | 130,768 | ||||||
Total | $ | 1,626,441 | $ | 1,407,996 | ||||
At December 31, 2006 and 2005, certificates of deposits and other time deposits of $100,000 or more totaled $197.8 million and $149.2 million, respectively. At December 31, 2006, such deposits classified by time remaining to maturity were as follows:
(000’s) | ||||
3 months or less | $ | 142,844 | ||
Over 3 through 6 months | 22,544 | |||
Over 6 through 12 months | 32,406 | |||
Over 12 months | — | |||
Total | $ | 197,794 | ||
Total deposits at December 31, 2006 increased $218.4 million or 15.5 percent to $1,626.4 million, from $1,408.0 million at December 31, 2005, which increased $172.7 million or 14.0 percent from $1,235.3 million at December 31, 2004. Average deposits outstanding increased $177.1 million or 13.3 percent to $1,512.6 million in 2006 from $1,335.5 million in 2005, which increased $144.7 million or 12.2 percent from $1,190.8 million in 2004. Excluding municipal CD’s, which are acquired on a bid basis, total deposits increased 15.1 percent and 14.0 percent, and average deposits increased 13.2 percent and 12.3 percent in 2006 and 2004, respectively.
Average non interest bearing deposits increased $39.5 million or 7.0 percent to $602.0 million in 2006 from $562.5 in 2005 which increased $45.0 million or 8.7 percent from $517.5 million in 2004. These increases reflect the Company’s continuing emphasis on developing this funding source. Average interest bearing deposits in 2006 increased $137.7 million or 17.8 percent reflecting increases in checking with interest accounts, money market accounts, savings accounts and time deposits. Average interest bearing deposits in 2005 increased $99.7 million or 14.8 percent reflecting increases in checking with interest accounts, money market accounts, savings accounts and time deposits.
Average money market deposits increased $47.4 million or 12.3 percent in 2006 and $57.1 million or 17.5 percent in 2005, due in part to new customer accounts, increased activity in existing accounts, the addition of new branches and the acquisition of NYNB.
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Average checking with interest deposits increased $8.9 million or 7.1 percent in 2006 and $15.4 million or 14.0 percent in 2005 primarily as a result of new customer accounts, increased activity in existing accounts, the addition of new branches and the acquisition of NYNB.
Average time deposits increased $58.1 million or 30.8 percent in 2006 and $23.1 million or 14.0 percent in 2005. The increases were a result of increased activity in brokered CD’s, the acquisition of NYNB, new customer accounts, increased activity in existing accounts, and the addition of new branches.
Average savings deposit balances increased $23.3 million or 31.3 percents in 2006 and $4.0 million or 5.7 percent in 2005. These increases were a result of new customer accounts, increased activity in existing accounts the addition of new branches and the acquisition of NYNB.
Time deposits of over $100,000, including municipal CD’s, increased $48.6 million at December 31, 2006 and increased $42.5 million at December 31, 2005, respectively, compared to the prior year end balances. Municipal CD’s are used to expand or maintain lower cost municipal deposits, fund securities purchases and for capital leveraging. These CD’s are primarily short term and are acquired on a bid basis. Time deposits of over $100,000 generally have maturities of 7 to 180 days.
The Company also utilizes wholesale borrowings, brokered deposits 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 funding sources, the Company can experience higher volatility of interest margins during periods of both rising and declining interest rates. At December 31, 2006, the Company had $50.0 million in 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, | ||||||||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
Demand deposits — Non interest bearing | $ | 601,983 | — | $ | 562,533 | — | $ | 517,532 | — | |||||||||||||||
Money market accounts | 431,628 | 2.07 | % | 384,214 | 1.07 | % | 327,055 | 0.56 | % | |||||||||||||||
Savings accounts | 97,567 | 0.69 | % | 74,317 | 0.52 | % | 70,321 | 0.23 | % | |||||||||||||||
Time deposits | 246,538 | 3.32 | % | 188,460 | 2.07 | % | 165,349 | 1.19 | % | |||||||||||||||
Checking with interest | 134,874 | 0.78 | % | 125,934 | 0.37 | % | 110,499 | 0.22 | % | |||||||||||||||
Total | $ | 1,512,590 | 1.25 | % | $ | 1,335,458 | 0.66 | % | $ | 1,190,756 | 0.35 | % | ||||||||||||
Borrowings
Borrowings with original maturities of one year or less totaled $207,188 and $172,115 at December 31, 2006 and 2005, respectively. Such short-term borrowings consisted of securities sold under agreements to repurchase of $192,645 and $171,463 and note options on Treasury, tax and loan of $543 and $652 at December 31, 2006 and 2005, respectively, and overnight borrowings of $14,000 at December 31, 2006. Other borrowings totaled $249,371 and $263,097 at December 31, 2006 and 2005, respectively, which consisted of borrowings of $227,750 and $242,750 from the FHLB with initial stated maturities of five or ten years and one to four year call options and non callable FHLB borrowings of $21,621 and $20,347 at December 31, 2006 and 2005, respectively.
The callable borrowings from the FHLB mature beginning in 2008 through 2016. The FHLB has the right to call all of such borrowings at various dates in 2007 and quarterly thereafter. A non callable borrowing of $1,300 matures in 2027 and a non callable borrowing of $20,000 matures in 2011.
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Interest expense on all borrowings totaled $22,741, $16,436 and $12,611 in 2006, 2005 and 2004, 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:
(000’s except percentages) | ||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||
Average balance: | Short-term | $ | 234,959 | $ | 170,072 | $ | 181,870 | |||||||||
Other borrowings | 258,308 | 263,108 | 231,014 | |||||||||||||
Weighted average interest rate (for the year): | Short-term | 4.8 | % | 2.9 | % | 1.2 | % | |||||||||
Other borrowings | 4.5 | 4.4 | 4.5 | |||||||||||||
Weighted average interest rate (at year end): | Short-term | 2.0 | % | 2.6 | % | 1.7 | % | |||||||||
Other borrowings | 4.8 | 4.4 | 4.3 | |||||||||||||
Maximum month-end outstanding amount: | Short-term | $ | 289,575 | $ | 200,423 | $ | 216,920 | |||||||||
Other borrowings | 264,395 | 263,119 | 263,125 |
At December 31, 2006, the Company had available unused short-term lines of credit of $200 million from a large New York based investment banking firm, $186 million from the FHLB, $85 million from correspondent banks and $331 million in available borrowings under Retail CD Agreements with two major investment banking firms, all of which are subject to various terms and conditions.
Capital Resources
Stockholders’ equity increased $15.8 million or 9.3 percent to $185.6 million at December 31, 2006 from $169.8 million at December 31, 2005, which increased $10.1 million or 6.3 percent from $159.7 million at December 31, 2004. The 2006 increase resulted from net income of $34.1, net processed from stock options exercised of $4.5 million and proceeds from the sale of treasury stock of $0.2 million partially offset by cash dividends of $15.8 million, purchases of treasury stock of $6.6 million an a reduction of accumulated other comprehensive income of $0.6 million. The 2005 increase resulted from net income of $30.9 million, net proceeds from stock options exercised of $4.7 million, and proceeds from sales of treasury stock of $0.3 million, partially offset by cash dividends paid of $13.7 million, purchases of treasury stock of $5.5 million and a reduction of accumulated other comprehensive income of $6.6 million.
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. HVB’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, 2006, 2004 and 2004 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.
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The risk-based capital ratios at December 31, follow:
2006 | 2005 | 2004 | |||||||||||
Tier 1 capital: | |||||||||||||
Company | 12.3 | % | 13.8 | % | 14.5 | % | |||||||
HVB | 12.3 | 13.8 | 14.4 | ||||||||||
NYNB | 12.5 | — | — | ||||||||||
Total capital: | |||||||||||||
Company | 13.5 | % | 14.9 | % | 15.6 | % | |||||||
HVB | 13.5 | 14.9 | 15.5 | ||||||||||
NYNB | 13.7 | — | — |
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:
2006 | 2005 | 2004 | ||||||||||
Company | 7.8 | % | 8.3 | % | 8.2 | % | ||||||
HVB | 7.8 | 8.1 | 8.1 | |||||||||
NYNB | 7.0 | — | — |
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 Banks all current regulatory capital requirements to be considered in the “well capitalized” category at December 31, 2006. Management plans to conduct the affairs of the Banks so as to maintain a strong capital position in the future.
Liquidity
The Asset/ Liability Strategic Committee (“ALSC”) of the Board of Directors of HVB 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 Company’s liquid assets, at December 31, 2006, include cash and due from banks of $61.8 million and Federal funds sold of $11.9 million. Federal funds sold represents the Company’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 reinvestable 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 having contractual maturities, expected call dates or average lives of one year or less amounted to $153.3 million at December 31, 2006. This represented 17.3 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $341.6 million, or 27.9 percent of loans at December 31, 2006, mature in one year or less. The Company may increase liquidity by selling certain residential mortgages, or exchanging them for mortgage-backed securities that may be sold in the secondary market.
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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.
HVB and NYNB are members of the FHLB. HVB has a borrowing capacity of up to $186 million under two lines of credit at December 31, 2006, at various terms secured by FHLB stock owned and to be purchased and certain other assets of HVB. HVB had $14.0 outstanding under these lines from the FHLB at December 31, 2006. The Company’s short-term borrowings included $192.6 million under securities sold under agreements to repurchase at December 31, 2006, and had securities totaling $287.4 million at December 31, 2006 that could be sold under agreements to repurchase, thereby increasing liquidity. In addition, HVB has agreements with two investment firms to borrow up to $110 million under Retail CD Brokerage Agreements and has agreements with correspondent banks for purchasing Federal funds up to $80 million. 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 Company also has outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to the Company’s obligations. 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. The Company is also obligated under leases or license agreements for certain of its branches and equipment.
A summary of significant long-term contractual obligations and credit commitments at December 31, 2006 follows:
After 1 Year | After 3 Years | ||||||||||||||||||||
Within | but Within | but Within | After | ||||||||||||||||||
1 Year | 3 Years | 5 Years | 5 Years | Total | |||||||||||||||||
Contractual Obligations: | |||||||||||||||||||||
Time Deposits | $ | 291,501 | $ | 11,832 | $ | 6,546 | $ | 3 | $ | 309,882 | |||||||||||
FHLB Borrowings | 24 | 115,548 | 117,298 | 16,501 | 249,371 | ||||||||||||||||
Operating lease and license obligations | 1,903 | 4,104 | 3,891 | 9,004 | 18,902 | ||||||||||||||||
Total | $ | 293,428 | $ | 131,484 | $ | 127,735 | $ | 25,508 | $ | 578,155 | |||||||||||
Credit Commitments: | |||||||||||||||||||||
Available lines of credit | $ | 135,531 | $ | 56,119 | $ | 8,716 | $ | 52,647 | $ | 253,013 | |||||||||||
Other loan commitments | 47,648 | — | — | — | 47,648 | ||||||||||||||||
Letters of credit | 14,135 | 502 | — | — | 14,637 | ||||||||||||||||
Total | $ | 197,314 | $ | 56,621 | $ | 8,716 | $ | 52,647 | $ | 315,298 | |||||||||||
FHLB borrowings are presented in the above table by contractual maturity date. The FHLB has rights, under certain conditions, to call $242.8 million of those borrowings as of various dates during 2007 and quarterly thereafter.
