Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
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 þ 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 þ 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 | þ | |||
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 þ
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 August 1, 2013 | |
Common stock, par value $0.20 per share | 19,905,645 |
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 | 50 | ||||
ITEM 4 | CONTROLS AND PROCEDURES | 51 | ||||
PART II: OTHER INFORMATION | ||||||
ITEM 1A | RISK FACTORS | 52 | ||||
ITEM 6 | EXHIBITS | 52 | ||||
SIGNATURES | 53 |
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 data
Three Months Ended June 30 | ||||||||
2013 | 2012 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 18,826 | $ | 22,663 | ||||
Securities: | ||||||||
Taxable | 2,390 | 3,140 | ||||||
Exempt from Federal income taxes | 780 | 1,010 | ||||||
Federal funds sold | 11 | 9 | ||||||
Deposits in banks | 540 | 298 | ||||||
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Total interest income | 22,547 | 27,120 | ||||||
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Interest Expense: | ||||||||
Deposits | 1,292 | 1,414 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 7 | 16 | ||||||
Other borrowings | 180 | 182 | ||||||
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Total interest expense | 1,479 | 1,612 | ||||||
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Net Interest Income | 21,068 | 25,508 | ||||||
Provision for loan losses | 289 | 1,894 | ||||||
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Net interest income after provision for loan losses | 20,779 | 23,614 | ||||||
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Non Interest Income: | ||||||||
Service charges | 1,394 | 1,529 | ||||||
Investment advisory fees | 1,959 | 2,512 | ||||||
Other-than-temporary impairment loss: | ||||||||
Total impairment loss | — | (50 | ) | |||||
Loss recognized in comprehensive income | — | — | ||||||
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Net impairment loss recognized in earnings | — | (50 | ) | |||||
Losses on sales and revaluations of loans and other real estate owned, net | — | (15 | ) | |||||
Other income | 528 | 813 | ||||||
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Total non interest income | 3,881 | 4,789 | ||||||
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Non Interest Expense: | ||||||||
Salaries and employee benefits | 11,120 | 11,360 | ||||||
Occupancy | 2,101 | 2,210 | ||||||
Professional services | 1,731 | 2,040 | ||||||
Equipment | 1,001 | 1,161 | ||||||
Business development | 591 | 837 | ||||||
FDIC assessment | 949 | 726 | ||||||
Other operating expenses | 2,325 | 2,700 | ||||||
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Total non interest expense | 19,818 | 21,034 | ||||||
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Income Before Income Taxes | 4,842 | 7,369 | ||||||
Income Taxes | 1,355 | 2,408 | ||||||
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Net Income | $ | 3,487 | $ | 4,961 | ||||
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Basic Earnings Per Common Share | $ | 0.18 | $ | 0.25 | ||||
Diluted Earnings Per Common Share | $ | 0.18 | $ | 0.25 |
See notes to condensed consolidated financial statements
2
Table of Contents
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Dollars in thousands, except per share data
Six Months Ended June 30 | ||||||||
2013 | 2012 | |||||||
Interest Income: | ||||||||
Loans, including fees | $ | 38,085 | $ | 51,578 | ||||
Securities: | ||||||||
Taxable | 4,585 | 6,453 | ||||||
Exempt from Federal income taxes | 1,548 | 1,996 | ||||||
Federal funds sold | 22 | 17 | ||||||
Deposits in banks | 988 | 354 | ||||||
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Total interest income | 45,228 | 60,398 | ||||||
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Interest Expense: | ||||||||
Deposits | 2,539 | 3,164 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 16 | 67 | ||||||
Other borrowings | 359 | 363 | ||||||
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Total interest expense | 2,914 | 3,594 | ||||||
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Net Interest Income | 42,314 | 56,804 | ||||||
Provision for loan losses | 1,061 | 3,253 | ||||||
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Net interest income after provision for loan losses | 41,253 | 53,551 | ||||||
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Non Interest Income: | ||||||||
Service charges | 3,133 | 3,396 | ||||||
Investment advisory fees | 3,892 | 4,910 | ||||||
Other-than-temporary impairment loss: | ||||||||
Total impairment loss | — | (528 | ) | |||||
Loss recognized in comprehensive income | — | — | ||||||
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Net impairment loss recognized in earnings | — | (528 | ) | |||||
Gains on sales and revaluation of loans held for sale and other real estate owned, net | 17 | 15,920 | ||||||
Other income | 1,356 | 1,445 | ||||||
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Total non interest income | 8,398 | 25,143 | ||||||
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Non Interest Expense: | ||||||||
Salaries and employee benefits | 22,402 | 22,178 | ||||||
Occupancy | 4,210 | 4,442 | ||||||
Professional services | 3,236 | 3,907 | ||||||
Equipment | 2,057 | 2,229 | ||||||
Business development | 1,043 | 1,354 | ||||||
FDIC assessment | 1,893 | 1,354 | ||||||
Other operating expenses | 4,588 | 6,446 | ||||||
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Total non interest expense | 39,429 | 41,910 | ||||||
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Income Before Income Taxes | 10,222 | 36,784 | ||||||
Income Taxes | 3,084 | 13,810 | ||||||
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Net Income | $ | 7,138 | $ | 22,974 | ||||
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Basic Earnings Per Common Share | $ | 0.36 | $ | 1.17 | ||||
Diluted Earnings Per Common Share | $ | 0.36 | $ | 1.17 |
See notes to condensed consolidated financial statements
3
Table of Contents
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Dollars in thousands
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net Income | $ | 3,487 | $ | 4,961 | $ | 7,138 | $ | 22,974 | ||||||||
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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) | 354 | 395 | 550 | (105 | ) | |||||||||||
Losses recognized in earnings | — | 50 | — | 528 | ||||||||||||
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Gains recognized in comprehensive income | 354 | 445 | 550 | 423 | ||||||||||||
Income tax effect | (146 | ) | (182 | ) | (226 | ) | (173 | ) | ||||||||
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Unrealized holding gains on other-than-temporarily impaired securities available for sale, net of tax | 208 | 263 | 324 | 250 | ||||||||||||
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Securities available for sale not other-than-temporarily impaired: | ||||||||||||||||
Losses arising during the period | (10,733 | ) | (184 | ) | (12,276 | ) | (2,565 | ) | ||||||||
Income tax effect | 4,135 | 73 | 4,729 | 864 | ||||||||||||
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(6,598 | ) | (111 | ) | (7,547 | ) | (1,701 | ) | |||||||||
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Gains recognized in earnings | — | — | — | — | ||||||||||||
Income tax effect | — | — | — | — | ||||||||||||
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— | — | — | — | |||||||||||||
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Unrealized holding losses on securities available for sale not other-than-temporarily-impaired, net of tax | (6,598 | ) | (111 | ) | (7,547 | ) | (1,701 | ) | ||||||||
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Unrealized holding loss on securities, net | (6,390 | ) | 152 | (7,223 | ) | (1,451 | ) | |||||||||
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Accrued benefit liability adjustment: | ||||||||||||||||
Net gain during the period | — | 34 | — | 68 | ||||||||||||
Reclassification adjustment for amortization of prior service cost and net gain/loss included in net period pension cost | 155 | 110 | 310 | 220 | ||||||||||||
Tax effect | (62 | ) | (57 | ) | (124 | ) | (115 | ) | ||||||||
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Net of tax | 93 | 87 | 186 | 173 | ||||||||||||
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Other comprehensive (loss) gain | (6,297 | ) | 239 | (7,037 | ) | (1,278 | ) | |||||||||
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Comprehensive (Loss) Income | $ | (2,810 | ) | $ | 5,200 | $ | 101 | $ | 21,696 | |||||||
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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 and per share data
Jun 30 2013 | Dec 31 2012 | |||||||
ASSETS | ||||||||
Cash and non interest earning due from banks | $ | 61,892 | $ | 57,836 | ||||
Interest earning deposits in banks | 773,754 | 769,687 | ||||||
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Total cash and cash equivalents | 835,646 | 827,523 | ||||||
Federal funds sold | 24,360 | 19,251 | ||||||
Securities available for sale, at estimated fair value (amortized cost of $534,263 in 2013 and $444,243 in 2012) | 523,364 | 445,070 | ||||||
Securities held to maturity, at amortized cost (estimated fair value of $7,755 in 2013 and $10,825 in 2012) | 7,340 | 10,225 | ||||||
Federal Home Loan Bank of New York (FHLB) stock | 3,479 | 4,826 | ||||||
Loans (net of allowance for loan losses of $25,926 in 2013 and $26,612 in 2012) | 1,454,191 | 1,440,760 | ||||||
Loans held for sale | — | 2,317 | ||||||
Accrued interest and other receivables | 16,580 | 24,826 | ||||||
Premises and equipment, net | 21,171 | 23,996 | ||||||
Other real estate owned | — | 250 | ||||||
Deferred income tax, net | 23,603 | 19,263 | ||||||
Bank owned life insurance | 40,417 | 39,257 | ||||||
Goodwill | 23,842 | 23,842 | ||||||
Other intangible assets | 808 | 903 | ||||||
Other assets | 7,174 | 8,937 | ||||||
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TOTAL ASSETS | $ | 2,981,975 | $ | 2,891,246 | ||||
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LIABILITIES | ||||||||
Deposits: | ||||||||
Non interest bearing | $ | 1,003,682 | $ | 1,035,847 | ||||
Interest bearing | 1,621,433 | 1,484,114 | ||||||
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Total deposits | 2,625,115 | 2,519,961 | ||||||
Securities sold under repurchase agreements and other short-term borrowings | 23,902 | 34,624 | ||||||
Other borrowings | 16,409 | 16,428 | ||||||
Accrued interest and other liabilities | 27,083 | 29,262 | ||||||
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TOTAL LIABILITIES | 2,692,509 | 2,600,275 | ||||||
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STOCKHOLDERS’ EQUITY | ||||||||
Preferred Stock, $0.01 par value; authorized 15,000,000 shares; no shares outstanding in 2013 and 2012, respectively | — | — | ||||||
Common stock, $0.20 par value; authorized 25,000,000 shares: outstanding 19,898,145 and 19,761,426 shares in 2013 and 2012, respectively | 4,240 | 4,212 | ||||||
Additional paid-in capital | 349,388 | 348,643 | ||||||
Retained earnings (deficit) | 1,288 | (3,471 | ) | |||||
Accumulated other comprehensive loss | (7,886 | ) | (849 | ) | ||||
Treasury stock, at cost; 1,299,414 shares in 2013 and 2012 | (57,564 | ) | (57,564 | ) | ||||
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TOTAL STOCKHOLDERS’ EQUITY | 289,466 | 290,971 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,981,975 | $ | 2,891,246 | ||||
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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)
Six Months Ended June 30, 2013 and 2012
Dollars in thousands, except share and per share data
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 | 22,974 | 22,974 | ||||||||||||||||||||||||||
Other comprehensive loss | (1,278 | ) | (1,278 | ) | ||||||||||||||||||||||||
Vesting and exercise of stock options, net of tax | 14,207 | 2 | 242 | 244 | ||||||||||||||||||||||||
Restricted stock awards and related expense | 103,280 | 21 | 108 | 129 | ||||||||||||||||||||||||
Cash dividends ($0.36 per share) | (7,032 | ) | (7,032 | ) | ||||||||||||||||||||||||
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Balance at June 30, 2012 | 19,633,977 | $ | 4,186 | $ | (57,564 | ) | $ | 348,114 | $ | (2,585 | ) | $ | 448 | $ | 292,599 | |||||||||||||
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Balance at January 1, 2013 | 19,761,426 | $ | 4,212 | $ | (57,564 | ) | $ | 348,643 | $ | (3,471 | ) | $ | (849 | ) | $ | 290,971 | ||||||||||||
Net income | 7,138 | 7,138 | ||||||||||||||||||||||||||
Other comprehensive loss | (7,037 | ) | (7,037 | ) | ||||||||||||||||||||||||
Common stock issued for dividend reinvestment | 1,082 | 18 | 18 | |||||||||||||||||||||||||
Vesting and exercise of stock options, net of tax | 12,817 | 3 | 219 | 222 | ||||||||||||||||||||||||
Restricted stock awards and related expense | 122,820 | 25 | 508 | 533 | ||||||||||||||||||||||||
Cash dividends ($0.12 per share) | (2,379 | ) | (2,379 | ) | ||||||||||||||||||||||||
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Balance at June 30, 2013 | 19,898,145 | $ | 4,240 | $ | (57,564 | ) | $ | 349,388 | $ | 1,288 | $ | (7,886 | ) | $ | 289,466 | |||||||||||||
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See notes to condensed consolidated financial statements
6
Table of Contents
HUDSON VALLEY HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Dollars in thousands
Six Months Ended June 30 | ||||||||
2013 | 2012 | |||||||
Operating Activities: | ||||||||
Net Income | $ | 7,138 | $ | 22,974 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,061 | 3,253 | ||||||
Depreciation and amortization | 1,814 | 1,924 | ||||||
Recognized impairment charge on securities available for sale | — | 528 | ||||||
Amortization of premiums on securities, net | 879 | 1,033 | ||||||
Realized (loss) gain on sale and revaluation of OREO | (17 | ) | 15 | |||||
Increase in cash value of bank owned life insurance | (951 | ) | (686 | ) | ||||
Amortization of other intangible assets | 95 | 374 | ||||||
Share-based payment expense | 533 | 25 | ||||||
Realized gain on sale of loans held-for-sale | — | (15,935 | ) | |||||
Deferred taxes | 40 | 1,017 | ||||||
Decrease in deferred loan fees, net | (2,153 | ) | (841 | ) | ||||
Decrease in accrued interest and other receivables | 8,246 | 5,045 | ||||||
Decrease in other assets | 4,080 | 2,578 | ||||||
Excess tax benefits from share-based payment arrangements | (9 | ) | — | |||||
Decrease in accrued interest and other liabilities | (4,186 | ) | (170 | ) | ||||
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Net cash provided by Operating Activities | 16,570 | 21,134 | ||||||
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Investing Activities: | ||||||||
Net increase in short term investments | (5,109 | ) | (5,825 | ) | ||||
Decrease (increase) in FHLB stock | 1,347 | (996 | ) | |||||
Proceeds from maturities of securities available for sale | 119,469 | 128,835 | ||||||
Proceeds from maturities of securities held to maturity | 2,893 | 1,448 | ||||||
Purchases of securities available for sale | (210,376 | ) | (80,346 | ) | ||||
Proceeds from sales and payments of loans held for sale | — | 487,241 | ||||||
Net (increase) decrease in loans | (10,022 | ) | 15,282 | |||||
Proceeds from sales of OREO | 267 | 909 | ||||||
Premiums paid on bank owned life insurance | (209 | ) | (209 | ) | ||||
Net sales (purchases) of premises and equipment | 1,011 | (1,118 | ) | |||||
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Net cash (used in) provided by Investing Activities | (100,729 | ) | 545,221 | |||||
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Financing Activities: | ||||||||
Proceeds from issuance of common stock | 240 | 219 | ||||||
Excess tax benefits from share-based payment arrangements | 9 | — | ||||||
Net decrease in deposits | 105,154 | 14,566 | ||||||
Cash dividends paid | (2,379 | ) | (7,032 | ) | ||||
Repayment of other borrowings | (20 | ) | (19 | ) | ||||
Net decrease in securities sold under repurchase agreements and short-term borrowings | (10,722 | ) | (10,883 | ) | ||||
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Net cash provided by (used in) Financing Activities | 92,282 | (3,149 | ) | |||||
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Increase in Cash and Cash Equivalents | 8,123 | 563,206 | ||||||
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Cash and Cash Equivalents, beginning of period | 827,523 | 78,104 | ||||||
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Cash and Cash Equivalents, end of period | $ | 835,646 | $ | 641,310 | ||||
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Supplemental disclosures: | ||||||||
Interest paid | $ | 2,834 | $ | 4,449 | ||||
Income tax payments | 5,095 | 19 | ||||||
Transfers from loans held for sale back to loan portfolio | 2,317 | 121 |
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 share and per share data
1. Description of Operations
Hudson Valley Holding Corp. (“Hudson Valley” or 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. HVB has 17 branch offices in Westchester County, New York, 4 in Manhattan, New York, 4 in Bronx County, New York, 2 in Rockland County, New York, and 1 in Kings County, New York. On January 31, 2013, the Company announced its intention to consolidate or divest all of its Connecticut branch locations by the middle of 2013, as these branch offices did not meet the Company’s expectations for growth or profitability. The Company also announced that it would be closing one branch in Manhattan and one branch in Westchester by the middle of 2013. As of July 19, 2013, the Company completed the consolidation of the six branches in Connecticut and the two branches in New York.
