SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2007
Commission File No. 030525
HUDSON VALLEY HOLDING CORP.
(Exact name of registrant as specified in its charter)
NEW YORK | 13-3148745 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
21 Scarsdale Road, Yonkers, NY 10707
(Address of principal executive office with zip code)
914-961-6100
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þNo 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):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes oNo þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at | ||
Class | November 1, | |
2007 | ||
Common stock, par value $0.20 per share | 8,862,386 |
TABLE OF CONTENTS
1
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Dollars in thousands, except per share amounts
Three Months Ended | ||||||||
September 30, | ||||||||
2007 | 2006 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 26,384 | $ | 24,635 | ||||
Securities: | ||||||||
Taxable | 7,979 | 8,816 | ||||||
Exempt from Federal income taxes | 2,255 | 2,267 | ||||||
Federal funds sold | 1,247 | 77 | ||||||
Deposits in banks | 252 | 58 | ||||||
Total interest income | 38,117 | 35,853 | ||||||
Interest Expense: | ||||||||
Deposits | 7,484 | 5,104 | ||||||
Securities sold under repurchase agreements and othershort-term borrowings | 1,886 | 2,986 | ||||||
Other borrowings | 2,405 | 2,883 | ||||||
Total interest expense | 11,775 | 10,973 | ||||||
Net Interest Income | 26,342 | 24,880 | ||||||
Provision for loan losses | 180 | 529 | ||||||
Net interest income after provision for loan losses | 26,162 | 24,351 | ||||||
Non Interest Income: | ||||||||
Service charges | 1,152 | 1,151 | ||||||
Investment advisory fees | 2,432 | 1,831 | ||||||
Other income | 444 | 397 | ||||||
Total non interest income | 4,028 | 3,379 | ||||||
Non Interest Expense: | ||||||||
Salaries and employee benefits | 9,411 | 8,148 | ||||||
Occupancy | 1,606 | 1,398 | ||||||
Professional services | 1,211 | 1,016 | ||||||
Equipment | 841 | 715 | ||||||
Business development | 576 | 473 | ||||||
FDIC assessment | 49 | 94 | ||||||
Other operating expenses | 2,616 | 2,153 | ||||||
Total non interest expense | 16,310 | 13,997 | ||||||
Income Before Income Taxes | 13,880 | 13,733 | ||||||
Income Taxes | 4,789 | 4,850 | ||||||
Net Income | $ | 9,091 | $ | 8,883 | ||||
Basic Earnings Per Common Share | $ | 1.02 | $ | 0.99 | ||||
Diluted Earnings Per Common Share | $ | 0.98 | $ | 0.96 |
See notes to condensed consolidated financial statements
2
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Dollars in thousands, except per share amounts
Nine Months Ended | ||||||||
September 30, | ||||||||
2007 | 2006 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 78,300 | $ | 70,085 | ||||
Securities: | ||||||||
Taxable | 25,325 | 25,707 | ||||||
Exempt from Federal income taxes | 6,864 | 6,888 | ||||||
Federal funds sold | 2,375 | 530 | ||||||
Deposits in banks | 453 | 136 | ||||||
Total interest income | 113,317 | 103,346 | ||||||
Interest Expense: | ||||||||
Deposits | 20,645 | 12,907 | ||||||
Securities sold under repurchase agreements and othershort-term borrowings | 7,127 | 7,922 | ||||||
Other borrowings | 7,977 | 8,725 | ||||||
Total interest expense | 35,749 | 29,554 | ||||||
Net Interest Income | 77,568 | 73,792 | ||||||
Provision for loan losses | 1,290 | 1,604 | ||||||
Net interest income after provision for loan losses | 76,278 | 72,188 | ||||||
Non Interest Income: | ||||||||
Service charges | 3,520 | 3,420 | ||||||
Investment gain advisory fees | 6,522 | 5,185 | ||||||
Realized gain (loss) on security transactions, net | 56 | (200 | ) | |||||
Other income | 1,101 | 1,390 | ||||||
Total non interest income | 11,199 | 9,795 | ||||||
Non Interest Expense: | ||||||||
Salaries and employee benefits | 27,634 | 24,266 | ||||||
Occupancy | 4,730 | 4,171 | ||||||
Professional services | 3,541 | 3,678 | ||||||
Equipment | 2,284 | 2,046 | ||||||
Business development | 1,879 | 1,641 | ||||||
FDIC assessment | 140 | 289 | ||||||
Other operating expenses | 7,788 | 7,246 | ||||||
Total non interest expense | 47,996 | 43,337 | ||||||
Income Before Income Taxes | 39,481 | 38,646 | ||||||
Income Taxes | 13,712 | 13,353 | ||||||
Net Income | $ | 25,769 | $ | 25,293 | ||||
Basic Earnings Per Common Share | $ | 2.89 | $ | 2.82 | ||||
Diluted Earnings Per Common Share | $ | 2.78 | $ | 2.74 |
See notes to condensed consolidated financial statements
3
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Dollars in thousands
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net Income | $ | 9,091 | $ | 8,883 | $ | 25,769 | $ | 25,293 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Unrealized loss on securities available for sale arising during the period | 6,745 | 13,569 | 1,510 | 204 | ||||||||||||
Income tax effect | (2,994 | ) | (5,552 | ) | (811 | ) | (89 | ) | ||||||||
3,751 | 8,017 | 699 | 115 | |||||||||||||
Reclassification adjustment for net (gain) loss realized on securities available for sale | (21 | ) | (24 | ) | (56 | ) | 200 | |||||||||
Income tax effect | 9 | 9 | 23 | (81 | ) | |||||||||||
(12 | ) | (15 | ) | (33 | ) | 119 | ||||||||||
Unrealized loss on securities available for sale | 3,739 | 8,002 | 666 | 234 | ||||||||||||
Minimum pension liability adjustment | (254 | ) | (5 | ) | (760 | ) | (16 | ) | ||||||||
Income tax effect | 100 | 2 | 303 | 6 | ||||||||||||
(154 | ) | (3 | ) | (457 | ) | (10 | ) | |||||||||
Other comprehensive loss | 3,585 | 7,999 | 209 | 224 | ||||||||||||
Comprehensive income | $ | 12,676 | $ | 16,882 | $ | 25,978 | $ | 25,517 | ||||||||
See notes to condensed consolidated financial statements
4
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Dollars in thousands, except share amounts
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 52,055 | $ | 61,805 | ||||
Federal funds sold | 40,301 | 11,858 | ||||||
Securities available for sale at estimated fair value (amortized cost of $795,343 in 2007 and $886,170 in 2006) | 788,666 | 877,738 | ||||||
Securities held to maturity at amortized cost (estimated fair value of $34,373 in 2007 and $39,416 in 2006) | 34,829 | 39,922 | ||||||
Federal Home Loan Bank of New York (FHLB) Stock | 11,678 | 14,011 | ||||||
Loans (net of allowance for loan losses of $17,135 in 2007 and $16,784 in 2006) | 1,234,288 | 1,205,243 | ||||||
Accrued interest and other receivables | 18,077 | 16,921 | ||||||
Premises and equipment, net | 25,072 | 21,669 | ||||||
Deferred income taxes, net | 12,048 | 11,626 | ||||||
Other assets | 28,221 | 30,941 | ||||||
TOTAL ASSETS | $ | 2,245,235 | $ | 2,291,734 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Non interest-bearing | $ | 591,268 | $ | 644,447 | ||||
Interest-bearing | 1,136,944 | 981,994 | ||||||
Total deposits | 1,728,212 | 1,626,441 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 89,132 | 207,188 | ||||||
Other borrowings | 210,851 | 249,371 | ||||||
Accrued interest and other liabilities | 24,752 | 23,168 | ||||||
TOTAL LIABILITIES | 2,052,947 | 2,106,168 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $0.20 par value; authorized 25,000,000 and 10,000,000 shares in 2007 and 2006 respectively; outstanding 8,865,761 and 8,945,124 shares in 2007 and 2006, respectively | 1,898 | 1,880 | ||||||
Additional paid-in capital | 205,910 | 202,963 | ||||||
Retained earnings | 14,905 | 2,437 | ||||||
Accumulated other comprehensive loss, net | (6,701 | ) | (6,910 | ) | ||||
Treasury stock, at cost; 622,420 and 452,646 shares in 2007 and 2006, respectively | (23,724 | ) | (14,804 | ) | ||||
Total stockholders’ equity | 192,288 | 185,566 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,245,235 | $ | 2,291,734 | ||||
See notes to condensed consolidated financial statements
5
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Nine Months Ended September 30, 2007 and 2006
Dollars in thousands, except share amounts
Accumulated | ||||||||||||||||||||||||||||
Number | Other | |||||||||||||||||||||||||||
of | Additional | Comprehensive | ||||||||||||||||||||||||||
Shares | Common | Treasury | Paid-in | Retained | Income | |||||||||||||||||||||||
Outstanding | Stock | Stock | Capital | Earnings | (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2007 | 8,945,124 | $ | 1,880 | $ | (14,804 | ) | $ | 202,963 | $ | 2,437 | $ | (6,910 | ) | $ | 185,566 | |||||||||||||
Net income | 25,769 | 25,769 | ||||||||||||||||||||||||||
Exercise of stock options, net of tax | 90,411 | 18 | 2,905 | 2,923 | ||||||||||||||||||||||||
Purchase of treasury stock | (176,244 | ) | (9,161 | ) | (9,161 | ) | ||||||||||||||||||||||
Sale of treasury stock | 6,470 | 241 | 42 | 283 | ||||||||||||||||||||||||
Cash dividend | (13,301 | ) | (13,301 | ) | ||||||||||||||||||||||||
Minimum pension liability adjustment | (457 | ) | (457 | ) | ||||||||||||||||||||||||
Net unrealized loss on securities available for sale | 666 | 666 | ||||||||||||||||||||||||||
Balance at September 30, 2007 | 8,865,761 | $ | 1,898 | $ | (23,724 | ) | $ | 205,910 | $ | 14,905 | $ | (6,701 | ) | $ | 192,288 | |||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Number | Other | |||||||||||||||||||||||||||
of | Additional | Comprehensive | ||||||||||||||||||||||||||
Shares | Common | Treasury | Paid-in | Retained | Income | |||||||||||||||||||||||
