Attached files
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EX-32 - SMITHTOWN BANCORP INC | v201184_ex32.htm |
EX-31.1 - SMITHTOWN BANCORP INC | v201184_ex31-1.htm |
EX-31.2 - SMITHTOWN BANCORP INC | v201184_ex31-2.htm |
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2010
Commission
File Number 0 - 13314
SMITHTOWN
BANCORP, INC.
(Exact
name of Registrant as specified in its charter)
New
York
|
11-2695037
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
100
Motor Parkway, Suite 160, Hauppauge, NY
|
11788-5138
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(631)
360-9300
(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 (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such
files). Yes x No
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non accelerated filer, or a smaller reporting
company. See the definitions of “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer o Accelerated
filer x Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
Shares of
Common Stock ($.01 Par Value) Outstanding as of November 9, 2010
14,967,508
SMITHTOWN
BANCORP, INC.
INDEX
Part I - FINANCIAL INFORMATION | ||||
Item
1.
|
Financial
Statements
|
|||
Consolidated
Balance Sheets (Unaudited)
|
||||
September
30, 2010 and December 31, 2009
|
3
|
|||
Consolidated
Statements of Income (Unaudited)
|
||||
`
|
Three
and Nine Months Ended September 30, 2010 and 2009
|
4
|
||
Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)
|
||||
Nine
Months Ended September 30, 2010
|
5
|
|||
Consolidated
Statements of Cash Flows (Unaudited)
|
||||
Nine
Months Ended September 30, 2010 and 2009
|
6
|
|||
Notes
to Unaudited Consolidated Financial Statements
|
7
|
|||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
||
Item
4.
|
Controls
and Procedures
|
34
|
||
Part II - OTHER INFORMATION | ||||
Item
1.
|
Legal
Proceedings
|
34
|
||
Item
1A.
|
Risk
Factors
|
35
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
36
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
36
|
||
Item
4.
|
Reserved
|
36
|
||
Item
5.
|
Other
Information
|
36
|
||
Item
6.
|
Exhibits
|
36
|
||
Signatures |
Exhibit
31.1
|
Certification
of Principal Executive Officer pursuant to Rule
13a-14(a)
|
Exhibit
31.2
|
Certification
of Principal Financial Officer pursuant to Rule
13a-14(a)
|
Exhibit
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) and 18 U.S.C.
Section 1350
|
2
Item
1. Financial Statements
|
||||||||
Consolidated
Balance Sheets (unaudited)
|
||||||||
(Dollar
amounts in thousands except share data)
|
||||||||
September 30, 2010
|
December 31, 2009
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 32,172 | $ | 18,745 | ||||
Interest
earning deposits with banks
|
69,611 | 3,409 | ||||||
Total
cash and cash equivalents
|
101,783 | 22,154 | ||||||
Term
placements
|
507 | 507 | ||||||
Securities
available for sale
|
199,102 | 397,274 | ||||||
Securities
held to maturity (fair value of $34 and $67, respectively)
|
33 | 66 | ||||||
Loans
held for sale
|
- | 16,450 | ||||||
Loans
|
1,912,963 | 2,090,896 | ||||||
Less:
allowance for loan losses
|
68,682 | 38,483 | ||||||
Loans,
net
|
1,844,281 | 2,052,413 | ||||||
Restricted
stock, at cost
|
18,002 | 18,353 | ||||||
Real
estate owned, net
|
3,511 | 2,013 | ||||||
Premises
and equipment, net
|
52,892 | 47,708 | ||||||
Goodwill
|
3,923 | 3,923 | ||||||
Intangible
assets
|
433 | 616 | ||||||
Cash
value of company owned life insurance
|
25,358 | 24,874 | ||||||
Accrued
interest receivable and other assets
|
28,291 | 48,579 | ||||||
Total
assets
|
$ | 2,278,116 | $ | 2,634,930 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Liabilities:
|
||||||||
Demand
deposits
|
$ | 145,355 | $ | 152,306 | ||||
Saving,
NOW and money market deposits
|
867,661 | 999,066 | ||||||
Time
deposits of $100,000 or more
|
457,842 | 508,632 | ||||||
Other
time deposits
|
344,411 | 415,024 | ||||||
Total
deposits
|
1,815,269 | 2,075,028 | ||||||
Other
borrowings
|
311,480 | 352,820 | ||||||
Subordinated
debentures
|
56,595 | 56,351 | ||||||
Accrued
interest payable and other liabilities
|
19,764 | 14,976 | ||||||
Total
liabilities
|
2,203,108 | 2,499,175 | ||||||
Commitments
and contingent liabilities (Note 10)
|
- | - | ||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, par value $.01 per share:
Authorized:
1,000,000 shares at September 30, 2010 and December 31, 2009,
respectively; no shares issued or outstanding
|
- | - | ||||||
Common
stock, par value $.01 per share:
Authorized:
35,000,000 shares at September 30, 2010 and December 31, 2009,
respectively; 17,019,372 and 16,907,346 shares issued at September 30,
2010 and December 31, 2009, respectively; 14,967,508 and 14,855,482 shares
outstanding at September 30, 2010 and December 31, 2009,
respectively
|
170 | 169 | ||||||
Additional
paid-in capital
|
82,557 | 82,318 | ||||||
Retained
earnings
|
1,361 | 64,820 | ||||||
Treasury
stock, at cost, 2,051,864 shares
|
(10,062 | ) | (10,062 | ) | ||||
74,026 | 137,245 | |||||||
Accumulated
other comprehensive income (loss)
|
982 | (1,490 | ) | |||||
Total
stockholders' equity
|
75,008 | 135,755 | ||||||
Total
liabilities and stockholders' equity
|
$ | 2,278,116 | $ | 2,634,930 |
See notes
to consolidated financial statements.
3
Consolidated
Statements of Income (unaudited)
|
||||||||||||||||
(Dollar
amounts in thousands except share data)
|
||||||||||||||||
For the three months ended September
30,
|
For the nine months ended September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Interest
income:
|
||||||||||||||||
Loans
|
$ | 24,555 | $ | 29,317 | $ | 78,585 | $ | 82,859 | ||||||||
Taxable
securities
|
1,464 | 2,314 | 4,890 | 4,020 | ||||||||||||
Tax
exempt securities
|
495 | 440 | 1,496 | 635 | ||||||||||||
Interest
earning deposits with banks
|
21 | 20 | 61 | 146 | ||||||||||||
Other
|
211 | 239 | 645 | 546 | ||||||||||||
Total
interest income
|
26,746 | 32,330 | 85,677 | 88,206 | ||||||||||||
Interest
expense:
|
||||||||||||||||
Savings,
NOW and money market deposits
|
2,026 | 3,715 | 6,689 | 10,364 | ||||||||||||
Time
deposits of $100,000 or more
|
2,487 | 3,257 | 8,025 | 9,968 | ||||||||||||
Other
time deposits
|
2,250 | 3,291 | 7,431 | 10,559 | ||||||||||||
Other
borrowings
|
2,134 | 2,287 | 6,384 | 6,773 | ||||||||||||
Subordinated
debentures
|
1,041 | 922 | 3,067 | 1,915 | ||||||||||||
Total
interest expense
|
9,938 | 13,472 | 31,596 | 39,579 | ||||||||||||
Net
interest income
|
16,808 | 18,858 | 54,081 | 48,627 | ||||||||||||
Provision
for loan losses
|
25,000 | 10,000 | 77,500 | 13,000 | ||||||||||||
Net
interest income (loss) after provision for loan losses
|
(8,192 | ) | 8,858 | (23,419 | ) | 35,627 | ||||||||||
Noninterest
income:
|
||||||||||||||||
Revenues
from insurance agency
|
843 | 836 | 2,560 | 2,711 | ||||||||||||
Service
charges on deposit accounts
|
653 | 619 | 1,913 | 1,737 | ||||||||||||
Net
gain on the sale of investment securities
|
- | 959 | 518 | 1,481 | ||||||||||||
Trust and
investment services
|
124 | 136 | 473 | 463 | ||||||||||||
Increase
in cash value of company owned life insurance
|
206 | 108 | 484 | 341 | ||||||||||||
OTTI loss:
|
||||||||||||||||
Total
OTTI losses
|
(177 | ) | (69 | ) | (774 | ) | (324 | ) | ||||||||
Portion
of loss recognized in other comprehensive income
|
20 | - | 37 | - | ||||||||||||
Net
impairment losses recognized in earnings
|
(157 | ) | (69 | ) | (737 | ) | (324 | ) | ||||||||
Other
|
894 | 396 | 2,150 | 1,298 | ||||||||||||
Total
noninterest income
|
2,563 | 2,985 | 7,361 | 7,707 | ||||||||||||
Noninterest
expense:
|
||||||||||||||||
Salaries
and employee benefits
|
5,408 | 5,381 | 15,968 | 15,428 | ||||||||||||
Occupancy
and equipment
|
3,976 | 3,033 | 11,681 | 8,391 | ||||||||||||
Federal
deposit insurance
|
1,534 | 824 | 4,795 | 3,171 | ||||||||||||
Amortization
of intangible assets
|
61 | 85 | 183 | 266 | ||||||||||||
Other
|
4,416 | 1,664 | 12,113 | 4,334 | ||||||||||||
Total
noninterest expense
|
15,395 | 10,987 | 44,740 | 31,590 | ||||||||||||
Income
(loss) before income taxes
|
(21,024 | ) | 856 | (60,798 | ) | 11,744 | ||||||||||
Provision
(benefit) for income taxes
|
(548 | ) | (42 | ) | 2,661 | 3,817 | ||||||||||
Net
income (loss)
|
$ | (20,476 | ) | $ | 898 | $ | (63,459 | ) | $ | 7,927 | ||||||
Comprehensive
income (loss)
|
$ | (20,637 | ) | $ | 4,237 | $ | (60,987 | ) | $ | 9,605 | ||||||
Basic
earnings (loss) per share
|
$ | (1.38 | ) | $ | 0.06 | $ | (4.27 | ) | $ | 0.60 | ||||||
Diluted
earnings (loss) per share
|
$ | (1.38 | ) | $ | 0.06 | $ | (4.27 | ) | $ | 0.59 |
See notes
to consolidated financial statements.
4
Consolidated
Statements of Changes in Stockholders’ Equity (unaudited)
(Dollar
amounts in thousands except share data)
Accumulated
|
||||||||||||||||||||||||||||||||
Common Stock
|
Additional
|
Other
|
Total
|
Total
|
||||||||||||||||||||||||||||
Shares
Outstanding
|
Amount
|
Paid
In Capital
|
Retained
Earnings
|
Treasury
Stock
|
Comprehensive
Income (Loss)
|
Stockholders’
Equity
|
Comprehensive
(Loss)
|
|||||||||||||||||||||||||
Balance
at January 1, 2010
|
14,855,482 | $ | 169 | $ | 82,318 | $ | 64,820 | $ | (10,062 | ) | $ | (1,490 | ) | $ | 135,755 | |||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Net
loss
|
(63,459 | ) | (63,459 | ) | (63,459 | ) | ||||||||||||||||||||||||||
Change
in unrealized gain on securities available for sale, net of
reclassification and tax effects
|
2,691 | 2,691 | 2,691 | |||||||||||||||||||||||||||||
Change
in unrealized gain (loss) on securities available for sale for which a
portion of an OTTI has been recognized in earnings, net of
reclassification and tax
|
(39 | ) | (39 | ) | (39 | ) | ||||||||||||||||||||||||||
Changes
in funded status of retirement plans, net of tax
|
(180 | ) | (180 | ) | (180 | ) | ||||||||||||||||||||||||||
Total
comprehensive loss
|
$ | (60,987 | ) | |||||||||||||||||||||||||||||
Issuance
of shares for employee stock ownership plan
|
50,526 | 1 | 239 | 240 | ||||||||||||||||||||||||||||
Stock
awards granted
|
61,500 | |||||||||||||||||||||||||||||||
Balance
at September 30, 2010
|
14,967,508 | $ | 170 | $ | 82,557 | $ | 1,361 | $ | (10,062 | ) | $ | 982 | $ | 75,008 |
See notes
to consolidated financial statements.
5
Consolidated
Statements of Cash Flows (unaudited)
|
||
(Dollar
amounts in thousands except share data)
|
For the nine months ended September
30,
|
||||||||
Cash
flows from operating activities
|
2010
|
2009
|
||||||
Net
income (loss)
|
$ | (63,459 | ) | $ | 7,927 | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Depreciation
on premises and equipment
|
3,588 | 3,055 | ||||||
Provision
for loan losses
|
77,500 | 13,000 | ||||||
Deferred
tax asset valuation allowance
|
28,600 | - | ||||||
Net
gain on investment securities
|
(518 | ) | (1,481 | ) | ||||
Loss
on sale of real estate owned
|
22 | - | ||||||
Loss
on sale of loans held for sale
|
250 | - | ||||||
Other
than temporary net impairment loss on securities
|
737 | 324 | ||||||
Net
increase in other liabilities
|
7,217 | 2,628 | ||||||
Net
increase other assets
|
(3,261 | ) | (4,520 | ) | ||||
Net
increase in deferred taxes
|
(12,078 | ) | (3,918 | ) | ||||
Amortization
of unearned restricted stock awards
|
287 | 270 | ||||||
Amortization
of ESOP awards
|
180 | 225 | ||||||
Increase
in cash surrender value of company owned life insurance
|
(484 | ) | (338 | ) | ||||
Investment
securities amortization of premium/(accretion) of
|
||||||||
discount,
net
|
864 | 1,239 | ||||||
Amortization
of intangible assets
|
183 | 266 | ||||||
Cash provided by operating
activities
|
39,628 | 18,677 | ||||||
Cash
flows from investing activities
|
||||||||
Proceeds
from calls, repayments, maturities and sales
|
||||||||
of
available for sale securities
|
201,555 | 118,054 | ||||||
Proceeds
from calls, repayments, maturities and sales
|
||||||||
of
held to maturity securities
|
33 | 46 | ||||||
Purchases
of available for sale securities
|
- | (465,622 | ) | |||||
Net
redemptions (purchases) of restricted securities
|
351 | (1,252 | ) | |||||
Net
decrease (increase) in loans
|
146,832 | (389,161 | ) | |||||
Proceeds
from the sale of real estate owned
|
861 | - | ||||||
Purchases
of premises and equipment
|
(8,772 | ) | (12,610 | ) | ||||
Cash
provided by (used in) investing activities
|
340,860 | (750,545 | ) | |||||
Cash
flows from financing activities
|
||||||||
Net
(decrease) increase in demand, money market, NOW and savings
deposits
|
(138,356 | ) | 480,982 | |||||
Net
(decrease) increase in time deposits
|
(121,403 | ) | 232,671 | |||||
Cash
dividends paid
|
- | (1,541 | ) | |||||
Net decrease in other borrowings
|
(41,340 | ) | - | |||||
Proceeds from subordinated debt and warrant issuance
|
- | 18,990 | ||||||
Net proceeds from common stock issuance
|
240 | 28,190 | ||||||
Cash
(used in) provided by financing activities
|
(300,859 | ) | 759,292 | |||||
Net
increase in cash and cash equivalents
|
79,629 | 27,424 | ||||||
Cash
and cash equivalents, beginning of period
|
22,154 | 25,969 | ||||||
Cash
and cash equivalents, end of period
|
$ | 101,783 | $ | 53,393 | ||||
Supplemental
Information - Cash Flows:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 31,738 | $ | 39,664 | ||||
Income
taxes (refunded) paid
|
(11,555 | ) | 7,301 | |||||
|
See notes
to consolidated financial statements.