The Company provides investment management services through a wholly-owned subsidiary of HVB, A.R. Schmeidler & Co., Inc. (“ARS”), a money management firm, thereby generating fee income. ARS has offices at 500 Fifth Avenue in Manhattan, New York.
We derive substantially all of our revenue and income from providing banking and related services to businesses, professionals, municipalities, not-for-profit organizations and individuals within our market area, primarily Westchester County and Rockland County, New York and portions of New York City.
Our principal executive offices are located at 21 Scarsdale Road, Yonkers, New York 10707.
Our principal customers are businesses, professionals, municipalities, not-for-profit organizations and individuals. Our strategy is to operate community-oriented banking institutions dedicated to providing personalized service to customers and focusing on products and services for selected segments of the market. We believe that our ability to attract and retain customers is due primarily to our focused approach to our markets, our personalized and professional services, our product offerings, our experienced staff, our knowledge of our local markets and our ability to provide responsive solutions to customer needs. We provide these products and services to a diverse range of customers and do not rely on a single large depositor for a significant percentage of deposits.
2. Basis of Presentation
The unaudited condensed consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not contain all of the information and footnotes required by GAAP for annual financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
The accounting and reporting policies followed in the presentation of the unaudited condensed consolidated financial statements are consistent with those described in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s 2012 Annual Report on Form 10-K. Management has evaluated all significant events and transactions that occurred after June 30, 2013, for potential recognition or disclosure in these consolidated financial statements. In the opinion of management, these consolidated financial statements reflect all adjustments necessary to present fairly such information for the periods and dates indicated. Such adjustments are normal and recurring in nature. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period’s presentation. Reclassifications had no effect on prior period net income or stockholders’ equity.
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.
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Table of Contents
3. Securities
The following tables set forth the amortized cost, gross unrealized gains and losses and the estimated fair value of securities classified as available for sale and held to maturity at June 30, 2013 and December 31, 2012 (in thousands):
June 30, 2013 | ||||||||||||||||
Amortized | Gross Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Classified as Available for Sale | ||||||||||||||||
U.S. Treasury and government agencies | $ | 90,050 | $ | 8 | $ | 893 | $ | 89,165 | ||||||||
Mortgage-backed securities—residential | 343,615 | 2,419 | 7,884 | 338,150 | ||||||||||||
Obligations of states and political subdivisions | 79,458 | 1,953 | 129 | 81,282 | ||||||||||||
Other debt securities | 11,149 | 1 | 7,028 | 4,122 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total debt securities | 524,272 | 4,381 | 15,934 | 512,719 | ||||||||||||
Mutual funds and other equity securities | 9,991 | 936 | 282 | 10,645 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 534,263 | $ | 5,317 | $ | 16,216 | $ | 523,364 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Amortized | Gross Unrecognized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities—residential | $ | 3,870 | $ | 307 | — | $ | 4,177 | |||||||||
Obligations of states and political subdivisions | 3,470 | 108 | — | 3,578 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 7,340 | $ | 415 | — | $ | 7,755 | |||||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2012 | ||||||||||||||||
Amortized | Gross Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Classified as Available for Sale | ||||||||||||||||
U.S. Treasury and government agencies | $ | 53,197 | $ | 36 | $ | 10 | $ | 53,223 | ||||||||
Mortgage-backed securities—residential | 290,063 | 5,337 | 312 | 295,088 | ||||||||||||
Obligations of states and political subdivisions | 79,638 | 2,974 | 10 | 82,602 | ||||||||||||
Other debt securities | 11,319 | 1 | 7,572 | 3,748 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total debt securities | 434,217 | 8,348 | 7,904 | 434,661 | ||||||||||||
Mutual funds and other equity securities | 10,026 | 507 | 124 | 10,409 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 444,243 | $ | 8,855 | $ | 8,028 | $ | 445,070 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Amortized | Gross Unrecognized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
Classified as Held to Maturity | ||||||||||||||||
Mortgage-backed securities—residential | $ | 5,083 | $ | 415 | — | $ | 5,498 | |||||||||
Obligations of states and political subdivisions | 5,142 | 185 | — | 5,327 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 10,225 | $ | 600 | — | $ | 10,825 | |||||||||
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|
|
|
|
|
|
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Table of Contents
Included in other debt securities are investments in five pooled trust preferred securities with an aggregate amortized cost and estimated fair value of $10,356 and $3,335, respectively, at June 30, 2013, and $10,521 and $2,950, respectively, at December 31, 2012. These investments represent trust preferred obligations of banking industry companies. The value of these investments has been severely negatively affected by the continued weakness in the economy and elevated 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 June 30, 2013 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.
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 1% of performing collateral in year 1 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 June 30, 2013 included the following:
PreTSL IV | PreTSL VII | PreTSL VIII | PreTSL VIII | PreTSL X | PreTSL XI | |||||||||||||||||||
Class | Mezz | B | B-1 | B-2 | B-2 | B-2 | ||||||||||||||||||
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 | % | 53 | % | 54 | % | 54 | % | 36 | % | 33 | % | ||||||||||||
Projected severity of loss as % of specific defaults/deferrals | 84 | % | 94 | % | 92 | % | 92 | % | 88 | % | 79 | % | ||||||||||||
Projected additional defaults/deferrals as % of performing collateral: | ||||||||||||||||||||||||
Year 1 | 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 June 30, 2013 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 | $ | 866 | $ | 746 | $ | 1,119 | $ | 5,521 | $ | 2,043 | ||||||||||||
Fair value | 15 | 579 | 201 | 301 | 1,829 | 410 | ||||||||||||||||||
Unrealized loss | (46 | ) | (287 | ) | (545 | ) | (818 | ) | (3,692 | ) | (1,633 | ) | ||||||||||||
OTTI recognized in earnings—six months ended June 30, 2013 | — | — | — | — | — | — | ||||||||||||||||||
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 | Ca/C | Ca/C | ||||||||||||||||||
Number of institutions currently performing | 4 | 9 | 15 | 15 | 33 | 42 | ||||||||||||||||||
Actual defaults/deferrals as % of original collateral | 18 | % | 46 | % | 54 | % | 54 | % | 34 | % | 29 | % | ||||||||||||
Excess subordination as % of performing collateral (1) | 28 | % | (69 | )% | (94 | )% | (94 | )% | (30 | )% | (24 | )% |
(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. |
10
Table of Contents
The following table summarizes the change in pretax OTTI credit related losses on securities available for sale for the six months ended June 30, 2013 and 2012 (in thousands):
Six Months Ended | ||||||||
Jun 30 | Jun 30 | |||||||
2013 | 2012 | |||||||
Balance at beginning of period: | ||||||||
Total OTTI credit related impairment charges beginning of period | $ | 10,002 | $ | 9,478 | ||||
Increase to the amount related to the credit loss for which other-than-temporary impairment was previously recognized | — | 528 | ||||||
Credit related impairment dispositions | — | — | ||||||
Credit related impairment not previously recognized | — | — | ||||||
|
|
|
| |||||
Balance at end of period: | $ | 10,002 | $ | 10,006 | ||||
|
|
|
|
There were no OTTI losses recognized for the six month period ended June 30, 2013. During the six month period ended June 30, 2012, pretax OTTI losses of $4, $53, $2, $468 and $1 were recognized on five pooled trust preferred securities which prior to the 2012 charges had book values of $2,088, $5,696, $919, $2,228 and $662, respectively. 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 June 30, 2013 and December 31, 2012, securities having a stated value of approximately $238,506 and $195,142, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
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 June 30, 2013 and December 31, 2012 (in thousands):
June 30, 2013
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less Than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | |||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||
U.S. Treasuries and government agencies | $ | 76,649 | $ | 893 | — | — | $ | 76,649 | $ | 893 | ||||||||||||||
Mortgage-backed securities—residential | 267,718 | 7,884 | — | — | 267,718 | 7,884 | ||||||||||||||||||
Obligations of states and political subdivisions | 7,348 | 129 | — | — | 7,348 | 129 | ||||||||||||||||||
Other debt securities | 515 | 7 | $ | 3,335 | $ | 7,021 | 3,850 | 7,028 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total debt securities | 352,230 | 8,913 | 3,335 | 7,021 | 355,565 | 15,934 | ||||||||||||||||||
Mutual funds and other equity securities | 8,828 | 172 | 95 | 110 | 8,923 | 282 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 361,058 | $ | 9,085 | $ | 3,430 | $ | 7,131 | $ | 364,488 | $ | 16,216 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
There were no securities classified as held to maturity in an unrealized loss position at June 30, 2013.
11
Table of Contents
December 31, 2012
Duration of Unrealized Loss | ||||||||||||||||||||||||
Less Than 12 Months | Greater than 12 Months | Total | ||||||||||||||||||||||
Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | Fair Value | Gross Unrealized Loss | |||||||||||||||||||
Classified as Available for Sale | ||||||||||||||||||||||||
U.S. Treasuries and government agencies | $ | 8,048 | $ | 10 | — | — | $ | 8,048 | $ | 10 | ||||||||||||||
Mortgage-backed securities—residential | 47,211 | 312 | — | — | 47,211 | 312 | ||||||||||||||||||
Obligations of states and political subdivisions | 2,963 | 10 | — | — | 2,963 | 10 | ||||||||||||||||||
Other debt securities | 367 | 1 | $ | 2,950 | $ | 7,571 | 3,317 | 7,572 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total debt securities | 58,589 | 333 | 2,950 | 7,571 | 61,539 | 7,904 | ||||||||||||||||||
Mutual funds and other equity securities | 12 | 1 | 96 | 123 | 108 | 124 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 58,601 | $ | 334 | $ | 3,046 | $ | 7,694 | $ | 61,647 | $ | 8,028 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
There were no securities classified as held to maturity in an unrealized loss position at December 31, 2012.
The total number of securities in the Company’s portfolio that were in an unrealized loss position was 222 and 88, respectively, at June 30, 2013 and December 31, 2012. 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 June 30, 2013. 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 June 30, 2013.
The contractual maturity of all debt securities held at June 30, 2013 is shown below (in thousands). 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 | $ | 14,960 | $ | 15,100 | — | — | ||||||||||
After 1 year but within 5 years | 125,049 | 125,686 | $ | 3,470 | $ | 3,578 | ||||||||||
After 5 year but within 10 years | 30,287 | 30,442 | — | — | ||||||||||||
After 10 years | 10,361 | 3,341 | — | — | ||||||||||||
Mortgage-backed securities—residential | 343,615 | 338,150 | 3,870 | 4,177 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 524,272 | $ | 512,719 | $ | 7,340 | $ | 7,755 | ||||||||
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|
|
|
|
|
|
|
12
Table of Contents
4. Loans
The loan portfolio, excluding loans held for sale, is comprised of the following (in thousands):
June 30 | December 31 | |||||||
2013 | 2012 | |||||||
Real Estate: | ||||||||
Commercial | $ | 594,301 | $ | 550,786 | ||||
Construction | 72,337 | 74,727 | ||||||
Residential Multi-Family | 196,438 | 196,199 | ||||||
Residential Other | 328,922 | 325,774 | ||||||
Commercial & Industrial | 261,469 | 288,809 | ||||||
Individuals & lease financing | 26,906 | 33,488 | ||||||
|
|
|
| |||||
Total loans | 1,480,373 | 1,469,783 | ||||||
Deferred loan fees | (256 | ) | (2,411 | ) | ||||
Allowance for loan losses | (25,926 | ) | (26,612 | ) | ||||
|
|
|
| |||||
Loans, net | $ | 1,454,191 | $ | 1,440,760 | ||||
|
|
|
|
Risk characteristics of the Company’s loan 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 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 $7.5 million 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 Federal Home Loan Bank (“FHLB”) 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 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,
13
Table of Contents
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 reserve lines of credit to individuals. Repayment of such loans are 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.
