Table of Contents
UNITED STATES
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 Quarterly Period Ended June 30, 2009
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No 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 | ||
August 3, | ||
Class | 2009 | |
Common stock, par value $0.20 per share | 10,546,059 |
FORM 10-Q
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EX-32.2 |
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PART 1 — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Dollars in thousands, except per share amounts
Three Months Ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 27,374 | $ | 25,023 | ||||
Securities: | ||||||||
Taxable | 4,483 | 6,162 | ||||||
Exempt from Federal income taxes | 2,032 | 2,267 | ||||||
Federal funds sold | 14 | 96 | ||||||
Deposits in banks | 7 | 17 | ||||||
Total interest income | 33,910 | 33,565 | ||||||
Interest Expense: | ||||||||
Deposits | 3,719 | 4,333 | ||||||
Securities sold under repurchase agreements and othershort-term borrowings | 87 | 458 | ||||||
Other borrowings | 1,925 | 2,213 | ||||||
Total interest expense | 5,731 | 7,004 | ||||||
Net Interest Income | 28,179 | 26,561 | ||||||
Provision for loan losses | 11,527 | 2,114 | ||||||
Net interest income after provision for loan losses | 16,652 | 24,447 | ||||||
Non Interest Income: | ||||||||
Service charges | 1,392 | 1,329 | ||||||
Investment advisory fees | 1,755 | 2,877 | ||||||
Recognized impairment charge on securities available for sale (includes $8,450 of total losses less $6,335 of losses on securities available for sale, recognized in other comprehensive income at June 30, 2009) | (2,115 | ) | — | |||||
Realized gain on securities available for sale, net | 52 | 148 | ||||||
Other income | 753 | 805 | ||||||
Total non interest income | 1,837 | 5,159 | ||||||
Non Interest Expense: | ||||||||
Salaries and employee benefits | 10,415 | 10,198 | ||||||
Occupancy | 1,888 | 1,896 | ||||||
Professional services | 1,001 | 1,115 | ||||||
Equipment | 1,046 | 1,082 | ||||||
Business development | 491 | 607 | ||||||
FDIC assessment | 2,087 | 193 | ||||||
Other operating expenses | 2,711 | 2,593 | ||||||
Total non interest expense | 19,639 | 17,684 | ||||||
(Loss) Income Before Income Taxes | (1,150 | ) | 11,922 | |||||
Income Taxes (benefit) | (1,460 | ) | 4,026 | |||||
Net Income | $ | 310 | $ | 7,896 | ||||
Basic Earnings Per Common Share | $ | 0.03 | $ | 0.72 | ||||
Diluted Earnings Per Common Share | 0.03 | $ | 0.70 |
See notes to condensed consolidated financial statements
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Dollars in thousands, except per share amounts
Six Months Ended | ||||||||
June 30, | ||||||||
2009 | 2008 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 54,391 | $ | 50,325 | ||||
Securities: | ||||||||
Taxable | 9,930 | 13,044 | ||||||
Exempt from Federal income taxes | 4,189 | 4,511 | ||||||
Federal funds sold | 24 | 723 | ||||||
Deposits in banks | 12 | 63 | ||||||
Total interest income | 68,546 | 68,666 | ||||||
Interest Expense: | ||||||||
Deposits | 7,555 | 10,751 | ||||||
Securities sold under repurchase agreements and othershort-term borrowings | 401 | 938 | ||||||
Other borrowings | 4,026 | 4,541 | ||||||
Total interest expense | 11,982 | 16,230 | ||||||
Net Interest Income | 56,564 | 52,436 | ||||||
Provision for loan losses | 14,492 | 2,445 | ||||||
Net interest income after provision for loan losses | 42,072 | 49,991 | ||||||
Non Interest Income: | ||||||||
Service charges | 3,005 | 2,855 | ||||||
Investment advisory fees | 3,642 | 5,602 | ||||||
Recognized impairment charge on securities available for sale (includes $10,075 of total losses less $6,523 of losses on securities available for sale, recognized in other comprehensive income at June 30, 2009) | (3,552 | ) | (485 | ) | ||||
Realized gain on securities available for sale, net | 52 | 148 | ||||||
Other income | 1,340 | 1,326 | ||||||
Total non interest income | 4,487 | 9,446 | ||||||
Non Interest Expense: | ||||||||
Salaries and employee benefits | 20,218 | 20,138 | ||||||
Occupancy | 4,005 | 3,655 | ||||||
Professional services | 2,060 | 2,249 | ||||||
Equipment | 2,040 | 2,089 | ||||||
Business development | 1,040 | 1,100 | ||||||
FDIC assessment | 3,639 | 282 | ||||||
Other operating expenses | 5,086 | 5,157 | ||||||
Total non interest expense | 38,088 | 34,670 | ||||||
Income Before Income Taxes | 8,471 | 24,767 | ||||||
Income Taxes | 1,569 | 8,424 | ||||||
Net Income | $ | 6,902 | $ | 16,343 | ||||
Basic Earnings Per Common Share | $ | 0.65 | $ | 1.50 | ||||
Diluted Earnings Per Common Share | 0.64 | 1.45 |
See notes to condensed consolidated financial statements
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Dollars in thousands
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net Income | $ | 310 | $ | 7,896 | $ | 6,902 | $ | 16,343 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Net change in unrealized gains (losses): | ||||||||||||||||
Other-than-temporary impaired securities available for sale: | ||||||||||||||||
Total losses | (8,450 | ) | — | (10,075 | ) | (485 | ) | |||||||||
Loss recognized in earnings | 2,115 | — | 3,552 | 485 | ||||||||||||
(6,335 | ) | — | (6,523 | ) | — | |||||||||||
Income tax effect | 2,597 | — | 2,674 | — | ||||||||||||
(3,738 | ) | — | (3,849 | ) | — | |||||||||||
Securities available for sale not other-than- temporarily impaired | 6,642 | (13,688 | ) | 12,261 | (4,712 | ) | ||||||||||
Income tax effect | (2,709 | ) | 5,397 | (4,907 | ) | 1,992 | ||||||||||
3,933 | (8,291 | ) | 7,354 | (2,720 | ) | |||||||||||
Unrealized holding gains on securities, net of tax | 195 | (8,291 | ) | 3,505 | (2,720 | ) | ||||||||||
Accrued benefit liability adjustment | 343 | (134 | ) | 534 | 40 | |||||||||||
Income tax effect | (136 | ) | 54 | (213 | ) | (16 | ) | |||||||||
207 | (80 | ) | 321 | 24 | ||||||||||||
Other comprehensive income (loss) | 402 | (8,371 | ) | 3,826 | (2,696 | ) | ||||||||||
Comprehensive income (loss) | $ | 712 | $ | (475 | ) | $ | 10,728 | $ | 13,647 | |||||||
See notes to condensed consolidated financial statements
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Dollars in thousands, except share amounts
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 76,719 | $ | 45,428 | ||||
Federal funds sold | 87,525 | 6,679 | ||||||
Securities available for sale at estimated fair value (amortized cost of $494,575 in 2009 and $647,279 in 2008) | 495,397 | 642,363 | ||||||
Securities held to maturity at amortized cost (estimated fair value of $25,517 in 2009 and $29,546 in 2008) | 24,705 | 28,992 | ||||||
Federal Home Loan Bank of New York (FHLB) Stock | 8,606 | 20,493 | ||||||
Loans (net of allowance for loan losses of $34,177 in 2009 and $22,537 in 2008) | 1,746,190 | 1,677,611 | ||||||
Accrued interest and other receivables | 13,496 | 16,357 | ||||||
Premises and equipment, net | 30,642 | 30,987 | ||||||
Other real estate owned | 7,188 | 5,467 | ||||||
Deferred income taxes, net | 19,154 | 14,030 | ||||||
Bank owned life insurance | 23,595 | 22,853 | ||||||
Goodwill | 20,933 | 20,942 | ||||||
Other intangible assets | 3,687 | 4,097 | ||||||
Other assets | 4,211 | 4,591 | ||||||
TOTAL ASSETS | $ | 2,562,048 | $ | 2,540,890 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Non interest-bearing | $ | 701,867 | $ | 647,828 | ||||
Interest-bearing | 1,433,380 | 1,191,498 | ||||||
Total deposits | 2,135,247 | 1,839,326 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 76,828 | 269,585 | ||||||
Other borrowings | 126,798 | 196,813 | ||||||
Accrued interest and other liabilities | 28,424 | 27,665 | ||||||
TOTAL LIABILITIES | 2,367,297 | 2,333,389 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $0.20 par value; authorized 25,000,000 shares; outstanding 10,571,056 and 10,871,609 shares in 2009 and 2008, respectively | 2,369 | 2,367 | ||||||
Additional paid-in capital | 250,513 | 250,129 | ||||||
Retained earnings (deficit) | (249 | ) | 2,084 | |||||
Accumulated other comprehensive loss, net | (1,318 | ) | (5,144 | ) | ||||
Treasury stock, at cost; 1,274,414 and 964,763 shares in 2009 and 2008, respectively | (56,564 | ) | (41,935 | ) | ||||
Total stockholders’ equity | 194,751 | 207,501 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,562,048 | $ | 2,540,890 | ||||
See notes to condensed consolidated financial statements
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Six Months Ended June 30, 2009 and 2008
Dollars in thousands, except share amounts
Accumulated | ||||||||||||||||||||||||||||
Number | Other | |||||||||||||||||||||||||||
of | Additional | Retained | Comprehensive | |||||||||||||||||||||||||
Shares | Common | Treasury | Paid-in | Earnings | Income | |||||||||||||||||||||||
Outstanding | Stock | Stock | Capital | (Deficit) | (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2009 | 10,871,609 | $ | 2,367 | $ | (41,935 | ) | $ | 250,129 | $ | 2,084 | $ | (5,144 | ) | $ | 207,501 | |||||||||||||
Net income | 6,902 | 6,902 | ||||||||||||||||||||||||||
Exercise of stock options, net of tax | 9,098 | 2 | 384 | 386 | ||||||||||||||||||||||||
Purchase of treasury stock | (309,703 | ) | (14,631 | ) | (14,631 | ) | ||||||||||||||||||||||
Sale of treasury stock | 52 | 2 | 2 | |||||||||||||||||||||||||
Cash dividends ($0.87 per share) | (9,235 | ) | (9,235 | ) | ||||||||||||||||||||||||
Minimum pension liability adjustment | 321 | 321 | ||||||||||||||||||||||||||
Net unrealized gain on securities available for sale: | ||||||||||||||||||||||||||||
Not other-than-temporarily impaired | 7,354 | 7,354 | ||||||||||||||||||||||||||
Other-than-temporarily impaired (includes $10,075 of total losses less $3,552 of losses recognized in earnings, net of $2,674 tax) | (3,849 | ) | (3,849 | ) | ||||||||||||||||||||||||
Balance at June 30, 2009 | 10,571,056 | $ | 2,369 | $ | (56,564 | ) | $ | 250,513 | $ | (249 | ) | $ | (1,318 | ) | $ | 194,751 | ||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Number | Other | |||||||||||||||||||||||||||
of | Additional | Comprehensive | ||||||||||||||||||||||||||
Shares | Common | Treasury | Paid-in | Retained | Income | |||||||||||||||||||||||
Outstanding | Stock | Stock | Capital | Earnings | (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2008 | 9,841,890 | $ | 2,091 | $ | (23,580 | ) | $ | 227,173 | $ | 2,369 | $ | (4,366 | ) | $ | 203,687 | |||||||||||||
Net income | 16,343 | 16,343 | ||||||||||||||||||||||||||
Grants and exercises of stock options, net of tax | 195,419 | 39 | 5,838 | 5,877 | ||||||||||||||||||||||||
Purchase of treasury stock | (140,235 | ) | (7,404 | ) | (7,404 | ) | ||||||||||||||||||||||
Sale of treasury stock | 2,577 | 101 | 33 | 134 | ||||||||||||||||||||||||
Cash dividends ($0.92 per share) | (9,999 | ) | (9,999 | ) | ||||||||||||||||||||||||
Accrued benefit liability adjustment | 24 | 24 | ||||||||||||||||||||||||||
Net unrealized loss on securities available for sale | (2,720 | ) | (2,720 | ) | ||||||||||||||||||||||||
Balance at June 30, 2008 | 9,899,651 | $ | 2,130 | $ | (30,883 | ) | $ | 233,044 | $ | 8,713 | $ | (7,062 | ) | $ | 205,942 | |||||||||||||
See notes to condensed consolidated financial statements
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HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Dollars in thousands
For the Six Months | ||||||||
Ended June 30, | ||||||||
2009 | 2008 | |||||||
Operating Activities: | ||||||||
Net income | $ | 6,902 | $ | 16,343 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 14,492 | 2,445 | ||||||
Depreciation and amortization | 1,934 | 1,713 | ||||||
Recognized impairment charge on securities available for sale | 3,552 | 485 | ||||||
Realized gain on security transactions, net | (52 | ) | (148 | ) | ||||
Amortization of premiums on securities, net | 183 | 81 | ||||||
Increase in cash value of bank owned life insurance | (466 | ) | (389 | ) | ||||
Amortization of intangible assets | 411 | 411 | ||||||
Stock option expense and related tax benefits | 147 | 1,509 | ||||||
Deferred taxes (benefit) | (7,572 | ) | (233 | ) | ||||
(Decrease) increase in deferred loan fees, net | (388 | ) | 553 | |||||
Decrease (increase) in accrued interest and other receivables | 2,861 | (977 | ) | |||||
Decrease in other assets | 379 | 318 | ||||||
Excess tax benefits from share-based payment arrangements | (12 | ) | (1,096 | ) | ||||
Increase in accrued interest and other liabilities | 759 | 166 | ||||||
Decrease in accrued benefit liability adjustment | 541 | 41 | ||||||
Net cash provided by operating activities | 23,671 | 21,222 | ||||||
Investing Activities: | ||||||||
Net (increase) decrease in Federal funds sold | (80,846 | ) | 86,901 | |||||
Decrease (increase) in FHLB stock | 11,887 | (4,001 | ) | |||||
Proceeds from maturities and paydowns of securities available for sale | 312,586 | 163,793 | ||||||
Proceeds from maturities and paydowns of securities held to maturity | 4,284 | 2,787 | ||||||
Proceeds from sales of securities available for sale | 8,750 | 63,936 | ||||||
Purchases of securities available for sale | (172,317 | ) | (109,856 | ) | ||||
Net increase in loans | (84,404 | ) | (210,142 | ) | ||||
Net purchases of premises and equipment | (1,589 | ) | (3,692 | ) | ||||
Increase in goodwill | 9 | — | ||||||
Premiums paid on bank owned life insurance | (276 | ) | (341 | ) | ||||
Net cash used in investing activities | (1,916 | ) | (10,615 | ) | ||||
Financing Activities: | ||||||||
Net increase (decrease) in deposits | 295,921 | (82,121 | ) | |||||
Net (decrease) increase in securities sold under repurchase agreements and short-term borrowings | (192,757 | ) | 99,186 | |||||
Repayment of other borrowings | (70,015 | ) | (14,014 | ) | ||||
Proceeds from issuance of common stock | 239 | 4,368 | ||||||
Excess tax benefits from share-based payment arrangements | 12 | 1,096 | ||||||
Proceeds from sale of treasury stock | 2 | 134 | ||||||
Acquisition of treasury stock | (14,631 | ) | (7,404 | ) | ||||
Cash dividends paid | (9,235 | ) | (9,999 | ) | ||||
Net cash provided by (used in) financing activities | 9,536 | (8,754 | ) | |||||
Increase in Cash and Due from Banks | 31,291 | 1,853 | ||||||
Cash and due from banks, beginning of period | 45,428 | 51,067 | ||||||
Cash and due from banks, end of period | $ | 76,719 | $ | 52,920 | ||||
Supplemental Disclosures: | ||||||||
Interest paid | $ | 12,968 | $ | 17,306 | ||||
Income tax payments | 6,150 | 9,555 | ||||||
Increase in other real estate owned | 1,721 | 1,900 |
See notes to condensed consolidated financial statements
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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, N.A. (“HVB”), a national banking association headquartered in Westchester County, New York and New York National Bank (“NYNB”), a national banking association headquartered in Bronx County, New York (together with HVB, “the Banks”). HVB is the successor to Hudson Valley Bank, a New York State bank originally established in 1972. NYNB is a national banking association which the Company acquired effective January 1, 2006. For the period from January 1, 2006 to November 19, 2007, NYNB was operated as a New York State bank. HVB has 18 branch offices in Westchester County, New York, 4 in Manhattan, New York, 2 in Bronx County, New York, 1 in Rockland County, New York, 1 in Queens County, New York, 1 in Kings County, New York and 4 in Fairfield County, Connecticut. NYNB has 1 branch office in Manhattan, New York and 2 in Bronx County, New York. In May 2009, HVB opened a full service branch at 420 Post Road West, Westport Connecticut and in July 2009, HVB opened a full service branch at 111 Brook Street, Scarsdale, New York and a full service branch at 54 Broad Street, Milford (New Haven County), Connecticut. HVB has received regulatory approval to open a full service branch at 2505 Main Street, Stratford (Fairfield County), Connecticut. In June 2009, NYNB closed a full service branch located at 4211 Broadway, Manhattan, New York. In July 2009, NYNB closed a full service branch located at 619 Main Street, Roosevelt Island, New York.
