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 September 30, 2012
Commission File No. 001-34453
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 x No ¨
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 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||||
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at November 1, 2012 | |
Common stock, par value $0.20 per share | 19,643,510 |
Table of Contents
FORM 10-Q
Page No. | ||||||
PART I: | FINANCIAL INFORMATION | |||||
ITEM 1 | CONDENSED FINANCIAL STATEMENTS | 2 | ||||
ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 32 | ||||
ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 51 | ||||
ITEM 4 | CONTROLS AND PROCEDURES | 52 | ||||
PART II: | OTHER INFORMATION | |||||
ITEM 1 | LEGAL PROCEEDINGS | 53 | ||||
ITEM 1A | RISK FACTORS | 53 | ||||
ITEM 6 | EXHIBITS | 53 | ||||
54 |
1
Table of Contents
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 September 30 | ||||||||
2012 | 2011 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 21,619 | $ | 28,641 | ||||
Securities: | ||||||||
Taxable | 2,902 | 2,778 | ||||||
Exempt from Federal income taxes | 796 | 989 | ||||||
Federal funds sold | 11 | 24 | ||||||
Deposits in banks | 381 | 154 | ||||||
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Total interest income | 25,709 | 32,586 | ||||||
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Interest Expense: | ||||||||
Deposits | 1,393 | 2,226 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 18 | 68 | ||||||
Other borrowings | 183 | 254 | ||||||
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Total interest expense | 1,594 | 2,548 | ||||||
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Net Interest Income | 24,115 | 30,038 | ||||||
Provision for loan losses | 3,723 | 2,536 | ||||||
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Net interest income after provision for loan losses | 20,392 | 27,502 | ||||||
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Non Interest Income: | ||||||||
Service charges | 1,454 | 1,671 | ||||||
Investment advisory fees | 2,303 | 2,639 | ||||||
Recognized impairment charge on securities available for sale (includes $699 of total gains and $361 of total losses in 2012 and 2011, respectively, less $699 of gains and $242 of losses on securities available for sale, recognized in other comprehensive income in 2012 and 2011, respectively) | — | (119 | ) | |||||
Realized gains on securities available for sale, net | — | 8 | ||||||
Gain on sales and revaluation of loans held for sale and other real estate owned, net | — | 946 | ||||||
Other income | 596 | 569 | ||||||
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Total non interest income | 4,353 | 5,714 | ||||||
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Non Interest Expense: | ||||||||
Salaries and employee benefits | 11,366 | 11,296 | ||||||
Occupancy | 2,121 | 2,217 | ||||||
Professional services | 1,739 | 1,700 | ||||||
Equipment | 1,071 | 1,101 | ||||||
Business development | 545 | 452 | ||||||
FDIC assessment | 811 | 553 | ||||||
Other operating expenses | 2,382 | 2,771 | ||||||
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Total non interest expense | 20,035 | 20,090 | ||||||
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Income Before Income Taxes | 4,710 | 13,126 | ||||||
Income Taxes | 1,576 | 4,618 | ||||||
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Net Income | $ | 3,134 | $ | 8,508 | ||||
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Basic Earnings Per Common Share | $ | 0.16 | $ | 0.44 | ||||
Diluted Earnings Per Common Share | $ | 0.16 | $ | 0.43 |
See notes to condensed consolidated financial statements
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Table of Contents
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Dollars in thousands, except per share amounts
Nine Months Ended September 30 | ||||||||
2012 | 2011 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 73,197 | $ | 82,914 | ||||
Securities: | ||||||||
Taxable | 9,355 | 8,875 | ||||||
Exempt from Federal income taxes | 2,792 | 3,300 | ||||||
Federal funds sold | 28 | 73 | ||||||
Deposits in banks | 735 | 519 | ||||||
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Total interest income | 86,107 | 95,681 | ||||||
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Interest Expense: | ||||||||
Deposits | 4,557 | 6,790 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 85 | 172 | ||||||
Other borrowings | 546 | 1,599 | ||||||
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Total interest expense | 5,188 | 8,561 | ||||||
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Net Interest Income | 80,919 | 87,120 | ||||||
Provision for loan losses | 6,976 | 9,533 | ||||||
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Net interest income after provision for loan losses | 73,943 | 77,587 | ||||||
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Non Interest Income: | ||||||||
Service charges | 4,850 | 5,263 | ||||||
Investment advisory fees | 7,213 | 7,998 | ||||||
Recognized impairment charge on securities available for sale (includes $594 of total gains and $1,318 of total losses in 2012 and 2011, respectively, less $1,122 of gains and $995 of losses on securities available for sale, recognized in other comprehensive income in 2012 and 2011, respectively) | (528 | ) | (323 | ) | ||||
Gains on sales and revaluation of loans held for sale and other real estate owned, net | 15,920 | 73 | ||||||
Realized gains on securities available for sale, net | — | 8 | ||||||
Other income | 2,041 | 1,745 | ||||||
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Total non interest income | 29,496 | 14,764 | ||||||
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Non Interest Expense: | ||||||||
Salaries and employee benefits | 33,544 | 33,377 | ||||||
Occupancy | 6,563 | 6,764 | ||||||
Professional services | 5,646 | 4,902 | ||||||
Equipment | 3,300 | 3,218 | ||||||
Business development | 1,899 | 1,548 | ||||||
FDIC assessment | 2,165 | 2,350 | ||||||
Other operating expenses | 8,828 | 9,029 | ||||||
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Total non interest expense | 61,945 | 61,188 | ||||||
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Income Before Income Taxes | 41,494 | 31,163 | ||||||
Income Taxes | 15,386 | 10,399 | ||||||
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Net Income | $ | 26,108 | $ | 20,764 | ||||
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Basic Earnings Per Common Share | $ | 1.33 | $ | 1.07 | ||||
Diluted Earnings Per Common Share | $ | 1.33 | $ | 1.06 |
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 Sep 30 | Nine Months Ended Sep 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net Income | $ | 3,134 | $ | 8,508 | $ | 26,108 | $ | 20,764 | ||||||||
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Other comprehensive income (loss), net of tax: | ||||||||||||||||
Net change in unrealized gains (losses): | ||||||||||||||||
Other-than-temporarily impaired securities available for sale: | ||||||||||||||||
Total gains (losses) | 699 | (361 | ) | 594 | (1,318 | ) | ||||||||||
Losses recognized in earnings | — | 119 | 528 | 323 | ||||||||||||
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Gains (losses) recognized in comprehensive income | 699 | (242 | ) | 1,122 | (995 | ) | ||||||||||
Income tax effect | (287 | ) | 99 | (460 | ) | 408 | ||||||||||
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Unrealized holding losses on other-than-temporarily impaired securities available for sale, net of tax | 412 | (143 | ) | 662 | (587 | ) | ||||||||||
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Securities available for sale not other-than-temporarily impaired: | ||||||||||||||||
Gains (losses) arising during the year | 245 | 4,735 | (2,320 | ) | 2,535 | |||||||||||
Income tax effect | (105 | ) | (1,777 | ) | 759 | (907 | ) | |||||||||
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140 | 2,958 | (1,561 | ) | 1,628 | ||||||||||||
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(Gains) losses recognized in earnings | — | (8 | ) | — | (8 | ) | ||||||||||
Income tax effect | — | 3 | — | 3 | ||||||||||||
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— | (5 | ) | — | (5 | ) | |||||||||||
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Unrealized holding gains (losses) on securities available for sale not other-than-temporarily-impaired , net of tax | 140 | 2,953 | (1,561 | ) | 1,623 | |||||||||||
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Unrealized holding gain (loss) on securities, net | 552 | 2,810 | (899 | ) | 1,036 | |||||||||||
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Accrued benefit liability adjustment | 143 | (78 | ) | 431 | 77 | |||||||||||
Income tax effect | (58 | ) | 31 | (173 | ) | (31 | ) | |||||||||
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85 | (47 | ) | 258 | 46 | ||||||||||||
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Other comprehensive income (loss) | 637 | 2,763 | (641 | ) | 1,082 | |||||||||||
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Comprehensive Income | $ | 3,771 | $ | 11,271 | $ | 25,467 | $ | 21,846 | ||||||||
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See notes to condensed consolidated financial statements
4
Table of Contents
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Dollars in thousands, except share amounts
Sep 30 2012 | Dec 31 2011 | |||||||
ASSETS | ||||||||
Cash and non interest earning due from banks | $ | 53,349 | $ | 43,743 | ||||
Interest earning deposits in banks | 778,025 | 34,361 | ||||||
Federal funds sold | 12,517 | 16,425 | ||||||
Securities available for sale, at estimated fair value (amortized cost of $444,337 in 2012 and $503,584 in 2011) | 447,453 | 507,897 | ||||||
Securities held to maturity, at amortized cost (estimated fair value of $11,627 in 2012 and $13,819 in 2011) | 10,902 | 12,905 | ||||||
Federal Home Loan Bank of New York (FHLB) stock | 4,827 | 3,831 | ||||||
Loans (net of allowance for loan losses of $28,107 in 2012 and $30,685 in 2011) | 1,476,814 | 1,541,405 | ||||||
Loans held for sale | 2,354 | 473,814 | ||||||
Accrued interest and other receivables | 25,099 | 40,405 | ||||||
Premises and equipment, net | 24,424 | 25,936 | ||||||
Other real estate owned | 250 | 1,174 | ||||||
Deferred income tax, net | 18,585 | 19,822 | ||||||
Bank owned life insurance | 38,937 | 37,563 | ||||||
Goodwill | 23,842 | 23,842 | ||||||
Other intangible assets | 1,090 | 1,651 | ||||||
Other assets | 10,574 | 12,896 | ||||||
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TOTAL ASSETS | $ | 2,929,042 | $ | 2,797,670 | ||||
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LIABILITIES | ||||||||
Deposits: | ||||||||
Non interest bearing | $ | 997,251 | $ | 910,329 | ||||
Interest bearing | 1,551,359 | 1,514,953 | ||||||
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Total deposits | 2,548,610 | 2,425,282 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 42,693 | 53,056 | ||||||
Other borrowings | 16,438 | 16,466 | ||||||
Accrued interest and other liabilities | 28,401 | 25,304 | ||||||
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TOTAL LIABILITIES | 2,636,142 | 2,520,108 | ||||||
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STOCKHOLDERS’ EQUITY | ||||||||
Preferred Stock, $0.01 par value; authorized 15,000,000 shares; no shares outstanding in 2012 and 2011, respectively | — | — | ||||||
Common stock, $0.20 par value; authorized 25,000,000 shares: outstanding 19,638,090 and 19,516,490 shares in 2012 and 2011, respectively | 4,188 | 4,163 | ||||||
Additional paid-in capital | 348,159 | 347,764 | ||||||
Retained earnings (deficit) | (2,968 | ) | (18,527 | ) | ||||
Accumulated other comprehensive income | 1,085 | 1,726 | ||||||
Treasury stock, at cost; 1,299,414 shares in 2012 and 2011 | (57,564 | ) | (57,564 | ) | ||||
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TOTAL STOCKHOLDERS’ EQUITY | 292,900 | 277,562 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,929,042 | $ | 2,797,670 | ||||
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See notes to condensed consolidated financial statements
5
Table of Contents
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Nine Months Ended September 30, 2012 and 2011
Dollars in thousands, except share amounts
Number of Shares Outstanding | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2012 | 19,516,490 | $ | 4,163 | $ | (57,564 | ) | $ | 347,764 | $ | (18,527 | ) | $ | 1,726 | $ | 277,562 | |||||||||||||
Net income | 26,108 | 26,108 | ||||||||||||||||||||||||||
Comprehensive loss | (641 | ) | (641 | ) | ||||||||||||||||||||||||
Stock option expense and exercises of stock options, net of tax | 16,166 | 3 | 285 | 288 | ||||||||||||||||||||||||
Restricted stock awards | 105,434 | 22 | 110 | 132 | ||||||||||||||||||||||||
Cash dividends ($0.54 per share) | (10,549 | ) | (10,549 | ) | ||||||||||||||||||||||||
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Balance at September 30, 2012 | 19,638,090 | $ | 4,188 | $ | (57,564 | ) | $ | 348,159 | $ | (2,968 | ) | $ | 1,085 | $ | 292,900 | |||||||||||||
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Number of Shares Outstanding | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2011 | 17,665,908 | 3,793 | (57,564 | ) | 346,750 | (3,989 | ) | 927 | 289,917 | |||||||||||||||||||
Net income | 20,764 | 20,764 | ||||||||||||||||||||||||||
Comprehensive income | 1,081 | 1,081 | ||||||||||||||||||||||||||
Stock option expense and exercises of stock options, net of tax | 28,389 | 6 | 587 | 593 | ||||||||||||||||||||||||
Cash dividends ($0.45 per share) | (8,844 | ) | (8,844 | ) | ||||||||||||||||||||||||
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Balance at September 30, 2011 | 17,694,297 | $ | 3,799 | $ | (57,564 | ) | $ | 347,337 | $ | 7,931 | $ | 2,008 | $ | 303,511 | ||||||||||||||
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See notes to condensed consolidated financial statements
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Table of Contents
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Dollars in thousands
Nine Months Ended September 30 | ||||||||
2012 | 2011 | |||||||
Operating Activities: | ||||||||
Net Income | $ | 26,108 | $ | 20,764 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 6,976 | 9,533 | ||||||
Depreciation and amortization | 2,882 | 2,969 | ||||||
Recognized impairment charge on securities available for sale | 528 | 323 | ||||||
Realized gain on security transactions net | — | (8 | ) | |||||
Amortization of premiums on securities, net | 1,492 | 2,468 | ||||||
Realized loss (gain) on sale and revaluation of OREO | 15 | (82 | ) | |||||
Increase in cash value of bank owned life insurance | (1,113 | ) | (869 | ) | ||||
Amortization of other intangible assets | 561 | 616 | ||||||
Stock option expense | 37 | 107 | ||||||
Loss on valuation of loans held for sale | — | 8 | ||||||
Realized (gain) on sale of loans held-for-sale | (15,935 | ) | — | |||||
Deferred taxes (benefit) | 1,363 | (1,313 | ) | |||||
Increase in deferred loan fees, net | (1,095 | ) | (82 | ) | ||||
Decrease in accrued interest and other receivables | 15,306 | 3,109 | ||||||
Decrease (increase) in other assets | 2,443 | (487 | ) | |||||
Excess tax benefits from share-based payment arrangements | — | (7 | ) | |||||
Increase in accrued interest and other liabilities | 3,660 | 5,679 | ||||||
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Net cash provided by Operating Activities | 43,228 | 42,728 | ||||||
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Investing Activities: | ||||||||
Net decrease in short term investments | 3,908 | 35,671 | ||||||
(Increase) decrease in FHLB stock | (996 | ) | 3,178 | |||||
Proceeds from maturities of securities available for sale | 191,136 | 164,096 | ||||||
Proceeds from maturities of securities held to maturity | 2,006 | 2,596 | ||||||
Proceeds from sales of securities available for sale | — | 1,284 | ||||||
Purchases of securities available for sale | (133,913 | ) | (209,072 | ) | ||||
Proceeds from sales and payments of loans held for sale | 487,274 | 3,253 | ||||||
Net decrease (increase) decrease in loans | 58,710 | (309,204 | ) | |||||
Proceeds from sales of OREO | 909 | 11,036 | ||||||
Premiums paid on bank owned life insurance | (261 | ) | (324 | ) | ||||
Net purchases of premises and equipment | (1,370 | ) | (868 | ) | ||||
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Net cash provided by (used in) Investing Activities | 607,403 | (298,354 | ) | |||||
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Financing Activities: | ||||||||
Proceeds from issuance of common stock | 251 | 486 | ||||||
Excess tax benefits from share-based payment arrangements | — | 7 | ||||||
Net increase in deposits | 123,328 | 295,256 | ||||||
Cash dividends paid | (10,549 | ) | (8,844 | ) | ||||
Repayment of other borrowings | (28 | ) | (71,276 | ) | ||||
Net (decrease) increase in securities sold under repurchase agreements and short-term borrowings | (10,363 | ) | 10,017 | |||||
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Net cash provided by Financing Activities | 102,639 | 225,646 | ||||||
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Increase (decrease) in Cash and Cash Equivalents | 753,270 | (29,980 | ) | |||||
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Cash and Cash Equivalents, beginning of period | 78,104 | 284,156 | ||||||
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Cash and Cash Equivalents, end of period | $ | 831,374 | $ | 254,176 | ||||
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Supplemental disclosures: | ||||||||
Interest paid | $ | 5,956 | $ | 9,142 | ||||
Income tax payments | 924 | 7,262 | ||||||
Transfers from loans held for sale back to loan portfolio | 121 | 2,305 | ||||||
Transfers to other real estate owned | — | 850 |
See notes to condensed consolidated financial statements
7
Table of Contents
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 subsidiary, Hudson Valley Bank, N.A. (“HVB” or “the Bank”), a national banking association established in 1972, with operational headquarters in Westchester County, New York. The Bank has 18 branch offices in Westchester County, New York, 5 in Manhattan, New York, 4 in Bronx County, New York, 2 in Rockland County, New York, 1 in Kings County, New York, 5 in Fairfield County, Connecticut and 1 in New Haven County, Connecticut.
The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a Manhattan, New York based money management firm.
Our principal executive offices are located at 21 Scarsdale Road, Yonkers, New York 10707.
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. We are 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 through various means which include acquiring other banks and related businesses, adding staff, opening loan production offices and continuing to open new branch offices.
2. | Basis of Presentation |
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (comprising only normal recurring adjustments) necessary to present fairly the financial position of the Company at September 30, 2012 and December 31, 2011 and the results of its operations and comprehensive income for the three and nine month periods ended September 30, 2012 and 2011 and cash flows and changes in stockholders’ equity for the nine month periods ended September 30, 2012 and 2011. The results of operations for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results of operations to be expected for the remainder of the year.