The Company 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 Company is able to access a variety of cost effective sources of funds. The assets pledged consist of certain loans secured by real estate, U.S. Treasury and government agency securities, mortgage-backed securities, certain obligations of state and political subdivisions 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.
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.
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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.
In connection with the 2004 acquisition of A. R. Schmeidler and Co., Inc., the Company may be required to make additional performance-based payments over the five years subsequent to the acquisition. These additional payments would be accounted for as additional purchase price and, as a result, would reduce the Company’s liquidity and capital. We believe that our liquidity and capital are sufficient for any future payments required.
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 (Unaudited)
Set forth below are certain quarterly results of operations for 2006 and 2005.
2006 Quarters | 2005 Quarters | |||||||||||||||||||||||||||||||
Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||
Interest income | $ | 37,811 | $ | 35,853 | $ | 34,711 | $ | 32,782 | $ | 30,202 | $ | 28,368 | $ | 26,736 | $ | 25,058 | ||||||||||||||||
Net interest income | 25,765 | 24,880 | 24,909 | 24,003 | 22,784 | 21,781 | 20,802 | 19,691 | ||||||||||||||||||||||||
Provision for loan losses | 526 | 529 | 598 | 477 | 538 | 512 | 521 | 488 | ||||||||||||||||||||||||
Income before income taxes | 13,447 | 13,733 | 13,279 | 11,634 | 12,197 | 12,148 | 11,777 | 10,861 | ||||||||||||||||||||||||
Net income | 8,766 | 8,883 | 8,701 | 7,709 | 7,718 | 8,025 | 7,863 | 7,339 | ||||||||||||||||||||||||
Basic earnings per common share | $ | 0.98 | $ | 0.99 | $ | 0.97 | $ | 0.86 | $ | 0.86 | $ | 0.90 | $ | 0.89 | $ | 0.82 | ||||||||||||||||
Diluted earnings per common share | $ | 0.95 | $ | 0.96 | $ | 0.94 | $ | 0.84 | $ | 0.83 | $ | 0.87 | $ | 0.86 | $ | 0.81 |
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, 2006. 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; | |
• | adverse changes in economic conditions especially those effecting real estate; | |
• | 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; | |
• | regulatory delays or conditions imposed by regulators in connection with the conversion of the Banks to national banks, acquisitions or other expansion plans; | |
• | increases in federal and state income taxes and/or the Company’s effective income tax rate; | |
• | the extent and timing of legislative and regulatory actions and reform; and | |
• | difficulties in integrating acquisitions, offering new services or expanding into new markets. |
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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. Establishing 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 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 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 changes 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 simulation analysis at December 31, 2006 shows the Company’s net interest income declining slightly if rates rise or fall.
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
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Percentage Change in | Percentage Change in | |||||||
Estimated Net Interest | Estimated Net Interest | |||||||
Income from | Income from | |||||||
Gradual Change in Interest Rates | December 31, 2006 | December 31, 2005 | ||||||
+200 basis points | (2.2 | )% | 0.5 | % | ||||
-200 basis points | (1.7 | )% | (3.7 | )% |
The percentage change in estimated net interest income for the subsequent 12 month measurement period from December 31, 2006 in the +200 basis points and -200 basis points scenarios of (2.2)% and (1.7)%, respectively, are within the Company’s policy limit of (5.0)%.
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 may purchase 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 Company’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.
The Company also prepares a static gap analysis. The “Static Gap” as of December 31, 2006 and 2005 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 accounts 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.
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At December 31, 2006, the “Static Gap” showed a positive cumulative gap of $4.8 million in the one day to one year repricing period, as compared to a positive cumulative gap of $74.7 million at December 31, 2005. The change in the cumulative static gap between December 31, 2006 and December 31, 2005 reflects the results of the Company’s efforts to reposition its portfolios as a result of changes in interest rates and flattening of the yield curve which began in late 2004 and continued through 2005. Management believes that this strategy has enabled the Company to be well positioned for the next cycle of interest rate changes.
The tables below set forth the interest rate sensitivity analysis by repricing date at year end 2006 and 2005.
Interest Rate Sensitivity Analysis By Repricing Date
December 31, 2006
(000’s except percentages) | ||||||||||||||||||||||||||||
Over | Over | Over | Non- | |||||||||||||||||||||||||
One Day to | Three Months | One Year to | Over | Interest | ||||||||||||||||||||||||
One Day | Three Months | to One Year | Five Years | Five Years | Bearing | Total | ||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||
Loans, net | — | $ | 571,739 | $ | 97,168 | $ | 421,523 | $ | 104,955 | $ | 9,858 | $ | 1,205,243 | |||||||||||||||
Mortgage-backed securities | — | 39,379 | 119,969 | 308,901 | 39,067 | — | 507,316 | |||||||||||||||||||||
Other securities | — | 57,539 | 52,354 | 159,892 | 154,570 | — | 424,355 | |||||||||||||||||||||
Other earning assets | $ | 17,651 | — | — | — | — | — | 17,651 | ||||||||||||||||||||
Other assets | — | — | — | — | — | 137,169 | 137,169 | |||||||||||||||||||||
Total Assets | 17,651 | 668,657 | 269,491 | 890,316 | 298,592 | 147,027 | 2,291,734 | |||||||||||||||||||||
Liabilities & Stockholders’ Equity: | ||||||||||||||||||||||||||||
Interest bearing deposits | — | $ | 636,186 | $ | 77,635 | $ | 18,378 | $ | 249,795 | — | $ | 981,994 | ||||||||||||||||
Other borrowed funds | $ | 89,849 | 147,345 | 18 | 219,149 | 198 | — | 456,559 | ||||||||||||||||||||
Demand deposits | — | — | — | — | — | $ | 644,447 | 644,447 | ||||||||||||||||||||
Other liabilities | — | — | — | — | — | 23,168 | 23,168 | |||||||||||||||||||||
Stockholders’ equity | — | — | — | — | — | 185,566 | 185,566 | |||||||||||||||||||||
Total Liabilities & Stockholders’ Equity | 89,849 | 783,531 | 77,653 | 237,527 | 249,993 | 853,181 | 2,291,734 | |||||||||||||||||||||
Net interest rate sensitivity gap | $ | (72,198 | ) | $ | (114,874 | ) | $ | 191,838 | $ | 652,789 | $ | 48,599 | $ | (706,154 | ) | — | ||||||||||||
Cumulative gap | $ | (72,198 | ) | $ | (187,072 | ) | $ | 4,766 | $ | 657,555 | $ | 706,154 | — | — | ||||||||||||||
Cumulative gap to interest earning assets | (3.35 | )% | (8.68 | )% | 0.22 | % | 30.52 | % | 32.77 | % | ||||||||||||||||||
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December 31, 2005
(000’s except percentages) | ||||||||||||||||||||||||||||
Over | Over | Over | Non- | |||||||||||||||||||||||||
One Day to | Three Months | One Year to | Over | Interest | ||||||||||||||||||||||||
One Day | Three Months | to One Year | Five Years | Five Years | Bearing | Total | ||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||
Loans, net | — | $ | 536,768 | $ | 66,948 | $ | 309,237 | $ | 91,378 | $ | 5,488 | $ | 1,009,819 | |||||||||||||||
Mortgage-backed securities | — | 31,579 | 112,228 | 288,077 | 72,507 | — | 504,391 | |||||||||||||||||||||
Other securities | — | 44,511 | 48,533 | 153,938 | 146,291 | — | 393,273 | |||||||||||||||||||||
Other earning assets | $ | 19,393 | — | — | — | — | — | 19,393 | ||||||||||||||||||||
Other assets | — | — | — | — | — | 105,845 | 105,845 | |||||||||||||||||||||
Total Assets | 19,393 | 612,858 | 227,709 | 751,252 | 310,176 | 111,333 | 2,032,721 | |||||||||||||||||||||
Liabilities & Stockholders’ Equity: | ||||||||||||||||||||||||||||
Interest bearing deposits | — | $ | 561,078 | $ | 52,015 | $ | 14,942 | $ | 203,929 | — | $ | 831,964 | ||||||||||||||||
Other borrowed funds | $ | 57,763 | 114,358 | 16 | 156,596 | 106,479 | — | 435,212 | ||||||||||||||||||||
Demand deposits | — | — | — | — | — | $ | 576,032 | 576,032 | ||||||||||||||||||||
Other liabilities | — | — | — | — | — | 19,724 | 19,724 | |||||||||||||||||||||
Stockholders’ equity | — | — | — | — | — | 169,789 | 169,789 | |||||||||||||||||||||
Total Liabilities & Stockholders’ Equity | 57,763 | 675,436 | 52,031 | 171,538 | 310,408 | 765,545 | 2,032,721 | |||||||||||||||||||||
Net interest rate sensitivity gap | $ | (38,370 | ) | $ | (62,578 | ) | $ | 175,678 | $ | 579,714 | $ | (232 | ) | $ | (654,212 | ) | — | |||||||||||
Cumulative gap | $ | (38,370 | ) | $ | (100,948 | ) | $ | 74,730 | $ | 654,444 | $ | 654,212 | — | — | ||||||||||||||
Cumulative gap to interest earning assets | (1.99 | )% | (5.24 | )% | 3.88 | % | 33.96 | % | 33.95 | % | ||||||||||||||||||
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ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 58 | ||||
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND 2005 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2006: | |||||
Consolidated Statements of Income | 59 | ||||
Consolidated Statements of Comprehensive Income | 60 | ||||
Consolidated Balance Sheets | 61 | ||||
Consolidated Statements of Changes in Stockholders’ Equity | 62 | ||||
Consolidated Statements of Cash Flows | 63 | ||||
Notes to Consolidated Financial Statements | 64 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
We have audited the accompanying consolidated balance sheets of Hudson Valley Holding Corp. and its subsidiaries, (the “Company”), as of December 31, 2006 and 2005, 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, 2006. 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 standards of the Public Company Accounting Oversight Board (United States). 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 subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 12, the Company adopted the initial recognition provisions of Statement of Financial Accounting Standard No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans” as of December 31, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
New York, New York
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2006 | 2005 | 2004 | |||||||||||
Interest Income: | |||||||||||||
Loans, including fees | $ | 96,527 | $ | 72,169 | $ | 54,136 | |||||||
Securities: | |||||||||||||
Taxable | 34,591 | 28,377 | 25,307 | ||||||||||
Exempt from Federal income taxes | 9,234 | 8,848 | 8,734 | ||||||||||
Federal funds sold | 600 | 841 | 209 | ||||||||||
Deposits in banks | 205 | 129 | 46 | ||||||||||
Total interest income | 141,157 | 110,364 | 88,432 | ||||||||||
Interest Expense: | |||||||||||||
Deposits | 18,859 | 8,870 | 4,184 | ||||||||||
Securities sold under repurchase agreements and other short-term borrowings | 11,149 | 4,909 | 2,140 | ||||||||||
Other borrowings | 11,592 | 11,527 | 10,471 | ||||||||||
Total interest expense | 41,600 | 25,306 | 16,795 | ||||||||||
Net Interest Income | 99,557 | 85,058 | 71,637 | ||||||||||
Provision for loan losses | 2,130 | 2,059 | 473 | ||||||||||
Net interest income after provision for loan losses | 97,427 | 82,999 | 71,164 | ||||||||||
Non Interest Income: | |||||||||||||
Service charges | 4,529 | 3,973 | 3,373 | ||||||||||
Investment advisory fees | 7,008 | 4,569 | 1,354 | ||||||||||
Realized (loss) gain on sales of securities, net | (199 | ) | (1,158 | ) | 1,100 | ||||||||
Other income | 1,741 | 919 | 698 | ||||||||||
Total non interest income | 13,079 | 8,303 | 6,525 | ||||||||||
Non Interest Expense: | |||||||||||||
Salaries and employee benefits | 32,791 | 25,574 | 21,072 | ||||||||||
Occupancy | 5,779 | 3,760 | 3,119 | ||||||||||
Professional services | 4,941 | 4,319 | 3,491 | ||||||||||
Equipment | 2,821 | 2,297 | 2,056 | ||||||||||
Business development | 2,120 | 1,722 | 1,485 | ||||||||||
FDIC assessment | 381 | 178 | 173 | ||||||||||
Other operating expenses | 9,579 | 6,469 | 5,323 | ||||||||||
Total non interest expense | 58,412 | 44,319 | 36,719 | ||||||||||
Income Before Income Taxes | 52,094 | 46,983 | 40,970 | ||||||||||
Income Taxes | 18,035 | 16,038 | 13,430 | ||||||||||
Net Income | $ | 34,059 | $ | 30,945 | $ | 27,540 | |||||||
Basic Earnings per Common Share | $ | 3.80 | $ | 3.47 | $ | 3.11 | |||||||
Diluted Earnings per Common Share | 3.69 | 3.37 | 3.05 |
See notes to consolidated financial statements.