6
Notes
to Consolidated Financial Statements (unaudited)
(Dollar
amounts in thousands except share data)
Note
1 – Financial Statement Presentation
The
consolidated financial statements include the accounts of Smithtown Bancorp,
Inc., (“Company”), a New York State-chartered bank holding company with its New
York State-chartered commercial bank subsidiary, Bank of Smithtown
(“Bank”), and three other subsidiaries, Smithtown Bancorp Capital
Trust I, Smithtown Bancorp Capital Trust II and Smithtown Bancorp Capital Trust
III, all of which are Delaware Statutory Trusts that were formed to issue trust
preferred securities. Bank of Smithtown has six wholly owned
subsidiaries, Bank of Smithtown Financial Services, Inc., Bank of Smithtown
Insurance Agents and Brokers, Inc., BOS Preferred Funding Corporation, SBRE
Realty Corp., SBRE Realty II, LLC, formed to hold other real estate owned
property, and Carlyle & Co, a nominee partnership used by the Bank’s trust
department to hold securities in a fiduciary capacity. Intercompany
transactions and balances are eliminated in consolidation.
The
accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form
10-Q. Accordingly, certain disclosures required by U.S. generally
accepted accounting principles are not included herein. These interim
statements should be read in conjunction with the consolidated financial
statements and notes included in the Annual Report on Form 10-K filed by the
Company with the Securities and Exchange Commission (“SEC”). The
December 31, 2009 consolidated financial statements were derived from the
Company’s December 31, 2009 audited financial statements included in the Annual
Report on Form 10-K.
Interim
statements are subject to possible adjustments in connection with the annual
audit of the Company for the year ending December 31, 2010. In the
opinion of management, the accompanying unaudited interim consolidated financial
statements contain all adjustments necessary to present fairly the Company’s
financial position and its results of operations for the periods
presented. Operating results for the nine months ended September 30,
2010 are not necessarily indicative of those that may be expected for the year
ending December 31, 2010.
In
preparing the consolidated financial statements, management is required to make
estimates and assumptions, such as the allowance for loan losses, deferred tax
asset valuation allowance and fair value measurements that affect the reported
asset and liability balances and revenue and expense amounts and the disclosure
of contingent assets and liabilities. Actual results could differ
significantly from those estimates.
Written
Agreement
On June
22, 2010, the Company entered into a Written Agreement with the Federal Reserve
Bank of New York (“FRB”). The Written Agreement is in addition to the
Consent Agreement with the Federal Deposit Insurance Corporations (“FDIC”) and a
parallel Consent Order with the New York State Banking Department (“Banking
Department”), hereinafter collectively referred to as the “Consent Agreement,”
that the Bank entered into on January 29, 2010. The Written Agreement
similarly requires that the Company obtain the approval of the FRB prior to
paying a dividend. Certain provisions of the Consent Agreement are
described in more detail in Note 11.
Proposed
Plan of Merger with People’s United Financial, Inc.
On July
15, 2010, the Company and People’s United Financial, Inc. (“People’s United”) of
Bridgeport, Connecticut announced a definitive agreement under which People’s
United will acquire the Company in a cash and stock transaction valued at
approximately $60 million, or $4.00 per share.
Under the
agreement, People’s United will acquire the Company for approximately $30
million in cash and 2.14 million shares of People’s United common stock, valued
in the aggregate at approximately $30 million based on the 5-day average closing
price of People’s United common stock for the period ended July 14,
2010.
The
definitive agreement has been unanimously approved by the respective boards of
directors of People’s United and the Company. The Company will merge
into People’s United, and the Bank, will simultaneously merge into People’s
United Bank, People’s United’s banking subsidiary. The value of the
consideration a shareholder of the Company will receive for each share of
Company common stock is equivalent in the aggregate to 0.1430 shares of People’s
United common stock and $2.00 in cash. A special meeting of the
common stockholders of Smithtown Bancorp will be held at the Sheraton Long
Island Hotel, 110 Motor Parkway, Hauppauge, New York 11788 on November 19, 2010
at 10:00 a.m. local time. Shareholders of the Company on record as of
October 8, 2010, will be entitled to vote on the transaction and to elect for
each share held whether to receive shares of People’s United common stock or
cash, subject to reallocation if either cash or stock is
oversubscribed.
7
The
actual value of the merger consideration to be paid upon closing to each
shareholder of the Company will depend on the average People’s United stock
price shortly prior to completion of the merger, and the exact amount of cash
payable per common share of the Company and the exact number of shares to be
issued per common share of the Company will be determined at that time based on
the average People’s United stock price, so that each share of the Company
receives consideration with approximately the same value. Receipt of
People’s United common stock is expected to be tax-free to shareholders of the
Company.
The
transaction is subject to approval by the Office of Thrift Supervision and by
the shareholders of the Company. People’s United shareholder approval
is not required. The United States Department of Justice is able to
provide input into the approval process of federal banking agencies to challenge
the approval on antitrust grounds. Smithtown Bancorp and People’s
United have filed all necessary applications and notices with the applicable
regulatory authorities. Smithtown Bancorp and People’s United cannot
predict, however, whether or when the required regulatory approvals will be
obtained.
The
merger is the result of an assessment by the Company and its board of directors
of the Company’s strategic alternatives in light of the financial challenges
facing the Company. The Merger Agreement satisfies the requirement of
the Consent Agreement to consider a sale or merger of the Company and the Bank
in the event that the required capital ratios are not satisfied by June 30,
2010. If the merger is not consummated, the Company would be required
to find an alternative approach to overcoming its challenges and satisfying the
relevant regulatory requirements, including meeting the capital ratios required
by the Consent Agreement and the Written Agreement. At this time, the
Company has no other alternative to raise capital or to enter into another
merger agreement if the merger with People’s United is not
consummated. In addition, the terms of the Merger Agreement prohibit
the Company and the Bank from taking certain actions to facilitate the
foregoing.
The
unaudited consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business for the foreseeable future.
If the
People’s United merger is not consummated, the Company may not be able to raise
any additional capital and, if it could raise any additional capital, such
capital is likely to be extremely dilutive to the Company’s existing
shareholders. In addition, the Company may not be able to find
another merger partner or acquirer. In such circumstances, a failure
to raise such capital or to find another merger partner or acquirer could result
in further and more severe regulatory actions against the Company and the Bank
thereby giving rise to substantial doubt as to the Company’s ability to continue
as a going concern. These financial statements do not include any
adjustments that may result should the Company be unable to continue as a going
concern.
Note
2 – Earnings Per Common Share
The
Company has stock compensation awards with non-forfeitable dividend rights,
which are considered participating securities. As such, earnings per
share is computed using the two-class method. Basic earnings per
common share is computed by dividing net income allocated to common stock by the
weighted average number of common shares outstanding during the period which
excludes the participating securities. Diluted earnings per common
share includes the dilutive effect of additional potential issuance of common
shares from stock-based compensation plans and warrants to purchase common
shares, but excludes awards considered participating
securities. Earnings and dividends per share are restated for all
stock splits and stock dividends through the date of issuance of the financial
statements.
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
|
||||||||||||||||
Net
(Loss)
|
$ | (20,476 | ) | $ | - | $ | (63,459 | ) | $ | - | ||||||
Distributed
earnings allocated to common stock
|
- | $ | 591 | - | $ | 1,533 | ||||||||||
Undistributed
earnings allocated to common stock
|
- | 302 | - | 6,353 | ||||||||||||
Net
earnings allocated to common stock
|
$ | - | $ | 893 | $ | - | $ | 7,886 | ||||||||
Weighted
average common shares outstanding, including shares considered
participating securities
|
14,967,508 | 14,858,522 | 14,951,915 | 13,314,905 | ||||||||||||
Less: weighted
average participating securities
|
(113,170 | ) | (73,974 | ) | (104,610 | ) | (69,226 | ) | ||||||||
Weighted
average shares
|
14,854,338 | 14,784,548 | 14,847,305 | 13,245,679 | ||||||||||||
Basic
earnings (loss) per common share
|
$ | (1.38 | ) | $ | 0.06 | $ | (4.27 | ) | $ | 0.60 0.31 | ||||||
Diluted
|
||||||||||||||||
Net
(Loss)
|
$ | (20,476 | ) | $ | - | $ | (63,459 | ) | $ | - | ||||||
Net
earnings allocated to common stock
|
$ | - | $ | 893 | $ | - | $ | 7,886 | ||||||||
Weighted
average common shares outstanding for basic earnings per common
share
|
14,854,338 | 14,784,548 | 14,847,305 | 13,245,679 | ||||||||||||
Add: Dilutive
effect of warrants issued to purchase common stock
|
- | 35,172 | - | 11,942 | ||||||||||||
Weighted
average shares and dilutive potential common shares
|
14,854,338 | 14,819,720 | 14,847,305 | 13,257,621 | ||||||||||||
Diluted
earnings (loss) per common share
|
$ | (1.38 | ) | $ | 0.06 | $ | (4.27 | ) | $ | 0.59 |
8
No
dividends were paid on unvested shares with non-forfeitable dividend rights
during the nine months ended September 30, 2010. Dividends of $8 were
paid on unvested shares with non-forfeitable dividend rights during the nine
months ended September 30, 2009, none of which were included in net income as
compensation expense as all awards were expected to vest.
Participating
securities totaling 113,170, representing shares of restricted common stock, and
475,000 warrants to purchase common stock were not included in the calculation
of diluted earnings per share for the three and nine months ended September 30,
2010, because they were not dilutive.
Note
3 – Stock-Based Compensation
The Board
of Directors determines restricted stock awarded under the 2007 Stock
Compensation Plan (“Stock Compensation Plan”). Compensation expense
is recognized over the vesting period of the awards based on the fair value of
the stock at issue date. The fair value of the stock was determined
using the closing price at the date of issuance. Restricted shares
vest ratably over five years. The board of directors
elected to issue 61,500 and 38,125 shares of non-vested restricted stock under
the Stock Compensation Plan for the nine months ended September 30, 2010 and
2009, respectively.
A summary
of changes in the Company’s nonvested shares for the nine months ended September
30, 2010 follows:
Shares
|
Weighted
Average Grant Date Share Value
|
|||||||
Nonvested
at January 1, 2010
|
51,670 | $ | 17.51 | |||||
Granted
|
61,500 | 4.75 | ||||||
Non-vested
at September 30, 2010
|
113,170 | 10.58 |
As of
September 30, 2010, there was $892 of total unrecognized compensation cost
related to nonvested shares granted under the Plan. The cost is
expected to be recognized over a weighted-average period of 4.25
years.
Note
4 – Investment Securities
The
following table summarizes the amortized cost and fair value of the available
for sale securities and held to maturity investment securities portfolios
at September 30, 2010 and December 31, 2009 and the corresponding amounts of
gross unrealized gains and losses recognized in accumulated other comprehensive
income (loss):
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
September 30,
2010
|
||||||||||||||||
Available
for sale
|
||||||||||||||||
U.S.
government sponsored entities and agencies
|
$ | 5,000 | $ | 523 | $ | - | $ | 5,523 | ||||||||
Obligations
of state and political subdivisions
|
57,755 | 2,994 | (3 | ) | 60,746 | |||||||||||
Mortgage-backed
securities: residential
|
119,230 | 3,329 | - | 122,559 | ||||||||||||
Collateralized
mortgage obligations
|
4,542 | - | (82 | ) | 4,460 | |||||||||||
Other
|
9,601 | - | (3,787 | ) | 5,814 | |||||||||||
Total
available for sale
|
$ | 196,128 | $ | 6,846 | $ | (3,872 | ) | $ | 199,102 | |||||||
Held
to maturity
|
||||||||||||||||
Obligations
of state and political subdivisions
|
$ | 33 | $ | 1 | $ | - | $ | 34 | ||||||||
December 31,
2009
|
||||||||||||||||
Available
for sale
|
||||||||||||||||
U.S.
government sponsored entities and agencies
|
$ | 5,000 | $ | - | $ | (34 | ) | $ | 4,966 | |||||||
Obligations
of state and political subdivisions
|
59,339 | 761 | (114 | ) | 59,986 | |||||||||||
Mortgage-backed
securities: residential
|
319,543 | 1,447 | (212 | ) | 320,778 | |||||||||||
Collateralized
mortgage obligations
|
4,545 | 8 | - | 4,553 | ||||||||||||
Other
|
10,338 | - | (3,347 | ) | 6,991 | |||||||||||
Total
available for sale
|
$ | 398,765 | $ | 2,216 | $ | (3,707 | ) | $ | 397,274 | |||||||
Held
to maturity
|
||||||||||||||||
Obligations
of state and political subdivisions
|
$ | 66 | $ | 1 | $ | - | $ | 67 |
9
The
proceeds from sales and calls of securities and the associated gains and
losses for the three and nine months ended September 30, are listed
below:
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Proceeds
|
$ | 405 | $ | 33,625 | $ | 163,193 | $ | 80,529 | ||||||||
Gross
gains
|
- | - | 653 | 1,572 | ||||||||||||
Gross
losses
|
- | - | 135 | 91 |
The tax
provision related to these realized gains and losses was $181 and $518 for the
nine months ended September 30, 2010 and 2009, respectively.
The
amortized cost and fair value of the investment securities portfolio are shown
by expected maturity in the following table. Expected maturities may
differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
September 30, 2010
|
||||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Available
for sale
|
||||||||
Within
one year
|
$ | 318 | $ | 315 | ||||
One
to five years
|
10,368 | 10,736 | ||||||
Five
to ten years
|
29,697 | 31,533 | ||||||
Beyond
ten years
|
155,745 | 156,518 | ||||||
Total
|
$ | 196,128 | $ | 199,102 | ||||
Held
to maturity
|
||||||||
Within
one year
|
$ | 33 | $ | 34 | ||||
Total
|
$ | 33 | $ | 34 |
Securities
pledged at September 30, 2010, had a carrying amount of $116,863 and were
pledged to secure public deposits, treasury tax and loan deposits and FHLB
borrowings.
At
September 30, 2010, there were no holdings of securities of any one issuer,
other than the U.S. Government and its entities and agencies, in an amount
greater than 10% of shareholders’ equity.
The
following table summarizes the investment securities with unrealized losses at
September 30, 2010 and December 31, 2009 aggregated by major security type
and length of time in a continuous unrealized loss position:
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
|||||||||||||||||||
September 30,
2010
|
||||||||||||||||||||||||
Available
for sale
|
||||||||||||||||||||||||
Obligations
of state and political subdivisions
|
$ | 193 | $ | (3 | ) | $ | - | $ | - | $ | 193 | $ | (3 | ) | ||||||||||
Collateralized
mortgage obligations
|
4,460 | (82 | ) | - | - | 4,460 | (82 | ) | ||||||||||||||||
Other
|
- | - | 3,334 | (3,787 | ) | 3,334 | (3,787 | ) | ||||||||||||||||
Total
|
$ | 4,653 | $ | (85 | ) | $ | 3,334 | $ | (3,787 | ) | $ | 7,987 | $ | (3,872 | ) | |||||||||
December 31,
2009
|
||||||||||||||||||||||||
Available
for sale
|
||||||||||||||||||||||||
U.S.
Government sponsored entities and agencies
|
$ | 4,966 | $ | (34 | ) | $ | - | $ | - | $ | 4,966 | $ | (34 | ) | ||||||||||
Obligations
of state and political subdivisions
|
13,312 | (114 | ) | - | - | 13,312 | (114 | ) | ||||||||||||||||
Mortgage-backed
securities
|
82,283 | ( 212 | ) | - | - | 82,283 | (212 | ) | ||||||||||||||||
Other
|
- | - | 4,511 | (3,347 | ) | 4,511 | (3,347 | ) | ||||||||||||||||
Total
|
$ | 100,561 | $ | (360 | ) | $ | 4,511 | $ | (3,347 | ) | $ | 105,072 | $ | (3,707 | ) |
10
Other-Than-Temporary-Impairment
In
determining OTTI for debt securities, management considers many factors,
including: (1) the length of time and the extent to which the fair value
has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the Company has the intent to
sell the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery. The assessment of whether
an OTTI exists involves a high degree of subjectivity and judgment and is based
on the information available to management at a point in time.
In order
to determine OTTI for purchased beneficial interests that, on the purchase date,
were rated below AA, the Company compares the present value of the remaining
cash flows as estimated at the preceding evaluation date to the current expected
remaining cash flows. OTTI is deemed to have occurred if there has
been an adverse change in the remaining expected future cash flows.