Outstanding | Stock | Stock | Capital | Earnings | (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2006 | 8,138,752 | $ | 1,856 | $ | (34,588 | ) | $ | 207,372 | $ | 1,431 | $ | (6,282 | ) | $ | 169,789 | |||||||||||||
Net income | 25,293 | 25,293 | ||||||||||||||||||||||||||
Exercise of stock options | 89,112 | 18 | 3,284 | 3,302 | ||||||||||||||||||||||||
Purchase of treasury stock | (106,614 | ) | (5,476 | ) | (5,476 | ) | ||||||||||||||||||||||
Sale of Treasury stock | 5,730 | 180 | 61 | 241 | ||||||||||||||||||||||||
Cash dividend | (11,821 | ) | (11,821 | ) | ||||||||||||||||||||||||
Minimum pension liability adjustment | (10 | ) | (10 | ) | ||||||||||||||||||||||||
Net unrealized loss on securities available for sale | 234 | 234 | ||||||||||||||||||||||||||
Balance at September 30, 2006 | 8,126,980 | $ | 1,874 | $ | (39,884 | ) | $ | 210,717 | $ | 14,903 | $ | (6,058 | ) | $ | 181,552 | |||||||||||||
See notes to condensed consolidated financial statements
6
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Dollars in thousands
For the Nine Months | ||||||||
Ended September 30, | ||||||||
2007 | 2006 | |||||||
Operating Activities: | ||||||||
Net income | $ | 25,769 | $ | 25,293 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,290 | 1,604 | ||||||
Depreciation and amortization | 2,127 | 1,938 | ||||||
Realized (gain) loss on security transactions, net | (56 | ) | 200 | |||||
Amortization of premiums on securities, net | 323 | 510 | ||||||
Stock option expense and related tax benefits | 535 | 727 | ||||||
Deferred taxes (benefit) liability | (905 | ) | 1,507 | |||||
(Decrease) increase in deferred loan fees, net | (221 | ) | 369 | |||||
Increase in accrued interest and other receivables | (1,156 | ) | (3,921 | ) | ||||
Decrease (increase) in other assets | 2,720 | (5,681 | ) | |||||
Excess tax benefits from share-based payment arrangements | (266 | ) | (256 | ) | ||||
Increase in accrued interest and other liabilities | 1,584 | 713 | ||||||
Increase in minimum pension liability adjustment | (758 | ) | (18 | ) | ||||
Net cash provided by operating activities | 30,986 | 22,985 | ||||||
Investing Activities: | ||||||||
Net (increase) decrease in Federal funds sold | (28,443 | ) | 4,460 | |||||
Increase (decrease) in FHLB stock | 2,333 | (1,734 | ) | |||||
Proceeds from maturities and paydowns of securities available for sale | 119,198 | 114,605 | ||||||
Proceeds from maturities and paydowns of securities held to maturity | 5,121 | 8,244 | ||||||
Proceeds from sales of securities available for sale | 3 | 45,634 | ||||||
Purchases of securities available for sale | (28,973 | ) | (196,967 | ) | ||||
Net increase in loans | (30,115 | ) | (165,327 | ) | ||||
Net purchases of premises and equipment | (5,530 | ) | (9,719 | ) | ||||
Net cash provided by (used in) investing activities | 33,594 | (200,804 | ) | |||||
Financing Activities: | ||||||||
Net increase in deposits | 101,771 | 125,103 | ||||||
Net (decrease) increase in securities sold under repurchase agreements and other short-term borrowings | (118,056 | ) | 75,516 | |||||
Repayment of other borrowings | (38,520 | ) | (31,269 | ) | ||||
Proceeds from other borrowings | — | 22,550 | ||||||
Proceeds from issuance of common stock | 2,388 | 2,575 | ||||||
Excess tax benefits from share-based payment arrangements | 266 | 256 | ||||||
Proceeds from sale of treasury stock | 283 | 241 | ||||||
Acquisition of treasury stock | (9,161 | ) | (5,476 | ) | ||||
Cash dividends paid | (13,301 | ) | (11,821 | ) | ||||
Net cash (used in) provided by financing activities | (74,330 | ) | 177,675 | |||||
Decrease in Cash and Due from Banks | (9,750 | ) | (144 | ) | ||||
Cash and due from banks, beginning of period | 61,805 | 47,776 | ||||||
Cash and due from banks, end of period | $ | 52,055 | $ | 47,632 | ||||
Supplemental Disclosures: | ||||||||
Interest paid | $ | 36,118 | $ | 28,387 | ||||
Income tax payments | 15,646 | 14,031 | ||||||
Change in unrealized loss on securities available for sale — net of tax | 666 | 234 |
See notes to condensed consolidated financial statements
7
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Dollars in thousands, except per share and share amounts
1. Description of Operations
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”). 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 17 branch offices in Westchester County, New York, including a recently opened branch in Mamaroneck, 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. HVB has received regulatory approvals to open a full service branch at 112 West 34th Street, Manhattan, New York and to relocate its Queens, New York branch to162-05 Crocheron Avenue, Flushing, New York. NYNB has 3 branch offices in Manhattan, New York and 2 in Bronx County, New York.
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 interstate basis. On October 30, 2007 the OCC granted preliminary approval of the conversions. The conversions will be completed upon the satisfaction of certain standard conditions. We anticipate completion of the conversions in the fourth quarter of 2007. We have also applied to the OCC to designate the main banking office of HVB following the conversion to 1055 Summer Street, Stamford, Connecticut.
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 500 Fifth Avenue, 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, primarily Westchester County and Rockland County, New York, portions of New York City and Fairfield County, Connecticut.
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.
2. Summary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at September 30, 2007 and the results of its operations, and comprehensive income for the three and nine month periods ended September 30, 2007 and 2006, and cash flows and changes in stockholders’ equity for the nine month periods ended September 30, 2007 and 2006. The results of operations for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results of operations to be expected for the remainder of the year.
8
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and predominant practices used within the banking industry. Certain information and note disclosures normally included in annual financial statements have been omitted.
In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and statements of income for the periods reported. 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.
Intercompany items and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2006 and notes thereto.
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 Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principaland/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, consumer 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.
9
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 September 30, 2007. 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 examinations.
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 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. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management’s judgment as to the collectability of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible.
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 valuesand/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. The Company is not aware of any events during the nine month period ended September 30, 2007 which would have required additional impairment evaluations.
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 SFAS No. 123R, “Share-Based Payment” (“SFAS 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
10
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 7 herein for additional discussion.
3. 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.
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 September 30, 2007 and December 31, 2006.
September 30, 2007 | December 31, 2006 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
(000’s) | ||||||||||||||||
Deposit Premium | $ | 3,907 | $ | 977 | $ | 3,907 | $ | 558 | ||||||||
Customer Relationships | 2,470 | 570 | 2,470 | 427 | ||||||||||||
Employment Related | 516 | 221 | 516 | 166 | ||||||||||||
Total | $ | 6,893 | $ | 1,768 | $ | 6,893 | $ | 1,151 | ||||||||
Intangible assets amortization expense was $205 and $616 for the three and nine month periods ended September 30, 2007, and $205 and $616 for the three and nine month periods ended September 30, 2006. 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 $10,092 and $10,284 at September 30, 2007 and December 31, 2006, respectively. Cumulative reductions of goodwill related to deferred tax on goodwill deductible for tax purposes were $516 and $324 at September 30, 2007 and December 31, 2006, respectively. Goodwill, net of related deferred tax is included in “Other assets” in the Company’s Consolidated Balance Sheets.
4. | Income Taxes |
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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The Company and its subsidiaries file various income tax returns in the U.S. federal jurisdiction and the New York State and New York City jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years 2003 through 2006. The Company is currently open to audit by New York State under the statute of limitations for the years 2005 and 2006. The Company is currently under examination by New York City for the tax year 2004.