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2006 | 2005 | 2004 | ||||||||||
Net Income | $ | 34,059 | $ | 30,945 | $ | 27,540 | ||||||
Other comprehensive income, (loss) net of tax: | ||||||||||||
Unrealized holding gain (loss) on securities available for sale arising during the year | 696 | (12,823 | ) | (1,321 | ) | |||||||
Income tax effect | (285 | ) | 5,229 | 586 | ||||||||
411 | (7,594 | ) | (735 | ) | ||||||||
Reclassification adjustment for net loss (gain) realized on securities available for sale | 199 | 1,158 | (1,100 | ) | ||||||||
Income tax effect | (81 | ) | (472 | ) | 396 | |||||||
118 | 686 | (704 | ) | |||||||||
Unrealized holding gain (loss) on securities, net | 529 | (6,908 | ) | (1,439 | ) | |||||||
Minimum pension liability adjustment | (22 | ) | 436 | 7 | ||||||||
Income tax effect | 9 | (175 | ) | (3 | ) | |||||||
(13 | ) | 261 | 4 | |||||||||
Other comprehensive income (loss) | 516 | (6,647 | ) | (1,435 | ) | |||||||
Comprehensive Income | $ | 34,575 | $ | 24,298 | $ | 26,105 | ||||||
See notes to consolidated financial statements.
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2006 | 2005 | ||||||||
ASSETS | |||||||||
Cash and due from banks | $ | 61,805 | $ | 47,776 | |||||
Federal funds sold | 11,858 | 17,329 | |||||||
Securities available for sale, at estimated fair value (amortized cost of $886,170 in 2006 and $843,200 in 2005) | 877,738 | 833,873 | |||||||
Securities held to maturity, at amortized cost (estimated fair value of $39,416 in 2006 and $49,633 in 2005) | 39,922 | 50,119 | |||||||
Federal Home Loan Bank of New York (FHLB) stock | 14,011 | 13,672 | |||||||
Loans (net of allowance for loan losses of $16,784 in 2006 and $13,525 in 2005) | 1,205,243 | 1,009,819 | |||||||
Accrued interest and other receivables | 16,921 | 12,625 | |||||||
Premises and equipment, net | 21,669 | 13,591 | |||||||
Deferred income taxes, net | 11,626 | 12,187 | |||||||
Other assets | 30,941 | 21,730 | |||||||
TOTAL ASSETS | $ | 2,291,734 | $ | 2,032,721 | |||||
LIABILITIES | |||||||||
Deposits: | |||||||||
Non interest-bearing | $ | 644,447 | $ | 576,032 | |||||
Interest-bearing | 981,994 | 831,964 | |||||||
Total deposits | 1,626,441 | 1,407,996 | |||||||
Securities sold under repurchase agreements and other short-term borrowings | 207,188 | 172,115 | |||||||
Other borrowings | 249,371 | 263,097 | |||||||
Accrued interest and other liabilities | 23,168 | 19,724 | |||||||
TOTAL LIABILITIES | 2,106,168 | 1,862,932 | |||||||
Commitments and contingencies (Note 13) | |||||||||
STOCKHOLDERS’ EQUITY | |||||||||
Common Stock, $0.20 par value; authorized 10,000,000 shares; outstanding 8,945,124 and 8,138,752 shares in 2006 and 2005, respectively | 1,880 | 1,856 | |||||||
Additional paid-in capital | 202,963 | 207,372 | |||||||
Retained earnings | 2,437 | 1,431 | |||||||
Accumulated other comprehensive income (loss) | (6,910 | ) | (6,282 | ) | |||||
Treasury stock, at cost; 452,646 and 1,142,699 shares in 2006 and 2005, respectively | (14,804 | ) | (34,588 | ) | |||||
Total stockholders’ equity | 185,566 | 169,789 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,291,734 | $ | 2,032,721 | |||||
See notes to consolidated financial statements.
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||||||||||
Number of | Additional | Other | ||||||||||||||||||||||||||
Shares | Common | Treasury | Paid-In | Retained | Comprehensive | |||||||||||||||||||||||
Outstanding | Stock | Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2004 | 6,586,816 | 1,519 | (27,824 | ) | 165,562 | 1,304 | 1,800 | 142,361 | ||||||||||||||||||||
Net income | 27,540 | 27,540 | ||||||||||||||||||||||||||
Exercise of stock options, net of tax | 134,337 | 27 | 4,025 | 4,052 | ||||||||||||||||||||||||
Purchase of treasury stock | (43,496 | ) | (1,854 | ) | (1,854 | ) | ||||||||||||||||||||||
Sale of treasury stock | 12,824 | 365 | 165 | 530 | ||||||||||||||||||||||||
Stock dividend | 668,679 | 134 | 15,686 | (15,820 | ) | — | ||||||||||||||||||||||
Cash dividends | (11,532 | ) | (11,532 | ) | ||||||||||||||||||||||||
Minimum pension liability adjustment | 4 | 4 | ||||||||||||||||||||||||||
Net unrealized loss on securities available for sale | (1,439 | ) | (1,439 | ) | ||||||||||||||||||||||||
Balance at December 31, 2004 | 7,359,160 | $ | 1,680 | (29,313 | ) | 185,438 | 1,492 | 365 | 159,662 | |||||||||||||||||||
Net income | 30,945 | 30,945 | ||||||||||||||||||||||||||
Exercise of stock options, net of tax | 142,415 | 28 | 4,698 | 4,726 | ||||||||||||||||||||||||
Purchase of treasury stock | (110,126 | ) | (5,492 | ) | (5,492 | ) | ||||||||||||||||||||||
Sale of treasury stock | 7,473 | 217 | 65 | 282 | ||||||||||||||||||||||||
Stock dividend | 739,830 | 148 | 17,171 | (17,319 | ) | — | ||||||||||||||||||||||
Cash dividends | (13,687 | ) | (13,687 | ) | ||||||||||||||||||||||||
Minimum pension liability adjustment | 261 | 261 | ||||||||||||||||||||||||||
Net unrealized loss on securities available for sale | (6,908 | ) | (6,908 | ) | ||||||||||||||||||||||||
Balance at December 31, 2005 | 8,138,752 | 1,856 | (34,588 | ) | 207,372 | 1,431 | (6,282 | ) | 169,789 | |||||||||||||||||||
Net income | 34,059 | 34,059 | ||||||||||||||||||||||||||
Exercise of stock options, net of tax | 116,319 | 24 | 4,510 | 4,534 | ||||||||||||||||||||||||
Purchase of treasury stock | (129,703 | ) | (6,593 | ) | (6,593 | ) | ||||||||||||||||||||||
Sale of treasury stock | 5,730 | 180 | 61 | 241 | ||||||||||||||||||||||||
Stock dividend | 814,026 | 26,197 | (8,980 | ) | (17,217 | ) | — | |||||||||||||||||||||
Cash dividends | (15,836 | ) | (15,836 | ) | ||||||||||||||||||||||||
Minimum pension liability adjustment | (13 | ) | (13 | ) | ||||||||||||||||||||||||
Adjustment for the initial application of SFAS No. 158, net of tax | (1,144 | ) | (1,144 | ) | ||||||||||||||||||||||||
Net unrealized gain on securities available for sale | 529 | 529 | ||||||||||||||||||||||||||
Balance at December 31, 2006 | 8,945,124 | $ | 1,880 | $ | (14,804 | ) | $ | 202,963 | $ | 2,437 | $ | (6,910 | ) | $ | 185,566 | |||||||||||||
See notes to consolidated financial statements.