When OTTI
occurs, for either debt securities or purchased beneficial interests that, on
the purchase date, were rated bellow AA, the amount of the OTTI recognized in
earnings depends on whether an entity intends to sell the security or it is more
likely than not it will be required to sell the security before recovery of its
amortized cost basis, less any current-period credit loss. If an
entity intends to sell or it is more likely than not it will be required to sell
the security before recovery of its amortized cost basis, less any
current-period credit loss, the OTTI shall be recognized in earnings in an
amount equal to the entire difference between the investment’s amortized cost
basis and its fair value at the balance sheet date. If an entity does
not intend to sell the security and it is not more likely than not that the
entity will be required to sell the security before recovery of its amortized
cost basis less any current-period loss, the OTTI shall be separated into the
amount representing the credit loss and the amount related to all other
factors. The amount of the total OTTI related to the credit loss is
determined based on the present value of cash flows expected to be collected and
is recognized in earnings. The amount of the total OTTI related to
other factors is recognized in other comprehensive income, net of applicable
taxes. The previous amortized cost basis less the OTTI recognized in
earnings becomes the new amortized cost basis of the investment.
At
September 30, 2010, the Company’s securities portfolio totaled $199,135, of
which $7,987 was in an unrealized loss position. The majority of
unrealized losses are related to the Company’s other securities, as discussed
below.
Other
Securities
The
Company’s unrealized losses on other securities relate primarily to its
investment in two pooled trust preferred securities and one single issuer trust
preferred security. The decline in fair value is primarily attributable to
temporary illiquidity and the financial crisis affecting these markets and not
necessarily the expected cash flows of the individual securities. Due to
the illiquidity in the market, it is unlikely that the Company would be able to
recover its investment in these securities if the Company sold the securities at
this time.
The
following table presents detailed information for each trust preferred security
held by the Company at September 30, 2010.
Issuer
|
Single
Issuer or Pooled
|
Class
|
Book
Value
|
Gross
Unrealized Loss
|
Estimated
Fair Value
|
Credit
Rating
|
Number
of
Paying
Banks in Issuance
|
Deferrals
and
Defaults
as
% of Collateral
|
Excess
Subordination as a Percent of Paying Collateral
|
||||||||||||||||||||||
Fairfield
County Bank Trust Preferred
|
Single
|
- | $ | 5,000 | $ | (2,277 | ) | $ | 2,723 |
NA
|
1 |
None
|
- | ||||||||||||||||||
Trust
Preferred Funding III LTD Series 144A
|
Pooled
|
B-2 | 1,128 | (857 | ) | 271 |
Ca/C
|
23 | 34.64 | % | (35.5 | )% | |||||||||||||||||||
Trust
Preferred Funding I
|
Pooled
|
B | 993 | (653 | ) | 340 |
Caa3/D
|
11 | 44.69 | % | (46.9 | )% | |||||||||||||||||||
Total
|
$ | 7,121 | $ | (3,787 | ) | $ | 3,334 |
Excess
subordination is the amount of paying collateral above the amount of outstanding
collateral underlying each class of the security. The Excess
Subordination as a Percent of Paying Collateral, in the table detailing each
trust preferred security above, reflects the difference between the paying
collateral and the collateral underlying each security in the pool divided by
the paying collateral. A negative number results when the paying
collateral is less than the collateral underlying each class of the
security. A low or negative number decreases the likelihood of full
repayment of principal and interest according to original contractual
terms.
11
Our
analysis of two of these investments includes $2,121 book value of pooled trust
preferred securities (CDOs). The issuers in these securities are
primarily banks. The Company uses the OTTI evaluation model to
compare the present value of expected cash flows to the previous estimate to
ensure there are no adverse changes in cash flows during the
quarter. The OTTI model considers the structure and term of the CDO
and the financial condition of the underlying issuers. Specifically,
the model details interest rates, principal balances of note classes and
underlying issuers, the timing and amount of interest and principal payments of
the underlying issuers, and the allocation of the payments to the note
classes. The current estimate of expected cash flows is based on the
recent trustee reports and any other relevant market information including
announcements of interest payment deferrals or defaults of underlying trust
preferred securities. Assumptions used in the model include expected
future default rates and prepayments. We assume no recoveries on
defaults and treat all interest payment deferrals as defaults. Upon
completion of the September 30, 2010 analysis, our model indicated OTTI on both
CDOs, which experienced additional defaults or deferrals during the
period. These securities had OTTI losses recognized in earnings of
$157 and $737 for the three and nine months ended September 30, 2010,
respectively. The two CDOs remained classified as available for sale
at September 30, 2010, and together, the two CDOs and one single issuer trust
preferred security accounted for all of the unrealized losses in the other
securities category at September 30, 2010.
The
discount rates used to support the realizable value in trust preferred
securities is the actual index and margin on each security. The
discount rates used for the estimated fair value of the two CDOs and
the one single issuer trust preferred security were 14% and 13%,
respectively, at September 30, 2010. Management determined these
rates based on discussions with our investment bankers regarding newly issued
bank debt. Management also reviewed the current internal risk ratings
of the collateral underlying the securities.
Future
deferrals and defaults on the two CDOs are estimated based on an analysis of the
collateral underlying the security. Particular attention is paid to
each bank’s nonperforming assets to total loans, total risk based capital ratio
and Texas ratio (nonperforming assets plus restructured loans/tangible capital
plus the allowance for loan losses). These three ratios are weighted
to calculate a credit risk rating (“CRR”) for each bank. The CRR,
based on a scale of 1 being the best and 5 being the worst, is used as the basis
for future default assumptions. Banks known to have deferred or
defaulted prior, or subsequent, to the reporting date and banks with a CRR of 4
or higher as of the reporting date are considered to default immediately in our
discounted cash flow pricing model (“model”). As of September 30,
2010 other future default rates were estimated at 50.00% if the CRR was 3.50 to
3.99, 25.00% if the CRR was 3.00 to 3.49, 12.50% if the CRR was 2.50 to 2.99,
6.25% if the CRR was 2.00 to 2.49 and 3.00% if the CRR was 1.99 or
less. These weightings generate an overall estimate of future
defaults that are spread over the remaining maturity of the security in our
Model.
Trust
Preferred Funding I has experienced $30,000 in defaults and $31,000 in
deferrals, with $10,000 of the deferrals announced in the first nine months of
2010. Trust Preferred Funding III LTD Series 144A has experienced
$51,750 in defaults and $48,000 in deferrals with $20,000 of the deferrals
announced in the first nine months of 2010 and $27,500 of deferrals moving to
defaults in the first nine months of 2010. Our Model as of September
30, 2010, estimated $24,127 and $23,505 in future defaults in Trust Preferred
Funding III LTD Series 144A and Trust Preferred Funding I,
respectively. Principal and interest payments on each trust preferred security have been made
on a timely basis. Two interest payments on Trust Preferred Funding I
have produced a shortfall,
but were subsequently made whole.
Fairfield
County Bank Trust Preferred is performing. The Company monitors the
regulatory filings of Fairfield County Bank to assess their financial
condition. Based on the analysis for the first nine months of 2010,
there is no assumption of a future default. Our model, using the
contractual coupon of the security with no defaults, shows no credit related
loss.
Information
received after the balance sheet date, but before the issuance of the financial
statements is included in the cash flow analysis during the reporting
period.
The table
below presents a roll forward of the credit losses recognized in earnings from
December 31, 2009 through September 30, 2010:
Beginning
balance, December 31, 2009
|
$ | 414 | ||
Additions/Subtractions:
|
||||
Increases
to the amount related to the credit loss for which OTTI was previously
recognized
|
737 | |||
Ending
balance, September 30, 2010
|
$ | 1,151 |
12
Note
5 – Loans
Loans as of September 30,
2010 and December 31, 2009 consisted of the following:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Commercial
and industrial loans
|
$ | 38,951 | $ | 48,625 | ||||
Real
estate:
|
||||||||
Land
and construction
|
295,382 | 353,772 | ||||||
Commercial
|
923,397 | 997,097 | ||||||
Multifamily
|
458,046 | 478,840 | ||||||
Residential
|
198,323 | 214,548 | ||||||
Consumer
|
1,779 | 2,082 | ||||||
Less:
Net deferred loan fees
|
2,915 | 4,068 | ||||||
Total
loans
|
1,912,963 | 2,090,896 | ||||||
Allowance
for loan losses
|
68,682 | 38,483 | ||||||
Net
loans
|
$ | 1,844,281 | $ | 2,052,413 |
Individually
impaired loans were as follows:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Loans
with no allocated allowance for loan losses
|
$ | 144,397 | $ | 133,155 | ||||
Loans
with allocated allowance for loan losses
|
210,036 | 79,385 | ||||||
Total
|
$ | 354,433 | $ | 212,540 | ||||
Amount
of the allowance for loan losses allocated
|
$ | 30,694 | $ | 21,630 | ||||
Average
of individually impaired loans during the year
|
268,017 | 44,685 | ||||||
Interest
income recognized during impairment
|
5,147 | 495 |
Included
in impaired loans above are troubled debt restructurings of $71,169 and $42,633
at September 30, 2010 and December 31, 2009, respectively. As of
September 30, 2010 and December 31, 2009, $45,382 and $15,696 of troubled debt
restructurings were in nonaccrual status, respectively. The amount of
the allowance for loan losses allocated to trouble debt restructurings was
$10,108 and $2,571 at September 30, 2010 and December 31, 2009,
respectively.
At
September 30, 2010, there were no funds committed to customers whose loans were
classified as a troubled debt restructuring. At December 31, 2009,
$51 was committed to customers whose loans were classified as a troubled debt
restructuring.
Recognition
of interest income on impaired loans, as for all other loans, is discontinued
when reasonable doubt exists as to the full collectability of principal or
interest. Any payments received on nonaccrual impaired loans are
applied to the recorded investment in the loan. No interest was
earned for the nine months ended September 30, 2010 and for 2009 on the cash
basis for nonaccrual impaired loans.
Nonaccrual
loans, loans past due 90 days and still accruing and troubled debt
restructurings not included in nonaccrual loans and loans past due 90 days and
still accruing were as follows:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Nonaccrual
loans
|
$ | 279,755 | $ | 130,172 | ||||
Loans
past due 90 days and still accruing
|
- | - | ||||||
Troubled
debt restructurings not included in nonaccrual loans and loans past
due 90 days and still accruing
|
25,787 | 26,937 |
Nonaccrual
loans and loans past due 90 days or more and still accruing include both smaller
balance homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans.
13
Note
6 - 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 company’s own assumptions about
the assumptions that market participants would use in pricing an asset or
liability.
The
Company used the following methods and significant assumptions to estimate the
fair value of the following assets and liabilities:
Investment
Securities: The fair values for investment securities are
determined by quoted market prices, if available (Level 1). For
securities where quoted prices are not available, fair values are calculated
based on market prices of similar securities (Level 2). For securities
where quoted prices or market prices of similar securities are not available,
fair values are calculated using discounted cash flows or other market
indicators (Level 3). Discounted cash flows are calculated using spread to
swap and LIBOR curves that are updated to incorporate loss severities,
volatility, credit spread and optionality. During times when trading
is more liquid, broker quotes are used (if available) to validate the
model. Rating agency and industry research reports as well as
defaults and deferrals on individual securities are reviewed and incorporated
into the calculations.
Impaired
Loans: The fair value of collateral dependent impaired loans
with specific allocations of the allowance for loan losses is generally 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 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 for determining
fair value. Internal valuation calculations are performed and
utilized for appraisals in process or otherwise delayed as of period
end.
Other Real Estate
Owned: Nonrecurring adjustments to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
are measured at the lower of carrying amount or fair value, less costs to
sell. Fair values are generally based on third party appraisals of
the property, resulting in a Level 3 classification. In cases where
the carrying amount exceeds the fair value, less costs to sell, an impairment
loss is recognized.
Loans Held For
Sale: Loans held for sale are carried at the lower of cost or
fair value, as determined by outstanding commitments, from third party
investors.
Assets
and liabilities measured at fair value on a recurring basis, including financial
assets and liabilities for which the Company has elected the fair value option,
are summarized below:
Fair
Value Measurements at
|
||||||||||||||||
September 30, 2010 Using
|
||||||||||||||||
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Other Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Available
for sale securities
|
||||||||||||||||
U.S.
government sponsored entities and agencies
|
$ | 5,523 | $ | - | $ | 5,523 | $ | - | ||||||||
Obligations
of state and political subdivisions
|
60,746 | - | 60,746 | - | ||||||||||||
Mortgage-backed
securities: residential
|
122,559 | - | 122,559 | - | ||||||||||||
Collateralized
mortgage obligations
|
4,460 | - | 4,460 | - | ||||||||||||
Other
|
5,814 | - | 2,480 | 3,334 |
Fair
Value Measurements at
|
||||||||||||||||
December 31, 2009 Using
|
||||||||||||||||
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Other Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Available
for sale securities
|
||||||||||||||||
U.S.
government sponsored entities and agencies
|
$ | 4,966 | $ | - | $ | 4,966 | $ | - | ||||||||
Obligations
of state and political subdivisions
|
59,986 | - | 59,986 | - | ||||||||||||
Mortgage-backed
securities: residential
|
320,778 | - | 320,778 | - | ||||||||||||
Collateralized
mortgage obligations
|
4,553 | - | 4,553 | - | ||||||||||||
Other
|
6,991 | - | 2,480 | 4,511 |
14
The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
ended September 30, 2010 and the year ended December 31, 2009:
Fair
Value Measurements Using Significant
|
||||
Unobservable Inputs (Level
3)
|
||||
Available
for Sale Securities
|
||||
Balance
of recurring Level 3 assets at January 1, 2010
|
$ | 4,511 | ||
Total
gains or losses (realized/unrealized):
|
||||
Included
in earnings – realized
|
||||
Included
in earnings – unrealized
|
(737 | ) | ||
Included
in other comprehensive income
|
(440 | ) | ||
Purchases,
sales, issuances and settlements, net
|
- | |||
Transfers
in and/or out of Level 3
|
- | |||
Balance
of recurring Level 3 assets at September 30, 2010
|
$ | 3,334 |
Fair
Value Measurements Using Significant
|
||||
Unobservable Inputs (Level
3)
|
||||
Available
for Sale Securities
|
||||
Balance
of recurring Level 3 assets at January 1, 2009
|
$ | 8,743 | ||
Total
gains or losses (realized/unrealized):
|
||||
Included
in earnings – realized
|
(77 | ) | ||
Included
in earnings – unrealized
|
(414 | ) | ||
Included
in other comprehensive income
|
(1,882 | ) | ||
Purchases,
sales, issuances and settlements, net
|
(1,859 | ) | ||
Transfers
in and/or out of Level 3
|
- | |||
Balance
of recurring Level 3 assets at December 31, 2009
|
$ | 4,511 |
Assets
measured at fair value on a non-recurring basis are summarized
below:
Fair
Value Measurements at
September 30, 2010 Using
|
||||||||||||||||
Quoted
Prices
|
Significant
|
Significant
|
||||||||||||||
in
Active
|
Other
|
Other
|
||||||||||||||
Markets
for
|
Observable
|
Unobservable
|
||||||||||||||
Carrying
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
Value
|
(Level 1)
|
( Level 2)
|
( Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Impaired
loans
|
$ | 210,036 | $ | - | $ | - | $ | 179,342 | ||||||||
Other
real estate owned, net
|
3,511 | - | - | 3,511 |
Fair
Value Measurements at
December 31, 2009 Using
|
||||||||||||||||
Quoted
Prices
|
Significant
|
Significant
|
||||||||||||||
in
Active
|
Other
|
Other
|
||||||||||||||
Markets
for
|
Observable
|
Unobservable
|
||||||||||||||
Carrying
|
Identical
Assets
|
Inputs
|
Inputs
|
|||||||||||||
Value
|
(Level 1)
|
( Level 2)
|
( Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Impaired
loans
|
$ | 79,385 | $ | - | $ | - | $ | 57,755 | ||||||||
Other
real estate owned, net
|
2,013 | - | - | 2,013 | ||||||||||||
Loans
held for sale
|
16,450 | - | 16,450 | - |
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $210,036, with a
valuation allowance of $30,694 at September 30, 2010, resulting in
an additional provision for loan losses of $9,064 for the nine months ended
September 30, 2010. At December 31, 2009, impaired loans had a
carrying amount of $79,385, with a valuation allowance of $21,630, resulting in
an additional provision for loan losses of $21,305 for the year ending December
31, 2009. Appraisals less than 12-months old were used to measure
impairment on $197,781, or 94.17%, and $50,252, or 63.30%, of collateral
dependent impaired loans at September 30, 2010 and December 31, 2009,
respectively. Internal valuations were used to measure impairment on
the remaining collateral dependent impaired loans at the end of each
period.