The following table presents the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2013 and 2012 (in thousands):
Three months ended June 30, 2013 | ||||||||||||||||||||||||
Total | Commercial Real Estate | Construction | Residential Real Estate | Commercial & Industrial | Lease Financing & Other | |||||||||||||||||||
Balance at beginning of period | $ | 26,088 | $ | 11,270 | $ | 4,559 | $ | 6,420 | $ | 3,424 | $ | 415 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Charge-offs | (1,717 | ) | — | (192 | ) | (1,022 | ) | (256 | ) | (247 | ) | |||||||||||||
Recoveries | 1,266 | 56 | — | 1,104 | 76 | 30 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (451 | ) | 56 | (192 | ) | 82 | (180 | ) | (217 | ) | ||||||||||||||
Provision for loan losses | 289 | 18 | (255 | ) | (56 | ) | 394 | 188 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | (162 | ) | 74 | (447 | ) | 26 | 214 | (29 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 25,926 | $ | 11,344 | $ | 4,112 | $ | 6,446 | $ | 3,638 | $ | 386 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013 | ||||||||||||||||||||||||
Total | Commercial Real Estate | Construction | Residential Real Estate | Commercial & Industrial | Lease Financing & Other | |||||||||||||||||||
Balance at beginning of period | $ | 26,612 | $ | 10,090 | $ | 3,949 | $ | 8,119 | $ | 4,077 | $ | 377 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Charge-offs | (3,442 | ) | (368 | ) | (582 | ) | (1,570 | ) | (675 | ) | (247 | ) | ||||||||||||
Recoveries | 1,695 | 57 | 3 | 1,353 | 249 | 33 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (1,747 | ) | (311 | ) | (579 | ) | (217 | ) | (426 | ) | (214 | ) | ||||||||||||
Provision for loan losses | 1,061 | 1,565 | 742 | (1,456 | ) | (13 | ) | 223 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | (686 | ) | 1,254 | 163 | (1,673 | ) | (439 | ) | 9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 25,926 | $ | 11,344 | $ | 4,112 | $ | 6,446 | $ | 3,638 | $ | 386 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2012 | ||||||||||||||||||||||||
Total | Commercial Real Estate | Construction | Residential Real Estate | Commercial & Industrial | Lease Financing & Other | |||||||||||||||||||
Balance at beginning of period | $ | 31,856 | $ | 13,049 | $ | 6,568 | $ | 8,786 | $ | 2,761 | $ | 692 | ||||||||||||
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|
| |||||||||||||
Charge-offs | (5,784 | ) | — | (1,580 | ) | (1,270 | ) | (2,372 | ) | (562 | ) | |||||||||||||
Recoveries | 767 | — | — | (208 | ) | 476 | 499 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (5,017 | ) | — | (1,580 | ) | (1,478 | ) | (1,896 | ) | (63 | ) | |||||||||||||
Provision for loan losses | 1,894 | (1,457 | ) | (492 | ) | 1,481 | 2,555 | (193 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | (3,123 | ) | (1,457 | ) | (2,072 | ) | 3 | 659 | (256 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 28,733 | $ | 11,592 | $ | 4,496 | $ | 8,789 | $ | 3,420 | $ | 436 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
14
Table of Contents
Six months ended June 30, 2012 | ||||||||||||||||||||||||
Total | Commercial Real Estate | Construction | Residential Real Estate | Commercial & Industrial | Lease Financing & Other | |||||||||||||||||||
Balance at beginning of period | $ | 30,685 | $ | 12,776 | $ | 6,470 | $ | 8,093 | $ | 2,650 | $ | 696 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Charge-offs | (6,909 | ) | (398 | ) | (1,580 | ) | (1,828 | ) | (2,497 | ) | (606 | ) | ||||||||||||
Recoveries | 1,704 | 298 | 1 | 326 | 565 | 514 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net Charge-offs | (5,205 | ) | (100 | ) | (1,579 | ) | (1,502 | ) | (1,932 | ) | (92 | ) | ||||||||||||
Provision for loan losses | 3,253 | (1,084 | ) | (395 | ) | 2,198 | 2,702 | (168 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net change during the period | (1,952 | ) | (1,184 | ) | (1,974 | ) | 696 | 770 | (260 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at end of period | $ | 28,733 | $ | 11,592 | $ | 4,496 | $ | 8,789 | $ | 3,420 | $ | 436 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of June 30, 2013 and December 31, 2012 (in thousands):
June 30, 2013 | ||||||||||||||||||||||||
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 | $ | 25,926 | $ | 11,344 | $ | 4,112 | $ | 6,446 | $ | 3,638 | $ | 386 | ||||||||||||
Individually evaluated for impairment | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of allowance | $ | 25,926 | $ | 11,344 | $ | 4,112 | $ | 6,446 | $ | 3,638 | $ | 386 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans: | ||||||||||||||||||||||||
Ending balance of loans: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 1,425,986 | $ | 571,307 | $ | 69,702 | $ | 508,289 | $ | 249,782 | $ | 26,906 | ||||||||||||
Individually evaluated for impairment | 54,387 | 22,994 | 2,635 | 17,071 | 11,687 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of loans | $ | 1,480,373 | $ | 594,301 | $ | 72,337 | $ | 525,360 | $ | 261,469 | $ | 26,906 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 | $ | 26,612 | $ | 10,090 | $ | 3,949 | $ | 8,119 | $ | 4,077 | $ | 377 | ||||||||||||
Individually evaluated for impairment | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of allowance | $ | 26,612 | $ | 10,090 | $ | 3,949 | $ | 8,119 | $ | 4,077 | $ | 377 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans: | ||||||||||||||||||||||||
Ending balance of loans: | ||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 1,415,035 | $ | 525,579 | $ | 70,007 | $ | 509,297 | $ | 276,664 | $ | 33,488 | ||||||||||||
Individually evaluated for impairment | 54,748 | 25,207 | 4,720 | 12,676 | 12,145 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total ending balance of loans | $ | 1,469,783 | $ | 550,786 | $ | 74,727 | $ | 521,973 | $ | 288,809 | $ | 33,488 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
15
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 June 30, 2013 and December 31, 2012 (in thousands):
June 30, 2013 | December 31, 2012 | |||||||||||||||
Non-Accrual | Past Due 90 Days and Still Accruing | Non-Accrual | Past Due 90 Days and Still Accruing | |||||||||||||
Loans: | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||
Owner occupied | $ | 13,493 | — | $ | 15,670 | �� | — | |||||||||
Non owner occupied | 2,779 | — | 2,717 | — | ||||||||||||
Construction: | ||||||||||||||||
Commercial | 974 | — | 2,478 | — | ||||||||||||
Residential | 1,661 | — | 2,242 | — | ||||||||||||
Residential: | ||||||||||||||||
Multifamily | 327 | — | — | — | ||||||||||||
1-4 family | 8,324 | — | 8,470 | — | ||||||||||||
Home equity | 463 | — | 1,212 | — | ||||||||||||
Commercial & Industrial | 2,246 | — | 2,019 | — | ||||||||||||
Other: | ||||||||||||||||
Lease financing and other | — | — | — | — | ||||||||||||
Overdrafts | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 30,267 | — | $ | 34,808 | — | ||||||||||
|
|
|
|
|
|
|
|
The following table presents the aging of loans (including past due and non-accrual loans) as of June 30, 2013 and December 31, 2012 by class of loans (in thousands):
June 30, 2013 | ||||||||||||||||||||||||
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 | $ | 186,198 | — | $ | 465 | $ | 7,169 | $ | 7,634 | $ | 178,564 | |||||||||||||
Non owner occupied | 408,103 | $ | 1,433 | — | 2,778 | 4,211 | 403,892 | |||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | 37,014 | 435 | — | 974 | 1,409 | 35,605 | ||||||||||||||||||
Residential | 35,323 | — | — | 1,661 | 1,661 | 33,662 | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | 196,438 | 140 | — | 327 | 467 | 195,971 | ||||||||||||||||||
1-4 family | 221,950 | 1,562 | 137 | 8,324 | 10,023 | 211,927 | ||||||||||||||||||
Home equity | 106,972 | 2,055 | 650 | 462 | 3,167 | 103,805 | ||||||||||||||||||
Commercial & Industrial | 261,469 | 2,069 | 779 | 1,197 | 4,045 | 257,424 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Lease financing and other | 26,016 | 23 | 53 | — | 76 | 25,940 | ||||||||||||||||||
Overdrafts | 890 | — | — | — | — | 890 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,480,373 | $ | 7,717 | $ | 2,084 | $ | 22,892 | $ | 32,693 | $ | 1,447,680 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
16
Table of Contents
December 31, 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 | $ | 181,541 | $ | 472 | — | $ | 9,464 | $ | 9,936 | $ | 171,605 | |||||||||||||
Non owner occupied | 369,245 | 802 | — | 2,717 | 3,519 | 365,726 | ||||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | 40,708 | 1,421 | — | — | 1,421 | 39,287 | ||||||||||||||||||
Residential | 34,019 | 455 | — | 2,242 | 2,697 | 31,322 | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | 196,199 | — | — | — | — | 196,199 | ||||||||||||||||||
1-4 family | 215,771 | 4,506 | $ | 91 | 8,470 | 13,067 | 202,704 | |||||||||||||||||
Home equity | 110,003 | 3,411 | 321 | 1,212 | 4,944 | 105,059 | ||||||||||||||||||
Commercial & Industrial | 288,809 | 1,938 | 170 | 1,479 | 3,587 | 285,222 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Lease financing and other | 32,104 | 431 | 1 | — | 432 | 31,672 | ||||||||||||||||||
Overdrafts | 1,384 | — | — | — | — | 1,384 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,469,783 | $ | 13,436 | $ | 583 | $ | 25,584 | $ | 39,603 | $ | 1,430,180 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans and the recorded investment in impaired loans as of June 30, 2013 and December 31, 2012 were as follows (in thousands):
June 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
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 | $ | 24,019 | $ | 19,806 | — | $ | 26,235 | $ | 22,022 | — | ||||||||||||||
Non owner occupied | 4,227 | 3,188 | — | 4,292 | 3,185 | — | ||||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | 1,231 | 974 | — | 2,735 | 2,478 | — | ||||||||||||||||||
Residential | 3,242 | 1,661 | — | 3,242 | 2,242 | — | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | 3,283 | 3,283 | — | 2,994 | 2,994 | — | ||||||||||||||||||
1-4 family | 14,772 | 13,326 | — | 9,726 | 8,470 | — | ||||||||||||||||||
Home equity | 980 | 462 | — | 2,220 | 1,212 | — | ||||||||||||||||||
Commercial & Industrial | 12,790 | 11,687 | — | 13,218 | 12,145 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | $ | 64,544 | $ | 54,387 | — | $ | 64,662 | $ | 54,748 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of impaired loans was determined using either the fair value of the underlying collateral of the loan or by an analysis of the expected cash flows related to the loan. At June 30, 2013 and December 31, 2012, the Company had no specific reserves allocated as partial charge-offs were recorded for all identified impairments. Impaired loans as of June 30, 2013 and December 31, 2012 included $37,009 and $27,183, respectively, of loans considered to be troubled debt restructurings (“TDRs”). There were seven additional loan modifications classified as TDRs during the six months ended June 30, 2013. The Company is not committed to extending any additional credit to borrowers whose loans are classified as TDRs. As of June 30, 2013, eleven TDRs with carrying amounts of $24,120 were on accrual status and performing in accordance with their modified terms. All other TDRs as of June 30, 2013 were on nonaccrual status. For the six months ended June 30, 2013 and 2012, there were no TDRs in which there were payment defaults within twelve months following the modification. The Company’s policy states that a loan is considered to be in payment default once it is 45 days contractually past due under the modified terms.
17
Table of Contents
The following table presents the average recorded investment in impaired loans by portfolio segment and interest recognized on impaired loans for the three and six month periods ended June 30, 2013 and 2012 (in thousands):
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||||||||||
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 | $ | 20,782 | $ | 4 | $ | 23,775 | $ | 152 | $ | 21,336 | $ | 7 | $ | 22,238 | $ | 266 | ||||||||||||||||
Non owner occupied | 3,189 | 76 | 12,848 | 85 | 3,188 | 147 | 10,927 | 149 | ||||||||||||||||||||||||
Construction: | ||||||||||||||||||||||||||||||||
Commercial | 975 | — | 2,448 | — | 1,351 | — | 3,669 | — | ||||||||||||||||||||||||
Residential | 1,757 | 61 | 1,828 | — | 1,902 | 72 | 914 | — | ||||||||||||||||||||||||
Residential: | ||||||||||||||||||||||||||||||||
Multifamily | 3,292 | 40 | 1,331 | — | 3,220 | 79 | 1,002 | — | ||||||||||||||||||||||||
1-4 family | 13,338 | — | 5,651 | 12 | 12,124 | — | 3,778 | 21 | ||||||||||||||||||||||||
Home equity | 462 | — | 1,626 | — | 650 | — | 1,701 | — | ||||||||||||||||||||||||
Commercial & Industrial | 11,759 | 109 | 10,005 | — | 11,874 | 222 | 8,886 | — | ||||||||||||||||||||||||
Lease Financing & Other | — | — | 128 | — | — | — | 64 | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 55,554 | $ | 290 | $ | 59,640 | $ | 249 | $ | 55,645 | $ | 527 | $ | 53,179 | $ | 436 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $323 and $641 for the three and six month periods ended June 30, 2013, respectively, and $565 and $868 for the three and six month periods ended June 30, 2012, respectively. There was no interest income recorded on non accrual loans during the six month periods ended June 30, 2013 and 2012.
During the six months ended June 30, 2013, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 6 months to 15 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 3 years.
18
Table of Contents
The following table presents loans by class modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2013 (in thousands):
Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 | |||||||||||||||||||||||
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Owner occupied | — | — | — | — | — | — | ||||||||||||||||||
Non owner occupied | 1 | $ | 5,546 | $ | 5,546 | 1 | $ | 5,546 | $ | 5,546 | ||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | — | — | — | — | — | — | ||||||||||||||||||
Residential | — | — | — | — | — | — | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | — | — | — | — | — | — | ||||||||||||||||||
1-4 family | — | — | — | 4 | 5,202 | 5,026 | ||||||||||||||||||
Home equity | — | — | — | — | — | — | ||||||||||||||||||
Commercial & Industrial | 2 | 569 | 538 | 2 | 569 | 538 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Lease financing and other | — | — | — | — | — | — | ||||||||||||||||||
Overdrafts | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 3 | $ | 6,115 | $ | 6,084 | 7 | $ | 11,317 | $ | 11,110 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The TDRs above resulted in charge-offs of $31 and $221 during the three and six month periods ended June 30, 2013.
Three Months Ended June 30,2012 | Six Months Ended June 30,2012 | |||||||||||||||||||||||
Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Loans | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Owner occupied | — | — | — | — | — | — | ||||||||||||||||||
Non owner occupied | — | — | — | — | — | — | ||||||||||||||||||
Construction: | ||||||||||||||||||||||||
Commercial | — | — | — | — | — | — | ||||||||||||||||||
Residential | — | — | — | — | — | — | ||||||||||||||||||
Residential: | ||||||||||||||||||||||||
Multifamily | 1 | 1,579 | 1,579 | 1 | 1,579 | 1,579 | ||||||||||||||||||
1-4 family | — | — | — | — | — | — | ||||||||||||||||||
Home equity | — | — | — | — | — | — | ||||||||||||||||||
Commercial & Industrial | 1 | 10,500 | 10,500 | 1 | 10,500 | 10,500 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Lease financing and other | — | — | — | — | — | — | ||||||||||||||||||
Overdrafts | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 2 | $ | 12,079 | $ | 12,079 | 2 | $ | 12,079 | $ | 12,079 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The TDRs above resulted in charge-offs of $0 during both the three and six month periods ended June 30, 2012.
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.