The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a money management firm, thereby generating fee income. ARS has offices at 500 Fifth Avenue, New York, 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, Fairfield County and New Haven 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, opening loan production offices and continuing to open new branch 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 June 30, 2009 and the results of its operations and comprehensive income for the three and six month periods ended June 30, 2009 and cash flows and changes in stockholders’ equity for the six month periods ended June 30, 2009 and 2008. The results of operations for the three and six month period ended June 30, 2009 are not necessarily indicative of the results of operations to be expected for the remainder of the year.
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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.
Estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of the fair value of securities available for sale and the determination ofother-than-temporary impairment. In connection with the determination of the allowance for loan losses, management utilizes the work of professional appraisers for significant properties. Methodology used in the determination of fair values of securities available for sale andother-than-temporary impairment are discussed in Notes 3 and 9 herein.
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, 2008 and notes thereto.
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. Interest income includes amortization of purchase premium and accretion of purchase discount. The amortization of premiums and accretion of discounts is determined by using the level yield method. 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. The Company regularly reviews declines in the fair value of securities below their costs for purposes of determining whether such declines areother-than-temporary in nature. In estimatingother-than-temporary losses, management considers adverse changes in expected cash flows, the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and whether it is more likely than not that the Company would be required to sell the investments prior to maturity or recovery of cost. If the Company determines that a decline in the fair value of a security below cost isother-than-temporary, the carrying amount of the security is reduced by any portion of the decline deemed to be credit related, with the corresponding decline charged to earnings. The carrying amount of the security is also reduced by any additional impairment deemed to be non credit related, with the corresponding decline charged to other comprehensive income.
Loans —Loans are reported at their outstanding principal balance, net of the allowance for loan losses, and deferred loan origination fees and costs. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the related loan or commitment as an adjustment to yield, or taken directly into income when the related loan is sold or commitment expires.
Interest Rate Contracts —The Company, from time to time, uses various interest rate contracts such as forward rate agreements, interest rate swaps, caps and floors, primarily as hedges against specific assets and liabilities. Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS Statement No. 133” and as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” requires that all derivative instruments, including interest rate contracts, be recorded on the balance sheet at their fair value. Changes in the value of derivative instruments are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. There were no interest rate contracts outstanding as of June 30, 2009 or December 31, 2008.
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Allowance for Loan Losses —The Company maintains an allowance for loan losses to absorb probable losses incurred 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 a specific component for identified problem loans, and a formula component which addresses historical loan loss experience together with other relevant risk factors affecting the portfolio. 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 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 component 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 first applying historical loss experience factors to outstanding loans by type. This component is then adjusted to reflect additional risk factors not addressed by historical loss experience. These factors include the 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 each of these conditions is quantified by loan type and reflected in the formula component. The evaluations of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty due to the subjective nature of such evaluations and because they are not identified with specific problem credits.
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 June 30, 2009. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Company’s service area, since the majority of the Company’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments at the time of their examinations.
Loan Restructurings —Loan restructurings are renegotiated loans for which concessions have been granted to the borrower that the Company would not have otherwise granted. Restructured loans are returned to accrual status when said loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms, or by the presence of other significant factors.
Income Recognition on Loans —Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans
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generally is either applied against principal or reported as interest income, in accordance with management’s judgment as to the collectibility of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible.
Premises and Equipment —Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally 3 to 5 years for furniture, fixtures and equipment and 31.5 years for buildings. Leasehold improvements are amortized over the lesser of the term of the lease or the estimated useful life of the asset.
Other Real Estate Owned (“OREO”) —Real estate properties acquired through loan foreclosure are recorded at estimated fair value, net of estimated selling costs, at time of foreclosure establishing a new cost basis. Credit losses arising at the time of foreclosure are charged against the allowance for loan losses. Subsequent valuations are periodically performed by management and the carrying value is adjusted by a charge to expense to reflect any subsequent declines in the estimated fair value. Routine holding costs are charged to expense as incurred.
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 June 30, 2009 and December 31, 2008 did not indicate impairment of its goodwill or identified intangible assets.
Income Taxes —Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. 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 No. 123R”), which requires that compensation cost relating to share-based payment transactions be recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Non-employee stock options are expensed as of the date of grant. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. See Note 8 herein for additional discussion
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3. | Securities |
The following tables set forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities classified as available for sale and held to maturity at June 30, 2009 and December 31, 2008 (in thousands):
June 30, 2009
Gross Unrealized | Estimated Fair | |||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
Classified as Available for Sale | ||||||||||||||||
U.S. Treasury and government agencies | $ | 13,000 | $ | 106 | — | $ | 13,106 | |||||||||
Mortgage-backed securities | 293,777 | 5,913 | $ | 156 | 299,534 | |||||||||||
Obligations of states and political subdivisions | 162,143 | 2,934 | 1,077 | 164,000 | ||||||||||||
Other debt securities | 16,483 | 19 | 7,733 | 8,769 | ||||||||||||
Total debt securities | 485,403 | 8,972 | 8,966 | 485,409 | ||||||||||||
Mutual funds and other equity securities | 9,172 | 906 | 90 | 9,988 | ||||||||||||
Total | $ | 494,575 | $ | 9,878 | $ | 9,056 | $ | 495,397 | ||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities | $ | 19,571 | $ | 614 | — | $ | 20,185 | |||||||||
Obligations of states and political subdivisions | 5,134 | 198 | — | 5,332 | ||||||||||||
Total | $ | 24,705 | $ | 812 | $ | — | $ | 25,517 | ||||||||
December 31, 2008
Gross Unrealized | Estimated Fair | |||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
Classified as Available for Sale | ||||||||||||||||
U.S. Treasury and government agencies | $ | 45,206 | $ | 288 | $ | 79 | $ | 45,415 | ||||||||
Mortgage-backed securities | 371,963 | 3,487 | 1,313 | 374,137 | ||||||||||||
Obligations of states and political subdivisions | 200,858 | 2,341 | 1,710 | 201,489 | ||||||||||||
Other debt securities | 20,082 | 227 | 8,665 | 11,644 | ||||||||||||
Total debt securities | 638,109 | 6,343 | 11,767 | 632,685 | ||||||||||||
Mutual funds and other equity securities | 9,170 | 613 | 105 | 9,678 | ||||||||||||
Total | $ | 647,279 | $ | 6,956 | $ | 11,872 | $ | 642,363 | ||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities | $ | 23,859 | $ | 525 | $ | 78 | $ | 24,306 | ||||||||
Obligations of states and political subdivisions | 5,133 | 108 | 1 | 5,240 | ||||||||||||
Total | $ | 28,992 | $ | 633 | $ | 79 | $ | 29,546 | ||||||||
Included in other debt securities are investments in six pooled trust preferred securities with amortized costs and estimated fair values of $15,594 and $7,956, respectively at June 30, 2009. These investments represent trust preferred obligations of banking industry companies. The value of these investments has been severely negatively affected by the recent downturn in the economy and increased investor concerns about recent and potential future losses in the financial services industry. These investments are rated below investment grade by Moody’s Investor Services at June 30, 2009 with one issue with amortized cost of $646 and estimated fair value of $434 rated Caa1 and the remaining five issues rated Ca. In light of these conditions, these investments were reviewed forother-than-temporary impairment.
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In estimatingother-than-temporary impairment (“OTTI”) losses, the Company considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuers, (3) whether it is more likely than not that the Company would be required to sell the investments prior to maturity or recovery of cost (4) evaluation of cash flows to determine if they have been adversely affected.
In September 2008 the Company recognized a pretax OTTI loss of $1,061 on one trust preferred security which, prior to the OTTI adjustment, had a book value of $2,000. During the six months ended June 30, 2009, additional pretax OTTI losses of $2,623 and $929 were recognized on two other pooled trust preferred securities with original cost basis of $5,000 and $10,000, respectively, due to adverse changes in their expected cash flows which indicated that the Company may not recover the entire cost basis of these investments. Continuation or worsening of the current adverse economic conditions may result in further impairment charges in the future.
The Company uses a discounted cash flow (“DCF”) analysis to provide an estimate of an OTTI loss. Inputs to the discount model included known defaults and interest deferrals, projected additional default rates, projected additional deferrals of interest, over-collateralization tests, interest coverage tests and other factors. Expected default and deferral rates were weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. The discount rate was based upon the yield expected from the related securities. Significant inputs to the cash flow models used in determining credit related other-than-temporary impairment losses on pooled trust preferred securities included the following:
Significant Inputs at June 30, 2009 | ||
Annual prepayment | 1.0% | |
Projected specific defaults/deferrals | 14.0% - 61.0% | |
Projected severity of loss on specific defaults/deferrals | 50.0% - 89.0% | |
Projected additional defaults: | ||
Year 1 | 3.0% | |
Year 2 | 3.0% | |
Year 3 | 2.5% | |
Year 4 | 2.0% | |
Year 5 | 1.0% | |
Thereafter | 0.3% | |
Projected severity of loss on additional defaults | 85.0% | |
Present value discount rates | 4.9% - 7.8% |
The following table summarizes the change in pretax OTTI credit related losses on securities available for sale for the six months ended June 30, 2009:
Balance at January 1, 2009: | ||||
Total OTTI credit losses at January 1, 2009 | $ | 1,061 | ||
Less: portion recognized in other comprehensive Income | — | |||
Balance at January 1, 2009, as adjusted | 1,061 | |||
Credit related impairment not previously recognized | 3,552 | |||
Balance at June 30, 2009 | $ | 4,613 | ||
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The following tables reflect the Company’s investment’s fair values and gross unrealized loss, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of June 30, 2009 and December 31, 2008 (in thousands):
June 30, 2009
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||
U.S. Treasuries and government agencies | — | — | — | — | — | — | ||||||||||||||||||
Mortgage-backed securities | $ | 19,263 | $ | 137 | $ | 1,954 | $ | 19 | $ | 21,217 | $ | 156 | ||||||||||||
Obligations of states and political subdivisions | 38,018 | 726 | 4,660 | 351 | 42,678 | 1,077 | ||||||||||||||||||
Other debt securities | 941 | 131 | 17,287 | 7,602 | 95 | 7,733 | ||||||||||||||||||
Total debt securities | 58,222 | 994 | 23,901 | 7,972 | 63,990 | 8,966 | ||||||||||||||||||
Mutual funds and other equity securities | — | — | 217 | 90 | 217 | 90 | ||||||||||||||||||
Total temporarily impaired securities | $ | 58,222 | $ | 994 | $ | 24,118 | $ | 8,062 | $ | 64,207 | $ | 9,056 | ||||||||||||
There were no securities classified as held to maturity in an unrealized loss position at June 30, 2009.
December 31, 2008
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||
U.S. Treasuries and government agencies | $ | 11,700 | $ | 79 | — | — | $ | 11,700 | $ | 79 | ||||||||||||||
Mortgage-backed securities | 84,610 | 472 | $ | 79,505 | $ | 841 | 164,115 | 1,313 | ||||||||||||||||
Obligations of states and political subdivisions | 52,538 | 1,477 | 8,868 | 233 | 61,406 | 1,710 | ||||||||||||||||||
Other debt securities | 414 | 102 | 18,207 | 8,563 | 18,621 | 8,665 | ||||||||||||||||||
Total debt securities | 149,262 | 2,130 | 106,580 | 9,637 | 255,842 | 11,767 | ||||||||||||||||||
Mutual funds and other equity securities | 8,128 | 92 | 83 | 13 | 8,211 | 105 | ||||||||||||||||||
Total temporarily impaired securities | $ | 157,390 | $ | 2,222 | $ | 106,663 | $ | 9,650 | $ | 264,053 | $ | 11,872 | ||||||||||||
Classified as Held to Maturity | ||||||||||||||||||||||||
Mortgage-backed securities | $ | 1,621 | $ | 73 | $ | 974 | $ | 5 | $ | 2,595 | $ | 78 | ||||||||||||
Obligations of states and political subdivisions | 276 | 1 | — | — | 276 | 1 | ||||||||||||||||||
Total temporarily impaired securities | $ | 1,897 | $ | 74 | $ | 974 | $ | 5 | $ | 2,871 | $ | 79 | ||||||||||||
The total number of securities in the Company’s portfolio that were in an unrealized loss position was 147 and 544, respectively, at June 30, 2009 and December 31, 2008. The Company has determined that it is more likely than not that it would not be required to sell its securities prior to maturity or to recovery of cost. With the exception of the investment in pooled trust preferred securities discussed above, the Company believes that its securities continue to have satisfactory ratings and are readily marketable. Therefore management does not consider these investments to beother-than-temporarily impaired at June 30, 2009. With regard to the investments in pooled trust preferred securities, the Company has decided to hold these securities as they continue to perform and the Company believes that current market quotes for these securities are not necessarily indicative of their value. As noted above the Company has recognizedother-than-temporary impairment charges on three of the pooled trust preferred securities. Management
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believes that the remaining impairment in the value of these securities to be primarily related to illiquidity in the market and therefore not credit related at June 30, 2009.