15
Other
real estate owned, which is measured at the lower of carrying or fair value less
costs to sell, had a net carrying amount of $3,511, with no valuation allowance
at September 30, 2010. Proceeds from sales of other real estate owned
were $861 for the nine months ended September 30, 2010. Gross losses
of $22 were realized on sales during the first
nine months of 2010. The Bank’s leasehold
tenancy on a building on Madison Avenue in New York City was terminated
during the third quarter of 2010 and other real estate owned and the valuation
allowance on other real estate owned were both reduced by
$6,972. At December
31, 2009, other real estate owned had a net carrying amount of $2,013,
which was made up of the outstanding balance of $8,985, net of a valuation
allowance of $6,972. A write-down of $6,872 was recorded for the year
ending December 31, 2009. There were no sales of other real estate
owned during 2009.
There
were no loans held for sale, which are carried at the lower of cost or fair
value, at September 30, 2010. Charge offs of $1,864 were recognized
during the first nine months of 2010 on the loans held for sale before they were
classified as held for sale. Proceeds from sales of loans held for sale were $19,400
for the nine months ended September 30, 2010. Losses on sales totaled
$250 during the first nine months of 2010. Loans held for sale
at December 31, 2009 totaled $16,450. Charge offs of $9,883 were
recognized in 2009 on the loans held for sale at December 31, 2009 before they
were classified as held for sale. There were no sales of loans held
for sale in 2009.
The
carrying amounts and estimated fair values of financial instruments at September
30, 2010 and December 31, 2009 were as follows:
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and due from banks
|
$ | 32,172 | $ | 32,172 | $ | 18,745 | $ | 18,745 | ||||||||
Interest
earning deposits with banks
|
69,611 | 69,611 | 3,409 | 3,409 | ||||||||||||
Term
placements
|
507 | 507 | 507 | 507 | ||||||||||||
Securities
available for sale
|
199,102 | 199,102 | 397,274 | 397,274 | ||||||||||||
Securities
held to maturity
|
33 | 34 | 66 | 67 | ||||||||||||
Restricted
stock
|
18,002 |
NA
|
18,353 |
NA
|
||||||||||||
Loans
held for sale
|
- | - | 16,450 | 16,450 | ||||||||||||
Loans,
net
|
1,844,281 | 1,717,472 | 2,090,896 | 1,975,640 | ||||||||||||
Other
real estate owned
|
3,511 | 3,511 | 2,013 | 2,013 | ||||||||||||
Accrued
interest receivable
|
8,184 | 8,184 | 10,152 | 10,152 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
1,815,269 | 1,823,658 | 2,075,028 | 2,086,245 | ||||||||||||
FHLB
advances and other
|
||||||||||||||||
Borrowings
|
311,480 | 287,233 | 352,820 | 303,354 | ||||||||||||
Subordinated
debt
|
56,595 | 33,626 | 56,351 | 28,480 | ||||||||||||
Accrued
interest payable
|
4,455 | 4,455 | 4,597 | 4,597 |
The
methods and assumptions, not previously presented, used to estimate fair value
are described as follows:
Carrying
amount is the estimated fair value for cash and cash equivalents, interest
bearing deposits, accrued interest receivable and payable, demand deposits,
short term debt, and variable rate loans or deposits that re-price frequently
and fully. The methods for determining the fair values for securities
were described previously. For fixed rate loans or deposits and for
variable rate loans or deposits with infrequent re-pricing or re-pricing limits,
fair value is based on discounted cash flows using current market rates applied
to the estimated life and credit risk. Fair value of debt is based on
current rates for similar financing. It was not practicable to
determine the fair value of FHLB stock due to restrictions placed on its
transferability. The fair value of off balance sheet items is not
considered material.
Note
7 – Other Borrowings and Subordinated Debentures
Advances
from the FHLB were as follows:
September
30, 2010:
|
||||
Maturities
from January 2011 through September 2018, fixed rate at rates from 2.18%
to 3.15%, averaging 2.68%
|
310,000 | |||
December
31, 2009:
|
||||
Overnight
line of credit at 0.34%
|
$ | 36,340 | ||
Maturities
from January 2010 through September 2018, fixed rate at rates from 2.18%
to 3.61%, averaging 2.70%
|
315,000 |
16
Each term
advance is payable at its maturity date with a prepayment penalty if paid before
the maturity date. All advances are periodically
callable. The advances were collateralized by $779,352 and $884,328
of first mortgage loans at September 30, 2010 and December 31, 2009,
respectively. The collateral at September 30, 2010 has been delivered
to the FHLB and at December 31, 2009 was under a blanket lien
arrangement. Based on this collateral and the Company’s holdings of
FHLB stock, the Company is eligible to borrow up to an additional $29,328
at September 30, 2010.
In 2003,
a trust formed by the Company issued $11,000 of floating rate trust preferred
securities as part of a pooled offering of such securities due October 8,
2033. The securities bear interest at 3 month London Interbank
Offered Rate (“LIBOR”) plus 2.99% with a rate of 3.52% as of September 30,
2010. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering. The debentures and related
debt issuance costs represent the sole assets of the trust. The
Company may redeem the subordinated debentures, in whole or in part, on any
interest payment date.
In 2006,
an additional trust formed by the Company issued $7,000 of floating rate trust
preferred securities as part of a pooled offering of such securities due
September 30, 2036. These securities bear interest at 6.53% for the
initial five-year term and thereafter at 3 month LIBOR plus
1.43%. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering. The debentures and related
debt issuance costs represent the sole assets of the trust. The
Company may not redeem any part of the subordinated debentures prior to the
initial call date of September 30, 2011.
In 2008,
a third trust formed by the Company issued $20,000 of floating rate trust
preferred securities due September 1, 2038. The securities bear interest at 3
month LIBOR plus 3.75% with a rate of 4.05% as of September 30,
2010. The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering. The debentures and related
debt issuance costs represent the sole assets of the trust. The
Company may redeem the subordinated debentures, in whole or in part, at a
premium declining ratably to par on September 1, 2013.
The
Company is not considered the primary beneficiary of these trusts, which are
variable interest entities; therefore the trusts are not consolidated in the
Company’s financial statements, but rather the subordinated debentures are shown
as a liability. The Company has the option to defer interest payments
on the subordinated debentures from time to time for a period not to exceed five
consecutive years. The subordinated debentures may be included in
Tier 1 capital (with certain limitations applicable) under current regulatory
guidelines and interpretations. On May 3, 2010, the Company announced
it decided to defer interest on these subordinated debentures. During
the interest deferral period, the Company will continue to accrue interest
expense.
On July
27, 2009 and June 29, 2009, the Bank issued $14,000 and $5,000, respectively, of
fixed rate subordinated notes due July 1, 2019; the notes bear interest at
11%. The Bank, subject to obtaining prior approval of the FDIC and
the Banking Department, may redeem the subordinated notes, in whole or in part,
on any interest payment date beginning on July 1, 2014. The
subordinated debentures may be included in Tier 2 capital (with certain
limitations applicable) under current regulatory guidelines and
interpretations.
Note
8 – Post Retirement Benefits
The
Company sponsors a postretirement medical and life insurance plan for a closed
group of prior employees. Pre-Medicare eligible retirees pay an
amount similar to active employees. Post-Medicare eligible retirees
pay the entire amount over the Bank’s obligation, which is frozen at $864 per
year per covered person. Since the plans hold no assets, the Bank did
not contribute to the plans in 2009 and does not expect to contribute to the
plans during 2010, other than to fund the payments for the
benefits.
A
nontax-qualified executive and director incentive retirement plan covers certain
directors and executive officers. Under the plan, the Company can
award up to 10% of the executive officer’s salary for the prior fiscal year and
up to 25% of a director’s fees for the prior fiscal year. The Company
pays each participant the amount awarded plus interest either over 15 years or
in a lump sum at normal retirement age. The Bank’s expense for these
plans was $(3) and $112 for the three and nine months ended September 30, 2010,
respectively. The Bank’s expense for these plans was $94 and $284 for
the three and nine months ended September 30, 2009, respectively.
17
A
nontax-qualified deferred compensation plan covers all directors and executive
officers. Under the plan, directors may elect to defer a portion of
their fees and executive officers may elect to defer a portion of their
compensation. Upon retirement or termination of service, the Company
pays each participant the amount of their deferrals plus interest over 5 years,
10 years or in a lump sum payment. A liability is accrued for the
obligation under this plan. The Bank’s expense for these plans was $8
and $24 for the three and nine months ended September 30, 2010,
respectively. The Bank’s expense for these plans was $8 and $23 for
the three and nine months ended September 30, 2009, respectively.
Certain
members of management are covered by group term replacement life
insurance. The benefit provides postretirement life insurance up to a
maximum of two and one half times final annual base salary. The
Bank’s expense for these plans was $35 and $81 for the three and nine months
ended September 30, 2010, respectively. The Bank’s expense for these
plans was $10 and $32 for the three and nine months ended September 30, 2009,
respectively.
The Chief
Executive Officer (“CEO”) has a Supplemental Executive Retirement Agreement
(“SERA”). Under the plan, the CEO receives a lifetime benefit at
retirement, with a guaranteed 15 years, based on seventy percent of his final
three-year average base salary reduced by various offsets including employer
contributions under the 401(k) Plan, the Executive Incentive Retirement Plan, as
well as 50% of his Social Security benefit. The Bank’s expense for
this plan was $351 and $1,054 for the three and nine months ended September 30,
2010, respectively. The Bank’s expense for this plan was $185 and
$556 for the three and nine months ended September 30, 2009,
respectively.
The
following table sets forth the components of net periodic benefit cost and other
amounts recognized in Other Comprehensive Income:
Three
months ended September 30,
|
SERA Benefits
|
Postretirement
Medical and Life
Benefits
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Service
cost
|
$ | 179 | $ | 133 | $ | - | $ | - | ||||||||
Interest
cost
|
61 | 37 | 4 | 3 | ||||||||||||
Amortization
of net (gain)/loss
|
111 | 15 | (1 | ) | (3 | ) | ||||||||||
Amortization
of unrecognized transition obligation
|
- | - | 8 | 8 | ||||||||||||
Net
periodic benefit cost
|
$ | 351 | $ | 185 | $ | 11 | $ | 8 |
Nine
months ended September 30,
|
SERA Benefits
|
Postretirement
Medical and Life
Benefits
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Service
cost
|
$ | 537 | $ | 398 | $ | - | $ | - | ||||||||
Interest
cost
|
183 | 112 | 12 | 9 | ||||||||||||
Amortization
of net (gain)/loss
|
334 | 46 | (3 | ) | (9 | ) | ||||||||||
Amortization
of unrecognized transition obligation
|
- | - | 24 | 24 | ||||||||||||
Net
periodic benefit cost
|
$ | 1,054 | $ | 556 | $ | 33 | $ | 24 |
Note
9 – Income Taxes
The
Company had an income tax benefit for the three months ended September 30, 2010
of $548. Due to an operating loss before taxes for the quarter of
$21,024, there was a gross income tax benefit of $9,348 offset by a valuation
allowance on the Company’s deferred tax asset of $8,800. For the nine
months ended September 30, 2010, the Company had income tax expense of
$2,661. Due to an operating loss before taxes of $60,798, there was a
gross income tax benefit was $25,939 offset by a valuation allowance on the
Company’s deferred tax asset of $28,600. An assessment of the
Company’s deferred tax asset before valuation allowance at September 30, 2010 of
$33,993, led to the decision to record the additional valuation
allowance. Based on the Company’s operating losses over the past four
quarters, the ability to realize the full benefits of the deferred tax asset has
become further impaired. In determining the need for and the amount
of a valuation allowance Management considered the Company’s ability to realize
carry back benefits of the current losses as well as the ability to realize
future tax benefits based on tax planning strategies that are feasible and could
be implemented. The Company evaluates the need for a valuation
allowance for its deferred tax asset on a quarterly basis.
Note
10 - Loan Commitments and Other Related Activities
Some
financial instruments, such as loan commitments, credit lines, letters of credit
and overdraft protection, are issued to meet customer financing
needs. These are agreements to provide credit or to support the
credit of others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being
used. Off balance sheet risk to credit loss exists up to the face
amount of these instruments, although material losses are not
anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of
the commitment.
18
The
contractual amounts of financial instruments with off balance sheet risk were as
follows:
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
Fixed
|
Variable
|
Fixed
|
Variable
|
|||||||||||||
Rate
|
Rate
|
Rate
|
Rate
|
|||||||||||||
Commitments
to make loans
|
$ | - | $ | 4,760 | $ | 2,742 | $ | 16,971 | ||||||||
Unused
lines of credit
|
1,099 | 61,308 | 1,108 | 107,456 | ||||||||||||
Standby
letters of credit
|
- | 18,526 | - | 18,281 |
Note
11 – Regulatory Capital Matters
We are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimal capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on our
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, we must meet specific capital
guidelines that involve quantitative measures of our assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. Our capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weighting and
other factors.
Quantitative
measures established by regulations to ensure capital adequacy require us to
maintain minimum amounts and ratios (set forth below in the table) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined in the regulations), and of Tier 1 capital (as defined in the
regulations) to average assets (as defined in the
regulations). Pursuant to the Consent Agreement, the Bank must
maintain Tier 1 Capital at least equal to 7% of total assets, Tier 1 Risk-Based
Capital at least equal to 9% of Total Risk-Weighted Assets and Total Risk-Based
Capital at least equal to 11% of Total Risk-Weighted Assets.
The
Company’s and the Bank’s actual capital amounts and ratios as of September 30,
2010 and December 31, 2009 are in the following table. The Bank is
categorized as adequately capitalized for regulatory capital
purposes.
Actual
|
Required
For Capital Adequacy
Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action Provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
September
30,
2010
|
||||||||||||||||||||||||
Total
capital to risk weighted assets:
|
||||||||||||||||||||||||
Consolidated
|
$ | 148,353 | 8.63 | % | $ | 137,569 | 8.00 | % |
$ NA
|
NA%
|
||||||||||||||
Bank
|
147,629 | 8.59 | 137,423 | 8.00 | 171,779 | 10.00 | ||||||||||||||||||
Tier
1 capital to risk weighted assets:
|
||||||||||||||||||||||||
Consolidated
|
92,893 | 5.40 | 68,785 | 4.00 |
NA
|
NA
|
||||||||||||||||||
Bank
|
107,804 | 6.28 | 68,712 | 4.00 | 103,068 | 6.00 | ||||||||||||||||||
Tier
1 capital to average assets:
|
||||||||||||||||||||||||
Consolidated
|
92,893 | 4.06 | 91,366 | 4.00 |
NA
|
NA
|
||||||||||||||||||
Bank
|
107,804 | 4.72 | 91,409 | 4.00 | 114,261 | 5.00 |
Actual
|
Required
For Capital Adequacy
Purposes
|
To
Be Well Capitalized Under Prompt Corrective Action Provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
December 31,
2009
|
||||||||||||||||||||||||
Total
capital to risk weighted assets:
|
||||||||||||||||||||||||
Consolidated
|
$ | 214,555 | 10.52 | % | $ | 163,188 | 8.00 | % |
$ NA
|
NA%
|
||||||||||||||
Bank
|
211,718 | 10.37 | 162,977 | 8.00 | 203,721 | 10.00 | ||||||||||||||||||
Tier
1 capital to risk weighted assets:
|
||||||||||||||||||||||||
Consolidated
|
171,540 | 8.41 | 81,594 | 4.00 |
NA
|
NA
|
||||||||||||||||||
Bank
|
168,196 | 8.26 | 81,488 | 4.00 | 122,233 | 6.00 | ||||||||||||||||||
Tier
1 capital to average assets:
|
||||||||||||||||||||||||
Consolidated
|
171,540 | 6.39 | 107,347 | 4.00 |
NA
|
NA
|
||||||||||||||||||
Bank
|
168,196 | 6.28 | 107,086 | 4.00 | 133,857 | 5.00 |
19
Based on
the Bank’s September 30, 2010 total risk weighted assets of
$1,717,793 and total month end assets used for leverage of $2,271,957, the Bank
would have needed total capital of $188,957 and Tier 1 capital $159,037 to meet
the capital requirements of the Consent Agreement.