19
Table of Contents
The following table presents the risk category by class of loans as of June 30, 2013 and December 31, 2012 of non-homogeneous loans individually classified as to credit risk as of the most recent analysis performed (in thousands):
June 30, 2013 | ||||||||||||||||||||
Total | Pass | Special Mention | Substandard | Doubtful | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Owner occupied | $ | 186,198 | $ | 144,662 | $ | 6,214 | $ | 35,322 | — | |||||||||||
Non owner occupied | 408,103 | 386,130 | 13,850 | 8,123 | — | |||||||||||||||
Construction: | ||||||||||||||||||||
Commercial | 37,014 | 32,189 | — | 4,825 | — | |||||||||||||||
Residential | 35,323 | 29,895 | 3,421 | 2,007 | — | |||||||||||||||
Residential: | ||||||||||||||||||||
Multifamily | 196,438 | 191,226 | 929 | 4,283 | — | |||||||||||||||
1-4 family | 65,420 | 45,776 | 1,463 | 18,181 | — | |||||||||||||||
Home equity | 1,312 | 201 | — | 1,111 | — | |||||||||||||||
Commercial & Industrial | 261,469 | 255,087 | 1,858 | 4,524 | — | |||||||||||||||
Lease Financing & Other | 24,952 | 24,605 | — | 347 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans | $ | 1,216,229 | $ | 1,109,771 | $ | 27,735 | $ | 78,723 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||||||
Total | Pass | Special Mention | Substandard | Doubtful | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Owner occupied | $ | 181,541 | $ | 132,181 | $ | 6,447 | $ | 42,913 | — | |||||||||||
Non owner occupied | 369,245 | 356,960 | 4,438 | 7,847 | — | |||||||||||||||
Construction: | ||||||||||||||||||||
Commercial | 40,708 | 29,303 | 5,349 | 6,056 | — | |||||||||||||||
Residential | 34,019 | 28,936 | 891 | 4,192 | — | |||||||||||||||
Residential: | ||||||||||||||||||||
Multifamily | 196,199 | 193,083 | — | 3,116 | — | |||||||||||||||
1-4 family | 89,246 | 58,480 | 20,439 | 10,327 | — | |||||||||||||||
Home equity | 1,212 | — | — | 1,212 | — | |||||||||||||||
Commercial & Industrial | 288,809 | 270,362 | 3,368 | 15,079 | — | |||||||||||||||
Lease Financing & Other | 31,015 | 29,842 | 846 | 327 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total loans | $ | 1,231,994 | $ | 1,099,147 | $ | 41,778 | $ | 91,069 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
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.
20
Table of Contents
The following table presents the delinquency categories by class of loans as of June 30, 2013 and December 31, 2012 for loans evaluated for risk in groups of homogeneous loans (in thousands):
June 30, 2013 | ||||||||||||||||||||||||
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 | $ | 156,529 | $ | 973 | $ | 15 | — | $ | 988 | $ | 155,541 | |||||||||||||
Home equity | 105,661 | 2,055 | — | — | 2,055 | 103,606 | ||||||||||||||||||
Other: | ||||||||||||||||||||||||
Other loans | 1,064 | 23 | 3 | — | 26 | 1,038 | ||||||||||||||||||
Overdrafts | 890 | — | — | — | — | 890 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total loans | $ | 264,144 | $ | 3,051 | $ | 18 | — | $ | 3,069 | $ | 261,075 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 | $ | 126,525 | — | $ | 91 | — | $ | 91 | $ | 126,434 | ||||||||||||||
Home equity | 108,791 | $ | 3,411 | 321 | — | 3,732 | 105,059 | |||||||||||||||||
Other: | ||||||||||||||||||||||||
Other loans | 1,089 | 30 | 1 | — | 31 | 1,058 | ||||||||||||||||||
Overdrafts | 1,384 | — | — | — | — | 1,384 | ||||||||||||||||||
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|
|
|
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|
|
|
| |||||||||||||
Total loans | $ | 237,789 | $ | 3,441 | $ | 413 | — | $ | 3,854 | $ | 233,935 | |||||||||||||
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|
5. Earnings Per Share
FASB ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards and restricted stock units granted by the Company contain nonforfeitable rights to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.
21
Table of Contents
The following table presents the calculation of earnings per share for the periods indicated:
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(000’s except share data) | ||||||||||||||||
Net income | $ | 3,487 | $ | 4,961 | $ | 7,138 | $ | 22,974 | ||||||||
Less: Dividends paid on and earnings allocated to participating securities | 53 | 42 | 96 | 50 | ||||||||||||
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|
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|
|
|
|
| |||||||||
Income attributable to common stock | $ | 3,434 | $ | 4,919 | $ | 7,042 | $ | 22,924 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average common shares outstanding, including participating securities | 19,885,481 | 19,633,732 | 19,848,369 | 19,586,033 | ||||||||||||
Less: Weighted average participating securities | 302,722 | 95,616 | 275,394 | 52,564 | ||||||||||||
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|
|
|
|
|
| |||||||||
Weighted average common shares outstanding | 19,582,759 | 19,538,116 | 19,572,975 | 19,533,469 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Basic earnings per common share | $ | 0.18 | $ | 0.25 | $ | 0.36 | $ | 1.17 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Income attributable to common stock | $ | 3,434 | $ | 4,919 | $ | 7,042 | $ | 22,924 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average common shares outstanding | 19,582,759 | 19,538,116 | 19,572,975 | 19,533,469 | ||||||||||||
Weighted average common equivalent shares outstanding | — | 2,948 | — | 11,355 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average common and equivalent shares outstanding | 19,582,759 | 19,541,064 | 19,572,975 | 19,544,824 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted earnings per common share | $ | 0.18 | $ | 0.25 | $ | 0.36 | $ | 1.17 | ||||||||
|
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|
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|
|
| |||||||||
Dividends per common share | $ | 0.06 | $ | 0.18 | $ | 0.12 | $ | 0.36 | ||||||||
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|
|
There were 344,125 and 475,904 options outstanding at June 30, 2013, and 2012, respectively, that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common stock and were, therefore, antidilutive.
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 June 30 | Six Months Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Service cost | $ | 131 | $ | 111 | $ | 262 | $ | 221 | ||||||||
Interest cost | 154 | 156 | 304 | 309 | ||||||||||||
Amortization of prior service cost | (54 | ) | (58 | ) | (108 | ) | (116 | ) | ||||||||
Amortization of net loss | 209 | 167 | 418 | 335 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net periodic pension cost | $ | 440 | $ | 376 | $ | 877 | $ | 749 | ||||||||
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|
|
|
|
The Company makes contributions to the unfunded defined benefit plans only as benefit payments become due. The Company disclosed in its 2012 Annual Report on Form 10-K that it expected to contribute $923 to the unfunded defined benefit plans during 2013. For the three and six month periods ended June 30, 2013, the Company contributed $225 and $449 to these plans, respectively.
7. Stock-Based Compensation
In accordance with the provisions of the Hudson Valley Holding Corp. 2010 Omnibus Incentive Plan, 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 at an exercise price not less than the market value of the stock on the date of grant subject to various eligibility and vesting requirements. There will be no further grants under any plans adopted prior to the 2010 plan.
22
Table of Contents
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 six month period ended June 30, 2013:
Prior Option Plans (1): | Shares | Weighted Average Grant or Exercise Price | Aggregate Intrinsic Value (2) ($000’s) | Weighted Average Remaining Contractual Term | ||||||||||||
Outstanding at December 31, 2012 | 428,111 | $ | 20.21 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (12,817 | ) | 16.97 | |||||||||||||
Cancelled or Expired | (71,169 | ) | 16.89 | |||||||||||||
|
| |||||||||||||||
Outstanding at June 30, 2013 | 344,125 | 21.02 | — | 1.8 | ||||||||||||
|
| |||||||||||||||
Exercisable at June 30, 2013 | 344,125 | 21.02 | — | 1.8 | ||||||||||||
|
| |||||||||||||||
Nonvested at June 30, 2013 | — | — | ||||||||||||||
|
| |||||||||||||||
2010 Omnibus Incentive Plan (1): | ||||||||||||||||
Nonvested at December 31, 2012 | 202,005 | $ | 16.25 | |||||||||||||
Granted at fair value | 140,853 | 15.79 | ||||||||||||||
Restriction released | (35,791 | ) | 16.33 | |||||||||||||
Cancelled | (3,293 | ) | 17.22 | |||||||||||||
|
| |||||||||||||||
Nonvested at June 30, 2013 | 303,774 | 16.02 | ||||||||||||||
|
| |||||||||||||||
Available for grant at December 31, 2012 | 1,121,322 | |||||||||||||||
Restricted stock awards | (140,853 | ) | $ | 15.79 | ||||||||||||
Unissued or cancelled | 3,293 | 17.22 | ||||||||||||||
|
| |||||||||||||||
Available for future grant | 983,762 | |||||||||||||||
|
|
(1) | 2010 Omnibus Incentive Plan includes restricted stock awards while prior option plans do not. |
(2) | 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 June 30, 2013. This amount changes based on 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 six month period ended June 30, 2013 or the year ended December 31, 2012.
There was no net compensation expense related to stock options included in net income for the six month period ended June 30, 2013. Net compensation expense of $25 related to the Company’s stock options was included in net income for the six month period ended June 30, 2012. The tax effect related thereto was ($2). There was no remaining unrecognized compensation expense related to stock options at June 30, 2013.
Compensation expense of $556 and $219 related to the Company’s restricted stock awards was included in net income for the six month periods ended June 30, 2013 and 2012, respectively. The tax effect related thereto was $229 and $90, respectively. Unrecognized compensation expense related to restricted stock awards totaled $3,840 at June 30, 2013. This expense is expected to be recognized over a remaining weighted average period of 2.7 years.
23
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 June 30, 2013 and December 31, 2012 include several pooled trust preferred instruments. The 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 Company’s 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 is 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. Management may apply additional discounts based on changes in the market from the time of valuation. 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.
24
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 June 30, 2013 and December 31, 2012 (dollars in thousands):
Asset | Fair Value at June 30, 2013 | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||
Impaired loans—commercial real estate | $ | 5,571 | Sales comparison or income approach | Discounts to appraisals for market conditions | 0%-62% (8%) | |||||
Capitalization rate | 8% | |||||||||
Impaired loans—construction | $ | 2,635 | Sales comparison approach | Discounts to appraisals for market conditions | 0%-21% (6%) | |||||
Impaired loans—residential real estate | $ | 7,764 | Sales comparison or income approach | Discounts to appraisals for market conditions | 0%-47% (4%) | |||||
Impaired loans—commercial and industrial | $ | 1,709 | Sales comparison approach—secondary collateral | Discounts to appraisals for market conditions | 7% (7%) |
Asset | Fair Value at December 31, 2012 | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||
Impaired loans—commercial real estate | $ | 6,835 | Sales comparison or income approach | Discounts to appraisals for market conditions | 0%-62% (8%) | |||||
Capitalization rate | 8% | |||||||||
Impaired loans—construction | $ | 3,219 | Sales comparison approach | Discounts to appraisals for market conditions | 0%-21% (6%) | |||||
Impaired loans—residential real estate | $ | 8,514 | Sales comparison or income approach | Discounts to appraisals for market conditions | 0%-47% (4%) | |||||
Impaired loans—commercial and industrial | $ | 1,737 | Sales comparison approach—secondary collateral | Discounts to appraisals for market conditions | 7% (7%) | |||||
Other real estate owned | $ | 250 | Sales comparison approach | Discounts to appraisals for market conditions | 0% (0%) | |||||
Loans held for sale | $ | 2,317 | Third party bids | Bids from interested third parties | 60%-65% (64%) |
25
Table of Contents
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012 (dollars in thousands):
Asset | Fair Value at June 30, 2013 | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||
Trust preferred securities | $ | 3,335 | Discounted cash flow | Specific issuer default rates | 33%-57% (44%) | |||||
Specific issuer default severity | 79%-94% (88%) | |||||||||
Annual prepayment rate | 1% | |||||||||
Projected annual nonspecific issuer default rates | 0.25%-1.00% | |||||||||
Projected annual nonspecific issuer default severity | 85% | |||||||||
Present value discount rate | 22.5% |
Asset | Fair Value at December 31, 2012 | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | ||||||
Trust preferred securities | $ | 2,950 | Discounted cash flow | Specific issuer default rates | 34%-61% (45%) | |||||
Specific issuer default severity | 83%-92% (89%) | |||||||||
Annual prepayment rate | 1% | |||||||||
Projected annual nonspecific issuer default rates | 0.25%-1.00% | |||||||||
Projected annual nonspecific issuer default severity | 85% | |||||||||
Present value discount rate | 22.5% |
26
Table of Contents
Assets and liabilities measured at fair value are summarized below:
Fair Value Measurements at | ||||||||||||||||
June 30, 2013 | ||||||||||||||||
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 | — | $ | 89,165 | — | $ | 89,165 | ||||||||||
Mortgage-backed securities—residential | — | 338,150 | — | 338,150 | ||||||||||||
Obligations of states and political subdivisions | — | 81,282 | — | 81,282 | ||||||||||||
Other debt securities | — | 787 | $ | 3,335 | 4,122 | |||||||||||
Mutual funds and other equity securities | — | 10,645 | — | 10,645 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | $ | 520,029 | $ | 3,335 | $ | 523,364 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Measured on a non-recurring basis: | ||||||||||||||||
Impaired loans: (1) | ||||||||||||||||
Commercial Real Estate | — | — | $ | 5,571 | $ | 5,571 | ||||||||||
Construction | — | — | 2,635 | 2,635 | ||||||||||||
Residential | — | — | 7,764 | 7,764 | ||||||||||||
Commercial & Industrial | — | — | 1,709 | 1,709 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | — | $ | 17,679 | $ | 17,679 | ||||||||||
|
|
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|
|
|
|
|
(1) | Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 and Level 3 inputs which include independent appraisals and internally customized discounting criteria. The recorded investment in impaired loans subject to fair value reporting on June 30, 2013 was $17,679 for which no specific allowance has been established within the allowance for loan losses. During the six months ended June 30, 2013, $581 of charge-offs were recorded related to these loans. The level of charge-offs has a direct impact on the determination of the provision for loan losses. The fair values were based on internally customized discounting criteria of the collateral and thus classified as Level 3 fair values. |
27
Table of Contents
Fair Value Measurements at | ||||||||||||||||
December 31, 2012 | ||||||||||||||||
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 | — | $ | 53,223 | — | $ | 53,223 | ||||||||||
Mortgage-backed securities—residential | — | 295,088 | — | 295,088 | ||||||||||||
Obligations of states and political subdivisions | — | 82,602 | — | 82,602 | ||||||||||||
Other debt securities | — | 798 | $ | 2,950 | 3,748 | |||||||||||
Mutual funds and other equity securities | — | 10,409 | — | 10,409 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | $ | 442,120 | $ | 2,950 | $ | 445,070 | |||||||||
|
|
|
|
|
|
|
| |||||||||
Measured on a non-recurring basis: | ||||||||||||||||
Impaired loans: (1) | ||||||||||||||||
Commercial Real Estate | — | — | $ | 6,835 | $ | 6,835 | ||||||||||
Construction | — | — | 3,219 | 3,219 | ||||||||||||
Residential | — | — | 8,514 | 8,514 | ||||||||||||
Commercial & Industrial | — | — | 1,737 | 1,737 | ||||||||||||
Loans held for sale (2) | — | — | 2,317 | 2,317 | ||||||||||||
Other real estate owned (3) | — | — | 250 | 250 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | — | — | $ | 22,872 | $ | 22,872 | ||||||||||
|
|
|
|
|
|
|
|
(1) | Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 and Level 3 inputs which include independent appraisals and internally customized discounting criteria. The recorded investment in impaired loans subject to fair value reporting on December 31, 2012 was $20,305 for which no specific allowance has been established within the allowance for loan losses. During 2012, $7,344 of charge-offs were recorded related to these loans. The level of charge-offs has a direct impact on the determination of the provision for loan losses. The fair values were based on internally customized discounting criteria of the collateral and thus classified as Level 3 fair values. |
(2) | Loans held for sale are reported at lower of cost or fair value. Fair value is based on average bid indicators received from third parties expected to participate in the loan sales. |
(3) | Other real estate owned is reported at fair value less anticipated costs to sell. Fair value is based on third party or internally developed appraisals which, considering the assumptions in the valuation, are considered Level 2 or Level 3 inputs. The fair value of other real estate owned at December 31, 2012 was derived by management from appraisals which used various assumptions and were discounted as necessary, resulting in a Level 3 classification. |
The table below presents a reconciliation and income statement classification of gains and losses for securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six month periods ended June 30, 2013 and 2012:
Level 3 Assets Measured on a Recurring Basis | ||||||||||||||||
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(000’s) | (000’s) | |||||||||||||||
Balance at beginning of period | $ | 3,038 | $ | 2,422 | $ | 2,950 | $ | 2,816 | ||||||||
Additions to Level 3 | 62 | 102 | 158 | 208 | ||||||||||||
Net unrealized gain included in other comprehensive income (1) | 354 | 445 | 550 | 423 | ||||||||||||
Principal payments | (119 | ) | (151 | ) | (323 | ) | (151 | ) | ||||||||
Recognized impairment charge included in the statement of income (2) | — | (50 | ) | — | (528 | ) | ||||||||||
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|
|
|
|
|
|
| |||||||||
Balance at end of period | $ | 3,335 | $ | 2,768 | $ | 3,335 | $ | 2,768 | ||||||||
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|
|
|
|
|
(1) | Reported under “Gains recognized in comprehensive income” |
(2) | Reported under “Net impairment loss recognized in earnings” |
28
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 June 30, 2013 and December 31, 2012 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.