At June 30, 2009 and December 31, 2008, securities having a stated value of approximately $407,000 and $401,000, respectively were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
The contractual maturity of all debt securities held at June 30, 2009 is shown below. Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
(000’s) | ||||||||
Contractual Maturity | ||||||||
Within 1 year | $ | 20,164 | $ | 20,281 | ||||
After 1 but within 5 years | 26,617 | 27,378 | ||||||
After 5 years but within 10 years | 122,546 | 123,824 | ||||||
After 10 years | 22,299 | 14,392 | ||||||
Mortgaged-backed Securities | 293,777 | 299,534 | ||||||
Total | $ | 485,403 | $ | 485,409 | ||||
4. 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.
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, November 2006, November 2007 and December 2008 the Company made the first four of these additional payments in the amounts of $1,572, $3,016, $4,918 and $5,565, respectively. The deferred income tax effects related to temporary differences between the book and tax basis of identified intangible assets and goodwill deductible for tax purposes are included in net deferred tax assets 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 $1,378 of goodwill.
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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 June 30, 2009 and December 31, 2008.
June 30, 2009 | December 31, 2008 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
(000’s) | ||||||||||||||||
Deposit Premium | $ | 3,907 | $ | 1,954 | $ | 3,907 | $ | 1,674 | ||||||||
Customer Relationships | 2,470 | 902 | 2,470 | 808 | ||||||||||||
Employment Related | 516 | 350 | 516 | 314 | ||||||||||||
Total | $ | 6,893 | $ | 3,206 | $ | 6,893 | $ | 2,796 | ||||||||
Intangible assets amortization expense was $205 and $411 for the three and six month periods ended June 30, 2009, and $206 and $616 for the three and six month periods ended June 30, 2008. The annual intangible assets amortization expense is estimated to be approximately $822 in 2009 and 2010, $803 in 2011, $748 in 2012 and $190 in 2013.
Goodwill was $20,933 at June 30, 2009 and $20,942 at December 31, 2008.
5. | 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.
The Company and its subsidiaries file various income tax returns in the U.S. federal jurisdiction, the New York State, New York City and Connecticut State jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years 2005 through 2008. The Company is currently open to audit by New York State under the statute of limitations for the years 2005 through 2008.
The Company has performed an evaluation of its tax positions in accordance with the provisions of FIN 48 and has concluded that as of June 30, 2009, 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 six month period ended June 30, 2009.
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6. 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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(000’s except share data) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income available to common shareholders for basic and diluted earnings per share | $ | 310 | $ | 7,896 | $ | 6,902 | $ | 16,343 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per common share — weighted average shares | 10,588,446 | 10,892,152 | 10,618,256 | 10,870,794 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options | 223,322 | 369,041 | 240,508 | 405,160 | ||||||||||||
Denominator for diluted earnings per common share — adjusted weighted average shares | 10,811,768 | 11,261,193 | 10,858,764 | 11,275,954 | ||||||||||||
Basic earnings per common share | $ | 0.03 | $ | 0.72 | $ | 0.65 | $ | 1.50 | ||||||||
Diluted earnings per common share | 0.03 | 0.70 | 0.64 | 1.45 | ||||||||||||
Dividends declared per share | 0.40 | 0.46 | 0.87 | 0.92 |
In December 2008, the Company declared a 10% stock dividend. Share and per share amounts for 2008 have been retroactively restated to reflect the issuance of the additional shares.
7. 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 | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost | $ | 829 | $ | 113 | $ | 910 | $ | 225 | ||||||||
Interest cost | 158 | 156 | 305 | 283 | ||||||||||||
Amortization of transition obligation | — | — | — | 47 | ||||||||||||
Amortization of prior service cost | 11 | 11 | 22 | 70 | ||||||||||||
Amortization of net loss | 173 | 164 | 362 | 285 | ||||||||||||
Net periodic pension cost | $ | 1,171 | $ | 466 | $ | 1,599 | $ | 887 | ||||||||
The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2008 Annual Report onForm 10-K that it expected to contribute $611 to the unfunded defined benefit plans during 2009. As a result of the addition of an employee to an officers’ supplemental plan in the second quarter of 2009, the expected contribution for 2009 is $668. For the three and six month periods ended June 30, 2009, the Company contributed $172 and $324, respectively, to these plans.
8. 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
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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 up to ten years from the date of grant. The Company estimates that more than 75% of options granted will vest. In accordance with the provisions of SFAS No. 123R, compensation costs relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Stock options are expensed over their respective vesting periods. There were no stock options granted during the six month period ended June 30, 2009.
The following table summarizes stock option activity for the six month period ended June 30, 2009:
Weighted Average | ||||||||||||||||
Weighted Average | Aggregate Intrinsic | Remaining Contractual | ||||||||||||||
Shares | Exercise Price | Value(1) ($000’s) | Term(Yrs) | |||||||||||||
Outstanding at December 31, 2008 | 698,612 | $ | 27.54 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (9,098 | ) | 26.35 | |||||||||||||
Forfeited or Expired | (5,531 | ) | 25.97 | |||||||||||||
Outstanding at June 30, 2009 | 683,983 | 27.57 | $ | 8,502 | 4.3 | |||||||||||
Exercisable at June 30, 2009 | 538,046 | 25.02 | $ | 8,059 | 4.2 | |||||||||||
1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2009. 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 six month periods ended June 30, 2009 and 2008.
Six Month Period Ended June 30, | ||||||||
2009 | 2008 | |||||||
Weighted average assumptions: | ||||||||
Dividend Yield | — | 3.3 | % | |||||
Expected volatility | — | 43.3 | % | |||||
Risk-free interest rate | — | 3.1 | % | |||||
Expected lives (years) | — | 4.0 |
The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience.
The weighted average fair values of options granted during the six month period ended June 30, 2008 was $15.38 per share. Net compensation expense of $67 and $135 related to the Company’s stock option plans was included in net income for the three and six month periods ended June 30, 2009, respectively. The total tax benefit related thereto was $3 and $3, respectively. Net compensation expense of $196 and $414 related to the Company’s stock option plans was included in net income for the three and six month periods ended June 30, 2008, respectively. The total tax benefit related thereto was $62 and $123, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $643 at June 30, 2009. This expense is expected to be recognized over a remaining weighted average period of 1.9 years.
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9. | Fair Value |
Effective January 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”), which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value. SFAS No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. While management believes the Company’s valuation methodologies are appropriate and consistent with other financial institutions, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, which is a Level 1 input, or matrix pricing, which is a mathematical technique widely used to in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, which is a Level 2 input.
The Company’s available for sale securities at June 30, 2009 and December 31, 2008 include several pooled trust preferred instruments. The recent severe downturn in the overall economy and, in particular, in the financial services industry has created a situation where significant observable inputs (Level 2) are not readily available. As an alternative, the Company combined Level 2 input of market yield requirements of similar instruments together with certain Level 3 assumptions addressing the impact of current market illiquidity to estimate the fair value of these instruments — See Note 3 “Securities” for further discussion of pooled trust preferred securities.
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Assets and liabilities measured at fair value are summarized below:
Fair Value Measurements at June 30, 2009 Using | ||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets | Other | Unobservable | ||||||||||||||
for Identical | Observable Inputs | Inputs | ||||||||||||||
Assets (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(000’s) | ||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Treasury and government agencies | — | $ | 13,106 | — | $ | 13,106 | ||||||||||
Mortgage-backed securities | — | 299,534 | — | 299,534 | ||||||||||||
Obligations of states and political subdivisions | — | 164,000 | — | 164,000 | ||||||||||||
Other debt securities | — | 813 | $ | 7,956 | 8,769 | |||||||||||
Mutual funds and other equity securities | — | 9,988 | — | 9,988 | ||||||||||||
Total assets at fair value | $ | — | $ | 487,441 | $ | 7,956 | $ | 495,397 | ||||||||
Measured on a non-recurring basis: | ||||||||||||||||
Impaired loans(1) | — | — | $ | 41,308 | $ | 41,308 | ||||||||||
Other real estate owned(2) | 7,188 | 7,188 | ||||||||||||||
Total assets at fair value | $ | — | $ | — | $ | 41,308 | $ | 41,308 | ||||||||
(1) | Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 and Level 3 inputs which include independent appraisals and internally customized discounting criteria. The recorded investment in impaired loans on June 30, 2009 was $41.3 million for which a specific allowance of $1.8 million has been established within the allowance for loan losses. | |
(2) | Other real estate owned is reported at fair value less anticipated costs to sell. Fair value is based on third party or internally developed appraisals which, considering the assumptions in the valuation, are considered Level 2 or Level 3 inputs. |
Fair Value Measurements at December 31, 2008 Using | ||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets | Other | Unobservable | ||||||||||||||
for Identical | Observable Inputs | Inputs | ||||||||||||||
Assets (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(000’s) | ||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Treasury and government agencies | — | $ | 45,415 | — | $ | 45,415 | ||||||||||
Mortgage-backed securities | — | 374,137 | — | 374,137 | ||||||||||||
Obligations of states and political subdivisions | — | 201,489 | — | 201,489 | ||||||||||||
Other debt securities | — | 858 | $ | 10,786 | 11,644 | |||||||||||
Mutual funds and other equity securities | — | 9,678 | — | 9,678 | ||||||||||||
Total assets at fair value | $ | — | $ | 631,577 | $ | 10,786 | $ | 642,363 | ||||||||
Measured on a non-recurring basis: | ||||||||||||||||
Impaired loans(1) | — | — | $ | 11,284 | $ | 11,284 | ||||||||||
Total assets at fair value | $ | — | $ | — | $ | 11,284 | $ | 11,284 | ||||||||
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(1) | Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 and Level 3 inputs which include independent appraisals and internally customized discounting criteria. The recorded investment in impaired loans on December 31, 2008 was $11.3 million for which no specific allowance has been established within the allowance for loan losses. |
The table below presents a reconciliation and income statement classification of gains and losses for securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six month periods ended June 30, 2009 and 2008:
Level 3 Assets Measured on a Recurring Basis | ||||||||||||||||
For the three months | For the six months | |||||||||||||||
ended June 30, | ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(000’s) | (000’s) | |||||||||||||||
Balance at beginning of period | $ | 10,786 | — | $ | 10,786 | — | ||||||||||
Transfers into (out of) Level 3 | — | $ | 18,309 | — | $ | 18,309 | ||||||||||
Net unrealized gain (loss) included in other comprehensive income | (1,927 | ) | — | 722 | (2,281 | ) | ||||||||||
Principal payments | — | — | — | (15 | ) | |||||||||||
Recognized impairment charge included in the statement of income | (1,437 | ) | — | (3,552 | ) | — | ||||||||||
Balance at end of period | $ | 7,422 | $ | 18,309 | $ | 7,956 | $ | 16,013 | ||||||||
10. Fair Value of Financial Instruments
SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of June 30, 2009 and December 31, 2008 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.
Carrying amount and estimated fair value of financial instruments, not previously presented, at June 30, 2009 and December 31, 2008 were as follows:
June 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
Assets: | ||||||||||||||||
Financial assets for which carrying value | ||||||||||||||||
approximates fair value | $ | 164.2 | $ | 164.2 | $ | 52.1 | $ | 52.1 | ||||||||
Held to maturity securities, FHLB stock and accrued interest | 33.4 | 34.2 | 49.6 | 50.1 | ||||||||||||
Loans and accrued interest | 1,748.3 | 1,745.4 | 1,698.4 | 1,700.7 |
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June 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
Liabilities: | ||||||||||||||||
Deposits with no stated maturity and accrued interest | 1,874.2 | 1,874.2 | 1,547.4 | 1,547.4 | ||||||||||||
Time deposits and accrued interest | 264.1 | 263.3 | 295.7 | 294.8 | ||||||||||||
Securities sold under repurchase agreements and other short-term borrowing and accrued interest | 76.8 | 76.8 | 269.6 | 269.6 | ||||||||||||
Other borrowings and accrued interest | 127.5 | 120.4 | 197.7 | 186.1 | ||||||||||||
Financial liabilities for which carrying value approximates fair value | — | — | — | — |
The estimated fair value of the indicated items was determined as follows:
Financial assets for which carrying value approximates fair value — The estimated fair value approximates carrying amount because of the immediate availability of these funds or based on the short maturities and current rates for similar deposits. Cash and due from banks as well as Federal funds sold are reported in this line item.
Held to maturity securities, FHLB stock and accrued interest — The fair value was estimated based on quoted market prices or dealer quotations. FHLB stock and accrued interest are stated at their carrying amounts which approximates fair value.
Loans and accrued interest — The fair value of loans was estimated by discounting projected cash flows at the reporting date using current rates for similar loans. Accrued interest is stated at its carrying amount which approximates fair value.
Deposits with no stated maturity and accrued interest — The estimated fair value of deposits with no stated maturity and accrued interest, as applicable, are considered to be equal to their carrying amounts.
Time deposits and accrued interest — The fair value of time deposits has been estimated by discounting projected cash flows at the reporting date using current rates for similar deposits. Accrued interest is stated at its carrying amount which approximates fair value.
Securities sold under repurchase agreements and other short-term borrowings and accrued interest— The estimated fair value of these instruments approximate carrying amount because of their short maturities and variable rates. Accrued interest is stated at its carrying amount which approximates fair value.
Other borrowings and accrued interest — The fair value of callable FHLB advances was estimated by discounting projected cash flows at the reporting date using the rate applicable to the projected call date option. Accrued interest is stated at its carrying amount which approximates fair value.
11. Recent Accounting Pronouncements
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. In February 2008, the FASB issued Staff Position (“FSP”)157-2, “Effective Date of FASB Statement No. 157.” This FSP delays the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of SFAS No. 157 by the Company on January 1, 2008 did not have any impact on its consolidated results of operations and financial condition.
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In October 2008, the FASB issued FSPNo. 157-3 (“FSPNo. 157-3”), “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” FSPNo. 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining fair value of financial assets when the market for that financial asset is not active. FSPNo. 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. FSPNo. 157-3 was effective upon issuance and included prior periods for which financial statements had not been issued. The application of FSPNo. 157-3 did not have a material impact on the Company’s consolidated results of operations and financial condition.
In April 2009, the FASB issued FSPNo. 157-4 (“FSPNo. 157-4”) “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly” to provide guidance for determining fair value when there is no active market or where price inputs represent distressed sales. It reaffirms the fair value measurement objective of FAS No. 157 to reflect how much an asset would be sold for in an orderly transaction under current market conditions. FSPNo. 157-4 is effective for interim and annual periods ending after June 15, 2009. Early adoption for interim and annual periods ending after March 15, 2009 is permitted. The early adoption of FSPNo. 157-4 by the Company did not have a material impact on the Company’s consolidated results of operations and financial condition.