The Company has performed an evaluation of its tax positions in accordance with the provisions of FIN 48 and has concluded that as of both January 1, 2007 and September 30, 2007, there were no significant uncertain tax positions requiring additional recognition in its financial statements and does not believe that there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. There were no accruals for interest or penalties during the nine months ended September 30, 2007.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common share for each of the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30 | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
(000’s except share data) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income available to common shareholders for basic and diluted earnings per share | $ | 9,091 | $ | 8,883 | $ | 25,769 | $ | 25,293 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per common share — weighted average shares | 8,873,746 | 8,951,235 | 8,914,725 | 8,953,856 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options | 404,104 | 293,806 | 341,527 | 278,170 | ||||||||||||
Denominator for diluted earnings per common share — adjusted weighted average shares | 9,277,850 | 9,245,041 | 9,256,252 | 9,232,026 | ||||||||||||
Basic earnings per common share | $ | 1.02 | $ | 0.99 | $ | 2.89 | $ | 2.82 | ||||||||
Diluted earnings per common share | $ | 0.98 | $ | 0.96 | $ | 2.78 | $ | 2.74 | ||||||||
Dividends declared per share | $ | 0.50 | $ | 0.45 | $ | 1.49 | $ | 1.32 |
In December 2006, the Company declared a 10% stock dividend. Share and per share amounts for 2006 have been retroactively restated to reflect the issuance of the additional shares.
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6. Benefit Plans
In addition to defined contribution pension and savings plans which cover substantially all employees, the Company provides additional retirement benefits to certain officers and directors pursuant to unfunded supplemental defined benefit plans. The following table summarizes the components of the net periodic pension cost of the defined benefit plans (dollars in thousands).
Three Months | Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Service cost | $ | 101 | $ | 77 | $ | 303 | $ | 230 | ||||||||
Interest cost | 142 | 131 | 424 | 392 | ||||||||||||
Amortization of transition obligation | 24 | 13 | 71 | 39 | ||||||||||||
Amortization of prior service cost | 38 | 37 | 108 | 110 | ||||||||||||
Amortization of net loss | 182 | 52 | 467 | 159 | ||||||||||||
Net periodic pension cost | $ | 487 | $ | 310 | $ | 1,373 | $ | 930 | ||||||||
The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2006 Annual Report onForm 10-K that it expected to contribute $611 to the unfunded defined benefit plans during 2007. For the three and nine month periods ended September 30, 2007, the Company contributed $153 and $458 to these plans.
7. 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.
The following table summarizes stock option activity for the nine month period ended September 30, 2007:
Weighted Average | ||||||||||||||||
Weighted Average | Aggregate Intrinsic | Remaining Contractual | ||||||||||||||
Shares | Exercise Price | Value(1) ($000’s) | Term(Yrs) | |||||||||||||
Outstanding at December 31, 2006 | 933,880 | $ | 27.30 | |||||||||||||
Granted at fair value | 3,700 | 42.29 | ||||||||||||||
Exercised | (90,411 | ) | 26.41 | |||||||||||||
Forfeited or Expired | (5,721 | ) | 38.01 | |||||||||||||
Outstanding at September 30, 2007 | 841,448 | 27.39 | $ | 24,702 | 5.9 | |||||||||||
Exercisable at September 30, 2007 | 609,848 | 25.59 | $ | 19,003 | 5.3 |
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 |
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would have been received by the option holders had all option holders exercised their options on September 30, 2007. This amount changes based on changes in the market value of the Company’s stock. |
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 the assumptions used in the valuation model for activity during the nine month periods ended September 30, 2007 and 2006.
Nine Month Period Ended September 30, | ||||||||
2007 | 2006 | |||||||
Weighted average assumptions: | ||||||||
Dividend Yield | 4.4 | % | 4.4 | % | ||||
Expected volatility | 9.8 | % | 9.6 | % | ||||
Risk-free interest rate | 4.6 | % | 4.3 | % | ||||
Expected lives (years) | 7.0 | 5.1 |
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 weighted average fair values of options granted during the nine month periods ended September 30, 2007 and 2006 was $3.00 per share and $2.61 per share, respectively. Net compensation expense of $83 and $269 related to the Company’s stock option plans was included in net income for the three and nine month periods ended September 30, 2007, respectively. The total tax benefit related thereto was $22 and $78, respectively. Net compensation expense of $81 and $471 related to the Company’s stock option plans was included in net income for the three and nine month periods ended September 30, 2006, respectively. The total tax benefit related thereto was $20 and $135, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $221 at September 30, 2007. This expense is expected to be recognized over a weighted-average period of 2.4 years.
The following table presents a summary status of the Company’s non-vested options as of September 30, 2007, and changes during the nine month period ended September 30, 2007:
Weighted-Average Grant | ||||||||
Number of | Date Fair | |||||||
Shares | Value | |||||||
Non-vested at December 31, 2006 | 313,128 | $ | 33.20 | |||||
Granted | 1,500 | 46.08 | ||||||
Vested | (77,307 | ) | 31.88 | |||||
Forfeited or Expired | (5,721 | ) | 40.02 | |||||
Non-vested at September 30, 2007 | 231,600 | 33.55 |
8. Recent Accounting Pronouncements
Accounting Changes and Error Corrections — In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of Accounting Principles Board (“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
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December 15, 2005. The adoption of SFAS No. 154 by the Company as of January 1, 2006 did not have any impact on the Company’s condensed consolidated financial statements.
Other-Than-Temporary Impairment of Investments — On November 3, 2005, the FASB issued FASB Staff Position (“FSP”) Nos.FAS 115-1 andFAS 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 Emerging Issues Task Force (“EITF”) Issue03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, and supersedes EITF TopicNo. 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.
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 adoption of the initial recognition provisions of SFAS No. 158 are presented in Note 6 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.
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.
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Item 2. | 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 September 30, 2007 and December 31, 2006, and consolidated results of operations for the three and nine month periods ended September 30, 2007 and September 30, 2006. The Company is consolidated with its wholly-owned subsidiaries, Hudson Valley Bank and its subsidiaries, 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 its subsidiary 369 East 149th Street Corp. (collectively “NYNB”). This discussion and analysis should be read in conjunction with the financial statements and supplementary financial information contained in the Company’s 2006 Annual Report on Form 10-K.
Overview of Management’s Discussion and Analysis |
This overview is intended to highlight selected information included in this Quarterly Report onForm 10-Q. 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 Quarterly Report onForm 10-Q and the Company’s 2006 Annual Report onForm 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 Rockland County, New York, portions of New York City and Fairfield County, Connecticut. 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.
Net income for the three month period ended September 30, 2007 was $9.1 million or $0.98 per diluted share, an increase of $0.2 million or 2.2 percent compared to $8.9 million or $0.96 per diluted share for the three month period ended September 30, 2006. Net income for the nine month period ended September 30, 2007 was $25.8 million or $2.78 per diluted share, an increase of $0.5 million or 2.0 percent compared to $25.3 million or $2.74 per diluted share for the nine month period ended September 30, 2006. The Company achieved growth in both its core businesses of loans and deposits during the nine month period ended September 30, 2007, primarily as a result of the addition of new customers and additional loans and deposits from existing customers, partially offset by declines in certain deposit balances, and other declines 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. 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 September 30, 2007 had approximately $1.3 billion in assets under management compared to approximately $917 million at September 30, 2006.
Overall asset quality continued to be good as a result of the Company’s conservative underwriting and investment standards. Recently, there has been considerable national media attention regarding increases in delinquencies and defaults primarily resulting from “sub-prime” residential mortgage lending. The Company does not generally engage in sub-prime lending, except in occasional circumstances where additional underwriting factors are present which justify extending the loan. The Company does not offer loans with low “teaser” rates or high loan-to-value ratios to sub-prime borrowers. In addition, the Company has not invested in mortgage-backed securities secured by sub-prime loans.
Short-term interest rates, which rose gradually in 2005 and into the second quarter of 2006, remained virtually unchanged from September, 2006 through the first half of September 2007. The immediate effect of this rise in interest rates was positive to the Company, due to more assets than liabilities repricing in the near term. The rise in short-term rates, however, was not accompanied with similar increases in longer term interest rates resulting in a flattening and eventual inversion of the yield curve. The persistence of this condition throughout the second half of 2006 and the first three quarters of 2007 put downward pressure on the Company’s net interest income as liabilities
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repriced at higher rates and maturing longer term assets repriced at similar or only slightly higher rates. The 50 basis point reduction of short-term interest rates in late September 2007 has resulted in some steepening of the yield curve, however, the Company expects continued downward pressure on net interest income for the near future.
As a result of the effects of interest rates, growth in the Company’s core businesses of loans and deposits and other asset/liability management activities, tax equivalent basis net interest income increased by $1.5 million or 5.7 percent to $27.6 million for the three month period ended September 30, 2007, compared to $26.1 million for the same period in the prior year, and increased by $3.8 million or 4.9 percent to $81.3 million for the nine month period ended September 30, 2007, compared to $77.5 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $1.2 million and $1.2 million for the three month periods ended September 30, 2007 and 2006 and $3.7 million for both of the nine month periods ended September 30, 2007 and 2006.