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2006 | 2005 | 2004 | |||||||||||
Operating Activities: | |||||||||||||
Net income | $ | 34,059 | $ | 30,945 | $ | 27,540 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||
Provision for loan losses | 2,130 | 2,059 | 473 | ||||||||||
Depreciation and amortization | 2,572 | 2,000 | 1,926 | ||||||||||
Realized loss (gain) on security transactions, net | 199 | 1,158 | (1,100 | ) | |||||||||
Amortization of premiums on securities, net | 598 | 2,662 | 4,259 | ||||||||||
Stock option expense and related tax benefits | 944 | 550 | 330 | ||||||||||
Deferred taxes (benefit) | 959 | (671 | ) | 107 | |||||||||
Increase in deferred loan fees | 365 | 354 | 871 | ||||||||||
Increase in accrued interest and other receivables | (4,296 | ) | (1,454 | ) | (393 | ) | |||||||
Increase in other assets | (9,211 | ) | (2,978 | ) | (8,744 | ) | |||||||
Excess tax benefits from share based payment arrangements | (247 | ) | (257 | ) | (141 | ) | |||||||
Increase in accrued interest and other liabilities | 3,444 | 1,937 | 1,935 | ||||||||||
(Increase) decrease in minimum pension liability adjustment | (1,921 | ) | 437 | 7 | |||||||||
Net cash provided by operating activities | 29,595 | 36,742 | 27,070 | ||||||||||
Investing Activities: | |||||||||||||
Decrease (increase) in Federal Funds sold | 5,471 | (11,629 | ) | 300 | |||||||||
Increase (decrease) in FHLB stock | (339 | ) | 534 | (3,049 | ) | ||||||||
Proceeds from maturities of securities available for sale | 165,145 | 144,797 | 197,276 | ||||||||||
Proceeds from maturities of securities held to maturity | 10,282 | 20,919 | 5,596 | ||||||||||
Proceeds from sales of securities available for sale | 45,634 | 50,032 | 29,144 | ||||||||||
Purchases of securities available for sale | (254,629 | ) | (240,105 | ) | (174,933 | ) | |||||||
Purchases of securities held to maturity | — | — | (76,372 | ) | |||||||||
(Decrease) increase in payable for securities purchased | — | (491 | ) | 491 | |||||||||
Net increase in loans | (197,921 | ) | (149,737 | ) | (156,737 | ) | |||||||
Net purchases of premises and equipment | (10,650 | ) | (1,524 | ) | (1,557 | ) | |||||||
Net cash used in investing activities | (237,007 | ) | (187,204 | ) | (179,841 | ) | |||||||
Financing Activities: | |||||||||||||
Net increase in deposits | 218,445 | 172,655 | 110,441 | ||||||||||
Repayment of other borrowings | (51,276 | ) | (24 | ) | (23 | ) | |||||||
Proceeds from other borrowings | 37,550 | — | 75,000 | ||||||||||
Net increase (decrease) in securities sold under repurchase agreements and short term borrowings | 35,073 | 7,643 | (33,784 | ) | |||||||||
Proceeds from issuance of common stock | 3,590 | 4,176 | 3,722 | ||||||||||
Proceeds from sale of treasury stock | 241 | 282 | 530 | ||||||||||
Cash dividends paid | (15,836 | ) | (13,687 | ) | (11,532 | ) | |||||||
Acquisition of treasury stock | (6,593 | ) | (5,492 | ) | (1,854 | ) | |||||||
Excess tax benefits from share based payment arrangements | 247 | 257 | 141 | ||||||||||
Net cash provided by financing activities | 221,441 | 165,810 | 142,641 | ||||||||||
Increase (Decrease) in Cash and Due from Banks | 14,029 | 15,348 | (10,130 | ) | |||||||||
Cash and due from banks, beginning of year | 47,776 | 32,428 | 42,558 | ||||||||||
Cash and due from banks, end of year | $ | 61,805 | $ | 47,776 | $ | 32,428 | |||||||
Supplemental Disclosures: | |||||||||||||
Interest paid | $ | 39,567 | $ | 24,212 | $ | 16,377 | |||||||
Income tax payments | 19,089 | 16,135 | 12,627 | ||||||||||
Change in unrealized gain (loss) on securities available for sale — net of tax | 529 | (6,908 | ) | (1,439 | ) |
See notes to consolidated financial statements.
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 subsidiaries, Hudson Valley Bank (“HVB”) and NYNB Bank (“NYNB”), (collectively the “Company”). The Company acquired NYNB (formerly known as New York National Bank) effective January 1, 2006 in a tax free stock purchase transaction for approximately $13.5 million in cash. At the time of the acquisition, including the effects of purchase accounting, NYNB had total assets of $136.5 million, net loans of $59.9 million and total deposits of $117.7 million. The Company offers a broad range of banking and related services to businesses, professionals, municipalities, not-for-profit organizations and individuals. HVB, a New York chartered commercial bank headquartered in Westchester County, New York has 15 branch offices in Westchester County, New York, 3 in Manhattan, New York, 2 in Bronx County, New York, 1 in Queens County, New York and 1 in Rockland County, New York. NYNB, a New York chartered commercial bank headquartered in Bronx County, New York has 3 branch offices in Manhattan, New York and 2 in Bronx County, New York. The Company also provides investment management services to its customers through its wholly-owned subsidiary, A.R. Schmeidler & Co., Inc. (“ARS”), a Manhattan, New York based money management firm acquired in 2004. NYNB and ARS are not significant subsidiaries for purposes of disclosing additional information related to each acquisition. 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 Company may sell in the ordinary course of business, or as held to maturity, representing securities the Company 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 to maturity are stated at amortized cost. 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.
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. Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS Statement No. 133” and as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” requires that all derivative instruments, including interest rate contracts, 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
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it is, the type of hedge transaction. There were no interest rate contracts outstanding as of December 31, 2006 or 2005.
Allowance for Loan Losses —The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio based on ongoing quarterly assessments of the estimated losses. The methodology for assessing the appropriateness of the allowance consists of several key components, which include a specific component for identified problem loans, a formula component, and an unallocated component. The specific component 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. 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 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.
The formula component 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 component.
The appropriateness of the unallocated component is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company 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 component. 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 Company’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, 2006 and 2005. 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 Company’s service area, since the majority of the Company’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments at the time of their examination.
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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 collectibility 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 5 years for furniture, fixtures and equipment and 31.5 years for buildings. 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.
Goodwill and Other Intangible Assets — In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Identified intangible assets that have finite useful lives are amortized over those lives by a method which reflects the pattern in which the economic benefits of the intangible asset are used up. All goodwill and identified intangible assets are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company’s impairment evaluations as of December 31, 2006 and 2005 did not indicate impairment of its goodwill or identified intangible assets.
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.
Stock-Based Compensation — The Company has stock option plans that provide for the granting of options to directors, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Options are granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of the stock on the date of grant. Stock options under the Company’s plans vest over various periods. Vesting periods range from immediate to five years from date of grant. Options expire ten years from the date of grant. Effective January 1, 2006, the Company adopted
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SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), which requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Non-employee stock options are expensed as of the date of grant. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. See Note 11 herein for additional discussion.
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 common share (i.e. common stock equivalents are not considered) and diluted earnings per common 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 common 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 common 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:
2006 | 2005 | 2004 | ||||||||||
Weighted average common shares: | ||||||||||||
Basic | 8,952,652 | 8,929,679 | 8,847,452 | |||||||||
Effect of stock options | 287,626 | 245,912 | 177,783 | |||||||||
Diluted | 9,240,278 | 9,175,591 | 9,025,235 |
In December 2006, 2005 and 2004, 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 and 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 Company has one operating segment, “Community Banking.”
Recent Accounting Pronouncements
Accounting Changes and Error Corrections — In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154.”). SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The
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adoption of SFAS No. 154 by the Company as of January 1, 2006 did not have any impact on the Company’s consolidated financial statements.
Other-Than-Temporary Impairment of Investments — On November 3, 2005, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The guidance in this FSP amends FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The FSP is effective for reporting periods beginning after December 15, 2005. The Company’s adoption of this guidance on January 1, 2006 did not have any impact on its consolidated financial statements.
Accounting for Uncertainty in Income Taxes — In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company intends to adopt this guidance on January 1, 2007. Management is in the process of evaluating the impact of the adoption of this guidance on its consolidated results of operations and financial condition.
Accounting for Certain Hybrid Financial Instrument — In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, an amendment of SFAS No. 133 and 140 (“SFAS No. 155”). SFAS No. 155 changes the accounting for various derivatives and securitized financial assets. SFAS No. 155 will be effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after January 1, 2007. Management does not expect that the adoption of this standard will have a material impact on its consolidated results of operations and financial condition.
Fair Value Measurements — In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, provides a framework for measuring the fair value of assets and liabilities and requires additional disclosure about fair value measurement. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is currently evaluating the impact of adopting SFAS No. 157 on its consolidated results of operations and financial condition.
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”(“SFAS No. 158”). This statement, which amends FASB Statement Nos. 87, 88, 106 and 132R, requires employers to recognize the overfunded and underfunded status of a defined benefit postretirement plan as an asset or a liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income, net of tax. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The effective date of the requirement to initially recognize the funded status of the plan and to provide the required disclosures was December 31, 2006. The effects of and required disclosures from the
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adoption of the initial recognition provisions of SFAS No. 158 are presented in Note 12 herein. The requirement to measure plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Management is currently evaluating the impact of adopting provisions in SFAS No. 158 related to the change in its measurement date on its consolidated results of operations and financial condition.
Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements — In September 2006, the Securities Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”), “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). The SEC staff is providing guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have a material effect on the consolidated results of operations and financial condition.
The Fair Value Option for Financial Assets and Financial Liabilities —In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact of adopting SFAS No. 159 on its consolidated results of operations and financial condition.
Other —Certain 2005 and 2004 amounts have been reclassified to conform to the 2006 presentation.
2 Securities
December 31, | ||||||||||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||||||||||
Gross Unrealized | Gross Unrealized | |||||||||||||||||||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 137,180 | $ | 12 | $ | 2,711 | $ | 134,481 | $ | 119,200 | $ | 1 | $ | 2,969 | $ | 116,232 | ||||||||||||||||
Mortgage-backed securities | 480,955 | 167 | 9,165 | 471,957 | 468,731 | 448 | 9,761 | 459,418 | ||||||||||||||||||||||||
Obligations of states and political subdivisions | 209,502 | 3,427 | 676 | 212,253 | 203,204 | 4,203 | 1,300 | 206,107 | ||||||||||||||||||||||||
Other debt securities | 27,889 | 357 | 5 | 28,241 | 27,906 | 179 | 246 | 27,839 | ||||||||||||||||||||||||
Total debt securities | 855,526 | 3,963 | 12,557 | 846,932 | 819,041 | 4,831 | 14,276 | 809,596 | ||||||||||||||||||||||||
Mutual funds and other equity securities | 30,644 | 610 | 448 | 30,806 | 24,159 | 609 | 491 | 24,277 | ||||||||||||||||||||||||
Total | $ | 886,170 | $ | 4,573 | $ | 13,005 | $ | 877,738 | $ | 843,200 | $ | 5,440 | $ | 14,767 | $ | 833,873 | ||||||||||||||||
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December 31, | ||||||||||||||||||||||||||||||||
2006 | 2005 | |||||||||||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||
Classified as Held to Maturity | ||||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | 34,791 | — | $ | 596 | $ | 34,195 | $ | 44,990 | — | $ | 499 | $ | 44,491 | ||||||||||||||||||
Obligations of states and political subdivisions | 5,131 | $ | 93 | 3 | 5,221 | 5,129 | $ | 36 | 23 | 5,142 | ||||||||||||||||||||||
Total | $ | 39,922 | $ | 93 | $ | 599 | $ | 39,416 | $ | 50,119 | $ | 36 | $ | 522 | $ | 49,633 | ||||||||||||||||
At December 31, 2006, securities having a stated value of approximately $553,920 were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.