In April 2009, the FASB issued FSPNo. 115-2 &124-2 “Recognition and Presentation of Other-Than Temporary Impairments”(“FSPNo. 115-2”). FSPNo. 115-2 eliminates the requirement for the issuer to evaluate whether it has the intent and ability to hold an impaired investment until maturity. Conversely, FSPNo. 115-2 requires the issuer to recognize an other-than-temporary-impairment (“OTTI”) in the event that the issuer intends to sell the impaired security or in the event that it is more likely than not that the issuer will sell the security prior to recovery. In the event that the sale of the security in question prior to its maturity is not probable but the entity does not expect to recover its amortized cost basis in that security, then the entity will be required to recognize an OTTI. In the event that the recovery of the security’s cost basis prior to maturity is not probable and an OTTI is recognized, FSPNo. 115-2 provides that any component of the OTTI relating to a decline in the creditworthiness of the debtor should be reflected in earnings, with the remainder being recognized in Other Comprehensive Income. Conversely, in the event that the issuer determines that sale of the security in question prior to recovery is probable, then the entire OTTI will be recognized in earnings. FSPNo. 115-2 is effective for interim and annual reporting periods ending after June 15, 2009. Early adoption for interim and annual periods ending after March 15, 2009 is permitted. The early adoption of FSPNo. 115-2 by the Company did not have a material impact on the Company’s consolidated results of operations and financial condition.
In April 2009, the FASB issued FSPNo. 107-1 and APB No28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSPNo. 107-1”). FSPNo. 107-1 enhances consistency in financial reporting by increasing the frequency of fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. Previously, these disclosures were only required in annual financial statements.FAS No. 107-1 requires disclosures in interim financial statements that provide qualitative and quantitative information about fair value estimates. FSPNo. 107-1 is effective for interim and annual periods ending after June 15, 2009. Early adoption for interim and annual periods ending after March 15, 2009 is permitted. The early adoption of FSPNo. 107-1 by the Company did not have a material impact on the Company’s consolidated results of operations and financial condition.
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. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165” ) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS No. 165 establishes (i) the period after the balance sheet date
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during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 became effective for the Company’s financial statements for periods ending after June 15, 2009 and did not have a significant impact on the Company’s financial statements. The Company evaluated subsequent events through August 10, 2009, the date that the financial statements were issued.
In June 2009, the FASB issued SFAS No. 168, “The FASE Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162” (“SFAS No. 168”), which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”,and establishes theFASB Accounting Standards Codification(the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All nongrandfathered non-SEC accounting literature not included in the Codification is superseded and deemed nonauthoritative SFAS No. 168 will be effective for the Company’s financial statements for periods ending after September 15, 2009. SFAS No. 168 is not expected to have a significant impact on the Company’s financial statements.
Other —Certain 2008 amounts have been reclassified to conform to the 2009 presentation.
12. | Financial Crisis and Recent Regulatory Actions |
In response to the current financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008. This law established the Troubled Asset Relief Program (“TARP”). As part of TARP, the Treasury established the Capital Purchase Program (“CPP”) to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital Stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. After carefully reviewing and analyzing the terms and conditions of the CPP, the Board of Directors and management of the Company in January 2009 decided that, given its present financial condition, participation in the CPP was unnecessary and not in the best interests of the Company, its customers or shareholders.
On November 21, 2008 the FDIC adopted the final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”) which is also a part of EESA. Under the TLG program the FDIC will (1) guarantee certain newly issued senior unsecured debt and (2) provide full FDIC deposit insurance coverage for non-interest bearing transaction accounts, NOW accounts paying less than 0.5 percent interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC insured institutions through December 31, 2009. The Company has elected to participate in both guarantee programs.
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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 June 30, 2009 and December 31, 2008, and consolidated results of operations for the three and six month periods ended June 30, 2009 and June 30, 2008. The Company is consolidated with its wholly-owned subsidiaries, Hudson Valley Bank, NA 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 New York National Bank and its subsidiaries 369 East 149th Street Corp. and 369 East Realty 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 2008 Annual Report onForm 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 2008 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. Considering current economic conditions, the Company’s primary market risk exposures are interest rate risk, the risk of deterioration of market values of collateral supporting the Company’s loan portfolio, particularly commercial and residential real estate and potential risks associated with the impact of regulatory changes that may take place in reaction to the current crisis in the financial system. Interest rate risk is the exposure of net interest income to changes in interest rates. Commercial and residential real estate are the primary collateral for the majority of the Company’s loans.
The year 2008 marked the beginning of an extremely difficult period for the overall economy in general and for the financial services industry in particular. This wide ranging economic downturn, which has had extremely negative effects on all financial sectors both domestic and foreign, has continued into 2009. During 2008 we witnessed the financial collapse of several financial institutions including the country’s largest savings bank and two large Wall Street investment banking firms. In addition, the U.S. Congress has enacted unprecedented financial assistance legislation in an attempt to shore up the financial markets and provide needed credit to a faltering economy. Perhaps the most severe impact of this downturn has been felt by the real estate industry, which is a major source of both the deposit and loan businesses of the Company. The Company experienced a general decline in average deposit balances of customers in all sectors of the real estate industry as activity has been severely curtailed as a result of the current economic downturn. In addition, the Company experienced sharp declines in the value of real estate collateral supporting the majority of its loans, significant increases in delinquent and nonperforming loans, and the continued lack of a liquid market for a small part of its investment portfolio. The effects of these conditions have continued, and have significantly worsened during the first half of 2009 as unemployment has continued to rise, real estate values have continued to decline and overall asset quality has deteriorated. Management expects that the Company will experience continued pressure from these adverse conditions throughout 2009 and beyond.
Net income for the three month period ended June 30, 2009 was $0.3 million or $0.03 per diluted share, a decrease of $7.6 million or 96.2 percent compared to $7.9 million or $0.70 per diluted share for the three month period ended June 30, 2008. Net income for the six month period ended June 30, 2009 was $6.9 million or $0.64 per diluted share, a decrease of $9.4 million or 57.7 percent compared to $16.3 million or $1.45 per diluted share for the six month period ended June 30, 2008. The significant declines in net income for both the three and six month
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periods ended June 30, 2009, compared to the same periods in the prior year, resulted primarily from sharply higher provisions for loan losses in 2009, significant adjustments for temporary impairment of certain investments, higher noninterest expenses, including a significant increase in FDIC deposit insurance premiums, and lower noninterest income, partially offset by higher net interest income and lower income taxes.
Total deposits increased $295.9 million during the six month period ended June 30, 2009. Approximately $75.0 million of this growth resulted from the transfer of certain money market mutual fund investments of existing customers to interest bearing demand deposits. This transfer was primarily due to the recent increase in FDIC insurance coverage of certain deposit products which was part of the legislation enacted in response to the current economic crisis. In addition to the above mentioned deposit growth, the Company also experienced significant growth in new customers both in existing branches and new branches added during 2008. This growth was partially offset by some declines in balances of existing customers, primarily those customers directly involved in or supported by the real estate industry. Proceeds from deposit growth were used primarily to reduce long term and short term borrowings and to fund loan growth.
Total loans increased $79.8 million during the six month period ended June 30, 2009 as the Company continued to provide lending availability to new and existing customers. This growth, however, was accompanied by a continued slowdown in payments of certain loans, such as construction loans, whose repayment is often dependent on sales of completed real estate projects, as well as additional increases in delinquent and nonperforming loans in other sectors of the loan portfolio which have also been adversely impacted by the severe economic conditions currently affecting the real estate markets.
The Company’s noninterest income decreased in 2009, primarily as a result of a significant increase in recognized impairment charges related to the Company’s investments in certain pooled trust preferred securities which have been adversely affected by the effects of the current economic downturn in the financial services industry, and decreases in investment advisory fees of its subsidiary A.R. Schmeidler & Co., Inc., a registered investment advisory firm located in Manhattan, New York. Fee income from this source began to decline in the fourth quarter of 2008 and is expected to continue to decline, at least in the near term, as a result of the effects of significant declines in both domestic and international markets. At June 30, 2009, A.R. Schmeidler & Co., Inc. had approximately $1.0 billion of assets under management compared to approximately $1.7 billion at June 30, 2008.
Nonperforming assets increased dramatically during the first half of 2009 as overall asset quality continues to be adversely affected by the current state of the economy. During the six month period ended June 30, 2009, the Company has experienced significant increases in delinquent and nonperforming loans and a continuation of the slowdowns in repayments and declines in theloan-to-value ratios on existing loans which began in the second half of 2008. The Company does not originate loans similar to payment option loans or loans that allow for negative interest amortization. The Company does not engage insub-prime lending nor does it offer loans with low “teaser” rates or highloan-to-value ratios tosub-prime borrowers. At June 30, 2009, the Company had nosub-prime loans in its portfolio. In addition, the Company has not invested in mortgage-backed securities secured bysub-prime loans. These conservative practices somewhat protected the Company from the effects of the early stages of the current financial crisis. However, the severity of the economic downturn, particularly noted during the second quarter of 2009, has extended well beyond thesub-prime lending issue, and has resulted in severe declines in the demand for and values of virtually all commercial and residential real estate properties. These declines, together with the present shortage of available residential mortgage financing, have put downward pressure on the overall asset quality of virtually all financial institutions, including the Company. Continuation or worsening of such conditions would have additional significant adverse effects on asset quality in the future.
The 500 basis point reduction of short-term interest rates from September 2007 through December 2008 resulted in a steeper yield curve by late 2008 and into the second quarter of 2009. However, with interest rates at historical low levels, availability of long-term financing at interest rates attractive to the Company has been limited. This has resulted in many financial institutions including the Company replacing maturing long-term borrowings with short-term debt. While replacing long-term borrowings with lower cost short-term debt may have a positive impact on net interest income in the near term, this condition presents additional challenges in the ongoing management of interest rate risk to the extent that these borrowings are utilized to fund longer term assets at fixed rates.
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As a result of the effects of changes in interest rates, activity in the Company’s core businesses of loans and deposits, an increase in loans as a percentage of total interest earning assets and other asset/liability management activities, tax equivalent basis net interest income increased by $1.5 million or 5.4 percent to $29.3 million for the three month period ended June 30, 2009, compared to $27.8 million for the same period in the prior year, and increased by $3.9 million or 7.1 percent to $58.8 million for the six month period ended June 30, 2009, compared to $54.9 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $1.1 million and $2.2 million for the three and six month periods ended June 30, 2009, respectively, compared to $1.2 million and $2.5 million for the same periods in the prior year.
Non interest income, excluding net gains and losses on securities transactions and recognized impairment charges, was $3.9 million for the three month period ended June 30, 2009, a decrease of $1.1 million or 22.0 percent compared to $5.0 million for the same period in the prior year. Non interest income, excluding net gains and losses on securities transactions and recognized impairment charges, was $8.0 million for the six month period ended June 30, 2009, a decrease of $1.8 million or 18.4 percent compared to $9.8 million for the same period in the prior year. The decreases were primarily due to a reduction in the investment advisory fees of A.R. Schmeidler & Co., Inc., partially offset by increased income from bank owned life insurance and higher deposit activity and other service fees. Investment advisory fee income is expected to decline at least in the near term, due to the current difficulties in the global financial markets. Non interest income also included recognized pre-tax impairment charges on securities available for sale of $1.4 million for the three month period ended June 30, 2009 and $3.6 million and $0.5 million for the six month periods ended June 30, 2009 and 2008, respectively. The 2009 adjustments were related to the Company’s investments in pooled trust preferred securities. The 2008 loss related to the Company’s investment in a mutual fund which was sold in April 2008 without additional loss. The Company has decided to hold its investments in pooled trust preferred securities as it does not believe that the current market quotes for these investments are indicative of their underlying value.
Non interest expense was $19.6 million for the three month period ended June 30, 2009, an increase of $1.9 million or 10.7 percent compared to $17.7 million for the same period in the prior year. Non interest expense was $38.1 million for the six month period ended June 30, 2009, an increase of $3.4 million or 9.8 percent compared to $34.7 million for the same period in the prior year. The increase reflects the Company’s continued investment in its branch offices, technology and personnel to accommodate growth in loans and deposits, the expansion of services and products available to new and existing customers and the upgrading of certain internal processes. The increase also reflects a significant increase in FDIC deposit premiums. These additional premiums were imposed by the FDIC to replenish shortfalls in the FDIC Insurance Fund which has resulted from the current economic crisis. Additional significant premium increases are possible for the remainder of 2009 and perhaps beyond.
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 June 30, 2009 shows the Company’s net interest income decreasing slightly if interest rates fall and increasing slightly if rates rise.
The Company has established specific policies and operating procedures governing its liquidity levels to address future liquidity needs, including contingent sources of liquidity. While the current adverse economic situation has put pressure on the availability of liquidity in the marketplace, the Company believes that its present liquidity and borrowing capacity are sufficient for its current business needs. In addition, the Company, HVB and NYNB are subject to various regulatory capital guidelines. To be considered “well capitalized,” an institution must generally have a leverage ratio of at least 5 percent, a Tier 1 ratio of 6 percent and a total capital ratio of 10 percent. The Company, HVB and NYNB each exceeded all current regulatory capital requirements to be considered in the “well-capitalized” category at June 30, 2009. Management plans to conduct the affairs of the Company and its subsidiary banks so as to maintain a strong capital position in the future.
In response to the current financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008. This law established the Troubled Asset Relief Program (“TARP”). As part of TARP, the Treasury established the Capital Purchase Program (“CPP”) to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial
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markets. After carefully reviewing and analyzing the terms and conditions of the CPP, the Board of Directors and management of the Company determined that, given its present financial condition, participation in the CPP was unnecessary and not in the best interests of the Company, its customers or shareholders.
On November 21, 2008 the FDIC adopted the final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”) which is also a part of EESA. Under the TLG Program the FDIC will (1) guarantee certain newly issued senior unsecured debt and (2) provide full FDIC deposit insurance coverage for non-interest bearing transaction accounts, NOW accounts paying less than 0.5 percent interest per annum and interest on Lawyers Trust Accounts held at participating FDIC insured institutions through December 31, 2009. The Company has elected to participate in both guarantee programs.
Critical Accounting Policies
Allowance for Loan Losses —The Company maintains an allowance for loan losses to absorb probable losses incurred 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 a specific component for identified problem loans, and a formula component which addresses historical loan loss experience together with other relevant risk factors affecting the portfolio.
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 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 component 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 first applying historical loss experience factors to outstanding loans by type. This component is then adjusted to reflect additional risk factors not addressed by historical loss experience. These factors include the 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 each of these conditions is quantified by loan type and reflected in the formula component. The evaluations of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty due to the subjective nature of such evaluations and because they are not identified with specific problem credits.
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 June 30, 2009. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions, particularly in the Company’s service area, since the majority of the Company’s loans are collateralized by real estate. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan
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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 collectibility of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible.
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. Interest income includes amortization of purchase premium and accretion of purchase discount. The amortization of premiums and accretion of discounts is determined by using the level yield method. 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. The Company regularly reviews declines in the fair value of securities below their costs for purposes of determining whether such declines are other-than-temporary in nature. In estimating other-than-temporary losses, management considers adverse changes in expected cash flows, the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and whether it is more likely than not that the Company would be required to sell the investments prior to maturity or recovery of cost. If the Company determines that a decline in the fair value of a security below cost is other-than-temporary, the carrying amount of the security is reduced by any portion of the decline deemed to be credit related, with the corresponding decline charged to earnings. The carrying amount of the security is also reduced by any additional impairment deemed to be non credit related, with the corresponding decline charged to other comprehensive income.