Non interest income, excluding net gains and losses on securities transactions, was $4.0 million for the three month period ended September 30, 2007, an increase of $0.6 million or 17.6 percent compared to $3.4 million for the same period in the prior year. Non interest income, excluding net gains and losses on securities transactions, was $11.1 million for the nine month period ended September 30, 2007, an increase of $1.1 million or 11.0 percent compared to $10.0 million for the same period in the prior year. The increases were primarily due to growth in the investment advisory fee income of A.R. Schmeidler & Co., Inc. and deposit activity and other service fees, partially offset by decreases in other income.
Non interest expense was $16.3 million for the three month period ended September 30, 2007, an increase of $2.3 million or 16.4 percent compared to $14.0 million for the same period in the prior year. Non interest expense was $48.0 million for the nine month period ended September 30, 2007, an increase of $4.7 million or 10.9 percent compared to $43.3 million for the same period in the prior year. The increases reflect 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, partially offset by efficiencies gained by the integration of systems and support services of NYNB Bank.
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 September 30, 2007 shows the Company’s net interest income increasing slightly if interest rates rise and decreasing moderately if interest rates fall, considering a continuation of the current relatively flat yield curve.
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 exceeded all current regulatory capital requirements to be considered in the “well-capitalized” category at September 30, 2007. 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
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. A loan is recognized as impaired when it is probable that principaland/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
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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 September 30, 2007. 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 examinations.
Income Recognition on Loans — Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management’s judgment as to the collectability of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible.
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
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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 valuesand/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. The Company is not aware of any events during the nine month period ended September 30, 2007 which would have required additional impairment evaluations.
Results of Operations for the Three and Nine Month Periods Ended September 30, 2007 and September 30, 2006
Summary of Results |
The Company reported net income of $9.1 million for the three month period ended September 30, 2007, an increase of $0.2 million or 2.2 percent compared to $8.9 million reported for the three month period ended September 30, 2006. The increase in the current year period compared to the prior year period resulted from higher net interest income, higher non interest income, a lower provision for loan loss and slightly lower income taxes, partially offset by higher non interest expenses. Net income for the nine month period ended September 30, 2007 was $25.8 million, an increase of $0.5 million or 2.0 percent compared to $25.3 million for the nine month period ended September 30, 2006. The increase in net income in the current year period compared to the prior year period resulted from higher net interest income and higher non interest income and a lower provision for loan losses, partially offset by higher non interest expenses and higher income taxes. In addition, the nine month period ended September 30, 2006 included $0.2 million pretax losses on sales of $45.6 million of securities available for sale, conducted as part of the Company’s ongoing asset/liability management efforts.
Diluted earnings per share were $0.98 for the three month period ended September 30, 2007, an increase of $0.02 or 2.1 percent compared to $0.96 reported for the same period in the prior year. Diluted earnings per share were $2.78 for the nine month period ended September 30, 2007, an increase of $0.04 or 1.5 percent compared to $2.74 reported for the same period in the prior year. Annualized returns on average equity and average assets, excluding the effects of net unrealized gains and losses on securities available for sale, were 18.6 percent and 1.6 percent, respectively, for the three month period ended September 30, 2007, compared to 19.1 percent and 1.6 percent, respectively, for the same period in the prior year. Annualized returns on average equity and average assets, excluding the effects of net unrealized gains and losses on securities available for sale, were 17.7 percent and 1.5 percent, respectively, for the nine month period ended September 30, 2007, compared to 18.6 percent and 1.5 percent, respectively, for the same period in the prior year.
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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 the three month periods ended September 30, 2007 and September 30, 2006, 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 Company’s federal statutory rate of 35 percent in 2007 and 2006.
Three Months Ended September 30, | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest(3) | Rate | Balance | Interest(3) | Rate | |||||||||||||||||||
(000’s except percentages) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in banks | $ | 18,428 | $ | 252 | 5.47 | % | $ | 5,154 | $ | 58 | 4.50 | % | ||||||||||||
Federal funds sold | 95,441 | 1,247 | 5.23 | 5,959 | 77 | 5.17 | ||||||||||||||||||
Securities:(1) | ||||||||||||||||||||||||
Taxable | 648,377 | 7,979 | 4.92 | 728,105 | 8,816 | 4.84 | ||||||||||||||||||
Exempt from federal income taxes | 214,147 | 3,469 | 6.48 | 213,942 | 3,488 | 6.52 | ||||||||||||||||||
Loans, net(2) | 1,230,034 | 26,384 | 8.58 | 1,141,819 | 24,635 | 8.63 | ||||||||||||||||||
Total interest earning assets | 2,206,427 | 39,331 | 7.13 | 2,094,979 | 37,074 | 7.08 | ||||||||||||||||||
Non interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 58,367 | 45,658 | ||||||||||||||||||||||
Other assets | 84,371 | 78,298 | ||||||||||||||||||||||
Total non interest earning assets | 142,738 | 123,956 | ||||||||||||||||||||||
Total assets | $ | 2,349,165 | $ | 2,218,935 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 588,030 | $ | 4,044 | 2.75 | % | $ | 446,547 | $ | 2,683 | 2.40 | % | ||||||||||||
Savings | 93,158 | 196 | 0.84 | 95,055 | 167 | 0.70 | ||||||||||||||||||
Time | 287,022 | 2,860 | 3.99 | 226,034 | 1,976 | 3.50 | ||||||||||||||||||
Checking with interest | 159,949 | 384 | 0.96 | 133,272 | 278 | 0.83 | ||||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | 159,137 | 1,886 | 4.74 | 236,684 | 2,986 | 5.05 | ||||||||||||||||||
Other borrowings | 214,593 | 2,405 | 4.48 | 254,380 | 2,883 | 4.53 | ||||||||||||||||||
Total interest bearing liabilities | 1,501,889 | 11,775 | 3.14 | 1,391,972 | 10,973 | 3.15 | ||||||||||||||||||
Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 619,564 | 610,604 | ||||||||||||||||||||||
Other liabilities | 32,014 | 30,406 | ||||||||||||||||||||||
Total non interest bearing liabilities | 651,578 | 641,010 | ||||||||||||||||||||||
Stockholders’ equity(1) | 195,698 | 185,953 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity(1) | $ | 2,349,165 | $ | 2,218,935 | ||||||||||||||||||||
Net interest earnings | $ | 27,556 | $ | 26,101 | ||||||||||||||||||||
Net yield on interest earning assets | 5.00 | % | 4.98 | % | ||||||||||||||||||||
(1) | Excludes unrealized gains (losses) on securities available for sale |
(2) | Includes loans classified as non-accrual |
(3) | Effects of adjustments to a tax equivalent basis were increases of $1,214 and $1,221 for the three month periods ended September 30, 2007 and September 30, 2006, respectively. |
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The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the nine month periods ended September 30, 2007 and September 30, 2006, 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 Company’s federal statutory rate of 35 percent in 2007 and 2006.
Nine Months Ended September 30, | ||||||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest(3) | Rate | Balance | Interest(3) | Rate | |||||||||||||||||||
(000’s except percentages) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in banks | $ | 11,184 | $ | 453 | 5.40 | % | $ | 4,493 | $ | 136 | 4.04 | % | ||||||||||||
Federal funds sold | 60,675 | 2,375 | 5.22 | 15,121 | 530 | 4.67 | ||||||||||||||||||
Securities:(1) | ||||||||||||||||||||||||
Taxable | 684,976 | 25,325 | 4.93 | 734,622 | 25,707 | 4.67 | ||||||||||||||||||
Exempt from federal income taxes | 215,135 | 10,560 | 6.54 | 213,517 | 10,597 | 6.62 | ||||||||||||||||||
Loans, net(2) | 1,223,082 | 78,300 | 8.54 | 1,108,129 | 70,085 | 8.43 | ||||||||||||||||||
Total interest earning assets | 2,195,052 | 117,013 | 7.11 | 2,075,882 | 107,055 | 6.88 | ||||||||||||||||||
Non interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 55,232 | $ | 45,729 | |||||||||||||||||||||
Other assets | 82,909 | 77,712 | ||||||||||||||||||||||
Total non interest earning assets | 138,141 | 123,441 | ||||||||||||||||||||||
Total assets | $ | 2,333,193 | $ | 2,199,323 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 534,569 | $ | 10,694 | 2.67 | % | $ | 433,684 | $ | 6,415 | 1.97 | % | ||||||||||||
Savings | 93,495 | 584 | 0.83 | 98,560 | 489 | 0.66 | ||||||||||||||||||
Time | 279,339 | 8,227 | 3.93 | 233,654 | 5,295 | 3.02 | ||||||||||||||||||
Checking with interest | 155,450 | 1,140 | 0.98 | 133,867 | 708 | 0.71 | ||||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | 196,275 | 7,127 | 4.84 | 228,384 | 7,922 | 4.62 | ||||||||||||||||||
Other borrowings | 236,474 | 7,977 | 4.50 | 260,554 | 8,725 | 4.46 | ||||||||||||||||||
Total interest bearing liabilities | 1,495,602 | 35,749 | 3.19 | 1,388,703 | 29,554 | 2.84 | ||||||||||||||||||
Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 613,238 | 597,596 | ||||||||||||||||||||||
Other liabilities | 30,281 | 31,549 | ||||||||||||||||||||||
Total non interest bearing liabilities | 643,519 | 629,145 | ||||||||||||||||||||||
Stockholders’ equity(1) | 194,072 | 181,475 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity(1) | $ | 2,333,193 | $ | 2,199,323 | ||||||||||||||||||||
Net interest earnings | $ | 81,264 | $ | 77,501 | ||||||||||||||||||||
Net yield on interest earning assets | 4.94 | % | 4.98 | % | ||||||||||||||||||||
(1) | Excludes unrealized gains (losses) on securities available for sale |
(2) | Includes loans classified as non-accrual |
(3) | Effects of adjustments to a tax equivalent basis were increases of $3,696 and $3,709 for the nine month periods ended September 30, 2007 and September 30, 2006, 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 three and nine month periods ended September 30, 2007 and September 30, 2006.