Carrying amount and estimated fair value of financial instruments, not previously presented, at June 30, 2013 and December 31, 2012 were as follows (in millions):
June 30, 2013 | Fair Value Measurements | |||||||||||||||||||
Carrying Amount | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Assets: | ||||||||||||||||||||
Financial assets for which carrying value approximates fair value | $ | 860.0 | $ | 860.0 | $ | 860.0 | ||||||||||||||
Held to maturity securities and accrued interest | 7.3 | 7.8 | $ | 7.8 | ||||||||||||||||
FHLB Stock | 3.5 | N/A | N/A | |||||||||||||||||
Loans and accrued interest | 1,468.0 | 1,487.1 | $ | 1,487.1 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposits with no stated maturity and accrued interest | 2,502.8 | 2,502.8 | 2,502.8 | |||||||||||||||||
Time deposits and accrued interest | 122.4 | 122.4 | 122.4 | |||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowing and accrued interest | 23.9 | 23.9 | 23.9 | |||||||||||||||||
Other borrowings and accrued interest | 16.5 | 14.6 | 14.6 | |||||||||||||||||
December 31, 2012 | Fair Value Measurements | |||||||||||||||||||
Carrying Amount | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Assets: | ||||||||||||||||||||
Financial assets for which carrying value approximates fair value | $ | 846.8 | $ | 846.8 | $ | 846.8 | ||||||||||||||
Held to maturity securities and accrued interest | 10.2 | 10.8 | $ | 10.8 | ||||||||||||||||
FHLB Stock | 4.8 | N/A | N/A | |||||||||||||||||
Loans and accrued interest | 1,453.2 | 1,490.2 | $ | 1,490.2 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||
Deposits with no stated maturity and accrued interest | 2,387.7 | 2,387.7 | 2,387.7 | |||||||||||||||||
Time deposits and accrued interest | 132.4 | 132.7 | 132.7 | |||||||||||||||||
Securities sold under repurchase agreements and other short-term borrowing and accrued interest | 34.6 | 34.6 | 34.6 | |||||||||||||||||
Other borrowings and accrued interest | 16.5 | 14.2 | 14.2 |
The estimated fair value of the indicated items was determined as follows:
Financial assets for which carrying value approximates fair value — The estimated fair value approximates carrying amount because of the immediate availability of these funds or based on the short maturities and current rates for similar deposits. Cash and due from banks as well as Federal funds sold are reported in this line item.
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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.
10. Accumulated Other Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and accrued benefit liability adjustments which are also recognized as separate components of equity. Activity in accumulated other comprehensive income (loss), net of tax, was as follows (in thousands):
Securities Available For Sale | Defined Benefit Plans | Accumulated Other Comprehensive Income | ||||||||||
Balance at January 1, 2013 | $ | 624 | $ | (1,473 | ) | $ | (849 | ) | ||||
Other comprehensive loss before reclassification | (7,223 | ) | — | (7,223 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | — | 186 | 186 | |||||||||
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Net other comprehensive (loss) income during period | (7,223 | ) | 186 | (7,037 | ) | |||||||
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Balance at June 30, 2013 | $ | (6,599 | ) | $ | (1,287 | ) | $ | (7,886 | ) | |||
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Balance at January 1, 2012 | $ | 2,924 | $ | (1,198 | ) | $ | 1,726 | |||||
Other comprehensive (loss) income before reclassification | (1,763 | ) | 41 | (1,722 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income | 312 | 132 | 444 | |||||||||
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Net other comprehensive (loss) income during period | (1,451 | ) | 173 | (1,278 | ) | |||||||
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Balance at June 30, 2012 | $ | 1,473 | $ | (1,025 | ) | $ | 448 | |||||
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The following table represents the reclassification out of accumulated other comprehensive income for the three and six months ended June 30, 2013 and 2012:
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Unrealized gains (losses) on securities available for sale: | ||||||||||||||||
Realized gains (losses) on securities transactions | — | — | — | — | ||||||||||||
Other-than-temporary impairment charges | — | $ | (50 | ) | — | $ | (528 | ) | ||||||||
Income tax expense | — | 20 | — | 215 | ||||||||||||
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Net of tax | — | (30 | ) | — | (313 | ) | ||||||||||
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Amortization of pension and post-retirement benefit items: | ||||||||||||||||
Amortization of net actuarial loss | $ | (209 | ) | (167 | ) | $ | (418 | ) | (335 | ) | ||||||
Amortization of prior service cost | 54 | 58 | 108 | 116 | ||||||||||||
Income tax expense | 62 | 44 | 124 | 88 | ||||||||||||
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Net of tax | (93 | ) | (65 | ) | (186 | ) | (131 | ) | ||||||||
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Total reclassifications, net of tax | $ | (93 | ) | $ | (95 | ) | $ | (186 | ) | $ | (444 | ) | ||||
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The income statement line items impacted by the reclassification of unrealized gains (losses) on securities available for sale are net impairment loss recognized in earnings and income tax expense. The income statement line items impacted by the reclassification of amortization of pension and post-retirement benefit items are salaries and employee benefits and income tax expense.
11. Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02,“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of AccumulatedOther Comprehensive Income,” which amended existing guidance to require an entity to provide information about amounts reclassified out of other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For all other amounts, an entity is required to cross-reference to other disclosures that provide additional details about these amounts. The guidance is effective for public companies for interim and annual periods beginning after December 15, 2012. The adoption of the guidance did not have a material impact on the Company’s results of operation or financial position but did require expansion of the Company’s disclosures.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This section presents discussion and analysis of the Company’s consolidated financial condition at June 30, 2013 and December 31, 2012, and the consolidated results of operations for the three and six month periods ended June 30, 2013 and June 30, 2012. 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 2012 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 2012 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 and portions of New York City. The Company’s assets consist primarily of cash and cash equivalents, 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 cash and cash equivalents, loans and investments, and interest expense on deposits and borrowed funds. The Company’s strategy includes investigation of opportunities for expansion within our market area, as well as an ongoing review of our existing branch system to evaluate if our current locations have or have not met expectations for growth and profitability. 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 have occurred and may continue to take place in reaction to current conditions 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 June 30, 2013 of $3.5 million or $0.18 per diluted share, a decrease of $1.5 million compared to net income of $5.0 million or $0.25 per diluted share for the same period in the prior year. Net income for the six month period ended June 30, 2013 was $7.1 million or $0.36 per diluted share, a decrease of $15.9 million compared to net income of $23.0 million or $1.17 per diluted share for the same period in the prior year. Noninterest income in the first quarter of 2012 included a pretax gain of $15.9 million resulting from the successful completion of approximately $470 million of loan sales announced in the fourth quarter of 2011 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.
The decrease in earnings for the three and six month periods ended June 30, 2013, compared to the same period in the prior year, was a result of lower net interest income and lower noninterest income, partially offset by lower provisions for loan losses, lower noninterest expenses and lower income taxes. The decrease in net interest income for the three months ended June 30, 2013, compared to the prior year period resulted primarily from a significant decrease in the net interest margin to 3.06 percent for the second quarter of 2013 from 3.93 percent for the same period in the prior year. This decrease resulted from significant changes in the composition of interest earning assets resulting from the combined effects of previously reported loan sales in the first quarter of 2012 and continued low interest rates. Earnings for the first half of 2013 continued to be adversely affected by significant excess liquidity remaining from the proceeds of the aforementioned loan sales and the continuing effects of historically low interest rates on yields available on new loans and investments.
Total loans, excluding loans held for sale, increased $10.6 million to $1,480.4 million at June 30, 2013, compared to $1,469.8 million at the prior year end. The increase was primarily the result of a $36 million purchase of fixed and adjustable rate residential loans in the second quarter of 2013 and new loan production, partially offset by pay downs and payoffs of existing loans. The loan purchase consisted of 1-4 family jumbo residential mortgage loans in the metro New York area with a weighted average loan to value ratio of 69.3 percent and a weighted average credit score of 767. The Company continues to provide lending availability to both new and existing customers.
Nonperforming assets decreased to $30.3 million at June 30, 2013, compared to $35.1 million at December 31, 2012. Overall asset quality showed significant improvement during the first half of 2013 but continues to be adversely affected by the current state of the economy and the real estate market. Overall reductions in classified, nonperforming and delinquent loans have resulted from the Company’s aggressive strategies for resolving problem assets and from the slow improvement in the overall economy. However, levels of nonperforming and classified loans remain at elevated levels. As a result of these factors, the Company has continued to
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maintain the allowance for loan losses at a higher than normal level, while recognizing the measurable improvements in overall asset quality and the general economic outlook. The provision for loan losses totaled $0.3 million and $1.1 million, respectively, for the three and six month periods ended June 30, 2013, compared to $1.9 million and $3.3 million, respectively, for the same periods in the prior year. The 2013 provisions were lower than in 2012 reflecting improvements in overall asset quality, and significant reductions in net charge-offs in the first half of 2013 primarily due to recoveries, compared to the same periods in the prior year.
Total deposits increased by $105.2 million during the six month period ended June 30, 2013, 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 remaining from the 2012 loan sales and from deposit growth in excess of loan and investment growth 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 continued high level of liquidity contributed to significant margin compression. The net interest margin was 3.06 percent and 3.12 percent, respectively, for the three and six month periods ended June 30, 2013, compared to 3.93 percent and 4.34 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 2012 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 Office of the Comptroller of the Currency (OCC). 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 $4.6 million or 17.6 percent to $21.5 million for the three month period ended June 30, 2013, compared to $26.1 million for the same period in the prior year. Tax equivalent basis net interest income decreased by $14.8 million or 25.6 percent to $43.1 million for the six month period ended June 30, 2013, compared to $57.9 million for the same period in the prior year. The effect of the adjustment to a tax equivalent basis was $0.4 million and $0.8 million, respectively, for the three and six month periods ended June 30, 2013, compared to $0.6 million and $1.1 million, respectively, for the same periods in the prior year.
The Company’s non interest income was $3.9 million and $8.4 million, respectively, for the three and six month periods ended June 30, 2013. This represented decreases of $0.9 million and $16.7 million, respectively, compared to $4.8 million and $25.1 million, respectively, for the same periods in the prior year. The decreases in the three and six month periods ended June 30, 2013, compared to the same periods in the prior year, resulted from lower service fees, lower investment advisory fees, lower net gains on sales and revaluations of assets and lower other income. The decrease in the six month period ended June 30, 2013, compared to the same period in the prior year, also resulted from a nonrecurring $15.9 million pretax gain on sales of loans completed in the first quarter of 2012. Investment advisory fee income was lower in 2013 primarily due to a reduction in assets under management. Service charges decreased due to decreased activity. There were no pretax impairment charges on securities available-for-sale recorded during the first half of 2013. Pre-tax impairment charges on securities available-for-sale were $0.1 million and $0.5 million, respectively, for the three and six month periods ended June 30, 2012. The impairment charges were related to the Company’s investments in pooled trust preferred securities.
Non interest expense was $19.8 million and $39.4 million, respectively, for the three and six month periods ended June 30, 2013. This represented decreases of $1.2 million or 5.7 percent and $2.5 million or 6.0 percent, respectively, compared to $21.0 million and $41.9 million, respectively, for the same periods in the prior year. The decrease in non interest expense resulted primarily from an additional provision of $1.3 million in the first quarter of 2012 related to the Securities and Exchange Commission (SEC) administrative proceeding relating to the brokerage practices and policies of the Company’s investment advisory subsidiary, A.R. Schmeidler & Co., Inc. (ARS). In July 2013, ARS reached an agreement with the SEC to settle the matters which arose during the investigations. Prior accruals for anticipated penalties and related costs in the final resolution of this matter were sufficient to pay the agreed upon settlement amount.
Non interest expense for the three and six month periods ended June 30, 2013, compared to the same periods in the prior year also reflected reductions in personnel and other costs resulting from cost saving initiatives implemented, including closings of certain unprofitable branches, decreases in costs associated with problem loan resolution and decreases in occupancy expenses, partially offset by an increase in FDIC insurance premiums and increases related to the investment in technology and personnel to accommodate growth, expansion of services and products available to new and existing customers and expansion of the Company’s regulatory compliance capabilities.
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On April 24, 2012, the Board of Directors of Hudson Valley Bank signed a formal written agreement with the OCC. With this agreement, the Bank committed 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 were enhancements to HVB’s procedures, systems, policies, programs, plans, training and resources. The written agreement imposed no specific capital ratio mandates or other quantitative conditions or obligations on HVB and did not impose any limit on the HVB board’s ability to pay dividends to its parent, except those imposed by law. During the second quarter of 2012, the Bank submitted a capital plan to the OCC, which included provisions regarding the payment of dividends by HVB, as required under the written agreement. The Bank is operating in accordance with its capital plan without supervisory objection from the OCC. Hudson Valley’s capital ratios remain significantly in excess of “well capitalized” levels generally applicable to banks under current regulations. At June 30, 2013, Hudson Valley Holding Corp. posted a total risk-based capital ratio of 17.7 percent, a Tier 1 risk-based capital ratio of 16.5 percent, and a Tier 1 leverage ratio of 9.3 percent. At June 30, 2013, Hudson Valley Bank, N.A. posted a total risk-based capital ratio of 17.4 percent, a Tier 1 risk-based capital ratio of 16.2 percent, and a Tier 1 leverage ratio of 9.1 percent.
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”). 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 critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, 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. There have been no changes to the Company’s critical accounting policies during the six months ended June 30, 2013.