Gross proceeds from sales of securities available for sale were $45,634, $50,032 and $29,144 for 2006, 2005 and 2004, respectively. This resulted in gross losses of $199 and $1,158 and gross gains of $1,100 in 2006, 2005 and 2004 respectively. Applicable income taxes relating to such transactions were $(81), $(472) and $396 in 2006, 2005 and 2004, respectively.
The following tables reflect the Company’s investment’s fair value and gross unrealized loss, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of December 31, 2006 and 2005 (in thousands):
December 31, 2006
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | |||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 96,800 | $ | 2,611 | $ | 35,160 | $ | 100 | $ | 131,960 | $ | 2,711 | ||||||||||||
Mortgage-backed securities | 306,940 | 8,203 | 139,334 | 962 | 446,274 | 9,165 | ||||||||||||||||||
Obligations of states and political subdivisions | 32,521 | 536 | 30,624 | 140 | 63,145 | 676 | ||||||||||||||||||
Other debt securities | — | — | 552 | 5 | 552 | 5 | ||||||||||||||||||
Total debt securities | 436,261 | 11,350 | 205,670 | 1,207 | 641,931 | 12,557 | ||||||||||||||||||
Mutual funds and other equity securities | 29,593 | 443 | 12 | 5 | 29,605 | 448 | ||||||||||||||||||
Total temporarily impaired securities | $ | 465,854 | $ | 11,793 | $ | 205,682 | $ | 1,212 | $ | 671,536 | $ | 13,005 | ||||||||||||
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Duration of Unrealized Loss | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | |||||||||||||||||||
Classified as Held to Maturity | ||||||||||||||||||||||||
Mortgage-backed securities | $ | 28,539 | $ | 547 | $ | 6,252 | $ | 49 | $ | 34,791 | $ | 596 | ||||||||||||
Obligations of states and political subdivisions | 275 | 2 | 183 | 1 | 458 | 3 | ||||||||||||||||||
Total temporarily impaired securities | $ | 28,814 | $ | 549 | $ | 6,435 | $ | 50 | $ | 35,249 | $ | 599 | ||||||||||||
December 31, 2005
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Classified as Available for Sale | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
U.S. Treasury and government agencies | $ | 21,798 | $ | 198 | $ | 92,198 | $ | 2,771 | $ | 113,996 | $ | 2,969 | ||||||||||||
Mortgage-backed securities | 245,211 | 4,509 | 160,866 | 5,252 | 406,077 | 9,761 | ||||||||||||||||||
Obligations of states and political subdivisions | 44,058 | 636 | 19,221 | 664 | 63,279 | 1,300 | ||||||||||||||||||
Other debt securities | — | — | 17,274 | 246 | 17,274 | 246 | ||||||||||||||||||
Total debt securities | 311,067 | 5,343 | 289,559 | 8,933 | 600,626 | 14,276 | ||||||||||||||||||
Mutual funds and other equity securities | 2,528 | 4 | 20,116 | 487 | 22,644 | 491 | ||||||||||||||||||
Total | $ | 313,595 | $ | 5,347 | $ | 309,675 | $ | 9,420 | $ | 623,270 | $ | 14,767 | ||||||||||||
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Classified as Held To Maturity | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
Mortgage-backed securities | $ | 43,548 | $ | 495 | $ | 943 | $ | 4 | $ | 44,491 | $ | 499 | ||||||||||||
Obligations of states and political subdivisions | 2,041 | 16 | 268 | 7 | 2,309 | 23 | ||||||||||||||||||
Total | $ | 45,589 | $ | 511 | $ | 1,211 | $ | 11 | $ | 46,800 | $ | 522 | ||||||||||||
The Company has the ability and intent to hold its securities to maturity or to recovery of cost. There have been no downgrades in credit ratings of securities in the Company’s portfolio, and all of the Company’s securities continue to be readily marketable. Based on these and other factors, the Company has concluded that the impairment in the market value of the above securities is primarily the result of changes in interest rates since the securities were acquired and is considered to be temporary in nature. The total number of securities in the Company’s portfolio that were in an unrealized loss position was 515 and 473 at December 31, 2006 and 2005, respectively.
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The contractual maturity of all debt securities held at December 31, 2006 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 | $ | 36,835 | $ | 36,685 | ||||
After 1 but within 5 years | 119,349 | 118,026 | ||||||
After 5 but within 10 years | 93,211 | 94,679 | ||||||
After 10 years | 130,304 | 130,806 | ||||||
Mortgage-backed Securities | 515,747 | 506,152 | ||||||
Total | $ | 895,446 | $ | 886,348 | ||||
3 Credit Commitments and Concentrations of Credit Risk
The Company 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 Company’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.
2006 | 2005 | |||||||
Contract | Contract | |||||||
Amount | Amount | |||||||
Credit commitments | $ | 300,661 | $ | 306,559 | ||||
Guarantees written | $ | 14,637 | $ | 16,281 |
The majority of loan commitments have terms up to one year, with either a floating interest rate or contracted fixed interest rates, generally ranging from 5.25% to 12.00%. 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 Company’s policy is to require customers to provide collateral prior to the disbursement of approved loans. For loans and financial guarantees, the Company 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 Company does not have a significant exposure to any individual customer or counterparty. A geographic concentration arises because the Company operates
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principally in Westchester County and Bronx County, New York. Loans and credit commitments collateralized by real estate including all loans where real estate is either primary or secondary collateral are as follows:
Residential | Commercial | |||||||||||
Property | Property | Total | ||||||||||
2006 | ||||||||||||
Loans | $ | 327,301 | $ | 747,204 | $ | 1,074,505 | ||||||
Credit commitments | 100,589 | 97,748 | 198,337 | |||||||||
$ | 427,890 | $ | 844,952 | $ | 1,272,842 | |||||||
2005 | ||||||||||||
Loans | $ | 315,828 | $ | 584,065 | $ | 899,893 | ||||||
Credit commitments | 100,520 | 127,457 | 227,977 | |||||||||
$ | 416,348 | $ | 711,522 | $ | 1,127,870 | |||||||
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 Company has in the past experienced little difficulty in accessing collateral when required.
4 Loans
The loan portfolio is comprised of the following:
December 31 | |||||||||
2006 | 2005 | ||||||||
Real Estate: | |||||||||
Commercial | $ | 290,185 | $ | 220,384 | |||||
Construction | 252,941 | 178,731 | |||||||
Residential | 289,553 | 276,384 | |||||||
Commercial and industrial | 355,214 | 316,907 | |||||||
Individuals | 28,777 | 25,632 | |||||||
Lease financing | 8,766 | 8,348 | |||||||
Total | 1,225,436 | 1,026,386 | |||||||
Deferred loan fees | (3,409 | ) | (3,042 | ) | |||||
Allowance for loan losses | (16,784 | ) | (13,525 | ) | |||||
Loans, net | $ | 1,205,243 | $ | 1,009,819 | |||||
The Company has established credit policies applicable to each type of lending activity in which it engages. The Banks evaluate 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 Company ordinarily requires the primary source of payment to be based on the borrower’s ability to generate continuing cash flows.
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A summary of the activity in the allowance for loan losses follows:
December 31 | |||||||||||||
2006 | 2005 | 2004 | |||||||||||
Balance, beginning of year | $ | 13,525 | $ | 11,801 | $ | 11,441 | |||||||
Add (deduct): | |||||||||||||
Provision for loan losses | 2,130 | 2,059 | 473 | ||||||||||
Amount acquired | 1,529 | — | — | ||||||||||
Recoveries on loans previously charged-off | 45 | 36 | 81 | ||||||||||
Charge-offs | (445 | ) | (371 | ) | (194 | ) | |||||||
Balance, end of year | $ | 16,784 | $ | 13,525 | $ | 11,801 | |||||||
The recorded investment in impaired loans at December 31, 2006 was $5,572 for which an allowance of $1,795 has been established. The recorded investment in impaired loans at December 31, 2005 was $3,837, for which an allowance of $1,300 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 2006, 2005 and 2004 was $5,320, $3,745, and $2,664, respectively. During the years reported, no income was recorded on impaired loans during the portion of the year that they were impaired.
Non-accrual loans at December 31, 2006, 2005 and 2004 and related interest income are summarized as follows:
2006 | 2005 | 2004 | ||||||||||
Amount | $ | 5,572 | $ | 3,837 | $ | 2,301 | ||||||
Interest income recorded | — | — | — | |||||||||
Interest income that would have been recorded under the original contract terms | 474 | 283 | 243 |
Non-accrual loans at December 31, 2006 and 2005 include $5,572 and $3,837, respectively, of loans considered to be impaired under SFAS No. 114.
There were no restructured loans at December 31, 2006, 2005 or 2004.
Loans made directly or indirectly to employees, directors or principal shareholders were approximately $16,894 and $17,992 at December 31, 2006 and 2005, respectively. During 2006, new loans granted to these individuals totaled $2,243 and payments totaled $3,341.
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5 Premises and Equipment
A summary of premises and equipment follows:
December 31 | ||||||||
2006 | 2005 | |||||||
Land | $ | 2,589 | $ | 1,139 | ||||
Buildings | 18,368 | 11,386 | ||||||
Leasehold improvements | 5,663 | 4,624 | ||||||
Furniture, fixtures and equipment | 19,862 | 16,754 | ||||||
Automobiles | 665 | 702 | ||||||
Total | 47,147 | 34,605 | ||||||
Less accumulated depreciation and amortization | (25,479 | ) | (21,014 | ) | ||||
Premises and equipment, net | $ | 21,668 | $ | 13,591 | ||||
Depreciation and amortization expense totaled $2,572, $2,000 and $1,926 in 2006, 2005 and 2004, respectively.
6 | Goodwill and Other Intangible Assets |
In the fourth quarter 2004, the Company acquired A.R. Schmeidler & Co., Inc. in a transaction accounted for as an asset purchase for tax purposes. In connection with this acquisition, the Company recorded customer relationship intangible assets of $2,470 and non-compete provision intangible assets of $516, which have amortization periods of 13 years and 7 years, respectively. Deferred tax benefits have been provided for the tax effect of temporary differences in the amortization periods of these identified intangible assets for book and tax purposes. The deferred income tax effects related to timing differences between the book and tax bases of identified intangible assets are included in net deferred tax assets in the Company’s Consolidated Balance Sheets.