(000’s) | ||||||||||||||||||||||||
Three Month Period Increase | Nine Month Period Increase | |||||||||||||||||||||||
(Decrease) Due to Change in | (Decrease) Due to Change in | |||||||||||||||||||||||
Volume | Rate | Total(1) | Volume | Rate | Total(1) | |||||||||||||||||||
Interest Income: | ||||||||||||||||||||||||
Deposits in banks | $ | 149 | $ | 45 | $ | 194 | $ | 203 | $ | 114 | $ | 317 | ||||||||||||
Federal funds sold | 1,156 | 14 | 1,170 | 1,597 | 248 | 1,845 | ||||||||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | (965 | ) | 128 | (837 | ) | (1,737 | ) | 1,355 | (382 | ) | ||||||||||||||
Exempt from federal income taxes(2) | 3 | (22 | ) | (19 | ) | 80 | (117 | ) | (37 | ) | ||||||||||||||
Loans, net | 1,903 | (154 | ) | 1,749 | 7,270 | 945 | 8,215 | |||||||||||||||||
Total interest income | 2,246 | 11 | 2,257 | 7,413 | 2,545 | 9,958 | ||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | 850 | 511 | 1,361 | 1,492 | 2,787 | 4,279 | ||||||||||||||||||
Savings | (3 | ) | 32 | 29 | (25 | ) | 120 | 95 | ||||||||||||||||
Time | 533 | 351 | 884 | 1,035 | 1,897 | 2,932 | ||||||||||||||||||
Checking with interest | 56 | 50 | 106 | 114 | 318 | 432 | ||||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | (978 | ) | (122 | ) | (1,100 | ) | (1,114 | ) | 319 | (795 | ) | |||||||||||||
Other borrowings | (451 | ) | (27 | ) | (478 | ) | (806 | ) | 58 | (748 | ) | |||||||||||||
Total interest expense | 7 | 795 | 802 | 696 | 5,499 | 6,195 | ||||||||||||||||||
Increase in interest differential | $ | 2,239 | $ | (784 | ) | $ | 1,455 | $ | 6,717 | $ | (2,954 | ) | $ | 3,763 | ||||||||||
(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. |
(2) | Equivalent yields on securities exempt from federal income taxes are based on a federal statutory rate of 35 percent in 2007 and 2006. |
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. For the three and nine month periods ended September 30, 2007, net interest income, on a tax equivalent basis, increased $1.5 million or 5.7 percent to $27.6 million and $3.8 million or 4.9 percent to $81.3 million, respectively, compared to $26.1 million and $77.5 million for the same periods in the prior year. Net interest income for the three month period ended September 30, 2007 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $1.5 million or 0.2 percent to $704.5 million compared to $703.0 million for the same period in the prior year and a slight increase in the tax equivalent basis net interest margin to 5.00% in 2007 from 4.98% in the prior year period. Net interest income for the nine month period ended September 30, 2007 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $12.3 million or 1.8 percent to $699.5 million compared to $687.2 million for the same period in the prior year, partially offset by a slight decrease in the tax equivalent basis net interest margin to 4.94% in 2006 from 4.98% in the prior year period.
Interest income is determined by the volume of, and related rates earned on, interest earning assets. Interest income, on a tax equivalent basis, increased $2.2 million or 5.9 percent to $39.3 million and $9.9 million or 9.2 percent to $117.0 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $37.1 million and $107.1 million for the same periods in the prior year. Average interest earning assets increased $111.4 million or 5.3 percent to $2,206.4 million and $119.2 million or 5.7 percent to $2,195.1 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $2,095.0 million and $2,075.9 million for the same periods in the prior year. Volume increases in interest bearing deposits, federal funds
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sold, tax-exempt securities and loans and generally higher interest rates, partially offset by a volume decrease in taxable securities, contributed to the higher interest income in the three and nine month periods ended September 30, 2007 compared to the same periods in the prior year.
Average total securities, excluding average net unrealized losses on available for sale securities, decreased by $79.5 million or 8.4 percent to $862.5 million and by $48.0 million or 5.1 percent to $900.1 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $942.0 million and $948.1 million for the same periods in the prior year. The decreases in average total securities in the three and nine month periods ended September 30, 2007, compared to the same periods in the prior year, was a result of cash flow from maturing securities being utilized to repay certain maturing short-term and long-term borrowings as part of strategies being conducted as a part of the Company’s ongoing asset/liability management. The average yields on securities were higher for the three and nine month periods ended September 30, 2007 compared to the same periods in the prior year. Average tax equivalent basis yields on securities for the three and nine month periods ended September 30, 2007 were 5.31 percent and 5.32 percent, respectively, compared to 5.22 percent and 5.11 percent for the same periods in the prior year. As a result, tax equivalent basis interest income from securities was lower for the three and nine month periods ended September 30, 2007, compared to the same periods in the prior year, due to lower volume, partially offset by higher interest rates.
Average net loans increased $88.2 million or 7.7 percent to $1,230.0 million and $115.0 million or 10.4 percent to $1,223.1 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $1,141.8 million and $1,108.1 million for the same periods in the prior year. The increase in average net loans reflect the Company’s continuing emphasis on making new loans, expansion of loan production capabilities and more effective market penetration. Average yields on loans were 8.58 percent and 8.54 percent, respectively, for the three and nine month periods ended September 30, 2007 compared to 8.63 percent and 8.43 percent for the same periods in the prior year. As a result, interest income on loans was higher for the three month period ended September 30, 2007, compared to the same period in the prior year, due to higher volume, partially offset by lower interest rates. Interest income on loans was higher for the nine month period ended September 30, 2007, compared to the same period in the prior year, due to higher volume and higher interest rates.
Interest expense is a function of the volume of, and rates paid for, interest bearing liabilities, comprised of deposits and borrowings. Interest expense increased $0.8 million or 7.3 percent to $11.8 million and $6.2 million or 21.0 percent to $35.7 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $11.0 million and $29.6 million for the same periods in the prior year. Average interest bearing liabilities increased $109.9 million or 7.9 percent to $1,501.9 million and $106.9 million or 7.7 percent to $1,495.6 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $1,392.0 million and $1,388.7 million for the same periods in the prior year. The increase in average interest bearing liabilities for the three and nine month periods ended September 30, 2007, compared to the same periods in the prior year, resulted from volume increases in checking with interest, money market deposits and time deposits, partially offset by volume decreases in savings deposits, securities sold under agreements to repurchase, other short-term borrowings and other borrowed funds. Deposits increased from new customers, existing customers and the continued growth resulting from the opening of new branches. Average borrowed funds decreased $117.4 million or 23.9 percent to $373.7 million and $56.2 million or 11.5 percent to $432.7 million for the three and nine month periods ended September 30, 2007, compared to $491.1 million and $488.9 million for the same periods in the prior year. Maturing borrowings were repaid with cash flow from maturing investment securities in a planned reduction conducted as part of the Company’s ongoing asset/liability management. Average interest rates on interest bearing liabilities remained virtually unchanged during the three month period ended September 30, 2007, compared to the same period in the prior year, due to lower average interest rates on borrowed funds, offset by higher average interest rates on deposits. As a result, interest expense was higher for the three month period ended September 30, 2007, compared to the same period in the prior year due primarily to higher volume. Average interest rates on interest bearing liabilities were higher during the nine month period ended September 30, 2007, compared to the same period in the prior year, due to higher average interest rates on deposits, partially offset by lower average interest rates on borrowed funds. As a result, interest expense was higher for the three month period ended September 30, 2007, compared to the same period in the prior year due to higher volume and higher interest rates.
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Average non interest bearing demand deposits increased $9.0 million or 1.5 percent to $619.6 million and $15.6 million or 2.6 percent to $613.2 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $610.6 million and $597.6 million for the same periods in the prior year. These deposits are an important component of the Company’s asset/liability management and have a direct impact on the determination of net interest income. Funds from increases in both interest bearing and non interest bearing deposits were utilized to reduce borrowings and to fund increases in loans and short term investments.
The interest rate spread on a tax equivalent basis for the three and nine month periods ended September 30, 2007 and 2006 is as follows:
Three Month | Nine Month | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Average interest rate on: | ||||||||||||||||
Total average interest earning assets | 7.13% | 7.08% | 7.11% | 6.88% | ||||||||||||
Total average interest bearing liabilities | 3.14% | 3.15% | 3.19% | 2.84% | ||||||||||||
Total interest rate spread | 3.99% | 3.93% | 3.92% | 4.04% |
Although the interest rate spread improved slightly for the three month period ended September 30, 2007, compared to the same period in the prior year, the interest rate spread decreased for the nine month period ended September 30, 2007, compared to the same period in the prior year. The overall year to date decrease resulted from a greater increase in the average rates on interest bearing liabilities over that of interest earning assets. Management cannot predict what impact market conditions will have on its interest rate spread and additional future compression in the net interest rate spread may occur.