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, the determination of other-than-temporary impairment of investments and the carrying amounts of goodwill and deferred tax assets. In connection with the determination of the allowance for loan losses, management utilizes the work of professional appraisers for significant properties.
Intercompany items and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
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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, 2011 and notes thereto.
Cash and Cash Equivalents – For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and interest bearing deposits in other banks (including the Federal Reserve Bank of New York).
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 that the Company has determined that it is more likely than not that it would not be required to sell prior to maturity or recovery of cost. 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 impairment (“OTTI”), management considers adverse changes in expected cash flows, the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer. The Company also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Loans Held for Sale – Loan sales occur in limited circumstances as part of strategic business or regulatory compliance initiatives. Loans held for sale, including deferred fees and costs, are reported at the lower of cost or fair value as determined by expected bid prices from potential investors. Loans held for sale are segregated into pools based on distinct criteria and the lower of cost or fair value analysis is performed at the pool level. Loans are sold without recourse and servicing released. When a loan is transferred from portfolio to held for sale and the fair value is less than cost, a charge off is recorded against the allowance for loan loss. Subsequent declines in fair value, if any, are recorded as a valuation allowance and charged against earnings.
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.
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. This methodology applies to all portfolio segments.
The specific component incorporates the Company’s analysis of impaired loans. These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms. In addition, a loan which has been renegotiated with a borrower experiencing financial difficulties for which the terms of the loan have been modified with a concession that the Company would not otherwise have granted are considered troubled debt restructurings and are also recognized as impaired. 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, taking into account estimated selling costs, 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 an impaired loan is less than the related recorded amount, a specific valuation component is established within the allowance for loan losses or, if the impairment is considered to be permanent, a full or partial charge-off is recorded against the allowance for loan losses. Triggering events that may impact the Company’s decision to record a specific reserve instead of a partial charge-off on impaired loans typically involve some uncertainty as to the amount of permanent loss to be recorded. Examples include ongoing negotiations with a borrower, new appraisals or other collateral evaluations not yet received or completed and other factors where the decision to record a charge-off is considered premature. The Company has groups of smaller balance homogenous loans which are collectively reviewed for impairment. These groups include residential 1-4 family loans, home equity lines of credit and consumer loans. These loans are not individually risk rated while performing. They are either charged off or evaluated for impairment after 90 days delinquency.
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The formula component is calculated by first applying historical loss experience factors to outstanding loans by type. The Company uses a three year average loss experience as the starting base for the formula component. 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, recent charge-off and delinquency experience, 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 collectability 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 portfolio segment 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 collectability of the loan portfolio as of the evaluation date have changed.
Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of September 30, 2012. There is no assurance that the Company will not be required to make future adjustments to the allowance for possible adverse effects on borrowers or collateral values that may result from widespread damage caused by the recent storm, or 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 Charge-Offs – The Company’s charge-off policy covers all loan portfolio classes. Loans are generally fully or partially charged-off at the earlier of when it is determined that collection efforts are no longer productive or when they have been identified as permanent losses by management, internal loan review and/or bank examiners. Factors considered in determining whether collection efforts are no longer productive include any amounts currently being collected, the status of discussions or negotiations with the borrower, the principal and/or guarantors, the cost of continuing, efforts to collect, the status of any foreclosure or legal actions, the value of the collateral, and any other pertinent factors. For loans in groups that are collectively reviewed for impairment, certain actions are taken after 90 days delinquency. Consumer loans, loans and lines with balances of $100,000 or less and other unsecured loans are charged off after 90 days delinquency. Other larger balance residential 1-4 mortgages and home equity lines of credit are placed on nonaccrual status after 90 days delinquency and are immediately evaluated for collectability utilizing a collateral based impairment analysis. Full or partial charge-offs are taken for impairment shortfalls on these loans. The loans are then transferred to asset recovery or other legal channels for foreclosure or other resolution.
Income Recognition on Loans —Interest on loans is accrued monthly. Net loan origination and commitment fees are deferred and recognized as an adjustment of yield over the lives of the related loans. Loans, including impaired loans, are placed on a non-accrual status when management believes that interest or principal on such loans may not be collected in the normal course of business. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, in accordance with management’s judgment as to the collectability of principal. Loans can be returned to accruing status when they become current as to principal and interest, demonstrate a period of performance under the contractual terms, and when, in management’s opinion, they are estimated to be fully collectible. This methodology applies to all loan classes.
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 — 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. Goodwill is subject to impairment testing on an annual basis, or more often if events or circumstances indicate that impairment may exist. Identifiable intangible assets are subject to impairment if events or circumstances indicate that impairment may exist. If such testing indicates impairment in the values and/or remaining amortization periods of the intangible assets, adjustments are made to reflect such impairment. The Company’s goodwill
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impairment evaluations as of December 31, 2011 did not indicate any impairment. The Company is not aware of any events or circumstances that existed with the identified intangible assets that would indicate impairment as of September 30, 2012.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Legal fees associated with loss contingencies are included in loss contingency accruals.
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 from a change in tax rates is recognized in income in the period the change is enacted.
Stock-Based Compensation — 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. Compensation costs related to share based payment transactions are expensed over their respective vesting periods. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. See Note 7 “Stock-Based Compensation” herein for additional discussion.
Earnings per Common Share —Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per common share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, consisting solely of stock options, had been issued.
Other —Certain 2011 amounts have been reclassified to conform to the 2012 presentation.
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 September 30, 2012 and December 31, 2011 (in thousands):
($000’s) | ||||||||||||||||||||||||||||||||
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Amortized | Gross Unrealized | Estimated | Amortized | Gross Unrealized | Estimated | |||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||||||||||
U.S. Treasury and government agencies | $ | 33,201 | $ | 8 | $ | 12 | $ | 33,197 | — | — | — | — | ||||||||||||||||||||
Mortgage-backed securities - residential | 306,996 | 7,189 | 264 | 313,921 | $ | 385,206 | $ | 8,430 | $ | 218 | $ | 393,418 | ||||||||||||||||||||
Obligations of states and political subdivisions | 81,007 | 3,402 | — | 84,409 | 96,091 | 4,508 | — | 100,599 | ||||||||||||||||||||||||
Other debt securities | 13,098 | 12 | 7,716 | 5,394 | 12,220 | — | 8,888 | 3,332 | ||||||||||||||||||||||||
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Total debt securities | 434,302 | 10,611 | 7,992 | 436,921 | 493,517 | 12,938 | 9,106 | 497,349 | ||||||||||||||||||||||||
Mutual funds and other equity securities | 10,035 | 609 | 112 | 10,532 | 10,067 | 617 | 136 | 10,548 | ||||||||||||||||||||||||
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Total | $ | 444,337 | $ | 11,220 | $ | 8,104 | $ | 447,453 | $ | 503,584 | $ | 13,555 | $ | 9,242 | $ | 507,897 | ||||||||||||||||
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Amortized | Gross Unrecognized | Estimated | Amortized | Gross Unrecognized | Estimated | |||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||
Classified as Held to Maturity | ||||||||||||||||||||||||||||||||
Mortgage-backed securities - residential | $ | 5,762 | $ | 498 | — | $ | 6,260 | $ | 7,767 | $ | 607 | — | $ | 8,374 | ||||||||||||||||||
Obligations of states and political subdivisions | 5,140 | 227 | — | 5,367 | 5,138 | 307 | — | 5,445 | ||||||||||||||||||||||||
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Total | $ | 10,902 | $ | 725 | — | $ | 11,627 | $ | 12,905 | $ | 914 | — | $ | 13,819 | ||||||||||||||||||
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Included in other debt securities are investments in five pooled trust preferred securities with amortized costs and estimated fair values of $10,006 and $2,996 respectively, at September 30, 2012. These investments represent trust preferred obligations of banking industry companies. The value of these investments has been severely negatively affected by the continued 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 both Moody’s Investor Services and Fitch Ratings, Ltd at September 30, 2012 with ratings ranging from Caa2 to C. All of the Company’s pooled trust preferred securities are mezzanine class issues, four of which are subordinate to certain other classes of securities within their pools. In light of these conditions, these investments were reviewed for other-than-temporary impairment.
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In estimating 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 the Company intends to sell or whether it is more likely than not that the Company would be required to sell the investments prior to recovery of cost and (4) evaluation of cash flows to determine if they have been adversely affected.
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. Additional expected default and deferral rates were weighted toward the near future to reflect the current adverse economic environment affecting the banking industry. All known and projected defaults are applied a loss severity of 100%. All known and expected deferrals are assigned a loss severity between 25% and 100% based on an individual review of the related issuers’ financial information. The review is focused on capital adequacy, earnings performance and various asset quality measurements. An additional factor for potential defaults/deferrals is included in each DCF at 2% of performing collateral in year 1, 1% in year 2 and 0.25% annually thereafter, at a loss severity rate of 85%. A 1% annual prepayment factor is also applied to each DCF. The discount rate used in the DCF was based upon the original yield expected from the related securities.
Significant specific inputs to the cash flow models used in determining credit related OTTI losses on pooled trust preferred securities as of September 30, 2012 included the following:
PreTSL IV | PreTSL VII | PreTSL VIII | PreTSL VIII | PreTSL X | PreTSL XI | |||||||||||||||||||
Discount rate index | 3m LIBOR | 3m LIBOR | 3m LIBOR | 3m LIBOR | 3m LIBOR | 3m LIBOR | ||||||||||||||||||
Discount rate spread | 2.25 | % | 1.80 | % | 1.90 | % | 1.90 | % | 1.70 | % | 1.60 | % | ||||||||||||
Projected specific defaults and deferrals as % of original Collateral | 57 | % | 63 | % | 51 | % | 51 | % | 41 | % | 34 | % | ||||||||||||
Projected severity of loss as % of specific defaults/deferrals | 84 | % | 86 | % | 92 | % | 92 | % | 80 | % | 82 | % | ||||||||||||
Projected additional defaults/deferrals as % of performing collateral: | ||||||||||||||||||||||||
Year 1 | 2.00 | % | 2.00 | % | 2.00 | % | 2.00 | % | 2.00 | % | 2.00 | % | ||||||||||||
Year 2 | 1.00 | % | 1.00 | % | 1.00 | % | 1.00 | % | 1.00 | % | 1.00 | % | ||||||||||||
Thereafter | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | 0.25 | % | ||||||||||||
Severity of loss | 85 | % | 85 | % | 85 | % | 85 | % | 85 | % | 85 | % |
Additional information related to the Company’s pooled trust preferred securities as of September 30, 2012 is presented below:
PreTSL IV | PreTSL VII | PreTSL VIII | PreTSL VIII | PreTSL X | PreTSL XI | |||||||||||||||||||
Class | Mezz | B | B-1 | B-2 | B-2 | B-2 | ||||||||||||||||||
Seniority | Mezzanine | Mezzanine | Mezzanine | Mezzanine | Mezzanine | Mezzanine | ||||||||||||||||||
Amortized cost | $ | 61 | $ | 923 | $ | 733 | $ | 1,100 | $ | 5,791 | $ | 2,104 | ||||||||||||
Fair value | 14 | 437 | 167 | 250 | 1,739 | 389 | ||||||||||||||||||
Unrealized gain (loss) | (47 | ) | (486 | ) | (566 | ) | (850 | ) | (4,052 | ) | (1,715 | ) | ||||||||||||
OTTI recognized in earnings - nine months ended September 30, 2012 | — | (2 | ) | (188 | ) | (281 | ) | (53 | ) | (4 | ) | |||||||||||||
OTTI recognized in earnings - life to date | — | (1,122 | ) | (1,418 | ) | (2,127 | ) | (4,863 | ) | (472 | ) | |||||||||||||
Moody’s / Fitch | Caa2/CCC | Ca/C | C/C | C/C | C/C | Ca/C | ||||||||||||||||||
Number of institutions currently performing | 4 | 9 | 16 | 16 | 33 | 41 | ||||||||||||||||||
Actual defaults/deferrals as % of original collateral | 27 | % | 52 | % | 51 | % | 51 | % | 41 | % | 32 | % | ||||||||||||
Excess subordination as % of performing collateral (1) | 20 | % | -91 | % | -88 | % | -88 | % | -47 | % | -31 | % |
(1) | The excess subordination as % of performing collateral is calculated by taking total performing collateral and dividing it by the sum of all class balances with seniority senior to and equal to the class for which the measurement is applicable. A negative percentage is indicative of a cash flow shortfall which could result in credit component OTTI. The severity of a current negative excess subordination is not necessarily indicative of the severity of the credit component OTTI as actual cash flow results realized with respect to future defaults and deferrals, default and deferral timing, loss severities, recovery timing, redirections of payments in other classes and other factors could act to increase or decrease an indicated deficiency at a future date. |
The following table summarizes the change in pretax OTTI credit related losses on securities available for sale for the periods indicated (in thousands):
Nine Months Ended | ||||||||
Sep 30 2012 | Sep 30 2011 | |||||||
Balance at beginning of period: | ||||||||
Total OTTI credit related impairment charges beginning of period | $ | 9,478 | $ | 9,110 | ||||
Increase to the amount related to the credit loss for which other-than-temporary impairment was previously recognized | 528 | 323 | ||||||
Credit related impairment dispositions | (4 | ) | — | |||||
Credit related impairment not previously recognized | — | — | ||||||
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Balance at end of period: | $ | 10,002 | $ | 9,433 | ||||
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During the nine month periods ended September 30, 2012 and 2011, pretax OTTI losses of $528 and $323, respectively, were recognized on pooled trust preferred securities. These OTTI losses resulted from adverse changes in the expected cash flows of these securities which indicated that the Company may not recover the entire cost basis of these investments. Continuation or worsening of current adverse economic conditions may result in further impairment charges in the future.
At September 30, 2012 and December 31, 2011, securities having a stated value of approximately $313 and $365, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
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The following tables reflect the Company’s investment’s fair value and gross unrealized loss, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, as of the dates indicated (in thousands):
September 30, 2012 | Duration of Unrealized Loss | |||||||||||||||||||||||
Greater than | ||||||||||||||||||||||||
Less Than 12 Months | 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 | $ | 8,990 | $ | 12 | — | — | $ | 8,990 | $ | 12 | ||||||||||||||
Mortgage-backed securities - residential | 40,396 | 264 | — | — | 40,396 | 264 | ||||||||||||||||||
Obligations of states and political subdivisions | — | — | — | — | — | — | ||||||||||||||||||
Other debt securities | — | — | $ | 2,996 | $ | 7,716 | 2,996 | 7,716 | ||||||||||||||||
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Total debt securities | 49,386 | 276 | 2,996 | 7,716 | 52,382 | 7,992 | ||||||||||||||||||
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Mutual funds and other equity securities | 8 | 1 | 97 | 111 | 105 | 112 | ||||||||||||||||||
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Total temporarily impaired securities | $ | 49,394 | $ | 277 | $ | 3,093 | $ | 7,827 | $ | 52,487 | $ | 8,104 | ||||||||||||
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There were no securities classified as held to maturity in an unrealized loss position at September 30, 2012.
December 31, 2011 | Duration of Unrealized Loss | |||||||||||||||||||||||
Greater than | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||
Mortgage-backed securities - residential | $ | 41,421 | $ | 218 | — | — | $ | 41,421 | $ | 218 | ||||||||||||||
Other debt securities | 460 | 50 | $ | 2,816 | $ | 8,838 | 3,276 | 8,888 | ||||||||||||||||
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Total debt securities | 41,881 | 268 | 2,816 | 8,838 | 44,697 | 9,106 | ||||||||||||||||||
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Mutual funds and other equity securities | — | — | 92 | 136 | 92 | 136 | ||||||||||||||||||
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Total temporarily impaired securities | $ | 41,881 | $ | 268 | $ | 2,908 | $ | 8,974 | $ | 44,789 | $ | 9,242 | ||||||||||||
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There were no securities classified as held to maturity in an unrealized loss position at December 31, 2011.
The total number of securities in the Company’s portfolio that were in an unrealized loss position was 79 at September 30, 2012 and 82 at December 31, 2011. The Company has determined that it does not intend to sell, or it is more likely than not that it will be required to sell, its securities that are in an unrealized loss position prior to the recovery of its amortized cost basis. With the exception of the investment in pooled trust preferred securities discussed above, the Company believes that its securities continue to have satisfactory ratings, are readily marketable and that current unrealized losses are primarily a result of changes in interest rates. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2012. With regard to the investments in pooled trust preferred securities, the Company has decided to hold these securities as it believes that current market quotes for these securities are not necessarily indicative of their value. The Company has recognized impairment charges on five of the pooled trust preferred securities. Management 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 September 30, 2012.
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The contractual maturity of all debt securities held at September 30, 2012 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 | Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Contractual Maturity | ||||||||||||||||
Within 1 year | $ | 22,563 | $ | 22,081 | — | — | ||||||||||
After 1 year but within 5 years | 64,681 | 66,738 | $ | 5,140 | $ | 5,367 | ||||||||||
After 5 year but within 10 years | 29,350 | 31,185 | — | — | ||||||||||||
After 10 years | 10,712 | 2,996 | — | — | ||||||||||||
Mortgage-backed securities - residential | 306,996 | 313,921 | 5,762 | 6,260 | ||||||||||||
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Total | $ | 434,302 | $ | 436,921 | $ | 10,902 | $ | 11,627 | ||||||||
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4. | Loans |
The loan portfolio, excluding loans held for sale, is comprised of the following:
September 30 2012 | December 31 2011 | |||||||
Real Estate: | ||||||||
Commercial | $ | 583,653 | $ | 690,837 | ||||
Construction | 91,241 | 110,027 | ||||||
Residential Multi-Family | 209,192 | 227,595 | ||||||
Residential Other | 322,841 | 287,233 | ||||||
Commercial & Industrial | 266,118 | 218,500 | ||||||
Individuals & lease financing | 34,643 | 41,760 | ||||||
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Total loans | 1,507,688 | 1,575,952 | ||||||
Deferred loan fees | (2,767 | ) | (3,862 | ) | ||||
Allowance for loan losses | (28,107 | ) | (30,685 | ) | ||||
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Loans, net | $ | 1,476,814 | $ | 1,541,405 | ||||
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In March 2012, the Company purchased $65,795 of adjustable rate 1-4 family residential loans as a partial redeployment of proceeds from the loan sales completed during the first quarter of 2012.