Also, at the time of this acquisition, the Company recorded $4,492 of goodwill. In accordance with the terms of the acquisition agreement, the Company may make additional performance-based payments over the five years subsequent to the acquisition. These additional payments would be accounted for as additional purchase price and, as a result, would increase goodwill related to the acquisition. In December 2005 and November 2006, the Company made the first two of these additional payments in the amounts of $1,572 and $3,016, respectively. The deferred income tax effects related to goodwill deductible for tax purposes has been reflected as a reduction of goodwill in the Company’s Consolidated Balance Sheets.
On January 1, 2006, the Company acquired NYNB in a tax-free stock purchase transaction. In connection with this acquisition the Company recorded a core deposit premium intangible asset of $3,907 and a related deferred tax liability of $1,805. The core deposit premium has an estimated amortization period of 7 years. Also in connection with this acquisition, the Company recorded $1,528 of goodwill.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the gross carrying amount and accumulated amortization for each of the Company’s intangible assets subject to amortization as of December 31, 2006 and 2005.
2006 | 2005 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Deposit Premium | $ | 3,907 | $ | 558 | — | — | ||||||||||
Customer Relationships | 2,470 | 427 | $ | 2,470 | $ | 237 | ||||||||||
Employment Related | 516 | 166 | 516 | 92 | ||||||||||||
Total | $ | 6,893 | $ | 1,151 | $ | 2,986 | $ | 329 | ||||||||
Intangible assets amortization expense was $822 for 2006, $264 for 2005 and $65 for 2004. The annual intangible assets amortization expense is estimated to be approximately $822 in each of the five years subsequent to December 31, 2006.
Goodwill, net of deferred tax, was $10,284 and $5,913 at December 31, 2006 and 2005, respectively. Cumulative reductions of goodwill related to deferred tax on goodwill deductible for tax purposes were $324 and $151 at December 31 2006 and 2005, respectively. Goodwill, net of related deferred tax is included in “Other assets” in the Company’s Consolidated Balance Sheets.
7 | Deposits |
The following table presents a summary of deposits at December 31:
(000’s) | ||||||||
2006 | 2005 | |||||||
Demand deposits | $ | 644,447 | $ | 576,032 | ||||
Money Market accounts | 417,089 | 421,720 | ||||||
Savings accounts | 95,741 | 73,028 | ||||||
Time deposits of $100,000 or more | 197,794 | 149,231 | ||||||
Time deposits of less than $100,000 | 112,089 | 57,217 | ||||||
Checking with interest | 159,281 | 130,768 | ||||||
Total Deposits | $ | 1,626,411 | $ | 1,407,996 | ||||
At December 31, 2006 and 2005, certificates of deposit and other time deposits of $100,000 or more totaled $197.8 million and $149.2 million, respectively. At December 31, such deposits classified by time remaining to maturity were as follows:
(000’s) | ||||||||
2006 | 2005 | |||||||
3 months or less | $ | 142,844 | $ | 115,098 | ||||
Over 3 months through 6 months | 22,544 | 20,496 | ||||||
Over 6 months through 12 months | 32,406 | 13,637 | ||||||
Over 12 months | — | — | ||||||
Total | $ | 197,794 | $ | 149,231 | ||||
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8 Borrowings
Borrowings with original maturities of one year or less totaled $207,188 and $172,115 at December 31, 2006 and 2005, respectively. Such short-term borrowings consisted of securities sold under agreements to repurchase of $192,645 and $171,463 and note options on Treasury, tax and loan of $543 and $652 at December 31, 2006 and 2005, respectively, and overnight borrowings of $14,000 at December 31, 2006. Other borrowings totaled $249,371 and $263,097 at December 31, 2006 and 2005, respectively, which consisted of borrowings of $227,750 and $242,750 from the FHLB with initial stated maturities of five or ten years and one to four year call options and non callable FHLB borrowings of $21,621 and $20,347 at December 31, 2006 and 2005, respectively.
The callable borrowings from FHLB mature beginning in 2008 through 2016. The FHLB has the right to call all of such borrowings at various dates in 2007 and quarterly thereafter. A non callable borrowing of $1,300 matures in 2027 and a non callable borrowing of $20,000 matures in 2011.
Interest expense on all borrowings totaled $22,741, $16,436 and $12,611 in 2006, 2005 and 2004, 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:
2006 | 2005 | 2004 | |||||||||||
Average balance: | |||||||||||||
Short-term | $ | 234,959 | $ | 170,072 | $ | 181,870 | |||||||
Other Borrowings | 258,308 | 263,108 | 231,014 | ||||||||||
Weighted average interest rate: | |||||||||||||
Short-term | 4.8 | % | 2.9 | % | 1.2 | % | |||||||
Other Borrowings | 4.5 | 4.4 | 4.5 | ||||||||||
Maximum month-end outstanding amount: | |||||||||||||
Short-term | $ | 289,575 | $ | 200,423 | $ | 216,920 | |||||||
Other Borrowings | 264,395 | 263,119 | 263,125 |
As of December 31, 2006 and 2005, these borrowings were collateralized by loans and securities with an estimated fair value of $499,642 and $482,032, respectively.
At December 31, 2006, the Company had available unused short-term lines of credit of $200 million from a large New York based investment banking firm, $186 million from the FHLB and $85 million from correspondent banks. In addition, the Company had $331 million in available borrowings under Retail CD Agreements with two major investment banking firms, all of which are subject to various terms and conditions.
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9 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 | ||||||||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||||||||
Income tax at statutory rate | $ | 18,233 | 35.0 | % | $ | 16,444 | 35.0 | % | $ | 14,339 | 35.0 | % | ||||||||||||
State income tax, net of Federal benefit | 2,746 | 5.3 | 2,529 | 5.3 | 2,039 | 5.1 | % | |||||||||||||||||
Tax-exempt interest income | (2,970 | ) | (5.7 | ) | (2,918 | ) | (6.2 | ) | (2,944 | ) | (7.2 | %) | ||||||||||||
Non-deductible expenses and other | 26 | — | (17 | ) | — | (33 | ) | (0.1 | %) | |||||||||||||||
Provision for income taxes | $ | 18,035 | 34.6 | % | $ | 16,038 | 34.1 | % | $ | 13,430 | 32.8 | % | ||||||||||||
The components of the provision for income taxes (benefit) are as follows:
Years Ended December 31 | |||||||||||||
2006 | 2005 | 2004 | |||||||||||
Federal: | |||||||||||||
Current | $ | 14,921 | $ | 12,823 | $ | 10,574 | |||||||
Deferred | (1,126 | ) | (650 | ) | (31 | ) | |||||||
State and Local: | |||||||||||||
Current | 4,629 | 4,037 | 2,903 | ||||||||||
Deferred | (389 | ) | (172 | ) | (16 | ) | |||||||
Total | $ | 18,035 | $ | 16,038 | $ | 13,430 | |||||||
The tax effect of temporary differences giving rise to the Company’s deferred tax assets and liabilities are as follows:
December 31, 2006 | December 31, 2005 | |||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||
Allowance for loan losses | $ | 6,743 | $ | 5,510 | ||||||||||||
Securities available for sale | 3,375 | 3,740 | ||||||||||||||
Supplemental pension benefit | 2,535 | 2,197 | ||||||||||||||
Minimum pension liability | 1,235 | 471 | ||||||||||||||
Deferred compensation | 587 | 639 | ||||||||||||||
Interest on non-accrual loans | 345 | 204 | ||||||||||||||
SFAS 123 compensation costs | 191 | 93 | ||||||||||||||
Depreciation | $ | (1,744 | ) | $ | (267 | ) | ||||||||||
Intangible assets | (1,612 | ) | (106 | ) | ||||||||||||
Other | (29 | ) | (294 | ) | ||||||||||||
Total | $ | 15,011 | $ | (3,385 | ) | $ | 12,854 | $ | (667 | ) | ||||||
Net deferred tax asset | $ | 11,626 | $ | 12,187 | ||||||||||||
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In connection with the acquisition of NYNB Bank, the Company recorded $2,488 of net deferred tax liabilities, which included liabilities of $1,819 related to the write up of banking premises to market value and $1,804 related to a core deposit intangible asset, partially offset by deferred tax assets of $537 related to the allowance for loan losses, $265 related to unrealized losses on the NYNB securities portfolios and $333 of other deferred tax assets.
In the normal course of business, the Company’s Federal, New York State and New York City Corporation tax returns are subject to audit. The Company has reached a final agreement with New York State on all open issues for tax years through 2004. The final resolution of this matter did not have a significant impact on its financial position or results of operations.
10 Stockholders’ Equity
The Company and the Banks 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 the financial statements of the Company and the Banks. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks 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 HVB 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, 2006, that the Company and the Banks meet all capital adequacy requirements to which they are subject.
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The following summarizes the capital requirements and capital position at December 31, 2006 and 2005:
Minimum To Be | ||||||||||||||||||||||||
Well Capitalized | ||||||||||||||||||||||||
Minimum For | Under Prompt | |||||||||||||||||||||||
Capital Adequacy | Corrective Action | |||||||||||||||||||||||
Actual | Purposes | Provision | ||||||||||||||||||||||
Capital Ratios: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
HVB Only: | ||||||||||||||||||||||||
As of December 31, 2006: | ||||||||||||||||||||||||
Total Capital (To Risk Weighted Assets) | $ | 182,502 | 13.5 | % | $ | 108,126 | 8.0 | % | $ | 135,157 | 10.0 | % | ||||||||||||
Tier 1 Capital (To Risk Weighted Assets) | 166,901 | 12.3 | 54,063 | 4.0 | 81,094 | 6.0 | ||||||||||||||||||
Tier 1 Capital (To Average Assets) | 166,901 | 7.8 | 85,808 | 4.0 | 107,260 | 5.0 | ||||||||||||||||||
As of December 31, 2005: | ||||||||||||||||||||||||
Total Capital (To Risk Weighted Assets) | $ | 179,852 | 14.9 | % | $ | 96,355 | 8.0 | % | $ | 120,444 | 10.0 | % | ||||||||||||
Tier 1 Capital (To Risk Weighted Assets) | 166,327 | 13.8 | 48,177 | 4.0 | 72,266 | 6.0 | ||||||||||||||||||
Tier 1 Capital (To Average Assets) | 166,327 | 8.3 | 80,194 | 4.0 | 100,243 | 5.0 | ||||||||||||||||||
NYNB Only: | ||||||||||||||||||||||||
As of December 31, 2006: | ||||||||||||||||||||||||
Total Capital (To Risk Weighted Assets) | $ | 10,576 | 13.7 | % | $ | 6,159 | 8.0 | % | $ | 7,699 | 10.0 | % | ||||||||||||
Tier 1 Capital (To Risk Weighted Assets) | 9,604 | 12.5 | 3,079 | 4.0 | 4,619 | 6.0 | ||||||||||||||||||
Tier 1 Capital (To Average Assets) | 9,604 | 7.0 | 5,524 | 4.0 | 6,905 | 5.0 |
Minimum For | ||||||||||||||||
Capital Adequacy | ||||||||||||||||
Actual | Purposes | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
Consolidated: | ||||||||||||||||
As of December 31, 2006: | ||||||||||||||||
Total Capital (To Risk Weighted Assets) | $ | 192,642 | 13.5 | % | $ | 114,017 | 8.0 | % | ||||||||
Tier 1 Capital (To Risk Weighted Assets) | 175,857 | 12.3 | 57,009 | 4.0 | ||||||||||||
Tier 1 Capital (To Average Assets) | 175,857 | 7.8 | 90,681 | 4.0 | ||||||||||||
As of December 31, 2005: | ||||||||||||||||
Total Capital (To Risk Weighted Assets) | $ | 180,074 | 14.9 | % | $ | 96,400 | 8.0 | % | ||||||||
Tier 1 Capital (To Risk Weighted Assets) | 166,549 | 13.8 | 48,200 | 4.0 | ||||||||||||
Tier 1 Capital (To Average Assets) | 166,549 | 8.3 | 80,228 | 4.0 |
As of December 31, 2006, the most recent notification from the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a 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 either institution’s category.