Provision for Loan Losses
The Company recorded a provision for loan losses of $0.2 million and $0.5 million for the three month periods ended September 30, 2007 and 2006, respectively. The Company recorded a provision for loan losses of $1.3 million and $1.6 million for the nine month periods ended September 30, 2007 and 2006, respectively. 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. See “Financial Condition” for further discussion.
Non Interest Income
Non interest income, excluding net gains on securities available for sale, was $4.0 million for the three month period ended September 30, 2007, an increase of $0.6 million or 19.2 percent from $3.4 million for the same period in the prior year. Non interest income, excluding net losses on available for sale securities, was $11.1 million for the nine month period ended September 30, 2007, an increase of $1.4 million or 11.5 percent from $10.0 million for the same period in the prior year.
• | Service charges for the three month period ended September 30, 2007 were unchanged as compared to the prior period. Service charges for the nine month period ended September 30, 2007 increased $0.1 million or 2.9 percent to $3.5 million from $3.4 million. This increase reflects new fees, a higher level of fees charged and increased activity. | |
• | Investment advisory fee income for the three and nine month periods ended September 30, 2007 increased 32.8 percent to $2.4 million from $1.8 million and 25.8 percent to $6.5 million from $5.2 million as compared to the prior year periods. The increase was primarily due to increases in assets under management, resulting from net increases in assets from existing customers, addition of new customers and net increases in asset values. |
• | Other income for the three and nine month periods ended September 30, 2007 increased 13.4 percent to $423 thousand from $373 thousand and decreased 20.8 percent to $1.1 million from $1.4 million as compared to the prior year periods. The increase was primarily the result of increased rental income. The decrease was primarily the result of decreases in safe deposit income, wire transfer income and miscellaneous non-recurring service fees recorded in the prior year periods. |
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Gains and losses on sales or redemptions of securities were not significant in either the current or prior year periods.
Non Interest Expense
Non interest expense for the three and nine month periods ended September 30, 2007 increased 16.5 percent to $16.3 million from $14.0 million and 10.8 percent to $48.0 million from $43.3 million in the prior year periods. These increases reflect the overall growth of the Company and resulted from increases in salaries and employee benefits expense, occupancy expense, equipment expense, business development expense and other operating expenses partially offset by decreases in FDIC assessment for both the three and nine month period and professional services for the nine month period ended September 30, 2007, as compared to the prior year periods.
Salaries and employee benefits, the largest component of non interest expense, for the three and nine month periods ended September 30, 2007 increased 15.5 percent to $9.4 million from $8.1 million and 13.9 percent to $27.6 million from $24.3 million, as compared to prior year periods. The increase resulted from additional staff to accommodate the growth in loans and deposits, new branch facilities, and merit increases. In addition, salaries and employee benefits increased as a result of higher costs of employee benefit plans and costs associated with related payroll taxes.
Occupancy expense for the three and nine month periods ended September 30, 2007 increased 14.9 percent to $1.6 million from $1.4 million and 13.4 percent to $4.7 million from $4.2 million in the prior year periods. These increases reflected the opening of new branch facilities as well as rising costs on leased facilities, real estate taxes, utility costs, maintenance costs and other costs to operate the Company’s facilities.
Professional services expense for the three and nine month periods ended September 30, 2007 increased 19.2 percent to $1.2 million from $1.0 million and decreased 3.7 percent to $3.5 million from $3.7 million in the prior year periods. The increase was due to expenses related to a higher audit costs, a document imaging project and executive compensation surveys. The decrease was due to expenses, recorded in the prior periods, related to the acquisition of NYNB partially offset by higher audit costs.
Equipment expense for the three and nine month periods ended September 30, 2007 increased 17.6 percent to $0.8 million from $0.7 million and 11.6 percent to $2.3 million from $2.0 million in the prior year periods. The increases resulted from the implementation of a new telephone system and increased maintenance costs compared to the prior year periods.
Business development expense for the three and nine month periods ended September 30, 2007 increased 21.8 percent to $0.6 million from $0.5 million and 14.5 percent to $1.9 million from $1.6 million in the prior year periods. The increase was due to increased promotion of Bank products, including HVB’s anniversary and costs related to increased participation in public relations events.
The assessment of the FDIC for the three and nine month periods ended September 30, 2007 decreased 47.9 percent to $49,000 from $94,000 and 51.6 percent to $0.1 million from $0.3 million in the prior year. This decrease was primarily due to a reduction of the assessment rate on deposits at NYNB.
Significant changes, more than 5 percent, in other components of non interest expense for the three and nine month periods ended September 30, 2007 as compared to the three and nine month periods ended September 30, 2006, were due to the following:
• | Increase of $2,000 (0.7%) and $82,000 (9.2%), respectively, in office supplies due to the opening of new branch facilities | |
• | Increase of $124,000 (1240.0%) and $93,000 (112.1%), respectively, in other insurance expense resulting from increases in banker’s professional insurance costs and automobile insurance costs partially offset by reductions in the estimates of the net cost of certain life insurance programs. | |
• | Decrease of $10,000 (8.6%) and $99,000 (13.4), respectively, in other loan expenses due to decreases in residential mortgage recording fees and loan collection expenses. |
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• | Increase of $103,000 (21.8%) and decrease of $259,000 (12.8%), respectively, in outside services costs due to service termination fee related to the acquisition of NYNB recorded in the prior periods partially offset by increased data processing costs in the current periods. | |
• | Increase of $96,000 (48.2%) and $96,000 (13.2%), respectively, in courier expenses due to an increase in customer utilization and increased fuel costs. | |
• | Increase of $14,000 (11.3%) and $50,000 (13.4%), respectively, in dues, meetings and seminar expense due to increased participation in such events. | |
• | Increase of $60,000 (19.2%) and $225,000 (25.5%), respectively, in communications expense due to added voice and data lines associated with the expansion of technology usage and growth in customer and business activity. |
Income Taxes |
Income taxes of $4.8 million and $13.7 million were recorded in the three and nine month periods ended September 30, 2007, compared to $4.9 million and $13.4 million, respectively, for the same periods in the prior year. The Company is currently subject to a statutory Federal tax rate of 35 percent, a New York State tax rate of 7.1 percent plus a 17 percent surcharge, and a New York City tax rate of approximately 9 percent. The Company’s overall effective tax rates were 34.7 percent and 34.5 percent for the three and nine month periods ended September 30, 2007, compared to 35.3 percent and 34.5 percent, respectively, for the same periods in the prior year. The decrease in the overall effective tax rates for the 2007 periods, compared to the prior year periods, resulted from increases in the percentages of income subject to New York State, taxes and a slight reduction in the New York State corporate income tax rate.
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 is currently open to audit by the Internal Revenue Service under the statute of limitations for years 2003 through 2006. The Company is currently open to audit by New York State under the statute of limitations for years 2005 and 2006. Other pertinent tax information is set forth in the Notes to Condensed Consolidated Financial Statements included elsewhere herein.
Financial Condition
Assets
The Company had total assets of $2,245.2 million at September 30, 2007, a decrease of $46.5 million or 2.0 percent from $2,291.7 million at December 31, 2006.
Federal Funds Sold
Federal funds sold totaled $40.3 million at September 30, 2007, a increase of $28.4 million from $11.9 million at December 31, 2006. The increase resulted from timing differences in the redeployment of available funds into loans and longer term investments and volatility in certain deposit types and relationships.
Securities and FHLB Stock
The Company invests in stock of the Federal Home Loan Bank of New York (“FHLB”) and other securities which are rated with an investment grade by nationally recognized credit rating organizations and, on a limited basis, in non-rated securities. Non-rated securities totaled $13.3 million at September 30, 2007, and were comprised primarily of obligations of municipalities located within the Company’s market area.