The
merger agreement satisfies the requirement of the Consent Agreement to consider
a sale or merger of the Bank in the event that the required capital ratios were
not satisfied by June 30, 2010. All other efforts to raise capital or
find another partner have been discontinued as the merger agreement prohibits
the Company and the Bank from taking certain actions to facilitate raising
capital or soliciting other merger partners. As such, the Bank will not be
able to meet the required capital ratios in the Consent Agreement prior to the
consummation of the merger.
Banking
regulators solely determine the Bank’s progress toward compliance with
provisions of the Consent Agreement. Accordingly, it is possible
banking regulators in the future could impose further and more stringent
conditions or take other actions whose impact could be material.
Item
2. - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
(Dollar
amounts in thousands except share data)
About
Forward-Looking Statements
This
report may contain statements relating to the future results of the Company
(including certain projections and business trends) that are considered
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995 (the “PSLRA”). In addition, certain statements may
be contained in the Company’s future filings with the SEC, in press releases,
and in oral and written statements made by or with the approval of the Company
that are not statements of historical fact and constitute forward-looking
statements within the meaning of the PSLRA. Such forward-looking
statements, in addition to historical information, which involve risk and
uncertainties, are based on the beliefs, assumptions and expectations of
management of the Company. Words such as “expects,” “believes,”
“should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,”
“outlook,” “predict,” “project,” “would,” “estimates,” “assumes,” “likely,” and
variations of such similar expressions are intended to identify such
forward-looking statements. Examples of forward-looking statements
include, but are not limited to, possible or assumed estimates with respect to
the financial condition, expected or anticipated revenue, and results of
operations and business of the Company, including earnings growth; revenue
growth in retail banking, lending and other areas; origination volume in the
Company’s consumer, commercial and other lending businesses; current and future
capital management programs; future loan loss provision; noninterest income
levels, including fees from banking services as well as product sales; tangible
capital generation; market share; expense levels; and other business operations
and strategies. For this presentation, the Company claims the protection of the
safe harbor for forward-looking statements contained in the PSLRA.
Factors
that could cause future results to vary from current management expectations
include, but are not limited to: changes in economic conditions including an
economic recession that could affect the value of real estate collateral and the
ability for borrowers to repay their loans; the ability of the Company to
successfully execute its plans and strategies; legislative and regulatory
changes, including increases in Federal Deposit Insurance Corporation (“FDIC”)
insurance rates; monetary and fiscal policies of the federal government; changes
in tax policies, rates and regulations of federal, state and local tax
authorities; changes in interest rates; deposit flows; the cost of funds; demand
for loan products and other financial services; competition; changes in the
quality and composition of the Bank’s loan and investment portfolios; changes in
estimates of future reserve requirements based upon the periodic review thereof
under relevant regulatory and accounting requirements; changes in management’s
business strategies; acquisitions and integration of acquired businesses;
changes in accounting principles, policies or guidelines; changes in real estate
values; changes in the level of nonperforming assets and charge offs and other
factors discussed elsewhere in this report, factors set forth in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009 under “Item 1A.,
Risk Factors,” factors set forth in this report under “Item 1A., Risk Factors”
and in other reports filed by the Company with the SEC. The forward-looking
statements are made as of the date of this report, and the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.
This
discussion and analysis should be read in conjunction with the Company’s
consolidated financial statements, notes thereto and other financial information
appearing elsewhere in this report. Dollar amounts in thousands except
share data.
Proposed
Plan of Merger with People’s United Financial, Inc.
On July
15, 2010, the Company and People’s United Financial, Inc. (“People’s United”) of
Bridgeport, Connecticut announced a definitive agreement under which People’s
United will acquire the Company in a cash and stock transaction valued at
approximately $60 million, or $4.00 per share.
20
Under the
agreement, People’s United will acquire the Company for approximately $30
million in cash and 2.14 million shares of People’s United common stock, valued
in the aggregate at approximately $30 million based on the 5-day average closing
price of People’s United common stock for the period ended July 14,
2010.
The
definitive agreement has been unanimously approved by the respective boards of
directors of People’s United and the Company. The Company will merge
into People’s United, and the Bank, will simultaneously merge into People’s
United Bank, People’s United’s banking subsidiary. The value of the
consideration a shareholder of the Company will receive for each share of
Company common stock is equivalent in the aggregate to 0.1430 shares of People’s
United common stock and $2.00 in cash. A special meeting of the
common stockholders of Smithtown Bancorp will be held at the Sheraton Long
Island Hotel, 110 Motor Parkway, Hauppauge, New York 11788 on November 19, 2010
at 10:00 a.m. local time. Shareholders of the Company on record as of
October 8, 2010, will be entitled to vote on the transaction and to elect for
each share held whether to receive shares of People’s United common stock or
cash, subject to reallocation if either cash or stock is
oversubscribed.
The
actual value of the merger consideration to be paid upon closing to each
shareholder of the Company will depend on the average People’s United stock
price shortly prior to completion of the merger, and the exact amount of cash
payable per common share of the Company and the exact number of shares to be
issued per common share of the Company will be determined at that time based on
the average People’s United stock price, so that each share of the Company
receives consideration with approximately the same value. Receipt of
People’s United common stock is expected to be tax-free to shareholders of the
Company.
The
transaction is subject to approval by the Office of Thrift Supervision and by
the shareholders of the Company. People’s United shareholder approval
is not required. The United States Department of Justice is able to
provide input into the approval process of federal banking agencies to challenge
the approval on antitrust grounds. Smithtown Bancorp and People’s
United have filed all necessary applications and notices with the applicable
regulatory authorities. Smithtown Bancorp and People’s United cannot
predict, however, whether or when the required regulatory approvals will be
obtained.
The
merger is the result of an assessment by the Company and its board of directors
of the Company’s strategic alternatives in light of the financial challenges
facing the Company. The Merger Agreement satisfies the requirement of
the Consent Agreement to sell or merge the Company and the Bank in the event
that the required capital ratios are not satisfied by June 30,
2010. If the merger is not consummated, the Company would be required
to find an alternative approach to overcoming its challenges and satisfying the
relevant regulatory requirements, including meeting the capital ratios required
by the Consent Agreement and the Written Agreement. At this time, the
Company has no other alternative to raise capital or to enter into another
merger agreement if the merger with People’s United is not
consummated. In addition, the terms of the Merger Agreement prohibit
the Company and the Bank from taking certain actions to facilitate the
foregoing.
If the
People’s merger is not consummated, the Company may not be able to raise any
additional capital and, if it could raise any additional capital, such capital
is likely to be extremely dilutive to the Company’s existing
shareholders. In addition, the Company may not be able to find
another merger partner or acquirer. In such circumstances, a failure
to raise such capital or to find another merger partner or acquirer could result
in further and more severe regulatory actions against the Company and the
Bank thereby giving rise to substantial doubt as to the Company’s ability
to continue as a going concern.
Overview
The
Company recorded a net loss for the third quarter of 2010 of $20,476, or $1.38
per fully diluted share. The net loss for the first nine months of
2010 was $63,459, or $4.27 per fully diluted share. Net charge offs
and additional specific allocations added to the allowance for loan losses on
impaired loans, especially in the Bank’s land and construction portfolio, led to
a provisions for loan losses of $25,000 and $77,500 for the three and nine month
periods ended September 30, 2010. After net charge offs of $14,317
and $47,301 during the quarter and nine months ended September 30, 2010, the
allowance for loan losses at September 30, 2010 totaled $68,682, or 3.59%, of
total loans. Nonperforming loans at September 30, 2010 were $279,755,
or 14.62% of total loans. At December 31, 2009, nonperforming loans
were $130,172, or 6.23%, of total loans.
On June
22, 2010, the Company entered into a Written Agreement with the
FRB. The Written Agreement is in addition to the Consent Agreement
and similarly requires that the Company obtain the approval of the FRB prior to
paying a dividend.
21
During
the first nine months of 2010, the Bank made the following progress in complying
with the Consent Agreement and Written Agreement provisions:
i.
|
The
Bank submitted to the FDIC and Banking Department a revised lending
policy to provide additional guidance and control over the lending
functions.
|
ii.
|
The
Bank submitted to the FDIC and Banking Department a revised independent
loan review policy and program that it is consistent with the Bank’s loan
review policy and that is sufficiently comprehensive to assess risks in
the Bank’s lending and minimize credit
losses.
|
iii.
|
The
Bank has eliminated from its books all assets or portions of assets
classified as “Loss.”
|
iv.
|
The
Bank completed and submitted to the FDIC and Banking Department a plan for
systematically reducing and monitoring its CRE loan concentration of
credit to an amount, which is commensurate with the Bank’s business
strategy, management expertise, size and
location.
|
v.
|
The
Bank completed and submitted to the FDIC and Banking Department a plan to
reduce assets classified “Doubtful” and
“Substandard.”
|
vi.
|
The
Bank completed and submitted to the FDIC and Banking Department a profit
plan and comprehensive budget for all categories of income and expense for
the calendar year 2010.
|
vii.
|
The
Bank provided updated plans and forecasts based on the known information
at the time to the FDIC and Banking Department regarding our capital
requirements.
|
viii.
|
The
Company provided a Capital Plan and Cash Flow Projections based on the
known information at the time to the
FRB.
|
ix.
|
The
Company and Bank entered into a merger agreement with People’s United, a
very well capitalized $22 billion financial
institution.
|
The Bank
was not successful meeting the capital ratios in the Consent Agreement of Tier 1
Capital at least equal to 7% of total assets, Tier 1 Risk-Based Capital at least
equal to 9% of Total Risk-Weighted Assets and Total Risk-Based Capital at least
equal to 11% of Total Risk-Weighted Assets by June 30, 2010 and did not meet the
ratios at September 30, 2010. The merger agreement satisfies the
requirement of the Consent Agreement to consider a sale or merger of the Bank in
the event that the required capital ratios were not satisfied by June 30,
2010. All other efforts to raise capital or find another partner have
been discontinued as the merger agreement prohibits the Company and the Bank
from taking certain actions to facilitate raising capital or soliciting other
merger partners. As such, the Bank will not be able to meet the required
capital ratios in the Consent Agreement prior to the consummation of the
merger.
The
Merger Agreement with People’s, described above, imposes significant
restrictions on the Company’s operations until the consummation of the
merger.
Cash
dividends will remain suspended and the Company will continue to defer interest
payments on its trust preferred securities. Dividends cannot be paid
to common shareholders until all deferred interest payments on the trust
preferred securities are brought current.
On April
13, 2010, the FDIC approved an interim rule (finalized in June 2010) extending
the Transaction Account Guarantee Program (“TAG Program”), which offers deposit
insurance on the entire amount of all noninterest bearing checking accounts
through December 31, 2010. The Bank has decided to continue its
participation in the TAG Program through this latest extension
period.
Net
Income (Loss)
The net
loss for the quarter ended September 30, 2010 totaled $20,476, or $1.38 per
diluted share, while net income for the quarter ended September 30, 2009 totaled
$898, or $0.06 per diluted share. Significant trends for the third
quarter of 2010 include: (i) a $15,000, or 150.00%, increase in the provision
for loan losses; (ii) a $2,050, or 10.87%, decrease in net interest income;
(iii) a $422, or 14.14%, decrease in total noninterest income; (iv) a $4,408, or
40.12%, increase in total noninterest expense and (v) a $506, or 1,204.76%,
increase in the benefit for income taxes.
22
The net
loss for the nine months ended September 30, 2010 totaled $63,459, or $4.27 per
diluted share, while net income for the same period in 2009 totaled $7,927, or
$0.59 per diluted share. Significant trends for the first nine months
of 2010 include: (i) a $64,500, or 496.15%, increase in the provision for loan
losses; (ii) a $5,454, or 11.22%, increase in net interest income; (iii) a $346,
or 4.49%, decrease in total noninterest income; (iv) a $13,150, or 41.63%,
increase in total noninterest expense and (v) a $1,156, or 30.29%, decrease in
the provision for income taxes.
Net
Interest Income
Net
interest income, the primary contributor to earnings, represents the difference
between income on interest earning assets and expense on interest bearing
liabilities. Net interest income depends upon the volume of interest earning
assets and interest bearing liabilities and the interest rates earned or paid on
them.
The
following table sets forth certain information relating to the Company's average
consolidated statements of financial condition and its consolidated statements
of income for the periods indicated and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Interest
income on investment securities is shown on a tax equivalent (“TE”)
basis. Interest income on nontaxable investment securities depicted
below have been grossed up by .54 to estimate the TE yield. Yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average
balances are derived from daily average balances and include nonaccrual loans,
if any. The yields and costs include fees, which are considered
adjustments to yields.