Results of Operations for the Three and Six Month Periods Ended June 30, 2013 and June 30, 2012
Summary of Results
The Company recorded net income of $3.5 million or $0.18 per diluted share and $7.1 million or $0.36 per diluted share for the three and six month periods ended June 30, 2013, respectively, compared to net income of $5.0 million or $0.25 per diluted share and $23.0 million or $1.17 per diluted share for the same periods in the prior year. The decreases in net income for the three and six month periods ended June 30, 2013, compared to the same periods in the prior year, were the result of lower net interest income, lower noninterest income and lower income taxes, partially offset by lower provision for loan losses and lower noninterest expense. The decrease in net interest income for the three and six month periods ended June 30, 2013, compared to the prior year periods resulted primarily from decreases in the net interest margin to 3.06 percent and 3.12 percent for three and six months ended June 30, 2013, respectively, from 3.93 percent and 4.34 percent for the same periods in the prior year. These decreases resulted from significant changes in the composition of interest earning assets resulting from the combined effects of previously reported loan sales in the first quarter of 2012, generally weak new loan demand and continued low interest rates. Noninterest income in the first quarter of 2012 included a pretax gain of $15.9 million resulting from the loan sales. The provision for loan losses totaled $0.3 million and $1.1 million for the three and six month periods ended June 30, 2013, compared to $1.9 million and $3.3 million for the same periods in the prior year, reflecting improvements achieved in the resolutions of classified and nonperforming loans, partially offset by continued weakness in the overall economy, and the continued effects of this weakness on the Company’s overall asset quality.
Annualized returns on average stockholders’ equity and average assets were 4.8 percent and 0.5 percent for the three month period ended June 30, 2013, compared to 6.7 percent and 0.7 percent for the same period in the prior year. Annualized returns on average stockholders’ equity and average assets were 4.9 percent and 0.5 percent for the six month period ended June 30, 2013, compared to 15.9 percent and 1.6 percent for the same period in the prior year. Returns on adjusted average stockholders’ equity were 4.7 percent and 4.9 percent for the three and six month periods ended June 30, 2013, compared to 6.8 and 16.0 percent for the same periods in the prior year. Adjusted average stockholders’ equity excludes the effects of average net unrealized losses on securities available for sale, net of tax, of $1.2 million and $0.6 million for the three and six month periods ended June 30, 2013, and average net unrealized gains on securities available for sale, net of tax, of $2.0 million and $2.4 million for the same periods 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 June 30, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average Balance | Interest (3) | Yield/ Rate | Average Balance | Interest (3) | Yield/ Rate | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in Banks | $ | 822,288 | $ | 540 | 0.26 | % | $ | 532,009 | $ | 298 | 0.22 | % | ||||||||||||
Federal funds sold | 23,279 | 11 | 0.19 | % | 16,658 | 9 | 0.22 | % | ||||||||||||||||
Securities: (1) | ||||||||||||||||||||||||
Taxable | 421,394 | 2,390 | 2.27 | % | 373,009 | 3,140 | 3.37 | % | ||||||||||||||||
Exempt from federal income taxes | 82,236 | 1,200 | 5.84 | % | 96,953 | 1,554 | 6.41 | % | ||||||||||||||||
Loans, net (2) | 1,409,875 | 18,826 | 5.34 | % | 1,577,190 | 22,663 | 5.75 | % | ||||||||||||||||
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Total interest earning assets | 2,759,072 | 22,967 | 3.33 | % | 2,595,819 | 27,664 | 4.26 | % | ||||||||||||||||
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Non interest earning assets: | ||||||||||||||||||||||||
Cash & due from banks | 60,270 | 46,279 | ||||||||||||||||||||||
Other assets | 132,272 | 150,049 | ||||||||||||||||||||||
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Total non interest earning assets | 192,542 | 196,328 | ||||||||||||||||||||||
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Total assets | $ | 2,951,614 | $ | 2,792,147 | ||||||||||||||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 894,878 | $ | 784 | 0.35 | % | $ | 856,977 | $ | 917 | 0.43 | % | ||||||||||||
Savings | 123,925 | 95 | 0.31 | % | 126,547 | 148 | 0.47 | % | ||||||||||||||||
Time | 124,058 | 155 | 0.50 | % | 140,963 | 211 | 0.60 | % | ||||||||||||||||
Checking with interest | 442,048 | 258 | 0.23 | % | 358,670 | 138 | 0.15 | % | ||||||||||||||||
Securities sold under repo & other s/t borrowings | 26,115 | 7 | 0.11 | % | 44,715 | 16 | 0.14 | % | ||||||||||||||||
Other borrowings | 16,412 | 180 | 4.39 | % | 16,450 | 182 | 4.43 | % | ||||||||||||||||
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Total interest bearing liabilities | 1,627,436 | 1,479 | 0.36 | % | 1,544,322 | 1,612 | 0.42 | % | ||||||||||||||||
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Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 1,001,674 | 925,569 | ||||||||||||||||||||||
Other liabilities | 27,658 | 28,830 | ||||||||||||||||||||||
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Total non interest bearing liabilities | 1,029,332 | 954,399 | ||||||||||||||||||||||
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Stockholders’ equity (1) | 294,846 | 293,426 | ||||||||||||||||||||||
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Total liabilities and stockholders’ equity | $ | 2,951,614 | $ | 2,792,147 | ||||||||||||||||||||
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Net interest earnings | $ | 21,488 | $ | 26,052 | ||||||||||||||||||||
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Net yield on interest earning assets | 3.12 | % | 4.01 | % |
(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. Also, see the non-GAAP financial disclosures and reconciliation to GAAP table below. |
(2) | Includes loans classified as non-accrual. |
(3) | The data contained in this 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. Also, see the non-GAAP financial disclosures and reconciliation to GAAP table below. |
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(Dollars in thousands) | ||||||||||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||||
Average Balance | Interest (3) | Yield/ Rate | Average Balance | Interest (3) | Yield/ Rate | |||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||
Deposits in Banks | $ | 787,982 | $ | 988 | 0.25 | % | $ | 327,322 | $ | 354 | 0.22 | % | ||||||||||||
Federal funds sold | 24,415 | 22 | 0.18 | % | 16,647 | 17 | 0.20 | % | ||||||||||||||||
Securities: (1) | ||||||||||||||||||||||||
Taxable | 403,689 | 4,585 | 2.27 | % | 384,002 | 6,453 | 3.36 | % | ||||||||||||||||
Exempt from federal income taxes | 83,058 | 2,382 | 5.74 | % | 98,806 | 3,071 | 6.22 | % | ||||||||||||||||
Loans, net (2) | 1,415,970 | 38,085 | 5.38 | % | 1,787,290 | 51,578 | 5.77 | % | ||||||||||||||||
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|
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| |||||||||||||||||
Total interest earning assets | 2,715,114 | 46,062 | 3.39 | % | 2,614,067 | 61,473 | 4.70 | % | ||||||||||||||||
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Non interest earning assets: | ||||||||||||||||||||||||
Cash & due from banks | 56,284 | 47,850 | ||||||||||||||||||||||
Other assets | 134,438 | 154,651 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total non interest earning assets | 190,722 | 202,501 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total assets | $ | 2,905,836 | $ | 2,816,568 | ||||||||||||||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | $ | 878,399 | $ | 1,625 | 0.37 | % | $ | 919,917 | $ | 2,156 | 0.47 | % | ||||||||||||
Savings | 127,108 | 187 | 0.29 | % | 121,171 | 261 | 0.43 | % | ||||||||||||||||
Time | 126,521 | 318 | 0.50 | % | 142,953 | 465 | 0.65 | % | ||||||||||||||||
Checking with interest | 405,065 | 409 | 0.20 | % | 329,671 | 282 | 0.17 | % | ||||||||||||||||
Securities sold under repo & other s/t borrowings | 28,019 | 16 | 0.11 | % | 49,150 | 67 | 0.27 | % | ||||||||||||||||
Other borrowings | 16,417 | 359 | 4.37 | % | 16,455 | 363 | 4.41 | % | ||||||||||||||||
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|
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| |||||||||||||||||
Total interest bearing liabilities | 1,581,529 | 2,914 | 0.37 | % | 1,579,317 | 3,594 | 0.46 | % | ||||||||||||||||
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Non interest bearing liabilities: | ||||||||||||||||||||||||
Demand deposits | 1,002,967 | 923,730 | ||||||||||||||||||||||
Other liabilities | 28,458 | 27,016 | ||||||||||||||||||||||
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| |||||||||||||||||||||
Total non interest bearing liabilities | 1,031,425 | 950,746 | ||||||||||||||||||||||
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Stockholders’ equity (1) | 292,882 | 286,505 | ||||||||||||||||||||||
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Total liabilities and stockholders’ equity | $ | 2,905,836 | $ | 2,816,568 | ||||||||||||||||||||
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Net interest earnings | $ | 43,148 | $ | 57,879 | ||||||||||||||||||||
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| |||||||||||||||||||||
Net yield on interest earning assets | 3.18 | % | 4.43 | % |
(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. Also, see the non-GAAP financial disclosures and reconciliation to GAAP table below. |
(2) | Includes loans classified as non-accrual. |
(3) | The data contained in this 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. Also, see the non-GAAP financial disclosures and reconciliation to GAAP table below. |
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Non-GAAP Reconciliation to GAAP
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(000’s) | ||||||||||||||||
Total average interest earning assets: | ||||||||||||||||
As reported | $ | 2,756,881 | $ | 2,598,762 | $ | 2,713,959 | $ | 2,617,656 | ||||||||
Unrealized (loss) gain on securities available for sale (1) | (2,191 | ) | 2,943 | (1,155 | ) | 3,589 | ||||||||||
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Adjusted total average interest earning assets | $ | 2,759,072 | $ | 2,595,819 | $ | 2,715,114 | $ | 2,614,067 | ||||||||
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Net interest earnings: | ||||||||||||||||
As reported | $ | 21,068 | $ | 25,508 | $ | 42,314 | $ | 56,804 | ||||||||
Adjustment to tax equivalency basis (2) | 420 | 544 | 834 | 1,075 | ||||||||||||
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Adjusted net interest earnings | $ | 21,488 | $ | 26,052 | $ | 43,148 | $ | 57,879 | ||||||||
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Net yield on interest earning assets: | ||||||||||||||||
As reported | 3.06 | % | 3.93 | % | 3.12 | % | 4.34 | % | ||||||||
Effects of (1) and (2) above | 0.06 | % | 0.08 | % | 0.06 | % | 0.09 | % | ||||||||
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Adjusted net yield on interest earning assets | 3.12 | % | 4.01 | % | 3.18 | % | 4.43 | % | ||||||||
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Average stockholders’ equity: | ||||||||||||||||
As reported | $ | 293,616 | $ | 295,378 | $ | 292,290 | $ | 288,918 | ||||||||
Effects of (1) and (2) above | (1,230 | ) | 1,952 | (592 | ) | 2,413 | ||||||||||
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Adjusted average stockholders’ equity | $ | 294,846 | $ | 293,426 | $ | 292,882 | $ | 286,505 | ||||||||
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Interest Differential
The following table sets forth the dollar amount of changes in interest income, interest expense and net interest income between the three and six month periods ended June 30, 2013 and 2012:
(000’s) | (000’s) | |||||||||||||||||||||||
Three Month Period Increase | Six Month Period Increase | |||||||||||||||||||||||
(Decrease) Due to Change in | (Decrease) Due to Change in | |||||||||||||||||||||||
Volume | Rate | Total (1) | Volume | Rate | Total (1) | |||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Deposits in Banks | $ | 163 | $ | 79 | $ | 242 | $ | 498 | $ | 136 | $ | 634 | ||||||||||||
Federal funds sold | 4 | (2 | ) | 2 | 8 | (3 | ) | 5 | ||||||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | 407 | (1,157 | ) | (750 | ) | 331 | (2,199 | ) | (1,868 | ) | ||||||||||||||
Exempt from federal income taxes (2) | (236 | ) | (118 | ) | (354 | ) | (489 | ) | (200 | ) | (689 | ) | ||||||||||||
Loans, net | (2,404 | ) | (1,433 | ) | (3,837 | ) | (10,716 | ) | (2,777 | ) | (13,493 | ) | ||||||||||||
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Total interest income | (2,066 | ) | (2,631 | ) | (4,697 | ) | (10,368 | ) | (5,043 | ) | (15,411 | ) | ||||||||||||
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Interest expense: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
Money market | 41 | (174 | ) | (133 | ) | (97 | ) | (434 | ) | (531 | ) | |||||||||||||
Savings | (3 | ) | (50 | ) | (53 | ) | 13 | (87 | ) | (74 | ) | |||||||||||||
Time | (25 | ) | (31 | ) | (56 | ) | (53 | ) | (94 | ) | (147 | ) | ||||||||||||
Checking with interest | 32 | 88 | 120 | 64 | 63 | 127 | ||||||||||||||||||
Securities sold under repo & other s/t borrowings | (7 | ) | (2 | ) | (9 | ) | (29 | ) | (22 | ) | (51 | ) | ||||||||||||
Other borrowings | — | (2 | ) | (2 | ) | (1 | ) | (3 | ) | (4 | ) | |||||||||||||
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Total interest expense | 38 | (171 | ) | (133 | ) | (103 | ) | (577 | ) | (680 | ) | |||||||||||||
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Decrease in interest differential | $ | (2,104 | ) | $ | (2,460 | ) | $ | (4,564 | ) | $ | (10,265 | ) | $ | (4,466 | ) | $ | (14,731 | ) | ||||||
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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 2013 and 2012. |
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 the“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 2012 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, and declining margins. In addition, a dynamically changing regulatory landscape has resulted in greater scrutiny of the historic business models of 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, 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. The Company expects the pace of margin compression to moderate in 2013 compared to the prior year. The Company expects stabilizing net interest margin as mid- and long-term interest rates begin to rise and the Company continues to make progress on deploying cash into earning assets. The Company has implemented increased levels of investment securities purchases, new lending initiatives designed to address both near and long term redeployment of available liquidity and
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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 continued 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 $4.6 million or 17.6 percent to $21.5 million and by $14.8 million or 25.6 percent to $43.1 million, respectively, for the three and six month periods ended June 30, 2013, compared to $26.1 million and $57.9 million, respectively, for the same periods in the prior year. Net interest income was lower partially due to decreases in tax equivalent basis net interest margin to 3.12 percent and 3.18 percent for the three and six month periods ended June 30, 2013, respectively, compared to 4.01 percent and 4.43 percent for the same periods in the prior year, and generally lower interest rates. The decrease in net interest income was also partially offset by the increase in adjusted average interest earning assets over average interest bearing liabilities of $80.2 million or 7.6 percent to $1,131.7 million, and $98.8 million or 9.5 percent to $1,133.6 million, respectively, for the three and six month periods ended June 30, 2013, compared to $1,051.5 million and $1,034.8 million for the same periods in the prior year. Net interest income in accordance with GAAP decreased by $4.4 million or 17.3 percent to $21.1 million and by $14.5 million or 25.5 percent to $42.3 million for the three and six month periods ended June 30, 2013, respectively, compared to $25.5 million and $56.8 million 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 it 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 and proceeds from loan sales which have not 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 include interest rate floors on many originated loans 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.