Securities totaled $823.5 million at September 30, 2007, a decrease of $94.2 million or 10.3 percent from $917.7 million at December 31, 2006. Securities classified as available for sale, which are recorded at estimated fair value, totaled $788.7 million at September 30, 2007, a decrease of $89.0 million or 10.2 percent from $877.7 million at December 31, 2006. Securities classified as held to maturity, which are recorded at amortized cost, totaled $34.8 million at September 30, 2007, a decrease of $5.1 million or 12.8 percent from $39.9 million at December 31, 2006. The overall decrease in securities is a result of cash flow from maturing securities being utilized to repay
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certain maturing short-term and long-term borrowings as part of strategies being conducted by the Company’s ongoing asset/liability management. The following table sets forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities at September 30, 2007:
Gross | ||||||||||||||||
Amortized | Unrealized | Estimated | ||||||||||||||
Classified as Available for Sale | Cost | Gains | Losses | Fair Value | ||||||||||||
(000’s) | ||||||||||||||||
U.S. Treasury and government agencies | $ | 129,838 | $ | 73 | $ | 1,138 | $ | 128,773 | ||||||||
Mortgage-backed securities | 403,591 | 261 | 7,478 | 396,374 | ||||||||||||
Obligations of states and political subdivisions | 207,227 | 2,437 | 1,125 | 208,539 | ||||||||||||
Other debt securities | 23,510 | 41 | — | 23,551 | ||||||||||||
Total debt securities | 764,166 | 2,812 | 9,741 | 757,237 | ||||||||||||
Mutual funds and other equity securities | 31,477 | 591 | 639 | 31,429 | ||||||||||||
Total | $ | 795,643 | $ | 3,403 | $ | 10,380 | $ | 788,666 | ||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities | $ | 29,698 | — | $ | 515 | $ | 29,183 | |||||||||
Obligations of states and political subdivisions | 5,131 | $ | 59 | — | 5,190 | |||||||||||
Total | $ | 34,829 | $ | 59 | $ | 515 | $ | 34,373 | ||||||||
U.S. Treasury and government agency obligations classified as available for sale totaled $128.8 million at September 30, 2007, a decrease of $5.7 million or 4.2 percent from $134.5 million at December 31, 2006. The decrease was due to maturities and calls of $15.8 partially offset by purchases of $8.5 million and other increases of $1.6 million. There were no U.S. Treasury or government agency obligations classified as held to maturity at September 30, 2007 or at December 31, 2006.
Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $396.4 million at September 30, 2007, a decrease of $75.6 million or 16.0 percent from $472.0 million at December 31, 2006. The decrease was due to maturities and principal paydowns of $85.0 million partially offset by purchases of $7.9 million and other increases of $1.5 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $29.7 million at September 30, 2007, a decrease of $5.1 million or 14.7 percent from $34.8 million at December 31, 2006. The decrease was due to maturities and principal paydowns of $5.1 million. The purchases of available for sale securities consisted of fixed rate mortgage-backed securities with average lives of five years or less at the time of purchase.
Obligations of state and political subdivisions classified as available for sale totaled $208.5 million at September 30, 2007, a decrease of $3.8 million or 1.7 percent from $212.3 million at December 31, 2006. The decrease was due to maturities and calls of $14.0 million and other decreases of $1.6 million partially offset by purchases of $11.8 million. Obligations of state and political subdivisions classified as held to maturity totaled $5.1 million at both September 30, 2007 and December 31, 2006. The combined available for sale and held to maturity obligations at September 30, 2007 were comprised of approximately 69 percent of New York State political subdivisions and 31 percent of a variety of other states and their subdivisions all with diversified maturity dates. The Company considers such securities to have favorable tax equivalent yields.
Other debt securities, consisting primarily of corporate bonds and trust preferred securities, totaled $23.6 million at September 30, 2007, a decrease of $4.6 million or 16.3 percent from $28.2 million at December 31, 2006. The decrease resulted from maturities and calls of $4.3 million and other decreases of $0.3 million. All other debt securities are classified as available for sale.
Mutual funds and other equity securities totaled $31.4 million at September 30, 2007, an increase of $0.6 million or 1.9 percent from $30.8 million at December 31, 2006. The increase resulted from purchases of $0.8 million partially offset by other decreases of $0.2 million. All mutual funds and other equity securities are classified as available for sale.
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The Banks, as members of the FHLB, invest in stock of the FHLB as a prerequisite to obtaining funding under various programs offered by the FHLB. The Banks must purchase additional shares of FHLB stock to obtain increases in such borrowings. Shares in excess of required amounts for outstanding borrowings are generally redeemed by the FHLB. The investment in FHLB stock totaled $11.7 million at September 30, 2007, and $14.0 million at December 31, 2006.
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 September 30, 2007 or December 31, 2006. The Company has not invested in mortgage-backed securities secured by sub-prime loans.
Loans |
Net loans totaled $1,234.3 million at September 30, 2007, an increase of $29.1 million or 2.4 percent from $1,205.2 million at December 31, 2006. The increase resulted principally from a $52.7 million increase in commercial real estate loans, $15.4 million increase in residential real estate loans a $10.6 million increase in commercial and industrial loans and $3.3 million increase in lease financing partially offset by a $48.1 million decrease in construction loans and a $3.9 million decrease in loans to individuals. The increase in loans reflect the Company’s continuing emphasis on making new loans, expansion of loan production facilities, and more effective market penetration. Recently, there has been considerable national media attention regarding increases in delinquencies and defaults primarily resulting from “sub-prime” residential mortgage lending. The Company does not generally engage in sub-prime lending, except in occasional circumstances where additional underwriting factors are present which justify extending the loan. The Company does not offer loans with low “teaser” rates or high loan-to-value ratios to sub-prime borrowers.
Major classifications of loans at September 30, 2007 and December 31, 2006 are as follows:
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
(000’s) | ||||||||
Real Estate: | ||||||||
Commercial | $ | 342,869 | $ | 290,185 | ||||
Construction | 204,794 | 252,941 | ||||||
Residential | 304,977 | 289,553 | ||||||
Commercial and industrial | 365,807 | 355,214 | ||||||
Individuals | 24,903 | 28,777 | ||||||
Lease financing | 12,073 | 8,766 | ||||||
Total | 1,254,613 | 1,225,436 | ||||||
Deferred loan fees, net | (3,190 | ) | (3,409 | ) | ||||
Allowance for loan losses | (17,135 | ) | (16,784 | ) | ||||
Loans, net | $ | 1,234,288 | $ | 1,205,243 | ||||
The following table summarizes the Company’s non-accrual loans and loans past due 90 days or more and still accruing as of September 30, 2007 and December 31, 2006:
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
(000’s except percentages) | ||||||||
Non-accrual loans at period end | $ | 8,149 | $ | 5,572 | ||||
Loans past due 90 days or more and still accruing | 5,051 | 3,879 | ||||||
Non performing assets to total assets at period end | 0.36 | % | 0.24 | % |
Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $799,000 and $474,000 for the nine month period ended September 30, 2007 and the year ended December 31, 2006, respectively. There was no interest income on nonperforming assets included in net income for the three and nine month periods ended September 30, 2007 and the year ended December 31, 2006.
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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 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.
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 for loan losses for the dates indicated is as follows:
September 30, | Change During | December 31, | ||||||||||
2007 | Period | 2006 | ||||||||||
(000’s) | ||||||||||||
Specific component | $ | 799 | $ | (996 | ) | $ | 1,795 | |||||
Formula component | 936 | (153 | ) | 1,089 | ||||||||
Unallocated component | 15,400 | 1,500 | 13,900 | |||||||||
Total allowance | $ | 17,135 | $ | 16,784 | ||||||||
Net change | 351 | |||||||||||
Net chargeoffs | (939 | ) | ||||||||||
Provision amount | $ | 1,290 | ||||||||||
The change in the specific component of the allowance for loan losses is the result of our analysis of impaired and other problem loans and our determination of the amount required to reduce the carrying amount of such loans to estimated fair value.
The change in the formula component of the allowance for loan losses is 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 determination of the unallocated component of the allowance for loan losses is the result of our consideration of other relevant factors affecting loan collectibility. Due to the inherent uncertainty in the process, we do not attempt to quantify separate amounts for each of the conditions considered in estimating the unallocated component of the allowance. We periodically adjust the unallocated component to an amount that, when considered with the specific and formula components, represents our best estimate of probable losses in the loan portfolio as of each balance sheet date. The following factors affected the determination of the unallocated component for loan losses at September 30, 2007.
• | 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 that trigger economic uncertainty or possible slowing economic conditions are part of the determination of the unallocated component of the allowance. | |
• | Concentration — Construction loans totaled $204.8 million or 16.6 percent of net loans at September 30, 2007. These loans currently 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. During the nine months ended September 30, 2007, the number of completed properties and their time on the market has increased and there has been further downward pressure on prices. Further exacerbating the ability to sell newly constructed homes and condominiums is the tightening of credit in the secondary markets for residential borrowers, particularly sub-prime borrowers and, recently, jumbo loan borrowers. Therefore, the borrowers’ ability to pay and collateral values may be negatively impacted. Such concentration and the associated increase in various risk factors are not reflected in the formula component of the allowance due to the lag caused by using three years historical losses in |
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determining the loss factors. Therefore, consideration of concentrations is a part of the determination of the unallocated component of the allowance. |
• | Credit quality — The dollar amount of nonperforming loans increased to $8.1 million or 0.65 percent of total loans at September 30, 2007, compared to $5.6 million or 0.45 percent of total loans at December 31, 2006. 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. |
As a result of our detailed review process and consideration of the identified relevant factors, management determined that a $1.5 million increase in the unallocated component of the allowance to $15.4 million reflects our best estimate of probable losses which have been incurred as of September 30, 2007.