Risk characteristics of the Company’s portfolio segments include the following:
Commercial Real Estate Loans — In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loan. Repayment of such loans may be negatively impacted should the borrower default or should there be a substantial decline in the value of the property securing the loan, or a decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied. These types of loans may involve greater risks than other types of lending, because payments on such loans are often dependent upon the successful operation of the business involved, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions affecting the borrowers’ business.
Construction Loans — Construction loans are short-term loans (generally up to 18 months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Most non-residential construction loans require pre-approved permanent financing or pre-leasing by the Company or another bank providing the permanent financing. The Company funds construction of single family homes and commercial real estate, when no contract of sale exists, based upon the experience of the builder, the financial strength of the owner, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the
14
Table of Contents
principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or by a decline in general economic conditions. The Bank’s primary regulator considers construction loans to be part of commercial real estate for concentration risk measurement purposes.
Residential Real Estate Loans — Various loans secured by residential real estate properties are offered by the Company, including 1-4 family residential mortgages, multi-family residential loans and a variety of home equity line of credit products. Repayment of such loans may be negatively impacted should the borrower default, should there be a significant decline in the value of the property securing the loan or should there be decline in general economic conditions. The Company offers multi-family loans up to $7,500,000 per transaction. These loans are available for 7 or 10 year terms with one 5 year extension option. A 7 year term with no extension option is also offered. Pricing is typically based on a spread over the corresponding FHLBNY rate. Amortization of up to 30 years, a maximum loan to value ratio of 75% and a debt service coverage ratio of 1.2 to 1 are generally required. The Bank’s primary regulator considers multi-family residential loans to be part of commercial real estate for concentration risk measurement purposes.
Commercial and Industrial Loans — The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses, not-for-profit organizations and professionals. These loans are usually made to finance the purchase of inventory, new or used equipment or other short or long-term working capital purposes. These loans are generally secured by corporate assets, often with real estate as secondary collateral, but are also offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source. Commercial loans are often larger and may involve greater risks than other types of loans offered by the Company. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market for the borrower’s products or services.
Lease Financing and Other Loans — The Company originates lease financing transactions which are primarily conducted with businesses, professionals and not-for-profit organizations and provide financing principally for office equipment, telephone systems, computer systems, energy saving improvements and other special use equipment. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, and management’s inability to effectively manage the business. The Company also offers installment loans and cash reserve lines of credit to individuals. Repayment of such loans is often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place an emphasis on originating these types of loans.
15
Table of Contents
The following tables presents the allowance for loan losses by portfolio segment for the periods indicated (in thousands):
Three Months Ended September 30, 2012 | ||||||||||||||||||||||||
Lease | ||||||||||||||||||||||||
Commercial | Residential | Commercial & | Financing | |||||||||||||||||||||
Total | Real Estate | Construction | Real Estate | Industrial | & Other | |||||||||||||||||||
Balance at beginning of period | $ | 28,733 | $ | 11,592 | $ | 4,496 | $ | 8,789 | $ | 3,420 | $ | 436 | ||||||||||||
Charge-offs | (5,628 | ) | (4,372 | ) | 1 | (1,171 | ) | (128 | ) | 42 | ||||||||||||||
Recoveries | 1,279 | 563 | 178 | 70 | 464 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (4,349 | ) | (3,809 | ) | 179 | (1,101 | ) | 336 | 46 | |||||||||||||||
Provision for loan losses | 3,723 | 3,467 | (383 | ) | 625 | 76 | (62 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | (626 | ) | (342 | ) | (204 | ) | (476 | ) | 412 | (16 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 28,107 | $ | 11,250 | $ | 4,292 | $ | 8,313 | $ | 3,832 | $ | 420 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012 | ||||||||||||||||||||||||
Lease | ||||||||||||||||||||||||
Commercial | Residential | Commercial & | Financing | |||||||||||||||||||||
Total | Real Estate | Construction | Real Estate | Industrial | & Other | |||||||||||||||||||
Balance at beginning of period | $ | 30,685 | $ | 12,776 | $ | 6,470 | $ | 8,093 | $ | 2,650 | $ | 696 | ||||||||||||
Charge-offs | (12,537 | ) | (4,770 | ) | (1,579 | ) | (2,999 | ) | (2,625 | ) | (564 | ) | ||||||||||||
Recoveries | 2,983 | 861 | 179 | 396 | 1,029 | 518 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (9,554 | ) | (3,909 | ) | (1,400 | ) | (2,603 | ) | (1,596 | ) | (46 | ) | ||||||||||||
Provision for loan losses | 6,976 | 2,383 | (778 | ) | 2,823 | 2,778 | (230 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | (2,578 | ) | (1,526 | ) | (2,178 | ) | 220 | 1,182 | (276 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 28,107 | $ | 11,250 | $ | 4,292 | $ | 8,313 | $ | 3,832 | $ | 420 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2011 | ||||||||||||||||||||||||
Lease | ||||||||||||||||||||||||
Commercial | Residential | Commercial & | Financing | |||||||||||||||||||||
Total | Real Estate | Construction | Real Estate | Industrial | & Other | |||||||||||||||||||
Balance at beginning of period | $ | 41,889 | $ | 17,112 | $ | 6,440 | $ | 13,161 | $ | 4,246 | $ | 930 | ||||||||||||
Charge-offs | (2,802 | ) | (69 | ) | (11 | ) | (2,263 | ) | (453 | ) | (6 | ) | ||||||||||||
Recoveries | 527 | 44 | 28 | 336 | 112 | 7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (2,275 | ) | (25 | ) | 17 | (1,927 | ) | (341 | ) | 1 | ||||||||||||||
Provision for loan losses | 2,536 | (716 | ) | (231 | ) | 3,115 | 387 | (19 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | 261 | (741 | ) | (214 | ) | 1,188 | 46 | (18 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 42,150 | $ | 16,371 | $ | 6,226 | $ | 14,349 | $ | 4,292 | $ | 912 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||
Lease | ||||||||||||||||||||||||
Commercial | Residential | Commercial & | Financing | |||||||||||||||||||||
Total | Real Estate | Construction | Real Estate | Industrial | & Other | |||||||||||||||||||
Balance at beginning of period | $ | 38,949 | $ | 16,736 | $ | 7,140 | $ | 9,851 | $ | 4,290 | $ | 932 | ||||||||||||
Charge-offs | (9,429 | ) | (225 | ) | (867 | ) | (5,276 | ) | (2,997 | ) | (64 | ) | ||||||||||||
Recoveries | 3,097 | 730 | 603 | 1,355 | 388 | 21 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (6,332 | ) | 505 | (264 | ) | (3,921 | ) | (2,609 | ) | (43 | ) | |||||||||||||
Provision for loan losses | 9,533 | (870 | ) | (650 | ) | 8,419 | 2,611 | 23 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | 3,201 | (365 | ) | (914 | ) | 4,498 | 2 | (20 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 42,150 | $ | 16,371 | $ | 6,226 | $ | 14,349 | $ | 4,292 | $ | 912 | ||||||||||||
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|
|
|
|
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16
Table of Contents
The following table presents the unpaid principal balance of impaired loans, including troubled debt restructurings, and the related recorded investment and allocated allowance for loan losses by class of loans, as of the dates indicated (in thousands):
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | |||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Owner occupied | $ | 27,551 | $ | 22,947 | — | $ | 21,115 | $ | 21,039 | — | ||||||||||||||
Non owner occupied | 3,103 | 2,063 | — | 10,762 | 9,723 | — | ||||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | — | — | — | 2,690 | 1,723 | — | ||||||||||||||||||
Residential | 3,201 | 2,201 | — | — | — | — | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | 2,993 | 2,993 | — | — | — | — | ||||||||||||||||||
1-4 family | 9,583 | 8,345 | — | 1,930 | 1,898 | — | ||||||||||||||||||
Home equity | 2,220 | 1,212 | — | 2,669 | 1,926 | — | ||||||||||||||||||
Commercial & industrial | 13,440 | 12,367 | — | 8,560 | 7,803 | — | ||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | — | — | — | 3,758 | 3,758 | $ | 2,374 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | $ | 62,091 | $ | 52,128 | — | $ | 51,484 | $ | 47,870 | $ | 2,374 | |||||||||||||
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|
|
The carrying value of impaired loans was determined using either the fair value of the underlying collateral of the loan taking into account estimated selling costs or by an analysis of the expected cash flows related to the loan. There were no allocations of specific reserves during the nine month period ended September 30, 2012. The Company typically records partial charge-offs for impairment as opposed to establishing specific reserves except in situations where estimated losses are in process of being finalized. The $2,374 specific reserve allocated to impaired loans as of December 31, 2011 was charged off in June 2012 upon completion of the TDR for which the specific reserve was originally established. The above tables as of September 30, 2012 and December 31, 2011 include $27,540 and $28,256, respectively, of loans considered to be troubled debt restructurings (“TDRs”). There were two additional loan modifications classified as TDRs during the nine month period ended September 30, 2012 with pre-modification balances of $14,604 for which charge-offs of $2,595 were recorded. An additional partial charge-off of $4,132 was recorded in the third quarter of 2012 on a prior performing TDR based on a significant reduction in the appraised value of the underlying collateral. The Company is not committed to extend any additional credit to borrowers whose loans are classified as TDRs. As of September 30, 2012, six TDRs with carrying amounts of $9,823 were on accrual status and six loans with carrying amounts of $17,717 on nonaccrual status that were performing in accordance with their modified terms.
The following table presents the average recorded investment in impaired loans including, troubled debt restructurings, and interest recognized on impaired loans by class of loans for the periods indicated (in thousands):
17
Table of Contents
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Average Recorded Investment | Interest Income | Average Recorded Investment | Interest Income | Average Recorded Investment | Interest Income | Average Recorded Investment | Interest Income | |||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Owner occupied | $ | 25,067 | $ | 168 | $ | 28,234 | $ | 239 | $ | 23,179 | $ | 434 | $ | 16,810 | $ | 357 | ||||||||||||||||
Non owner occupied | 2,114 | 96 | 15,292 | — | 5,448 | 275 | 16,835 | — | ||||||||||||||||||||||||
Construction: | ||||||||||||||||||||||||||||||||
Commercial | 290 | — | 9,345 | — | 2,546 | — | 9,665 | — | ||||||||||||||||||||||||
Residential | 2,929 | — | 6,457 | — | 1,586 | — | 5,616 | — | ||||||||||||||||||||||||
Residential: | ||||||||||||||||||||||||||||||||
Multifamily | 2,156 | 48 | 4,586 | — | 1,386 | 69 | 4,453 | — | ||||||||||||||||||||||||
1-4 family | 8,869 | — | 5,005 | 32 | 5,475 | — | 4,940 | 32 | ||||||||||||||||||||||||
Home equity | 1,419 | — | 3,989 | — | 1,607 | — | 3,299 | — | ||||||||||||||||||||||||
Commercial & industrial | 12,323 | — | 8,623 | — | 10,032 | — | 7,081 | — | ||||||||||||||||||||||||
Lease financing and other | 128 | — | 245 | — | 85 | — | 318 | — | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 55,295 | $ | 312 | $ | 81,776 | $ | 271 | $ | 51,344 | $ | 778 | $ | 69,017 | $ | 389 | ||||||||||||||||
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|
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|
The difference between interest income recognized and interest income collected on impaired loans for the three and nine month periods ended September 30, 2012 and 2011 was not significant. Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $452 and $1,320, respectively, for the three and nine month periods ended September 30, 2012 and $1,630 and $2,466, respectively, for the three and nine month periods ended September 30, 2011.
The following tables present the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of the dates indicated (in thousands):
September 30, 2012 | ||||||||||||||||||||||||
Total | Commercial Real Estate | Construction | Residential Real Estate | Commercial & Industrial | Lease Financing & Other | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending balance attributed to loans: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 28,107 | $ | 11,250 | $ | 4,292 | $ | 8,313 | $ | 3,832 | $ | 420 | ||||||||||||
Individually evaluated for impairment | — | — | — | — | — | — | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of allowance | $ | 28,107 | $ | 11,250 | $ | 4,292 | $ | 8,313 | $ | 3,832 | $ | 420 | ||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans: | ||||||||||||||||||||||||
Ending balance of loans: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 1,455,560 | $ | 558,643 | $ | 89,040 | $ | 519,483 | $ | 253,751 | $ | 34,643 | ||||||||||||
Individually evaluated for impairment | 52,128 | 25,010 | 2,201 | 12,550 | 12,367 | — | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of loans | $1,507,688 | $583,653 | $91,241 | $532,033 | $266,118 | $34,643 | ||||||||||||||||||
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18
Table of Contents
December 31, 2011 | ||||||||||||||||||||||||
Total | Commercial Real Estate | Construction | Residential Real Estate | Commercial & Industrial | Lease Financing & Other | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending balance attributed to loans: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 28,311 | $ | 12,776 | $ | 4,096 | $ | 8,093 | $ | 2,650 | $ | 696 | ||||||||||||
Individually evaluated for impairment | 2,374 | — | 2,374 | — | — | — | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of allowance | $ | 30,685 | $ | 12,776 | $ | 6,470 | $ | 8,093 | $ | 2,650 | $ | 696 | ||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans: | ||||||||||||||||||||||||
Ending balance of loans: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 1,528,082 | $ | 660,075 | $ | 104,546 | $ | 511,004 | $ | 210,697 | $ | 41,760 | ||||||||||||
Individually evaluated for impairment | 47,870 | 30,762 | 5,481 | 3,824 | 7,803 | — | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of loans | $ | 1,575,952 | $ | 690,837 | $ | 110,027 | $ | 514,828 | $ | 218,500 | $ | 41,760 | ||||||||||||
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19
Table of Contents
The following table presents the recorded investment in non-accrual loans and loans past due 90 days and still accruing by class of loans as of the dates indicated (in thousands):
September 30, 2012 | December 31, 2011 | |||||||||||||||
Non-Accrual | Past Due 90 Days and Still Accruing | Non-Accrual | Past Due 90 Days and Still Accruing | |||||||||||||
Loans: | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||
Owner occupied | $ | 16,575 | — | $ | 3,856 | — | ||||||||||
Non owner occupied | 1,605 | — | 9,356 | — | ||||||||||||
Construction: | ||||||||||||||||
Commercial | — | — | 5,481 | — | ||||||||||||
Residential | 2,201 | — | — | — | ||||||||||||
Residential: | ||||||||||||||||
Multifamily | — | — | — | — | ||||||||||||
1-4 family | 8,345 | — | 1,470 | — | ||||||||||||
Home equity | 1,212 | — | 1,926 | — | ||||||||||||
Commercial & industrial | 12,367 | — | 7,803 | — | ||||||||||||
Other: | ||||||||||||||||
Lease financing and other | — | — | — | — | ||||||||||||
Overdrafts | — | — | — | — | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total | $ | 42,305 | — | $ | 29,892 | — | ||||||||||
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|
|
|
|
|
|
The following tables present the aging of loans (including past due and non-accrual loans) by class of loans as of the dates indicated (in thousands):
September 30, 2012 | ||||||||||||||||||||||||
Total | 31-59 Days Past Due | 60-89 Days Past Due | 90 Days Or More Past Due | Total Past Due | Current | |||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Owner occupied | $ | 194,782 | — | $ | 1,821 | $ | 9,746 | $ | 11,567 | $ | 183,215 | |||||||||||||
Non owner occupied | 388,871 | — | 927 | 1,605 | 2,532 | 386,339 | ||||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | 43,377 | — | — | — | — | 43,377 | ||||||||||||||||||
Residential | 47,864 | — | — | 2,201 | 2,201 | 45,663 | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | 209,192 | — | — | — | — | 209,192 | ||||||||||||||||||
1-4 family | 214,102 | $ | 145 | 809 | 8,345 | 9,299 | 204,803 | |||||||||||||||||
Home equity | 108,739 | 2,735 | 178 | 1,212 | 4,125 | 104,614 | ||||||||||||||||||
Commercial & industrial | 266,118 | 76 | 1,442 | 1,479 | 2,997 | 263,121 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Lease financing and other | 33,136 | 1 | — | — | 1 | 33,135 | ||||||||||||||||||
Overdrafts | 1,507 | — | — | — | — | 1,507 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,507,688 | $ | 2,957 | $ | 5,177 | $ | 24,588 | $ | 32,722 | $ | 1,474,966 | ||||||||||||
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20
Table of Contents
December 31, 2011 | ||||||||||||||||||||||||
Total | 31-59 Days Past Due | 60-89 Days Past Due | 90 Days Or More Past Due | Total Past Due | Current | |||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Owner occupied | $ | 243,862 | $ | 1,801 | — | $ | 3,489 | $ | 5,290 | $ | 238,572 | |||||||||||||
Non owner occupied | 446,975 | 1,917 | — | 5,108 | 7,025 | 439,950 | ||||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | 56,933 | — | — | 4,883 | 4,883 | 52,050 | ||||||||||||||||||
Residential | 53,094 | 900 | — | — | 900 | 52,194 | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | 227,595 | — | — | — | — | 227,595 | ||||||||||||||||||
1-4 family | 174,714 | — | — | 1,470 | 1,470 | 173,244 | ||||||||||||||||||
Home equity | 112,519 | — | $ | 97 | 1,926 | 2,023 | 110,496 | |||||||||||||||||
Commercial & industrial | 218,500 | 197 | 50 | 4,403 | 4,650 | 213,850 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Lease financing and other | 39,898 | 1 | 10 | — | 11 | 39,887 | ||||||||||||||||||
Overdrafts | 1,862 | — | — | — | — | 1,862 | ||||||||||||||||||
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|
| |||||||||||||
Total | $ | 1,575,952 | $ | 4,816 | $ | 157 | $ | 21,279 | $ | 26,252 | $ | 1,549,700 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: value of underlying collateral, current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans individually and classifies them as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention — Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the asset or in the institution’s credit position at some future date.