Interest income is determined by the volume of, and related rates earned on, interest earning assets. Volume decreases in loans and a lower average yield on interest earning assets, partially offset by volume increases in investments, interest bearing deposits and federal funds sold resulted in lower interest income for the three month period ended June 30, 2013, compared to the same period in the prior year. Volume decreases in loans and a lower average yield on interest earning assets, partially offset by a volume increase in investments, interest bearing deposits and federal funds sold resulted in lower interest income for the six month period ended June 30, 2013, compared to the same period in the prior year. Adjusted average interest earning assets for the three and six month periods ended June 30, 2013, increased $163.3 million or 6.3 percent to $2,759.1 million from $2,595.8 million and increased $101.0 million or 3.9 percent to $2,715.1 million from $2,614.1 million, respectively, for the same periods in the prior year.
Loans are the largest component of interest earning assets. Average net loans decreased $167.3 million or 10.6 percent to $1,409.9 million, for the three month period ended June 30, 2013, compared to $1,577.2 million for the same period in the prior year. The reduction in average loans resulted from only partial redeployment of proceeds from the previously reported loan sales completed at the end of the first quarter of 2012 and payoffs and pay downs in excess of production. The average yield on loans was 5.34 percent for the three month period ended June 30, 2013, compared to 5.75 percent for the same period in the prior year. This reduction resulted primarily from continued historically low interest rates and their effect on the yield of new and renewing loans. As a result, interest income on loans was lower for the three month period ended June 30, 2013, compared to the same period in the prior year, due to lower volume and lower average interest rates. Average net loans decreased $371.3 million or 20.7 percent to $1,416.0 million, for the six month period ended June 30, 2013, compared to $1,787.3 million for the same period in the prior year. The reduction in average loans resulted from only partial redeployment of proceeds from the previously reported loan sales completed at the end of the first quarter of 2012 and payoffs and pay downs in excess of production. The average yield on loans was 5.38 percent for the six month period ended June 30, 2013, compared to 5.77 percent for the same period in the prior year. This reduction resulted primarily from continued historically low interest rates and their effect on the yield of new and renewing loans. As a result, interest income on loans was lower for the six month period ended June 30, 2013, compared to the same period in the prior year, due to lower volume and lower average interest rates.
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Table of Contents
Average total securities, including FHLB stock and excluding net unrealized gains and losses, increased $33.6 million or 7.2 percent to $503.6 million for the three month period ended June 30, 2013, compared to $470.0 million for the same period in the prior year. The increase in average total securities resulted primarily from significant purchases during the period. The average tax equivalent basis yield on securities was 2.85 percent for the three month period ended June 30, 2013, compared to 4.00 percent for the same period in the prior year. As a result, tax equivalent basis interest income on securities decreased for the three month period ended June 30, 2013, compared to the same period in the prior year, due to lower interest rates. Average total securities, including FHLB stock and excluding net unrealized gains and losses, increased $3.9 million or 0.8 percent to $486.7 million for the six month period ended June 30, 2013, compared to $482.8 million for the same period in the prior year. The increase in average total securities resulted primarily from significant purchases during the period. The average tax equivalent basis yield on securities was 2.86 percent for the six month period ended June 30, 2013, compared to 3.95 percent for the same period in the prior year. As a result, tax equivalent basis interest income on securities decreased for the three month period ended June 30, 2013, compared to the same period in the prior year, due to lower interest rates. 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 $0.1 million or 6.3 percent to $1.5 million for the three month period ended June 30, 2013, compared to $1.6 million for the same period in the prior year. Average interest bearing liabilities increased $83.1 million or 5.4 percent to $1,627.4 million for the three month period ended June 30, 2013, compared to $1,544.3 million for the same period in the prior year. The increase in average interest bearing liabilities for the three month period ended June 30, 2013, compared to the same period in the prior year, was due to volume increases in interest bearing deposits and volume decreases in securities sold under repurchase agreements and other short-term borrowings and other borrowings. There were increases in average noninterest bearing demand deposits. The decrease in average short-term and other borrowings for the three month period ended June 30, 2013, compared to the same period 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. The average interest rate paid on interest bearing liabilities was 0.36 percent for the three month period ended June 30, 2013, compared to 0.42 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 June 30, 2013, compared to the same period in the prior year due to lower interest rates. Interest expense decreased $0.7 million or 19.4 percent to $2.9 million for the six month period ended June 30, 2013, compared to $3.6 million for the same period in the prior year. Average interest bearing liabilities increased $2.2 million or 0.1 percent to $1,581.5 million for the six month period ended June 30, 2013, compared to $1,579.3 million for the same period in the prior year. The increase in average interest bearing liabilities for the six month period ended June 30, 2013, compared to the same period in the prior year, was due to volume increases in interest bearing deposits partially offset by volume decreases in securities sold under repurchase agreements and other short-term borrowings. There were increases in average noninterest bearing demand deposits. The decrease in average short-term and other borrowings for the six month period ended June 30, 2013, compared to the same period 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. The average interest rate paid on interest bearing liabilities was 0.37 percent for the six month period ended June 30, 2013, compared to 0.46 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 six month period ended June 30, 2013, compared to the same period in the prior year due to lower interest rates.
Average non interest bearing demand deposits increased $76.1 million or 8.2 percent to $1,001.7 million and $79.3 million or 8.6 percent to $1,003.0 million for the three and six month periods ended June 30, 2013, respectively, compared to $925.6 million and $923.7 million 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 interest rate spread on a tax equivalent basis for the three and six month periods ended June 30, 2013 and 2012 is as follows:
Three Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Average interest rate on: | ||||||||||||||||
Total average interest earning assets | 3.33 | % | 4.26 | % | 3.39 | % | 4.70 | % | ||||||||
Total average interest bearing liabilities | 0.36 | % | 0.42 | % | 0.37 | % | 0.46 | % | ||||||||
Total interest rate spread | 2.97 | % | 3.84 | % | 3.02 | % | 4.24 | % |
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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
The Company recorded a provision for loan losses of $0.3 million and $1.1 million for the three and six month periods ended June 30, 2013, respectively, compared to $1.9 million and $3.3 million for the same periods in the prior year, reflecting improvements achieved in the resolutions of classified and nonperforming loans, partially offset by continued weakness in the overall economy, and the related effects of this weakness on the Company’s overall asset quality. 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 decreased $0.9 million or 19.0 percent to $3.9 million and $16.7 million or 66.5 percent to $8.4 million for the three and six month periods ended June 30, 2013, respectively, compared to $4.8 million and $25.1 million for the same periods in the prior year. The decrease in the six month period ended June 30, 2013, was primarily due to the $15.9 million pretax gain on sales of loans completed in the first quarter of 2012. Investment management fees decreased $0.5 million to $2.0 million and $1.0 million to $3.9 million for the three and six month periods ended June 30, 2013, on lower balances resulting from the departure to a competitor of a manager of ARS.
Non Interest Expense
Non interest expense decreased $1.2 million or 5.7 percent to $19.8 million and $2.5 million or 6.0 percent to $39.4 million for the three and six month periods ended June 30, 2013, respectively, compared to $21.0 million and $41.9 million for the same periods in the prior year. The decrease in non interest expenses reflected decreases in costs associated with problem loan resolution and decreases in occupancy expenses, partially offset by an increase in FDIC insurance premiums and increases related to the investment in technology and personnel to accommodate growth, expansion of services and products available to new and existing customers and expansion of the Company’s regulatory compliance capabilities. The decrease also resulted from a $1.3 million provision in the first quarter of 2012 for legal and settlement costs related to the Securities and Exchange Commission (SEC) administrative proceeding relating to the brokerage practices and policies of the Company’s investment advisory subsidiary, A.R. Schmeidler & Co., Inc. In July 2013, ARS reached an agreement with the SEC to settle the matters which arose during the investigations. Prior accruals for anticipated penalties and related costs in the final resolution of this matter were sufficient to pay the agreed upon settlement amount.
Salaries and employee benefits expense, the largest component of non interest expense, decreased $0.3 million or 2.6 percent to $11.1 million and increased $0.2 million or 0.9 percent to $22.4 million for the three and six month periods ended June 30, 2013, respectively, compared to the same periods in the prior year. The slight decrease for the three month period ended June 30, 2013 was due to lower bonus expense and the slight increase for the six month period ended June 30, 2013 was due to higher stock-based compensation.
Occupancy expense decreased $0.1 million or 4.5 percent to $2.1 million and $0.2 million or 4.5 percent to $4.2 million for the three and six month periods ended June 30, 2013, respectively, compared to $2.2 million and $4.4 million for the same periods in the prior year. The slight decreases reflected lower maintenance costs.
Professional service fees decreased $0.3 million or 15.0 percent to $1.7 million and $0.7 million or 17.9 percent to $3.2 million for the three and six month periods ended June 30, 2013, respectively, compared to $2.0 million and $3.9 million for the same periods in the prior year. The decreases were primarily due to higher costs in the prior year related to the engagement of consultants to assist with new systems implementations and legal costs related to the aforementioned SEC investigation of A.R. Schmeidler & Co., Inc.
Equipment expense decreased $0.2 million or 16.7 percent to $1.0 million and $0.1 million or 4.5 percent to $2.0 million for the three and six month periods ended June 30, 2013, respectively, compared to $1.2 million and $2.2 million for the same periods in the prior year. The slight decreases were due to lower equipment and software maintenance costs.
Business development expense decreased $0.2 million or 25.0 percent and $0.4 million or 28.6 percent to $1.0 million for the three and six month periods ended June 30, 2013, respectively, compared to $0.8 million and $1.4 million for the same periods in the prior year. The decreases were due to higher expenses in the prior year related to the celebration of the Bank’s 40th anniversary.
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The FDIC assessment increased $0.2 million or 28.6 percent to $0.9 million and $0.5 million or 35.7 percent to $1.9 million for the three and six month periods ended June 30, 2013, respectively, compared to $0.7 million and $1.4 million for the same periods in the prior year. The increase reflected changes in the Bank’s premium calculation base and assessment rate.
Significant changes in other components of non interest expense for the three and six month periods ended June 30, 2013 compared to June 30, 2012, were due to the following:
• | Decreases of $294,000 (420.0%) and $287,000 (322.5%), respectively, in other insurance expense, resulting from reductions in the estimates of the net cost of certain life insurance policies, |
• | Increases of $64,000 (33.0%) and $140,000 (36.8%), respectively, in stationary and printing costs, due to higher consumption levels, |
• | Decreases of $99,000 (40.4%) and $53,000 (28.0%), respectively, in courier expenses due to higher utilization during the second quarter of 2012, |
• | Increase of $4,000 (2.4%) and decrease of $37,000 (10.5%), respectively, in communication expense, due to outsourcing of several data processing functions, |
• | Increases of $200,000 (89.3%) and $2,000 (0.3%), respectively, in other loan expense, due to higher problem loans resolution expenses, |
• | Decreases of $57,000 (5.0%) and $13,000 (0.6%), respectively, in outside services due to the completion of a systems implementation during the second quarter of 2012, |
• | Increases of $24,000 (29.6%) and $6,000 (3.4%), respectively, in dues and meeting expenses, due to increased participation in such events, |
• | Decreases of $217,000 (36.8%) and $1,616,000 (70.5%), respectively, in other expenses, resulting primarily from lower deposit premium amortization and the provision of $1.3 million, recorded during the first quarter of 2012, related to the aforementioned SEC administrative proceeding involving A.R. Schmeidler & Co., Inc. |
Income Taxes
Income taxes of $1.4 million and $3.1 million were recorded in the three and six month periods ended June 30, 2013, respectively, compared to $2.4 million and $13.8 million for the same periods in the prior year. The overall effective tax rate of 28.0 percent and 30.2 percent for the three and six month periods ended June 30, 2013 was lower compared to 32.7 percent and 37.5 percent for the same periods in the prior year. The effective tax rate for the three month period ended June 30, 2013, was lower primarily due to higher tax-exempt income. The effective rate for the six month period ended June 30, 2013, was lower primarily due to the tax effect of the $15.9 million gain on loan sales, recorded in 2012 resulted in tax-exempt income representing a higher percentage of pretax income in 2013 compared to 2012. The Company is subject to a Federal statutory tax 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 9.0 percent.
In May 2013, the Internal Revenue Service (IRS) commenced an examination of the Company’s 2009, 2010 and 2011 income tax returns. The examinations are in the review stage and the Company can provide no assurance as to how these audits will be resolved.
Financial Condition
Assets
The Company had total assets of $2,982.0 million at June 30, 2013, an increase of $90.7 million or 3.1 percent from $2,891.2 million at December 31, 2012.
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Cash and Due from Banks
Cash and due from banks was $835.6 million at June 30, 2013, an increase of $8.1 million or 1.0 percent from $827.5 million at December 31, 2012. Included in cash and due from banks is interest earning deposits of $773.8 million at June 30, 2013 and $769.7 million at December 31, 2012.
Federal Funds Sold
Federal funds sold totaled $24.4 million at June 30, 2013, an increase of $5.1 million or 26.4 percent from $19.3 million at December 31, 2012.
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 $523.4 million at June 30, 2013 which was an increase of $78.3 million or 17.6 percent from $445.1 million at December 31, 2012. The increase resulted from a $37.0 million increase in U.S. Treasury and agency securities, a $43.1 million increase in mortgage-backed securities, partially offset by a $1.3 million decrease in obligations of states and political subdivisions. Included in other debt securities are pooled trust preferred securities, which had an aggregate cost basis of $10.4 million at June 30, 2013 and $10.5 million at December 31, 2012.
The held to maturity portfolio totaled $7.3 million at June 30, 2013, which was a decrease of $2.9 million or 28.4 percent from $10.2 million at December 31, 2012. The decrease was due to a $1.2 million decrease in mortgage-backed securities and a $1.7 million decrease in obligations of states and political subdivisions.
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 $3.5 million at June 30, 2013 and $4.8 million at December 31, 2012.
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 June 30, 2013 or December 31, 2012.
Loan Portfolio
Net loans totaled $1,454.2 million at June 30, 2013, an increase of $13.4 million or 0.9 percent from $1,440.8 million at December 31, 2012. The overall increase in loans was primarily driven by loan originations and purchases totaling $136.9 million, which was partially offset by $123.5 million of pay-downs, payoffs, and other changes.