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 June 30, 2009 and December 31, 2008 did not indicate impairment of its goodwill or identified intangible assets.
Results of Operations for the Three and Six Month Periods Ended June 30, 2009 and June 30, 2008
Summary of Results
The Company reported net income of $0.3 million for the three month period ended June 30, 2009, a decrease of $7.6 million or 96.2 percent compared to $7.9 million for the same period in the prior year. Net income was $6.9 million for the six month period ended June 30, 2009, a decrease of $9.4 million or 57.7 percent compared to $16.3 million for the same period in the prior year. The decrease in net income in the current year periods, compared to the prior year periods, reflected a significantly higher provision for loan losses, higher noninterest expense including significantly higher FDIC deposit insurance premiums, higher recognized impairment charges on securities available for sale and lower noninterest income, partially offset by higher net interest income and lower income taxes. Provisions for loan losses totaled $11.5 million and $14.5 million, respectively, for the three and six month periods ended June 30, 2009, compared to $2.1 million and $2.4 million, respectively, for the same periods in the prior year. The increased provisions for the 2009 periods resulted from significant negative effects of the current
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economic downturn, which intensified in the first six months of 2009, on the performance and underlying collateral values of the Company’s loan portfolios. Recognized impairment charges on securities available for sale totaled $2.1 million for the three month period ended June 30, 2009 and $3.6 million and $0.5 million for the six month periods ended June 30, 2009 and 2008, respectively. The 2009 adjustments were related to the Company’s investments in pooled trust preferred securities which have been adversely affected by financial difficulties and failures of a number of financial institutions underlying these investments. The 2008 loss related to the Company’s investment in a mutual fund which was sold in April 2008 without additional loss. The Company has decided to hold its investments in pooled trust preferred securities as it does not believe that the current market quotes for these investments are indicative of their underlying value.
Diluted earnings per share were $0.03 for the three month period ended June 30, 2009, a decrease of $0.67 or 95.7 percent compared to $0.70 for the same period in the prior year. Diluted earnings per share were $0.64 for the six month period ended June 30, 2009, a decrease of $0.81 or 55.9 percent compared to $1.45 for the same period in the prior year. These decreases are a direct result of the changes in net income in the current year period compared to the prior year period. Prior period per share amounts have been adjusted to reflect the 10 percent stock dividend distributed in December 2008. Annualized returns on average stockholders’ equity and average assets were 0.6 percent and 0.1 percent for the three month period ended June 30, 2009, compared to 14.9 percent and 1.4 percent for the same period in the prior year. Annualized returns on average stockholders’ equity and average assets were 6.8 percent and 0.5 percent for the six month period ended June 30, 2009, compared to 15.6 percent and 1.4 percent 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 June 30, 2009 and June 30, 2008, 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 2009 and 2008.
Three Months Ended June 30, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest(3) | Rate | Balance | Interest(3) | Rate | |||||||||||||||||||
(000’s except percentages) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in banks | $ | 1,289 | $ | 7 | 2.17 | % | $ | 3,815 | $ | 17 | 1.78 | % | ||||||||||||
Federal funds sold | 19,703 | 14 | 0.28 | 16,134 | 96 | 2.38 | ||||||||||||||||||
Securities:(1) | ||||||||||||||||||||||||
Taxable | 432,019 | 4,483 | 4.15 | 498,796 | 6,162 | 4.94 | ||||||||||||||||||
Exempt from federal income taxes | 196,954 | 3,127 | 6.35 | 221,095 | 3,488 | 6.31 | ||||||||||||||||||
Loans, net(2) | 1,739,010 | 27,374 | 6.30 | 1,426,176 | 25,023 | 7.02 | ||||||||||||||||||
Total interest earning assets | 2,388,975 | 35,005 | 5.86 | 2,166,016 | 34,786 | 6.42 | ||||||||||||||||||
Non interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 46,307 | 52,138 | ||||||||||||||||||||||
Other assets | 121,109 | 102,347 | ||||||||||||||||||||||
Total non interest earning assets | 167,416 | 154,485 | ||||||||||||||||||||||
Total assets | $ | 2,556,391 | $ | 2,320,501 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 775,267 | $ | 2,327 | 1.20 | % | $ | 640,893 | $ | 2,322 | 1.45 | % | ||||||||||||
Savings | 99,338 | 113 | 0.46 | 94,400 | 168 | 0.71 | ||||||||||||||||||
Time | 268,712 | 975 | 1.45 | 251,333 | 1,597 | 2.54 | ||||||||||||||||||
Checking with interest | 267,069 | 304 | 0.46 | 152,244 | 246 | 0.65 | ||||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | 88,675 | 87 | 0.39 | 127,100 | 458 | 1.44 | ||||||||||||||||||
Other borrowings | 170,644 | 1,925 | 4.51 | 202,371 | 2,213 | 4.37 | ||||||||||||||||||
Total interest bearing liabilities | 1,669,705 | 5,731 | 1.37 | 1,468,341 | 7,004 | 1.91 | ||||||||||||||||||
Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 652,008 | 612,285 | ||||||||||||||||||||||
Other liabilities | 32,718 | 29,046 | ||||||||||||||||||||||
Total non interest bearing liabilities | 684,726 | 641,331 | ||||||||||||||||||||||
Stockholders’ equity(1) | 201,960 | 210,829 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity(1) | $ | 2,556,391 | $ | 2,320,501 | ||||||||||||||||||||
Net interest earnings | $ | 29,274 | $ | 27,782 | ||||||||||||||||||||
Net yield on interest earning assets | 4.90 | % | 5.13 | % |
(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 $1,094 and $1,221 for the three month periods ended June 30, 2009 and June 30, 2008, respectively. |
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The following table sets forth the average balances of interest earning assets and interest bearing liabilities for the six month periods ended June 30, 2009 and June 30, 2008, 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 2009 and 2008.
Six Months Ended June 30, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balance | Interest(3) | Rate | Balance | Interest(3) | Rate | |||||||||||||||||||
(000’s except percentages) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in banks | $ | 4,573 | $ | 12 | 0.52 | % | $ | 4,724 | $ | 63 | 2.67 | % | ||||||||||||
Federal funds sold | 12,694 | 24 | 0.38 | 41,624 | 723 | 3.47 | ||||||||||||||||||
Securities:(1) | ||||||||||||||||||||||||
Taxable | 453,161 | 9,930 | 4.38 | 529,668 | 13,044 | 4.93 | ||||||||||||||||||
Exempt from federal income taxes | 200,687 | 6,445 | 6.42 | 217,783 | 6,940 | 6.37 | ||||||||||||||||||
Loans, net(2) | 1,717,905 | 54,391 | 6.33 | 1,373,982 | 50,325 | 7.33 | ||||||||||||||||||
Total interest earning assets | 2,389,020 | 70,802 | 5.93 | 2,167,781 | 71,095 | 6.56 | ||||||||||||||||||
Non interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 43,891 | 49,546 | ||||||||||||||||||||||
Other assets | 118,556 | 100,696 | ||||||||||||||||||||||
Total non interest earning assets | 162,447 | 150,239 | ||||||||||||||||||||||
Total assets | $ | 2,551,467 | $ | 2,318,020 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 727,942 | $ | 4,547 | 1.25 | % | $ | 648,871 | $ | 5,880 | 1.81 | % | ||||||||||||
Savings | 97,577 | 228 | 0.47 | 94,087 | 385 | 0.82 | ||||||||||||||||||
Time | 290,788 | 2,281 | 1.57 | 255,881 | 3,814 | 2.98 | ||||||||||||||||||
Checking with interest | 224,822 | 499 | 0.44 | 154,869 | 672 | 0.87 | ||||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | 141,604 | 401 | 0.57 | 109,614 | 938 | 1.71 | ||||||||||||||||||
Other borrowings | 183,655 | 4,026 | 4.38 | 206,605 | 4,541 | 4.40 | ||||||||||||||||||
Total interest bearing liabilities | 1,666,388 | 11,982 | 1.44 | 1,469,741 | 16,230 | 2.21 | ||||||||||||||||||
Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 651,575 | 608,760 | ||||||||||||||||||||||
Other liabilities | 30,941 | 30,202 | ||||||||||||||||||||||
Total non interest bearing liabilities | 682,516 | 638,692 | ||||||||||||||||||||||
Stockholders’ equity(1) | 202,563 | 209,311 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity(1) | $ | 2,551,467 | $ | 2,318,020 | ||||||||||||||||||||
Net interest earnings | $ | 58,820 | $ | 54,865 | ||||||||||||||||||||
Net yield on interest earning assets | 4.92 | % | 5.06 | % |
(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 $2,256 and $2,429 for the six month periods ended June 30, 2009 and June 30, 2008, 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 six month periods ended June 30, 2009 and June 30, 2008.
(000’s) | ||||||||||||||||||||||||
Three Month Period Increase | Six 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 | $ | (11 | ) | $ | 1 | $ | (10 | ) | $ | (2 | ) | $ | (49 | ) | $ | (51 | ) | |||||||
Federal funds sold | 21 | (103 | ) | (82 | ) | (503 | ) | (196 | ) | (699 | ) | |||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | (825 | ) | (854 | ) | (1,679 | ) | (1,884 | ) | (1,230 | ) | (3,114 | ) | ||||||||||||
Exempt from federal income taxes(2) | (381 | ) | 20 | (361 | ) | (545 | ) | 50 | (495 | ) | ||||||||||||||
Loans, net | 5,489 | (3,138 | ) | 2,351 | 12,597 | (8,531 | ) | 4,066 | ||||||||||||||||
Total interest income | 4,293 | (4,074 | ) | 219 | 9,663 | (9,956 | ) | (293 | ) | |||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | 487 | (482 | ) | 5 | 717 | (2,050 | ) | (1,333 | ) | |||||||||||||||
Savings | 9 | (64 | ) | (55 | ) | 14 | (171 | ) | (157 | ) | ||||||||||||||
Time | 110 | (732 | ) | (622 | ) | 520 | (2,053 | ) | (1,533 | ) | ||||||||||||||
Checking with interest | 186 | (128 | ) | 58 | 305 | (478 | ) | (173 | ) | |||||||||||||||
Securities sold under repurchase agreements and other short-term borrowings | (138 | ) | (233 | ) | (371 | ) | 274 | (811 | ) | (537 | ) | |||||||||||||
Other borrowings | (347 | ) | 59 | (288 | ) | (504 | ) | (11 | ) | (515 | ) | |||||||||||||
Total interest expense | 307 | (1,580 | ) | (1,273 | ) | 1,326 | (5,574 | ) | (4,248 | ) | ||||||||||||||
Increase in interest differential | $ | 3,986 | $ | (2,494 | ) | 1,492 | $ | 8,337 | $ | (4,382 | ) | $ | 3,995 | |||||||||||
(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 2009 and 2008. |
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 six month periods ended June 30, 2009, net interest income, on a tax equivalent basis, increased $1.5 million or 5.4 percent to $29.3 million and $3.9 million or 7.1 percent to $58.8 million, respectively, compared to $27.8 million and $54.9 million for the same periods in the prior year. Net interest income for the three month period ended June 30, 2009 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $21.6 million or 3.1 percent to $719.3 million compared to $697.7 million for the same period in the prior year, partially offset by a decrease in the tax equivalent basis net interest margin to 4.90% in the second quarter of 2009 from 5.13% in the prior year period. Net interest income for the six month period ended June 30, 2009 was higher due to an increase in the excess of average interest earning assets over average interest bearing liabilities of $24.5 million or 3.5 percent to $722.6 million compared to $698.1 million for the same period in the prior year, partially offset by a decrease in the tax equivalent basis net interest margin to 4.92% in the first six months of 2009 from 5.06% 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 $0.2 million or 0.6 percent to $35.0 million and decreased $0.3 million or 0.4 percent to $70.8 million, for the three and six month periods ended June 30, 2009, respectively, compared to $34.8 million and $71.1 million for the same periods in the prior year. Average interest earning assets increased $223.0 million or 10.3 percent to $2,389.0 million and $221.2 million or 10.2 percent to $2,389.0 million, for the three and six month periods ended June 30, 2009, compared to $2,166.0 million and $2,167.8 million for the same
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periods in the prior year. Volume increases in loans and federal funds sold, partially offset by volume decreases in interest bearing deposits, taxable securities and tax-exempt securities and generally lower interest rates, contributed to the slightly higher interest income in the three month period ended June 30, 2009, compared to the same period in the prior year. Volume decreases in interest bearing deposits, federal funds sold, taxable securities and tax-exempt securities and generally lower interest rates, partially offset by a volume increase in loans, contributed to the slightly lower interest income in the six month period ended June 30, 2009 compared to the same period in the prior year.
Average total securities, excluding average net unrealized gains and losses on available for sale securities, decreased by $90.9 million or 12.6 percent to $629.0 million and by $93.7 million or 12.5 percent to $653.8 million, for the three and six month periods ended June 30, 2009, compared to $719.9 million and $747.5 million for the same periods in the prior year. The decreases in average total securities in the three and six month periods ended June 30, 2009, compared to the same periods in the prior year, was a result of cash flow from maturing securities being utilized to fund loan growth and 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 lower for the three and six month periods ended June 30, 2009 compared to the same periods in the prior year. Average tax equivalent basis yields on securities for the three and six month periods ended June 30, 2009 were 4.84 percent and 5.01 percent, compared to 5.36 percent and 5.35 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 six month periods ended June 30, 2009, compared to the same periods in the prior year, due to lower volume and lower interest rates.
Average net loans increased $312.8 million or 21.9 percent to $1,739.0 million and $343.9 million or 25.0 percent to $1,717.9 million, for the three and six month periods ended June 30, 2009, compared to $1,426.2 million and $1,374.0 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 6.30 percent and 6.33 percent for the three and six month periods ended June 30, 2009 compared to 7.02 percent and 7.33 percent for the same periods in the prior year. As a result, interest income on loans was higher for the three and six month periods ended June 30, 2009, compared to the same periods in the prior year due to higher volume, partially offset by lower 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 decreased $1.3 million or 18.6 percent to $5.7 million and $4.2 million or 25.9 percent to $12.0 million, for the three and six month periods ended June 30, 2009, compared to $7.0 million and $16.2 million for the same periods in the prior year. Average interest bearing liabilities increased $201.4 million or 13.7 percent to $1,669.7 million and $196.7 million or 13.4 percent to $1,666.4 million, for the three and six month periods ended June 30, 2009, compared to $1,468.3 million and $1,469.7 million for the same periods in the prior year. The increase in average interest bearing liabilities for the three month period ended June 30, 2009, compared to the same period in the prior year, resulted from volume increases in money market deposits, savings deposits, checking with interest and time deposits, partially offset by volume decreases in, securities sold under agreements to repurchase, other short-term borrowings and other borrowed funds. The increase in average interest bearing liabilities for the six month period ended June 30, 2009, compared to the same period in the prior year, resulted from volume increases in money market deposits, savings deposits, checking with interest, time deposits and other short-term borrowings, partially offset by volume decreases in securities sold under agreements to repurchase and other borrowed funds. Average money market deposits for the 2008 periods include the effects of a $97 million temporary deposit from January 1, 2008 through February 8, 2008. Average interest bearing deposits, excluding brokered certificates of deposit, increased during the six months ended June 30, 2009, compared to the same period in the prior year, as a result of increases in new customers, existing customers and continued growth resulting from the opening of new branches. The decreases in average other borrowings for the three and six month periods ended June 30, 2009, compared to the same periods in the prior year, resulted from managements utilization of cash flows from maturing investment securities and deposit growth to reduce borrowings as part of the Company’s ongoing asset/liability management efforts. Average interest rates on interest bearing liabilities were 1.37 percent and 1.44 percent for the three and six month periods ended June 30, 2009, compared to 1.91 percent and 2.21 percent for the same periods in the prior year. As a result, interest expense was lower for the three and six month periods ended June 30, 2009, compared to the same periods in the prior year due to lower interest rates, partially offset by higher volume.