Substandard — Loans classified as substandard asset are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loans not meeting the above criteria that are analyzed individually as part of the above described process are considered to be pass rated loans.
21
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The following table presents the risk category by class of loans of non-homogeneous loans individually classified as to credit risk as of the most recent analysis performed for the dates indicated (in thousands):
September 30, 2012 | ||||||||||||||||||||
Total | Pass | Special Mention | Substandard | Doubtful | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Owner occupied | $ | 194,782 | $ | 148,047 | $ | 3,062 | $ | 43,673 | — | |||||||||||
Non owner occupied | 388,871 | 377,586 | 4,926 | 6,359 | — | |||||||||||||||
Construction: | ||||||||||||||||||||
Commercial | 43,377 | 31,974 | 5,349 | 6,054 | — | |||||||||||||||
Residential | 47,864 | 42,813 | 900 | 4,151 | — | |||||||||||||||
Residential: | ||||||||||||||||||||
Multifamily | 209,192 | 205,999 | — | 3,193 | — | |||||||||||||||
1-4 family | 83,234 | 53,611 | 20,856 | 8,767 | — | |||||||||||||||
Home equity | 1,411 | — | — | 1,411 | — | |||||||||||||||
Commercial & Industrial | 266,118 | 246,199 | 4,081 | 15,838 | — | |||||||||||||||
Lease Financing & Other | 31,931 | 30,699 | 847 | 385 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans | $ | 1,266,780 | $ | 1,136,928 | $ | 40,021 | $ | 89,831 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||
Total | Pass | Special Mention | Substandard | Doubtful | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Owner occupied | $ | 243,862 | $ | 177,921 | $ | 32,144 | $ | 33,797 | — | |||||||||||
Non owner occupied | 446,975 | 422,402 | 14,924 | 9,649 | — | |||||||||||||||
Construction: | ||||||||||||||||||||
Commercial | 56,933 | 42,641 | 5,382 | 8,910 | — | |||||||||||||||
Residential | 53,094 | 38,956 | 7,274 | 6,864 | — | |||||||||||||||
Residential: | ||||||||||||||||||||
Multifamily | 227,595 | 226,224 | — | 1,371 | — | |||||||||||||||
1-4 family | 90,033 | 72,594 | 15,109 | 2,330 | — | |||||||||||||||
Home equity | 2,174 | — | — | 2,174 | — | |||||||||||||||
Commercial & Industrial | 218,500 | 204,305 | 5,410 | 8,785 | — | |||||||||||||||
Lease Financing & Other | 38,441 | 37,619 | 523 | 299 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans | $ | 1,377,607 | $ | 1,222,662 | $ | 80,766 | $ | 74,179 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
Loans not individually rated, primarily consisting of certain 1-4 family residential mortgages and home equity lines of credit, are evaluated for risk in groups of homogeneous loans. The primary risk characteristic evaluated on these pools is delinquency.
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Table of Contents
The following table presents, as of the dates indicated, the delinquency categories by class of loans for loans evaluated for risk in groups of homogeneous loans (in thousands):
September 30, 2012 | ||||||||||||||||||||||||
Total | 31-59 Days Past Due | 60-89 Days Past Due | 90 Days Or More Past Due | Total Past Due | Current | |||||||||||||||||||
Residential: | ||||||||||||||||||||||||
1-4 family | $ | 130,868 | $ | 145 | $ | 91 | — | $ | 236 | $ | 130,632 | |||||||||||||
Home equity | 107,328 | 2,734 | 178 | — | 2,912 | 104,416 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Other loans | 1,205 | 1 | — | — | 1 | 1,204 | ||||||||||||||||||
Overdrafts | 1,507 | — | — | — | — | 1,507 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | $ | 240,908 | $ | 2,880 | $ | 269 | — | $ | 3,149 | $ | 237,759 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
Total | 31-59 Days Past Due | 60-89 Days Past Due | 90 Days Or More Past Due | Total Past Due | Current | |||||||||||||||||||
Residential: | ||||||||||||||||||||||||
1-4 family | $ | 84,681 | — | — | — | — | $ | 84,681 | ||||||||||||||||
Home equity | 110,345 | — | $ | 97 | — | $ | 97 | 110,248 | ||||||||||||||||
Other: | ||||||||||||||||||||||||
Other loans | 1,457 | $ | 1 | 10 | — | 11 | 1,446 | |||||||||||||||||
Overdrafts | 1,862 | — | — | — | — | 1,862 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | $ | 198,345 | $ | 1 | $ | 107 | — | $ | 108 | $ | 198,237 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale
On February 1, 2012, the Company announced plans to sell a total of $474 million in performing and non-performing loans in two tranches by mid-2012, as a significant step toward reducing the bank's concentrations of commercial real estate loans and classified assets. These loans were transferred to loans held-for-sale at December 31, 2011 and both tranche sales were completed in March 2012.
The first tranche included $200 million in performing and non-performing loans. The carrying value of these commercial real estate loans was reduced by $60 million at December 31, 2011. These loans were primarily all commercial real estate credits, including classified assets totaling $53 million net of the market value adjustment. The recorded sales price, net of broker fees and expenses, exceeded the carrying value of this portfolio, resulting in a pre-tax gain of approximately $7.9 million.
The second tranche included $274 million in performing, non-classified multifamily loans. No market value adjustment was recorded when this portfolio was transferred to held-for-sale at December 31, 2011, as they were expected to be sold at or above par value. The sale of these loans in March 2012 resulted in a pre-tax gain of approximately $8.0 million.
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5. | Earnings Per Share |
The following table sets forth the computation of basic and diluted earnings per common share for each of the periods indicated:
Three Months Ended Sep 30 | Nine Months Ended Sep 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(000’s except share data) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) available to common shareholders for basic and diluted earnings per share | $ | 3,134 | $ | 8,508 | $ | 26,108 | $ | 20,764 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per common share - weighted average shares | 19,636,014 | 19,462,158 | 19,602,815 | 19,455,553 | ||||||||||||
Effect of diluted securities: | ||||||||||||||||
Stock options | 6,676 | 16,172 | 9,784 | 50,666 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Denominator for diluted earnings per common share - adjusted weighted average shares | 19,642,690 | 19,478,329 | 19,612,599 | 19,506,219 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Basic earnings per common share | $ | 0.16 | $ | 0.44 | $ | 1.33 | $ | 1.07 | ||||||||
Diluted earnings per common share | $ | 0.16 | $ | 0.43 | $ | 1.33 | $ | 1.06 | ||||||||
Dividends declared per share | $ | 0.18 | $ | 0.18 | $ | 0.54 | $ | 0.46 |
Stock options of 465,304 and 259,271 were not considered in computing diluted earnings per share at September 30, 2012 and 2011, respectively, because they were anti dilutive. In November 2011, the Company declared a 10% stock dividend. Share and per share amounts for 2011 have been retroactively restated to reflect the issuance of the additional shares.
6. | Benefit Plans |
In addition to defined contribution pension and savings plans which cover substantially all employees, the Company provides additional retirement benefits to certain officers and directors pursuant to unfunded supplemental defined benefit plans. The following table summarizes the components of the net periodic pension cost of the defined benefit plans (in thousands).
Three Months Ended Sep 30 | Nine Months Ended Sep 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Service cost | $ | 110 | $ | 103 | $ | 329 | $ | 294 | ||||||||
Interest cost | 164 | 155 | 476 | 449 | ||||||||||||
Amortization of prior service cost | (58 | ) | (58 | ) | (175 | ) | (174 | ) | ||||||||
Amortization of net loss | 168 | 139 | 503 | 418 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net periodic pension cost | $ | 384 | $ | 339 | $ | 1,133 | $ | 987 | ||||||||
|
|
|
|
|
|
|
|
The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2011 Annual Report on Form 10-K that it expected to contribute $813 to the unfunded defined benefit plans during 2012. For the three and nine month periods ended September 30, 2012, the Company contributed $172 and $484, respectively, to these plans.
7. | Stock-Based Compensation |
In accordance with the provisions of the Hudson Valley Holding Corp. 2010 Omnibus Incentive Plan, approved by the Company’s shareholders on May 27, 2010, the Company may grant eligible employees, including directors, consultants and advisors, incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards and other types of awards. The 2010 Plan provides for the issuance of up to 1,331,000 shares of the Company’s common stock. Prior to the 2010 Plan, the Company had stock option plans that provided for the granting of options to directors, officers, eligible employees, and certain advisors, based upon eligibility as determined by the Compensation Committee. Under the prior plans, options were granted for the purchase of shares of the Company’s common stock at an exercise price not less than the market value of
24
Table of Contents
the stock on the date of grant, vested over various periods ranging from immediate to five years from date of grant, and had expiration dates up to ten years from the date of grant.
Compensation costs relating to stock-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. Stock-based payments are expensed over their respective vesting periods.
The following table summarizes stock-based compensation activity for the nine month period ended September 30, 2012:
Prior Option Plans: | Shares | Weighted Average Grant or Exercise Price | Aggregate Intrinsic Value (1) ($000’s) | Weighted Average Remaining Contractual Term | ||||||||||||
Outstanding at December 31, 2011 | 625,256 | $ | 22.81 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (7,757 | ) | 16.54 | |||||||||||||
Cancelled or Expired | (21,550 | ) | 24.64 | |||||||||||||
|
| |||||||||||||||
Outstanding at September 30, 2012 | 595,949 | $ | 22.83 | $ | 106 | 1.8 | ||||||||||
|
| |||||||||||||||
Exercisable at September 30, 2012 | 587,639 | $ | 22.64 | $ | 106 | 1.8 | ||||||||||
|
| |||||||||||||||
Nonvested at September 30, 2012 | 8,310 | $ | 35.94 | |||||||||||||
|
| |||||||||||||||
2010 Omnibus Incentive Plan: | ||||||||||||||||
Outstanding at December 31, 2011 | — | — | ||||||||||||||
Granted at fair value | 114,586 | $ | 16.69 | |||||||||||||
Restriction released | (7,673 | ) | 17.10 | |||||||||||||
Cancelled | (9,152 | ) | 16.74 | |||||||||||||
|
| |||||||||||||||
Nonvested at September 30, 2012 | 97,761 | $ | 16.65 | |||||||||||||
|
| |||||||||||||||
Available for grant at December 31, 2011 | 1,331,000 | |||||||||||||||
Restricted stock awards | (114,586 | ) | $ | 16.69 | ||||||||||||
Cancelled | 9,152 | 16.74 | ||||||||||||||
|
| |||||||||||||||
Available for future grant | 1,225,566 | |||||||||||||||
|
|
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 fair 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 September 30, 2012. This amount changes based on changes in the fair 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. There were no stock options granted in the nine month period ended September 30, 2012 or the year ended December 31, 2011. The restricted stock awards granted during the nine month period ended September 30, 2012 were the initial awards under the 2010 Plan.
Net compensation expense of $37 and $100 related to the Company’s stock option plans was included in net income for the nine month periods ended September 30, 2012 and 2011, respectively. The total tax effect related thereto was $(2) and $4, respectively. Unrecognized compensation expense related to non-vested share-based compensation granted under the Company’s stock option plans totaled $14 at September 30, 2012. This expense is expected to be recognized over a remaining weighted average period of 0.4 years. Unrecognized compensation expense related to restricted stock awards totaled $1,628 at September 30, 2012. This expense is expected to be recognized over a remaining weighted average period of 2.3 years.
25
Table of Contents
8. | Fair Value |
Fair Value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
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.
Investment Securities - The fair values of investment securities are determined by obtaining quoted prices on nationally recognized securities exchanges, if available (Level 1), or matrix pricing, which is a mathematical technique widely used 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 September 30, 2012 and December 31, 2011 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 for these instruments. 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. The fair values of Level 3 investment securities are determined by the Controller and Investment Officer who report to the Chief Financial Officer. See Note 3 “Securities” for further discussion of pooled trust preferred securities.
Impaired Loans – At the time a loan is considered impaired, it is valued at lower of cost or fair value. Impaired loans carried at fair value generally are partially charged off or receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value in commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraiser to adjust for differences between the comparable sales and the income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining value. Non real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
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. Fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a level 3 classification of the inputs used in determining fair value.
Loans Held for Sale - Loans held for sale are carried at lower of cost or fair value. The fair value of loans held for sale is determined using average bid indicators from third parties expected to participate in the loan sales, in some cases adjusted for specific attributes of that loan or other observable market data. Such bids and adjustments often vary significantly and typically result in level 3 classification of the inputs used in determining fair value.
26
Table of Contents
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2012:
Asset | Fair Value | Valuation Technique | Unobservable Inputs | Range of Inputs | ||||||
Impaired loans | $ | 15,559 | Sales comparison and income based appraisals | Capitalization rates | 7.00% - 7.75% | |||||
Management adjustment for for dated appraisal | 0% - 20% | |||||||||
Management adjustment for costs to sell | 0% - 30% | |||||||||
Other real estate owned | $ | 250 | Sales comparison and income based appraisals | Management adjustment for costs to sell | 30% | |||||
Loans held for sale | $ | 2,354 | Third party bids | Bids from interested third parties | 64% - 65% |
The following table presents quantitative information about Level 3 fair value measurements for financial instruments at fair value on a recurring basis at September 30, 2012:
Asset | Fair Value | Valuation Technique | Unobservable Inputs | Range of Inputs | ||||||
Trust preferred securities | $ | 2,996 | Discounted cash flow | Specific issuer default rates | 33%-63% | |||||
Specific issuer default severity | 80%-92% | |||||||||
Annual prepayment rate | 1% | |||||||||
Projected annual nonspecific issuer default rates | 0.25%-2.00% | |||||||||
Projected annual nonspecific issuer default severity | 85% | |||||||||
Present value discount rate | 22.5% |
27
Table of Contents
Assets and liabilities measured at fair value as of the dates indicated are summarized below:
Fair Value Measurements at | ||||||||||||||||
September 30, 2012 | ||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets | Other | Unobservable | ||||||||||||||
for Identical Assets | Observable Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(000’s) | ||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Treasury and government agencies | — | $ | 33,197 | — | $ | 33,197 | ||||||||||
Mortgage-backed securities - residential | — | 313,921 | — | 313,921 | ||||||||||||
Obligations of states and political subdivisions | — | 84,409 | — | 84,409 | ||||||||||||
Other debt securities | — | 2,398 | $ | 2,996 | 5,394 | |||||||||||
Mutual funds and other equity securities | — | 10,532 | — | 10,532 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | $ | 444,457 | $ | 2,996 | $ | 447,453 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Measured on a non-recurring basis: | ||||||||||||||||
Impaired loans: (1) | ||||||||||||||||
Commercial Real Estate | — | — | $ | 6,529 | $ | 6,529 | ||||||||||
Construction | — | — | 2,201 | 2,201 | ||||||||||||
Residential | — | — | 5,057 | 5,057 | ||||||||||||
Commercial & Industrial | — | — | 1,772 | 1,772 | ||||||||||||
Other | — | — | — | — | ||||||||||||
Loans held for sale | — | — | 2,354 | 2,354 | ||||||||||||
Other real estate owned | — | — | 250 | 250 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | — | $ | 18,163 | $ | 18,163 | ||||||||||
|
|
|
|
|
|
|
|
28
Table of Contents
Fair Value Measurements at | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||
(000’s) | ||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Treasury and government agencies | — | — | — | — | ||||||||||||
Mortgage-backed securities - residential | — | $ | 393,418 | — | $ | 393,418 | ||||||||||
Obligations of states and political subdivisions | — | 100,599 | — | 100,599 | ||||||||||||
Other debt securities | — | 516 | $ | 2,816 | 3,332 | |||||||||||
Mutual funds and other equity securities | — | 10,548 | — | 10,548 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | $ | 505,081 | $ | 2,816 | $ | 507,897 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Measured on a non-recurring basis: | ||||||||||||||||
Impaired loans: (1) | ||||||||||||||||
Commercial Real Estate | — | — | $ | 1,410 | $ | 1,410 | ||||||||||
Construction | — | — | 3,107 | 3,107 | ||||||||||||
Residential | — | — | 1,529 | 1,529 | ||||||||||||
Commercial & Industrial | — | — | 2,145 | 2,145 | ||||||||||||
Other | — | — | — | — | ||||||||||||
Loans held for sale | — | — | 473,814 | 473,814 | ||||||||||||
Other real estate owned | — | — | 1,174 | 1,174 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | — | $ | 483,179 | $ | 483,179 | ||||||||||
|
|
|
|
|
|
|
|
(1) | The recorded investments in impaired loans subject to fair value reporting at September 30, 2012 and December 31, 2011 were $12,407 and $10,565, respectively. Specific allowances of $0 and $2,374 had been established within the allowance for loan losses as of September 30, 2012 and December 31, 2011, respectively. |
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 nine month periods ended September 30, 2012 and 2011:
Level 3 Assets Measured on a Recurring Basis | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Sep 30 | Sep 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(000’s) | (000’s) | |||||||||||||||
Balance at beginning of period | $ | 2,768 | $ | 2,923 | $ | 2,816 | $ | 3,687 | ||||||||
Additions to Level 3 | 49 | 93 | 257 | 289 | ||||||||||||
Net unrealized gain (loss) included in other comprehensive income | 699 | (242 | ) | 1,122 | (995 | ) | ||||||||||
Principal payments | (520 | ) | — | (671 | ) | (3 | ) | |||||||||
Recognized impairment charge included in the statement of income | — | (119 | ) | (528 | ) | (323 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | 2,996 | $ | 2,655 | $ | 2,996 | $ | 2,655 | ||||||||
|
|
|
|
|
|
|
|
29
Table of Contents
9. | Fair Value of Financial Instruments |
The Company follows the “Financial Instruments” topic of the FASB Accounting Standards Codification which requires the disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of September 30, 2012 and December 31, 2011 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 as of the dates indicated were as follows:
September 30, 2012 | Fair Value Measurements | |||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
Total | Active Markets | Other | Unobservable | |||||||||||||||||
Carrying | Fair | for Identical Assets | Observable Inputs | Inputs | ||||||||||||||||
Amount | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Assets: | ||||||||||||||||||||
Financial assets for which carrying value approximates fair value | $ | 843.9 | $ | 843.9 | $ | 843.9 | ||||||||||||||
Held to maturity securities and accrued interest | 10.9 | 11.6 | $ | 11.6 | ||||||||||||||||
FHLB Stock | 4.8 | N/A | N/A | |||||||||||||||||
Loans and accrued interest | 1,495.7 | 1,536.3 | $ | 1,536.3 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposits with no stated maturity and accrued interest | 2,414.5 | 2,414.5 | 2,414.5 | |||||||||||||||||
Time deposits and accrued interest | 134.4 | 134.8 | 134.8 | |||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowing and accrued interest | 42.7 | 42.7 | 42.7 | |||||||||||||||||
Other borrowings and accrued interest | 16.6 | 14.0 | 14.0 |
December 31, 2011 | Fair Value Measurements | |||||||||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||||||
Total | Active Markets | Other | Unobservable | |||||||||||||||||
Carrying | Fair | for Identical Assets | Observable Inputs | Inputs | ||||||||||||||||
Amount | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Assets: | ||||||||||||||||||||
Financial assets for which carrying value approximates fair value | $ | 94.5 | $ | 94.5 | $ | 94.5 | ||||||||||||||
Held to maturity securities and accrued interest | 13.0 | 13.9 | $ | 13.9 | ||||||||||||||||
FHLB Stock | 4.8 | N/A | N/A | |||||||||||||||||
Loans and accrued interest | 1,571.3 | 1,609.2 | $ | 1,609.2 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposits with no stated maturity and accrued interest | 2,274.7 | 2,274.7 | 2,274.7 | |||||||||||||||||
Time deposits and accrued interest | 151.7 | 152.1 | 152.1 | |||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowing and accrued interest | 53.1 | 53.1 | 53.1 | |||||||||||||||||
Other borrowings and accrued interest | 16.6 | 14.0 | 14.0 |
The estimated fair value of the indicated items was determined as follows:
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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 and accrued interest — The fair value of securities held to maturity was estimated based on quoted market prices or dealer quotations. Accrued interest is stated at its carrying amounts which approximates fair value.