In addition, pursuant to Rule 15c3-1 of the Securities and Exchange Commission, ARS is required to maintain minimum “net capital” as defined under such rule. As of December 31, 2006 ARS exceeded its minimum capital requirement.
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Stock Dividend
In December 2006 and 2005 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.
11 Stock-Based Compensation
The Company has stock option plans that provide for the granting of options to directors, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Options are granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of the stock on the date of grant. Stock options under the Company’s plans vest over various periods. Vesting periods range from immediate to five years from date of grant. Options expire ten years from the date of grant. Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), which requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. From January 1, 2002 through the adoption of SFAS No. 123R, the Company followed the fair value recognition provisions for stock-based compensation in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123” (“SFAS No. 148”). Therefore, the Company has utilized fair value recognition provisions for measurement of cost related to share-based transactions since 2002. Non-employee stock options are expensed as of the date of grant.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes stock option activity for the years December 31, 2006 and 2005. Shares and per share amounts have been adjusted to reflect the effects of the 10% stock dividends in 2006, 2005 and 2004:
Weighted | ||||||||||||||||
Aggregate | Average | |||||||||||||||
Shares | Weighted | Intrinsic | Remaining | |||||||||||||
Underlying | Average Exercise | Value(1) | Contractual | |||||||||||||
Outstanding Options | Options | Price Per Share | ($000s) | Term (Yrs.) | ||||||||||||
As of January 1, 2004 | 658,292 | 19.58 | ||||||||||||||
Granted at fair value | 337,236 | 27.80 | ||||||||||||||
Cancelled or expired | (6,160 | ) | 25.13 | |||||||||||||
Exercised | (178,267 | ) | 20.89 | |||||||||||||
As of December 31, 2004 | 811,101 | 22.66 | ||||||||||||||
Granted at fair value | 253,545 | 30.54 | ||||||||||||||
Cancelled or expired | (42,108 | ) | 27.44 | |||||||||||||
Exercised | (172,019 | ) | 24.28 | |||||||||||||
As of December 31, 2005 | 850,519 | 24.45 | ||||||||||||||
Granted at fair value | 221,477 | 38.79 | ||||||||||||||
Cancelled or expired | (10,422 | ) | 28.67 | |||||||||||||
Exercised | (127,694 | ) | 28.11 | |||||||||||||
As of December 31, 2006 | 933,880 | 27.30 | $ | 14,424 | 6.5 | |||||||||||
Exercisable as of December 31, 2006 | 620,752 | 25.07 | 10,878 | 5.8 | ||||||||||||
Available for future grant | 50,053 |
(1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on changes in the market value of the Company’s stock. |
The following table summarizes the range of exercise prices of the Company’s stock options outstanding and exercisable at December 31, 2006:
Weighted Average | ||||||||||||||||||||
Exercise Price | Number of | Remaining | Exercise | |||||||||||||||||
Range | Options | Life (yrs) | Price | |||||||||||||||||
$ | 9.34 | $ | 22.97 | 286,625 | 3.9 | $ | 18.92 | |||||||||||||
$ | 23.10 | $ | 29.40 | 321,453 | 6.9 | $ | 27.11 | |||||||||||||
$ | 30.17 | $ | 42.85 | 325,802 | 8.6 | $ | 34.88 | |||||||||||||
Total Options Outstanding | $ | 9.34 | $ | 42.85 | 933,880 | 6.5 | $ | 27.30 | ||||||||||||
Exercisable | $ | 9.34 | $ | 42.85 | 620,752 | 5.8 | $ | 25.07 | ||||||||||||
Not Exercisable | $ | 22.08 | $ | 39.29 | 313,128 | 8.0 | $ | 31.74 |
The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following table illustrates
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the assumptions used in the valuation model for activity during the years ended December 31, 2006, 2005 and 2004.
Years Ended | ||||||||||||
December 31 | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Weighted average assumptions: | ||||||||||||
Dividend yield | 4.4 | % | 4.5 | % | 4.5 | % | ||||||
Expected volatility | 9.8 | % | 5.8 | % | 6.9 | % | ||||||
Risk-free interest rate | 4.6 | % | 3.6 | % | 3.2 | % | ||||||
Expected lives | 4.8 | 4.9 | 5.0 |
The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience.
The per share weighted average fair value of options granted during the years ended December 31, 2006, 2005 and 2004 was $3.14, $0.71 and $0.84, respectively. Net compensation expense of $698, $293 and $189 related to the Company’s stock option plans was included in net income for the years ended December 30, 2006, 2005 and 2004, respectively. The total tax benefit related thereto was $213, $84 and $31, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $322 at December 31, 2006. This expense is expected to be recognized over a weighted-average period of 2.0 years.
The following table presents a summary status of the Company’s non-vested options as of December 31, 2006, and changes during the year then ended. Shares and per share amounts have been adjusted to reflect the effects of the 10% stock dividends in 2006 and 2005:
Weighted- | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Nonvested at December 31, 2005 | 298,668 | 29.84 | ||||||
Granted | 95,281 | 40.86 | ||||||
Vested | (71,318 | ) | 29.37 | |||||
Forfeited or Expired | (9,503 | ) | 33.24 | |||||
Nonvested at December 31, 2006 | 313,128 | 33.20 | ||||||
12 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 totaled approximately $754, $694 and $478 in 2006, 2005 and 2004, respectively.
The Hudson Valley Bank Employees’ Savings Plan covers substantially all employees. The Company matches 25 percent of employee contributions annually, up to 4 percent of base salary. Savings Plan costs charged to expense totaled approximately $123, $113 and $100 in 2006, 2005 and 2004, respectively.
The Company does not offer its own stock as an investment to participants of the Employees’ Savings Plan. The Company’s matching contribution under the Employees’ Savings Plan as well as its contribution to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Defined Contribution Pension Plan is in the form of cash. Neither plan holds any shares of the Company’s Stock.
Additional retirement benefits are provided to certain officers and directors of HVB pursuant to supplemental plans. Costs for the supplemental pension plans totaled $1,239, $1,140 and $1,019 in 2006, 2005 and 2004, respectively. The Company 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. The estimated contribution expected to be paid to these plans in 2006 is $611.
The Company adopted the initial recognition provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), as of December 31, 2006. The initial recognition provisions of this statement require employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or a liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income, net of tax. The adoption of the initial recognition provisions of SFAS No. 158 resulted in a reduction of Stockholders’ Equity through accumulated other comprehensive income of $1.1 million. There was no effect on the Company’s results of operations as a result of this adoption.
The following tables set forth the status of the Company’s plans as of December 31:
2006 | 2005 | ||||||||
Change in benefit obligation: | |||||||||
Benefit obligation at beginning of year | $ | 8,309 | $ | 7,699 | |||||
Service cost | 307 | 262 | |||||||
Interest cost | 523 | 479 | |||||||
Amendments | 340 | 247 | |||||||
Actuarial (gain) loss | 340 | 145 | |||||||
Benefits paid | (513 | ) | (522 | ) | |||||
Benefit obligation at end of year | 9,306 | 8,310 | |||||||
�� | |||||||||
Change in plan assets: | |||||||||
Fair value of plan assets at beginning of year | — | — | |||||||
Actual return on assets | — | — | |||||||
Employer contributions | 513 | 522 | |||||||
Benefits paid | (513 | ) | (522 | ) | |||||
Fair value of plan assets at end of year | — | — | |||||||
Funded status | (9,306 | ) | (8,310 | ) | |||||
Unrecognized transition obligation | — | 108 | |||||||
Unrecognized prior service cost | — | 428 | |||||||
Unrecognized net loss | — | 2,283 | |||||||
Accrued benefit cost | (9,306 | ) | (5,491 | ) | |||||
Weighted average assumptions: | |||||||||
Discount rate | 6.25 | % | 6.25 | % | |||||
Expected return on plan assets | — | — | |||||||
Rate of compensation increase | 5.00 | % | 5.00 | % |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2006 | 2005 | |||||||
Components of net periodic benefit cost: | ||||||||
Service cost | $ | 307 | $ | 262 | ||||
Interest cost | 523 | 479 | ||||||
Expected return on plan assets | — | — | ||||||
Amortization of transition obligation | 95 | 73 | ||||||
Amortization of prior service cost | 147 | 147 | ||||||
Amortization of net loss | 167 | 179 | ||||||
Net periodic benefit cost | $ | 1,239 | $ | 1,140 | ||||
Set forth below is a summary of the amounts reflected in the Company’s balance sheets as of December 31:
2006 | 2005 | |||||||
Accrued benefit liability | $ | (9,306 | ) | $ | (7,186 | ) | ||
Intangible asset | 536 | |||||||
Accumulated other comprehensive income (pre-tax net reduction in equity) | 1,159 | |||||||
Accrued benefit cost | $ | (5,491 | ) | |||||
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Pension | ||||
Benefits | ||||
2007 | $ | 611 | ||
2008 | 682 | |||
2009 | 682 | |||
2010 | 759 | |||
2011 | 670 | |||
Years 2012-2016 | 4,963 |
13 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, | ||||
2007 | $ | 1,903 | ||
2008 | 2,046 | |||
2009 | 2,059 | |||
2010 | 1,982 | |||
2011 | 1,909 | |||
Thereafter | 9,004 | |||
Total minimum future rentals | $ | 18,902 |
Rent expense for premises and equipment was approximately $2,360, $1,597 and $1,207 in 2006, 2005 and 2004 respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Cash Reserve Requirements
HVB and NYNB are required to maintain average reserve balances under the Federal Reserve Act and Regulation D issued thereunder. Such reserves totaled approximately $3,678 for HVB and $807 for NYNB at December 31, 2006.