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Average non interest bearing demand deposits increased by $39.7 million or 6.5 percent to $652.0 million and $42.8 million or 7.0 percent to $651.6 million, for the three and six month periods ended June 30, 2009, compared to $612.3 million and $608.8 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.
The interest rate spread on a tax equivalent basis for the three and six month periods ended June 30, 2009 and 2008 is as follows:
Three Month | Six Month | |||||||||||||||
Period Ended | Period Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Average interest rate on: | ||||||||||||||||
Total average interest earning assets | 5.86 | % | 6.42% | 5.93% | 6.56.% | |||||||||||
Total average interest bearing liabilities | 1.37 | % | 1.91% | 1.44% | 2.21% | |||||||||||
Total interest rate spread | 4.49 | % | 4.51% | 4.49% | 4.35% |
Interest rate spreads increase or decrease as a result of the relative change in average interest rates on interest earning assets compared to the change in average interest rates on interest bearing liabilities. The interest rate spread decreased slightly for the three month period ended June 30, 2009 and increased slightly for the six month period ended June 30, 2009, compared to the respective prior year period. Management cannot predict what impact market conditions will have on its interest rate spread and future compression of in net interest spread may occur.
Provision for Loan Losses
The Company recorded a provision for loan losses of $11.5 million and $2.1 million for the three month periods ended June 30, 2009 and 2008, respectively. The Company recorded a provision for loan losses of $14.5 million and $2.4 million for the six month periods ended June 30, 2009 and 2008, 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. The overall increase in the 2009 provision resulted from the significant negative impact that the current economic downturn, which intensified in the first six months of 2009, has had on the performance and underlying collateral value of the Company’s loan portfolio. See “Financial Condition” for further discussion.
Non Interest Income
Non interest income decreased $3.3 million, or 64.4 percent to $1.8 million for the three month period ended June 30, 2009, compared to $5.2 million for the prior year period. Non interest income decreased $5.0 million, or 52.5 percent to $4.5 million for the six month period ended June 30, 2009, compared to $9.4 million for the prior year period.
Service charges income increased $0.1 million or 4.7 percent to $1.4 million for the three month period ended June 30, 2009, compared to $1.3 million for the prior year period. Service charges income increased $0.2 million or 5.3 percent to $3.0 million for the six month period ended June 30, 2009, compared to $2.8 million for the prior year period. The increases were primarily due to growth in deposit activity and other services charges and increases in scheduled fees.
Investment advisory fee income for the three month period ended June 30, 2009 decreased $1.1 million or 37.9 percent to $1.8 million from $2.9 million in the prior year period. Investment advisory fee income for the six month period ended June 30, 2009 decreased $2.0 million or 35.0 percent to $3.6 million from $5.6 million in the prior year period. The decreases were primarily due to a net decrease in the market values of assets under management which was primarily as a result of the current difficulties in the global financial markets.
The Company recognized impairment charges on securities available for sale of $2.1 million for the three month period ended June 30, 2009. The Company recognized impairment charges on securities available for sale of $3.5 million and $0.5 million for the six month periods ended June 30, 2009 and 2008, respectively. The 2009 charge resulted from another-than-temporary-impairment adjustment related to the Company’s investment in a three pooled trust preferred securities. The 2008 charge resulted from another-than-temporary-impairment adjustment related to the Company’s investment in a mutual fund.
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The Company recorded realized gains on sales of securities available for sale of $52,000 and $148,000 for both the three and six month periods ended June 30, 2009 and 2008, respectively.
Other income for the three and six month periods ended June 30, 2009 was essentially unchanged from the prior year periods.
Non Interest Expense
Non interest expense for the three and six month periods ended June 30, 2009 increased $2.0 million or 11.1 percent to $19.6 million and $3.4 million or 9.9 percent to $38.1 million, respectively, as compared to the prior year periods. These increases reflect the overall growth of the Company resulted primary from increases in FDIC assessments in both periods.
Salaries and employee benefits, the largest component of non interest expense, for the three and six month period ended June 30, 2009 increased $0.2 million or 2.1 percent to $10.4 million and decreased $0.1 million or 0.4 percent to $20.2 million, respectively, as compared to the prior year periods. The increases resulted from the addition of an employee to the officer’s supplemental retirement plan and was partially offset by a reduction in the accrual for incentive compensation.
Occupancy expense for the three month period ended June 30, 2009 was unchanged as compared to the prior year period. Occupancy expense for the six month period increased $0.3 million or 9.6 percent to $4.0 million from $3.7 million in prior year period. The increase reflected the Company’s continued expansion, including 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 for the three and six month periods ended June 30, 2009 decreased $0.1 million or 10.2 percent to $1.0 million and $0.2 million or 8.4 percent to $2.1 million, respectively, as compared to prior year periods. The decrease was due to an executive compensation consultant who had been engaged in the prior year periods.
Equipment expense for the three and six month periods ended June 30, 2009 was essentially unchanged from the prior year periods.
Business development expense for the three and six month periods ended June 30, 2009 decreased $0.1 million or 19.1 percent to $0.5 million and $0.1 million or 5.5 percent to $1.0 million, respectively, as compared to prior year periods. The decreases were due to lower annual report expense.
The assessment of the Federal Deposit Insurance Corporation (“FDIC”) for the three and six month periods ended June 30, 2009 increased $1.9 million to $2.1 million from $0.2 million and increased $3.4 million to $3.6 million from $0.3 million, respectively.. The increases were due to additional premiums that were imposed by the FDIC to replenish shortfalls in the FDIC Insurance Fund which resulted from the current economic crisis. Additional significant premium increases are expected for the remainder of 2009.
Significant changes, more than 5 percent, in other components of non interest expense for the three and six month periods ended June 30, 2009 compared to June 30 2008, were due to the following:
• | Increase of $43,000 (58.1%) and $106,000 (75.7%)%) in other insurance expense, resulting from increases in banker’s professional and automobile insurance costs partially offset by reductions in the estimates of the net cost of certain life insurance policies due | |
• | Decrease of $97,000 (25.7%) and $345,000 (37.1%) in stationary and printing costs due to decreased consumption, | |
• | Decrease of $59,000 (25.7%) and $109,000 (22.5%) in communication costs due to the implementation of more efficient systems. | |
• | Decrease of $43,000 (18.9%) and $67,000 (14.9%) in courier costs due to the implementation of a remote capture system |
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• | Increase of $121,000 (66.5%) and $186,000 (65.3%) in other loan expenses due to costs associated with properties held in other real estate owned and increased collection costs. | |
• | Decrease of $30,000 (26.8%) and $160,000 (32.6%) in dues, meetings and seminars due to decreased participation in such events. |
Income Taxes |
Income taxes (benefits) of ($1.5) million and $1.6 million were recorded in the three and six month periods ended June 30, 2009, compared to $4.0 million and $8.4 million for the same periods in the prior year. The Company’s overall effective tax rate of 18.5% for the six months ended June 30, 2009 was significantly lower compared to 34.0% for the same period in the prior year. The 2009 effective rate was lower primarily due to the fact that tax-exempt income represented a significantly higher percentage of pretax income in 2009 compared to 2008. The Company is subject to a Federal statutory rate of 35 percent, a New York State tax rate of 7.1 percent plus a 17% surcharge, a Connecticut State tax rate of 7.5 percent and a New York City tax rate of 9 percent.
Financial Condition
Assets
The Company had total assets of $2,562.0 million at June 30, 2009, an increase of $21.1 million from $2,540.9 million at December 31, 2008.
Federal Funds Sold
Federal funds sold totaled $87.5 million at June 30, 2009, an increase of $80.8 million from $6.7 million at December 31, 2008. The decrease 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 $5.0 million at June 30, 2009 and were comprised primarily of obligations of municipalities located within the Company’s market area.
Securities totaled $494.6 million at June 30, 2009, a decrease of $176.8 million or 26.3 percent from $671.4 million at December 31, 2008. Securities classified as available for sale, which are recorded at estimated fair value, totaled $495.4 million at June 30, 2009, a decrease of $146.9 million or 22.9 percent from $642.4 million at December 31, 2008. Securities classified as held to maturity, which are recorded at amortized cost, totaled $24.7 million at June 30, 2009, a decrease of $4.3 million or 14.8 percent from $29.0 million at December 31, 2008.
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The following tables set forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities at June 30, 2009 and December 31, 2008:
June 30, 2009
Gross Unrealized | Estimated Fair | |||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
(000s) | ||||||||||||||||
Classified as Available for Sale | ||||||||||||||||
U.S. Treasury and government agencies | $ | 13,000 | $ | 106 | — | $ | 13,106 | |||||||||
Mortgage-backed securities | 293,777 | 5,913 | $ | 156 | 299,534 | |||||||||||
Obligations of states and political subdivisions | 162,143 | 2,934 | 1,077 | 164,000 | ||||||||||||
Other debt securities | 16,483 | 19 | 7,733 | 8,769 | ||||||||||||
Total debt securities | 485,403 | 8,972 | 8,966 | 485,409 | ||||||||||||
Mutual funds and other equity securities | 9,172 | 906 | 90 | 9,988 | ||||||||||||
Total | $ | 494,575 | $ | 9,878 | $ | 9,056 | $ | 495,397 | ||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities | $ | 19,571 | $ | 614 | — | $ | 20,185 | |||||||||
Obligations of states and political subdivisions | 5,134 | 198 | — | 5,332 | ||||||||||||
Total | $ | 24,705 | $ | 812 | $ | — | $ | 25,517 | ||||||||
December 31, 2008
Gross Unrealized | Estimated Fair | |||||||||||||||
Amortized Cost | Gains | Losses | Value | |||||||||||||
(000’s) | ||||||||||||||||
Classified as Available for Sale | ||||||||||||||||
U.S. Treasury and government agencies | $ | 45,206 | $ | 288 | $ | 79 | $ | 45,415 | ||||||||
Mortgage-backed securities | 371,963 | 3,487 | 1,313 | 374,137 | ||||||||||||
Obligations of states and political subdivisions | 200,858 | 2,341 | 1,710 | 201,489 | ||||||||||||
Other debt securities | 20,082 | 227 | 8,665 | 11,644 | ||||||||||||
Total debt securities | 638,109 | 6,343 | 11,767 | 632,685 | ||||||||||||
Mutual funds and other equity securities | 9,170 | 613 | 105 | 9,678 | ||||||||||||
Total | $ | 647,279 | $ | 6,956 | $ | 11,872 | $ | 642,363 | ||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities | $ | 23,859 | $ | 525 | $ | 78 | $ | 24,306 | ||||||||
Obligations of states and political subdivisions | 5,133 | 108 | 1 | 5,240 | ||||||||||||
Total | $ | 28,992 | $ | 633 | $ | 79 | $ | 29,546 | ||||||||
U.S. Treasury and government agency obligations classified as available for sale totaled $13.1 million at June 30, 2009, a decrease of $32.3 million or 71.1 percent from $45.4 million at December 31, 2008. The decrease was due to maturities and calls of $188.1 million and other decreases of $0.1 million which were partially offset by purchases of $155.9 million. There were no U.S. Treasury or government agency obligations classified as held to maturity at June 30, 2009 or at December 31, 2008.
Mortgage-backed securities, including collateralized mortgage obligations (“CMO’s”), classified as available for sale totaled $299.5 million at June 30, 2009, a decrease of $74.6 million or 19.9 percent from $374.1 million at December 31, 2008. The decrease was due to maturities and principal paydowns of $86.4 million and sales of
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$6.8 million which were partially offset by purchases of $15.1 million and other increases of $3.5 million. Mortgage-backed securities, including CMO’s, classified as held to maturity totaled $19.6 million at June 30, 2009, a decrease of $4.3 million or 18.0 percent from $23.9 million at December 31, 2008. The decrease was due to maturities and principal paydowns of $4.3 million.
Obligations of state and political subdivisions classified as available for sale totaled $164.0 million at June 30, 2009, a decrease of $37.5 million or 18.6 percent from $201.5 million at December 31, 2008. The decrease was due to maturities and calls of $38.0 million and sales of $2.0 million which were partially offset by purchases of $1.3 million and other increases of $1.2 million. Obligations of state and political subdivisions classified as held to maturity totaled $5.1 million at both June 30, 2009 and December 31, 2008. The combined available for sale and held to maturity obligations at March 31, 2009 were comprised of approximately 68 percent of New York State political subdivisions and 32 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 classified as available for sale decreased $2.8 million, or 24.1 percent, to $8.8 million at June 30, 2009 from $11.6 million at December 31, 2008. The decrease was due to other changes of $2.8 million. Included in other changes was a $3.6 million pretax loss for other than temporary impairment related to the Company’s investment in a pooled trust preferred security, and $0.1 million of unrealized losses on other debt securities. These pooled trust preferred securities, while continuing to perform have suffered severe declines in estimated fair value primarily as a result of illiquidity in the marketplace and declines in the credit ratings of a number of issuing banks underlying these securities. The Company has recognized $4.6 million inother-than-temporary-impairment charges over the past twelve months, related to its investments in pooled trust preferred securities. Management cannot predict what effect that continuation of such conditions could have on potential future value or whether there will be additionalother-than-temporary impairment of these securities.
Mutual funds and other equity securities totaled $10.0 million at June 30, 2009, an increase of $0.3 million or 3.1 percent from $9.7 million at December 31, 2008. All mutual funds and other equity securities are classified as available for sale.
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 $8.6 million at June 30, 2009, compared to $20.5 million at December 31, 2008.
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 June 30, 2009 or December 31, 2008.
Loans
Net loans totaled $1,746.2 million at June 30, 2009, an increase of $68.6 million or 4.1 percent from $1,677.6 million at December 31, 2008. The increase resulted principally from a $89.0 million increase in commercial real estate loans, $43.8 million increase in residential loans, $19.2 million increase in construction loans, $4.4 million increase in loans to individuals, and a $2.2 million increase in lease financing. These increases were partially offset by a $78.7 million decrease in commercial and industrial loans. The increase in loans reflect the Company’s continuing emphasis on making new loans, expansion of loan production facilities, and more effective market penetration.