FHLB Stock — It is not practicable to determine its fair value due to restrictions placed on its transferability.
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. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
Deposits with no stated maturity and accrued interest — The estimated fair value of deposits with no stated maturity and accrued interest, as applicable, are considered to be equal to their carrying amounts.
Time deposits and accrued interest — The fair value of time deposits has been estimated by discounting projected cash flows at the reporting date using current rates for similar deposits. Accrued interest is stated at its carrying amount which approximates fair value.
Securities sold under repurchase agreements and other short-term borrowings and accrued interest— The estimated fair value of these instruments approximate carrying amount because of their short maturities and variable rates. Accrued interest is stated at its carrying amount which approximates fair value.
Other borrowings and accrued interest — The fair value of callable FHLB advances was estimated by discounting projected cash flows at the reporting date using the rate applicable to the projected call date option. Accrued interest is stated at its carrying amount which approximates fair value.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section presents discussion and analysis of the Company’s consolidated financial condition at September 30, 2012 and December 31, 2011, and the consolidated results of operations for the three and nine month periods ended September 30, 2012 and 2011. The Company is consolidated with its wholly owned subsidiaries Hudson Valley Bank, N.A. and its subsidiaries (collectively “HVB” or “the Bank”) and HVHC Risk Management Corp. This discussion and analysis should be read in conjunction with the financial statements and supplementary financial information contained in the Company’s 2011 Annual Report on Form 10-K.
Overview of Management’s Discussion and Analysis
This overview is intended to highlight selected information included in this Quarterly Report on Form 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 on Form 10-Q and the Company’s 2011 Annual Report on Form 10-K.
The Company derives substantially all of its revenue from providing banking and related services to businesses, professionals, municipalities, not-for profit organizations and individuals within its market area, primarily Westchester County and Rockland County, New York, portions of New York City and Fairfield County and New Haven 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 Company recorded net income for the three month period ended September 30, 2012 of $3.1 million or $0.16 per diluted share, a decrease of $5.4 million compared to net income of $8.5 million or $0.43 per diluted share for the same period in the prior year. Net income for the nine month period ended September 30, 2012 was $26.1 million or $1.33 per diluted share, an increase of $5.3 million compared to net income of $20.8 million or $1.06 per diluted share for the same period in the prior year. Per share amounts for the 2011 periods have been adjusted to reflect the effects of the 10 percent stock dividend issued in December 2011.
The decrease in earnings for the three month period ended September 30, 2012, compared to the same period in the prior year, was primarily due to a $5.9 million decrease in net interest income, the anticipated result of excess liquidity remaining from the proceeds of the loan sales conducted in the first and second quarters of 2012. The loan sales were conducted as part of the company’s efforts to reduce the levels of nonperforming and other classified loans, and also to reduce the overall concentration in commercial real estate loans. In addition to the decrease in net interest income, net income for the third quarter of 2012 was lower, compared to the same period in the prior year, as a result of a higher provision for loan losses and lower fee income, partially offset by lower losses on sales and revaluations of loans and other real estate owned and slightly lower non interest expenses. The increase in earnings for the nine month period ended September 30, 2012, compared to the same period in the prior year, resulted primarily from pretax gain of $15.9 million resulting from the successful completion of $474 million of loan sales announced in the fourth quarter of 2011 and completed at the end of the first quarter of 2012. In addition to the gains on the loan sales, income for the nine month period ended September 30, 2012 was higher, compared to the same period in the prior year, due to a lower provision for loan losses, partially offset by lower net interest income, higher impairment charges on securities available for sale and slightly higher non interest expenses.
Total loans, excluding loans held for sale, decreased $47.9 million and $68.3 million during the three and nine month periods ended September 30, 2012 compared to the prior year end. The overall decrease was primarily the result of pay downs and payoffs of existing loans exceeding new production and additional loan sales conducted in the second quarter of 2012, partially offset by the purchase of adjustable rate residential loans in the first quarter of 2012, which were purchased as partial redeployment of proceeds from sales of loans held for sale. The Company continues to provide lending availability to both new and existing customers.
Nonperforming assets decreased to $42.6 million at September 30, 2012, compared to $58.9 million at December 31, 2011. Overall asset quality continued to be adversely affected by the current state of the economy and the real estate market. Although there is evidence that the current economic downturn may have begun to slowly turn around, higher than normal levels of delinquent and nonperforming loans, slowdowns in repayments and declines in the loan-to-value ratios on existing loans continued during the first three quarters of 2012. Despite overall reductions in classified and nonperforming loans, the Company’s loan portfolio continued to be
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adversely impacted by the effects of declines in the demand for and values of virtually all commercial and residential real estate properties. These declines, together with the limited availability of residential mortgage financing, resulted in some continuing weakness in the overall asset quality of the company’s loan portfolio. As a result of these factors, the Company has continued to follow aggressive strategies for resolving problem assets and has maintained the allowance for loan loss at a higher than normal level. The provision for loan losses totaled $3.7 million and $7.0 million, respectively, for the three and nine month periods ended September 30, 2012, compared to $2.5 million and $9.5 million, respectively, for the same periods in the prior year. The 2012 provision is lower than in 2011 reflecting improvements achieved in the resolutions of classified and nonperforming loans, however, the provisions in both 2012 and 2011 are reflective of continued weakness in the overall economy, and the related effects of this weakness on the company’s overall asset quality.
Total deposits increased by $123.3 million during the nine month period ended September 30, 2012, compared to the prior year end. The Company continued to emphasize its core deposit growth, while placing less emphasis on non core deposits including deposits which are obtained on a bid basis.
Liquidity from deposit growth and excess loan and investment repayments over new production was retained in the Company’s short-term liquidity portfolios, available to fund future loan growth. With interest rates remaining at historical low levels, this increase in liquidity contributed to significant margin compression. The net interest margin was 3.60 percent and 4.09 percent, respectively, for the three and nine month periods ended September 30, 2012, compared to 4.47 percent and 4.47 percent, respectively, for the same periods in the prior year. The Company expects some additional net interest margin compression in future quarters due to maturing loans and investments being reinvested at lower interest rates and until redeployment of the excess proceeds from the recent loan sales and other maturing assets can be completed in a manner consistent with both the Company’s risk management policies and the requirements of the OCC. The Company is in the process of implementing new lending initiatives designed to address both near and long term redeployment of available liquidity and diversification of the balance sheet. These initiatives include asset purchases, loan participations with other institutions and the development of internal ability to originate, underwrite and service leasing and other non commercial real estate credits. Regardless of the timing of the aforementioned redeployment, if interest rates continue at current levels, we expect that additional downward pressure on net interest margin will continue.
As a result of the aforementioned activity in the Company’s core businesses of loans and deposits and other asset/liability management activities, tax equivalent basis net interest income decreased by $6.1 million or 19.9 percent to $24.5 million for the three month period ended September 30, 2012, compared to $30.6 million for the same period in the prior year. Tax equivalent basis net interest income decreased by $6.5 million or 7.3 percent to $82.4 million for the nine month period ended September 30, 2012, compared to $88.9 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $0.4 million and $1.5 million, respectively, for the three and nine month periods ended September 30, 2012, compared to $0.6 million and $1.8 million, respectively, for the same periods in the prior year.
The Company’s non interest income was $4.4 million and $29.5 million, respectively, for the three and nine month periods ended September 30, 2012. This represented a decrease of $1.3 million and an increase of $14.7 million, respectively, compared to $5.7 million and $14.8 million, respectively, for the same periods in the prior year. The decrease in the three month period ended September 30, 2012, compared to the same period in the prior year, resulted from lower service fees, lower investment advisory fees and lower net gains on sales and revaluations of assets. The increase in the nine month period ended September 30, 2012, compared to the same period in the prior year, resulted from a $15.9 million pretax gain on sales of loans completed in the first quarter of 2012 and higher other income, partially offset by lower service fees, lower investment advisory fees and higher impairment charges on securities available-for-sale. Investment advisory fee income was lower in 2012 primarily as a result of the effects of continued fluctuation in both domestic and international equity markets. Service charges decreased due to decreased activity. Pre-tax impairment charges on securities available for sale were $0.5 million for the nine month period ended September 30, 2012 and $0.3 million for the same period in the prior year. The impairment charges were related to the company’s investments in pooled trust preferred securities. Non interest income also included other gains of $0.9 million and $0.1 million, respectively, for the three and nine month periods ended September 30, 2011. These gains related to sales and revaluations of other real estate owned and loans held for sale.
Non interest expense was $20.0 million and $61.9 million, respectively, for the three and nine month periods ended September 30, 2012. This represented a decrease of $0.1 million or 0.5 percent and an increase of $0.7 million or 1.1 percent, respectively, compared to $20.1 million and $61.2 million, respectively, for the same periods in the prior year. The overall increase in non interest expense resulted primarily from an additional provision of $1.3 million related to the previously announced ongoing investigations by the Securities and Exchange Commission (“SEC”) and the Department of Labor (“DOL”) relating to issues surrounding the brokerage practices and policies and disclosures about such practices of the Company’s investment advisory subsidiary, A.R. Schmeidler & Co., Inc. Based on ongoing discussions with the SEC and the DOL, the Company believes it has substantially accrued for any penalties and related costs anticipated in the final resolution of this matter although, until final agreement is reached, the exact result cannot be determined. Other changes in non interest expense included decreases in costs associated with problem loan resolution and decreases in FDIC insurance, partially offset by increases in investments in technology and personnel to accommodate expanding risk management requirements and growth and the expansion of services and products available to new and existing customers.
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The Office of Comptroller of the Currency (“OCC”) has directed greater scrutiny to banks with higher levels of commercial real estate loans. During the fourth quarter of 2009, the OCC required HVB to maintain, by December 31, 2009, a total risk-based capital ratio of at least 12.0%, a Tier 1 risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 8.0%. These capital levels are in excess of “well capitalized” levels generally applicable to banks under current regulations. The Company and HVB have continuously exceeded all required regulatory capital ratios.
On February 1, 2012, Hudson Valley announced that during a routine exam and discussions with the OCC, HVB was made aware that it would be required to reduce its concentration in commercial real estate loans, including multi-family lending, as well as classified loans. As previously disclosed, the Company’s response to these discussions with the OCC included a commitment to reduce concentrations of CRE loans and classified assets to less than 400 percent and 25 percent of risk-based capital, respectively, in the near term.
As a result of the loan sales completed in the first quarter of 2012, and other resolution efforts, the Company reduced CRE loans to 313 percent of risk-based capital from 558 percent at the end of last year, while lowering classified assets to 31.9 percent of risk-based capital. Classified assets ranged between 56 percent and 67 percent of risk-based capital in 2011, before the impact of loan marks at December 31, 2011.
Also on February 1, Hudson Valley announced its new dividend policy capping dividend payments at no more than 50 percent of net income in 2012, and in future periods if CRE loans and classified assets exceed 400 percent and 25 percent of risk-based capital, respectively.
On April 24, 2012, the Board of Directors of Hudson Valley Bank signed a formal written agreement with the OCC. With this agreement, Hudson Valley is committing to adopt best practices modeled on those of the nation’s larger financial institutions, as well as evolving expectations of regulatory agencies on community banks. Included in the agreed-upon commitments are enhancements to the HVB’s procedures, systems, policies, programs, plans, training and resources. The agreement is consistent with the CRE lending and classified asset concentration commitments Hudson Valley announced on February 1. The written agreement imposes no specific capital ratio mandates or other quantitative conditions or obligations on Hudson Valley and does not impose any limit on the HVB board’s ability to pay dividends to its parent, except those imposed by the law. During the second quarter of 2012, the Bank submitted a capital plan to the OCC, which included provisions regarding the payment of dividend by HVB, as required under the written agreement. The Bank is operating in accordance with its capital plan without supervisory objection from the OCC.
Critical Accounting Policies
Application of Critical Accounting Policies —The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The Company’s significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements. Certain accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, management evaluates its estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require management to make estimates and judgments, and therefore, are critical to understanding the Company’s results of operations. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of the Company’s Board of Directors.
Results of Operations for the Three and Nine Month Periods Ended September 30, 2012 and 2011
Summary of Results
The Company recorded net income of $3.1 million or $0.16 per diluted share and $26.1 million or $1.33 per diluted share for the three and nine month periods ended September 30, 2012, compared to $8.5 million or $0.43 per diluted share and $20.8 million or $1.06 per diluted share for the same periods in the prior year. Per share amounts for the 2011 periods have been adjusted to reflect the effects of the 10% stock dividend issued in December 2011. The decrease in earnings for the three month period ended September 30, 2012, compared to the same period in the prior year, was primarily due to a $5.9 million decrease in net interest income, the anticipated result of excess liquidity remaining from the proceeds of the loan sales conducted in the first and second quarters of 2012. In addition to the decrease in net interest income, income from the second quarter of 2012 was lower, compared to the same period in the prior year, as a result of higher provision for loan losses and lower fee income, partially offset by lower loss on sales and revaluations of loans and other real estate owned and slightly higher non interest expenses. The increase in earnings for the nine month period ended
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September 30, 2012, compared to the same period in the prior year, resulted primarily from pretax gain of $15.9 million resulting from the successful completion of $474 million of loan sales announced in the fourth quarter of 2011 and completed at the end of the first quarter of 2012. In addition to the gains on the loan sales, income for the nine month period ended September 30, 2012 was higher, compared to the same period in the prior year, due to a lower provision for loan losses, partially offset by lower net interest income, higher impairment charges on securities available for sale and slightly higher non interest expenses. The provision for loan losses totaled $3.7 million and $7.0 million, respectively, for the three and nine month periods ended September 30, 2012, compared to $2.5 million and $9.5 million, respectively, for the same periods in the prior year. The 2012 provision for the first nine months is significantly lower than the comprable 2011 period reflecting improvements achieved in the resolutions of classified and nonperforming loans, however, the provisions in both 2012 and 2011 are reflective of continued weakness in the overall economy, and the related effects of this weakness on the Company’s overall asset quality.
Annualized returns on average stockholders’ equity and average assets were 4.3 percent and 0.4 percent for the three month period ended September 30, 2012, compared to 11.3 percent and 1.2 percent for the same period in the prior year. Annualized returns on average stockholders’ equity and average assets were 12.0 percent and 1.2 percent for the nine month period ended September 30, 2012, compared to 9.4 percent and 1.0 percent for the same period in the prior year. Returns on adjusted average stockholders’ equity were 4.3 percent and 12.2 percent for the three and nine month periods ended September 30, 2012, compared to 11.5 percent and 9.5 percent for the same periods in the prior year. Adjusted average stockholders’ equity excludes the effects of average net unrealized gains (losses) on securities available for sale, net of tax, of $(0.5) million and $1.5 million for the three and nine month periods ended September 30, 2012, and $1.7 million and $0.8 million for the same period in the prior year. The annualized return on adjusted average stockholders’ equity is, under SEC regulations, a non-GAAP financial measure. Management believes that this non-GAAP financial measure more closely reflects actual performance, as it is more consistent with the Company’s stated asset/liability management strategies, which do not contemplate significant realization of market gains or losses on securities available for sale which were primarily related to changes in interest rates or illiquidity in the marketplace.
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Average Balances and Interest Rates:
The following tables set forth the average balances of interest earning assets and interest bearing liabilities for the periods indicated, as well as total interest and corresponding yields and rates (dollars in thousands).
Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average Balance | Interest (3) | Yield/ Rate | Average Balance | Interest (3) | Yield/ Rate | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in Banks | $ | 696,798 | $ | 381 | 0.22 | % | $ | 234,589 | $ | 154 | 0.26 | % | ||||||||||||
Federal funds sold | 22,782 | 11 | 0.19 | % | 39,971 | 24 | 0.24 | % | ||||||||||||||||
Securities: (1) | ||||||||||||||||||||||||
Taxable | 367,206 | 2,902 | 3.16 | % | 378,157 | 2,778 | 2.94 | % | ||||||||||||||||
Exempt from federal income taxes | 86,429 | 1,224 | 5.66 | % | 103,638 | 1,522 | 5.87 | % | ||||||||||||||||
Loans, net (2) | 1,505,942 | 21,619 | 5.74 | % | 1,928,888 | 28,641 | 5.94 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest earning assets | 2,679,157 | 26,137 | 3.90 | % | 2,685,243 | 33,119 | 4.93 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Non interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 50,526 | 48,290 | ||||||||||||||||||||||
Other assets | 146,062 | 135,965 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non interest earning assets | 196,588 | 184,255 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 2,875,745 | $ | 2,869,498 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 874,877 | $ | 841 | 0.38 | % | $ | 999,130 | $ | 1,557 | 0.62 | % | ||||||||||||
Savings | 125,759 | 146 | 0.46 | % | 111,358 | 116 | 0.42 | % | ||||||||||||||||
Time | 136,459 | 194 | 0.57 | % | 163,830 | 357 | 0.87 | % | ||||||||||||||||
Checking with interest | 383,258 | 212 | 0.22 | % | 309,694 | 196 | 0.25 | % | ||||||||||||||||
Securities sold under repo & other s/t borrowings | 48,082 | 18 | 0.15 | % | 53,100 | 68 | 0.51 | % | ||||||||||||||||
Other borrowings | 16,441 | 183 | 4.45 | % | 23,652 | 254 | 4.30 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest bearing liabilities | 1,584,876 | 1,594 | 0.40 | % | 1,660,764 | 2,548 | 0.61 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 969,025 | 884,347 | ||||||||||||||||||||||
Other liabilities | 31,204 | 25,770 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non interest bearing liabilities | 1,000,229 | 910,117 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Stockholders’ equity (1) | 290,640 | 298,617 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 2,875,745 | $ | 2,869,498 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest earnings | $ | 24,543 | $ | 30,571 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net yield on interest earning assets | 3.66 | % | 4.55 | % |
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Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average Balance | Interest (3) | Yield/ Rate | Average Balance | Interest (3) | Yield/ Rate | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in Banks | $ | 451,380 | $ | 735 | 0.22 | % | $ | 253,829 | $ | 519 | 0.27 | % | ||||||||||||
Federal funds sold | 18,707 | 28 | 0.20 | % | 42,190 | 73 | 0.23 | % | ||||||||||||||||
Securities: (1) | ||||||||||||||||||||||||
Taxable | 378,363 | 9,355 | 3.30 | % | 359,008 | 8,875 | 3.30 | % | ||||||||||||||||
Exempt from federal income taxes | 94,650 | 4,295 | 6.05 | % | 109,837 | 5,077 | 6.16 | % | ||||||||||||||||
Loans, net (2) | 1,692,823 | 73,197 | 5.77 | % | 1,832,866 | 82,914 | 6.03 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest earning assets | 2,635,923 | 87,610 | 4.43 | % | 2,597,730 | 97,458 | 5.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Non interest earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 48,748 | 46,501 | ||||||||||||||||||||||
Other assets | 151,766 | 143,107 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non interest earning assets | 200,514 | 189,608 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 2,836,437 | $ | 2,787,338 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 904,794 | $ | 2,997 | 0.44 | % | $ | 946,616 | $ | 4,699 | 0.66 | % | ||||||||||||
Savings | 122,711 | 407 | 0.44 | % | 112,907 | 358 | 0.42 | % | ||||||||||||||||
Time | 140,774 | 659 | 0.62 | % | 172,634 | 1,176 | 0.91 | % | ||||||||||||||||
Checking with interest | 347,664 | 494 | 0.19 | % | 293,660 | 557 | 0.25 | % | ||||||||||||||||
Securities sold under repo & other s/t borrowings | 48,791 | 85 | 0.23 | % | 46,102 | 172 | 0.50 | % | ||||||||||||||||
Other borrowings | 16,450 | 546 | 4.43 | % | 48,176 | 1,599 | 4.43 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest bearing liabilities | 1,581,184 | 5,188 | 0.44 | % | 1,620,095 | 8,561 | 0.70 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 938,938 | 848,834 | ||||||||||||||||||||||
Other liabilities | 28,421 | 24,106 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total non interest bearing liabilities | 967,359 | 872,940 | ||||||||||||||||||||||
|
|
|
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Stockholders’ equity (1) | 287,894 | 294,303 | ||||||||||||||||||||||
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Total liabilities and stockholders’ equity | $ | 2,836,437 | $ | 2,787,338 | ||||||||||||||||||||
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Net interest earnings | $ | 82,422 | $ | 88,897 | ||||||||||||||||||||
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Net yield on interest earning assets | 4.17 | % | 4.56 | % |
(1) | Excludes unrealized gains (losses) on securities available for sale. Management believes that this presentation more closely reflects actual performance, as it is more consistent with the Company’s stated asset/liability management strategies, which have not resulted in significant realization of temporary market gains or losses on securities available for sale which were primarily related to changes in interest rates. Effects of these adjustments are presented in the table below. |
(2) | Includes loans classified as non-accrual and loans held-for-sale. |
(3) | 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. Management believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules. Effects of these adjustments are presented in the table below. |
Non-GAAP Reconciliation to GAAP
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Three Months Ended | Nine Months Ended | |||||||||||||||
Sep 30 | Sep 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(000’s) | (000’s) | |||||||||||||||
Total interest earning assets: | ||||||||||||||||
As reported | $ | 2,678,046 | $ | 2,687,904 | $ | 2,637,934 | $ | 2,598,798 | ||||||||
Unrealized gain on securities available for sale (1) | (1,111 | ) | 2,661 | 2,011 | 1,068 | |||||||||||
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Adjusted total interest earning assets | $ | 2,679,157 | $ | 2,685,243 | $ | 2,635,923 | $ | 2,597,730 | ||||||||
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Net interest earnings: | ||||||||||||||||
As reported | $ | 24,115 | $ | 30,038 | $ | 80,919 | $ | 87,120 | ||||||||
Adjustment to tax equivalency basis (2) | 428 | 533 | 1,503 | 1,777 | ||||||||||||
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Adjusted net interest earnings | $ | 24,543 | $ | 30,571 | $ | 82,422 | $ | 88,897 | ||||||||
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Net yield on interest earning assets: | ||||||||||||||||
As reported | 3.60 | % | 4.47 | % | 4.09 | % | 4.47 | % | ||||||||
Effects of (1) and (2) above | 0.06 | % | 0.08 | % | 0.08 | % | 0.09 | % | ||||||||
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Adjusted net yield on interest earning assets | 3.66 | % | 4.55 | % | 4.17 | % | 4.56 | % | ||||||||
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Average stockholders’ equity: | ||||||||||||||||
As reported | $ | 290,189 | $ | 300,338 | $ | 289,345 | $ | 295,084 | ||||||||
Effects of (1) and (2) above | (451 | ) | 1,721 | 1,451 | 781 | |||||||||||
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Adjusted average stockholders’ equity | $ | 290,640 | $ | 298,617 | $ | 287,894 | $ | 294,303 | ||||||||
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Interest Differential
The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three and nine month periods ended September 30, 2012 and 2011:
(000’s) | (000’s) | |||||||||||||||||||||||
Three Month Period Increase | Nine Month Period Increase | |||||||||||||||||||||||
(Decrease) Due to Change in | (Decrease) Due to Change in | |||||||||||||||||||||||
Volume | Rate | Total (1) | Volume | Rate | Total (1) | |||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Deposits in Banks | $ | 303 | $ | (76 | ) | $ | 227 | $ | 404 | $ | (188 | ) | $ | 216 | ||||||||||
Federal funds sold | (10 | ) | (3 | ) | (13 | ) | (41 | ) | (4 | ) | (45 | ) | ||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | (80 | ) | 204 | 124 | 478 | 2 | 480 | |||||||||||||||||
Exempt from federal income taxes | (253 | ) | (45 | ) | (298 | ) | (702 | ) | (80 | ) | (782 | ) | ||||||||||||
Loans, net | (6,280 | ) | (742 | ) | (7,022 | ) | (6,335 | ) | (3,382 | ) | (9,717 | ) | ||||||||||||
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Total interest income | (6,320 | ) | (662 | ) | (6,982 | ) | (6,196 | ) | (3,652 | ) | (9,848 | ) | ||||||||||||
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Interest expense: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | (194 | ) | (522 | ) | (716 | ) | (208 | ) | (1,494 | ) | (1,702 | ) | ||||||||||||
Savings | 15 | 15 | 30 | 31 | 18 | 49 | ||||||||||||||||||
Time | (60 | ) | (103 | ) | (163 | ) | (217 | ) | (300 | ) | (517 | ) | ||||||||||||
Checking with interest | 47 | (31 | ) | 16 | 102 | (165 | ) | (63 | ) | |||||||||||||||
Securities sold under repo & other s/t borrowings | (6 | ) | (44 | ) | (50 | ) | 10 | (97 | ) | (87 | ) | |||||||||||||
Other borrowings | (77 | ) | 6 | (71 | ) | (1,053 | ) | — | (1,053 | ) | ||||||||||||||
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Total interest expense | (275 | ) | (679 | ) | (954 | ) | (1,335 | ) | (2,038 | ) | (3,373 | ) | ||||||||||||
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(Decrease) increase in interest differential | $ | (6,045 | ) | $ | 17 | $ | (6,028 | ) | $ | (4,861 | ) | $ | (1,614 | ) | $ | (6,475 | ) | |||||||
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(1) | Changes attributable to both rate and volume are allocated between the rate and volume variances based upon their absolute relative weight 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 2012 and 2011. |
Net Interest Income
For purposes of the financial information included in this section, the Company adjusts average interest earning assets to exclude the effects of unrealized gains and losses on securities available for sale and adjusts net interest income to a tax equivalent basis. Management believes that this alternate presentation more closely reflects actual performance, as it is consistent with the Company’s stated asset/liability management strategies. The effects of these non-GAAP adjustments to tax equivalent basis net interest income and adjusted average assets are included in the table presented in“Average Balances and Interest Rates”section herein.
Net interest income, the difference between interest income and interest expense, is the most significant component of the Company’s consolidated earnings. As previously noted in the Company’s 2011 Annual Report on Form 10-K, the Company has experienced an extended period of severe negative economic conditions and historically low interest rates. These conditions have resulted in sharp declines in the value of collateral securing many of the Company’s loans, elevated levels of classified and nonperforming loans, weak loan demand and declining margins. In addition, a dynamically changing regulatory landscape has resulted in greater scrutiny of the historic business models of smaller community-based institutions. This has resulted in greater pressure on many community banks to reduce loan concentrations, particularly commercial real estate loans, and to accelerate the reduction of levels of nonperforming and classified loans. During this period of economic difficulty and low interest rates, the Company took various steps to address these issues. These steps included repositioning its securities portfolio, reducing higher cost term borrowings and, during the first half of 2012, executing significant loan sales for the purpose of reducing commercial real estate concentrations and overall levels of classified and nonperforming loans. These actions have resulted in significant margin compression, particularly in the second and third quarters of 2012, as a result of the impact of only partial redeployment of proceeds from loan sales completed in the first quarter of 2012 together with the continuation of historically low interest rate levels. As a result of these differentials in redeployment
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and average yields, together with the current historically low interest rate environment, the Company expects additional margin compression will result in the near term, particularly during the period of redeployment of the remaining proceeds from the loan sales. The Company is in the process of implementing new lending initiatives designed to address both near and long term redeployment of available liquidity and diversification of the balance sheet. These initiatives include asset purchases, loan participations with other institutions and the development of internal ability to originate, underwrite and service leasing and other non commercial real estate credits. Management believes that the results of these efforts will enable the Company, given the difficulties encountered during the recent financial crisis, to maximize its net interest income, address regulatory concerns, and effectively reposition its portfolios from both asset composition and interest rate risk perspectives.
Net interest income, on a tax equivalent basis, decreased by $6.1 million or 19.9 percent to $24.5 million and by $6.5 million or 7.3 percent to $82.4 million, respectively, for the three and nine month periods ended September 30, 2012, compared to $30.6 million and $88.9 million, respectively, for the same periods in the prior year. Net interest income for the 2012 periods was lower primarily due to decreases in the tax equivalent basis net interest margin to 3.66 percent and 4.17 percent, respectively, for the three and nine month periods ended September 30, 2012, compared to 4.55 percent and 4.56 percent, respectively, for the same periods in the prior year. The declines in the 2012 net interest margins were primarily caused by significant increases in short term liquidity balances resulting from the proceeds of loan sales, together with the continuing effects of the current low interest rates on the redeployment of maturing loans and investments. The decreases in 2012 net interest income were partially offset by increases in the excess of adjusted average interest earning assets over average interest bearing liabilities of $69.8 million or 6.8 percent to $1,094.3 million, and $77.1 million or 7.9 percent to $1,054.7 million, respectively, for the three and nine month periods ended September 30, 2012, compared to $1,024.5 million and $977.6 million, respectively, for the same periods in the prior year.
The Company’s overall asset quality has improved as a result of actions taken by management to reduce concentrations and classified assets. However, asset quality has continued to be adversely affected by the current state of the economy and has continued to experience elevated levels of delinquent and nonperforming loans, and declines in the loan-to-value ratios on existing loans. Changes in the levels of nonperforming loans have a direct impact on net interest income.
The Company’s short-term liquidity remains at elevated levels, resulting from continued deposit growth, soft loan demand and proceeds from recent loan sales which have not as yet been redeployed. This excess liquidity contributed to margin compression. The Company has made efforts throughout the extended period of severe economic uncertainty and fluctuating interest rates to minimize the impact on its net interest income by appropriately repositioning its securities portfolio and funding sources while maintaining prudence and awareness of the potential consequences that the current economic crisis could have on its asset quality and interest rate risk profiles. The Company continues to increase the number of loans originated with interest rate floors and exercise caution in reinvestment of excess liquidity provided from continued strong deposit growth and proceeds from loan sales. These actions are being conducted partially to maintain flexibility in reaction to the continuation of historically low interest rates. The Company’s ability to make changes in its asset mix allows management to capitalize on more desirable yields, as available, on various interest earning assets. Management believes that the result of these efforts has enabled the Company, given the difficulties being encountered in the current economic crisis, to maximize the effective repositioning of its portfolios from both asset and interest rate risk perspectives.
Interest income is determined by the volume of, and related rates earned on, interest earning assets. Average volume decreases in loan and federal funds sold and lower average yield on interest earning assets, partially offset by average volume increases in interest bearing deposits and investments, resulted in lower interest income for the three month period ended September 30, 2012, compared to the same period in the prior year. Average volume decreases in federal funds sold and lower average yield on interest earning assets, partially offset by volume increases in interest bearing deposits and investments and a slight increase in the average volume of loans, resulted in lower interest income for the nine month period ended September 30, 2012, compared to the same period in the prior year. Adjusted average interest earning assets for the three and nine month periods ended September 30, 2012 decreased $6.0 million or 0.2 percent to $2,679.2 million and increased $38.2 million or 1.5 percent to $2,635.9, respectively, from $2,685.2 million and $2,597.7 million, respectively, for the same periods in the prior year.
Loans are the largest component of interest earning assets. Average net loans decreased $423.0 million or 21.9 percent to $1,505.9 million, for the three month period ended September 30, 2012, compared to $1,928.9 million for the same period in the prior year. The average yield on loans was 5.74 percent for the three month period ended September 30, 2012, compared to 5.94 percent for the same period in the prior year. As a result, interest income on loans was lower for the three month period ended September 30, 2012, compared to the same period in the prior year, due to lower average volume and lower average interest rates. Average net loans decreased by $140.1 million or 7.6 percent to $1,692.8 million, for the nine month period ended September 30, 2012, compared to $1,832.9 million for the same period in the prior year. The average yield on loans was 5.77 percent for the nine month period ended September 30, 2012, compared to 6.03 percent for the same period in the prior year. As a result, interest income on loans was lower for the nine month period ended September 30, 2012, compared to the same period in the prior year, due to lower average interest rates, partially offset by slightly higher average volume.
Average total securities, including Federal Home Loan Bank (“FHLB”) stock and excluding net unrealized gains and losses, decreased $45.4 million or 8.7 percent to $476.4 million for the three month period ended September 30, 2012, compared to $521.8 million for the same period in the prior year. The average tax equivalent basis yield on securities was 3.64 percent for the three month period ended September 30, 2012, compared to 3.57 percent for the same period in the prior year. As a result, tax equivalent
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basis interest income on securities decreased slightly for the three month period ended September 30, 2012, compared to the same period in the prior year, due to lower average volume partially offset by slightly higher average interest rates. Average total securities, including Federal Home Loan Bank (“FHLB”) stock and excluding net unrealized gains and losses, decreased $19.3 million or 3.8 percent to $491.7 million for the nine month period ended September 30, 2012, compared to $511.0 million for the same period in the prior year. The average tax equivalent basis yield on securities was 3.85 percent for the nine month period ended September 30, 2012, compared to 3.97 percent for the same period in the prior year. As a result, tax equivalent basis interest income on securities decreased for the nine month period ended September 30, 2012, compared to the same period in the prior year, due to lower average interest rates, partially offset by slightly higher average volume. Increases or decreases in average FHLB stock result from purchases or redemptions of stock in order to maintain required levels to support FHLB borrowings.