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The loan portfolio, excluding loans held for sale, is comprised of the following:
June 30 | December 31 | |||||||
2013 | 2012 | |||||||
Real Estate: | ||||||||
Commercial | $ | 594,301 | $ | 550,786 | ||||
Construction | 72,337 | 74,727 | ||||||
Residential Multi-Family | 196,438 | 196,199 | ||||||
Residential Other | 328,922 | 325,774 | ||||||
Commercial & Industrial | 261,469 | 288,809 | ||||||
Individuals & lease financing | 26,906 | 33,488 | ||||||
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Total loans | 1,480,373 | 1,469,783 | ||||||
Deferred loan fees | (256 | ) | (2,411 | ) | ||||
Allowance for loan losses | (25,926 | ) | (26,612 | ) | ||||
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Loans, net | $ | 1,454,191 | $ | 1,440,760 | ||||
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The following table illustrates the trend in nonperforming assets from June 30, 2012 to June 30, 2013 (in thousands):
Jun 30 | Mar 31 | Dec 31 | Sep 30 | Jun 30 | ||||||||||||||||
2013 | 2013 | 2012 | 2012 | 2012 | ||||||||||||||||
Loans Past Due 90 Days or More and Still Accruing: | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | — | — | — | — | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Residential | — | — | — | — | — | |||||||||||||||
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Total Real Estate | — | — | — | — | — | |||||||||||||||
Commercial & Industrial | — | — | — | — | — | |||||||||||||||
Lease Financing and Individuals | — | — | — | — | — | |||||||||||||||
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Total Loans Past Due 90 Days or More and Still Accruing | — | — | — | — | — | |||||||||||||||
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Non-Accrual Loans: | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | $ | 16,272 | $ | 18,209 | $ | 18,387 | $ | 18,180 | $ | 12,222 | ||||||||||
Construction | 2,635 | 2,826 | 4,720 | 2,201 | 2,659 | |||||||||||||||
Residential | 9,114 | 9,114 | 9,682 | 9,557 | 11,888 | |||||||||||||||
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Total Real Estate | 28,021 | 30,149 | 32,789 | 29,938 | 26,769 | |||||||||||||||
Commercial & Industrial | 2,246 | 1,991 | 2,019 | 12,367 | 12,535 | |||||||||||||||
Lease Financing and Other | — | — | — | — | — | |||||||||||||||
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Total Non-Accrual Loans | 30,267 | 32,140 | 34,808 | 42,305 | 39,304 | |||||||||||||||
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Other Real Estate Owned | — | — | 250 | 250 | 250 | |||||||||||||||
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Nonperforming Assets excluding loans held for sale | 30,267 | 32,140 | 35,058 | 42,555 | 39,554 | |||||||||||||||
Nonperforming loans held for sale | — | — | — | — | — | |||||||||||||||
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Total Nonperforming Assets including loans held for sale | $ | 30,267 | $ | 32,140 | $ | 35,058 | $ | 42,555 | $ | 39,554 | ||||||||||
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Net charge-offs during quarter | $ | 452 | $ | 1,296 | $ | 3,026 | $ | 4,349 | $ | 5,018 | ||||||||||
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Nonperforming assets to total assets: | ||||||||||||||||||||
Excluding loans held for sale | 1.01 | % | 1.14 | % | 1.21 | % | 1.45 | % | 1.40 | % | ||||||||||
Including loans held for sale | 1.01 | % | 1.14 | % | 1.21 | % | 1.45 | % | 1.40 | % |
Non-accrual loans decreased $4.5 million to $30.3 million at June 30, 2013 from $34.8 million at December 31, 2012. There was no interest income on non-accrual loans included in net income for the six month period ended June 30, 2013 and the year ended December 31, 2012. Gross interest income that would have been recorded if these borrowers had been current in accordance with their original loan terms was $0.6 million and $1.4 million for the six month period ended June 30, 2013 and the year ended December 31, 2012, respectively.
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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.
During the six month period ended June 30, 2013:
• | Non-accrual commercial real estate loans decreased $2.1 million resulting from principal payments of $4.0 million and the charge-off of one loan totaling $0.2 million, which was partially offset by the transfer of three loans totaling $1.8 million due to changes in collateral and the transfer of one loan totaling $0.3 million to non-accrual. |
• | Non-accrual construction loans decreased $2.1 million resulting from the transfer of one loan totaling $1.5 million due to changes in collateral and the partial charge-off of one loan totaling $0.6 million. |
• | Non-accrual residential loans decreased $0.6 million resulting from principal payments of $0.7 million and the transfer of one loan totaling $0.2 million to accrual, which was partially offset by the addition of one loan totaling $0.3 million. |
• | Non-accrual commercial and industrial loans increased $0.2 million resulting from the addition of two loans totaling $0.5 million, which was partially offset by the transfer of one loan totaling $0.3 million to accrual. |
There were no loans past due 90 days or more and still accruing at June 30, 2013 and December 31, 2012. In addition, the Company had $8.8 million and $12.6 million of loans that were 31-89 days delinquent and still accruing at June 30, 2013 and December 31, 2012, respectively.
Loans considered by the Company to be impaired totaled $54.4 million and $54.7 million at June 30, 2013 and December 31, 2012, respectively, for which no specific reserves had been established.
There were nineteen loans totaling $37.0 million at June 30, 2013 and twelve loans totaling $27.2 million at December 31, 2012 that were considered troubled debt restructurings. There were eleven loans totaling $24.1 million at June 30, 2013 and seven loans totaling $19.9 million at December 31, 2012 that were performing in accordance with their restructured terms. The remaining loans which totaled $12.9 million and $7.3 million at June 30, 2013 and December 31, 2012, respectively, were on non-accrual status. At June 30, 2013, the Company had no commitments to lend additional funds to non-accrual or restructured loans.
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.
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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) | |||||||||||||||||||||||
Jun 30 2013 | Change During 2013 | Dec 31 2012 | Jun 30 2012 | Change During 2012 | Dec 31 2011 | |||||||||||||||||||
Components | ||||||||||||||||||||||||
Specific: | ||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||
Commercial | — | — | — | — | — | — | ||||||||||||||||||
Construction | — | — | — | — | $ | (2,374 | ) | $ | 2,374 | |||||||||||||||
Residential | — | — | — | — | — | — | ||||||||||||||||||
Commercial and Industrial | — | — | — | — | — | — | ||||||||||||||||||
Lease Financing and other | — | — | — | — | — | — | ||||||||||||||||||
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Total Specific Component | — | — | — | — | (2,374 | ) | 2,374 | |||||||||||||||||
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Formula: | ||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||
Commercial | $ | 11,344 | $ | 1,254 | $ | 10,090 | $ | 11,592 | (1,184 | ) | 12,776 | |||||||||||||
Construction | 4,112 | 163 | 3,949 | 4,496 | 400 | 4,096 | ||||||||||||||||||
Residential | 6,446 | (1,673 | ) | 8,119 | 8,789 | 696 | 8,093 | |||||||||||||||||
Commercial and Industrial | 3,638 | (439 | ) | 4,077 | 3,420 | 770 | 2,650 | |||||||||||||||||
Lease Financing and other | 386 | 9 | 377 | 436 | (260 | ) | 696 | |||||||||||||||||
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Total Formula Component | 25,926 | (686 | ) | 26,612 | 28,733 | 422 | 28,311 | |||||||||||||||||
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Total Allowance | $ | 25,926 | $ | 26,612 | $ | 28,733 | $ | 30,685 | ||||||||||||||||
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Net Change | (686 | ) | (1,952 | ) | ||||||||||||||||||||
Net Charge-offs (1) | 1,747 | 5,205 | ||||||||||||||||||||||
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Provision for loan losses | $ | 1,061 | $ | 3,253 | ||||||||||||||||||||
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Coverage Ratio (2) | 86 | % | 76 | % | 73 | % | 103 | % | ||||||||||||||||
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Coverage Ratio excluding partial chargeoffs | 89 | % | 82 | % | 76 | % | 102 | % | ||||||||||||||||
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(1) | Net charge-offs include partial charge-offs of $771 and $5,500 related to nonperforming and impaired loans for the six month periods ended June 30, 2013 and 2012, respectively. |
(2) | Coverage Ratio is the allowance for loan losses divided by total nonperforming 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. During the six months ended June 30, 2013, the Company recorded $3.4 million of charge-offs, of which $0.6 million were partial charge-offs related to non-accrual loans. At June 30, 2013 and December 31, 2012, the Company had no specific reserves allocated as partial charge-offs were recorded for all identified impairments. The Company’s analyses as of June 30, 2013 and December 31, 2012 indicated that impaired loans were principally real estate collateral dependent and that 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. 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.
Actual losses can vary significantly from the estimated amounts. The Company’s methodology permits adjustments to the allowance in the event that, in management’s judgment, significant factors which affect the collectibility of the loan portfolio as of the evaluation date have changed. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, the 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.
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Management believes the allowance for loan losses is the best estimate of probable losses which have been incurred as of June 30, 2013. 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 $2,625.1 million at June 30, 2013, an increase of $105.1 million or 4.2 percent from $2,520.0 million at December 31, 2012. The increase resulted primarily from seasonal increases in certain deposit balances. 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. The following table presents a summary of deposits at June 30, 2013 and December 31, 2012:
(000’s) | ||||||||||||
Jun 30 | Dec 31 | Increase | ||||||||||
2013 | 2012 | (Decrease) | ||||||||||
Demand deposits | $ | 1,003,682 | $ | 1,035,847 | $ | (32,165 | ) | |||||
Money market accounts | 887,198 | 843,224 | 43,974 | |||||||||
Savings accounts | 131,215 | 126,885 | 4,330 | |||||||||
Time deposits of $100,000 or more | 89,098 | 97,704 | (8,606 | ) | ||||||||
Time deposits of less than $100,000 | 33,270 | 34,603 | (1,333 | ) | ||||||||
Checking with interest | 480,652 | 381,698 | 98,954 | |||||||||
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Total Deposits | $ | 2,625,115 | $ | 2,519,961 | $ | 105,154 | ||||||
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Borrowings
Total borrowings were $40.3 million at June 30, 2013, a decrease of $10.7 million or 21.0 percent from $51.0 million at December 31, 2012. The decrease resulted from a $10.7 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 $289.5 million at June 30, 2013, a decrease of $1.5 million or 0.5 percent from $291.0 million at December 31, 2012. The decrease in stockholders’ equity resulted from cash dividends paid on common stock of $2.3 million and a decrease in accumulated other comprehensive income of $7.0 million which was partially offset by net income of $7.1 million, net proceeds from stock options of $0.2 million and restricted stock of $0.5 million.
The Company’s and the Bank’s capital ratios at June 30, 2013 and December 31, 2012 were as follows:
Jun 30 2013 | Dec 31 2012 | Minimum to be Considered Well Capitalized | Enhanced Capitalized Requirement | |||||||||||||
Leverage ratio: | ||||||||||||||||
Company | 9.3 | % | 9.3 | % | N/A | N/A | ||||||||||
HVB | 9.1 | % | 9.2 | % | 5.0 | % | 8.0 | % | ||||||||
Tier 1 capital: | ||||||||||||||||
Company | 16.5 | % | 16.5 | % | N/A | N/A | ||||||||||
HVB | 16.2 | % | 16.2 | % | 6.0 | % | 10.0 | % | ||||||||
Total capital: | ||||||||||||||||
Company | 17.7 | % | 17.7 | % | N/A | N/A | ||||||||||
HVB | 17.4 | % | 17.4 | % | 10.0 | % | 12.0 | % |
Since the fourth quarter of 2009, the 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.
On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact to the Company.
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Table of Contents
Liquidity
The Asset/Liability Strategic Committee (“ALSC”) of the Board of Directors of HVB establishes specific policies and operating procedures governing the Company’s liquidity levels and develops plans to address future liquidity needs, including contingent sources of liquidity. The primary functions of asset liability management are to provide safety of depositor and investor funds, assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirement of depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to manage fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
The Company’s liquid assets at June 30, 2013 include cash and due from banks of $61.9 million, $773.8 million of interest earning deposits and Federal funds sold of $24.4 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 $68.8 million at June 30, 2013. This represented 12.7 percent of the amortized cost of the securities portfolio. Excluding installment loans to individuals, real estate loans other than construction loans and lease financing, $138.8 million, or 9.4 percent of loans at June 30, 2013, 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 June 30, 2013, 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 June 30, 2013. 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 June 30, 2013. Utilization of these lines is subject to product availability and other restrictions.
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 June 30, 2013.
As of June 30, 2013, the Company had qualifying loan and investment securities totaling approximately $505 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.
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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 June 30, 2013. 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, 2012 include, but are not limited to, statements regarding:
• | our inability to comply with the formal agreement entered into with 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; |
• | our inability to deploy our excess cash, reduce our expenses and improve our operating leverage and efficiency; |
• | the results of the announcement of the administrative settlement with the SEC by A.R. Schmeidler & Co., Inc. and the follow-up closing agreement with the Department of Labor (the “DOL”); |
• | 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; |
• | 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; |
• | 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 outcome of the Internal Revenue Service audit; |
• | potential liabilities under federal and state environmental laws. |
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.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Quantitative and qualitative disclosures about market risk at December 31, 2012 were previously reported in the Company’s 2012 Annual Report on Form 10-K. There have been no material changes in the Company’s market risk exposure at June 30, 2013 compared to December 31, 2012.
The Company’s primary market risk exposure is interest rate risk since substantially all transactions are denominated in U.S. dollars with no direct foreign exchange or changes in commodity price exposure.
All market risk sensitive instruments are classified either as available for sale or held to maturity with no financial instruments entered into for trading purposes. The Company from time to time uses derivative financial instruments to manage risk. The Company did not enter into any new derivative financial instruments during the six month period ended June 30, 2013. The Company had no derivative financial instruments in place at June 30, 2013 and December 31, 2012.
The Company uses a simulation analysis to evaluate market risk to changes in interest rates. The simulation analysis at June 30, 2013 shows the Company’s net interest income increasing slightly if interest rates rise and decreasing slightly if interest rates fall, considering a continuation of the current yield curve. A change in the shape or steepness of the yield curve will impact our market risk to change in interest rates.
The Company also prepares a static gap analysis which, at June 30, 2013, shows a positive cumulative static gap of $519.3 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 June 30, 2013.
Gradual Change in Interest Rates | Percentage Change Percentage Change in Estimated Net Interest Income from June 30, 2013 | Policy Limit | ||||||
+200 basis points | 5.3 | % | (5.0 | )% | ||||
-100 basis points | (2.7 | )% | (5.0 | )% |
Beginning on June 30, 2008, a 100 basis point downward change was substituted for the 200 basis point downward scenario previously used, as management believes that a 200 basis point downward change is not a meaningful analysis in light of current interest rate levels. The percentage change in estimated net income in the +200 and -100 basis points scenario is within the Company’s policy limits.
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Item 4. | Controls and Procedures |
Hudson Valley’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), with the assistance of other members of the Company’s management, have evaluated the effectiveness of Hudson Valley’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company’s CEO and CFO have concluded that Hudson Valley’s disclosure controls and procedures are effective.
The Company’s CEO and CFO have also concluded that there have not been any changes in Hudson Valley’s internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, Hudson Valley’s internal control over financial reporting.
The Company’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Hudson Valley have been or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II — OTHER INFORMATION
Item 1A. | Risk Factors |
Our business is subject to various risks. These risks are included in our 2012 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.
Item 6. | Exhibits |
(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) | |
31.1 | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3) | |
31.2 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3) | |
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 (3) | |
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 (3) | |
101.INS | XBRL Instance Document (4) | |
101.SCH | XBRL Taxonomy Extension Schema (4) | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase (4) | |
101.LAB | XBRL Taxonomy Extension Label Linkbase (4) | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase (4) | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase (4) |
(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) | Filed herewith. |
(4) | 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/ MICHAEL J. INDIVERI | |
Michael J. Indiveri Executive Vice President, Chief Financial Officer |
August 9, 2013
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