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Major classifications of loans at June 30, 2009 and December 31, 2008 are as follows:
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
(000’s) | ||||||||
Real Estate: | ||||||||
Commercial | $ | 731,927 | $ | 642,923 | ||||
Construction | 274,039 | 254,837 | ||||||
Residential | 453,182 | 409,431 | ||||||
Commercial and industrial | 279,400 | 358,079 | ||||||
Individuals | 25,887 | 21,536 | ||||||
Lease financing | 20,660 | 18,461 | ||||||
Total | 1,785,095 | 1,705,264 | ||||||
Deferred loan fees, net | (4,728 | ) | (5,116 | ) | ||||
Allowance for loan losses | (34,177 | ) | (22,537 | ) | ||||
Loans, net | $ | 1,746,190 | $ | 1,677,611 | ||||
Nonperforming assets and delinquency have increased significantly since December 31, 2008 as the cumulative effect of the current economic downturn has impacted the Company’s customers and market area, particularly in the second quarter of 2009. The following table illustrates the trend in nonperforming assets and delinquency from June 2008 to June 2009.
June 30, | March 31, | December 31, | September 30, | June 30, | ||||||||||||||||
2009 | 2009 | 2008 | 2008 | 2008 | ||||||||||||||||
(000’s) | ||||||||||||||||||||
Loans past due 90 days or more and still accruing | $ | 11,039 | $ | 5,885 | $ | 7,019 | $ | 776 | $ | 1,383 | ||||||||||
Total non-accrual loans | $ | 41,308 | $ | 27,859 | $ | 11,284 | $ | 14,117 | $ | 12,318 | ||||||||||
Other real estate owned | 7,188 | 5,455 | 5,467 | 1,900 | 1,900 | |||||||||||||||
Total nonperforming assets | $ | 48,496 | $ | 33,314 | $ | 16,751 | $ | 16,017 | $ | 14,218 | ||||||||||
Nonperforming assets to total assets | 1.89 | % | 1.31 | % | 0.66 | % | 0.66 | % | 0.61 | % |
There was no interest income on non-accrual loans included in net income for the three and six month periods ended June 30, 2009 and the year ended December 31, 2008. Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $1.5 million and $0.9 million for the six month period ended June 30, 2009 and the year ended December 31, 2008, respectively.
A summary of nonperforming assets as of June 30, 2009 and December 31, 2008 follows:
June 30, | December 31, | Increase | ||||||||||
2009 | 2008 | (Decrease) | ||||||||||
(000’s) | ||||||||||||
Non-accrual loans: | ||||||||||||
Real Estate: | ||||||||||||
Commercial | $ | 10,725 | $ | 2,241 | $ | 8,484 | ||||||
Construction | 11,469 | 2,824 | 8,645 | |||||||||
Residential | 16,437 | 4,618 | 11,819 | |||||||||
Total Real Estate | 38,631 | 9,683 | 28,948 | |||||||||
Commercial & Industrial | 2,677 | 1,601 | 1,075 | |||||||||
Lease Financing & Individuals | — | — | — | |||||||||
Total Non-accrual loans | 41,308 | 11,284 | 30,024 | |||||||||
Other Real Estate Owned | 7,188 | 5,467 | 1,721 | |||||||||
Total Nonperforming assets | $ | 48,496 | $ | 16,751 | $ | 31,745 | ||||||
Nonperforming assets to total assets at period end | 1.89 | % | 0.66 | % |
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The overall increase in nonperforming assets has primarily resulted from the current severe economic slowdown, which intensified in the first six months of 2009, which has had negative effects on real estate values, sales and available financing, particularly in the commercial and residential real estate sectors. Continuation of this condition could result in additional increases in nonperforming assets and charge-offs in the future.
During the six month period ended June 30, 2009:
• | Nonperforming commercial loans increased $8.5 million resulting from the transfer of four loans totaling $9.0 million, which was offset by a charge-off of $0.5 million. | |
• | Nonperforming construction loans increased $8.6 million, resulting from the transfer of nine loans totaling $10.8 million, which was offset by a transfer of one loan totaling $1.7 million to other real estate owned and a charge-off of $0.4 million. | |
• | Nonperforming residential loans increased $11.8 million resulting from the transfer of five loans totaling $13.6 million, which was partially offset by charge-offs of $1.0 million and payments of $0.8 million. | |
• | Nonperforming commercial and industrial loans increased $1.1 million resulting from the transfer of ten loans totaling $2.1 million, which was partially offset by charge-offs of $1.0 million. | |
• | Other real estate owned increased $1.7 million resulting from foreclosure proceedings on a property related to a nonperforming construction loan. |
At June 30, 2009, the Company had no commitments to lend additional funds to customers with non-accrual or restructured loan balances. Non-accrual loans increased $30.0 million to $41.3 million at June 30, 2009 from $11.3 million at December 31, 2008. Net income is adversely impacted by the level of nonperforming assets caused by the deterioration of the borrowers’ ability to meet scheduled interest and principal payments. In addition to forgone revenue, the Company must increase the level of provision for loan losses, incur higher collection costs and other costs associated with the management and disposition of foreclosed properties.
In accordance with SFAS No. 114, which establishes the accounting treatment of impaired loans, loans that are within the scope of SFAS No. 114 totaling $41.3 million and $11.3 million at June 30, 2009 and December 31, 2008, respectively, have been measured based on the estimated fair value of the collateral since these loans are all collateral dependent. At June 30, 2009, the Company had $1.8 million of specific reserves specifically allocated to four impaired loans. At December 31, 2008 there was no allowance for loan losses specifically allocated to impaired and other identified problem loans.
The Company performs extensive ongoing asset quality monitoring by both internal and independent loan review functions. In addition, the Company conducts timely remediation and collection activities through a network of internal and external resources which include an internal asset recovery department, real estate and other loan workout attorneys and external collection agencies. Management believes that these efforts are appropriate for accomplishing either successful remediation or maximizing collections related to nonperforming assets.
Allowance for Loan Losses
The Company maintains an allowance for loan losses to absorb probable losses incurred 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 a specific component for identified problem loans and a formula component to consider historical loan loss experience and additional risk factors affecting the portfolio.
The specific component incorporates the results of measuring impaired loans as provided in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.
The formula component is calculated by first applying historical loss experience factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. This component is then adjusted to reflect additional risk factors not addressed by historical loss experience. These factors include the 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
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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 quantified by loan type and reflected in the formula component. The evaluations of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty due to the subjective nature of such evaluations and because they are not identified with specific problem credits.
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:
(000’s) | ||||||||||||
Change | ||||||||||||
June 30, | During | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
Components | ||||||||||||
Specific: | ||||||||||||
Real Estate: | ||||||||||||
Commericial | — | — | — | |||||||||
Construction | — | — | — | |||||||||
Residential | $ | 270 | $ | 270 | — | |||||||
Commercial and Industrial | 1,497 | 1,497 | — | |||||||||
Lease Financing and individuals | 25 | 25 | — | |||||||||
Total Specific component | $ | 1,792 | $ | 1,792 | $ | — | ||||||
Formula: | ||||||||||||
Real Estate: | ||||||||||||
Commericial | $ | 12,988 | $ | 4,768 | $ | 8,220 | ||||||
Construction | 5,958 | 2,288 | 3,670 | |||||||||
Residential | 7,233 | 3,039 | 4,194 | |||||||||
Commercial and Industrial | 6,166 | (106 | ) | 6,272 | ||||||||
Lease Financing and individuals | 40 | (141 | ) | 181 | ||||||||
Total Formula component | $ | 32,385 | $ | 9,848 | $ | 22,537 | ||||||
Total Allowance | $ | 34,177 | $ | 22,537 | ||||||||
Net Change | 11,640 | |||||||||||
Net Charge-offs | (2,852 | ) | ||||||||||
Provision for loan losses | $ | 14,492 | ||||||||||
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Change | ||||||||||||
June 30, | During | December 31, | ||||||||||
2008 | 2008 | 2007 | ||||||||||
Components | ||||||||||||
Specific: | ||||||||||||
Real Estate: | ||||||||||||
Commericial | — | — | — | |||||||||
Construction | — | $ | (500 | ) | $ | 500 | ||||||
Residential | — | (950 | ) | 950 | ||||||||
Commercial and Industrial | $ | 124 | (83 | ) | 207 | |||||||
Lease Financing and individuals | — | (120 | ) | 120 | ||||||||
Total Specific component | $ | 124 | $ | (1,653 | ) | $ | 1,777 | |||||
Formula: | ||||||||||||
Real Estate: | ||||||||||||
Commericial | $ | 5,930 | $ | 1,703 | $ | 4,227 | ||||||
Construction | 2,648 | (513 | ) | 3,161 | ||||||||
Residential | 3,026 | 58 | 2,968 | |||||||||
Commercial and Industrial | 4,525 | (520 | ) | 5,045 | ||||||||
Lease Financing and individuals | 131 | (58 | ) | 189 | ||||||||
Total Formula component | $ | 16,258 | $ | 668 | $ | 15,590 | ||||||
Total Allowance | $ | 16,382 | $ | 17,367 | ||||||||
Net Change | (985 | ) | ||||||||||
Net Charge-offs | (3,430 | ) | ||||||||||
Provision for loan losses | $ | 2,445 | ||||||||||
The specific component of the allowance for loan losses is the result of our analysis of impaired loans and our determination of the amount required to reduce the carrying amount of such loans to estimated fair value, as provided in SFAS No. 114 and SFAS No. 118. Accordingly, such allowance is dependent on the particular loans and their characteristics at each measurement date, not necessarily the total amount of such loans. We generally record partial charge-offs for impaired loans where the fair value is less than the carrying amount, that are real estate collateral dependent and for which we utilize independent appraisals in determining the fair value of the collateral. At June 30, 2009, the Company had $1.8 million of specific reserves allocated to four impaired loans. There were no specific reserves assigned to impaired loans as of December 31, 2008. The Company’s analysis indicated that these loans were principally real estate collateral dependent or guaranteed under U.S. government programs and that, with the exception of four loans for which specific reserves were assigned at June 30, 2009, there was sufficient underlying collateral value or guarantees to indicate expected recovery of the carrying amount of the loans.
The changes in the formula component of the allowance for loan losses are the result of the application of historical loss experience to outstanding loans by type. Loss experience for each year is based upon average charge-off experience for the prior three year period by loan type. The formula component is then adjusted to reflect changes in other relevant factors affecting loan collectibility. Management periodically adjusted the formula component to an amount that, when considered with the specific component, represented its best estimate of probable losses in the loan portfolio as of each balance sheet date. The following factors affected the changes in the formula component of the allowance for loan losses at June 30, 2009:
• | Economic and business conditions— The volatility in energy costs and the cost of raw materials used in construction, the demand for and value of real estate, the primary collateral for the Company’s loans, and the level of real estate taxes within the Company’s market area, together with the general state of the economy, trigger economic uncertainty. During the six month period ended June 30, 2009, these factors have generally continued to worsen, particularly in the second quarter. Further deterioration in the economy in general and business conditions in the Company’s primary market area are expected to continue. During the fourth quarter of 2008 and continuing through the first half of 2009, housing prices have significantly declined and the availability of mortgage financing is limited. We have considered these trends in determining the formula component of the allowance for loan losses. |
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• | Credit risk— Construction 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. Changes in concentration and the associated changes in various risk factors are considered in the determination of the formula component of the allowance. During the six month period ended June 30, 2009, the market for new construction has continued to slow significantly in the Company’s primary market area. Houses are taking longer to sell and prices have declined. We have considered these trends in determining the formula component of the allowance for loan losses. | |
• | Asset quality— Changes in the amount of nonperforming loans, classified loans, delinquencies, and the results of the Company’s periodic loan review process are also considered in the process of determining the formula component. During the six month period ended June 30, 2009, nonperforming assets and delinquencies have increased substantially. We believe this increase is due to current trends within the economy and our local market area. | |
• | Loan Participations— We purchase loan participations from a number of banks, including some outside our primary market area. While we review each loan and make our own determination regarding whether to participate in the loan, we 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 is considered in the determination of the formula component of the allowance for loan losses. |
A summary of the activity in the allowance for loans losses during the six month periods ended June 30, 2009 and 2008 follows:
June 30, | ||||||||
2009 | 2008 | |||||||
(000’s except percentages) | ||||||||
Net loans outstanding at end of period | $ | 1,746,190 | $ | 1,496,013 | ||||
Average net loans outstanding during the period | 1,717,905 | 1,373,982 | ||||||
Allowance for loan losses: | ||||||||
Balance, beginning of the year | 22,537 | 17,367 | ||||||
Provision charged to expense | 14,492 | 2,445 | ||||||
37,029 | 19,812 | |||||||
Charge-off and recoveries during the period | ||||||||
Charge-offs: | ||||||||
Real Estate: | ||||||||
Commericial | (535 | ) | (71 | ) | ||||
Construction | (440 | ) | (775 | ) | ||||
Residential | (979 | ) | (1,277 | ) | ||||
Commercial and Industrial | (990 | ) | (905 | ) | ||||
Lease Financing and individuals | (31 | ) | (602 | ) | ||||
Recoveries | ||||||||
Real Estate: | ||||||||
Commericial | — | — | ||||||
Construction | — | — | ||||||
Residential | 6 | 137 | ||||||
Commercial and Industrial | 102 | 40 | ||||||
Lease Financing and individuals | 15 | 23 | ||||||
Net charge-offs during the period | (2,852 | ) | (3,430 | ) | ||||
Balance, at period end | $ | 34,177 | $ | 16,382 | ||||
Ratio of net charge-offs to average net loans outstanding during the period | 0.17 | % | 0.25 | % | ||||
Ratio of allowance for loan losses to gross loans outstanding at end of the period | 1.94 | % | 1.10 | % |
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The distribution of our allowance for loan losses at the dates indicated is summarized as follows:
June 30, 2009 | ||||||||||||
Percentage | ||||||||||||
of Loans | ||||||||||||
Amount | in each | |||||||||||
of Loan | Loan | Category | ||||||||||
Loss | Amount | by Total | ||||||||||
Allowance | By Category | Loans | ||||||||||
Real Estate: | ||||||||||||
Commercial | $ | 12,988 | $ | 731,927 | 41.00 | % | ||||||
Construction | 5,958 | 274,039 | 15.35 | % | ||||||||
Residential | 7,503 | 453,182 | 25.39 | % | ||||||||
Commercial & Industrial | 7,663 | 279,400 | 15.65 | % | ||||||||
Lease Financing & Individuals | 65 | 46,547 | 2.61 | % | ||||||||
Total | $ | 34,177 | $ | 1,785,095 | 100.00 | % | ||||||
December 31, 2008 | ||||||||||||
Percentage | ||||||||||||
of Loans | ||||||||||||
Amount | in each | |||||||||||
of Loan | Loan | Category | ||||||||||
Loss | Amount | by Total | ||||||||||
Allowance | By Category | Loans | ||||||||||
Real Estate: | ||||||||||||
Commercial | $ | 8,220 | $ | 642,923 | 37.70 | % | ||||||
Construction | 3,670 | 254,837 | 14.94 | % | ||||||||
Residential | 4,194 | 409,431 | 24.01 | % | ||||||||
Commercial & Industrial | 8,272 | 358,076 | 21.00 | % | ||||||||
Lease Financing & Individuals | 181 | 39,997 | 2.35 | % | ||||||||
Total | $ | 24,537 | $ | 1,705,264 | 100.00 | % | ||||||
Actual losses can vary significantly from the estimated amounts. The Company’s methodology permits adjustments to the allowance in the event that, in management’s judgment, significant factors which affect the collectibility of the loan portfolio as of the evaluation date have changed. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, the Banks are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.
Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of June 30, 2009. There is no assurance that the Company will not be required to make future adjustments to the allowance in response to changing economic conditions or regulatory examinations.
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Deposits
Deposits totaled $2,135.2 million at June 30, 2009, an increase of $295.9 million or 16.1 percent from $1,839.3 million at December 31, 2008. Approximately $75 million of this growth resulted from the transfer of certain money market mutual fund investments of existing customers to interest bearing deposits. The following table presents a summary of deposits at June 30, 2009 and December 31, 2008.
(000’s) | ||||||||||||
June 30, | December 31, | |||||||||||
2009 | 2008 | Increase (Decrease) | ||||||||||
Demand deposits | $ | 701,867 | $ | 647,828 | $ | 54,039 | ||||||
Money market accounts | 811,112 | 631,948 | 179,164 | |||||||||
Savings accounts | 100,898 | 99,022 | 1,876 | |||||||||
Time deposits of $100,000 or more | 150,470 | 156,481 | (6,011 | ) | ||||||||
Time deposits of less than $100,000 | 112,861 | 138,504 | (25,643 | ) | ||||||||
Checking with interest | 258,039 | 165,543 | 92,496 | |||||||||
Total Deposits | $ | 2,135,247 | $ | 1,839,326 | $ | 295,921 | ||||||
Borrowings
Total borrowings were $203.6 million at June 30, 2009, a decrease of $262.8 million or 56.3 percent from $466.4 million at December 31, 2008. The overall decrease resulted primarily from a $194.6 million decrease in other short-term borrowings and $70.0 million of payoffs at maturity of long term FHLB borrowings, partially offset by a $1.8 million increase in short-term repurchase agreements. Reduction of borrowings was funded primarily by deposit growth. Borrowings are utilized as part of the Company’s continuing efforts to effectively leverage its capital and to manage interest rate risk.
Stockholders’ Equity
Stockholders’ equity totaled $194.8 million at June 30, 2009, a decrease of $12.7 million or 6.1 percent from $207.5 million at December 31, 2008. The decrease in stockholders’ equity resulted from $14.6 million in purchases of treasury stock and $9.2 million of cash dividends paid on common stock which was partially offset by net income of $6.9 million, increases in accumulated comprehensive income of $3.8 million and $0.4 million of net increases related to grants and exercises of stock options
The Company’s and the Banks’ capital ratios at June 30, 2009 and December 31, 2008 are as follows:
Minimum for | ||||||||||||
June 30, | December 31, | Capital Adequacy | ||||||||||
2009 | 2008 | Purposes | ||||||||||
Leverage ratio: | ||||||||||||
Company | 6.8 | % | 7.5 | % | 4.0 | % | ||||||
HVB | 6.8 | 7.4 | 4.0 | |||||||||
NYNB | 6.1 | 6.7 | 4.0 | |||||||||
Tier 1 capital: | ||||||||||||
Company | 9.0 | % | 10.1 | % | 4.0 | % | ||||||
HVB | 9.0 | 9.9 | 4.0 | |||||||||
NYNB | 9.1 | 10.1 | 4.0 | |||||||||
Total capital: | ||||||||||||
Company | 10.2 | % | 11.3 | % | 8.0 | % | ||||||
HVB | 10.2 | 11.1 | 8.0 | |||||||||
NYNB | 10.4 | 11.4 | 8.0 |
The Company, HVB and NYNB each exceed all current regulatory capital requirements to be considered in the “well capitalized” category at June 30, 2009.
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Liquidity
The Asset/Liability Strategic Committee (“ALSC”) of the Board of Directors of HVB establishes specific policies and operating procedures governing the Company’s liquidity levels and develops plans to address future liquidity needs, including contingent sources of liquidity. The primary functions of asset liability management are to provide safety of depositor and investor funds, assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirement of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to manage fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
The Company’s liquid assets, at June 30, 2009 include cash and due from banks of $76.7 million and Federal funds sold of $87.5 million. Federal funds sold represents the Company’s excess liquid funds that are invested with other financial institutions in need of funds and which mature daily.
Other sources of liquidity include maturities and principal and interest payments on loans and securities. The loan and securities portfolios are of high credit quality and of mixed maturity, providing a constant stream of maturing and re-investable assets, which can be converted into cash should the need arise. The ability to redeploy these funds is an important source of medium to long term liquidity. The amortized cost of securities having contractual maturities, expected call dates or average lives of one year or less amounted to $159.7 million at June 30, 2009. This represented 30.8 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $339.3 million, or 19.0 percent of loans at June 30, 2009, 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.
Non interest bearing demand deposits and interest bearing deposits from businesses, professionals, not-for-profit organizations and individuals are a relatively stable, low-cost source of funds. The deposits of the Bank generally have shown a steady growth trend as well as a generally consistent deposit mix. However, there can be no assurance that deposit growth will continue or that the deposit mix will not shift to higher rate products.
HVB and NYNB are members of the FHLB. As members, they are able to participate in various FHLB borrowing programs which require certain investments in FHLB common stock as a prerequisite to obtaining funds. As of June 30, 2009, HVB had short-term borrowing lines with the FHLB of $200 million with no amounts outstanding. NYNB had short-term borrowing lines of $27 million with no amounts outstanding. These and various other FHLB borrowing programs available to members are subject to availability of qualifying loanand/or investment securities collateral and other terms and conditions.
HVB also has unsecured overnight borrowing lines totaling $80 million with three major financial institutions which were all unused and available at June 30, 2009. In addition, HVB has approved lines under Retail Certificate of Deposit Agreements with three major financial institutions totaling $700 million of which $50 million was outstanding as at June 30, 2009. NYNB has an approved line under Retail Certificate of Deposit Agreements with one financial institution totaling $5.0 million which was unused and available at June 30, 2009.
Additional liquidity is also provided by the Company’s ability to borrow from the Federal Reserve Bank’s discount window. In response to the current economic crisis, the Federal Reserve Bank has increased the ability of banks to borrow from this source through itsBorrower-in-Custody (“BIC”) program, which expanded the types of collateral which qualify as security for such borrowings. Both HVB and NYNB have been approved to participate in the BIC program. There was $15 million outstanding with the Federal Reserve at June 30, 2009.
As of June 30, 2009, the Company had qualifying loan and investment securities totaling approximately $514 million which could be utilized under available borrowing programs thereby increasing liquidity.
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.
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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 June 30, 2009. 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 herein and those factors identified elsewhere in Item 1A of Part II of this report, the following factors that could cause actual results to differ materially from such forward-looking statements are set forth in the Company’s 2008 Annual Report onForm 10-K:
We May Not Repurchase Shares Consistent with Past Practices.
As our common stock is not actively traded or listed on a national securities exchange, we have historically maintained a stock repurchase program for the benefit of our shareholders. However, we are under no obligation to maintain such repurchase program and may modify or discontinue the program at any time. In the event that our subsidiaries’ earnings are reduced we may choose to discontinue the stock repurchase program or to substantially reduce the amount of shares purchased under such program. In addition, if our capital levels or earnings decrease substantially, our banking regulator may preclude us from repurchasing shares under our stock repurchase program. We may also voluntarily decide to substantially curtail or discontinue the stock repurchase program at any time for any reason or no reason whatsoever.
We May Need to Raise Additional Capital in the Future, Which May Result in a Dilution of Our Common Stock.
Subject to market conditions and other factors, we may need to raise additional capital in the future. Accordingly, we may conduct substantial future offerings of debt securities or our equity securities including both common and preferred stock. Future equity issuances, including future public offerings or future private placements of equity securities and any additional shares issued in connection with acquisitions, will result in dilution to shareholders. In addition, the market price of our common stock could fall as a result of resales of any of these shares of common stock due to an increased number of shares available for sale in the market. Our certificate of incorporation authorizes our Board of Directors to, among other things, issue additional shares of common or preferred stock or securities convertible or exchangeable into equity securities, without shareholder approval. We may issue such additional equity or convertible securities to raise additional capital in connection with acquisitions, as part of our employee and director compensation or otherwise. The issuance of any additional shares of common or preferred stock or convertible securities could be substantially dilutive to shareholders of our common stock. If we issue preferred stock, these securities may be senior to the common stock with regard to dividend payments, rights upon liquidation, voting, and other terms. Any debt securities we issue will be senior to the common stock with regard to the payment of interest and upon any liquidation of the Company. Moreover, to the extent that we issue restricted stock, stock options, or warrants to purchase our common stock in the future and those stock options or warrants are exercised or the restricted stock vest, our shareholders may experience further dilution. Holders of our shares of common stock have no preemptive rights that entitle them to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders.
Substantial Increase in Our Nonperforming Loans May Occur and Adversely Affect Our Results of Operations and Financial Condition.
As a result of the economic downturn, particularly in the first six months of 2009, we are facing increased delinquencies on our loans. Further downturn in the market areas we serve could increase our credit risk associated with our loan portfolio, as it could have a material adverse effect on both the ability of borrowers to repay loans as
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well as the value of the real property or other property held as collateral for such loans. The deterioration of our loan portfolio may cause a significant increase in nonperforming loans, which could have an adverse impact on our results of operations and financial condition. There can be no assurance that we will not experience further increases in nonperforming loans in the future.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk at December 31, 2008 were previously reported in the Company’s 2008 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at June 30, 2009 compared to December 31, 2008.
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 six month period ended June 30, 2009. The Company had no derivative financial instruments in place at June 30, 2009 and December 31, 2008.
The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at June 30, 2009 shows the Company’s net interest income increasing slightly if interest rates rise and decreasing slightly if interest rates fall, considering a continuation of the current yield curve. A change in the shape or steepness of the yield curve will impact our market risk to change in interest rates.
The Company also prepares a static gap analysis which, at June 30, 2009, shows a positive cumulative static gap of $169.8 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 June 30, 2009.
Percentage Change | |||||||||
in Estimated | |||||||||
Net Interest | |||||||||
Income from | |||||||||
June 30, | |||||||||
Gradual Change in Interest Rates | 2009 | Policy Limit | |||||||
+200 basis points | 1 | .9 | % | (5.0 | )% | ||||
–100 basis points | (1 | .5 | )% | (5.0 | )% |
As of March 31, 2008, a 100 basis point downward change was substituted for the 200 basis point downward scenario previously used, as management believes that a 200 basis point downward change is not a meaningful analysis in light of current interest rate levels. The percentage change in estimated net income in the +200 and –100 basis points scenario is within the Company’s policy limits.
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Item 4. Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e) orRule 15d-15(e) of the Exchange Act) as of June 30, 2009. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2009, 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 June 30, 2009, there has not been any change that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1A. | Risk Factors |
Our business is subject to various risks. These risks are included in our 2008 Annual Report onForm 10-K under “Risk Factors”. There has been no material change in such risk factors other than the following:
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth information with respect to purchase made by the Company of its common stock during the three month period ended June 30, 2009:
Total number | Maximum number | |||||||||||||||
of shares | of shares | |||||||||||||||
purchased as | that may | |||||||||||||||
Total number | Average price | part of | yet be | |||||||||||||
of shares | paid per | publicly announced | purchased under | |||||||||||||
Period | purchased | share | programs | the programs(1) | ||||||||||||
April 1, 2009 — April 30, 2009 | — | $ | 0.00 | — | — | |||||||||||
May 1, 2009 — May 31, 2009(1) | 24,998 | $ | 40.00 | 24,998 | — | |||||||||||
June 1, 2009 — June 30, 2009 | 4,390 | $ | 40.00 | — | — | |||||||||||
Total | 29,388 | $ | 40.00 | 24,998 | — | |||||||||||
(1) | In April 2009, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 25,000 of the Company’s shares at a price of $40.00 per share, limited to the repurchase of up to 1,000 shares from each beneficial holder. The program was fully subscribed prior to its expiration on May 15, 2009. |
In May 2009, the Company announced that the Board of Directors had approved a share repurchase program which authorized the repurchase of up to 25,000 of the Company’s shares at a price of $40.00 per share, limited to the repurchase of up to 1,000 shares from each beneficial holder. The program was fully subscribed prior to its expiration on July 17, 2009.
Item 4. | Submission of Matters to a Vote of Security Holders |
The Annual Meeting of Shareholders was held on May 28, 2009 for the purpose of considering and voting upon the following matters:
Election of the following directors, constituting all members of the Board of Directors, to a one-year term of office: William E. Griffin, Stephen R. Brown, James M. Coogan, Mary-Jane Foster, Gregory F. Holcombe, Adam Ifshin, James J. Landy, Michael P. Maloney, Angelo R. Martinelli, William J. Mulrow, John A. Pratt Jr., Cecile D. Singer and Craig S. Thompson.
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The results were as follows:
For | Withhold | Abstain | ||||||||
William E. Griffin | 8,527,034 | 264,587 | — | |||||||
Stephen R. Brown | 8,560,532 | 231,089 | — | |||||||
James M. Coogan | 8,546,190 | 245,431 | — | |||||||
Mary-Jane Foster | 8,593,867 | 197,754 | — | |||||||
Gregory F. Holcombe | 8,632,952 | 158,699 | — | |||||||
Adam W. Ifshin | 8,552,622 | 238,999 | — | |||||||
James J. Landy | 8,597,239 | 194,382 | — | |||||||
Michael P. Maloney | 8,562,528 | 229,093 | — | |||||||
Angelo R. Martinelli | 8,552,500 | 239,121 | — | |||||||
William J. Mulrow | 8,594,047 | 197,574 | — | |||||||
John A. Pratt Jr. | 8,560,532 | 231,089 | — | |||||||
Cecile D. Singer | 8,596,378 | 195,243 | — | |||||||
Craig S. Thompson | 8,560,532 | 231,089 | — |
To consider and vote upon the proposal to amend the Company’s Amended and Restated Certificate of Incorporation to authorize the issuance of up to 15,000,000 shares of preferred stock.
For | 7,897,228 | |||
Against | 370,950 | |||
Abstain | 62,776 |
To ratify the appointment of Crowe Horwath LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009.
For | 8,515,528 | |||
Against | 253,366 | |||
Abstain | 22,723 |
Item 6. Exhibits
(A) Exhibits
3.1 | Amended and Restated Certificate of Incorporation of Hudson Valley Holding Corp. (filed herewith) |
3.2 | Amended and Restated 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-Q filed on May 12, 2008
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SIGNATURES
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
August 10, 2009
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