Interest expense is a function of the volume of, and rates paid for, interest bearing liabilities, comprised of deposits and borrowings. Interest expense decreased $0.9 million or 36.0 percent to $1.6 million for the three month period ended September 30, 2012, compared to $2.5 million for the same period in the prior year. Average interest bearing liabilities decreased $75.9 million or 4.6 percent to $1,584.9 million for the three month period ended September 30, 2012, compared to $1,660.9 million for the same period in the prior year. The decrease in average interest bearing liabilities for the three month period ended September 30, 2012, compared to the same period in the prior year, was due to average volume decreases in interest bearing demand deposits, time deposits, securities sold under repurchase agreements and other short-term borrowings and other borrowings. The average interest rate paid on interest bearing liabilities was 0.40 percent for the three month period ended September 30, 2012, compared to 0.61 percent for the same period in the prior year. As a result of these factors, interest expense on average interest bearing liabilities was lower for the three month period ended September 30, 2012, compared to the same period in the prior year due to lower average volume and lower average interest rates. Interest expense decreased $3.4 million or 39.5 percent to $5.2 million for the nine month period ended September 30, 2012, compared to $8.6 million for the same period in the prior year. Average interest bearing liabilities decreased $38.9 million or 2.4 percent to $1,581.2 million for the nine month period ended September 30, 2012, compared to $1,620.1 million for the same period in the prior year. The decrease in average interest bearing liabilities for the nine month period ended September 30, 2012, compared to the same period in the prior year, was due to average volume decreases in time deposits and other borrowings, partially offset by volume increases in interest bearing demand deposits and securities sold under agreements to repurchase and other short-term borrowings. The average interest rate paid on interest bearing liabilities was 0.44 percent for the nine month period ended September 30, 2012, compared to 0.70 percent for the same period in the prior year. As a result of these factors, interest expense on average interest bearing liabilities was lower for the nine month period ended September 30, 2012, compared to the same period in the prior year due to lower average volume and lower average interest rates. The decrease in other borrowings for the three and nine month periods ended September 30, 2012, compared to the same periods in the prior year, resulted from management’s decision to utilize cash flow from deposit growth and maturing investment securities to reduce borrowings as part of the Company’s ongoing asset/liability management efforts.
Average non interest bearing demand deposits increased $84.7 million or 9.6 percent to $969.0 million, and $90.1 million or 10.6 percent to $938.9 million, respectively, for the three and nine month periods ended September 30, 2012, compared to $884.3 million and $848.8 million, respectively for the same periods in the prior year. Non interest bearing demand deposits are an important component of the Company’s ongoing asset liability management, and also have a direct impact on the determination of net interest income.
The following table presents the interest rate spread on a tax equivalent basis for the periods indicated:
Three Months | Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Average interest rate on: | ||||||||||||||||
Total average interest earning assets | 3.90 | % | 4.93 | % | 4.43 | % | 5.00 | % | ||||||||
Total average interest bearing liabilities | 0.40 | % | 0.61 | % | 0.44 | % | 0.70 | % | ||||||||
Total interest rate spread | 3.50 | % | 4.32 | % | 3.99 | % | 4.30 | % |
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. Management cannot predict what impact market conditions will have on its interest rate spread and future compression of net interest spread may occur.
Provision for Loan Losses
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The Company recorded provisions for loan losses of $3.7 million and $7.0 million for the three and nine month periods ended September 30, 2012, compared to $2.5 million and $9.5 million for the same periods in the prior year. The provision for loan losses is charged to income to bring the Company’s allowance for loan losses to a level deemed appropriate by management. See“Allowance for Loan Losses”for further discussion.
Non Interest Income
The Company’s non interest income was $4.4 million and $29.5 million, respectively, for the three and nine month periods ended September 30, 2012. This represented a decrease of $1.3 million and an increase of $14.7 million, respectively, compared to $5.7 million and $14.8 million, respectively, for the same periods in the prior year. The decrease in the three month period ended September 30, 2012, compared to the same period in the prior year, resulted from lower service fees, lower investment advisory fees and lower net gains on sales and revaluations of assets. The increase in the nine month period ended September 30, 2012, compared to the same period in the prior year, resulted from a $15.9 million pretax gain on sales of loans completed in the first quarter of 2012 and higher other income, partially offset by lower service fees, lower investment advisory fees and higher impairment charges on securities available-for-sale. Investment advisory fee income was lower in 2012 primarily as a result of the effects of continued fluctuation in both domestic and international equity markets. Service charges decreased due to decreased activity. Pre-tax impairment charges on securities available for sale were $0.5 million for the nine month period ended September 30, 2012 and $0.3 million for the same period in the prior year. The impairment charges were related to the company’s investments in pooled trust preferred securities. Non interest income also included other gains of $0.9 million and $0.1 million, respectively, for the three and nine month periods ended September 30, 2011. These gains related to sales and revaluations of other real estate owned and loans held for sale.
Non Interest Expense
Non interest expense was $20.0 million and $61.9 million, respectively, for the three and nine month periods ended September 30, 2012. This represented a decrease of $0.1 million or 0.5 percent and an increase of $0.7 million or 1.1 percent, respectively, compared to $20.1 million and $61.2 million, respectively, for the same periods in the prior year. The overall increase in non interest expense for the nine month period resulted primarily from an additional provision of $1.3 million related to the previously announced ongoing investigations by the SEC and the DOL relating to issues surrounding the brokerage practices and policies and disclosures about such practices of the Company’s investment advisory subsidiary, A.R. Schmeidler & Co., Inc. Other changes in non interest expense included decreases in costs associated with problem loan resolution and decreases in FDIC insurance, partially offset by increases in investments in technology and personnel to accommodate expanding risk management requirements and growth and the expansion of services and products available to new and existing customers.
Salaries and employee benefits expense, the largest component of non interest expense, for the three and nine month periods ended September 30, 2012 increased $0.1 million or 0.9 percent to $11.4 million and $0.1 million or 0.3 percent to $33.5 million, respectively, compared to $11.3 million and $33.4 million for the same periods in the prior year. Increases in salaries in 2012 were offset by the partial reduction of previously accrued officers’ incentive compensation in March 2012.
Occupancy expense for the three and nine month periods ended September 30, 2012 decreased $0.1 million or 4.5 percent to $2.1 million and $0.2 million or 2.9 percent to $6.6 million, respectively, compared to $2.2 million and $6.8 million for the same periods in the prior years. The slight decrease reflected lower maintenance costs.
Professional services expense for the three month period ended September 30, 2012 was unchanged compared to the same period in the prior year. Professional services expense for the nine month period ended September 30, 2012 increased $0.7 million or 14.3 percent to $5.6 million compared to $4.9 million in the same period in the prior year. The increases was primarily due to costs related to the engagement of consultants to assist with new systems implementations and legal costs related to the aforementioned SEC and DOL investigations of A.R. Schmeidler & Co., Inc.
Equipment expense for the three month period ended September 30, 2012 was unchanged compared to the same period in the prior year. Equipment expense for the nine month period ended September 30, 2012 increased $0.1 million or 3.1 percent to $3.3 million compared to $3.2 million for the same period in the prior year. The slight increase was due to increased equipment and software maintenance costs.
Business development expense for the three month period ended September 30, 2012 was unchanged compared to the same period in the prior year. Business development expense for the nine month period ended September 30, 2012 increased $0.4 million or $26.7
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percent to $1.9 million compared to $1.5 million for the same period in the prior year. The increase for the nine month period was due to increased business development efforts and expenses related to the celebration of the Bank’s 40th anniversary.
The FDIC assessment for the three month period ended September 30, 2012 increased $0.2 million or 33.3 percent to $0.8 million compared to $0.6 million in the same period in the prior year. The FDIC assessment for the nine month period ended September 30, 2012 decreased $0.2 million or 8.3 percent to $2.2 million compared to $2.4 million for the same period in the prior years. The increase in the three month period was due to changes in the assessment rate. The decrease in the nine month period was due to the change in the premium calculation base by the FDIC.
Significant changes in other components of non interest expense for the three and nine month periods ended September 30, 2012 compared to the same periods in the prior year were due to the following:
• | Decreases of $161,000 (167.7 %) and $58,000 (70.7%), respectively, in other insurance expense, resulting from reductions in the estimates of the net cost of certain life insurance policies partially offset by increases in blanket bond insurance costs, |
• | Increases of $52,000 (30.4%) and $35,000 (6.2%), respectively, in stationery and printing costs due to the systems implementation, |
• | Decreases of $139,000 (43.0%) and $549,000 (40.3%), respectively, in other loan expenses, due to lower expenses related to OREO and loans in the asset recovery portfolio, |
• | Decreases of $123,000 (10.5%) and $271,000 (7.9%), respectively, in outside services due to the outsourcing of several data processing functions |
• | Decreases of $66,000 (52.8%) and $153,000 (39.52%), respectively, in meetings and seminars, reflecting reduced participation in such events in 2012, |
• | Increases of $31,000 (6.4%) and $800,000 (39.9 %) in other expenses, resulting from the additional contingency provision of $1.3 million, recorded during the first quarter of 2012, related to the aforementioned SEC investigation of A.R. Schmeidler & Co., Inc. |
Income Taxes
Income taxes of $1.6 million and $15.4 million, respectively, were recorded in the three and nine month periods ended September 30, 2012, compared to $4.6 million and $10.4 million, respectively, for the same periods in the prior year. The overall effective tax rate of 37.1 percent for the nine month period ended September 30, 2012 was higher compared to 33.4 percent for the same period in the prior year. The 2012 effective rate was higher primarily due to the fact that the tax effect of the $15.9 million gain on loan sales resulted in tax-exempt income representing a lower percentage of pretax income in 2012 compared to 2011. 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 percent 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 $2,929.0 million at September 30, 2012, an increase of $131.3 million or 4.7 percent from $2,797.7 million at December 31, 2011.
Cash and Due from Banks
Cash and due from banks was $831.4 million at September 30, 2012, an increase of $753.3 million or 964.51 percent from $78.1 million at December 31, 2011. Included in cash and due from banks is interest earning deposits of $778.0 million at September 30, 2012 and $34.4 million at December 31, 2011. The increase was due to the proceeds from the sale of loans held for sale not being fully deployed.
Federal Funds Sold
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Federal funds sold totaled $12.5 million at September 30, 2012, a decrease of $3.9 million or 23.8 percent from $16.4 million at December 31, 2011.
Securities Portfolio
Securities are selected to provide safety of principal, liquidity, pledging capabilities (to collateralize certain deposits and borrowings), income and to leverage capital. The Company’s investment strategy focuses on maximizing income while providing for safety of principal, maintaining appropriate utilization of capital, providing adequate liquidity to meet loan demand or deposit outflows and to manage overall interest rate risk. The Company selects individual securities whose credit, cash flow, maturity and interest rate characteristics, in the aggregate, affect the stated strategies.
Securities are classified as either available for sale, representing securities the Company may sell in the ordinary course of business, or as held to maturity, representing securities the Company has the ability and positive intent to hold until maturity. Securities available for sale are reported at fair value with unrealized gains and losses (net of tax) excluded from operations and reported in other comprehensive income. Securities held to maturity are stated at amortized cost.
The available for sale portfolio totaled $447.5 million at September 30, 2012 which was a decrease of $60.4 million or 11.9 percent from $507.9 million at December 31, 2011. The decrease resulted from a $79.5 million decrease in mortgage-backed securities and a decrease of $16.2 million of obligations of state political subdivisions which was partially offset by increases of $33.2 million in U.S. Treasury and government agency securities and $2.1 million in other debt securities. Included in other debt securities are pooled trust preferred securities, which had an aggregate cost basis of $10.7 million at September 30, 2012 and $11.6 million at December 31, 2011. These pooled trust preferred securities have suffered severe declines in the prior periods in estimated fair value primarily as a result of both illiquidity in the marketplace and declines in the credit ratings of a number of issuing banks underlying these securities. Management cannot predict what effect that continuation of such conditions could have on potential future value or whether there will be additional impairment charges related to these securities.
The held to maturity portfolio totaled $10.9 million at September 30, 2012, which was a decrease of $2.0 million or 15.5 percent from $12.9 million at December 31, 2011. The decrease was due to a decrease in mortgage-backed securities.
The Bank, as a member of the FHLB, invests in stock of the FHLB as a prerequisite to obtaining funding under various programs offered by the FHLB. The Bank 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 $4.8 million and $3.8 million, respectively, at September 30, 2012 and December 31, 2011.
The Company continues to exercise a conservative approach to investing by purchasing high credit quality investments with various maturities and cash flows to provide for liquidity needs and prudent asset liability management. The Company’s securities portfolio provides for a significant source of income, liquidity and is utilized in managing Company-wide interest rate risk. These securities are used to collateralize borrowings and deposits to the extent required or permitted by law. Therefore, the securities portfolio is an integral part of the Company’s funding strategy.
There were no obligations of any single issuer which exceeded ten percent of stockholders’ equity at September 30, 2012 or December 31, 2011.
Loan Portfolio
Net loans totaled $1,476.8 million at September 30, 2012, a decrease of $64.6 million or 4.2 percent from $1,541.4 million at December 31, 2011. The decrease resulted principally from a $10.7 million decrease in commercial real estate loans, a $18.8 million decrease in construction loans, a $18.4 million decrease in multifamily loans and a $7.1 million decrease in lease financing and other loans, These decreases were partially offset by a $47.6 million increase in commercial and industrial loans and $35.6 increase in residential real estate loans. The increase in commercial and industrial loans reflects the Company’s strategic plan to diversify its commercial loan base among new and existing customers in its metro New York markets. The increase in residential loans was primarily the result of the purchase of adjustable rate residential loans, which were purchased as partial redeployment of proceeds from sales of loans held for sale.
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The loan portfolio, excluding loans held for sale, is comprised of the following:
September 30 | December 31 | |||||||
2012 | 2011 | |||||||
Real Estate: | ||||||||
Commercial | $ | 583,653 | $ | 690,837 | ||||
Construction | 91,241 | 110,027 | ||||||
Residential Multi-Family | 209,192 | 227,595 | ||||||
Residential Other | 322,841 | 287,233 | ||||||
Commercial & Industrial | 266,118 | 218,500 | ||||||
Individuals & lease financing | 34,643 | 41,760 | ||||||
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Total loans | 1,507,688 | 1,575,952 | ||||||
Deferred loan fees | (2,767 | ) | (3,862 | ) | ||||
Allowance for loan losses | (28,107 | ) | (30,685 | ) | ||||
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Loans, net | $ | 1,476,814 | $ | 1,541,405 | ||||
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The following table illustrates the trend in nonperforming assets, delinquency and net charge-offs from September 2011 to September 2012 (in thousands):
Sep 30 | Jun 30 | Mar 31 | Dec 31 | Sep 30 | ||||||||||||||||
2012 | 2012 | 2012 | 2011 | 2011 | ||||||||||||||||
Non-Accrual Loans: | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | $ | 18,180 | $ | 12,222 | $ | 11,372 | $ | 13,212 | $ | 20,614 | ||||||||||
Construction | 2,201 | 2,659 | 4,317 | 5,481 | 17,237 | |||||||||||||||
Residential | 9,557 | 11,888 | 4,440 | 3,396 | 12,248 | |||||||||||||||
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Total Real Estate | 29,938 | 26,769 | 20,129 | 22,089 | 50,099 | |||||||||||||||
Commercial & Industrial | 12,367 | 12,535 | 7,730 | 7,803 | 8,196 | |||||||||||||||
Lease Financing and Other | — | — | — | — | 241 | |||||||||||||||
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Total Non-Accrual Loans | 42,305 | 39,304 | 27,859 | 29,892 | 58,536 | |||||||||||||||
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Other Real Estate Owned | 250 | 250 | 1,174 | 1,174 | 924 | |||||||||||||||
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Nonperforming Assets excluding loans held for sale | 42,555 | 39,554 | 29,033 | 31,066 | 59,460 | |||||||||||||||
Nonperforming loans held for sale | — | — | — | 27,848 | 2,244 | |||||||||||||||
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Total Nonperforming Assets including loans held for sale | $ | 42,555 | $ | 39,554 | $ | 29,033 | $ | 58,914 | $ | 61,704 | ||||||||||
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Net charge-offs (recoveries) during quarter | $ | 4,349 | $ | 5,017 | $ | 188 | $ | 66,086 | $ | 2,276 | ||||||||||
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Nonperforming assets to total assets: | ||||||||||||||||||||
Excluding loans held for sale | 1.45 | % | 1.40 | % | 1.03 | % | 1.11 | % | 2.03 | % | ||||||||||
Including loans held for sale | 1.45 | % | 1.40 | % | 1.03 | % | 2.11 | % | 2.11 | % |
Non-accrual loans increased $12.4 million to $42.3 million at September 30, 2012 from $29.9 million at December 31, 2011. There was no interest income on non-accrual loans included in net income for the nine month period ended September 30, 2012 and the year ended December 31, 2011. Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $1.3 million and $1.1 million for the nine month period ended September 30, 2012 and the year ended December 31, 2011, respectively.
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.
The high level of nonperforming assets has primarily resulted from the current severe economic slowdown, 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.
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During the nine month period ended September 30, 2012:
• | Non-accrual commercial real estate loans increased $5.0 million resulting from the addition of eighteen loans totaling $21.6 million which was partially offset by the transfer of two loans totaling $4.8 million to non-accrual residential loans due to changes in the underlying collateral securing those loans, the charge-off of four loans totaling $4.8 million, the payoffs of six loans totaling $3.8 million, and principal payments of $3.2 million |
• | Non-accrual construction loans decreased $3.3 million, resulting from the payoff of four loans totaling $7.3 million, a partial charge-off of one loan totaling $1.0 million, a charge-off of one loan totaling $0.6 million, and principal payments of $0.1 million which was partially offset by the addition of three loans totaling $5.7 million |
• | Non-accrual residential loans increased $6.2 million resulting from the addition of seven loans totaling $8.9 million and transfer of two loans totaling $1.5 million from non-accrual commercial real estate loans and one loan totaling $0.1 million from non-accrual commercial and industrial loans due to changes in the underlying collateral securing those loans million which was partially offset by the charge off of eleven loans totaling $1.8 million, the transfer back to accrual of one loan totaling $1.3 million and the partial charge-off of two loans totaling $1.2 million. |
• | Non-accrual commercial and industrial loans increased $4.6 million resulting from the addition of eighteen loans totaling $7.5 million and the transfer of one loan totaling $0.1 million from non-accrual commercial and industrial loans due to changes in the underlying collateral securing that loan which was partially offset by charge-offs of $2.6 million and principal payments of $0.4 million. |
There were no loans past due 90 days or more and still accruing at September 30, 2012 and December 31, 2011. In addition, the Company had $7.6 million and $5.0 million of loans that were 31-89 days delinquent and still accruing at September 30, 2012 and December 31, 2011, respectively.