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 a bank in any year exceed the net profits of that year, as defined, combined with the retained net profits for the two preceding years.
14 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 Company 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 in the New York metropolitan area. For the years ended December 31, 2006, 2005 and 2004, there is no customer that accounted for more than 10% of the Company’s revenue.
15 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, 2006 and 2005 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.
December 31 | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Financial assets for which carrying value approximates fair value | $ | 73.7 | $ | 73.7 | $ | 65.1 | $ | 65.1 | ||||||||
Securities, FHLB stock and accrued interest | 937.8 | 937.3 | 903.2 | 902.7 | ||||||||||||
Loans and accrued interest | 1,230.3 | 1,224.8 | 1,029.3 | 1,024.0 | ||||||||||||
Liabilities: | ||||||||||||||||
Deposits with no stated maturity and accrued interest | 1,318.0 | 1,318.0 | 1,202.2 | 1,202.2 | ||||||||||||
Time deposits and accrued interest | 311.4 | 313.4 | 206.9 | 207.5 | ||||||||||||
Securities sold under repurchase agreements and other short-term borrowings and accrued interest | 208.1 | 208.1 | 172.8 | 172.8 | ||||||||||||
Other borrowings and accrued interest | 250.6 | 250.3 | 264.4 | 262.3 | ||||||||||||
Financial liabilities for which carrying value approximates fair value | — | — | — | — |
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 which approximates fair value. | |
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 which approximates fair value. | |
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. | |
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 which approximates fair value. | |
Securities sold under repurchase agreements and other short-term borrowings and accrued interest — The estimated fair value of these instruments approximate carrying amount because of their short maturities and variable rates. Accrued interest is stated at its carrying amount which approximates fair value. | |
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 projected call date option. Accrued interest is stated at its carrying amount which approximates fair value. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16 Condensed Financial Information of Hudson Valley Holding Corp.
Condensed Balance Sheets
2006 | 2005 | |||||||
Assets | ||||||||
Cash | $ | 350 | $ | 95 | ||||
Investment in subsidiaries | 184,576 | 169,208 | ||||||
Equity securities | 1,289 | 1,270 | ||||||
Total Assets | $ | 186,215 | $ | 170,573 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Other liabilities | $ | 649 | $ | 784 | ||||
Stockholders’ equity | 185,566 | 169,789 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 186,215 | $ | 170,573 | ||||
Condensed Statements of Income
2006 | 2005 | 2004 | ||||||||||
Dividends from subsidiaries | $ | 32,955 | $ | 14,255 | $ | 10,105 | ||||||
Dividends from equity securities | 61 | 50 | 39 | |||||||||
Other income | 24 | 3 | 6 | |||||||||
Operating expenses | 537 | 506 | 162 | |||||||||
Income before equity in undistributed earnings in the subsidiaries | 32,503 | 13,802 | 9,988 | |||||||||
Equity in undistributed earnings of the subsidiaries | 1,556 | 17,143 | 17,552 | |||||||||
Net Income | $ | 34,059 | $ | 30,945 | $ | 27,540 | ||||||
Condensed Statements of Cash Flows
2006 | 2005 | 2004 | |||||||||||
Operating Activities: | |||||||||||||
Net income | $ | 34,059 | $ | 30,945 | $ | 27,540 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||
Equity in undistributed earnings of the subsidiaries | (1,556 | ) | (17,143 | ) | (17,552 | ) | |||||||
Increase (decrease) in other liabilities | (121 | ) | 195 | 48 | |||||||||
Other changes, net | (38 | ) | (3 | ) | (5 | ) | |||||||
Net cash (used in) provided by operating activities | 32,344 | 13,994 | 10,031 | ||||||||||
Investing Activities: | |||||||||||||
Proceeds from sales of equity securities | 29 | 3 | 11 | ||||||||||
Purchase of equity securities including acquisition of NYNB Bank | (13,520 | ) | (6 | ) | (84 | ) | |||||||
Net cash used in investing activities | (13,491 | ) | (3 | ) | (73 | ) | |||||||
Financing Activities: | |||||||||||||
Proceeds from issuance of common stock and sale of treasury stock | 3,831 | 4,458 | 4,252 | ||||||||||
Purchase of treasury stock | (6,593 | ) | (5,492 | ) | (1,854 | ) | |||||||
Cash dividends paid | (15,836 | ) | (13,687 | ) | (11,533 | ) | |||||||
Net cash used in financing activities | (18,598 | ) | (14,721 | ) | (9,135 | ) | |||||||
Increase (decrease) in Cash and Due from Banks | 255 | (730 | ) | 823 | |||||||||
Cash and due from banks, beginning of year | 95 | 825 | 2 | ||||||||||
Cash and due from banks, end of year | $ | 350 | $ | 95 | $ | 825 | |||||||
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ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2006. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, the Company’s disclosure controls and procedures were effective in bringing to their attention on a timely basis information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act. Also, during the year ended December 31, 2006, there has not been any change that has effected, or is reasonably likely to materially effect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective 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 and NYNB 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 and NYNB Bank, in conformity with the Call Report Instructions as of December 31, 2006. This assessment was based on criteria for effective internal control over financial reporting, including safeguarding of assets, described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting, including safeguarding of assets, presented in conformity with accounting principles generally accepted in the United States of America and, for Hudson Valley Bank and NYNB Bank, in conformity with the Call Report Instructions, as of December 31, 2006.
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Attestation Report of Independent Registered Public Accounting Firm |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Hudson Valley Holding Corp.
Yonkers, New York
We have audited management’s assessment, included in the accompanying “Management’s Report to the Stockholders,” that Hudson Valley Holding Corp. and its subsidiaries, Hudson Valley Bank and NYNB Bank (collectively the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income (“Call Report Instructions”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing, and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls 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 assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria
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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2006 of the Company and our report dated March 15, 2007 expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standard No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans”, as of December 31, 2006.
Deloitte & Touche LLP
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ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions “Nominees for the Board of Directors”, “Executive Officers”, “Corporate Governance” and “Required Reporting of Transactions” in the 2007 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption “Executive Compensation” in the 2007 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The information set forth under the captions “Outstanding Equity Awards at Fiscal Year End” and “Security Ownership of Certain Beneficial Owners and Management” in the 2007 Proxy Statement is incorporated herein by reference.
The following table sets forth information regarding the Company’s Stock Option Plans as of December 31, 2006:
Number of Shares | ||||||||||||
Number of Shares | Remaining Available | |||||||||||
to be Issued Upon | Weighted-Average | for Future Issuance | ||||||||||
Exercise of | Exercise Price of | Under Equity | ||||||||||
Plan Category | Outstanding Options | Outstanding Options | Compensation Plans | |||||||||
Equity compensation plans approved by stockholders | 933,880 | $ | 27.30 | 50,053 | ||||||||
Equity compensation plans not approved by stockholders | — | — | — |
All equity compensation plans have been approved by the Company’s stockholders. Additional details related to the Company’s equity compensation plans are provided in Notes 10 and 11 to the Company’s consolidated financial statements presented in this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the captions “Compensation Committee Interlocks and Insider Participation”, “Certain Relationships and Related Transactions” and “Corporate Governance” in the 2007 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption “Independent Registered Public Accounting Firm Fees” in the 2007 Proxy Statement and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The following financial statements of the Company are included in this document in Item 8 — Financial Statements and Supplementary Data:
• | Report of Independent Registered Public Accounting Firm | |
• | Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004 | |
• | Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004 | |
• | Consolidated Balance Sheets at December 31, 2006 and 2005 | |
• | Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004 | |
• | Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 | |
• | Notes to Consolidated Financial Statements |
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.”
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3. Exhibits Required by Securities and Exchange Commission Regulation S-K
Number | Exhibit Title | |||
3.1 | Amended and Restated Certificate of Incorporation of Hudson Valley Holding Corp.(7) | |||
3.2 | By-Laws of Hudson Valley Holding Corp.(7) | |||
3.3 | Specimen of Common Stock Certificate(7) | |||
4.1 | Specimen Stock Restriction Agreement Between the Company and a Shareholder who Acquired Shares from the Company or a Shareholder Subject to the Agreement(6) | |||
10.1 | Hudson Valley Bank Amended and Restated Directors Retirement Plan Effective May 1, 2004(2) | |||
10.2 | Hudson Valley Bank Restated and Amended Supplemental Retirement Plan, effective December 1, 1995*(7) | |||
10.3 | Hudson Valley Bank Supplemental Retirement Plan of 1997*(7) | |||
10.4 | 2002 Stock Option Plan*(1) | |||
10.5 | Specimen Non-Statutory Stock Option Agreement*(7) | |||
10.6 | Specimen Incentive Stock Option Agreement*(5) | |||
10.7 | Consulting Agreement Between the Company and Director John A. Pratt, Jr.*(7) | |||
10.8 | Acquisition Agreement dated June 29, 2004 by and among the shareholders of A. R. Schmeidler & Co., Inc., as Sellers, A. R. Schmeidler & Co., Inc., Hudson Valley Bank, as Buyer, and Hudson Valley Holding Corp.(3) | |||
10.9 | Agreement and Plan of Consolidation, dated December 23, 2004, between Hudson Valley Holding Corp., a New York corporation and registered bank holding company and New York National Bank, a national banking association.(4) | |||
11 | Statements re: Computation of Per Share Earnings(7) | |||
21 | Subsidiaries of the Company(7) | |||
23 | Consents of Experts and Counsel(7) | |||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(7) | |||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(7) | |||
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(7) | |||
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(7) |
(1) | Incorporated herein by reference in this document to Appendix A and Exhibit A to Appendix A to the Registrant’s Proxy Statement for the 2002 Annual Meeting of Stockholders |
(2) | Incorporated herein by reference in this document to the Form 10-Q filed on May 10, 2004 |
(3) | Incorporated herein by reference in this document to the Form 8-K filed on June 30, 2004 |
(4) | Incorporated herein by reference in this document to the Form 8-K filed on December 27, 2004 |
(5) | Incorporated herein by reference in this document to the Form 10-K filed on March 11, 2005 |
(6) | Incorporated herein by reference in the document to the Form 10-Q filed on August 9, 2006 |
(7) | Filed herewith |
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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 15, 2007
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 15, 2007 by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ JAMES J. LANDY
/s/ STEPHEN R. BROWN
/s/ WILLIAM E. GRIFFIN
/s/ JAMES M. COOGAN
/s/ BRUNO J. GIOFFRE
/s/ GREGORY F. HOLCOMBE
/s/ MICHAEL J. MALONEY
/s/ WILLIAM J. MULROW
/s/ JOHN A. PRATT JR.
/s/ CECILE D. SINGER
/s/ CRAIG S. THOMPSON
/s/ ANDREW J. REINHART
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