For
the three months ended
September 30, 2010
|
For
the three months ended
September 30, 2009
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Interest
earning assets:
|
||||||||||||||||||||||||
Investment
securities:
|
||||||||||||||||||||||||
Taxable
|
$ | 144,347 | $ | 1,464 | 4.06 | % | $ | 234,121 | $ | 2,314 | 3.95 | % | ||||||||||||
Nontaxable
|
60,611 | 762 | 5.03 | 52,320 | 678 | 5.18 | ||||||||||||||||||
Total
investment securities
|
204,958 | 2,226 | 4.34 | 286,441 | 2,992 | 4.18 | ||||||||||||||||||
Loans
|
1,952,637 | 24,555 | 5.03 | 2,044,654 | 29,317 | 5.73 | ||||||||||||||||||
Interest
earning deposits with banks
|
32,584 | 21 | 0.26 | 26,594 | 19 | 0.29 | ||||||||||||||||||
Other
interest earning assets
|
18,093 | 211 | 4.66 | 17,471 | 239 | 5.47 | ||||||||||||||||||
Total
interest earning assets
|
2,208,272 | 27,013 | 4.89 | 2,375,160 | 32,567 | 5.48 | ||||||||||||||||||
Noninterest
earning assets:
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
19,514 | 40,281 | ||||||||||||||||||||||
Other
assets
|
63,593 | 66,902 | ||||||||||||||||||||||
Total
assets
|
$ | 2,291,379 | $ | 2,482,343 | ||||||||||||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||
Liabilities
|
||||||||||||||||||||||||
Interest
bearing liabilities:
|
||||||||||||||||||||||||
Savings,
NOW and money market deposits
|
$ | 857,504 | $ | 2,026 | 0.94 | % | $ | 934,085 | $ | 3,715 | 1.58 | % | ||||||||||||
Time
deposits of $100,000 or more
|
437,044 | 2,487 | 2.26 | 441,887 | 3,257 | 2.92 | ||||||||||||||||||
Other
time deposits
|
363,187 | 2,250 | 2.46 | 411,016 | 3,291 | 3.18 | ||||||||||||||||||
Other
borrowings
|
313,517 | 2,134 | 2.72 | 330,340 | 2,287 | 2.77 | ||||||||||||||||||
Subordinated
debt
|
56,551 | 1,041 | 7.36 | 53,580 | 922 | 6.88 | ||||||||||||||||||
Total
interest bearing liabilities
|
2,027,803 | 9,938 | 1.95 | 2,170,908 | 13,472 | 2.47 | ||||||||||||||||||
Noninterest
bearing liabilities:
|
||||||||||||||||||||||||
Demand
deposits
|
145,507 | 133,709 | ||||||||||||||||||||||
Other
liabilities
|
18,150 | 21,157 | ||||||||||||||||||||||
Total
liabilities
|
2,191,460 | 2,325,774 | ||||||||||||||||||||||
Stockholders'
equity
|
99,919 | 156,569 | ||||||||||||||||||||||
Total
liabilities and stockholders' equity
|
$ | 2,291,379 | $ | 2,482,343 | ||||||||||||||||||||
Net
interest income (TE)/interest rate spread
|
$ | 17,075 | 2.94 | % | $ | 19,095 | 3.01 | % | ||||||||||||||||
Net
interest earning assets/net interest margin
|
$ | 180,469 | 3.10 | % | $ | 204,252 | 3.23 | % | ||||||||||||||||
Less: tax
equivalent adjustment
|
267 | 237 | ||||||||||||||||||||||
Net
interest income
|
$ | 16,808 | $ | 18,858 |
23
For
the nine months ended
September 30, 2010
|
For
the nine months ended
September 30, 2009
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Interest
earning assets:
|
||||||||||||||||||||||||
Investment
securities:
|
||||||||||||||||||||||||
Taxable
|
$ | 164,920 | $ | 4,890 | 3.95 | % | $ | 142,282 | $ | 4,020 | 3.77 | % | ||||||||||||
Nontaxable
|
60,359 | 2,304 | 5.09 | 24,509 | 978 | 5.32 | ||||||||||||||||||
Total
investment securities
|
225,279 | 7,194 | 4.26 | 166,791 | 4,998 | 4.00 | ||||||||||||||||||
Loans
|
2,022,556 | 78,585 | 5.18 | 1,888,596 | 82,859 | 5.85 | ||||||||||||||||||
Interest
earning deposits with banks
|
31,712 | 61 | 0.26 | 67,896 | 146 | 0.29 | ||||||||||||||||||
Other
interest earning assets
|
18,195 | 645 | 4.73 | 21,920 | 546 | 3.32 | ||||||||||||||||||
Total
interest earning assets
|
2,297,742 | 86,485 | 5.02 | 2,145,203 | 88,549 | 5.51 | ||||||||||||||||||
Noninterest
earning assets:
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
20,474 | 27,073 | ||||||||||||||||||||||
Other
assets
|
72,198 | 73,074 | ||||||||||||||||||||||
Total
assets
|
$ | 2,390,414 | $ | 2,245,350 | ||||||||||||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||
Liabilities
|
||||||||||||||||||||||||
Interest
bearing liabilities:
|
||||||||||||||||||||||||
Savings,
NOW and money market deposits
|
$ | 904,780 | $ | 6,689 | 0.99 | % | $ | 781,101 | $ | 10,364 | 1.77 | % | ||||||||||||
Time
deposits of $100,000 or more
|
446,979 | 8,025 | 2.40 | 411,880 | 9,968 | 3.24 | ||||||||||||||||||
Other
time deposits
|
371,153 | 7,431 | 2.68 | 406,190 | 10,559 | 3.48 | ||||||||||||||||||
Other
borrowings
|
326,948 | 6,384 | 2.60 | 326,818 | 6,773 | 2.76 | ||||||||||||||||||
Subordinated
debt
|
56,474 | 3,067 | 7.24 | 43,643 | 1,915 | 5.85 | ||||||||||||||||||
Total
interest bearing liabilities
|
2,106,334 | 31,596 | 2.00 | 1,969,632 | 39,579 | 2.69 | ||||||||||||||||||
Noninterest
bearing liabilities:
|
||||||||||||||||||||||||
Demand
deposits
|
148,067 | 121,191 | ||||||||||||||||||||||
Other
liabilities
|
13,775 | 15,873 | ||||||||||||||||||||||
Total
liabilities
|
2,268,177 | 2,106,696 | ||||||||||||||||||||||
Stockholders'
equity
|
122,237 | 138,654 | ||||||||||||||||||||||
Total
liabilities and stockholders' equity
|
$ | 2,390,414 | $ | 2,245,350 | ||||||||||||||||||||
Net
interest income (TE)/interest rate spread
|
$ | 54,889 | 3.02 | % | $ | 48,970 | 2.82 | % | ||||||||||||||||
Net
interest earning assets/net interest margin
|
$ | 191,408 | 3.18 | % | $ | 175,571 | 3.04 | % | ||||||||||||||||
Less: tax
equivalent adjustment
|
808 | 343 | ||||||||||||||||||||||
Net
interest income
|
$ | 54,081 | $ | 48,627 |
The
Bank’s net interest margin decreased 13 basis points during the quarter ended
September 30, 2010 compared to the same period last year. Loan yields
decreased 70 basis points, primarily the result of nonperforming loans, causing
a decrease in the average yield on total interest earning assets of 59 basis
points, or 10.77%. The lower yields on interest earning assets were
partially offset by lower interest expense on interest bearing
liabilities. The average rate on interest bearing liabilities
decreased 52 basis points in the third quarter of 2010 from the third quarter of
2009, a 21.05% drop. Net interest income decreased $2,050, or 10.87%,
to 16,808 in the third quarter of 2010 compared to $18,858 in third quarter of
2009.
The
Bank’s net interest margin increased 14 basis points during the nine months
ended September 30, 2010 compared to the same period last year. Asset
yields were lower by 49 basis points resulting largely from loans yields being
down 67 basis due to the continued high level of nonperforming
loans. All deposit categories benefited from a lower cost of funds
due to the continued low rate environment. The average rate on
interest bearing liabilities decreased 69 basis points in the first nine months
of 2010 from the first nine months of 2009, a 25.65% drop. Net
interest income increased $5,454, or 11.22%, in the nine-month period of 2010
compared to the same period of 2009.
24
Asset
Quality
The table
below sets forth the amounts and categories of our nonperforming assets,
including troubled debt restructurings (See Note 5), at the dates
indicated.
At
September
30,
|
At
December
31,
|
|||||||
2010
|
2009
|
|||||||
Nonaccrual
loans:
|
||||||||
Real
estate loans:
|
||||||||
Land
and construction
|
$ | 130,747 | $ | 52,590 | ||||
Commercial
|
103,984 | 57,026 | ||||||
Multifamily
|
29,038 | 7,870 | ||||||
Residential
|
12,937 | 9,575 | ||||||
Commercial
and industrial loans
|
3,038 | 3,097 | ||||||
All
other loans (including overdrafts)
|
11 | 14 | ||||||
Total
nonaccrual loans
|
$ | 279,755 | $ | 130,172 | ||||
Loans
past due 90 days and still accruing
|
- | - | ||||||
Total
nonperforming loans
|
$ | 279,755 | $ | 130,172 | ||||
Other
nonperforming assets:
|
||||||||
Other
real estate owned
|
$ | 3,511 | $ | 2,013 | ||||
Total
nonperforming assets
|
$ | 283,266 | $ | 132,185 | ||||
Total
nonperforming loans to total loans
|
14.62 | % | 6.23 | % | ||||
Total
nonperforming assets to total assets
|
12.44 | % | 5.02 | % | ||||
Allowance
for loan losses to total nonperforming loans
|
24.55 | % | 29.56 | % |
The
following table sets forth certain types of loans which management believes to
be considered higher risk loans because of the lack of principal amortization, a
collateral position subordinate to another creditor, or increased defaults due
to slowdowns in the construction and real estate sales sector during the
economic recession. The table quantifies their respective percentage
of the Company’s total loans, the total allowance for loan losses balance
specifically allocated to these loans and the level of nonperforming loans
within these categories.
September
30, 2010
|
Amount
|
Percentage
of Loan Portfolio
|
Total
Specific Allocation
|
Nonperforming
Loans
|
||||||||||||
Interest
only land and construction loans
|
$ | 277,686 | 14.52 | % | $ | 7,323 | $ | 121,122 | ||||||||
Interest
only commercial mortgages
|
36,515 | 1.91 | 1,527 | 4,329 | ||||||||||||
Interest
only residential mortgages and home equity lines
|
28,233 | 1.47 | - | 1,078 | ||||||||||||
Interest
only commercial loans
|
21,393 | 1.12 | - | 2,560 | ||||||||||||
Interest
only consumer loans
|
551 | 0.03 | - | - | ||||||||||||
Total
|
$ | 364,378 | 19.05 | % | $ | 8,850 | $ | 129,089 |
The
following table describes the activity in the allowance for loan losses account
followed by a key loan ratio for the periods ended:
For
the nine months ended
September 30, 2010
|
For
the nine months ended
September 30, 2009
|
|||||||
Allowance
for loan losses at beginning of period
|
$ | 38,483 | $ | 11,303 | ||||
Charge
offs:
|
||||||||
Commercial
|
4,501 | 1,014 | ||||||
Real
estate:
|
||||||||
Land
and construction
|
29,621 | 220 | ||||||
Commercial
|
9,001 | - | ||||||
Multifamily
|
4,030 | - | ||||||
Residential
|
208 | |||||||
Consumer
|
74 | 134 | ||||||
Total
|
47,435 | 1,368 | ||||||
Recoveries:
|
||||||||
Commercial
|
6 | 122 | ||||||
Real estate:
|
||||||||
Land
and construction
|
5 | - | ||||||
Commercial
|
36 | - | ||||||
Multifamily
|
52 | - | ||||||
Consumer
|
35 | 34 | ||||||
Total
|
134 | 156 | ||||||
Net
charge offs
|
(47,301 | ) | (1,212 | ) | ||||
Provision
for loan losses
|
77,500 | 13,000 | ||||||
Allowance
for loan losses at end of period
|
$ | 68,682 | $ | 23,091 | ||||
Ratio
of net charge offs during period to average loans outstanding
(annualized)
|
3.12 | % | 0.06 | % |
25
Allocation
of Allowance for Loan Losses
The
following table sets forth the allocation of the Company’s allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the date indicated. The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses, which may occur within the loan category since the total loan
loss allowance is a valuation allocation applicable to the entire loan
portfolio.
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
Amount
|
Percentage
of Loans to Total
Loans
|
Amount
|
Percentage
of Loans to Total
Loans
|
|||||||||||||
Commercial
|
$ | 2,526 | 2.0 | % | $ | 1,883 | 3.1 | % | ||||||||
Real
estate
|
57,631 | 97.9 | 35,802 | 96.8 | ||||||||||||
Consumer
and other
|
161 | 0.1 | 138 | 0.1 | ||||||||||||
Unallocated
|
8,364 | - | 660 | - | ||||||||||||
Total
|
$ | 68,682 | 100.0 | % | $ | 38,483 | 100.0 | % |
The
Company made a $77,500 provision for loan losses for the nine-month period ended
September 30, 2010. The Company received a number of updated
appraisals on impaired loans during the first nine months of 2010 that
demonstrated a continued trend of declining values from the original
appraisals. Net loan charge offs totaled $47,301 during the first
nine months of 2010, a significant increase from $1,212 during the same period
last year. The general allocation portion of the allowance for loan
losses has been adjusted to account for the higher historical charge
offs. For example, the general allocation for commercial mortgages
has increased to 118 basis points at September 30, 2010 from 52 basis points at
December 31, 2009 and the general allocation on multifamily mortgages has
increased to 144 basis points from 40 basis points over the same
period. The general allocation on the loan and construction portfolio
increased to 836 basis points at September 30, 2010 from 350 basis points at
December 31, 2009.
Nonperforming
loans totaled $279,755, or 14.62%, of total loans as of September 30, 2010, as
compared to $130,172, or 6.23%, as of December 31, 2009. Nonperforming
loans include $45,381 of restructured loans that are in nonaccrual
status. In addition, delinquent loans increased as loans 30-89 days
past due totaled $43,821, or 2.29%, of total loans at September 30, 2010
compared to $20,756, or .99%, of total loans at December 31, 2009.
The ratio
of the allowance for loan losses to total nonperforming loans as of September
30, 2010 and December 31, 2009 was 24.55% and 29.56%,
respectively. The ratio of the allowance for loan losses to total
loans increased to 3.59% at September 30, 2010 from 1.84% at December 31,
2009. Annualized net charge offs for the first nine months of 2010
totaled 3.12% of average total loans. Net charge offs for 2009 were
1.22% of average total loans.
Noninterest
Income
Noninterest
income decreased $422, or 14.14%, and $346, or 4.49%, for the three and nine
months ended September 30, 2010, respectively, over the comparable periods in
2009. Total noninterest income was reduced $157 due to the net loss
on OTTI recognized in earnings during the quarter and $737 for the first nine
months of 2010. Gross revenues from the Company’s insurance
subsidiary increased $7, or 0.84%, for three months ended September 30, 2010,
and decreased $151, or 5.57%, for nine months ended September 30,
2010, as premiums and corresponding commissions are down as a result of the soft
insurance market. Service charge income increased $34, or 5.49%, for
the quarter and $176, or 10.13%, for the first nine months ended September 30,
2010, due to an increased volume of transaction accounts resulting from branch
expansion efforts during 2009. Income from trust and investment
management services have been relatively flat for the quarter and nine months
ended September 30, 2010, due to efforts to move deposit relationships off the
balance sheet and into alternative investment products to meet the requirements
of the Consent Agreement, offset by efforts to reduce assets under management as
the Bank moves toward offering limited trust services. Other
noninterest income increased $498, or 125.76%, and $852, or 65.64%, for the
three and nine month periods ended September 30, 2010, respectively, mainly the
result of ATM and debit card transaction fees, loan fees generated from renewals
and gross rental income on other real estate owned.
26
Noninterest
Expense
Noninterest
expense increased $4,408, or 40.12%, and $13,150, or 41.63%, for the three and
nine months ended September 30, 2010, respectively, as compared to the same
periods in 2009. The Company’s Federal deposit insurance increased
$710, or 86.17%, and $1,624, or 51.21%, during the third quarter of 2010 and
year to date, respectively, as the higher risk based insurance premiums during
2010 have outpaced both the regular premiums and special assessment expensed in
the same periods in 2009. Occupancy and equipment expense increased
$943, or 31.09%, and $3,290, or 39.21%, for the quarter and year to date,
consistent with the increase in branch locations during 2009. Salary
and employee benefits increased $27, or 0.50%, and $540, or 3.50%, for the three
and nine months ended September 30, 2010, respectively, mainly the result of the
new branch locations offset by no accruals for incentive compensation due to net
losses. Other noninterest expenses increased $2,752, or 165.38%, and
$7,779, or 179.49%, due to costs attributed to the impaired loan portfolio such
as legal fees, collection expenses, real estate taxes and insurance for
properties in foreclosure. Other added costs in other noninterest
expenses include expenses attributed to meeting the terms of the Consent
Agreement and legal fees associated with defending various
lawsuits.
Income
Tax Expense/Benefit
The
Company had an income tax benefit for the three months ended September 30, 2010
of $548. Due to an operating loss before taxes for the quarter of
$21,024, there was a gross income tax benefit of $9,348 offset by a valuation
allowance on the Company’s deferred tax asset of $8,800. For the nine
months ended September 30, 2010, the Company had income tax expense of
$2,661. Due to an operating loss before taxes of $60,798, there was a
gross income tax benefit was $25,939 offset by a valuation allowance on the
Company’s deferred tax asset of $28,600. An assessment of the
Company’s deferred tax asset before valuation allowance at September 30, 2010 of
$33,993, led to the decision to record the additional valuation
allowance. Based on the Company’s operating losses over the past four
quarters, the ability to realize the full benefits of the deferred tax asset has
become further impaired. In determining the need for and the amount
of a valuation allowance Management considered the Company’s ability to realize
carry back benefits of the current losses as well as the ability to realize
future tax benefits based on tax planning strategies that are feasible and could
be implemented. The Company evaluates the need for a valuation
allowance for its deferred tax asset on a quarterly basis.