Loans considered by the Company to be impaired totaled $52.1 million and $47.9 million at September 30, 2012 and December 31, 2011, respectively, for which no specific reserve and specific reserves of $2.4 million, respectively, had been established.
There were twelve loans totaling $27.5 million at September 30, 2012 and sixteen loans totaling $29.0 million at December 31, 2011 that were considered troubled debt restructurings (TDRs). Of the September 30, 2012 TDRs, six loans totaling $9.8 million on accrual status and six loans totaling $17.7 million on non-accrual status were performing in accordance with their restructured terms. Of the December 2011 TDRs, seven loans totaling $18.0 were on accrual status and nine loans totaling $11.0 million were on non-accrual status. At December 31, 2011 all TDRs were performing in accordance with their restructured terms. At September 30, 2012, the Company had no commitments to lend additional funds to non-accrual loans or TDRs.
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. In addition, during the second quarter of 2010, the Company decided to implement a more aggressive workout strategy for the resolution of problem assets in light of a sluggish economic recovery, continued weakness in local real estate activity and market values and growing difficulty in resolving problem loans in a timely fashion through traditional foreclosure proceedings due to increased bankruptcy filings and overcrowded court systems. See“Allowance for Loan Losses”below for further discussion of this strategy. 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.
See Note 2 to the Company’s condensed consolidated financial statements presented in this Form 10-Q for a detailed description of the methodology employed by the Company in determining the specific and formula components of the allowance for loan losses.
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A summary of the components of the allowance for loan losses, changes in the components and the impact of charge-offs/recoveries on the resulting provision for loan losses for the dates indicated is as follows:
(000's) | (000's) | |||||||||||||||||||||||
Sep 30 2012 | Change During 2012 | Dec 31 2011 | Sep 30 2011 | Change During 2011 | Dec 31 2010 | |||||||||||||||||||
Components | ||||||||||||||||||||||||
Specific: | ||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||
Commercial | — | — | — | — | — | — | ||||||||||||||||||
Construction | — | $ | (2,374 | ) | $ | 2,374 | $ | 863 | $ | 13 | $ | 850 | ||||||||||||
Residential | — | — | — | — | (17 | ) | 17 | |||||||||||||||||
Commercial and Industrial | — | — | — | 25 | — | 25 | ||||||||||||||||||
Lease Financing and other | — | — | — | — | — | — | ||||||||||||||||||
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Total Specific Component | — | (2,374 | ) | 2,374 | 888 | 40 | 892 | |||||||||||||||||
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Formula: | ||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||
Commercial | $ | 11,250 | (1,526 | ) | 12,776 | 16,371 | (365 | ) | 16,736 | |||||||||||||||
Construction | 4,292 | 196 | 4,096 | 5,363 | (927 | ) | 6,290 | |||||||||||||||||
Residential | 8,313 | 220 | 8,093 | 14,349 | 4,515 | 9,834 | ||||||||||||||||||
Commercial and Industrial | 3,832 | 1,182 | 2,650 | 4,267 | 2 | 4,265 | ||||||||||||||||||
Lease Financing and other | 420 | (276 | ) | 696 | 912 | (20 | ) | 932 | ||||||||||||||||
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Total Formula Component | 28,107 | (204 | ) | 28,311 | 41,262 | 3,205 | 38,057 | |||||||||||||||||
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Total Allowance | $ | 28,107 | $ | 30,685 | $ | 42,150 | $ | 38,949 | ||||||||||||||||
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Net Change | (2,578 | ) | 3,201 | |||||||||||||||||||||
Net Charge-offs (1) | 9,554 | 6,332 | ||||||||||||||||||||||
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Provision for loan losses | $ | 6,976 | $ | 9,533 | ||||||||||||||||||||
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Coverage Ratio (2) | 66 | % | 103 | % | 72 | % | 86 | % | ||||||||||||||||
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Coverage Ratio excluding partial chargeoffs | 73 | % | 102 | % | 76 | % | 89 | % | ||||||||||||||||
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(1) | Net charge-offs include partial charge-offs of $7,317 and $2,586 related non-performing and impaired loans for the nine month periods ended September 30, 2012 and 2011, respectively. |
(2) | The Coverage Ratio is the allowance for loan losses divided by total non-performing loans. |
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. Accordingly, such allowance is dependent on the particular loans and their characteristics at each measurement date, not necessarily the total amount of such loans. The Company usually records partial charge-offs as opposed to specific reserves for impaired loans that are real estate collateral dependent and for which independent appraisals have determined the fair value of the collateral to be less than the carrying amount of the loan. Partial charge-offs can significantly impact the allowance for loan losses as a percentage of nonperforming loans (coverage ratio) and other credit loss statistics and trends due to the fact that, in this situation, the allowance for loan loss is reduced and the remaining loan balance continues to be carried in nonperforming loans. At September 30, 2012 and December 31, 2011, the Company had $15.6 million and $10.6 million, respectively, of impaired loans for which $10.0 million and $1.3 million of partial charge-offs, respectively, had been recorded. At September 30, 2012, the Company had no specific reserves allocated as partial charge-offs were recorded for all identified impairments. There was a $2.4 million specific reserve allocated to one impaired loan as of December 31, 2011. This reserve was charged off in the second quarter of 2012 upon completion of the restructure of the related loan for which it was established. The Company’s analyses as of September 30, 2012 and December 31, 2011 indicated that impaired loans were principally real estate collateral dependent and that, with the exception of those loans for which specific reserves were assigned, 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 collectability. Loss experience factors for new products, such as the residential multi-family program implemented in 2010 and 2011, were supplemented with additional factors such as industry loss experience and add-ons for new product and concentration risk. 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.
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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 collectability of the loan portfolio as of the evaluation date have changed. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, the Bank is able to adjust specific and inherent loss estimates based upon any more recent information that has become available. Additional information related to the Company’s allowance for loan losses is contained in Note 4 to the Company’s condensed consolidated financial statements presented in this Form 10-Q.
Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of September 30, 2012. 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.
Deposits
Deposits totaled $2,548.6 million at September 30, 2012, an increase of $123.3 million or 5.1 percent from $2,425.3 million at December 31, 2011. The following table presents a summary of deposits as of the dates indicated:
(000's) | ||||||||||||
Sep 30 2012 | Dec 31 2011 | Increase (Decrease) | ||||||||||
Demand deposits | $ | 997,251 | $ | 910,329 | $ | 86,922 | ||||||
Money market accounts | 859,887 | 963,390 | (103,503 | ) | ||||||||
Savings accounts | 127,120 | 114,371 | 12,749 | |||||||||
Time deposits of $100,000 or more | 98,366 | 110,967 | (12,601 | ) | ||||||||
Time deposits of less than $100,000 | 36,012 | 40,634 | (4,622 | ) | ||||||||
Checking with interest | 429,974 | 285,591 | 144,383 | |||||||||
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Total Deposits | $ | 2,548,610 | $ | 2,425,282 | $ | 123,328 | ||||||
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The Company experienced growth in both new and existing customers, including growth from new branches added during 2010 and 2011 which was partially offset by seasonal decreases in municipal deposits. This growth was partially offset by planned reductions in certain deposits, primarily higher cost municipal demand deposits.
Borrowings
Total borrowings were $59.1 million at September 30, 2012, a decrease of $10.4 million or 15.0 percent from $69.5 million at December 31, 2011. The decrease resulted from a $10.4 million decrease in short-term repurchase agreements. 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 $292.9 million at September 30, 2012, an increase of $15.3 million or 5.5 percent from $277.6 million at December 31, 2011. The increase in stockholders’ equity resulted from net income of $26.1 million and a net increase related to exercises of stock options of $0.4 million, which was partially offset by cash dividends paid on common stock of $10.6 million and a decrease in accumulated other comprehensive income of $0.6 million.
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The following table presents the Company’s and the Bank’s capital ratios as of the dates indicated:
Sep 30 2012 | Dec 31 2011 | Minimum to be Considered Well Capitalized | Enhanced Capital Requirements Effective as of December 31, 2009 | |||||||||||||
Leverage ratio: | ||||||||||||||||
Company | 9.4 | % | 8.8 | % | 5.0 | % | N / A | |||||||||
HVB | 9.2 | % | 8.4 | % | 5.0 | % | 8.0 | % | ||||||||
Tier 1 capital: | ||||||||||||||||
Company | 16.1 | % | 11.3 | % | 6.0 | % | N / A | |||||||||
HVB | 15.9 | % | 10.8 | % | 6.0 | % | 10.0 | % | ||||||||
Total capital: | ||||||||||||||||
Company | 17.4 | % | 12.6 | % | 10.0 | % | N / A | |||||||||
HVB | 17.2 | % | 12.1 | % | 10.0 | % | 12.0 | % |
Since the fourth quarter of 2009, the Office of the Comptroller of the Currency (“’OCC”) required HVB to maintain a total risk-based capital ratio of at least 12.0%, a Tier 1 risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 8.0%. These capital levels are in excess of “well capitalized” levels generally applicable to banks under current regulations. In addition, The Bank has established internal minimum capital ratios under its capital plan of a total risk-based capital ratio of 13.0%, a Tier 1 risk-based capital ratio of 10.0% and a Tier 1 leverage ratio of 8.5%.
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 September 30, 2012 include cash and due from banks of $53.3 million, $778.0 million of interest earning deposits and Federal funds sold of $12.5 million. Interest earning deposits and Federal funds sold represent the Company’s excess liquid funds which are invested with other financial institutions and are available 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 $240.8 million at September 30, 2012. This represented 52.9 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $407.7 million, or 40.9 percent of these loans at September 30, 2012, 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 relatively stable, low-cost sources 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 is a member of the FHLB. As a member, HVB is able to participate in various FHLB borrowing programs which require certain investments in FHLB common stock as a prerequisite to obtaining funds. As of September 30, 2012, HVB had short-term borrowing lines with the FHLB of $200 million with no amounts outstanding. These and various other FHLB borrowing programs available to members are subject to availability of qualifying loan and/or investment securities collateral and other terms and conditions.
HVB also has unsecured overnight borrowing lines totaling $70 million with three major financial institutions which were all unused and available at September 30, 2012. In addition, HVB has approved lines under Retail Certificate of Deposit Agreements with three major financial institutions totaling $1.0 billion of which no balances were outstanding as at September 30, 2012. Utilization of these lines are subject to product availability and other restrictions.
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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 its Borrower-in-Custody (“BIC”) program, which expanded the types of collateral which qualify as security for such borrowings. HVB has been approved to participate in the BIC program. There were no balances outstanding with the Federal Reserve at September 30, 2012.
As of September 30, 2012, the Company had qualifying loan and investment securities totaling approximately $295 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.
Contractual Obligations and Off-Balance Sheet Arrangements
The Company has outstanding, at any time, a significant number of commitments to extend credit and provide financial guarantees to third parties. These arrangements are subject to strict credit control assessments. Guarantees specify limits to the Company’s obligations. Because many commitments and almost all guarantees expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. The Company is also obligated under leases or license agreements for certain of its branches and equipment. There have been no material changes to those obligations or arrangements outside the ordinary course of business since the most recent fiscal year end.
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking statements with respect to earnings, credit quality and other financial and business matters for periods subsequent to December 31, 2011. 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.
Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, in addition to those risk factors disclosed in the Hudson Valley’s Annual Report on Form 10-K for the year ended December 31, 2011 include, but are not limited to, statements regarding:
• | our ability to comply with the formal agreement entered into with the Office of the Comptroller of the Currency (the“OCC”) and any additional restrictions placed on us as a result of future regulatory exams or changes in regulatory policy implemented by the OCC or other bank regulators; |
• | the OCC and other bank regulators may require us to further modify or change our mix of assets, including our concentration in certain types of loans, or require us to take further remedial actions; |
• | the results of the investigation of A.R. Schmeidler & Co., Inc. by the Securities and Exchange Commission (the“SEC”) and the Department of Labor (the “DOL”) and the possibility that our management’s attention will be diverted to the SEC and DOL investigations and settlement discussions and we will incur further costs and legal expenses; |
• | the adverse affects on the business of A.R. Schmeidler & Co., Inc. and our trust department arising from a settlement with the SEC and DOL investigations; |
• | our inability to pay quarterly cash dividends to shareholders in light of our earnings, the current and future economic environment, Federal Reserve Board guidance, our Bank’s capital plan and other regulatory requirements applicable to Hudson Valley or Hudson Valley Bank ; |
• | the possibility that we may need to raise additional capital in the future and our ability to raise such capital on terms that are favorable to us; |
• | further increases in our non-performing loans and allowance for loan losses; |
• | ineffectiveness in managing our commercial real estate portfolio; |
• | lower than expected future performance of our investment portfolio; |
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• | a lack of opportunities for growth, plans for expansion (including opening new branches) and increased or unexpected competition in attracting and retaining customers; |
• | continued poor economic conditions generally and in our market area in particular, which may adversely affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans; |
• | the possible adverse effects that unprecedented damage in the Company’s primary market area, which resulted from the recent storm, may have on the operations of the Company and its service providers, or on the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans; |
• | lower than expected demand for our products and services; |
• | possible impairment of our goodwill and other intangible assets; |
• | our inability to manage interest rate risk; |
• | increased expense and burdens resulting from the regulatory environment in which we operate and our inability to comply with existing and future regulatory requirements; |
• | our inability to maintain regulatory capital above the minimum levels Hudson Valley Bank has set as its minimum capital levels in its capital plan provided to the OCC, or such higher capital levels as may be required; |
• | proposed legislative and regulatory action may adversely affect us and the financial services industry; |
• | future increased Federal Deposit Insurance Corporation, or FDIC, special assessments or changes to regular assessments; |
• | potential liabilities under federal and state environmental laws; |
• | regulatory limitations on dividends payable by Hudson Valley or Hudson Valley Bank. |
Hudson Valley does not undertake to update or revise any of its forward-looking statements even if experience shows that the indicated results or events will not be realized.
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, 2011 were previously reported in the Company’s 2011 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at September 30, 2012 compared to December 31, 2011.
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 three month period ended September 30, 2012. The Company had no derivative financial instruments in place at September 30, 2012 and December 31, 2011.
The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at September 30, 2012 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.
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The Company also prepares a static gap analysis which, at September 30, 2012, shows a positive cumulative static gap of $698.8 million in the one year time frame.
The following table illustrates the estimated exposure under a rising rate scenario and a declining rate scenario calculated as a percentage change in estimated net interest income assuming a gradual shift in interest rates for the next 12 month measurement period, beginning September 30, 2012.
Gradual Change in Interest Rates | Percentage Change Percentage Change in Estimated Net Interest Income from September 30, 2012 | Policy Limit | ||||||
+200 basis points | 6.6 | % | (5.0 | )% | ||||
-100 basis points | (2.1 | )% | (5.0 | )% |
Beginning on 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.
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 in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of September 30, 2012. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2012, the Company’s disclosure controls and procedures were effective in bringing to their attention on a timely basis information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act. Also, during the quarter ended September 30, 2012, 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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As previously announced, the Securities and Exchange Commission (SEC) and the Department of Labor (DOL) are conducting ongoing investigations related to issues surrounding the brokerage practices and policies and disclosures about such practices of the Company’s investment advisory subsidiary, A.R. Schmeidler & Co., Inc.(ARS). To date the Company and ARS have accrued $2.9 million of legal and other expenses related to this matter, $1.2 million of which was accrued in the first quarter 2012 and the remainder in the fourth quarter of 2011. Based on ongoing discussions with the SEC and the DOL, the Company believes it has substantially accrued for any penalties and related costs anticipated in the final resolution of this matter although, until final agreement is reached, the exact result cannot be determined.
Various other claims and lawsuits are pending against the Company and its subsidiaries in the ordinary course of business. In the opinion of management, resolution of each of these other matters is not expected to have a material effect on the financial condition or results of operations of the Company and its subsidiaries.
Our business is subject to various risks. These risks are included in our 2011 Annual Report on Form 10-K under “Risk Factors”.
There have been no material changes in such risk factors since the date of such report.
(A) Exhibits
3.1 | Restated Certificate of Incorporation of Hudson Valley Holding Corp.(1) | |||||
3.2 | Amended and Restated By-Laws of Hudson Valley Holding Corp.(2) | |||||
13.16 | Hudson Valley Bank 2011 Senior Officer Incentive Program (filed herewith) | |||||
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). | |||||
101.INS | XBRL Instance Document(3) | |||||
101.SCH | XBRL Taxonomy Extension Schema(3) | |||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase(3) | |||||
101.LAB | XBRL Taxonomy Extension Label Linkbase(3) | |||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase(3) | |||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase(3) |
(1) | Incorporated herein by reference in this document to the Form 10-Q filed on October 20, 2009. |
(2) | Incorporated herein by reference in this document to the Form 8-K filed on April 28, 2010. |
(3) | Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or section 34(b) of the Investment Company Act of 1940, as amended, and otherwise is not subject to liability under these sections. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HUDSON VALLEY HOLDING CORP. | ||
By: | /S/ STEPHEN R. BROWN | |
Stephen R. Brown | ||
President and Chief Executive Officer |
November 9, 2012
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