Deposits
Deposits totaled $1,728.2 million at September 30, 2007, an increase of $101.8 million or 6.3 percent from $1,626.4 million at December 31, 2006. The following table presents a summary of deposits at September 30, 2007 and December 31, 2006:
(000’s) | ||||||||||||
September 30, | December 31, | |||||||||||
2007 | 2006 | Increase (Decrease) | ||||||||||
Demand deposits | $ | 591,268 | $ | 644,447 | $ | (53,179 | ) | |||||
Money market accounts | 600,006 | 417,089 | 182,917 | |||||||||
Savings accounts | 92,010 | 95,741 | (3,731 | ) | ||||||||
Time deposits of $100,000 or more | 217,831 | 197,794 | 20,037 | |||||||||
Time deposits of less than $100,000 | 60,792 | 112,089 | (51,297 | ) | ||||||||
Checking with interest | 166,305 | 159,281 | 7,024 | |||||||||
Total Deposits | $ | 1,728,212 | $ | 1,626,441 | $ | 101,771 | ||||||
The increase in deposits resulted from the new account relationships, increased account activity as well as increases in deposits associated with real estate activity partially offset by seasonal decreases in certain accounts consistent with activity experienced by the Company in prior years.
Borrowings |
Borrowings are utilized as part of the Company’s continuing efforts to effectively leverage its capital and to manage interest rate risk. Total borrowings were $300.0 million at September 30, 2007, a decrease of $156.6 million or 34.3 percent from $456.6 million at December 31, 2006. The overall decrease resulted primarily from a $38.5 million decrease in FHLB term borrowings, a $117.4 million decrease in short-term repurchase agreements with brokers and a $13.9 million decrease in other short-term borrowings, partially offset by a $13.2 million increase in short-term repurchase agreements with customers. The decreases in FHLB term borrowings and short-term repurchase agreements with brokers are primarily the result of a planned reduction of certain maturing borrowings being conducted as part of the Company’s ongoing asset/liability management.
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Stockholders’ Equity |
Stockholders’ equity totaled $192.3 million at September 30, 2007, an increase of 6.7 million or 3.6 percent from $185.6 million at December 31, 2006. Increases in stockholders’ equity resulted from net income of $25.8 million for the nine month period ended September 30, 2007, and $2.9 million proceeds from stock options exercised. Decreases in stockholders’ equity resulted from $13.3 million cash dividends paid on common stock and, $9.2 million purchases of treasury stock and a $0.2 million decrease in accumulated comprehensive income, principally as a result of a decrease in the net unrealized value of securities available for sale.
The Company’s and the Banks’ capital ratios at September 30, 2007 and December 31, 2006 are as follows:
Minimum for | ||||||||||||
September 30, | December 31, | Capital Adequacy | ||||||||||
2007 | 2006 | Purposes | ||||||||||
Leverage ratio: | ||||||||||||
Company | 7.8 | 7.8 | % | 4.0 | % | |||||||
HVB | 7.9 | 7.8 | 4.0 | |||||||||
NYNB | 6.8 | 7.0 | 4.0 | |||||||||
Tier 1 capital: | ||||||||||||
Company | 12.8 | 12.3 | % | 4.0 | % | |||||||
HVB | 12.9 | 12.3 | 4.0 | |||||||||
NYNB | 11.8 | 12.5 | 4.0 | |||||||||
Total capital: | ||||||||||||
Company | 14.0 | 13.5 | % | 8.0 | % | |||||||
HVB | 14.1 | 13.5 | 8.0 | |||||||||
NYNB | 13.0 | 13.7 | 8.0 |
The Company, HVB and NYNB each exceed all current regulatory capital requirements to be considered in the “well capitalized” category at September 30, 2007.
Liquidity |
The Company’s liquid assets, at September 30, 2007, include cash and due from banks of $52.1 million and Federal funds sold of $40.3 million. 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 $202.7 million at September 30, 2007. This represented 24.4 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $303.2 million, or 24.2 percent of loans at September 30, 2007, 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.
HVB and NYNB are members of the FHLB. HVB has a borrowing capacity of up to $200 million under two lines of credit at September 30, 2007, at various terms secured by FHLB stock owned and to be purchased and certain other assets of HVB. HVB had nothing outstanding under these lines from the FHLB at September 30, 2007. NYNB had a borrowing capacity of up to $26 million under a line of credit from the FHLB at June 30, 2007. There was nothing outstanding under this line at September 30, 2007. The Company’s short-term borrowings included $89.1 million under securities sold under agreements to repurchase at September 30, 2007, and had securities totaling $300.0 million at September 30, 2007 that could be sold under agreements to repurchase, thereby increasing liquidity. In addition, HVB has agreements with two investment firms to borrow up to $381 million under Retail CD Brokerage Agreements and has agreements with correspondent banks for purchasing Federal funds up to $85 million. There was nothing outstanding under these agreements at September 30, 2007. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank’s discount window, these borrowings must be collateralized by U.S. Treasury and government agency securities.
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Management considers the Company’s sources of liquidity to be adequate to meet any expected funding needs and to be responsive to changing interest rate markets.
Forward-Looking Statements
The Company has made in this Form 10-Q various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to earnings, credit quality and other financial and business matters for periods subsequent to September 30, 2007. These statements may be identified by such forward-looking terminology as “expect”, “may”, “will”, “anticipate”, “continue”, “believe” or similar statements or variations of such terms. 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 affecting 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, state and local 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. |
Impact of Inflation and Changing Prices
The Condensed Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollar amounts or estimated fair value without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
Quantitative and qualitative disclosures about market risk at December 31, 2006 were previously reported in the Company’s 2006 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at September 30, 2007 compared to December 31, 2006.
The Company’s primary market risk exposure is interest rate risk since substantially all transactions are denominated in U.S. dollars with no direct foreign exchange or changes in commodity price exposure.
All market risk sensitive instruments are classified either as available for sale or held to maturity with no financial instruments entered into for trading purposes. The Company from time to time uses derivative financial instruments to manage risk. The Company did not enter into any new derivative financial instruments during the
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nine month period ended September 30, 2007. The Company had no derivative financial instruments in place at September 30, 2007.
The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at September 30, 2007 shows the Company’s net interest income increasing slightly if interest rates rise and decreasing moderately if interest rates fall, considering a continuation of the current flat yield curve. A change in the shape or steepness of the yield curve will impact our market risk to changes in interest rates.
The Company also prepares a static gap analysis which, at September 30, 2007, shows a positive cumulative static gap of $25.3 million in the one year time frame.
The Company’s policy limit on interest rate risk has remained unchanged since December 31, 2002. The following table illustrates the estimated exposure under a rising rate scenario and a declining rate scenario calculated as a percentage change in estimated net interest income assuming a gradual shift in interest rates for the next 12 month measurement period, beginning September 30, 2007.
Percentage Change | |||||||||
in Estimated | |||||||||
Net Interest | |||||||||
Income from | |||||||||
September 30, | |||||||||
Gradual Change in Interest Rates | 2007 | Policy Limit | |||||||
+200 basis points | 0 | .6 | % | (5.0 | )% | ||||
–200 basis points | (2 | .6 | )% | (5.0 | )% |
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 September 30, 2007. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2007, 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 quarter ended September 30, 2007, there has not been any change that has affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Item 1A. | Risk Factors |
Our business is subject to various risks. These risks are included in our 2006 Annual Report onForm 10-K under “Risk Factors”. There has been no material change in such risk factors.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On September 19, 2007, the Company sold 5,412 shares of its common stock to existing common shareholders for $231,363 in cash in transactions that did not involve a public offering. These shares were sold to certain directors of the Company under a program where directors may elect to receive a portion of their director’s fees in common stock in lieu of cash. In conducting the sales, the Company relied upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933. The proceeds from the sales were used for general corporate purposes.
The following table sets forth information with respect to purchases made by the Company of its common stock during the three month period ended September 30, 2007.
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) | ||||||||||||||||
July 1, 2007 — July 31, 2007(1) | 5,568 | $ | 56.00 | 5,568 | — | |||||||||||||||
August 1, 2007 — August 28, 2007(1) | 22,716 | $ | 56.00 | 22,716 | — | |||||||||||||||
August 29, 2007 — August 31, 2007(2) | 78 | $ | 56.75 | 78 | ||||||||||||||||
September 1, 2007 — September 30, 2007(2) | 5,906 | $ | 56.75 | 5,906 | 244,094 | |||||||||||||||
Total | 34,190 | $ | 56.13 | 34,190 | ||||||||||||||||
(1) | In May 2007, the Company announced that the Board of Directors had approved a share repurchase which authorized the repurchase of up to 250,000 of the Company’s shares at a price of $56.00 per share. This offer expired on August 28, 2007. |
(2) | In August 2007, the Company announced that the Board of Directors had approved a share repurchase program, which authorized the repurchase of up to 250,000 of the Company’s shares at a price of $56.75 per share. This offer expires on December 7, 2007. |
(A) Exhibits
3.1 | Amended and Restated Certificate of Incorporation of Hudson Valley Holding Corp. (filed herewith) |
3.2 | By-Laws of Hudson Valley Holding Corp.(1) |
31.1 | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
31.2 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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 (filed herewith). |
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 (filed herewith). |
(1) Incorporated herein by reference in this document to theForm 10-K filed on March 15, 2007
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Pursuant to the requirements 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.
By: | /s/ Stephen R. Brown |
Stephen R. Brown
Senior Executive Vice President,
Chief Financial Officer and Treasurer
November 9, 2007
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