Financial
Condition
Total
assets were $2,278,116 at September 30, 2010, a decrease of $356,814, or 13.54%,
from the previous year-end. This decrease in assets was driven
predominantly by a decrease in loans, including loans held for sale, of
$194,383, or 9.22%, and investments of $198,205, or 49.88%. The
shrinking of the balance sheet was in reaction to the no growth provision and
capital requirements of the Consent Agreement. Deposits have
decreased by $259,759, or 12.52%, mainly through pricing to retain multiple
service customers and let go single service CD customers.
The
decrease in loans during the first nine months of 2010 included the sale, or pay
off, of $97,901 of problem real estate loans. In the course of these
resolutions, the Bank recovered $72,842 of principal and charged off $25,059,
representing a loss rate of approximately 25.60%. These resolutions
continue to be more than offset by the movement of additional loans into
classified loans or potential problem loans.
Loans
The
Company’s loan portfolio consists mainly of real estate loans secured by
commercial and residential properties located primarily within the Bank’s market
area of Long Island, the five boroughs of New York City and the greater
metropolitan area. Most classifications of loans had decreases from
the prior year-end. Land and construction loans decreased by $58,390,
or 16.50%, as the Bank continued to look to reduce its exposure in this loan
category. Commercial real estate loans declined by $94,494, or 6.40%,
and combined with the decrease on land and construction loans represents the
bulk of the Company’s progress in reducing its CRE loan exposure as per the
terms of the Consent Agreement.
With
97.87% of the Bank’s loan portfolio secured by real estate, the portfolio is
subject to additional risk of significant additional losses due to the downturn
in the real estate market. The effects of the economic recession,
especially commercial real estate difficulties, took, and will continue to take,
a significant toll on our portfolio. The land and construction
portfolio, in particular speculative construction, was impacted to the greatest
degree resulting in charge offs well above historical rates.
27
The
following table sets forth the major classifications of loans:
September
30,
2010
|
December
31,
2009
|
|||||||
Real
estate:
|
||||||||
Land
and construction
|
$ | 295,382 | $ | 353,772 | ||||
Commercial
|
923,397 | 997,097 | ||||||
Multifamily
|
458,046 | 478,840 | ||||||
Residential
|
198,323 | 214,548 | ||||||
Agricultural
|
- | - | ||||||
Commercial
and industrial loans
|
38,951 | 48,625 | ||||||
Loans
to individuals for household,
|
||||||||
family
and other personal expenditures
|
1,212 | 1,740 | ||||||
All
other loans (including overdrafts)
|
567 | 342 | ||||||
Less: Net
deferred loan fees
|
2,915 | 4,068 | ||||||
Total
loans
|
$ | 1,912,963 | $ | 2,090,896 |
Nonaccrual,
Past Due and Restructured Loans
The
following table sets forth the Bank's nonaccrual, contractually past due and
restructured loans:
September
30,
2010
|
December
31,
2009
|
|||||||
Nonaccrual
loans
|
$ | 279,755 | $ | 130,172 | ||||
Trouble
Debt Restructured loans
|
71,169 | 47,633 |
The
amount of gross interest income that would have been recorded in 2010 on
nonaccrual and restructured loans if the loans had been current in accordance
with their original terms was $15,210. The amount of interest income
that was recorded in 2010 on nonaccrual and restructured loans was
$5,204.
A loan is
moved to nonaccrual status at 90 days past due unless the loan is both well
secured and in the process of collection. All interest accrued but
not received for loans placed on nonaccrual is reversed against interest
income. Interest received on such loans is accounted for on a cash
basis, until qualifying for return to accrual status. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Impaired
loans of $354,433 less nonaccrual loans of $279,755, represents $74,678 of
impaired loans that are still performing, which management believes it is
probable the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. In addition to loans
identified as impaired that are still performing, there is a total of $74,822 of
loans that are not considered impaired, where management has serious doubts as
to the ability of the borrowers to comply with the present loan repayment
terms. Potential problem loans are the sum of the $74,678 and $74,822
above, or $149,500.
Securities
Securities
totaled $199,135 at September 30, 2010, down 49.88% from $397,340 at December
31, 2009. Sales and principal payments of government sponsored entity
and agency mortgage-backed securities used to offset the decrease in deposits
caused the reduction.
The
following schedule presents the estimated fair value for securities available
for sale and the amortized cost for securities held to maturity as detailed in
the Company's balance sheets as of September 30, 2010 and December 31,
2009.
September
30,
2010
|
December
31,
2009
|
|||||||
Available
for sale
|
||||||||
U.S.
government sponsored entities and agencies
|
$ | 5,523 | $ | 4,966 | ||||
Obligations
of state and political subdivisions
|
60,746 | 59,986 | ||||||
Mortgage-backed
securities: residential
|
122,559 | 320,778 | ||||||
Collateralized
mortgage obligations
|
4,460 | 4,553 | ||||||
Other
securities
|
5,814 | 6,991 | ||||||
Total
available for sale
|
$ | 199,102 | $ | 397,274 | ||||
Held
to maturity
|
||||||||
Obligations
of state and political subdivisions
|
$ | 33 | $ | 66 |
28
The
following table presents the amortized costs and estimated fair values of
securities by contractual maturity at September 30, 2010:
Within
One Year
|
After
One But
Within
Five Years
|
After
Five But
Within
Ten Years
|
After
Ten Years
|
Total
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost
|
Estimated Fair
Value
|
Yield
|
Amortized Cost
|
Estimated Fair
Value
|
Yield
|
Amortized Cost
|
Estimated Fair
Value
|
Yield
|
Amortized Cost
|
Estimated Fair
Value
|
Yield
|
Amortized Cost
|
Estimated Fair
Value
|
|||||||||||||||||||||||||||||||||||||||||||
Available
for sale
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S.
government sponsored entities and agencies
|
$ | - | $ | - | - | % | $ | - | $ | - | - | % | $ | 5,000 | $ | 5,523 | 4.00 | % | $ | - | $ | - | - | % | $ | 5,000 | $ | 5,523 | ||||||||||||||||||||||||||||
Obligations
of state and political subdivisions
|
318 | 315 | 2.90 | 10,471 | 10,843 | 3.38 | 22,114 | 23,422 | 3.47 | 24,852 | 26,166 | 4.00 | 57,755 | 60,746 | ||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed
securities
|
- | - | - | - | - | - | - | - | - | 119,230 | 122,559 | 5.42 | 119,230 | 122,559 | ||||||||||||||||||||||||||||||||||||||||||
Collateralized
mortgage obligations
|
- | - | - | - | - | - | - | - | - | 4,542 | 4,460 | 5.00 | 4,542 | 4,460 | ||||||||||||||||||||||||||||||||||||||||||
Other
securities
|
7,121 | 3,334 | 3.71 | - | - | - | 1,480 | 1,480 | 3.25 | 1,000 | 1,000 | 3.67 | 9,601 | 5,814 | ||||||||||||||||||||||||||||||||||||||||||
Total
available for sale
|
$ | 7,439 | $ | 3,649 | 3.68 | % | $ | 10,471 | $ | 10,843 | 3.38 | % | $ | 28,594 | $ | 30,425 | 3.55 | % | $ | 149,624 | $ | 154,185 | 5.15 | % | $ | 196,128 | $ | 199,102 | ||||||||||||||||||||||||||||
Held
to maturity
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations
of state and political subdivisions
|
$ | 33 | $ | 34 | 4.34 | % | $ | - | $ | - | - | % | $ | - | $ | - | - | % | $ | - | $ | - | - | % | $ | 33 | $ | 34 |
29
Deposits
& Other Borrowings
Total
deposits decreased $259,457, or 12.50%, for the period ended September 30, 2010
from December 31, 2009. The largest segment of the portfolio was
savings, NOW and money market deposits, which decreased $131,405, or 13.15%, in
the first nine months of 2010. Time deposits decreased $121,404, or
13.14%. Strategies implemented to attempt to meet the terms of the
Consent Agreement led to the shrinkage in total deposits.
At
September 30, 2010, the remaining maturities of the Bank's time deposits in
amounts of $100,000 or more were as follows:
3
months or less
|
$ | 140,767 | ||
Over
3 through 6 months
|
65,286 | |||
Over
6 through 12 months
|
52,784 | |||
Over
12 months
|
199,005 | |||
Total
|
$ | 457,842 |
Other
borrowings decreased to $311,480 at September 30, 2010 from $352,820 at December
31, 2009. Included in other borrowings are $1,480 of secured
borrowings that are a financial arrangement with the Senior Housing Crime
Prevention program that are secured by U.S. government agency
bonds. At maturity, the Company has the option to repay the secured
borrowings simultaneous with the release of the collateral or to renew the
borrowings.
The
following table sets forth the Bank's borrowed funds:
September 30,
2010
|
December 31,
2009
|
|||||||
FHLBNY
OLOC:
|
||||||||
Maximum
month end balance during the period
|
$ | 14,800 | $ | 36,340 | ||||
Average
balance during the period
|
4,735 | 1,801 | ||||||
Weighted
average interest rate during the period
|
0.26 | % | 0.38 | % | ||||
Weighted
average interest rate at period end
|
- | 0.34 | ||||||
Term
advances from FHLBNY:
|
||||||||
Maximum
month end balance during the period
|
$ | 310,000 | $ | 325,000 | ||||
Average
balance during the period
|
310,000 | 324,247 | ||||||
Weighted
average interest rate during the period
|
2.68 | % | 2.77 | % | ||||
Weighted
average interest rate at period end
|
2.68 | 2.70 | ||||||
Senior
Housing Crime Prevention:
|
||||||||
Maximum
month end balance during the period
|
$ | 1,480 | $ | 1,480 | ||||
Average
balance during the period
|
1,480 | 1,480 | ||||||
Weighted
average interest rate during the period
|
1.79 | % | 1.79 | % | ||||
Weighted
average interest rate at period end
|
1.79 | 1.79 |
Liquidity
Liquidity
provides the source of funds for anticipated deposit outflow and loan
growth. The Bank’s primary sources of liquidity include deposits,
repayments of loan principal, maturities and sales of investment securities,
principal reductions on mortgage-backed securities, “unpledged” securities,
deposits with banks, and borrowing potential from correspondent
banks. The primary factors affecting these sources of liquidity are
their immediate availability if necessary and current market rates of interest,
which can cause fluctuations in levels of deposits and prepayments on loans and
securities. Management believes that the Bank’s liquidity level is
sufficient to meet funding needs while under the terms of the Consent
Agreement.
The Bank
has the ability, as a member of the FHLB system, to borrow against residential
and commercial mortgages owned by the Bank and pledged to FHLB. As a
result of entering into the Consent Agreement, the FHLB has required the Bank to
physically deliver the pledged loan collateral during 2010. At
December 31, 2009, the collateral pledged to the FHLB was under a blanket lien
arrangement and delivered electronically. At September 30, 2010, the
unused available credit totaled $29,328, which represents a decrease of $455,901
from the December 31, 2009 amount of $485,229. The Bank has the
ability to deliver additional collateral should the need arise. As of
September 30, 2010, the Bank had no collateralized overnight borrowings, which
was down from $36,340 at December 31, 2009. The Bank had $310,000 and
$315,000 in collateralized term advances outstanding with the FHLB as of
September 30, 2010 and December 31, 2009, respectively. At September
30, 2010, the Company has $101,783 in cash and cash equivalents, a 359.43%
increase from the December level of $22,154, as additional interest earning
deposits are being maintained by the Bank at the Federal Reserve Bank of New
York for increased liquidity while under the Consent Agreement.
30
The
Company’s principal source of liquidity is dividends from the
Bank. Cash available to service Company trust preferred debt
obligations, to pay expenses and for distribution of dividends to shareholders
is primarily derived from dividends paid by the Bank to the
Company. Under the Consent Agreement, the Bank’s payment of dividends
requires prior approval of the FDIC and Banking Department. Under the
Written Agreement, the Bank’s payment of dividends requires prior approval of
the FRB. Such prior approval of the FDIC, Banking Department and FRB
is unlikely to be received. As of September 30, 2010, the Company had
$96 in cash to pay its expenses. Interest payments on trust preferred
securities were made during the first quarter of 2010, but the Company deferred
interest payments on its trust preferred securities during the second and third
quarters of 2010 to preserve cash for operating expenses due to the dividend
restrictions. In the event the Company subsequently needs additional
funds and the FDIC, Banking Department and FRB are unwilling to approve a
dividend from the Bank, the Company will need to raise additional capital or
borrow funds to meet liquidity needs.
Capital
Resources
Total
stockholders’ equity was $75,008 at September 30, 2010, a decrease of $60,747,
or 44.75%, from December 31, 2009, primarily due the net loss of $63,459 offset
by an increase in other comprehensive income of $2,472.
Initial
efforts to meet the capital requirements of the Consent Agreement focused upon
shrinking the balance sheet. The success in shrinking the balance
sheet has been more than offset by the loss for the first nine months resulting
largely from the $77,500 provision for loan losses and a valuation allowance of
$28,600 against the Company’s deferred tax asset. As a result,
efforts were focused on assessing the Company’s strategic initiatives, which
resulted in the Company entering into the Merger Agreement with People’s United
Financial, Inc. on July 15, 2010.
The
Company had returns on average equity of (69.22%) and 7.62%, and returns on
average assets of (3.54%) and 0.47% for the nine months ended September 30, 2010
and 2009, respectively. The equity to assets ratio was 3.29% and
5.15% at September 30, 2010 and December 31, 2009, respectively. No
dividends were paid for the nine months ended September 30, 2010. The
Company paid dividends of $1,541 for the nine months ended September 30,
2009.
Recent
Regulatory and Accounting Developments
Adoption
of New Accounting Guidance
In
January 2010, the Financial Accounting Standards Board (“FASB”) amended existing
guidance to improve disclosure requirements related to fair value
measurements. New disclosures are required for significant transfers
in and out of Level 1 and Level 2 fair value measurements and the reasons for
the transfers. In addition, the FASB clarified guidance related to
disclosures for each class of assets and liabilities as
well as disclosures about the
valuation techniques and inputs used to measure fair value
for both
recurring and nonrecurring fair value measurements
that fall in either Level 2 or Level 3. The impact of adoption on
January 1, 2010 was not material as it required only disclosures, which are
included in the Fair Value footnote.
In June
2009, the FASB amended existing guidance to improve the relevance,
representational faithfulness, and comparability of the information
that a reporting entity provides in its financial
statements about a transfer of
financial assets; the effects of a
transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. This amended guidance addresses (1) practices that
are not consistent with the intent and key requirements of the original guidance
and (2) concerns of financial statement users that many of the financial assets
(and related obligations) that have been derecognized should continue to be
reported in the financial statements of transferors. The impact of
adoption on January 1, 2010 was not material.
In June
2009, the FASB amended guidance for consolidation of variable interest entities
by replacing the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity. The new approach focuses on identifying
which enterprise has the power to direct the activities of a variable interest
entity that most significantly impact the entity’s economic performance and (1)
the obligation to absorb losses of the entity or (2) the right to receive
benefits from the entity. Additional disclosures about an
enterprise’s involvement in variable interest entities are also
required. The impact of adoption on January 1, 2010 was not
material.
In
December 2007, the FASB enhanced existing guidance for the use of the
acquisition method of accounting (formerly the purchase method) for all business
combinations, for an acquirer to be identified for each business combination and
for intangible assets to be identified and recognized separately from
goodwill. An entity in a business combination is required to
recognize the assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions. Additionally, there were
changes in requirements for recognizing assets acquired and liabilities assumed
arising from contingencies and recognizing and measuring contingent
consideration. Disclosure requirements for business combinations were
also enhanced. The impact of adoption on January 1, 2009 was not
material.
31
In April
2009, the FASB issued amended clarifying guidance to address application issues
raised by preparers, auditors and members of the legal profession on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies
in a business combination. The impact of adoption on January 1, 2009
was not material.
In January 2010, the FASB
issued amended clarifying guidance addressing
implementation issues related to the changes in ownership
provisions. The impact of adoption on January 1, 2010 was not
material.
Newly
Issued But Not Yet Effective Accounting Guidance
In
January 2010, the FASB amended existing guidance related to fair value
measurements requiring new disclosures for activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales, issuances,
and settlements (that is, on a gross basis rather than as one net
number). These disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal
years. The impact of adoption is expected to be
immaterial.
On July
21, 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20,
“Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses.” The new disclosures will
require significantly more information about credit quality within the Company’s
portfolio. Although this statement addresses only disclosures and does not seek
to change recognition or measurement, the disclosures represent a meaningful
change in practice. The amendments that require period-end
disclosures are effective for periods ending on or after December 15, 2010. The
amendments that require disclosures about activity during a period are effective
for periods beginning on or after December 15, 2010. Management is
currently evaluating the impact of ASU 2010-20 on the Company’s
disclosures.
Recent
Legislative Developments
On July
21, 2010, President Obama signed into law the sweeping financial regulatory
reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection
Act” that implements far-reaching changes to the regulation of the financial
services industry, including provisions that, among other things
will:
·
|
Centralize
responsibility for consumer financial protection by creating a new agency
responsible for implementing, examining and enforcing compliance with
federal consumer financial laws.
|
·
|
Apply
the same leverage and risk-based capital requirements that apply to
insured depository institutions to bank holding
companies.
|
·
|
Require
the FDIC to seek to make its capital requirements for banks such as the
Bank of Smithtown countercyclical so that the amount of capital required
to be maintained increases in times of economic expansion and decreases in
times of economic contraction.
|
·
|
Change
the assessment base for federal deposit insurance from the amount of
insured deposits to consolidated assets less tangible
capital.
|
·
|
Implement
corporate governance revisions, including with regard to executive
compensation and proxy access by shareholders, that apply to all public
companies, not just financial
institutions.
|
·
|
Make
permanent the $250 thousand limit for federal deposit insurance and
increase the cash limit of Securities Investor Protection Corporation
protection from $100 thousand to $250 thousand, and provide unlimited
federal deposit insurance until January 1, 2013, for non-interest bearing
demand transaction accounts at all insured depository
institutions.
|
·
|
Repeal
the federal prohibitions on the payment of interest on demand deposits,
thereby permitting depository institutions to pay interest on business
transaction and other accounts.
|
·
|
Increase
the authority of the Federal Reserve to examine the Company and its
non-bank subsidiaries.
|
Many
aspects of the act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on the
Company, its customers or the financial industry more
generally. Provisions in the legislation that affect deposit
insurance assessments and payment of interest on demand deposits could increase
the costs associated with deposits as well as place limitations on certain
revenues those deposits may generate.
32
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Management
considers interest rate risk to be the most significant market risk for the
Company. Market risk is the risk of loss from adverse changes in
market prices and rates. Interest rate risk is the exposure to
adverse changes in the net income of the Company as a result of changes in
interest rates. The Company’s primary earnings source is net interest
income, which is affected by changes in the level of interest rates, the
relationship between rates, the impact of interest rate fluctuations on asset
prepayments, the level and composition of deposits and liabilities, and the
credit quality of earning assets. The Company’s objectives in its
asset and liability management are to maintain a strong, stable net interest
margin, to utilize its capital effectively without taking undue risks, to
maintain adequate liquidity, and to reduce vulnerability of its operations to
changes in interest rates.
The
Company’s Asset and Liability Committee evaluates at least quarterly the impact
of changes in market interest rates on assets and liabilities, net interest
margin, capital and liquidity. Risk assessments are governed by
policies and limits established by senior management, which are reviewed and
approved by the board of directors at least annually. The economic
environment continually presents uncertainties as to future interest rate
trends. The Asset and Liability Committee regularly utilizes a model
that projects net interest income based on increasing or decreasing interest
rates in order to be better able to respond to changes in interest
rates.
Changes
in interest rates affect the value of the Company’s interest earning assets and
in particular its securities portfolio. Generally, the value of
securities fluctuates inversely with changes in interest
rates. Increases in interest rates could result in decreases in the
market value of interest earning assets, which could adversely affect the
Company’s stockholders’ equity and its results of operations if
sold. The Company is also subject to reinvestment risk associated
with changes in interest rates. Changes in market interest rates also
could affect the type (fixed rate or adjustable rate) and amount of loans
originated by the Company and the average life of loans and securities, which
can impact the yields earned on the Company’s loans and
securities. Changes in interest rates may affect the average life of
loans and mortgage related securities. In periods of decreasing
interest rates, the average life of loans and securities held by the Company may
be shortened to the extent increased prepayment activity occurs during such
periods which, in turn, may result in the reinvestment of funds from such
prepayments into lower yielding assets. Under these circumstances,
the Company is subject to reinvestment risk to the extent that it is unable to
reinvest the cash received from such prepayments at rates that are comparable to
the rates on existing loans and securities. Additionally, increases
in interest rates may result in decreasing loan prepayments with respect to
fixed rate loans (and therefore an increase in the average life of such loans),
may result in a decrease in loan demand, and make it more difficult for
borrowers to repay adjustable rate loans.
The
Company utilizes the results of a detailed and dynamic simulation model to
quantify the estimated exposure to net interest income to sustained interest
rate changes. Management routinely monitors simulated net interest
income sensitivity over a rolling two-year horizon. The simulation
model captures the seasonality of the Company’s deposit flows and the impact of
changing interest rates on the interest income received and the interest expense
paid on all assets and liabilities reflected on the Company’s balance
sheet. This sensitivity analysis is compared to the asset and
liability policy limits that specify a maximum tolerance level for net interest
income exposure over a one-year horizon. A 100, 200 and 300 basis
point upward and downward shift in interest rates over a one-year time horizon
was considered at September 30, 2010 and December 31, 2009. A
parallel and pro rata shift in rates over a twelve-month period is
assumed.
The
following table reflects the Bank’s income sensitivity analysis as of September
30, 2010 and December 31, 2009:
Change
In Interest Rates In Basis Points
|
As
of September 30, 2010
Potential
Change In
|
As
of December 31, 2009
Potential
Change In
|
||||||||||||||
(Rate Shock)
|
Net Interest Income
|
Net Interest Income
|
||||||||||||||
$ Change
|
% Change
|
$ Change
|
% Change
|
|||||||||||||
Up
300 basis points
|
1,999 | 2.67 | 1,048 | 1.18 | ||||||||||||
Up
200 basis points
|
1,365 | 1.82 | 880 | 0.99 | ||||||||||||
Up
100 basis points
|
702 | 0.94 | 542 | 0.61 | ||||||||||||
Static
|
- | - | - | - | ||||||||||||
Down
100 basis points
|
(676 | ) | (0.90 | ) | (667 | ) | (0.75 | ) | ||||||||
Down
200 basis points
|
(1,276 | ) | (1.71 | ) | (1,541 | ) | (1.74 | ) | ||||||||
Down
300 basis points
|
(1,863 | ) | (2.49 | ) | (2,603 | ) | (2.94 | ) |
33
The
preceding sensitivity analysis does not represent a Company forecast and should
not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous
assumptions including, but not limited to, the nature and timing of interest
rate levels and yield curve shapes, prepayments on loans and securities, deposit
decay rates, pricing decisions on loans and deposits, and reinvestment and
replacement of asset and liability cash flows. While assumptions are
developed based upon perceived current economic and local market conditions, the
Company cannot make any assurances as to the predictive nature of these
assumptions including how customer preferences or competitor influences may
change.
Also, as
market conditions vary from those assumed in the sensitivity analysis, actual
results will also differ due to prepayment and refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals,
prepayment penalties and product preference changes and other internal and
external variables. Furthermore, the sensitivity analysis does not
reflect actions that management might take in responding to, or anticipating
changes in, interest rates and market conditions.
Item
4. Controls and Procedures
An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 131-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
September 30, 2010. Based on that evaluation, the Company’s
management, including the Principal Executive Officer and Principal Financial
Officer, concluded that the Company’s disclosure controls and procedures were
effective. There has been no change in the Company’s internal controls over
financial reporting during the quarter that has materially affected, or is
reasonably likely to affect, the Company’s internal control over financial
reporting.
Part
II - Other Information
Item
1. Legal Proceedings
On
February 25, 2010 and March 29, 2010, the Company and several of its officers
and its directors were named in two lawsuits commenced in United States District
Court, Eastern District of New York on behalf of a putative class of all persons
and entities who purchased the Company’s common stock between March 13, 2008 and
February 1, 2010, alleging claims under Section 10(b) and Section 20(a) of the
securities Exchange Act of 1934. The plaintiffs allege, among other
things, the Company’s loan loss reserve, fair value of its assets, recognition
of impaired assets and its internal and disclosure controls were materially
false, misleading or incomplete.
On April
26, 2010, the Plaintiffs in the February 25, 2010 action moved to consolidate
their action with the action filed on March 29, 2010, to have itself appointed
lead plaintiff in the consolidated action and to obtain approval of its
selection of lead counsel. The motion is currently
pending.
On April
22, 2010, an action was commenced in New York State Supreme Court, Kings County
by Robert I. Toussie against the Company and several of its
officers. The complaint alleges claims for fraud and aiding and
abetting fraud based upon, among other things, the plaintiff’s allegation that
during 2008 and 2009, one or more defendants made material misrepresentations
and incomplete statements to the plaintiff concerning the Company’s loan losses,
delinquent loans, capitalization, quarterly earnings and financial
soundness. The complaint seeks compensatory and punitive damages
against the defendants.
On May
12, 2010, the defendants removed the April 22, 2010 action to the United States
District Court for the Eastern District of New York. The defendants
notified the court that the action was related to the February 25, 2010 and
March 29, 2010 actions. On June 1, 2010, the plaintiff moved to
remand the action back to State court. The defendants filed an
opposition to the plaintiff’s remand motion on June 15, 2010, and the plaintiff
filed his reply on June 22, 2010. The plaintiff’s remand motion has
been assigned to a magistrate judge and is currently pending.
The
Company and the individual defendants intend to vigorously defend all aspects of
these actions.
Five
cases have been filed in the New York State Supreme Court, Suffolk County, and
one in the United States District Court, Eastern District of New York, on behalf
of a putative class of Smithtown Bancorp stockholders against Smithtown Bancorp,
Smithtown Bancorp’s directors and certain of its officers and People’s United
challenging People’s United’s proposed acquisition of Smithtown
Bancorp.
The
complaints allege that the individual defendants breached their fiduciary duties
of loyalty, good faith, fair dealing, due care, candor, and full and fair
disclosure in connection with the proposed acquisition by People’s
United. The complaints allege that Smithtown Bancorp and People’s
United aided and abetted the alleged fiduciary breaches by the individual
defendants. The complaint filed in the Eastern District of New York,
which was voluntarily dismissed without prejudice by the plaintiff on October
19, 2010, alleged, in addition to the foregoing, violations of the federal
securities laws.
34
In an
order dated September 22, 2010, and pursuant to the parties’ agreement, the New
York State Supreme Court, Suffolk County among other things, consolidated the
cases filed in that court. The consolidated action is captioned In re Smithtown Bancorp Shareholder
Litigation (No. 026751/2010) (“In re Smithtown Bancorp”).
On
October 6, 2010, the plaintiffs in In re Smithtown Bancorp filed
a Consolidated Class Action Complaint. The Consolidated Class Action
Complaint alleges, among other things, that the individual defendants did not
maximize shareholder value and agreed to deal protection devices that
impermissibly limit their ability to pursue and accept any competing offer for
Smithtown Bancorp. The Consolidated Class Action Complaint also
alleges that the amended proxy statement/prospectus contains material omissions
which, if not cured, would prevent Smithtown Bancorp shareholders from casting
an informed vote in connection with the proposed merger.
The
complaints seek, among other things, an order enjoining the defendants from
proceeding with or consummating the transaction, other equitable relief, damages
and attorneys’ fees.
On
October 12, 2010, the parties in In re Smithtown Bancorp
entered into an agreement in principle to settle the
action. The agreement is set forth in a Memorandum of Understanding
between the parties (“MOU”).
The
defendants believe that no further disclosure than what was set forth in the
previous filing of the amended proxy statement/prospectus is required under
applicable laws, but to avoid the costs, distraction and disruption of further
litigation, the defendants in In re Smithtown Bancorp have
agreed, as part of the MOU and without admitting to the validity of any
allegations made in the action, to make certain additional disclosure requested
by the plaintiffs in this proxy statement/prospectus. The proposed
settlement is subject to, among other things, court approval, plaintiffs
conducting confirmatory discovery to confirm the fairness and adequacy of the
terms of the settlement and the disclosures relating to the proposed merger and
the closing of the proposed merger.
Smithtown
Bancorp, People’s United and the individual defendants deny any wrongdoing in
connection with the proposed merger.
On
October 21, 2010, the Company received a subpoena from the U.S. Securities and
Exchange Commission seeking documents concerning, among other things, the
Federal Deposit Insurance Corporation's most recent annual examination of the
Bank and the Company’s financial results, loan portfolio, loan losses and
reserves reported during the second half of 2009. The Company intends
to respond to the subpoena and cooperate fully in the inquiry.
Item
1A. Risk Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Items 1A: Risk Factors,” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and
the additional risk factor below, as such factors could materially affect the
Company’s business, financial condition, or future results. The risks
described below and in the Annual Report on Form 10-K are not the only risks
that the Company faces. Additional risks and uncertainties not
currently known to the Company, or that the Company currently deems to be
immaterial, also may have a material impact on the Company’s business, financial
condition, or results.
The
proposed merger of the Company with People’s United described above under “Item
2. - Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Proposed Plan of Merger with People’s United Financial,
Inc.” might not be consummated. The merger is subject to approval by
bank regulatory authorities and by the shareholders of the Company and to the
satisfaction of various closing conditions. The merger is the result
of an assessment by the Company and its board of directors of the Company’s
strategic alternatives in light of the financial challenges facing the
Company. The Merger Agreement satisfies the requirement of the
Consent Agreement to sell or merge the Company and the Bank in the event that
the required capital ratios are not satisfied by June 30, 2010. If
the merger is not consummated, the Company would be required to find an
alternative approach to overcoming its challenges and satisfying the relevant
regulatory requirements, including meeting the capital ratios required by the
Consent Agreement and the Written Agreement. At this time, the
Company has no other alternative to raise capital or to enter into another
merger agreement if the merger with People’s United is not
consummated. In addition, the terms of the Merger Agreement prohibit
the Company and the Bank from taking certain actions to facilitate the
foregoing.
If the
People’s United merger is not consummated, the Company may not be able to raise
any additional capital and, if it could raise any additional capital, such
capital is likely to be extremely dilutive to the Company’s existing
shareholders. In addition, the Company may not be able to find
another merger partner or acquirer. In such circumstances, a failure
to raise such capital or to find another merger partner or acquirer could result
in further and more severe regulatory actions against the Company and the
Bank.
35
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item
3. Defaults upon Senior Securities
None
Item
4. Reserved
Item
5. Other Information
None
Item
6. Exhibits and Reports on Form 8-K
Exhibit
|
Description |
Exhibit
31.1
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) |
Exhibit
31.2
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) |
Exhibit
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) and 18 U.S.C. Section
1350
|
36
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
SMITHTOWN BANCORP, INC. | |||
November 9, 2010 | |||
|
/s/ BRADLEY E.
ROCK
|
||
Bradley
E. Rock,
Chairman
and
Chief Executive Officer
(Principal
Executive Officer)
|
|||
/s/ CHRISTOPHER
BECKER
|
|||
Christopher
Becker,
Executive
Vice President
and
Chief Financial Officer
(Principal
Financial Officer)
|
|||
37